Case Law Companies Act MADANLAL FAKIRCHAND DUDHEDIYA Vs. SHREE CHANGDEO SUGAR MILLS LTD.

PETITIONER:
MADANLAL FAKIRCHAND DUDHEDIYA

Vs.

RESPONDENT:
SHREE CHANGDEO SUGAR MILLS LTD.

DATE OF JUDGMENT:
20/03/1962

BENCH:
GAJENDRAGADKAR, P.B.
BENCH:
GAJENDRAGADKAR, P.B.
SARKAR, A.K.
WANCHOO, K.N.

CITATION:
1962 AIR 1543 1962 SCR Supl. (3) 973
ACT:
Company-Agreement to pay commission from profits beyond
specified limit-Validity-Companies Act, 1956 (1 of 1956), s.
76(1) & (2).

 

HEADNOTE:
There was an agreement between the respondent company, which
was incorporated as a Private Limited Company in 1939, and
its promoters, the appellant and the rest of the
respondents, that in consideration of the promoters having
each purchased sharers worth 1-1 1/2 lakhs of the company,
the company would pay them 12-1/2% of the net profits every
year. That agreement was put in art. 3 of the Articles of
Association of the company. In 1941 there was a second
agreement between the company, its promoters and a firm, and
by it the said firm was appointed as the managing agent of
the company and the commission payable to the promoters was
reduced to 6-1/40′ and art 3 amended accordingly. There was
litigation between the parties and the consent decrees
passed. there in left the promoters’ commission in tact.
Meanwhile the Companies Act, 1956, came into force and the
company served a notice to the appellant saving that the
promoters’ commission was no longer lawful and that art. 3
would be deleted. The appellant then brought the suit, out
of which the present appeal arose, for a declaration that
the agreement to pay commission was valid and for an
injunction restraining the company from deleting the said
art. 3. It was urged on behalf of the company that s.76(1)
and (2) of the said Act had made the agreement invalid and
unenforceable. The trial court found in favour of the
company and dismissed the suit. The court of appeal
agreeing with the trial court dismissed the appeal-
974
Section 76 of the Companies Act, 1956, before it was amended
in 1960, was in its material parts as follows
“(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
debentures 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, viz.
(i) the payment of commission is authorised
by the articles;
(ii) the commission paid or agreed to be said
does not exceed in the case of shares, five
per cent. of the price at which the shares are
issued or the amount or rate authorised by the
Articles, whichever is less, and in the case
of debentures, two and a half per cent.-of the
price at which the debentures are issued or
the amount or rate authorised by the articles,
whichever is less;
(iii) the amount or rate per cent. of the
commission paid or agreed to be paid is in the
case of shares or debentures offered to the
public for subscription, disclosed in the
prospectus; and ………….. I
(iv)
(2) 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
in, or debentures of, the company or
(b)
By Amending Act 65 of 1960 the word ‘capital’ occurring in
that s. 76(2) deleted.
975
Held, (per Gajendra-adkar, and Wanchoo, JJ.) that s. 76 of
the Act must be construed by itself, in the light of its own
scheme and object and not by reference to what the English
law on the point may be. So judged there can be no doubt
that s. 76(1) clearly prescribes the payment of commission,
whatever the source from which it is paid may be. It is not
merely an enabling provision, but also prohibits payment
beyond the prescribed ceiling. It is clear that the section
covers commission paid both out of capital and profits.
Hilder v. Dexter, (1902) A.C. 472, explained.
The Ooregum Gold Mining Co. of India Ltd. v. George Rover
and Charles Henry Wallroth, (1892) A.C. 125, considered.
There can be no repugnancy between s. 76(1) thus construed
and s. 76(2). The Legislature was aware that capital money
was often applied to payment of commission under the garb of
ostensible lawful payments. In view of the devices adopted
to defeat the limit imposed by s.76(1), it is provided by s.
76(2) that such devices must also conform to the prescribed
limit The two subsections constitute in integrated provision
one of the objects of which was to impose a limit on the
Payment of commission whether for shares or for debentures
in order to save the property of the company.
The deletion of the word ‘capital” from s. 76(2) by the
Amending Act of 1960 made the intention of the Legislature
clear that the limit imposed on the payment of commission in
respect of shares and debentures applies as much to commiss-
ions paid out of capital as to those paid out of profits.
Per Sarkar,.J There is nothing in, S. 76(1) of the Companies
Act, 1956, to suggest that it intended in any way to change
the preexisting law under which a company was free to pay
any commission it liked out of its profits to any person
subscribing for shares in it, and the proper way to construe
that sub-section would be to confine its terms to payments
or commission out of capital.
Hilder v. Dexter, (1902) A. C. 474, held applicable.
Oorgeoum Gold Minning Co. of India Ltd. v. George Roper,
(1892) A.C. 125, referred to.
The words ,it shall be lawful” used in s. 105(1) of the
Indian Companies Act, 1913, and the word ‘may’ used in s. 76
(1) of the Companies Act, 1956, mean the same thing and both
these sections were enabling provisions that intended to
legalise something which was previously illegal.
976

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 64 of
1959.
Appeal by special leave from the judgment and decree dated
July 24, 1957, of the Bombay High Court in Appeal No. 23 of
1957.
A. V. Viswanatha ,Sastri, Jaswantlal Mathubai and I. N.
Shroff, for the appellant.
C. B. Agarwala, I. P. Dadachanji, O. C. Mathur and
Ravinder Narain, for respondent No. 1.
1962. March 20. The Judgment of Gajendragadkar and
Wanchoo, JJ., was delivered by Gajendragadkar, J., Sarkar,
J., delivered a separate Judgment.
GAJENDRAGADKAR, J.-The principal question which arises in
this appeal relates to the construction of s. 76(1) and (2)
of the Companies Act, 1956 (1 of 1956) (hereinafter called
the Act) before the amendment of sub-s.(2) in 1960. That
question arises in this way. The appellant, Madanlal
Fakirchand Dudhediya, and respondents Nos. 2 and 3 and
the father of respondents Nos. 7 to 10 were the promoters
of the 1st respondent Co., Shree Changdeo Sugar Mills Ltd.
The said Co. was incorporated in 1939 as a Private Limited
Company. It was, however, converted into a Public Ltd. Co.
in 1944. At the time of the original incorporation of the
Co., a Promoter’s Agreement was arrived at whereby the Co.
agreed during its existence to pay a sum equal to 3-1/80%
every year out of its net profits to each of the four
promoters. As a result of. this agreement, the aggregate
consideration payable every year to the promoters came to
12-1/2% of the not profits of the Co. Article 3 of the
Articles of Association of the Co. justified the making of
this agreement. In 1941 the Co. came into financial
difficulties and
977
in consequence, on the 22nd April, 1941, a tripartite
Agreement was arrived at between the Company, M/s. Ardeshir
Hormusji Bhiwandiwalla & Co., and the Promoters. Under this
agreement, it was agreed inter-alia, to appoint the said
firm of Bhiwandiwalla & Co. or its nominee as the Managing
Agents of the Co. for 10 years with an option to the Co. to
extend the said period upon certain terms. At this time,
the earlier agreement as to the payment of the promoters’
commission was modified and the said commission payable to
the promoters was reduced to 6-1/4% and Art. 3 of the
Articles of Association was accordingly amended. Three
years later, dispute arose between the parties and they led
to three suits filed on the original side of the Bombay High
Court. All the said suits were compromised and decrees by
consent were passed in them. One of the terms of the
compromise was that the promoters’ commission payable to the
four promoters which was Rs. 1-9-0 to each of them and which
came 6-1/4% in the aggregate payable to them under the
agreement entered into between them and the Managing Agents
shall remain in force as in the Agreement and the promoters’
right of commission shall continue accordingly. Thus. as a
result of the compromise, the promoters’ commission which
was payable to them under the earlier Agreement was saved.
