[1958]
28 COMP. CAS. 252 (CD)
In Re Paringa Mining And
Exploration Co Ltd.
WYNN-PARRY J.
OCTOBER 28, 1957
WYNN-PARRY J. This is a petition for the confirmation of a reduction of the company’s capital and share premium account by writing down its capital from 300,000 to 67,600 and its share premium account from 189,556 18s. 2d. to nil. The evidence satisfied me that both the sums in question have been lost, and I find no difficulty in confirming the reduction.
A point,
however, has been taken on the form of the minute. It is, I am told, the
practice of the court up to now, in cases where there is a share premium
account and it is written off or written down, to include a reference to the
resulting position as regards the share premium account in the minute. This
practice has been challenged by Mr. Instone, who appears for the company.
The position
of the share premium account on a reduction of capital is dealt with by section
56 of the Companies Act, 1948. Subsection (1) says: “Where a company issues
shares at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount or value of the premium on those shares shall be transferred
to an account, to be called ``the share premium account’, and the provisions of
this Act relating to the reduction of the share capital of a company shall,
except as provided in this section, apply as if the share premium account were
paid-up share capital of the company.” Prima facie, that language is sufficient
to bring into operation all the other provisions of the Act relating in anyway
to the reduction of the share capital of the company, and would therefore bring
into operation sections 69 and 70. Subsection (2) provides -this is the
exception contemplated by subsection (1)-that “the share premium account may,
notwithstanding anything in the foregoing subsection, be applied by the company
in paying up unissued shares of the company to be issued to members of the
company as fully paid bonus shares, in writing off-(a) the preliminary expenses
of the company ; or (b) the expense of, or the commission paid or discount
allowed on, any issue of shares or debentures of the company; or in providing
for the premium payable on redemption of any redeemable preference shares or of
any debentures of the company.”
I will
consider section 69, bearing in mind the provisions of section 4, namely, that
“A company may not alter the conditions contained in its memorandum except in
the cases, in the mode and to the extent for which express provision is made in
this Act.” Section 69, relates to the registration of the order of the court
and the minute, and subsection (1) to the content of the minute according to
the type of case involved. Subsection (5) is the important subsection for this
purpose: “The minute when registered shall be deemed to be substituted for the
corresponding part of the memorandum, and shall be valid and alterable as if it
had been originally contained therein.” Section 70 relates to the liability of
members in respect of reduced shares; and prima facie, that also must operate
in the case of a reduction involving the writing of writing off of the share
premium account. Take first the case of writing off a share premium account
altogether. What is the relevance, for the purpose of the minute, of putting in
a reference to that complete writing off ? Subsection (5) of section 69, as I
pointed out, provides in effect that the minute is to form part of the memorandum,
taking the place of the statement of the capital in the memorandum which,
before registration of the minute, and before the reduction was confirmed,
represented an accurate statement of the company’s capital. If-this, I think,
is a stronger case-a share premium account is written down without being
written off completely, then the remaining amount of the share premium account,
if it appears in the minute, must by the operation of subsection (5) of section
69 be part of the memorandum.
How, then, is
one to reconcile section 4, which provides that a company may not alter the
conditions of the memorandum except in the cases expressly provided in the Act,
with the provision in subsection (2) of section 56 that the share premium
account may be applied by the company in the various ways which are stated in
that section ? It may company in the various ways which are stated in that
section ? It may be said that that can be done because of the express exception
in subsection (1); but it seems to me to be very inconvenient to proceed upon
the basis that something is to be treated as part of the memorandum of
association of a company and therefore, prima facie, unalterable under section
4 except to the extent expressly allowed by the Act, and at the same time there
should be this express power to deal with the share premium account as provided
in section 56(2).
I think that
the sensible view to take is to regard the provision of section 69 relating to
the minute-I shall not trouble about section 70-as inapplicable to cases where
the reduction involves either the writing down or the writing off of the share
premium account, so far as regards the share premium account. I think that the
convenience of the matter and the doubts which have been thrown on the possible
reconciliation of section 4 and section 56 make it desirable to alter the
practice. I shall therefore propose in this case to accede to the application
which has been put forward by Mr. Instone and direct that the minute shall make
no reference to the share premium account.
I therefore
approve the minute without the proposed reference to the share premium account,
with the slight exception that the word “additional” in front of “shares” in
the last line of the minute as appearing into the petition should be omitted.
There will be the usual directions as to advertisement.
Order
accordingly.
[2004]
53 scl 387 (bom.)
High
Court of
Anoop
V. Mohta, J.
Company
Petition No. 274 of 2004
Company
Application No. 115 of 2004
and
Company Application (Lodg.) No. 479 of 2004
May 6,
2004
Section 78, read with section 100 of the
Companies Act, 1956 - Share - Application of premium received on issue of -
Petitioner-company decided to adjust its losses by making adjustments in its
security premium account and since adjustment would be deemed to be reduction
in share capital, instant petition was filed for sanction of court - At stage
of final hearing, two shareholders of petitioner-company, filed an application
seeking to file reply and inspect some documents - Whether since all
formalities required under law had been complied with by company and objectors
were fully aware of proceedings but still at relevant time had not attended
proceedings as well as meetings, whereby all objections could have been raised
and majority shareholders of company, at relevant time, could have decided or
could have given deliberation to their objections, objections raised for first
time at stage of final hearing were not bona fide and could not be said to be
in interest of company - Held, yes - Whether, therefore, application filed by
objectors was to be rejected - Held, yes - Whether since there was no
illegality or any breach of any provision of law and reduction of share premium
was fair, just and proper and within framework of law, instant company petition
was to be allowed - Held, yes
Facts
In order to
reflect the true and fair status of the petitioner-company’s financial
performance, the company proposed to adjust the diminution of value of its
investments by making adjustments in its security premium account. Since the
proposed adjustment would be deemed to be a reduction in the share capital, the
petitioner filed the instant petition under section 78 read with section 100 for
obtaining sanction of the court. At the stage of final hearing of the petition,
two objectors/intervenors who were also the shareholders of the
petitioner-company, filed a company application wanting to file reply and
inspect some of the documents. No one else had objected to the petition and
nothing objectionable was found or traced out from the record. The petitioner
contended that the objection was not bona fide and it was raised with ulterior
purposes and that the objectors/intervenors had never attended the meeting in
spite of due notice of advertisement.
Held
There was no
dispute that the admission and hearing of the petition was advertised. What was
required was proper and due advertisement with proper notices and details as
per law. Once those formalities had been complied with by the company, at the
instance of one shareholder, there was no question of providing all such
detailed documents as required by the objector for the first time in this
instant application. [
Under the
procedure prescribed by the Company Rules and Regulations, parties are under an
obligation to file their affidavit of objection within the specified period or
time, failing which, the court may or may not take into consideration their
objections. In the instant case, objectors were fully aware of the proceedings,
but still, at the relevant time, had admittedly not attended the proceedings as
well as, the meetings, whereby all these objections could have been raised and
the majority shareholders of the concerned companies or members, at the
relevant time, could have decided or could have given deliberation to the
objections. Therefore, the objection raised for the first time by the instant
company application and that too, at the stage of final hearing, was not bona
fide and could not be said to be in the interest of the companies of which they
were holding some shares. The company runs as per the scheme and thereby, once
unanimous decision is taken by the company based on the experts opinion,
persons like the present objectors, at this stage, would not be allowed to
interfere with the unanimous decision taken. In view of the reasons and
background, if the company had taken particular decision within the framework
of law which was not illegal or contrary to public policy, there was no reason
to interfere with such decision taken by the experts which included, business,
financial experts auditors and majority shareholders of the company. [
The objectors’
application, was liable to be rejected as that was nothing, but fishing inquiry
for information to support vague and unsupported objections, if any. A single
objector, even assuming for a moment that had some case, his objections could
not be gone into for want of detail objections or affidavit. He was fully aware
of the contents of the petition, as copy of the petition was served on him. One
cannot overlook the obligations of the shareholders and their rights as
contemplated under Act, which should have been exercised at the relevant time.
Shareholders had full rights to inspection as admittedly notices were issued
and published with details and requisite materials, alongwith explanatory notes
as contemplated under the law. In that view of the matter, there was no reason
to accept the objections of the objectors. [
Therefore, the
company application was rejected. [
Having
considered the scheme and purpose of reduction of the share premium, there was
no illegality or any breach of any other provision of law. The total reduction,
as claimed, was fair, just and proper and within the framework of law and in
view of that, the instant petition was allowed. [
Shyam Diwan,
P.D. Shah and Kamlesh Kharade for the Petitioner. S.J. Khera and
Aradhana Khera for the Objectioner-Shareholder.
Order
1. The present Company
Petition has been filed by Zee Telefilms Limited, having its registered office
at Continental Building, 125, Dr. Annie Basant Road, Worli, Mumbai, for the
purpose of reduction of Securities Premium Account of Zee Telefilms Limited by
invoking the provisions of sections 78 and 100 to 104 of the Companies Act,
1956 (for short “Companies Act”) and the Company (Court) Rules (for short
“Rules”).
2. The details of the
authorised, issued, subscribed and paid-up capital of the petitioner-company as
on 31st March, 2004, i.e., the last audited balance sheet along with the
unaudited balance sheet of the petitioner- company for the period 31st
December, 2003 is reproduced in paragraphs 5 and 6 of the Petition.
3. As per the objects of
the petitioner-company, as set out in their Memorandum of Association, they
have an authority and power to reduce the share capital in case of urgency,
need of exigency, within the framework of their Memorandum of Association,
specially Articles 43 of the Articles of Association.
4. The petitioner-company
have set out to reduce its premium Account pursuant to the provisions of
section 78 read with sections 100 to 104 of the Companies Act, which can be
reproduced as under :
“(i) In two separate acquisitions, in the year 1999-2000, the
petitioner- company acquired 100 per cent equity shares in Zee Multimedia
Worldwide Limited (a company having broadcasting and marketing operations in
USA, UK, Europe, Africa, and many other countries) and 50 per cent equity
shares in Winterheath Company Limited (a company broadcasting and marketing TV
channels in India and Middle East) and 50 per cent equity shares in Siticable
Networks Limited and Programme Asia Trading Company Limited (companies engaged
in distribution of television content in India). This was done with a view to
consolidate Petitioner Company’s direct ownership on the content and
distribution of the television channels in
(iv) The above Overseas Companies, which became wholly owned
subsidiaries upon acquisition, were broadcasting several of the Group’s channel
including Zee TV, Zee Cinema and Zee News from their overseas locations. Due to
certain regulatory restrictions in India on broadcasting, until recently,
several of the Group’s channels including Zee TV, Zee Cinema and Zee News were
uplinked by these overseas companies from abroad. After removal of these
restrictions, the petitioner company commenced uplinking of many of these
channels from India for strategic reasons. By moving uplinking of these
television channels to India, the investment of the petitioner company in these
overseas subsidiaries (particularly Asia Today Limited) diminished
substantially. As overseas subsidiaries as appearing in its books of account is
required to be adjusted so as to reflect true and fair value of the petitioner
company’s investments in these subsidiaries.
(v) The petitioner-company appointed M/s. Deloitte Haskins &
Sells, a firm of Chartered Accountants to value the remaining businesses of
overseas subsidiaries under the changed circumstances. M/s. Deloitte Haskins
and Sells, in their valuation report dated 16th February, 2004, valued the
remaining businesses of overseas subsidiaries to Rs. 12,319 million thereby
resulting in permanent diminution in value of investments by Rs. 17,716 million
in the books of the Company. The petitioner-company craves leave to refer to
and rely upon the copy of the valuation report as and when produced.
(ix) M/s. Jaiswal & Associates, Chartered Accountants, have
ascertained these assets and diminution thereof. M/s. Jaiswal & Associates
has submitted their valuation report dated 18th February, 2004. As per the
valuation report, movable assets have diminished by Rs. 896 million. The
petitioner company craves leave to refer to and rely upon the valuation report
dated 18th February, 2004 as and when produced.
(xi) Petitioner-company has made a total equity investment of Rs.
3179.97 million in equity share capital of Siticable Networks Limited. The
reduction in share capital of Siticable Networks Limited (wholly owned by
petitioner company) will cause proportionate reduction of Rs. 1,491 million in
the value of investments made by the petitioner-company in Siticable Networks
Limited. This would result in reduction of petitioner-company’s investments in
Siticable Networks Limited from Rs. 3,179.97 million to Rs. 1,689 million.”
5. In order to
reflect the true and fair status of the petitioner-company’s financial
performance, the company proposed to adjust the diminution of value of its
investments as per the provisions of section 78 read with sections 100 to 104
of the Companies Act. The Board of Directors of the company, therefore, decided
to adjust the losses of the petitioner-company by making adjustments in its
Security Premiums Account of Rs. 19,207 million. The balance in the Security
Premium Account shall stand reduced by Rs. 19,207 million and the investment of
account shall stand reduced to Rs. 15,149 million from Rs. 34,356 million.
According to the petitioner, therefore, this proposed adjustment in Reserve and
Surplus Account is deemed to be the reduction in the share capital by reason of
section 78 and, therefore, sanction of the Court under section 100 of the
Companies Act is necessary. To achieve this particular object, the
petitioner-company have called its meeting on 25th March, 2004 for a Special
Resolution as required under law. The meeting was accordingly attended and the
Special Resolution in question was unanimously passed. The said Resolution is a
part of the record.
6. It may be
mentioned here that the notice of the said meetings with the explanatory
statement is also part of the record.
7. As contended, as
the adjustment in the Security Premium Account of the petitioner-company does
not involve diminution of liability in respect of unpaid share capital or the
payment to any shareholder of any paid up share capital, the list of the
creditors of the petitioner-company is not annexed to the present petition. As
contended, the creditors of the petitioner-company are not in any way affected
by the proposed objects as there is no reduction in the amount payable to any
of the creditors and no compromise or arrangement is contemplated with the
creditors. The proposed adjustment would not in any way adversely affect the
ordinary operations of the petitioner-company or the ability of the petitioner-company
to honour its commitments or to pay its debts in the ordinary course of
business and the creditors are, therefore, not entitled to object and holding
their meeting would be a mere formality and, therefore, the dispensation. The
Scheme, as contemplated, would not, in any manner adversely affect the rights
of the creditors. There are no proceedings pending under sections 235 to 251 of
the Companies Act against the petitioner. However, the Registrar of Companies,
Mumbai, has launched prosecution under sections 217(5), 212(9), 209(5), 307(7)
and 211(7) and those cases are pending. The offences are compoundable under
section 621A of the Companies Act. The relevant applications have been filed
before the Regional Director under Regulation 40(1) of the Company Law Board
Regulations. However, till this date, the petitioner-company or their Directors
have not been served with any notice or summons or complaint in respect of the
said offences. Parties are bound to follow provisions of all laws.
8. As per the
provisions of the Listing Agreement, the petitioner-company has filed a draft
of this petition with the Stock Exchanges where the shares of the
petitioner-company are presently listed. In view of the letter dated 26th
February, 2004, there is no objection of any kind received, even from the said
authority.
9. By order dated 2nd
April, 2004, the petition was admitted and it was made returnable on 29th
April, 2004, after usual notices of publication. Affidavit of publication of
the notice dated 13th April, 2004, has been filed on record.
10. The matter was
heard initially, as listed on the returnable date i.e. on 29th April, 2004. On
that day, two objectors/intervenors viz. Aradhana Shivkumar Khera and one Mr.
Shivkumar Khera appeared in person. Mr. Shivkumar Khera is an Advocate, who
appeared for person himself and he also appeared on behalf of Aradhana
Shivkumar Khera, who is his wife. As per the objectors, they are holding shares
of the petitioner-company vide client ID No. 1111012 and D.P. No. IN 300100.
The objectors are holders of 665 shares. As per his request, as he wanted to
file reply and also wanted to take inspection of the documents, the matter was
adjourned for one week. Only to accommodate Mr. Khera, the matter was adjourned
for one week. No one else objected or nothing objectionable was found or traced
out from the record. On 6th May, 2004, the matter was called out again. Mr.
S.J. Khera appeared and filed Company Application (Lodg.) No. 459 of 2004 and
requested to grant the said application whereby the objector wanted direction
for the inspection of the documents and for furnishing xerox copies of the
documents as described in the Schedule E annexed to the Judges’ Summons. This
includes various documents : Company Petition No. 274 of 2004, list of
documents in Company Petition No. 274, exhibits referred therein, Annual
Reports from 1999 to 2003, Indian subsidiaries, as well as, Foreign
subsidiaries, Valuation Report of M/s. Deloitte, Haskins and Sells, Valuation
Report of Jaiswal & Associates, Chartered Accountants, Board Resolution,
and cases pending and permission from the Reserve Bank of India for acquiring
foreign subsidiaries of the companies. On this foundation, he again submitted
that these documents are essential to raise objections and/or to oppose the
Scheme in question.
11. Heard the learned
counsel for the parties. Mr. Diwan, learned counsel for the petitioner-company
pointed out from the Affidavit filed alongwith the Company Application No. 459
of 2004 and submitted that this petition or objection is not bona fide and it
is raised with ulterior purposes. Mr. Diwan also pointed out that the
objectors/intervenors, inspite of due notice of advertisement, admittedly never
attended the meeting. Mr. Khera made a statement that they have not received
notice of the said meeting. So far as documents are concerned, Mr. Diwan
pointed out the Annexures which start from letter dated 21st April, 2004,
whereby full opportunity was given to the petitioner to have inspection of the
documents, which includes all details, requisite and essential materials which
are necessary for the purpose of holding such meetings under the provisions of
the Companies Act. What is required is that all the material and requisite
statutory documents which are essential to place in particular Resolution
should be part of such notice or notifications. All the shareholders, even
otherwise, as per the scheme of the Companies Act, in such cases, always have
full opportunities and rights to inspect the documents, but at the relevant
time. There is no dispute that the admission and hearing of the petition was
advertised. What was required is proper and due advertisement with proper
notices and details as per law. Once those formalities have been complied with
by the company, at the instance of one shareholder, there is no question of
providing all such detailed documents as required by the objector for the first
time in this company application in the Court.
12. One cannot overlook
the procedure prescribed by the Company Rules and Regulations whereby, parties
are under an obligation to file their affidavit of objection within the
specified period or time, failing which, the Court may or may not take into
consideration their objections. In the present case, Mr. Khera who appears in
person, is fully aware of the proceedings, but still, at the relevant time, has
admittedly not attended the proceedings as well as, the meetings, whereby all
these objections could have been raised and the majority shareholders of the
concerned companies or members, at the relevant time, could have decided or
could have given deliberation to the objections of Mr. Khera. Therefore, in my
opinion, the objection raised by Mr. Khera, for the first time by this company
application in the company petition and that too, at the stage of final
hearing, is not bona fide and cannot be said to be in the interest of the
companies of which they were holding some shares. The company runs as per the
scheme and thereby, once unanimous decision is taken by the company based on
the experts, opinion, in my view, persons like the present objectors, at this
stage, need not be allowed to interfere with the unanimous decision taken. It
need not be mentioned here that in view of the reasons and background, as
referred above, if the company has taken particular decision within the
framework of law which is not illegal or contrary to public policy, there is no
reason to interfere with such decision taken by the experts which includes business,
financial experts, auditors and majority shareholders of the company.
12A. The reason,
therefore, as reflected in the affidavit filed by Mr. Khera for inspection of
the documents, at this stage, cannot be entertained and such application, is
also liable to be rejected as this is nothing, but fishing inquiry for
information to support vague and unsupported objections, if any. Mr. Khera, as
a single objector, even assuming for a moment that has some case, his
objections cannot be gone into for want of detail objections or affidavit. He
was fully aware of the contents of the petition, as copy of the petition was
served on 22nd April, 2004. However, Mr. Khera contended that only copy of the
petition was served and not the annexures. One cannot overlook the obligations
of the shareholders and their rights as contemplated under the Companies Act,
which should have been exercised at the relevant time. Shareholders, had full
rights to inspection as admittedly notices were issued and published with
details and requisite materials, alongwith explanatory notes as contemplated
under the law. In this view of the matter, I see no reason to accept the
objections of Mr. Khera.
13. Therefore, company application Lodging No.
479 of 2004 is rejected.
14. Having considered
the Scheme and purpose of reduction of the Share Premium, I see there is no
illegality or any breach of any other provision of law. The total reduction, as
claimed, is fair, just and proper and within the framework of law and in view
of this, the petition is allowed, as prayed, in terms of prayer clauses (a) to
(d). No order as to costs.
15. At this stage, Mr.
Khera orally applies for stay of this order. Considering the objections raised
and the observations made above, I see no reason to stay the sanction of such
reduction and the oral stay application is also rejected.
Parties to act
on an ordinary copy of this order, duly authenticated by the Company Registrar
of this Court.
[1962] 32 COMP. CAS. 654 (AP)
Biochemical And Synthetic Products Ltd.
v.
Registrar Of Companies
Andhra Pradesh
SATYANARAYANA
RAJU, J.
OCTOBER
13, 1961
SATYANARAYANA
RAJU J.-This petition under
rule 9 of the Companies (Court) Rules, 1959, is for a declaration that a
transaction of share is not affected by section 79 of the Companies Act.
The
Biochemical and Synthetic Products Limited is the petitioner. The first
respondent is the Register of Companies, Andhra Pradesh, and the second
respondent is the Under Secretary to the Government of India, Ministry of
Industries and Commerce, Department of Company Law Administration.
The material
facts which let up to this petition may be briefly stated. The Biochemical and
Synthetic Products Limited (hereinafter referred to as “the company”) was
registered as a public limited company under the provision of the Companies Act
on May 27, 1943. The office of the company is situated at Sanatnager,
At a meeting
of the board of directors held on December 4, 1956, the following resolution
was passed:
“Taking into
consideration the capital structure of the company and the existing losses in
the balance-sheet, the board unanimously resolves to re-issue and allot the
42,413 forfeited shares to the managing agent, viz., The Hyderabad Syndicate
Private Limited or to their assigns or/and nominees at (O.S.) Rs.1-4-0 per
share as fully paid and out of the total price of (O.S.) Rs. 43,016-4-0 equal
to I.G. Rs. 35,442-8-0 one half be collected in cash and the other half
adjusted against the credit balance standing in the name of Messrs. Hyderabad
Syndicate Private Limited.”
It is said
that pursuant to the above resolution, the managing agents paid to the company
half the price in cash and the other half was adjusted against the amount due
to them by the company. On September 30,1957, an extraordinary general body
meeting of the company approved the sale of the forfeited shares to the
managing agents, as per the board’s resolution of December 4, 1956. By their
letter, dated December 7, 1957 the company notified the Registrar of Companies
about the completion of the sale transaction.
So September
3, 1958, the second respondent intimated the company as follows:
“With
reference to your letter dated the 7th December 1957, addressed to the
Registrar of Companies, Andhra Pradesh, I am directed to state that the
reallotment of 42,413 forfeited shares at a discount, not having been made in
accordance with the provisions of section 79(2) of the Companies Act, 1956. was
void. No dividend can, therefore, be legally paid on these reallotted shares.
The holders of these share cannot also exercise any voting rights in respect of
them.”
In the
communication, dated February i, 1959, the company, though their advocate,
endeavored to persuade the respondent to hold that the sale of the forfeited
shares was not reallotment or issue within the meaning of section 79. By his
communication, dated March 6, 1959 the second respondent intimated the company
that the Government did not see any reason to change their earlier view that
there allotment of the forfeited shares contravened the provision of section
79(2). Thereupon the petitioner filed this petition for the issue of a
direction as mentioned above.
At the outset
it may be mentioned that some of the shareholders of the company intervened at
an earlier stage but eventually withdrew their opposition to the petition. From
the facts disclosed in their counter affidavits, it would appear that out of
the forfeited shares 11,667 shares were surrendered by the company. It was
averred by one of the shareholders that the company’s former managing agents
did not, in fact, own as many as 11,667 shares and it was not known how the
managing agents could surrender shares of which they were not the owners.
In the reply
affidavit filed on behalf of the petitioner the fat that the company’s former
managing agents did not own 11,667 shares was not disputed. It was, however,
mentioned that they were unable to say as to how they surrendered those shares.
It is
contended by Mr. Rajarama Iyer, learned counsel for the petitioner,. that the
sale of the forfeited shares to the Hyderabad Syndicate Private Limited was,
not a reallotment or issue within the meaning of section 79 of the Companies
Act, as all the 1,500,000 shares had been fully issued at par even in 1943 and
that it was a sale and disposal of forfeited shares governed by article 32 of
Table A of Schedule I, which was within powers of the board of directors who
were entitled to dispose of them on such terms and in such manner at they
thought fit, and that the sale is, therefore, quite in order and valid.
Mr.
N.S.Raghavan, the learned Principal Government Pleader, on the other hand
contended that the transaction amounted to reallotment of forfeited shares at a
discount, which not having been made in accordance with the provisions of
section 79(2) is void.
The question
for determination is whether the sale of 42,413 shares to the Hyderabad
Syndicate Private Limited contravenes section 79 of the Companies Act.
Section 79
runs as follows :
“(1) A company shall not issue shares at a
discount shares except as provided in this section.
(2) A company may issue at
a discount shares in the company of a class already issued, if the following
conditions are fulfilled, namely :--
(i) the issue of the shares
at a discount is authorised by a resolution passed by the company in general
meeting, and sanctioned by the court;
(ii) The resolution
specifies the maximum rate of discount (not exceeding ten per cent. or such
higher percentage as the Central Government may permit in any special case) at
which the shares are to be issued;
(iii) not less than one year
has at the date of the issue elapsed since the date on which the company was
entitled to commerce business and
(iv) the shares to be issued
at a discount are issued within two months after the date on which the issue is
sanctioned by the court or within such extended time as the court may allow.
(3) Where a company has
passed a resolution authorizing the issue of shares at a discount, it may apply
to the court for an order sanctioning the issue; and on any such application,
the court, if, having regard to all the circumstances of the case, it thinks
proper so to do, may make an order sanctioning the issue on such terms and
conditions as it thinks fit.
(4) Every prospectus
relating to the issue of the shares shall contain particulars of the discount
allowed on the issue of the shares or of so much of that discount as has not
been written off at the date of the issue of the prospectus.
If default is
made in complying with this sub-section, the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to
fifty rupees.”
Admittedly,
the company sold 42,413 shares of the face value of Rs. 10 (O.S.)each, in
respect of which Rs. 8 (O.S.) alone was paid and the balance of Rs. 2 (O.S.)
was due on each share at Rs.1-4-0 allowing a discount of annals 12 per share.
It is to be observed that the company purported to reallot those share as fully
paid up shares.
As pointed out
by the Earl or Halsbury L.C. in Randi Gold Mining Company v. New Balkis
Esrsteling Limited, the amount subscribed, which is to make the shareholder a
partner in the concern, must be paid and be no expedient not indirect
arrangement can the companies evade the obligation of possessing the capital
which the legislature has enjoined shall be the capital upon which it is to
trade. The limited liability system, which is the corner stone of the Company
Act is, in the words of the Lord Chancellor,”... a sort of partnership in which
the liability of each member of the partnership was to be limited to an amount
ascertained by what has been called the “face value’ of the shares.” When the
shareholder does not pay full money which he has agreed to pay by taking the
shares, he ceased to be a member of the company and his share are forfeited;
but nevertheless he remains liable to pay what he has been called upon to pay.
The legislature, no, doubt, provides that the share in the company, which
belonged to the defaulting shareholder, shall be capable of being sold to
another person, “...but, though that other person is to be relieved from any
liability for calls made previously to his becoming a holder of the shares,
there is nothing whatever which suggests that he should be relieved from paying
the balance still remaining unpaid on the shares.” It is open to the directors
to reallot the forfeited shares giving credit for the money already received,
in which event, the new allottee would be liable only for the unpaid capital in
respect of the forfeited shares.
