Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd. (1962)

The case is cited for a proposition about enabling words: may and it shall be lawful confer a power and allow something that was not allowed before. They do not command. The main source of that proposition in this judgment is the dissent of Sarkar J. The majority reached the opposite result on s. 76. They held that may in s. 76(1) did more than enable. It also set a ceiling that works as a prohibition.

So the case teaches two things at once. The ordinary meaning of permissive words is enabling. And the context and scheme of a section can show that the legislature meant more than that. Students who cite the case for the rule that may is enabling should know that the majority read may in this section as also restrictive.

Shree Changdeo Sugar Mills Ltd was incorporated as a private company in 1939. The appellant and three others promoted it. By a promoters' agreement, the company agreed to pay each promoter a share of its net profits every year. The majority found that the agreement was substantially based on the promoters having agreed to buy, and having bought, shares worth Rs. 1½ lakhs each. Article 3 of the Articles provided for the payment. A tripartite agreement in 1941 cut the total commission to 6¼%. Consent decrees in later suits kept that commission in place.

The Companies Act 1956 came into force on 1 April 1956. The company then told the appellant that the agreement had become illegal and void, and proposed to delete Article 3. The appellant sued for a declaration that the agreement was valid and for an injunction. The trial court dismissed the suit and the Bombay High Court dismissed his appeal. The appellant had already received over Rs. 5,80,000, which his counsel conceded was far above what s. 76(1) now allowed.

1. Was the payment a commission for subscribing for shares, within s. 76 at all?
2. Does the ceiling in s. 76(1) apply only to commission paid out of capital, or also to commission paid out of profits?
3. Should s. 76 be read to match what the corresponding English provision was said to mean?
4. Is there a conflict between s. 76(1) and s. 76(2), which in terms prohibited applying capital moneys?

The appeal was dismissed by majority: "In accordance with the opinion of the majority, the appeal fails and is dismissed with costs."

The agreement fell within s. 76. The majority said "we are satisfied that the payment claimed by the appellant is payment by way of commission to which s. 76 would apply." The argument that part of the consideration could be severed had not been raised properly in the trial court and could not be raised for the first time in this appeal.

The approach to English law. The appellant argued that Indian company law follows English law and that English law does not limit commission paid out of profits. The majority declined to begin from that assumption. The question "must be determined by us on a fair and reasonable construction of s.76(1) and (2)". They pointed to three changes from s. 105 of the 1913 Act. First, may pay replaced it shall be lawful to pay. Second, the conditions were now set out categorically. Third, debentures were brought in. On the first change they said: "It is true that this change is not very significant; but it cannot be treated as of no significance at all". The change might show that s. 76 "was not intended to be merely an enabling provision." The Act as a whole also aimed to protect a company's profits.

The rules of construction applied. The majority set them out:

"The first rule of construction which is elementary, is that the words used in the section must be given their plain grammatical meaning."

The two sub-sections "must be read as parts of an integral whole and as being interdependent", and the court should try to reconcile them "if it is reasonably possible to do so, and to avoid repugnancy."

Section 76(1) is not merely enabling. The ceiling refers to commission generally and says nothing about the source of the payment. So s. 76(1) "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." The majority added that s. 76(1) "cannot be treated merely as an enabling section."

No repugnancy. Section 76(2) is aimed at devices that hide commission paid out of capital, for example by inflating the purchase price of property. Read that way, the two sub-sections "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 1960 amendment. The Amending Act 65 of 1960 deleted the word capital from s. 76(2). The majority treated this as the legislature removing doubt, so that after 1960 the limit "applies as much to commissions out of capital as to those which are paid out of profits."

Retrospectivity. The agreement was made before the Act, but that did not help the appellant. Section 9 of the Act gives the Act priority over inconsistent agreements and articles.

Section 76(1) of the Companies Act 1956 both allows commission and prohibits commission above the ceiling it sets, whether the commission is paid out of capital or out of profits. When construing it, the court reads sub-ss. (1) and (2) together and reconciles them where possible. It does not assume that the Indian section means what a corresponding English provision was once said to mean. The words used, the scheme of the Act and its object decide the question.

• May is ordinarily directory and shall mandatory. Discuss. Use Sarkar J's passage and Julius v. Bishop of Oxford for the enabling meaning of permissive words. Then use the majority to show that the scheme and object of a section can make even a permissive provision restrictive.
• Should Indian courts construe an Indian statute in the light of English decisions on a similar English provision? The majority declined to construe s. 76 "with a preconceived notion". The Indian section had its own scheme and object and must be read on its own terms.
• Harmonious construction: use the majority's reading of s. 76(1) and (2) as "one integrated provision". It is a clear example of avoiding repugnancy between sub-sections of the same section.
• Amendment as an aid: a later amendment that deletes a doubtful word can be treated as the legislature making its intention "clear beyond any doubt". The majority put this cautiously: it may be permissible to assume so.