PINGLE VENKAT RAMA REDDY Vs. PADAMPAT SINGHANIA

JUDGEMENT

(1.) These two appeals arise from a common judgment given by Bhagwati J., and a few facts must be stated in order to appreciate what the real contentions between the parties were. One P. V. Reddy, who was a director of the Bombay Page 1 of 10 Pingle Venkat Rama Reddy vs. Padampat Singhania (07.03.1949 - BOMHC) Life Assurance Co., Ltd., held 534 shares on which Rs. 25 per share had been paid up, and there was an uncalled for liability of Rs. 75 on each share. On 25th July 1944, Reddy sold through his constituted attorney Bhaidas Gulabdas 484 out of these shares, retaining for himself 60 shares which, it might be mentioned, were necessary to be held by a director as qualifying shares. Reddy executed 5 blank transfer forms in respect of these 484 shares--4 for 100 shares each and 1 for 84 shares. These blank transfer forms were ultimately filled in the name of Sir Padampat Singhania, who was shown as the purchaser of these shares. The company some time thereafter decided on increasing its capital. Sanction for such increase was applied for to the Central Government on 8th January 1945, under Rule 94A, Defence of India Rules, and the Government granted its sanction on 16th February 1945. On 21st February 1945, the company resolved upon increasing its capital by issuing 4596 shares of Rs. 100 each at a premium of Rs. 75 per share. On the existing shares only RS. 25 per share were called up, and the company also decided that the new shares should be offered to the existing shareholders in the proportion of 4 new shares to every 5 shares held by the shareholders. Pursuant to that resolution letters were issued to the various shareholders, and a letter was also issued to Reddy informing him that as a holder of 534 shares he was entitled to 427 new shares and one fractional certificate. The letter was written to Reddy because the purchasers from Reddy had not got their names registered in the books of the company as the shareholders of these shares. On the same day Reddy applied for 40 shares out of 427 offered to him. It may be pointed out that the company in its letter enclosed form A which was intended to be used by the shareholders who applied for new shares and also another form B intended as a letter of renunciation to be used by the shareholder who wanted to renounce the shares allotted to him to any other person. Reddy made no use of this letter of renunciation and he contented himself with applying for only 40 shares. On 23rd February 1945, Reddy received a letter from one Mehta and one Bharatiya calling upon him to forward to them the circular letter received by Reddy from the company dated 21st February 1945, with the forms annexed thereto duly signed by him so as to enable Mehta and Bharatiya to apply for the shares which were allotted to Reddy. Mehta and Bharatiya stated in this letter that so long as Reddy continued to be the holder of these shares, on the company's register, he held the shares as trustees for Mehta and Bharatiya. Mehta and Bharatiya did not enlighten Reddy how Reddy was constituted trustee for them. On 28th February 1945, Messrs. Craigie Blunt & Caroe wrote a letter on behalf of their clients, J. M. Mehta, Sir Padampat Singhania, Lala Kailaspat Singhania and N. K. Bharatiya and others calling upon Reddy to apply for the additional shares and fractional certificate which had been issued to Reddy and asking him that when the shares were allotted to him he should hold the shares on behalf of Craigie Blunt & Caroe's clients, and also intimating to him that when this was done the Hindustan Commercial Bank, Ltd., would pay Reddy a sum of RS. 100 for every share allotted to him. The implication of this demand was that Ready was first to apply for the shares, spend his own money and then the amount expended by him would be refunded by Sir Padampat and others, but in the next paragraph Craigie Blunt & Caroe made another requisition and that was that if Reddy so preferred he could send the form of application A duly signed by him as well as the renunciation form B as also the fractional certificate to Bharatiya so as to reach him before 7th March 1945, who would then forward Page 2 of 10 Pingle Venkat Rama Reddy vs. Padampat Singhania (07.03.1949 - BOMHC) the application to the company on behalf of the defendant Reddy along with the necessary remittance. Messrs. Craigie Blunt & Caroe also agreed on behalf of their clients to indemnify Reddy against any and every liability which he would incur by applying for these partly paid shares. In the early part of their letter Messrs. Craigie Blunt & Caroe draw the attention of Reddy to the effect that in their opinion the issue of further capital by the company was illegal and the requisitions that were being made were without prejudice to that contention. On 3rd March 1945, Messrs. Hindustan Commercial Bank, Ltd., followed up the demand made by Messrs. Craigie Blunt & Caroe by offering to pay to Reddy a sum of Rs. 100 per share when these shares were allotted to him. On 3rd March 1945, Reddy replied to Messrs. Craigie Blunt & Caroe, pointing out to them that he had no objection to give them the renunciation form duly signed in favour of the real and true purchaser of these shares and he wanted to be satisfied who the real and true purchasers were by the transfer forms in their possession being produced for his satisfaction, but be went on to say that he was under no obligation to comply with the requisition with regard to the sending of Form A: the only obligation which he accepted was to sign the renunciation form in favour of the true purchasers. On that Sir Padampat filed Suit no. 366 of 1945 against Reddy for the following reliefs. He wanted the defendant Reddy to be ordered to sign and deliver to the plaintiff the application form A annexed to the circular letter; he wanted the defendant to be ordered, upon receiving the certificates of the new shares, to band over the same as also the fractional certificates to the plaintiff together with the relative transfer forms in blank duly signed by him; he applied for appointment of a receiver and he also subsequently, by an amendment, asked for damages in the alternative in the sum of Rs. 7,29,600. On the same day Sir Padampat applied for a receiver, and Bhagwati J. made an order appointing the Court Receiver receiver of the application form and letter of renunciation and of the rights, if any, of the defendant in the 484 shares of the Bombay Life Assurance Co., Ltd. The receiver then wrote a letter to the company on 10th March 1945, formally intimating to the company that he was applying for and requesting the company to allot to him 384 new shares of Rs. 100 each of the company upon the terms of the company's letter; and he therein agreed to accept the same. I may point out here that the proper number of shares to which Reddy was entitled was 387 and not 384 but through some arithmetical error the plaint says that Reddy was entitled to 384 shares and the receiver's application is based on that basis.