In the present
case, the directors purported to reallot the forfeited shares as fully paid up
share on payment of a sum of Rs. 1-4-0 per share. The result is that the
company has suffered a loss of Rs. 0-12-0 on each of these shares. It is,
therefore, plain enough that the shares were issued at a discount and this was
done without the sanction of the court as required by section of the court as
required by section 79 of the Companies Act. Under section 79(3) of the Act
there is an embargo on the company re-issuing he shares at a discount without
obtaining the necessary permission of court.
Sri Rajarama
Iyer relied upon articles 32 in Table A as validating the transaction. The said
article reads:
“(1) A forfeited share may be
sold or otherwise disposed of on such terms and in such manner as the board
thinks fit.
(2) At any time before a
sale or disposal as aforesaid, the board may cancel the forfeiture on such
terms as it thinks fit.”
As supporting
his contention, the learned counsel for the petitioner has relied upon the case
of Morrison v. Trustees Executors and Securities Insurances Corporation. There
the facts were as follows : The articles of association of a company provided
that the directors might sell, reallot, or otherwise dispose of forfeited
shares in such manner as they thought fit. A number of shares on which at least
3 pointed per share had been paid having been forfeited, the directors entered
into an agreement for the sale of these shares with 2 pounds 5 shillings
credited as paid up, for 30 shillings per share. It was held that the company
could deal with the shares as partly paid up to an extent not exceeding the
amount which had been paid up on each at the time of forfeiture, and that the
transaction did not amount to an issue of shares at a discount. Chitty L.J.
observed:
“These shares
had been forfeited, and under the articles such shares may be sold upon such
terms as the directors think fit. Why is not that valid ? In this case the
shares have had a certain amount already paid up upon them and it is not
proposed to sell them in such way that the company will not in the result get
the full nominal amount of the shares. This is a sale of the shares credited
with so much paid upon them. It is not an issued of shares. It does not come
within the principle which forbids the issue of shares at a discount, and the
transaction is not country to the principles of the Companies Acts.” (Italics
mine).
The ratio of
the decision is that the company could deal with the shares as partly paid up
to an extent not exceeding the amount which bad been paid up on each at the
time of the forfeiture. The decision lays emphasis on the fact that where it is
proposed to sell the shares in such a way that the company will in the result
get the full amount of the shares, the transaction dies not amount to the issue
of shares at a discount.
From the facts
already narrated, it is clear that the present case does not fall within the
scope of the above decision. Here, what was done by the company was to sell the
shares in such a way that the company did not in the result get the full
nominal amount of the shares. The principle of the above decision is therefore
not applicable to the instant case.
For the above
reasons, it must be held that the reallotment of 42,413 shares not having been
made in accordance with the provisions of section 79(2) of the Companies Act is
void. On this conclusion, this petition fails and is dismissed with the costs
of respondent.
Petition
dismissed.
[1994] 79 COMP. CAS. 551
[BEFORE THE COMPANY LAW
BOARD—SOUTHERN REGION BENCH]
Mangalore Chemicals & Fertilizers Ltd., In re.
S. BALASUBRAMANIAN
(CHAIRMAN).
Company Petition No. 60/80A/SRB/93
DECEMBER 8, 1993
S. Srinivasan,
Company Secretary, for the petitioner.
J.S. Prasanna
Kumar, for the objector.
ORDER
S.
Balasubramanian (Member).—In
this petition filed under the proviso to section 80A(1) of the Companies Act,
1956, on October 30, 1992, the petitioner seeks consent of this Bench to issue
further redeemable preference shares in lieu of the unredeemed preference
shares.
The facts
leading to the filing of this petition are that the petitioner issued two lots
of preference shares on October 6, 1972, and January 8, 1973, consisting of
1,50,000 and 1,49,825 preference shares of Rs. 100 each respectively. The
period of redemption was fifteen years and the shares carried a dividend of
9.5%. 52.70% of the total issue was held by the Karnataka State Co-operative
Marketing Federation Limited (1,28,025 shares) and the Karnataka State Agro
Industries Corporation Limited (30,000 shares), both Karnataka Government State
Corporations. While other bodies corporate and financial institutions held 32%,
the remaining 16% was held by the public as on September 16, 1992. These
preference shares in accordance with the terms of issue should have been
redeemed on or before October 5, 1987, and January 7, 1988, respectively. The
petitioner-company extended the date of redemption by five years with the
permission of the Controller of Capital Issues with an increased rate of
dividend at 13%. Therefore, the preference shares in question were to be
redeemed on or before October 5, 1992, and January 7, 1993, respectively.
The petition
says that the petitioner has paid dividends up to the financial year 1988.
Thereafter since the petitioner has not made any profits, no dividend has been
declared either on the equity or on the preference shares.
The
petitioner avers that the petitioner having got into difficult days made a
reference to the Board for Industrial and Financial Reconstruction (BIFR) to
declare the petitioner-company as a potentially sick company. However, the BIFR
by its order dated June 21, 1991; dropped the proceedings, holding that the
petitioner was not a sick company and leaving the adoption of revival measures
to the petitioner-company's financial institutions and the banks. Having
incurred cash losses for several years, the petitioner could neither declare
dividend nor redeem the preference shares in question. The accumulated losses
as per the balance-sheet as at March 31, 1992, stood at Rs. 8,873.05 lakhs.
There was change in the management in the year 1990, when the present
management of U. B. Group stepped in. It is stated that the present management
is trying its best to turn the petitioner around and, therefore, the petitioner
is not in a position at present to repay the preference shareholders which are
due for redemption in October, 1992, and January, 1993, aggregating to about
Rs. 4,80,68,732 (rupees four crores eighty lakhs sixty-eight thousand seven
hundred and thirty-two only).
In view of
its inability to redeem the preference shares in question on the prescribed
dates, the petitioner's annual general meeting held on April 8, 1991, empowered
the petitioner's board to issue further redeemable preference shares in terms
of section 80A on such terms/conditions, as it deems fit subject to obtaining
consent of this Bench.
The board of
directors, in turn, authorised the managing director of the company to issue
further redeemable preference shares in terms of section 80A on such terms and
conditions as he deems fit subject to obtaining the consent of this Bench.
Accordingly, this Bench has been approached for its consent for the issue of
2,99,825 redeemable preference shares of Rs. 100 each to be redeemed after a
period of 10 years from the due dates in place of the existing 2 lots of
preference shares with the stipulation that the arrears of accrued dividend
would be paid as premium at the time of redemption.
The
petitioner contends that no permission or approval of the preference
shareholders is necessary and, therefore, no class meeting of preference
shareholders has been held. For this proposition, the petitioner relies on the
Sachar Committee's Report.
This petition
was posted to February 3, 1993, when Shri S. Srinivasan, practising company
secretary, was heard on behalf of the petitioner. As this Bench desired to
ascertain the wishes of the major preference shareholders, the petitioner was
directed to issue notices to them. Accordingly, the petitioner issued notices
on February 18, 1993, to eight major preference shareholders holding in all
84.25 per cent. This includes two Karnataka Government Corporations holding
52.70 per cent, and the remaining six shareholders who are either insurance
companies or financial institutions. Pursuant to the said notice only the
Karnataka State Cooperative Marketing Federation Limited and the Karnataka Agro
Industries Corporation Limited filed their objections dated March 12, 1993, and
March 13, 1993, respectively, more or less on the same lines, seeking dismissal
of the petition.
The
objections summarised are (a) that section 80A of the Companies Act, 1956, does
not apply to the present case because section 80A applies only to preference
shares which are irredeemable or to preference shares which are redeemable
after the expiry of 10 years. In the present case, as the preference shares
were originally issued for fifteen years followed by five years' extension,
section 80A does not cover these cases, (b) Request for extension of time by
the petitioner-company amounts to breach of contract. In spite of five years'
extension, the petitioner has failed to honour its commitment. The objector
corporations require funds badly for their own business. The U.B. Group which
has taken over the petitioner's management in September, 1990, being one of the
leading groups in India with commanding financial resources, should not find it
difficult to redeem the preference shares, (c) That it had not received any
dividend since 1988 and, therefore, the petition be dismissed with direction to
the petitioner to redeem the preference shares without any further delay.
The petition was
subsequently heard on March 24, 1993, when Shri S. Srinivasan, practising
company secretary, appeared for the petitioner while the objector, the
Karnataka Agro Industries Corporation Limited, was represented by its Financial
Adviser and Chief Accounts Officer, Shri J. N. Prasanna Kumar. Nobody appeared
for the other objector.
I have
considered the petition of the company, the affidavits filed by the objectors
and the arguments of the representatives of all the parties.
The issues that
emerge for decision are :
1. Whether
the proviso to section 80A applies to the facts of this case ?
2. Whether the consent of preference shareholders
is necessary before the board decided to issue further preference shares in
lieu of the old ones ?
3. Whether
the facts and circumstances stated by the petitioner justify according consent
by this Bench ?
Section 80A
of the Act was introduced and came into effect with effect from June 15, 1988.
This amendment was the outcome of the recommendations made by the Sachar
Committee in paragraphs 17.13— 17.14 of its report. It is worthwhile to record
certain observations of the Committee :
"... we
would specifically mention that no consent of any class of members should be
necessary for such conversion. Our recommendations regarding redemption should
equally apply to the preference shares which are at present redeemable at the
option of the company."
"... We
would further suggest that when the time for redemption of preference shares
comes, it should be incumbent upon the company to redeem all the shares in
cash, excepting those specifically agreed to be renewed. Further, it should no
longer be open to the company to take recourse to section 106 or section 391 to
have an arrangement by a majority decision, subject to the confirmation of the
court. This is to ensure that the existing irredeemable preference shares are
redeemed within the five years or on the expiry of 12 years, as the case may
be, after which such shares may be either renewed or paid off in cash to those
who do not agree to renewal ..."
Clauses 12 to
14 of the Notes on Clauses (see [1987] 62 Comp Cas (St.) 81 at page 116) read
as follows :
"... A
new provision is sought to be introduced in the Act to ensure that all existing
preference shares which are irredeemable not earlier than ten years, ..."
It is also
relevant to note that as per the provisions of section 80A(b), the redeemable
preference shares which are in currency at the time of commencement of section
80A should be redeemed within a period of 10 years or as per the maturity date,
whichever is earlier, and as per the proviso, the Company Law Board can,
notwithstanding anything contained in the Act, give its consent for extending
the period of redemption by issue of fresh preference shares as per the
provisions of this proviso.
According to
the objectors, section 80A should be read with section 80(5A) and, therefore,
section 80A relates only to those shares which are irredeemable or which are
redeemable after the expiry of 10 years from the date of issue and as such they
are not applicable on the facts of the case to preference shares of this
company. I am unable to agree with this contention for the simple reason that
the provisions of section 80(5A) are applicable to preference shares issued after
the commencement of the Amendment Act on June 15, 1988, while section 80A talks
of issues made before the commencement of the Amendment Act. It is also amply
clear from section 80A(b) read with the proviso thereto that both the lots of
preference shares issued by the company became due for redemption after the
commencement of section 80A and as, according to the company, it is not in a
position to redeem the same, the company has a right to approach the Company
Law Board as per the proviso to section 80A as long as it is proved that the
company is not in a position to redeem and pay the dividend within such period.
Therefore, I do not sustain the objection of the objectors that the provisions
of section 80A are not applicable to the preference shares in issue in this
case.
As far as the
second issue, whether the consent of the preference shareholders is necessary,
is concerned, as has been already pointed out, even the Sachar Committee did
not consider the same necessary. While section 80A makes it incumbent on the
company to redeem preference shares as they become due, the proviso provides
for extension by way of issue of fresh preference shares. The only condition is
that the company should prove its inability to redeem the preference shares on
the due dates. No other condition is attached. Therefore, I do not think that
the consent of the preference shareholders is a pre-condition to this petition.
While that is
the position of law, even otherwise on facts, the two objectors (the KSCMF and
the KAIC) also hold 27,06,834 and 10,50,000 (Rs. 10 each) equity shares in the
petitioner's company. They never objected to the passing of the resolution on
April 8, 1991, to issue fresh preference shares.
The
rejoinder, in fact, says that the former corporation holding 42.70 per cent, of
the preference shares in the petitioner-company was duly represented at the
annual general meeting in its capacity as an equity shareholder and further
approved the resolution. Therefore, they should be deemed to have known the
financial position of the petitioner-company even in April, 1991. It is very
pertinent to note from the petition that even though the petitioner was
registered in the year 1966, it was incurring heavy losses even from the
initial years. About 55 per cent, of the equity shares were held by the
objectors and other financial institutions, the remaining 45% was held by
others. In 1978, the financial institutions/banks came to the petitioner's
rescue and the petitioner was able to wipe off its losses only by 1985 and could
declare its maiden dividend of 12 per cent, in 1986. It is mentioned that in
the year 1986, the petitioner imported large quantities of fertilizers which
piled up due to drought conditions prevailing in the country. Owing to
prolonged storage, there was deterioration in the quality and, therefore, they
had to be disposed of at uneconomical prices. Then between 1988 and 1990 there
were labour unrest, plant breakdowns, water shortage in the summer, and
non-availability of phosphoric acid. The cumulative effect was that the
petitioner suffered heavy losses and finally the net worth of the petitioner
got eroded. Then for revival of the petitioner, a rehabilitation scheme was
drawn up with the financial assistance of the Industrial Development Bank of
India, the State Bank of India, etc., in consultation with the Government of
Karnataka including the objectors and with the consent of the BIFR, eventually
resulting in the present management stepping in on September 27, 1990. It is in
this situation that the petitioner which has been obliged to redeem the
preference shares, is unable to do so.
The question
that is to be considered is whether the company is bound to redeem the
preference shares notwithstanding the financial position of the company as is
evident from the recommendations of the Sachar Committee and also the Notes on
Clauses. The very purpose of introduction of section 80A is to ensure that all
preference shares, whether redeemable or irredeemable, which were in existence
on the commencement of the Act should be redeemed within such period as
stipulated in the section itself. The proviso is only a saving clause to take
care of instances where a company is not in a position to redeem any such
shares within the period aforesaid and to pay the dividend. This proviso is a
non obstante proviso to the effect that notwithstanding anything contained in
the Act once the Company Law Board is satisfied that a company is unable to
redeem its preference shares, the company can issue further redeemable
preference shares in place of the existing preference shares. From the petition
of the company it is clear that the financial position of the company is not
sound and as a matter of fact a new group has already taken over the management
of the company and even the proposal of the company to go in for a "rights
issue" as indicated in its annual report for the year 1991-92 has not
materialised due to uncertainty of the revival process started by the new
group. The company in its annual report has highlighted the problems it is
facing with regard to mobilisation of working capital and also the efforts
taken in respect of the rehabilitation efforts.
Section 80A
was inserted by the 1988 Amendment Act, which came into effect from June 15,
1988, enabling companies in financial distress, if they are unable to redeem
such shares on the due dates, to issue further (fresh) preference shares in
lieu of the old ones, with the consent of the Company Law Board. The power
conferred on the Company Law Board under the proviso to section 80A(1) is not
only discretionary but also extraordinary and is intended to obviate hardship
to companies which are in financial difficulties. The phrase
"Notwithstanding anything contained in this Act" used in the proviso
read with sub-section (2) thereof is of great significance. They give absolute
and unfettered powers to the Company Law Board in dealing with such cases.
Therefore,
while exercising this discretionary power, the paramount consideration should
be the interest of the company while the interest of all others is only
secondary or subordinate.
I am
convinced that the company has not been in a position to redeem the preference
shares when they are due along with dividend thereon. Non-grant of some time
for redemption of these preference shares and immediate payment thereon would,
in my view, on the basis of the facts narrated in the petition and also as
found in its annual report, affect drastically the financial position of the
company and, therefore, I am inclined to give my consent to the prayer of the
company for the issue of 2,99,825 — 13 per cent, redeemable preference shares,
in place of the existing ones.
However, I do
not consent to the latter part of the company's proposal for treating the
dividend due as premium to be paid at the time of redemption. As per the
proviso to section 80A, the accumulated dividend is also to be converted into
preference shares and the total number of preference shares should comprise the
face value of the existing preference shares plus the accumulated dividend. I,
therefore, considering the facts and circumstances of the case, give my consent
to the issue of 2 lots of redeemable preference shares in place of the existing
two lots of preference shares—the first lot being 1.5 lakhs of preference
shares of Rs. 100 each plus such number of preference shares as may be
necessary to cover arrears of unpaid accumulated dividends on the maturity
date, i.e., October 5, 1992 ; and the second lot of 1,49,825 preference shares
of Rs. 100 each plus such number of preference shares as may be necessary to
cover arrears of unpaid accumulated dividends on the maturity date, i.e.,
January 7, 1993.
With regard
to the period of redemption of the proposed shares, viz., ten years as prayed
for by the company, having regard to all the facts and circumstances of the
case and taking into consideration the oral submissions of Shri S. Srinivasan,
as also the provisions of section 80(5A) of the Act, I feel that a period of
eight years from the due dates of redemption of the 2 lots should be sufficient.
Accordingly,
these preference shares shall be redeemed not later than 8 years from the dates
on which the earlier lots became due for redemption, i.e., October 5, 1992, and
January 7, 1993, respectively. These redeemable preference shares will be
issued within a period of three months from the date of receipt of this order
and on issue of these preference shares, the earlier lots would be deemed to
have been redeemed on the dates on which they became due for redemption.
In the result,
the petition is allowed with the above directions.
[2003] 45 scl 190 (Punj. & Har.)
High
Court of Punjab And Haryana
Raja
Ram, Corn Products (
v.
Company Law Board
G.S.
Singhvi and Mrs. Bakhshish Kaur, JJ.
Company
Appeal No. 3 of 2002
May 7,
2002
Section 80A of the Companies Act, 1956 -
Redemption of irredeemable preference shares - Whether nature of power vested
in CLB under section 80A to give consent for issuance of redeemable preference
shares is very wide and pervasive and is not hedged in with any restriction,
implying thereby that CLB can give consent with or without conditions and Court
can interfere with discretion exercised by it only if conditions are arbitrary,
unreasonable or capricious - Held, yes - Company Law Board allowed issue of
further 4 per cent cumulative redeemable preference shares in lieu of existing
cumulative redeemable preference shares on conditions, inter alia, that company
should issue further preference shares to extent of amount due including
dividend up to date of redemption, that cumulative preference shares should
carry dividend at rate of 15 per cent per annum and be redeemable on or before
expiry of ten years - Whether impugned order did not suffer from any legal
infirmity warranting modification by Court - Held, yes
The
appellant-company had issued certain 4 per cent redeemable preference shares
with a maturity period of 12 years. Ten days before maturity, the appellant
convened a meeting of the shareholders including preference shareholders and
succeeded in getting a resolution passed for issuance of further 4 per cent
cumulative redeemable preference shares in lieu of existing 4 per cent
cumulative redeemable preference shares. Thereafter, it submitted an
application under section 80A before the CLB for grant of consent. Some of the
preference shareholders filed objections on the ground that the appellant’s
claim about unanimity in the meeting of shareholders was incorrect.
They also urged
that the application of the appellant be heard along with their complaints
under sections 397 and 398 and also claimed that the rate of dividend be
increased to 15 per cent. The CLB allowed the application of the appellant and
gave consent subject to the conditions that
(a) the company should
issue further preference shares to the extent of the amount due including the
dividend up to the date of redemption;
(b) the further
redeemable cumulative preference shares should carry a dividend at the rate of
15 per cent per annum and should be redeemable on or before the expiry of ten
years;
(c) the company should
make the above issue within 90 days of the receipt of a copy of the order and
comply with relevant provisions of the Act; and
(d) any fractional entitlement
should be suitably dealt with at the discretion of the Board of directors.
It was argued
that the CLB overlooked the provisions of section 80A of the Act and article
3(a) of the Articles of Association of the company. It was further argued that
in view of section 80A, the appellant could not be compelled to issue
redeemable cumulative preference shares which shall carry a dividend at the
rate of 15 per cent per annum. Relying upon the judgment of the Constitution
Bench of the Supreme Court in Dr. A Lakshmanaswami Mudaliar v. LIC of India AIR
1963 SC 1185 it was argued that the direction for adding the amount of dividend
to the fresh cumulative preference shares be declared ultra vires article 3(a)
of the Articles of Association of the company.
The CLB
rejected the objections raised on behalf of some preference shareholders to the
validity of the resolution passed in the meeting of the shareholders, by
observing that even if the resolution had not been passed unanimously, the
appellant’s right to allot fresh cumulative preference shares could not be
questioned. It further held that shareholders did not have a right to seek
redemption at the end of the maturity period. The prayer of the objectors for
hearing of the application along with the complaints filed by them under
sections 397 and 398 was rejected by the CLB with the observation that pendency
of complaints had no bearing on the decision of the application filed by the
appellant. It also rejected the appellant’s plea that nothing was payable to
the holders of cumulative preference redeemable shares. The CLB then passed the
conditional order of consent. The reasons assigned by it for granting
conditional consent did not suffer from any legal infirmity requiring
interference by the Court. [Paras 5 and 6]
In Raja Ram
Corn Products (
The distinction
sought to be made by the appellant between the case at hand and the previous
appeal was illusory because the consent given by the appellant’s representative
for issuance of redeemable preference shares with dividend of 15 per cent per
annum was not the factor which had weighed with the Court for declining
interference with the order passed by the CLB. Rather, the ratio of the Court’s
decision was based on the interpretation of sections 80 and 80A. [
Thus, the order
under challenge did not suffer from any legal infirmity warranting modification
by the Court. [
The argument of
the appellant that the direction given by the CLB should be declared ultra
vires article 3(a) of the Articles of Association of the company was merit less
and deserved to be rejected because by virtue of the non obstante clause
contained in proviso to section 80A(1)(b) provisions contained in that section
would override the articles of association of the company. [
For the above
reasons aforementioned, the appeal was dismissed.
Cases referred to
Dr. A.
Lakshmanaswami Mudaliar v. LIC of India AIR 1963 SC 1185 (para 4) and Raja Ram
Corn Products (
L.M. Suri and Ms.
Radhika Suri for the Appellant.
Judgment
1. This appeal is directed
against order dated 30th October, 2000, vide which the Company Law Board,
Northern Bench, New Delhi (hereinafter described as respondent No. 1) granted
consent to the proposal of the appellant for issuing further 4 per cent
cumulative redeemable preference shares in lieu of 10,891 existing shares of
that category subject to certain conditions including the one for payment of
dividend at the rate of 15 per cent per annum.
THE FACTS
2. The appellant-company
had issued 10,891, 4 per cent redeemable preference shares of Rs. 100 each on
25th December, 1985, with a maturity period of 12 years. Ten days before the
maturity of the shares, the appellant convened a meeting of the shareholders
including preference shareholders on 15th December, 1997, and succeeded in
getting a resolution passed for issuance of further 4 per cent cumulative
redeemable preference shares in lieu of 10,891 existing 4 per cent cumulative
redeemable preference shares. Thereafter, it submitted an application under
section 80A of the Companies Act, 1956 (for short ‘the Act’), before respondent
No. 1 for grant of consent. Some of the preference shareholders (respondent
Nos. 2 to 13) filed objections to contest the application of the appellant.
They pleaded that the application was liable to be dismissed because the
appellant’s claim about unanimity in the meeting of the shareholders was
incorrect. They also urged that the application of the appellant may be heard
along with the complaints filed by them under sections 397 and 398 of the Act.
In the end, they claimed that the rate of dividend be increased from 4 per cent
of 15 per cent per annum.
3. Respondent No. 1 allowed the application of the appellant, vide
order dated 30th October, 2000, and gave consent to its proposal subject to the
following conditions :
“(a) The company shall issue further preference shares to the extent
of the amount due including the dividend up to the date of redemption, i.e.,
24th December, 1997.
(b) The further redeemable cumulative preference shares shall carry
a dividend at the rate of 15 per cent per annum and shall be redeemable on or
before the expiry of ten years from 24th December, 1997.
(c) The company shall make the above issue within 90 days of the
receipt of a copy of this order and shall comply with the relevant provision of
the Act consequent to the above allotment.
(d) Any fractional entitlement shall be suitably dealt with at the
discretion of the Board of directors.”
4. Shri L.M. Suri, senior advocate, argued that the conditions
imposed by respondent No. 1 may be declared illegal, arbitrary and unjust and
quashed because while doing so, respondent No. 1 overlooked the provisions of
section 80A of the Act and article 3(a) of the articles of association of the
company. He further argued that in view of section 80A of the Act, the
appellant cannot be compelled to issue redeemable cumulative preference shares
which shall carry a dividend at the rate of 15 per cent per annum. Learned
counsel also criticised the directions given by respondent No. 1 for issuance
of cumulative preference shares by including the amount of dividend payable up
to the redemption by arguing that such a condition is totally unwarranted. He
relied on the judgment of the Constitution Bench of the Supreme Court in Dr. A
Lakshmanaswami Mudaliar v. LIC of India AIR 1963 SC 1185 and argued that the
direction given by respondent No. 1 for adding the amount of dividend to the
fresh cumulative preference shares should be declared ultra vires article 3(a)
of the articles of association of the company.
5. We have given serious thought to the arguments of learned counsel,
but have not felt persuaded to agree with him that the conditions imposed by
respondent No. 1 are arbitrary or ultra vires the provisions of the Act. A
careful reading of the order under challenge shows that respondent No. 1
rejected the objections raised on behalf of respondents Nos. 2 to 13 to the
validity of the resolution passed in the meeting of the shareholders held on
15th December, 1997, by observing that even if the resolution had not been
passed unanimously, the appellant’s right to allot fresh cumulative preference
shares cannot be questioned. It further held that shareholders do not have a
right to seek redemption at the end of the maturity period. The prayer of the
objectors for hearing of the application along with the complaints filed by
them under sections 397 and 398 of the Act was rejected by respondent No. 1
with the observation that pendency of complaints has no bearing on the decision
of the application filed by the appellant. Respondent No. 1 also rejected the
appellant’s plea that nothing was payable to the holders of cumulative
preference redeemable shares. While doing so, respondent No. 1 made reference
to order dated 21st February, 2000, passed by this court in CA No. 27 of 1997
filed by the appellant and observed as under :
“This Board has to satisfy that company is not
in a position to redeem preference shares and pay the dividend, if any, due
thereon before according its consent under section 80 of the Companies Act for
issue of further shares for this purpose. As per the company’s balance sheet as
on 31st March, 1997, as against the paid up capital and reserves and surplus of
the company of Rs. 337.46 lakhs its accumulated losses were of the order of Rs.
311.35 lakh. Further as per the company’s latest audited balance sheet as on
31st March, 2000, accumulated losses have increased to the extent of Rs. 389.31
lakh, in addition the company has contingent liability on account of
non-provision of full depreciation, etc. Under the circumstances the company
can neither create capital redemption reserve out of profits nor is it in a
position to issue further additional shares for the purpose of redemption of
preference shares. I am satisfied that the company is not in a position to
redeem existing 10,891, 4 per cent cumulative preference shares due for
redemption on December 24, 1997.”
6. Respondent No. 1 then passed the conditional order of consent.
In our opinion, the reasons assigned by respondent No. 1 for granting
conditional consent do not suffer from any legal infirmity requiring
interference by this Court.
7. In Raja Ram Corn
Products (Punjab) Ltd. v. CLB [2001] 106 Comp. Cas 563, this Court considered a
somewhat similar issue and upheld the order passed by respondent No. 1. In that
case, the appellant had applied for consent to the issue of further preference
shares in lieu of 19,000 preference shares. While granting consent, respondent
No. 1 imposed the following conditions :
“(1) The company shall issue further preference shares to the extent of the amount due including the dividend up to the date of redemption, i.e., 7th October, 1996.
