# NANALAL ZAVER AND ANOTHER v. BOMBAY LIFE ASSURANCE CO. LTD. AND OTHERS

- **Citation:** [1950] 1 S.C.R. 391
- **Court:** Supreme Court of India
- **Decided:** 1947-11-10
- **Bench:** Shri Harilal Kania C.J, Mehr Chand Mahajan, MuKHERJEA, Das
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/nanalal-zaver-and-another-v-bombay-life-assurance-co-ltd-and-others-131
- **Pages:** 44

## Headnote

Indian Companies Act (VII of 1913), s. _ 105-C-CompanyOutsidet· trying to get control of management by p11rchasing shores
-Issue of further shares-Offer of new shares to es;isting shareholders-Validity of resolution and offer-Company in need of
funds-Additional motit1e to pret1ent outsidet· getting control-Bona
fides of resolution-Scope of s. 105-C.
A company was incorporated with a capital divided into 10,000
shares. After 5,404 shares had been subscribed, the directors of
the company, finding that a businessman. who had several other
businesses and who was likely to use the funds of this company
for his own businesses, was trying to get control of this company
by purchasing its shares, resolved to issue the remaining 4,596
shares and qffered . these shares to the existing shareholders in the
proportion of four new shares for every five she.res held by them.
Two of the shareholders of the company instituted .a suit age.inst
the company and the directors for the following reliefs: (i) a. declaration that the resolution of the directors and the offer of shares
contravened the provisions of section 105·.c of the Indian Companies Act, 1913, and was therefore ultra vires and illegal; (ii) a.
declaration that the. offer of she.res was not made bona fide or in
the interests of the company and was therefore illegal ; a.nd (iii) to
restre.in the defenda.nts from allotting any shares in pursue.nee of
their offer :
Held per KANIA C.J., MAHAJAN, MUKHERJEA and DAB JJ.-
that inasmuch as the sh!Lres resolved to be issued were offered to
the existing shareholders only, and not to any outsider a.nd these
shares were also offered to the existing shareholders in proportion
to the she.res held by each member without making any discriminatior.<,, between them the two requirements of section 105-C were
complied with and the resolution e.nd offer did not contravene tba.t
section even though 272 shares remained undistributed as a. result
of the offer of four new shares for every five shares.
1950
May 4.
1950
N anal al Zaver
And A1wther
v.
Bo1nba y Life
Assurance Co,
A.nd Others
I<an;a C. J.
392
SUPREME COURT REPORTS
(1950]
Held also per KANIA C.J., MAHAJAN, Mux1rnRJEA and
DAS JJ.-that the fact that one of the motives of the directors
in issuing further shares was to prevent an outsider who ha.d
not yet become a shareholder, from getting control of the
company did not render the resolution or the offer illegal inasmuch
as such a motive could not in itself be said to be not in the
inherests of the company and even assuming that such a. motive
was bad this n.dditional motive could not render the resolution
and offer illegal as the company was in fact in need of further
funds and it was necessary in the interests of the company to
issue further shares.
J.,dgment of th• Bombay High Co!f.rt affirmed.
APPEAL from the High Court of Judicature at
Bombay: (Civil Appeal No. LXIX of 1949).
This was an appeal from the judgment and decree
of thE: High Court of Bombay dated 1 lth March, 1949,
(Chagla C.J. and Tendolkar J.) in Appeal No. 85 of
1947, confirming a "decree of the said High Court in its
Original Jurisdiction dated 10th November, 1947. The
facts of the case and arguments of the counsel are set
out in the judgment.
N. P. Engineer (M. !JI. Desai and H.]. Umrigar
with him) for the appellants. -
l\f. C. Setalvad (G. N. Joshi with him) for respondents Nos. 1 to 6 and 8 and 9.
1950. May 4.
The Court delivered the following
Judgments:
KANIA C. J.-This is an appeal from the decision
of the High Court of Judicature at Bombay. The
respondent company was incorporated in 1908 with an
authorised capital of Rs. IO lakhs divided into 10,000
shares of Rs. 100 each. By 1945, 5,404 .shares were
subscribed and Rs. 25 per share were called on each of
them. Four thousand five hundred and ninetysix
shares out of the authorised capital thus remained
unissued. From about July, 1944, Mr. Padampat
Singhania, a
businessman
interested
in
many
companies, began to purchase shares o

## Text

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S.C.R.
. SUPREME COURT REPORTS
391
NANALAL ZAVER AND ANOTHER
v.
BOMBAY LIFE ASSURANCE CO. LTD.
AND OTHERS.
[SHRI HARILAL KANIA C.J., MEHR CHAND MAHAJAN,
MuKHERJEA and DAS, JJ.]
