TMI Blog1963 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of this case we will make no order as to costs in both the suits throughout. - 52, 53 AND 54 OF 1950 - - - Dated:- 19-5-1953 - MEHR CHAND MAHAJAN, VIVIAN BOSE AND JAGANNADHADAS, JJ. G.S. Pathak, H.J. Umrigar, P.N. Mehta and S.P. Varma for the Appellant. M.C. Setalvad, J.B. Dadachanji and Rajinder Narain for the Respondent . JUDGMENT Mahajan, J . -These appeals, though they arise out of two different suits, No. 336 of 1945 and No. 786 of 1948, can be disposed of by a common judgment, as both these suits were instituted in effect to obtain the same relief. In July, 1944, a struggle commenced between the group of Sir Padampat Singhania and the group of Shri Meneklal Prem Chand for control of the management of the Bombay Life Assurance Co. Ltd. and there was a race for the acquisition of the shares of the company between the two groups. Sir Padampat, the appellant in Civil Appeal No. 54 of 1950, and respondent in the cross appeal No. 53 of 1950, on the 25th July, 1944, purchased through Shri P.N. Gupta, his Bombay agent, 667 shares of the company, 484 out of which belonged to Mr. Reddy, the appellant in C.A. No. 53 of 1950 and respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of new shares, the shareholder had to subscribe his name to it and return it to the company for allotment of the shares offered accompanied by a cheque for the amount that had to be paid for obtaining the shares. Form B was a renunciation form. In case a shareholder did not want all or any of the shares offered to be allotted to him, he was allowed to renounce his right in favour of some other person. On the 21st February, 1945, Reddy returned to the company form A duly filled in, requesting the company for allotment of 40 shares out of the new issue, which appertained to the 50 shares he still held in the company. In respect of the balance of 384 shares offered to him and which appertained to the 484 shares sold by him he said nothing. The renunciation form was retained by him. On the 23rd February, 1945, Messrs. J.L. Mehta and N.K. Bhartiya purporting to act on behalf of the purchasers of 484 shares wrote to Reddy asking him to forward to them the company's circular letter along with forms A and B as and when received by him, after appending to them his signatures, to enable them to apply for these shares either in Mr. Reddy's name or in the name of the transferees. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing our clients' name being entered on the register in respect of the shares which you have sold to them and that you are bound to comply with our clients' request. The Hindustan Commercial Bank Ltd. also wrote a letter to Mr. Reddy on the 1st of March 1945, which reads thus: - With reference to a circular dated the 28th February, 1945, issued by Messrs. Craigie Blunt and Caroe on behalf of their clients Mr. J.L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhania, Mr. N.K. Bhartiya and others, we have instructions to pay you in respect of all shares of the above named company in the new issue that you deliver to us at ₹ 100 per share, when such shares are allotted to you in exchange for the allotment letters or share scrips with a duly signed transfer deed. We have also instructions to pay you at ₹ 20 per fractional certificate delivered to us on or before the 7th March, 1945. Please note that we shall to the same if the shares and/or fractional certificates are delivered to us in terms of the circular mentioned above. You may send these to us through any bank and the exchange commission will also be paid by us. These letters indicate that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l certificates and the application relating thereto (unsigned and in blank) upon the plaintiff paying to him such sum as this Honourable Court may direct and/or upon the plaintiff giving such indemnity as this Hon'ble Court may deem proper; 2. That the defendant may be ordered upon receiving the certificates of the new shares to hand over the same as also the fractional certificates to the plaintiff together with transfer forms in blank duly signed by him. On the 7th December, 1945, the plaint was amended and an alternative relief for a decree for ₹ 7,29,600 by way of damages was included therein. It was averred in the plaint that upon the sale by the defendant of 484shares the plaintiff became the beneficial owner of those shares and the defendant became a trustee for him of all rights and benefits whatsoever appertaining or accruing to the said shares, that one of such rights was the right and opportunity to apply for shares forming part of the new issue, that the defendant was bound to do all lawful acts in relation to and for the purpose of securing the said benefits for the plaintiff and which the plaintiff might call upon him to do, on terms of the plain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same reliefs which were claimed in his own suit, by the receiver against the company with the leave of the court, namely, suit No. 786 of 1948. This suit was filed on the 8th March, 1948, after the lapse of about three years of the company's rejection of the receiver's application. It was explained in para. 14 of the plaint that the suit had not been filed earlier as the validity of the issue of the new shares was being challenged in suit No. 347 of 1945. The prayer in this suit was that the defendant company be ordered to allot to the plaintiff 384 shares mentioned in the application and to put his name on the share register of the company for the said shares. Both the suits were heard by Bhagwati J., who delivered one judgment in both of them and substantially granted the reliefs claimed in both the suits. It was held by the learned Judge that the 484 shares which Reddy had sold through Bhaidas Gulabdas had been purchased by Sir Padampat, that as trustee of these shares he as vendor was also a trustee of all property rights annexed to the shares and that it was the duty of Reddy, when called upon to do so by Sir Padampat on proper safeguard and indemnity for payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the beneficiary