(2) The further redeemable cumulative preference shares shall carry a dividend at the rate of 15 per cent per annum and shall be redeemable at par on or before the expiry of ten years from 7th October, 1996.
(3) The company shall make the above issue within 90 days of the receipt of a copy of this order and shall comply with the relevant provisions of the Act consequent to the above allotment.
(4) Any fractional entitlement shall be suitably dealt with at the discretion of the board of directors.” (p. 566)
8. The appellant challenged
the aforementioned conditions on various grounds including the one that under
section 80A of the Act, respondent No. 1 cannot grant the conditional consent
and in the absence of a statutory provision, it cannot direct issuance of
redeemable cumulative preference shares with a dividend of 15 per cent per
annum. This court referred to the provisions of sections 80 and 80A of the Act
and held as under :
“An analysis of the provisions quoted above
shows that section 80 of the Act empowers the company limited by shares to
issue redeemable preference shares but, at the same time, it imposes certain
restrictions on redemption of shares. Sub-section (5A) of section 80 which begins
with a non obstante clause declares that no company limited by shares shall
after the commencement of the Companies (Amendment) Act, 1996, issue any
preference share which is irredeemable or is redeemable after 20 years from the
date of its issue. Sub-section (6) contains punitive provisions to deal with
the cases of non-compliance with the provisions contained in other sub-sections
of section 80. Section 80A was inserted in the Act with effect from June 15,
1998, by the Companies (Amendment) Act, 1988. Sub-section (1) of section 80A
also begins with a non obstante clause. Clause (a) thereof provides for
redemption of the irredeemable preference shares issued before the commencement
of the Companies (Amendment) Act, 1988, and clause (b) provides for redemption
of those preference shares which were not redeemable before the expiry of ten
years from the date of issue in accordance with the terms of the issue and
which had not been redeemed before 15th June, 1988. The proviso to section
80A(1) also contains a non obstante clause. It provides for issuance of further
redeemable preference shares by the company which is not in a position to
redeem the preference shares within the period stipulated in sub-section (1).
This is subject to the condition that the company concerned obtains consent of
the Company Law Board. The proviso to section 80A also contains a deeming
provision, inasmuch as it declares that on the issue of further redeemable
preference shares/the unredeemed shares shall be deemed to have been redeemed.
Sub-section (2) of section 80A empowers the Central Government to vary or
modify the provisions of section 80A and sub-section (3) provides for dealing
with the cases of default in complying with the provisions of section 80A.
The above analysis of sections 80 and 80A
shows that the latter provision was enacted by Parliament to bail out those
companies which were facing financial crunch and were not in a position to
redeem the preference shares. For achieving this object, respondent No. 1 was
invested with the power to give consent to the company’s proposal for issuance
of further redeemable preference shares equal to the amount due (including the
dividend thereof) in respect of the unredeemed preference shares. By obtaining
such consent, the concerned company could postpone its liability towards the
holders of redeemable preference shares and thereby get breathing time. In our
opinion, the nature of power vested in respondent No. 1 under section 80A to
give consent for issuance of redeemable preference shares is very wide and
pervasive and is not hedged in with any restriction. This implies that
respondent No. 1 could give consent with or without conditions and the Court
can interfere with the discretion exercised by it only if the conditions are arbitrary,
unreasonable or capricious. Therefore, we are unable to agree with Shri Suri
that while giving consent to the petitioner to issue further redeemable
preference shares in lieu of the unredeemed preference shares, respondent No. 1
could not have imposed a condition regarding payment of dividend at the
particular rate.” (p. 569)
9. Learned counsel for the
appellant tried to distinguish the order passed in CA No. 27 of 1997, by
arguing that in the earlier case, the company’s representative had given consent
before respondent No. 1 for issuance of redeemable preference shares with
dividend of 15 per cent per annum, but no such consent was given in this case.
In our opinion, the distinction sought to be made by learned counsel between
the case in hand and the previous appeal is illusory because the consent given
by the appellant’s representative was not the factor which had weighed with the
court for declining interference with the order passed by respondent No. 1.
Rather, the ratio of this court’s decision was based on the interpretation of
sections 80 and 80A of the Act.
10. Therefore, by applying the ratio of order passed in Company
Appeal No. 27 of 1997, we hold that the order under challenge does not suffer
from any legal infirmity warranting modification by this Court.
11. The argument of learned counsel that the direction given by
respondent No. 1 should be declared ultra vires article 3(a) of the articles of
association of the company is merit less and deserves to be rejected because by
virtue of the non obstante clause contained in proviso to section 80A(1)(b) of
the Act, provision contained in that section will override the articles of
association of the company.
12. The decision of the Supreme Court in Dr. A. Lakshmanaswami
Mudaliar’s case (supra) does not have any bearing on the issue raised in the
present appeal. In that case, the trustees nominated under the deed of trust of
M. Ct. M. Chidambaram Chettiar Memorial Trust had challenged the decision of
the Life Insurance Corporation of India to call upon the trust to refund Rs. 2
lakhs received by it from the United India Life Assurance Company by way of
donation. The Life Insurance Tribunal directed the appellant to pay the amount
of Rs. 2 lakhs. While upholding the order of the Tribunal, their Lordships of
the Supreme Court observed as under (headnote) :
“A company was competent to carry out its
objects specified in the memorandum of association and could not travel beyond
the objects. The memorandum of association must like any other document be construed
according to accepted principles applicable to the interpretation of all legal
documents and no rigid canon of construction was to be applied to such a
document. Take any other judgment, it must be read fairly and its import
derived from a reasonable interpretation of the language which it employed.
Power to carry out an object, undoubtedly included power to carry out what was
incidental or conducive to the attainment of that object, for such extension
merely permitted something to be done which was connected with the objects to
the attained, as being naturally conducive thereto. Undoubtedly, the memorandum
of association had to be read together with the articles of association, where
the terms were ambiguous or silent. The articles might explain the memorandum,
but could not extend its scope.
Where a company did an act which was ultra
vires, no legal relationship or effect ensued therefrom. Such as act was
absolutely void and could not be ratified even if all the shareholders agreed.
The payment made pursuant to the resolution was therefore unauthorised and the
trustees acquired no right to the amount paid by the directors to the trust.”
(p. 1186)
13. In the aforementioned case, the Supreme Court was not called
upon to consider a provision, like the non obstante clause contained in section
80A. Therefore, the said decision cannot be applied for entertaining the
appellant’s prayer for modification of the order under challenge.
14. For
the reasons mentioned above, the appeal is dismissed.
[1971] 41 COMP CAS 26 (MAD)
HIGH COURT OF
v.
Tamilnad Transports (
PALANISWAMY J.
C.P. NOS. 57 AND 58 OF 1969
MARCH 17, 1970
JUDGMENT
Palaniswamy
J.—In the year 1960, P.K. Palaniappa
Gounder, the second respondent in both these petitions, promoted two private
companies going by the name of Sambandam Engineering Works Private Ltd. and
TamilNad Transports (
Respondents
Nos. 2 and 3 have filed separate counter-statements opposing both the
petitions. So far as C.P. No. 57 of 1969 relating to the transport company is
concerned, the defence is that it is neither just nor equitable to wind up the
company. These respondents contend that the petitioner, besides being a director
was also works manager on salary, that it was due entirely to his mismanagement
that labour problems arose resulting in labour disputes, that the petitioner,
with a view to enrich himself, committed several acts of mismanagement at the
expense of the company, that the petitioner was solely responsible for the
stoppage of some of the route buses, that some routes had to be given up
because they were unremunerative and that this petition is an abuse of the
process of the court. As regards C.P. No. 53 of 1969 relating to the
engineering company, it is contended by respondents Nos. 2 and 3 that
the petition is not maintainable under section 399(1)(e) of the Companies Act,
as the petitioner had not paid the value of the shares held by him. They deny
the allegations of oppression and deadlock and contend that the petitioner, as
the managing director of this company, was found guilty of several serious acts
of omission and commission in regard to the management of the company, that at
a meeting held on July 9, 1969, the petitioner was removed from his position as
managing director for good and justifiable grounds and that there is no ground
to appoint either an administrator or to give any direction to purchase the
petitioner's shares.
First, we may take up C.P. No. 58 of 1969 relating to
the engineering company. As already noticed, in this company the petitioner
owns 21 out of 84 shares. The objection taken by respondents Nos. 2 and 3 to
the maintainability of this petition is that the petitioner has not paid the value
of his shares. This objection is based upon section 399(1)(a) of the Companies
Act, which reads thus :
"399. (1) The following members of a company
shall have the right to apply under section 397 or 398 :—
(a) in the case of a company having a share capital,
not less than one hundred members of the company or not less than one-tenth of
the total number of its members, whichever is less, or any member or members
holding not less than one-tenth of the issued share capital of the company,
provided that the applicant or applicants have paid all calls and other sums
due on their shares".
The case of the petitioner, as put forward in
paragraph 8 of his petition, is that he has paid all calls made on him and
other sums due on his shares. The contention of respondents Nos. 2 and 3 is
that the petitioner has not paid all calls and other sums due on his shares. In
his reply to this allegation, the petitioner has filed an affidavit denying
that any other call was made on him and that any amount is due from him. Initially,
the burden lies upon the petitioner to prove that he has paid all calls made on
him and other sums due on his shares. He has made out that case in his petition
so far as calls made on him are concerned. But the contention of the
respondents is that all the calls have not been paid and that some balance is
due. To support this allegation, they have not let in any evidence. A call
becomes due when a notice is issued making a call. The word "call"
necessarily implies a calling which ordinarily means a calling for the amount
due on the share. The respondents have not substantiated their allegation that
any call was made on the petitioner and that that call remained unanswered.
Therefore, it is not possible to uphold the objections of the respondents that
the petition is not maintainable under section 399(1)(a).
Before adverting to the contentions of the parties,
it is necessary to set out the relevant provisions of the Act relating to this
matter. Section 397 reads thus:
"397. (1) Any members of a company, who complain
that the affairs of the company are being conducted..........in a manner
oppressive to any member or members (including any one or more of themselves)
may apply to the court for an order under this section, provided such members
have a right so to apply in virtue of section 399.
(2) If, on any
application under sub-section (1), the court is of opinion—
(a) that the
company's affairs are being conducted..........in a manner oppressive to any
member or members ; and
(b) that to wind
up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a winding-up order on the
ground that it was just and equitable that the company should be wound up;
The court may, with a view to bringing to an end the
matters complained of, make such order as it thinks fit".
Omitting the portions which are not relevant, section
398 reads thus :
"398. (1) Any members of a company who complain—
(a) that the affairs of the company are being
conducted...in a manner prejudicial to the interests of the company ; ... may
apply to the court for an order under this section, provided such members have
a right so to apply in virtue of section 399.
(2) if, on any application under sub-section (1), the
court is of opinion that the affairs of the company are being conducted as
aforesaid or that by reason of any material change as aforesaid in the
management or control of the company, it is likely that the affairs of the
company will be conducted as aforesaid, the court may, with a view to bringing
to an end or preventing the matters complained of or apprehended, make such
order as it thinks fit".
In order to entitle the petitioner to succeed in his
petition under sections 397 and 398, if he has right to apply by virtue of
section 399, he should satisfy, (1) that the affairs of the company are being
conducted in a manner oppressive to any member or members; and (2) that to wind
up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a winding-up order on the
ground that it is just and equitable that the company should be wound up. The
question whether the affairs of the company are being conducted in a manner
oppressive to any member or members is a question of fact depending upon the
facts of each case: "Oppression" means burdensome, harsh and
wrongful. A conduct to be oppressive should indicate lack of probity and fair
dealing towards one or more members of the company.
Oppression
may take various forms. But an isolated act of oppression will not normally be
sufficient to justify the relief under this section. The words used are
"the affairs of the company are being conducted in a manner oppressive to
any member or members" and they suggest that the oppressive conduct must
be a continuing process. In a recent case of Shanti Prasad Jain v. Kalinga
Tubes Ltd.,
the Supreme Court, after reviewing the leading authorities, has expressed the
position thus:
"...it
is not enough to show that there is just and equitable cause for winding up the
company, though that must be shown as preliminary to the application of section
397. It must further be shown that the conduct of the majority shareholders was
oppressive to the minority as members and this requires that events have to be
considered not in isolation but as a part of a consecutive story. There must be
continuous acts on the part of the majority shareholders, continuing up to the
date of petition, showing that the affairs of the company were being conducted
in a manner oppressive to some part of the members. The conduct must be
burdensome, harsh and wrongful and mere lack of confidence between the majority
shareholders and the minority shareholders would not be enough unless the lack
of confidence springs from oppression of a minority by a majority in the
management of the company's affairs, and such oppression must involve at least
an element of lack of probity or fair dealing to a member in the matter of his
proprietary rights as a shareholder".
Section 397
of the Indian Companies Act corresponds to section 210 of the English Companies
Act, 1948. In In re Five Minute Car Wash Service Ltd., arising
under section 210 of the English Companies Act, Buckley J., delivering the
judgment, laid down the following principles in a case in which relief under
section 210 of the English Companies Act was sought on the ground of
oppression. The relevant passage occurs at pages 246 and 247:
"To
succeed in obtaining relief under section 210 of the Companies Act, 1948, a
member of a company must have established that at the time when his petition
was presented, the affairs of the company were being conducted in a manner
oppressive of himself, or of a part of the members including himself, and
unless a petitioner in his petition alleges facts capable of establishing that
the company's affairs are being conducted in such a manner, the petition will
disclose no ground for granting any relief and will be dismissed in limine as
being demurrable.
First, the
matters complained of must affect the person or persons alleged to have been
oppressed in his or their character as a member or members of the company.
Harsh or unfair treatment of the petitioner in some other capacity, as,
for instance, a director or a creditor of the company, or as a person doing
business or having dealings with the company, or in relation to his personal
affairs apart from the company, cannot entitle him to any relief under section
210.
Secondly, the matters complained of must relate to
the conduct of the affairs of the company.
Thirdly, they must be such as not only to make the
winding up of the company just and equitable, but also to lead to the
conclusion that the affairs of the company are being conducted in a manner
which can properly be described as 'oppressive' of the petitioner, and, it may
be, other members. The mere fact that a member of a company has lost confidence
in the manner in which the company's affairs are conducted does not lead to the
conclusion that he is oppressed; nor can resentment at being out-voted; nor
mere dissatisfaction with or disapproval of the conduct of the company's
affairs, whether on grounds relating to policy or to efficiency, however well
founded. Those who are alleged to have acted oppressively must be shown to have
acted at least unfairly towards those who claim to have been oppressed".
Section 210 of the English Companies Act was
liberally construed by the Court of Appeal in In re H.R. Harmer Ltd., where a
petition for relief was presented by the two sons of the founder of the
business who himself controlled the company. The father and the two sons were
life directors, the father was the chairman and the governing director,
although this gave him no special powers under the articles of association. The
lather had continued to regard the business of the company as his own and had
constantly ignored the wishes of his co-directors and the resolutions of the
board. Affirming the order of Roxburgh J., the Court of Appeal held that the
company should contract for the services of the father as consultant at a stated
salary, that he should not interfere in the affairs of the company otherwise
than in accordance with the valid decisions of the board of directors and that
he should be appointed President of the company for life, but that this should
not impose any duties or confer any rights or powers. In In re Bellador Silk
Ltd. it
was alleged, inter alia, that the petitioner had been wrongfully excluded from
all discussion of the company's affairs. Plowman J. held that this allegation
was not true, but observed that, even if it were true, it would be a complaint
of oppression as a director and not as a member and that, therefore, the case
was outside the purview of section 210. The learned judge also held that the
petition failed because of the petitioner's own admission that it was not
designed primarily to obtain relief under the section but for the collateral
purpose of putting pressure on the company to repay a loan due to another
company in which he had a major share. The same learned judge in In re Lundie
Brothers Ltd.
affirmed the same view and rejected a petition for relief under section 210 in
which it was alleged that the petitioner had been removed from his position as
working director and excluded from taking any part in the business of the
company, although it was held that the facts justified the making of a
winding-up order on the just and equitable ground. Commenting upon these two
decisions it is observed in Palmer's Company Law, 21st edition, at page 514,
that in the light of the dicta in the earlier cases any such doubt should be
resolved in favour of the petitioner and that these two decisions of Plowman J.
should not be regarded as laying down any general principles.
As against the foregoing decisions, Mr. Raghavachari,
appearing for the petitioner, cited the
decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer. In that
case the company was a subsidiary company. The controlling powers vested in the
majority shareholders and they were found to have been exercised for the
purpose of destroying the company's business. The facts established that the
majority shareholders acted in such a way as to cause oppression on the
minority shareholders. In view of these facts, it was held that relief under
section 210 was necessary. Mr. Raghavachari also referred to the decision in In
re H.R. Harmer Ltd., already
referred to, as supporting the petitioner's case that the conduct of the second
respondent, the father of the petitioner, is such as to cause oppression upon
the petitioner. The facts in that case are not identical with the facts of the
instant case. Reliance was next placed upon the decision of the Calcutta High Court in In re Hindustan Co-operative
Insurance Society Ltd., which is
a case under sections 397 and 398 of the Indian Companies Act. There,
the facts established that the affairs of the company were conducted by the
directors on the strength of majority backing in a manner prejudicial to the
interest of the company. The compensation obtained as a result of the company
having been taken over for nationalisation was not distributed. General
meetings of the company were not called and accounts were not submitted. There
was also an attempt to change the business of the company. In those
circumstances, it was held that it was a fit case for invoking the powers under
sections 397 and 398.
Keeping the foregoing principles in view, the facts
of this case may be examined. The petitioner was the managing director of the
engineering company from the time of its inception. The object of the company
is to carry on the business in
fixtures, mechanical engineering, manufacture of machineries and implements of
all kinds, tool making, etc. The. engineering section of this company was
leased to the transport company for a period of five years on a rent of Rs. 500
from June, 1963. The rent was subsequently raised to Rs. 1,000 per month from
April 1, 1964. In the year 1966, the rent was reduced to Rs. 300. The
petitioner was a party to that resolution passed on September 4, 1968, reducing
the rent from Rs. 1,000 to Rs. 300 per month. There is controversy as to
whether any amount of arrears of rent is payable by the transport company to the
engineering company. The case of the petitioner is that the arrears amount to
Rs. 13,925.70. But the case of the respondents is that if proper accounts are
taken, some amount may be found due from the engineering company to the
transport company. Exhibit P-23 is the report made to the shareholders on
September 4, 1967, by the second respondent in his capacity as chairman of the
board of directors. It is stated in that report that the engineering company
had incurred a net loss of Rs. 4,927.14 and that this was because the rent
payable by the transport company had been reduced in that year. Exhibit P-26 is
the balance-sheet for the year ending with March 31, 1968. There, we find a sum
of Rs. 13,925.70 as being the debt payable by the transport company to the
engineering company. But it is, however, the common case of both the parties
that the engineering company is financially sound.
Differences
appear to have arisen between the petitioner on the one hand and his father,
the second respondent, on the other, in about May, 1969, and, as a result of
that misunderstanding, one was attempting to find fault with the other.
Complaining that the petitioner, as the managing director of the engineering
company, had defaulted in convening the meetings of the board, the second
respondent wrote on May 27, 1969, exhibit R-1, calling upon the petitioner to
convene a meeting as early as possible. The petitioner appears to have declined
to acknowledge receipt of the notice and therefore the second respondent was
obliged to send the notice by certificate of posting. To the same effect, the
third respondent also sent a notice to the petitioner under exhibit R-2 on May
27, 1969. On May 29, 1969, the second respondent informed the petitioner by his
letter, exhibit R-3, in his capacity as the permanent chairman of the board of
directors of the engineering company that he wanted to inspect the records and
documents of the company. The petitioner was called upon to make it convenient
to give necessary inspection. To that notice, the petitioner replied under
exhibit R-4 stating that it was the second respondent who was in actual control
and management of the company and its books. He also stated that the second
respondent was at liberty to inspect the documents. In reply to exhibit R-1 the
petitioner stated in his letter, exhibit R-5, on May 29, 1969, that at six
meetings held on the specified dates the third respondent, Kadiresan,
did not take any part, that the stalemate was due to the irregularity practised
by the second respondent in the matter of conducting meetings and that the
second respondent was managing the affairs of the company in an autocratic
manner. It was also stated, that the petitioner was willing to convene a
meeting if the second respondent expressed an inclination for the same and he
called upon the second respondent to intimate to him the convenient date. The
second respondent sent the communication, exhibit R-6, to the petitioner on
June 4, 1969, complaining that in spite of his efforts to inspect the records
he could not do so as the clerk in charge refused to produce them. The post
script found in the letter says that the petitioner refused to receive the
notice and that, therefore, the communication was sent under certificate of
posting. The second respondent also informed the petitioner by his
communication, exhibit R-7, dated June 5, 1969, that it was the petitioner who
was in actual charge of the affairs of the company as the managing director and
that it was false to say that the second respondent was in actual management.
The second respondent also informed the petitioner that a time had come for the
petitioner to account for all his acts. He followed up that communication by
another communication on June 6, 1969, exhibit R-8, denying the allegation of
the petitioner that the third respondent did not attend the meetings. He also
made allegations against the petitioner in the matter of his management of the
affairs of the company. The third respondent, for his part, repudiated the
allegations by his letter, exhibit R-9, on June 9, 1969, that he did not attend
the meetings. He said that he did not receive any notice of any of the meetings
referred to by the petitioner in his letter, exhibit R-5. Respondents Nos. 2
and 3 together wrote exhibit R-10, to the petitioner on June 11, 1969, stating
that though they wanted inspection, the books were not made available. On June
11, 1969, the third respondent sent the registered communication, exhibit R-11,
to the petitioner making serious allegations against him in regard to his
management of the affairs of the company and calling upon the petitioner to
furnish some details. On June 26, 1969, respondents Nos, 2 and 3 together sent
the communication, exhibit R-12, to the petitioner stating that in spite of
their efforts the petitioner had not convened a meeting and that they gave him
a last chance to convene a meeting of the board. They also informed him that if
the petitioner failed to take necessary steps, they would be taking necessary
action open to them for convening a meeting as expeditiously as possible.
On 1st July, 1969, the petitioner replied under
exhibit R-13 to exhibit R-10 making counter-allegations to the effect that the
minutes books were with the second respondent. He also called upon the second
respondent to pay all arrears of rent
payable by the transport company to the engineering company. Finding
that the petitioner was not in a mood to convene a meeting, respondents Nos. 2
and 3 issued the notice, exhibit R-14, on July 4, 1969, setting out the agenda
for the meeting which was announced to beheld on July 9, 1969, at 10 a.m. In
the agenda, some items related to the conduct of the petitioner as the managing
director and to his failure to convene a meeting and to some other matters. The
petitioner was requested to be present at the meeting with all the books of the
company. To that notice, the petitioner replied under exhibit R-15 on July 6,
1969, stating that it was highly inconvenient for him to attend the meeting on
July 9, 1969, on account of his personal matters of a pressing nature. The
result was that he did not attend the meeting. On receipt of that letter, the
second respondent sent the letter, exhibit R-16, under certificate of posting
on July 7, 1969, advising the petitioner to attend the meeting and to give his
explanation in respect of certain matters. Still the petitioner did not attend
the meeting. On July 9, 1969, the board of directors met and considered several
matters and passed a resolution removing the petitioner from his post as
managing director. Enclosing a copy of the minutes of the meeting, the second
respondent wrote the letter, exhibit R-17, to the petitioner on July 12, 1969,
calling upon him to hand over charge as managing director to the third
respondent, who was appointed as the managing director. After receiving this
notice, the petitioner filed the two company petitions under enquiry on July
16, 1969. On July 19, 1969, the petitioner wrote the letter, exhibit R-19, to
respondents Nos. 2 and 3 denying that any meeting had been held and also
stating that the alleged meeting, even if true, was void and illegal. After the
resolution was passed on July 9, 1969, the petitioner was removed from managing
directorship, but his continuance as a director of the company is noted in the
register, exhibit R-20.
It is also necessary to state that the petitioner has
filed a suit O.S. No. 386 of 1969 on the file of the Subordinate Judge,
Coimbatore, for partition and other reliefs, of his family properties,
impleading the second respondent and his sons by his second wife as defendants.
After filing that suit, the petitioner took out Interlocutory Application No.
425 of 1969, on July 11, 1969, praying for the appointment of a receiver for
the family properties. The subordinate judge passed an order on December 12,
1969, directing the second respondent herein to deposit into court a sum of Rs.
500 on or before 15th of every month commencing from January, 1970, and further
holding that in case of default, a receiver would be appointed. Against that
order, the second respondent has filed an appeal to this court and the order of
the lower court has been stayed.
It would be seen from the foregoing facts that all is
not well between the petitioner and the other members of his family. But the
question is whether the petitioner has
made out a case that the affairs of the company are being managed in a
manner oppressive to him. The materials on record do not justify an inference
in favour of the petitioner. The correspondence reveals that the petitioner was
consistently evading the request of the second respondent for convening a
meeting. He did not face the board of directors to answer the several charges
made against him in his capacity as the managing director. It was open to the
other directors to take such action as was open to them in law for the purpose
of protecting the interest of the company. Any action taken by them in that
behalf cannot be characterised as an oppressive conduct. What respondents Nos.
2 and 3 have done is neither harsh nor wrongful. The necessary inference that
follow from the correspondence is that the petitioner was adopting obstructive
tactics in regard to the affairs of the company in his capacity as the managing
director. I, therefore, do not find any circumstance whatsoever to hold that
the affairs of the company are being conducted in a manner oppressive to the
petitioner.
The burden lies upon the petitioner to make out that
it is just and equitable that the company should be wound up and that such an order
of winding-up would unfairly prejudice him. Admittedly, the company is in sound
financial position. The mere fact that the petitioner says that he has no
confidence in respondents Nos. 2 and 3 by itself is not a sufficient ground to
hold that it is just and equitable that the company should be wound up. Nothing
is proved to justify the apprehension of the petitioner that respondents Nos. 2
and 3 are likely to do anything to the prejudice of the company or to its
shareholders. In Rajahmundry Electric Supply Corporation v. Nageswara Rao the
Supreme Court has stated:
"Where nothing more is established than that the
directors have misappropriated the funds of the company, an order for winding
up would not be just or equitable, because if it is a sound concern, such an
order must operate harshly on the rights of the shareholders".
In dealing with the question as to what the
petitioner, seeking to wind up the company on the ground of just and equitable
rule, should establish, the Judicial Committee in Loch v. John Blackwood Ltd.
observed:
"It is undoubtedly true that at the foundation
of applications for winding-up, on the 'just and equitable' rule, there must be
a justifiable lack of confidence in the conduct and management of the company's
affairs. But this: lack of confidence must be grounded on conduct of the
directors, not in regard to their private life or affairs, but in regard to the
company's business. Furthermore, the lack of confidence must spring not from
dissatisfaction at being outvoted on the business affairs or on what is called
the domestic policy of the company. On the other hand, wherever the lack of
confidence is rested on a lack of probity in the conduct of the company's
affairs, then the former is justified by the latter, and it is under the
statute just and equitable that the company be wound up".
Applying this test, I do not find any circumstance
whatsoever to hold that it is just and equitable to wind up the company.
