TMI Blog1955 (10) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... apital of the Company was about ₹ 70,000; but most of the shares were then held by Sri M.Ct. Muthiah Chettiar. It therefore appeared that the Company was dominated by that gentleman and was an one man's show. Though the share capital of the Company was comparatively small, the assets and the funds of the Company amounted to about 20 lakhs. Naturally, therefore, an agitation was started by the policy-holders to rescue the Company from the control of that one gentleman and to devise ways and means for protecting their interests and safeguarding the monies of the Company. The Company had to yield to the agitation and the pressure of the shareholders, with the result that with effect from 1st January, 1927, a separate fund called the Policy-holders' Trust-fund was created; and the necessary amendments to the Articles of Association were carried out by incorporating therein Articles no to 125. 3. Article 110 provided that the Company shall with effect from 1st January, 1927, maintain a separate account called the policy-holders' trust-account, and the fund relating to the said account be called Policy-holders' Trust-fund. That fund was to be kept distinct and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to be executed in May, 1928, between the Company, its then directors and the Official Trustee, now represented by defendants 1 to 8. It recited that it was executed in accordance with the said articles, namely, with the special object of protecting and safeguarding the interests of the policy-holders of the Company, and placing such protection and safeguard on a permanent basis, by declaring that the trust-fund created thereunder was to constitute and remain the security of the policy-holders of the Company in accordance with Articles no to 125, which dealt with and defined the objects and purposes and the scope of the trust-fund. On that date, there was a sum of over 25 lakhs available for the fund, and it was declared that sum together with such further sums or assets as may be due or payable to the trust-fund shall form and constitute the policy-holders' trust-fund and remain the security of the policy-holders of the Company in the manner laid down in Articles 111 and 118. It was further declared that the sum or any part thereof shall not be expended or appropriated or applied towards any purpose except such as are specifically provided for and authorised by Articles 116, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costly building was a speculative venture and not a sound business proposition or a safe investment, and that the proposed building was an extravagant and a colossal waste (vide paragraphs 21 and 22 of the plaint). 6. It will be remembered that under Article 116(a)(1)(i), the directors were authorised (by a unanimous resolution) to invest the trust-fund in the purchase of house-property . Apparently, the directors were confronted with the problem whether the acquisition of a site and putting up a building thereon would amount to a purchase of house-property within the meaning of that article; and so, at an extraordinary meeting of the shareholders held even in 1935, that article was amended, and for the words house-property , the following words were substituted, '' acquisition of houses, buildings or tenements or lands suitable for building purpose, and in the construction, erection, improvement, alteration of equipment of houses, buildings, tenements, or other structures of whatsoever description . To give effect to that alteration, a supplemental trust-deed, Exhibit B-5 was brought into existence, so as to carry out the necessary amendment into the original tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those articles must be construed and understood as forming part of the original trust-deed. That being so, it seems to us that the amendment to the Articles of Association will not mean an automatic amendment of the trust deed in order to enable the Company to execute additional trust-deeds, incorporating such amendments into the original trust-deed. As we said, in case it is held that the policy-holders are beneficiaries of the trust-fund, no amendment to the original trust-deed would be permissible without their concurrence. 8. A great deal of the arguments on both sides in this appeal was therefore directed to the question, whether the policy-holders were constituted the beneficiaries of the trust-fund under the original trust-deed. It was common ground that there was a trust created in respect of that fund. The learned Counsel for the plaintiffs claimed that under the trust created in respect of the fund, the policy-holders were the main beneficiaries. He reminded us of the circumstances which forced the Company to execute the trust-deed. He referred to Exhibit A-3, the extract from the statement of the directors of the Company, and to Exhibit A-4, the speech of Sri Muthiah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to challenge that finding in further appeal, and the policy-holders will get an undue advantage and (2) if on the other hand, we hold that the policy-holders are not the beneficiaries, we are afraid that such a decision would seriously affect the reputation and the future business of the Company; and so, in the larger interests of the Company itself, we should refrain