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TMI Blog1963 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... e company, 484 out of which belonged to Mr. Reddy, the appellant in C.A. No. 53 of 1950 and respondent in Civil Appeal No. 54 of 1950. This deal was made on his behalf by a firm of share and stock brokers Bhaidas Gulabdas. The shares were sold at the rate of Rs. 300 per share. On the 29th July Gupta executed a receipt in favour of Bhaidas Gulabdas acknowledging the receipt of these shares, while Bhaidas Gulabdas as constituted attorneys of Mr. Reddy executed five blank transfer forms in respect of the 484 shares sold by them- four for 100 shares each, and one for 84 shares. It is alleged that these transfer forms were ultimately filled in the name of Sir Padampat Singhania. Sir Padampat, however, made no application to the company for registration of his name in the register of shareholders till the 11th April, 1945. On an application being made, the company declined to register the shares in his name and intimated to him their refusal to do so on the 8th May, 1945. On the 8th January, 1945, the company, in order to combat the move of Sir Padampat to acquire control of its management, made an application under rule 94-A of the Defence of India Rules for sanction for the issue of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares either in Mr. Reddy's name or in the name of the transferees. He was told that he was to hold the shares offered when acquired as a trustee for them. On the 28th February, 1945, Messrs. Craigie Blunt & Caroe, a firm of solicitors, also acting on behalf of the purchasers, wrote to Mr. Reddy a letter to a similar effect. This was prefaced with the remark that the offer of fresh shares by the company was illegal. Without prejudice to that contention, Mr. Reddy was called upon to apply for the newly offered shares and obtain them on their behalf or to send them the application form (A) and the renunciation form (B) and the fractional certificate to enable them to obtain the new shares offered which appertained to the 484 shares sold by him. The relevant part of this letter reads thus: - "We are instructed by our clients, the parties to whom you sold these shares, Mr. J.L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhnnia, Mr. N.K. Bhartiya and others to call upon you to apply for the additional shares and fractional certificates now issued to which you have become entitled, and to let us know when you have done so. When allotted to you, you will hold these shares on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by us." These letters indicate that the persons named therein with some undisclosed persons were the purchasers of the shares sold by Reddy and they were the equitable owners of the shares, in spite of the original bargain having been made by Sir Padampat. It was not disclosed in these letters that the persons named therein were mere nominees or benamidars of Sir Padampat. One fact however is beyond dispute that the names of these persons were not entered in the blank transfer forms in the column of transferee, and eventually it was the name of Sir Padampat alone that was entered therein. Mr. Reddy replied to all these communications received by him on the 3rd March, 1945, in the following terms: - "With reference to all these communications, I have to state that nearly eight months have elapsed since I sold the shares and the shares are not as yet transferred to the names of the purchasers. I have no objection to give the renunciation forms, duly signed in favour of the real and true purchasers. As regards the requisition made by you in paras 4 and 5 of the circular letter of 28th February, 1945,1 fail to understand as to how I am under an obligation to comply with it. I am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the plaintiff indemnifying him against all the consequences thereof, and that the plaintiff was ready and willing to do the same. It was further alleged that unless the plaintiff's rights were safeguarded by the 10th March, 1945, which was the last day for making application for the shares, he will be irretrievably prejudiced. An application was made for the appointment of a receiver of the application form and letter of renunciation and of the rights of Reddy in the new issue of shares. On the same day Bhagwati J. made an order under Order XL, rule 1, of the Civil Procedure Code, appointing the court receiver, interim receiver of the application form and letter of renunciation and of the rights, if any, of the defendant in the 384 shares of the Bombay Life Assurance Co. Ltd. The receiver was given power to exercise all the rights of the defendant in' respect of the said shares on the plaintiff giving the usual undertakings. On the 10th March, 1945, the receiver made a request to the company for the allotment to him of 384 shares of the new issue appertaining to the 484 shares standing in Reddy's name in the company register and sold by him on the 25th July, 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment, to transfer to Sir Padampat all the benefits which he derived by the issue of the new shares by virtue of his being their legal owner. It was further held that a proper requisition had been made by the beneficial owner on the trustee to obtain for him these shares and that the trustee defaulted in his duty in not complying with that requisition and that the company was also in error in refusing the application of the court receiver for registration of his name as a shareholder in respect of the new shares on the ground that Reddy having applied for 40 shares, his right to obtain the remaining shares had lapsed. It was argued on behalf of the company that the sanction given by the Examiner of Capital Issues having lapsed, no relief could be given against the company and it could not be ordered to allot shares to the plaintiff as there was no available capital which could be issued. Bhagwati J., however took the view that the plaintiff could not be deprived of his rights by reason of this circumstance. In the result he ordered the company to comply with the order and allot within three months 384 shares