It is next contended on behalf of the petitioner that
on account of the difference of opinion between the petitioner and the other
shareholders, a complete deadlock has been created and that on account of such
deadlock, it is just and equitable to wind up the company. It is true that if
there is complete deadlock in the management of the company, it would be just
and equitable to wind up the company, for, with such deadlock, the affairs of
the company cannot be carried on to its advantage. The question in this case is
whether there is such deadlock. In my view, there is not. The petitioner is
only a minority shareholder. Even, according to him, all the other shareholders
are all one side, of course as against him. In those circumstances, it can
hardly be said that such a deadlock has come into exist ence as to make it
impossible for the affairs of the company being carried on normally. In In re
Yenidje Tobacco Co. Ltd. it was
observed by Warring- ton L.J. that inasmuch as there were only two persons
interested and and as there were no shareholders other than those two and as
there was no means of overruling by the action of a general body of
shareholders, the trouble which was occasioned by the quarrels of the two
directors was such that a deadlock had come into existence and, in such
circumstances, the company should be wound up. The same principle was applied
in In re Newbridge Sanitary Steam Laundry in which an order of. compulsory winding up
was made on the ground that in the situation which had arisen, such winding-up
order afforded the only means of enabling justice to be done to the
petitioners. The principle upon which these decisions have proceeded is this.
If there is a private partnership between two people having equal shares and
there being no other provision to terminate it, what would be the position if
the two partners are opposed to each other making it impossible for the
business of the partnership to go on ? In such a case the course open to the
court, at the instance of one of the partners, is to direct the dissolution of
the partnership. The same principle is applicable, in the case of a company
also. But if the difference of opinion between one set of shareholders and
another set. in the case of a company is such that it may be resolved by a
determination of the view of the majority at a duly convened meeting, certainly
it cannot be said that there is a deadlock in the management. At such a
meeting, it would always be open to the majority to take a decision and after
the decision was implemented, there can be no ground to hold that merely on
account of the difference of opinion among
the shareholders there is deadlock. In the case before us, the majority do not
want a winding up order and, therefore, the court has to be very careful in
exercise of its discretion in considering the request of the petitioner for
directing a winding up. Taking all the circumstances into consideration, I hold
that though the petitioner does not see eye to eye with the other shareholders,
there is no ground to direct a winding up, as I am of the view that there is no
deadlock in the management of the company.
Mr.
Raghavachari, appearing for the petitioner, lastly, contended that if I should
hold that there is no ground to appoint an administrator as prayed for by the
petitioner, necessary direction may be given to the second respondent to
purchase the shares of the petitioner, as the petitioner does not want to
continue to be a shareholder any longer. He submitted that a commissioner may
be appointed for the purpose of valuing the shares of the petitioner. I do not
think that the circumstances of the case call for such an action, though it is
undoubtedly open to the court in suitable cases to pass such an order. The
petitioner is solely responsible for the present state of affairs and he cannot
take advantage of his own fault and get out by getting an order compelling the
other shareholders to purchase his share.
We may next
take up the case of the petitioner as regards the transport company. In this
case, the petitioner has prayed for an order of winding up the company on the
following grounds: (1) that the affairs of the company are continuously
mismanaged by respondents Nos. 2 and 3 resulting in financial loss; (2) that
there is complete deadlock in the management; that the company has committed
default in its statutory obligations; and (3) that the substratum of the
company has gone on account of the reduction of the route buses and in the
dwindling of the business. The contention of the petitioner is that the
mismanagement has resulted in labour trouble on account of which labourers
struck work resulting in loss to the company, that on account of inefficient
transport service, several punishments have been meted out, that on account of
inefficient and improper management, three out of ten routes, which were
acquired, had been given up and that even these routes are not used properly.
Respondents Nos. 2 and 3 deny these allegations. The evidence does not
establish the contention of the petitioner. Admittedly, the petitioner was the
works manager of the trans port company at all relevant times. He was also a
director. On October 16, 1968, he tendered his resignation of his post as
director and sent the letter, exhibit P-7. But the resignation was not
accepted. On May 28, 1969, he wrote to the second respondent under exhibit P-8
stating that he had already resigned from directorship and that he would not be
responsible for any of the functions of the company as a director. In
continuation of that letter he wrote exhibit P-9 on June 2, 1969, stating that
he would be sending a detailed reply clarifying his stand and that in the
meantime facilities should be given to him to inspect the records. To
that letter, a reply was sent under exhibit P-10 on behalf of the transport
company stating that the second respondent was looking forward to a detailed
clarification as promised by the petitioner. The petitioner was also informed
that he had already inspected the accounts on two days when he took elaborate
notes. The petitioner was further informed that at a meeting held on June 11,
1969, his resignation of his directorship was accepted and that, therefore, he
was not entitled to inspect the books, as asked for by him. On June 18, 1969,
the petitioner complained by telegram, exhibit P-11, that he had been refused
access to have inspection. To that telegram he received a reply under exhibit
P-12 drawing his attention to the letter, exhibit P-10.
Making reference to the telegram and the previous
letter, the petitioner wrote exhibit P-13 on June 19, 1969, stating that
suitable arrangements must be made to facilitate for his inspection of the
accounts. He followed up the letter by the next letter, exhibit P-14, on July
5, 1969, stating that it was rather amusing that his resignation sent on
October 16, 1968, was accepted only on June 11, 1969. He also stated that he
was not responsible for any of the functions as a director after October 16,
1968. This is the state of relationship between the petitioner and the other
directors as regards the affairs of the transport company.
In view of the foregoing situation, it is contended
on behalf of the petitioner by Mr. Raghavachari that there is a complete
deadlock in the management of the business and that, therefore, it is necessary
to direct the winding up of the company. I have already dealt with the
contention of the petitioner in regard to the management of the engineering
company with regard to which also it was contended that there was similar
deadlock. For the reasons, which need not be repeated here, I am of the view
that there is no deadlock as regards the management of the affairs of the
transport company. In spite of the petitioner having a hostile attitude against
the other shareholders, the affairs of the company can be carried on by the
other shareholders who do not want the company to be wound up. Therefore, there
is no deadlock, much less complete deadlock, as contended for on behalf of the
petitioner.
The next contention urged on behalf of the petitioner
is that on account of the mismanagement of the affairs of the company by the
second respondent, as managing director, the company is running at a loss. To
substantiate this contention, it is pointed out that, whereas at the time of
the acquisition of the transport business there were ten route buses, there were
only seven route buses at the time of the filing of the petition and that the
stoppage of the three buses was due to mismanagement. I am not impressed with
this argument. The respondents no doubt concede that out of ten route buses,
only 7 were running. Their explanation is that one route bus had to be stopped as the plying was not
remunerative. Their contention is that it was on account of the inefficient
management of the petitioner himself as the works manager that all the routes
could not be maintained. In the course of the argument it was contended by Mr.
Raghavachari that at present no bus was plying. In reply to this, it was
contended on behalf of the respondents that, on account of the attitude of the
petitioner in launching the litigations, the running of the buses had to be
temporarily stopped, that there was labour trouble on account of which there
was damage and sabotage, and that after getting adequate safeguards against
such acts of damage and sabotage, the buses are proposed to be re-started. To
this effect, the second respondent has filed an affidavit dated March 5, 1970.
This is an event that happened subsequent to the institution of the petition,
and the petitioner is not entitled to take advantage of that circumstance in
support of his prayer for winding up.
Reliance was
next placed upon the fact that, in the course of the transport operations, the
transport authorities had to take action for some offences resulting in
imposition of fine and that it was due to inefficient management. The respondents
no doubt admit that there were occasions of action for overloading and
overspeed. But this can hardly be a ground to hold that there was such
mismanagement as to call for interference by the court by an order for winding
up.
It was next
contended on behalf of the petitioner that having regard to the liabilities of
the company, it is not possible to expect profitable working so as to wipe off
the liabilities and that if the company is not wound up, there is the
likelihood of further loss which would have to be shared by the petitioner
also. This argument assumes as if the company was started on a clean slate with
regard to its financial position. It is admitted that the buses were acquired
from another operator and that for such acquisition, loans had to be raised on
security of property. It is not the case of the petitioner that the quantum of
loan has since increased. It is not disputed that the loan originally borrowed
has been reduced, though it is not completely' wiped out. Therefore, there is
no substance in the argument that on account of the debts, the company should
be wound up.
To support
the contention that creditors have taken action against the company for
realising their dues, reliance is placed upon some notices issued by some
creditors and those notices are exhibits P-1G to P-21. All these notices were
issued during the period from June to September, 1969, that is, after the
petitioner and the father and other members of his family fell out. It is
contended on behalf of the respondents that these notices were engineered by
the petitioner so as to lend support to these petitions. The point to be noted
in this connection is that none of these creditors has taken any action by way
of suit to recover the dues.
It is also important to note in this connection that
none of those creditors has come forward to support this petition for winding
up. Therefore, the fact that some creditors have issued notices is not by
itself sufficient to hold that the financial position of the company is such as
to call for a compulsory winding-up.
Mr. Raghavachari finally contended that, inasmuch as
the company has at present stopped running all its buses, it should be taken
that the substratum of the company has disappeared and that such disappearance
is a sufficient ground for an order to compulsorily wind-up the company. I have
already pointed out that the petitioner is not entitled to take advantage of a
circumstance that happened after the presentation of the petition in order to
support his prayer for winding-up. But even if such an event were to be taken
note of, I do not think that the argument that the substratum of the company
has disappeared is well-founded. After all, what has happened is the stoppage
of the buses temporarily. That can hardly be called a disappearance of the
substratum of the company. The substratum of the company can be said to have
disappeared when the object for which it was incorporated has substantially
failed or when it is impossible to carry on the business of the company except
at a loss or the existing or possible assets are insufficient to meet the
existing liabilities (vide Seth Mohan Lal v. Grain Chambers Ltd.).
Therefore, there is no substance in the contention that the substratum of the
company has disappeared.
On a consideration of all the circumstances of the
case, I am of the view that the petitioner does not seem to have come forward
with these petitions with a view to protect his interest in the two companies.
His object seems to be to force the hands of the second respondent to come to
terms with regard to their dispute for partition of the joint family
properties. Both the petitions are dismissed with costs. Advocate's fee one
set.
[1961] 31 COMP. CAS. 573 (PUNJ.)
v.
Liquidator, Hindustan
Petroleum Co. Ltd.
MEHAR
SINGH J.
F.A.O.
No. 2D of 1957
APRIL
7, 1961
MEHAR SINGH
J. - This judgment will dispose
of five direst appeals against orders Nos. 2-D and 14-D to 17-D of 1957. The
appeals are by five different appellants arising out of the objections filed by
each to his being entered in the list of contributories in the matter of
liquidation of Hindustan Petroleum Co. Ltd. and against five different orders
of the learned company judge, all of which orders are of November 14,1956 .
These appeal have been taken together because the substantial facts in all the
five are the same and the main arguments are also the same though in each
appeal there is also a separate additional argument. But it is convenient to
deal with these five appeals in one judgment in the circumstances.
The appellants
are (1) Major Teja Singh, (2) Raja Maheshinder Singh, (3) Gurinder Singh, (4)
Hardam Singh, and (5) Gurbakshish Singh, and they have been named respectively
as the numbers of their appeals have been given above. All the five appellants
were directors of the Hindustan Petroleum Co. Ltd. The head office of this
company has been Darya Ganj at
Copies of
resolutions Nos. 3 and 4 passed in the meeting of the directors held on April
30,1953, at I-Nihal Bagh, I Paradari,
|
Proceedings and discussions |
Conclusions & resolutions. |
|
3. S. Jasbir Singh proposed that a call of 25% on each
ordinary share be made. S. Hardam Singh seconded the proposal. |
Resolved that a 25% call on all shares be made and notices of
call be sent by the managing agents. |
|
4. S. Jasbir Singh proposed that all directors be asked to
make their shares fully paid-up. S.Gurbakshish Singh seconded the proposal . |
Resolved that call on shares held by the directors be made to
make their shares fully paid-up. |
So
under this resolution a call was made towards unsubscribed shares capital as
stated in the resolution.
In
February 1954, proceedings for winding up of the company were started before
the company judge at
Each
one of the appellants as director took 2,000 shares of the company, each share
of the value of Rs. 10. Each one of them paid Rs.5,000 towards the allotment of
shares. The official liquidator in trying to settle the list of contributories
of the company issued notice to each one of the appellants why he should not be
shown in the list as a contributory to the extent of Rs. 15,000 the remaining
amount of the value of the shares due from him and payable by him pursuant to
the call made by resolution No. 4 of the directors’ resolution of April 30,
1953. He has also pointed out in the notice that each one of the appellants is
liable to pay interest on the amount from the date of that resolution to the
date of payment. It is in regard to this notice that each appellant filed
objections before the company judge to his being entered in the list of
contributories.
In
the appeals of Major Teja Singh and Gurinder Singh one of their objections was
that each one of these two had made payment of Rs. 5,000 to the company as
advance call payment and that that has not been taken into account. Of the
other three Raja Maheshinder Singh and Gurbakshish Singh each claimed credit for
an amount of Rs. 2,500 and Hardam Singh for an amount of Rs. 500 paid to the
company. Each one of the appellants has raised a number of objections in his
objection application and in substance the objection that was pressed before
the learned company judge and has been urged here is that there has been no
valid call made by the company and consequently, the notice given by the
liquidator is wrong. As stated there are other objections listed in the
objection application but at this stage nothing turns upon them as no argument
has been founded in reference to them. In the case of Gurinder Singh,
appellant, before he put in his objection application through his counsel on
June 12,1950, he sent reply, dated March 19,1956, to the notice given to him by
the liquidator and this was sent by post. In this application he first points
out that apart from his payment of Rs. 5,000 for the allotment of the shares,
he has paid another sum of Rs. 5,000 as advance call money. He then pointedly
says that no call for share money has been made from him prior to the
liquidation of the company and further says that no meeting whatever was held
or resolution has been passed by the company for the call of share money from
him. He then denies his liability to pay any interest. After this he says that
he was already paid Rs. 10,000 and on the total number of shares allotted to
him he is liable only to pay Rs. 10,000. The objection- applications of the
appellants were of course opposed by the liquidator.
The
learned company judge settled issues in each objection application but one set
of issues need only be given here for the issues in all the five objection
applications are the same. They are :
1. Was
a valid call of 75% of the share money made by the Hindustan Petroleum Co. Ltd.
in the meeting of the board of directors held on April 30,1957?
2.
If so, what has been paid by the
objector towards the call?
3.
Whether the amount paid in advance
can be adjusted towards the call money?
4.
What interest, if any, is
chargeable on the amount of call remaining unpaid ?
5.
Relief?
The
learned company judge has found on issue No. 1 that a valid call as referred to
in this issue has been made, on issue No. 2, in the case of each
objection-application, he has found that no payment other than the first amount
of Rs. 5,000 has been made towards the call made by the resolution of April
30,1953 on issue No. 3 his finding is that advance towards call money has not
been shown to have been proved except in the case of Gurinder Singh, and in regard
to Gurinder Singh benefit of this has been allowed to him, and on the fourth
issue his finding is that each appellant is liable to pay interest at the rate
of 9 per cent. Per annum on the amount of the call due from him. In consequence
each objection - application has been dismissed with costs, and each one of the
appellants, as stated,has come in appeal against the order of the learned
company judge in his own objection application.
The
learned counsel for the appellants has put forward three arguments questioning
the validity of the call under the directors; resolution of April 30,1953, and
the arguments are (a) that the resolution does not fix or give the time of
payment of the call, (b) that, when both the resolutions are read together, on
shareholders who were directors, the call was for the total balance of the
amount remaining due on the shares, in other words , 75 per cent. of the value
of the shares, whereas in the case of shareholders, other than directors the
call was only confined to 25 per cent. of the value of the shares, which
discriminatory calls were outside the powers and authority of the directors as
also the company, and (c) that no notice was given to any of the appellants of
the making of the call and of the demand on them to pay the call in terms of
the resolution. These three arguments are common to all the five appeals. There
is an additional argument in each appeal with regard to the amounts paid by
each appellant to the company over and above the first amount of Rs. 5,000 as
payment made on the allotment of shares, and credit is claimed in regard to
such subsequent payment. The reply of the learned counsel on behalf of the
liquidator is to split the cases into two sets, one of the three directors who
were parties to resolution Nos. 3 and 4 of April 30,1953, and the other the
remaining two directors, namely, Major Teja Singh and Gurinder Singh,
appellants, who were not present at the meeting when those resolutions were
passed. In regard to the first set of three directors what the learned counsel
contends is that, even assuming that there is some irregularity or defect in
the resolutions, they are stopped from taking advantage of the same. In so far
as the remaining two directors are concerned, with regard to Gurinder Singh
(appellant) the learned counsel refers to his application of March 19,1956, and
presses that it contains his admission of his liability to the extent of Rs.
10,000 thereby implying further an admission on his part in regard to the
correctness of the call made on him for the amount of at least Rs. 5,000 under
the resolution of April 30,1953. In fact what the learned counsel says is that
he admits the correctness of the call in substance and says that his liability
is only confined to Rs. 10,000. In regard to the fifth director, Major Teja
Singh (appellant), the substance of the argument of the learned counsel for the
liquidator is that he being a director of the company and in the know of all
the business of the company, he must be credited with the knowledge of what transpired
at the meeting of the directors on April 30,1953, and he is bound by the
resolution passed by the meeting of directors on that day. On the question of
want of notice, the learned counsel refers to the evidence of the accountant,
Saran Das, whose evidence is that according to an entry in the dispatch
register of the company a circular letter was dispatched to each one of the
appellants to pay the call according to resolution No 4 of April 30,1953, and
there is further entry in the same register of a reminder of the letter having
been sent at a later date. So he contends that notice in fact was given to each
one of the five appellants to pay the call. On the question of other payments
pleaded by each one of the appellants, in the case of Gurinder Singh
(Appellant) the learned company judge has already given him the benefit of Rs.
5,000 paid by him after the first payment of Rs. 5,000 at the time of the
allotment of shares and this matter is no longer one of controversy between the
parties, but with regard to the remaining for appellant the learned Counsel
contends that in the case of the three, other than major Teja Singh (appellant)
no payment is proved to have been made and in the case of Major Teja Singh
(appellant) the payment of Rs. 5,000 was not an advance towards call but merely
a loan to the company. In addition, the learned counsel appearing for the
liquidator has raised a preliminary objection that of the three main arguments
urged in all the five appeals the first two have not been raised at all in the
objection applications of the appellants and were not subject-matter of
argument before the learned company judge.
The
last argument on behalf of the appellants with regard to the payment of additional
amount by each may be disposed of first. The only evidence that Raja
Maheshinder Singh (appellant) paid Rs. 2,500 is his bare statement not
supported by anything else and as this has not been accepted by the learned
company judge as sufficient I see no reason to differ from him in this respect.
He has not succeeded in proving the payment of this amount. In so far as the
payment of Rs. 500 said to have been made by Hardam Singh, appellant, is
concerned there is not even his own statement in support of this payment. So
the payment of this amount by him is not proved. The payment of Rs. 2,500 said
to have been made by Gurbakshish Singh, appellant, was not made , even
according to his own allegations, as a payment in cash but what he has alleged
is that a meeting of the board of directors of the company was held at his
residence at Dehra Dun and in connection with that meeting he incurred as much
expenditure and for that expenditure he has been given no credit by the
company. The evidence of the accountant of the company is that such a meeting
was held that but that in the books of the company there is no entry in regard
to any expenditure on behalf of the company by this appellant. There is no
proof of this amount having been paid by the appellant to the company in any
form. So that in the case of these three appellants not one of them has paid
anything apart from a sum of Rs. 5,000 paid when the allotment of shares was
made to him. It has already been stated that another amount of Rs. 5,000 paid
by Gurinder Singh (Appellant) has been accepted by the learned company judge
and there is no controversy over this matter at this stage. There remains only
the claim in this respect of Major Teja Singh (Appellant). It is not denied on
behalf of the liquidator that he has made a payment of Rs. 5,000 to the company
and it is further admitted in the reply of the liquidator that this amount was
paid by this appellant as advance call money. There is, therefore, no dispute
in regard to the nature of this payment. It was not a loan as that term is
ordinarily understood. it was a payment by this appellant to the company and
the object of this payment was that it would be utilised towards meeting the
demand of call on shares that may in future be made on him by the company.
Assuming for a moment that the call made upon this appellant under resolution
no. 4 of April 30,1953, is a valid call, as soon as the call was made this much
amount for the purpose being in the hands of the company from this appellant
must be taken to this purpose immediately. So that in my opinion if he is
liable for the call made under the resolution for any amount then that amount
has to be less by Rs. 5,000 and would leave against him a demand of Rs. 10,000
only. This disposes of the last argument on behalf of he appellants.
The
first three arguments are common to all the appeals. On behalf of the
appellants their learned counsel has made reference to articles 17 and 18 of
the articles of association of the company. These articles read :
“17.
The directors may from time to time make such calls upon the members in respect
of all moneys unpaid on their shares and not by the conditions of allotment
thereof made payable at fixed times, as they think fit, or as may be hereafter
determined by the company in the general meeting. A call may be made payable in
installments. One month’s notice at least shall be given of each call and each
member shall be liable to pay the amount of calls so made, to the persons at
the times and places appointed by the directors and specified in such notice.
18.
A call shall be deemed to have been made at the time when the resolution of the
directors authorizing such call was passed.”
The
learned counsel contends that the first part of article 17 provides for a call
on shares on unpaid part of the share capital but further provides the call to
be “payable at fixed times” and the second part of this article then first
refers to the matter of payment by installments and secondly to at least one
month’s notice of the call and to the liability of each member of the company
to pay the amount of the call made to the persons at the time and place
appointed by the directors and specified in the notice. It will be seen that
statement about the time or times at which the call is to be paid appears in
the articles twice. In the first part of the articles it apparently is made an
imperative part of the resolution making the call and the requirement is that
the resolution is to fix the time of payment. In the second part is the
direction about the payment to the persons at the times and places appointed by
the directors. The first, the learned counsel contends, is imperative and
invites the call but the second being merely a direction may or may not be
complied with or it may not come in the resolution but may come in the
subsequent Bengal Electric Lamp Works, In re and East and West Insurance Co.
ltd. v. Kamla Jayantilal Mehta. The first of these two case holds the call to
be invalid if it is not stated either in the resolution or in the notice to
whom the amount is to be paid and at what that did not arise in that case. The
learned judge has held that the omission ubtgus respect invalidates the call.
But the second is directly in point and there the learned Chief Judge held,
after review of cases here and also in England, that when time is not fixed for
payment of the call, the call is invalid, though he thinks that if it is not
stated to whom it is to be paid and at what place, the non fulfillment of these
two requirements will not invalidate the call. In these two cases the learned
judges have discussed all the case law bearing on the subject and it will be
idle on my part to repeater the same here. I agree with the learned Chief
Justice of Bombay that the fixation of the time of payment of the call is
imperative and if that is not done as has been the case here, the call is not
valid. the learned counsel for the liquidator refers to Collector of Moradabad
v. Equity Insurance Co. Ltd. but all that that case decides is that it is not
necessary that the time and payment should be specified in three resolution
authorising the making of the call and that this should be done subsequently.
probably what the learned judge means is, in the notice making a demand of the
payment of the call. he refers to the first of the two above mentioned cases in
this respect. I do not consider that this case advances the argument on behalf
of the liquidator any further. The learned counsel for the liquidator then
points out that the two cases relied upon by the appellants in this respect and
all the other cases relied upon by the appellants in this respect and all the
other cases referred to in these cases deal with calls made on ordinary
shareholders and not with a call made on directors, which as a factual matter
is true, but I do not see that this makes the least difference, deal in so far
as those directors are concerned who were actually present at the meeting when
the resolution was passed. So that for this omission in the resolution the call
must be held to be not a valid call. the learned counsel for the liquidator has
then urged that the appellants were given notice of demand pursuant to the call
and it must be assumed that in that notice the time of payment of the call was
given. the notice has not been produced. the only witness who has appeared to
make reference to it says nothing of the sort. No such assumption can be made.
So hat on this ground I would hold the call to be bad under resolution No. 4 of
April 30, 1953.
When
both the resolutions are looked at there is obvious disparity in the calls
made, one from an ordinary shareholder and the other from a director. This is a
case that has to be considered under the Indian Companies Act, 1913. Section 49
of the Act provides that “A company, if so authorised by its articles, may do
any one or more of the following things, namely : (I) make arrangements on the
issue of shares for a difference between the shareholders in the amounts and
times of payment of calls on their shares ;....” It is obvious that the company
has this power only if so authorised by its articles and not otherwise. In
Table A, clause 16, an instance of providing for such power is given. It reads
: “The directors may make arrangements on the issue of shares for a difference
between the shareholders in the amount of calls to be paid and in the times of
payment.” This is one of the clauses in Table A which is not compulsorily part
of the articles of association of the company, and it is a clause which has not
been adopted by the company as an article its articles of association. The
company has, therefore, taken no power under section 49 of the Said Act to make
any arrangement on the issue of shares for a difference between the holders in
the amount of calls to be paid, and it is obvious that the power not having
been taken apparently the resolutions of April 30, 1953, will have to be
considered as bad on that account but the learned counsel for the liquidator
says that, though he does not accept this even if this was so, the call on the
directors must be held to be good to the extent of 25 percent as on an ordinary
shareholder of the company, but I think that would amount to modification of
the resolution and I am convinced that that cannot be done in the manner in
which the learned counsel seems to me to suggest. So on this ground also I
would consider the resolution No. 4, as bad and not making a proper and valid
call.
On
the third argument I have already stated that the notice alleged to have been
sent as a circular letter to the directors has not been produced and it is not
known what are its contents. The learned counsel for the liquidator refers to
articles 156 and 158 of the articles of association and contends that once
letters were posted the presumption is that they were delivered in the ordinary
cousel of post. Article 158 draws such a presumption but then provides that the
letter containing the notice must be properly addressed, prepaid and put into
the post box. What the learned counsel wishes to say is that because the
accountant says that according to the dispatch register such letters were
dispatched all these conditions had been fulfilled. But it is not inconceivable
that even after entry in the dispatch register of the letter going out of the
office of the company they may never have reached the post box. To draw such a
presumption proof of posting must be given and there is no such proof in the
present case. So that no notice of the demand has been given.
After
all this has been said the cases of two different sets of directors may now be
considered. There are three directors, namely, Raga Maheshinder Singh, Hardam
Singh and Gurbakshish Singh, appellants who were present when the resolution of
April 30, 1953, was passed and they have been parties to it. In spite of the
omission and defects in the resolutions, the learned counsel for the liquidator
urges that they are estoppel from taking the three objections that have been
already discuss above and here I am inclined to agree with him. The reason is
this. The first defect is with regard to the fixation of the time of payment of
the call. these directors were themselves present at the meeting and they
decided even with regard to themselves that they shall pay the whole of the
balance of the share money remaining due on their shares. then in their case
there was the fixation of the immediate time for payment and this objection
cannot thus be available to them. They cannot say that they have had no notice
of the time when their liability to pay arose. They have known this all the
time and knew this immediately as the resolution was passed. In regard to the
discriminatory nature of the calls it is open to a shareholder to agree to pay
all what is due on a share and as they have themselves agreed it is not now
open to them to say that they will not pay what they have already agreed to
pay. On the question of want of notice, surely they do not need any notice for
they are the persons who have decided this matter and in their case to ask for
notice would be to ask for something which is basically a redundancy. So that
the substance of the three arguments would render the call not valid qua those
who were not present and does not apply to the directors who are themselves a
party to the call. On this consideration those three appellants are stopped from
questioning the validity of the call and they cannot have the benefit of the
first three arguments. The learned counsel for these appellants raises an
objection that stopped may operate against them in regard to an irregularity in
the resolution but cannot do so where the resolution is not valid. But the
question of the validity of the call comes in because of want of due and proper
notice of liability to a shareholder but that basis does not exist in the case
of these three appellants and therefore they are stopped from raising these
arguments to the demand of the call against them. So, in their cases,
therefore, it is not necessary to go into the question whether or not those
three arguments have in so many words been raised by them in their objection applications.
