Dewan Singh v. The Minerva Films Limited, Sonepat .

Tek Chand, J.:— This is a petition by Shri Dewan Singh, Director, Minerva Films Limited, made under section 155 of the Companies Act, 1956 (No. 1 of 1956) for the rectification of the register of members by omitting the names of all persons mentioned in Annexures A and B to this petition. The Minerva Films Limited is a public Company and was registered on 8th of February, 1952.

2. The allegations of the petitioner briefly are that he is a holder of 2501B class shares of the value of Rs. 5/- each, that at a meeting of the Company held on 15th of June, 1952, a resolution was passed requiring the Board of Directors to allot 5000A class shares which are of Rs. 10/- each. On 16th of August, 1952, at the meeting of the Directors of the Company, 1205 A class shares were allotted. At the meeting of the Directors held on 30th of June, 1953, 1145 A class shares were allotted. On 10th of August, 1953, 905 A class shares were allotted, and on 28th of June, 1955, the Directors again allotted 750 A class shares. On 26th of February, 1956, 2085 A class shares were allotted. Thus up to the coming into force of the New Companies Act, 6090 A class shares had been allotted. After 1956 Act became law, 4075 A class shares were allotted on 22nd October, 1956, 2485 on 24th May, 1957 and 600 on 4th July, 1957. Thus the total number of A class, shares allotted after 15th June, 1952 came to 13250 as against 5000 A class shares which the Directors were authorised to allot.

3. The contention of the petitioner is, that the allotments of A class shares at the Board Meetings prior to the coming into force of the Companies Act, 1956, were in contravention of section 105-C of the Indian Companies Act (No. 7 of 1913) and the shares allotted after the coming into force of the new Act were against the provisions of section 81 of the Companies Act, 1956. It was urged that under the resolution passed at the share-holders' meeting held on 15th of June, 1952, the Directors were authorised to allot 5000 shares of A class of Rs. 10/- each, but the Directors actually allotted 13250 such shares and thus acted beyond the scope of their authority. In annexure A to the petition, there is a list of the holders of A class shares who, according to the petitioner, should not have been on the register of members and to whom unauthorised allotments had been made at the meetings of the Board of Directors dated 26th of February, 1956, 22nd of October, 1956, 24th of May, 1957, and 4th of July, 1957. It was also maintained that the procedure prescribed in section 105-C of the old Act and in section 81 of the new Act had not been followed, and the shares were not offered to the members in proportion to the existing shares held by each member, and notice specifying the number of shares to which each member was entitled, was not given.

4. The second ground, in support of the prayer for rectification of the register, is, that allotments were made to minors whose names were listed in annexure B to the petition. According to the petitioner, the allotments to the minors were void, and therefore their names should be removed from the register of the members of the Company.

5. In the written statement filed on behalf of the respondents, it is alleged that the petition is mala fide. The petitioner was present at the meetings of Directors held on 16th of August, 1952, and on 4th of July, 1957, and he presided at the meetings held on 30th of June, 1953, 10th of August, 1953, 28th of June, 1955, 26th of February, 1956, 22nd of October, 1956, and 24th of May, 1957. The allotments which are being objected to, were made not only without any objection being raised by the petitioner but he was said to be a consenting party to all the allotments. The allottees of A class shares had paid full consideration and their names were rightly entered on the register of members. Neither the Company nor any A class shareholder had raised any objection to the allotments in question. The allottees of A class shares in excess of 5000 had purchased the said shares without notice of any defect in them, and it could not, therefore, be said that their names had been entered without any sufficient cause. The petitioner is the only person who has now raised objections, although his holding is confined to B class shares. It is also said that the petitioner is actuated by malice, as at a general meeting held on 12th of October, 1957, under orders of this Court, the majority of the shareholders had voted against him and his party. It was finally argued that this Court, in equity, ought not to grant relief sought by the petitioner despite the irregularities having been committed as alleged by the petitioner.