After the Act came into force on the 1st of April, 1956, the
appellant received a letter from respondent No. 1 informing
him that respondent No. 1 had been advised that as from the
date of the commencement of the, Act, the agreement between
the parties as to the payment of the promoters’ commission
had become illegal and void and that the 1st respondent
would not, therefore, pay any more, commission,% after
April, 1956. In October, 1956 the appellant received a
notice from the let respondent that an extraordinary general
978
meeting of the shareholders of the 1st respondent Co. was
going to be held, inter alia, for the purpose of amending
certain Articles of Association of the Co. One, of the
amendments proposed to be put before the said meeting was to
delete Article 3 from the Articles of Association of the Co.
On receipt of this notice, the appellant filed the present
suit on the 13th December 1956. By his plaint, he claimed a
declaration that the agreement between the parties was valid
and legal and he asked for an injunction restraining
respondent No. 1 from passing any resolution deleting
Article 3 of the Articles of Association of the respondent
Co. or from taking any action on the basis that the said
agreement had become illegal and void. Respondent No. 1
resisted this suit. It was urged on its behalf that as a
result of the provisions of section 76(1) and (2) of the
Act, the agreement in question had become void and could not
be en. forced. Respondents Nos. 2 to 10 are the other
beneficiaries under the said agreement and they ,supported
the appellant. The learned Judge who tried the suit held
that the defence raised by respondent No. 1 was well-founded
and that the agreement in question having become void and
unenforceable under the relevant provisions of the Act, no
declaration could be granted or no injunction could be
issued in favour of the appellant as claimed by him. In the
result, the appellant’s suit was dismissed with costs. The
appellant then preferred an appeal challenging the correct-
ness of the decision of the Trial. Court. The Court of
Appeal, however, agreed with the view taken by the learned
Trial Judge and dismissed the appeal preferred by the
appellant. The appellant then applied for and obtained a
Certificate from the High Court and it is with the said
certificate that he has come to this Court by his present
appeal. That is how the principal point which has been
raised for our decision in the present appeal is about the
construction of section 76(1) and (2).
979
Mr. Sastri contends that in coming to the conclusion that
the appellant’s claim to enforce the agreement in question
in respect of the profits made by respondent No. 1 is
affected by s. 76, the Courts below have misconstrued the
provisions of the said section. It is conceded by Mr.
Sastri that the promoters have so far received an aggregate
amount of over ‘Rs. 5,80,000 which is far in excess of the
maximum amount now permissible under a. 76(1).But his
argument is that the statutory provision imposing the limit
in regard to the payment of commission on which respondent
No. 1 relies is inapplicable to a case where the said
commission is claimed not out of capital but out of the
profits of the Company.
Before dealing with this point, however, it would be
convenient to dispose of another objection raised by Mr.
Sastri. He contends that the agreement in question is
really outside the purview of s. 76. Section 76 refers
inter alia, to the commissions payable to any person for his
subscribing or agreeing to subscribe, whether absolutely or
conditionally, for any shares of a Co. That being so, since
the presents agreement has been ‘entered into for
consideration other than those specified in s. 76, its
enforcement cannot be resisted on the ground that it is hit
by a. 76. The decision of the question naturally depends
upon the construction, of the two agreements. The first
agreement of 1939 provides that for the help rendered and
pains taken by the promoters and because each of them had
agreed to purchase and had purchased shares worth Rs. 1-1/2
lakhs out of the Co.’s capital, the Co. was entering into an
agreement with them for the payment of the commission. The
agreement provided that the said commission would be payable
as long as the Co. was in- existence. It is thus clear
that though the help rendered by the promoters and pains
taken by them are incidentally referred to the agreement
980
is substantially, if not entirely, based upon the fact that
the promoters had agreed to purchase and had purchased
shares worth As. 1-1/2 lakhs and so there cm be no doubt
that this agreement clearly falls within the mischief of s.
76. It is, however, urged that the completion of the first
agreement changed completely when the second agreement was
entered into in 1941. In this latter agreement which was
entered into between the promoters and the new Managing
Agents, the former agreed to receive 6-1/4% as promoters’
commission instead of 12-1/2% ,,as provided in our
respective agreements with the Company.” That is the
substance of the agreement. However, Mr. Sastri relies on
the other recitals in the document in support of his
argument that the latter agreement was not in consideration
for the purchase of shares by the promoters. These recitals
refer to the fact that the promoters had resigned their
office and surrendered and renounced their rights to act as
the Managing Director or Managing Directors of respondent
No. 1 and it was in consideration of this fact that the
agreement was made. We are not impressed by this argument.
It is true that before this agreement was made, the new
Managing Agents were appointed and that was no doubt the
occasion for the making of the agreement. But the essential
part of the new agreement was the reduction made in the
commission payable to the promoters; for the rest, the
earlier agreement continued and so, in determining the scope
and nature of this latter agreement, we have inevitably to
go back to the &A agreement. As we have just pointed out,
the operative clause in the agreement, in terms refers to
the earlier agreements between the respective parties and
avers that Instead of 12-1/20% as provided by the said
agreement 6-1/4% would hereafter be paid. Therefore, we are
satisfied that the payment claimed by the appellant is
payment by way of commission to which s. 76 would apply.
981
Then it is argued that though the purchase of shares by the
promoters may partly be the consideration for the agreement,
the service rendered by them and the pains taken by them in
promoting the Co. were also set out in the first agreement
as forming part of the consideration and even if the
agreement as to the payment of commission may fall within s.
76 part of the agreement which is based on other
considerations would be outside a. 76 and the two parts
being severable, it is necessary to determine how much the
appellant would be entitled to claim under the part which is
valid. In our opinion, this argument is not open to the
appellant at this stage. It appears that in the trial
Court, an attempt was made on behalf of the appellant to
lead oral evidence for the purpose of saying that the two
considerations could be severed and so, the amount payable
to the appellant in respect of that part of the agreement
which was valid, should be determined. The learned Trial
Judge did not allow oral evidence to be led as suggested by
the appellant because he found that the case sought to be
made by adducing the said oral evidence was not made out by
any averments in the plaint nor was any attempt made to
raise any issue in that behalf at the time when the issues
were framed. Indeed, it appears from the judgement of the
learned Trial Judge that the attempt made by the- appellant
in that behalf was feeble and half-hearted. Thus, in the
Trial Court, the appellant was not allowed to make out this
case and when he went before the court of Appeal, he, appa-
rently made no grievance about the decision of the Trial
Court; otherwise the Appeal Court would have dealt with this
point. Therefore, we do not think that the appellant can be
permitted, to raise this point before us in this appeal.
That takes us to the principal point of controversy, between
the parties in regard to the construction of section 76(1)
and (2) of the Act.– Mr. Sastri contends that in construing
the relevant statutory
982
provisions, it would be necessary to bear in mind that the
provisions of the Indian Company Law are substantially based
on the provisions of the English Company Law and so it would
be necessary to enquire what the corresponding provision of
the English Law has been construed to mean. The pattern of
the Indian Company Law is set by the English Company Law and
the principles enunciated by English decisions in dealing
with the corresponding provisions of the English Company Law
should be followed when we are interpreting the provisions
of the Indian company Law. This argument proceeds on the
assumption that the ,Corresponding provision of the English
Company Law permits the payment of commission for sub-
scribing for shares out of the profits of the Co. with out
any limitation. It is, therefore, necessary to examine
briefly this argument.
