# MATHALONE v. BOMBAY LIFE ASSURANCE CO. ·LTD. PINGLE VENKAT RAMA REDDY

- **Citation:** [1954] 1 S.C.R. 117
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Case number:** · Civil Appeals Nos. 52, 53 and 54 of 1950
- **Bench:** Mehr Chand Mahajan, VIVIAN BosE, Jagannadha Das
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mathalone-v-bombay-life-assurance-co-ltd-pingle-venkat-rama-reddy-256
- **Pages:** 28

## Headnote

117
Indian Companies Act (VII of 1913), s. 105.C-Transfer of
shares-Transferee's name not entered on regi'ster-Offer (Jf new
shares 1mder s. 105-0-Transferor whether bound to acqiiire the iz.ew
shares as trustee for transferee-Ditties of tmnsferor-Validity of
requisition by transferee-S1iit by trans! eree again.st transferorJfaintainabilit11.
A, who held a certain number of shares in a company, sold
some of these shares to Bon the 29th July, 1944, and executed
blauk transfer :forms in respect of the shares. B made an application to the company for registration of his name, only on the
11th April, 1945, and his application was rejected. Meanwhile,
in February, 1945, the company resolved to issue new shares and
offered to A the number of shares to which he was entitled under
the provisions of s. 105-C of the Indian Companies Act in respect
of the shares which stood in the register in his name.
A did not
apply for the new shares pertaining to the shares sold to B.
A
firm of solicitors sent a requisition to A on behalf of B, C, D, E
and others who claimed to be the purchasers of the share.a sold by
A, calling upon A to apply for the additional shares, and to hold
them, when allotted, on behalf of B, C, D and E and others, and
offering to indemnify A against all liabilities he may incur thereby.
A declined to apply but offered to sigp. the renunciation form
in favour of the.true purchasers. As the time fixed for making
an application for the new shares was about to expire, B filed a
suit against A praying that A may be ordered to deliver to B the
application form for the new shares, and to hand over the new
share certificates when received, with transfer forms in blank duly
signed by him, and for damages in the alternative. A receive!
17
1963
May .19.
19.13
.At at ha lone
v,
Bo1nbay Life
Assurance Co.
Ltd,
118
SUPREME COURT REPORTS
[1954]
was appointed and he applied to the company in his own na1ne for
allot.ment of the ne'\v shares and .for registering his name in res·
pect thereof hut the con1pany declined to do so.
The receiver
filed a suit against the co1npany for a·llotment of the new shares
to him.
The High Court of Bombay held that, as A was a trustee
of B in respect of the new issue, and he had failed to apply for the
new shares, he \\'RS liable in damages to I}. On appe~l :
Held, (i) that if A was not of his own volition, prepared to
obtain the new shares in his name, there v;;·as no principle of la~v
or equity hy vl'"l1ich he could he compelled to aOquire those shares
by spending his ov;;·n money or by undertaking financial liabilities
and pass th01n over to Bon receiving the amount spellt hy hiin
£ro1n the purchaser 01· being other~vise fully indemnified by hin1 in
respect of the liahilities incurred or to he incurred.
(ii) Assuming that A was under any such obligation, as the
requisition n1ade hy t.he solicitors to A to purchase the shares was
made on behalf of 21- disclosed and some undisclosed persons, it was
ineffective and inaclequate, and A was not guilty of any breach of
duty as a trustee in not complying 'vith the r~quisition.
, (iii) As B had no right to call upon A . to buy the new
'shares in his own name for his (B's) benefit, a foit1'.01·i, the receiver
'bad also no such right.
(iv) In any event,· as the con1pany was not a party to B's
suit, no orrler could be issued to the co1npany in that· suit to
recognise the receiver as a shareholder in respect of shares sold to
B· and, as long as he ,vas not on the register, the company ,vas not
hound to entertain an application fro1n him for issne or the new
shares in his favour.
Hai·doon v. Belilios ([19011 A. C. llS), E. D. Sassoon ,c· Oo·
J,td. v. Patch (45 Born. L.R. 46), Miles v. Safe Deposit Tiwst Qo.
(66 L.E. 903) referred to. Biss v. Bis.• ([19031 2 Ch. 40), ·.Jone.• v.
Evans ([19131 l Ch. 23) distinguished.
'

## Text

_Characters 0–39,979 of 61,970. This is a partial read: ask again with offset=39979 for what follows._

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•
S.O.R.
SUPREME COURT REPORTS
MATHALONE
v.
BOMBAY LIFE ASSURANCE CO. ·LTD.
PINGLE VENKAT RAMA REDDY
v.
SIR PADAMPAT SINGHANIA.
SIR PADAMPAT SINGHANIA
v .
. PING LE VENKAT RAMA REDDY.
[MEHR CHAND MAHAJAN, VIVIAN BosE and
JAGANNADHA DAS JJ.]
117
Indian Companies Act (VII of 1913), s. 105.C-Transfer of
shares-Transferee's name not entered on regi'ster-Offer (Jf new
shares 1mder s. 105-0-Transferor whether bound to acqiiire the iz.ew
shares as trustee for transferee-Ditties of tmnsferor-Validity of
requisition by transferee-S1iit by trans! eree again.st transferorJfaintainabilit11.
