# March 20. {96t ,\/ odc1da/ Fa~·irchar.d /)11d~td1ja v. SI.,,, ClltJntdto ~ 11rtir Mr/ls J.tr/

- **Citation:** [1962] Supp. 3 S.C.R. 973
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Bench:** P. B. Gajendragadkar, A. K. Sarkar, K. N. Wanchoo
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/march-20-96t-odc1da-fa-irchar-d-11d-td1ja-v-si-clltjntdto-11rtir-mr-ls-j-tr-2525
- **Pages:** 43

## Headnote

Company-Agreement to
pa11 c1Jmmission
beyond
specified
limi'.t-Validity-Oompa.nie8
(1qf1950), 8, 76(1) & (2).
from profit.o
Act,
.Wi6
There was an agreement between the respondent com~
pany, which was incorporated as a Private Limited Company
in 1939, and its promoters, the appeilant and the rest l)f the
respondent~, that in consideration of the promoters having
each purchased sharers worth 1-1 /2 lakhs of the company, the
company would pay them 12-l/2% of the net profits every yoar.
That agreement was put in art. 3 of the ArticJes of Association
of the company.
In 1941
there was a second agreement
between the company, its promoters and a firm, and by it
the said firm was appointed as the managing agent of the
company and the commission payable to the promoters \vas
reduced to 6-1 /4% and art 3 amended accordingly. There was
litigation between the parti's and the consent decrees pcissed
there in left the promoters' commission in tact. Meanwhile the
Companies Act, I 956, came into force and the company served
a notice to the appellant saying that the promoters' commission was no longer lawful and that.art. 3 would be deleted.
The appellant then brought the suit out of which the present
appeal arose, for a declaration that the agreement to pay
cor.-imission was valid and for an injunction rf"Str::iining the
company from deleting the said art. 3. It was urged on behalf
of the companv that s. 76( l) anrl (2) of the '"id Act had made
the agreement invalid and unenforceable. The trial court found
in favour of the company and di~mis~ed the suit.
The court
of appeal agreeing, with the trial court dismissed the appeal·
1!162
K.M.S. Reddy,
Commissioner of
Income-tax, Kera/a
v.
The West Co1at
Chemicals tJnd
!ndurtiies l.td
Tiidayat11llah .J,
1962
March 20.
{96t
,\/ odc1da/ Fa~·irchar.d
/)11d~td1ja
v.
SI.,,, ClltJntdto
~ 11rtir Mr/ls J.tr/.
974
SUPRE~fE COURT REPORTS [l!l62] SCPP.
Section iG of tl:e Cc,mpanits Act, 1956, before it"'"' amrndrd
in 1960, \\'as in i1s ma1crial parts as follo\\·s :-
''(1 ).
A rompany may pay a commission to any
~rson in consideration of
(a)
his s11hscrihin~ or agrrr.ing to sub~rrihc,
:vhrthrr abso111trlY nr condi,r:onally, for any !'har~s
111, or del:cnt11rrs of, the companv. or.
(h)
his procuringor
agrec-ing to procure
sub~c1 iption,!:,
v.·l~ethrr ab!'olutr. or conditional, for
anv sharrs in, or debentures oC the. con1plny, if t hcfoJJ0,ving conditions arc- fulfillrd, viz.
(i~
the pavmrnt of er n1mission is a11thori·
srci hy the 1rticlt's:
(ii) the commi!:.si0n paid or agreed to be
paid does not c·xrrrd in the <'a!'e of !'hares, fi\"C
per CC'nt. of the prirf" at \,-hh h the .!)ha1 es a1 r.
ist;ue<l or the amount or rate authorised by the
Art:cJes, ,,·hicht>vrr is Je!'s, and in the cac;.c <Jf
debentures, t\\'O and a half per cent. of the price
;, t '"'hich thr dr.br.nturrs arr. is5.ued or the
;imonnt "'f rate au'horised hy
the articles,
\\·h:c-hc\er i~ Jc·!'s:
(iii) the an1ount or rate per rent. of the
<<,rrn1is(;ion paid or agrrc<l to be paid is in the
ta!'c of !-hares or deb<'ntures offered to the public
for s1il'scription, disclosed in the .prospectus; and
~iv) .............................. .
(2)
Save a<
nforc<aid and save as provided in
srction i9: no con1pany shall allot any of its shares or
dehrntures or apply a,ny of it'." c~pitaI moneys, eitl":er
dirr<:!ly or indireclly, in payment of any c:on11nis~ion,
di~co11nt or a)Jo,,·anrc, to any person in considc·ration of
(a)
his suhscrihing- or agref'ing to su~Jscribc,
\vhethrr absohit~ly or ronditionall'.-', ff)r any share<;
in, r,r dthrnt11r('<; of, 1~1c company~ or
(b)
.,., . .,,.,,,,,.,., . ., ........... .
By 1\mcncling Act GS of 1960 the ,,.r,rd ~capital' occt1rring
in thats. 76(2) v.a!' clelr.ted.
'
3 S.C.R.
SUPREME COURT REPORTS
975
Held,
(per Gajendragadkar, and Wanchoo, JJ) that
s. 76 of the Act must be co,.<rued by itself, in the light of its
own scheme and object and not by reference to what the
English law on the point may be.
So judged there ca

## Text

_Characters 0–39,929 of 86,519. This is a partial read: ask again with offset=39929 for what follows._

>
!
•
3 S.C.R.
SUPREME COUH.T REPOH.TS
973
Company and not a sale in the course of business
operations, which alone would had attracted t.ax, if
profit resulted.
In the result, the appeiil fail.-i, ancl is dismissed with costs.
