NANALAL ZAVER Vs. BOMBAY LIFE ASSURANCE CO LTD

JUDGEMENT

(1.) This is an appeal from a judgment of Mr. Justice Bhagwati and the facts leading up to it may be briefly summarised. The first defendant company is a limited company which was incorporated in the year 1908. It does life assurance business. Its authorised capital is ten lakhs of rupees divided into 10,000 shares of Rs. 100 each. In 1945 the total number of shares issued was 5,404 paid up as to Rs. 25. The life fund of the company at the end of December 1948 was Rs. 2,30,000. Defendants Nos. 2 to 9 are the directors of the company and defendant No. 2 is the chairman of the board of directors. It seems that in July 1944 Sir Padampat Singhania in search of fresh financial conquests entered the market and started purchasing shares of this company and these purchases were done through his agents in Bombay. The result of his wanting to purchase shares was to shoot up the price of the shares considerably and the shares which were ordinarily quoted at Rs. 250 went up as much as to Rs. 2,000 in March 1945. The result at the e December, 1944 was that as against defendant No. 2's group, viz. Manecklal Premchand's group holding 2,397 shares, the Singhania group-and that is how I propose to call Sir Padampat Singhania's party-had 2,517 shares.

(2.) On September 18, 1944, a meeting of the board of directors was convened and the chairman drew attention to the serious situation that had arisen owing to the attempt of a group of persons to purchase the company's shares with a view to get the control of the management of the company and this board meeting decided to issue a circular to the company's shareholders acquainting them with the real facts. It was also decided to authorise the chairman to sign the circular and on the next day, September 19, a circular was issued to various shareholders drawing their attention to what was happening and requesting them to offer their shares if they wanted to sell them, in the first instance, to the chairman. On Januarys, 1945, an application was made by the company to the Examiner of Capital Issues for a fresh issue of capital. The sanction was granted on February 20, 1945, and on February 21, 1945, a meeting of directors was called and at this meeting it was resolved to issue 4,596 shares and to call up Rs. 25 on each of these shares. The shares were to be issued at a premium of Rs. 75. It was also decided that these new shares, viz. 4,596, were to be offered in the first instance to the shareholders of the company as shown on the register of members of the February 20, 1945, in the proportion of four new shares to every five shares held by them in the capital of the company on that date. Applications for shares in accordance with the offer made had to be presented and the payment made at the registered office of the company in Bombay on or before March 10, 1945. The resolution also provided that any balance of the shares remaining out of this issue not applied for by March 10, 1945, shall be disposed of by the directors as they might consider best in the interests of the company. A draft circular which was to be issued to the shareholders containing this offer was also placed before the meeting of the board and was approved by the directors This circular mentioned that the directors reserved the right in their absolute and uncontrolled discretion to accept or refuse any application for shares made by a person in whoso favour the shareholder may renounce his right to the whole or any of the shares which the shareholder might be entitled to have allotted to him in terms of the circular. The directors also reserved the right to accept or refuse any application in respect of fractional certificates by a person who was not a shareholder of the company. In fact although 4,596 shares were issued, out of these 272 4/5 shares were not offered to the shareholders at all and the balance was offered in the proportion of four shares to every five shares held by the shareholders.

(3.) The plaintiffs, who are two shareholders of the first defendant company and who admittedly belonged to the Singhania group, have filed this suit challenging this issue of new capital mainly on two grounds : (1) that the new issue contravened 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. The learned Judge who heard the suit decided against the plaintiffs on both these points and dismissed the suit. Hence this appeal.