Indian Companies Act (VII of 1913), s. _ 105-C-CompanyOutsidet· trying to get control of management by p11rchasing shores
-Issue of further shares-Offer of new shares to es;isting shareholders-Validity of resolution and offer-Company in need of
funds-Additional motit1e to pret1ent outsidet· getting control-Bona
fides of resolution-Scope of s. 105-C.
A company was incorporated with a capital divided into 10,000
shares. After 5,404 shares had been subscribed, the directors of
the company, finding that a businessman. who had several other
businesses and who was likely to use the funds of this company
for his own businesses, was trying to get control of this company
by purchasing its shares, resolved to issue the remaining 4,596
shares and qffered . these shares to the existing shareholders in the
proportion of four new shares for every five she.res held by them.
Two of the shareholders of the company instituted .a suit age.inst
the company and the directors for the following reliefs: (i) a. declaration that the resolution of the directors and the offer of shares
contravened the provisions of section 105·.c of the Indian Companies Act, 1913, and was therefore ultra vires and illegal; (ii) a.
declaration that the. offer of she.res was not made bona fide or in
the interests of the company and was therefore illegal ; a.nd (iii) to
restre.in the defenda.nts from allotting any shares in pursue.nee of
their offer :
Held per KANIA C.J., MAHAJAN, MUKHERJEA and DAB JJ.-
that inasmuch as the sh!Lres resolved to be issued were offered to
the existing shareholders only, and not to any outsider a.nd these
shares were also offered to the existing shareholders in proportion
to the she.res held by each member without making any discriminatior.<,, between them the two requirements of section 105-C were
complied with and the resolution e.nd offer did not contravene tba.t
section even though 272 shares remained undistributed as a. result
of the offer of four new shares for every five shares.
1950
May 4.
1950
N anal al Zaver
And A1wther
v.
Bo1nba y Life
Assurance Co,
A.nd Others
I<an;a C. J.
392
SUPREME COURT REPORTS
(1950]
Held also per KANIA C.J., MAHAJAN, Mux1rnRJEA and
DAS JJ.-that the fact that one of the motives of the directors
in issuing further shares was to prevent an outsider who ha.d
not yet become a shareholder, from getting control of the
company did not render the resolution or the offer illegal inasmuch
as such a motive could not in itself be said to be not in the
inherests of the company and even assuming that such a. motive
was bad this n.dditional motive could not render the resolution
and offer illegal as the company was in fact in need of further
funds and it was necessary in the interests of the company to
issue further shares.
J.,dgment of th• Bombay High Co!f.rt affirmed.
APPEAL from the High Court of Judicature at
Bombay: (Civil Appeal No. LXIX of 1949).
This was an appeal from the judgment and decree
of thE: High Court of Bombay dated 1 lth March, 1949,
(Chagla C.J. and Tendolkar J.) in Appeal No. 85 of
1947, confirming a "decree of the said High Court in its
Original Jurisdiction dated 10th November, 1947. The
facts of the case and arguments of the counsel are set
out in the judgment.
N. P. Engineer (M. !JI. Desai and H.]. Umrigar
with him) for the appellants. -
l\f. C. Setalvad (G. N. Joshi with him) for respondents Nos. 1 to 6 and 8 and 9.
1950. May 4.
The Court delivered the following
Judgments:
KANIA C. J.-This is an appeal from the decision
of the High Court of Judicature at Bombay. The
respondent company was incorporated in 1908 with an
authorised capital of Rs. IO lakhs divided into 10,000
shares of Rs. 100 each. By 1945, 5,404 .shares were
subscribed and Rs. 25 per share were called on each of
them. Four thousand five hundred and ninetysix
shares out of the authorised capital thus remained
unissued. From about July, 1944, Mr. Padampat
Singhania, a
businessman
interested
in
many
companies, began to purchase shares of the company
from the holders thereof on a large scale. This naturally •
S.C.R.
SUPREME COURT REPORTS
393
put up the price of the shares considerably. On the
18th September, 1944, at a board meeting of the directors the chairman drew attention of his co-directors to
the attempt thus made by an outsider to corner the
shares of the company. In pursuance of a resolution
passed at the meeting, the chairman issued a circular to
the existing shareholders acquainting them of the true
. position and suggesting that if they wanted to part
with the shares they might get in touch with the
chairman. A circular was accordingly issued with the
result that two rival groups were thus offering to buy
shares from those who were desirous of selling them.
The shares on which about Rs. 12 or 14 were paid per
annum as dividend began to be quoted in the market
at about Rs. 2,000 per share in March, 1945. Mr.