(2.) The receiver also remitted a sum of Rs. 38,400 for payment in respect of these shares at Rs. 100 per share, He then requested the company to put his name on the register of members in respect of the shares so allotted. He also sent along with this application another letter in which he set out the history of the litigation; how he came to be appointed a receiver and what his powers were and he added that as stated in his application he had to request the company, as Court Receiver, High Court, Bombay, and receiver in Suit No. 366 of 1945, to register his name as such in the register of the company in respect of the shares allotted to him. The company replied to this letter on 30th April 1945, stating that Reddy had accepted the company's offer only to the extent of 40 shares and the offer as regards the balance had lapsed, and they returned the sum of Rs. 38,400 sent by the receiver. The receiver thereupon filed suit Page 3 of 10 Pingle Venkat Rama Reddy vs. Padampat Singhania (07.03.1949 - BOMHC) No. 786 of 1948 against the Bombay Life Assurance Company, Ltd., praying that the defendant company should be ordered and decreed to allot to the plaintiff the 384 shares and to put the name of the plaintiff in the share register of the company for the said shares and the register of shareholders of the defendant company be rectified by putting the said shares in the name of the plaintiff. The learned Judge, in substance, decreed both Sir Padampat's suit, being suit No. 366 of 1945 and also the Receiver's suit being suit No. 786 of 1948. It is from this decree and judgment of the learned Judge that both Reddy and the Bombay Life Assurance Co., Ltd., have come in appeal before us.

(3.) The first contention raised by Sir Jamshedji is that there is no evidence on the record to show that Sir Padampat Singhania was the purchaser of these shares from Reddy and that Reddy had knowledge that Sir Padampat was the purchaser and that he was the cestui que trust for whom he was the trustee. The only oral evidence led before the learned Judge was the evidence of Gupta to whom the shares were sold by the constituted attorney of Reddy, Mr. Bhaidas Gulabdas. In his evidence Gupta said that Bhaidas Gulabdas knew from the conversation which he had with Mehta, Basri and himself that these shares were being purchased for and on behalf of Sir Padampat Singhania Now, Sir Jamshedji says that if Bhaidas Gulabdas had this knowledge, this knowledge cannot be imputed to his principal Reddy. In law a principal is only bound by the knowledge of his agent provided that that knowledge is on a material point and the knowledge is such that the Court would draw the inference that the agent was bound to communicate the knowledge acquired by him to his principal. Sir Jamshedji is right when he says that when a shareholder sells his shares through a broker, he is not in any way interested to know to whom the shares are sold. He is not likely to make that enquiry of the broker and the broker is not likely to tell his constituent to whom the shares have been sold. The holder of the share is only interested in the price which he obtains. But we are dealing with a case that is not the case of an ordinary shareholder selling his shares in the open market. This transaction of a very large holding was effected by a private treaty and not in the open market. As a matter of fact Bhaidas sold to Gupta as many as 667 shares by this transaction and out of this number 484 shares belonged to Reddy, and it would not be a very far-fetched inference to draw that Reddy as the director of the Bombay Life Assurance Co, Ltd., would like to know from his constituted attorney as to who was the party who was acquiring such a large holding of the shares of the company. The learned Judge has also taken into consideration the background of this litigation. It seems that some time in July 1944 about the time that Reddy sold these shares to Gupta Sir Padampat Singhania suddenly made up his mind, for reasons best known to him, to acquire as large an interest as possible in the Bombay Life Assurance Co., Ltd., and for that purpose from July 1944 he started buying as many shares as he could get through various agents of his, and in September 1944 a meeting of the board of directors was convened, and the Chairman drew attention to the serious situation that had arisen with a view to get control of the management of the company. The meeting resolved that a circular should be issued to the various shareholders acquainting them with the real facts. The learned Judge takes the view that Reddy must have been present at this meeting and must have known what was happening with regard to the affairs of the company and the interest that Sir Padampat was taking in Page 4 of 10 Pingle Venkat Rama Reddy vs. Padampat Singhania (07.03.1949 - BOMHC) its affairs. Sir Jamshedji is right when he points out that the learned Judge was in error in thinking Reddy must have been a party to this resolution when there is no evidence of that fact on the record. But the learned Judge is right when he takes the view that even if Reddy was not present at the meeting, being a director, the circular letter having been issued to all the share holders as far back as September 1944, he must have known that the party of Sir Padampat Singhania and the party of Maneklal, another director, were fighting out the issue as to who should dominate over the destinies of this life assurance company. The importance of this question lies in considering whether a proper requisition was made by Messrs. Craigie Blunt & Caroe on 28th February 1945, when they called upon Reddy to carry out certain requisitions. But before I deal with that aspect of the case it is necessary to consider what is the position in law with regard to a share-holder who acquires rights to an issue of new shares qua the person to whom he has sold his shares.