Mathalone vs Bombay Life Assurance Co. Ltd.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 52, 53 and 54 of 1950

Decision Date: 19 May 1953

Coram: Mehr Chand Mahajan, Vivian Bose, B. Jagannadhadas

In this matter the petitioner was Mathalone and the respondent was Bombay Life Assurance Company Limited. The case was decided by the Supreme Court of India on 19 May 1953. The judgment was authored by Justice Mehr Chand Mahajan, who was joined by Justices Vivian Bose and B. Jagannadhadas. The citation for the decision is reported in 1953 AIR 385 and 1954 SCR 117. The case also appears in later citators, including R 1959 SC 775, R 1985 SC 520, and RF 1986 SC 1370. The dispute centred on the application of section 105-C of the Indian Companies Act (VII of 1913), which deals with the transfer of shares, the entry of the transferee’s name in the register, the offer of new shares to the transferor, the duties of the transferor when acting as a trustee for the transferee, the validity of a requisition made by a transferee, and the maintainability of a suit brought by a transferee against a transferor.

The factual matrix was as follows: A, who held a certain number of shares in the respondent company, sold a portion of those shares to B on 29 July 1944 and executed blank transfer forms for the transferred shares. B applied to the company for registration of his name on 11 April 1945, but the company rejected the application. In February 1945 the company resolved to issue new shares and, pursuant to section 105-C, offered to A the number of new shares to which he was entitled in respect of the shares that remained in his name on the register. A did not apply for the new shares that corresponded to the shares already sold to B. Subsequently, a firm of solicitors, acting on behalf of B, C, D, E and other claimed purchasers, sent a requisition to A, urging him to apply for the additional shares, to hold the allotted shares on behalf of the purchasers, and promising to indemnify A against any liability that might arise. A refused to make the application but volunteered to sign a renunciation form in favour of the actual purchasers. As the deadline for applying for the new shares approached, B instituted suit against A seeking an order directing A to deliver the application form for the new shares, to hand over the new share certificates upon receipt, together with duly signed blank transfer forms, and alternatively claiming damages. A receiver, identified as 17 118, was later appointed. The receiver applied to the company in his own name for allotment and registration of the new shares, but the company declined. The receiver then sued the company for the allotment of the new shares. The High Court of Bombay held that A, acting as a trustee for B concerning the new issue, had failed to apply for the new shares and was therefore liable to B in damages. The matter was then brought before this Court for further determination.

The Court held that, first, if A acquired the newly issued shares in his own name without having acted of his own free will, there existed no rule of law or equity that could force him to purchase those shares by using his own money or assuming financial liabilities and then transfer them to B after receiving reimbursement from the purchaser or after being fully indemnified for any liabilities incurred. Second, even if it were assumed that A owed such an obligation, the request made by the solicitors for A to purchase the shares was issued on behalf of four disclosed persons and some undisclosed persons; that request was therefore ineffective and insufficient, and A could not be said to have breached any fiduciary duty by refusing to comply with it. Third, because B possessed no right to demand that A buy the new shares in A’s own name for B’s benefit, the same principle applied even more strongly to the receiver, who likewise could not compel A to act. Fourth, the company itself had not been a party to B’s suit, and consequently the Court could not issue any order in that suit directing the company to recognize the receiver as a shareholder for shares sold to B. Moreover, as the receiver’s name did not appear on the register, the company was under no obligation to consider any application from him for the issue of the new share in his favor. The Court referred to the authorities 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) and distinguished the cases Biss v. Biss ([1903] 2 Ch. 40) and Jones v. Evans ([1913] 1 Ch. 23).

The appeal was heard in the Civil Appellate jurisdiction under Civil Appeals Numbers 52, 53 and 54 of 1950. These appeals arose from the judgment and decree dated 7 March 1949 of the High Court of Judicature at Bombay in Appeals Numbers 55 and 54 of 1948, which themselves were based on a decree dated 29 July 1948 of the same High Court in its ordinary original civil jurisdiction in Suits Number 336 of 1945 and Number 786 of 1948. Counsel G. S. Pathak, assisted by H. J. Umrigar and P. N. Mehta, represented the appellant in Civil Appeals Numbers 52 and 54 and the respondent in Civil Appeal Number 53. Counsel M. C. Setalvad, Attorney-General for India, assisted by J. B. Dadachanji, represented the respondent in Civil Appeals Numbers 52 and 54 and the appellant in Civil Appeal Number 53. The judgment was delivered on 19 May 1953 by Justice Mahajan. Although the appeals derived from two separate suits, namely Suit 336 of 1945 and Suit 786 of 1948, the Court found that both suits aimed at obtaining the same relief and therefore could be resolved together in a single judgment. The factual backdrop included a contest that began in July 1944 between the group led by Sir Padampat Singhania and the group led by Shri Maneklal Prem Chand for control of the management of the Bombay Life Assurance Company Limited, which set off a competitive struggle for the acquisition of the company’s shares.

In the dispute over the acquisition of shares of the Bombay Life Assurance Company between the two rival groups, the appellant in Civil Appeal No 54 of 1950, Sir Padampat Singhania, who also appeared as respondent in the cross-appeal No 53 of 1950, bought on 25 July 1944 a total of 667 shares of the company. The purchase was effected through his Bombay agent, Shri P N Gupta, and the transaction was carried out on his behalf by the share- and stock-broking firm Bhaidas Gulabdas. Of the 667 shares, 484 belonged to Mr Reddy, who was the appellant in Civil Appeal No 53 of 1950 and respondent in Civil Appeal No 54 of 1950. The shares were sold at a price of three hundred rupees each.

