Case Summary
| Citation | Bharat Insurance Co. Ltd. v. Kanhaya Lal Gauba AIR 1935 Lah. 792 |
| Keywords | |
| Facts | The plaintiff was a shareholder. He approached the court for correct construction of a particular object of the company embodied in the memorandum of association pertaining to application of the assets of the Company. The plaint was opposed on the ground that the shareholder, if dissatisfied with the acts and deeds of the directors, should have raised the question before the general body of shareholders. The broad rule in such cases is, no doubt, that in all matters of internal management of a company, the company itself is the best judge of its affairs and the court should not interfere in such matters. |
| Issues | Whether, on the facts and in the circumstances of the case, a single member of the company can maintain a suit for a declaration as to the true construction of the Article 3(d) of the MOA? |
| Contentions | |
| Law Points | It was held that the suit in so far as related to declaration of meaning of the clause,i.e. article 3(d) was concerned, the main point involved was the interpretation of a certain clause in the MOA relating to application of the assets of the company. Such a question was not a matter of internal management. A single member of the company could maintain a suit for declaration as to the true construction of the AOA. Regarding the true meaning of the impugned clause, the distinction was clearly drawn in the clause between “advancing money at interest ” and “investing money”. If the intention of the directors was to make a “temporary loan” it was clear that the transaction would fall under the head of advancing money at interest as mentioned in the first portion of the clause and would not be an investment. Such loans could only be made on the security of land, houses, machinery and other property situated in India. If however, the directors intended to invest money; e.g., in government securities or other stock, the directors would have full liberty to decide whether the nature of the security for the investment was or was not adequate, without reference to the kind of security required for loans covered by the first portion of the clause. |
| Judgement | Court held that, the key point involved was the interpretation of a certain clause of an object in the memorandum relating to the application of the assets of the company. Such a question is not a matter of mere internal Management. It was alleged that certain directors whose good faith had not been questioned had misunderstood the clause in question and were in consequence acting ultra vires in their application of the funds of the company. |
| Ratio Decidendi & Case Authority |
Full Case Details
SALE, J. – The plaintiff-respondent in this case, Mr. Kanhaya Lal Gauba, is a share-holder,
policy-holder and director of the Bharat Insurance Company. Among other objects of the
company, as stated in the Memorandum of Association, is the object embodied in Cl. 3(d) of
the Memorandum of Association, the correct construction of which forms the main subject of
the action. This clause runs as follows:
“To advance money at interest on the security of land, houses, machinery and
other property situated in India and to invest money not immediately required upon
such securities and Bank Deposits as may be from time to time determined.”
The Board of Directors of this company consists of Lala Harkishan Lal, Chairman, Mr.
Shiv Dyal, Lala Duni Chand and the plaintiff-respondent himself. Mr. Gauba alleges that a
considerable portion of the assets of the company in the shape of the life insurance fund are
invested in the business undertakings controlled by the Chairman. He complains that several
of these investments have been made by the Director without adequate security contrary to the
provisions of Cl. (d), Art. 3 of the Memorandum of Association, and he brought this action
for a declaration that the defendant company is entitled to make investments only against
securities specified in this clause and not against merely personal securities of the borrower,
and also for a perpetual injunction against the defendant company restraining it from granting
any loans to or making any investments in certain specified concerns except on proper
security and with the concurrence of a valid quorum of the Board of Directors. The learned
Subordinate Judge, who heard and decided the case ex parte against the company, granted the
plaintiff the declaration prayed for, but, as regards the second relief; he granted a perpetual
injunction against the Directors of the defendant company only restraining them from
infringing the provisions relating to quorum in the Articles of Association. From this ex parte
decision the defendant company has instituted this appeal.
Before dealing with the main point in this appeal, which is the correct interpretation of
Cl. (d), Art. 3 of the Memorandum of Association, it is necessary to notice the contention
urged by Mr. Badri Das at the outset that the cause of action disclosed in the plaint is not
maintainable against the company and that Mr. Gauba, if dissatisfied with the proceedings of
the Directors, should have raised the question before the general body of share-holders. The
broad rule in such cases is no doubt that in all matters of internal management of a company,
the company itself is the best judge of its affairs and the Court should not interfere. But here
the main point involved is the interpretation of a certain clause in the Memorandum of
Association relating to the application of the assets of the company. Such a question is not a
matter of mere internal management. It is alleged that certain Directors whose good faith has
not been questioned have misunderstood the clause in question and are in consequence acting
ultra vires in their application of the funds of the company.
Under these circumstances, I have no doubt that a single member of the company can
maintain a suit for a declaration as to the true construction of the article in question. I would
refer in this connexion to the observations by Brice on Ultra Vires on pp. 714, 226 and 745 of
Edn. 3, which deal with the circumstances under which a single member can maintain an
action against the company for acts alleged to be ultra vires. As regards the proper persons to
be cited as defendants, it seems that the company itself must in any case be joined. At p. 721
of Brice, para 294, the learned author observes:
“There does not appear to be any case where the necessity of the corporation
being a party has been expressly decided; but with respect to the first class of action
(that is to say actions to prevent ultra vires proceedings), the question can admit of no
doubt – the relief therein claimed against the corporation itself,”
and the learned author lays it down that the corporation itself must be a party. No doubt there
have been cases quoted on p. 721 where the absence of the corporation has been excused. In
the present case however I am of opinion that this is essentially a case where the relief
claimed in respect of the declaration must lie against the company, and I see no reason why
the company could or should have been excused from being impleaded in the present action.
