P.C. Mallick, J.
1. This is a suit in which the plaintiff seeks to establish his title to a bunch of 26752 ordinary shares in the defendant company. The Company and one Ramapada Gupta in whose name the shares are registered in the books of the company have been impleaded as defendants.
2. The plaintiff who was born in Iraq came over to India some years prior to 1938 and started business in medicine first under the name and style of Albert David Bros, and then of Albert David and Co. In 1938 the plaintiff promoted a private company which in 1948 was converted into a public company. To this company in 1938 the plaintiffs business of Albert David and Co. was made over. The company was given the same name. Till September 1954, the plaintiff and his wife owned more than 90 per cent. of the ordinary shares. The plaintiff was also the largest holder of preference shares. Under the Articles, only the ordinary shares had voting rights. To become a director, one need not hold any share at all. The plaintiff was the Managing Director for life under the Articles and under an agreement entered into between the company and the plaintiff pursuant to the Articles.
3. At the beginning the company used to deal with imported medicines. In 1939 the plaintiff conceived the idea of manufacturing medicine and with that object the plaintiff appointed Dr. Mukherjee a very able chemist and put him in charge of the manufacturing side. Dr. Mukherjee was given full scope and every facility to manufacture medicine. Dr. Mukherjee in his turn proved his worth. Dr. Mukherjee's services to the company were recognised and he was made a director of the company in July 1940. In a formal resolution passed in a meeting of the Board of Directors held on May 4, 1943 the plaintiff as Managing Director recorded that the success achieved by the company was chiefly due to the quality products prepared by Dr. Mukherjee. The phenomenal success of the company will appear from the sale of its products which rose to over Rs. 50 Lacs from 1952 onward. Dr. Mukherjee's position in the company steadily improved and while the plaintiff was the No. 1 in the company. Dr. Mukherjee became the No. 2. Dr. Mukherjee's remuneration was increased with the passage of time and when the dispute started Dr. Mukherjee was getting as his remuneration 1 per cent. of the total sale i.e. more than Rs. 55,000/- per annum. This was much more than what the plaintiff was getting as Managing Director. In 1948, Dr. Neogy was appointed as a propaganda officer on a salary of Rs. 500/- per month. Shortly thereafter Dr. Neogy was made a director.
4. In January 1949 Dr. Mukherjee went to Europe on study leave for a period of little more than two years. He retained his seat in the Board of Directors and during his absence he was given allowance of Rs. 2000/- per month for a period of two years from a date beginning nine months after he left for study. This money was paid to Dr. Mukherjee, though the payment was not made regularly. Dr. Mukherjee returned from abroad in April 1951 and the plaintiff made a gift of 1000 ordinary shares out of his own shares to Dr. Mukherjee. This gift was made as a token of affection as also in appreciation of the services rendered by Dr. Mukherjee to the company.
5. It appears that feelings between the parties were strained in the middle of 1954. Dr. Mukherjee stated in his evidence that he apprehended that he would be thrown out from the company. The plaintiff denied that he had any such intention. Be that as it may, whatever the motive of Dr. Mukherjee might have been i.e. to prevent the plaintiff from ousting him as a measure of self protection or to himself get supreme control of the company by ousting the plaintiff Dr. Mukherjee acted and acted with vigour. There was a General Meeting of the company on the morning of September 10, 1954, to increase the Share Capital. The meeting was held in which the plaintiff, Dr. Mukherjee, Dr. Neogy amongst others were present. The plaintiff wanted the increase of share Capital by the issue of preference Shares only because this carried no voting right, Dr. Mukherjee's party wanted the increase of Share Capital by the issue of Ordinary Shares. According to the plaintiff, the meeting ended without passing any resolution, while according to Dr. Mukherjee the meeting unanimously agreed to increase the share capital by the issue of 60,000/- additional Ordinary Shares. There is a minute of the Company to this effect. The plaintiff contends that it is false minute. Be that as it may, it is clear that there was open hostility between the plaintiff on one side and Dr. Mukherjee with whom Dr. Neogy sided on the other. Events began to move vapidly thereafter. A meeting of the Board of Directors was alleged to have been held at 4 P.M. in the office in which Dr. Mukherjee and Neogy were alleged to have been present. No notice of the meeting was given to the plaintiff because Dr. Mukherjee was proceeding on the basis that the plaintiff had ipso facto vacated his office as director. In this meeting a number of important resolutions were passed. Services of seven employees who, apparently, were loyal to the plaintiff were terminated. The plaintiff was deprived of the power of operating on Company's account. Messrs. Mukherjee and Biswas were appointed solicitor of the company and lastly the company was declared to have a lien on all the shares registered in the name of the plaintiff for the sum of Rs. 4 00,887/14/8 alleged to be a debt due by the plaintiff to the company on the said date. At or about the same time, all the plaintiffs men including his son-in-law were physically ejected from the factory premises and the plaintiff himself was refused access either in the factory or in the office. It is clear that Dr. Mukherjee acted with vigour and succeeded in his coup and got complete possession of the company. Mr. Subimal Roy learned counsel appearing for the plaintiff characterised this coup as the first stage in the conspiracy to deprive the plaintiff of his interest in the Company.
6. To continue the narrative. On 16-9-1954, the plaintiff intimated Dr. Mukherjee and Neogy that they had ceased to he directors as no meeting of the Company was held since 7-12-1950. On September 18, 1954 the plaintiff's the then solicitors Messrs. Sandersons and Morgans wrote to Dr. Mukherjee and Neogy to the same effect. On September 23, the directors resolved to enforce the lien against the plaintiffs shares and Dr. Mukherjee was authorised to serve notice of demand for payment of the debt and also to serve notice of sale in default of payment. This notice was served on the plaintiff on the following day. This notice was replied to by the plaintiffs the then solicitors on the 27th in which the indebtedness was denied, right to sell the shares was disputed and the company was warned that any action taken on the basis of this notice would be illegal and would be contested. In October 1954 the parties came to Court.
7. The plaintiff filed a suit seeking a number of declarations--(1) to protect his right to act as managing director, (2) challenging the validity of the issue of new shares and allotment thereof and a number of other reliefs. In this suit Dr. Mukherjee Dr. Neogy and the Company were impleaded as defendants. This is Suit No. 3112 of 1954. On November 15, 1954 another suit was filed by Mrs. Judah and Nagendra Nath Ghosh on behalf of all the shareholders against Dr. Mukherjee, Dr. Neogy and Debendranath Bhattacharji in their capacity as representative of the newly issued shares for a declaration that the plaintiff was still the managing director, for injunction restraining the defendants from interfering with the management of the company and for other reliefs. This is Suit No. 3117 of 1954. There were some interlocutory proceedings in these suits. In Suit No. 3117 of 1954 on the application of the plaintiff a Receiver was appointed by P.B. Mukherji J. against which an appeal was preferred. This is Appeal No. 56 of 1955. An injunction was issued on the plaintiffs application in Suit No. 3112 of 1954 restraining the sale of the same shares, as in the instant suit. Ultimately the suits were settled and withdrawn, and on 24-1-1956 the Receiver made over possession of the Company to Dr. Mukherjee pursuant to the order of the Appeal Court in Appeal No. 56 of 1956. On the same date the shares in suit were sold to the defendant, Ramapada Gupta for Rs. 2.67,520. The defendant Ramapada Gupta is alleged to have paid Rs. 1,30,000/- on account of price and the balance to be paid after delivery of the relevant share certificates. Ramapada's name was immediately entered in the share Register as the owner of the said shares in place of the plaintiff. This will appear from the letter written by the Company to Ramapada Gupta bearing date 24/25th January 1956. By a letter dated February 1, 1956 the plaintiff was informed by the Company that in enforcement of the lien the entire bunch of ordinary shares of the plaintiff had been sold 'and the purchaser's name had been entered in the register of members as the registered holder of the said shares.' The name of the purchaser and the price paid, however, was not mentioned in the letter. The plaintiff thereafter instituted the present suit on February 14, 1956.
8. The suit is instituted for a declaration that the plaintiff is the holder of 26752 ordinary shares and as such is alone entitled to the rights and privileges attached to the shares, that the transfer of shares in the name of the defendant Ramapada Gupta is illegal, void and inoperative, that the defendant Ramapada Gupta be restrained by an injunction from exercising any right or privilege attached to these shares, that the share register be rectified and other reliefs, such as damages against Ramapada Gupta. It must be admitted that the drafting of the plaint is not very happy. There are, however, averments which do disclose a sufficient cause of action against both the defendants. The plaint does contain inter alia the following averments. No general meeting having been held for years, there were no properly appointed directors from January 1951 onwards and that Dr. Mukherjee and Neogy had discovered before 23-9-1954 that they had vacated their office and were not entitled to act as directors and that they nevertheless persisted, in acting as directors, that the general meetings that were held after 1950 were all illegal; that no debt was due by the plaintiff as alleged or at all for which the company can claim any lien and that in any event it was not an ascertained amount or presently payable. The sale was purported to be held by Dr. S.L. Mukherjee and Dr. B.P. Neogy who masqueraded themselves as the Board of Directors, in other words, it is alleged that they acted as directors though they were not in fact directors. The sale has been characterised fraudulent in consequence. There is a clear averment that the defendant Ramapada Gupta had full knowledge of the illegal nature of the transaction and that the sale was fictitious. These allegations, in my judgment, do amount to an averment of absence of bona fide on the part of Ramapada Gupta in respect of his purchase if there was a purchase at all.
9. The Company in its written statement disputed each of the allegations made in the plaint. It is pleaded that the various meetings of the company were properly held, that Dr. Mukherji and were properly appointed directors and were entitled to act as such, that the plaintiff was liable to pay to the company the sum referred to in the letter dated 24-9-1954, that the same was presently payable and that the Company had lien on the shares of the plaintiff for the said sum, that the sale was properly effected in enforcement of the lien. It is alleged that the plaintiff is not entitled to challenge Ramapada's title as purchaser. It is denied that the sale was fraudulent or fictitious as alleged in the plaint. In paragraph 22 the point is taken that the suit is bad for non-joinder of necessary parties. In paragraph 23 it is pleaded that the suit is barred by the provisions of Order 2 Rule 2 and Order 23 Rule 1(3) of the Code of Civil Procedure by reason of the withdrawal of suits Nos. 8112 and 3117 of 1954 without permission to institute a fresh suit. The defendant Ramapada Gupta in his written statement made out substantially the same defence. In paragraph 1 of the written statement he sets out the informations he had when he purchased the shares. The only information he had was that the shares belonged to the plaintiff, that the plaintiff was indebted to the company for Rs. 4.00,887/14/8 for which the company had a lien, that due notice to enforce the lien was given, that plaintiff instituted a suit challenging his indebtedness to the company, that in the said suit an injunction was issued against Dr. Mukherjee and Neogy restraining them from selling the shares in enforcement of the lien and that the suit was withdrawn without any liberty to institute a fresh suit on the same subject matter. He had further information that by an order of the Court of Appeal the Receiver was directed to make over possession to a nominee of the Board of Directors consisting of Dr. Mukherjee, Dr. Neogy and D. N. Bhattacharji and that on January 24, 1956 when Ramapada Gupta purchased the shares, no suit was pending with respect to the shares and that the plaintiff had not paid off his dues to the company. Fully relying on these informations the defendant Ramapada Gupta bona fide purchased the said shares at par.
10. On these pleadings the following issues were settled:
1. Is this suit barred by Order II, Rule 2(3) and/or Order 33, Rule 1(3) of the Code of Civil Procedure?
2. Were any Annual General Meetings of theCompany held on 6-1-1955? Were the elections ofDirectors in the said meetings invalid as allegedin the plaint?
3. (a) Were there no Directors or sufficient Directors of the Company as alleged in paragraph 14 of the plaint?
(b) Did five members of the Company convene an Extra-ordinary General Meeting as alleged in the said paragraph? If so, was it duly convened ?
(c) Was there any Extra-ordinary General Meeting of the Company as alleged in the said paragraph? If so, was a new Board of Directors elected in the said Meeting as alleged in the said paragraph? Was such election lawful?
4. (a) Was there any money due by the plaintiff to the defendant company for debts or liabilities If so, how much?
(b) How much of the said amount is covered by the notice dated 24-9-1954?
(c) For what sum the Company had a lien on the plaintiffs shares?
(d) Was the defendant company entitled to sell the shares in enforcement of such lien?
5. Was the sale of 26752 Ordinary Shares of the Company belonging to the plaintiff to the defendant No. 1 bad, illegal or void as alleged in paragraph 21 of the plaint?
6. Did defendant No. 1 connive and/or otherwise conspire with Dr. Mukherjee and Dr. Neogy in effecting the sale of the said shares to defendant No. 1 and in entering the name of defendant No. 1 in the share register of the company?
7. Is the plaintiff entitled to rectification of the Share Register?
8. Did the plaintiff continue to be the owner of the shares in suit after the date of alleged sale?
9. Did Dr. S.L. Mukherjee or Dr. Neogy vacate their office of Directors or cease to be Directors of the Company as alleged in paragraph 9 read with paragraphs 7 and 8 of the plaint?
10. Is the suit bad for non-joinder of Dr. S. L. Mukherjee and Dr. Neogy?
11. To what relief or reliefs, if any, is the plaintiff entitled?
11. In support of his case the plaintiff tendered his own evidence. The defendant company tendered the evidence of Dr. S.L. Mukherjee its present managing director, Sri Bimal Mitra the Accountant in 1954 and a number of other employees of the company and one Dr. Das Gupta. Defendant Ramapada Gupta did not tender his own evidence nor call any witness to tender evidence on his behalf. Over and above this oral evidence, a large mass of documentary evidence has been tendered. To prove the plaintiffs liability, entries in the ledger books of the company for various years, a number of statements compiled by the officers of the company, the balance sheets of the company with auditor's report, a large number of vouchees and correspondence have been tendered. The proceedings in the minute books of the general meetings and Directors' meetings have also been tendered by either side. As none of the documents were admitted and formal proof was not dispensed with, considerable time was spent in formally proving the entries, the vouchers and the minutes and records of the company. Witnesses who came to prove these documents were elaborately cross-examined. Certain court proceedings and correspondence have also been tendered in evidence. (After considering the evidence. His Lordship proceeded):
12. A point of law has been raised by the defendants which, if decided in their favour, must result in the dismissal of this suit. I may as well consider the point now. Previously two suits were instituted; one by the plaintiff, being suit No. 3112 of 1954 and the other by the plaintiff's wife along with two others being suit No. 3117 of 1954. The latter suit was a representative suit on behalf of the shareholders of the defendant company. The suits, as stated before, were withdrawn and no liberty was asked for or obtained to institute fresh suits on the same subject-matter. The point taken is that the withdrawal of the two suits, specially suit No. 3112 of 1954, in which the present plaintiff was the plaintiff, without liberty to institute a fresh suit on the same subject-matter operates as a bar to the institution of the instant suit under Order 23 Rule 1(3) and Order 2, Rule 2 of the Code of Civil Procedure.
13. To take up Suit No. 3112 of 1954 first. The suit was instituted by the present plaintiff against the defendant company, Dr. Sudhir Lal Mukherjee and Birendra Prasad Neogy. The reliefs claimed in the suit are :
'1. Declaration that the plaintiff is the Managing Director of the defendant company and that any resolutions purported to have been passed without notice to him to the effect that he has ceased to be so and has vacated office as director and preventing him from operating the banking accounts of the said company and otherwise exercise his rights as such Managing Director as aforesaid are void, illegal and not binding upon him and that the said resolutions have not in any way affected his rights;
2. Declaration that any other resolutions likewise purported to have been passed without notice to the plaintiff authorising the offer of shares under Section 105C of the Indian Companies Act, or otherwise affecting his rights as a share-holder of the defendant company and all action taken pursuant to such resolutions are void, illegal and not binding on him and that the said resolutions and such action have not in any way affected his rights;
3. Declaration that the plaintiff as a member of the defendant company is entitled as of right to obtain shares in case of a proper issue of capital thereof;
4. Allotment to the plaintiff of shares to which he may be entitled in case of any such proper, issue of capital;
5. Rectification of the share register of the defendant Company, if necessary;
8. Enquiry into damages and judgment for theamount found due;
9. All such directions and orders as will afford complete relief to the plaintiff; and
14. The fact pleaded in the body of the plaint, apart from the introductory facts, relate to the prayers 1 and 2, that is, with reference to the title of the plaintiff to act as Managing Director and to the increase of share capital and the allotment of new shares. All the allegations in the body of the plaint, except what is contained in paragraph 20 are in support of the two declarations claimed in prayers 1 and 2 of the plaint. The plaint does indicate an intention on the part of the plaintiff to agitate his right with respect to the new ordinary shares purported to have been issued and also the plaintiffs right to act as Managing Director. With respect to these rights only declaration is prayed in prayers 1 and 2 of the plaint. The other reliefs in the plaint are consequential. On a fair reading of the plaint, it cannot be said that the suit in any way relates to the old shares belonging to the plaintiff. There are, however two praragraphs in the plaint which, according to Mr. P.R. Das, the learned counsel for the defendant company, indicate that the suit related also to the old shares of the plaintiff. Paragraph 9 and paragraph 20 of the plaint are relied on by Mr. P.R. Das, paragraph 9 states that out of 40,000 fully paid up ordinary shares the plaintiff was the registered holder of 26,752 snares and he was also the owner of the preference shares as well. Paragraph 20 of the plaint reads as follows:
'By a letter dated 24-9-1954, purported to be signed by Defendant No. 1 on behalf of the Board of Directors of the said company a demand was purported to be made on behalf of the said Company on the plaintiff for payment of Rs. 4.00,887-14-8 alleged to be due from him to the said company and by the said letter it was threatened that in default of such payment within seven days from the date of its receipt the alleged lien of the Company in respect of the shares held by the plaintiff would be enforced by the sale of the said shares. The plaintiff asserts that no sum is due from him to the said company and the object of the said demand and the said threat is to put pressure upon him and to deprive him of his property as well as just rights.'
15. Mr. Das's argument is that these paragraphs indicate that the prayer for injunction has not merely reference to the two declaratory reliefs claimed in prayers 1 and 2, but also to the old shares which are threatened to be sold. I do not agree. The allegations in paragraph 20 have been made as illustrations of wrongful conduct of the defendants and nothing more. The concluding sentence in the paragraph does not indicate that the allegation has been made with the object of claiming any relief thereon. In my judgment, suit No. 3112 of 1954 was not in relation to 26,752 old shares in the defendant company of which the plaintiff was the registered holder. The threat of sale of the shares is in enforcement of a lien for debt. The right to sell the shares is based on a contract contained in the Articles. In a suit for injunction restraining a breach of a contractual obligation, a pleader must, at least, plead the contract and the threatened breach thereof. In the plaint under consideration the Articles constituting the contract have not been pleaded at all. At its highest, the allegation made in paragraph 20 amounts to an allegation of the breach. In the absence of any averment of the Articles constituting the contract in the plaint I cannot persuade myself to hold that by merely pleading a breach the learned pleader intended to frame a claim for injunction against the sale of shares. Mr. Das argued that even though in the prayer of the plaint no declaration is claimed to the effect that the shares are not liable to be sold in enforcement of the lien for the dett alleged, the Court can in the suit as framed pass a decree for such declaration and issue injunction restraining sale of the shares. He submitted that this can be done under Order 7, Rule 7 of the Code of Civil Procedure. I am unable to agree that under the said rule it is permissible to grant this prayer on the plaint as it stands without any amendment.