,Singhania had not submitted to the company for
registration of the transfers to his name the shares
purchased by him. In the meantime on the 8th January, 1945, an application was submitted by the
company to the Examiner of Capital Issues for sanction
of a fresh issue of capital. Several reasons were mentioned in that application to show why the company
iequired additional capital. Such application had
become necessary owing to war regulations. The
Government granted the sanction on the 16th February,
1945, and the communication was received by the
company on the 20th of February. On the next day a
board meeting was held at which the directors decided
to issue the remaining 4,596 shares at a premium
of Rs. 75 per share and to call Rs. 25 per share on them.
Pursuant to this resolution a circular was issued to
the shareholders on the same day with copies of the form
of application . and renunciation referred to in the
resolution and in the circular. The shares were offered
to the shareholders shown on the register of members
in the proportion of four further shares for every five
shares held by them .. ·· The last date for submission of
the application and payment was 10th March, 1945.
The Uirectors and their friends in the next few days
applied and were allotted 1,648 shares. By the 6th of
March, 1945, 2,204 shares were allotted to shareholders
who had applied for the same.
1950
Nanalal Zaver
,tfld Anothe 1 .
v.
Bombay Life
Assurance Co.
And Others
Kanta C.J.
1950
N an.alal Z ave,.
And Another
v.
Boin.bay Life
Assurance Co.
And Others
l{ania C. J.
394
SUPREME COURT REPORTS
[1950j
The appellants are two shareholders of the company. They filed the suit, out of which this present
appeal has arisen, " for themselves and all other
aggrieved shareholders of the company." The defendants are the company and eight directors.
It is
contended in the plaint that the whole issue of these
further shares and the idea of increasing the capital of
the company was mala fide and with the object of
retaining the control and management of the company
in the hands of defendants 2 to 9. It is further contended that the resolution of the directors and the offer
of shares contained in the circuluar letter were in
contravention of section 105-C of the Indian Companies
Act. There were further prayers restraining the
company and directors from proceeding with the
allotment of shares. It was contended that the com-
. pany was not in need of capital and the issue of further·
shares was not made bona fide for the benefit or in the
interest of the company but had been made " merely
with the object of retaining or securing the second
defendant and his friends the control of the first
defendant company."
Considerable evidence was led in the trial Court
on rhe question of bona fides.
The trial Court held
that the issue of new shares was bona fide and the
appellate Court has also come to the conclusion that
the object of the directors in issuing the new shares was
not merely with the object of retaining or securing to
the second defendant and his friends the control of the
first defendant company. They held that the company was in need of capital. The suit was consequently
dismissed and that decision was affirmed by the High
Court on appeal.
The decision of the appellate Court has been
challenged before us on both grounds. The learned
counsel appearing for the appellants did not contest
the concurrent finding of fact of both the lower Courts
to the effect that the company was in need of ctlpital.
It was however urged on their behalf that as the issue
of these shares, although not admitted in the written
f
,_
S.C.R.
SUPREME COURT REPORTS
395
statement but admitted in the course of evidence, was
for the purpose of preventing the control of the
company going in the hands of Mr: Singhania, the
directors had not acted bona' fide and solely in the
interest of the company. I have read the judgment
prepared by Das J. and I agree with his conclusion
·and line of reasoning on this part of the case. In my
opinion, the contention of the appellants on this point
was rightly rejected by both the lower Courts and that
contention must fail.
That leaves the question whether the issue of these
shares was in contravention of section 105-C of the
Indian Companies Act. That section rnns as follows:-
" 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 propor.
tion to the existing shares held by each member
(irrespective of class) and such offer shall be made by
notice specifying the number of shares fo which the
member is entitled and 1imiting 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 given1hat 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."
On behalf of the respondents three answers were
submitted. The first was that the section deals with
the -case of increase of capital by the directors beyond
the authorised limit and as in the present case the new
shares were issued within the authorized limit of capital, ·the section has no application. The second was
that the terms of the section should be construed in a
practical way . and. there was no. difference between
Regulation 42 in Table A of the Companies Act and
section 105-C in respect of the scheme to offer the
proportion_ of shares to the existing shareholders. It
was iifgued that so long as they were offered " as nearly
as circumstances admit " the directors had complied
with the requirements of the section and therefore
their action was not illegal. The third answer was
that in fact the directors had not committed any
50
19;;0
N a1Url al Z aver
A11d Aflother
v.
Bomb" y I;ife
Assurance Ca..
;\ nd Others
/(ania C. J.
1950
Nanalal Za1•cr
And Another
v.
Bo1nba y L(fe
·Assuran:c Co.
A1td Others
J(auia C. J.