to the plaintiff after obtaining a fresh sanction for the same from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the altered situation of the company. It has been held in the courts below that Sir Padampat became on the 28th July, 1944, the sole beneficial owner of 484 shares sold by Reddy, the legal title to which was vested in him. That having been found, the relation of trustee and cestui que trust was thereby established between them. All that is necessary to establish such a relationship is to prove that the legal title was in the plaintiff and the equitable title in the defendant. The fact that such a relationship qua the 484 shares sold by Reddy existed between the parties to the suit was not disputed by the learned Attorney-General appearing for Reddy, but he contested the view of the High Court that the cestui que trust could not on any principle of equity or law call upon the trustee to bear his burdens and ask him to obtain on his behalf new shares of the company or make further investments in its capital which would involve in its train new obligations and fresh burdens. As observed by Lord Lindley in Hardoon v. Belilios, the plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can show som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal of the company by the issue of further shares such shares shall be offered to the members in proportion to the existing shares held by each member and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting a time within which the offer if not accepted, will be deemed to be declined; and after the expiration of such time, or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the directors may dispose of the same in such manner as they think most beneficial to the company." This section limits the power of the directors to dispose of the further issue of capital in any manner that they may think most beneficial to the company. They are under a mandate to offer these shares in the first instance to the members in proportion to the existing shares held by them. In other words, a member becomes entitled under the provisions of this section by reason of his being the holder of a certain number of shares in the company, to obtain shares in the further issue of capital as of right. This is not a fruit of stock ownership, in the nature of a profit, nor does it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 105-C and obtain them in his name by making the necessary payments and by incurring the consequential obligations. Plainly put, the question may be posed thus: whether the obligation of a transferor of a certain number of shares as a trustee extends also in respect of the right to acquire further shares issued by the company on behalf of his cestui que trust by putting himself on the register of shareholders in respect of the new shares regarding which he may have to incur fresh liabilities and obligations which were not existing at the time when he made the transfer. Mr. Pathak contended that as the right to obtain new shares was inseparable from the ownership of the old stock, the transferor of the old stock held the option to buy new stock in like manner as he held the original stock, and if qua the old stock he was a trustee for the beneficial owner, in the like manner he was a trustee also of the right or the option to buy new shares and was bound to exercise it for the benefit of the cestui que trust and according to his directions, and was bound to obtain new shares in his own name for the ceslui que trust. Reliance was placed for this proposition on certain observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors proposed a scheme for distribution of the reserve fund representing accumulated undivided profits amongst the shareholders, so that every shareholder was to get a bonus of one new fully paid up share of GBP 10 for every existing share held by him. Accordingly resolutions were passed by the company empowering the directors to declare a bonus dividend out of the reserve fund and sanctioning the distribution of a bonus dividend of GBP 10 per share out of the reserve fund and authorising the further issue of 3,728 shares of GBP 10 each out of the unissued capital of the company to be allotted pro rata amongst the existing shareholders and directing that such new shares be paid up in full forthwith. The directors sent a circular letter to every shareholder with a warrant for the bonus dividend on his shares, informing him of an allotment to him of his proportion of the new shares and giving him an option to accept or refuse the allotment, and stating that if he accepted the allotment he was to indorse and return the dividend warrant to the company to be applied in payment of the new shares. Trustees of a testator's will held 200 shares of the company, and on receipt of the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emises and the renewal of the lease was obviously for the benefit of the lessee and carried with it no new or onerous obligations. In Jones v. Evans, the trustee had to incur no liability of any kind whatsoever. The only question there was whether he should exercise the option of receiving the dividend or of converting the bonus into the shape of capital. It is part of the general law of trust that a trustee must act in a manner most beneficial to the cestui que trust and he can retain no benefit to himself from the corpus of the trust estate or from anything that accrues to that estate subsequently. None of these cases deal with a situation like the one that has arisen in the present case. If the newly offered shares were fully paid up and no liability was attached to them, there is no question that the trustee would have been bound to obtain them for the benefit of the cestui que trust. The cases referred to therefore go only so far and no further. We see no principle of equity or of general law which obliges a trustee to buy new shares in his own name for the benefit of the cestui que trust and when in so doing he has to bear a heavier pecuniary burden than he undertook to bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epared to put his name on the register of members for any additional