The learned company judge has, in my opinion, rightly dismissed their objection
applications and as the call upon them was immediate and on their consent they
must pay interest on the amount of the call not paid and on this also I agree
with the conclusion of the learned company judge. The appeals of Raja
Maheshinder Singh, Hardam Singh and Gurbakshish Singh, appellants, thus fail
and are dismissed with costs.
The
one argument that has been pressed, in so far as Gurinder Singh (appellant) is
concerned, on the side of the liquidator to my mind is entirely without
substance. No doubt in his earlier application he does say that at most his
liability is only at Rs. 10,000, but that cannot be read as an admission on his
part of acceptance of the call made on him under the resolution, for stray
sentences from his application cannot be picked up and used against him and the
application must be read as a whole. When it is read as a whole, it is clear
that he is questioning the validity of the call but would consider that his
language is not couched strictly in the form which would perhaps have pleased
the liquidator. But there is no doubt that he is questioning the validity of
the call. He says that no call has been made and what more could he say is there
is no valid call in law than that there is no call. So that this argument does
not negative his claim.
In
so far as Major Teja Singh (appellant) is concerned the learned counsel for the
liquidator says that because he was a director he must be credited with the
knowledge of what happened in the meeting and how the business of the company
was being conducted but I do not see how, when it is established as a fact that
he did not attend the meeting, any such knowledge can be imputed to him. Then
the learned counsel says that it must be assumed that he has known what has
been going on in the company but then there is not material that on any
subsequent meeting, if attended by him, the minutes of the proceedings of the
meeting of April 30, 1953, came before the meeting. No such knowledge can,
therefore, be imputed to this appellant. so the cases of Major Teja Singh and
Gurinder Singh, appellants, must proceed on the same basis. In so far as they
are concerned the call cannot be, on that account, placed in the list of
contributories. Now there remains for consideration one argument of the learned
counsel for the liquidator, which has been urged by him as a preliminary
argument, and that is that the first three arguments as detailed above have not
been set out by these appellants in their objection applications and they were
not in this form urged before the learned company judge. Those appellants have
in their objection applications stated that no call has been made against them
and they have questioned their liability. Once they have done that the details
of their argument need not appear in their applications. What must appear in
their applications are the facts necessary for the decision of the question on
which they ask for decision and the omission of arguments in the application
does not bar them from pressing these arguments. Nor do I consider, as the
arguments are matters that raise the questions of law, that they are barred
from pursuing the same at this stage in these appeals even if as arguments they
were not placed before the learned company judge in the form in which they have
been urged here. So these two appellants succeed and their objection
applications are accepted that there has been no valid call against them under
the resolutions Nos. 3 and 4 of April 30, 1953, and on this account they cannot
be in the list of contributories.
At
this stage the learned counsel for Raja Maheshinder Singh, hardam Singh and
Gurbakshish Singh appellants says that this decision is inconsistent in this,
that it is found that the resolution, No. 4, of April 30 1953, does not make a
valid call and yet these three appellants have been held to be bound by the
call made under that resolution. If this is an inconsistency, it is only a
seeming inconsistency for the defect in the call which is available to others
is not available to these three appellants for they were parties to the
resolution and are stopped from relying upon this defect to escape liability.
The learned counsel then says that there is a distinction between what is due
and what is presently due and he points out that in the case of these
appellants the call cannot be said to be presently due but that is exactly with
what I do not agree for as they are stopped from questioning the propriety of
the call so under the resolutions the demand of the call is a present demand
from them.
In
the result the appeals of Major Teja Singh and Gurinder Singh appellants are
accepted. Counsel’s fee in each appeal is fixed at Rs. 60.
[1956] 26 COMP. CAS. 313 (BOM.)
East And West Insurance Company Limited
v.
Mrs. Kamla Jayantilal Mehta.
CHAGLA, C.J.
DIXIT, J.
FEBRUARY 13, 1956
CHAGLA, C.J.-The defendant, who is the respondent before
us, was at all material times a shareholders of the plaintiff company who are the
appellants. The plaintiff company filed a suit, out of which this appeal
arises, to recover from the defendant a sum of Rs. 4,835 being the amount due
in respect of call made by the company and interest thereon. The contention was
accepted by the trial court which proceeded to dismiss the plaintiffs' suit.
The appellants have now come in appeal.
At
a meeting of the board of directors held on March 3, 1948, the directors
resolved that a further call of Rs. 40 per share on B class shares of the
company and a notice of one month be given to all B class shareholders to pay
the same. The b class shares are of the face value of Rs. 50 and Rs. 10 were
paid up, and the defendant held 100 B class shares of this company. Another
meeting of the board of directors was held on June 22, 1948, and at this
meeting the minutes showed that the opinion of the directors was divided as to
the manner of requiring the calls to be paid, and the evidence of the manager
Mr. Samant on this point is that the division of the directors was on the
question as to whether the call should be for Rs. 40 at one time or whether the
call should be by instalments. They were also divided as to what time should be
given if the call was to be by instalments. The minutes of this meeting go on
to state: "It was therefore resolved that the draft notice be finalised in
consultation with the company's solicitors." It is also in the evidence of
Mr. Samant that he had produced before the meeting of the board a notice to be
sent to the shareholders with regard to this call prepared by the solicitors.
In this notice, there were various blanks which were filled in by him, and
turning to this draft notice it proceeds on the basis that the call was payable
by four instalments and in this draft notice the dates of payment of the
instalments are mentioned, the first instalment being payable on August 5,
1948, the second on September 5, 1948, the third on October 5, 1948, and the
fourth on November 5, 1948. It is not quite clear from the language used in the
minutes of this meeting as to what exactly was intended by the expression,
"it was therefore resolved that the draft notice be finalised in
consultation with the company's solicitors." But the evidence of Mr.
Samant is that he finalised the draft notice himself and he then sent out
notices to the shareholders in the form of the draft notice which was the final
form of the notice. It is common ground that the final form never came before
the board of directors. This particular notice was sent to the defendant on July
7/9, 1948, and she was called upon to pay the first instalment on August 5,
1948. As she failed to pay the first instalment, another notice was served upon
her on August 17, 1948, by which she was reminded that the first instalment
remained unpaid and notice was given to her to pay the remaining three
instalments on the due dates, viz., September 5, October 5, and November 5,
1948. She failed to pay also the second instalment on the due date and a notice
was served upon her on September 28, 1948, reminding her that the two
instalments on their due dates. A third reminder was sent to her on November
10, 1948, when she had failed to pay the remaining two instalments and she was
requested to pay the whole amount of Rs. 4,000 with interest thereon due by her.
Finally, an attorney's notice was given to her on January 26, 1949, and in this
notice it was stated:
"By
a resolution of the board of directors dated the 3rd March, 1948, it was
decided that a further sum of Rs. 40 per share be called from B class shareholders.
By another resolution of the board of directors of the company dated the 22nd
June, 1948, it was decided to forward to the shareholders the notice demanding
payment of the said call in the manner decided at that time."
The
letter further says that in pursuance of these resolutions various notices were
sent to the defendant and she was called upon to pay the amount. As she failed
to comply with this requisition a suit wa filed in the City Civil Court on
February 14, 1951, which suit ultimately came to be dismissed by the learned
Judge.
Turning
to the articles of association which constitute the contract between the
company and the shareholders and according to which a call can be made and the
liability for the call can be imposed upon a shareholder, the two material
articles are articles 18 and 19.
Article
18 provides:
"The
directors may, from time to time, make such calls as they think fit upon the
members in respect of all monies unpaid on the shares held by them
respectively, and not by the conditions of allotment thereof made payable at
fixed times, and each member shall pay the amount of every call so made on him
to the persons and at the time and places appointed by the directors. A call
may be made payable by instalments."
And
article 19 provides:
"A
call shall be deemed to have been made at the time when the resolution of the
directors authorising such call was passed."
It
is clear that article 18 divides itself into two parts. The first deals with
the authority of the directors to make a call and the second deals with the
imposition of liability upon the shareholder, and as a condition for imposition
of the liability upon the shareholder the second part provides that the
directors must appoint the person to whom the payment has to be made, the time
at which it has to be made and the place at which it has to be made. Neither
the first part nor the second part of article 18 lays down the mode by which
either the directors should make the call or impose the liability upon the
shareholder. it is true, as pointed out by Mr. Desai, that the directors can
only act at a meeting of the board of directors through resolutions passed at
such a meeting, and therefore it was contended by Mr. Desai that the action of
the directors both with respect of making of the call and the imposition of the
liability must be by resolution passed at a meeting of the board of directors.
Our attention was drawn to article 115 which makes it competent for a meeting
of directors to exercise all or any of the authorities, powers and discretions
by or under the articles of the company for the time being vested in or
exercisable by the directors generally, and it was rightly pointed out that but
for this article action could only be taken by all the directors jointly, but article
115 makes it competent to a meeting of directors, where all the directors are
not present, provided a quorum is there, for such a meeting to transact the
business which otherwise all the directors will have to transact. But as the
argument was advanced to us with regard to the power of delegation of the
directors, which we shall examine later, it is necessary to look at articles 18
and 19 on the assumption that the directors could delegate their power vested
in them under article 18. Article 19 when read with article 18 makes it clear
that whatever power of delegation the directors may have generally, as far as
the making of the call is concerned, a call can only be made by a resolution of
the directors, because article 19 fixes the time when the call is deemed to be
made and the time fixed is when the resolution of the directors authorises the
call. Therefore it is clear that article 19 contemplates and indeed requires
the making of the call by a resolution passed by the directors at a meeting of
the board of directors.
If
every valid call has to be made by a resolution of the board of directors, the
next question that we have to consider is, what are the essential features of a
valid resolution making a call? It cannot be disputed that the amount of the
call must be mentioned in the resolution. The question in controversy before us
has been whether it is equally essential that the time when the call money
should be paid by the shareholder should be mentioned in the resolution. Apart
from authority, it is difficult to understand how the fixing of the time for
the payment of the call is not an essential feature of the making of the call.
A call imposes a liability upon a shareholder and that liability only commences
from the time when he becomes liable to pay the call, and therefore authorising
the call and fixing the amount of the call by themselves do not fix the
liability upon the shareholder. It is further necessary that the time when the
shareholder should pay the amount should be indicated so that the shareholder
knows when he has to pay the amount and he also knows that failure to pay the
amount will entail serious consequences. The other two requisites for imposing
liability upon the shareholder, viz., the fixing by the directors of the person
to whom the payment is to be made and the place where the payment is to be
made, are not material requisites. Whatever the place that may be fixed and
whoever the person may be to whom the payment is to be made, does not in any
way affect either the quantum of the liability or the time from which the
liability is fixed. What is urged against this view is that although by reason
of article 19 a call can only be made by a resolution, article 18 makes a
distinction between the making of the call and the appointing by the directors
of the place at which, the person to whom, and the time when the payment is to
be made, and therefore it is urged that all these three factors must stand on
the same footing. If it is not necessary to fix the person to whom and the
place at which payment is to be made by a resolution it is equally not
necessary to fix the time of payment. The fallacy underlying this argument is
that although the second part of article 18 mentions all these factors it does
not, as already pointed out, indicate how these factors should be appointed by
the directors. It may be by a resolution or it may not be; the second part of
article 18 is silent. Therefore, if any of these factors are essential for the
making of a call, then by reason of article 19 that factor must form part of a
valid resolution making the call. Therefore, there is not much substance in the
contention that no distinction can be made as between person and place on the
one hand and time on the other. A distinction has to be made because these
three factors do not stand on the same footing. Whereas the person to whom the
payment is to be made and the place at which the payment is to be made are
trifling requirements of no substance and of no consequence, the time at which
the payment is to be made is of considerable substance and of great consequence
to the shareholder. We might also look at the provision with regard to the call
being made payable by instalments. This provision appears at the end of article
18 after article 18 has dealt with the authority of the directors to make the
call and the conditions imposing the liability upon the shareholders, and in
our opinion this provision relates tot he making of the call and therefore it
must form part of the resolution authorising the call. This again is a matter
of substance. Whether a call should be paid in one sum or by instalments goes
to the question of the liability of the shareholder, and therefore this
provision is as much of substance as the provision with regard to the fixing of
time for the payment of the call. Therefore, the provision that a call should
be made payable by instalments by reason of article 19 can only be made by
resolution properly passed by the directors.
Turning
to the first aspect of the matter whether it is essential to indicate the time
of payment in the resolution authorising a call, it is not disputed in this
case that neither the resolution of March 3, 1948, nor the resolution of June
22, 1948, fixes the time for payment, but what is urged by Mr. Engineer on behalf
of the company is that it is not necessary for the validity of a resolution
authorising a call that the time for the payment of the call must be stated in
the resolution itself. There seems to be some conflict of judicial opinion on
this point and it is necessary to briefly consider how the matter stands. The
first important pronouncement on this point was in a very early case reported
in Newry and Enniskillen Railway v. Edmunds. In that case Baron Parke expressed
the opinion that the resolution to make a call need not specify either the time
or place for payment; but the directors must appoint a time and place, which
must be notified to the shareholder by a notice allowing him 21 days for the
purpose of payment, and the learned Baron referring to an earlier case of Great
North of England Railway Co v. Biddulph, says that that case proves that the
resolution need not contain the place of payment and he thought that by
implication it also proved that it need not contain the time of payment, and he
added:
"The
resolution is nothing more than a determination, that thereafter `a call' shall
be made, that is, that an application shall be made to each shareholder for a
proportion of his share; and it is enough if the directors appoint a time or
place, either by public advertisement, (where such a mode is allowed by the
private act), as in the case referred to, or under the general act, by an
individual notice to each shareholder."
These
observations naturally have been very strongly relied upon by Mr. Engineer and
he says that in this case the call having been made by the directors, the time
and the place and the person to whom the payment is to be made was appointed by
means of the notice served by the manager upon the shareholder.
There
are two subsequent English cases which have struck a discordant note. The first
is Johnson v. Lyttle's Iron Agency. In that case there are weighty observations
of so eminent an authority as Jessel M.R., who seems to have taken the same
view as Baron Parke in the earlier case. This is what the learned Master of the
Rolls says at page 690:
"Now,
it is quite clear that the Act of Parliament [and he was considering the
sections which are similar to our articles] does not require the day for the
call to be named in the same resolution as the one by which the call is made.
You may make the call, and then you may by subsequent resolution or direction
name the day for the payment. Nor does the Act of Parliament require the day to
be named by any particular formal act by the directors. No doubt it requires
their sanction and authority, but it does not require it to be made by a formal
resolution put in that shape, or by resolution entered in the minutes. It is
sufficient if they direct it. What shall be sufficient evidence of direction is
another matter."
In
that case, when it went to the Court of Appeal, although the observations of
Lord Justice James were obiter, the learned Law Lord did say at page 694:
"I
may add that, as at present advised, I think that the time for the payment of
the call could not properly be fixed by a mere verbal direction to the
secretary; it ought to be fixed by a formal resolution of the directors."
Neither
Lord Justice Mellish nor Justice Baggallay expressed any opinion on this
matter. This observation of Lord Justice James seems to have started a chain of
thought which was contrary to the view taken by Baron Parke and Jessel M.R. as
already indicated, and, as we shall presently point out, this indication given
by Lord Justice James which is the contrary view seems to have ultimately
stabilized itself in England as the correct view of the law.
The
next case to which reference has been made is the case In re Cawley and Co. It
may be said that the articles which came up for consideration by that court
were different from the articles we have to consider here, and Mr. Justice
Chitty in the trial court came to conclusion that inasmuch as there was first a
resolution making a call and a subsequent resolution where the time for payment
was fixed, taking the two resolutions together there was a valid call as from
the passing of the first resolution and not the second resolution. When the
matter went in appeal the case was decided on a point with which we are not
concerned, but Lord Esher M.R. says (at page 228):
"That
would be an end of the case had it not been for the equity which has been
alleged, and which I will deal with presently."
Then
he proceeds to deal with this equity and he considered the question whether there
was a good call on the date when the first resolution was passed, and this is
what he says (at page 228):
"Therefore,
there could be no valid call in this company until the time and place for its
payment had been appointed by the board; that is to say, until it had been
resolved by the directors that the call should be payable uncertain instalments
and in a certain manner and at a certain time appointed by the board."
Lord
Justice Cotton agrees with the Master of the Rolls on this point and this is what
he says (at page 232):
"When
a man takes a share in a company, of course, he thereby contracts with the
company to pay the full amount of the share, but only to pay when and if the
directors call for it to be paid up; and when one comes to look at article 38
and other articles following it, I should say that a requisition on the
shareholder to pay up the amount of his share should be by a resolution stating
the amount to be paid and the time when it is to be paid."
Lord
Justice Fry also took the same view and he observes (at page 235):
"I
am clearly of opinion that, according to the constitution of this company, no
call was made until the time for payment was fixed."
What
has been urged by Mr. Engineer is that these observations apply to the particular
articles which those Law Lords were considering and if our articles are
different, then that case is no authority for the construction of the articles
before us. Unfortunately for Mr. Engineer, Lord Esher M.R., after having
already delivered the main judgment, thought it proper to deliver a
supplementary judgment which is at page 236, and this is what the learned
Master of the Rolls says:
"I
do not wish it to be supposed that my decision in this case rests only on the
articles. I take it to be of the very essence of a call that the time and place
for payment should be determined."
When
we turn to the acknowledged text books on Company Law, where one would normally
expect the correct statement of the law to be laid down, first in Palmer's
Company Law, page 127, where the learned author says:
"In
making a call care must, therefore, be taken that the directors making it are
duly appointed, and duly qualified, that the meeting of directors has been duly
convened, that the proper quorum is present, and that the resolution making the
call is duly passed and specifies the amount of the call, the time and place of
payment-for these are of its essence-and to whom the call is to be paid."
Therefore,
according to this learned author, time and place are both of the essence,
apparently following the view of Lord Esher M.R., but he puts the person to
whom the call is to be made in a different category. Then turning to Buckley on
the Companies Act, 12th edn., at page 805 the learned author says:
"A
resolution for a call must state not only the amount of the call, but also the
time (or, if payable by instalments, the several times) at which it is to be
paid. If the date for payment be left in blank there is no valid call.
The
time fixed for payment of a call should be fixed by a formal resolution of the
directors, not by a mere verbal direction to the secretary."
Therefore,
Buckley does not attach the same importance to the place where the payment is
to be made and confines his observations with regard to the validity of the
resolution only to the time for payment. Then turning to Stiebel's Company Law
and Precedents, 3rd edn., at page 197, the learned author says:
"The
date when a call is payable is of the essence of the call, and there will be no
proper call until a resolution has been passed fixing both the amount and the
date of the call; it would appear to be probable that a verbal direction to the
secretary fixing the date of the call is not enough."
Halsbury,
3rd edition, Vol. VI, page 227, says:
"The
resolution must comply with the provisions of the articles and must in any case
state the amount of the call and the time at which it is to be paid; otherwise
the call will be invalid."
It
will be noticed again, following the view of Lord Esher, that the learned author
makes the time at which the call has to be paid an essential ingredient of a
valid resolution intendently of the provisions of the articles. Therefore,
whatever might have been the position when Baron Parke and Sir John
Jessel-undoubtedly both eminent authorities-made observations on which Mr.
Engineer has relied, the position today in England with regard to this
particular aspect of the matter is beyond doubt.
It
is then argued by Mr. Engineer that whatever the English law might be, we are
bound by the decision of a Division bench of this court, and the decision
relied on is the decision of Sir John Beaumont, Chief Justice, and Mr. Justice
Blackwell in Dhanraj v. Wadia. As Sir John Beaumont says, it was rather a
startling case. It was a claim by the company to include a shareholder whose
shares had been forfeited as a contributor, and the ground on which this
application was made was that the forfeiture was bad because the resolution
making the call was not a valid resolution. The most significant feature of
that case is that as a matter of fact this particular resolution did mention
the time for paying the call. What was not mentioned was the place at which the
payment should be made and the person to whom the payment should be made.
Therefore, strictly, the observations of the learned Chief Justice with regard
to the question of time are obiter, but even so one must respect the
observations of such an eminent Judge as Sir John Beaumont, and let us see
whether these observations really are of help to Mr. Engineer. At page 30 the
learned Chief Justice says:
"As
matter of construction I can see no justification for reading the conditions
necessary to impose inability to pay upon the member into the first part of the
article authorising the directors to make a call."
We
might point out that the articles the learned Chief Justice was considering
were identical with articles 18 and 19. It may be said that these are really
model articles 18 and 19. It may be said that these are really model articles
which are to be found in most articles of association. Then the learned Chief
Justice goes on (page 30):
"It
seems to be that the directors may (as they did in this case) pass a resolution
making a call of a particular amount payable at a particular time, and that
that resolution constitutes a valid call and fixes the date of the call,
although before the payment of the call can be enforced the directors must
appoint the persons to whom and the place where the call is to be made."
Therefore,
the learned Chief Justice emphasises the fact that the resolution constituted a
valid cause because it made a call of a particular amount payable at a
particular time. Then the learned Chief Justice refers to the case of Newry and
Enniskillen Railway v. Edmunds to which we have already referred, and then he
deals with the case of Johnson Lyttle's Iron Agency, and says that he decision
and view of Sir George Jessel M.R. was a direct and a view necessary for
arriving at that decision and that the views expressed by Lord Justice James
were merely tentative views, and then the learned Chief Justice observes at
page 32:
"It
appears to me that that case is a direct authority for the proposition that
under such articles as we have in this case it is not necessary for the
resolution making the call to specify the time for payment, and it would seem
to follow a fortiori that it is not necessary to specify the person to whom or
the place where the call is to be made. I need hardly say that the opinion of
Sir George Jessel as to the construction of articles of association is entitled
to very great weight."
This
is the passage on which Mr. Engineer has very strongly relied, but it must be
borne in mind that the learned Chief Justice was not really concerned with the
aspect of the matter with which we are concerned. He did not have a resolution
before him which did not mention the time of payment. He was concerned with a
resolution where the place at which the payment should be made and the person
to whom the payment should be made were not mentioned, and therefore the
weight, the value, and the validity of this observations really attaches to the
question the learned Chief Justice has to consider with regard to the absence
of the place and the person from the resolution. He then refers to Cawley's
case and he dissents from the view taken by Lord Esher M.R. Unfortunately, with
very great respect to the learned Chief Justice, his dissent does not seem to
have been followed by all the learned text writers on the subject who all seem
to have preferred the views of Lord Esher M.R. to the views of the other Master
of the Rolls Sir George Jessel. Then the learned Chief Justice refers to the
two Indian decisions. First is the judgment of Mr. Justice Taraporewala in
Pioneer Alkali Works v. Amiruddin. In that case Mr. Justice Taraporewala
followed Cawley's case, but the learned Chief Justice distinguished it on the
ground that inasmuch as the amount of the call was not specified in the
resolution, the resolution was bad anyhow. Then there is a subsequent judgment
of a Division Bench in Bhagirath Spinning & Weaving Company v. Balaji,
which follows the judgment of Mr. Justice Taraporewala, and the learned Chief
Justice dismissed the learned Judge's observation by saying that the learned
Judges who decided the case do not mention the terms of the articles which the
court had to construe. Then there is rather an illuminating passage in the
judgment of the learned Chief Justice at page 34:
"But
speaking for myself, I do not think that it is necessary to have a formal
resolution of the directors specifying the person to whom, and the place where,
a call is to be made. These are minor matters of much less consequence to a
shareholder than the fixing of the time for payment, and, as I have pointed
out, Sir George Jessel M.R. in Johnson v. Lyttle's Iron Agency held that even
the fixing of time need not be the subject of a formal resolution, though James
L.J. differed from this view."
Therefore,
the learned Chief Justice himself realised the vital distinction between the
person to whom and the place where a call is to be made and the time for
payment, and really it is on this vital distinction that the text book writers
following Lord Esher M.R. have made a difference in requiring that whereas to
the validity of a resolution the mention of the place and the person is not
necessary, the time for payment is necessary. Again, with respect to the
learned Chief Justice, we are not at all satisfied that if he had to consider a
case of a resolution making a call where the time for payment was not
specified, in view of his observation just referred to he would have come to
the conclusion that the resolution was still valid. It is strictly not
necessary for us to say that we dissent from the view taken in Dhanraj v.
Wadia, because it is not very clear what view the learned Chief Justice takes
on this point. But in any view of the matter, the observations of the learned
Chief Justice, even if they help Mr. Engineer, are clearly obiter and all that
is binding on us is the decision that where the place at which and the person
to whom the call is to be made are not mentioned in the resolution, that does
not affect the validity of the resolution.
If,
therefore, this be the correct view of the law that a resolution making the call
must specify the time of payment, then it is clear that the resolutions on
which the plaintiff company relies are not valid resolutions making a call. The
first resolution of March 3, 1948, merely mentions the amount and the period of
the notice. The second resolution gives the interesting information that the
directors are divided in their view and resolves that the draft notice be
finalised in consultation with the company's solicitors. Therefore, in our
opinion, apart from any other consideration the two resolutions, even taken
together and read together and accepting the view of Mr. Engineer that these
two resolutions make a call, as neither of these two resolutions specifies the
time for making the payment, they fail to make a valid call as required by law.
We
are also in agreement with Mr. Desai that these resolutions suffer from another
infirmity, and that is that they do not decide that the amount of the call
should be paid by instalments. We have already indicated our opinion on a
construction of articles 18 and 19 that the payment of call by instalments is
as essential a feature of a resolution making a call as fixing of time for
payment, and on the evidence of Mr. Samant it is clear that the directors had
not made up their minds nor did they know their minds as to whether the call
should be paid in one sum or by instalments. Therefore, the directors never
resolved that this call should be paid by instalments. Faced with this
difficulty Mr. Engineer has relied on the principle of delegation and his
contention is that the fixing of the time can be delegated by the directors by
a proper resolution to the manager and in his submission the manager has fixed
the time by reason of the power delegated to him. Mr. Engineer advanced the
proposition which seems to us rather startling that there is nothing in law to
prevent the directors from delegating to a manger the power to make a call, and
according to him the directors could leave it to the manager to decide whether
a call should be made at all, when it should be made and what the amount of the
call should be. When one remembers that the power to make a call is in the
nature of a trust and it is to be exercised in the interests of the company, it
is rather difficult to accept the proposition that such an important power
which is vested in the directors could be delegated by them to any one and
could be exercised by any one.
Reliance
was placed on article 130 for this purpose, and that article provides:
"(a) The directors may from time to time entrust to and confer upon a
manager and/or managing director for the time being such of the powers
exercisable under these presents by the directors as they may think fit, and
may confer such powers for such time, and to be exercised for such objects and
purposes, and upon such terms and conditions, and with such restrictions as
they think expedient; and they may confer such powers, either collaterally
with, or to the exclusion of, and in substitution for, all or any of the powers
of the directors in that behalf; and may from time revoke, withdraw, alter, or
vary all or any of such powers."
Mr.