396
SUPREME COURT REPORTS
[1950}
breach of the terms of section 105-C up to now and
therefore their action cannot be held to be illegal. In
view of my conclusion on the third point it is not
necessary to express any opinion on the first two
answers. submitted on behalf of the respondents. It
seems to me that section 105-C, interpreted strictly as
contended by the appellants, casts on the directors
two obligations. They have to offer the shares issued
to the shareholders on the register of the company and
not to anyone else, and secondly, the offer must be '
in the same proportion to all the shareholders and
there should be no discrimination amongst them. It
is not contended that by the offer made by the directors fo the shareholders there has been any discrimination amongst the shareholders on the register of the
company. It was contended on behalf of the appellant
that the directors had failed to offer all the shares
resolved to be issued by them to the existing shareholders and therefore the requirements of the section
had not been complied with. It was argued that the
directors having resolved to issue 4,596 shares, they
had to offer that whole lot at once to the shareholders
on the register and the result of the offer made by them
was to retain in their hands 272-4/5 shares. In my
opinion, this contention is unsound.
By their resolution of the 21st February, 1945, the directors.resolved
to issue.4,596 shares out of the authorized capital of
the company. They have offered shares to the existing
shareholders in the proportion of four new shares to five
shares held by them. Inasmuch as the offer does not
absorb the whole lot of 4,596 shares I am unable to
construe the offer as an offer of the whole fot at once
to the existing shareholders.
Unless the whole lot
of shares in pursuance of the offer could be accepted
and taken up I am unable to consider the offer contained in the circular as an offer of the 4,596 shares.
That however does not establish the contention of
the appellai:its. I find not~in? in the section to justify
the conclusion that the directors must offer all the
shares resolved to be issued in one lot to the shareholders.
I can conceive of numerous cases where a
_;
limited company with a growing business does not
S.C.R.
SUP~EME COURT REPORTS
397
require its capital to be called up at once. For instance,
soon aftel a company is formed it may issue shares of,
say a lakh of rupees required for the construction of
the buildings, and after . a year when it requires
ft'.lrther capital for payment of machinery etc. it can
issue further shares. I do not think the section as
worded prevents the directors from issuing shares to
existing shar~holders from time to time in that way. As
noticed before, the object of the section is to prevent
discrimination amongst shareholders and prevent
the djrectors from offering shares to outsiders before
they are offered to the shareholders. So long as these
two requirements are complied with, the action
of the directors in selecting the time when they will
issue the shares as also the proportion in which they
should be issued is a matter left to their discretion and
it is not the province ;of the Court to interfere with the
exercise of that discretion. This is of course subject
to the general exception that the directors are not to
act against the interest of the company or mala · fide.
No such question arises in this case and therefore it
is unnecessary to discuss that aspect of the situation.
In my opinion tp.erefore on this. third ground this contentio~. of the appellants should be rej~cted.
The appeal therefore fails and is dismissed with
costs.
1950
N anal al Z avu
And Another
v.
Bombay Llfe
Assu,.an -:e Co-.
And Ot/lus
[(a11ia C. J,
MAHAJAN J .-This is an appeal by special leave
M11T1ajm1 J
from the judgment and decree of the High Court of
Judicature at Bombay (Chagla C.J. arid Tendolkar J.)
dated 11th March, 1948, confirming the judgment of
the said High Court in its Original Jurisdiction
(Bhagwati J.) dated IGth Nov~mber, 1947.
The two · questions canvassed in this appeal are:
(1) whether the issue of further shares by the directors
was in contravention of the provisions of section
105-C of the Indian Companies Act, and (2) whether
this issue was not made bona fide.
Both these questions 'were answered in favour of the respondents by
the High Court.
'~
The Bombay Life Assurance Co. Ltd., the first
c;iefendant in the case, was incorporated in the year
--
1950
Jo.i~a11al11l Zl1't't'I"
And A11otlter
v.
Bo111hay l.rje
Ass11ranc.! Co,
And Others
398
SUPREME COURT REPORTS
[1950)
1908 as a limited company with an authorized capital
of ten lakhs. Five thousand four hundred and four
shares had been issued till the year 1945 and they
were paid up to Rs. 25 each. The second defendant
is the chairman of the board. of directors which is
comprised of defendants 2 to 9. The company has a
life fund of Rs. 230 lakhs.
In the year 1944 Sir Padampat Singhania, an
industrialist of Kanpur, attracted by the soundness
of this concern, began purchasing the shares of the
company with a view to acquiring a controlling interest in its management.
Soon after competition
started for the purchase of the shares of the company
between the Singhania group and the Maneklal Premchand group who were in management of this company.