The provision in the Company Law in regard to the payment of
commission for subscribing for any shares was introduced in
the English Companies Act in the form of an enabling
provision in 1900 and it became necessary to make the said
enabling provision because of an earlier decision of the
House of Lords in The Ooregum Gold Mining Co. of India, Ltd.
And George Roper and Charles Henry Wallroth (1). In that
case, the House of Lords had held that a company limited by
shares, formed and registered under the Act of 1862, had no,
power to issue shares as fully paid up for a money
consideration less than their nominal value. It appears
that the memorandum of association of a company registered
under the, Act of 1862 stated that the capital of the
company was 125,000 divided into 125,000 shares of pound 1
each, and that the shares of which the original or increased
capital might consist might be divided into different
classes and issued with such preference, privilege, or
guarantee as the company might direct. The company being in
want of money
(1) (1892) A.C. 125.134.133.
983
and the original shares being At a great discount, the
directors in accordance with resolutions duly passed issued
preference shares of E1 each with 15s. credited as paid,
leaving a liability of only 5s. per share. A contract to
this effect was registered under the Companies Act of 1867
s.25. The transaction was bona fide and for the benefit of
the company. In an action by an ordinary shareholder to
test the validity of the issue, it was held that reading the
Companies Acts of 1862 and 1867 together, the issue was
beyond the powers of the company, and that the preference
shares so far as the same were held by original allottees
were held subject to the liability of the holder to pay to
the company ‘m cash the full amount unpaid on the shares.
In his ,speech, Lord Halsbury observed that “Two things were
manifest in s. 25 of the Act of .1867. The shares to be held
&abject to the payment, and the payment is to be in cash.
The amount is to be paid and the whole amount to be paid in
cash, and to me it appears, looking at the latter part of
the section whereby a contract made and filed may. qualify
and cut down the form of payment, and that it may be in
goods or in value received in some. form, instead of in
cash, it must nevertheless be payment.” He also added that
“the capital is fixed and certain, and every creditor of the
company is entitled to look to that capital as his
security.” Thus, as a result of this decision, it become
obvious that no commission could be paid to any person for
his subscribing to the shares of the Company out of the
capital of the Co.
It was as a result of this decision that section 8 was
enacted in the Act which was passed to amend the Companies
Act, in 1900. Section 8(1) provided that
“Upon any offer of share to the public for
subscription, it shall be lawful ‘for a
company to pay a commission to: any person
984
in consideration of this subscribing or
agreeing to subscribe, whether absolutely 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 and the amount or rate per
cent. of the commission paid of agreed to be
paid are respectively authorised by-the
articles of association and disclosed in the
prospectus, and the commission paid or agreed
to be paid does exceed the amount or rate so
authorised.”
Sub-see. (2) provided that:
“‘Save as aforesaid, no company shall apply
for 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,
whether 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.”
Sub-sec.(3) added that
“But nothing in this section shall affect the
power of any company to pay such broke. rage
as it has heretofore been lawful for a company
to pay.”
It would thus be seen that the difficulty created by the
decision of the House of Lords in the case of The Ooregum
Gold Mining Co.’ of India Ltd. was
985
overcome by this statutory provision and in consequence, it
became lawful for the company to pay commission subject to
the conditions specified in the section. It was because the
legal difficulty created by the decision of the House of
Lords was intended to be cured that the Legislature enacted
the section by providing that it shall be lawful for the
company to pay commission on the terms specified. That is
the genesis of the expression “it shall be lawful for a
company to pay” with which the section begins.
Then followed the Consolidating Act of 1908. S. 89 of this
Act dealt with the power of the company to pay commission
and discounts. This section is more elaborate than s.8 of
the Act of 1900, but in substance, the pattern. remained the
same.
Sec. 43 of the Act of 1929 introduced an important change by
making an additional provision by which the. commission paid
or agreed to be paid was not to exceed 10% of the price at
which the shares are issued or the amount or rate authorised
by the articles, whichever is the less. In other words, in
1929, a ceiling was placed on the payment of commission at
10% of the price. After this Act was passed, commission
paid could not exceed 10% of the price at which the shares
were issued.
The Companies Act, 1948 by s.53 has maintained the same
provisions as those contained in s.43 of the earlier Act.
That, in brief, is the position of the corresponding
provisions in the English Companies Acts.
Mr. Sastri contends that the relevant provisions of the
English Companies Act have been construed to mean that the
ceiling on the payment of commission to which they refer is
payment of co ion out of capital and not out- of profits.
In other words, the argument is that the payment of
commission out of profits is outside the mischief of
986
the relevant English provisions. In support of this
argument reliance has been placed on the decision of the
House of Lords in Hilder And Dexter (1). In that case, to
raise working capital a company offered shares at par to the
appellant and some other persons with an option to take
further shares at par within a certain time. The appellant
subscribed for shares, and the market price having risen to
a premium, desired to take up the further shares. It was
held : “that this was not an application of shares of
capital money directly or indirectly in payment of
commission, discount, or allowance within the meaning of the
Companies Act, 1900, s.8. Sub-s. 2 and (the transaction
being otherwise unobjectionable that the appellant was
entitled to exercise the option,” It would be noticed that
what the House of Lords was called upon to consider was
whether an application made by the appellant for further
shares offended against the provisions of s. 8(2) of the
English Act and the House of Lords held that it did not. It
is true that the shareholder would have been able to sell
his shares at a premium and thereby obtain a benefit, but
the said benefit cannot be said to have been obtained by him
at the expense of the company’s capital. Thus, the
application made by the appellant was outside the
prohibition contained in s. 8(2). In other words, this
decision is directly a decision the construction of s.8(2).
It has, however, been urged by Mr. Sastri that in dealing
with the construction of s. 8(2), Lord Davey in his speech
has considered s. 8(1) and observed that : “this sub-section
permits a limited application of the company’s capital in
payment of a commission.” The whole of the appellant’s
argument is base on this sentence. It is suggested that
this sentence amounts to a decision that the provisions of
a. 8(1) have reference to the payment of commission out of
capital and, therefore, have no reference to the payment of
commission
(1) (1902) A.C. 474, 479.
987
out of profits. We are not inclined to accept this
contention. It is clear that in the case of Hilder, the
House of Lords bad no occasion to consider whether or not
commission could be paid out of profits. That point simply
did not arise in that litigation. The question which arose
was whether that was a case of payment out of capital which
was prohibited by s. 8(2) and it is in that context and
while dealing with the narrow controversy between the
parties that an observation has no doubt been made that
section 8(1) permits an application of the company’s capital
in payment of a commission in a limited way. This statement
cannot be taken to be an exhaustive interpretation of s.
8(1) so that it should be possible to hold that by necessary
implication it was intended ‘to lay down that payment of
commission out of profit was not within the purview of this
section. Therefore, we are not prepared to accept the
assumption made by the appellant that this decision is a
direct authority on the’ point that payment of commission
out of profits is not covered by a. 8(1) or by the-relevant
provisions in the subsequent English Companies Acts.