·
Appeal dismi8sed.
MADANLAL FAKfRCHAND DUDHEDIYA
v.
SHREITI CHANGDEO SUGAR MILLS L'l'D.
(P. B. GAJENDRAGADKAR, A. K. SARKAR and
K. N. WANCHOO JJ.)
Company-Agreement to
pa11 c1Jmmission
beyond
specified
limi'.t-Validity-Oompa.nie8
(1qf1950), 8, 76(1) & (2).
from profit.o
Act,
.Wi6
There was an agreement between the respondent com~
pany, which was incorporated as a Private Limited Company
in 1939, and its promoters, the appeilant and the rest l)f the
respondent~, that in consideration of the promoters having
each purchased sharers worth 1-1 /2 lakhs of the company, the
company would pay them 12-l/2% of the net profits every yoar.
That agreement was put in art. 3 of the ArticJes of Association
of the company.
In 1941
there was a second agreement
between the company, its promoters and a firm, and by it
the said firm was appointed as the managing agent of the
company and the commission payable to the promoters \vas
reduced to 6-1 /4% and art 3 amended accordingly. There was
litigation between the parti's and the consent decrees pcissed
there in left the promoters' commission in tact. Meanwhile the
Companies Act, I 956, came into force and the company served
a notice to the appellant saying that the promoters' commission was no longer lawful and that.art. 3 would be deleted.
The appellant then brought the suit out of which the present
appeal arose, for a declaration that the agreement to pay
cor.-imission was valid and for an injunction rf"Str::iining the
company from deleting the said art. 3. It was urged on behalf
of the companv that s. 76( l) anrl (2) of the '"id Act had made
the agreement invalid and unenforceable. The trial court found
in favour of the company and di~mis~ed the suit.
The court
of appeal agreeing, with the trial court dismissed the appeal·
1!162
K.M.S. Reddy,
Commissioner of
Income-tax, Kera/a
v.
The West Co1at
Chemicals tJnd
!ndurtiies l.td
Tiidayat11llah .J,
1962
March 20.
{96t
,\/ odc1da/ Fa~·irchar.d
/)11d~td1ja
v.
SI.,,, ClltJntdto
~ 11rtir Mr/ls J.tr/.
974
SUPRE~fE COURT REPORTS [l!l62] SCPP.
Section iG of tl:e Cc,mpanits Act, 1956, before it"'"' amrndrd
in 1960, \\'as in i1s ma1crial parts as follo\\·s :-
''(1 ).
A rompany may pay a commission to any
~rson in consideration of
(a)
his s11hscrihin~ or agrrr.ing to sub~rrihc,
:vhrthrr abso111trlY nr condi,r:onally, for any !'har~s
111, or del:cnt11rrs of, the companv. or.
(h)
his procuringor
agrec-ing to procure
sub~c1 iption,!:,
v.·l~ethrr ab!'olutr. or conditional, for
anv sharrs in, or debentures oC the. con1plny, if t hcfoJJ0,ving conditions arc- fulfillrd, viz.
(i~
the pavmrnt of er n1mission is a11thori·
srci hy the 1rticlt's:
(ii) the commi!:.si0n paid or agreed to be
paid does not c·xrrrd in the <'a!'e of !'hares, fi\"C
per CC'nt. of the prirf" at \,-hh h the .!)ha1 es a1 r.
ist;ue<l or the amount or rate authorised by the
Art:cJes, ,,·hicht>vrr is Je!'s, and in the cac;.c <Jf
debentures, t\\'O and a half per cent. of the price
;, t '"'hich thr dr.br.nturrs arr. is5.ued or the
;imonnt "'f rate au'horised hy
the articles,
\\·h:c-hc\er i~ Jc·!'s:
(iii) the an1ount or rate per rent. of the
<<,rrn1is(;ion paid or agrrc<l to be paid is in the
ta!'c of !-hares or deb<'ntures offered to the public
for s1il'scription, disclosed in the .prospectus; and
~iv) .............................. .
(2)
Save a<
nforc<aid and save as provided in
srction i9: no con1pany shall allot any of its shares or
dehrntures or apply a,ny of it'." c~pitaI moneys, eitl":er
dirr<:!ly or indireclly, in payment of any c:on11nis~ion,
di~co11nt or a)Jo,,·anrc, to any person in considc·ration of
(a)
his suhscrihing- or agref'ing to su~Jscribc,
\vhethrr absohit~ly or ronditionall'.-', ff)r any share<;
in, r,r dthrnt11r('<; of, 1~1c company~ or
(b)
.,., . .,,.,,,,,.,., . ., ........... .
By 1\mcncling Act GS of 1960 the ,,.r,rd ~capital' occt1rring
in thats. 76(2) v.a!' clelr.ted.
'
3 S.C.R.
SUPREME COURT REPORTS
975
Held,
(per Gajendragadkar, and Wanchoo, JJ) that
s. 76 of the Act must be co,.<rued by itself, in the light of its
own scheme and object and not by reference to what the
English law on the point may be.
So judged there can be no
doubt that s.
76( I) clearly prescribes
the payment of
commis'sion, whatever the source from "'·hich it is paid may
be.
It is not merely an enabling provision, .but aho prohibits
payment beyond the prescribed ceiling.
It is clear th'1t
the section covers commission paid both out of capital.and
profits.
Hilder v. Dexter, (1902) A.C. 472, rxp'ained.
The Ooregum Gold l!fininq Co. of India [td. v. George
Roper and Charles Henry Wallrot/i., (1892) A.C. 125, considered.