The result of this competition was that shares which
.were ordinarily quoted at 250 went up as much as to
2,000 in March, 1945.
A circular was issued by the
directors to the shareholders apprising them of the
activities of the Singhania party and suggesting that
those who wanted to sell their shares should sell them
in the first instance to the chairman. This circular
does not seem to have had much effect as the shareholders wanted to reap the maximum benefit which
would come to them as a result of this competition
between two rich parties. By the end of December,
1944, the Singhania group had purchased 2,517 shares
as against 2,397 held by Maneklal Premchand's party.
The Singhania group had thus acquired a majority of
the shares in the company though these had not yet
been transferred in their name. On 8th January, 1945,
the chairman at his own instance and after consulting
some of the directors made an application to the
Examiner of Capital Issues for permission for a fresh
issue of capital. This was allowed on 20th February,
1945. As soon as sanction of the Examiner of Capital
Issues was obtained for increasing the capital of the
company, a meeting of the directors was held OJ} 21st
February, 1945, and it adopted the following resolution:--
1. That the capital of the company be increased
from Rs. 5,40,400 to Rs. 10,00,000 by the issue of the
'
/
S.C.R.
SUPREME COURT REPORTS
399
remaining 4,596 ordinary shares of Rs. 100 each at a
premium of Rs. 75 per share.
2. That as on the existing shares of Rs. 100 each
Rs. 25 is paid up, to call Rs. 22 per, share on these
new shares also.
3. That these new shares shall rank pari passu
in all respects with the existing shares ofthecompany,
but they shall be entitled to rank for dividend as
from 1st April, 1945.
4. ·That these new shares shall be offered in the
first instance by a circular to the shareholders of the
~ompany as shown on the register of members on 20th
February, 1945, in the proportion of four new shares
to every five shares held by them in the capital of the
company on that date.
5. That in the case of any shareholder holding
less than five shares, or whose holding of shares shall
not be complete multiples of five shares, then fractional certificates shall be issued to such shareholders
in respect of their rights for fraction of a share, each
fractional certificate representing one-fifth of a share.
6. That a sum of Rs. 100 per share (Rs. 25
towards capital and Rs. 75 for premium) shall be payable along with application for these new shares.
7. That all applications for shares in accordance
with this offer (including applications for shares made
in respect of and accompanied by fracticmal certificates and applications for shares accompanied by
a renunciation) must be presented to and payment
made at the registered office of the company in Bombay
on or before the 10th March, 1945. . Any shareholder
or person in whose favour a renunciation has been signed
not applyin,g Qil or before the 10th March, 1945, in
terms of tlie{(Tfer shall be· deemed to have declined to
participate in tliis new issue and all fractional certificates not presented as required on or before 10th March,
1945, will c~ase to have any validity and will not entitle
the hC\Jder to any rights.
~· That any balance of the shares remaining out
·Of this issue not applied for by the: 10th March, 1945,
shall be disposed of by the directors as they may consider best in the interests of the company.
1950
Nanalal Zaver
And Another
v.
Bomhay Life
Assurance Co.
A11tl Others
.UahajanJ.
1950
Nanalal Zavcr
And Another
Y,
&tuba y Life
Assurance Co,
And Others
J\lahajanJ.
400
SUPREME COURT REPORTS
[1950J
· 9. That the draft circular to the shareholders
with the enclosures (form A being the form of
application, form B form of renunciation and form of
fractional certificates with application form) placed
on the table by the manager and actuary be approved
and initialled by the chairman.
10. That the manager and actuary be and is
hereby directed to issue forthwith the necessary circulars to the shareholders.
11. That a committee consisting of the chairman and any one of the directors or the chairman
and any two of the directors be and are hereby appointed to scrutinise the application for the new shares
which may be received and to make allotment of these
new shares.
*
*
*
*
."
It is the validity of this resolution that is the subject matter of the present dispute; The plaintiffs, who
are two shareholders of the company owing allegiance
to the Singhania group, filed the suit out of which this
appeal arises challenging this issue of further shares,
principally on two grounds, viz. (1) that. the new
issue contravenes the provisions of section 105-C of the
Indian Companies Act, and (2) that the issue of shares
was not bona fide made in the interests or for the benefit of the first defendant company, but was resolved
upon merely with the object of retaining or securing
to the second defendant and his friends control of the
first defendant company.
As already stated, both
these contentions were negatived by the trial Judge
and the suit was dismissed and this decision was
affirmed on appeal.
The answer to the first question pepends on the
meaning to be given to the words used in section
105-C of the Indian Companies Act as to its scope.
The section was introduced in the Indian Companies
Act in the year 1936.