It is then argued that authoritative text. books on Company
Law support the view that payment, of commission out of
profits is not prohibited by the English Companies Law. In
the “Handbook on Joint Stock Companies” by Gore-Browne, it
is observed : that there is no prohibition against paving
commission unconditionally `out of profits’, ‘and this would
seem to be lawful unless contrary to any stipulation in the,
Articles.,” (p. 191). Buckley Oil the Companies Acts’
observes that : ‘,the prohibition is against application of
“shares or capital money,’ and payment of commission out
of a fund of undistributed profit is not, a all events not
expressly, forbidden by the section.” (p. 132). It in clear
that this statement is somewhat cautious
988
and not as unqualified as the statement in Gore Browne’s
Handbook. In Palmer’s Company Precedents it is observed
that the provisions of s. 53(2) of the Act of 1948 “leave it
company at liberty to apply any of its `profit’ in paying
commissions in accordance with the practice above referred
to as existing before the Act of 1900.” (p. 179). In
Palmer’s Company Law, however, the position is stated
somewhat differently. Referring to section 53(2), it is
observed that : “if the words used are intended to restrict
sub-sec.(1) so as to make it only lawful to pay commission
out of the newly issued ,shares or capital money, received
for them, the payment of commission out of profits would
appear to be prohibited by a. 54 which prohibits a company
to give any financial assistance in connection with, inter
alia, the subscription of its own shares. If, on the other
hand, sub-sec. (2) does not intend to restrict sub-sec.(1)
but contains a separate and independent provision, the
application of profit of the company within the limits of
sub-section (1)(b) of s.53 would be permissible. It is
thought that the latter interpretation is correct and that
the words, in sub-sec.(2) of s.53 are intended to make it
clear that the former practice may be continued under which
a company could use its profits for the payment of
commission within the permitted limits.” (p. 200). It would
thus appear that the last observation seems to support the
view that the prohibition contained in s.53(1) applies as
much to payments made out of capital as to payments made out
of profits.
It is thus clear that the views expressed by the different
writers on Company Law disclose a difference of approach and
do not appear to be based on any judicial decision. In
fiat, though Mr. Sastri conceded that there was no direct
decision on this point, he contended that the absence of any
judicial decision shows, that the point was never disputed.
On the other hand, Mr. Aggarwala
989
contends that the absence of any judicial decision speaks
for the fact that nobody ever thought that payment of
commission could be made out of profits beyond the limits
prescribed by the relevant statutory provision. However
that may be, in view of the material placed before us, we do
not think it would be safe for us to assume that the
position under the English Law is established either one way
or the other and for obvious reasons, we would be reluctant
to embark upon an enquiry on that point by seeking to
interpret the relevant English provisions ourselves.
Let us, however, assume that the true legal position under
the relevant provision of the English statute is as the
appellant contends. Does it follow therefrom that we should
approach the problem of construing s. 76 with the pre-
conceived notion that s. 76 provides exactly for the same
position ? In our opinion, the answer to this question has
to be against the appellant. Lot us first read a. 105 of
the. Indian Companies Act of 1913 and s. 76 of the Act of
1956 side by side. Section 105 reads thus :-
“Power to pay certain commissions and
prohibition of payment of all other commis-
sions, 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 cow any, 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
990
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 cases of share 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 con-
sideration 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) reads thus :
“(1) A company may pay a commission to any
person in consideration of
(a) his subscribing or agreeing to
subscribe, whether absolutely or condi-
tionally, for any shares in, or debenture,
991
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 of shares, five
per cent of the price at which the shares are
issued or the amount or rate authorised by the
articles, whichever is less,, and in the case
of debentures, two and a half per cent of the
price at Which the debentures are issued or
the amount of the rate authorised by the
articles, whichever is less ;
(iii) the amount of rate per cent. of the
commission paid or agreed to be paid is-in the
case of shares or debentures offered to the
public for subscription, disclosed in the pro-
spectus : and in the case of shares or deben-
tures 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
before the payment of the commission with the
Registrar and, where a circular or notice, not
being a prospectus inviting subscription for
the shares or debentures, is issued, also
disclosed in that circular or notice ; and
(iv) the number of shares or
992
debentures which persons have agreed for a
commission to subscribe absolutely or
conditionally is disclosed in the manner
aforesaid
(2) 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 condi-
tionally for any shares in, or debentures 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,
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 other-
A comparison of the two sections will show that a. 76 has
made three departures from s. 105 ; first it begins by
saving that “a company may pay a commission” and this
expression has substituted the earlier expression “it shall
be lawful for a company to pay commission”. It is true that
this change is not very significant; but it cannot be
treated as of no significance at all and it may be
993
that by adopting the present expression, the Legislature
wanted to indicate that s. 76 unlike its predecessor a. 105,
was not intended to be merely an enabling provision. Then
it would be noticed that the substantial part of a. 105(1)
has now been put more categorically and definitely in the
form Of conditions in s. 76 and that may suggest that what
a. 76(1) purports to, do is to authorise the payment of
commission but subject only to the limitations prescribed by
it. In other words, it is a section which enables payment
to be made and prohibits payment being made beyond the limit
prescribed. The third change which is very material is that
debenture are included within its purview. It is common
ground that so far as, commission payable on debentures is
concerned, there never was any prohibition in the- English
Law or in the Indian Law; and so, if s. 76(1) was intended
merely to be an enabling provision it was hardly necessary
to include debentures within its scope. The inclusion of
debenture marks an important departure from the position
under s. 105 of the. earlier Act as well as from the
position under the corresponding Provisions of the English
statute. Therefore, having regard to the scheme of the
present s. 76(1), it would, we think, not be legitimate to
attempt the task of construing the said provision with a
preconceived notion as suggested by the appellant for it may
well be that the object intended to be achieved by this sub-
section is different from the object intended to be achieved
by the corresponding provision in the English Law.
Besides, it would be relevant to recall that one of the
objects of the Act clearly was to impose stringent
restrictions upon payments out of profits ‘of the company to
the Managing Agents, Directors, Managing Directors, and
others concerned with the management of the affairs of the
company. This object has been expressly achieved by several
provisions in the Act, such as sections 348, 352 and
994
387. The anxiety of the Legislature to save the profits
made by the company and to prevent extravagant payments
being made out of them which is a distinguishing feature of
the Act, also shows that it would not be safe to assume that
s.76(1) must have intended to achieve exactly what the
corresponding provision in the English statute intended to
achieve. Therefore, we do not think it would be right to
assume at the very outset that the payment of commission out
of profits is outside the provisions of s. 76 because it is
not included in the corresponding provision in the English
law. After all, the question which has been raised before us
in the present appeal must be determine by us on a fair and
reasonable construction of s.76(1) and (2) and it is to that
problem that we must now turn.
In construing section 76 (1) and (2), it would be necessary
to bear in mind the relevant rules of construction. The
first rule of construction which is elementary, is that the
words used in the section must be given their plain
grammatical meaning. Since we are dealing with two sub-
sections of s. 76, it is necessary that the said two sub-
sections must be construed as a whole “each portion throwing
light, if need be, on the rest.” The two sub-sections must
be read as parts of an integral whole and as being inter-
dependent; an attempt should be made in construing them to
reconcile them if it is reasonably possible to do so, and to
avoid repugnancy. if repugnancy cannot possibly be avoided,
then a question may arise as to which of the two should
prevail. But that question can arise only if repugnancy
cannot be avoided.
The important part in s. 76(1) with which we are directly
concerned is the one that provides that the commission paid
or agreed to be paid does not exceed the limit therein
prescribed. One of the conditions which has to be satisfied
in the matter
995
of payment of commission to a person subscribing for any
shares is’ that the said commission shall not exceed 5% of
the price at which the shares are issued or the amount or
rate authorised by the articles, whichever is less. It is
significant that this provision seeks to place an absolute
ceiling on the payment of commission and in doing so, it
refers to the commission generally as such and does not
refer to the commission paid either out of capital or out of
profits, so that a. 76(1) read by itself unambiguously and
clearly prescribes a ceiling on the payment of commission
what ever may be the source from which the said commission
may be paid. We have already seen that a. 76(1) cannot be
treated merely as an enabling section. This position has
been conceded by the appellant before us, and so there can
be no doubt that the ceiling placed on the payment of
commission is intended to act as a prohibition against the
payment of any commission beyond the said ceiling.