Engineer's contention is that the powers referred to in this article would
include the power of making a call. It is significant that article 115 which
deals with the exercise of powers by the directors at a meeting where a quorum
is present, deals with the authorities, powers and discretions vested in or
exercisable by the directors. In article 125(3) also, which deals with setting
up of a local management outside the place where the head office is situated
the power is given to the directors to delegate to any person appointed a local
manager any of the powers, authorities and discretions for the time being
vested in the directors. But when we turn to article 130, obviously the
intention was to confer upon the directors the right of delegation which was
much narrower in its extent than the one referred to in article 115 or article
125(3). Mr. Engineer says that there is no distinction between the two
expressions used. Now, the normal canon of construction either of a statute or
of articles of association is that when different expressions are used they are
intended to connote something different, and the draftsman of these articles
had article 115 and article 125(3) before him and having used words of the
widest import, when he comes to article 130 he uses an expression of a narrower
application. Clearly the intention must be not to refer to every authority and
every discretion exercisable by the directors under the articles. It would
indeed be a serious view to take that under article 130 the directors could
leave it to the manager to exercise the discretion or exercise the authority
which the articles require they should exercise, and nothing is more patent
than this that the contract between the company and the shareholders which is
embodied in the articles requires that the directors must exercise their
discretion and decide whether a call should be made. We refuse to countenance
the contention that such a power could be delegated by the directors to the
manger or to any one else. But really in a sense this argument is academic. We
only noticed it because it was strenuously urged before us, because as we have
already pointed out even Mr. Engineer concedes that even though there may be a
power of delegation under article 130 of the widest character, when we look at
article 18 and read it with article 19, a call can only be made by a resolution
of the directors, and therefore as far as the making of the call is concerned
that is a power or a discretion or an authority which cannot be delegated to
the manager or to any one else.
It
is then urged that when we look at the second resolution of June 22, 1948, in
effect the directors have fixed time for payment, and therefore even on the
assumption that the fixing of time is essential for the validity of a
resolution of call, the requirement is satisfied. Really, the resolution of
June 22, 1948, is very difficult to understand. One thing is clear that the
directors could not make up their minds as to whether the call should be paid
in one sum or by instalments and the time of the payment of instalments. In
view of this position, we fail to understand how it could be seriously urged
that by this resolution the directors fixed the time when the payment of the
call should be made. What is urged is that we must look at the second part of
the resolution which resolves that the draft notice be finalised in
consultation with the company's solicitors, and what is pointed out is that the
evidence of Mr. Samant is that the draft notice which was placed before the
board of directors was on the basis of the call being paid by instalments and
also mentioned the time when these instalments should be paid. We will accept
the evidence of Mr. Samant-there is no reason why we should not-, but even
accepting that evidence it is impossible to take the view that the board of
directors on June 22, 1948, accepted the basis of that notice and concurred
with the view of the manager which seemed to have been given expression to in
the draft notice that the call should be made by instalments and as to the time
when the instalments should be paid. If that had been the position, there was
no reason why the resolution of June 22, 1948, should have proclaimed to the
world the disagreement among the directors, nor was it necessary to resolve
that the draft notice should be finalised in consultation with company's
solicitors. If the basis of the draft notice was accepted, nothing was simpler
than to pass a resolution approving of the draft. But that was not done
precisely because the draft was not approved.
There
is further confusion caused by this resolution because it does not state who is
to finalise the notice. Mr. Samant does suggest that he was given to understand
that he had to go to the solicitors and get the notice finalised. But the
expression "finalised" can only refer to the form and not to the
substance. This part of the resolution does not seem to have left it to the
manager to decide the substance of the notice or to resolve the conflict which
was present among the directors as to whether the call should be paid in one
amount or by instalments. Therefore, if only the finalising in the sense of
settling the proper form was left to the manager, then it is clear that the
resolution expected the notice to come back to the directors for their
imprimatur. The most curious feature of this case is that at no time did the
directors ever express their approval to the substance contained in the notice,
substance of the most vital importance, substance with regard to the payment of
the call by instalments, substance with regard to the time at which those
instalments were to be paid. Nor does this resolution clearly authorise the
manager to issue the notice after it was finalised. Mr. Engineer says that this
was merely a ministerial act and the notice was issued and the notice purports
to have been issued by order of the board of directors. We agree with Mr.
Engineer that when a notice issued by an officer of a company purports to have
been issued by order of the board of directors, there is a presumption that it
was issued by order of the board of directors, there is a presumption that it
was issued pursuant to such an order, and unless the presumption is displaced,
the court must act on that presumption. But what we are dealing with here is
the resolution which is before us and which speaks for itself. We are not
concerned with any authority that the directors might have given to the manager
independently of this resolution. It was therefore not a formal matter for the
directors to decide that the notice should be issued. Having failed to
directors to decide that the notice should be issued. Having failed to agree on
a substantial question, having directed the manager, assuming it was the
manager, to finalise the notice in consultation with the company's solicitors,
it was essential that the board of directors, after the notice was finalised,
should direct the manager to issue the notice. Therefore, in this case this is
not a mere technically but something which goes to the root of the matter,
because it shows clearly that the directors never applied their minds to the
question of the call being payable by instalments or the time the instalments
should be paid.
Therefore,
in our opinion, on the terms of this resolution, even assuming it was open to
the directors to delegate to the manager the fixing of the time and the
decision with regard to instalments, there is no clear delegation established
on the terms of this resolution. If the power of delegation is to be exercised,
it must be clearly exercised. If the directors do not wish to do what the
articles require them to do and leave the doing of it to some one else, they
must clearly resolve to that the directors, assuming they had the power of
delegation, delegated to the manager not only the finalising of the notice in
the sense of seeing that it was in proper form, but the substance of the matter
that he was to decide whether the call was payable by instalments and the time
when the instalments were to be paid. Therefore, the notice issued by the
manager was without authority. Therefore, even on this narrow ground, apart
from the more important ground that we have considered, there was no authority
in the manager, no authority given to him by the directors, to issue a notice
calling upon the shareholders to pay the call by instalments and the time when
those instalments should be paid.
Another
point has been urged by Mr. Desai to which a passing reference might be made.
The original resolution of March 3, 1948, as already pointed out required that
a notice of one month should be given to all the B class shareholders to pay
the call, and Mr. Desai points out that when in fact the notice came to be
given on July 7/9, 1948, the shareholder was called upon to pay the first
instalment on August 5, 1948, which gave him less than one month's notice. It
was attempted to be argued by Mr. Engineer that in law the shareholder could
only be proceeded against when he had failed to pay the last instalment and no
liability would arise till the date fixed for the payment of the last
instalment, and on that basis it was sought to be argued that the notice of
July 7/9, really required the payment in law on November 5, 1948, and not
August 5, 1948, and therefore the notice was a proper notice. Mr. Desai has
rightly drawn our attention to the articles which require calls payable by
instalments to be paid at the due date of every instalment and he has also
pointed out that not only is there a liability upon the shareholder to pay the
instalment on the due date, but the consequence of not paying the instalment on
the due date is the liability to have his share forfeited. Therefore, whatever
the decisions on which Mr. Engineer relies lay down-and those decisions would
only be true with reference to the particular articles there-on the articles
that we have before us it is clear that there is a liability could have been
enforced by the company and therefore Mr. Desai is right that one month's
notice failed to carry out the mandate given by the resolution of March 3,
1948. There are two answers given by Mr. Engineer to this contention. One is
that even assuming the notice with regard to the first instalments is
insufficient, there is no answer with regard to the notice to the second, third
and fourth instalments which are all made payable more than one month after the
notice, and Mr. Engineer also relied on certain English cases for the purpose
of contending that a notice which is irregular does not invalid the call. We
should have thought on first principles that a requirement with regard to a
notice being a concession given to the shareholder by the articles that
concession may be waived, but if it is not waived the requirement of the notice
must be strictly complied with, and as no plea has been made here of a waiver
of the notice by the shareholder, it is difficult to understand how if the
notice is bad the court could uphold the claim for the call. But in our opinion
it is unnecessary to decide the rather interesting question raised by counsel
at the Bar.
Some
faint suggestion was also made by Mr. Engineer that the doctrine of
ratification would come into play in this case and the doctrine of ratification
is relied upon by reason of a resolution to which we have not yet referred
which was passed by the board of directors on September 12, 1949, and that
resolution considered the notice issued by the manager on July 7/9, 1948, and
resolved to adopt and ratify the said notice in the manner, mode and time of
recovering the unpaid balance of Rs. 40 on each B class share. Therefore, this
was the first time, on September 12, 1949, that the directors in their wisdom
considered the notice which had been issued as far back as July 7/9, 1948. It
will be noticed that what has been ratified is the notice and the manner, mode
and time of recovering the unpaid balance of Rs. 40. The resolution does not
even purport to ratify the resolution making the call on March 3, 1948, and the
subsequent resolution of June 22, 1948. It is difficult to understand how, if
the resolution making the call was invalid, it could be subsequently rendered
valid by anything that the directors might do on September 12, 1949. The basis
of the call and the basis of the liability of the defendant is the two
resolutions on March 3 and June 22, 1948. If those resolutions are invalid,
they cannot be rendered valid by the resolution of September 12, 1949. This is
not a case where a valid resolution has been passed by some one lacking the
necessary authority. In that case the persons with the requisite authority may
adopt the resolution validly passed and thereby ratify it. But where the
objection to the resolution is not the want of authority but illegality in the
very making of it, in the very passing of it, then it is impossible to accept
Mr. Engineer's contention that the doctrine of ratification can validate a
resolution which when it was passed was invalid.
Under
the circumstances we are of the opinion that the call was not validly made and
the learned Judge below was right in dismissing the plaintiff's suit. The
result will be that the appeal is dismissed with costs.
[1949] 19 COMP CAS 246
(MAD.)
HIGH COURT OF
Mahalakshmi Textile Mills Ltd.
v.
RAJAMANNAR, C.J., AND
RAGHAVA RAO, J.
O.S. NO. 44 OF 1944 and APPEAL NO. 505 OF 1945
A. Krishnaswami
Aiyar, K. Subrahmanyam and Alladi Kuppuwswami, for the Appellant.
S. Venkatesa
Aiyangar, for the Respondent.
Raghava Rao, J.—An interesting question of company law is
raised for determination by this appeal. The material facts which are more or
less beyond the pale of controversy may be briefly stated.
The plaintiff, a
shareholder of the defendant, which is a limited company, fell into arrears in
respect of the third and fourth instalments of Rs. 1,250 each of the total
share amount of Rs. 5,000 payable by him on his 50 shares of the face value of
Rs. 100 each, having duly paid the amounts of the first and second instalments
of Rs. 1,250 each, payable along with the application for shares and at the
time of allotment thereof
respectively. There was a meeting of the Directors of the company held on 31st
October, 1928, as shown by the entries, Exs. D-4 and D-5, in the minutes book at
which, firstly, it was resolved that the first call (i.e., the call in respect
of the third instalment) made as proposed in the circular letters, Ex. D-2
series, should be confirmed and, secondly, the Managing Directors were
authorised to make the second call (i.e., the call in respect of the fourth
instalment) before 5th December, 1928, requiring the amount of that call to be
paid by 25th December, 1928. It is the case of the defendant company that
thereafter, as shown by Exs. D-3 and D-3 (a), the blank printed form of the
call notice maintained by it and the counterfoil of the notice actually issued,
notice was duly sent to the plaintiff in respect of the first call on 30th
March, 1928, and that, similarly, as shown by Exs. D-6 and D-6 (a), a similar printed
form of the call notice and a similar counterfoil respectively, notice was duly
sent to the plaintiff in respect of the second call on 4th December, 1928. The
plaintiff did not comply with the notices and make the payments. There were
further notices, Ex. D-8 series, which also proved fruitless. The company
thereupon resolved by Ex. D-9 on 2nd December, 1938, to issue farther notices
to defaulting shareholders intimating to them its intention to forfeit their
shares on default of payment, within the further time to be given. Accordingly
on 30th July, 1940, notice (Ex. D.-10) was issued by the company to the
plaintiff, demanding the payment of Rs. 2,500 for the first and second calls
with interest at nine per cent. per annum on 31st August, 1940, and intimating
forfeiture on default. Although the plaintiff received this notice, he did not
respond. On 18th January, 1941, the Directors resolved, as shown by Ex. D-11(a)
the entry in the minutes book, that final notice should be given to the
defaulters that payment should be made by 30th April, 1941, or else that the
shares would stand forfeited. Ex. D-12 is the notice issued to the plaintiff,
giving him intimation of the resolution and demanding payment. In response to
this notice the plaintiff sent to the managing agents of the company a hundi,
Ex. D-14, on 23rd April, 1941, for Rs. 2,500 and along with the hundi also paid
a sum of Rs. 500, leaving a balance of Rs. 2,000 still to be paid. The balance
not having been paid till 11th May, 1943, there was a resolution of forfeiture
passed by the company on that date (Ex. D-17). Intimation of the forfeiture was
given to the plaintiff by letter dated 22nd May, 1943 (Ex. D-18). The hundi,
Ex. D-14, and Rs. 500 were also returned to the plaintiff along with a covering
letter, Ex. D-19. Thereupon, notices passed between the parties, Exs. D-20 and
D-20 (a) and Exs. D-21 and 21 (a), the plaintiff challenging and the company
maintaining the validity of the forfeiture.
The suit out of which this appeal arises is the sequel to these notices. The
plaintiff craves in his plaint a declaration of the invalidity of the
forfeiture and an injunction in restraint of a sale or reallotment of the
shares or any other dealing with them by the company.
The Court below
found (1) that Ex D-2 series, the circular letters and the resolution at the
meeting, Ex. D-4, in respect of the first call, were defective, in that they
did not fix the amount of the call or specify the person to whom or the place
at which it was to be paid, as required by Art. 40 of the Articles of
Association; (2) that the resolution Ex. D-5 in respect of the second call did
not, while fixing the time for payment, specify the amount to be paid and the
person to whom or the place at which it was to be paid, and was therefore
defective for want of conformity to the same article; (3) that the notices said
to have been issued by the company to the plaintiff in respect of the two calls
on 30th March, 1928, and 4th December, 1928, were not proved to have been
served on the plaintiff or even posted, and that there was no proof, in fact,
of how the notices were sent to the plaintiff; (4) that the further notices,
Ex. D-8 series, of 1931 and 1932 were defective, in that, while mentioning the
total amount as being Rs. 2,500 they did not, as required by Art. 42 of the
Articles of Association, contain particulars concerning the place at which or
the person to whom the amount was to be paid; (5) that the resolutions Exs. D-9
and D-11 (a) could not be regarded as resolutions for calls under Art. 40; and
(6) that the notices Exs. D-10 and D-12 were defective in the particulars
required to be mentioned by Art. 42 in notices for call amounts. On these
findings the court below held the forfeiture of shares made by the defendants
by Ex. D-17 to be illegal and invalid. It also held that there was no waiver on
the part of the plaintiff of his right to complain of the irregularity of
proceedings on the part of the defendant. The parties were at issue in the
court below also on one subsidiary matter which we may dismiss from
consideration after just adverting to it, viz., whether the hundi Ex. D-14 and
the Rs. 500 were accepted by the defendant as an unconditional payment as
contended by the plaintiff or only as a conditional payment as contended by the
defendant. The court below upheld the defendant's case in this regard and found
that it was open to the defendant to treat the plaintiff as a defaulter, even
though the defendant did not send the hundi to the plaintiff's agent at
The questions
arising on the arguments advanced before us in the appeal are: (1) whether the
forfeiture of the plaintiff's shares, by the defendant company is illegal and
invalid; and (2) whether there has been on the part of the plaintiff any waiver
of the illegality and the invalidity by reason of his conduct. We do not feel
called upon to say anything on the latter question, for, assuming that there
was no waiver, the appellant is, in our opinion, entitled to succeed on the
ground that there was sufficient warrant for its forfeiture of the plaintiff's
shares. In connection with the former question, we may observe in limine that
we fully realise that a forfeiture ought not to be lightly favoured and that a
party aggrieved is entitled to rely on any technicality of rule or regulation
to invalidate it. The first submission of Mr. Venkatesa Aiyangar, the learned
advocate for the respondent, in connection with this question, is that the
notices for call amounts said to have been issued by the defendant to the
plaintiff are not proved by the evidence on record, and that for want of
notices duly conforming to the requirements of Art. 42 of the Articles of
Association the forfeiture made by the company must be regarded as illegal and
invalid. This is a contention which the learned Subordinate Judge in the court
below has accepted. We consider that, in so accepting, he was unreasonable to a
degree which we are constrained to discountenance in no mistakeable terms in
his appreciation of, the evidence on record. The learned Subordinate Judge
makes the criticism, which we cannot accept, that there is no knowing whether
the blank spaces of the printed notice forms were filled up and notices were
duly posted. He makes the point which, in our opinion, is not of much
substance, that the clerk who is said to have informed D.W. 1 of the despatch
of notices has not been examined. Notwithstanding the abstention of the clerk
from the witness box, commonsense warrants the presumption, which we are
prepared to raise, that the notices were duly posted in the ordinary course of
business. Notwithstanding, again, the interested and of course uncorroborated
denial by the plaintiff of his receipt of the notices, the common course of
human affairs warrants the further presumption, which we are prepared to raise,
that the notices were duly received by the plaintiff. His conduct in keeping
quiet after his admitted receipt of Ex. D-8 series and Ex. D-10 which he has
produced into court, quite apart from his conduct in sending in response to Ex.
D-12, the hundi, Ex. D-14, and the sum of Rs. 500 fortifies us in our
conclusion that he must have received the prior notices suggested by Exs. D-3
and D-3 (a) in regard to the first call and by Exs. D-6 and D-6 (a) in regard
to the second, which he is apparently suppressing, as, if produced, they will
be found to contain all the particulars required by Art. 42 of the Articles of Association of the company. Asked
in cross-examination why he did not pay the calls as demanded in Ex. D-8 series
P.W. 1 states in reply that he did not, thinking that he might pay if D.W. 1
went to him and personally asked him to pay. The conduct of the plaintiff has
been such that we have no hesitation in the circumstances in accepting and
acting upon the evidence of D.W. 1 and holding that there is no substance in the
respondent's complaint that notices of the kind required were not duly
despatched to him or served on him. We accordingly overrule the first
submission of Mr. Venkatesa Aiyangar.
Mr. Venkatesa
Aiyangar has next contended that the resolutions passed by the directors at
their meeting of 31st October, 1928, one confirming Ex. D-2 series in relation
to the first call and the other authorising the managing directors to make the
second call, are invalid as not fulfiling the requirements of Art. 40 of the
Articles of Association. He complains, that there is no proof that the
particulars required by Arts. 40 and 42 were fixed by the directors themselves,
whether in connection with Ex. D-2 series, confirmed though they may have been
by Ex. D-4, or in connection with Ex. D-5 authorising the managing directors to
make the second call. Says the learned advocate, Exs. D-4 and D-5 do not at all
refer to such particulars and therefore negative any fixation of the
particulars by the directors themselves and not by the Managing Agents. In
support of his submission, the learned advocate placed strong reliance on a
decision of the High Court of Bengal reported in In re Bengal Electric Lamp
Works Ltd.,
and attacked a decision of the High Court of Bombay to the contrary reported in
Dhunraj Keshrimal v. H.H. Wadia. In a
conflict between the two decisions, counsel urged that the former has to be
preferred, founded as it is on a decision of the Judicial Committee reported in
Premila Devi v. The Peoples Bank of Northern India Ltd. (in liquidation), which is
subsequent in date to the
In the
"It is true that these matters must be fixed by the Board, because
the articles so provide, but I think we must presume that the agents did their
duty and took instructions from the Board; otherwise they would not have been
justified in signing by order of the Board."
At page 428 of the
report, Blackwell, J., observes:—
"I am of the opinion that it is not necessary that the persons to
whom, and the place at which, the call is to be paid, should be mention ed in
the resolution making the call........."
And at page 429,
the learned Judge further observes:—
"......In the absence of any evidence upon the point, the Court is
entitled to assume that these notices were sent out by the agents of the
company with the sanction of the Directors, and that the Directors had in fact
appointed the persons and the place, and that is the assumption which I
make."
With these
observations we respectfully agree. The learned Judges deal exhaustively with
the English case law on the point and rely in particular on the judgment of
Jessel, M.R., in Johnson v. Lyttle's Iron Agency. They point
out that the article of the company which they had to deal with was similar to
the one which Jessel, M.R., in the English case had to deal with. We may
observe that in the present case also, as in the
Turning next to the
Calcutta case, we find that what happened there was that Lort Williams, J.,
held on the facts that the directors had failed to appoint the place at which
and person to whom the call was payable, that therefore the resolutions and
notices of calls were invalid and that there could be no forfeiture of the
shares for non-payment of such calls. The learned Judge sets forth the substance
of the decision of the Chief Justice of the Bombay High Court at page 145 in
the following words:—
"With regard to the decision of Sir George Jessel, M.R., in the
case of Johnson v. Lyttle's Iron Agency, the learned
Chief Justice seemed to think that his judgment was reversed by the Court of
Appeal only upon the ground that the notice for final payment was inaccurate,
and therefore the forfeiture founded on the notice was bad. Further, he
observed that none of the judges in the Court of Appeal expressed dissent from
the views of the Master of the Rolls as to the construction of Table A, except
that James, L.J., expressed the tentative view that the time for the payment of
the call could not properly be fixed by a mere verbal direction to the
secretary, and that it ought to be fixed by a formal resolution of the
directors, and the learned Chief Justice thought that the case was a direct
authority for the proposition that under such articles it is not necessary for
the resolution making the call to specify the time for payment, and a fortiori
it was not necessary to specify the person to whom or the place where the call
was to be made."
Then the learned
Judge proceeds to criticise the view of the learned Chief Justice on the ground
that his Lordship did not give sufficient weight to the observations of the
Lords Justices in Johnson v. Lytile's Iron Agency about the
necessity for strict adherence to the provisions of the contract between the
company and the shareholders. Lort Williams, J., then proceeds to observe that
no forfeiture of property could be made, unless every condition precedent had
been strictly and literally complied with. To this last observation of the
learned Judge we have no
exception to take, but the question still remains whether his criticism of the
view of the Chief Justice of Bombay is correct. We think not. His criticism is
only in general terms and does not attempt "to show specifically how or
where exactly the Chief Justice's view of Jessel, M.R.'s judgment or James,
L.J.'s judgment in Johnson v. Lyttle's Iron Agency goes wrong.
We have finally to
ascertain what precisely the Privy Council ruling in Premila Devi v. The
Peoples Bank of Northern India Ltd., decides and
to consider how far it supports In re Bengal Electric Lamp Works, and
invalidates Dhunraj Keshrimal v. H.H. Wadia. The
substance of the decision is set forth accurately in the headnote which, so far
as relevant to the consideratioh of the point under discussion, may be
reproduced as follows :—
"A scheme of arrangement, sanctioned by the Court under Section 153
of the Indian Companies Act is binding upon the creditors, Shareholders and the
company alike. Its terms can thereafter only be varied by order of the court
after the variation has been approved at meetings of the creditors and
shareholders.
It is not, therefore, possible for the company, its directors or
shareholders whether by resolution or ratification or otherwise to alter dates
fixed by a sanctioned scheme for calls on unpaid capital.
A resolution of directors requiring payment of call on dates at variance
with a sanctioned scheme is an attempt to do something ultra vires of the
company.
A purported forfeiture of shares for non-payment of calls in accordance
with such a resolution is inoperative and void and the creditors, in a winding-up,
are entitled to have the names of shareholders which have been removed from the
register of members by reason of an invalid forfeiture restored."
It will be seen
from this that there is nothing decided by this case which can be held to
conflict with Dhunraj Keshrimal v. H.H. Wadia; but Mr.
Venkatesa Aiyangar has contended that there is the following passage of two
paragraphs in the judgment of the Privy Council begining at page 18 and running
into page 19 which assists his contention:—
"This may seem to be somewhat technical; but in the matter of the
forfeiture of shares, technicalities must be strictly observed. And it is not,
as is sometimes apt to be forgotten, merely the person whose shares are being
forfeited who is entitled to insist upon the strict fulfilment of the
conditions prescribed for forfeiture. For, the forfeiture of shares may result
in a permanent reduction of the capital of a company. It will suffice to take the present case as an example, If the
forfeitures are upheld, the appellants remain liable, no doubt, for the whole
25 per cent. called up in March, 1932, and in January, 1933. But they will
escape liability altogether in respect of the uncalled 25 per cent. and this is
a matter that vitally affects the creditors. These creditors cannot be deprived
of their right to have this 25 per cent. made available for payment of their
debts without due cause.
The creditors are, therefore, entitled to see that the power of
forfeiting shares is exercised strictly. Where the power of a company to
forfeit the shares has arisen the articles of association usually contain
provisions as to the sending of notices and the like that may be regarded as
being inserted merely for the protection of the shareholder affected. Such
provisions may properly be regarded as being directory Only and capable of
being waived by the individual shareholder. But no waiver by him can confer
upon the company or its directors a power of forfeiture that they do not
possess, as for example, a power to forfeit shares for non-payment of calls
that are not yet due."
It seems to us that
this passage has no relevancy to the point under discussion.
We are not
satisfied on a consideration of Arts. 40 and 42 and of the evidence on record
in the present case that there was any irregularity, much less illegality,
committed by the company in declaring the forfeiture of the plaintiff's shares
; nor does the question of waiver fall to be considered in this view of the
matter. The facts of the case before the Privy Council in Premila Devi v. The
Peoples Bank of Northern India Ltd. are
altogether different from those of the present case, and there is no principle
of law exigible from that decision which affects the conclusions which we have
reached on the evidence.
The appeal is
accordingly accepted, and the suit dismissed with costs of the appellant here
and in the court below.
[1939] 9 COMP. CAS. 85 (CA)
COURT OF APPEAL
LORD ROMER, MACKINNON, L.J., CLAUSON, L.J.
APPEAL FROM A DECISION OF BENNETT, J.
DEC. 17, 20, 1937. JAN. 11, 12. FEB. 17, 1938.
MacKinnon, L.J.,—I am authorised by Lord Romer to say, as I say for myself, that the judgment which Clauson, L. J., is about to read is the judgment of the Court.
Clauson, L. J.—This is an application in the liquidation of the White Star Line, Ltd., a company limited by shares, now in compulsory liquidation under an order of April 8, 1935. The object of the application is to ascertain what are the rights of the Royal Mail Steam Packet Co. (also a company limited by shares and in compulsory liquidation under an order of the Court of February 10, 1936) with regard to payment out of the assets of the White Star Co. of a very large sum, the bulk of which is admittedly due from the White Star Co. to the Royal Mail Co. The difficulty in the case arises from the fact that the Royal Mail Co. ate and at all material times have been holders of a very block of shares in the capital of the White Star Co., and it becomes necessary to determine the legal position of the Royal Mail Co. as holders of those shares, in view of the fact that the White Star Co. are in liquidation, and that their assets, apart at all events from such contributions to their funds as the liquidator is entitled to call on the shareholders to make, are insufficient to meet their liabilities.
Put quite shortly, the contention of the liquidator of the White Star Co. is that he is in a position to require a contribution from the Royal Mail Co. to the assets of the White Star Co. of £750,990, that sum, as he contends, being still unpaid on the shares held by the Royal Mail Co. in the White Star Co. He admits that if that contribution is made in full, the Royal Mail Co. will be entitled to be paid a dividend in due course on a very large sum admittedly due to them.
The contra contention of the Royal Mail Co. is that there is nothing unpaid on the shares which they hold in the White Star Co. If they establish this contention, it follows, that, without making any contribution to the assets of the White Star Co., they will be entitled to be paid a dividend in due course on a sum of approximately two and a half millions, subject to a set-off of any cross-claim (there would in fact be a cross-claim of upwards of a million) made by the White Star Co.
The first question is whether in the circumstances of the case the Royal Mail Co. are correct in their contention that there is nothing unpaid on the shares which they hold in the White Star Co.