16. Mr. Das next argued that in fact on the same date the suit No. 15112 of 1954 was filed. An application for injunction was moved and an order obtained restraining the defendants from selling the shares. This tends to show that the suit was not merely with respect to the Managing Directorship of the plaintiff and the issue and allotment of new shares, but also in respect of 26,752 old shares of the plaintiff in the defendant company. In my judgment for the determination of the subject-matter of a suit under Order 23, Rule 1(3) subsequent interlocutory applications or orders passed on such applications have no relevance and bearing. Injunction can be issued by the Court even with respect to a matter which is not the subject-matter of a suit. Order 39, Rule 1(b) clearly indicates that even in a suit for money, the Court is competent to issue an injunction, when it is satisfied that the defendant threatens or intends to remove or dispose of his property which is wholly outside the scope of the suit with a view to defraud his creditors. Again apart from Order 39 this Court has inherent power to issue injunctions. I am, therefore, unable to hold that the fact that an injunction has been issued in this case against the defendants restraining them from selling the shares in suit proves that the subject-matter of the suit No, 3112 of 1954 must have been the right to sell the shares. Again, an application for injunction may not come within the ambit of the suit and the order passed may not be correct. In the instant case, if the attention of the learned Judge who passed the order for injunction, was drawn to the plaint and the point taken that the order asked for was outside the suit, the learned Judge might not have passed the order of injunction without suitable amendment of the plaint, so as to bring the application within the purview of the suit. It does not appear that the point was taken and the learned Judge was invited to decide whether the suit covers the application for injunction.
17. Assuming that on a correct reading of the plaint in Suit No. 3112 of 1954 it should be held that the suit does include a prayer for injunction restraining the defendants from selling the shares in suit, can it be said that the instant suit is barred by reason of the withdrawal of the previously instituted suit No. 3112 of 1954? This will depend on the construction of Order 23, Rule 1(3) of the Code of Civil Procedure. That rule provides that 'when the plaintiff withdraws from a suit without the permission of the Court ........... he shall be precluded from instituting a fresh suit in respect of such subject-matter'. In order that this rule may apply the instant suit must be in respect of the same subject-matter as the suit No. 3112 of 1954. The question, therefore, involves the determination of the meaning of the phrase 'in respect to the same subject-matter' used in the rule.
18. Mr. Das argued that the words 'same subject-matter' do not mean and cannot be taken as equivalent to 'the same cause of action for the same reliefs'. The words 'cause of action' and 'relief are very familiar phrases well-known to the legislature and having a clear meaning. In fact in the Code itself the legislature has used the phrase in very many sections and rules. If the legislature intended the 'subject-matter' means the same thing as 'cause of action for the same relief the legislature would have said so. The legislature has not, however, used the phrase 'same cause of action for the same relief but has used the phrase 'in respect of the same subject-matter.' It follows that the two things are not identical and even if the cause of action and the relief claimed in the subsequent suit may not be the same as the cause of action and relief claimed in the previous suit withdrawn, the subsequent suit may yet be in respect of the same subject-matter. Mr. Das has argued with good deal of reason that it had been so, any clever draftsman could avoid the mischief of the rule by clever draftsmanship by simply adding to or modifying the reliefs and the cause of action, though the substance of the suit remained the same. This argument certainly has force. I agree that if on a comparison of the plaints in the two suits it is found that the reliefs claimed and the allegations constituting the cause of action are not exactly identical, that will not be conclusive and subsequent suit may yet be hit by the mischief of Order 23, Rule 1(3). Mr. Das is also right when he submitted that for the determination of the question one has to look to the substance of the two suits and not to their form and language only. But how far does it take us in solving the problem? We have yet to find out what the phrase 'in respect to the same subject-matter' means. The subject-matter of a suit can only be ascertained from they plaint filed. For the purpose of finding out the meaning of 'subject-matter' within the meaning of Order 23, Rule 1(3) it is not necessary nor is it proper to look to the written statement. What the plaint should contain is clearly stated in the Code of Civil Procedure. The imperative provisions of a plaint are, amongst others, the facts constituting the cause of action and the relief which the plaintiff claims. In other words, the plaint must state the reliefs claimed and the cause of action that entitles the plaintiff to get the reliefs claimed. This indicates that the subject-matter of a suit can only be ascertained from the cause of action and relief, set out in the plaint. I cannot conceive how without reference to the cause of action and the reliefs, as stated in the plaint, the subject-matter of a suit can be ascertained. If the cause of action in the subsequent suit is different from the cause of action in the previous suit withdrawn, the two suits must be held to be in respect of different subject-matter. I hasten to add that the two causes of action must not be different in form only but in substance; in other words, the difference must not be due to the clever draftsmanship of the counsel who drafted the subsequent plaint whereby the same cause of action has been presented in different form. As I read the decided authorities to be referred to presently, I think the trend of decisions is consistent with the conclusions set out above.
19. It is however, argued that cause of action' is nothing but a bundle of facts that entitles the plaintiff to the reliefs claimed. If the bundle of facts constituting the cause of action in the first suit is the same as the bundle of facts constituting the cause of action in the second suit, less one fact, that entitles the plaintiff to the reliefs claimed in the second suit, would the cause of action in the two suits be considered substantially the same? I do not think so. It is the combination of facts, the concatenation of circumstances that give rise to a cause of action and a claim for relief. The addition of a new fact to a state of existing facts may change the character of the suit and the right to relief. I am unable to accept the argument that for the purpose of Order 23, Rule 1(3) each one of the bundle of facts jointly and severally should be treated as giving rise to the cause of action so that the subject-matter of the suit is so extensive as to cover all claims that may arise from the proof of each single fact in such permutation and combination as can be imagined. I do not think so. For the purpose of cause of action all the facts pleaded have to be looked at as a 'bundle' that is in its collective capacity as giving right to a claim. Each fact cannot be looked at in isolation, or the facts cannot be looked at in a different combination. If the reliefs claimed in the subsequent suit though not expressly stated but was implicit in the previous plaint by reason of the bundle of facts pleaded as constituting thecause of action, the plaintiff would be debarredfrom claiming the relief in a subsequent suit basedon the same bundle of facts because of Order 2, Rule 2of the Code. I doubt whether in such a case Order 23,Rule 1(3) would be a bar, even though certain decisionsmay perhaps be read as suggesting it would. Buttthis is by the way.
20. It would follow from what is stated before that of the cause of action which gave rise tothe reliefs claimed in the subsequent suit did notarise when the previous suit was instituted and withdrawn in the sense that one important event absolutely essential to complete the cause of action inthe subsequent suit did not take place, then thesubject-matter of the two suits must be differentand Order 23, Rule 1(3) has no application. It may bethat for successful determination of the suit allegedto be hit by the mischief of Order 23, Rule 1(3) questionsand issues have to be decided which were substantially at issue in the previously instituted suit; butthat in my judgment does not make the subject-matter in the two suits to be the same. If the previous suit was decided against the plaintiff then thedecisions on those issues either expressly or constructively must have been taken to have beendecided against the plaintiff and the subsequentsuit would fail because of the principles of res judicata embodied in Section 11 of the Code. If however thesuit was not decided but merely withdrawn, noquestion of res judicata arises and in law the plaintiff is still entitled to agitate the question in Court.The argument advanced by Mr. Das in substanceand in fact is an attempt to extend the principlesof res judicata to cases in which there has been noadjudication by the Court. In my judgment theprinciples of Section 11 and Order 23, Rule 1(3) are differentand it is not permissible to apply the principles ofres judicata to cases under Order 23 Rule 1(3).
21. Mr. Das has strenuously argued that Order 23, Rule 1(3) having made the identity of subject-matter and not the identity of cause of action and relief claimed, as a bar and the word 'subject-matter' having been nowhere defined, the Legislature must be taken to have laid down a commonsense test for not allowing a subsequent suit to proceed having regard to the withdrawal of the prior suit. That important test, according to Mr. Das is would the subsequent suit be necessary had the earlier suit proceeded upto judgment? If not the subsequent suit must be in respect to the same subject-matter within the meaning of Order 23, Rule 1(3). In other words, if the subsequent suit becomes unnecessary had the previous suit been proceeded upto judgment, then it must be held that the subsequent suit is covered by the previous suit i.e. the subject-matter of the two suits are identical. In the instant case, if in the previous suit a decree for injunction was passed restraining the defendant Company from selling the shares, the subsequent suit for a declaration that the defendant Ramapada Gupta had acquired no title pursuant to the sale effected by the company to the defendant Ramapada would nave been unnecessary. Hence it must be held that the subject-matter of the two suits are the same, Mr. Das conceded that if the sale is sought to be challenged on any ground other than the ground on which injunction was claimed or could have been claimed in the previous suit, then the subject-matter in the two suits must be held to be different In the instant case, according to Mr. Das, in substance the ground of challenging the sale is the same, namely no debt no lien no right to sell. It is to be noted, however, that some of the grounds on which the sale is challenged in the instant suit are not the grounds on which the sale was challenged in the previous suit No. 3112 of 1954. For instance, in the instant suit, the sale has been challenged on the ground that the sale was fictitious, that there was no lien or charge which covers not merely a case of no indebtedness but also the determination of questions of interpretation of the Articles giving rise to the Hen or charge, that the sale was collusive, that the sale was held in a meeting of the Board consisting of persons who were not entitled to act and function as directors at the date of sale. Mr. Das asked me to ignore the new grounds taken to challenge the sale in the instant suit, firstly because some of them could have been taken and should have been taken in the previous suit, secondly because the allegations of fraud, collusion and conspiracy alleged are without particulars and thirdly because these allegations have been added to evade the provisions of Order 23, Rule 1(3). It is, according to Mr. Das, nothing more than clever draftsmanship and the old case in suit No. 3112 of 1954 has been instituted in a new garb. In substance the suits are the same. I am unable to accept this argument of Mr. Das. The additional grounds taken in the instant suit to challenge the sale was not as it could not be present when the Suit No. 3112 of 1954 was instituted. The allegations of fact in support of the case of fraud and collusion and the mala fide character of the transaction that took place on 24-1-1956 are to be found in the plaint and I am not entitled to ignore them. Lastly. I do not consider that there has been any clever ness on the part of the draftsman of the plaint in the instant suit and I do not agree that the object of drafting the plaint in the present form was to evade the provisions of Order 23 Rule 1 (3) or that certain redundant or unsubstantial grounds have been taken in the present suit to challenge the sale which were not taken in the previous suit. It follows that even if Mr. Das's interpretation of the word 'subject matter' in Order 23 Rule 1(3) is accepted, the present suit cannot be batted under that rule. I am, how-ever, unable to accept Mr. Das's interpretation of the word 'subject matter' in Order 23 Rule 1 (3) and the test which, according to him should be applied in determining whether the subsequent suit is barred under that sub-rule or not. In order that the bar may operate the suit sought to be barred must be covered by the previous suit withdrawn. If the cause of action for the suit sought to be barred did not arise when the previous suit was instituted, then the second suit cannot be said to be covered by the suit withdrawn. It may be that if the previous suit instead of being withdrawn was proceeded upto judgment, it would have determined issues that would have been binding on the parties, thereby the institution of a second suit would have been either unnecessary or useless. The second suit may be unnecessary because the decision has become binding on both the parties but that does not mean that the second suit is covered by the first or that the subject matter of the two suits is identical. Mr. Das's argument as I stated before amounts really to the extension of the principles of res judicata in construing Order 23 Rule 1 (3) even though there has been no decision by the Court either actually or constructively. In my judgment this is not permissible.
22. Let me now consider the cases cited on the point and first the two decisions on which Mr. Das strongly relies. The first suit relied on by Mr. Das is the suit of Rakhmabai Piraji v. Mahadeo Narayan decided by a division Bench of the Bombay High Court consisting of Scott C. J and Batchelor I. reported in ILR 42 Bom 155 : (AIR 1917 Bom 10 (1)). This was a suit for ejectment. The plaintiff in that case previously instituted another suit for ejectment but withdrew the suit after detecting that there was no proper notice to quit served on the defendant. In the subsequent suit for ejectment the point was taken that by reason of the withdrawal of the previous suit without permission to institute a fresh suit on the same subject matter, the subsequent suit was barred under Order 23 Rule 1 (3). The Bench negatived this contention of the defendant with the following observation :
'We are of opinion, that 'subject matter' means to use the words of Order 1, Rule 1, 'the series of acts or transactions alleged to exist giving rise to the relief claimed.' Obviously the first series of acts or transactions which formed the basis of the first suit was incomplete or the plaintiff would have been able to prosecute his suit to decree. It was incomplete because there was no notice to quit. The second series of acts or transactions is complete because the notice to quit has been given, and therefore, the two suits are not in respect of the same subject matter.
The same result arises if 'subject-matter' is to be taken to be 'the cause of action' in the sense in which it is usually understood, namely the bundle of facts which have to be proved in order to entitle the plaintiff to relief. In that sense the word, 'subject matter' was understood by the Madras High Court in Achuta Menon v. Achuta Nayer (ILR 21 Mad 35) and by the Calcutta High Court in Kamini Kant Roy v. Ram Nath Chuckerbutty (ILR 21 Cal 265) in cases arising under Section 373 of the Code of 1882.'
22-a. Mr. Das's argument is that in the cited case the suit withdrawn could not have been successfully prosecuted to a decree and it is because of this fact that the Court held that the suit withdrawn would not operate as a bar under Order 23 Rule 1 (3). But if the suit could have been successfully prosecuted upto the decree, the subsequent suit for ejectment would have been barred. I am unable to agree with Mr. Das. The reason why the suit withdrawn was held not to operate as a bar to the subsequent suit for ejectment was that the fact or due service of the notice to quit--an essential fact to enable the plaintiff to get a decree was not in existence when the suit withdrawn was instituted. Hence the cause of action to get a decree for ejectment in the first suit was incomplete and the cause of action in the second suit only became complete after the notice to quit was duly served. Hence the subject matter in the subsequent suit was held to be different from the subject-matter, in the suit withdrawn. The concluding portion of the judgment clearly indicates that in order that the subject matter or the two suits may be the same, the cause of action of the two suits must substantially be the same and that if the one fact constituting the cause of action in the second suit did not arise when the first suit was instituted, the subject-matter of the two suits cannot be the same.
23. The second decision on which Mr. Das strongly relies is a decision of the Division Bench of the Rangoon High Court in the case of Maung Mu v. Mating Kan Gyi. I.L.R. 1 Rang. 618: AIR 1924 Rang. 127. In this case the plaintiff sought to establish his title in a lottery ticket which won a prize of War Bonds for Rs. 75,000/-. In the first suit which was subsequently withdrawn no consequential relief was claimed. The reasons given for not claiming any consequential relief was that the ticket was in the possession of the Managers of the Sweepstake and the plaintiff believed that after the declaration as to the plaintiffs title in the ticket was given the Managers would make over the ticket to the plaintiff. After the withdrawal of the first suit, the War Bonds were given to the defendants and the defendants sold them to a third party. Thereupon the plaintiff instituted another suit impleading the defendants in the previous suit and the subsequent purchaser. The relief claimed in the subsequent suit is not declaration of title to the ticket or the War Loan Bonds but recovery of the War Loan Bonds or its value Rs. 75,000/-. The Court held that though the reliefs claimed are different and the cause of action has been cleverly put in such a way as to appear different from the cause of action in the previous suit, the two suits were substantially of the same nature though couched in different form. At page 627 of the report (ILR Rang) : (at p. 131 of AIR) I find the following observation :
'I am of opinion therefore that viewed broadly the two suits are substantially the same in nature, though couched in different form.
The crucial matter of each suit is in reality the title of plaintiffs to the winning ticket. If they failed to prove that title neither suit could succeed.
Plaintiffs' alleged title to the ticket is in each suit the ultimate cause of action.'
24. Again a little below, 'The further relief claimed in the second suit is purely consequential; and the fundamental basis of the suits to slightly vary in the words of the District Judge, remains the same.'
The ratio of decision in this case is that the title to the ticket is in each case the ultimate cause of action, therefore, there was identity of subject-matter Stripped of its trappings the suit alleged to be hit by the mischief of Order 23 Rule 1 (3) is the same as the suit withdrawn. It will be noticed that the 'ultimate cause of action' has been taken to be the test in determining whether there was identity of subject matter. Some observations in the judgment do to some extent lend support to the argument of Mr. Das. But at the same time it must be noticed that ultimate decision rests on the finding that the ultimate cause of action in both the suits was the same, namely, title to the ticket and the consequential relief though not expressly claimed in this suit withdrawn was implicitly there and the claim to the possession of the shares in the second suit was implicitly in the suit withdrawn. It does not appear from the judgment that the Court considered the question whether Order 23 Rule 1 (3) applies to a case where the defendants in the two suits are not the same.
25. One important fact that distinguishes that suit cited from the instant suit is that whereas in the cited suit the plaintiff's cause of action against the defendants for declaration of title to the ticket and the consequential relief to get possession of the ticket was complete when the first suit withdrawn was instituted, in the instant case at the date of the institution of the suit withdrawn the plaintiff had full title in the shares and the cause of action for a suit for declaration of title and consequential relief of rectification of share register did not arise. The case cited, therefore, is clearly distinguishable on that ground.
26. Mr. Chowdhury cited some cases which may now be noticed. The first case cited is the case of Mukhoda Soondury Dasi v. Ram Churn Karmokar decided by a division bench of this Court and reported in ILR 8 Cal, 871. In the annotation of the Civil Procedure Code by Sir Dinshaw Mulla, this case is relied on in support of the proposition that the second suit will not be barred if it is brought against a defendant who was not a defendant in the previous suit withdrawn, even though the rule does not expressly say so.
27. The next case cited by Mr. Chowdhury is the case of ILR 21 Cal 265 decided by a Division Bench of this Court consisting of Batterji and Prinsep JJ. and reported in ILR 21 Cal. 265. In this case the plaintiff first instituted a suit to establish his right to sell certain property in satisfaction of a decree against a judgment debtor but he withdrew the suit without obtaining leave to institute a fresh suit. Subsequently he instituted another suit to establish his right to sell the same property in satisfaction of another decree against the same judgment-debtor. The Court held that the second suit was not barred by the provisions of Section 373 of the old Code which in substance is the same as Order 21 Rule 1 (3) of the present Code. It is to be noted however that the second decree was not obtained by the plaintiff but was transferred to the plaintiff by the original decree holder. But that hardly affects the applicability of the rule. The point noted by the Bench is that though the suit withdrawn and the subsequent suit in all other respects were identical the cause of action in the suit withdrawn was different from the cause of action in the subsequent suit. Then follows the following observation which is very important:
'That being so, we think the present suit is not for the same matter as that for which the former suit was brought. It may be quite true that the main issue to be tried in the present suit is the same as that which was the main issue in the former suit, but that would not make the present suit one for the same matter as that for which the former suit was brought. If the former suit had been heard and determined, and if Section 13 (Section 11 of the present Code) was in consequence applicable to the suit such an issue tried in the former suit might have operated as res judicata in the present suit; but that is not the case here.'