On 29 July 1944 Gupta signed a receipt in favour of Bhaidas Gulabdas acknowledging that he had received the 667 shares. Acting as attorneys for Mr Reddy, Bhaidas Gulabdas then prepared five blank share-transfer forms covering the 484 shares that were to be transferred: four forms each dealt with one hundred shares and one form dealt with the remaining eighty-four shares. It was later alleged that these blank transfer forms were completed in favour of Sir Padampat Singhania.

Sir Padampat Singhania did not make any application to the company for entry of his name in the register of shareholders until 11 April 1945. When an application was finally made, the company refused to register the shares in his name and communicated its refusal on 8 May 1945. In the same period a letter was addressed to the holder of the shares. The letter began with the words:

"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 one hundred rupees for every share allotted to you, which should be accompanied by a blank transfer form signed by you as the transferor and the form of renunciation unsigned. They will also pay you the 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 7 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’ together with 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 7 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"

The correspondence from Hindustan Commercial Bank Ltd. to Mr. Reddy, dated 1 March 1945, referred to a circular issued on 28 February 1945 by Messrs. Craigie, Blunt and Caroe on behalf of their clients, namely Mr. J. L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhania, Mr. N. K. Bhartiya and others. The bank stated that it had instructions to pay Mr. Reddy Rs 100 for each share of the company that he would deliver, provided the shares were allotted to him in exchange for the allotment letters or share scrips together with a duly signed transfer deed. The bank further indicated that it would pay Rs 20 for each fractional certificate delivered on or before 7 March 1945, and that it would also pay any exchange commission, provided the shares or certificates were delivered in accordance with the circular. These letters demonstrated that the persons named in the correspondence, together with some undisclosed individuals, were presented as the purchasers of the shares sold by Mr. Reddy and were therefore treated as the equitable owners, notwithstanding that the original agreement had been concluded by Sir Padampat. The letters did not disclose that the named persons were merely nominees or benamidars of Sir Padampat. It was undisputed that the blank transfer forms did not contain the names of the purchasers in the transferee column; ultimately only the name of Sir Padampat was entered. In response, Mr. Reddy wrote on 3 March 1945 to address all the communications he had received. He explained that approximately eight months had passed since he sold the shares and that the transfer to the purchasers’ names had not yet been completed. He expressed no objection to providing the renunciation forms duly signed in favour of the genuine purchasers, but he could not understand how he was bound by the requisition contained in paragraphs 4 and 5 of the circular dated 28 February 1945. Mr. Reddy affirmed his willingness to sign the renunciation form in favour of the true purchasers once he was satisfied that those described as purchasers were indeed the real and true purchasers, a verification he required through the presentation of the transfer forms executed by them together with the share certificates.

Regarding the conduct of Mr Reddy, the Court observed that he was unquestionably entitled to know the identity of the person or persons who were the true purchasers of the shares he had sold, because he could lawfully honor and comply only with a requisition made by those genuine purchasers and by no one else. The Court noted that the plaintiff was not satisfied with Mr Reddy’s response, and, because the final date for filing an application for the issue of additional shares was set to expire on 10 March 1945, Sir Padampat instituted Suit No 336 of 1945 on 8 March 1945 in the Original Side of the Bombay High Court. The suit named Mr Reddy as the sole defendant and did not implead the company. The reliefs claimed in the suit were twofold. First, the plaintiff sought an order directing the defendant to forward to him the application form A annexed to the circular letter, together with the fractional share certificates and the related application, both unsigned and in blank, upon the plaintiff either paying to the defendant such sum as the Court might direct or furnishing such indemnity as the Court might deem appropriate. Second, the plaintiff asked that, once the defendant received the certificates of the newly issued shares, the defendant be ordered to hand over those certificates and the fractional certificates to the plaintiff, together with transfer forms in blank duly signed by the defendant. On 7 December 1945 the plaintiff amended the plaint to include an alternative claim for a decree of damages amounting to Rs 7,29,600. The amended plaint asserted that, by selling 484 shares, the defendant had become a trustee for the plaintiff, who had become the beneficial owner of those shares, and that the trustee was bound to perform all lawful acts necessary to secure the rights and benefits arising from the shares, including the right to apply for shares in the new issue. The plaintiff contended that he was prepared to indemnify the defendant against any consequences of such acts. It was further alleged that, unless the plaintiff’s rights were protected by the 10 March 1945 deadline, he would suffer irretrievable prejudice. Consequently, the plaintiff applied for the appointment of a receiver to take control of the application form, the letter of renunciation and any rights of Mr Reddy in the new issue of shares. On the same day, Justice Bhagwati issued an order under Order XL, Rule 1 of the Civil Procedure Code, appointing a court-appointed interim receiver to hold the application form, the renunciation letter and any rights, if any, of the defendant in the 384 shares of Bombay Life Assurance Co. Ltd.

