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Judgment
G. Ramanujam, J.—These second appeals arise out of the suits filed by the respondent in each against the appellant company for recovery
of the sitting fees due to them as directors of the company. The plaint allegations in both the suits are substantially the same. The plaintiffs in both
the suits were shareholders of the defendant company, hereinafter referred to as the company till 3rd October, 1969 when they resigned their
offices. As per Article 14 of the Articles of the company they were entitled to sitting fees at the rate of Rs. 100 for each meeting of the Board of
Directors attended by them while they were Directors. According to the plaintiffs a sum of Rs. 2,000 was due to each Of them on that account.
The practice of the company has been to credit the sitting fees in the company''s books as and when they accrued due, leaving it to the Directors to
draw it at their convenience. It is the common case of both the plaintiffs that when the total amount payable to each of them as sitting fees came to
Rs. 700, the then managing Director requested them to agree to accept seven preference shares of Rs. 100 each in lieu of the payment of the sum
of Rs. 700, that the plaintiffs, however, were not amenable to that request but that the Managing Director sent the share certificates for seven fully
paid preference shares which the plaintiffs finally refused to accept and returned and that, therefore, they are entitled to get the entirety of sitting
fees of Rs. 2,000 each due to them.
The Company resisted the suits contending that the suit claims relate to the internal administration of the company and as such it is not
maintainable in a civil Court. It also contended that though the Directors are entitled to a sitting fees of Rs. 100 for every meeting, the company
with a view to conserve the little liquid cash it had approached the Directors with a request that they should take preference shares in the company
in discharge of its dues to them by way of sitting fees which was accepted by all the Directors, that they had passed a unanimous resolution on 10th
March, 1967, allotting the shares to the various Directors including the plaintiffs, that both the plaintiffs were present in the meeting, that they had
not demurred to the allotment of seven preference shares to each of them, that they had also attended the meeting held oh 22nd June, 1969 and
approved the minutes of the earlier meeting held on 10th March, 1967, wherein the unanimous resolution were passed, that they also attended the
subsequent meetings which considered and approved the annual accounts of the company for the years 1966-67, 1967-68 and 1968-69 and
signed the balance sheet for all the above years, that in the balance sheets the preference shares allotted to the plaintiffs were included and shown
under the head ""issued and subscribed capital"" and that therefore, the plaintiffs by their conduct in acquiescing in the allotment of the seven
preference shares are estopped from questioning the validity of the allotment of the shares in these suits. As regards the claim for the balance of Rs.
1,300 the company stated that the claim is premature as all the Directors had agreed to wait till the financial position of the company improves.
On the above pleadings which are common to both the suits, the trial Court proceeded to consider the sustainability of the claims of the
plaintiffs. At the stage of the trial no oral evidence was adduced by either of the parties and they only produced documents in support of their
contentions. The trial Court held that Exhibit A-1, the minutes of the meeting of the Board of Directors of the company held on 10th March, 1967,
Exhibit A-17 the agenda for the meeting to be held on 10th March, 1967 and Exhibit B-6 the attendance register showed that a unanimous
resolution had been passed allotting preference shares to such of those members who are entitled to get the sitting fees including the plaintiffs, that
seven shares with specific numbers had been allotted to each of the plaintiffs, that the plaintiffs were also parties to the unanimous resolution, that
Exhibit A-7 the daybook of the company showed that a sum of Rs. 700 which had been credited oh 1st March, 1967 in the plaintiffs'' ledger page
had been debited on 10th March, 1967, being the value of seven preference shares as soon as the unanimous resolution had been passed. Exhibits
A-8 to A-16. are adjustment vouchers prepared on the same day showing that Rs. 700 towards the value of the seven shares has been adjusted
against the names of the plaintiffs. The trial Court, therefore, found that the plaintiffs in both the suits were consenting parties to the allotment of
preference shares to them and that they have not chosen to question the resolution in general or the allotment of shares in particular in any of the
subsequent meetings held on 22nd June, 1967, 22nd June, 1968 and 17th July,-1969, which they had admittedly attended, It also found that the
profit and loss account and the balance sheet as on 31st March, 1969, had been approved and signed by the plaintiffs and that the said balance
sheets showed the total number of shares issued and subscribed which also included the shares allotted to the plaintiffs. It therefore held that the
plaintiffs are bound by the allotment of the shares and cannot recover the sum of Rs. 700 each adjusted as the value of the seven preference shares
allotted to each of them. As regards the balance of Rs. 1,300 the trial Court held that the case of the defendant that all the Directors of the
company agreed not to press claims till the financial position of the company improved cannot be a sufficient defence. It therefore passed a decree
for the said sum in both the suits.