Therefore, s. 76(1)(i)(ii) leaves no doubt that it covers
commission paid either out of capital or out of profits.
Section 76(1)(b)(i) prescribes another condition that the
payment’ of commission is authorised by the articles. Since
the payment of commission. which is referred to in this
clause is commission payable either for the shares or for
the debentures, it may be relevant to consider whether the
commission here referred to can be commission only out of
capital. Ordinarily, commission paid for debentures would
be commission out of debenture money or profit* though, of
course it is conceivable that the commission on debenture
may also be paid out of capital. ‘But if commission on
debentures can be paid out of profits. then it would not be
unreasonable to assume that the Raid provision refers to
commission payable not only out of capital but out of
profits as well. The inclusion of debentures within the
scope s. 76 suggests that the commission mentioned scope
76(1) (c)(i) would not
996
on a reasonable construction be confined to a commission
payable out of capital alone.
Clause (iii) of s. 76 (1)(b) seems to suggest the same
conclusion. Under this clause, the condition imposed is
that the amount or rate per cent of the commission paid or
agreed to be paid is in the case of shares or debentures 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 before the payment of the commission
with the Registrar. In construing this clause, it may be
useful to refer to section III of the Act of 1913. Under
that section, particulars in case of commission on
debentures had to be filed and it cannot be disputed that
the said particulars would also refer to particulars of
commission paid out of profits. Now that debentures have
been brought under s. 76, would it be unreasonable to assume
that under the particulars required to be filed under
condition (iii), particulars in regard to commission payable
out of profits are also required to be filed? In other
words, the word ,commission” used in cl. (i) and (iii) seems
to refer to commission paid not only out of capital but also
out of profits in relation to debentures. That incidentally
supports the construction that the word “commission” used in
clause (ii) cannot be confined only to the commission
payable out of capital. Indeed, if s. 76(1) is read by
itself, there can be no doubt or difficulty in coming to the
conclusion that commission there contemplated is commission
payable both out of capital as well as profits.
The argument, however, is that if this construction is
accepted, there would be repugnancy between the two sub-
clauses of, a. 76. It is therefore, necessary to examine s’
76(2) because as we have already seen, before determining
the true scope and effect of a. 76(1) and (2) we must read
them together as parts of an integral who e. Now what does
997
S. 76(2) provide? It provides that 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 the objects therein specified, save as
aforesaid and as provided in a. 79. In other words, what
is prohibited by sub-s. 2 is gave as aforesaid in s. 76(1)
just as it is save as provided in s. 79. That means that
prohibition enacted by s. 76(2) has to be worked out in the
light of s. 76(1) and s. 79. The prohibition imposed by s.
76(1) is in general terms and it includes payments from any
source or fund. The Legislature knew that payment of
commission may be made by adopting several devices and what
sub-s. (2) intends to achieve is to prohibit the adoption of
such devices by making it clear that whatever be the nature
of the device adopted, if the object of the device is to pay
commission, then it must conform to the limit prescribed by
s. 76(1), It is well-known that sometimes shares or
debentures are allotted or capital money is applied in
payment of commission. Similarly, under the garb of what
‘may ostensibly be lawful payments, for instance, in respect
of purchase money of any property acquired by the company or
the contract price of ‘any work to be executed for the
company, commission may be paid; the purchase price of any
property or the contract price of any work may be fixed so
as to include something more than its real value the
difference being intended to be paid as commission. It was
in view of these devices which the Legislature knew were
being adopted for the payment of commission that s. 76(2)
has been inserted in the form which it has taken. As has
been observed by Craies “On Statute Law’, provisos are often
inserted “to allay fears” or to remove misapprehensions.
Just as s. 76(2) has to be read in the light of s. 79 and
subject to its provision, so it has to, be ‘read in the
light of s. 76(1) and subject to its provision. In
998
other words, in order to clarify the position in regard to
the devices which may be adopted to defeat the limit imposed
by s. 76 (1), the Legislature has provided by s. 76 (2) that
these devices are also subject to s. 76(1) and payments can
be made under those garbs or devices, provided they do not
exceed the limit prescribed by 8. 76(1). In our opinion,
therefore, far from there being any conflict or repugnancy
between s. 76(1) and a. 76(2) they constitute one integrated
provision, one of the objects of which is to impose a limit
on the payment of commission either in respect of shares or
in respect of debentures. The anxiety to save the profits
of the company is as much in evidence in s. 76(1) as it is
in other sections to which we have already referred.
Mr. Sastri however, contends that the proper way to read a.
76(1) and (2) would be to treat s.76(2) as the main
provision and s. 76(1) as a proviso to it. His argument was
that s. 76(2) puts a blanket ban on the allotment of any
shares or debentures or the application of any capital
moneys and s.76(1)relaxes the ban by allowing the payment to
be made within the limits prescribed and subject to the
conditions therein specified. The ban imposed by s. 76(2)
is in respect of capital and not in respect of profits and
so the relaxation from the ban prescribed by a. 76(1) must
likewise be confined to capital and cannot be extended to
profits. In our opinion, this is an argument of
desperation. What we are asked to do by Mr. Sastri is in
substance, to rewrite the two subsection of s. 76 and that
we cannot legitimately do, particularly when on the
alternative construction it is found that there is no
repugnance between the two sub-sections. On the appellant’s
view, we have to ignore the opening words in a. 76(2) and
substitute the said words in s. 76(1). That clearly is the
function of the Legislature which enacts laws and not of the
Court which interprets them. Therefore..’ in our opinion,
the learned Judges of the High Court were right when
999
they held that a claim for commission out of the profits of
the company which the appellant seeks to make in the present
suit is hit by is. 76(1) and cannot be entertained.
In this connection, there are two other points which have
been urged before us by Mr. Aggarwala. He contents that if
s. 76(1) and (2) are read as confined to the payment of
commission from out of the capital, there would be no
provision for payment of commission out of profits at all
and so the plaintiff’s claim would have to be dismissed on
that ground. The argument is that the Act is a Consoli-
dating Act and as such, it would be legitimate to assume
that the relevant provisions of s. 76 deal exhaustively with
the topic of the payment of commission in respect of shares
and debentures. If that be so, whatever is not provided for
by s. 76 could not be claimed after the passing of the
Consolidating Act. Similarly, it is urged that if
commission payable out of profits in respect of dividends
was intended to be saved a provision would have been made in
s.. 76 corresponding to the provision made by s. 76(3) in
regard to brokerage. a. 76(3) provides that nothing in this
section shall affect the power of any company to pay such
brokerage as it has heretofore been lawful for a company to
pay. There is no such provision in respect of payment of
commission out of profits in relation to debentures. There
may be some force in these contentions.
Before we part with this subject, it would be relevant to
state that in 1960, s. 76(2) has been amended by s. 22 of
the Amending Act (No. 65 of 1960) and as a result of this
amendment, the word ‘capital’ has been deleted. It is
common ground that after this amendment was effected, a.
76(1) and (2) both refer to payment of commission out of
profits as well as out of capital. As. we have already
seen, the whole of the argument urged by the appellant on
the construction of’ s. 76(2) was substantially based on the
use of the expression “any of its
1000
capital moneys”. The word “capital” having been deleted,
the provision of s. 76 (2) is wide enough to include
profits. Therefore, there can be no doubt that after 1960,
the limit imposed on the payment of commission in respect of
shares and debentures applies as much to commissions out of
capital as to those which are paid out of profits. It May
be permissible to assume that by the amendment made in 1960,
the Legislature hat; attempted to remove doubt that may have
arisen owing to the use of the .word “capital” in s. 76(2)
and has now made its intentions clear beyond any doubt.