I
There can be no repugnancy ·between s. 76( I) thns
construed and s. 76(2). The Legislature was aware that capital
money WflS often applied to payment of commission under the
garb of ostensible lawful pavmen ts. Tn view of the devices adopted to defeat the limit imposed by s.76(1), it is provided bv
s. 76(2) that such devices must also conform to the pre•crihed
limit · The two sub-sections constitute an integrated provision
one of the objects of which was to impose a limit on the
Payment of commission whether for shares ·or for debentures
in order to save the property of the company.
The deletion of the word 'capital' from s. 76(2) by the
Amending Act of 1960 made the intention of the Legislaiure
clear that the Jimit imposed on the payment of commission in
respect of shares and debentures applies as much to commi~~
ions paid out of capi~al as to those paid 0ut of profits.
Per Sarkar, J -There is nothing in s . . 76( I) of the Com·
panies Act, 1956, to' sug~est that it intended in any way to
change the pre-:existing law under which a cnmpany was free
to pay any commission it liked out of its profits to an.y person
subscribing for sharrs in it, and the proper way to construe
that sub-section would he to confine its terms to pa vments of
commission out of capital.
'
Hilder v .. Dexler, (1902) A. C. 474, held apolicahle.
Oorequm Gold Min'rl,inq Co. of India Ltd. v. Geor(fl', Roper,
(1892) A.C. 125, referred to.
The words "it shall be lawful" used ins. !05( I) of the
Indian Companies Act, 1913, anrl the word 'mav' usPd ins. 76
(I) of the Companie1 Act, l 9!i6, mean the ;ame thing and
both these sections were enabling provisions that intended to
legalise something which was previously illegal.
·
196?.
Jf adanlt l Fakirchand
Dudhuliya
v.
Shree Changdao
Sugai Mills Lid.
!if ad,mfal Fakirrhand
J)udlred1)'a
..
Shrft (.1.01 g1t'J
Su1-ar A·tilli /Jt(J.
!liG SUPREME COVRT REPORTS [196'2] SCPP.
C1nL APPELLATE .JuRI~lll.CTJOX: Civil Appeal
No. 6~ of l!hi!J.
Appeal hy spPcial leave from the judgm.,nt.
and decree dated .July 24, I!):)i, of the Bombay High
Court in Appeal No. 2:! of l!liii.
·
A. V. Vi811:a11alha 8a.slri, .Jasu•rmtlal }rfolh11hlv1·i
and I. N. Sl•.ro.ff, for the appellant .
. C. n. Agrirwala, .!. /?, D11rl11d1anji. O. C. :lfoth11r
1tnd Rflrindo· Nara.in, for responclent. Xo. I.
l!l62.
March
20.
The
,Judgment
of
Gajendragadkar :ind Wanchoo, ,J.J., was d<'livererl
hy GajPndragaclkar, ,J., Sark>tr, J., r],.Jiverwl a separate ,Judgment.
a,;,.,d,.gm/k ·" J.
GA,TEJ\flRAOADKAR, .J.-Thc principal quest.ion
which ariRes in t.hiR nppeal relat<i~ to the construction of s. 7o(I) anrl (~) of the Comprv1io• Act, I !J:'il)
(I of l!liifl) (h•m'inaft.er called tlw Act) bnfore tho
amendmrnt, ·of 8ub-s.(2) in I 000. That que>tion
arises in
this way. Tlw appellant, !lforlanl:ll
Fnkirchand
Dudherliya, and respondent£ Nos. 2
and :land th" father of reopondents :\os. i to IO
were
the promoters of the 1st respondent Co.,
Shree Changdeo Su[!ar :\Tills Ltd. The said Co.
was incorporatPd in I !l~O as a Private Limited
Company.
Tt.
was. however,
~'onverted into a
Public Ltd. Co. in 1!)44.
At th<' time of the original
incorporation of the Co.,
11. Promoter's
A(!rerment. was arrivC'd at whcrel1y the Co. agrned
dming its existPnce to pay a. sum equal to
3-1,'8~~
every year out. 0f its net profits to each of thP.
four promoters.
As a re•ult nf this agreement,
the aggrpgate con•ideration payable "very year to
t.he promot.,rs r~'\me to 12-112°;, of t.hfl n<>t profits
of the Co. Article a of the Artic!Ps of Assodation
of tho Co. just.ifierl th,. making of this ngreement.
In l\H I the Co. ca.me into financial difficulties and
•
3 S C.R.
SDPREl\IE CODRT REPORTS
977
in consequence, on the 22nd April, 19il, a tripar·
tite Agreement was arriv_ed at between the Com·
pany, Mis. Ardeshir Hormusji Bhiwandiwalla &
Co., and the Promoters. Under this agreement,
it was agreed inter alia, to appoint the said firm
of Bhiwandiwalla & Co. or its nominee as the
Managing Agents · of the Co.
for 10 . years with
a,n option to the Co.
to extend the said period
upon
certain terms. At this time, the earlier
agreement as to the payment of the promoters'
commission was modified an:l the sa,id commission
payable to the promoters was reduced to 6-1/4%
and Art. 3 of the Articles of
Association was
accordingly amended. Three years later, dispute
arose between the parties and they led to three
snits filed on the original side of the Bombay High
Court. All the said suits were compromised and
decrees hy consent were passed in them. One of the
terms of the compromise was that the promoters'
commission payable to the four promoters which
was· Ks. 1-9-0 to each of them and which came
6:1/4% in the aggregate payable to them under
the agreement entered into between them and the
Managing Agents shall remain in force as in the
Agreement and the promoters' right
of commi·
ssion shall continue accordingly.
Thus, as a result
of the compromise, the promoters' comm1ss10n
which was payable to them under the earlier
Agreement was saved.