6. On the above pleadings, the following issues were framed:—

1. Whether the names of the respondents are liable to be removed from the register of members?

2. Whether the petition is mala fide?

3. Whether the petitioner is estopped from challenging the allotment of shares to the respondents?

7. The petitioner produced five witnesses besides appearing himself. The sum and substance of the statements of his witnesses is, that a number of minors had been allotted shares which fact is not denied by the respondents. The petitioner Dewan Singh, as P.W 6, stated, that more shares than had been originally decided upon, had been allotted by the Directors, though no objections had been made to the allotment of such shares. He admitted in cross-examination that at most of the meetings of the shareholders and also of Directors he occupied the chair as the Chairman. Application of no shareholder who had applied for allotment of fresh shares had been rejected. He admitted that the shares that had been allotted to the minors were fully paid up.

8. I have held in another case between the same parties decided by me on 26th of December, 1957 (Dewan Singh v. Minerva Films Limited . 1958 28 Company Cases 191.), that there was nothing in law, preventing a minor from becoming a transferee of shares, and, that such a transaction was not void because of the minority of the transferees. There was no bar to a minor acquiring or holding shares in a joint stock company and the shares of the minors were fully paid up and they were subject to no obligation.

9. The main argument of the learned counsel for the petitioner is that the provisions of law contained in section 105-C of the Act of 1913 and in section 81 of the new Act have not been complied with, and that the Directors exceeded their powers in allotting more than 5000 shares. In reply, Mr. Tuli counsel for the respondents had not denied the above allegations that the allotments were in contravention of the provisions of law, but has contended, that the jurisdiction of this Court is discretionary and the petitioner is not entitled to the relief on equitable grounds. He has urged, that Dewan Singh petitioner has been the chairman at most of the meetings at which the shares in question had been allotted, and he was a party to those allotments. No shareholder has come for-word to say that he wanted to purchase the shares and would have done so if they had been offered to him. Dewan Singh's own holding entirely consists of B class shares, with respect to which there is no dispute. No case has been made out by Dewan Singh petitioner that he or anybody else has been prejudiced by the irregularity in question.

10. Section 155 of the Companies Act (No. 1 of 1956) confers upon the Court very wide powers in the matter of the rectification of the register of members, but the exercise of these powers is circumscribed by the judicial discretion of the Court. It is now well settled that a petitioner seeking rectification of the register of members is not entitled to an order ex debito justitiae. The jurisdiction under this provision and under similar provisions under the previous Acts is unlimited, but it has always been open to the Courts to allow or reject the petition, and in exercising the discretion they are guided by equitable principles.

11. In Bellerby v. Rowland & Marwood's Steamship Company, Limited . 1901 2 Ch. D. 265.. Kekewich, J. at page 273, observed—

“The power of rectifying the register given by the 35th section of the Act of 1862 is discretionary in this sense—that the Court properly can only exercise it if satisfied of the justice of the case, and on many applications the Court has declined to exercise this power on the ground that it would not be fair to do so, or, to put it more technically, that the applicant has not established any equity to disturb the existing state of things. And, in considering this, the Court has always had regard to the lapse of time, and to any facts and circumstances indicating acquiescence in the existing state of things by those on whose behalf the application is made to disturb it.”

12. Lord Macnaghten in Trevor v. Whitworth . 1887 L.R 12 A.C 409 at 440., at page 440, observed—

“After winding up, the Court has that power under sections 35 and 98 (of Companies Act of 1862). But it is a judicial power, as it has been called, and it is to be exercised by the Court, to use the language of section 35, ‘if satisfied of the justice of the case.’ Those are not mere idle words. They mean, I think, what they say.”

13. Lord Cairns, L.J, in Sichell's case . 1867 L.R 3 Ch. A. 119 122., said—

“In my opinion the reference in the 98th section to a rectification of the register cannot mean that the Court in winding up a company is to rectify the register ex mero motu suo; it must mean that the Court may exercise the judicial power conferred by the 35th section, having regard to who is the applicant, and to all the circumstances of the case, otherwise how could the Court, according to the language of the 35th section, be ‘satisfied of the justice of the case?’.”

14. In Re Kimberley North Block Diamond Mining Company5, Cotton, L.J, said—

“Two points have been raised on this appeal. The first is whether the court below had jurisdiction under section 35 to rectify the register; the second, whether, assuming there was jurisdiction, the order of the learned Judge was right. Section 35 of the Companies Act, 1862 imposes no limit on the jurisdiction thereby conferred on the Court, though there may be cases in which it is not desirable that it should be exercised.”

