Full Judgment Text
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PETITIONER:
MATHALONE
Vs.
RESPONDENT:
BOMBAY LIFE ASSURANCE CO. LTD.PINGLE VENKAT RAMA REDDYV.SIR
DATE OF JUDGMENT:
19/05/1953
BENCH:
MAHAJAN, MEHR CHAND
BENCH:
MAHAJAN, MEHR CHAND
BOSE, VIVIAN
JAGANNADHADAS, B.
CITATION:
1953 AIR 385 1954 SCR 117
CITATOR INFO :
R 1959 SC 775 (10)
RF 1981 SC1298 (137)
R 1985 SC 520 (20)
RF 1986 SC1370 (77,79)
ACT:
Indian Companies Act (VII of 1913), s. 105-C-Transfer of
shares-Transferee’s name not entered on register-Offer of
new shares under s. 105-C-Transferor whether bound to
acquire the new shares as trustee for transferee-Duties of
transferor--Validity of requisition by transferee-Suit by
transferee against transferor-Maintainability.
HEADNOTE:
A, who held a certain number of shares in- a company,
sold some of these shares to B on the 29th July, 1944, and
executed blank transfer forms in respect of the shares. B
made an application to the company for registration of his
name, only on the 11th April, 1945, and his application was
rejected. Meanwhile, in February, 1945, the company
resolved to issue new shares and offered to A the number of
shares to which he was entitled under the provisions of s.
105-C of the Indian Companies Act in respect of the shares
which stood in the register in his name. A did not apply
for the now shares pertaining to the shares sold to B. A
firm of solicitors sent a requisition to A on behalf of B,
C, D, E and others who claimed to be the purchasers of the
shares sold by A, calling upon A to apply for the additional
shares, and to hold them, when allotted, on behalf of B, C,
D and E and others, and offering to indemnify A against all
liabilities he may incur thereby. A declined to apply but
offered to sign the renunciation form in favour of the true
purchasers. As the time fixed for making an application for
the new shares was about to expire, B filed a suit against A
praying that A may be ordered to deliver to B the
application form for the now shares, and to hand over the
new share certificates when received, with transfer forms in
blank duly signed by him, and for damages in the
alternative. A receiver
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118
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was appointed and he applied to the company in his own name
for allotment of the new shares and for registering his name
in respect thereof but the company declined to do so. The
receiver filed a suit against the company for allotment of
the new shares to him. The High Court of Bombay held that,
as A was a trustee of B in respect of the new issue, and he
had failed to apply for the new shares, he was liable in
damages to B. On appeal :
Held, (i) that if A ",as not of his own volition, prepared
to obtain the now shares in his name, there was no principle
of law or equity by which he could be compelled to acquire
those shares by spending his own money or by undertaking
financial liabilities and pass them over to B on receiving
the amount spent by him from the purchaser or being
otherwise fully indemnified by him in respect of the
liabilities incurred or to be incurred.
(ii)Assuming that A was under any such obligation, as the
requisition made by the solicitors to A to purchase the
shares was made on behalf of 4 disclosed and some
undisclosed persons, it was ineffective and inadequate, and
A was not guilty of any breach of duty as a trustee in not
complying with the requisition.
(iii)As B had no right to call upon A to buy the new shares
in his own name for his (B’s) benefit, a fortiori, the
receiver had also no such right.
(iv) In any event, as the company was not a party to B’s
suit, no order could be issued to the company in that suit
to recognise the receiver as a shareholder in respect of
shares sold to B and, as long as he was not on the register,
the company was not bound to entertain an application from
him for issue of the now share in his favour.
Hardoon v. Belilios ([1901] A. C. 118), E. D. Sassoon, & Co
Ltd. v. Patch (45 Bom. L.R. 46), Miles v. Safe Deposit
Trust Co. (66 L.E. 903) referred to. Biss v. Biss ([1903] 2
Ch. 40), Jones v. Evans ([1913] 1 Ch. 23) distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 52, 53 and
54 of 1950.