After the Act came into force on the 1st of
April, 1956, the appellant received a letter from
respondent No. 1 informing him that respondent
No. 1 had been 'advised that as from the date of
the commencement of the Act, the agreement between the parties as to the payment of the promoters' romrnission had become illegal and void and
t,hat the 1st respondent would not. therefore, pay
any more commissions after April, 1956. In
October, 1956 the appellant received a notiee from
the 1st respondent that an extraordinary general
1962
Madanlal Fakirchan4
Dud/iediya
..
Shree Changde()
Sugar Mil,/s Ltd.
G 11jendragad/oar J.
1962
Jleddnlal F&ikirch.nd
DudhttiiJa
v.
Sllrtt CluJngdto
Sugar Mills Ltd.
O•jtndragadkar .T.
978 SUPREME COURT REPORTS [19621 SUPP.
meeting of the sharoholders of the !st respondent
Co. was going to be held,_ inter aUa, for the pur.
pose of amending certain Articles of Association
of the Co.
One of tht' amendments proposed to
be. put before the said meeting was to delete
Article 3 from the Articles of Association of the
Co.
On receipt of this notice, the appellant filed
the present suit on the 13th December 19ii6.
By
his plaint, he claimed a declaration that the agree·
ment between tho partieH was \'alid and legal and
he asked for an injunction r('straining respondent
:N'o. I from passing any resolution deleting Article 3
of the Articles of Association of tho respondent Co.
or from taking any action on the basis that
tho said agreement had become illegal and void.
Respondent ~ o. l resisted this suit. It was urged
on its beh1tlf that as a result of the prnvisions of
section 76(1) and (2) of t.he Act, the agreement
in question had become void and could not be en·
forced.
Respondents '.Ii os. ·2 to l 0 are the other
beneficiaries under the said agrl'cment and they
supported the appellant. The le1trned .Tudgo who
tried the suit held that the defence raised by respondent No. I was wcll-foundod and that the agreement in question having become void and unenforceable under the relevant prnviBions of the Act,
no declaration could be granted or no injunction
could be issued in favour of the appel11tnt as
claimed by him. In the result, the appellant's
suit was dismissed
with costs. The appellant
then prefPrrod an appeal challenging the <'Orrectncss of the decision of the Trial Court. The Court
of Apppeal, howl"ver, agreed with ,the view taken
by the learm•d Trial Judge and dismissed t.he
appeal preferred by the appellant. The appellant.
then applied for ancl obt1tincd a certificate from the
High Court and it is with the said certific1ttc that
he h1ts come to this Court by his present appeal.
That is how the principal point which has been
raised for our decision in the present appeal is
about the construction of secticn 76( I) and ( 2).
1
a s.c.R.
SUPREME COURT REPORTS 9i9
1962
Mr. Sastri contenrls that in coming to the
conclusion that the appellant's claim to enforce
Madanlal Faki"hcnd
•
f th
f"t
Dudhediya
the agreement in question in respect o
e pro 1 s
v.
made by respoudent No. 1 is affected by s. 76, the
Shroe Changdea
Courts below have misconstrued the provisions of
Sugar Mill,Dd.
the said section. It is conceded by Mr. Sastri
Gai,nd•agadlar J.
that the promoters have so far received .an aggregate amount of over Rs. 5,80,000 which is far in excess of the maximum amount now permissable under
s. 76( I ).But his argument is that the statutory provision imposing the limit in regard to the payment
of commission on which respondent No. I relies
is inapplicable t6 a caRe where the said commission
is claimed not out of capital but out of the profits
of the Company.
Before dealing with this point, however, it
would be convenient to dispose of another objection raised by Mr. Sastri. He contends that the
agreement in question is really outside the purview of s. 76.
Section 76 refers, inter alia, to
the commissions payable to any person for his
subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of a Co.
That being so, since . the present agreement has
been entered into for consideration other than
those specified in s. 76, its enforcement oannot
. be resisted on the
ground that it 'is hit hy
s. 76.
The d1Jcision of the question naturally
depends
upon
the construction of the
two
agreements. The first agreement of 1939 provides
that for the help rendered and pains taken by the
prompters and because each of them had agreed to
• purch~se and had purchased shares worth Rs. 1-1/2
lakhs out of the C.o.'s capital, the Co. was entering
into
an agreement with them for the payment
of the commission.
The agreement provid<>d that
the said commission would be payable as long as the
Co. was in existence. It is thus clear that though
the help rendered by the promoters ar.d pains taken
by them are incidentally 1eferred to, the a.greement
1962
JI. "411lal l"dli.irclumd
D:uUttdiJa
v.
Shrtt Char1gd!J
Sugar Mills l.td.
Gajtntiragaika rJ.
980 SUPREME COURT REPORTS [1962] SUPP.
is substantially, if not entirely, based upon the fact
that the promoters hail agreed to purchase and had
purchased shares worth Its. 1-1/2 lakhs and so there
can be no doubt tha,t this agreement clearly falls
within tbe mischi~f of s. 7().
It is, however, urged
that the completion of the first agreement changed
completely when the second agreement was entered
into in 19·11.
In this latter agreement which was
entered into betwc·<m the promoters anti the new
Managing Agents, the former agreed to receive 6-1 /4%
an promoters' commission instead of 12-1/2% "as
provided in our respective agreements with the
Company .. " That is the su bstanee of the agreement.