This amendment along with several others which were made in
1960 was presumably the result of the recommendation of the
Committee appointed in that behalf. In its report, the
Committee observed that “in order to remove any doubt, we
would recommend the deletion of the word “capital” from s.
76(2)”, Thus, it is clear that the point raised in the
present appeal cannot arise under the amended provisions of
s. 76.
That leaves one minor point-still to be considered. It was
urged in the Courts below that the provisions of a. 76
cannot be invoked against the appellant because the
agreement on which the appellant rests his claim was made
prior to the 1st April, 1956 when the Act came into force.
The contention appears to have been that in’ invoking the
provisions of s. 76, respondent No. 1 was seeking to make
the said provision retrospective which it is not. In our
opinion, there is no substance in this argument. Section 9
of the Act is a clear answer to this contention. Under s.
9(a) any. agreement executed by’ the company cannot I
prevail if it is inconsistent with the provisions of the Act
and under a. 9(b) the articles shall likewise not prevail if
they are inconsistent with the’ provisions of the Act.
Section 645 leads to the same conclusion.
The result is, the appeal fails and is dismissed with costs.
1001
SARKAR., J.-The respondent Shri Changdeo Sugar Mills Ltd.
was incorporated as a ‘private company on September 1, 1939.
The appellant, the respondents Nos. 2 and 3 and one
Kasturchand Srikrishna, since deceased, had promoted its
formation. On December 18, 1939, the respondent company
entered into separate agreements with the promoters
providing that “In consideration of the help given and
trouble taken by you promoters and in consideration of each
of you having agreed to take shares of the value of one and
half lac of rupees in the capital of the company and having
taken the said shares the company enters into an agreement
with you as well as with other three promoters as follows:
(1) The company…………… will ………… pay a sum
equal to 3- 1/8 per cent out of the net profits of the
company to each of you promoters or his heirs and
representatives, executors, administrators or assigns”. The
promoters duly took the shares mentioned in the agreements
and became entitled to receive, taken all together, 12-1/2
per cent of the profits of the respondent company. Article
3 (of the Articles of Association of the respondent company
provided that it would enter into the aforesaid agreements
with the promoters.
In 1941, the respondent company was involved in financial
difficulties and on April 22, 1941, a tripartite agreement
was made between it and a firm called Ardeshir Harmusji
Bhiwandiwalla and Co. and the promoters under which it was
provided that the firm or its nominee would become the
managing agent of the respondent company and the promoters
all together 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 to say, the
agreements of December 18, 1939. In terms of this agreement
article 3 of the Articles of Association of the company was
duly amended. An agreement was also specifically entered
into by
1002
the respondent company with each of the promoters.
In 1944,the respondent company was converted into a public
limited company. On June 10, 1944, Kasturchand Srikrishan
died and his interest under the agreements is now
represented by respondents Nos. 7 to 10. Presumably
respondent No. 3 had taken the shares and entered into the
agreements as representing a joint family, for it is not in
dispute that on a partition between respondent No. 3 ‘and
his co-sharers, respondents Nos. 4 to 6 became entitled to
participate in the interest of respondent No. 3 under the
agreements and in the shares.
In September 1944, three suits were pending in the Hi, Court
at Bombay between the respondent company, the beneficiaries
under the agreements and the said Bhiwandiwalla & Co. to the
details of which it is unnecessary to refer for the said
suits were however compromised. The terms of settlement
provided that (a) all the suits would be mutually withdrawn;
and, (b) “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
terms of settlement means the beneficiaries under the
agreements.
The respondent company paid the commission at the said rate
of 6-1/4 percent to the beneficiaries under the agreements
upto September 30, 1955. On October 1, 1956, the respondent
company informed the appellant and the other beneficiaries
that as from April 1, 1956, when the Companies Act, 1956,
had come into force, the agreements had become illegal and
void. It was said that so; 76 of the Companies Act, 1966,
prohibited all payment of commission for subscribing for
shares in excess of 5 per
1003
cent of the price at which the shares were issued. It is
not in dispute that what the appellant and the other
beneficiaries had been paid as commission exceeded five per
cent of the price, at which the shares had been issued. The
respondent company therefore contended that the appellant
and the other beneficiaries were not entitled to any further
commission.
The appellant disputed the contention of’ the respondent
company and filed a suit in the High Court at Bombay against
it in which the other beneficiaries were also made
defendants for a declaration that the agreements of December
19, 1939, as modified on April, 22, 1941, were valid and for
an injunction restraining the respondent company from
passing a resolution deleting article 3 of its Articles of
Association as it-proposed to do and from acting on the
footing as if the said agreements were illegal. The
appellant contended that s. 76 of the Companies Apt of 1956
prohibited payment of commission for subscribing for shares
beyond the limit specified out of capital only and as the
agreements provided for payment of the commission out of
profits, they were not affected by that section at all.
The suit was contested by the respondent company but the
other defendant supported the appellant’s case. The
respondent company contended that the section applied to
payment of commission both out of capital as well as out of
profits. The suit was heard in the first instance by S. T.
Desai, J, and was dismissed. An appeal to an appellate
Bench of the High Court was also dismissed. The present
appeal is against the judgment of the Appellate Bench by
special leave granted by this Court.
I shall have presently to refer to the provisions of a. 76
but before doing so. I think it necessary to refer to the
previous state of the law.. In
1004
England, prior to the Companies Act of 1900, there was no
statutory provision concerning payment of commission for
subscribing for shares and such a provision was first
enacted by s. 8 of that Companies Act. Even before the Act
of 1900, however, the law was that anybody subscribing for
shares in a company had to pay the amount of the shares in
frill. That was considered to be one of the fundamental
principles of Company law. Ooregum Gold Mining Co. of India
Ltd, V. George, Roper (1) was a case which turned on the law
as it stood before 1900. There a company had issued shares
of pound 1 each with 15s credited as paid up leaving a
liability of only 5s per share. A shareholder brought an
action to test the validity of the issue. It was held that
the issue was invalid. Lord Halsbury observed (p.) “It
seems to me that the system thus created 133, by which the
shareholder’s liability is to be limited by the amount
unpaid upon his shares, renders it impossible for the
company to depart from that requirement, and by any
expedient to arrange with their shareholders that they shall
not be liable for the amount unpaid on the shares, although
the amount of those shares has been,, in accordance with the
Act of Parliament, fixed, at a certain sum of money. It is
manifest that if the company could do so the provision in
question would operate nothing”. The provision referred to
by Lord Halsbury was the section which required the memoran-
dum of association to state the amount of the companies
capital as divided into shares of a certain fixed amount.
Such a provision of course occurs in our Companies Act too.
This decision made it impossible for a company to pay out of
its capital any commission to any person for subscribing for
its shares. It was felt that this created some
inconvenience to a company in the management of its affairs
and therefore a. 8 was incorporated in the Companies Act,
1900
(1) (1892) A.C. 125, 133.
1005
with the intention of granting some relief against that
inconvenience. Sub-section (1) of this section provided
that it would be lawful for a company to pay commission to a
person in consideration of his subscribing for any shares in
the company if the amount or rate of it were respectively
authorised by the Articles of Association and disclosed in
the prospectus and the commission paid, did not exceed the
amount or rate so authorised. Sub-section (2) provided that
save as aforesaid no company could apply any of its capital
money, either directly or indirectly, in payment of any
commission to any person in consideration of his subscribing
for any shares in the company. This provision came up for
consideration before the House of Lords in Hilder v. Dexter
(1). There a company had in consideration of person taking
up some of its shares entered into an agreement with him
that he would have an option to take further shares at par
within a certain time. A little later the price of the
shares ‘went up and the person then exercised his option.