A, who held a certain number of shares in a company, sold
some of these shares to Bon the 29th July, 1944, and executed
blauk transfer :forms in respect of the shares. B made an application to the company for registration of his name, only on the
11th April, 1945, and his application was rejected. Meanwhile,
in February, 1945, the company resolved to issue new shares and
offered to A the number of shares to which he was entitled under
the provisions of s. 105-C of the Indian Companies Act in respect
of the shares which stood in the register in his name.
A did not
apply for the new shares pertaining to the shares sold to B.
A
firm of solicitors sent a requisition to A on behalf of B, C, D, E
and others who claimed to be the purchasers of the share.a sold by
A, calling upon A to apply for the additional shares, and to hold
them, when allotted, on behalf of B, C, D and E and others, and
offering to indemnify A against all liabilities he may incur thereby.
A declined to apply but offered to sigp. the renunciation form
in favour of the.true purchasers. As the time fixed for making
an application for the new shares was about to expire, B filed a
suit against A praying that A may be ordered to deliver to B the
application form for the new shares, and to hand over the new
share certificates when received, with transfer forms in blank duly
signed by him, and for damages in the alternative. A receive!
17
1963
May .19.
19.13
.At at ha lone
v,
Bo1nbay Life
Assurance Co.
Ltd,
118
SUPREME COURT REPORTS
[1954]
was appointed and he applied to the company in his own na1ne for
allot.ment of the ne'\v shares and .for registering his name in res·
pect thereof hut the con1pany declined to do so.
The receiver
filed a suit against the co1npany for a·llotment of the new shares
to him.
The High Court of Bombay held that, as A was a trustee
of B in respect of the new issue, and he had failed to apply for the
new shares, he \\'RS liable in damages to I}. On appe~l :
Held, (i) that if A was not of his own volition, prepared to
obtain the new shares in his name, there v;;·as no principle of la~v
or equity hy vl'"l1ich he could he compelled to aOquire those shares
by spending his ov;;·n money or by undertaking financial liabilities
and pass th01n over to Bon receiving the amount spellt hy hiin
£ro1n the purchaser 01· being other~vise fully indemnified by hin1 in
respect of the liahilities incurred or to he incurred.
(ii) Assuming that A was under any such obligation, as the
requisition n1ade hy t.he solicitors to A to purchase the shares was
made on behalf of 21- disclosed and some undisclosed persons, it was
ineffective and inaclequate, and A was not guilty of any breach of
duty as a trustee in not complying 'vith the r~quisition.
, (iii) As B had no right to call upon A . to buy the new
'shares in his own name for his (B's) benefit, a foit1'.01·i, the receiver
'bad also no such right.
(iv) In any event,· as the con1pany was not a party to B's
suit, no orrler could be issued to the co1npany in that· suit to
recognise the receiver as a shareholder in respect of shares sold to
B· and, as long as he ,vas not on the register, the company ,vas not
hound to entertain an application fro1n him for issne or the new
shares in his favour.
Hai·doon v. Belilios ([19011 A. C. llS), E. D. Sassoon ,c· Oo·
J,td. v. Patch (45 Born. L.R. 46), Miles v. Safe Deposit Tiwst Qo.
(66 L.E. 903) referred to. Biss v. Bis.• ([19031 2 Ch. 40), ·.Jone.• v.
Evans ([19131 l Ch. 23) distinguished.
'
CIVIL APPELLATE JURISDICTION:· Civil Appeals
Nos. 52, 53 and 54 of 1950.
Appeals from the Judgment and Decree dated the
7th March, 1949, of the High Court of Judicature at
Bombay in Appeals Nos. 55 and 54 of 1948, arising
out of Decree dated the 29th July, 1948, of the said
High Court in its Ordinary Original Civil Jurisdiction
in Suits No. 336 of 1945 and No. 786of1948.
G. S. Pathak (H.J. Umrigar and P. N. Mehta, with
him) for the appellant in Civil Appeals Nos. 52 and
54 and respondent in Civil Appeal No. 53.
. .
...
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•
s.c.:k.
SUPREME COURT REPOR'l'S
119
M.
0.
Setalvad,
Attorney-G~neral
for
India
(J.B. Dadachanji, with him) for ~he respondent iI.l
Civil Appeals Nos. 52 and 54 and appellant in Civil
Appeal No. 53.
·
1953. May 19. The Judgment of the Court was
delivered by
MAHAJAN J.-These appeals, though they arise out
of two different suits, 336 of 1945 and 786 of 1948, can
be disposed of by a common judgment, as both these
suits were instituted in effect to obtain the same
relief.
In July, 1944, a struggle commenced between the
group of Sir Padampat Singhania and the group of
Shri l\faneklal Prem Chand for control of the manageme11.t of the Bombay Life Assurance Co. Ltd. and
there was a race for the acquisition of the shares of
the company between the two groups.