This observation runs counter to the proposition put forward by Mr. Das that identity of the main issue in both the suits is the test in determining the identity of the subject matter of the two suits. It also runs counter to the proposition of Mr. Das that the test to be applied in determining whether the Sub-rule applies is whether the second suit would be necessary if the first suit was fought upto judgment.
28. In the case of Gopal Chandra v. Purna Chandra reported in 4 Cal W.N. 110 Banerjee J. made the following observation :
'The mere fact of the two suits being in respect of the same property would not be sufficient to make the later suit one for the some matter as the former, when the state of facts leading to the two suits and the reliefs claimed are different.
These two old decisions of this court of a Bench consisting of very eminent Judges, have been cited and followed in a number of cases not only by this Court but also other courts as well. This decision in 4 Cal W.N. 110 has been cited with approval by a Full Bench of the Madras High Court in a case under the new Code which I have to consider now. This is the case of Singha Reddi v. Subba Reddi decided by a Full Bench of the Madras High Court and reported in ILR 39 Mad. 987 : (AIR 1917 Mad 512 (2)). In this case the plaintiff the next reversioner instituted a suit against a Hindu widow for a declaration that the alienation by her of her husband's estate is void and not binding on the reversioners. In that suit the alienee was impleaded as the second defendant. During the pendency of the suit the widow died. The plaintiff thereupon withdrew the suit without obtaining leave to institute a fresh suit on the same subject matter. Then the plaintiff instituted a fresh suit against the alienee for possession of the property alienated because after the death of the widow the property vested in the plaintiff. The point taken by the defendant in the new suit was that by reason of the withdrawal of the previous suit without obtaining leave to institute a fresh suit, the present suit was barred by Order 23 Rule 1 (3) of the Code of Civil Procedure. Sadasiva Iyer J. who referred the point to the Full Bench considered the entire case law and in a very well considered judgment was of opinion that Order 23 Rule 1 (3) does not operate as a bar when the cause of action and the relief claimed in the subsequent suit are substantially different from the cause of action and relief claimed in the suit withdrawn. . The Full Bench concurred with the judgment of Sadasiva Iyer J. and expressed their opinion as Follows :'The terms 'subject-matter' and 'the same matter' which occurred in the corresponding Section 373 of the old Code have not been defined, and must, we think, be construed strictly in a penal provision of this character. Without attempting an exhaustive definition of all that may be included in the term 'subject-matter' we are of opinion that where as in the present case, the cause of action and the relief claimed in the second suit are not the same as the cause of action and the relief claimed in the first suit, the second suit cannot be considered. to have been brought in respect of the same subject-matter as the first suit. This was expressly decided in 4 Cal W.N. 110 with which we agree.'
29. During argument, the applicability of Order 23 Rule 1 (3) to partition and redemption suits was raised. The judicial decisions are uniform that the withdrawal of such a partition or redemption suit without liberty, does not operate as a bar to a subsequent suit for partition or redemption. The suit withdrawn and the new suit instituted after the withdrawal of a suit for partition or redemption is in every respect the same except this that the cause of action being recurring in these cases, the cause of action in the suit withdrawn is different from the cause of action in the subsequent suit instituted for partition or redemption. It is this want of identity of the cause of action, though otherwise the two suits are identical, that prevents the application of Order 23 Rule 1 (3) in the case of partition and redemption suits. To get out of this difficulty Mr. Das argued that in the case of partition and redemption suits Order 23 Rule 1 (3) does not apply because Order 23 Rule 1 (3) is a law of Procedure and must give place to the substantive law of partition and mortgage, that gives right to the parties to seek partition and redemption till the property is divided and allotted to the parties in severally in the case of partition or till the property is actually sold according to law in enforcement of the mortgage or the mortgage redeemed. The substantive law in every case gives the right to enforce a claim by suit. In the case of partition and redemption, the substantive right to claim a partition or redemption is always there and the parties have recurring cause of action as long as the right subsists. It is non identity of the cause of action in the two suits even though otherwise the suits are the same that prevents the application of Order 23 Rule 1(3) to this class of cases. Order 23 Rule 1(3) does not purport to take away or affect any substantive right. It only takes away a party's remedy by preventing him to enforce his right by a suit.
30. For reasons given above I am unable to hold that the withdrawal of Suit No. 3112 of 1954 operates as a bar to the institution of the instant suit.
31. So far as Suit No. 3117 of 1954 is concerned, its withdrawal without leave to institute a fresh suit clearly cannot operate as a bar. In this suit the defendants are different from the defendants in the instant suit. The defendant company which is a defendant in the instant suit is the plaintiff in Suit No 3117 of 1954. The plaintiff in this suit is not the plaintiff in Suit No. 3117 of 1954, but it is alleged that the three plaintiffs who are the plaintiffs in Suit No. 3117 of 1954 have instituted the suit in their representative capacity for and on behalf of all the shareholders. It is not necessary for me to decide whether such institution of a representative suit does come under Order 23l Rule 1 (3) because in the instant case it has not been proved that the advertisement as required by Order 1 Rule 8 had been issued and the suit has been decided as a representative suit in fact. The grounds on which I have decided against the nonapplicability of Order 23 Rule 1 (3) to the other suit also applies to this case. I may state at once that this point was not very much pressed by the learned counsel. Though the point was taken in the written statement that the suit is barred under Order 2 Rule 2 of the Code of Civil Procedure, it had not been pressed at the time of the hearing.
32. The shares in suit were sold to liquidate the plaintiff's indebtedness to the defendant company amounting to Rs. 4,00,887/14/8. According to the defendant company, this total liability of the plaintiff consists of :
(a) Plaintiff's debit balance in the personal account amounting to Rs. 81,002/-.
(b) Unrealised debit 'balance --
(i) Albert David (G.B.) Ltd. amounting toRs. 57,918/3/9.(ii) Albert David (Pak) Ltd. amounting toRs. 1,608/2/- and(iii) Albert David (Cey.) Ltd. amounting toRs. 54654/4/6 and (c) Unusual discount given to -- (i) Albert David (Cey) Ltd. amounting toRs. 76,392/4/- and(ii) Albert David (Pak) Ltd. amounting toRs. 1,29,313/-/1.
The plaintiff is held liable for the unrealised debit balance against the three said foreign companies-He is also made liable for the unusual discount alleged to have been given by the plaintiff to the Ceylon and Pakistan Companies
33. Taking the unrealised debit balance of the Great Rritain, Pakistan and Ceylon Companies first: The claim of the defendant company against the debtor companies have been proved by entries in the books of account, which have been tendered in this case. I have held that the plaintiff as Managing Director of the Company will not be allowed to take advantage of the irregularities in the account books on the basis of which the company's balance-sheet upto October 1953 were prepared. I will therefore take it as proved that the Great Britain Company Pakistan company and Ceylon Company were indebted to the defendant company for the sums stated above. The claims against the Pakistan and Ceylon companies were for goods sold and delivered. The nature of the claim against the Great Britain company is not very clear. The original indebtedness is alleged to have arisen in 1948, when the defendant company is alleged to have advanced a considerable sum of money to the British Company. This sum represents the price of goods sent by the British Company to the defendant company. Gradually as the goods were sold by the defendant company the sale proceeds were credited to the Great Britain Company and the debit entry being the amount advanced have been decreased According to the plaintiff, a considerable amount of the said consignment sent by the Great Britain Company is there still. The transaction according to the entries in the book does not appear to be a case of sale by the British Company. Entries are more consistent with agency the defendant company having acted as the agent of the Great Britain Company and advanced the value of the goods to the principal. But assuming as I do that there are debts due by these foreign companies to the defendant company, I do not understand how they become the liability of the plaintiff. Regarding the claim made on account of unusual discount alleged to have been given by the plaintiff to the Ceylon Company, I find on the evidence there was no such thing as usual or normal discount granted by the company to its different customers within and outside the country. The plaintiff as Managing Director in the usual course for the purpose of expending the market granted discount which in many cases appear to be heavy. This discount was granted in the interest of the Company to push its own products to new markets. There was not the slightest impropriety in the plaintiff's conduct in granting discount in some cases large discount but the sole motive of the plaintiff in granting large discount was to benefit the defendant company. There was no motive, as there could not be to further the interest of the Pakistan and Cevlon companies at the expense of the defendant company, of which the plaintiff was practically the owner. Mr. Subimal Roy was justified in characterising this claim as a moonshine claim. I have no hesitation in holding that both claims made on account of unrealised debit balance of the Great Britain, Pakistan and Ceylon companies and on account of unusual discount given to Pakistan and Ceylon companies are fantastic. These liabilities against the plaintiff have been cooked up by Dr. Mukherjee and Dr. Neogy with full knowledge that they are unreal and fantastic and their motive for cooking up this fantastic liability of the plaintiff is too obvious.
34. It is argued that this liability of the plaintiff as Director arises because of the provisions of Section 86F of the Indian Companies Act and because the plaintiff as the Managing Director was in the position of trustee. Section 86F of the Companies Act reads as follows :
'Except with the consent of the directors, a director of the Company, or the firm of which he is a partner or any partner of such firm, or the private company of which he is a member or director, shall not enter into any contracts for the sale purchased or supply of goods and materials with the company provided that nothing herein contained shall affect any such contract or agreement for such sale, purchase or supply entered into before the commencement of the Indian Companies (Amendment) Act, 1936.
In order that the section may apply, it must be proved that the plaintiff is a member or director of Great Britain, Ceylon or Pakistan companies that these companies are private companies, that contracts for sale, purchase or supply of goods between the defendant company and the other companies were effected by the plaintiff without the consent of the other directors of the defendant company. If there is no proof of any one of the above facts, the section would not apply. It is proved from the plaintiffs admission contained in his letter to the Company dated 7-7-1954 that he was interested as) a member and/or director of the three companies, though there is no evidence as to when the plaintiff became interested, so as to enable the Court to ascertain whether at the time of each contract for sale or purchase the plaintiff was interested as such. There is no evidence that Pakistan Company and Great Britain Company are private companies, though the plaintiff stated in his cross-examination that Ceylon Company was a private Company. Each of these companies is a foreign Company, and Mr. Choudhury is entitled to argue, as he did, that the 'Private Company' referred to in Section 87F must be in private Company as defined by the Indian Companies Act, which does not include a foreign company. Thirdly, no contract for sale has been proved to enable the Court to ascertain the nature of contract. It is certainly doubtful whether the Section will apply if an employee of a private company purchases some goods from the defendant Company in the usual course. The plaintiff as Managing Director of the defendant Company or director of the private Company may have nothing to do with it. If in fact the contracts were entered into by the plaintiff, I believe the other directors had full knowledge and consent in the plaintiff trying to sell goods to the other Companies, though no resolution to that effect has been proved to have been passed. I do not think it imperative that there should be a formal resolution recording the consent of the other directors in the plaintiff's entering into these contracts. I do not think that Sec. 87F applies in terms to the facts of this case.
34-A. Even assuming that Sec. 86F does apply to the case, I do not think the Section imposes on the offending director the liability of the private Companies. It is argued by Mr. Das that these contracts for sale of goods to the private companies must be held to be illegal in the absence of previous consent of the directors and hence there must be restitution of the benefit to the defendant company under Section 65 of the Indian contract Act. In the first place, the language of the section does not indicate that such a contract effected by a director without the consent of the other directors is illegal. The prohibition is against the director and there is a penalty for any violation of the provisions of the section. This does not mean that the contract is void. In the second place, the party liable to restitution under Section 65 of the Indian Contract Act is the private company and even if the plaintiff is a member or director of the private company, he is in law different from the Company. It is to be noted, however, that the claim is made on the footing that the private companies are liable on account of the balance of price under a contract for sale. The claim was never made debors the contract. It 19 interesting to note that the defendant company, upto the date of the suit, never repudiated the contracts, never called upon the private companies to return back the medicines sole by itself and never offered to return back whatever money it received on account of price. I am unable to hold that the plaintiff, as the Managing Director of the defendant company, can be liable For the balance of price due and payable by the foreign companies.
35. Mr. Das further argued that even assuming that Sec. 86F does not cover the case, the plaintiff is, nevertheless, liable on general principles. The plaintiff as a Director was occupying a fiduciary position vis-a-vis the company. Occupying as he did a fiduciary position the plaintiff as a director of the defendant company could not in law enter into any dealings with the Great Britain Pakistan and Ceylon companies in which the plaintiff had interest. This is not permissible on the broad ground that there was a possibility of conflict of duty and interest, that is, duty as a director of the defendant company and interest of the defendant in the three above companies. The court of Equity in such cases strikes down a contract and refuses to enforce it. In the instant case, the plaintiff as Managing Director of the defendant Company did deal with Great Britain, Pakistan and Ceylon Companies, in which admittedly the plaintiff had interest, AH these contracts the Court of Equity would refuse to enforce. Therefore they are illegal contracts under Section 23 of the Indian Contract Act. If the contracts resulting in the dealings of the defendant Company with the three above companies are illegal, then under Section 65 of the Contract Act the benefits received by the three companies from the defendantcompany are to be restored. The benefit receivedby the Pakistan and Ceylon Companies is the unusual commission, that is excess commission abovethe normal commission and also the goods. Thebenefit received by the Great Britain company is theadvance made against goods less the price of suchportion of the goods. This is the argument of Mr.P.R. Das to foist the liability on the plaintiff onaccount of dealings of the defendant Company withthe three above Companies.
35A. The position of the directors has been laid down in a number of authoritative decisions. In Ferguson v. Wilson (1866) 2 Ch. A. 77, Turner and Cairns, LJJ. pointed out that the directors are agents of the Company. The Company cannot itself act in its own person, for it has no person; it can only act through Directors and the case is, as regards the Directors merely the ordinary case of principal and agent, for whenever an agent is liable the directors would be liable. In some sense and to some extent, the directors are no doubt in the position of trustees. In York and North Midland Ry. Co. v. Hudson, (1.845) 16 Beav 485 Roumilly, M.R. observed :
'Directors are persons selected to manage the affairs of the Company for the benefit of the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely.'
This two fold Character of the directors has been well expressed by Lord Selbourne in Great Eastern Railway Company v. Turner, (1872); 8 Ch. A. 149 in these words :
'The Directors are the mere trustees or agents of the company--trustees of the company's money and property; agents in the transactions which they enter into on behalf of the company.'
The observations of Sir George Jessel in the case of Re Forest of Dean, Coal Mining Co., (1878) 10 Ch. D. 450, is to the effect that the directors are trustees of the Company's assets which have come into their hand or which are under their control.
36. It is clear that the directors are trustees in a very limited sense. They are liable as trustees for breach of trust, if they mis-applied the funds or committed breach of byelaws. Their position differs considerably from ordinary trustees and it is futile to apply the entire law of Trust and the whole body of rules enunciated by the Court of Equity defining the rights and liabilities of the trustees, to determine the rights and liabilities of a director. The conduct of the directors is to be measured with reference to the character of the undertaking which they are appointed to manage and conduct. In the case of an ordinary commercial company, a director does not commit a breach of trust when he, in the usual course of business, sells or purchases goods from another company in which the director had interest. He is only liable for breach of trust when he misapplies the fund and mis appropriates any assets In the instant case, the plaintiff as Managing Director has neither misappropriated the funds or the assets of the Company nor is he alleged to have committed any breach of byelaws. How then can the plaintiff be held liable? I do not understand the argument of Mr. Das that Section 23 of the Indian Contract Act applies to the case of a contract entered into by the Managing Director of a public company with another private company in which the said Director has interest. Mr. Das has cited certain cases in which the Court of Equity refused Specific performance of contract. The fact that a contract is not enforced by a Court of Equity on equitable ground does not make the contract illegal within Section 23 of the Indian Contract Act. There may be a perfectly good contract, but nevertheless a Court of Equity would not enforce it on equitable consideration. There is no statute prohibiting contracts between two companies, one private and another public, with some common shareholders and common directors. The two companies in law are two different persons, even though they have some common share-holders or directors. Section 86F of the Companies Act does not, in my judgment, contain any such prohibition. On the contrary, it expressly states that a director, with the consent of the other directors, can enter into a contract with a partnership or private company in which he is a partner or share-holder or director. The section does not seem to recognise any public policy prohibiting contract between a private and public company with some common share-holders or directors. Not a single decision has been cited in which any Court, either in India or in England has held that such a contract between a public company and a private company with a common director is void on the ground of public policy. At best, in one case the Court refused to enforce such a contract and held that it is voidable and public company was relieved of the contractual obligation on equitable grounds. No case has been cited in which after the contract has been fully performed the Court directed restitution of the benefit on the ground that the contract was void.
37. For reasons stated above, I hold that the plaintiff was not indebted to the defendant company on account of its transactions with Great Britain Company, Pakistan Company and Ceylon Company. The total claim made by the defendant company on these accounts comes up to Rs. 3,19,885-14-4. There is no foundation to this claim.
38. I have now to examine the liability of the plaintiff as representing the debit balance in the plaintiff's personal accounts. This debt is proved by the entries in the Company's General Ledger and Control Ledger of the personal account of the plaintiff and by vouchers. I have held that it is not open to the plaintiff to contend that the account books of the company upto October 1953 are not correct, His admission contained in the circular letter dated 16-8-1954, is binding on him. On the basis of entries in the General Ledger Book, the plaintiff's liability to the company as on 31-10-1953 must be held to be Rs. 57,797/-. Subsequent liability has to be strictly proved. I am not satisfied that the entries in the General Ledger from 1-11-1953 to 10-9-1954 were made before the plaintiff was ejected from office on 10-9-1954. Nor am I satisfied with the entries made in the Control Ledger. The probabilities are that these entries were made after the plaintiff was ejected and made under the direction of Dr. S. L. Mukherjee, who was ruling over the destinies of this company since then. Dr. Mukherjee was over anxious to build up as much liability of the plaintiff as possible. The entries in the General Ledger and Control Ledger cannot be taken as sufficient to make the plaintiff liable. The other evidence is the vouchers. To the extent the vouchers are signed by the plaintiff and such of the vouchers as have been proved to represent payment made to the Bank on account of the plaintiffs relations or plaintiff's such relations as wife and daughter, they will constitute the liability of the plaintiff. But control vouchers from which many of the entries in the Control Ledger have been made represent money spent on other accounts for which the plaintiff has been made liable. These payments were made on other accounts and Bimal Mitra had no personal knowledge of it. They must have been debited against the plaintiff's personal account by Bimal Mitra under instruction of the man controlling the company--most probably Dr. Mukherjee or Dr. Neogy. I would not hold the plaintiff liable on these entries based on these control ledger vouchers. Many of the other entries in the Control Ledger were made by way of transfer of entries from the personal account of other people to the plaintiff's account. The correctness of the entries in the other accounts has not been satisfactorily Droved.