Antecedent to this period the
question of issue of new shares by the directors was
dealt with by article 42 of the Articles of Assqciation
given in the schedule to the Indian Companies Act,
1913. The article was in these terms:-
'
" Subject to any directions to the contrary that· '
may be given by the resolution sanctioning the ..
S.C.R.
SUPREME COURT REPORTS
401
increase of share capital, allnew shares shall, before
issue, be offered to such persons as at the date of the
offer are entitled to receive notice from the company
of general meetings in proportion, as nearly as the
drcumstances admit, to the amount of the existing
shares to which they are entitled."
As its language indicates, the article only applied
to cases where the capital of the company was increased by a resolution of the company·. It had no
application to cases where the directors issued further
shares within the authorised limits. The new section
introduced in 1936 is in these terms:-.
"Where the directors decide to increase the capi.,
tal of the company by the issue of further shares such
shares shall be offered to the members in proportion to
·the existing shares held by each member (irrespective
·of class) 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 intimatiou 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."
It qualifies the discretion of the directors in the
matter of issue .of capital by enjoining on them that if
they decide to ·issue further shares, the existing shareholders should be given the first option to buy them.
The language employed in th~ section admits of. three
possible interpretations : ( 1) that its scope is limited tQ
cases where there is an increase in the capital of the
-company according to the provisions of section 50; (2)
that the section covers within its ambit all issue of
further qi.pital whether made by increasing the nominal capital or by. issuing further shares with.in the
authorised capital ; (3) that the section has appllcation
only to ,cases where the directors issue· further shares
within the authorized limit.
\
·
The learned counsel for the respondents contended
that the whole int(lnt and purpose of the section was to
limit the discretion 'of directors in' regard fo the· issue
1950
Nana/al Zavcr
And 111zotlla
\',
Bombay Ufe
A ssurancc Co.
A>ul Others
ltlalinja"l·
1950
Nanalal Zaver
And Anotlu·1·
v.
Boiirba y Life
Asst'1·ance Co.
And Others
Mahajan J.
402
SUPREME COURT REPORTS
(1950]
of further shares in those cases alone where there was
an increase in the nominal capital of the company by
recourse to the provisions of section 50 of the Indian
Companies Act. It was argued that the phrase "increase
of capital" has been employed by the legislature in
section 50 and some other sections preceding section
105-C with reference only to the nominal capital of a
company and' that this expression had not been used
with reference to the subscribed capital anywhere in
the Act and therefore the scope of section 105-C should
be limited to cases where the increase in the capital is
brought about under section 50 of the Act and new
shares are created and issued by the directors. In
Sircar and Sen's Indian Companies Act, 1937 Edn. at
page 309 the learned authors observe as follows :-
" The words •further shares' must be read in conjunction with the words 'decide to increase the capital
of the company.' They must mean shares which are
issued for the purpose of increasing the capital beyond
the authorized capital."
.
Mr. Ghosh on Indian Company Law, 8th Edn. at
page 263 has stated as follows :-
" The object of this new section appears to be to
make the salient provisions of Regulation 42 in Table A
compulsory. The section as drafted is liable to the construction that whenever· the directors !lecide to increase the capital of the company by the issue of further shares, even if it be a part of the authorized
capital, the new shares must be first offered to the
existing shareholders. But this section should be read
in conjunction with clause (a) of section 50 under subsection (2) of which the directors have no power to increase the share capital of the company. Therefore it
seems that the words •further shares' mean shares
beyond the authorized capital of the company."
Whatever might be the opinion expressed by these
commentators, the matter has to be decided on the
language of the Act itself. As already pointtd out,.
the learned counsel for the respondents contended that
the above was the correct view as to the scope of the ,
'
section. The learned counsel for the appellants however urged that on a proper interpretation of the
...
S.C.R.
SUPREME COURT REPORTS
403
section its scope could not be limited only to cases of
issue of further shares by creation of new shares by increasing the nominal capital of the company, but that
the language employed in the section also included
within its ambit cases where there was a further issue
of shares by the directors, within the authorized
capital. The learned counsel laid considerable emphasis
on the expression " further shares " used in the section
and suggested that these words have been used advisedly instead of the expression "new shares " in order
to bring within the scope of the section increases in the
capital of a company whether within the authorised
limit or outside it.
The third interpretation of the section finds support from the language employed by the legislature in
the opening part of the section, wherein it is said :
" Where the directors decide to increase the capital of
the company by the issue of further shares ....... " The
directors can only decide to increase the capital at their
own initiative when they issue further shares out of
the authorised capital. In no other case can the directors themselves decide as to the increase in the capital
ot a company. Under section 50 the capital can only be
increased by a resolution of the company. Once the
company has increased the nominal capital, then the
directors can issue shares within the new limit. Therefore the authority of the directors, strictly speaking,
in respect to the increase of capital is limited to an
increase within the authorised limit. They cannot by
their own decision increase the nominal cap-ital of the
company. In view of this language the third interpretation of the section seems more plausible.