Appeals from the Judgment and Decree dated the 7th March,
1949, of the High Court of Judicature at Bombay in Appeals
Nos. 55 and 54 of 1948, arising out of Decree dated the 29th
July, 1948, of the said High Court in its Ordinary Original
Civil Jurisdiction in Suits No. 336 of 1945 and No. 786 of
1948.
G.S. Pathak (H. J. Umrigar and P. N. Mehta, with him) for
the appellant in Civil Appeals Nos. 52 and 54 and respondent
in Civil Appeal No. 53,
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M. C. Setalvad, Attorney-General for India (J. B.Dadachanji,
with him) for the respondent in Civil Appeals Nos. 52 and 54
and appellant in Civil Appeal No. 53.
1953. May 19. The Judgment of the Court was delivered by
MAHAJAN J.-These appeals, though they arise out of two
different suits, 336 of 1945 and 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 Maneklal 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
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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 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 Sin-
ghania. 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.
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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 further
capital. The sanction was granted and the company was
authorised within a time limit of six months to increase its
capital by a sum of Rs. 4,59,600 by issuing 4,596 shares;
otherwise the sanction was to lapse. On the 21st February,
1945, the directors of the company passed a resolution
increasing the capital of the company by issuing these 4,596
shares of Rs. 100 each at a premium of Rs. 75 per share. On
the existing shares only Rs. 25 per share had been called
up. The company therefore decided that the new shares
should be offered to the existing shareholders, in the
proportion of four shares to every five shares held by the
shareholders. Reddy as a shareholder of 534 shares
(including 484 shares sold by him on 25th July, but yet not
registered in the transferee’s name) thus became entitled to
427 new shares and one fractional certificate. Out of the
427 new shares offered to him he was entitled to 40 shares
in his own right which appertained to 50 unsold shares which
he still held in the company. The other 384 shares
appertained to the shares that he had sold. The company
issued a circular letter to every shareholder giving the
details of the offer made and along with it sent two forms,
A and B. Form A being the application form for allotment 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 with 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,
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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,
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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
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 renuniciation 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 Singhania, 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 their behalf
and please then hand them to the Hindustan Commercial Bank
Ltd., Apollo Street, Fort, Bombay, who will pay you the sum
of Rs. 100 for every share allotted to you, which should be
accompanied by blank transfer form signed by you as the
transferor and the form of renunciation unsigned. They will
also pay you the,
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Proportionate sum on any fractional certificate to which you
are entitled on handing over the same to the bank in blank
unsigned on or before the 7th March, 1945.
If you prefer to do so, please send the form of application
’A’ duly signed by you as well as the renunciation form ’B’
as also the fractional certificate and the relevant
application attached thereto unsigned in blank to our
client, Mr. N. K. Bhartiya at Second Floor, Rahimtoola
House, Homji Street, Fort, Bombay, so as to reach him before
the 7th March, 1945, and he will then forward the
application to the company on your behalf along with the
necessary remittance.
Our clients agree to indemnify you against any and every
liability which you will incur by applying for the partly
paid shares.
We are instructed to point out that you are a trustee for
our clients by virtue of the fact that you have sold your
shares in this company to them pending 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
abovenamed company in the new issue that you deliver to us
at Rs. 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 Rs. 20 per fractional certificate delivered to us on
or before the 7th March, 1945. Please note that we shall do
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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
123
bank and the exchange commission will also be paid 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 ready and willing to sign renunciation form in
favour of the true purchasers, on my being satisfied that
those who are described as the purchasers of my shares are
the real and true purchasers of those shares by their
producing the transfer forms given by me duly executed by
them along with the share certificates."
Whatever else may be said about the attitude of Reddy, he
was certainly entitled to know the name of person or persons
who were the real purchasers of the shares sold, because he
could only respect and comply with the requisition made by
those persons and those persons alone and by none else. Not
satisfied with this reply and in view of the fact that the
last date for making the application for the issue of
additional shares
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was to expire on the 10th March, Sir Padampat instituted
suit No. 336 of 1945 on the 8th March, 1945, on the Original
Side of the Bombay High Court, inter alia, for the following
reliefs against Mr. Reddy as the sole defendant. The
company was not impleaded in this suit.