The Court recorded that the receiver had been authorized to exercise all of the defendant’s rights in respect of the four-hundred-eighty-four shares, provided that the plaintiff gave the standard undertakings required for such a appointment. On 10 March 1945 the receiver sent a request to the company seeking allotment of three-hundred-eighty-four shares of the new issue, which corresponded to the four-hundred-eighty-four shares recorded in Reddy’s name in the company register and which Reddy had sold on 25 July 1944. The request was accompanied by a remittance of Rs 38,400, an amount that was payable on those shares in accordance with a resolution of the board of directors. The receiver also asked that his name be entered in the register of members as the holder of the newly allotted shares. On 30 April 1945 the company replied to the receiver, informing him that the board of directors had considered his application at a meeting held on 21 April 1945 and had resolved to reject it. The company’s reason for rejection was that Reddy had accepted the company’s offer only with respect to forty shares and that the offer concerning the balance of the shares had therefore lapsed. Consequently, on 30 April 1945 the company declined to register the receiver’s name in respect of the new shares and also refused the application of Sir Padampat for registration of his name as transferee of the four-hundred-eighty-four shares that he had purchased, an act that might have enabled him to retain the new shares in his own name. Because Sir Padampat was unable to secure registration of the newly issued shares in the receiver’s name, he found himself with no other recourse but to pursue the suit that had already been instituted against Reddy. In addition, Sir Padampat had instituted a separate suit, numbered 786 of 1948, to obtain essentially the same reliefs that he claimed in his own suit, this time by the receiver against the company and with the leave of the court. That suit was filed on 8 March 1948, after roughly three years had elapsed since the company’s rejection of the receiver’s application. Paragraph 14 of the plaint explained that the suit had not been filed earlier because the validity of the issue of the new shares was already being contested in suit No. 347 of 1945. The prayer in the 1948 suit was that the defendant company be ordered to allot to the plaintiff the three-hundred-eighty-four shares mentioned in the application and to enter his name in the company’s share register for those shares. Both suits were heard by Justice Bhagwati, who delivered a single judgment covering both matters and substantially granted the reliefs sought in each. Justice Bhagwati held that the four-hundred-eighty-four shares that Reddy had transferred through Bhaidas Gulabdas had indeed been purchased by Sir Padampat, and that, as the vendor and trustee of those shares, Sir Padampat was also a trustee of all property rights attached to the shares. The judgment further observed that it was the duty of Reddy, when called upon by Sir Padampat, to …

The Court held that it was necessary to provide a proper safeguard and indemnity for payment and to transfer to Sir Padampat all the benefits that he had derived from the issue of the new shares by virtue of his legal ownership of those shares. The Court further found that the beneficial owner had made a valid requisition on the trustee to obtain the shares for him, and that the trustee had defaulted in his duty by failing to comply with that requisition. In addition, the Court observed that the company erred in refusing the application of the court-appointed receiver for registration of the receiver’s name as a shareholder in respect of the new shares on the ground that, because Reddy had applied for only forty shares, his right to obtain the remaining shares had supposedly lapsed. The company argued that the sanction given by the examiner of capital issues had expired, and that consequently no relief could be granted against the company because there was no unissued capital available for allotment. Bhagwati J. rejected that argument, holding that the plaintiff could not be deprived of his rights merely because of the lapse of the earlier sanction. Accordingly, the Court directed the company to comply with the order and to allot three hundred and eighty-four shares to the plaintiff within three months, after obtaining a fresh sanction from the appropriate authority. Before concluding, the learned judge noted that issues ten and eleven had not been argued before him, that the contentions raised in those issues appeared to have been abandoned, and that, even if they were taken up, they lacked merit. Following this common judgment in both suits, Reddy and the company each filed separate appeals.

The appellate bench of the High Court allowed the company’s appeal and dismissed the receiver’s suit, holding that the court-appointed receiver was not entitled to have the new shares allotted in his own name. A civil appeal, numbered 52 of 1950, was filed against that decision. In the later suit numbered 366 of 1945, the High Court allowed Reddy’s appeal to the extent that it held the plaintiff to be disentitled because the sanction for reliefs (A) and (B) granted by Bhagwati J. had lapsed. Nevertheless, the Court affirmed that Reddy was acting as a trustee for Sir Padampat with respect to the newly issued shares, and that Reddy’s failure to apply for those shares made him liable to Sir Padampat for damages. The Court further held that Reddy’s earlier application for forty shares did not deprive him of the right to make a further application for the remaining three hundred and eighty-four shares. It was also reiterated that a proper requisition had been made by the beneficiary upon the trustee, and that the trustee had defaulted in complying with that requisition. Accordingly, the suit was remanded to the trial judge for assessment of damages. The principal questions presented for determination in the appeals were whether, on the facts, Reddy was under a legal obligation as a trustee to apply for and obtain on behalf of Sir Padampat the three hundred and eighty-four new shares that related to the shares sold by Reddy to Singhania.

In this case the Court identified five principal questions for determination. First, whether Reddy, acting as trustee, was under a legal duty to apply for and obtain on behalf of Sir Padampat three hundred and eighty-four new shares that corresponded to the shares Reddy had sold to Singhania. Second, whether the requisition addressed to Reddy by Messrs Craigie, Blunt & Caroe in their letter dated 3 March 1945 satisfied the legal requirements to compel him to apply for the new issue, and whether Reddy’s failure to obey that requisition amounted to a default as trustee. Third, whether Sir Padampat’s conduct of not depositing four hundred and eighty-four shares for transfer into his name until April 1945 disqualified him from obtaining the reliefs he claimed. Fourth, whether the receiver possessed the authority to make the requisition and whether the receiver was the proper person to apply for the new shares in his own name, and consequently whether the company was under any obligation to allot those shares to the receiver. Fifth, whether the plaintiff was entitled to the reliefs designated as (A) and (B) in the plaint, given the altered circumstances of the company.