39. For reasons given above, I am unable to hold that on 10-9-1954, the plaintiff in his personal account was indebted to the defendant company in the sum of Rs. 81,002/-. The plaintiff has been proved to have been liable on 31-10-1953 for Rs. 57,797, but for subsequent period the proof of liability is insufficient. I believe, however, on the evidence on record that on 10-9-1954, the plaintiff was liable, but not to the extent of Rs. 81,002/- as claimed by the defendant company. It is not necessary for me to determine the exact indebtedness of the plaintiff in this suit. To appreciate the arguments advanced by the parties and to be considered later, it is necessary to decide whether the plaintiff's indebtedness on 10-9-1954 was Rs. 4,00,887-14-6 or whether the plaintiff was at all indebted or if so, whether the indebtedness was nominal. I hold, on the evidence before me that the plaintiff was not indebted to the extent of Rs. 4,00,887-14-6, but that the plaintiff was indebted for a lower amount and that such amount, though less than Rs. 81,002-0-4, cannot be certainly characterised as nominal. I believe that the indebtedness would amount to near about, say, Rs. 50,000/- just to indicate that the indebtedness was not nominal. I hold, further that on 10-9-1954 the exact liability of the plaintiff was not ascertained, nor were the people controlling the company since September 1954 anxious honestly to find out the plaintiff's liability. Dr. Mukherjee and Dr. Neogy, I am satisfied, were anxious to cook up a liability of the plaintiff to the company as much as possible, so as to give them a pretext to sell the entire ordinary shares of the plaintiff. Dr. Mukherjee and Dr. Neogy knew that so long as the plaintiff had this large block of ordinary shares, which carried the voting right, their position in the company was extremely insecure.
40. The shares in suit were sold in exercise of the power of sale given to the directors by the Articles of the Company to enforce the lien. It has been argued that in the instant case there was no power of sale and in any event, the resolutions imposing lien and enforcing the lien by sale were passed by men who were not directors of the company. This leads us to consider the Articles under which the sale took place. The relevant Articles are Articles 16, 17, 18 and 19, and are set out below.
'16. The Company shall have a first and paramount lien and charge available at law and in equity upon all shares (whether fully paid or not) registered in the name of any member, either alone or jointly with any other person for his debts, liabilities and engagements whether 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 such lien shall extend to all dividends from time to time declared in respect of such shares. But the Directors may at any time declare any share to be exempt, wholly or partially from the provisions of this Article.
17. The Directors may sell the shares subject to any such lien at such time or times and in such manner as they think fit, but no sale shall be made until such time as the money in respect of which such lien exists or some part thereof are or is presently payable or the liability or engagement in respect of which such lien exists is liable to be presently fulfilled or discharged and until a demand and notice in writing stating the amount due or specifying the liability or engagement and demanding payment or fulfilment or discharge thereof and giving notice of intention to sell in default shall have been served on such member or the persons (if any) entitled by transmission to the shares and default in payment, fulfilment or discharge shall have been made by him or them for seven days after such notice.
18. The net proceeds of any such sale shall be applied in or towards satisfaction of the amount due to the company or of the liability or engagement as the case may be and the balance (if any) shall be paid to the member or the persons (if any) entitled by transmission to the shares so sold.
19. Upon any such sale as aforesaid the Directors may enter the purchaser's name in the Register as holder of the shares and the purchaser shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.'
It is to be noted that these are not compulsory articles, that is, the company law does not require that every company must adopt these Articles. The Articles, therefore, constitute nothing more and nothing less than an agreement arrived at between the company and its share-holders. It has to be considered, therefore, what powers the parties intended the company should have to sell the share in enforcement of the lien or charge.
41. Article 16 provides that the company 'shall have a first and paramount lien and charge available at law and in equity upon all shares .... registered in the name of any member.' Article 17 provides that 'the directors may sell the shares subject to any such lien' and does not mention 'any charge'. Mr. Chaudhuri contended that on construction of these two articles it must be held that though for the debts and liabilities due to it the company shall have under Article 16 a lien at law and charge in equity, yet it is only in those cases where the company has a lien at law that the directors were authorised to sell under Article 17. The directors have no authority to sell shares with respect to which the company had no lien at law, but merely an equitable charge. There would be lien only in, those cases where the company had the share-scrips in its possession, that is, the word 'lien' has been used in the sense of 'possessory lien' of share scrips. With respect to the shares, the scrips of which are no in possession of the company but of the members, there would be equitable charge and shares subject to such equitable charge were not intended by the parties to be sold by the company under Article 17. The only way in which such equitable charge could be enforced is by way of a regular suit in a Civil Court.
42. It has been argued, on the other hand, by the learned Counsel for the defendants that the word 'lien' has a more comprehensive connotation. It not merely means possessory lien but equitable charge as well and the word 'lien' has been used in the Articles in the comprehensive sense: That the word 'lien' has a more comprehensive meaning to include 'equitable charge' as well cannot and indeed has not been disputed. (See the case of Everitt v. Automatic Weighing Machine Co. reported in (1892) 3 Ch. 506; In re National Bank of Wales Ltd. (1899) 2 Ch. 629 at p. 675; and In re General Exchange Bank, (1871) 6 Ch. A. 818. It has been further argued that when the word 'lien' is provided by Articles of the Company, it operates as an equitable charge. (See the observations in (1871) 6 Ch. A 818). The reason given by the learned Additional Solicitor General is that 'shares are to be regarded as the interest of the share-holders in the company, measured, for the purpose of liability and dividend by a sum of money, but consisting of a series of mutual covenants entered into by all the share-holders inter se ...... and made up of various rights and liabilities contained in 'the contract, including the right to a certain sum of money.' (See Borlands Trustee v. Steel Brothers and Co. Ltd., (1901) 1 Ch. 279). Shares are different from share scrips. Share scrips are not documents of title but only evidence of title. It is the share register and not the share scrips which is the document of title. (See Commissioner of Inland Revenue v. Wilson, (1928) 13 Tax Cas 789). It is urged that in Article 16 the word 'shares' and not share scrips has been used. This argument of the learned Additional Solicitor General has great force and had the word 'lien' been used in both Article 16 and Article 17, there would have been no difficulty and I would have no hesitation in holding that the 'lien' under the Article operates as an equitable charge. Difficulty has arisen because o the use of the words 'lien and charge available at law and in equity upon all shares' in Article 16, while Article 17, which gives the power to sell, does not mention equitable charge but only Hen. This seems to indicate that a distinction has been made between lien and equitable charge in the two Articles and it is only the shares subject to lien as opposed to those in which the company had equitable charge that are to be sold under Article 17. It is argued by Mr. Chaudhuri that lien must mean something different from equitable charge What then can the 'lien at law' mean except the possessory lien on the share scrips recognised by the law in this country and understood by all? Again, the share scrips may not be documents of title. But under the Sale of Goods Act the shares are marketable property and goods as defined in the Sale of Goods Act. When the Sale of Goods Act defines 'goods' to mean 'every kind of movable properly.... and includes ...... shares' it must have meant the share scrips which can be dealt with in the Bazar as 'movable property'. It is true no share-holder can be in possession of the Share Register which must be kept in the registered office of the Company under the Companies Act, but the share scrips representing the shares are themselves goods and can be delivered to the share-holders. The company like any other person can have possessory lien with respect to these share scrips. It has been contended that under the Companies Act the Company cannot retain the share scrips beyond a certain period, but this does not mean that under a collateral agreement under the Articles the company is debarred from retaining' possession of the share scrips in exercise of its possessory lien. Here in this country we are familiar with possessory lien of the finder of the goods, of the bailees, bankers, factors, attorneys and policy brokers, powers and agents under Sections 168, 170, 171, 173, 174 and 221 of the Indian Contract Act and possessory lien of the seller of goods and auctioneer under Section 47 of the Sale of Goods Act. These are important for the purpose of construction of the contract contained in Articles 16 and 17 of the Company's Articles of Association. When, therefore, we find in Article 16 that the company will have 'lien and charge available at law and in equity', it means that the company will have lien at law on the share scrips and equitable charge on the shares, if the scrips are not in possession of the company, but in the possession of share-holders. Article provides for the sale of shares, subject to lien only, that is, the company will have right to sell under Article 17 only the shares, the scrips of which are in possession of the company. With respect to shares, subject only to equitable charge, right of the company to sell the stares can only be enforced by a suit.
43. There is another reason why it appears to me that the parties intended that only in those cases in which the company had possession of the share scrips and having possessory lien, that the shares could be sold by the company under Article 17 and not in the other case in which the company had no possession of the share scrips but only an equitable charge on the share. In selling the shares the company will be under an obligation to make over to the purchaser the share scrips. How can this be done if the share scrips are not in the possession of the company? The Companies Act provides for the issue of duplicate scrips only in cases when the share scrips are lost. It seems to me that the Company had no power to sell the shares under Article 17 in the instant case, because the shares were only subject to equitable charge and the share scrips were not in the possession of the company. Article 17 gives no authority to the directors to sell shares which are subject to equitable charge only and the only way to enforce the equitable charge was by instituting a suit.
44. Assuming, however, that the lien could be enforced by sale of shares, it has to be considered whether in the instant case the shares could be sold in terms of Article 17 of the Articles. In this case the resolutions declaring lien and to sell the shares in enforcement of the lien were passed by two directors--Dr. Mukherjee and Dr. Neogy. So also the resolution to sell the shares to the defendant Rampada was passed by the same Dr. Mukherjee and Dr. Neogy. It is argued by Mr. Chaudhuri that all steps to enforce the lien by sale must be held by directors properly and lawfully appointed, and if at the material time Dr. Mukherjee and Dr. Neogy were not directors then there has been a non-compliance with the Articles and the sale must be held to be invalid.
45. The Companies Act and the Articles provide for the appointment of directors by election in the General Meetings and by co-option. Except the plaintiff, who is the ex-officio Managing Director, every other director must either be elected in General Meeting of the share-holders or appointed in a Board Meeting. Dr. Mukherjee and Dr. Neogy purported to act, at all material times as elected directors. It is very strongly urged that there has been no proper meetings of the company and no proper appointment of directors. Dr. Mukherjee and Dr. Neogy were not directors of the company at all. They were mere usurpers. Such usurpers had no authority under Article 17 to pass resolutions declaring lien, determining the debt due by the plaintiff to the company, to take any steps in enforcement of the lien by sale of shares. All proceedings beginning from the determination of indebtedness and ending with the sale are tainted with illegality done by and at the instance of two usurpers who were not directors of the Company at all.
46. To appreciate the point made by Mr. Chaudhuri it is necessary to consider the provisions of the Companies Act regarding meetings of the company. Section 76 of the Companies Act provides that 'a general meeting shall be held within 18 months from the date of incorporation and thereafter once at least in every calendar year and not more than 15 months after the holding of the last preceding general meeting.' In default, the manager or director, who is a wilful party to the default shall be liable to a fine. Sub-section (3) provides that in default, the Court may, on the application of the member of the Company, call or direct the calling of a general meeting by the company. Section 78 provides for the calling of extraordinary general meeting on the requisition of members. Section 79(2) provides that the following provisions shall have effect in so far as the Articles of the company do not make other provisions in that behalf namely,
'two or more members holding not less than one-tenth of the share capital........ may call a meeting.'
In the instant case, there is Article 64 of the Articles of Association which provides for the calling of such an extraordinary general meeting by 5 share-holders, if there are no directors capable of acting or if there foe no director.
47. It is contended by Mr. Chaudhuri that in the instant case no annual general meeting has been held for 3 years after December 7, 1950 till April 6. 1953. Therefore, the annual general meeting of 1953 was bad in law and the re-election of all the directors, namely Dr. S. L. Mukherjee, B. P. Neogy, S. Shangloo and Dr. Tapas Bose, was bad in law. The annual general meeting was purported to be held in violation of the express provisions of Section 76 of the Companies Act, not to speak of the illegalities in convening the meeting by a Board of Directors, which, in law, did not exist on that date. The Directors elected in the Annual General Meeting held on December 7, 1950 in law vacated their office 15 months after that date, within which the next annual general meeting should have been held. Hence all the acts of these directors including the act of convening the Annual General Meeting of 1953, holding the meeting, re-electing directors without proper nomination as provided by the Articles are invalid. Again, assuming that these directors appointed by the General Meeting held on April 6, 1953, could act as such, they, in their turn, continued to be directors for 15 months, and if no General Meeting is held thereafter, they vacated their office on July 6, 1954. After that date, the company had no directors entitled to act as such. Thereafter, these directors whose office had expired, cannot act as the Board of Directors of the Company. Such a Board cannot give any order for convening any meeting of the Company, recommend for re-election of directors whose office long expired and secure their re-election as directors, without proper nomination by members as required by the Articles, On these grounds, it was strongly urged by Mr. Chaudhuri that the 12th, 13th, 14th and 15th Annual General Meetings held on December 30, 1954 and adjourned and held on January 6, 1955, were illegal and the election of all the directors in the said meeting, including that of Dr. Mukherjee and Dr. Neogy must be held to be illegal. It is not a case of mere defect in the appointment, but a case of no appointment at all. It is urged that in any event from July 6, 1954 to January 6, 1955, there were no directors of the company entitled to function and it is during this period, that is, in September, 1954, that the first essential step to enforce the lien by sale was taken by certain usurpers, pretending themselves to be directors. It is again, emphasised that it is not a case of defective appointment but a case of no appointment at all.
48. The learned Advocate-General contended that even though the Annual General Meeting might not have been held as required by Section 76 of the Companies Act, the company does not cease to exist. In law, the company still exists and functions. The mere fact that no Annual General Meeting is held within the period prescribed by Section 76 of the Companies Act, is not even a ground for winding up of the company. Sub-section (3) or Section 76 enables the Court to direct the calling of an Annual General Meeting after the period and there is no period of limitation. It follows that the Court has the power of convening the Annual General Meeting of 1950 in 1953 and the Court normally will pass such an order on the application of a shareholder and will not penalise the company for the delinquencies of the directors who ceased to hold office. If such a meeting is held pursuant to an order of the Court, such an Annual General Meeting has the power amongst others, to pass the account of the years long passed and to appoint directors for years long over. It may appear somewhat paradoxical to appoint persons as directors retrospectively with respect to a period long gone by. Nevertheless, there is no reason why it cannot be done under the Companies Act. It is clear that the persons who could be appointed as directors are persons who actually acted as such without any legal warrant during a period long gone and the effect of appointment would be to ratify all acts done by these so-called directors without authority; in other words, to validate all the acts done by these directors which otherwise would have been invalid. The learned Advocate-General has pointed out that unless this contention is accepted, all acts done after the expiry of the period when the meeting was required to be convened, that is, 15 months after the last meeting, all acts and transactions of the company would be illegal and void and the position would be intolerable. Surely this could not have been the intention of the legislature.
49. It is not correct to say that once the period stated in Section 76 of the Act is over, no Annual General Meeting can be convened without the order of the Court. Section 76(3) is an enabling section. But apart from it, there is no reason why the requisite number of share-holders under Section 78 or 79(2) would not be entitled to convene an Annual General Meeting, which is overdue and which the Directors have defaulted in convening within the prescribed period. If certain technicalities stand in the way, those technicalities should be brushed aside and provided proper notice is given to all entitled to notice, the Court should uphold such a meeting and recognise as valid all acts done in that meeting, including the appointment of directors and passing of the accounts, even though the meeting is held without an order of the Court. Even if the meeting was not properly convened, it is nothing more than a mere irregularity and the appointment of the directors in such a meeting is nothing more than defective appointment. Such acts of the directors must be held valid under Section 86 of the Companies Act, notwithstanding that this appointment is subsequently discovered to be invalid because of the irregularity of the meeting in which the directors have been appointed. In the submission of the learned Advocate-General, the law recognises a 'de facto' director who is not a 'de jure' director. Such de facto director has all the powers of a de jure director and a sale of shares by such de facto directors in exercise of the lien under the Articles gives good title to the purchaser. If the policy of law is that the company which does not hold its Annual General Meeting in proper time would continue to exist and carry on business and if there are people who, though not properly appointed directors, nevertheless carried on the business of the company as directors, the Court recognises them as de facto directors and upholds their acts as if they were properly appointed directors. This is expressly provided for in Section 86 of the Indian Companies Act. which reads as follows:
'The acts of a director shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification: Provided that nothing in this section shall be deemed to give validity to acts done by a director after the appointment of such director has been shown to be invalid.'
50. The cases cited may now be considered. In Re: County Life Assurance Co., reported in (1870) 5 Ch. A. 288, the promoter of a Life Assurance Company who was also named as Managing Director in the Articles, continued to carry on business in spite of the fact that the three nominated directors in the Articles expressly prohibited the Managing Director to carry on the business and themselves refused to act as directors. The Managing Director thereupon proceeded to choose fresh directors in place of those who declined to act. The company issued a number of policies and the policies ex facie were in order and were consistent with the Articles. having been signed by three directors. The Company was wound up and in the winding up proceedings the question arose whether the policy was binding on the company. The Court held that it was so binding. Giffard, L.J. held that an outsider was not expected to know the indoor management of the company and could not be and was not aware that anything irregular had taken place. The learned Lord Justice upheld the claim under the policy with the following observation:
'The Company is bound by what takes place in the usual course of business with a third party where the third party deals bona fide with persons who may be termed 'dc facto' directors, and who might so far as he could tell have been directors 'de jure' as well.'
It is to be noticed that this case is one of defective or irregular appointment. The original directors named in the Articles having refused to act, the Managing Director co-opted directors in their place. In the case of Mahony v. East Holyford Mining Co. Ltd. (1875) 7 H. L. 869, the Official Liquidator of a company in liquidation sought to recover from the Banker amount paid on cheques drawn by the directors who were not directors properly appointed. In this case also the Court held that an outsider was not expected to know the indoor management of a company so as to ascertain whether the directors who signed the cheques in the usual way were properly appointed directors or not. The Lord Chancellor in his speech observed as follows at page 888:
'I have no hesitation in advising your Lordships, in accordance with the opinion of the learned Judges who have attended the hearing of this case and have advised your Lordships, that you should now hold that there having been de facto directors of the company, who were suffered and permitted by the majority of those who signed the articles of association to occupy the position of and act as directors, and the bankers having in the full belief that these persons were directors, as they were represented to be, honoured the cheques) drawn by them, the payment of these cheques is an answer to the action of the liquidator of the company, and that the judgment in the action ought to be entered for the Defendant, the public officer of the bank, and the present appeal allowed'
Lord Chelmsford at page 892 makes the following observation:
'The first finding of the jury is that no four of the seven persons who signed the articles of association ever agreed to the appointment of directors, or assented to Wadge, Hoare, or McNally acting as such. If it is now open to the bankers to question this finding, it may be said, that although there was no evidence of four of the persons who signed the articles of association formally meeting & agreeing together to such appointment, yet there was ample proof that not four of the seven merely, but all the seven, had assented to the three persons named acting as directors.'