"1. That the defendant may be ordered to send and deliver to
the plaintiff the application form A annexed to the circular
letter for the number of additional shares allotable to him,
as also the fractional 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 Rs. 7,29,600 by way of
damages was included therein.
It was averred in the plaint that upon the sale by defendant
of 484 shares the plaintiff became the beneficial owner of
those shares and the defendant became a trustee for him of
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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 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 irretriev-
ably prejudiced. Ail application was made for the
appointment of a receiver of the application form and
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letterof 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, 1944. This
application was accompanied by a remittance of Rs. 38,400
payable on these shares according to the resolution of the
board. The company was requested to register the name of
the receiver in the register of members in respect of these
shares. On the 30th April, 1945, the company intimated to
the receiver that his application for allotment of shares
was considered by the board of directors in a meeting held
on the 21st April, 1945, and it was resolved to reject the
same because Reddy had accepted the company’s offer only to
the extent of 40 shares and the offer regarding the balance
had lapsed.
The result was that the company refused to register the name
of the receiver in respect of the new shares on the 30th
April, 1945, and it also refused Sir Padampat’s application
for registering his name as transferee in respect of the 484
shares of Reddy purchased by him which might have entitled
him to retain the new shares in his own name. Sir Padampat
having thus failed in getting the newly issued shares regis-
tered in the name of the receiver had no alternative left
but to fight out the suit already instituted against Reddy.
He also had another suit instituted to obtain practically
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.
18
126
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 paragraph 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.
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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 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
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months 384 shares to the plaintiff after obtaining a fresh
sanction for the same from the authority concerned. Before
concluding the learned judge said that issues 10 and 11 had
not been argued before him and the contentions raised
therein seemed to have been abandoned and that even
otherwise there was no merit in them. Against this common
judgment in both the suits, Reddy and the company preferred
separate appeals. The appeal Bench of the High Court
allowed the company’s appeal and dismissed the receiver’s
suit on the finding that the court receiver was not entitled
to the allotment of the new shares in his own name as such.
Civil Appeal No. 52 of 1950 has been preferred against this
decision. In suit No. 366 of 1945 Reddy’s appeal was
allowed to the extent that the plaintiff was held
disentitled by the reason of lapse of the sanction to
reliefs (A) and (B) granted to him by Bhagwati J. It was
however held that he was a trustee of Sir Padampat in
respect of the shares of the new issue and he having failed
to apply for the new shares was liable to him in damages and
the fact that he made an application in respect of 40 shares
did not disentitle him to make another application in
respect of the 384 shares. It was also held that a proper
requisition had been made by the beneficiary upon the
trustee to carry out the trust and he had defaulted in
complying with the 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 ease 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 shares 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;
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(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) and (B)
of the plaint in the altered situation of the company.
It has been held in the courts below that Sir Padampat
became on the 29th 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 AttorneyGeneral 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(1) the
plainest principles of justice require that cestui que trust
who gets all the benefit of the property should bear its
burden unless be can show some good reason why his trustee
should bear them himself. Mr. Pathak did not contest the
proposition that Singhania had any right as a beneficial
owner of 484 shares to throw on Reddy any of the burdens
incidental to the ownership of those shares. He conceded
that Reddy as a trustee had a right to be indemnified by his
cestui que trust against calls. The proposition is well
recognised and
(1) [1901] A.C. 118.
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the liability is enforced on the principles applicable to
the equitable ownership of property.
Once it is held established that Reddy was a trustee of the
484 shares sold by him, he as holder of those shares must
also be held to be a trustee of all the property rights
annexed to the shares. It was conceded that he was not only
the trustee of the corpus but also the trustee of the income
and of the dividends that he may receive and that he was
bound to pay them over to the beneficiary. In E.D. Sassoon
& Co. Ltd. v. Patch(1) Pratt J. held that under section 94
of the Indian Trusts Act a transferor holds the shares for
the benefit of the transferee to the extent necessary to
satisfy its demands and that as the transferee holds the
whole beneficial interest and 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 AttorneyGeneral 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
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there is no provision corresponding to section 105 (C) 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’ 105(C), 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:
" Where the directors decide to increase the capital of the
company by the issue of further shares such shares shall be
offered to the members in proportion to
(1) 45 Bom. L.R. 46.