The expression "capital of a company " is an ambiguous phrase and may mean either issued capital or
authorized capital according to the context. It has
been used in different senses in various parts of the
· Act. In what sense it has been used in this section is
by no means an easy matter to decide, particularly in
view of the fact that in spite of the introduction of this
· ~ction in the Indian Companies Act in the year 1936r
article 42 still remains as one of the articles to be
adopted by companies if they do not choose otherwise
51
1950
Nana/al Zat'el"
And Another
v.
Bombay Life
Assurance C<>..
A11tl Others
Mahaja1'].
!950
Na1ialal Zavcr
And Another
v.
Boml1a y Life
Assurance Co.
And Others
Mahajan/,
404
SUPREME COURT REPORTS
[1950)
and this refers to cases of increase in the nominal capital of a company. In my opinion, for the purpose of
deciding the present case it is not necessary to pronounce on the question as to the precise scope of the
section because I consider that on any interpretation of
it the appellants' contention has to be negatived. If the
interpretation suggested by the learned counsel for the
respondents is accepted, then the plaintiffs' contention
on the first question fails, because here there has been
no increase in the capital of the company under
section 50. Conceding however for the sake of argument (but not deciding) that the scope of the section
is as it has been contended for by Sir Noshirwan, the
question still remains " To what extent has there been
a contravention of its provisions by the directors in
the present case." So far as I have been able to see,
the resolution passed by the directors is in accordance
with the provisions of the section and does not
injuriously affect the shareholders or the company,
and they cannot be said to have any cause of grievance
against it.
In other words, in my opinion, the resolution substantially complies with the provisions of
section 105-C of the Indian Companies Act. The
directors offered all the new shares to the shareholders
in the ratio of 4 to 5, as the shares of the company
were held in multiples of five to a larger extent than in
any other multiple. The result of fixing this ratio is
that 272 shares remain outside the offer. In whatever
other proportion the shares were offered, still a few
shares were.bound to remain unoffered. If a liberal interpretation is placed on the section, then it has to be held
that the directors' resolution substantially complies
with its provisions. On the other hand, if a technical and
literal interpretation is placed on the section, then the
directors were bound to offer the shares in the ratio of
4596/5404 in spite of the practical difficulties that might
result in the actual working out of such a proportion,
and irrespective also of whatever absurdities or anomalies might thus result. I am of the opinion that the
section has to be given a workable construction and a.
construction that is businesslike in preference to a literal
construction which might lead to a deadlock. In each .
S.C.R.
SUPREME COURT REPORTS
405
case it should be seen whether the directors have substantially complied with the provisions of the section or not.
The basic idea underlying the section is that
whatever is given, is given to all the existing shareholders and is distributed equally and equitably between them.
It cannot be denied that all the shareholders were offered the further shares arid that they
were offered equally and equitably. Whatever is the
balance remains with the company with the result that
the capital remains unincreased to this extent. In such
a situation it is difficult to hold that the resolution
passed by the directors has contravened the provisions
of section 105-C and has caused any detriment or injury either, to the company or to the shareholders. Even
if the resolution passed by the directors is held to be
in technical breach of the section, as it has caused no
injury to anybody, the resolution cannot be held to be
void. Under the law as it existed prior to 1936, if a
company iecorporated in its Articles of Association
article 42 mentioned in the schedule to the Indian
Companies Act, then in the case of issua of new shares
the directors' discretion was curtailed inasmuch as
they were bound to offer these shares in the first instance in proportion as nearly as the circumstances admitted to the amount of the existing shares to the existing shareholders but in all other cases their discretion
remained unfettered. It was open to a company not to
adopt article 42 and thus fetter the discretion of the
directors even in the case of the issue of new capital.
After 1936. it has been made obligatory on the directors
to give the first option to buy further shares to the
existjng shareholders and without any favour to anyone. That being the intent and purpose of the section,
it has been fully carried out by the directors in the
present instance and has been carried out in a businesslike way because the ratio in which they offered the
shares is the ratio which works to the convenience of
the largest number of shareholders as the shares of the
company are held mostly in multiples of five. If the
~shares were issued in any other ratio, that would have
created some difficulty in the way of shareholders who
held shares in multiples of five and who owned 2, 110
1950
N anal al Z aver
And Another
v.
Bombay Ufe
Assurn1t -;e Co-.
And Others.
M alwjan J.