Lord Heatherley at page 896 bases his opinion on two grounds (i) that the 85th Clause, in the Articles of Association, analogous to Section 86 of our Act covers any defect that might have been in the appointment. The second ground on which Lord Heatherley found in favour of the bank is the broad equitable principle that of the two innocent persons to suffer loss, that party must suffer who was bound to do, or avoid any act by which the loss has been sustained. The learned Lord Justice held that the share-holders could have taken steps to see that things were properly done, the bank as an outside could have no knowledge of the indoor management and its impropriety. At page 898 Lord Heatherley makes the following observation:
'Now whose business was it to see that that was all properly done? It was the business of the share-holders to see that it was done, and properly done, and if they allowed this duty to be assumed by persons who had no title to it, in their office at 12 Grafton Street, the place where the office of the company was described in the prospectus as being--if they allowed persons who 'were not entitled to do it to carry on all the business of the company there--to act as directors and as secretary there; especially if they allowed them to perform the most important business of drawing cheques (for they must have known their own deed which says that that can only be done by a draft of three directors, and they must have known that money must be. had for the purposes of the company), if there is a fault on the one side or the other, it is on the side of those who allowed all these transactions to take place, when they were not conducted by persons legitimately appointed on the part of the company.
On the other hand, on the part of the bankers, I see no possible mode by which they might have pursued their inquiries in the manner contended for at the Bar without requiring all the minute books of the company to be produced to them, and without conducting a detailed investigation into all the transactions of the company as to the appointment of directors and the like--a duty they were not called upon to perform, and a duty which, if it was objected to, they could not have insisted upon performing.'
Lord Penzance found in favour of the bank by applying what is known as the Rule in Royal British Bank v. Turquand (1856) 6 E and B 327, as the following observation in page 902 indicates:--
'My Lords, the question is a very broad one whether a bank under such circumstances, having a written authority of a de facto secretary, is bound, before it acts upon that authority, to ascertain whether he is the properly constituted secretary of the company or not, and not only that, but whether any resolution, of which he forwards a copy, was properly passed by the directors. Now, my Lords, the case of Royal British Bank v. Turquand (1856) 6 E and B 327, distinctly lays down the proposition that the bank is not bound to make any such inquiry, but that it is justified in acting upon a letter such as the one to which reference has been made provided that the transaction which appears upon that letter is one which might legally have taken plane, and been legally consummated under the articles of association. Upon this simple ground my Lords, it seems to me that Your Lordships would be perfectly justified in directing the judgment in this case to be entered for the Defendant.'
In the penultimate paragraph of his speech the Law Lord considered the case to be a case of defective Appointment and the act of the directors not property appointed is validated by the 85th Clause of the Articles (same as Section 86 of our Act).
'In this case, no doubt, they were not properly appointed; they appear to have had either the formal, or the informal, assent of three out of the four persons who would have constituted the majority necessary to make a proper appointment; but, nevertheless, although not properly appointed, they would seem to have their acts validated under the 85th Clause.'
In the case of York Tramways Co. Ltd. v. Willows reported in (1882) 8 Q. B. D. 685 the Company instituted a suit against a snare-holder for the recovery of the share money. At the date of the application for allotment of shares, there were two directors and with respect to a third director, there was a letter of resignation which was accepted in the same meeting of the Board in which allotment of shares were made to the defendant and the defendant was, co-opted as a director in the vacancy created. According to the Articles the number of the Board should not be less than three. The Articles provided that the Board of Directors shall regulate their meetings and determine the quorum necessary for transaction of business. There was an Article like Section 86 of the Indian Companies Act. The defendant, after being elected director took part in the meetings wherein shares were allotted to different applicants. The defendant joined the other two directors in writing a letter to the Bank Manager as to what cheques were to be signed and honoured. After doing all these acts, the defendant withdrew his application for Shares. The Company instituted a suit to recover the share money on the footing that the defendant was a share-holder and was liable for the share money. It was held that the defendant was liable. Lord Coleridge C. J. based his decision on three points --The Directors were entitled under the Articles to act by a majority. 'If there were three directors, the two acted as the majority of the Board. If there were two directors only, the two were acting in a casual vacancy. The Board does not come to an end because a casual vacancy occurs ... until Fry's resignation was accepted the Board did act by a majority and did by a majority allot these shares to the defendant. These considerations are sufficient to dispose of the case and to show that the defendant must pay the amount of the call upon these shares.' It was also held that the defendant subsequently accepted the allotment, that the case at best was a case of defective appointment and that the defendant was completely estopped from stating that he was not a share-holder. The other Lord Justices (including Brett C, J.) took the same view and decided mainly on estoppel. This as noted before is also a case of defective appointment.
51. In the case of Newhaven Local Board v. Newhaven School Board reported in (1885) 30 Ch. D. 350 the Court held that under the Public Health Act, the Board does not cease to exist because of the lack of quorum occasioned by the resignation of members of the Board and that filling up of casual vacancies was 'business' within the meaning of Schedule 1, Rule 2, of the Act. At page 363 Cotton L. J., observed:
'In my opinion, therefore, as regards the validity of the acts done by the Board, Rule 9 cures the defect arising from the fact that the persons elected or selected to fill up the vacancies were chosen by two persons who, not being a quorum, were not competent to fill up the vacancies. Therefore, in my opinion, we cannot consider what had been done by the Board, although irregularly constituted, as being ineffectual.'
Lindley L. J., was of the same opinion. He observed at page 370;
'I was very much struck by the argument of Mr. Cozens-Hardy, that the object of this rule was to protect people dealing bona fide with the local board without notice of irregularity. Of course it was intended to provide for such a case but the question is whether it is confined to such cases. I to not think that it is; it appears to me to render the acts of a board valid notwithstanding any defect in the election of any of its members. I think, therefore, that whatever irregularity there was in the constitution of the Board in May, 1884, this rule would make the election of the three who were elected in 1885 perfectly valid. It appears to me to extend not only to protect people dealing bona fide with the board without knowledge of the disqualification, but also to protect the rate payers, whose guardians and trustees the local board are. 1 therefore, come to the conclusion that fixing the building line was a proceeding which is rendered valid by Rule 9.'
The argument of Cozens-Hardy referred to by Lindley L. J., is to be found in page 357:
'The cases under the Companies Act, 1862, Section 67, furnish an analogy; they shew that an outsider who knows nothing of the irregularity is safe in dealing with a board of directors however irregularly appointed, but that the case is different where the irregularly elected board seeks to impose a liability on others, as e.g. by forfeiting shares. So here a contractor would have a good claim against the board, but the case of seeking to impose a liability on outsiders apart from contract is quite another matter.'
Bowen L. J., the third member of the Board, took the same view as the other two.
52. In Dawson v. African Consolidated Land and Trading Co., reported in (1898) 1 Ch. 6, a share-holder resisted the claim of the company to recover share money on the ground that there were defects and irregularities in the appointment of directors i. e. the directors were not 'de jure' directors. One of the most important irregularities alleged against a director was that he parted with all his shares and in consequence under the Articles he was not qualified to be a director. This director, however, acquired the qualification shares six days later. When the director sold his shares, he ipso facto vacated office under the Articles. In the vacancy so created the other directors could very well appoint him director six days after when the director in question again acquired the qualification shares. In fact the other directors did treat him as a director but there was no formal appointment by passing a resolution to fill up a casual vacancy. It was held that Article 114 (same as our Section 86 of the Act) covers the case and the irregularities were trivial. Lindley M. R. negatived the contention that the scope of the Article was restricted to transactions between the company and outsiders and not between the company and its shareholders so that the forfeiture of shares by the directors not properly appointed was protected by the Article. Cotton L.J., considered the case as nothing more than defective appointment and is (sic) covered by Article 114.
53. The case of British Asbestos Co. Ltd. v. Boyd reported in (1903) 2 Ch; 439 is also a case of defective appointment and the Court held that the irregularities in the appointment and subsequent acts of the directors irregularly appointed were validated by Article 108 and Section 67 of the Companies Act. In this case Article 89 of the Articles provided the circumstances in which the office of a director shall be vacated. One of the directors, Boyd had vacated office and the contingent irregularities were not brought to the notice of the defendant company. The irregularities complained of consisted in acting as director, convening meetings of the company ordinary and extra-ordinary, signing balance-sheets, recommending directors for re-election amongst others. On the finding that there was no evidence that the directors including Boyd and Reed had not acted in good faith in all they did, the Court held that the irregularities were condoned by Section 67 of the Act and Article 108 of the Companies Act. (same as our Section 86).
54. The Channel Colliery Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Ry. Co. reported in (1914) 2 Ch. 506 is also a case in which the appointment of two directors was held to be irregular on the ground that at the time of their appointment they had not acquired qualification shares which were subsequently allotted to them by a Board consisting amongst others the same directors who had not yet the qualification shares. It was held that the irregular allotment was done by de facto directors which was validated by the Companies Act as the directors acted bona fide which was not disputed. It was held that the provisions of Section 99 of the Companies Act should be construed broadly as between the Company and its members as well as between the Company and outsiders. Reliance was placed on the observations made at page 515 and set out below. These observations were made after pointing out that the appointed persons were not at the moment of their appointment qualified and a slip was made. Nevertheless acting in good faith they accepted the shares and acted and continued to act as directors.
'The question is whether their acts as de facto directors are protected by Section 99 of the Companies Clauses Act, 1845. It has been said that in substance the law is stated in a very short passage in Buckley on the Companies Acts, 9th Ed. p. 169, where it is summed up in these words: it is the note to Section 74 of the new Act: 'endangering accuracy for the sake of brevity, it may be said that the effect of this section is that, as between the company and persons having no notice to the contrary, directors &c.; de facto are as good as directors &c; de jure'. That is the note to Section 74 of the Companies (Consolidation) Act, 1908, but it is equally applicable to Section 99, which applies to companies--governed by the Companies Clauses Act, 1845. It is now settled that this section protects acts both with regard to insiders and outsiders, and having regard to the law as laid down by the Court of Appeal in (1898) 1 Ch. 6 and to the view subsequently of Farwell J., with which I must say I entirely concur, I think that it is a beneficial construction to put upon the section. Common sense really requires that there shall be some provision giving legal effect to acts in respect of which there is a technical informality because some slip has been made, where the acts have been done in good faith and where the slip has occurred because the parties have not had present to their minds the legal difficulties in the way of doing what they honestly think they are entitled to do.'
The following observation of Cozens-Hardy M.R. at page 512 is also to be noted:--
'If there is good faith, and I emphasise that, the mere fact that the person claiming the benefit of the section has notice of the existence of the facts which led to the disability is not sufficient to disentitle him to rely upon it if he can honestly say, 'I was not aware of the defect and the consequences of the facts I knew, I was not aware of the disqualification which now exists.' That, I think, is really the point of the case.'
55-60. In the case of Boschoeck Proprietary Co. Ltd. v. Fuke reported in (1906) 1 Ch. 148 it was held the resolutions passed in a meeting of the company convened by a Board of Directors not properly appointed are not invalid because of the irregularity in convening the meeting. So also in the case of Browne v. La Trinidad reported in (1887) 37 Ch. D. 1, the Court refused to grant an injunction restraining the Company from confirming the resolution of the Board of Directors removing a director. The ground on which the Court was asked to grant an injunction was that only ten minutes before the meeting of the Board the petitioner being the director removed was served with the notice of removal. He however did not object on the ground of insufficiency of notice nor did he require another meeting to be summoned to consider the question.
61. In the Case of In re Consolidated Nickel Mines Ltd. reported in (1914) 1 Ch. 883, the question was whether a director who continued to act as such after the expiry of office was entitled to remuneration as director. The Court held that the directors vacated their office on the last day on which the General Meeting for the year could have been held and were not entitled to any remuneration for the subsequent period. At page 888 Sargant J. makes the following observation:--
'A director on his appointment does not ordinarily step into an office which is perpetual unless terminated by some act, but into an office the holding of which is limited by the terms of the Articles ........The duty of the directors was to call a meeting in 1906 and 1907 and they cannot take advantage of their own fault in that respect and say that they still remained directors'.
62. In the case of Morris v. Kanssen decided by the House of Lords and reported in 1946 A. C. 459: (1946-1 All ER 586) it was held that Section 143 of the Companies Act and Table A Article 88 (the same as Section 86 of the Indian Statute) applied only to acts done by persons acting as directors whose appointment or qualification was afterwards found to be detective. They did not cover a case where there has been a total absence of appointment or a fraudulent usurpation of authority. The Rule in Turquand's Case was held not to be applicable because it can only be invoked by an outsider and not by one who was purporting to act on behalf of the company in the unauthorised transaction. In other words, a director who himself was a party to the irregular transaction cannot invoke the Rule in Turquand's Case in his favour. In this case all the cases have been reviewed and it is the last decision on the point in England. Mr. Chaudhury strongly relied on this decision in support of his contention that a director whose office had expired because no Annual General Meeting was held within the period prescribed was no longer a director and his acts after the termination of office as director are not protected by Section 86 of the Companies Act. The learned Additional Solicitor-General also relied on this decision in support of his argument that the defendant Ramapada Gupta the purchaser of the share being an outsider is entitled to invoke the Rule in Turquand's Case. It need hardly be said that the decision is of the highest authority.
63. A decision of this Court has been cited where an opinion has been expressed that a director continues in office even after the expiry of the period during which the new Annual General Meeting should have been held, till the next General Meeting is actually held. It is the case of Kailash Chandra v. Jogesh Chandra, decided by a Division Bench of this Court and reported in : AIR1928Cal868 . This is a suit under Section 42 of the Specific Relief Act for a declaration that the defendants were no longer directors of the Company and that all acts done by them were illegal and void. In this case the Annual General Meeting came to an end without electing the director whose terms of office had expired. The court held that the suit must fail because the plaintiff did not claim to be entitled to any legal character or any right as to property which has been denied by the defendants and, secondly, because in the circumstances of the case the Court should not exercise its discretion in granting specific performance. After disposing of the appeal on the above ground the Court made the following observation at the penultimate paragraph of the judgment:--
'With regard to the matter, the Articles of Association provided that the Directors should be elected annually at a General Meeting. It follows therefore that so long as the general meeting is not held in which the Directors are to be elected the Directors elected at the previous general meeting would continue in office. It is contended by the learned Advocate for the Respondent that according to the true interpretation of the Articles the Directors would hold office only for one year from the date of their appointment, and if no general meeting is held at the lapse of one year the Directors would automatically vacate their office and the Company would go on without any Directors at all. I am unable to accept this contention of the learned Advocate as it seems to me that it would be unreasonable to hold that this is the true meaning of the Articles of Association.'
63a. In the case of Ananthalakshmi Animal v. Indian Trades and Investments Ltd., decided by a Division Bench of the Madras High Court & : AIR1953Mad467 , it has been held that 'the directors who were due to retire at the Annual meeting next to that held on the previous occasion should be held to have vacated office on the last date on which the Annual Meeting should have been held and in consequence they ceased to be directors after such last date'. This is a decision of a very strong Bench of the Madras High Court consisting of Rajamanar C. J. and Venkatarama Aiyar J. and is a well considered judgment. Kansen's case 1946 AC 459 has been cited by the Madras High Court with approval.
64. The case of Changamal v. Provincial Bank Ltd. decided by the Division Bench of the Allahabad High Court and reported in ILR 36 All 412: (AIR 1914 All. 471 is a case in which the liquidator claimed the balance of the share money from three shareholders. The defence was that of the three Directors who were present in the meeting of the Board, not all were properly appointed and if those not properly appointed are left out, the meeting of the Board had no quorum. It was held that this irregularity in the allotment by reason of the fact that some or the directors in me Board Meeting which made the allotment were not directors properly appointed is condoned because of the Articles as will appear in the following observation: 'But if the Articles of Association validate an act done by de facto director in a bona fide manner, the Court will uphold the act'.
65. On consideration of the arguments advanced and the authorities cited I think that the learned Advocate-General was right in his submission that the company continued to exist and function even though the Annual General Meeting of the Company is not held in time, that Section 76(3) of the Indian Companies Act is an enabling section and that the share-holder has the right apart from an order of the Court under Sections 78 and 79(2) of the Companies Act to hold a General Meeting which may not strictly be characterised as the Annual General Meeting, but is nevertheless a meeting in which all that can be done in an Annual General Meeting can be done including the passing of the balance-sheet and appointment of Directors, When such a meeting is held when the year for which the meeting is held is over, clearly no directors properly can be appointed. But if such an appointment is made its effect would be to ratify the acts of those who purported to act as directors without being lawfully appointed. Only those acts of the directors however would be deemed to be ratified by such retrospective appointment as can be ratified in law and it should not be forgotten that ratification only binds the principal and the act done by an agent without authority will become binding on the principal after ratification. It has nothing to do and cannot affect the party other than the principal on whose behalf the agent purported to act without authority. In the instant case by retrospective appointment of Dr. Mukherjee and Neogy as Directors, the company might be deemed to have ratified all the acts of Dr. Mukherjee and Neogy leading upto the sale of plaintiffs share and as such the sale may be binding on the Company. Before retrospective appointments the acts of Dr. Mukherjee and Dr. Neogy were unauthorised and hence not binding on the company. But after appointment retrospectively those acts may become binding on the Company. But does it become, binding on the plaintiff? Does this ratification takeaway the right of the plaintiff to repudiate the sale which was effected by unauthorised persons? The plaintiff only gave authority to the directors to sell after taking necessary steps as provided in the Articles & if the sale was effected not by directors but by some unauthorised persons the plaintiff's right to repudiate cannot be affected by the Company's ratifying the unauthorised acts of persons who purported to act as directors, though in fact they were not.
66. Again, law recognises that the appointment of directors may be defective in that they may not have the qualifications as required by the Articles or the provisions of the Articles of Association have not strictly been complied with in the matter of appointment. Many acts might be done by these directors bona fide on behalf of the Company, before this defect in the appointment is detected and shown to the director or company. Section 86 of the Companies Act protects these acts of directors not properly appointed. But Section 86 does not protect the acts of directors whose office expired, after the termination of office. Kansen's Case reported in 1946 AC 459 and the Madras Case : AIR1953Mad467 are clear authorities in support of this proposition with which I respectfully agree. With respect, I am unable to subscribe to the obiter dicta of the Division Bench of this Court reported in : AIR1928Cal868 and noticed before.