Sir Padampat,
the appellant in Civil Appeal No. 54 of 1950,
and respondent in the cross appeal No. 53 of
1950, on the 25th July, 1944, purchased through Shri
P. N. Gupta, his Bombay agent, 667 shares of the
company, 484 out of which belonged to Mr. Reddy,
the appellant in C.A. No. 53 of 1950 and respondent
in Civil Appeal No. 54 of 1950.
This deal was made
on his behalf by a firm of share and stock brokers,
Bhaidas Gulabdas.
The shares were sold at the rate
of Rs. 300 per share. On the 29th July, Gupta executed· a receipt in favour of Bhaidas Gulabdas acknowledging the receipt of these shai·es, while Bhaidas Gulabdas as constituted attorneys of Mr. Reddy executed
five blank transfer forms in respect of the 484 shares
sold by them-four for 100 shares each, and one for 84
shares. It is alleged that these transfer forms were
ultimately filled in the name of Sir Padampat Singhania.
Sir Padampat, however, made no application
to the company for registration of his name in the
register of shareholders till the 11th April, 1945.
On
an application being made, the company declined to
register the shares in his name and intimated to him
their refusal to do so on the 8th May, 1945 .
1953
M~athalone
v.
Bombay Life
A8surance Go.
Ltd.
Jl«hajan J.
196J
Mathalone
v.
Bonibay Life
Assurance Co.
Ltd.
_;_lf aluija.n J.
120
SUPREME COUR'I.' REPOR1'S
[1954]
On the 8th January, 1945, the company, in order to
combat the move of Sir Padampat to acquire control
of its management, made an application under rule
94-A of the Defence of India Rules for sanction for
the issue of further capital. The sanction was granted
. and the company was authorised within a
time
limit of six months to increase its capital by a
sum of Rs. 4,59,600 by issuing 4,596 shares; otherwise the sanction ·was to lapse.
On the 21st
February,
1945, the directors of the company
passed a resolution increasing the capital of the company by issuing these 4,596 shares of Rs. 100 each at
a premium of Rs. 75 per share. On the existing shares
only Rs. 25 per sharti .had been called up; The company therefore decided that the new shares should be
offered to the existing sharnholders, in the proportion of four shares to every five shares held by
the shareholders.
Reddy as a shareholder of 534
shares (including 484 shares sold by him on 25th
July, but yet not registered in the transferee's
name) thus became entitled to 427 new shares·
and one fractional certificate. Out of the 427 new
shares offered to him he was entitled to 40 shares in
his own right which appertained to 50 unsold shares·
which he still held in the company.
The other
384 shares appertained to the shares that he had
sold.
The company issued a circular letter to 0very
shareholder giving the details of the offer made
and along with it sent two forms, A and B.
Form A
being
the application form for allotment of new
shares, the shareholder had to subscribe his llame to
it and return it to the company for allotment of the .
shares offered accompanied with a cheque for the
amount that had to be paid for obtaining the shares.
Form B was a renunciation form.
In case a shareholder did not want all or any of the shaJ"es offered fo
be allotted to him, he was allowed to renounce his
right in favour of some other person.
On the 21st Fehnmry, 1945, Reddy retmned to the
company form A duly filled in, requesting the company for allotment of 40 shares out of the new issue,
..,..
I
••
.\
•
s.c.h.
12i
which appertained to the 50 snares he still held in the
company. In respect of the balance of 384 shares
offered to him and which appertained to the 484
shares sold by him he said nothing.
The renunciation
form was retained by him.
On the 23rd February,
1945, Messrs. J. L. Mehta and N. K. Bhartiya purporting to act on behalf of the purchasers of 484
shares wrote to Reddy asking him to forward to them
the company's circular letter along with forms A and
B as and when received by him, after appending to
them his signatures, to enable them to apply for these
shares either in Mr. Reddy's name or in the name of
the transferees.
He was told that he was to hold the
shares offered when acquired al'l. a trustee for them.
On the 28th February, 1945, Messrs. Craigie, Blunt &
Caroe, a firm of solicitors, also acting on behalf of the
purchasers, wrote to Mr. Reddy a letter to a similar
effect.
This was prefaced with the remark that the
offer of fresh shares by the company was illegal.
Without prejudice to that contention, Mr. Reddy was
called upon to apply for the newly offered shares and
obtain them on their behalf or to send them the
application form (A) and the renuniciation form (B)
and the fractional certificate to enable them to obtain
the new shares offered which appertained to the 484
shares sold by him.
The relevant part of this letter
reads thus : ..,..
"We are instructed by oiir clients, the parties to
whom you sold these shares, .Mr. J. L. :Mehta, Sir
Padampat Singhania, Lala Kailashpat
Singhanilt,
.Mr. N. K. Bhartiya and others to call upon you to
apply for the additional shares and fractional certificates now issued to which you have become entitled, and
to let us know when you have done so. When allotted to
you, you will hold these shares on their behalf and
please then hand them to the Hindustan Commercial
Bank· Ltd.,- Apollo Street, Fort, Bombay, who will
pay you the sum of Rs. 100 for every share allotted
to you, which should be accompanied by blank transfer
form signed by yon as the transferor and the form of
renunciation unsigned.