However, :\Ir. Sastri reiies on the othm· recitals in the
document in support of his argument that the latter
agreement was not in consideration for the purchase
of shares by the promoters. These recitals refer to the
fact that the promoters had resigned their office and
surrendered and renounced their rights to act as the
i\fanaging Director or :'.lfana.ging Directors of respondent Xo. 1 and it was in consideration of this fact
that the agreement was made. We a.re not impressed by this argument. It iH true that before .this
agreement was ma.de, the new lll•naging Agents
were appointed and that was no doubt the occasion
for the making of the agreement. But the essential
pa.rt of the new ai;rre.,ment waH the reduction made
in the commission payable to the promoters; for
the rest, the earlier agreement continued and so,
in det-0rmining the scope and nature of this latter
agreement, we have inevitably to go hack to the
first agreement. As we have. just pointed out, the
operative clause in the agreement, in terms, refers
to the earlier agreements between the respective
parties a.nd avers that instead of 12-1/2% as provided by the saicl agreement().)/-!% would hereafter
be pa.id.
Therefore, we are sati~fied that the payment claimed by the appellant is payment by way
of commission to which s. i6 would apply.
•
3 S.C.R.
SUPREME COURT REPORTS
981
Then it is argued that th~ugh the purchase of
shares by the promoters may partly be the consideration for the a,greement, the service rendered by them
and the pains taken by them in promoting the Co.
were also set out in the first agreement as forming
part of the consideration and even if the agreement
as to the payment of commission may fall within
s. 76 part of the agreement which is based on other
considerations would be outside s. 76 and the two
parts being severable, it is necessary to determine
how much the appellant would be entitled to claim
under the part which is valid. In our opinion, this
argument is not open to the appellant at this stage.
It appears th:tt in the· trial Court, an attempt was
made on behalf of the appellant to. lead oral evidence
for the purpose of saying that the two considerations
could be severed and so, the amount payable to the
appellant in respect of that part of the agreement
which was valid, should be determined.
The learned Trial Judge did not allow oral evidence to be led
as suggested by the appellant because he found that
the case sought to be made by adducing the said
oral evidence was not made out by any averments
in the plaint nor was any attempt made to raise
any issue in that behalf at the time when the issues
were framed. Indeed, it appears from the judg-
. ment of the learned Trial Judge that the attempt
made by the appellant in that. behalf was feeble and
half· hearted. Thus, in the Trial Court, the appellant was not allowed to make out this case and
when he went before the court of Appeal, he appa-
-rently made no grievance about the decision of the
Trial Court; otherwise the Appeal Court would have
dealt with this point. Therefore, we do not think
that the appellant can be permitted to raise this
point before us in this appeal..
'l'hat takes us to the principal point of controversy
between the parties in n gard to the construction of
section 76(1) and (2) of the Act. Mr. Sastri contends that in construing the relevant statutory
1962
M adanlal Fakirchanp
Dudhediya
v.
Sh"e Changdro
Sugar Mills Ltd.
Gajendragadkar J,
1962
M oJanlal Fakirchand
Dwlhtdi.JiO
v.
Sf.ru ChanJdto
Sugar JI illt LJd.
Gajtnd1agaJkar J,
982 ~UPREllIE COURT REPORTS [_1962)
SUPP.
proviRions, it would be ne<-essar.v to bear in mind
tha.t the provisions of the Indian Company Law are
substantially based on th" provisions of the English
Company Law and so it would bo necessary to
enquire what the corresponding provision of tho
English Law has been construed to mean. Tho
pattern of the Indian Company Law is set by the
Englieh Company Law and the princip!t·s enunciated by English decisions in dealing with the corresponding provisions of the English Company Law
should be followed when we are interpreting the
provisions of the Indian Company Law.
This
argument proceeds on the assumption that the
corresponding provision
of the English Company
Law permits the payment of commission for subscribing for shares out of the profits of the Co. with
out any limitation. It is, therefore, necessary to
examine briefly this argument.
The provision in the Company L1tw in regard
to the payment of commission for subscribing for
any shares was introduced in the English Companies Act in the form of an enablin~ provision in 1900
and it became necessary to make the saitl enabling
provision because ·of an earlier decision of the
House of Lords in 'J'he Ooreguin Gold Mininy Co. of
India, Ltd. And Georye Hopet and Charles Henry
Wallroth ('). In that case, the House of Lords had
held that a company limited by shares, form~d and
registered under the Act of 1862, had no power to
issue shares as fully paid up for a money consideration less than their nominal value. It appears that
tho memorandum of association of a company
registered under the Act of 1862 stated that the
capital of the company was £ 125,000 divided into
125,1100 shares of £1 each, and that the shares of which
the original or increased capital might consist might
be divided into difforcnt classes and issued with•such
preference, privilege, or guarantee as the company
might direct. The company being in want of money
(I) (18'l2J A.r..125, 134. 133.
\
·•
3 S.C.R.
SUPREME COURT REPORTS
983
and the original shares being at a great discount,
the directors in accordance with resolutions duly
passed issued preference shares of £1 each with 15s.
credited as paid, leaving a liability of only 5s. per
share. A contract to this effect was registered
under 'the Companies Act of 1867 s.25. The transaction was bona fide and for the benefit of the company. In an action by an ordinary shareholder to
test the validity of the issue, it was held that reading the Companies Acts of 1862 and 1867 together,
the issue was beyond the powers of the company,
and that the preference shares so far as the same
were held by original a!lottees were held subject to
the liability of the holder to pay to the company in
cash the full amount unpaid on the shares. In his
speech, Lord Halshury observed that "Twci things
were manifest in s. 25 of the Act of .1867.
The
shares to be held subject to the payment, and the
payment is to be in cash.
The amount is to be paid
and the whole amount to be paid in cash, and to me
it appears, looking at the latter part of the section
whereby a contract made and filed may qualify and
cut down the form of payment, and that it may be
in goods or in value received in some form, instead
of in cash, it must· nevertheless be payment." He
also added that "the capital is fixed and certain,
and every creditor of the company is entitled to
look to that capital as his security." Thus, as a
result of this decision, it become obvious that no
commission could be paid to any person for his subscribing to the shares of the Company out of the
capital of the Co.