67. Apart from the acts by directors whose appointment is defective which are protected by Section 86 of the Companies Act are there other acts by persons who are not directors 'de jure' but directors 'de facto' protected? It has been argued that law recognises 'de facto' directors and as stated by Buckley and Palmer, two recognised authorities on Company Law, the directors 'de facto' are practically the same as directors 'de jure' and both have the same powers. In all the authorities however cited before me and noticed before the term 'de facto' directors has been restricted to directors with defective appointment. No case has been cited in which the Court has upheld the act of a 'pretended director' without any appointment. In other words, in no case the term 'de facto' director has been applied to a mere usurper without any appointment whatsoever. The Court has upheld the acts done by a director whose appointment is defective but in no case it has gone further to uphold acts of one purporting to act as director without any appointment or whose office has expired. In this state of the law I am not prepared to accept the broad proposition of the learned Advocate General, that 'the de facto' director is one who actually acts as such, that he has the same power as a 'director de jure' and that all acts of 'such a de facto' director whether appointed or not should be upheld by the Court. It such be the policy of law why enact Section 86 of the Companion Act giving only qualified validity to some acts not of all 'de facto' directors but of those only who have been appointed but whose appointment is found to be defective? It is to be noted that in all cases in which the court upheld the act of a 'de facto director' in which the outsider has dealt with such 'de facto director' bona fide the Court did not uphold the act because it was valid. They were held to be invalid, but the Company was precluded from raising the question of the invalidity of the acts, on principles akin to estoppel and holding out, only to protect the bona fide third party. I have kept out of consideration for the present, the acts of a 'de facto director' with whom an innocent third party deals bona fide. This aspect of the question will be considered later.
68. In the instant case I hold that on 20th and 24th September 1954 Dr. Mukherjee and Dr. Neogy had vacated their office as directors as 15 months expired after the last Annual General Meeting held on April 6, 1953. The resolution determining the liability of the plaintiff at over Rs. 4 lacs passed on September 10, 1954, and the resolution passed on September 23, 1954 to enforce the lien and making demand of payment, and giving notice under Article 17, and the notice served on the Plaintiff in terms of the resolution dated September 24. 1954--all these acts are not warranted by law and must be held to be illegal. The annual General Meeting held on April 6, 1953 arid on January 6, 1955 were not in compliance with the provisions of the Companies Act and the Articles. The Directors whose office had expired were not competent to convene a General Meeting. In such a case it would be quite competent for five members of the company to convene a meeting under Article 64 of the Articles of Association. This is provided for in Section 79(2) of the Companies Act. The only other way to convene a General Meeting is to hold a meeting under Section 76(3) by and under an order of the Court. In the instant case, the 12th, 13th, 14th and 15th Annual General Meetings were convened by a defunct Board of Directors whose office had long expired. They had not been convened by five members in terms of Article 64 of the Articles. These meetings therefore were not in accordance with law and the appointment of directors at these meetings must be held to be invalid. Having regard to the fact that there have been an appointment in General Meetings of the Company which were not properly convened, I am prepared to stretch a point in favour of the defendant and hold it to be a case of defective appointment and the acts of the directors with such defective appointment can be validated by Section 86 of the Companies Act. In the instant case, however, Dr. Mukherjee and Dr. Neogy are hit by the proviso, because the invalidity of their appointment was shown to them before they took steps in the matter of sale and when the sale actually took place. In the instant case I hold that Dr. Mukherjee and Dr. 'Neogy were not directors and if after their so-called election on January 6, 1955, they can be called directors at all, they were in any event directors with defective appointment and further the defect in their appointment was shown to them. I am unable to accept the argument of the learned Additional Solicitor General that an usurper of the office without any appointment or a director whose office had expired is a director within the meaning of the Companies Act and the Articles because he acts as such even though he does it without any lawful authority.
69. Assuming again that the 12th, 13th, 14th and 15th meetings were valid and good, the resolution appointing directors for periods passed retrospectively cannot be anything more than the ratification of acts done by those who purported to act as directors, provided those acts can be ratified. In my judgment Dr. Mukherjee and Dr. Neogy were not directors a t any event from July 1954 onward having vacated their office and they had no authority under Article 17 to declare. and/or impose and/or enforce--lien on shares and/or sell them. These are wholly unauthorised acts and ratification of such unauthorised acts by the company cannot take away the right of the share-holder to repudiate such unauthorised acts.
70. It is next contended by Mr. Chowdhury that assuming Dr. Mukherjee and Dr. Neogy were directors, they as directors had no authority to sell the shares because the conditions for the exercise of that power are lacking in the instant case. The conditions precedent to the exercise of the powers are:--(1) money must be presently payable (2) until a demand is made and notice given in writing stating the amount due and (3) giving notice of intention to sell the shares in default. But in the instant case the amount of the debt for which the shares were sold was at its highest a claim on account and such claim does not become 'presently payable' till a demand for payment is made. Secondly the notice of demand that is required to be served in writing must state the exact amount due and payable, for which the lien is sought to be imposed. In the instant case even though the Company may have some claim, it is nothing near the amount demanded and for which the snares were sold. The amount stated in the notice is over Rs. 4 lacs whereas the liability of the plaintiff on the date would be far less, near about Rs. 50,000/-. in any event not more than Rs. 81,000/-. It must be held, there-tore, that the conditions laid down in Article 17 for the exercise of the power of sale were absent in the instant case and therefore the same was bad.
71. I am unable to agree with Mr. Chaudhury that the debt due by the plaintiff was not 'presently payable'. Holding as I do that the amount taken from the Company by the plaintiff on account from time to time represents a loan, the debt was 'presently payable' even before demand. The other indebtedness which I held to be fictitious and unreal was not a debt due by the plaintiff and as such cannot be a debt 'presently payable' for which the Company can claim to have any lien. The company sought to sell the shares for the recovery of a debt which was far in excess of what was actually due by the plaintiff and to that extent the notice demanding payment and threatening sale is not compliance with Article 17 of the Articles and to that extent it was wrongful. There is substance in the contention of Mr. Chaudhury that the language of Article 17 makes clear that non-compliance of the conditions laid down, affects the validity of the sale.
72. Lastly it is argued that the motive behind the acts of Dr. Mukherjee and Dr. Neogy was not to realise a just debt due to the Company by the plaintiff but to deprive the plaintiff of his shares. There can be no reasonable doubt that this was the motive that led Dr. Mukherji and Dr. Neogy to act in the way they did, namely, fixing the debt at a fantastic figure, declaring the shares to be subject to lien for the payment of such debt, demanding payment immediately after Dr. Mukherjee had occupied the saddle after ousting the plaintiff and selling the shares with the greatest possible expedition. The motive behind these acts on the part of Dr. Mukherjee and Dr. Neogy is clear & palpable. Mr. Chaudhury has argued that when the motive of the director is not to benefit the company but to promote their own interest by driving away the plaintiff from the company, such act of the director would not be upheld by the Court. In support of this argument Mr. Chaudhury has cited the case of Najialal v. Bombay Life Assurance Co. decided by the Supreme Court and : 1SCR391 . In this case the directors increased the share capital of the company with two objects in view--(1) Company needed additional capital, (2) prevent cornering of shares by one group, a group of outsiders, namely, the Singhania group. This act of the directors in passing a resolution to issue additional shares was challenged on the ground that the directors did it to protect their own position. The Court upheld the action of the directors. There was a concurrent finding of fact by the Courts below that the resolution was passed because the Company needed additional funds and that the issue of shares was not due solely to the desire on the part of the directors to keep themselves in saddle. In the opinion of Das J., 'the motive to prevent the Singhania group, who were outsiders, from acquiring control over the company cannot as between the directors and the company and the existing shareholders, be stigmatised as mala fide'. Mr. Chaudhury relies on the following observations of Das J.:
'It is well established that directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the Court will interfere and prevent the directors from doing so. The very basis of the Court's interference in such a case is the existence of the relationship of a trustee and of cesttui que trust as between the directors and the company'.
And the following observation of Mahajan J:
'Both the Courts below have found as a fact that to a certain extent in resolving to issue new shares the directors were actuated by a fear that the Singhania group would capture the company and oust the present directors from their vantage point and take control of the company itself. It was argued that this motive was an ulterior motive and the exercise of power by the directors to achieve this object by the issue of further shares was an exercise of power for the purpose for which it was not conferred. This argument would have had force if this was the main purpose of the directors in issuing the further shares, but this is not the case here.'
Mr. Chaudhury contended that applying the principles set out above in the instant case, it must be held that inasmuch as the sole motive of Dr. Mukherjee and Dr. Neogy in the matter of sale of shares was to drive the plaintiff out of the company and make their own position safe, the sale of shares in the instant case should not be upheld by the Court. It has been contended on behalf of the defendants that it has been proved that at the material time the plaintiff was indebted to the company and the shares were subject to a lien and as such liable to be sold in exercise of the lien. The company was entitled to enforce its legal right to enforce the lien by selling the shares. However improper the motive of the directors might be, the legal right of the company to sell the shares to enforce the lien cannot be affected and the motive of the directors has no bearing on the question. The company had a legal right and the company enforced it. The Court has no power to question the right of the company to exercise its legal right to sell the shares in exercise of lien for a debt due from the plaintiff as share-holder. The second point urged on behalf of the defendant is that the motive of sale immediately on getting possession of the company on January 24, 1956 was that the directors needed cash money to meet heavy disbursements in the first week of the following month. Possession was given to Dr. Mukherjee on January 24, 1956 and the Company needed cash money to the extent of about Rs. 1 Lac to meet heavy expenses in the first week of February next. It is in evidence that at the time when possession was made over to Dr. Mukherjee by the official Receiver, Dr. Mukherjee got Rs. 10,000/- in cash on the same date and the company had over Rs. 7 Lacs lying in the bank in the account of the Official Receiver. Dr. Mukherjee explained that he apprehended that the Official Receiver would not make over the money to him and he would be in difficulty in meeting the expected disbursement in the first week of February. Hence in order to get ready cash the plaintiff's shares were sold. I have no hesitation in rejecting this evidence of Dr. Mukherjee. He had no reason to apprehend that the Official Receiver would not make over the money to him. It was the duty of the Official Receiver to make over the money and if the Official Receiver dilly-dallied, he could have been compelled to do his duty. The Court was open and the Official Receiver could have been compelled to make over the money to the company. It is further in evidence that the company was a running concern and was doing very good business. The sale of the company's products as stated before was Rs. 55 Lacs annually. In other v. words, more than a Lac of rupees was coming to the coffers of the company per week. It is therefore impossible for me to hold that the object of selling the plaintiff's share in such a hurried manner was to get cash money to run the company. There cannot be any doubt that the sole motive of Dr. Mukherjee and Neogy who were running the company was to drive away the plaintiff from the membership of the company and deprive him of his voting right. At the date of sale the plaintiff and D. N. Bhattacharji had controlling shares and it was only by depriving the plaintiff. of his shares that the position of Dr. Neogy and Mukherjee could become secure. If is significant that the preference shares of the plaintiff were not. sold. The ordinary shares of the plaintiff which carried the voting right were sold. The motive of Dr. Mukherjee and Dr. Neogy in selling the plaintiff's share was not what is stated to be by Dr. Mukherjee. The motive is clearly to deprive the plaintiff of his voting right so that he may not have the control of the company. If however the directors were entitled in law to sell the shares in enforcement of lien for a debt due to the company by the plaintiff, the sale cannot be challenged on the ground of bad motive of the directors. Everybody including a most scheming person is entitled to enforce his legal right and motive of the plaintiff is no defence in an action to enforce that legal right.
73. If the directors were lawfully appointed by the company in the instant case then I doubt whether the Supreme Court decision would be of assistance to Mr. Chaudhuri. No doubt, the directors were acting in a fiduciary capacity and they must act for the benefit of the company. But the act of recovering debt due to the company by a director must necessarily be of benefit to the company and in such a case improper motive of the Directors would be immaterial and the principles laid down in the Supreme Court case would be hardly applicable. But in this case, the acts were not of directors 'de jure' but only of directors 'de facto' and the acts of the de facto directors are only upheld if the acts are done bona fide in the interest of the Company. If. however, the sole motive was not to benefit the company but to promote the private interest of the de facto directors, then the principles in the Supreme Court Case would apply and the acts of the 'de facto' directors would not be upheld by the Court.
74. Mr. Chaudhury has urged that the sale in the instant case is not merely irregular but illegal. The conditions laid down in Article 17 for the exercise of the power of sale not having been fully satisfied, the directors had no power to sell the shares, the sale was illegal as being beyond the power of the directors. It is contended in answer to this argument that they were not really conditions restricting the power of sale given to the directors but merely an indication as to how the power of sale was to be exercised. Hence when the sale takes place without complying with the 'conditions' laid down the sale is only irregular but not illegal. The power of sale was there, though that power was irregularly exercised, that is all.
75. The language of the Articles clearly indicates that the power of sale can only be exercised on satisfying three conditions laid down in Article 17. The language is clear. The power given to the directors is conditional and restricted. It follows that if the sale is effected in breach of the conditions laid down in the Article, the directors have acted in excess of their power and therefore the sale is invalid.
76. It is argued on behalf of the defence that this construction of Article 17, namely, that it can only be exercised after the conditions have been satisfied, will make the power of sale illusory. The indebtedness can always be challenged by the share-holder and simply by challenging the indebtedness, the share-holder can prevent the directors from exercising the power of sale. It is strongly urged that full authority is given by the articles to the directors to sell the shares in liquidation of the liability of a share-holder to the company and the directors have been given authority to determine that liability. For the purpose of exercising the power of sale, the parties by mutual covenant, have empowered the directors to determine the indebtedness, then make demand for payment within a week and in default of payment within a week, to sell the shares. The parties having agreed to a summary way of recovery by the directors of the share-holder's indebtedness to the company--this power should be liberally construed in favour of the company. The parties ere bound by their own covenant, and if it can be said on a fair reading of the Articles, that there is a covenant whereby the share-holders have agreed that for the purpose of the sale the directors would be the sole authority to determine the amount of a share-holder's indebtedness, then certainly the share-holders are bound by such covenant. If, however, no such covenant is to be found in either Article 16 or Article 17 of the Articles of the Company, why should the Court presume that such a wide power has been given by the shareholders to the directors. I am not impressed by the argument that the Articles should be construed beneficially in favour of the Company and hold that the share-holders have given full authority to the directors to determine the quantum of indebtedness and to sell the share to liquidate the indebtedness. In the absence of a clear covenant to that effect, I will not assume that such wide power has been given to the directors. Neither Article 16 nor Article 17 contains any covenant whereby it can be said that the share-holders have agreed that for the purpose of sale under Article 17, whatever amount the directors choose to decide would be the liability of the share-holder. If the construction called for by the defendants is correct, then it follows that even though the indebtedness of the share-holder is far less than what is determined by the directors the share-holder is powerless to prevent the sale and the Court is equally powerless to prevent the sale, even if the Court is satisfied that the indebtedness is far less than what is determined by the Directors. If the amount of indebtedness as fixed by the directors cannot be challenged in Court, then a suit for injunction prior to sale must fail as a suit challenging sale after the sale has taken place on the same ground, namely, that the directors are the sole authority to determine the amount, and the Court had no say in the matter. This runs counter to the opinion of Palmer that the share-holder can apply for an injunction before sale as stated in his Company Precedent 16th Ed. page 502 'when the company threatens to sell without justification, the existence of this clause renders it expedient for the shareholder to apply for an injunction before the sale is effected; for after sale it will be difficult, if not impossible to recover the share.'
76a. The Article referred to by Palmer is Article 33 which corresponds to Article 19 of our Articles of Association. The relevant Article in Palmer's Book corresponding to our Article 17 is Article 31. In the opinion of Palmer, therefore even though the directors have the same power of sale as is contained in our Article 17, when the sale is threatened without justification the Court can issue an injunction. I am unable to agree that if the condition set out in Article 17 is construed to limit the power of sale, then the power of the directors to sell in a summary way would prove to be illusory. It is argued that all that the share-holder need do is to write to the directors in answer to the notice of demand that the share-holder disputed the debt and then the directors under this construction would be powerless to act. If the dispute raised by the share-holder is sham and illusory, the directors may nevertheless proceed with the sale and in the proceeding initiated by the shareholder if it is found that the directors were right and the share-holder was wrong, nobody need bother. If however it is found in such proceeding that there was a serious dispute and the contention of the share-holder was ultimately upheld by the Court, in such a case the Court cannot but hold that the directors had no power to sell and were selling wrongfully. This does not mean that the power of sale given subject to conditions is illusory. This argument advanced by the defendant seems to suggest that power in order to be real must be absolute and that restricted and qualified power is wholly unreal and illusory.
77. The terms of the Article make it abundantly clear that the power of sale was not intended to be absolute. Sale of shares in enforcement of a debt summarily was recognised to be very serious from the standpoint of the share-holder. Hence it is provided that no sale shall take place unless there is a demand for payment in writing clearly stating the amount due and giving notice that in default of payment the shares will be sold That is, full opportunity must be given to the debtor share-holder to pay his debt and it is only on his failure to liquidate his indebtedness that the shares may be sold. It cannot therefore be contended that even if no proper notice is given stating correctly the amount of liability, but the demand is for a fantastically large amount the debtor share-holder is bound to comply with that illegal demand and pay otherwise his shares would be sold. Neither the debtor share-holder nor the creditor company could have entered into such a covenant. Such a construction is manifestly unjust. I am not compelled by the language of the Article to construe the Article in the manner suggested, on the sole ground that otherwise the company may be prevented from selling the share and the power of sale may prove to be illusory.
78. The points discussed above would have been conclusive if the dispute involved in this action was a dispute between the plaintiff and the company. But in the instant case the plaintiff to succeed must displace the title of Ramapada Gupta the purchaser of the share. The defendant primarily interested is Ramapada Gupta and the real point in the suit is whether Ramapada has acquired a good title in the share as purchaser, that is, even if it is held that the shares were sold by the directors improperly in excess of their power, whether this impropriety affects Ramapada's title to the shares in any way. The company defendant is only interested in the consequential relief of rectification of the Share Register. Therefore, the most important point still remains to be considered, namely, whether on the facts of this case and in law, the defendant Ramapada's title has been displaced.
79. It is contended that Ramapada's title is completely protected by Article 19 of the articles and Section 86 of the Companies Act and even if it is held that Article 19 of the Articles and Section 86 of the Companies Act do not cover the case, Ramapada is entitled to invoke the rule in Turquand's case, (1856) 6 E and B 327, in defence of his title. The argument is that however irregular and invalid the sale may be, Ramapada is a stranger who purchased the share bona fide for over Rs. 2,60,000/- out of which Rs. 1,30,000/-/- was paid and on such payment his name was entered in the Share Register. Ramapada, a stranger, had nothing to do with the indoor management of the Company. He cannot be expected to know that the 'de facto' directors who purported to sell the shares were in fact not 'de fure' directors and as such had no right to sell, that the debt for which the lien was imposed and in enforcement of which the shares were sold was not as much as was claimed by the company and that the conditions laid down in Article 17 had not been complied with. These are matters of indoor management which were beyond the knowledge of Ramapada and he was not expected to know of it. He as a stranger was entitled to presume that the directors who acted in the matter were 'de jure' directors, that all things were properly done in the matter of determination of liability, imposition of lien and enforcement of the lien by sale of shares. If anything irregular was done by the directors that cannot affect the title of Ramapada Gupta as purchaser.