15. The words ‘if satisfied of the justice of the case’ which occur in section 35 of the Act of 1862 do not appear in section 116 of the English Companies Act, 1948, but by virtue of the word ‘may’ the Court still has the same discretion. Vide Palmer's Company Precedents, 17th Edition, Part I, p. 1085.

16. Section 155 of the Companies Act, 1956, corresponds to section 116 of the English Act of 1948 and to section 38 of the Indian Companies Act, 1913. Courts in India have also been of the view that it is entirely a matter of discretion for the Court to order rectification of the register, vide Ramesh Chandra Mitter v. Jogini Mohan Chatterji . 1920 I.L.R 47 Cal. 901 904.; and Luchmee Chand v. The Bengal Coal Company . 1882 I.L.R 8 Cal. 317., and G.M.H Ariff v. Suratee Bara Bazaar Company Limited . 55 I.C 751..

17. I do not think that the petitioner has made out a case for the exercise of judicial discretion in his favour. Acceptance of his contention, will result in upsetting the established state of affairs with no benefit to anybody, the Company or the members or even the petitioner; the latter being in minority, feels disgruntled as he no longer has a dominating voice in the affairs of the company. The respondents had paid the entire consideration and as such are holders of fully paid up shares. Rectification of the register would result in the removal of their names from the register, and they would be entitled to receive back what they paid when they purchased the shares.

18. The Company opposes the petition as it does not want to return the share money to the allottees of the shares, which probably has been utilised.

19. The allottees of the shares were contracting in good faith with the Company, and they were entitled to assume, that the acts of the Directors in making allotments of shares to them, were within the scope of their powers conferred upon them by the share-holders of the Company. They were not bound to inquire whether the acts of the Directors which, as in this case, related to internal management, had been properly and regularly performed. Even where the Directors exceed their powers or infringe the restrictions imposed upon them, the Company may be bound; for an outsider dealing with the Company is only required to see, that the transaction on the face of it is regular and consistent with the Articles. Strangers are justified in assuming that all matters of ‘indoor management’ have been done regularly. The doctrine of ‘indoor management’ was stated thus by Lord Hatherley in Mahony v. East Holyford Mining Company . 1875 L.R 7 H.L 869 893..

“It is a point of very great importance, that those who are concerned in joint stock companies, and those who deal with them, should be aware of what is essential to the due performance of their duties, both as customers or dealers with the company, and as persons forming the company, and dealing with the outside world respectively. On the one hand, it is settled by a series of decisions, * * * * that those who deal with joint stock companies are bound to take notice of that which I may call the external position of the company. Every joint stock company has its memorandum and articles of association; every joint stock company, or nearly every one, I imagine (unless it adopts the form provided by the statute, and that comes to the same thing) has its partnership deed under which it acts. Those articles of association and that partnership deed are open to all who are minded to have any dealings whatsoever with the company, and those who so deal with them must be affected with notice of all that is contained in those two documents.

20. After that, the company entering upon its business and dealing with persons external to it, is supposed on its part to have all those powers and authorities which, by its articles of association and by its deed, it appears to possess; and all that the directors do with reference to what I may call the indoor management of their own Concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association or by the deed. * * * But, after that, when there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, externally, are not to be affected by any irregularities which may take place in the internal management of the company. They are entitled to presume that of which only they can have knowledge, namely, the external acts, are rightly done, when those external acts purport to be performed in the mode in which they ought to be performed.”

21. In The Royal British Bank v. Turquand . 1855 L.J 24 Q.B 327., the plaintiffs had sued upon a bond under the seal of the company. It was alleged on behalf of the defendants that the directors had exceeded their authority in executing the bond. It was however, not shown that the plaintiffs were aware of it. It was held by Lord Campbell, C.J, that a mere excess of authority by the directors of itself, would not amount to a defence. Lord Campbell said—

“If the directors had exceeded their authority to the prejudice of the share-holders by executing the bond, and this had been known to the obligees, illegality, we think, would have been shown. The obligors in executing, and the obligees in accepting, the bond might be considered as combining together to injure the share-holders. * * * * But without the scienter, and without prejudice to the shareholders or any others whatsoever, illegality is not established against the obligees. If no illegality is shown as against the party with whom the directors contract under the seal of the company, excess of authority is a matter only between the directors and the shareholders * * * We think that the bond cannot be rendered illegal and void from any irregularity in the proceedings of the company nor even by an excess of authority, the plaintiffs having acted with good faith, and the shareholders not being prejudiced. The plaintiffs have bona fide advanced their money for the use of the company, giving credit to the representations of the directors that they had authority to execute the bond; and the money which they advanced, and which they now seek to recover, must be taken to have been applied in the business of the company and for the benefit of the shareholders.”