· It was as a result of this decision that section
8 was enacted in th@ Act which was passed to amend
the Companies Act, in 1900. 'Section 8(1) !Jrovided
that:
"Upon. any offer of sh1.res to the public
for subscription, it shall be lawful for a
company to pay a commission to any person
1962
Madanlal flllld1cli11nd
Dudhediya
'
'·
Shree Changdeo
Sug'lr Mills Lld.
Gajendrogadkar, J.
19'2
Madan/al Fakirchnnd
Dudlμdi;'(J.
, ..
Sh1e1 Chon:d~11
Sug"' .\11/ts Ltd
Gojend1ago.dkar J,
984 SUPREME COURT REPORTS.(1962] SUPP.
in consideration of this subscribing or :1grceing
to subscribe, whether absolutely or conditionally,
for any share;; in the eump1wy, or
pror.uring or agreeing to procure subscriptions
whether absolute or condition;i,l, for any
shams in the company, if the payment of the
commission and the amouut or rate per cimt.
of the commission paid or agreed to be paid
are respectively authorised by the articles of
association and disclosed in the prospectus, and
the commission paid or agreed to be paiJ Joeti
exceed tho amount or rate so authorised."
Sub-sec. (2) provided that:
"Save as aforesaid, 110
company "hall
apply for any of its shares or capital money
either directly or
iudirectly in
payment
of any commission, discount, or 1illowance
to any person in
consideration of his
subscribing
or
agreeing
to
subscribe,
whether
absolutely
or conditionally, for
any shares of the comp;i,ny, or procuring
or agreeing to procure subscriptions, whether
absolute or conditional, for &nv shares in the
company, whether tho shares ~r mo1wy be so
applied by being added to the purchase money
of •LDY property acquired by the company or
to tho contract price of any work lo b1, executed for the company, or the money be paid
out of the nominal purchase money or contmct price, or otherwise."
Sub-sec.(3) added that.=
"But nothing in this section shall affect
the power of uhy company to pay such brokerage as it has heretofore been lawful for a
company to pay."
It would thus be seen that the difficulty cn•1tted by
the decision of the Hmrnc of Lords in the case of
The Oorcgum Gold lllining Co. of India Lt<l. waB
•
3 S.C.R .
SUPREME COURT REPORT.S
985
overcome by this statutory provision and in consequence, it became lawful for the company to pay
commission subject to the conditions specified in
the section. It was because the legal difficulty
created by the· decision of the House of Lords was
intended to be cured that the Legislature enacted
the section by providing that it shall be lawful for
the company to pay commission on the terms specified.
1'hat is the genesis of the expression "it shall
be lawful for a company to pay" with which the
section begins.
Then followed the Consolidating Act of 1908.
S. 89 of this Act dea.lt with the power of the company to pay commission and discounts. This section
is more elaborate than s.t! of the Act of 1900, but,
in substance, the pattern remained the same.
Sec. 43 of the Act of 1929 introduced an important change by making an additioual.provisiou
by which the commission paid or agreed to be paid
was not to exceed 10% of the price at which the
shares are issued or the amount or rate authorised
by the arti-Oles, whichever is the less. In other words,
in Hl29, a ceiling waa placed on the payment of
commission at 10% of the price. After this Act was
passed, commission paid could not exceed Hl% of
the price at which the shares were issued.
The Companies Act, 1948 by s.53 has maintained the same provisions as those contained in s.43
of the earlier Act. That, in brief, is the position
of the corresponding provisions in the English Companies Acts.
Mr. Sastri contends that the relevant provisions of the English Companies Act ·have been
construed to mean that the ceiling on the payment
of commission to which they refer is payment of
commission out of capital and not out of profits. In
othe1· words, the argument is that the payment of
commission out of profits is outside the misohief of
1962
Madanlal Fakircha
DudhediJ1a
v.
Shree Changdeo
Sugar JW £lls Ltd.
GaJ'endragadkar J
19G2
a,ianl'4l Fakircha11d
f)!Jd~(diya
..
• Sh1u Cha111dco
'flgar ,\/ iil:J Ltd.
986 SOPHEME COUB.T HEPOHTS [1962) SUPP.
the relevant English provisions. In support of this
argument reliauce has been placed on the decision
of the House of Lords in Hilder And Dexkr ( 1 ).
fo that case, to rniso working capital a company
offered shares at par to tho appellant and some
other persons with an option tu take further shares
at par within a certain time.
The appellant subscribed for shares, and the market price having
risen to a premium, desired to take up the further
shures. It was held : "that this was not an application of shares of capital monoy directly or indirectly in payment of commission, discount, or allowance within the meaning of the Companies Act, 1900,
s.8. Sub-s. ~ and (the transaetiun being otherwise
unobjectionable) thnt the appellant was entitled to
exercise the option." It would be nu ti cell that
what the House of Lords was callctl upon to consitler was whether 1'11 application 1nade by the ap1•ellant for further shares offcndod against the provisions of s. 8(2) of the English Act and the Hoi.se of
Lords helu that it did not. It is true that tho
shareholder would have been able to sell his shares
at a premium and thereby obtain <t benefit, but tho
said benefit cannot ba said to have been obtained
by him at the expcnso of the company's ca.pita..:
Thus, the application made by the appellant was
outside the prohibition contained in s. 8(2). In other
words, this decision is directly a decision on the
constrnction of s.8(:!). It has, however, been urged
by i\Ir. Sastri that in dealing with the construction
of s. 8(2), Lortl Davey in his speech had oonsiuered
s. 8( 1) and observed that : "this sub-section permitH
a limited application of the company's capital in
payment of a commission." The whole of the
appellant'H argument is based on this sentence. It
is suggesteu that this sentence amounts to a decision
that the provisions of s. 8(1) have reference to the
payment of commission out of capita.I and, therefore,
have no refern11ee tu the payment of commission
(I) (1901) A.C. 474, 479.