At the end of the year 1931, the Royal Mail Co. held, and they still hold, 1,501,100 ordinary shares of £1 each in the White Star Co. Up to the end of 1931, 14s. a share had been paid up on 1,000,000 of these shares, and 2s. had been paid up on 501,100 of these shares. The amount required to pay up the shares in full was accordingly at that date £750,990. Calls had been made for the total amount unpaid on the shares, and accordingly the White Star Co. were specialty creditors of the Royal Mail Co. for the £750,990 as well as for interest on the calls. The Royal Mail Co. contend that since January 1, 1932, the sum of £750,990 has been paid up on the shares. They say, and it is admitted, that by a document of April 7, 1932, the White Star Co. agreed (subject to Eve, J., confirming the scheme next mentioned) to be bound by a certain scheme of arrangement then proposed and subsequently confirmed by Eve, J., the material provisions of the scheme being that the debts of the Royal Mail Co. should be satisfied by the issue to the respective creditors of deferred creditors' certificates of the nominal amount of their respective debts. The effect, as regards any ordinary creditor, of accepting certificates in accordance with the scheme was, to put it shortly, that his right to immediate payment of his debt was exchanged for a right to be paid the amount of it at an indefinitely postponed date, that the amount was to carry interest payable only out of certain profits, and that he obtained a certain measure of control, as one of the whole body of certificate holders, over the conduct of the business of the Royal Mail Co. The document of April 7, 1932, did not contain the whole of the terms agreed between the Royal Mail Co. and the White Star Co. It was supplemented by two letters exchanged between the two companies dated May 19, 1932, and May 30, 1932.
Before Bennett, J., and before this Court, two quite separate points were raised with regard to the operation of the arrangement thus come to between the companies. In the first place, it was said on behalf of the White Star Co. that on the true construction of the document of April 7, 1932, and of the scheme, the specialty debt of £750,990 was not satisfied or discharged, but was merely postponed, a postponement which, in view of the supervening liquidation of the Royal Mail Co., would be immaterial for the purpose now in hand, and that accordingly, in the circumstances of the case, the arrangement made became ineffective, and the specialty debt remained a due and unpaid debt, and that accordingly the shares to the extent of the £750,990 remained unpaid shares. The learned Judge rejected this contention. The arguments in support of this contention are stated in detail in his judgment as are also his reasons for rejecting the contention. We can see no flaw in these reasons and we agree with him that this contention put forward on behalf of the White Star Co. fails.
The second point raised may be stated shortly as follows. It related not to the sum due from the Royal Mail Co. in respect of the shares held by the Royal Mail Co. in the White Star Co. but to the bulk of the sum claimed to be due from the White Star Co. to the Royal Mail Co. That claim arose thus. In the year 1926 the International Mercantile Marine Co. owned a block of shares in the Oceanic Co. These shares the Royal Mail Co. agreed to buy from the International Mercantile Marine Co. for a sum of seven millions, payable by instalments. In 1927 the Royal Mail Co. resold the Oceanic shares to the White Star Co. for the same purchase price, payable by like instalments, to be paid by the White Star Co. to the Royal Mail Co. in each case, a day before the due date of the instalment payable by the Royal Mail Co. to the International Co. The bulk of the sum claimed to be due in the liquidation of the White Star Co. from that company to the Royal Mail Co. consisted of the balance of this purchase price. It was suggested on behalf of the White Star Co. that the effect of the letters was to reduce the liability of the White Star Co. from the instalment figure to such figure as the Royal Mail Co. should in fact pay to the International Co. in respect of the corresponding instalment. The Royal Mail Co. have in fact paid nothing in respect of that instalment to the International Co., and it was accordingly suggested that the Royal Mail Co. could not, rebus sic stantibus, claim the instalment from the White Star Co. The detailed circumstances material to this point and the arguments put forward are clearly stated in the learned Judge's judgment, as also is his view that the argument has no foundation. We agree with his view and the reasons given for it, and we find it unnecessary to deal further with the point.
We accordingly agree with the learned Judge that the intention of the parties to the arrangement into which they entered in 1932, was to discharge the specialty debt of £750,990 for calls ; and the transaction can be accurately stated as one under which the White Star Co. accepted the deferred creditors' certificates by way of accord and satisfaction of the amount due for calls, or in other words for the amount unpaid on the shares held by the Royal Mail Co. in the White Star Co. The question which arises is whether the transaction is valid with the result that thereby £790,990 was paid up on the shares. If the answer is yes, then, by reason of Section 157(1)(d) of the Companies Act, 1929, the liquidator of the White Star Co. can make no further claim in respect of those shares, and his contention must fail. The White Star Co. is a company limited by shares, and by reason of Section 187 the liquidator cannot call upon the Royal Mail Co. as shares holders to provide funds to meet the company's debts save to an amount equal to the amount unpaid on the shares held in the White Star Co. by the Royal Mail Co.
The reported authorities establish that a sum payable on a share held in a company limited by shares, in response to a call made while the company is a going concern, is effectually paid up, so as to protect the shareholder pro tanto from further liability on the share, if that sum is paid in money or money's worth-—see per Lindley, L.J., Wragg, Ltd., In re (66 L.J. Ch., at p. 432 ; [1897] 1 Ch., at p. 831), and per Vaughan Williams, L.J., Moseley v. Koffyfontein Mines, Ltd. (73 L. J. Ch., at p. 573; [1904] 2 Ch., at p. 114); that a payment is an effective payment in money's worth if the consideration given by way of payment is something which is bona fide regarded by the parties to the payment as fairly representing the sum which the payment is to discharge—see per Lord Watson in Ooregaum Goldmining Co. of India v. Roper (61 L. J. Ch., at p. 344 ; [1892] A. C., at p. 136); but if the consideration given by way of payment is a mere blind or clearly colourable or illusory—see per Smith, L. J., in Wragg Ltd., In re (66 L. J. Ch., at p. 433; [1897] 1 Ch., at p. 836)—the so-called payment up is ineffectual for the purpose. The question whether the consideration is colourable is one of fact in each case—see per Vaughan Williams, L. J., Innes & Co., In re (72 L. J. Ch., at p. 646 ; [1903] 2 Ch., at p. 262).
It was argued in the present case that the sum due on the calls made before 1932 was a specialty debt, that a specialty debt may be discharged by accord and satisfaction, and that the debt in the present case was so discharged. Reference was made to the language used by Lindley, L. J., in Wragg Ltd., In re, where he said (66 L. J. Ch., at p. 429 ; [1897] 1 Ch., at p. 826): " It has never been doubted, so far as I know, that the obligation of every shareholder in a limited company to pay to the company the nominal amount of his shares could be satisfied by a transaction which amounted to accord and satisfaction or set-off as distinguished from payment in cash." But it is necessary also to refer to a subsequent passage in the same judgment, where his Lordship said 66 L. J. Ch., at p. 431; [1897] 1 Ch., at p. 829): "Specialty debts, like other debts, can be discharged in more ways than one, e.g., by payment, set-off, accord and satisfaction, and release." And it is significant that while he went on to point out that any mode of discharging a specialty debt is as available to a shareholder as to any other specialty debtor, he made the statement expressly subject to the qualification introduced by the doctrine of ultra vires, or, in other words, the doctrine of the limited capacity of statutory corporations. He pointed out that it is obviously beyond the power of a limited company, without receiving payment in money or money's worth, to release a shareholder from his obligation to pay up his shares.
In view of the principles to be deduced from the authorities, it is clear that a discharge by accord and satisfaction of the specialty debt resulting from a call must be subject to the qualification that the consideration which is given by way of satisfaction must not be a mere blind or clearly colourable or illusory, and that the question whether it is so or not is one of fact, and the language of Lindley, L.J., cannot, in our judgment, fairly be construed otherwise.
In Wragg, Ltd., In re, Smith, L. J., indicated the opinion (accepted as correct by counsel in argument in the present case) that if in a contract for payment up in money's worth a money value less than the face value of the sum to be paid up be placed on the consideration, the fact that the shares were not fully paid up in money or money's worth would be apparent on the face of the contract. It was, however, strenuously argued before this Court that, unless and until the contract is impeached in an independent action for that purpose, any consideration which, on the face of the contract, is accepted by the company as money's worth, must be taken as money's worth until the contract is set aside. We are not prepared to hold that if the facts are sufficiently plain, the Court is bound to insist on what, after all, in such a case is a mere technical requirement, namely, that the contract for payment in what is represented as money's worth should be impeached in an independent action. If the true view of the contract in question be that the consideration accepted is a mere promise of deferred payment, with a liability for payment of interest in the meantime only out of contingent profits, it would seem obvious that the consideration is not "money's worth" to the amount of the sum for which the shareholder is immediately liable. The matter is, of course, not necessarily so clear if, as in the present case, an advantage ii, by the bargain, given to the creditor company by way of a measure of control over the debtor's business being vested in the creditor company as part of the contract. But, on a due consideration, of the actual facts in the present case, we are satisfied that money's worth was not in fact given, or, to use alternative language, that the consideration was colourable or illusory in so far as it was represented as being of the value of £760,990. The material evidence on this point stand as follows:
By letter of March 25, 1937, the liquidator of the Royal Mail Co., admitted, for the purposes of the present proceedings, that the deferred certificates issued by the Royal Mail Co. under the scheme were at all material times worth less than their nominal or face value, and further, by letter of May 3, 1937, that to the knowledge of Sir William McClintock, the liquidator of the Royal Mail Co., who was a director of the Royal Mail Co. from October 20, 1932, to the date of liquidation, the deferred certificates were at all material times worth less than their nominal or face value. There is also before the Court an affidavit by Mr. Charlton, who was intimately concerned with the scheme and was from 1930 a director of the White Star Co. to the effect that the certificates were at all material times, and in particular at the time when the scheme was sanctioned by the Court, worth a great deal less than their nominal or face value. He adds that everyone with a knowledge of the affairs of the Royal Mail Co. realised when the scheme was sanctioned and also when the certificates were issued that it must be several years before the revenues of the Royal Mail Co. would be sufficient to permit any payment of interest on the certificates, and the value of the certificates was therefore wholly speculative and that the facts were well known to the directors of the White Star Co.
In our judgment, it is possible to draw one inference only from these facts, namely, that the transaction was an acceptance by the White Star Co. of the deferred certificates, not as in any sense a payment for the £750,990 due for calls on the shares, but as the best that could be saved out of the wreck of the Royal Mail Co.'s finances towards making some provision for compensation in the future for the failure of the Royal Mail Co. to provide a sum of £750,990, which they were unable in fact to pay. The transaction was in effect a release of the Royal Mail Co. from a liability which they could not meet at the time, in consideration of a limited obligation undertaken by them which was, and was understood by everyone to be, far less onerous than the obligation to pay £750,990, some control being given to the certificate holders over the future conduct of the Royal Mail Co.'s affairs. It is not, in our view, possible, as the authorities stand, to hold, on the facts, that such a transaction amounted to payment of £760,990, in the sense in which the word "unpaid" is used in section 157 of the Companies Act, 1929.
If the view above expressed be correct, it must follow that the Royal Mail Co. is to be treated as the holder of shares on which £750,990 remains unpaid, and they have no answer to the claim of the liquidator of the White Star Co. that they are liable to pay the sum. True it is that if the liquidator claimed that sum in the liquidation of the Royal Mail Co. he might have to be content with his right of proof. He is, however, not claiming any right to share in the assets of the Royal Mail Co. All that he claims is that until the Royal Mail Co. (who are, as shareholders in the White Star Co., liable for the debts of the White Star Co. up to the limit imposed by the limited nature of the company) pay up this liability they cannot compete with other creditors of the White Star Co. against the funds of the White Star Co. available to meet the White Star Co.'s debts. That this must necessarily be so appears to follow from the decision in Grissell's Case, Overend, Gurney & Co., In re, a decision which is not only unimpeachable as a matter of reasoning, but is binding on this Court. It is suggested that the position was varied by section 10 of the Judicature Act, 1875, now represented by section 262 of the Companies Act, 1929. This Court could not so decide without overruling the decision of Bacon, V.-C, in Gill's Case, General Works Co., In re, the decision of Fry, J., in West of England Bank, In re, and the decision of Wright, J., in Auriferous Properties Ltd., In re (No. 2). We see no flaw in reasoning in those judgments and we are not prepared to overrule them.
We were given to understand in the course of the case that there is no question between the parties as to the figure of the proof which the liquidator of the Royal Mail Co. would be entitled to put in against the White Star Co., if and when he has paid up the £750,990 in full. It is obvious that the liquidator of the White Star Co. cannot make any claim under the deferred creditors certificates issued to the White Star Co. in view of the abortive nature of the arrangement intended to be made between the companies in the year 1932. The order of the learned Judge admitted the proof of the Royal Mail Co. at a figure which gave effect to the cross-claim of the White Star Co. on the deferred creditors' certificates. The order of this Court will be to the following effect. The order of Bennett, J., will be discharged, except in so far as it directed that an earlier proof sworn May 30, 1935, be expunged. The order will declare that the amounts unpaid on the shares held by the Royal Mail Co. in the White Star Co. are in the aggregate £750,990, and that the Royal Mail Co. are entitled to prove in the liquidation for a figure which will be specified in the order, and will, we understand, be settled between the liquidators, and will be, or will approximate to, the figure of £2,742,942 6s. 3d. mentioned in the notice of appeal, but the order will further declare that the Royal Mail Co. are not to be entitled in respect of that proof to receive dividends in the winding up of the White Star Co. except on the footing of paying in cash such calls as may be duly made in the liquidation of the White Star Co. on the shares held by the Royal Mail Co. in the White Star Co. The liquidator of the Royal Mail Co. will be ordered to pay to the liquidators of the White Star Co. his taxed costs of the application by summons dated March 6, 1937, and of this appeal, and it would seem proper, subject to anything which the parties may wish to say on the point, that those costs should include the costs of the application by summons dated November 12, 1936.
[1959] 29 COMP CAS 418 (P&H)
V.
TEK CHAND, J.
CIVIL ORIGINAL NO. 104 OF 1957
MARCH 19, 1959
TEK CHAND, J. - This
is a petition under section 45-E of the Banking Companies Act read with section
187 of the Indian Companies Act of 1913, praying for the passing of payment
orders against all the contributories mentioned in list A who are 96 in number.
Out of the above contributories, three contributories Nos. 89 (Shri Tara Chand
Anand), 93 (Bhai Mohan Singh) and 94 (Shri Sita Ram Sawhney) had made
application to this court under section 19 of the Displaced Persons (Debts
Adjustment) Act No. 70 of 1951, read with section 45-B of the Banking Companies
Act. These three petitions were opposed by the official liquidator. By my order
dated 23rd of May, 1958, these petitions were dismissed. The three
contributories mentioned above have preferred appeals against my order which are
now pending before the Letters Patent Bench. Recovery of the amounts due from
each of these three contributories has been stayed by the Letters Patent Bench
and therefore the order passed in this case shall not relate to the above named
contributories Nos. 89,93 and 94.
Payment
orders on the basis of compromises sanctioned by me have already been passed in
case of contributories Nos. 17, 29, 69, 70, 72, 76 and 84 and these cases will
not be affected by this order.
Out
of the remaining contributories, the petition of the bank has been contested on
behalf of contributories Nos. 1 (Raizada Jagan Nath Bali), 16 (S. Balwant
Singh), 82 (Shrimati Ram Khetri and her son S. Taranjit Singh), 85 (Shrimati
Sant Kaur) and 88 (S. Taranjit Singh and Shrimati Ram Khetri). The above
contributories are represented by Bakhshi Gurcharan Singh, advocate in this
court. Contributories No. 82 and 88 are same persons but as contributory No. 82
they owe a sum of Rs. 10,000 on account of 200 shares and as contributory No.
88, the official liquidator has claimed Rs. 2,75,000 on account of 5,500
shares. The petition is also contested by contributories Nos. 43 (Messrs.
Harnam Singh-Bishan Singh), 45 (S. Budh Singh), 74 (S. Kartar Singh son of S.
Kishan Singh), who are represented by Shri H. S. Gujral, advocate, and
contributory No. 92 (Shri Prem Chand Bhasin) on whose behalf Shri K. S. Thapar,
advocate, appeared.
Shri
H. S. Gujral on behalf of his clients, contributories Nos. 43, 45 and 74 did
not advance separate arguments but has adopted the arguments advanced by
Bakhshi Gurcharan Singh on issued Nos. 2, 3 and 4 which are common to the
clients of Shri H. S. Gujral and Bakhshi Gurcharan Singh, advocates. The first
issue relates exclusively to contributory No. 88 and fifth issue to contributory
No. 92. Issues Nos. 2, 3 and 4 are common to all the contesting respondents.
In
his petition the official liquidator has prayed that payment orders against all
the contributories mentioned in list A attached to the petition for the amounts
shown against the contributories with interest at the rate of 6 per cent. per
annum from 21st of October, 1957, to date of payment, be passed. In the
petition it is stated that the Hind Iran Bank Limited was ordered to be wound
up by this court on 9th of April, 1954. On 26th of August, 1957, the official
liquidator had asked this court to endorse the list of contributories as
settled and filed by the official liquidator and for making a call to the
extent of the entire unpaid amount on the shares against all the contributories.
The
petition was opposed by the contesting respondents on several grounds. The
pleadings have given rise to the following issues :
1.
Whether the debt of contributory No. 88 had been discharged in 1948 and if so,
what is its effect ?
2.
Whether the contributories in this case are entitled to the benefit of section
19 of Act No. 70 of 1951 ?
3.
Whether the contributories are not liable to pay the amount claimed against
each ?
4.
Whether valid notice was issued to the contributories and if not, what is its
effect ?
5.
Whether contributory No. 92 (Shri Prem Chand Bhasin) can claim set-off and if
so, to what extent ?
Issue
No. 1. - This issue is confined to the case of contributory No. 88, Shri
Taranjit Singh and his mother Shrimati Ram Khetri. These two respondents are
holders of 5,500 shares of Rs. 100 each, on which Rs. 2,75,000 is the unpaid
amount of the calls. It is stated that notice was given to all the
contributories in the form marked 'B' attached with the petition, on 19th of
September, 1957, by registered post calling upon them to pay the amount due
from them on or before 20th of October, 1957, and that in default the official
liquidator would move the court for a payment order being passed against them
with interest.
Before
dealing with the case of these two respondents in support of the first issue,
some important facts may be mentioned. The registered office of the bank was at
Late
S. Sahib Singh who was the father of respondent Taranjit Singh and husband of
respondent Shrimati Ram Khetri, was one of the founders of this bank and on 4th
of May, 1945, he died leaving two sons and his widow. It is stated that the
elder son, Jai Singh, died in March, 1948. The members of his family held six
fixed deposit receipts of this bank of the value of Rs. 2,46,433-5-4. The
amounts payable to the holders of the above fixed deposit receipts had become
due along with interest when the call was made. The fixed deposit receipts have
been produced in this court by the bank from its custody and they are exhibits
C. 2, C. 3, C. 4, C. 5, C. 6, and C. 18. On 23rd of July, 1947, the bank sent a
notice addressed to S. Jai Singh, major (now deceased), S. Taranjit Singh,
minor, and S. Sardarni Ram Khetri asking them to pay a sum of Rs. 2,75,000 on
account of the third call on their 5,500 shares "to the manager of the
said bank at its office in Rawalpindi City on or before 7th of August, 1947,
during the working hours ...". Copy of the resolution dated 21st of July,
1947, resolving to make a further call of Rs. 50 per share was enclosed. A
communication was sent on 26th January, 1948, from
Exhibit
C. 21 is a communication dated 13th of February, 1948, sent by the Manager,
Hind Iran Bank Limited,
"We
beg to advise having credited you Rs. 2,57,26-10-0 (rupees two hundred and
fifty-seven thousand two hundred and sixty seven and annas ten only) o/a
payment by Shrimati Ram Khetri for 50 per cent. Call on her shares."
Exhibit
C. 31 is letter dated 17th of February, 1948, from Shri Tara Chand, managing
director, from
"Confidential.
My dear Shah Ji,
Re : Your advice for Rs. 2,57,267-10-0
on a/c of payment by Sh. Ram
Khetri on her unpaid call of 50% per share.
I
am afraid it is not possible for me to entertain the transaction in absence of
board's resolution and proper legal authority on the subject. You are,
therefore, requested not to accept the proceeds of deposit receipts towards
payment of unpaid calls on her shares for simple reason that the rest of the
depositors are not being paid their deposits and if in this case the F.D. Receipts
are adjusted towards capital account, you pay the depositor namely, Shrimati
Ram Khetri, in full, hence a preferential treatment, which I do not allow. This
requires board's resolution and legal authority. I have already made a
reference on February 11, 1948, on the subject to the legal adviser for
guidance and shall place before the directors his opinion for their decision.
Meanwhile
to avoid legal complications on a/c of our inability to meet our liabilities
please see that this transaction is not entertained and no similar transaction
is accepted by you until your getting our permission on the subject.
I
hope I am quite clear.
Yours
sincerly,
(
MANAGING
DIRECTOR."
It
was contended that the above letter, exhibit C. 31, was only a private letter
and could not have the effect of legally countermanding what had been already
done by the bank. Bakhshi Gurcharan Singh, advocate for the respondents, argued
that his clients had complied with the requirements of the call notice, exhibit
C. 30, in so far as they had sent the payment represented by the fixed deposit
receipts which had become matured to the manager of the bank at its office in
Mr.
Tuli, learned counsel for the bank, has argued that out of these fixed deposit
receipts, two of them had not matured on 26th of January, 1948, when the
letter-exhibit C. 1 was addressed to the manager of the bank at
It
was also argued that the tender had not been accepted by the manager of the
The
next question is whether the tender of the call money by Shrimati Ram Khetri
and her sons as per exhibit C. 1, dated 26th of January, 1948, enclosing six
fixed deposit receipts duly discharged had been accepted by the bank. It has
already been pointed out that the acceptance of the tender should be construed
from the fact that no objection was raised and the fixed deposit receipts,
which were valuable property were never returned by the bank. Besides that,
there is a letter, exhibit C. 21, dated 13th of February, 1948, produced by the
bank which was addressed by the manager of the
According
to the notice, exhibit C. 30, dated 23rd of July, 1947, these respondents were
required to pay the sum of Rs. 2,75,000 to the manager of the bank at its
office in Rawalpindi City, and this had been done and the manager of Rawalpindi
City branch advised to Amritsar branch that he had credited to Amritsar branch
the amount due on account of call on the shares in question. I do not think it
is open to the bank to object that the sum of Rs. 2,57,267-10-0 had not been
credited on account of payment of the call money due on these shares. On behalf
of the official liquidator of the bank, reliance had been placed upon two
documents, exhibits C. 31 and C. 22. Exhibit C. 31 is a confidential personal
letter dated 17th of February, 1948, addressed from
The
other document is exhibit C. 22; it is undated and is written on a letter form
of the bank but addressed to no one. It is in the nature of a note stating :
"These entries were passed in terms of Sardarni Sahib's instructions but
cancelled in view of M.D.'s letter."
On
behalf of Shrimati Ram Khetri it is contended that in view of the provisions of
section 86-1(1)(d) of the Indian Companies Act, 1913, Tara Chand Anand,
erstwhile managing director of the bank, should be deemed to have vacated his
office as he had failed to pay the call made on him in respect of shares held
by him within six months from the date of such call having been made. On the
day of writing the letter, exhibit C. 31, dated 17th of February, 1948, more
than six months had elapsed from the date of the call and he had incurred the
disability under section 86-1 of the Indian Companies Act, 1913. Moreover, this
letter is in the nature of a private communication addressed to the manager of
the
The
endorsement and the delivery of the fixed deposit receipts to the bank at its
"But
if a transaction resulted in this, that there was on the one side a bona fide
debt payable in money at once for the purchase of property, and on the other
side a bona fide liability to pay money at once on shares, so that if bank
notes had been handed from one side of the table to the other in payment of
calls, they might legitimately have been handed back in payment for the
property, it did appear to me in Fothergill's case, and does appear to me now,
that this Act of parliament did not make it necessary that the formality should
be gone through of the money being handed over and taken back again; but that
if the two demands are set off against each other the shares have been paid for
in cash. If it came to this, that there was a debt in money payable immediately
by the company to the shareholders, and an equal debt payable immediately by
the shareholders to the company, and that each was accepted in full payment of
the other, the company could have pleaded payment in an action brought against
them, and the shareholder could have pleaded payment in cash in a corresponding
action brought by the company against him for calls. Supposing the transaction
to be an honest transaction, it would in a court of law be sufficient evidence
in support of a plea of payment in cash, and it appears to me that it is
sufficient for this court sitting in a winding up matter."
The
above dictum was cited with approval in In re Jones, Lloyd & Co. Ltd.
Similar view was expressed in Adamson's case : In re Paraguassu Steam Tramway
Co.
A
debt and due owing by the bank to a shareholder can be set off against a sum
due from him upon calls so long as the bank is a going concern, vide
Habershon's case : In re Masons' Hall Tavern Co. and Ramwell's case : In re Exchange
Banking Co. Ltd. A call can be effectually paid in money's worth otherwise than
by cash and such a payment is effectual where the consideration given is
regarded by the parties as fairly representing the sum purporting to be
discharged, vide Buckley, 13th Edition, page 802, In re White Star Line.
In
this case the manager at
It
is not denied that the payment could not be made at
It
was lastly argued by Shri Tuli that according to the statement of Shri Balwant
Singh, son in law of Shrimati Ram Khetri, a reply was received to her letter,
exhibit C. 1, in which adjustment was refused with reference to the managing
director. That letter or its copy has not been produced and it is not known if
it is available. I cannot, from this, conclude that there had been no
adjustment at all.
In
this case it cannot be urged on behalf of the bank that adjustment of the
amount of the fixed deposit receipts towards the call money amounted to a
fraudulent preference by the bank of the respondents, on 13th of February,
1948, the date of exhibit C. 21, over the other creditors of the bank within the
contemplation of section 54 of the Provincial Insolvency Act read with section
231 of the Indian Companies Act, 1913. The resolution of the shareholders for
sending the bank into voluntary liquidation is dated 9th of September, 1948.
The adjustment had been done seven months previously in pursuance of the
respondent's letter exhibit C. 1, dated 26th of January, 1948. Moreover, as
found by HARNAM SINGH J. in his order dated 27th December, 1950 in C.O. No. 27
of 1950, the special resolution passed at a meeting of two shareholders, both
of whom were in arrears in respect of the call money, was of no legal effect as
they were not entitled to vote at the meeting. It was held in Chennakesava
Iyengar v. Coimbatore Mahalakshmi Bank Ltd., that there where a voluntary
winding up by a company is followed by a petition for its winding up by the
court or subject to its supervision, the crucial date for determining whether a
transfer by the company was within three months of the act of insolvency is the
date of the petition for compulsory winding up and not the date of the
resolution for voluntary winding up.
In
order to show that there has been fraudulent preference in a particular case on
the part of a debtor, of some creditor over another, it is not sufficient
merely to show that the creditor had in fact been preferred but that the
transfer or payment had been made "with a view" to giving a
preference to that creditor over the other creditors. In all cases of alleged
fraudulent preference it has to be proved that the view to prefer was the
dominant or the substantial view.
"The
fact that a debtor pays a particular creditor does not amount to a fraudulent
preference, though he may at the time of payment have been in insolvent
circumstances, not even if the consequence of his act has been to prefer that
creditor over his other creditors. It must be shown not only that he has
preferred the creditor, but that he has done so with the dominant view of
giving him preference over the other creditors". - See The Law of Insolvency
in
The
onus of proving that there had been a fraudulent preference lies on the
official liquidator. On the facts of this case it cannot be urged with any
seriousness that on the date of the acceptance of the call money by means of
fixed deposit receipts, the manager of the
In
view of what has been stated above, I hold that the debt of contributories
shown at No. 88 in respect of the call on shares in discharged to the extent of
the amount due from the bank in respect of the six fixed deposit receipts of
the bank of the value of Rs. 2,57,267-10-0 as admitted in exhibit C. 21.
Issue
No. 2 - This issue is common to all the contesting contributories and the
question is whether they are entitled to the benefit of section 19 of Act No.