22. The above observations equally apply to the facts of this case.

23. The judgment of the Court of Queen's Bench was affirmed by the Court of Exchequer Chamber. Jervis, C.J, with whom the other Judges concurred, said—

“Parties dealing with the directors of these joint-stock companies are bound to read the deed or statute limiting the directors' authority, but they are not bound to do more. The plaintiffs, therefore, assuming them to have read this deed, would have found, not a prohibition to borrow but a permission to borrow on certain things being done. They have, in my opinion, a right to infer that the company which put forward their directors to issue a bond of this sort, have had such a meeting and such a resolution passed as were requisite to authorize the directors in so doing.”

(Vide, The Royal British Bank v. Turquand . 1856 L.J 25 Q.B 317.).

24. Lord Simonds in Morris v. Kanssen . 1946 A.C 459 474 H.L, said—

“My Lords, I think that this question admits of any easy answer. The so called rule in Turquand's case is, I think, correctly stated in Halsbury's Laws of England, 2nd ed., volume V, at page 423; ‘But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular’.”

(See Halsbury's Laws of England, 3rd Ed., Volume 6, page 430).

25. The doctrine of internal management which emerges from a consideration of the above and other authorities has been summarised thus—

“But even where the directors exceed their powers or infringe the restrictions imposed on them, the company may be bound; for an outsider dealing with the company is only bound to see that the transaction is apparently regular and consistent with the articles. He need not go into internal matters, e.g, ascertain that a particular resoultion has been passed, that a particular meeting has been duly held, or that particular formalities have been complied with: he is entitled to presume omnia rite acta; but if he knows of the irregularity the case is different.”

(See Palmer's Company Precedents, 16th Edition, Part I, page 562).

26. In P.V Damodara Reddi v. Indian National Agencies, Limited . A.I.R 1946 Mad. 35., the facts were some-what similar. A company consisted of six members all of whom were directors. In a directors' meeting, where five were present, two outsiders were allotted shares on their applications to that effect. The allotments were discovered to be in contravention of article 5 of the articles of association which required sanction of the general meeting. Applying the doctrine of internal management, it was held that the applicants for shares were entitled to assume that the directors were acting regularly and that the sanction of the company in general had in fact been obtained and therefore the allotments could not be avoided.

27. The rule in the case of Royal British Bank v. Turquand, is based on the principle that a person who transacts business with a company is not obliged to inquire whether matters of internal management have been complied with, if apparently the acts seem to be regular; and in such a case, he is entitled to assume that acts within its constitution and power had been duly performed. The intention of the rule is to protect particularly outsiders dealing with the company, who, in the absence of knowledge, are entitled to assume that omnia rite et solemniter esse acta.

28. In this case the transactions which have been impugned, took place some years ago. The petitioner, who was present and who was presumed to be aware of the restricted authority of the directors, had not chosen to bring that fact to the notice of the intending purchasers. It is not his case that they were aware that the directors were authorised to allot not more than 5,000 A class shares. After receiving payments to the full value of the shares, and after a passage of long time, it is not open to the company, least of all to Dewan Singh petitioner, to question the legality of a transaction to which he was a party. It has already been noticed, that the company is supporting the shareholders and opposing the petition. In this case, virtually Dewan Singh is asking this Court to overlook his ignorance and to condone his act of dereliction of duty, and to undo an irregularity to which he was a party, and in a matter, in which, the shareholders and the Company stand to gain and not to lose. He wants to disturb the established state of affairs, which, if his contention is maintained, will bring about chaos, and land the Company and the shareholders, in great difficulties. This application has not been moved out of altruistic considerations.

29. The shareholders and the Company maintain that this application has been brought out of malevolence; it certainly is not out of any benevolence.

30. The petition, to my mind, is mala fide. All the equities are against the granting of the petition. It is a case in which judicial discretion should be exercised in favour of status quo and the existing state of affairs ought not to be disturbed. I find this application to be devoid of merit, and accordingly, I dismiss it with costs.

Petition dismissed.