They will also pay you thll
l!J!i3
M.athalone'
v.
Bombay Life
Assurance Oo.
Ltd.
Mahajan J ..
1953
Mathalont
v.
Bombay Life
A ssurancc Oo.
Ltd.
.J.1ahajan J.
!
!
<
'
I ~
'
;
"
:•
• ~
"
[
SUPREME COURT REPOR'l'S
proportionate sum on, ·any fractional certificate to
which you arn entitled on handing over the same to
the bank in blank unsigned on or before the 7th March,
1945.
If you prefer to do so, please send the form of application 'A' duly signed by you as well as the renunciation form 'B' as also the fractional certificate and the
relevant application attached thereto unsigned in blank
to our client, Mr. N. K. Bhartiya at Second Floor,
l'tahimtoola House, Homji Street, Fort, Bombay, so as to
reach him before the 7th March, 1945, and he will then
forward the application to the company on your behalf
<tlong with the necessary remittance.
Onr clients agree to indemnify yon agninst any ancl
every liability which you will incur by applying for the
11artly paid shares.
vVe are instructed to point out that you are a trustee
for our clients by virtue of the fact that you have sold
your shares in this company to them pending our
clients' name being entered on the register in respect
of the shares which you have sold to them and that
you are bound to comply with our clients' request."
The Hindustan Commercial Bank Ltd. also wrote a
letter to Mr. Reddy on the 1st of March, 1945, which
reads thus:-
"With reference to a circular dated the. 28th :February, 1945, issued by Messrs. Craigie, Blunt and Caroe on
behalf of their clients Mr. J. L. Mehta, Sir Padampat
Singhania, Lala Kailashpat Singhania, Mr. N. K.
Bhartiya and others, we have instructions to pay you
in respect of all shares of the abovenamed company in
the new issue that you deliver to us at Rs. 100 per
share, when such shares are allotted to you in exchange
for the allotment letters or share scrips with a duly
signed transfer deed. \Ve have also instructions to pay
you at l'ts. 20 per fractional certificate delivered to us
on or before the 7th March, 1945. Please note that we
shall do the same ifthe shares and/or fractional certificates are delivered to us ill terms of the uiruular mentioned above.
You may send these to us through any
'
•
S.C.R.
SUPREME COURT REPORTS
123
bank and the exchange commission will also be paid
by us."
Thes~ letters indicate that the persons named there·
in with some undisclosed persons were the purchasers
of the shares sold by Reddy and they were the equitable owners of the shares, in spite of the original
bargain having been made by Sir Padampat. It was
not disclosed in these letters that the persbns named
therein were
mere
nominees or benamidars of
Sir Padampat. One fact however is beyond dispute
that the names of these persons were not entered in the
blank transfer forms in the column of transferee, and
eventually it was the name of Sir Padarnpat alone that
was entered therein.
Mr. Reddy replied to all these communications
received by him on the 3rd March, 1945, in the following terms:-
"With reference to all these communications, I have
to state that nearly eight months have elapsed since
I sold the shares and the shares are not as yet
transferred to the names of the purchasers. I have no
objection to give the renunciation forms, duly signed
in favour of the real and true purchasers.
As regards the requisition made by you in paras.
4 and 5 of the circular letter of 28th February, 1945, I
fail to tmderstand as to how I am under an obligation
to comply with it.
I am ready and willing to sign
renunciation form in favour of the true purchasers, on
my being satisfied that those who are described as the
purchasers of my shares are the real and true purchasers of those shares by their producing the transfer
forms given by me duly executed by them along with
the share certificates."
Whatever else may be said about the attitude of
Reddy, he was certainly entitled to know the name of
person or persons who were the real purchasers of the
shares sold, because he could only respect and comply
with the requisition made by those persons and those
persons alone and by none else. Not satisfied with this
reply and in view of the - fact that the last date for
making the application for the issu.e of additional sh~res
1ft53
},f athalone
v.
Bombay Life
Assurance Oo.
Ltd.
Mahajan J.
.llfathalone
v.
Bornbay Life
As8t1rance Go.
Ltd.
l\1ahajan J.
124
SUPREME COURT REPORTS
[1954]
was to expire on the 10th March, Sir Padampat
instituted suit No. 336of1945 on the 8th March, 1945,
on the Original Side of the Bombay High Court, intei·
alia,, for the following reliefs against Mr. Reddy as the
sole defendant.
The company was not impleaded in
this suit.
"l. That the defendant may be ordered to send
and deliver to t.he plaintiff the application form A annexed to the circular letter for the number of additional
shares allotable to him, as also the fractional certificates and the application relating thereto (unsigned
and in blank) upon the plaintiff paying to him such
sum as this honourable court may direct and/or upon
the plaintiff giving such indemnity as this hon'ble
.court may deem proper;
2. That the defendant may be ordered upon receiving the certificates of the new shares to hand over the
same as also the fractional certificates to the plaintiff
together with transfer forms in blank duly .signed by
him .. "
On the 7th December, 1945, the plaint was amended
and an alternative relief for a decree for Rs. 7 ,29,600
by way of damages was included therein.
