1943 (10) TMI 14 - HC - Companies Law

Appeal dismissed as company's bullion purchase falls within objects clause. Directors acted in good faith.

Wamanlal Chhotalal Parekh Versus Scindia Steam Navigation Co. Ltd.

The court dismissed the appeal, ruling that the purchase of bullion by the respondent company was not ultra vires its objects clause. It found that the ... Requirements with respect to memorandum Issues Involved:1. Whether the purchase of bullion by the respondent company was ultra vires its objects clause.2. Whether the directors acted bona fide and in the best interests of the company.3. The interpretation of the term 'invest' within the memorandum of association.4. Whether the transaction was covered under sub-clause 3(h)(7) or sub-clause 3(g) of the memorandum of association.5. The implications of the directors' actions and the subsequent sale of bullion.Issue-Wise Detailed Analysis:1. Whether the purchase of bullion by the respondent company was ultra vires its objects clause.The appellant, a shareholder, argued that the purchase of bullion by the respondent company was ultra vires (beyond the powers) of the company's objects clause. This necessitated an examination of the memorandum of association, particularly sub-clauses 3(h)(7) and 3(g). The company was incorporated under the Indian Companies Act, 1913, and its objects clause included various business activities, including the purchase and sale of merchandise and property.2. Whether the directors acted bona fide and in the best interests of the company.The respondents contended that the purchase of bullion was made purely out of consideration of safety during the uncertain times of May 1940, when the collapse of France was imminent. They argued that the directors acted bona fide and considered the investment to be in the best interests of the company. The court found no evidence to support the charge of gross negligence against the directors, indicating that they acted in the company's best interests.3. The interpretation of the term 'invest' within the memorandum of association.The term 'invest' was central to the dispute. The appellant argued that 'invest' should be construed to mean investment in shares and securities. However, the court referred to various definitions, including those from Murray's Oxford Dictionary and Wharton's Law Lexicon, which indicated that 'invest' could mean employing money in the purchase of anything from which profit is expected. The court concluded that the ordinary meaning of 'invest' did not restrict it to shares and securities but could include the purchase of commodities like bullion.4. Whether the transaction was covered under sub-clause 3(h)(7) or sub-clause 3(g) of the memorandum of association.The court examined whether the transaction fell under sub-clause 3(h)(7), which allows the company to 'invest moneys of the company in such manner as the directors think fit.' The court found that the purchase of bullion for safe custody did not constitute an investment as it lacked the characteristics of activity, continuity, and risk associated with investments. However, the court also considered sub-clause 3(g), which permits the company to 'acquire and deal with personal estate and effects.' The court concluded that bullion is personal estate and that the company's actions were within the scope of sub-clause 3(g).5. The implications of the directors' actions and the subsequent sale of bullion.The court noted that the directors had sold the bullion at a profit, which was credited to the company's books. This indicated that the transaction was not speculative and was made out of consideration for safety. The court also observed that the appellant's suit was framed along hostile lines, charging the directors with gross negligence. The court dismissed the appeal, stating that the appellant must pay the costs of the appeal due to the hostile nature of the litigation.Conclusion:The court dismissed the appeal, concluding that the purchase of bullion by the respondent company was not ultra vires its objects clause. The court found that the directors acted bona fide and in the best interests of the company. The term 'invest' was interpreted broadly to include the purchase of commodities. The transaction was ultimately covered under sub-clause 3(g) of the memorandum of association, allowing the company to acquire and deal with personal estate. The appellant was ordered to pay the costs of the appeal due to the hostile nature of the litigation.