The lower courts held that on 29 July 1944 Sir Padampat became the sole beneficial owner of the four hundred and eighty-four shares that had been sold by Reddy, with the legal title to those shares vested in Sir Padampat. That finding established a trustee-beneficiary (cestui-que-trust) relationship between Reddy and Sir Padampat. The Court reiterated that the essential elements of such a relationship are the possession of legal title by the trustee and the holding of equitable title by the beneficiary; this factual matrix was not contested by the Attorney-General who appeared for Reddy. However, the Attorney-General challenged the High Court’s view that a beneficiary, on any basis of equity or law, could not call upon the trustee to shoulder the burdens associated with the trust, including the duty to obtain new shares of the company or to make further capital investments that would generate additional obligations.

Quoting Lord Lindley’s observation in Hardoon v Belilios, the Court emphasized the fundamental principle of justice that a beneficiary who enjoys the entire benefit of the property must also bear its burdens, unless the beneficiary can demonstrate a compelling reason for the trustee to assume those burdens alone. Counsel for the plaintiff did not dispute the proposition that Singhania, as the beneficial owner of the four hundred and eighty-four shares, could impose on Reddy any incidental burdens arising from that ownership. He conceded that, as trustee, Reddy was entitled to be indemnified by his beneficiary against any calls made. This principle is well recognized, and the liability is enforced according to the doctrines governing equitable ownership of property. Consequently, once it was established that Reddy was the trustee of the four hundred and eighty-four shares he sold, he was also deemed the trustee of all ancillary property rights attached to those shares. It was conceded that he was not only

The Court observed that the trustee was not merely the trustee of the corpus but also the trustee of any income and dividends that might be received, and that the trustee was bound to pay such amounts over to the beneficiary. The Court then referred to the decision in E.D. Sassoon & Co. Ltd. v. Patch, where Pratt J. held that, under section 94 of the Indian Trusts Act, a transferor holds shares for the benefit of the transferee only to the extent necessary to meet the transferee’s demands. Because the transferee possesses the entire beneficial interest and the transferor retains none, the transferor must obey all reasonable directions issued by the transferee. In that situation, if the transferor becomes a trustee of the dividends, he also becomes a trustee of the right to vote, since the vote is a proprietary right attached to the shares, and the beneficiary therefore has the right to control how the trustee exercises that voting right. The learned Attorney-General did not dispute Pratt J.’s view, but he opposed any further extension of the rule laid down therein. The Court noted that the question before it was without any direct authority. English law offered no guidance because the English Companies Act contains no provision comparable to section 105(C). The Court further pointed out that, in India, this was the first known instance of such a dispute arising between a transferor and a transferee of shares in a stock-exchange transaction. Consequently, the proposition raised in the present case had to be decided on first impression and according to general principles of equity. The Court then set out section 105(C), which confers certain rights and privileges on a shareholder that he did not possess before the enactment. The provision reads: “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 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.” The Court explained that this section limits the directors’ power to dispose of the new issue of capital to what they consider most beneficial to the company, but imposes a mandate that the shares must first be offered to existing members in proportion to the shares they already hold. In other words, a member becomes entitled under this section by virtue of being the holder of a certain number of shares in the company.

In this case the Court explained that a shareholder’s entitlement to obtain shares in a further issue of capital is a right that arises simply by virtue of his existing ownership of the company’s shares. The Court stressed that this entitlement is not a dividend or any form of profit that accrues from stock ownership, nor does it represent a division of the company’s assets. It is also not comparable to an organic product of the original stock, such as the offspring of animals or the fruit of a tree. Referring to the decision of the Supreme Court of the United States in Miles v. Safe Deposit Trust Co. (1), the Court characterised the right to subscribe to new stock as a privilege that allows existing shareholders to participate before strangers and on equal terms with one another in supplying the new capital that the corporation requires. This privilege is an equity that is inherent in the ownership of the old stock and is inseparable from the capital interest that the old stock represents. The Court further noted that the exercise of this privilege is optional for the shareholder; he may choose to invest additional money and purchase a proportionate portion of the new issue, but he is under no compulsion to do so.

The Court added that a shareholder may also assign the offer he receives to any other person. In such a case the directors retain the discretion either to allot the shares to the assignee or to refuse the allotment, as noted in the footnote (1) 66 Law Edition 903 at 026. The Court observed that the offer creates fresh rights for the shareholder, but it simultaneously imposes new liabilities and obligations. The right to purchase shares in the new issue in proportion to the existing holding is contingent upon the shareholder satisfying certain obligations, including the payment of application money to the company. Once the application is made and the money remitted, if the shares allotted are only partly paid up—as they were in the present matter—the shareholder becomes liable on allotment for any future calls on those shares. The Court then posed the question whether a transferor who is the legal owner of certain shares, while the beneficial interest lies with the cestui que trust, is liable for all payments and obligations attaching to the new issue of shares and is required to act for the benefit of the trust. In other words, the Court asked whether, when instructed by his beneficiary, the transferor has a duty under section 105-C to apply for the new issue of shares, obtain them in his name, make the necessary payments, and bear the consequent obligations. Plainly put, the question may be posed.

In this matter, the Court had to consider whether the duty of a transferor who acted as a trustee over a certain number of shares also extended to the right to acquire additional shares that the company might issue on behalf of the beneficiaries of the trust. The question was whether the transferor, by placing himself on the register of shareholders for the new shares, could become liable for fresh liabilities and obligations that did not exist at the time he effected the original transfer. Mr. Pathak argued that the right to obtain the new shares was inseparably linked to ownership of the original shares. He maintained that the transferor of the old shares possessed an option to purchase the new shares in the same manner in which he held the original shares. Accordingly, because the transferor acted as a trustee for the beneficial owner with respect to the old stock, he also acted as a trustee with respect to the option or right to acquire the new shares. Under that view, the transferor was obliged to exercise the option for the benefit of the cestui que trust, to follow the directions of the beneficiaries, and to secure the new shares in his own name on behalf of the trust. To support this proposition, counsel relied on certain observations made by Buckley J. in the case of Biss v. Biss (1). In that precedent, a lessor had granted a seven-year lease of a house where the lessee operated a profitable business. When the lease term ended, the lessor declined to renew it but permitted the lessee to remain as a tenant from year to year at an increased rent. During the tenancy, the lessee died, leaving a widow and three children, one of whom was an infant. The widow and one son each applied to the lessor for a new lease intended to benefit the estate, but the lessor refused those applications. Subsequently, after determining the year-to-year tenancy through notices, the lessor granted the son a personal three-year lease. In a separate action already brought by the children against the administratrix (the widow), the widow sought 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. However, the Court of Appeal reversed that decision, observing that the right of renewal had been decided by the lessor long before the son intervened, that the new lease could not be regarded as an addition to the estate, and that the son was entitled to retain the lease without having abused his position. Consequently, the Court concluded that Biss v. Biss did not provide authority for the proposition before it, and the Court of Appeal had not addressed the specific point raised. Nevertheless, Buckley J., while delivering his judgment, made the following observation: “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.”

In the passage under consideration the Court explained that, whether or not a renewal right exists, a trustee who acquires a new lease must hold that lease for the benefit of his cestui que trust. The Court identified the leading authority on this point as the case reported in (1) [1903] 2 Ch. 40, Keech v. Sanford (1). The principle articulated in that authority is that a trustee is obligated to obtain a renewal, if it is within his power, on terms that are beneficial to the trust, and that the court will not permit the trustee to secure a renewal on terms that are advantageous to himself when his duty is to secure it for the cestui que trust.

The Court further noted that counsel relied on observations made by Neville J. in the case Jones v. Evans (2). In that case the capital of a company was divided into ten thousand shares of ten pounds each, of which only three thousand seven hundred twenty-eight shares had been issued and were fully paid up. The company was thriving, and the market value of each share was thirty pounds. The company's reserve fund exceeded fifty thousand pounds. The directors proposed a scheme to distribute the reserve fund, which represented accumulated undistributed profits, among the shareholders. Under the scheme each shareholder would receive a bonus of one new fully paid-up share of ten pounds for every existing share held. To implement this, the company passed resolutions empowering the directors to declare a bonus dividend out of the reserve fund, to sanction the distribution of a ten-pound bonus dividend per share, to authorize the further issue of three thousand seven hundred twenty-eight shares of ten pounds each from the unissued capital, to allot those new shares pro rata among the existing shareholders, and to direct that the new shares be paid up in full immediately.

The directors then issued a circular letter to every shareholder together with a warrant for the bonus dividend on his existing shares. The circular informed each shareholder of the proportionate allotment of new shares to which he was entitled, offered him the option to accept or refuse the allotment, and explained that if he accepted, he must endorse and return the dividend warrant to the company so that it could be applied to the purchase price of the new shares. Trustees under a testator’s will held two hundred shares of the company. Upon receiving the circular, the trustees accepted the allotment of two hundred new shares, endorsed and returned their bonus dividend warrant for two thousand pounds, and subsequently sold the newly acquired shares at a profit. The legal question that arose was whether, between the life tenants and the remainderman under the will, the bonus dividend constituted capital or income. The Court held, on the basis of the evidence, that the company’s intention was to capitalize the reserve fund rather than to distribute it as a dividend, and consequently the entire bonus dividend was treated as capital of the testator’s estate. In the concluding portion of his judgment, Neville J. observed:

"............ when I say that the option vested in each shareholder, either to take the dividend and keep it, or to"

The Court explained that the rule allowing a shareholder to return a dividend warrant in order to obtain the larger benefit that the company proposes does not operate in the same manner for trustees. In the Court’s view, if a trustee were to accept cash of ten pounds when the company was offering a share worth twenty pounds on the condition that the dividend warrant be returned, such a refusal would amount to a deliberate default. Consequently, the cestui que trust would be entitled to require the trustees to secure the greater benefit that the company presented. The Court therefore held that, although a trustee may have a right to elect between options in the relationship with the company, there is no comparable right in the relationship with the cestui que trust; the trustee must therefore take the dividend in what the Court described as the “capitalized form.” Mr Pathak, appearing for the beneficiary, argued that his client was entitled to the fullest advantage conferred on the original shares by reason of the new offer and that the trustee should be compelled to act so as to obtain that advantage. The Court, however, observed that the precedents cited by Mr Pathak must be confined to the factual matrix of those earlier cases. This case involved a trustee who possessed distinct duties and distinct liabilities, and it would be erroneous to assume that every trustee bears identical obligations. None of the authorities relied upon by Mr Pathak involved a situation in which the trustee incurred any personal pecuniary liability. In Biss v. Biss(1) the issue concerned the acquisition of the benefit of renewing a lease, reported in [1903] 2 Ch. 40, and the trustee did not have to assume any fresh liability to obtain that benefit. Moreover, a thriving business operated in the premises, and the lease renewal was evidently for the lessee’s benefit, imposing no new or onerous obligations. Likewise, in Jones v. Evans(1) the trustee assumed no liability of any kind; the sole question there was whether the trustee should exercise the option of receiving the dividend or converting the bonus into capital. The Court reiterated that, under the general law of trust, a trustee must act in the manner most beneficial to the cestui que trust and may not retain any personal benefit from the trust corpus or from any subsequent accruals. These cited cases did not address a situation analogous to the present dispute. The Court noted that, had the newly offered shares been fully paid up and free of any attached liability, the trustee would unquestionably have been bound to acquire them for the benefit of the cestui que trust. Thus, the authorities cited by counsel extend only to the limited facts of those cases and do not provide a principle that obligates a trustee, in the present circumstances, to purchase new shares at a greater personal financial burden for the benefit of the trust.

In this case, the Court observed that there was no rule in equity or in general law that required a trustee to purchase new shares in his own name for the benefit of the cestui que trust when doing so would impose a heavier financial burden on the trustee than the burden he had already undertaken as a constructive trustee by virtue of selling his shares to the cestui que trust. The Court noted that the relationship between the trustee and the cestui que trust was intended to exist only until the shares sold could be registered in the name of the transferee. The Court explained that if the trustee voluntarily chose to obtain the new shares that corresponded to the shares he had already sold, equity would not deny the cestui que trust the right to demand that the trustee deliver those shares upon receipt of the amount expended by the trustee. However, the Court said that when the trustee, of his own volition, was unwilling to obtain those shares in his own name, there was no clear principle of law or equity that could compel him to apply for those shares, acquire them, and then transfer them to the cestui que trust after being reimbursed for the expenditure or after being fully indemnified for any present or future liabilities. The Court found it difficult to imagine any equitable principle that would oblige a person who was already a constructive trustee with respect to X number of shares to become a constructive trustee for an additional Y number of shares, thereby making him a trustee of X plus Y shares. The Court held that such an additional burden was not a necessary consequence or incident of the original purchase-and-sale transaction or of the legal relationship that had been created between trustee and beneficiary. According to the Court, that relationship arose solely because the transferee’s name had not yet been entered in the register of shareholders, and equity therefore appointed the transferor as a constructive trustee, obliging him to transfer all benefits attached to the sold shares to the beneficiary. The Court stated that this equitable principle could not be extended to situations where the transferee had not taken active steps, with due diligence, to have his name entered as a member of the company, and where, in the interim, other privileges or opportunities to purchase new shares arose as a consequence of owning the already acquired shares. Consequently, the Court concluded that the trustee could lawfully refuse any request by the cestui que trust to acquire additional shares and to place his name on the register of members for those extra shares, especially when such acquisition would involve the trustee in further liabilities.

The Court observed that the acquisition of the additional shares would have placed Mr Reddy under further liabilities. Accordingly, the Court held that, on neither principle nor authority, Mr Reddy could be compelled to acquire in his own name the three hundred and eighty-four shares that were attached to the four hundred and eighty-four shares he had sold to Sir Padampat. The Court explained that the only obligation Sir Padampat could impose on Mr Reddy was to execute a renunciation form in favour of Sir Padampat for the shares offered out of the new issue that related to the old shares, and, after obtaining that renunciation, to make an application in his own name for the purchase of those new shares. The Court sustained this view on the clear principle that a transferor who stands as a constructive trustee with respect to the shares he has sold cannot retain any benefit of the new issue that is annexed to those sold shares. If any benefit were to arise from the offer made under section 105-C, that benefit must pass to the beneficiary, and the beneficiary is not entitled to compel the trustee to perform additional acts.

Mr Pathak reiterated the argument that had been accepted by the High Court, namely that if Mr Reddy’s sole duty was to transfer the offer made to him under section 105-C to Sir Padampat after signing the renunciation, then Sir Padampat could not obtain the full advantage of that offer. The Court noted that, in such a circumstance, the directors would not be bound to allot the shares to the person in whose favour the shares had been renounced by the shareholder; the directors would only be bound to allot the shares when the shareholder himself applied for them. The Court acknowledged that this created a disadvantage for Sir Padampat, but emphasized that the equitable relationship of constructive trustee and cestui que trust cannot be extended indefinitely to cover every future acquisition of rights annexed to the sold shares. Such future acquisitions may involve not only rights but also liabilities and obligations that the constructive trustee may be unwilling to assume. Consequently, the cestui que trust may not be able to enjoy all the benefits arising from new incidents attached to the ownership of the shares it has purchased.

The Court further observed that the beneficiary could be at fault for any loss suffered because he failed to make a timely application to be entered on the register of members, and because he did not take the appropriate legal steps to have his transfer recognised by the company, especially where the company had already refused his request. The Court warned that the equitable principle establishing the legal relationship between the transferor and the transferee should not be applied in a way that prejudices the constructive trustee or makes him an accounting party for every privilege or fresh offer that may become attached to the sold shares for all time thereafter.

Pathak contended that his client was willing not only to pay the application money and the allotment money to the trustee but also to provide an indemnity against any future calls on those shares. It was recalled that the original four hundred eighty-four shares sold by Reddy to Sir Padampat were only partly paid, making Reddy liable for any call that might be made on those shares, unless an indemnity was supplied by Sir Padampat at the appropriate time. If the argument advanced by Pathak were accepted, Reddy would likewise become liable for future calls on the additional three hundred eighty-four shares, and his right to claim indemnity would arise only when a call actually materialised. Established legal principle holds that a trustee may claim indemnity only after suffering an injury that triggers the right to be indemnified. Consequently, the present liability to meet calls remained, at that stage, a personal liability of the trustee rather than that of the cestui que trust. Even after the trustee’s name was entered on the register of shareholders, a mere prospective right to claim indemnity could prove illusory when the moment to enforce it arrived. Various adverse scenarios could arise: the market value of the shares might decline, the company could enter liquidation, or the financial standing of the equitable owner could deteriorate. In each of these circumstances, the trustee’s claim to indemnity for fresh liabilities accruing on the shares would be merely theoretical, and the trustee would be compelled to bear personal financial responsibility for those liabilities. Hence, the proposition that the trustee was obligated to purchase the new shares in his own name for the benefit of the cestui que trust lacked support, because it imposed possible personal pecuniary burdens on the trustee that no legal system imposes on a trustee solely for the benefit of the beneficiaries.

The Court therefore concluded that Sir Padampat was not entitled to compel Reddy to make an application in his own name to acquire the newly issued shares by first investing his own money and later recovering it from Sir Padampat, nor to require Reddy to sign the application form and forward it to Sir Padampat for the purpose of obtaining the shares in Reddy’s name. The only appropriate demand was that Sir Padampat could ask Reddy to provide the renunciation form. Reddy expressed willingness to comply and offered to do so provided the names of all persons in whose favour the renunciation had to be effected were disclosed to him. However, such disclosure never occurred, and Sir Padampat could not achieve his objective merely by possessing the renunciation form, because, under the circumstances of this case, the company’s directors would not have approved an application made in Sir Padampat’s own name even if the renunciation form had been signed by Reddy.

In the Court’s view, the suit filed by Sir Padampat, or the suit filed by the court-appointed receiver, could not be decreed on the basis of the renunciation form that had been signed by Mr Reddy. Consequently, the Court concluded that both suits must be dismissed. The Court reasoned that, because Sir Padampat possessed no authority to require the trustee to purchase the newly offered shares in his own name for his personal benefit, the receiver, who was appointed by the Court, could not possess such authority either; therefore, on this singular ground, the claims asserted in both suits had to be rejected.

Further, the Court expressed the opinion that even if it were held that Mr Reddy owed a duty to sign both the application form and the renunciation form and to forward them to Sir Padampat so that Sir Padampat could acquire the newly offered shares in Mr Reddy’s name, the requisition that had been made on Sir Padampat’s behalf directing the trustee to purchase those shares and to exercise the option was nevertheless ineffective and inadequate. On the basis of that requisition, the trustee was unable to perform the mandate of the cestui que trust, and, because of this inability, the plaintiff was also entitled to no relief in either of the two suits.

The Court then examined the first requisition, which had been made by Messrs J L Mehta and N K Bhartiya on 23 February 1945. That requisition had been made solely in the name of those two gentlemen and not on behalf of Sir Padampat. It urged Mr Reddy to forward a circular letter together with his signatures on the forms annexed to that letter, so that the signatories could apply for the newly offered shares either in Mr Reddy’s name or in any other names that they might decide upon. The High Court had considered this requisition to be inadequate and had therefore excluded it from consideration. Counsel Pathak also placed little reliance on that requisition.

Both the lower courts and Counsel Pathak, however, relied upon a later requisition dated 28 February 1945, which had been set out in a letter from Messrs Craigie, Blunt & Caroe, quoted earlier in the judgment. That letter stated: “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 appeared to have been made on behalf of four disclosed beneficiaries and some other undisclosed cestui que trusts. The letter did not assert that the actual purchaser of the shares was Sir Padampat Singhania, nor did it describe the other persons named as merely his agents or benamidars. Moreover, the letter failed to disclose the names of all the beneficiaries.

Consequently, in his letter dated 3 March 1945, Mr Reddy declared that he was prepared and willing to sign the renunciation form in favour of the true purchasers, provided that he was satisfied that those described as beneficiaries were indeed the real and bona-fide purchasers of the shares.

The Court observed that the purchasers of the shares could be identified as the real and true purchasers by examining the transfer forms that had been duly executed together with the share certificates. It expressed difficulty in conceiving how a requisition made on the trustee by certain disclosed beneficiaries and other undisclosed beneficiaries could be treated as a proper direction that the trustee was obliged to obey. Consequently, the Court held that the requisition was defective in that respect and that the trustee could not be said to have defaulted in his duty by refusing to carry out such a requisition. The Court further characterised the indemnity offered in the requisition as illusory because the letter did not specify the extent of liability of each beneficiary, whether known or unknown, and therefore the trustee could not determine from the letter the name of every person who might be liable for indemnity or the magnitude of any such liability. A bare statement to the effect that “Our clients agree to indemnify you against each and every liability that you incur by applying for these partly paid up shares” was described as wholly inadequate. The Court noted that the situation might have been different if, together with the requisition, a bank guarantee protecting the trustee against future liabilities and a cheque for the money required at the time of the application had been provided. In view of the allegations made in the plaint and the fact that all the share transfer forms were subsequently signed only by Sir Padampat Singhania, the Court concluded that the requisition could not be said to have been made on behalf of the plaintiff. Accordingly, the plaintiff could not claim that a proper requisition had been made on the trustee, which the trustee then failed to execute, thereby making the trustee liable for damages. The Court also noted that the plaint did not explain how the names of the persons mentioned in the letter of 28 February were included or how the requisition could have been made on their behalf when they had never signed the blank transfer forms. Moreover, it was observed that the trustee was left with the option of paying the application money from his own pocket and later recovering it from the bank, a demand that could not be imposed on a trustee. The trustee was under no obligation to find a large sum of money and invest it in new shares for the benefit of the cestui-que-trust, nor to recover the amount after such investment. In effect, the solicitor’s letter to Reddy was understood to convey the instruction: “Pay yourself and obtain the shares, or else,”.

In this case, the Court explained that the solicitor’s letter to Reddy contained the instruction to “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 High Court had summarized its view of that point by stating that Sir Jamshedji, acting for his client, had argued that he had acted properly by enquiring who the real beneficiary was and by demanding the production of the relevant transfer forms. The High Court observed that if Reddy had taken only that attitude, the tribunal might have found in his favour. However, the Court noted that the very same letter showed Reddy clearly refusing to accept any liability or obligation to apply for the shares on behalf of his beneficiary. Whether Reddy knew that his purchaser was Sir Padampat or not, as the learned Judge had held, or whether Sir Jamshedji’s claim that Messrs. Craigie, Blunt and Caroe referred to the purchasers as Sir Padampat and others was correct, the fact remained that Reddy did not admit liability as a trustee and would agree to discharge it only after being satisfied about the identity of his purchaser. Reddy’s sole requirement was to be satisfied about his purchaser so that he could send a letter of renunciation; that was the only condition he sought to satisfy. In view of Reddy’s stance, the plaintiff had no alternative but to commence the suit, and the High Court was therefore correct in concluding that the plaintiff was entitled to the relief claimed. The present Court could not accept this line of reasoning. Reddy’s attitude could not remedy the deficiencies in the requisition alleged to have been made on the plaintiff’s behalf. If the directions given to the trustee were vague and legally ineffective, the trustee could not be held liable for damages for not complying with them, even if his attitude was less than ideal. The plaintiff is not entitled to damages unless he can demonstrate that he made a proper and enforceable demand on the trustee and that the trustee failed to perform it. On that basis, both suits must fail. Counsel for the plaintiff argued that the plaintiff was entitled to reliefs A and B in both his suit and the receiver’s suit and that the High Court had wrongly dismissed the receiver’s suit. The Court could not concur. In the Court’s view, the High Court correctly held that the receiver appointed in Sir Padampat’s suit could not acquire the newly issued shares in his own name. Section 105-C confers that privilege only on a person whose name appears on the register of members, and the receiver’s name was not entered in that register.

In this case the Court observed that the company was under no obligation to consider the receiver’s application. The receiver’s counsel contended that the application was not made in the receiver’s personal capacity but that the receiver had been empowered by the court to act on behalf of the defendant, Reddy. Nevertheless, the Court noted that the application had been filed in the receiver’s own name. Even assuming the counsel’s contention to be correct, the Court explained that the company had not been a party to the suit brought by Sir Padampat against Reddy; consequently no order could be issued in that suit directing the company to acknowledge the receiver as a shareholder in place of Reddy. The Court added that the situation would have been different only if the company itself had been impleaded in Sir Padampat’s suit and the court had specifically ordered the company to register the receiver’s name for the 484 shares purchased by Sir Padampat and to issue new shares in the receiver’s name. The Court declined to express any final opinion on whether it would have been within its authority to direct such a registration had the company been a party to the suit. However, the Court was clear that because the company was not impleaded, it was not bound to issue shares to a person whose name did not already appear in the register of members, even when that person claimed to represent an existing shareholder. Accordingly, the High Court was right in dismissing the receiver’s suit. The Court also affirmed that the appellate bench of the High Court was correct in refusing to grant reliefs A and B claimed by Sir Padampat. The sanction previously granted to the company for the issue of new capital had expired long before Justice Bhagwati had granted reliefs A and B to the plaintiff. The Court described it as an extraordinary step in a civil proceeding to direct a company that was not a party to the original suit to obtain fresh sanction for issuing new shares and then to allot those shares to the plaintiff. Moreover, the Court pointed out that even if fresh sanction were obtained, the new capital would have to be distributed in accordance with section 105-C and could not be allotted by the directors to any particular shareholder. In the altered circumstances that arose after the suit was instituted, the only possible relief for the plaintiff, had he succeeded, would have been damages. The Court could not grant that relief because it had found that Reddy could not be compelled as a constructive trustee to purchase new shares in his own name for the cestui-que-trust, and even if he could have been compelled, there was no proper and valid requisition by the trust for the acquisition of those shares. Consequently, the plaintiffs in the two suits were not entitled to any relief.

In this matter the Court observed that Reddy could not be regarded as having failed in any duty to the cestui que trust because the trust itself had never issued a proper and valid requisition directing the trustee to obtain the shares in question. Consequently, the Court held that the plaintiffs in the two related suits had no entitlement to any form of relief. Accordingly, after considering the foregoing reasons, the Court allowed Reddy’s appeal, identified as Appeal No. 53 of 1950, and dismissed both the cross-appeal filed by Sir Padampat and the receiver’s appeal, recorded as Appeal No. 52 of 1950. In addition, the Court dismissed the two suits that had been pending. The Court further pronounced that, given the circumstances, it would not make any order as to costs in either of the suits. The final orders were therefore that Appeal No. 53 was allowed, while Appeals Nos. 52 and 54 were dismissed. The Court noted that the agent for the appellants in Appeals Nos. 52 and 54 and the respondent in Appeal No. 53 was S. P. Varma, and that the agent for the respondents in Appeals Nos. 52 and 54 and the appellant in Appeal No. 53 was Rajinder Narain.