It was averred in the plaint that upon the sale by
defendant of 484 shares the plaintiff became the beneficial owner of those shares and the defendant ·became
a trustee for him of all rights and benefits whatsoever
appertaining or accruing to the said shares, that one of
such rights was the right and opportunity to apply for
shares forming part of the new issue, that the defendant was bound to do all lawful acts in relation to and
for the purpose of securing the said benefits for the
plaintiff and which the plaintiff might call upon him to
do, on terms of the plaintiff indemnifying him against
all the consequences thereof, and that the plaintiff was
ready and willing to do the same. It was further alleged that unless the plaintiff's rights were safeguarded
by the 10th March, 1945, which was the last day for
making application for the shares, he will be irretrievably prejudiced.
An application was made for the
appointment of a receiver of the application form and
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•
S.C.R.
1$UPREME COURT REPORTS
125
letterof renunciation and of tho rights of Reddy in
the new issue of shares.
On the same day Bhagwati J. made an order under
Order XL, rule 1, of the Civil Procedme Code, appointing the court receiver, interim receiver of the application form and letter ofrenunciation and of the rights, if
any, of the defendant in the 384 shares of the Bombay
Life Assurance Co. Ltd. The receiver was given power
to exercise all the rights of the defendant in respect of
the said shares on the plaintiff giving the usual undertakings.
On the 10th March, 1945, the receiver made
a request to the company for the allotment to him of
3$4 shares of' the new issue appertaining to the 484
shares standing in Reddy's name in the company register and sold by him on the 25th July, 1944. This application was accompanied by a remittance of Rs. 38,400
payable on these shares according to the resolution of
the board. The company was requested to register the
name of the receiver in the register of members in respect of these shares.
On the 30th April, 1945, the
company intimated to the receiver that his application
for allotment of shares was considered bv the board of
directors in a meeting held on the 21st April, 1945, and
it was resolved to reject the same because Reddy had
accepted the company's offer only to the extent of 40
shares and the offer regarding the balance had lapsed.
The result was that the company refused to register
the name of the receiver in respect of the new shares
on the 30th April, 1945, and it also refused Sir
Padampat's application for registering his name as
transferee in respect of the 484 shares of Reddy purchased by him which might have entitled him to retain
the new shares in his own name. · Sir Padampat having thus failed in getting the newly issued shares registered in the name of the receiver had no alternative
left but to fight out the suit already instituted against
Reddy. He also had another suitinstituted to obtain
practically the same reliefs which were claimed in his
own suit, by the receiver against the company with
the leave of the court, namely, suit No. 786 of 1948.
J8
1953
Mathalone
v.
Bombay Life
Assurance Go.
Ltd.
Mahajan J.
1953
Mathalone
v.
Bombay Life
Assurance Oo.
Ltd.
J.fahajan J.
126
SUPREME COURT REPORTS
[1954]
This suit was filed on the 8th March, 1948, after the
lapse of about three years of tho company's rejection
of the receiver's application. It was explained in paragraph 14 of the plaint that the suit had not been filed
earlier as the validity of the issue of the new shares
was being challenged in suit No. 347 of 1945.
The
prayer in this suit was that the defendant company be
ordered to allot to the plaintiff 384 shares mentioned
in the application and to put his name on the share
register of the company for the said shares.
Both the suits. were heard by Bhagwati J., who
delivered one judgment in both of them and substantially granted the reliefa claimed in both the suits. It
was held by the learned judge that the 484 shares
which Reddy had sold through Bhaidas Gulabdas
had been purchased by Sir Padampat, that as trustee
of these shares he as vendor was also a trustee of all
property rights annexed to the shares and that it was
the duty of Reddy, when called upon to do so by Sir
Padampat on proper safeguard and indemnity for
payment, to transfer to Sir Padampat all the benefits
which he derived by the issue of the new shares by
virtue of his being their legal owner. It was further
held that a proper requisition had been made by the
beneficial owner on the trustee to obtain for him
these shares and that the trustee defaulted in his duty
in not complying with that requisition and that the
company was also in error in refusing the application
of the court rocei ver for registration of his name as a
shareholder in respect of the new shares on the ground
that Reddy having applied for 40 shares, his right to
obtain the remaining shares had lapsed.
It was
argued on behalf of the company that the sanction
given by the examiner of capital issues having lapsed,
no relief could be given against the company and it
could not be ordered to allot shares to the plaintiff as
there was no available capital which could be issued.
Bhagwati J. however took the view that the plaintiff
could not be deprived of his rights by reason of this
circumstance. In the result he ordered the company
to comply with the order and allot within three
,
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•
S.C.R.
SUPREME COURT REPORTS
127
months 384 shares to the plaintiff after obtaining a
fresh sanction for the same from the authority concerned.
Before concluding the learned judge said
that issues 10 and 11 had not been argued before him
and the contentions raised therein seemed to have been
abandoned and that even otherwise there was no merit
in them. Against this common judgment in both the
suits, Reddy and the company preferred separate
appeals. The appeal Bench of the High Court allowed
the company's appeal and dismissed the receiver's suit
on the finding that the court receiver was not entitled
to the allotment of the new shares in his own name
as such. Civil Appeal No. 52 of 1950 has been preferred against this decision.