80. The case of the defendant Ramapada Gupta has been argued with rare forensic ability and I may state at once that no litigant got better legal assistance than what the defendant Ramapada Gupta got in this case. I need hardly say that the arguments advanced on behalf of the defendant Ramapada Gupta deserve very careful and serious consideration and to the best of my ability I have tried to appreciate them.
81. Assuming that the transaction resulting in the sale of shares is illegal in the sense that the directors under the Articles had no power to sell or that the sale had been effected by directors with defective appointment or that the sale was effected without satisfying the conditions laid down in Article 17 or that one important step in the transaction, namely, the determination of the liability and decision to enforce the lien by sale of the shares and giving notice required--was taken by these who at the time had ceased to be directors, then the defendant Ramapada can only protect his title as purchaser at such sale either under Section 86 of the Companies Act, or Article 19 of the Articles or by invoking the rule in Turquand's Case, (1856) 6 E and B 327. In each of these cases however the sale will not be upheld by the Court unless the party seeking the assistance of the Court acts 'bona fide'. An innocent purchaser will be protected. But the Court will never come to the assistance of a purchaser who purchases the share without good faith, that is, with notice that the sale was wrongful. No case has been cited wherein the Court upheld a wrongful or illegal sale in which the purchaser had notice of its illegal character. On the other hand, all the cases cited on analogous section and Articles of the English Act and English Courts have held that the person seeking protection of the Court must 'act bona fide'. So also acting bona fide is considered to be essential to uphold a transaction in all cases cited in which the Rule in Turquand's case has been invoked to protect an unauthorised act.
82. The first point to be considered with reference to the case of Defendant Ramapada Gupta is--has Ramapada been proved to be an innocent purchaser? If it is held otherwise, Ramapada's defence totally collapses. Ramapada does not, however come to the box and pledges his oath that he is an innocent purchaser. Throughout this longdrawn litigation, which is bitterly fought on every point and the most important question, if not the only one being whether the defendant .Ramapada had acquired title in the shares, Ramapada is conspicuous by his absence. His battle is fought in Court by Dr. S.L. Mukherjee, and I must say. ably fought with his back to the wall. Mr. Subimal Roy in his opening of the case commented that Dr. S.L. Mukherjee. who was brought in the company by the plaintiff and was given such a high position in the company with an employment that is to be envied by all, did not prove loyal to the plaintiff. That cannot be said of Dr. S.L. Mukherjee with reference to the defendant Ramapada Gupta. Nobody could have done more to Ramapada Gupta in this litigation than what Dr. Mukherji did for him. Nevertheless, the fact cannot be ignored that Ramapada Gupta gave this Court a wide berth and did not step into the witness-box to protest his innocence. It looks as if we are having the drama of Hamlet played in Court, with Hamlet's part left out. The importance of this fact was properly appreciated by the legal advisers of Ramapada. It must have been realised that unless satisfactory explanation for not calling Ramapada as a witness is given, which is acceptable to the Court, the consequence would be serious. No shelter has been taken by the learned Counsel behind the conventional ground of sudden illness or being called away suddenly on urgent piece of business, often taken and seldom accepted by the Court. A very bold stand is taken that Ramapada has been advisedly withheld from the Court, because Ramapada has been advised that his evidence is not necessary. The reasons given for taking this attitude have now to be very carefully considered.
83. It is urged, in the first place, that on the plaint Ramapada Gupta has no case to meet. The suit as against Ramapada Gupta must be dismissed 'in limine'. This argument is an argument on pleadings. I have gone through the plaint very carefully. The drafting of the plaint may not be artistic and leaves considerable scope for improvement. But I am unable to hold that the plaint does not disclose a cause of action against the defendant Ramapada, so that I should dismiss the suit 'in limine' as against Ramapada. The plaint does state the various acts leading up to the sale of the shares and the rectification of the Share Register by substituting the name of Ramapada in place of the plaintiff as the holder of these shares. It is then alleged that the defendant Ramapada 'connived and/or otherwise conspired with Drs. S. L. Mukherjee and B. P. Neogy in effecting the said purported sale and in entering his name in the books of the company'. Then in paragraph 20 it is alleged 'despite having knowledge of the fraudulent character of the transaction of the said purported sale of shares by the said Dr. S. L. Mukherjee and Dr. B. P. Neogy to him', the defendant was about to exercise his right as the holder of the shares. Then in paragraph 21 is set out the various grounds why the sale is illegal and void. Amongst the grounds taken are (i) that the sale is fictitious, that is, it is a colourable transaction and not a real transaction; and (ii) the defendant had all along knowledge of the wrongful character of the transaction. There are, in my judgment, sufficient to base a cause of action against the defendant Ramapada. The allegations amount to this that Ramapada did not act bona fide in the matter and that he is not an innocent purchaser. Further, the sale is a colourable transaction. Such allegations are enough to dispute Ramapada's title to the shares. It is urged that the words 'fraud', 'conspiracy' and 'connivance' have been used against Ramapada, but no particulars have been given. I do not agree. Sufficient particulars have been given to found a case of fraud and conspiracy against Ramapada: the fraud consists in this that Ramapada has been a party to an illegal and wrongful sale, inasmuch as he purchased the shares with full knowledge that the transaction was wrongful. No further particular was necessary or possible to be given beyond what is alleged in the plaint. It has been argued that no doubt it has been alleged that the defendant Ramapada had knowledge of the wrongful character of the transaction, but that he acquired this knowledge after the sale and not before. If Ramapada came to know the wrongful character of the transactions after purchasing the shares, then this knowledge would not affect his bona fide in the matter of purchase. But to me the allegations in the plaint clearly amount to knowledge from prior to sale. After fully setting out the facts in support of the case that the sale was wrongful and without authority, it is alleged that the defendant Ramapada 'connived and/or otherwise conspired with Mukherjee and Neogy in effecting the said purported sale'. This amounts to an averment of knowledge prior to the transaction. Without knowledge prior to the sale, there can be no connivance, no collusion and no conspiracy. It cannot therefore be held that the plaint does not disclose any cause of action against the defendant Ramapada Gupta and that in consequence the defendant Ramapada Gupta had no case to meet.
84. It is next argued that assuming that the plaint does disclose a cause of action against defendant Ramapada Gupta, nothing has been proved against him in the proceedings. The plaintiff who is the only witness on his behalf stated that he never knew Ramapada nor does he know him now. There being no evidence led by the plaintiff to prove that Ramapada had prior knowledge of the wrongful character of the sale there was no occasion for Ramapada to give rebutting evidence. The argument is that the presumption of law is in favour of the defendant, Ramapada, namely, that he acted in good faith in the transaction. That presumption has to be rebutted by the plaintiff, in the first place, by leading evidence to prove that there was bad faith on the part of Ramapada. The plaintiff has tendered no such evidence to rebut the presumption. Hence the presumption in favour of defendant Ramapada to the effect that he acted in good faith has not been displaced and still remains. It follows that the defendant need not tender evidence to prove his bona fides, legal presumption being in his favour, and this presumption has not been rebutted by any evidence tendered by the plaintiff.
85. It is argued with great force that the plaintiff is to make out his title to the shares. The entry in the share Register that the defendant Ramapada is the owner of these shares established Ramapada's prima facie title. The plaintiff, in order to establish his title must displace Ramapada's title. This the plaintiff can prove by establishing that he was the prior holder of these shares, that the sale effected By the company was unauthorised and wrongful and that the defendant Ramapada did not act in good faith in the transaction. In order to make out his title, therefore, the plaintiff has to prove, inter alia, that the defendant Ramapada did not act bona fide in good faith. Even though this is a negative fact, nevertheless, the plaintiff must prove it to establish his title. In support, the following observation of Bowen L. J., in the case of Abralh v. North East Railway Company, reported in (1883) 11 OBD 440, was relied on. The observation was made in a case of malicious prosecution and reads as follows:
'Now in an action for malicious prosecution, the plaintiff has the burden throughout of establishing that the circumstances of the prosecution were such that the Judge can see, no reasonable or probable cause for not instituting it. In one sense, that is the assertion of a negative and we have been pressed with the proposition that, when a negative is to be made out, the onus of proof drifts. That is not so. If the assertion of a negative is the essential part of the plaintiff's case, the proof of the assertion still rests on the plaintiff. The terms 'negative or affirmative' are, after all, relative and not absolute. In dealing with a question of negligence, that term may be considered either as negative or affirmative, according to the definition adopted in meaning the duty which is neglected.'
The point emphasised is that the plaintiff has not discharged this onus, even though it is the onus of proving the negative. Hence there was no necessity for the defendant Ramapada to give evidence in this case. On the basis of the evidence tendered, if the plaintiff has failed to prove that the defendant Ramapada did not act bona fide in good faith, and this being one of the essential facts to be proved in support of the case of the plaintiff, the observation of Bowen L. J., above referred to applies with full force to the facts of this case.
86. In the instant case the want of bona fides on the part of Ramapada consists in his knowledge that the act of the directors in selling the shares was unauthorised and wrongful. That knowledge can be proved by tendering positive evidence. For instance, it may be proved that Ramapada made an admission that he had knowledge prior to sale that the sale was unauthorised and wrongful. That would be direct evidence on the point, though it must be considered that rarely such evidence of the state of mind is available. In any event, no direct proof of, Ramapada's knowledge has been tendered in this case. The evidence is that the plaintiff did not even know the defendant Ramapada. It must be held, therefore, that there is no direct evidence to prove that the defendant Ramapada had knowledge of the wrongful and illegal character, of the transaction. The other way of proving knowledge is to establish facts* and circumstances from which an inference can be drawn that the defendant Ramapada had such knowledge. In other words, the fact of Ramapada's knowledge can be established by circumstantial evidence. This proposition is not disputed. It has, however, been strenuously argued that the circumstantial evidence must be such as to lead to one and the one conclusion, namely, that Ramapada had knowledge. If the evidence is equally consistent with knowledge and want of knowledge, then the circumstantial evidence tendered must not be held to be sufficient to establish Ramapada's knowledge of the wrongful or illegal character of the transaction. Certain decisions on criminal cases of fraud and conspiracy have been cited in support of the proposition that to prove fraud and conspiracy by circumstantial evidence, the circumstances must point to one and the one conclusion namely, that the accused is guilty. It is argued that in all cases of fraud the same rule will apply, it matters not whether the case is civil or criminal. It should not be forgotten, however, that in a criminal action, the accused is not required to depose in his favour and if he does not, no inference against him can be drawn, while in a civil action a defendant charged with fraud is entitled to give evidence and indeed required to give evidence, more particularly, when the fraud consists in the knowledge of a wrongful act in which he is alleged to be a party, and if the defendant withhold his own evidence, the court is required to draw an adverse inference.
87. In the instant case, what are the facts admitted and proved. It is admitted in the written statement that the defendant had knowledge of certain facts relating to the shares prior to his purchase. He had knowledge of the proceedings in this court in suit No. 3112 of 1954 and the proceedings in Appeal No. 56 of 1956 from the order of injunction passed by P.B. Mukharji J., in suit No. 3117 of 1954. He had knowledge of the termination of the suits by withdrawal and also of the appeal. He had also knowledge that under an order of the Court of Appeal the Official Receiver made over possession of the company to the Board of Directors consisting of Dr. Mukherjee, Dr. Neogy and D. N. Bhattacharjee. This order was passed in Appeal No. 56 of 1955 which was an appeal from an interlocutory order in suit No. 3117 of 1954. Apart from this admission, other facts have been proved in court by Dr. Mukherjee. The defendant Ramapada on 10th January came and saw Dr. Mukherjee and intimated his desire to purchase the shares of the plaintiff. Defendant Ramapada was not interested in purchasing other ordinary shares that were clearly available on that date. The defendant Ramapada took away the papers in connection with the litigation and on the following day made an offer in writing to purchase the shares. The letter containing the offer dated 11-1-1956 was not originally disclosed and the genuineness of the letter was questioned by the plaintiff in court. On the 24th shares were sold to the defendant Ramapada and in the evening a part of the purchase price amounting to Rs. 1,30,000/- was paid in cash. The cash money thus paid was never proved to have been deposited in Bank. The name of the plaintiff was immediately entered on the Share Register as the owner of this big bunch of shares in place of the plaintiff and there was no transfer deed. The defendant Ramapada was appointed a Director even before he had paid the price of shares. Dr. Mukherjee has not been cross-examined by Ramapada Gupta and it must be taken that he has accepted this evidence of Dr. Mukherjee. These facts do suggest that the defendant Ramapada was well known to Dr. Mukherjee, had knowledge of facts resulting in the sale of shares and that that knowledge he had acquired before the actual sale took place. The extent of his knowledge of facts can only be ascertained by the court from the evidence of the defendant himself. The court can only determine whether he was an innocent purchaser after hearing his testimony. I do not understand how else can the Court hold that the defendant is an innocent purchaser? The very fact that the defendant Ramapada refused to give evidence of his innocence in court is itself a very important fact and the court is bound to infer from this fact that defendant Ramapada had guilty knowledge. Certain presumptions are no doubt available in favour of the defendant Ramapada. Certain presumptions are also available against him and one of such presumptions is that the court must draw adverse inference against him from the fact of his refusal to swear his innocence in court. In my judgment, it is fatal to the case of Ramapada.
88. In the instant case the fact to be ascertained or proved is that state of mind of the defendant Ramapada, that is, whether prior to the sale, he has knowledge of the wrongful character of the transaction. This was within the special knowledge of the defendant Ramapada and the burden of proving the innocent state of his own mind is within the special knowledge of him and him alone. It was for him to prove it. Assuming that the initial onus is on the plaintiff to lead some evidence, the burden of proof is shifted to the defendant Ramapada, having regard to the admission in the written statement of Ramapada that he had some knowledge anterior to the sale and having regard to the evidence already tendered. In determining whether the onus has shifted to Ramapada, the evidence to be taken into account is the entire evidence tendered and not the evidence tendered on behalf of the plaintiff alone. Very slight evidence, if at all, is necessary to shift the burden on Ramapada and I hold that such evidence was tendered. It was imperative for the defendant Ramapada to tender his evidence as to the quantum of his knowledge of the transaction resulting in the sale of shares and to prove that he was an innocent purchaser. On Ramapada's failure to tender evidence in support of his own innocence, it must be held that Ramapada had full knowledge of the entire transaction resulting in the sale of shares and on my finding that the transaction was wrongful I am bound to hold that the defendant Ramapada did not act bona fide in the impugned transaction. This finding negatives the argument made on behalf of Ramapada that his purchase is protected by Section 86 of the Companies Act and/or by Article 19 of the Articles of the company or by the Rule in Turquands' Case, (1856) 6 E and B 327.
89. Let me, nevertheless, consider how far the sale is protected on the basis of this argument. I have held that at the time when the resolution to enforce the lien by sale of the shares was passed on 23-9-1954, and the notice in terms of Article 17 was served on the plaintiff pursuant to that resolution on 24-9-1954 the directors who purported to act in the matter, that is, Dr. Mukherjee and Dr. Neogy, were no longer directors, their office having expired in July 1954, that is, 15 months after the last annual general meeting held in April 1953. This resolution and notice sent thereunder is, therefore, not protected by Section 86 of the Companies Act, because in law the section validates only the acts of directors with defective appointment but not of those with no appointment or whose office had expired. Even if the section applied, the defendant Ramapada must be deemed to have discovered the defective nature of the appointment of Dr. Mukherjee and Dr. Neogy having regard to the letter of the plaintiff and his solicitor served previously to the effect that Dr. Mukherjee and Dr. Neogy had vacated their office, which letters are included in the records of this suit in the various proceedings in this court. The shares were sold in January 24, 1956. Previously is the annual general meeting held on 6-1-1955 Dr. Mukherjee and Dr. Neogy were appointed directors. Even if it is held that at the time when the sale took place Dr. Mukherjee and Dr. Neogy were properly appointed directors and even if at that particular date they had not discovered that their appointment was invalid, even then the sale cannot stand. The reason is that the actual sale on 24-1-1956 is only a part of the whole transaction. The transactions ultimately resulting in the sale consist of three steps; one, resolution to enforce the lien by sale passed by the board of directors; second notice of sale under Article 17, and then the actual sale on 24-1-1956. The resolution and the notice are essential steps in the matter and, as stated before, these acts of the directors are not protected. It follows that even though the sale held by the directors properly appointed, the case is not covered by Section 86 of the Act, because the two essential preliminary steps were taken by people pretending to act as directors, were no longer directors, they having vacated their office. In my judgment Article 19 of the Articles does not protect the sale. The purchaser can only invoke Article 19, if he acts bona fide and is an innocent purchaser. I have held that the defendant Ramapada did not act bona fide and that he was not an innocent purchaser. I have held, further, that the shares liable to be sold under Article 17 are only shares subject to lien, that is, with respect to which the defendant company were in possession of share scrips. In the instant case, the shares were only subject to equitable charge and the way of enforcing the equitable charge is not by sale under Article 17 of the Articles. Further conditions laid down in Article 17 were conditions precedent to the exercise of the power of sale and in the instant case, the conditions have not been fully complied with. I am in doubt whether this only amounts to 'irregularity or invalidity in the proceedings in reference to the sale' within the meaning of Article 19.
90. The Rule in Turquand's case, (1856) 6 E and B 327, as stated in Halsbury's Laws of England, Hailsham Edition, Volume V, page 423 and quoted in Kanssen's Case, 1946 AC 459: (1946) 1 All ER 586, is in the following terms:
'But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed, and are not bound to enquire whether acts of internal management have been regular''.
This presumption of regularity in the internal management of the company in favour of an outsider dealing with the company is due to the fact that an outsider has no right to look at the indoor management of the company. This rule has been followed in a number of decisions some of which has been already noticed. This rule of indoor management was also applied by a Division Bench of the Bombay High Court in the case of D. Pudumjee and Co. v. N.H. Moos, reported in AIR 1926 Bom 28, with the following observation:
'Persons contracting with the company are bound to know or are precluded from denying that they know, the constitution of the company and its power as given by statute and Memorandum and Articles but they are not affected with notice of all that is contained in the register of directors kept as required by Section 87 of the Act. Notwithstanding the provisions of Section 87, the appointment of directors will remain a part of the 'indoor management' of the company and it would hardly conduce to the facility of business if outsiders are compelled to search the register and find for themselves whether a person who was permitted to act as director of the company for some length of time was also its director de jure'.
