P L D 1949 Lahore 143 (PLP)

(4)If issue No. 1 is proved in favour of the plaintiff and issue No. 2 against the company, cannot the plaintiff be granted the relief sought for? The trial judge found issues 1 to 3 in favour of the plaintiff and granted a decree to the plaintiff against the defendant for a declaration that the acts of the defendant company in borrowing, receiving, renewing and advertising for deposits to the extent of the amounts invested in the ,shares of other companies, or applying its funds in the purchase of shares of other companies are ultra vires and not binding on the plaintiff. The suit in respect of the relief of injunction was, however, dismissed. The learned trial Judge thought that the relief of, declaration by itself sufficient met the ends of justice. It was, further, held that the plaintiff had failed to establish that the defendant company was carrying on the business of banking, of discounting or collecting of bills .f exchange. No relief in respect of that tatter was given to the plaintiff. Both parties were dissatisfied with this decision and preferred appeals to the Court of the Senior Subordinate Judge, Lahore, The learned Senior Subordinate judge reversed the decision of the trial Tudge and dismissed the plaintiffs suit. He further ordered that the costs incurred by the company be paid by the plaintiff. The company's appeal was allowed and the plaintiff's appeal was dismissed. The Senior Sub‑Judge held on issue No. 1 that under the Memorandum of Association the company had very wide powers and it could even carry on the business of buying and selling, shares. He remarked that the matter whether the defendant company was doing any banking business was not agitated before him. As regards the allegation that the directors were unnecessarily borrowing beyond the genuine needs of .the business of the Textile Mills, the learned Senior Subordinate judge noted that it, was not alleged before him that, the borrowing constituted a business and as ‑such it offended against the objects clause in the Memorandum of Association. It was observed that there was a clear distinction between the, objects of the company's formation and the powers of the company and that the power to borrow is not an object and is not required to he included in the objects clause and that this power was expressly conferred on the directors of the company by the articles. On these findings, it was held that the question of the viola tion of the objects clause did not arise in the case, even if it was assumed that the company bad been borrowing excessively and beyond the genuine needs of the business. The learned judge also held that in this case there was no allegation much less proof of the Punjab Textile Mills being engaged in the business of buying and selling shares. In conclusion it was observed that borrowing of money, receiving, renewing or advertising for deposits or investing its funds in shares of other companies is riot in violation of the; objects clause of the Memorandum of Association of the company and is not ultra vares and that the matters mentioned in issue No. 1 relate to the internal management of the company and the plaintiff had no right to agitate them in a Court of Law. Against the decision of the learned Senior Subordinate judge two second appeals have been preferred to this Court : R. S. A. No. 1763 of 1945 and R. S. A. 1979 of 1945. Both these appeals relate to the same question and can be decided in a single judgment. They were referred by me to a Division Bench in view of the questions raised therein. In order to appreciate the points of controversy between the parties it is necessary to state briefly the history of the borrowing that is being questioned in this case by the plaintiff. The balance‑sheet of the year ending with 30th of June 1942, Exh. p. 5, discloses that upto that date the company had borrowed from bankers as an overdraft a sum of Rs. 49,933 and it had raised a sum of Rs. 7,30,912 odd by inviting deposits from the public. Most of this money was required for the genuine needs of the company and had been so used, excepting a sum of about one lac which was invested in a number of shares, the maximum in one case being a sum of about Rs. 50,

000. Upto this stage it could not be said that this company was doing any business in the nature of buying and selling of shares. All that could be said was that about 1 /7th of the amount raised by borrowing had been put in a number of shares. The learned Senior Subordinate judge has pointed out that borrowing by inviting deposits started in the year 1936. The first investments in shares were made in the year 1938. The borrowing continued for anther five years but no investment in shares was made during these years. It was in the year 1943, after the institution of the suit, that investment of the company's moneys raised by borrowing was made in the purchase of shares of the Saraswati Sugar Syndicate, Ltd. It is really this investment in shares of the Saraswati Sugar Syndicate that has given rise to a serious attack on the management of this company on behalf of the plaintiff. It was contended in the two Courts below that money was raised to a very considerable extent in the year 1943 with the sole object of purchasing shares of the Sugar Syndicate in order to confer a status on a near relation of the Managing Director of this company. It was emphasized that this was wholly foreign to the objects as well as to the Articles of the company and that being so it was ultra vires of the objects clause in the Memorandum of Association and, therefore, the plaintiff was entitled to a declaration and an injunction asked for by him in the plaint. Exh. p. 6 is the balance sheet of the year ending 30th of June 1943. It discloses that the bankers' overdraft by this time had reached the figure 10,46,357 in one bank and including the overdraft raised from other sources it had come to the figure of Rs. 16,42,

826. The figure of deposits which was seven lacs odd in the year 1942 had gone upto Rs. 12,89,

042. In other words the borrowing had reached a limit of about 29 lacs from a figure of about 8 lacs in the year 1942. Out of the amount raised in the manner stated above, the balance‑sheet shows that 14 lacs was invested in the shares of the Saraswati Sugar Syndicate, Ltd. It has been said at the Bar that some more shares of the Saraswati Sugar Syndicate were also purchased later on, but it is conceded that these shares were really not purchased for the purpose of selling them or for carrying on business in the nature of buying and selling shares. It was, however, very strongly urged that the act of the directors in raising the loan mentioned above and in investing it in the manner that they did invest, is a wholly unwarranted act on their part and is really ultra vires of the company itself. In order to decide the matters that were urged before us it is necessary to state the objects clause contained in the Memorandum of Association of this company: It is in these terms:‑ The objects' for which the company is formed are all or any of the following :‑ (a) To erect and operate Textile Mills, at such places as the Company may from time to time decide. (b) To do all or undertake all or any other such acts, business, commissions of profits, or agencies, either connected or unconnected with the above objects, as the Company may decide. (c) To do all or any other things as are incidental or conducive to the attainment of the above objects or as are or may be incidental or conducive to the more convenient, more' economical, or more profitable carrying on of all or any of the above objects. In the Articles of Association the clause, dealing with the point which we have to decide is contained in Article

71. Clause (i) of this Article runs thus:-- "The directors are authorized to borrow on mortgage of the whole or any part of the property of the Company or on bonds, deben tures (either naked or secured by a charge or mortgage) notes or other securities of the Company, or otherwise in any manner as they may think expedient for the purposes and business of the Company." Clause (n) is in these terms :‑‑ "The directors are authorized to invest and deal with any of the moneys of the Company upon such securities or investments and in such manner as they may think fit and from time to time to vary or realise such securities and investments." The Article cited above was made part of the Articles of Association by a resolution of the company in September 1944. The original Article dealing with this matter is No. 72, which is in these terms :‑ "The Directors or any person or firm appointed to the office of Manager, Managing Director or Managing Agents appointed under article 71 and specially authorized by a resolution of the Board of Directors in this behalf may, from time to time, borrow or raise money for the purposes of the Company, and for this purpose may charge, mortgage or alienate all or any of its pro perties, rights, future profits or fund in such form and on such terms as may be expedient.". The question for consideration now is whether on the facts proved in this case it can be held that the directors by raising loans in the years 1942 and 1943 and by investing moneys thus raised in the purchase of certain shares, particularly, the shares of the Saraswati Sugar Syndicate Ltd., have contravened the objects clause of the Memorandum of Association, or have merely exceeded the powers conferred upon them by the Articles. The rule of law on this subject has been laid down in a judgment of the Court of Exchequer in the case of Ashbury Railway Carriage and Iron Company v. Riche (44 Law Journal Exchequer, 185). At page 196 the following observations of the Lord Chancellor may be quoted with advantage :‑ "With regard to the memorandum of association, as has often already been pointed out, although it appears somewhat to have been overlooked in the present case, the memorandum of associa tion is, as it were the charter and the limitation of the powers of; any company established under the Act. With regard to the articles of association, these play a part subsidiary to the memorandum of association. They accept the memorandum of association as the charter of incorporation of the company, and accepting it as the charter of incorporation of the company, the articles proceed to define the duties, the rights and powers of the governing body as between themselves and the company at large, and the mode and from in which the business of the company is to be carried on, and the mode and form in which changes in the in ternal regulations of the company must from time to time be made. With regard, therefore, to the memorandum of association, if you find anything which goes beyond that memorandum or is not warranted by contract, the question will arise whether that which is done is intra vires, not the directors of the company but the company itself. With regard to the articles of association, if you find anything which, still keeping within the memorandum of association, is a violation or iii excess of the articles of the association, the question will arise whether that is anything more than an act extra vires the directors but intra vires the company". The point for determination in the present controversy is whether the act of borrowing in the years 1942‑43 and the act of purchase of shares of the Saraswati Sugar Syndicate Ltd, in the year 1943 and afterwards, is an act which is ultra wires of the company or is only extra vices of the directors. The learned judge of the lower appellate Court held that the company was not carrying on the business of purchase or sale of shares, but it was only borrowing possibly in excess of its legitimate requirements and was using that money by way of invest ment in the shares of particular company. It seems to me that this finding is supported by the facts disclosed on this record. It is quite clear that the company is not carrying on the business of purchase and sale of shares as it is not habitually doing this. These purchases are independent of the act of borrowing, and. are individual and‑solitary acts. The essence of business is that there should be a course of dealings, which has not been proved to exist in the present case. At the best all that can be said on behalf of the plaintiff is that the particular borrowing e in the year 1943 was done with a purpose to buy the shares of the Saraswati Sugar Syndicate Ltd. As such, this borrowing may be said to be extra wires the directors, but it cannot be said to be ultra vires of the company. The company could certainly ratify the act of the directors in raising these loans even if the directors had exceeded their power. Without, therefore, going into the question whether the company actually raised this money for the definite purpose alleged by the plaintiff and conceding for the sake of argument that what he says is right, it cannot be held that the company was doing any business which it was forbidden to do or which was outside the four corners of its Memorandum of Association. All that could be said is that the directors have been misusing their power and were acting in excess of those given to them by the articles of association. It has been rightly pointed out by the Senior Subordinate judge that the question of the soundness of the investments or excessive borrowing by the directors is a matter of the internal or indoor management of the company and does not raise any question of the ultra vires of the objects clause of the Memorandum of Association. Once it is conceded that the company has a power to borrow and that the company has a power .to invest its funds in any manner it likes, then the remedy for any abuse of this power lies within the four corners of the Companies Act and not by having resort to a suit for a declaration and an injunction. Suppose for instance that the investment in these shares brings considerable amount of profit to the company, it seems to me that no shareholder would ever question the act of the directors in raising that loan and in making this investment. On the other hand, if the directors by exceeding their powers raised these loans and invested them within a particular manner with an ulterior object and as a result of these investments loss accrues to the company. I am quite clear that the remedy of the shareholders lies within the Indian Companies Act, section

235. Mr. Bali, the learned counsel for the appellant, very forcefully contended that any borrowing which is beyond the genuine needs or legitimate requirements of a company is really ultra vires of the objects clause of the company and that the doctrine of ultra vires is applicable to it. After a careful, consideration of the contention of the learned counsel I am unable to agree with the view that he so vehemently put forward. It seems to me that in this case an effort is being made to give colour to what really is contended to be an act of the directors in excess of their powers, into an act which is ultra vires of the company itself in order to have resort to a Civil Court rather than to seek redress as provided for in the Indian Companies Act. During the life of the company of 11 years, the investment in shares was very little upto the year 1942 as already stated. It is only the solitary act in the year 1943 which may be considered, on proper evidence being led, to be an abuse of the powers given to the directors by the Articles if they fail to furnish an explanation of their conduct. In that case it may be liable to charge under the Indian Companies Act. The question, however, before us is whether as a Civil Court we can call upon them to furnish an explanation at the instance of a share‑holder as to why they raised these big loans in that year and as to why they invested these moneys in the shares of the Saraswati Sugar Syndicate Ltd. I am of the opinion that as a Civil Court we cannot call upon them to give this explanation in this case. But if the matter is properly mooted and proper redress is sought, then under the Indian Companies Act a judge may call upon them to fur nish an explanation of their conduct. Mr. Bali sought to connect the borrowing with the investments. Beyond a conjecture of the learned counsel there is really no evidence to support that suggestion. It may or may not be so, but the matter cannot be examined in this suit by us. For the reasons given above I would hold that the learned judge of the lower appellate Court was perfectly right in his decision that the matters raised in the present suit and disclosed by the evidence on this record are matters which concern the internal and indoor management of the company and cannot be examined by a Civil Court in a regular suit. The learned Senior Subordinate judge held that even if the company was carrying on the business of buying and selling of shares it was empowered to do so by clause 3 (b) of the Memorandum of Association. Mr. Bali, the learned counsel for the appellant, contended that clause 3 (b) of the Memorandum of Association was not an object clause at all. It was so vague and indefinite that it could not be given the dignity of an object clause in a Memorandum of Association. He urged that an object clause must give the objects specifically and when a clause says that the comp any may in a general meeting decide what business it has to do, it is not stating the objects at all. The learned counsel cited a number of authorities for this proposition, but it is unnecessary to examine them. Reference may, however, be made to a decision of the House of Lords in the case of Cotman v. Brougham (1918 A C 514). _ In that case about the objects clause Lord Wrenbury made the following observations :‑ "There has grown up a pernicious practice of registering memoranda of association which, under the clause relating to objects, contain paragraph after paragraph not specifying or delimiting the proposed trade or purpose, but confusing power with purpose and indicating every class of act which the corporation is to have power to do. The practice is not one of recent growth. It was in active operation when I was a junior at the Bar. After a vain struggle I had to yield to it, contrary to my own convictions. It has arrived now at a point at which the fact is that the function of the memorandum is taken to be, not to specify, not to disclose, but, to bury beneath a mass of words the real object or objects of the company with the intent that every conceivable form of activity shall be found included somewhere within its terms. The present is the very worst case of the kind that I have seen. Such a memorandum is not, I think, a compliance with the Act. The Act throws upon the registrar a great responsibility when it provides, as it does, that his certificate of incorporation shall be conclusive evidence that all the requirements of this Act in respect of registration and of matters precedent and incidental thereto have been complied with. Before registering a memorandum of association the registrar ought to consider whether the requirements of the Act have been complied with and to refuse registration if he conceives that they have not . . . . . . . . In .spite of these observations the House of Lords in that case decided that what the company had done and what was sought to be declared ultra vires of the company was within the objects clause; so widely drafted that the company under it could do all kinds of conceivable business. In view of our decision on the first point it is, however, unnecessary to give any decision as to whether clause 3 (b) of the Memorandum of Association is an objects clause within the meaning of section 6 of the Indian Companies Act. Any decision that we would give on this point would be purely obiter. For la similar reason it is unnecessary to decide the effect of section 24 on this case. For the reasons given above I would refrain from finally pronouncing on the validity of clause 3 (b) contained in the Memorandum of Associa tion of this company. The result of the above discussion is that both these appeals preferred by the plaintiff fail on the ground that the matter raised by the plaintiff is one which cannot be examined by a Civil Court, but is a matter of a domestic nature and the remedy for the redress of, the grievance lies elsewhere, and they are dismissed. In view, however, of the circums tance of this case and in view of the fact that the balance‑sheets for the years 1942 and 1943 did provide a justification of some kind. to the plaintiff for this case, I would leave the parties to bear their own costs throughout. , ABDUL RASHID, C. J.:‑I agree. K. M. A. Appal dismissed.