upon the trustee to carry out the trust and he had defaulted in complying with requisition. The suit was accordingly remanded to the trial Judge for assessing damages. The principal questions involved in the appeals are: ( a )Whether on the facts and circumstances of this case Reddy was under a legal obligation as a trustee to apply for and obtain on behalf of Sir Padampat 384 new shares which appertained to the sharei sold by Reddy to Singhania; ( b )whether the requisition made on Reddy by Messrs. Craigie Blunt Caroe by their letter dated 3rd March, 1945, was sufficient in law to call upon him to apply for shares of the new issue and whether Reddy committed default as a trustee in not complying with this requisition; ( c )whether the conduct of Sir Padampat in not lodging 484 shares for transfer to his name till April, 1945, disentitled him to the reliefs claimed by him; ( d )whether the receiver was not entitled to make the requisition and was not the proper person to apply for the new shares in his own name, and whether the company was under no obligation to allot to him the shares; ( e )whether the plaintiff was entitled to reliefs ( a ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor has none, the transferor must comply with all reasonable directions that the transferee may give and that in this situation if he becomes a trustee of dividends he is also a trustee of the right to vote because the right to vote is a right to property annexed to the shares and as such the beneficiary has a right to control the exercise by the trustee of the right to vote. The learned Attorney-General did not combat the view expressed by Pratt J. but he objected to any further extension of the rule therein laid down. The question that needs our decision is bare of authority. The English law can furnish no guidance for its solution as there is no provision corresponding to section 105C in the English Companies Act. In India this is the first known occasion when a situation like this has arisen between a transferor and transferee of shares on a stock exchange transaction. The proposition therefore that has been canvassed in this case has to be decided on first impressions and on general principles of equity. Section 105C, the enactment of which has conferred certain rights and privileges on a shareholder which he did not possess before its enactment, is in these terms: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in its train liabilities and obligations. It confers the right on a shareholder to purchase shares in the new issue of capital in proportion to his existing shareholding, but in order to obtain that right he has to fulfil certain obligations and he has to incur certain liabilities. In the first instance, if he decides to invest his money in the further capital issued, he has to make an application to the company for the allotment of shares so offered and with his application he has to remit to the company the amount of the application money. That having been done, if the shares offered are only partly paid up, as they were in this case, he incurs on allotment the further liability of meeting any future calls on these shares. Can it be said in this situation that a transferor of a certain number of shares, being the legal owner of those shares and the beneficial interest of which vests in the cestui que trust, is liable for all the payments and obligations attaching to the new issue of shares and is bound to act in both respects for the benefit of the cestui que trust; in other words, that he is under a duty, when so instructed by his beneficiary, to make an application for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as an accretion to the estate and the son was entitled to retain the lease and that he had not abused his position in any way. This case therefore is no authority for the proposition before us, and the Court of Appeal did not say anything on the point. Buckley J. however in the course of his judgment observed as follows: - It is, of course, very familiar law that if a trustee obtains a renewal of a lease of property vested in him as trustee, whether by virtue of a right of renewal or not, he must hold the new lease for the benefit of his cestui que trust. The leading authority upon that is Keech v. Sanford. The principle is that the trustee owes it to his cestui que trust to obtain a renewal, if he can do so, on beneficial terms, and that the court will not allow him to obtain a renewal upon beneficial terms for himself when his duty is to get it for his cestui que trust. Reliance was also placed on certain observations of Neville J. in Jones v. Evans. That was a case where the capital of a company was divided into 10,000 shares of 10 each, of which 3,728 only had been issued and were fully paid up. The company was very prosperous and the market value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be entitled to insist upon the trustees taking the greatest benefit which the company offered. Therefore, in the case of trustees it seems to me that, although as between the company and them there may be a right to elect, between them and their cestui que trust there is no such right, and they must take the dividend in what I will call the capitalized form. On the basis of these authorities, Mr. Pathak contended that his client a6 a beneficiary was entitled to the fullest benefit conferred on the old shares by reason of the new offer and that he was entitled to compel the trustee to act in a manner which would enable him to obtain the benefit. In our opinion the observations made in these cases cited above must be limited to the facts of those cases. We are here dealing with a trustee with peculiar duties and peculiar liabilities, and it is a fallacy to suppose that every trustee has the same duties and liabilities. In none of the cases cited by Mr. Pathak was there any question of the trustees incurring any personal pecuniary liability. In the case of Biss v. Biss, the question was of obtaining the benefit of renewal of a lease, and the trustee had to incur no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of equity which obliges a person in the position