' '
....
...
~S.C.R.
SUPREME UOURT REPORTS
\)87
out of profits. We a.re not inclined to accept this
contention. It is clear that in the case of Hilder,
the House of Lords had np occasion to consider
whether or not commission could be paid out of
profits. That point simply did not arise in tha.t.
litigation. The question which arose was whether
that was a case of payment ant of capital which
was prohibited by s. 8(2) and it is in that context
and while dealing with the narrow controversy between the parties that an observation has no doubt
been made that section 8(1) permits an application
of the company's capital in payment of a commission in a limited way.
This statement cannot be
taken to be an exhaustive interpretation of s. 8(1)
so tha.t it should be possible to hold that by necessary implication it was intended to lay down thHt
payment of commission out of profit was not
within the purview of this section. Therefore, we
are not prepared to accept the assumption made by
the appellant that this decision is a direct authority
on the point that payment of commissfon out of
profits is not covered by s. 8( 1) or by the relevant
provisions in the subsequent English Companies
Acts.
It is then argued that authoritative text-books
on Company Law support the view that payment of
commission out of profits is not prohibited by the
English Companies Law.
In the "Hiindbook on
Joint Stock Companies" by Gore-Browne, it is observed : ·'that there is no prohibition against paying
. commission unconditionally 'out of profits', and
this would seem to be lawful unless contrary to any
stipualtion in the Articles." (p. 191).
Buckley •On
t~e ~ompa~ies Acts.' o?serves that : '·the prohibit10n 1s agamst apphcat10n of "shares or capital
money," and payment of commission out of a fund
of undistributed profit is not, at all events not
expressly, forbidden by the section." (p. 132). It
is cl"'ar that this statement is somewhat cautious
...~ adanlal Fakirohan~
Dudhediya
v.
Shree Ch11ngdeo
Sugar ],fills Ltd.
Gojendrogadkar I.
1962
lfada11lal FaJ.ircliand
Vudludi;-a
v.
Shru Changdeo
Su:a' :\1/l{j Ltd.
Gaj1nd1ogadkcr J.
988 SUPH.EME COUHT ItEPOl{TS [1962] SUPP.
and not as unqualified as the statement in GoreBrowne's Handbook.
In Palmer's Company Prcccclents it is observed that the provisions of s. 5:1(2)
of the Act of HJ48 "leave a company at liberty to
apply any of its 'profit' in paying commissions in
·a ccordonne with tht· practice above referred to ab
existing before the Act of HJOO."
(p. li9). In
Palmer's Company Law, however, the position is
stated wmewhat differently.
lleferring to section
5;~(:1). it is observed that : "if the words used are
intended to restrict sub-sec.( l) so as to make it only
lawful tu pay commission uut of the newly issued
shares or capital money received for them, tho
payment of commission out of profits would appear
to be prohibited bys. :i4 which prohibits a company
to give any financial assistance in connection with,
inter alia, the subscription of its own shares. If,
un the other hand, sub-seo. (2) docs not intend tu
restrict sub-sec.(l) but contains a separate and independent provision, the application of profit of the
company within the limits of sub-section (l)(b) of
s.53 would be permissible. It is thought that the
latter interprut11tion is correct and that thu words
in sub·sec.(:!J of s.5:! are intended to make it clear
th1it the former practice may be continued under
whwh a company could use its profits for the payment of commission within the permitted limits."
(p. 200). It would tbus appear that tho last observation seems to support the view that the prohibition couta.ined in s.5:!(1) applies as much to payments made uut of capital as to payments made
out of profits.
It is thus clear tha.t the vicwti expressed by
the different writers on Company Law disclose a
differenco of approach and do not appear to be
based on any judicial decision.
In fact, though
:\Ir. Sa~tri conceded that there was no direct decision on this point, be contended that the.absence of
any judicial Llecision shows that the point was
neve1· disputed. On the other hand, Mr. Aggarwala
-
.,
3 S.O.R.
SUPREME COURT REPORTS
989
contends that the absence · of any judicial decision
speaks for the fact that nobody ever thought that
payment of commission could be made out of profits beyond the limits prescribed by the relevant
statutory provision. However that may be, in
view of the material placed before us, we do not
think it wou Id be safe for us to assume that the
position under the English Law is established either
one way or the other and for obvious reasons, we
would be reluctant to embark upon an enquiry on
that point by seeking to interpret the relevant English provisions ourselves.
Let ns, however, assume that the true legal
position under the relevant provision of the English
statute is as the appellant contends. Does it follow
therefrom that we should approach the problem of
construing s. 76 with the pre-conceived notion that
s .. 76 provides exactly for the same position ? In
our opinion, the answer to this question has to be
against the appellant. Let us first read s. 105 of
the Indian Companies Act of 1913 and s. 76 of
the Act of 1956 Aide bv side. Section 105 rea<ls
thus:-
·
"Power to pay certain commissions and
prohibition of payment of all other commissions, discounts, etc.
( l) It shall be lawful for a company to
pay a commission to any person in consideratio~ of bis subscribing or , agreeing to subsrribe, whether absolutely or conditionally,
for any shares in the company, or procuring
or agreeing to procure subscriptions, whether
absolute or conditional, for any shares in the
company, if the paymer>t of the commission
is authorised by the articles and the commission paid or agreed to be paid does not exceed
the amount or rate so authorised and if the
1962
Maianlal Fakircha1
Dudhediya
v.