130
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 powers 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 amount to a division of any part of the
assets of the company. It is not an organic product of the
original stock like the young of animals or the fruit of
trees, but, as described by the Supreme Court of America in
Miles v. Safe Deposit Trust Co.(1) this right to subscribe
to new stock is but a right to participate in preference to
strangers and on equal terms with other existing
shareholders in the privilege of contributing new capital
called for by the corporation-an equity that inheres in
stock ownership under such circumstances as a quality
inseparable from the capital interest represented by the old
stock. The exercise of the privilege depends on the option
of the shareholder. If he likes, he can invest further
money and purchase a proportionate share, of the new issue
of capital. He is of course not obliged to do so. He has
also the right to assign the offer made to him in favour of
any other person but in that event the directors have the
option to allot or not to allot the
(1) 66 Law. Edition 903 at 026.
131
shares to the person in whose favour the share holder
renounces the shares offered to him. The offer, of course,
creates fresh rights but it also brings 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
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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 who 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, whether he is under
a duty, when so instructed by his beneficiary, to make an
application for the new issue of shares offered under the
provisions of section 105-C and obtain them in his name by
making the necessary payment 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
132
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 cestui que trust.
Reliance was placed for this proposition on certain
observations of Buckley J. in Biss v. Biss(1). In that
case, a lessor granted a lease for seven years of a house in
which the lessee carried on a profitable business. On
expiration of the term of the lease, the lessor refused to
renew the lease, but allowed the lessee to remain as a
tenant from year to year on increased rent. During the
tenure of the lease, the lessee died leaving a widow and 3
children, one being an infant. The widow and a son each
applied to the lessor for a new lease for the benefit of the
estate, which the lessor refused to grant. Having
determined the yearly tenancy by notices the lessor granted
to the son personally a new lease for 3 years. In an action
already instituted by the children against the
administratrix, namely, the widow, she applied to have the
new lease treated as being taken by the son for the benefit
of the estate. Buckley J. held that the son was a trustee
of the new lease for the benefit of the estate. The Court
of Appeal reversed this decision and held that the right of
renewal had been determined by the lessor long before the
son intervened, and that the new lease could not be regarded
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
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must hold the new lease for the benefit of his cestui que
trust. The leading authority upon that is
(1) [1903] 2 Ch . 40.
133
Keech v. Sanford (1). 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(2). That was a case where the capital
of a company was divided into 10,000 shares of pound 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 the shares was pound 30 each. The reserve fund of
the company exceeded pound, 50,000. The directors 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 pound 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 pound 10 per share out of the reserve fund and
authorising the further -issue of 3,728 shares of pound 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 divident 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 circular letter accepted
their allotment of 200 new shares, indorsed and returned
their bonus dividend warrant for pound 2,000, and afterwards
sold the new shares
(1) (1726) Sel. Cas. 61. (2) [1913] 1 Ch. 23.
134
at a profit. The question then arose whether, as between
the tenants for life and remainderman under the will, the
bonus dividend was capital or income. It was held, on the
evidence, that the company intended to capitalize the
reserve fund and not to distribute it as a bonus dividend,
and therefore the whole of the bonus dividend was capital of
the testator’s estate. In the concluding portion of his
judgment, Neville J. said as follows:-
"............ when I say that the option vested in each
shareholder, either to take the dividend and keep it, or to
return it and get the greater benefit which the company
offered if be did, I do not think that is true in the case
of trustees; because it seems to me that, if by taking pound
10 in cash, when they were offered by the company a share
worth E 20 if they would return it, it would be a wilful
default on their part if they refused and took less, and
consequently their cestui que trust 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
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dividend in what I will call the capitalized form."
On the basis of these authorities, Mr. Pathak contended that
his client as 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(1), the question was obtaining the
benefit of renewal of a
(1) [1903] 2 Ch. 40.