On appeal, the lower appellate Court not only upheld the decree for the sum of Rs. 1,300 but also passed a decree even in respect of the sum
of Rs. 700 which had been adjusted towards the value of the seven preference shares. The lower appellate Court has held that the allotment of
shares, was without any application from or with the consent of the plaintiffs, that, therefore, they are not bound by the allotment of shares made on
10th March, 1967 and that the mere fact that the plaintiffs have attended the various meetings and participated therein will not stand in the way of
enforcing their claim for the said sum of Rs. 700 each which was admittedly due to them by way of sitting fees. The, lower appellate Court also
held that the allotment of preference shares on 10th March, 1967 was in contravention of Section 81 of the Companies Act. Aggrieved against the
decision of the lower appellate Court the defendant has come in appeal.
The two substantial questions that have been urged before me are (1) whether the plaintiffs can question the allotment of shares made by the
Board of Directors of the company on 10th March, 1967 and (2) whether the said allotment of shares is in contravention of Section 81 of the
Companies Act as has been held by the lower appellate Court. The view taken by the lower appellate Court that the plaintiffs are not bound by the
allotment of shares made on 10th March, 1967 is based on the following circumstances : (1) the plaintiffs did not apply for allotment of any
preference shares, (2) when the share certificates were sent the plaintiffs immediately repudiated the factum of allotment and sent back the share
certificates which showed that they were not willing parties to the allotment of shares, (3) the mere fact that the plaintiffs signed the minutes or the
balance sheets cannot bind them if they establish that there was no binding contract as between them and the company as regards the allotment of
preference shares. The question is whether the above circumstances could justify the conclusion taken by the lower appellate Court. The lower
appellate Court proceeds on the basis that there cannot be any allotment of shares unless there is an application in writing by the plaintiffs to the
company seeking allotment of shares. The provisions of the Companies Act nowhere provide that there must be a written application for allotment
of shares and therefore, there can be an oral application for the purpose and an allotment made on the basis of such an oral application. If there has
been an oral offer from the plaintiffs for the allotment of shares which had been accepted by the company and if an allotment is made by the
company on the basis of that offer it cannot later on be questioned on the ground that there was no application in writing.
In this case the plaintiffs were in the position of creditors of the company, and in the meeting of Directors held on 10th March, 1967, by a
unanimous resolution the allotment has been made and the plaintiffs'' accounts had been debited with the value of the shares. It is also significant to
note that even the share certificate numbers allotted to the plaintiffs have been given in the resolution as against their names. Admittedly the plaintiffs
attended the meeting and participated in the proceedings, and the plaintiffs have nowhere stated that there was no such unanimous resolution. Even
in Exhibits A-3 and A-4 the protests made by the plaintiffs as soon as the share certificates reached them, they have not stated that there was no
unanimous resolution on 10th March, 1967, allotting the shares. , There they have merely stated that they had not made any application for
allotment of shares. Having regard to the fact that the unanimous resolution had been passed at a meeting which was attended by the plaintiffs,
which fact is not disputed, it must be taken that they were willing parties to the unanimous resolution. The resolution came up for confirmation in the
next meeting which was also attended by the plaintiffs. Even at that stage no protest was made as against the said resolution. The balance sheets
prepared subsequent to the said allotment of shares for a period of three years had been seen and approved by the plaintiffs in the subsequent
meetings held on 22nd June, 1967, 22nd June, 1968 and 17th July, 1969, which they had attended. The question is whether without questioning
the validity of the said unanimous resolution passed on 10th March, 1967, the plaintiffs can question the allotment of shares as such only on the
ground that they have not made any written application. Exhibit A-1 is the proceeding of the meeting held on 10th March, 1967 and it is found
therefrom that item 27 of the agenda was for considering the applications for preference shares. The resolution is stated to have been unanimously
passed that the shares applied for by the members should be allotted to them, and the plaintiffs'' names are found as numbers 46 and 47 in the list
of persons to whom shares had been allotted. u/s 194 of the Companies Act the minutes of a meeting recorded by the company shall be evidence
of the proceedings. Therefore, even though it has not been shown that there were written applications from the plaintiffs for allotment of shares, the
minutes show that there should have been an oral application by the plaintiffs along with others for allotment of shares. This appears to be clear
also from the circumstances under which the unanimous resolution came to be passed. The company''s financial position was not sound and
therefore the amounts due to the various Directors as sitting fees were agreed to be adjusted by allotment of preference shares and this all the
Directors agreed to and the allotment of shares had been done unanimously. In my view the continuous and consistent conduct of the plaintiffs at
the time of the passing of the unanimous resolution and subsequently shows that they were willing parties for the allotment of shares. If the shares
had been allotted against their will, they would have questioned the same in the various meetings held subsequent to 10th March, 1967, but in all
the subsequent meetings they have not demurred and they have been approving the minutes as well as the balance sheets prepared after such
allotment. It appears that the plaintiffs willingly agreed for the allotment of the shares on 10th March, 1967, but have chosen to resile from the
contract for allotment of shares with some ulterior motive, I do not therefore agree with the finding of the lower appellate Court that the plaintiffs
are not bound by the resolution to which they were parties.
