174 SEBI & Corporate Laws - Reports [Vol. 154
18. Piercy v. S. Mills & Co. Ltd. ( 1920 ) 1 Ch. 77 applied the same principle while
holding: (All ER p. 316 D-E)
“The basis of both cases is, as I understand, that Directors are not entitled to use their
powers of issuing shares merely for the purpose of maintaining their control or the
control of themselves and their friends over the affairs of the company, or merely
for the purpose of defeating the wishes of the existing majority of shareholders.”
19. In Hogg v. Cramphorn Ltd. ( 1967 ) 1 Ch 254 , Buckley, J. reiterated the principle
in Punt (supra) and in Piercy (supra). It was held that if the power to issue shares
was exercised for an improper motive the issue was liable to be set aside and it was
immaterial that the issue was made in a bona fide belief that it was in the interests
of the company.
20. The principle deduced from these cases is that when powers are used merely for
an extraneous purpose like maintenance or acquisition of control over the affairs
of
the
company,
the
same
cannot
be
upheld.
21.
Courts
in
the
Commonwealth
countries
including
England
and
Australia
have
emphasized^
that
the
duty
of
the
Directors
does
not
stop
at
“to
act
bona fide
”
require
ment. -
They
have
evolved
a
doctrine
called
the
‘proper
purpose
doctrine’
regarding
the^
duties
of
company
directors.
In
Hoggv.
Cramphorn(
supra),
explicit
recognition
was^
given
to
the
proper
purpose
test
over
and
above
the
traditional
bona fidetest.
In^
this
case
the
Director
had
allotted
shares
with
special
voting
rights
to
the
trustees
of^
of^ a^ scheme^ set^ up^ for^ the^ benefit^ of^ company^ employees^ with^ the^ primary^ purpose^
in^ avoiding^ a^ takeover^ bid.^ Buckley,^ J.^ found^ as^ a^ fact^ that^ the^ Directors^ had^ acted^
in^ subjective^ good^ faith.^ They^ had^ indeed^ honestly^ believed^ that^ their^ actions^ were^
the best interests of the company. Despite this it was observed: (All ER p. 427 E)
“An essential element of the scheme, and indeed its primary purpose, was to ensure
control of the company by the Directors and those whom they could confidently
regard as their supporters.”
22. As such, he concluded that the allotment was liable to be set aside as a con-
sequence of the exercise of the power for an improper motive. He also held that
the power to issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol
Petroleum Limitedpressed 1974 AC 821 , the Privy Council confirmed the above view ex-
The^ by^ Buckley,^ J.^ which^ shows^ a^ preference^ for^ the^ proper-purpose^ doctrine.^
bec^ aPursivey^ Council^ felt^ that^ the^ bona fide^ test^ was^ not^ sufficient^ to^ meet^ the^ challenge^
it
failed
to
encompass
the
obligation
of
directors
to
be
fair.
The Directors’
acts should not only satisfy the test ofbona
fides
, they should also be done with a
proper motive.
Any
lingering
doubts
over
the
status
of
the
proper
purpose
doctrine
as^
a
separate
and
independent
head
of
Directors
duty
within
the
common
law
ju
risdiction -
have
been
laid
to
rest
by
two
decisions
of
the
Court
of
Appeal
in
England
in^
Rolled Steel Products (Holdings) Limitedv.
British Steel Corporations1986
Ch
246
and
Bishopsgate Investment Management Ltd.
(
in liquidation)
v.
Maxwell(No.
2 )^
(^1994 ) 1 All ER 261 (CA). It was held by the Court of Appeal in Bishopsgate (su-prapro) (^) ptriheatty the bona fides of the Directors alone would not be determinative of the
doctrine^ of^ their^ actions.^ In^ a^ parallel^ development^ in^ Australia^ the^ proper^ purpose^
Hotel^ has^ been^ approved^ in^ a^ decision^ of^ the^ High^ Court^ in^ Whitehouse^ v.^ Carlto^
Pty. Ltd. (^1987 ) 162 CLR 285.
23. Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah ( 1998 ) 5 Comp LJ 463 was
also a case of a minority shareholder who on becoming Managing Director of the
company, issued further share capital in his favour in order to gain control of