shares, particularly when the acquisition of those shares involves him in further liabilities. In our judgment therefore neither on principle nor on authority can it be held that Mr. Reddy could be forced to acquire in his own name 384 shares which appertain to the 484 shares sold by him to Sir Padampat. All that Sir Padampat could call upon Reddy to do was to sign the renunciation form in his favour of the shares offered out of the new issue appertaining to the old shares and after having obtained the renunciation form, to make an application in his own name for the purchase of those shares. This view can be sustained on the intelligible principle that the transferor as a constructive trustee in respect of the shares sold by him cannot retain any benefit himself of the new issue which is annexed to the shares sold by him and if any benefit arises out of that offer made under section 105-C, that benefit must go to the beneficiary, but more than that the beneficiary is not entitled to call upon the trustee to do. Mr. Pathak reiterated the argument that had been accepted by the High Court that if the only duty of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It is well settled that a trustee is not entitled to claim indemnity till he suffers an injury for which he has to be indemnified. But the fact remains that the liability to pay calls is for the time being his liability and not that of the cestui que trust. Once his name is entered on the register of shareholders, a mere right to claim indemnity may, in a case like the present, when the time to claim it arises, prove to be merely illusory. The shares may go down in value, the company may go in liquidation, or the financial position of the equitable owner of the shares may deteriorate. In all these situations, the right of the trustee to be indemnified in respect of fresh liabilities accruing on the shares would be as already stated, merely chimerical, and the trustee would have to incur in those situations personal pecuniary liability on account of the shares. Therefore, the contention that the trustee is bound to buy the new shares in his own name for the benefit of the cestui que trust is not well founded, because it involves in its train pecuniary liabilities which the trustee may have to incur personally and which he is not bound to undertake under any system of law for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. This requisition was not considered adequate by the High Court and was left out of consideration. Mr. Pathak also did not place much reliance upon it. Both the courts below and Mr. Pathak however placed reliance on the requisition made on the 28th February, 1945, in the letter of Messrs. Craigie, Blunt & Caroe cited in the earlier part of this judgment. In that letter, it was stated as follows: - "We are instructed by our clients, the parties to whom you sold these shares, Mr. J.L. Mehta, Sir Padampat Singhania, Lala kailashpat Singhania, Mr. N.K. Bhartiya and others to call upon you to apply for the additional shares and fractional certificates now issued . . . . ." This requisition therefore purports to have been made on behalf of 4 disclosed beneficiaries and some other undisclosed cestitis que trust. It was not asserted in this letter that the real purchaser of the shares was Sir Padampat Singhania and the other persons mentioned therein were merely his agents or benamidars. Moreover, it did not disclose the names of all the beneficiaries. Legitimately, therefore, in his letter of the 3rd March, 1945, Mr. Reddy said that he was ready and willing to sign the renunciation f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e could not be asked to invest his own money for the benefit of the cestui que trust. The trustee was under no obligation to find a heavy sum of money and to invest it on the purchase of new shares for the benefit of the cestui que trust, and to recover the amount after having invested it in them. What the letter of the solicitors in fact intended to convey to Reddy was: "Pay yourself and obtain the shares, or else, sign a blank cheque and send it to us and then we will see to what extent we are going to make you liable by putting your name on the register of shareholders." The conclusion of the High Court on this point has been stated in these terms: - "Sir Jamshedji relies on the attitude taken up by his client and has contended that he took up the right attitude by enquiring as to who the real beneficiary was and to be satisfied by the production of the relative transfer forms. Now, if this had been the only attitude of Mr. Reddy much might have been said in his favour. But unfortunately in this very letter Reddy clearly declined any liability or obligation upon him to apply for these shares on behalf of his beneficiary. Whether he knew that his purchaser was Sir Padampat or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Sir Padampat against Reddy and that being so, no order could be issued to the company in that suit to recognize the receiver as a shareholder in place of Reddy. The matter might have been different if the company was a party to the suit and was ordered by the court to register the receiver's name in place of Reddy's for the 484 shares purchased by Sir Padampat and was also ordered to issue new shares in the name of the receiver. It is not necessary for us to offer any final opinion on the question whether the court would have been within its right to direct his name to be included in the register, even if the company was impleaded in the suit filed by, Sir Padampat against Reddy. We are however quite clear that the company not having been impleaded in that suit, it was not bound to issue the new shares in the name of a person whose name was not already in the register of members even if he represented a person whose name was already in the register. The High Court was thus right in dismissing the receiver's suit. We are also of the opinion that the appellate Bench of the High Court was also right when it declined to grant reliefs (a) and (b) of the plaint to Sir Pad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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