from giving expression to our opinion on this question, if we could possibly help it. One thing is clear to us. Here is a solemn arrangement entered into as early as 1928 and defining in meticulous detail the rights and duties of the Company in regard to this Fund as well as the rights of the policy-holders. Though the policy-holders were not eo nomine parties to that arrangement, it was certainly brought about as a result of their agitation and for their security. Possibly it was the original intention that the terms thereof should be unalterable, and not that they should be whittled down to nothing by a process of unilateral amendments in course of time. It is therefore our earnest desire and hope that in the interests of both, the terms of the original trust-deed should be scrupulously adhered to on both sides. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w well-established that, though the articles constitute a contract between the Company and a member in respect of his rights as a member, the articles do not constitute a contract between the Company and third persons, and a third person who purports to have rights against the Company would be precluded from relying on the articles as the basis of his claim and must prove a special contract. This question was the subject of an authoritative pronouncement of the House of Lords in Southern Foundries, Ltd. v. Shirlaw L.R. 1940 A.C. 701. Reference may also be made to Browne v. La Trinidad (1887) L.R. 37 Ch. Div. 1, where the proposition was affirmed that the articles are merely a contract between the shareholders inter se, and that, though a person, in whose favour a stipulation is made in the articles, may afterwards have shares allotted to him, he is not, by that means, in the same position as if he had entered into a contract with the Company. Similarly, in Baily v. British Equitable Assurance Co. (1904) 1 Ch. 374 at 384-385, it was pointed out that the rights of a shareholder in respect of his shares, except so far as they may be protected by the memorandum of association or by sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al process which will not affect the land possessed by the office at the time of the contract, although it may, in its final result, affect such laud as the office may have at the time when the process is executed. Ordinarily, the grantee has nothing but a right of action from the date of the contract until actual payment. 11. It follows that neither the contract embodied in the policy nor the Articles of Association can avail the plaintiffs in the present suit. 12. Mr. Raghavachariar, appearing for the second plaintiff contended that even apart from the terms of the trust-deed, the very constitution of the fund implied a constructive fiduciary ownership for the benefit of the policy-holders within the definition of trust in Section 3 of the Specific Relief Act, and so, under Section 54(a) of that Act, the Court can grant an injunction where the defendant threatens to invade the plaintiff's right. But that section which merely defines that a trust includes every species of express, implied or constructive fiduciary ownership, does not take the contentions of the policy-holders any further. There appears to be no authority for the contention that even apart from the trust- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be accepted on the authority of the above case that an insurance company may be deemed to be a trustee of the policy monies even where the form of the policy is a charge upon the funds of the Company without any direct promise to pay. An insurance company is in the position of an ordinary debtor, and must be treated accordingly. 15. It therefore seems to us to be clear on the authorities that apart from the trust-deed, it is not open to the policy-holders to take advantage of anything contained in the Articles of Association of the Company, as giving them any beneficial interest l:o other claim to the trust-fund; nor is it open to them to contend that the Company is in the position of a trustee so far as the fund is concerned. 16. The learned Counsel for the plaintiff further contended that even before their claim matured and became payable, they could obtain an injunction to prevent the funds from being wasted. They relied on the following observation in Halsbury's Laws of England, Volume 18, second edition, page 581, paragraph 944: Assurance companies registered with unlimited liability generally grant polices and annuities on the condition that the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of a particular fund, he could in equity obtain protection to prevent that fund from being dissipated so as to defeat his rights. 20. It may be that the policy-holders have a right to intervene if the Company dissipates or wastes or diverts the funds, out of which they expected to be paid the amounts assured to them on the maturity of their policies. But, on the facts of the present case, we are clearly of opinion that there is no dissipation or wastage of the trust fund. We consider that it would not be correct to characterise the proposed construction of the building as a waste or dissipation. That appears to us to be a very substantial investment. In this connection, we have gone through the evidence of the first plaintiff, and we are not prepared to accept it as proof that this venture is either speculative or unremunerative. It is possible that there are better investments. But, what pattern the investment should take is a matter for the directors to decide, so long as they do not exceed their powers in the matter of investments. There are over eight crores of rupees in the fund, and the proposed expenditure constitutes a small fraction. It is not the case of the plainti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be amended by the Company without the consent of the beneficiaries, by merely amending the Articles of Association. The parties will then be governed by the terms of the original trust-deed of 1928. We saw that under Article 116(a)(1)(i), the directors are authorised to invest the trust-fund by an unanimous resolution amongst other investments, in the purchase of house-property . It does not expressly authorise the construction of a house-property on a vacant site. But it was contended by the learned Counsel for the Company that the purchase of house-property in that article would certainly take in the construction of a new building, as is now proposed. He pointed out that with reference to some securities mentioned in Clause (a)(1) and Clause (b)(1) of that Article, the word purchase would be inappropriate, unless it is given the wider meaning of acquisition. We agree that there is much force in that contention. Our attention was also drawn to the fact, that under Section 27-A (n) of the Insurance Act of 1938, one of the approved investments is immovable property situate in the States provided that the property is free of all encumbrances. As regards the true connotat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the two classes of investment. Madhavan Nair, J., distinguished the English cases on the ground that but for the principle of stare decisis, those cases were not prepared to hold on the languages of the Act that purchase of land and building of a house meant substantially the same thing. On the other hand, Jackson, J., held that English authority had consistently proceeded on the general assumption that building and buying a house-property are substantially the same. The learned Judge thought that if the same authorities had been confronted with the terms of the present trust, they would presumably have followed the same line of thought and would have come to the same conclusion. The learned Judge concluded thus: With that conclusion, I respectfully agree, because I think there is no real difference between commissioning a contractor to build a house, and promising to buy it from him after it is built. 23. We have no hesitation in adopting the opinion of Jackson, J., in preference to that of Madhavan Nair, J. We consider that the word purchase in Article 116 must be given a wider meaning so as to include the construction of a new building; that is to say, the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the latter Act was not a code addressed to the same subject-matter as the Settled Land Act. The decision in Drake v. Trefusis (1875) L.R. 10 Ch. 364 was a typical decision under the Land Clauses Act. The learned Judge held that although the Courts had seen their way under the Land Clauses Act to allow money paid into Court to be employed in erecting new buildings, it would be inconsistent with the enumeration under Section 25 of the Settled Land Act to incorporate into it the said line of cases. We respectfully agree with the learned Judge when he said at page 258 : When you look at it as a whole, you must treat it as a whole, and not bring into this Act of Parliament authorities upon other Acts of Parliament which were passed, as I have said, for different purposes altogether. 24. In the present case, we are not endeavoring to do any such thing. It will be seen that the relevant words in the Settled Land Act were in purchase of land, ; purchase of house property is what we have in the Article we are now considering. That being so, we fail to see why we should not follow the line of cases such as Drake v. Trefusis (1875) L.R. 10 Ch. 364, decided under the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 would cover a case where the money which the Company provided was used to assist a subscription for the Company's own shares. Lord Greene, M.R., pointed out that throughout the whole of the Companies Act, the language which was used with regard to the issue of shares to subscribers was invariably confined to words like issue, subscription , application , allotment , and so forth, and that there was not a single passage in the Act in which the word purchase was used in relation to the transaction of subscription. The Master of the Rolls remarked at page 240 : That being so, it seems to me that a very clear context would be required to enable a meaning to be put on the word ' purchase ' in this section, which would extend it so as to cover the acquisition of shares by subscription. Quite apart from those considerations of mere language of the Act, it seems to me that the word ' purchase ' cannot with propriety be applied to the legal transaction under which a person, by the machinery of application and allotment, becomes a share-holder in the company. He does not purchase anything when he does that. 29. That being the decision in that case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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