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BHARAT INSURANCE CO. LTD. V. KANHAIYA LAL, AIR 1935 LAH. 792

BHARAT INSURANCE CO. LTD. V. KANHAIYA LAL, AIR 1935 LAH. 792

 

FACTS

  • 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.
  • 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.

 

ISSUE

  • Whether a suit filed by the shareholder for declaration of true meaning of clause in Memorandum of association be maintained against the company?
    What is the correct interpretation of Cl. (d), Art. 3 of the Memorandum of Association?

 

HELD

The plaintiff was 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, the court modified the order of the lower Court, as to the form of the declaration. So far as the claim for injunction is concerned, the court  accepted the appeal and directed that the suit be dismissed.

  • The lower Court took 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.”
  • 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.

 

COMMENTARY

“A shareholder is entitled to bring an action against the company and its officers in respect of matters which are ultra vires the company and which no majority of shareholders can sanction. The rule in Foss v Harbottle applies only as long as the company is acting within its powers. The FACTS of Bharat Insurance Co Ltd v Kanhaiya LaP'' provide a suitable illustration:
The plaintiff was a shareholder of the respondent company. One of the objects of the company was: "To advance money at interest on the security of land, houses, machinery and other property situated in India — "The plaintiff complained that "several investments have been made by the company without adequate security and contrary to the provisions of the memorandum and therefore prayed for a perpetual injunction to restrain it from making such investments".
The court observed as follows:
"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 application of the assets of a company is not a matter of mere internal management. It is alleged that directors are acting ultra vires in their application of the funds of the company. Under these circumstances a single member can maintain a suit for a declaration as to the true construction of the article in question."”