An action was thereupon brought by a shareholder to test the
validity of this agreement, and it was held by the House of
Lords that the agreement was valid. Lord Davey observed,
“In this case the question is as to the powers of the
company itself, and not as to the due exercise of the
directors’ powers. I have come to the conclusion from a
consideration of the language of s. 8, sub-s. 2, that the
prohibition therein contained extends only to the
application, direct or indirect, of the company’s capital in
payment of a commission by the company, and the transaction
impeached in this case is not within it. It is satisfactory
to find that the conclusion to which I have come will not
have the effect of extending the prohibition to transaction
which were legitimate before the Act, and not, so far as I
am aware, open to objection on any other around.” He also
said referring to sub-s. 1 of s. 8 ,This subsection,
therefore,, permits a limited application
(1) (1902). A.C. 474,481, 479.
1006
of the company’s capital in payment of a commission”.
Now there is no doubt to the Act of 1900 there ,was nothing
to prevent the payment of commission for subscribing for
shares out of a company’s profits. The decision in the
Ooregum Gold Mining Company case (1) only laid down that the
amount of the shares must be paid in full. It. would not be
so paid if the capital was utilised for payment of
commission for subscribing for shares. It was, therefore,
the legitimacy of transactions providing for payment of the
commission out of profits that Lord Davey was happy to feel
that his decision would not affect. It is hence, plain that
the House of Lords was of the opinion in Hilder v. Dexter
(2) that s. 8, sub-s. 2 of the Act of 1900 was not concerned
with payment of commission out of profits. That is how that
case has been understood in England:’ see Palmer’s Company
Precedents, 17th ed; vol. I p, 179, Palmer’s Company Law,
20th ed. p. 200. See also Sarkar & Sen’s. Indian Companies
Act, 1913, p. 302.
It seems to me that no other view is possible. There is
nothing in any Companies Act, except where it expressly does
so, to. restrict in any way the power of a company to deal
with its profits. A company is, therefore, free to enter
into any agreement entitling any person to a part of its
profits in consideration of his subscribing for shares in
it. That was the law as it existed before the Act of 1,900.
The view taken in Hilder v. Dexter (2) was that there was
nothing in s. 8 of that Act which effected a change in the
pre-existing law. In spite therefore of that Act, a company
retained fully its powers to pay out of its profits
commission for subscribing for shares in it. I think it
right. to remind here that we are dealing with the powers of
a company and not of its directors.
Section 8 of the Act 1900 was replaced by a. 89 of the
English Companies Act of 1908 and this
(1) (1892) A.C. 125, 133. (2) (1902) A.C. 474,481, 479.
1007
in its turn was substituted by s. 43 of the English
Companies Act of 1929 and the corresponding provision is now
contained in s. 53 of the English Companies Act of 1948.
Substantially the provision in this regard has remained the
same in England throughout from 1900 except. that in 1929 a
further restriction was put on the right to pay commission
for subscribing for shares by providing that the commission
paid shall not exceed 10 per cent of the price for which the
shares were issued or the amount or rate authorised by the
articles whichever was less. That restriction could not
have effected a change in the law as it previously existed
in England in regard to payment of commission out of
profits.
Now in our country a. 105 of the Companies Act of 1913 for
the first time introduced the provision corresponding to
that contained in s. 8 of the English Act of 1900. Both,
therefore, on the general principles underlying Company law,
under which a company, except in cases where an express
provision to the contrary is made, is free to deaf with its
profits in such manner as it likes and on the authority of
Hilder v. Dexter (1) which in my view would be fully
applicable to our Companies Act of 1913, a company in
our country could enter into a valid agreement to pay any
commission it liked out of its profits to any person for
subscribing for shares in it. I may here add that s. 105 of
the Companies Act, 1913 was in terms substantially the same
as s. 8 of the English Companies Act of 1900. It contained
no provision restricting the amount of the commission to be,
paid.
I now turn to a. 76 of our Companies Act 1956. It provides
by sub-s. (1) that “a company may pay a commission to any
person in consideration of his subscribing……… for any
shares in or debentures of the company……… if the
following conditions are fulfilled.” These conditions are,
(1) (1902) A.C. 475, 481, 479.
1008
(i) the payment of the commission is authorised by the
articles.,
(ii) the commission-paid does not exceed in the case of
shares, 5 per cent of the price at which the shares are
issued or the amount or rate authorised by the articles.
whichever is less, and in the case of debentures, 2-1/2 per
cent of the pride at which the debentures are issued or the
amount or rate authorised by the articles, whichever is
less;
(iii) the amount or rate of the commission paid ……
is, in the case of shares or debentures offered to the
public for subscription, disclosed in the prospectus, in the
case of shares or debentures not offered to the public for
subscription, disclosed in the statement in lien of
prospectus, or in a statement in the prescribed form. and
duly signed and filed before the payment of the commission
with the Registrar and, where a circular or notice, not
being a prospectus inviting subscription for the shares or
debentures is issued, also disclosed in that circular or
notice.
Now, the question that arises is whether this sub-section
has made any alteration in the law which previously existed
and which, for the reasons earlier stated, I think permitted
commission to be paid freely out of profits. In other
words, does this sub-section, as it stands, Prevent a
company from paving any commission it likes out of its pro-
fits to any person for subscribing for shires in it? I find
nothing in it to indicate that a change in the law was
intended. It is said that the permission granted by sub-
s.(1) is not expressly confined to payment of
commission out of capital only. Neither, however, does it
say that the enabling provision contained in it is to be
applied to payment of commission out of profits also. How
then is this sub-section to be construed? Now one of the
established rules of construction of statutes is that it is
to be presumed “that the legislature does not intend to make
any substantial alteration in the law beyond
1009
what it explicitly declares, either in express terms or by
clear implications, or, in other words, beyond the immediate
scope and object of the statute. In all general matters
outside those limits the law remains undisturbed. It is in
the last degree improbable that the legislature would
overthrow fundamental principles, infringe rights, of depart
from the general system of law, without expressing its
intention with irresistible clearness. and to give any such
effect to general words, simply because they have a meaning
that would lead thereto when used in either their widest;
their usual, or their natural sense, would be to give them a
meaning other than that which was actually intended.
General words and phrases, therefore, however with and
comprehensive they may be in their literal sense, must,
usually, be construed as being limited to the actual objects
of the Act.” (Maxwell on Interpretation of Statutes, 10th
ed., p.(81-82).
I have earlier stated that under the Act of 1913 a company
was free to pay any commission out of its profits it liked
to persons subscribing for shares in it. I find nothing in
sub-s. (1) of a. 76 to indicate that rule of law which is
based on the fundamental principles of Company law, was
intended to be affected by it. The only substantial de-
parture made in s. 76(1) of the, Act of 1956 from the
provisions in a. 105 of the Act of 1913, except another to
which I will later refer, is the imposition of a restriction
on the amount of commission that can be paid. That cannot,
to my mind, furnish any reason for holding that the pre-
existing ‘law giving full liberty to a company to pay
commission out of profits was intended to be changed. That
restriction will have full scope if applied to payment out
of capital and does not itself indicate any source out of
which the restricted commission is to be paid. Therefore,
it seems to me that the proper way of reading sub-s. (1) of
s. 76 is to restrict its general words so as not to affect
the preexisting law. So
1010
read the terms contained in it has to be confined to
payment of commission out of the capital moneys of the
companies.
Again, in s. 105(1) of our Companies Act of 1913 it was
said, “It shall be lawful for a company to pay a commission
to any person in consideration of his subscribing’ for
shares in it. The words ,it shall be lawful” are enabling
words. They are used in a statute when it is intended to
permit something to be done which previously could not
legally be done. In Craies on Statute Law, 5th ed. at p.
263, it has been said, “-Statutes passed for the purpose of
enabling something to be done are usually expressed in
permissive language, that is to say, it is enacted that “it
shall be lawful”, etc., or that such and such a thing may be
done”. In Julius v. Bishop of Oxford (1) it was said, “The
words it shall be lawful’ are not equivocal. They are plain
and unambiguous. They are words merely making that legal
and possible which there would otherwise be no right or
authority to do. They confer a faculty or power, and they
do not of themselves do more than confer a faculty or
power.” It would follow from the use of the words it “shall
be lawful” in a. 105(1) of the Act of 1913 that the
legislature intended to make that payment of commission for
subscribing for shares legal, which was not so before. The
legislature, therefore, intended to permit and make legal
the payment of commission out of capital to a person on his
subscribing for shares in a company which payment was
previously illegal. Payment of such commission out of
profits had always been legal and there was no necessity for
any statutory provision to make such payment legal or paw an
enabling enactment in regard to it. It would follow that s.
105 was not concerned with putting any restriction on a
company’s power to pay commission out of profits.
(1) (1880) 5 A.C. 214,222.
1011
Now sub-s (1) of s. 76 of our Companies Act of 1956 uses
instead of the words “it shall be lawful” the word “may”.
That however makes no difference. As has been stated in the
passage in Craies which I have earlier read, both mean the
same thing. They are both used in a statute to indicate
that something may be done which prior to it could not be
done. It would follow that s. 76(1) of the Act of 1956 was
intended to have the same effect as a. 105(1) of the Act of
1913, namely, the legalising of a payment of commission out
of capital which-before the Act of 1913 was illegal and
which became illegal on the repeal of that Act by the Act of
1956. That would be another reason for saying that a. 76(1)
of the Act of 1956 was not concerned with any payment of
commission out of profits.
I pass on now to sub-s. (2) of a. 76 of the Act of 1956.
That sub-section says:-
“‘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 subs-
cribe, whether absolutely or conditionally,
for any shares in or debentures of, the
company, or
(b) his procuring. of agreeing to procure
subscriptions, whether absolute or
conditional, for any shares in 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
1012
the money be paid out of the nominal purchase
money or contract ]price, or otherwise.”
This sub-section strongly suggests that subs. (1) is to be
read as confined only to payment of commission out of
capital, for it says that save to the extent provided by
sub-s. (1) no commission shall be paid out of the capital
moneys of the company. If sub-s. (1) were exhaustive of the
powers of a company to pay commission both out of its
capital and its profits so that nothing could be paid’ as
commission either out of capital, or out of profits or out
of any other moneys of the company except as therein
provided, as the respondent company is contention is then
sub-a. (2) would-be wholly redundant; the prohibition
contained in it would in that case be totally unnecessary.
It was said that sub-s. (2) is used only to make sure that
the limits prescribed by sub-s. (,I) would not be departed
from by indirect method. But surely it was not necessary to
make any provision for that purpose only. What could not be
done directly could also not be done indirectly.
Furthermore; if it was necessary to provide, as sub-s. (2)
is said to do, that the capital moneys of the company should
not be used indirectly for payment of commission, why was it
not provided that the profits should not also be used for
the same purpose indirectly. This clearly, for the same
reason should have been done if sub-a. (1) dealt with
payment of commission out of profits also. The reason
suggested on behalf of the respondent company for the
enactment of sub-a. (2) ‘does not therefore seem to me to be
well founded.
Furthermore, the two sub-sections must be read together.
Sub-section (2) contains a general prohibition of payment of
commission out of capital and an exception to it is provided
in sub-a. (1). That seems’ to be the inevitable result of
the words “save as aforesaid”, that is, save as provided in
sub-a. (1), with which sub-s. (2) opens it necessarily
1013
follows that sub-s. (1) contains an exception to the general
prohibition of payment of commission out of the capital.
It, therefore, has nothing to do with payment of commission
out of profits.
The other substantial feature in which s. 76 of the Act of
1956 has departed from the provisions of a. 105 of the Act
of 1913, is by inclusion in the former of a Provision for
the payment of commission for subscribing for debentures.
While a. 105 dealt only with payment of commission for subs-
cribing for shares, s. 76 deals with payment of commission
both for subscribing for shares as well as debentures. An
argument was based on this innovation made in a. 76. It was
pointed out that in regard to debentures a company was
before the Act of 1956 free to pay any commission it liked
for subscribing for them, either out of its capital or out
of its profits and only certain particulars had to be filed
as required by s. 111 of the Act of 1913. It has,
therefore, been contended that the inclusion of debentures
in a. 76 of the Act of 1956 would show that the power to pay
commission whether out of capital or profits for subscribing
for shares as well as debentures was exhaustively contained
in subs. (1) of that section. I am unable to’ accept this
argument.
If I am right in my view that sub-s. (1) of s.76 of the Act
of 1956 is only an exception to the general prohibition
contained in sub-s. (2), it would follow that the
restriction imposed by sub-a. (1) is confined to payment of
commission for subscribing for debentures out of capital
only. It is true that so read there would after the Act of
1956 be no power in a company to pay out of its capital any
commission for subscribing for its debentures, except as
provided in a. 76 (1) of that Act. The law would no doubt
thereby have been changed but it would have been so changed
because the Act of 1956 made that change in express words by
the prohibition contained in sub-s. (2) of a. 76. But
suppose sub-s. (1) is
1014
exhaustive as regards a company’s power to pay commission
for subscribing for debentures whether out of capital or
profits, then also the subsection would clearly be altering
the pre-existing law; it would then be putting a restriction
on the’ power to pay commission for subscribing for
debentures out of profits which power was previously free of
all restrictions. If it were not so, then sub-s. (1) in so
far as it relates to payment of commission for subscribing
for debentures out of profits would become infructuous.
Therefore, it would have in that case to be- read as
altering the pre-existing law by a necessary implication.
It is of some interest to point out here that a. 111 of the
Act of 1913 provided that an omission to file the
particulars as required by it would not affect the validity
of the debentures issued and, therefore, perhaps, the
validity of the agreement to pay commission on them.
Coming back now to the point under consideration find it
impossible to say that a necessary implication of sub-s. (1)
of s. 76 of the Act of 1956 is to alter the previous law
which permitted payment of commission for subscribing for
shares freely out of profits. In regard to payment of
commission out of capital for subscribing for shares, it was
only an enabling section and not a restrictive one, though
in regard to payment of commission for subscribing for
debentures whether out of capital or out of profits, on the
assumption that we have made, it would be a restrictive and
exhaustive provision with no power to pay such commission
except in accordance with its terms. In regard to payment
of commission out of capital for subscribing for shares, the
section being only an enabling provision, it cannot affect
the pre-existing power to pay out of profits a commission
for subscribing for shares. The fact that in regard to
payment of commission for subscribing for debentures the
section may have to be read at; restrictive, that is, as
containing
1015
exhaustively the power in regard thereto, is no reason for
saying that it has the same effect in regard to payment of
commission for subscribing for shares. the considerations
applicable to the two cases are entirely different and the
effect therefore, of the section on them has to be
different.
For these reasons, in my opinion, s. 76 of the Act of 1956
does not affect a company’s right to pay out of its profits
any commission it likes for subscribing for shares in it. I
therefore think that the agreements for payment of
commission for subscribing for shares in the respondent
company out of its profits with which this appeal is
concerned were not affected by s. 76 (1) of the Act of 1956.
They remained perfectly valid after the coming into force of
the Act of 1956:
I would, therefore, allow the appeal.
BY COURT: In accordance with the opinion of the majority,
the appeal fails and is dismissed with costs.

 

 

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