135
lease, and the trustee had to incur no fresh liability for
obtaining it. On the other hand, a prosperous business was
being conducted in those premises 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 (1), the trustee had incur no liability of any kind
whatsoever. That 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 accrue to that estate
subsequently. None of these cases death 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 quo trust. The cases referred to therefore go only
so far and no further. We see no principle of equity or on
general law which obliges a trustee to buy new shares in his
own name for the benefit of the cestui que trust, when in so
doing he has to bear a heavier pecuniary burden than he
undertook to bear as constructive trustee by reason of the
sale of his shares in favour of the cestui que trust and
which relationship was contemplated to last only till the
time when the shares sold could not be registered in the
name of the transferee. Of course, if the trustee of his
own volition chose to obtain the new shares which appertain
to the shares already sold by him, on principles of equity
it could not be denied that the cestui que trust would have
been entitled to call upon the trustee to hand over those
shares to him on receipt of the amount spent by the trustee;
but if the trustee of his own volition is not prepared to
obtain those shares in his own name, it is difficult to see
on what principle of law or equity he can be forced to make
an application for obtaining those shares in his own name,
and then pass
(1) [1913] 1 Ch. 23.
136
them over to the cestui que trust after obtaining the amount
spent by him or after being otherwise
fully indemnified in respect of the payments made or to be
made, or liabilities incurred or to be incurred in future.
It is difficult to conceive any principle 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 in additional, say, Y
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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 his 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 acquired. The trustee can very well say to any
request made by the cestui que trust for the acquisition of
new shares that he is not prepared 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 he
renunciation form in his favour of the shares offered put 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 Reddy was to
transfer the offer made to him under section 105-C to Sir
Padampat after signing the renunciation, then in that case
Sir Padampat could not get the full advantage of that offer
because in that event the directors were not bound to allot
the shares to the person in whose favour they have been
renounced by the shareholder, while on an application made
by the shareholder they were bound to allot him the shares
offered. That disadvantage is certainly there but it has to
be borne in mind that the relationship of constructive
trustee and cestui que trust created on principles of equity
cannot be extended ad infinitum in respect of all future
acquisitions of rights annexed to the shares sold which
acquisitions may involve not only rights but liabilities and
obligations which the constructive trustee may not be
prepared to undertake, and in this situation the cestui que
trust may not be able to get all the benefits of the fresh
incidents annexed to the ownership of the shares that he had
purchased. He himself may be blamable for the loss that be
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
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legal relationship between the transferor and the transferee
arises cannot be worked in a manner so as to prejudice the
138
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 also become further liable for
future calls on the new 384 shares. He would be entitled
only to claim indemnity when an occasion arose. 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 benefit of the cestui que
trust. We thus hold that Sir Padampat was not
139
entitled to call upon Reddy to make an application in his
own name for the acquisition of the newly issued shares by
investing his own money in the first instance and then
recovering it from Sir Padampat or by signing the
application form and sending it to Sir Padampat for
acquiring the shares in his name. All that he was entitled
to was to call upon him to send him the renunciation form.
This Reddy was prepared to do and offered to do so provided
the names of all the persons in whose favour renunciation
had to be made were disclosed to him. Admittedly this was
never done and Sir Padampat could not gain his object by
merely having the renunciation form, because the directors
of the company in the circumstances of this case would never
have granted his application, if made in his own name on the
basis of the renunciation form signed by Reddy. Sir
Padampat’s or the receiver’s suit therefore in this view of
the case could not have been decreed.
On the view expressed 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.
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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
140
behalf of Sir Padampat. It called upon Mr. Reddy to forward
the circular letter with his signatures on the forms annexed
to the letter, to enable them to apply for the newly offered
shares either in his name or in their or such other names as
might be decided upon by them. 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 cestuis 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
form in favour of the true purchasers, on his being
satisfied that those who are described as the purchasers of
his shares are the real and true purchasers by perusing the
transfer forms duly executed by them along with the share
certificates. It is difficult to understand how a
requisition made on the trustee by some disclosed and other
undisclosed beneficiaries could be regarded as a proper
direction to him, which he could be called upon to obey.
