SIVAGNANAMMAL Vs. THIRUMAGAL MILLS LIMITED

JUDGEMENT

(1.) This is an application made under the Indian Companies Act for a direction to the first respondent company to rectify the company s register of members so as to include in it the name of the applicant Mrs. Sivagnanammal, as being a member of the respondent company holding in her sole name 50 bonus shares of the company. Sivagnanammal is the widow of one Parasurama Mudaliar who died on the 29th May, 1942. The said Parasurama Mudaliar and one Pithambara Mudaliar were partners of the firm S. R. Ponnuswamy Mudaliar and Brothers and as such held in the first respondent company 100 shares of the face value of Rs. 100 each. The shares were registered in the books of the company jointly in their names. During the life time of Parasurama Mudaliar, Pithambara Mudaliar died and the shares which stood jointly in the name of Parasurama Mudaliar and Pithambara Mudaliar were duly transferred in the names of Parasurama Mudaliar and Neelamega Mudaliar, the younger brother of Pithambara Mudaliar. Parasurama Mudaliar left a last will and testament made on 4th June, 1941, by which he bequeathed to his wife Sivagnanammal his interest in the shares in the first respondent company for her lifetime and he provided that she should enjoy only the income (varumanam) derived therefrom and that after her death the shares should become the property of his heir and brother s son K. Ratna Mudaliar who would be the owner of the corpus. On Parasurama s death in May, 1942, the registry of shares was transferred in the books of the Company in the name of Neelamega Mudaliar representing the interest of Pithambara Mudaliar, and Sivagnanammal and Ratnam representing the interest of Parasurama Mudaliar. This seems to have been effected with the consent of all the concerned parties. Ratnam died in 1946 leaving three undivided sons Dharmaraja and his two minor brothers. Dharmaraja is the 2nd respondent in this application and Neelamega was subsequently impleaded as 3rd respondent. No change in the registry was made after the death of Ratnam as no application was made by any of the concerned parties and the registry at present stands as it was prior to Ratnam s death. At an extraordinary meeting of the general body of the shareholders held on the 29th December, 1946, it was resolved inter alia to increase the capital of the company and since there was a large profit it was decided that instead of distributing it as dividends, fully paid-up bonus shares should be issued to shareholders registered in the registry of the company as on 28th November, 1946. The resolution is as follows:

(2.) This case raises an important question of Company Law which, as far as I am able to gather, is not covered by the decision of any Indian High Court. The question is whether when a company decides to capitalise its profits and issues fully paid-up bonus shares to the shareholders, the sums represented by those shares are in the nature of capital or can for any purpose be treated as income. If it is to be regarded as capital, then having regard to the provisions of the will they will be virtually the property of the remainderman and not of the life-tenant, as under the directions contained in the will the life-tenant is only entitled to the varumanam of the shares. If, however, it is to be regarded as income on the ground that its origin is traceable to the profits of the company then under the will, it will be exclusively the property of Sivagnanammal and she will be entitled to the separate registry of those shares in her name. Before dealing with this interesting question, I may dispose of one or two minor points that incidentally arise. The contention of the applicant is that for all practical purposes she was considered to be the owner of 50 original shares after her husband s death and that even during her husband s life time he was regarded as owner of 50 shares, although the registry of the entire stock of 100 shares was throughout in the names of the joint owners. This contention does not stand scrutiny. No doubt dividends have been distributed separately but the registry has throughout been joint. When Pithambara was alive it was in the names of Parasurama and Pithambara. After Pithambara s death it stood in the joint names of Neelamega and Parasurama and after Parasurama s death, it was changed into the joint names of Neelamega, the petitioner and Ratnam. The second objection is that the applicant had no notice of the meeting of the general body held on the 29th December, 1946, and that therefore the resolution of that date capitalising the profits and authorising the issue of bonus shares is not binding upon her. It seems to me that this contention shows that the petitioner is approbating and reprobating at the same time, because her present application is on the footing that bonus shares having been issued she must be registered exclusively as the owner of 50 bonus shares. Even otherwise, I find no substance in this objection. Article 16 of the Articles of Association of the company explicitly provides that if any share is held under joint ownership in partnership, the person whose name is entered first in the books shall be treated as the important person for all proceedings and notices, etc., shall be given to him only. In this case, it is admitted that at the time when the meeting was called the name of Neelamega was entered first and it is also admitted that notice was duly served upon him.

(3.) Coming to the main question there can be no doubt that it is open to a company either to distribute its earned profits as dividends among its shareholders or to carry the whole or a portion thereof to the reserve fund. The shareholder individually has no right to claim that profits should necessarily be distributed as dividends and in fact the shareholder as such acquires no right in the profits of the company until the dividend is declared and distributed. If the Articles confer the necessary power upon the company, it may genuinely capitalise its undistributed profits and appropriate the same either by adding it to its capital or using it for the purpose of organising or expanding its business or for acquiring fresh assets. It usually does so by adding the profits either to its reserve fund or to its nominal capital. One of the recognised methods of capitalising undivided profits is to add to its capital issue in the shape of either bonus debentures or bonus shares. They may be either partly paid-up or fully paid-up. When fully paid-up bonus shares are issued to the shareholders what actually happens is that the profits are capitalised and the existing shareholders instead of receiving any moneys out of the undistributed profits only receive pro rata fresh shares out of the old shares converted as fully paid-up or out of the new issue. The present is the case of a new issue of shares. The significant circumstance is that in such a case the assets, i.e., the profits, remain with the company as capital and what the shareholders receive is merely a paper certificate as evidence of their interest in the additional capital of the company. The new shares would confer a title to a larger proportion of the surplus assets of the company only if and when a general distribution of assets takes place as when the company is wound up or when the capital is duly reduced. Until then the company s shares issued in such circumstances retain the character of capital. This in my opinion is the legal position under the Company Law with reference to bonus shares issued out of capitalised profits. As I have already indicated there is no direct decision of any Indian Court bearing upon this question; but the principles have never been in doubt in the British Courts. I shall first refer to the two leading cases on the subject. In Bouch v. Sproute (1887) 12 A.C. 385, a testator had bequeathed his residuary personal estate to his executor in trust for his wife for her life and after her death to a remainderman. Part of the residuary estate consisted of shares in a company whose directors had power, before recommending a dividend, to set apart out of the profits such sums as they thought proper as a reserve fund. After the testator s death the directors of the company decided to allot new shares (partly paid-up) to each shareholder, and to apply the bonus dividend in part payment of the new shares. This proposal was carried out and new shares were allotted to the remainderman and registered in his name. The Court of Appeal reversing the judgment of the Court below has held that the bonus belonged to the life-tenant. The House of Lords reversed that decision and held that the real nature of the transaction was that the Company did not pay or intend to pay any sura, as dividend, but intended to and did appropriate the undivided profits as an increase of the capital stock, that the bonus dividend was therefore capital of the testator s estate and that the life-tenant was not entitled to the bonus or the new shares. In the judgment of Lord Herschell all the previous cases were fully reviewed and finally the opinion of Lord Justice Fry given in an earlier case was endorsed and that opinion was to the following effect: