Madanlal Fakirchand Dudhediya vs Shree Changdeo Sugar Mills Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 64 of 1959

Decision Date: 20 March, 1962

Coram: P.B. Gajendragadkar, A.K. Sarkar, K.N. Wanchoo

In the matter titled Madanlal Fakirchand Dudhediya versus Shree Changdeo Sugar Mills Ltd, the Supreme Court of India delivered its judgment on 20 March 1962. The case was reported in 1962 AIR 1543 and 1962 SCR Supl. (3) 973. The judgment was authored by Justice P. B. Gajendragadkar, with Justices A. K. Sarkar and K. N. Wanchoo forming the bench. The dispute concerned the validity of an agreement to pay a commission from the company’s profits, an issue governed by Sections 76(1) and 76(2) of the Companies Act, 1956. The facts as recorded began with the incorporation of the respondent company, Shree Changdeo Sugar Mills Ltd, as a private limited company in 1939. At that time the promoters, who were also the appellants, each subscribed to shares valued at between one lakh and one and a half lakh rupees. In consideration of those subscriptions, the company’s articles of association, specifically Article 3, provided that the promoters would receive a yearly payment equal to twelve and a half percent of the net profits. In 1941 the parties entered into a second arrangement that appointed a firm as the managing agent of the company and, by amendment of Article 3, reduced the commission payable to the promoters to six and one‑fortieth percent. Subsequent litigation among the parties resulted in consent decrees, but the commissions due to the promoters were left unchanged. After the Companies Act of 1956 came into force, the company served a notice on the appellant stating that the promoter’s commission was no longer lawful under the new statutory regime and that Article 3 would be deleted. In response, the appellant instituted suit seeking a declaration that the commission agreement remained valid and an injunction to prevent the company from removing Article 3. The company contended that Sections 76(1) and 76(2) of the Act rendered the agreement void and unenforceable. The trial court ruled in favour of the company and dismissed the suit, and the appellate court affirmed that decision, also dismissing the appeal.

The appeal therefore turned on the interpretation of Section 76 of the Companies Act, 1956, as it stood before its amendment in 1960. The provision, quoted in the judgment, stipulated that a company could pay a commission to any person in consideration of that person’s subscription to shares or debentures, or the procurement of such subscriptions, provided certain conditions were satisfied. Specifically, the commission had to be authorised by the articles of association, and the amount of commission could not exceed, for shares, five per cent of the issue price or the amount authorised by the articles, whichever was lower; for debentures, the ceiling was two and a half per cent. The provision further required that any commission payable on shares or debentures offered to the public be disclosed in the prospectus, and it imposed additional restrictions under subsection (2) on the use of capital for payment of commissions, discounts, or allowances. The court examined these statutory limits and the wording of the provision to determine whether the promoters’ agreement to receive a percentage of net profits fell within the permissible scope of a commission under the Act. The judgment quoted the exact language of Section 76(1), emphasizing the necessity of authorisation by the articles and the statutory caps on commission percentages, as the basis for its analysis of the parties’ contractual arrangement.

The provision required that the commission payable on debentures could not be larger than either the issue price of the debentures or the amount or rate authorized by the articles of association, whichever of those two amounts was lower. It further prescribed that, in the case of shares or debentures offered to the public for subscription, the percentage rate or amount of commission that was paid or agreed to be paid had to be disclosed in the prospectus. In addition, subsection (2) of the section, subject to the savings in section 79, prohibited a company from allotting any of its shares or debentures or applying any of its capital moneys—either directly or indirectly—to the payment of any commission, discount, or allowance to any person in consideration of that person’s subscribing or agreeing to subscribe, whether absolutely or conditionally, to the company’s shares or debentures. By the Companies (Amendment) Act 65 of 1960, the word “capital” was deleted from subsection (2). The Court, speaking for the majority of the bench, held that section 76 must be interpreted in isolation, in light of its own scheme and purpose, and not by reference to English law on the same point. The Court observed that there could be no doubt that subsection (1) expressly governs the payment of commission, irrespective of the source from which the commission is drawn, and that the provision is not merely a permissive rule but also imposes a ceiling beyond which payment of commission is prohibited. The Court further clarified that the section covers commissions paid out of both capital and profits, citing the case of Hilder v. Dexter (1902) A.C. 472, and noted the earlier decision of Ooregum Gold Mining Co. of India Ltd. v. George Rover and Charles Henry Wallroth (1892) A.C. 125. The Court found no inconsistency between the constructions of subsections (1) and (2). It recognised that the legislature was aware that capital funds were sometimes used to pay commissions under the pretense of lawful payments, and therefore subsection (2) was intended to ensure that such devices also conform to the prescribed limit. The two subsections together form an integrated provision whose object was to impose a limit on commission payments for shares or debentures so as to protect the company’s property. The removal of the word “capital” by the 1960 amendment clarified that the limit applies equally to commissions paid out of capital and out of profits. Justice Sarkar, however, expressed a contrary view, stating that subsection (1) does not suggest any intention to alter the pre‑existing rule that a company could freely pay any commission out of its profits to a subscriber, and that the proper construction of that subsection should confine its terms to commissions paid out of capital, relying on Hilder v. Dexter (1902) A.C. 474.

The Court observed that the expression “it shall be lawful” appearing in section 105(1) of the Indian Companies Act, 1913 and the word “may” employed in section 76(1) of the Companies Act, 1956 convey the same meaning. Both provisions were characterized as enabling clauses intended to render lawful certain conduct that had previously been illegal, a view supported by reference to the decision in Oorgeoum Gold Mining Co. of India Ltd. v. George Roper (1892) A.C. 125. The appeal before this Court was Civil Appeal No. 64 of 1959, taken by special leave from the judgment and decree dated 24 July 1957 of the Bombay High Court in Appeal No. 23 of 1957. Counsel for the appellant consisted of A. V. Viswanatha, Sastri, Jaswantlal Mathubai and I. N. Shroff, while counsel for respondent No. 1 was C. B. Agarwala, I. P. Dadachanji, O. C. Mathur and Ravinder Narain. The judgment was delivered on 20 March 1962 by Judges Gajendragadkar and Wanchoo, with a separate judgment authored by Justice Sarkar. The principal issue raised in the appeal concerned the construction of sections 76(1) and 76(2) of the Companies Act, 1956 as they stood before the amendment of sub‑section (2) made in 1960.

The appellant, Madanlal Fakirchand Dudhediya, together with respondents 2 and 3 and the father of respondents 7 to 10, were identified as the promoters of the first respondent, Shree Changdeo Sugar Mills Ltd. The company had been incorporated in 1939 as a private limited company and was subsequently converted into a public limited company in 1944. At the time of its original incorporation, the promoters entered into a Promoter’s Agreement under which the company undertook to pay each of the four promoters, annually, a sum equal to “3‑1/80 %” of its net profits. Consequently, the total annual consideration payable to the promoters amounted to “12‑1/2 %” of the company’s net profits, an arrangement that was supported by Article 3 of the company’s Articles of Association. In 1941, when the company encountered financial difficulties, a tripartite agreement dated 22 April 1941 was executed among the company, the firm of Ardeshir Hormusji Bhiwandiwalla & Co., and the promoters. This agreement provided, inter‑alia, for the appointment of Bhiwandiwalla & Co. or its nominee as the managing agents of the company for a period of ten years, with an option for the company to extend this term under certain conditions. At that juncture, the earlier agreement concerning the promoters’ commission was altered, reducing the commission payable to the promoters to “6‑1/4 %”, and Article 3 of the Articles of Association was amended accordingly. Three years later, disputes arose between the parties, leading to the institution of three suits in the Bombay High Court. All three suits were eventually settled by compromise, and decrees by consent were recorded. One of the terms of the compromise required that the commission payable to the four promoters, which had been fixed at Rs. 1‑9‑0 to each promoter and represented “6‑1/4 %” in the aggregate under the agreement with the managing agents, would remain enforceable as stipulated in the agreement, thereby preserving the promoters’ right to receive the commission.

In the earlier settlement, each of the four promoters was to receive a commission of Rs 1‑9‑0, which together amounted to six and one‑quarter percent of the total sum payable under the agreement executed between the promoters and the Managing Agents, and the parties agreed that this commission right would continue to be effective as stipulated in the agreement. Consequently, the compromise preserved the promoters’ entitlement to the commission that had been provided for under the original agreement. After the relevant Act became operative on 1 April 1956, the appellant received a letter from respondent No 1 stating that, based on advice received, the agreement concerning the promoters’ commission had become illegal and void from the date of the Act’s commencement, and therefore respondent No 1 would no longer make any further commission payments after April 1956. In October 1956 the appellant was served with a notice from the first respondent indicating that an extraordinary general meeting of the shareholders of the first respondent company would be convened, inter alia, to consider amendments to certain Articles of Association, one of which proposed the deletion of Article 3 from those Articles. Upon receipt of that notice, the appellant instituted the present suit on 13 December 1956, alleging in his plaint that the agreement between the parties remained valid and lawful, and seeking a declaration to that effect together with an injunction restraining respondent No 1 from passing any resolution that would delete Article 3 or from acting on the premise that the agreement had become illegal and void. Respondent No 1 contested the suit, contending that, pursuant to sections 76(1) and 76(2) of the Act, the agreement had become void and unenforceable. Respondents Nos 2 to 10, who were also beneficiaries under the same agreement, aligned themselves with the appellant. The trial judge examined the defence raised by respondent No 1 and concluded that it was well founded; he held that, under the applicable provisions of the Act, the agreement was indeed void and could not be enforced, and consequently refused to grant the declaration or the injunction sought by the appellant. Accordingly, the appellant’s suit was dismissed with costs. The appellant then appealed the trial court’s decision, but the Court of Appeal affirmed the trial judge’s view and dismissed the appellant’s appeal. Subsequently, the appellant obtained a certificate from the High Court and, on the basis of that certificate, brought the present appeal before this Court, wherein the principal issue for determination concerns the construction of sections 76(1) and 76(2).

In this appeal the Court was asked to interpret the meaning of sections 76 (1) and (2) of the relevant Act. The appellant’s counsel, Mr Sastri, argued that the lower courts had misread those provisions when they concluded that the appellant’s attempt to enforce the agreement concerning the profits earned by respondent No 1 was barred by section 76. He acknowledged that the promoters had already received a total amount exceeding Rs 5,80,000, which was well beyond the ceiling allowed under section 76 (1). Nevertheless, his position was that the statutory ceiling, which limits the payment of commission relied upon by respondent No 1, should not apply in a situation where the commission is claimed from the company’s profits rather than from its capital. Before addressing that contention, Mr Sastri raised a further objection, asserting that the agreement in dispute fell outside the scope of section 76 altogether. Section 76, he noted, refers, inter alia, to commissions payable to any person for subscribing or agreeing to subscribe, either absolutely or conditionally, for shares of a company. Consequently, he maintained, because the present agreement was entered into for consideration other than that specified in section 76, it could not be resisted on the ground that it was covered by the section. The determination of this issue, the Court observed, required a construction of two distinct agreements. The first agreement, dated 1939, provided that the promoters would receive a commission in recognition of the assistance they rendered and the effort they expended, and because each of them had agreed to purchase and had purchased shares worth Rs 1‑1/2 lakhs out of the company’s capital. The agreement further stipulated that the commission would be payable for as long as the company continued to exist. Although the agreement mentioned the help and effort of the promoters, it was fundamentally, if not entirely, based on the fact that the promoters had agreed to buy and had actually bought the shares, making it clear that the agreement fell within the mischief contemplated by section 76. It was, however, urged that the character of the first agreement was completely altered when a second agreement was executed in 1941. In that later agreement, entered into between the promoters and the new managing agents, the promoters consented to receive a commission of 6‑1/4 percent instead of the 12‑1/2 percent that had been stipulated in the earlier arrangements with the company. The essence of that agreement, therefore, was a reduction in the commission rate. Nonetheless, Mr Sastri relied on other recitals contained in the document to argue that the second agreement was not given as consideration for the purchase of shares by the promoters; those recitals referred to the promoters’ resignation and the surrender of their rights to act as managing director, suggesting that the agreement was made in consideration of that fact.

The Court observed that the promoters had relinquished their offices and had renounced any right to act as Managing Director or Managing Directors of respondent No. 1, and that the agreement was purportedly made in consideration of that surrender. The Court was not impressed by the argument that this surrender alone formed the basis of the agreement. It accepted that the appointment of the new Managing Agents preceded the agreement and that such appointment certainly provided the occasion for entering into the agreement. However, the Court held that the essential feature of the later agreement was the reduction in the commission payable to the promoters, while the remainder of the earlier agreement continued to operate. Consequently, in determining the scope and nature of the later agreement, the Court found it necessary to return to the original agreement. The operative clause of the later agreement expressly referred to the earlier contracts between the parties and stated that, instead of the twelve and one‑half percent commission previously stipulated, a six and one‑quarter percent commission would be payable hereafter. On that basis, the Court was satisfied that the amount claimed by the appellant constituted a commission payment to which section 76 applied.

The Court then considered the contention that, although the purchase of shares by the promoters might form part of the consideration for the agreement, the services rendered and the efforts expended by the promoters in promoting the company were also set out in the first agreement as consideration. The appellant argued that even if the commission clause fell within section 76, the remainder of the agreement, based on other considerations, would lie outside that provision, and that the two parts could be severed, requiring the Court to determine the amount recoverable under the valid portion. The Court held that this argument could not be pursued at this stage. It noted that, in the trial court, the appellant had attempted to adduce oral evidence to show that the two considerations could be severed and that the payable amount should be assessed only on the valid portion. The trial judge refused to allow this oral evidence because the claim relied upon no allegation in the plaint and no issue had been raised at the time the issues were framed. Moreover, the trial judge found the appellant’s attempt to introduce such evidence to be feeble and half‑hearted. Accordingly, the trial court denied the appellant the opportunity to present that case. When the matter proceeded to the appellate court, the appellant made no grievance concerning the trial court’s decision; otherwise the appellate court would have addressed the point. Therefore, the Court concluded that the appellant could not be permitted to raise the severance argument at this juncture.

The Court observed that the appellant could not raise the present issue at this stage of the appeal. The discussion then turned to the main point of disagreement between the parties, namely the construction of sections 76(1) and 76(2) of the Act. Counsel for the appellant, Mr Sastri, argued that when interpreting the relevant statutory provisions, it was essential to remember that Indian company law is largely derived from English company law. Accordingly, he contended that the court should examine how the comparable provision in English law has been interpreted. He maintained that the pattern of Indian company law follows the English model and that the principles laid down by English decisions on the corresponding English provisions ought to guide the interpretation of the Indian statute. This line of argument presupposes that the analogous provision in English company law allows the payment of commission for subscribing to shares out of the company’s profits without any limitation. The Court therefore found it necessary to consider this contention briefly. It noted that the rule concerning the payment of commission for subscribing to shares was introduced into English company law by an enabling provision in the Companies Act of 1900. The introduction of that provision was prompted by an earlier decision of the House of Lords in the case of The Ooregum Gold Mining Co. of India, Ltd., reported in George Roper and Charles Henry Wallroth (1). In that case, the House of Lords held that a company limited by shares, formed and registered under the Companies Act of 1862, did not possess the power to issue shares as fully paid for a monetary consideration less than their nominal value. The memorandum of association of a company registered under the 1862 Act stated that the capital of the company was £125,000 divided into 125,000 shares of £1 each, and that the shares, whether the original or increased capital, might be divided into different classes and issued with such preference, privilege, or guarantee as the company might direct. The company, being short of money, issued preference shares at a great discount; the directors, acting pursuant to duly passed resolutions, issued preference shares with a nominal value of £1 each but with only 15 shillings credited as paid, leaving a liability of 5 shillings per share. A contract to this effect was registered under section 25 of the Companies Act of 1867. The transaction was bona fide and for the benefit of the company. When an ordinary shareholder challenged the validity of the issue, the court held that, read together, the Companies Acts of 1862 and 1867 rendered the issue beyond the company’s powers, and that the preference shares held by the original allottee remained subject to the holder’s liability to pay the unpaid portion to the company.

Lord Halsbury, speaking on the earlier case, explained that section 25 of the Companies Act 1867 made two points clear: the shares were subject to payment and the payment had to be made in cash. He further observed that the provision required the entire amount to be paid in cash, and even though the latter part of the section allowed a contract to be filed that might modify the form of payment, the payment still had to be made in cash, whether in goods or other value. He added that the company’s capital was fixed and certain, and consequently every creditor could rely on that capital as his security. As a result of that decision, it became evident that a company could not pay any commission out of its capital to any person who subscribed for shares. Because of this conclusion, Parliament enacted section 8 of the Companies Act amendment of 1900 to address the difficulty created by the House of Lords decision. Section 8(1) provides that when a company offers shares to the public for subscription, it may lawfully pay a commission to any person who subscribes or agrees to subscribe, or who procures subscriptions, provided that the commission amount or rate is authorized by the articles of association and disclosed in the prospectus. The same subsection requires that the commission not exceed the amount or rate that has been authorized. Section 8(2) then stipulates that, except as permitted in subsection (1), a company shall not apply any of its shares or capital money, directly or indirectly, to pay any commission, discount, or allowance to any person in consideration of his subscription or procurement of subscriptions, whether absolute or conditional. It also forbids the use of such payments by adding the amount to the purchase price of property, to the contract price of work, or out of the nominal purchase money. Section 8(3) clarifies that nothing in the section restricts the power of a company to pay commissions in the manner that had previously been lawful. Consequently, the statutory difficulty created by the House of Lords decision in the Ooregum Gold Mining Co. of India Ltd. case was removed by the enactment of section 8, which expressly permitted a company to pay commissions under the conditions specified.

In the earlier statutory provision, the law was amended so that a company could lawfully pay a commission provided the conditions laid down in the relevant section were observed; the amendment was introduced because a decision of the House of Lords had created a legal difficulty, and the Legislature intended to remedy that difficulty by expressly declaring that the company was permitted to pay commissions on the terms specified, which explains the origin of the wording “it shall be lawful for a company to pay” that opens the section. The next significant development came with the Consolidating Act of 1908, where Section 89 dealt with a company’s power to pay commissions and discounts; although Section 89 was more detailed than Section 8 of the Companies Act of 1900, the essential pattern of the rule remained unchanged. A further amendment arrived with Section 43 of the Companies Act of 1929, which introduced an important limitation by stating that any commission paid or agreed to be paid could not exceed ten per cent of the issue price of the shares, or the amount or rate authorised by the articles of association, whichever was lower, thereby placing a ceiling of ten per cent on the amount of commission that could be paid in relation to the share issue price and ensuring that after the 1929 Act a commission could not be larger than ten per cent of the price at which the shares were issued. The appellant contended that commissions could be paid out of profits, but the Court was not persuaded by that argument; it was noted that in the case of Hilder the House of Lords never addressed the question of whether a commission might be paid out of profits, as that issue simply did not arise in the litigation, which concerned only whether a payment constituted an application of capital prohibited by Section 8(2). While dealing with that narrow dispute, the Court observed that Section 8(1) allowed a limited use of the company’s capital for the payment of a commission, but that observation could not be taken as a complete interpretation of Section 8(1) that would imply that payment of commission out of profits was excluded from the provision. Accordingly, the Court declined to accept the appellant’s assumption that the Hilder decision directly settled the question of commission payments out of profits under Section 8(1) or under later provisions of the English Companies Acts. The appellant further argued that authoritative company‑law texts supported the view that payment of commission out of profits was not prohibited; for example, the “Handbook on Joint Stock Companies” by Gore‑Browne, on page 191, states that there is no prohibition against paying a commission unconditionally out of profits and that such payment appears to be lawful unless the articles of association provide otherwise, a citation that the Court noted but did not rely upon to reach its conclusion.

The commentary in the “Companies Acts” notes that the prohibition concerns the application of “shares or capital money,” and that paying a commission out of a fund of undistributed profit is not expressly forbidden by the provision. The author qualifies this observation, indicating that it is more cautious than the unequivocal statement found in Gore‑Browne’s Handbook, which declares that there is no prohibition on paying commission out of profits unless the articles of association say otherwise. Palmer’s Company Precedents records that section 53(2) of the 1948 Act “leaves a company at liberty to apply any of its profit in paying commissions in accordance with the practice existing before the Act of 1900.” In the same author’s Company Law, the analysis of section 53(2) is presented differently. It is suggested that if the language of sub‑section (2) is meant to limit sub‑section (1) so that commission may be paid only out of newly issued shares or capital received for them, then payment of commission out of profits would be prohibited by section 54, which bars a company from giving financial assistance in connection with the subscription of its own shares. Conversely, if sub‑section (2) is an independent provision and does not restrict sub‑section (1), then the use of profit within the limits of sub‑section (1)(b) of section 53 would be permissible. The author favours this latter interpretation, arguing that the wording of sub‑section (2) clarifies that the earlier practice of using profits for commission payments may continue, provided it stays within the authorised limits. This latter observation appears to support the view that the prohibition in section 53(1) applies equally to payments made out of capital and those made out of profits. Consequently, the various writers on company law exhibit differing approaches, none of which seem to be grounded in a judicial decision.

One counsel conceded that there is no direct case law on the issue, and argued that the lack of a decision indicates that the point has never been contested. The opposing counsel, however, contended that the absence of judicial rulings suggests that no one has ever considered that commission could be paid out of profits beyond the limits set by the relevant statutory provision. Regardless of these positions, the Court observed that, based on the material before it, it would be unsafe to assume that English law has settled the question in either direction. Moreover, for obvious reasons, the Court was reluctant to undertake an inquiry into the interpretation of the English provisions itself. Nevertheless, the Court indicated that, for the purpose of analysis, it could assume that the true legal position under the pertinent English statute aligns with the appellant’s contention, while noting that this assumption would not bind the ultimate conclusion.

In this case the Court examined whether it was proper to adopt the appellant’s assumption that the meaning of the newer provision, section 76 of the Companies Act, 1956, must be taken to be identical to the position described in the earlier statute. The Court concluded that such a presumption could not be accepted and that the answer to the appellant’s proposition was negative. Accordingly, the Court first placed side by side section 105 of the Indian Companies Act, 1913, and section 76 of the Companies Act, 1956, for a direct comparison. Section 105, as quoted in the judgment, reads:

“Power to pay certain commissions and prohibition of payment of all other commissions, discounts, etc. (1) It shall be lawful for a company to pay a commission to any person in consideration of his subscribing or agreeing to subscribe, whether absolute or conditionally, for any Shares in the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the company, if the payment of the commission is authorised by the articles and the commission paid or agreed to be paid does not exceed the amount or rate so authorised and if the amount or rate per cent. of the commission paid or agreed to be paid is (a) in the case of shares offered to the public for subscription, disclosed in the prospectus; or (b) in the case of shares not offered to the public for subscription, disclosed in the statement in lieu of prospectus, or in a statement in the prescribed form signed in like manner as a statement in lieu of prospectus and filed with the Registrar and, where a circular or notice, not being a prospectus inviting subscription for the shares is issued, also disclosed in that circular or notice. (2) Save as aforesaid and save as provided in a. 105A, no company shall apply any of its shares or capital money either directly or indirectly in payment of any commission, discount or allowance, to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the company, where the shares or money be so applied by being added to the purchase money of any property acquired by the company or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase‑money or contract price, or otherwise.”

Section 76(1) and (2) of the 1956 Act, as reproduced, states:

“(1) A company may pay a commission to any person in consideration of (a) his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in, or debenture, of, the company, or (b) his procuring or agreeing to procure subscriptions, whether absolute or conditional for any shares in, or debentures of, the company, if the following conditions are fulfilled, (i) the payment of the commission is authorised by the articles; (ii) the commission paid or agreed to be paid does not exceed in the case …”

The provision stipulates that for share subscriptions the commission may not exceed five percent of the issue price or the amount or rate authorised by the articles, whichever is lower. For debentures the maximum commission is set at two and a half percent of the issue price or the amount or rate authorised by the articles, whichever is lower. The rate of commission, whether actually paid or simply agreed to be paid, must be disclosed in the prospectus when the shares or debentures are offered to the public. Where the securities are not offered to the public, the rate must be disclosed in a statement in lieu of prospectus or in a prescribed form that is signed in the same manner as a statement in lieu of prospectus and filed with the Registrar before the commission is paid. If a circular or notice that is not a prospectus is issued to invite subscriptions, the commission rate must also be disclosed in that circular or notice. In addition, the number of shares or debentures for which a person has agreed to receive a commission, whether the subscription is absolute or conditional, must be disclosed in the same manner prescribed for the rate.

Except as provided in the preceding paragraph and subject to the provisions of Section 79, no company is permitted to allot any of its shares or debentures or to apply any of its capital monies, either directly or indirectly, for the payment of any commission, discount or allowance to any person in consideration of that person’s subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares or debentures of the company, or of that person’s procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares or debentures of the company. This restriction applies regardless of whether the shares, debentures or money are allotted or applied by being added to the purchase price of any property acquired by the company, to the contract price of any work to be executed for the company, or paid out of the nominal purchase money or contract price. A comparison of this section with the earlier provision shows three notable departures. First, the new wording begins with “a company may pay a commission,” replacing the earlier expression “it shall be lawful for a company to pay commission,” suggesting a shift in legislative intent. Second, the substantive conditions that formerly formed part of the earlier provision are now expressed more categorically as explicit conditions, indicating that the present section authorises commission payments only within the confines of those conditions. The third departure, discussed subsequently, concerns the inclusion of debentures within the scope of permissible commissions, marking a material change from the previous legislative scheme.

In this case, the Court explained that the provision under section 76 imposes only those limitations that are expressly prescribed by the section, thereby functioning as a rule that authorises payment but forbids any payment that exceeds the stated limit. The Court observed that a further significant amendment is the inclusion of debentures within the scope of the provision. It noted that, as a matter of common knowledge, there has never been any prohibition on the payment of commission in relation to debentures under either English law or Indian law; consequently, if section 76(1) were merely an enabling provision, it would not have been necessary to bring debentures within its ambit. The inclusion of debentures therefore represents a material departure from the earlier section 105 of the previous Act and also from the comparable provisions of the English statute. Accordingly, the Court held that it would be inappropriate to interpret section 76(1) with a preconceived notion suggested by the appellant, because the purpose intended by this subsection may differ from that of the corresponding English provision. The Court further recalled that one of the expressed objects of the Act was to impose strict restrictions on payments made out of the company’s profits to managing agents, directors, managing directors and others involved in the management of the company’s affairs. This objective has been expressly achieved by several provisions of the Act, including sections 348, 352 and 387. The Legislature’s anxiety to preserve the company’s profits and to prevent extravagant disbursements, a distinguishing feature of the Act, indicates that it would be unsafe to assume that section 76(1) was meant to achieve exactly the same result as the analogous English provision. Therefore, the Court concluded that it could not at the outset assume that payment of commission out of profits falls outside the ambit of section 76 merely because a similar provision is absent in English law. The matter before the Court required a fair and reasonable construction of sections 76(1) and 76(2). In construing these subsections, the Court emphasized the necessity of applying the elementary rule that the words must be given their plain grammatical meaning. Since two subsections are involved, the Court stressed that they must be read together as an integral whole, each part illuminating the other, and that they are inter‑dependent, requiring a harmonious interpretation that avoids any repugnancy.

The Court observed that when interpreting the two subsections it is proper to attempt a reconciliation wherever reasonably possible and to avoid any inconsistency. If an inconsistency cannot be avoided, a question may arise as to which provision should prevail, but that question arises only when reconciliation is impossible. The Court then turned to the portion of section 76(1) that is directly before it, namely the provision that the commission paid or agreed to be paid must not exceed the prescribed limit. The Court explained that one condition governing the payment of commission to a person subscribing for any shares is that the commission shall not exceed five per cent of the issue price of the shares or the amount or rate authorised by the articles, whichever is lower. It noted that this provision imposes an absolute ceiling on commission and, in doing so, refers to commission in general without distinguishing whether the commission is paid out of capital or out of profits. Consequently, the Court held that section 76(1), read by itself, unambiguously imposes a ceiling on the payment of commission regardless of the source from which the commission is drawn. The Court reiterated that section 76(1) cannot be treated merely as an enabling provision, a position conceded by the appellant, and therefore the ceiling is intended to prohibit any commission that exceeds the stated limit. Accordingly, the Court concluded that sub‑clauses (i) and (ii) of section 76(1) unquestionably cover commission paid either out of capital or out of profits. Section 76(1)(b)(i) adds the further condition that the payment of commission must be authorised by the articles. Since this clause refers to commission payable for shares or for debentures, the Court considered whether the commission mentioned could be limited to capital alone. It observed that ordinarily commission on debentures would be payable out of debenture money or profits, although it is conceivable that such commission could also be paid out of capital. If commission on debentures can be paid out of profits, the Court reasoned, it is reasonable to assume that the provision refers to commission payable not only out of capital but also out of profits. The inclusion of debentures within the scope of section 76 suggests that clause (c)(i) of section 76(1) should not be confined, on a reasonable construction, to commission payable solely out of capital. Clause (iii) of section 76(1)(b) leads to the same conclusion, as it imposes the condition that the amount or rate per cent of the commission paid or agreed to be paid, in the case of shares or debentures not offered to the public, must be disclosed in the prescribed statement.

The Court observed that the requirement for a public offering included the need to disclose the commission in a statement that functioned as a prospectus, or in a statement prepared in the prescribed format, signed in the same manner as a prospectus, and filed with the Registrar before any commission was paid. In interpreting this provision, the Court found it helpful to refer to section III of the 1913 Act, which mandated that particulars concerning commission on debentures be filed. The Court noted that those particulars inevitably covered commissions that were paid out of profits. Since debentures had now been brought within the scope of section 76, the Court questioned whether it would be unreasonable to assume that the filing requirements in condition (iii) also demanded particulars about commissions payable out of profits. The Court concluded that the term “commission” used in clauses (i) and (iii) clearly referred to commissions paid not only from capital but also from profits in relation to debentures. This interpretation, the Court said, supported the view that the word “commission” in clause (ii) could not be limited solely to commissions payable out of capital. Reading section 76(1) in isolation, the Court found no difficulty in understanding that the legislation contemplated commissions that could be drawn from both capital and profits.

The Court then turned to the argument that accepting this construction might create a conflict between the two sub‑clauses of section 76. Accordingly, the Court examined section 76(2), explaining that it prohibited any company from allotting shares or debentures or applying any of its capital monies, whether directly or indirectly, to pay any commission, discount or allowance to any person for the purposes specified, except as permitted by section 76(1) and section 79. In other words, the prohibition in subsection (2) mirrored the restriction in subsection (1) and was subject to the exception provided in section 79. The Court emphasized that the restriction in section 76(1) was broad and covered payments from any source or fund. Recognising that commissions could be paid through a variety of devices, the Legislature, the Court noted, intended subsection (2) to forbid the use of such devices unless the payment complied with the limits set out in section 76(1). The Court observed that it was well‑known that shares or debentures were sometimes allotted, or capital money was applied, as a means of paying commission, and that similar schemes were employed under the guise of other transactions.

In this case, the Court explained that payments which appear to be lawful, such as those made for the purchase price of property acquired by a company or for the contract price of work to be performed for the company, may in reality be used to disguise the payment of commission. The Court noted that the purchase price or contract price can be inflated beyond its true value, and the excess amount is intended to be paid as commission. The Court observed that the Legislature was aware of these schemes and therefore inserted subsection 2 of section 76 in its present wording. Referring to Craies’s comment in “On Statute Law”, the Court said that statutory provisions often contain provisos to dispel doubts or remove misapprehensions. Accordingly, subsection 2 of section 76 must be read in the light of section 79 and its provisions, and likewise must be read together with subsection 1 of the same section. In other words, to clarify the status of devices that might be used to circumvent the limit imposed by subsection 1, the Legislature provided in subsection 2 that such devices remain subject to the limitation of subsection 1, and that payments made under those disguises are permissible only if they do not exceed the ceiling prescribed by subsection 1. The Court concluded that, far from creating any conflict or repugnancy between subsections 1 and 2, they form a single integrated provision whose purpose is to impose a ceiling on commission payments, whether the commissions relate to shares or to debentures. The Court further observed that the desire to protect the company’s profits is evident in subsection 1 just as it is in other sections previously considered.

The Court then addressed the argument advanced by Mr Sastri, who contended that the proper construction should treat subsection 2 as the primary provision and view subsection 1 merely as a proviso to it. According to his reasoning, subsection 2 imposes an absolute ban on the allotment of any shares or debentures or on the application of any capital monies, while subsection 1 relaxes that ban by permitting payments within the limits specified and subject to the conditions prescribed. Mr Sastri further argued that the ban in subsection 2 relates to capital rather than profits, and therefore the relaxation in subsection 1 must also be confined to capital and cannot be extended to profits. The Court described this line of argument as one of desperation. It rejected the request to rewrite the two subsections, stating that the Court does not have the authority to amend statutory language, especially when an alternative construction shows no repugnancy between the subsections. The Court also noted that the appellant’s suggested approach of ignoring the opening words of subsection 2 and inserting them into subsection 1 is not permissible, as it would effectively amount to legislative rewriting, a function reserved for the Legislature, not the judiciary.

The Court observed that it was the Legislature’s role to enact statutes and not the Court’s role to rewrite them. Consequently, the Court agreed with the High Court judges when they held that the appellant’s claim for a commission derived from the company’s profits was barred by section 76(1) of the Act and therefore could not be entertained. In addressing further submissions raised by counsel, the Court considered two additional arguments presented by Mr Aggarwala. The first argument contended that if sections 76(1) and 76(2) were interpreted as applying solely to commissions payable out of capital, then the statute provided no basis for paying commissions out of profits; under that view the plaintiff’s claim would have to be dismissed on that ground. It was further submitted that, because the Act is a consolidating legislation, it should be presumed that the provisions of section 76 exhaustively cover the entire subject of commission payments in relation to shares and debentures, and that any matter not addressed by section 76 could not be claimed after the consolidating Act came into force. The second argument asserted that, had the legislature intended to preserve a right to pay commissions out of profits in respect of dividends, it would have introduced a provision analogous to section 76(3), which expressly preserves a company’s power to pay brokerage as it has historically been lawful to do so. Since section 76(3) contains no comparable saving clause for commissions out of profits relating to debentures, the argument claimed that there was some merit in the contention that the statute excluded such payments. Before concluding the discussion, the Court noted a significant amendment made in 1960: section 76(2) was altered by section 22 of the Amending Act (No. 65 of 1960), which removed the word “capital” from the text. It was uncontested that, after this amendment, both sections 76(1) and 76(2) applied to commissions payable from profits as well as from capital. The Court had already observed that the appellant’s construction of section 76(2) relied heavily on the phrase “any of its capital moneys.” With the deletion of the term “capital,” the provision of section 76(2) became sufficiently broad to encompass profits. Accordingly, the Court concluded that, post‑1960, the restriction imposed on the payment of commissions in relation to shares and debentures extended equally to commissions paid out of capital and those paid out of profits. It was reasonable to infer that the 1960 amendment was intended by the legislature to eliminate any ambiguity created by the earlier use of the word “capital” in section 76(2) and to clarify the legislative intent.

It was stated that the amendment made in 1960, together with several other amendments of the same year, was evidently based on the recommendation of the Committee appointed for that purpose. In the Committee’s report the members observed that “in order to remove any doubt, we would recommend the deletion of the word ‘capital’ from s. 76(2)”. Consequently, the Court found that the issue raised in the present appeal could not arise under the amended provisions of s. 76. Only one minor question remained for consideration. The lower courts had been urged to hold that s. 76 could not be invoked against the appellant because the agreement on which the appellant relied was executed before 1 April 1956, the date on which the Act became effective. The contention was that respondent No. 1, by relying on s. 76, was attempting to apply that provision retrospectively, which the appellant argued was impermissible. The Court expressed the view that this argument lacked merit. Section 9 of the Act provided a clear answer: under s. 9(a) any agreement entered into by a company is void if it is inconsistent with the provisions of the Act, and under s. 9(b) the articles of association are likewise ineffective if they conflict with the Act. Section 645 reinforced the same conclusion. Accordingly, the appeal was dismissed with costs.

The respondent, Shri Changdeo Sugar Mills Ltd., had been incorporated as a private company on 1 September 1939. The appellant, together with respondents Nos. 2 and 3 and the late Kasturchand Srikrishna, had acted as promoters of the company’s formation. On 18 December 1939 the company entered into separate agreements with each promoter. Each agreement stated that, in consideration of the assistance rendered and the trouble taken by the promoters, and on the condition that each promoter subscribed to shares valued at one and a half lakh rupees in the company’s capital and actually took those shares, the company would pay to each promoter—or to his heirs, representatives, executors, administrators or assigns—a sum equal to three and one‑eighth percent of the net profits of the company. The promoters duly accepted the allotted shares and, taken together, became entitled to receive twelve and one‑half percent of the company’s profits. Article 3 of the company’s Articles of Association authorized the company to enter into the aforementioned agreements with the promoters. In 1941 the company encountered financial difficulties, and on 22 April 1941 a tripartite agreement was executed among the company, a firm named Ardeshir Harmusji Bhiwandiwalla & Co., and the promoters. That agreement provided that the firm or its nominee would become the managing agent of the company, acting jointly with the promoters.

The parties agreed that they would receive “6‑1/4 percent as promoters’ commission instead of 12‑1/2 per cent as provided in our respective agreements with the company”, that is, the agreements dated 18 December 1939. By virtue of that agreement article 3 of the company’s Articles of Association was duly amended, and a separate agreement was also executed by the respondent company with each individual promoter. In 1944 the respondent company was converted into a public limited company. On 10 June 1944 Kasturchand Srikrishan died, and his interest under the agreements was thereafter represented by respondents 7 to 10. It is presumed that respondent 3 had taken the shares and entered into the agreements on behalf of a joint family; this is not in dispute because, following a partition between respondent 3 and his co‑sharers, respondents 4 to 6 became entitled to participate in respondent 3’s interest under the agreements as well as in the shares. In September 1944 three suits were pending in the High Court at Bombay between the respondent company, the beneficiaries under the agreements and the firm Bhiwandiwalla & Co.; the details of those suits are unnecessary, as they were subsequently compromised. The settlement terms required (a) the mutual withdrawal of all suits and (b) that “the promoters commission payable to us four which is Rs 1‑9‑0 to each of us and which comes to 6‑1/4 percent in the aggregate payable out; four under the agreement shall remain in force as in the agreement and our right of commission shall continue accordingly”. The word “us” in the settlement denotes the beneficiaries under the agreements. Accordingly, the respondent company continued to pay the commission at the rate of 6‑1/4 percent to those beneficiaries up to 30 September 1955. On 1 October 1956 the respondent company informed the appellant and the other beneficiaries that, effective 1 April 1956 when the Companies Act 1956 came into force, the agreements had become illegal and void. The company relied on section 76 of the Companies Act 1966, which it claimed prohibited any payment of commission for subscribing for shares in excess of five per cent of the issue price. It was not contested that the commission already paid to the appellant and the other beneficiaries exceeded five per cent of the issue price. Consequently, the respondent company contended that the appellant and the other beneficiaries were not entitled to any further commission. The appellant opposed this contention and instituted a suit in the High Court at Bombay against the respondent company, joining the other beneficiaries as defendants, seeking a declaration that the agreements of 19 December 1939, as modified on 22 April 1941, were valid and an injunction restraining the respondent company from passing a resolution to delete article 3 of its Articles of Association as proposed and from acting on the basis that the agreements were illegal.

The respondent company argued that the agreements were illegal. The appellant maintained that section 76 of the Companies Act of 1956 prohibited the payment of commission for subscribing for shares only when such commission was paid out of capital. Because the agreements in question provided for the commission to be paid out of profits, the appellant asserted that section 76 did not apply to those agreements at all. The respondent company contested the suit, but the other defendant, who was also a beneficiary under the agreements, supported the appellant’s position. The respondent company, however, insisted that section 76 applied to commission paid both out of capital and out of profits. The trial judge, S. T. Desai, dismissed the suit at first instance. An appeal to an appellate bench of the High Court was also dismissed. The present appeal challenges the judgment of that appellate bench and has been entertained by this Court on a special leave. The judgment now must consider the provisions of section 76, but before doing so the Court finds it necessary to examine the earlier state of the law.

In England, before the Companies Act of 1900, there was no statutory rule governing the payment of commission to persons who subscribed for shares. Such a rule was first introduced by section 8 of the 1900 Act. Even prior to that enactment, the common law required that any person who subscribed for shares must pay the full amount of the shares in cash. This principle was regarded as a fundamental tenet of company law. The case of Ooregum Gold Mining Co. of India Ltd., V. George, Roper (1) illustrated the law as it existed before 1900. In that case the company issued shares with a nominal value of one pound each, of which fifteen shillings were credited as paid‑up, leaving a liability of five shillings per share. A shareholder brought an action challenging the validity of that issue, and the court held the issue to be invalid. Lord Halsbury observed that the system created by the statutory requirement, which limited a shareholder’s liability to the unpaid portion of his shares, made it impossible for a company to deviate from that requirement or to arrange with shareholders that they would not be liable for the unpaid amount, even though the shares’ total value had been fixed by Parliament. He explained that if a company could do so, the statutory provision would become ineffective. The provision Lord Halsbury referred to required the memorandum of association to state the company’s capital as divided into shares of a fixed amount, a requirement that also appears in the present Companies Act. The decision consequently rendered it impossible for a company to pay any commission out of its capital to any person for subscribing for its shares, a restriction that was later perceived to cause certain inconvenience in the management of a company’s affairs.

In order to alleviate the inconvenience that arose from the inability of a company to use its capital to pay commissions to persons who subscribed for its shares, section 8 was introduced into the Companies Act, as reported in (1) (1892) A.C. 125, 133. Sub‑section (1) of that section declared that it would be lawful for a company to pay a commission to a person in consideration of his subscribing for any shares, provided that the amount or rate of the commission was authorized by the Articles of Association, disclosed in the prospectus, and that the commission actually paid did not exceed the authorized amount or rate. Sub‑section (2) then stipulated that, except as expressly permitted by sub‑section (1), no company could apply any of its capital money, whether directly or indirectly, to the payment of any commission to any person in consideration of his subscribing for shares.

This statutory provision was examined by the House of Lords in the case of Hilder v. Dexter (1). In that case a company had entered into an agreement with a person who had taken up some of its shares, giving the person an option to acquire further shares at par within a specified period. Subsequently the market price of the shares rose, and the person exercised his option. A shareholder then instituted an action to challenge the validity of the agreement. The House of Lords held that the agreement was valid. Lord Davey stated that the issue before the court concerned the powers of the company itself rather than the proper exercise of directors’ powers. He explained that, after considering the language of section 8, sub‑section 2, the prohibition contained in that sub‑section applied only to the use of the company’s capital, directly or indirectly, for the payment of a commission by the company, and that the transaction under dispute did not fall within that prohibition. He further observed that his conclusion would not extend the prohibition to transactions that were already legitimate before the enactment of the Act, and that, to his knowledge, no other ground existed for objection.

Lord Davey also referred to sub‑section 1 of section 8, noting that “this subsection, therefore, permits a limited application … of the company’s capital in payment of a commission” as recorded in (1) (1902) A.C. 474, 481, 479. Consequently, there was no doubt that under the 1900 Act nothing barred the payment of commissions for subscribing to shares out of a company’s profits. The earlier decision in the Ooregum Gold Mining Company case (1) had merely affirmed that the amount payable on shares must be paid in full and that capital could not be used to pay commissions on those shares. Thus, Lord Davey was satisfied that his decision did not affect the legitimacy of transactions that provided for the payment of commissions out of profits. It follows, therefore, that the House of Lords affirmed that the statutory prohibition in section 8, sub‑section 2, was limited to the use of capital, leaving the payment of commissions from profits unrestricted.

The Court noted that in Hilder v. Dexter (2) the view was expressed that section 8, sub‑section 2 of the Companies Act 1900 did not pertain to the payment of commission out of a company’s profits. This interpretation has been accepted in England, as recorded in Palmer’s Company Precedents, 17th edition, vol. I, p. 179, and in Palmer’s Company Law, 20th edition, p. 200, and is also referenced in Sarkar & Sen’s Indian Companies Act, 1913, p. 302. The Court said that no alternative interpretation is plausible because no Companies Act, unless it expressly provides otherwise, limits a company’s authority to deal with its own profits. Consequently, a company is free to contract with any person to receive a share of its profits in consideration for that person’s subscription to its shares. This was the law that existed before the 1900 Act. The judgment in Hilder v. Dexter (2) held that section 8 of the 1900 Act did not alter this pre‑existing rule, and therefore, despite the enactment of that Act, a company retained the full power to pay commissions out of its profits to those who subscribed for its shares. The Court reminded that the discussion concerns the powers of the company itself, not the powers of its directors. Section 8 of the 1900 Act was later replaced by article 89 of the English Companies Act 1908, which in turn was superseded by section 43 of the English Companies Act 1929, and the present equivalent is found in section 53 of the English Companies Act 1948. Throughout this period the substantive provision remained essentially unchanged in England, except that the 1929 amendment introduced an additional limitation stipulating that any commission paid for share subscriptions must not exceed ten per cent of the issue price or the amount or rate authorized by the articles, whichever is lower. The Court observed that this limitation did not alter the earlier English rule regarding the permissible payment of commissions out of profits.

Turning to Indian law, the Court explained that section 105 of the Companies Act 1913, for the first time, introduced a provision corresponding to the English section 8 of 1900. On the general principles of company law—namely that a company may, unless expressly restricted, dispose of its profits as it sees fit—and relying on the authority of Hilder v. Dexter (1), the Court held that this principle should be fully applicable to the Companies Act 1913. Accordingly, an Indian company may enter into a valid agreement to pay any commission it chooses, out of its profits, to any person who subscribes for its shares. The Court concluded that the power to pay such commissions remains intact under Indian law, consistent with the English precedent and the statutory scheme.

The Court observed that section 105 of the Companies Act, 1913 was in substance the same as section 8 of the English Companies Act of 1900, and that the 1913 provision contained no limitation on the amount of commission that could be paid. The Court then examined section 76 of the Companies Act, 1956. Sub‑section (1) of that provision allowed a company to pay a commission to any person in consideration of his subscribing for any shares or debentures of the company, provided that three conditions were satisfied. Condition (i) required that the payment of the commission be authorised by the articles of association. Condition (ii) limited the commission to, in the case of shares, five per cent of the issue price or the amount or rate authorised by the articles, whichever was less, and, in the case of debentures, two and a half per cent of the issue price or the amount or rate authorised by the articles, whichever was less. Condition (iii) mandated that the amount or rate of the commission be disclosed in the prospectus when the securities were offered to the public, or in a statement in lieu of a prospectus or in a prescribed form when the securities were not offered to the public, and that the disclosure be signed and filed with the Registrar before the commission was paid; where a circular or notice that was not a prospectus invited subscription, the commission also had to be disclosed in that circular or notice. The Court then posed the question of whether this sub‑section altered the earlier law that, as previously stated, permitted the free payment of commission out of profits. In other words, the Court asked whether, as it stood, the sub‑section prevented a company from paying any commission it chose out of its profits to a person who subscribed for its shares. The Court found no indication in the language of the sub‑section that a change in the law was intended. It noted that the permission granted by sub‑section (1) was not expressly confined to payment of commission out of capital, but it also did not state that the provision applied to payment of commission out of profits. Consequently, the Court considered how the sub‑section should be construed. It recalled a well‑established rule of statutory construction that presumes the legislature does not intend to make a substantial alteration in the law beyond what is expressly declared in clear terms or obvious implications, and that, absent such express intent, the existing legal principles remain undisturbed. The Court emphasized that it would be highly improbable for the legislature to overturn fundamental principles, infringe rights, or depart from the general system of law without expressing such intention with unmistakable clarity.

In explaining the rule of construction, the Court observed that the purpose of interpreting a provision is to ascertain the legislature’s intention with unmistakable clarity. The Court warned against attributing a particular effect to general words merely because those words might acquire such meaning when employed in their broadest, usual, or natural sense. The Court emphasized that, even when words appear wide‑ranging or comprehensive in their literal meaning, they must ordinarily be interpreted as being limited to the actual objects that the Act seeks to achieve. This principle was cited from Maxwell on Interpretation of Statutes, tenth edition, pages eighty‑one to eighty‑two.

The Court then turned to the specific statutory scheme dealing with the payment of commission by companies. It noted that, under the Companies Act of 1913, a company possessed the unfettered right to pay any commission out of its profits to any person who subscribed for shares in the company. The Court found no indication in subsection (1) of section 76 of the Companies Act of 1956 that this established rule, grounded in the fundamental principles of company law, was intended to be altered. The only material change introduced by section 76(1) of the 1956 Act, apart from another amendment to be considered later, was the insertion of a restriction on the amount of commission that could be paid. The Court held that this restriction, by itself, did not provide any basis for concluding that the pre‑existing law granting companies full liberty to pay commission out of profits was to be superseded. The Court explained that the restriction would have its full effect when applied to commissions paid out of capital, and the provision did not specify any source from which the limited commission must be drawn. Consequently, the Court concluded that the proper construction of subsection (1) of section 76 was to confine its general wording so that it would not disturb the earlier law. Accordingly, the Court read the terms of the provision as applying solely to the payment of commission out of the capital monies of the companies.

Addressing section 105(1) of the Companies Act of 1913, the Court quoted the enactment: “It shall be lawful for a company to pay a commission to any person in consideration of his subscribing for shares in it.” The Court identified the phrase “it shall be lawful” as an enabling expression, used in statutes to permit actions that were previously unlawful. Referring to Craies on Statute Law, fifth edition, page 263, the Court noted that statutes intended to enable a particular act are usually phrased in permissive language, such as “it shall be lawful” or “such and such may be done.” The Court then cited the decision in Julius v. Bishop of Oxford, observing that the words “it shall be lawful” are plain, unambiguous, and not equivocal. The Court explained that these words merely make legal and possible an act for which there would otherwise be no right or authority; they confer a faculty or power and, by themselves, do not do more than grant that faculty.

The Court explained that the expression “shall be lawful” in section 105(1) of the Companies Act of 1913 signified the legislature’s intention to render lawful the payment of a commission to a person who subscribed for shares, a practice that had previously been illegal. Accordingly, the legislature sought to permit and legitimize the payment of commission out of the company’s capital to a subscriber, a mode of payment that before the enactment was prohibited. By contrast, the payment of such commission out of profits had always been permissible, and therefore no statutory provision was required to enable that form of payment or to serve as an enabling enactment for it. Consequently, the Court held that section 105 did not aim to impose any restriction on a company’s authority to pay commission out of its profits. The Court also noted the authority cited as (1) (1880) 5 A.C. 214,222 in support of this view. The Court then turned to subsection (1) of section 76 of the Companies Act of 1956, observing that this provision replaces the words “shall be lawful” with the word “may”. The Court stated that this linguistic substitution makes no substantive difference, because, as earlier discussed in the passage from Craies, both expressions convey the same permissive meaning – they indicate that an act may be performed which could not have been performed before the enactment. Therefore, the Court concluded that section 76(1) of the 1956 Act was intended to produce the same effect as section 105(1) of the 1913 Act, namely, to legalise the payment of commission out of capital, a payment that before the 1913 Act was illegal and that became illegal again upon the repeal of the 1913 Act by the 1956 Act. The Court further emphasized that, for this reason, section 76(1) of the 1956 Act was not concerned with payments of commission out of profits.

The Court proceeded to examine subsection (2) of section 76 of the 1956 Act. That provision reads: “Save as aforesaid and save as provided in section 79, no company shall allot any of its shares or debentures or apply any of its capital moneys, either directly or indirectly, in payment of any commission, discount or allowance, to any person in consideration of – (a) his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares or debentures of the company; or (b) his procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares or debentures of the company, whether the shares, debentures or money be so allotted or applied by being added to the purchase money of any property acquired by the company, or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase money or contract price, or otherwise.” The Court observed that this subsection clearly indicates that subsection (1) should be interpreted as limited solely to the payment of commission out of capital. The language of subsection (2) expressly saves the situation described in subsection (1) and then provides a blanket prohibition on any commission being paid out of the company’s capital moneys. Hence, the Court inferred that the purpose of subsection (2) is to ensure that, apart from the narrow exception granted by subsection (1), no commission may be paid out of capital, whether directly or indirectly, thereby confirming that the scope of subsection (1) is confined to capital payments alone.

In the Court’s analysis, the first sub‑section of the provision was regarded as exhaustively defining the circumstances under which a company could pay commission from either its capital or its profits. According to that view, no commission could be paid from capital, from profits, or from any other company money except in the manner specifically described in the sub‑section. The respondent company argued that, if this interpretation were correct, the second sub‑section would become wholly redundant because its prohibition would already be covered by the first. The Court noted that the respondent contended the second sub‑section existed merely to prevent the limits set by the first sub‑section from being circumvented by indirect means. The Court observed that it was unnecessary to legislate a separate provision for that purpose, because anything that could not be done directly could not be done indirectly either. Moreover, if the second sub‑section was intended to stop the indirect use of capital for commission, the same logic would require a parallel restriction on the indirect use of profits, which the respondent had not provided. The Court therefore found the reasoning offered by the respondent for the enactment of the second sub‑section to be unpersuasive. It further held that the two sub‑sections must be read together: the second sub‑section imposed a general prohibition on paying commission out of capital, while the first sub‑section carved out an exception to that prohibition. The expression “save as aforesaid” in the second sub‑section necessarily meant that the first sub‑section was the sole exception to the general ban, and consequently the first sub‑section dealt only with capital and did not extend to profits.

The Court then turned to the substantive difference between section 76 of the 1956 Act and the earlier provision in section 105 of the 1913 Act. Section 76 introduced, for the first time, an explicit provision authorising the payment of commission for subscribing to debentures, whereas section 105 had dealt solely with commission for share subscriptions. The respondent advanced an argument based on this legislative innovation, contending that, prior to the 1956 Act, a company was free to pay any commission it chose for debenture subscriptions, whether from capital or from profits, subject only to the filing requirements of section 111 of the 1913 Act. Consequently, the respondent asserted that the inclusion of debentures in section 76 demonstrated that the power to pay commission—whether out of capital or out of profits—for both share and debenture subscriptions was comprehensively captured by the first sub‑section. The Court examined this contention in light of its earlier conclusion that the first sub‑section provided an exception only to the capital‑related prohibition and therefore did not create a separate power to pay commission from profits.

The Court indicated that it could not accept the argument that sub‑section (1) of section 76 of the 1956 Act was merely an exception to the general prohibition contained in sub‑section (2). It observed that, if sub‑section (1) were indeed only an exception, then the restriction created by sub‑section (1) would be limited solely to the payment of commission for subscribing for debentures out of the company’s capital. The Court noted that, read in that manner, after the commencement of the 1956 Act a company would have no power to pay any commission from its capital for subscribing for its debentures except as expressly provided in section 76(1) of that Act. Consequently, the law would undoubtedly have been altered, but such alteration would have occurred because the 1956 Act itself introduced the change in clear terms through the prohibition contained in sub‑section (2) of section 76. The Court then considered the alternative view that sub‑section (1) might be exhaustive with respect to a company’s power to pay commission for subscribing for debentures, whether out of capital or out of profits. Under that assumption, the Court held that the subsection would nevertheless modify the pre‑existing law by imposing a restriction on the power to pay commission for subscribing for debentures out of profits, a power that formerly existed without any limitation. If sub‑section (1) were not exhaustive, the Court argued, then its provisions relating to payment of commission out of profits would become ineffective, and it would have to be read as altering the earlier law by necessary implication. The Court found it noteworthy to point out that section 111 of the 1913 Act provided that failure to file the particulars required by that section would not affect the validity of the debentures issued and, therefore, might not affect the validity of any agreement to pay commission on those debentures. Returning to the matter presently before it, the Court concluded that it was impossible to say that a necessary implication of sub‑section (1) of section 76 of the 1956 Act was to alter the previous law that permitted the free payment of commission for subscribing for shares out of profits. Regarding commission paid out of capital for subscribing for shares, the Court held that the provision was merely enabling and not restrictive; however, regarding commission for debentures, whether paid out of capital or profits, the Court assumed the provision to be restrictive and exhaustive, allowing no power to pay such commission except as expressly permitted. Consequently, the Court stated that, because the provision concerning shares is only enabling, it cannot affect the pre‑existing power to pay commission out of profits for shares. The fact that the provision concerning debentures may have to be read as restrictive, that is, as exhaustively defining the power in that regard, is no reason for saying that it has the

The Judge observed that the provision of section 76 did not have the same effect when it concerned payment of commission for subscribing for shares. He explained that the considerations relevant to commissions on share subscriptions differ entirely from those applicable to commissions on debenture subscriptions, and therefore the statutory impact must also differ. On that basis, the Judge formed the opinion that section 76 of the 1956 Act does not limit a company’s authority to pay, out of its profits, any commission it chooses for share subscriptions. Accordingly, he concluded that the agreements whereby the respondent company paid commissions from its profits for subscribing to its own shares were not disturbed by section 76(1) of the Act. He further held that those agreements remained fully valid after the Act of 1956 came into force, and therefore the appeal should be allowed. However, the majority of the Court disagreed with that view and concluded that the appeal could not succeed. The Court therefore dismissed the appeal and ordered that the costs of the proceeding be borne by the appellant. The judgment emphasized that the legislative intent behind section 76 was to regulate commissions on debenture issues, not to curtail customary arrangements for share subscriptions. Consequently, the statutory provision could not be read to invalidate existing contracts that were executed before the enactment of the 1956 legislation.