In suit No. 366 of 1945
Reddy's appeal was allowed to the extent that the
plaintiff was held disentitled by the reason of lapse of
the sanction to reliefs (A) and (B) granted to him by
Bhagwati J. It was however held that he was a trustee
of Sir Padampat in respect of the shares of the new
issue and he having failed to apply for the new shares
was liable to him in damages and the fact that he made
an application in respect of 40 shares did not disentitle
him to make another application in respect of the 384
shares. It was also held that a proper requisition had
been made by the beneficiary upon the trustee to carry
out the trust and he had defaulted in complying with
the requisition.
The suit was accordingly remanded
to the trial judge for assessing damages.
The principal questions involved in the appeals are :
(a) ·whether on the facts and circumstances of this
case Reddy was under a legal obligation as a trustee to
apply for and obtain on behalf.of Sir Padampat 384
new shares which appertained to the shares sold by
Reddy to Singhania ;
(b) whether the requisition made on Reddy by
Messrs. Craigie, Blunt & Caroe by their letter dated
3rd March, 1945, was sufficient in law to call upon him
to apply for shares of the new issue and whether
Reddy committed default as a trustee in not complying with this requisition;
1963
Mathalone
v.
Bombay Lifo
As•urance Oo.
Ltd.
Mahajan J.
Jf,lfj:3
Mathalone
v.
Bmnbay Life
Assurance Co.
Ltd.
MahajanJ;
128
SUPREME COUi:tT 1i~POR'l'S
[1954j
( c) whether the conduct of Sir- Padampat in not
lodging 484 shares for transfer to his name till April,
1945, disentitled him to the reliefs claimed by him ;
(d) whether the receiver was not entitled to make
the requisition and was not tho proper person to apply
for the new shares in ·his own name, and whether the
company was under no obligation to allot to him the
shares;
(e) whether the plaintiff was entitled to reliefs (A)
and (B) of the plaint in the altered situation of the
company.
It has been held in the courts below that Sir Padampat became on the 29th July, 1944, the sole beneficial
owner of 484 shar\')s sold by Reddy, the legal title to
which was vested in him. That having been ·found, the
relation of trustee and cestui que trust was thereby
established between them. All that is necessary to
establish such a relationship is to prove that the legal
title was in the plaintiff and the equitable title in the
defendant. The fact that such a relationship qua the
484 shares sold by Reddy existed between the parties
to the suit was not disputed by the learned Attorney.
General appearing for Reddy, but he contested the
view of the High Court that the cestui que trust could
not on any principle of equity or law call upon the
trustee to bear his burdens and ask him to obtain on
his behalf new shares of the company or make further
investments in its capital which would involve in its
train new obligations and fresh burdens.
As observed by Lord Lindley in Hardoon v. Belilios(')
the plainest principles of justice require that ceshii que
trust who gets all the benefit of the property should bear
its burden unless he can show some good reason why
his trustee should bear them himself.
Mr. Pathak did
not contest the proposition that Singhania had any
right as a beneficial owner of 484 shares to throw on
Reddy any of the burdens incidental to the ownership
of those shares. He conceded that Reddy as a trustee
had a right to be indemnified by his cestiii que trust
against calls.
The proposition is well recognised and
(1) [1901] A.C. n8.
..
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S.C.R.
SUPREME COUR'f REPORTS
129
the liability is enforced on the principles applicable to
the equitable ownership of property.
Once it is held established that Reddy was a
trustee of the 484 shares sold by him, he as holder of
those shares must also be held to be a trustee of all the
property rights anJJexed to the shares. It was conceded
that he was not only the trustee of the corpus but also
the trustee of the income and of the dividends that he
may receive and that he was bound to pay them over
to the beneficiary. In E.D. Sassoon & Co. Ltd. v. Patch(')
Pratt J. held that under section 94 of the Indian
Trusts Act a transferor holds the shares for the benefit
of the transferee to the extent necessary to satisfy its
demands and that as the transferee holds the whole
beneficial interest
and transferor has none, the
transferor must comply with all reasonable directions
that the transferee may give and that in this situation
if he becomes a trustee of dividends he is also a trustee
of the right to vote because the right to vote is a right
to property annexed to the shares and as such the
beneficiary has a right to control the exercise by the
trustee of the right to vote.
The learned AttorneyGeneral did not com bat the view expressed by Pratt J.,
but he objected to any further extension of the rule therein laid down. The question that needs our decision is
bare of authority. The English law can furnish no
guidance for its solution as there is no provision corresponding to section 105 (C) in the English Companies
Act. In India this is the first known occasion when a
situation like this has arisen between a transferor and
transferee of shares on a stock exchange transaction.
The proposition therefore that has been canvassed in
this case has to be decided on first impressions and on
general principles of equity.