The learned Additional Solicitor General argued with force that this rule of indoor management is a salutary rule and however irregular the indoor management might have been, a total outsider is protected even if the acts of persons who were permitted to act as directors for some length of time were not de jure directors and even if such acts were not authorised. The outsider who acted on the faith of apparent state of affairs which were all in order was entitled to assume that they were the real state of facts. Therefore, the acts of de-facto directors, who were not regularly appointed, even though they acted as directors and had acted in a manner not regular, will be binding on the company in favour of an outsider in his dealings with the company. A share-holder who took no step to prevent a 'de facto director, though not properly appointed, from acting on behalf of the company will not be entitled to challenge the unauthorised act of a de facto director who was not a de jure director, as is clear from the speech of Lord Heatherley in Mahony's case, (1875) 7 HL 869, and noticed before. It is also argued that the outsider will not lose the protection unless he is aware not merely of the fact but their legal consequence, as is clearly indicated by Lord Cozens Hardy, M.R. in Channel Colliery Trust case, (1914) 2 Ch 506 at p. 512:
'It has been argued for the appellants with great force that this is a clause which ought not to be relied upon by persons who were aware of the facts, although not aware of the legal conclusions resulting from those facts, because such persons must be taken to know the law and it would be wrong that they should take the benefit of Section 99. I am unable to accept that view. It seems to me that the questions may be put very shortly: Aye or no, were the parties in the transaction acting in good faith. If they were, Section 99 would be available from all parties including the directors themselves. If there is a lack of good faith, then of course the court will not allow those who are lacking in good faith to take the benefit of it'
The test, therefore, is the presence or absence of good faith.
91. The reasons in support of the Rule in Turquand's case, (1856) 6 E and B 327, have been stated by Lord Simmonds in Kansen's case reported in 1946 AC 459 at p. 475:
'One of the fundamental maxims of the law is the maxim 'omina praesumuntur rite ease acta. It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appear to be in order. But the maxim has its proper limits. An ostensible agent cannot bind his principal to that which the principal cannot lawfully do. The directors or acting directors or other officers of a company cannot bind it to a transaction which is ultra vires. Nor is this the only limit to its application It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied that is if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done'.
This being the rule in Turquand's case, (1856) 6 E and B 327, the party seeking to invoke the Rule has to prove that he dealt with the company bona fide in relation to the offending transaction. In the instant case, the defendant Ramapada Gupta, in order to invoke the Rule in Turquand's case, (1856) 6 E and B 327, has to prove that he purchased the shares without knowing the wrongful nature of the transaction. In other words, he has to establish the allegation made in his written statement that 'fully relying on the facts set out in the earlier part of paragraph 1' of his written statement, defendant Ramapada 'bona fide purchased the shares at par'. This is a positive defence and it is for the defendant Ramapada to substantiate it. Defendant Ramapada cannot substantiate it without entering the witness box. Not having done it, he has not laid the foundation fear invoking the Rule in Turemand's case, (1856) 6 E and B 327. Again, as stated by Lord Simonds, there are limits to the application of this Rule and this Rule is designed for the protection of those who are entitled to assume, just because they cannot know facts happening 'indoor of a company'. But in the instant case, the facts happening indoor of the company are no longer confined indoor. They have been brought out in court. The defendant Ramapada admits some knowledge of the court proceedings and, therefore, what has happened indoor from those court proceedings. Where is the room for assumption in such a case when what was happening indoor can be known and is admitted to be known to the party to a certain extent: Knowledge is admitted by Ramapada. The only question is, how much he knew or could have known.
92. Another point has been raised and has to be considered and that is this: Does the Rule in Turquand's case, (1856) 6 E and B 327, apply to a case in which the dispute is in the title to shares between two rival claimants, even though the disputes has arisen because of the act of the company? The rule applies in the case of a dispute between an outsider and the company. But the instant dispute is not a dispute between the company and Ramapada, but a dispute between the defendant Ramapada and the plaintiff. The Rule in Turquand's case may prevent the company from disputing the title of Ramapada to the shares. But can it be invoked by Ramapada to defeat the plaintiff's title to the shares? The question is certainly not free from difficulty. The share-holder in law is distinct from the company and the shares are his property. The Articles which create a lien and charge constitutes nothing more than covenants between the company and its share-holders. If the shares are sold in breach of the covenants the share-holder may yet covenant, as he has done in the instant case, that the sale will not be set aside, because of any irregularity or invalidity in connection with the sale. This is Article 19 of the Articles of Association of the company. If the shares are wrongly sold, the plaintiff may be debarred from questioning the purchaser's title by reason of the covenant contained in Article 19. But if the case is not covered by Article 19, can the title of the shareholder in the shares sold in breach of the covenant be defeated by the purchaser by invoking the Rule in Turquand's case, (1856) 6 E and B 327? In none of the cases cited the private right of property in the shares of a particular share-holder was involved. In Turquand's case, (1856) 6 E and B 327, the dispute was between the outsider and the company. So also in Mahony's case, (1875) 7 HL 869. The case of Channel Colliery Trust, 1914-2 Ch 506, is a case of allotment of shares by directors not properly appointed and the dispute was between the company and the allottee, that is, the company and outsiders. In the case of British Asbestos Co., (1903) 2 Ch 439, the legality of a general meeting and the election of directors in that meeting was the subject of controversy. In Dawsons case, (1898) 1 Ch 6, the legality of a call on shares made by directors not properly appointed was the dispute. So also York Tramway Co. Ltd., (1882) 8 QBD 685, was a case in which the company sought to recover call money on shares and the defence was that the call was made by a board of directors not properly appointed. The Bombay case, AIR 1926 Bom 28, is also a case in which the right of a creditor to rank as secured creditor in winding up was in issue. The instant case appears to be a case of first impression on the point. The point is that if a company wrongfully sells a chattel deposited with it by one of its share-holders, can the Rule in Turquand's case be invoked by the purchaser in a suit by the share-holder to recover from the purchaser the chattel? If not, why should the Rule in Turquand's case, (1856) 6 E and B 327, be invoked by the purchaser, if the chattel happens to be the share of the company? I am not prepared to say that there is no substance in this contention. On the other hand, the reasoning in some of the cited cases- may be used in support of the contention that the Rule in Turquand's case, (1856) 6 E and B 327, may apply in such a case. The point is important and, as stated before, it is a point of first impression and need not be decided in this case, having regard to the view I have taken otherwise. Admitting the rule in Turquand's case, (1856) 6 E and B 327, and applying it to the facts of this case, what follows? The Rule in Turquand's case, (1856) 6 E and B 327, fixes on the outsider dealing with the company, notice of the Memorandum and Articles of Association, Rampada, therefore in the instant case, is, in any event fixed with the knowledge of Article 17; I have held that Article 17 gave no power to the directors to sell the shares with respect to which the company had no lien in terms of the Articles. From the letter of Ramapada to the company it is clear that Ramapada knew that the shares scrips were not available at that point of time. Hence even if under the Rule in Turquand's case the defendant Ramapada as a total outsider may be entitled to assume that the directors were properly appointed, that the directors properly determined the liability of the plaintiff, that all steps were taken by the directors properly, that is, the conditions laid down in Article 17 have been complied with he was not entitled to assume that the directors had power to sell Article 17 of which he must be deemed to have notice, gave no power of sale of shares with respect to which the company had no lien at law but only equitable charge. Hence the Rule in Turquand's case is of no avail to Ramapada.
93. It has been strenuously urged that the defendant Ramapada had no doubt knowledge of the allegations made by the plaintiff in the various suits disputing the right of Dr. S.L. Mukherjee and Dr. Neogy to sell the shares in Suit No. 3112 of 1954. But the suit was withdrawn without leave to institute another suit and with the withdrawal of the suit the challenge thrown out in the suit was withdrawn. In such circumstances, the defendant Ramapada was entitled to think that the objection of the plaintiff questioning the right of the directors to sell the shares in enforcement of the Hen was wholly unsubstantial and if on that belief the defendant Ramapada purchased the shares, he purchased the shares bona fide and there was no absence of good faith on his part. This is a defence in the nature of estoppel--the defendant Ramapada was misled by the conduct of the plaintiff in withdrawing the suit to believe that the allegations made by the plaintiff in the suit were without any substance and on the faith of that purchased the share. This argument would have been of great force if the case was substantiated by evidence. If Ramapada gave evidence to that effect, I might very well have accepted it and held that the defendant Ramapada purchased the shares bona fide. In the absence of Ramapada's evidence, this argument becomes wholly unreal and is of no avail to him.
94. The reason of the plaintiff not persisting in the suit filed and withdrawing the same will appear from the petition of withdrawal of the defendant company in suit No. 3117 of 1954. In suit No. 3117 of 1954 the company was one of the plaintiffs. This petition is signed by the company in this manner: 'Albert David Ltd., by the pen of Albert Judah Judah, Managing Director'. In this petition the reason of withdrawing the suit is stated to be this:
'An amicable settlement has been effected between the plaintiff in the present suit and D.N. Bhattacharjee and these two together hold the controlling shares. In consequence even though the allotment of new shares are recognised, the interest of the plaintiff would be protected. Hence to put an end to the litigation the suit is being withdrawn.'
No separate petition was filed to withdraw the Suit No. 3112 of 1954. But the two suits were withdrawn together at the same date. The defendant Ramapada, who admits to have some knowledge of the proceedings in court, might or might not have knowledge of the proceedings in Suit No. 3117 of 1954. There is no evidence to this effect, but the probabilities are that he had knowledge and if he had looked into the petition, he could have known the real reason of withdrawal of the suit. Further, in the petition before the Appeal Court for delivery of the company to the plaintiff's party it was clearly stated that they were the proper party to whom possession was to be made over by the Official Receiver and not to Dr. Mukherjee and Dr. Neogy. The Court, however, held that possession was to be made over to the party from whom possession was taken. This conduct of the plaintiff cannot he construed to mean that he gave up the claim that he had made and has made up till now. In any event, Ramapada, as the intending purchaser was put upon enquiry and if he refused to make enquiry and deliberately shut his eyes to the true state of affairs, he did it at his own risk; he is not entitled to complain that he did not know the real state of affairs. In the light of these facts the defendant Ramapada Gupta might or might not have been justified in thinking that the fact of withdrawal of the suit amounted to the plaintiff's giving up the charges against Dr. Mukherjee and Dr. Neogy. But the point is, what in fact was the state of mind of Ramapada, what was the knowledge with which he purchased the shares? That is the real point. On the point, the withdrawal of the suits and the records and proceedings are no doubt relevant materials but certainly not conclusive. In that view of the matter, it was imperative for the defendant Ramapada to come to Court and state his knowledge of facts on the basis of which he purchased shares. , Not having chosen to give evidence, it is not open to him to argue that the withdrawal of the suits led him to believe that the plaintiff's contention raised in Suit No. 3112 of 1954 to be of no substance from the fact that the plaintiff withdrew the suit without liberty to institute another suit and on that belief purchased the shares. This may or may not be true, and whether it is so or not can only be ascertained from evidence of the defendant Ramapada, if it was tendered. As I stated before the refusal of the defendant Ramapada Gupta to tender his evidence in this case is fatal to his case.
95. Another point taken by Mr. Chaudhury is that in the instant case, there is no instrument of transfer i.e., no deed transferring the shares to the defendant Ramapada Gupta. The plaintiff the registered holder of the shares did not execute any such deed. Nor does it appear that the Company did execute any such deed for and on behalf of the plaintiff. No deed of transfer has been proved in court on behalf of any of the defendants. It is contended that Section 34(3) of the Indian Companies Act provides that it shall not be lawful for the company to register a transfer of shares unless the proper instrument of transfer duly executed by the transferor and transferee, has beers delivered to the company along with the scrip. No transfer deed having been executed and no scrip having been made over to the company in the instant case as required by Section 34(3), it was not lawful for the company to register the transfer and record the defendant Ramapada Gupta as the holder of these shares. It follows that even if there has been a sale in favour of the defendant of the shares in suit, in the absence of a deed of transfer duly executed and deposited with the company, the company had no power to register Ramapada as the holder of these shares. It is, therefore, urged by Mr. Chaudhury that there must be rectification of the Share Register by restoring the plaintiff's name as the holder of these shares. It is to be remembered that in the instant case, the shares have not been forfeited and the company was not selling its own shares, in which case no transfer deed would be necessary. The company in the present case was selling the shares of the plaintiff and hence in law a deed of transfer becomes imperative to enable the directors of the company to register Ramapada as the transferee of these shares. This is the argument of Mr. Chaudhury.
96. In answer to this argument it is contended on behalf of the defendants that Article 19 provides for registration of shares sold by the company in enforcement of lien oven without a deed of transfer. I do not think that Article 19, does provide for registration without a deed of transfer. It only provides that upon any such sale as aforesaid, the directors may enter the purchaser's name in the register as the holder of these shares. It does not follow that the Article enables registration without a deed of transfer. To hold that it does make it inconsistent with the provisions of Section 34 of the Act. The Articles of the Company should be so construed as to harmonise and be consistent with the provisions of the Indian Companies Act. That is the proper rule of construction. To construe otherwise, Article 19 would run counter to Section 34 of the Companies Act & would be ultra vires to that extent.
97. It is next argued that on a true construction, the sale of shares by the company in enforcement of lien is excluded from the operation of Section 34 of the Act. The section does not apply to cases of sale when the company itself is selling the shares. The company being itself the seller is bound to register the shares and if the company does not, the purchaser can compel the company to register the shares. I agree that the section does not contemplate cases of transfer by the company of its own shares. Just as allotment by the company of its own share cannot be characterised as a transfer within the meaning of the section, similarly the sale of its own share by the company after forfeiture also cannot be characterised as a 'transfer', within the meaning of Section 34 of the Indian Companies Act. But shares belonging to other people which the company is selling in enforcement of lien or equitable charge cannot be treated on the same footing. They are not shares in which the company has 'property and the sale does not result in transfer of property from the company to the purchaser. The sale in enforcement of lien results in the transfer of property from one registered owner to the purchaser and is no different from ordinary transfer from one share-holder to another. The fact that the company acts as the seller being authorised by the Articles to sell, does not alter the character of the transaction. It is a case of transfer just like any other transfer and is covered by Section 34 of the Act. I do not think that sale of shares by the company in enforcement of lien is excluded from the operation of Section 34 of the Act.
98. Two authorities have been cited in support of the contention that even without the transfer deed, registration may be effected by the directors, which may now be considered. The first case is the case of Mohiddin v. Tinnevelly Mills. Co., decided by a very strong Division Bench of the Madras High Court and reported in AIR 1928 Mad 571. The case before the Madras High Court was argued by the most eminent counsel Mr. Varadachariar and Sir Alladi Krishnaswami Ayer. The point considered was whether a purchaser of share in a court sale is entitled to succeed in a suit for rectification of the share register by recording his name on the strength of his purchase in a court sale. It was held that such a suit is maintainable and must succeed. In his judgment Srinivas Ayengar J., made the following observation at page 574:
'To begin with it must be pointed out that the expression 'transfer' by itself is not altogether appropriate to indicate a sale in invitum by the court. No doubt the expression 'transfer' has been used in such collocations as 'transfer by operation of law' but at the same time the expression 'transfer' is undoubtedly more appropriate to indicate what is effected or brought about by the will of the person in whom the property is vested, as in the Transfer of Property Act.'
It is argued from the above observation that the word 'transfer' in Section 34 is to be construed in the sense of voluntary transfer and not transfer under compulsion. In the instant case, the transfer has not been effected voluntarily by the plaintiff the registered holder but by the directors against the wishes of the registered holder. Hence it is argued by the learned Additional Solicitor General that the observation set out above will apply only not to cases of court sale but also to involuntary sale effected by the directors to enforce lien.
99. The second case relied on is the case of Mahadeolal v. New Darjeeling Union Tea Co. decided by a Division Bench of this Court and : AIR1952Cal58 . In this case also the same question arose, namely, whether a purchaser in a court sale is entitled to have his name registered on the basis of being the auction purchaser in a court sale. The Division Bench cited with approval the above observation in the Madras case and agreed with the view taken by the Madras Division Bench on the point. It should be noted that the Madras case was decided prior to the amendment of Section 34 of the Companies Act, while the Calcutta case had been decided after the amendment when Section 34 is the same as it is now. It is clear that none of the cases is a direct authority on the point. Both are cases of court sale. Further, the Madras decision was prior to the amendment of the Companies. Act and was decided on a construction of the Articles of the Company and not upon a construction of Section 34 of the Companies Act. Observation made by the Madras High Court and approved by this Court must be read in the background of the facts of that case--and the fact considered in that case was the acquisition of the shares in a court sale. Nevertheless it is perfectly legitimate for the defendants to use the reasoning in the Madras case as being applicable not merely to court sale but to all kinds of involuntary transfer. This reasoning therefore, implies that Section 34 is restricted to voluntary transfer effected by a share-holder to a purchaser. It may include transfer effected by an agent of the share-holder with the approval of the share-holder at the time of transfer. But it cannot cover a case of sale of shares by a pledgee, when sale is effected in enforcement of the pledge by the pledgee, unless the pledgor expressly consents to the sale. It is on the same reasoning that the sale of shares by a director in enforcement of the pledge can be said to be 'transfer' within the meaning of Section 34 on the ground that the sale is involuntary. It has not been held in any case that in the case of sale of shares by a pledgee to enforce the pledge--transfer deed is unnecessary. If not, how can it be urged that it is unnecessary in the case of sale in enforcement of a lien on the ground that sale is involuntary. In either case the authority to sell is derived from the owner of the shares. In the case of pledge when the pledge was given and in the case of lien when the shares were purchased. In both cases the sale is effected with the implied consent of the owner--consent having been given before, though at the time of sale, the owner of the share has not only given no consent but positively objected to the sale. Indeed unless there is consent though presumed in law on the part of the share-holder, there cannot be any transfer of the property to the purchaser. Such sale, therefore, cannot be involuntary sale in the same sense as a court sale. A court sale is entirely different from such sale. There is an express provision in the Code of Civil Procedure Order 21 Rule 80 to the effect that where execution of a document is required to transfer shares then the execution of that document by the court would be sufficient. In other words such document will effect the transfor.
100. There being this specific provision in the Statute with respect to shares transferred or sold in execution of a decree, the general provision in Section 34 of the Companies Act as to transfer of shares is hold not be applicable in the case of shares sold in execution. The reason of non-applicability of Section 34 of the Companies Act in the case of court sale is not the involuntary nature of the transaction but the express provision in the Code which provides for another mode of transfer of share in the case of court sale.
101. For reasons stated, it was not lawful for the defendant company to register the transfer of shares in the name of Rampada Gupta in the absence of a proper instrument of transfer having been deposited with the company.
102. This disposes of all the points argued before me. I should record that no serious attempt was made to prove the case made by the plaintiff in paragraph 14 of the plaint to the effect that a new board of Directors consisting of Dr. S.P. Bhattacharji, Gunabantrai Ojha, D.N. Bhattacharji and the plaintiff was elected in a meeting convened by five members under Articles 64 and 65 of the Articles and duly held. Similarly, no serious argument was advanced that the suit was bad for non-joinder of Dr. Mukherjee and Dr. Neogy as parties.
103. For reasons given above the plaintiff succeeds and I pass a decree in terms of prayers (a), (b), (c), (d), (e), (f), (g) and costs. Certified for three counsel.
104. I would be failing in my duty if I donot record the great assistance rendered to thecourt by all the learned counsel--seniors andjuniors alike. The case is very heavy and the learned counsel did not spare themselves. No Judgegot the assistance that I received from the Bar inthis case and I wish to record my gratitude to eachone of them.