This requisition was therefore faulty in this respect, and
the trustee could not be said to have defaulted in his duty
in not carrying out
141
such a requisition. Again, the indemnity offered in the
requisition is merely illusory, because in the letter the
extent of the liability of each beneficiary, whether known
or unknown, is not mentioned, and the trustee could not
ascertain from its contents the name of each and every
person liable for his claim for indemnity as and when the
occasion for it arose, or its extent. A mere bald statement
in the following words "Our clients agree to indemnify 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
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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 option of
the trustee to pay from his own pocket the application
money, and then recover it from the bank. Such a demand
could not be made on a trustee and he 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
20
142
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 Reddy much might
have been said in his favour. But unfortunately in this
very letter Reddy clearly declined any liability or obliga-
tion upon him to apply for these shares on behalf of his
beneficiary. Whether he knew that his purchaser was Sir
Padampat or not, as the learned Judge has held, or whether
there is force in Sir Jamshedji’s contention that Messrs.
Craigie, Blunt and Caroe referred to the purchasers as Sir
Padampat and others, the fact remains that Reddy did not
accept his liability as a trustee and then agreed to
discharge that liability provided he was satisfied as to who
his purchaser was. He only wanted to be satisfied about his
purchaser in order to send to him the letter of
renunciation. That was the only question on which he wanted
to be satisfied. ’In view of the attitude taken up by Reddy
the plaintiff had no other course open to him except to file
the suit, and, therefore, in our opinion the learned judge
was right when he came to the conclusion that the plaintiff
was entitled to the relief he had claimed."
We have not been able to appreciate this line of thought.
The attitude adopted by Reddy could not cure the defects in
the requisition alleged to have been made on behalf of the
plaintiff. If the directions given to the trustee were of
an inconclusive nature, and were in law ineffective, then
the trustee could not be mulcted in damages for not obeying
them, even if his attitude was not what it should have been.
The plaintiff is not entitled to damages unless and until
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lie
143
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 Reddy. The fact however is that the receiver
made the application in his own name. Even if Mr. Pathak’s
contention is right the company was no party to the suit
filed 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 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 if 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 now
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
144
the High Court was also right when it declined to grant
reliefs A and B of the plaint to Sir Padampat. The sanction
given to the company to issue new capital had lapsed long
before Bhagwati J. granted reliefs A and B to the plaintiff.
It was an extraordinary procedure in a civil suit to direct
a company which was no party to the original suit to obtain
fresh sanction for the issue of new shares and then allot
them to the plaintiff It seems to have been overlooked that
if sanction to issue new capital was somehow obtained, that
capital would also have to be distributed as directed by
section 105-C and could not be allotted by the directors in
favour of any particular shareholder. In the altered
situation that arose after the institution of the suit, if
the plaintiff succeeded, the only relief that could be
granted to him was the relief of damages. We are however
unable to grant the relief to the plaintiff in view of our
finding that Reddy could not be compelled as constructive
trustee to buy new shares in his own name for the cestui que
trust and further in view of our finding that even if he
could be compelled to acquire those shares in his own name
for the cestui que trust he could not be said to have
defaulted in his duty in carrying out the directions of the
cestui que trust as in this case no proper and valid
requisition was made by the cestui que trust on the trustee
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for the acquisition of those shares. The plaintiffs in the
two suits are therefore not entitled to any relief
For the reasons given above, we allow Reddy’s appeal No. 53
of 1950 and dismiss the cross appeal of Sir Padampat as well
as the receiver’s appeal No. 52 of 1950 and dismiss both the
suits, but in the circumstances of this case we will make no
order as to costs in both the suits throughout.
Appeal No. 53 allowed.
Appeals Nos. 52 and 54 dismissed.
Agent for the appellants in Appeals Nos. 52 and 54 and the
respondent in Appeal No. 53: S. P. Varma.
Agent for the respondents in Appeals Nos. 52 and 54 and the
appellant in Appeal No. 53: Rajinder Narain.
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