Section 105(0), the enactment of which has conferred
certain rights and privileges on a shareholder which he
did not possess before its enactment is in these terms:
" Where the directors decide to increase the capital
of the company by the issue of further shares such
shares shall be offered to the members in proportion to
(l) 45 Born. L.R. 46;
1963
Mathalone
v.
Bombay Life
Assurance Oo.
Ltd.
Mahajan J,
1963
..L\fathalone
v.
Bombay Life
As8!trance Go.
Ltd.
Mahajan J.
130
SUPREME COUl'tT REPORTS
[1954]
the existing shares held by each member and such offer
shall be made by notice specifying the number of shares
to which the member is entitled and limiting a time
within which the offer, if not accepted, will be deemed
to be declined; and after the expiration of such time,
or on receipt of an intimation from the member to
whom such notice is given that he declines to accept
the shares offered, the directors may dispose of the
same in such manner as they think most beneficial to
the company."
This section limits the powers of the directors to
dispose of the further issue of capital in any manner that
they may think most beneficial to the company. They
are under a mandate to offer these shares in the first
instance to the members in proportion to the existing
shares held by them. In other words, a member
becomes entitled under the provisions of this section by
reason of his being the holder of a certain number of
shares in the company, to obtain shares in the further
issue of capital as of right.
This is not a fruit of stock ownership, in the nature
of a profit, nor does it amount to a division of any
part of the assets of the company. It is not an organic
product of the original stock like the young of animals
or the fruit of trees, but, as described by the Supreme
Court of America in 1vliles v. Safe Deposit 'Prust Co. (')
this right to subscribe to new stock
i~ but a right to
participate in preference to strangers and on equal
terms with other existing shareholders in the privilege
of contributing new capital called for by the corporation-an equity that inheres in stock ownership under
such circumstances as a quality inseparable from the
capital interest represented by the old stock.
The
exercise of the privilege depends on the option of the
shareholder. If he likes, he can invest further money
and purchase a proportionate share of the new issue
of capital.
He is of course not obliged to do so.
He
has also the right to assign the offer made to him in
favour of any other person but' in that event the
dirC()torn have the option to allot or not to allot the
{1) 66 Law, Edition 903 at 926.
~'
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.,
-.-
...
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•
S.C.H.
SUPREME COURT REPORTS
131
shares to the person in whose favour the shareholder
renounces the shares offered to him. The offer, of course,
creates fresh rights but it also brings in its train liabilities
and obligations. It confers the right on a shareholder to
purchase shares in the new issue of capital in proportion to his existing shareholding, but in order to obtain
that right he has to fulfil certain obligations and he
has to incur certain liabilities. In the first instance, if
he decides to invest his money in the further capital
issued, he has to make an application to the company
for the allotment of shares so offered and with his
application he has to remit to the company the amount
of the application money. That having been done, if
the shares offered are only partly paid up, as they were
in this case, he incurs on allotment the further liability
of meeting any future calls on these shares. Can it be
said in this situation that a transferor of a certain
number of shares who being the legal owner of those
shares and the beneficial interest of which vests in the
cestui que trust, is liable for all the payments
and 0bligations attaching to the new issue of shares
and is bound to act in both respects for the benefit
of the cestui que trust ; in other words, whether
he is under a duty, when so instructed by his beneficiary, to make an application for the new issue of
shares offered under the provisions of section 105-C and
obtain them in his name by making the necessary payment and by incurring the consequential obligations.
Plainly put, the question may be posed thus: whether
the obligation of a transferor of a certain number of
shares as a trustee extends also in respect of the right
to a0quire further shares issued by the company on
behalf of his cestui que frust by,.. putting himself
on the register of shareholders in respect of the new
shares regarding which he may have to incur fresh
liabilities and obligations which were not existing at
the time when he made the transfer.
Mr. Pathak contended that as the right to obtain
new shares was inseparable from the ownership of the
old stock, the transferor of the old stock held the
option to bu;Y new stocJr in like manner a13 }ie }ield the
1953
Mathalone
v.
Bombay Life
Ass«l:.[lnce Go.
Ltd.
Mahajan J.
1958
Mathalone
v.
Born.bay Life
Assurance Go.
Lttt.
Mahajan J.
132
SUPREME COURT REPORTS
[1954]
original stock, and if qua the old stock he was a trustee
for the beneficial owner, in the like manner he was a
trustee also of the right or the option to buy new
shares and was bound to exercise it for the benefit
of the cestui que tru.st and according to his directions, and was bound to obtain new shares in his
own name for the cestui que trust.
Reliance was
placed for this proposition on certain observations of
Buckley J. in Bi88 v. Biss('). In that case, a lessor
granted a lease for seven years of a house in which the
lessee carried on a profitable business.
On expiration
of the term of the lease, the lessor refused to renew the
lease, but allowed the lessee to remain as a tenant
from year to year on increased rent. During the tenure
of the lease, the lessee died leaving a widow and 3
children, one being an infant. The widow and a son
each applied to the lessor for anew lease for the benefit
of the estate, which the lessor refused to grant. Having
determined the yearly tenancy by notices the lessor
granted to the son personally a new lease for 3 years.