Jones v. Bellegrove Properties Ltd. (1949) All. E.R. 198, was a case where the plaintiff lent a certain sum in 1936 to a company in which he
was a shareholder. At the annual general meeting of the company held on 31st December, 1946 at which the plaintiff was present as a shareholder,
the accounts for the years 1939 to 1945 were presented. In an action by the plaintiff to recover the money lent the company pleaded that the
action was barred by limitation. But the plaintiff contended that the entry in the balance sheet showing the total sum due to the various creditors
constituted an acknowledgment of his debt and that notwithstanding that the accounts were presented to him in his capacity as shareholder and not
as a creditor, his right of action must be deemed to have accrued on the date of the acknowledgment. In that case it was held that even though the
debt due to the plaintiff had not been specifically and separately shown, the general entry giving the amount due to the creditors is sufficient to
constitute an acknowledgment. The principle of the above decision has been followed and applied by this Court in Rajah of Vizianagaram Vs. The
Official Liquidator, Vizianagaram Mining Company Limited, Vizagapatam, , In Sharpley v. Lowth and East Coast Railway Company (1876)
Ch.D. 663, a shareholder in a company filed a bill to have his contract to take shares declared void on the ground of deception and
misrepresentation of the company by reason of its having commenced its business before the minimum share capital was subscribed. The Court in
that case held that the shareholder is not entitled to the relief claimed as he had taken up the administration of the company as a Director after the
commencement of the business and thus acquiesced in the company carrying on the business and that in consequence of the act of acquiescence he
has entirely lost his right to resile from the contract to take shares. The finding of the lower appellate Court, that the plaintiffs are riot therefore
bound by the allotment of the shares made on 10th March, 1967, has, therefore, to be set aside.
On the question as to whether the allotment of shares made on 10th March, 1967, has contravened Section 81 of the Companies Act, it is seen
that clause 6 of the Articles of Association of the company enables the Directors to issue and allot shares in the capital of the company in payment
or part payment for any property sold or transferred or any goods or machinery supplied, or for services rendered to the company in or about the
formation or promotion of the company or the conduct of the business, and any shares which may be so allotted may be issued as fully paid up
shares, or as partly paid up. It is this power which the Directors had exercised in making the allotment of preference shares on 10th March, 1967.
The above provision deals with a special situation where the Directors have been given the discretion to allot shares in lieu of payment of dues to
the various creditors. such an allotment or shares cannot, in my view, come under the scope of Section 81 of the Companies Act. That section
applies when the company proposes to increase its subscribed capital by allotment of shares to the public. It cannot be said that in this case there
has been an issue of further capital for the company. What has been done is only to tide over the financial difficulties of the company by allotting
preference shares to all the creditors who were also Directors of the company. In such circumstances where the shares are treated as paid up by
adjusting the amounts due by the company to the various creditors, Section 81 cannot have application. Thus the view of the lower appellate Court
that the resolution is hit by Section 81 of the Companies Act appears to be erroneous.
Besides, even if the allotment of shares is held to offend Section 81, still it will only be voidable at the instance of shareholders who could be
aggrieved against the non-allotment of shares to them. A shareholder who has been allotted a share cannot question the same on the ground that
similar offer was not made to all shareholders.
The result is the second appeals are allowed, the decrees and judgments of the lower appellate Court are set aside and those of the trial Court
are restored. There will, however, be no order as to costs. No leave.