of a constructive trustee in respect of X number of shares to also become a constructive trustee in respect of an additional, say, Y number of shares and thus become a trustee of X plus Y shares. Such a burden is not a necessary consequence or an incident of the original transaction of purchase and sale of shares or of the legal relationship of trustee and cestui que trust thus created. That relationship arises by reason of the circumstance that till the name of the transferee is brought on the register of shareholders in order to bring about a fair dealing between the transferor and the transferee equity clothes the transferor with the status of a constructive trustee and this obliges him to transfer all the benefits of property rights annexed to the sold shares of the cestui que trust. That principle of equity cannot be extended to cases where the transferee has not taken active steps to get his name registered as a member on the register of the company with due diligence and in the meantime certain other privileges or opportunities arise for purchase of new shares in consequence of the ownership of the shares already acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he may have thus to suffer by his not having made an application in time for getting himself registered on the register of members and for not having taken proper steps in law for getting his transfer recognised by the company if the request made by him has already been refused by the company. The equitable principle on the basis of which the legal relationship between the transferor and the transferee arises cannot be worked in a manner so as to prejudice the position of the constructive trustee and make him an accounting party in respect of all privileges or fresh offers that may be annexed to the shares sold for all time to come. Mr. Pathak urged that his client was prepared not only to pay the application money and the allotment money to the trustee but was further prepared to indemnify him against any future calls on those shares. It has to be remembered that even the original 484 shares sold by Reddy to Sir Padampat were partly paid up shares and Reddy was liable to pay the amount of any call made on those shares, subject to being indemnified when the time arose by Sir Padampat for the amount paid on those shares. If Mr. Pathak's contention is accepted, then Reddy will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, both the suits must fail. If Sir Padampat had no right to call upon the trustee to buy the newly offered shares in his own name for his benefit, a fortiori, the receiver appointed by the court had also no such right, and on this short ground the claim put forward in both the suits has to be negatived. We are further of the opinion that even if it was held that Reddy was under a duty to sign the application form and the renunciation form and send them over to Sir Padampat to enable the latter to obtain the newly offered shares in Reddy's name, the requisition that was made on his behalf directing the trustee to purchase these shares and to exercise the option was ineffective and inadequate. On the basis of that requisition, it was not possible for the trustee to carry out the mandate of the cestui que trust, and, that being so, on this ground also, the plaintiff was disentitled to relief in the two suits. The first requisition made by Messrs. J.L. Mehta and N.K. Bhartiya on the 23rd February, 1945, was made on their own behalf only and not on behalf of Sir Padampat. It called upon Mr. Reddy to forward the circular letter with his signatures on the forms annexed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify you against each and every liability that you incur by applying for these partly paid up shares was in our opinion wholly inadequate. The matter may have been different if along with this requisition a bank guarantee safeguarding the trustee in regard to his future liabilities had been sent to him as well as a cheque for the money required to be paid at the time of making the application. We are also of the opinion that in view of the allegations made in the plaint and in view of the fact that all the share transfer forms were subsequently signed by Sir Padampat Singhania alone, this requisition cannot be said to have been made on behalf of the plaintiff and on the basis of it he cannot be heard to say that he made a proper requisition on the trustee which the latter failed to carry out and was therefore liable to him in damages for not carrying out his directions. It is significant that no mention is made in the plaint as to how the names of the persons contained in the letter of the 28th February came to be mentioned therein, and how the requisition was made on their behalf when they had never signed the blank transfer forms. It may also be observed that it was left to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive nature, and were in law ineffective, then the trustee could not be mulcted in damages for not obeying them, even if his attitude was hot what it should have been. The plaintiff is not entitled to damages, unless and until he proves that he made a proper and effective demand on the trustee and this the trustee failed to carry out. On this ground also, both the suits are bound to fail. Mr. Pathak argued that the plaintiff was entitled to reliefs ( a ) and ( b ) both in his suit as well as in the receiver's suit and that the receiver's suit was wrongly dismissed by the High Court. We are unable to agree. In our opinion, the High Court rightly held that the receiver appointed in the suit of Sir Padampat could not acquire the newly issued shares in his name. That privilege was conferred by section 105-C only on a person whose name was on the register of members. The receiver's name admittedly was not in the register and the company was not bound to entertain that application. Mr. Pathak argued that that may be so but the receiver was not making an application in his individual right but he had been armed by the court with power to apply in the right of the defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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