In an action already instituted by the children against
the administratrix, namely, the widow, she applied to
have the new lease treated as being taken by the son
for the benefit of the estate. Buckley J. held that the
son was a trustee of the new lease for the benefit of
the estate. The Court of Appeal reversed this decision
and held that the right of renewal had been determined by the lessor long before the son intervened, and
that the new lease could not be regarded as an accretion to the estate and the son was entitled to retain
the lease and that he had not abused his position in
any way. This case therefore is no authority for the
proposition before us, and the Court of Appeal did not
say anything on tbe point. Buckley J. however in the
course of his judgment observed as follows :-
" It is, of course, very familiar law that. if a trustee
obtains a renewal of a lease of property vested in him
as trustee, whether by virtue of a right of renewal or
not, he must hold the new lease for the benefit of his
cestui que trust. The leading authority upon that is
(1) [1903] z Ch. 40.
.w
(
..
•
•
S.C.E.
SUPEEME COUET EEPOETS
133
Keech v. Sanford(').
The principle is that the trustee
owes it to his cestui que trust to obtain a renewal, if he
can do so, on beneficial terms, and that the court will
not allow him to obtain a renewal upon beneficial terms
for himself when his duty is to get it for his cestui que
trust."
Eeliance was also placed on certain observations of
Neville J. in Jones v. Evans('). That was a case where
the capital of a company was divided into 10,000
shares of£ 10 each, of which 3, 728 only had been issued
and were fully paid up.
The company was very prosperous and the market value of the shares was £ 30 ·
each.
The reserve fund of the company exceeded
£ 50,000.
The directors proposed a scheme for distribution of the reserve fund representing accumulated
undivided profits amongst the shareholders, so that
every shareholder was to get a bonus of one new fully
paid up share of £ 10 for every existing share held
by him.
Accordingly resolutions were passed by
the company empowering the directors to declare a
bonus dividend out of the reserve fund and sanctioning the distribution of a bonus dividend of
£ 10 per share out of the reserve fund and authorising the further issue of 3, 728 shares of £ 10 each
out of the unissued capital of the company to be
allotted pro rata amongst the existing shareh.olders and
directing that such new shares be paid up in full forthwith.
The directors sent a circular letter to every
shareholder with a warrant for the bonus dividend on
his shares, informing him of an allotment to him of his
proportion of the new shares and giving him an option
to accept or refuse the allotment, and stating that if he
accepted the allotment he was to indorse and return
the dividend warrant to the company to be applied
in payment of the new shares. Trustees of a testator's
will held 200 shares of the company, and on receipt of
the circular letter accepted their allotment of 200 new
shares, indorsed and returned their bonus dividend
warrant for £ 2,000, and afterwards sold the new shares
(L) (1726) Se!. Cas. 61.
19
(2) (1913) I Ch. 2~,
1963
Mathalone
v.
Bombay Life
Assurance Oo.
Ltd.
MahajanJ
1953
Mathalonc
v.
Bo1nbay Life
Assurance Oo.
Ltd.
Mahajan J.
134
SUPREME COURT REPORTS
[1954]
at a profit.
The question then arose whether, as between the tenants for life and remainderman under the
will, the bonus dividend was capital or income. It
was held, on the evidence, that the company intended
to capitalize the reserve fund and not to distribute it
as a bonus dividend, and therefore the whole of the
bonus dividend was capital of the testator's estate.
In the concluding portion of his judgment, Neville J.
said as follows :-
" ............ when I say that the option vested in each
shareholder, either to take the dividend and keep it,
or to return it and get the greater benefit which the
company offered if he did, I do not think that is true
in the case of trustees; because it seems to me that,
if by taking £ 10 in cash, when they were offered by
the company a share worth £ 20 if they would return
it, it would be a wilful default on their part if they
refused and took less, and consequently their cestui
que trust would be entitled to insist upon the trustees
taking the greatest benefit which the company
offered.
Therefore, in the case of trustees it seems to
me that, although as between the company and them
there may be a right to elect, between them and their
cestui que trust there is no such right, and they must take
the dividend in what I will call the capitalized form."
On the basis of these authorities, Mr. Pathak
contended that his client as a beneficiary was entitled
to the fullest benefit conferred on the old shares by
reason of the new offer and that he was entitled to
compel the trustee to act in a manner which would
enable him to obtain the benefit.
In our opinion the observations made in these cases
cited above must be limited to the facts of those cases.
We are here dealing with a trustee with peculiar duties
and peculiar liabilities, and it is a fallacy to suppose
that every trustee has the same duties and liabilities.
In none of the cases cited by Mr. Pathak was there
any question of the trustees incurring any personal
- pecuniary liability. In the case of Biss v. Biss('),
the question was obtaining the benefit of renewa1 of a
(I) [1903] 2 Ch. 40,
~
..
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...
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•
'-' c 1·:)
I.).
•
\lo
SUPR~JME COUR'l' REPOR'l'S
i35
lease, and the trustee had to incur no fresh liability for
obtaining it. On the other hand, a prosperous business
was being conducted in those premises and the
renewal of the lease was obviously for the benefit of
the lessee and carried with it no new or onerous obligations. In Jones v.