Shree Chan~deo
Sugar 1.\1. ills Lrrl
Gaj:;ndragadkar J
AJadatilal Fakfr:hand
JJudl.tdiy4
v.
Shrtt Criangd10
Sugor ,\1 ills Ltd,
(Jojrndragailka1 .J
9!JO SUPREME COURT REPORTS [1962] SC'PP.
amount or rate per cent. of the commission
paid or agreed to be paid is-
(a)
in the rase of shams offered to
t.hc public for subscription, cliscloecd in
the pr~spectns ; or
(h)
in the cases of share not offered to the public for snhscription,disclos<'<l
in the statement in liPu of prospectuR, or
in a statement. in the prescribed form
signed in like manner as a stateml'nt. in
I ieu of prosnectus and filed with the Registrar and, where a circular or notice,
not hein!l a prospectus inviting su hecription for the shares ie issued, also disclosed
in that circular or notice.
(Z) Rave as nforcRaid and save as provided ins. I05A, no company shall apply any of
its shares nr captial money either directly. or
indirectly in payment of any commission,
discount. or nllowancP, t-0 any person in consicleration of hie subscribing or Bl!reP.ing to
FU hsrribe, whether nhsolut<:ly ·or conditionallv,
for any shares of the company, or procuring
or agreeing to procure subcriptions, whether
absolute or conditional. for any shares in the
compan.v. wh.:re the shares or money be so
applied by being added to the purchaee
money of any property acquired by the company or to the Mntract price of any work to
he exPrutP<l for the company, or .the money
he paid out . of the nominal purchase-mon11.v
or contract price, or otherwise."
Section i6( I) an<l (:2) reads thus :
"fl) A company m~y pity a commission
to any person in consideration of
(a) his >uhscrihing or agreeing to
subscribe, whether ahRolutely tJr conditionally, for any shares in, or debenture,
l
3 S.C.R.
,
(b)
• •
SUPREME COURT REPORTS 991
of, the company, or
•
his procuring or agreeing to procur? ~ubscriptions, whether absolute or cond1t10nal
for any shares in, or debentures of, the
company,
.
if the following conditions are fulfilled,
·l1iz.-
(i) the payment of the commission is authorised by the artinles ;
(ii) the commission paid or
agreed to be paid does not exceed
in the case of shares, five per cent of
the price at which the shares are
issued or the amount or rate authorised by the articles, whichever is
less, and in the case of debentures,
two and a half per cent of the price
at which the debentures are issued or
the amount of the rate authorised
by the articles, whichever is less ;
(iii) the amount of rate per cent.
of the commission paid or agreed to
be paid is-in the case of shares or
debentures offered to the public for
subscription, disclosed in the prospectus : and
in the case of shares or debentures not offered to the public for
subscription, disclosed in the statement in lieu of prospectus, or in a
statement in the prescribed form
signed in like manner as a statement
in lieu of prospectus and filed before
the payment of the commiBsion with
the Registrar and, where a circular
or notice, not being a prospectus in·
viting subscription for the shares or
debentures, is issued, also disclosed
in that circular or notice ; and
(iv) the number of shares or
1962
Madanlal Fal irclani
Dudhedi)·a
v.
Shree lhangd~o
Sugar Mills Ltd.
Gajendragadkar J.
1962
:lJadanlaJ. F .. kircl1a11d
IJ11dlu~: i;·a
v.
Shrte Cflan£dt·J
Su::rar M 1/ls I.Id.
Gajn;d•a[TadJ.:.11r .J.
992 SUPREME COURT REPORTS [1962] SUPP.
debentures which persoIJB have agreed for a commission to subscribe
absolutely or conditiomtlly is discloRed in the manm·r aforesaid.
(2)
Save as aforesaid and save as providPd in SPction 7fl, no company shall allot
any of its sh11,res or debentures or apply any
of its capital mr>JH'y~. either directly or indiroctly, in payment of any c0mmission, discount or allnw:mce, to any pr~rson in consi-
<lerntion of-
(a)
his subscribing or a!lreeing to
sulscrihf', whether ahsolut.elv or conditionally, for any shnr<'s in, or .. debentures
of, the company or,
(h) his prom1rin (( or a!!reeing to
procurf' subscriptions, whether absolute
or conditional, for
an~· shams in, or cl1ihentnres of, the company,
wlicthPr the shares, cleh<mtures or monev bo
so allotted or appliccl hy being nd<lecl to· the
Purchase monev of 1rny property acquired
by the company or to the contract price of
any work to b.- execntod for the company,
or the money be pnid out. of the nominal
purchase monPy or cont.met price, or othP-rwise.
..
• o o o o o o o o o o o o o o o o o o o o o o o o o o' o o o o o o o o o' o o o Io o o o o o o o o o o o
A . comparison of the ~wo AP.ctions will show that
s. 76 has m:ulc thrl)e cll'p~rtures from s. 105 ; firnt
it. hf'gins bv saving th:1t "a. company mav pay a
commi•sion" ancl thiA expr.-ssion has s11bstituted
the en.rliPr expression "it shall he lawful for n com_
pa.ny to pay commis•ion".
It is true that this
change is not very significant; hut it cannot be
treated as of no eignificnnce at all and it may be
-,
3 S.C.R. SUPREME COURT REPORTS
993
that by adopting the present expression, the Legilature wanted to indicate that s. 76 unlike its predecessor s. 105, was not intended to be merely an
enabling provision. Then it would be noticed that
the substantial part of s.