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TMI Blog1965 (4) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... their nominees would subscribe for a large number of shares. Narayandas Shriram Somani was one of the directors of the company. Ramnath Shriram Somani is his brother. They carried on business in the name of Ramkisan Ramratan Somani. Jivanbai is the mother of Narayandas and Ramnath, Goverjabai is the wife of Narayandas and Kamalabai is the wife of Ramnath. Narayandas decided to subscribe for 2,000 shares in the names of the three ladies. At a meeting held on May 25, 1946, the board of directors of the company allotted 500 shares to Goverjabai, 500 shares to Kamalabai and 1,000 shares to Jivanbai against three separate applications for shares signed by them. The applications were accompanied by three separate hundis dated May 25, 1946, for Rs. 25,000, Rs. 12,500 and Rs. 12,500 drawn by Narayandas in favour of the company. The meeting of May 25, 1946, was attended by three directors, Murlidhar Loya, D. R. Nayak and Narayandas. At that meeting, the directors also sanctioned a loan of Rs. 60,000 to Ramnath. On May 28, 1946, Ramnath obtained from the company the loan of Rs. 60,000 against his promissory note, and a separate loan account No. 1/18 was opened in his name in the books of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1954 in the Court of the Civil Judge, Senior Division of Poona, against Ramkisan Ramratan Somani and Ramnath for the recovery of Rs. 22,964-13-0 due from them in respect of their loan account and the promissory note, dated January 6, 1951. The suit was dismissed by the trial court on April 23, 1955, but in First Appeal No. 819 of 1955 preferred by the company, the High Court decreed the suit. Civil Appeal No. 801 of 1962 arises out of this claim. On April 24, 1954, the company instituted Special Suit No. 78 of 1954, in the Court of the Civil Judge, Senior Division, Poona, against Narayandas for the recovery of Rs. 1,09,099-14-0 due from him in respect of the loan account No. 6/184 and the promissory note dated December 27, 1951. On April 23, 1955, the trial court dismissed the suit, but in First Appeal No. 820 of 1955 preferred by the company, the High Court decreed the suit. Civil Appeal No. 802 of 1962 arises out of this claim. On behalf of the appellants, Mr. Purushottam Tricamdas contended that the allotment of the 2,000 shares and the several loans in the names of Ramnath and Narayandas were not genuine transactions, and that the parties did not intend that the allottees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten undertakings dated December 27, 1951, for the purchase of 800 and 500 shares respectively. By letter, dated June 28, 1954, Narayandas called upon Parulekar to fulfil his undertaking for the purchase of 500 shares. All these circumstances prove that the allotment of the 2,000 shares was intended to be operative and the allottees were intended to be the holders of the shares. Ramnath out of his own funds paid several sums of money towards discharge of his indebtedness in the loan accounts. He paid Rs. 750-4-0 in the overdraft account towards interest on December 12, 1946, and Rs. 1,484-7-0 in the loan account No. 1/18 on April 21, 1947, and we are not satisfied that these sums were paid out of commission earned by Narayandas from the company. Similarly, on December 29, 1951, he paid Rs. 4,198-8-0 in the loan account No. 9 and on January 4, 1954, Rs. 100 was paid by Ramkisan, Ramratan and Ramnath in their loan account. The loan accounts were secured by promissory notes. Moreover, the loan account of Narayandas was secured by a trust receipt and a letter of pledge. Even on March 3, 1953, Narayandas executed a letter in favour of the company declaring that he held as security a sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lants are not liable to repay the same. Now, a director of a company stands in a fiduciary position towards the company and is bound to protect its interest. For long, it has been an established rule of equity that he must not place himself in a position in which his personal interest conflicts with his duty, and unless authorised by the company's articles, he must not vote as a director on any contract or arrangement in which he is directly or indirectly interested. Standard articles give effect to this rule of equity. See Palmer's Company Precedents, 17th edition, Part I, page 553. If he votes in such a case, his vote would not be counted, and his presence would not count towards the quorum, that is to say, the minimum number fixed for the transaction of business by a board meeting, for a quorum must be a disinterested quorum, and must be comprised of directors who are entitled to vote on the particular matter before the meeting. Sec Yuill v. Greymouth Point Elizabeth Railway and Coal Company Limted [1904] 1 Ch 32. If an interested director votes and without his vote being counted there is no quorum, the meeting is irregular, and the contract sanctioned at the meeting is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was entitled to avoid the allotment. Instead of avoiding the allotment, the company has chosen to affirm it. The allotment is, therefore, valid and binding on the allottees. Moreover, Narayandas cannot be heard to say that there was no valid allotment of the shares. For the purpose of satisfying the requirement of section 277(1) it was necessary to allot the shares, and he allowed the company to commence business on the footing that the shares had been subscribed. He was a director of the company and a party to the resolution allotting the shares. He dealt with the shares on the footing that the allottees were the holders of the shares with a clear knowledge of the circumstances on which he might have founded his present objection. He cannot now be heard to say that he was interested in the allotment and could not vote. Like the director in York Tramways Company v. Willows [1882] 8 QBD 685, he is now estopped from contending that the allotment is invalid. For all these reasons, we hold that the allotment is valid, and there is no failure of consideration. In the plaint in Suit No. 78 of 1954, the company pleaded that on December 27, 1951, Narayandas took from it on loan a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) having regard to the decision in In re V.G.M. Holdings Ltd., [1942] 12 Comp Cas 254 the word "purchase" in section 54A(2) did not include the acquisition of shares by subscription or allotment, and, in this case, the loans were given in connection with the acquisition by Narayandas or his nominees of shares by subscription or allotment and not in connection with acquisition of shares by purchase, and consequently, section 54A(2) had no application. Now, it appears that in paragraph 15 of his written statement Narayandas pleaded that the advance of loans to him in connection with the purchase of shares was illegal, but no issue was raised on the question whether the loans were financial assistance in connection with the purchase of the shares and were in contravention of section 54A(2). There is passing reference to this contention in paragraph 15 of the judgment of the trial Court, but there is no reference to it in the judgment of the High Court. We find also that this contention finds no place in the statement of the case filed on behalf of the appellants. Mr. Purushottam Tricamdas relied on ground No. 12 of the appellants' statement of case, but we think that this ground i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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