] 950
Nanalal Zaver
And Another
v.
Bo11iba y Life
Ass11ran ;e Co.
And Others
Mahajan}.
406
SUPREME COURT REPORTS
[1950]
shares. They would have been obliged to collect fractions before they could claim a whole share and thus
make an application within the time allowed to exercise the option. Where the language of a statute in its
ordinary meaning and grammatical construction leads
to a manifest contradiction of the apparent purpose of
the enactment, or to some inconvenience or absurdity,
hardship or injustice, presumably not intended, a
construction may be put upon it which modifies the
meaning of the words, and even the structure of the sentence. In my opinion, the section when it says "such.
shares shall be offered to the members " should be
construed liberally and not literally, as such an interpretation would make
th~ section workable and
would not in any way affect its intent and purpose,
the phrase "such. shares" meaning those shares which
admit of being so offered in a businesslike way.
It was argued that a liberal interpretatibn of the
section would result in the directors allottii:ig the balance of shares remaining out of the further shares
unoffered to their own friends and relations and it
would operate to the detriment of the other shareholders. In this connection reference was made to
para 8 of the resolution above mentioned. In my
opinion this paragraph does not bear out the contention of the appellants because it has reference only 'to
shares not applied for, obviously shares not offered
and which could not be taken up by the shareholders
cannot fall under that description. That paragraph
applies only to cases where the shares could be applied
for and then no application was made in respect of
them. It was not disputed that the directors in., the
present case had not sold these shares to any one and
that these have remained unissued. It was urged
strongly by the learned counsel for the appellants that
the section being imperative and its language being
unambiguous, the Court was bound to place a literal
interpretation on it and 'the argument of. hardship or
inconvenience should not weigh with it. It was further
suggested that the directors could always give effect to.,
the provisions of the section by increasing the capital
in a manner and to the extent that the further shares
..
S.C.R.
SUPREME COURT REPORTS
407
<:ould be offered to the shareholders in such a proportion that all the shares offered could be taken up by
them. In other words, it was contended that the section
not only fetters the powers of the directors in the matt-
·er of sale of shares but it also restricts their discretion
in the matter of increase of capital and as to the
number of further shares. This contention, if accepted,
would mean that the legislature by enacting section
105-C indirectly enjoined on the directors that when-
·ever they decide to increase capital by issue of further
shares they should make the increase only to such an
·extent and in a manner as to enable the existing
shareholders to take the whole of it. If that was the
inten~ion of the section, there was nothing easier for
the legislature to say so. The section, on the other
1 hand, recognizes that the directors have a discretion in
the matter of the increase of capital when it says,
"'' when the directors decide to increase the capital of
a company." It means that it is within their absolute
discretion to take the decision whether to increase the
·capital or not. It is also within their discretion to say
to what limit and to what extent they will increase the
-capital. It is also for them to decide how many shares
and of what value ±h.ey will issue. Once they have
taken their decision, it is then and then only that. section 10s~c comes into operation. At that stage they
have to offer the new shares to the shareholders and at
that stage they can offer them i.J;i a businesslike manner
io all of them equitably and equally and if out of the
shares offered some cannot be taken up by the shareholders as they do not fit in the ratio in which th~
·Offer ha:; been made, the only result isthat those shares
Temain unoffered and thus unissued. I am therefore
-0f the opinion that the learned Judges of the Court of
appeal were right when they held that under section
105-C the shares have to be offered to the existing
shareholde1s as nearly as the circumstances would
admit and that the section has to be given a businesslike construction and should be construed liberally and
i. that the charge of contravention of section 105-C cannot be levelled against the directors -so long as they
.ha,ve not disposed of the unoffered balance contrary tb
1950
N analal Z aver
A11d Another
v.
Bombay Life
Assurance Co.
A".d Others
lYlahajan J.
1950
N anal al Z aver
And Another
v.
Bo111!Jay Life
Assrv-t11icc Co.
And Others
MaliajanJ.
408
SUPREME COURT REPORTS
[1950)
the provisions of the section. The result . is that the
first contention of the learned counsel stands negatived.
The next question whether the action of the directors in passing the resolution was not bona fide seems
to be concluded by concurrent findings of fact of the
Courts below to the effect that the resolution was
passed because the company needed additional funds
at the moment when the new issue was decided upon
and that the issue of shares was not due solely to the
desire on the part of the directors to keep themselves
in the saddle.
It is not the practice of this Court ordinarily to
interfere with concurrent conclusions on questions of
fact reached in the Courts below unless those conclusions have been reached on extraneous considerations
or by violating rules of procedure or by committing
any breach of some provision of law : vide Srirnati
Bibhabati Devi v.