As regards the injunction, however it will be noted that, while the relief claimed in the plaint
is against the company, the lower Court has granted the injunction against the Directors only,
who have not been made parties to the suit. On p. 744 of Brice on Ultra Vires (para 301-A),
it is laid down that:
“Among the defendants must appear personally or by representation all the
parties concerned in objecting to the suit. Consequently there must be joined in the
first place, the corporation itself; secondly, the governing body, or at least those of
them who are implicated in the objectionable proceedings.”
the reason assigned being that the latter are the persons who would be affected by the decree
in the first instance. In this case it is clear that the Directors as the governing body are the
persons mainly affected by the injunction, if issued, and, as the Directors have not been
personally impleaded it is doubtful whether the injunction in the form granted by the lower
Court can be maintained. In any case it is to be noted that the plaintiff has not asked the Court
to pronounce upon the validity of the past acts of the Directors. He asked only that for the
future the Directors should be restrained by injunction from disregarding the provisions of the
Memorandum of Association regarding quorum and security. Whatever the Directors may
have done in the past it is not right to assume that the Directors will not in future conduct the
affairs of the company with due order and regularity and in accordance with the interpretation
placed by the Court, on Cl. (d), Art. 3 of the Memorandum of Association; and I see no
reason, as regards the future conduct of the Directors in this respect, to depart from the
ordinary principle that the Court will not interfere in the management of a company’s internal
affairs. For this reason I would accept the appeal to the extent of setting aside the order of
injunction against the Directors.
Turning now to the main point urged in this appeal, the interpretation of Cl. (d), Art. 3 of
the Memorandum of Association, it is necessary in the first place to repeat that the plaintiff
does not ask us to pronounce on the validity of the past actions of the Directors, but to give an
authoritative interpretation of Cl. (d) for future guidance of the company. The lower Court has
taken the view that this article “forbids the Directors to invest money and advance loans in
and on personal securities.” This finding is apparently based on the view that the words “such
securities” occurring in the second portion of Cl. (d) must be interpreted according to the
ejusdem generis rule, to denote the same form of securities as are required for advancing
money at interest under the first portion of the clause, viz., the security of “land houses and
other property situated in India.” In appeal Mr. Gauba does not support the application of the
ejusdem generis rule to the interpretation of the word “securities” in this connexion. His
contention is that the advancing of money at interest is a transaction essentially different
from that of investing money. He concedes that the securities that may be required in
connexion with the investing of money may be of a different kind from the securities required
for advancing money at interest, but he urges that if the grant of a loan is to be included in the
phrase “invest money” according to the alleged present interpretation of this clause, the first
portion of Cl. (d) would be redundant. Mr. Badri Das for the company concedes that there is a
distinction between a loan and an investment and that the two portions of Cl. (d) are not
redundant. He urges however that the real distinction between the two portions of this clause
is that the first part of the clause relates to long term investments while the second part of the
clause is confined to short term investments. His view therefore is that while long term
investments or advances can only be made on the security of land, houses, machinery and
other property situated in India, it is open to the Directors to make short term advances under
the second part of Cl. (d) upon such securities as they think fit; in other words, that there is
nothing to prevent the Directors from making short term advances on personal security.
It is clear that the two portions of Cl. (d) must be read independently and without
qualification of each other. If the Directors intend to advance money at interest – in other
words to grant a loan – the first portion of the clause requires the security of land, houses,
machinery and other property situated in India. If however the Directors intend to invest
money in the sense ordinarily understood by men of business, they are at liberty to do so upon
such securities as they think fit. I do not agree with Mr. Badri Das that the point of difference
between these two clauses should be confined to the length of time for which the money is to
be tied up, whether advanced on loans or otherwise invested. If that were the true construction
of the clause, there would be no reason for the distinction clearly drawn in the clause between
advancing money at interest and investing money. As Mr. Badri Das concedes, a loan is not
the same thing as an investment and I am not prepared to interpret the clause as though the
two terms were interchangeable. The question must be determined by the real nature of the
transaction into which the Directors propose to enter. If the intention of the Directors is to
make a “temporary loan” (the expression used in p. 2 relating to one of the past transactions
of the Directors) it is in my view clear that the transaction would fall under the head of
advancing money at interest as mentioned in the first portion of Cl. (d) and would not be an
investment. Such loans can only be made on the security of land, houses, machinery and other
property, situated in India. If however the Directors intend to invest money, e.g., in
Government securities or other stock, the Directors have full liberty to decide whether the
nature of the security for the investment is or is not adequate, without reference to the kind of
security required for loans covered by the first portion of the clause.
I would therefore hold that the plaintiff is, on this interpretation, entitled to a declaration
that advances of money in the nature of loans shall only be made on the security of land,
houses, machinery and other property situated in India, but that, so far as the investment of
money not immediately required is concerned, the Directors have complete discretion in the
matter of approving the kind of security offered. To this extent, I would modify the order of
the lower Court, as to the form of the declaration. So far as the claim for injunction is
concerned, I would accept the appeal and direct that the suit be dismissed. I would leave the
parties to bear their own costs, throughout