70 of 1951 (the Displaced Persons (Debts Adjustment) Act). In their respective
written statements, the contributories Shri Jagan Nath Bali, Shrimati Ram
Khetri, Shrimati Sant Kaur, S. Balwant Singh and Shri Tara Chand Anand claimed
the benefits of section 19 of the Displaced Persons (Debts Adjustment) Act. It
was claimed on their behalf that they were displaced persons from
In
this case admittedly no application under section 19 has been made either to
the company or to the court, during the period of ten years from 15th day of
August, 1947, till 15th day of August, 1957. What has been submitted by the
learned counsel for the contributories is an argumentum ad misericordium. It is
stated that till the order of the single Judge passed on 27th of December,
1950, which was later confirmed by the Letters Patent Bench on 26th of August,
1953, the shareholders were in the dark about the exact situation of the bank
as to whether it was a living company or in liquidation. It is also stated that
they were unaware of the fact as to when application for its winding up was
made and when the winding up order was passed. It was on these grounds, prayed
that the benefit of section 19(4) of the Act should be extended to them. No
application by any shareholder was made prior to 15th of August, 1957, i.e.,
during the period of ten years when relief under section 19 could have been
granted. This bank is in liquidation since 1st October, 1953, when the petition
for its compulsory winding up was made. The order sending the bank into
compulsory winding up was passed on 9th of April, 1954.
I
have held in the case of Bhai Mohan Singh v. Hind Iran Bank Ltd. that a
displaced person who holds partly paid up shares in a company has no right
after the company has gone into liquidation to apply under section 19 of the
Act to have his partly paid up shares converted into a smaller number of fully
paid up shares. In this case the bank cannot be said to be in liquidation since
the passing of the resolution for voluntary winding up, as the voluntary
liquidation of the company was held to be illegal by HARNAM SINGH J. In Bhai
Mohan Singh's case, I expressed the view that section 19 referred exclusively
to the benefits conferred upon a displaced person or a displaced bank holding
shares in a company or a co-operative society which was a going concern and not
to a company or society in liquidation. Section 20 of the Act refers to a case
of a company or co-operative society in liquidation and sections 19 and 20 are
mutually exclusive. After hearing the arguments of the learned counsel, I have
not been able to persuade myself to change my view that I had formed in Bhai
Mohan Singh's case.
It
was next argued that even after the lapse of ten years from the 15th day of
August, 1947, section 19(6) kept the operation of section 19 alive "as
respects things done or omitted to be done". In this case it was argued
that if the shareholders had omitted to make an application under section 19
within the period of ten years, this period could be extended by virtue of
sub-section (6). This argument is devoid of any sound principle. Sub-section
(6) contemplates the taking of some steps during the statutory period. If after
the machinery provided by law had been set in motion, there were left certain
things unfinished they could be completed. The words of sub-section (6) cannot
be stretched so as to defeat the very purpose of providing a fixed period of
ten years during which the benefit of section 19 could be availed of. Any other
interpretation would have the effect of defeating the clear intention of the
provision. Section 19 was designed to give relief to displaced persons who
asked for it within ten years from 15th day of August, 1947, and not beyond
that period. This issue is, therefore, decided against the contributories.
Issue
No. 3. Under this issue, the contesting contributories claim that they are not
liable to pay the amount as it is barred by limitation in view of the
provisions of article 112 of the Indian Limitation Act, which runs as under :
"For a call by a company Three years. When the call is payable."
registered under any statute or Act.
Bakhshi
Gurcharan Singh, learned counsel for the contributories, argued that the call
was made payable on or before 7th of August, 1947, and the petition for
compulsory winding up of the company was filed on 1st October, 1953, more than
six years later, and under article 112 the limitation of three years had long
expired. Shri B. R. Tuli, learned counsel for the bank, argued that article 112
applied to a call made by a company. He said that the liability of the
contributories arose in this case under section 156(1)(iv) read with section
187 of the Indian Companies Act, 1913. In this case, besides the call made by
the company this court by order dated 30th August, 1957, in the exercise of its
powers under section 187 had ordered the making of the call and its payment by
the official liquidator. Such a call is recoverable within six years from the
date of default under article 120. Article 112 of the Limitation Act does not
apply.
It
was held in Parell Spinning and Weaving Co. Ltd. v. Manek Haji, that to a suit
which is brought not by the company but by the liquidator, article 120 of the
Limitation Act applied. JARDINE J. after discussing English authorities, said
that :
"The
result of the decisions and dicta seems to be, that although the liquidator is
submitted for, and enforces the rights of, the creditors in right of the
company yet that the winding up order calls into existence new rights and new
liabilities which did not exist before; and that equities which might have been
set up against the company cannot prevail against the liquidator as
representing the creditors."
Reliance
was also placed on the observations of JESSER M.R. in In re Whitehouse and CO.
:
"That
is a new liability; he is to contribute; it is a new contribution .... it is a
liability to contribute to the assets of the company; and when we look further
into the Act it will be seen that it is a liability to contribution to be
enforced by the liquidator. It is quite true that a call made before the
winding-up - ..... is a debt due to the company, but that does not affect this
new liability to contribution."
The
above view had been followed in a large number of decisions. In Pokhar Mal v. Flour
and Oil Mills CO. Ltd., TEK CHAND J. said :
"The
question of limitation is concluded by authority. It is settled in a long
course of decisions that a member of a company in liquidation is liable in
respect of unpaid calls even though the calls were made by the company before
it went into liquidation and the suit of the company for their realization had
become barred by time under article 112 of the Indian Limitation Act : Sorabji
v. Isher Das, Vaidiswara Ayyar v. Siva Subramania Mudaliar, Jagannath Prasad v.
U.P. Flour and Oil Mills CO. Ltd., Dehra Dun Mussourie Electric Tramway Co., In
re, Prayan Prasad v. Gaya Bank Ltd., Delhi Woollen Mills Co. Ltd. v. Durga Das
The principle of these decision is that when a company goes into liquidation,
section 156 creates a new liability on the shareholders in respect of such
calls, which is distinct from and independent of the rights which the company
had against them before the winding up : Hansraj Gupta v. Asthana, Whitehouse
& Co., In re.
In
Jagraon Trading Syndicate Ltd. v. Nanak Chand Roshan Lal it was said :
"It
is well settled now that section 156 imposes new rights and liabilities upon
shareholders as soon as the liquidation proceedings start. As laid down in
several authorities on the subject as soon as a company goes into liquidation,
this section saddles the shareholders with a new liability in respect of unpaid
calls and such unpaid calls are recoverable at the instance of the liquidators
though barred by time and though the company could not recover them."
Reference
may also be made to Mahomed Akbar Abdulla Fazalbhoy v. Associated Banking
Corporation of India Ltd., and Jagannath Prasad v. U.P. Flour and Oil Mills Co.
Ltd.
Bakhshi
Gurchan Singh relied upon Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway
Co. Ltd., and Sri Narain v. Union Bank Of India, for the proposition that the
words "money due" occurring in section 186 were to be confined to
money due and recoverable in a suit by the company and did not include money
which at the date of the application under section 186 could not have been so
recovered. But both these cases were judgments under section 186, which is
inapplicable and not under section 187, which governs the facts of this case.
The Judicial Committee of the Privy Council did not overrule the decision in
Jagannath Prasad v. U.P. Flour and Oil Mills Co. Ltd. but distinguished it as
it was a decision relating to section 187. The long string of authorities
beginning with Parell Spinning and Weaving CO. Ltd. v. Manek Haji, fully support
the contention raised on behalf of the official liquidator.
Bakhshi
Gurcharan Singh has next argues that the provisions of section 156(1)(iv) do
not govern the case of a time-barred debt. The relevant words of that provision
are :
"in
the case of a company limited by shares, no contribution shall be required from
any member exceeding the amount (if any) unpaid on the shares in respect to
which he is liable as a present or past member".
The
argument in brief is that the liability contemplated above is in respect of
claims which are enforceable in praesenti, i.e., which are not time-barred. He
maintains that the words "he is liable" means at the present time
when the provisions of section 156 are being invoked and the order is being
passed under section 187. He wants to give to the word "liable" the
restricted meaning of being legally responsible or bound in law and in
praesenti. The word "liable" has a large and comprehensive
significance and when so construed it means "obliged in law or equity,
subject", vide Webster's New International Dictionary. The word
"liable" has also a second definition and that is "exposed or
subject to a given contingency, risk or casualty which is more or less
probable" vide Black's Law Dictionary. The word is used in the sense of
actually or potentially subject to an obligation. The word is not used in an
absolute sense and does not exclude the idea of contingency. It refers to a
possible or probable happening which may not actually occur. Under section 187,
the court may make calls for payment of any money which it considers necessary
to satisfy the debts and liabilities of the company, etc. Thus a person is
liable "if he is actually or potentially subject to an obligation".
The provisions of section 156(1)(iv) emphasised the outside limit of liability
of a present or past member. What is required is that the contribution should
not be in excess of the unpaid amount on the shares in respect of which as a
present or past member he is liable.
The
liability of a member to contribute under section 156 is ex lge and arises by
reason of the fact that his name appears on the register of members. It is not
ex contractu. This section imposes a new liability on the shareholders after
the company goes into liquidation, in respect of unpaid calls made before or
after the winding up. Such calls can be recovered even if barred by limitation,
when the winding up order was made, vide Mahomed Akbar Abdulla Fazalbhoy v.
Official Liquidator, Vaidiswara Ayyar v. Siva Subramania Mudaliar, In re East
Bengal Sugar Mills Ltd., and Webb v. Whiffin.
On
issue No. 3, I hold that the contributories are liable to pay the amount
claimed against each.
Issue
No. 4. - This issue relates to validity of notice issued to the contributories.
This issue has not been pressed by either party and therefore it is assumed
that the notice issued to the contributories did not suffer from any infirmity.
Issue
No. 5 - This issue relates exclusively to contributory No. 92 (Shri Prem Chand
Bhasin) and the question is whether he can claim set-off and if so, to what
extent. The case of Shri Prem Chand Bhasin is that he was a director of the
bank and that a call was made on the shareholders in July, 1947, and he
evacuated from
In
the result I hold that contributory No. 88, namely, S. Taranjit Singh and
Shirmati Ram Khetri owe to the bank a sum of Rs. 17,732-6-0 that is to say, Rs.
2,75,000 claimed by the official liquidator, less Rs. 2,57,267-10-0 allowed by
me as set-off. I, therefore, pass payment order against contributory No. 88, S.
Taranjit Singh and Shrimati Ram Khetri for Rs. 17,732-6-0.
So
far as contributories Nos. 17, 29, 69, 70, 72/76 and 84 are concerned, orders
in respect of their cases have already been passed and this order does not
affect them.
Similarly
this order does not affect contributories Nos. 89, 93 and 94 whose appeals
under the Letters Patent have not been disposed of so far.
As
against all other contributories, I pass payment order for the amounts shown
against each as per list attached.
Order accordingly.
[1936] 6 Comp. Cas. 390 (
Punjab Electric Power Co. Ltd.
v.
BHIDE, J.
M.C. Mahajan and Rattan Lal Chawala for the Petitioner.
Achhru Ram, Durga Das Jaini and Mohammad Aslant, for the
Respondent.
Bhide, J.—This is a petition for revision of the
order of the Judge,
It is urged on behalf of the defendant that the learned
Judge was in error in holding that court-fee was payable on the sum of Rs.
147-14-3 which was claimed as a set off. This question of set off does not
appear to me to arise in the case, as the plea of the defendant really was that
the claims had already been adjusted and a balance of Rs. 3-14-3 was due to the
defendant. The defendant was, there, claiming only the latter sum and not Rs.
147-14-3. The case seems to be analogous to that reported in Bhagat Singh v.
Devi Dial (85 P.R. 1818). The learned Counsel for the defendant is not pressing
the claim for Rs. 3-14-3. I am, therefore, of opinion, that no Court-fee was
necessary on the written statement.
The next point for consideration is whether the sum of Rs.
147-14-3 was due to the defendant Company on account of interest and whether
the defendant Company was entitled to adjust it in the accounts as alleged by
them. With regard to this point the learned Counsel for the
plaintiff-respondent invited my attention to the law on the subject as set out
in Leake on Contracts at p. 779. It is stated there:—
"By common law there is no
right of set off between parties mutually indebted, in the absence of agreement
to that effect. And the rule of equity follows the law, unless there are
special circumstances connecting the debts, besides the mere fact of mutuality,
on which the relief can be founded."
It is not suggested that the law is different in
The present case seems to me to be analogous and I am,
therefore, of opinion, that the adjustment could not legally be made in the manner
alleged by the defendant Company without the consent of the plaintiff.
It was next urged that the plaintiff had in fact consented
to the adjustment. But of this there appears to be no satisfactory proof. It
was alleged that the plaintiff was present at the meeting of the directors
which adopted the annual balance sheet of 1933-34, which included the disputed
'adjustment'. The plaintiff did not admit his presence at the said meeting and
it is not proved by any other evidence. But apart from this it is not alleged
that the balance sheet showed distinctly the disputed adjustment and the mere
adoption of the balance sheet can hardly be considered to be any notice of the
adjustment in question, much less of his consent to the same. Exhibits P-1 and
P-2, indicate that no order about the adjustment had been passed even in March
or June, 1934.
The Company has usually a lien on shares or dividends for
realizations of money due on them but there appears to be no authority for
holding that it has any lien on fees due to a director as in the present case.
I, therefore, uphold the order of the learned Judge of the
Court below and dismiss the petition, but in view of all the circumstances,
leave the parties to bear their own costs.
[1971]
41 COMP CAS. 51 (SC)
SUPREME
COURT OF
v.
Calcutta
Stock Exchange Association Ltd.
J.C.
SHAH AND A.N. GROVER JJ.
CIVIL APPEAL NO. 1626 OF 1966
SEPTEMBER 25, 1970
R.B. Datar, amicus curiae, for the Appellant.
B. Sen, Senior Advocate (N.R. Khaitan and B.P. Maheshwari, Advocates,
with him) for the Respondent.
Shah J.—Naresh Chandra
Sanyal was the holder of a fully paid-up share of the Calcutta Stock Exchange
Association Ltd.—hereinafter called "the exchange". As a member of
the exchange he was authorised to carry on business as a broker in shares,
stocks and securities in the hall of the exchange. In December, 1941, Sanyal
purchased one hundred shares of the Indian Iron & Steel Company Ltd. from Johurmull
Daga & Company, but did not arrange to take delivery of the shares on the
due date. Johurmull Daga and Company sold the shares pursuant to the authority
given to them by the sub-committee of the exchange. The transaction resulted in
a loss of Rs. 438-10-0. The sub-committee directed Sanyal to pay the amount due
by him, but he failed to carry out that direction.
On January 7, 1942, the
complaint of Johurmull Daga & Company was referred to the full committee of
the exchange. Sanyal failed to pay the amount directed to be paid by him and he
was by resolution dated February 19, 1942, declared a defaulter. On September
1, 1942, at a meeting at which Sanyal was present, the full committee resolved
that the share standing in his name be forfeited to the exchange with effect
from September 1, 1942, and that Sanyal be expelled from the membership of the
exchange.
Sanyal then instituted an
action in the High Court of Calcutta on its original side, claiming a
declaration that the articles of the exchange providing for "forfeiture of
a fully paid-up share were ultra vires and illegal" and that
"particularly articles 21, 22 and 24 were invalid"; that the share
held by him had not been properly forfeited by the exchange and that forfeiture
of the share was "irregular, void and inoperative and was not binding upon
him". He also claimed an order that he be restored to the membership of
the exchange and that the share register be rectified accordingly. In the
alternative Sanyal claimed a decree for Rs. 55,000, being the value of the
share, or, in any event, to the surplus of the sale proceeds after
"liquidating the debts due by him to the exchange". The suit was
resisted by the exchange. The trial court dismissed the suit. In appeal under
the Letters Patent the decree was confirmed. With special leave Sanyal has
appealed to this court in forma pauperis.
The relevant articles of
association of the exchange are these :
Article 21:
"The committee shall have
power to expel or suspend any member or if being firm any member or authorised
assistant of the firm in any of the events following :—…………
(6) If the member or if being a
firm any member or authorised assistant of the firm refuses to abide by the
decision of the committee in any matter
which under these articles or under the bye-laws for the time being in force is
made the subject of a reference to the committee……………
Provided always that in every case arising under the provisions of
sub-sections (5), (6), (7) and (8) of this article no resolution for the
expulsion of a member or if being a firm any member or authorised assistant of
the firm shall be valid unless passed by a majority consisting of not less than
two-thirds of the members of the committee at a meeting specially convened for
the purpose and at which meeting not less than seven members of the committee
shall be present".
Article 22 :
"Any member who has been declared a defaulter by reason of his
failure to fulfil any engagement between himself and any other member or
members and who fails to fulfil such engagements within six months from the
date upon which he has been so declared a defaulter shall at the expiration of
such period of six calendar months automatically cease to be a member".
Article 24 :
"Upon any member ceasing to be a member under the provisions of
article 22 hereof and upon any resolution being passed by the committee
expelling any member under the provisions of article 21 hereof or upon any
member being adjudicated insolvent the share held by such member shall ipso
facto be forfeited".
Article 27 :
"Any share so forfeited shall be deemed to be the property of the
association, and the committee shall sell, re-allot, and otherwise dispose of
the same in such manner to the best advantage for the satisfaction of all debts
which may then be due and owing either to the Association or any of its members
arising out of transactions or dealings in stocks and shares".
Article 28 :
"Any member whose share has been so forfeited shall
notwithstanding be liable to pay and shall forthwith pay to the Association all
moneys owing by the member to the association at the time of the forfeiture
together with interest thereon, from the time of forfeiture until payment at 12
per cent. per annum and the committee may enforce the payment thereof, without
any deduction or allowance for the value of the share at the time of
forfeiture".
Article 29 :
"The forfeiture of a share shall involve the extinction of all
interest in and also of all claims and demands against the association in
respect of the share and all
other rights incidental to the share, except only such of those rights as by
these articles expressly saved".
Article 31 :
"The association shall have a first and paramount lien upon the
share registered in the name of each member and upon the proceeds of sale thereof
for his debts, liabilities and engagements……………".
Article 32 :
"For the purpose of enforcing such lien the Association may sell
the share subject thereto in such manner as they think fit………………"
Article 33 :
"The net proceeds of any such sale shall be applied in or towards
satisfaction of the debts, liabilities, or engagements, residue (if any) paid
to such member, his executors, administrators, committee, curator or other
representatives".
The relevant bye-laws of the exchange are :
"Settlement of disputes.—All disputes, complaints and claims
between by and against members shall, on the application of either party, be
decided by the committee or by a standing or special sub-committee appointed by
the committee for the purpose. In the event of the matter being decided by the
committee the decision shall be final and binding upon all members concerned
but any member aggrieved with the decision of the standing or special
sub-committee may, within seven days of such decision being given, appeal to
the committee whose decision shall be final. In the event of any member or
members refusing, neglecting or failing to observe, carry out or comply with
any decision of the committee, or if no appeal is preferred with the decision
of the standing or special sub-committee, such member or members so in default
shall be dealt with by the committee under the rules, regulations and/or
bye-laws of the association for the time being in force".
Bye-law 13 :
"Defaulters.—Any member who shall fail to pay any subscription or other
moneys due by him to the association, on due date, or who shall fail to fulfil
any engagement between himself and another member or members may be declared a
'defaulter' by the committee and on such declaration his name shall be posted
as a 'defaulter' on the notice board of the association and so long as his name
remains so posted he shall not be at liberty to exercise any of the privileges
of membership".
Under the scheme of the articles of association of the exchange, the
committee is authorised to expel or suspend a member on the ground, inter alia,
that he refuses to abide by the decision of the committee in any matter which
is under the articles or under the bye-laws referred to the committee. A person
declared a "defaulter" because he has failed to fulfil any engagement
between himself and any other member or members within six months from the date on which he has been
declared a defaulter, automatically ceases to be a member of the exchange and
his share also stands forfeited. The share so forfeited is deemed to be the
property of the exchange. But the committee must sell, re-allot or otherwise
dispose of the share for satisfaction of all debts which may then be due and
owing by the defaulter either to the exchange or to any of its members arising
out of transactions or dealings in stocks and shares. Forfeiture of a share
involves extinction of all interest in and also of all claims and demands
against the exchange in respect of the share and all other rights incidental to
the share, but not the liability of the erstwhile member to discharge his
liabilities to the exchange. The exchange has a first lien upon the share of a
member and upon the proceeds of sale thereof for his debts and liabilities, and
in enforcement of the lien, the exchange may sell the share. The net proceeds
of the share subject to the lien if sold will be applied in or towards
satisfaction of the debts, liabilities or engagements of the shareholder and
the residue, if any, paid to such member, his executors, administrators, committee,
curator or other representatives.
In this appeal counsel for Sanyal contended, that under the Indian
Companies Act, 1913, a fully paid-up share cannot be forfeited for failure to
carry out any engagement by the shareholder other than an engagement to pay a
call made by the company to pay unpaid capital ; that the procedure followed by
the sub-committee of the exchange was irregular in that Sanyal had no notice of
the meeting of the committee to declare him a defaulter ; that the committee
had no authority under the articles of association to direct sale of the share
; and that in any event Sanyal was entitled to the balance remaining on hand
with the exchange after satisfying his debts, liabilities and engagements under
the articles of association.
For failure to abide by the decision of the committee in respect of his
liability to pay the amount of loss due to Johurmull Daga & Company, Sanyal
was declared a defaulter, and when he continued to remain a defaulter for six
months he was by resolution of the full committee expelled from the membership
of the exchange. The full committee also resolved to forfeit his share. The
exchange thereafter disposed of the share for Rs. 55,000. The argument raised
by counsel for Sanyal that a member of the exchange forfeits his share only if
a resolution expelling him and a resolution declaring him a defaulter are
passed is without substance. The conjunctive "and" between the first
two clauses of article 24 is used to indicate an alternative, and does not make
the two conditions cumulative. We agree with the observations of Panckridge J. in Surajmall Mohta v. Ballabhdas Mohta that article
24 "is carelessly drawn, because, on its literal application, before his
share could be forfeited, a member would both have to be expelled by the
committee under article 21 and automatically cease to be a member under article
22. Clearly this cannot be the intention of the article and it is obvious that
by a slip, 'and' has been substituted for 'or'".
In any event the full committee passed on February 19, 1942, a
resolution declaring the appellant a defaulter. The appellant did not carry out
his engagements for a period of six months thereafter. By resolution dated
September 1, 1942, at a meeting of the full committee the appellant was
expelled from the membership of the exchange and it was resolved that his share
shall stand forfeited.
There is no provision in the Indian Companies Act, 1913, which
restricts the exercise of the right of the exchange to forfeit shares, for
nonpayment of a call only. The Indian Companies Act, 1913, made no provision
relating to forfeiture of shares. By section 17(2) of the Act, a company could
adopt the regulations contained in Table A in the First Schedule but the
company was not bound to do so. Regulations 24 to 30 of Table A dealt with the
power and the procedure relating to forfeiture of shares. Regulation 24, it is
true, provided for exercise of the power to forfeit a share when there was
default in paying calls, but no inference follows therefrom that the share of a
member could be forfeited only for non-payment of a call made in respect of the
share which was not fully paid up.
In Calcutta Stock Exchange Association Ltd. v. S.M. Nandy & Co., Harries
C.J., after examining the provisions of the Companies Act, 1913, reviewed the
decisions of the courts in England and of the High Court of Calcutta and
observed that the Indian Companies Act as well as the English Companies Act
contemplate, recognize and sanction forfeiture generally and not for
non-payment of calls only ; that a company may by its articles lawfully provide
for grounds of forfeiture other than non-payment of call, subject to the
qualification that the articles relating to forfeiture do not offend against
the general law of the land and in particular the Companies Act, and public policy
; and that the forfeiture contemplated does not entail or effect a reduction in
capital or involve or amount to purchase by the company of its own shares nor
does it amount to trafficking in its own shares. The court in that case was
concerned to determine the true effect of the articles of the exchange which
fell to be interpreted in this case.
This court in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange
Association Ltd.
also considered whether forfeiture of shares resulted in reduction of capital
contrary to the provisions of the Companies Act where power of
forfeiture was given by the articles for failure to carry out an undertaking or
satisfy an obligation of the member to forfeit the shares. The court in that case was interpreting the articles which fell to be
interpreted in this appeal. The court held that the exchange was not liable to
file any return of the forfeited shares under section 75(1) of the Companies
Act, 1956, when the same were reissued. The court observed that when a share is
forfeited and re-issued, there is no allotment, in the sense of appropriation
of shares out of the authorised and unappropriated capital, and approved the
observations of Harries C.J. in S.M. Nandy's case that :
"On such forfeiture all
that happened was that the right of the particular shareholder disappeared but
the shares considered as a unit of issued capital continued to exist and was
kept in suspense until another shareholder was found for it".
In the view of this court, the
shares so forfeited may not be "allotted" in the sense in which that
word is understood in the Companies Act. The court also pointed out that re-issue
of forfeited shares is not allotment of the shares but only a sale, for, if it
were not so, the forfeiture even for non-payment of call would be invalid as
involving an illegal reduction of capital.
Article 27 of the exchange, it may
be recalled, is in terms mandatory. The share forfeited to the exchange must be
re-allotted or otherwise disposed of ; it cannot be retained by the exchange.
The share after forfeiture in the hands of the company is subject to an
obligation to dispose it of. On that account there is no reduction of capital
by mere forfeiture. Mr. Datar, appearing for the appellant, however, contended
that in Sri Gopaljalan & Company's case the parties
argued the case on the footing that the articles of association of the exchange
were not invalid, whereas in the present case the validity of the articles is
challenged. But the court in citing with approval the observations of Harries
C.J. in S.M. Nandy's case did in effect
pronounce upon the validity of the articles.
A forfeited share is,
therefore, merely a share available to the company for sale and remains vested
in the company for that purpose only. By forfeiting a share pursuant to the
authority of the articles of association, no reduction of capital is achieved.
We are unable to agree with counsel' for Sanyal that forfeiture of shares is
permissible only in cases expressly contemplated by Table A—Model articles,
i.e., for non-payment of calls in respect of a share which is not fully paid
up.
Subject to the provisions of
the Companies Act the company and the members are bound by the provisions
contained in the articles of association. The articles regulate the internal
management of the company and define the powers of its officers. They also
establish a contract between the company and the members and between the
members inter se. The contract governs the ordinary rights and obligations
incidental to membership in the company. In the absence of any provisions
contained in the Indian Companies Act which prohibit a company from forfeiting
a share for failure on the part of the member to carry out an undertaking or an
engagement the articles of a company which provide that in certain events
membership rights of the shareholder including his right, to the share will be
forfeited are binding. The articles of association of the exchange expressly
provide that in the event of the member failing to carry out the engagement and
in the conditions specified therein his share shall stand forfeited. Articles
22, 24, 26, 27 & 29 of the exchange relating to forfeiture of shares in
certain events are, therefore, valid.
There is in our judgment nothing
in the procedure followed by the subcommittee and the full committee which
rendered the forfeiture of Sanyal's share illegal. It is not in dispute that
Sanyal incurred liability in favour of one of the members of the exchange to
pay Rs. 438-10-0 in the transaction relating to the sale of Indian Iron &
Steel Company's shares and he failed to discharge that liability. He continued
to remain in default for six months even after the resolution of the full
committee, and on that account he ceased to be a member and his share was
forfeited. The High Court has found that the copies of the letters dated 9th,
10th, 16th, 17th and 20th December, 1941, and of 8th January, 11th & 19th
February, 1942, were sent to Sanyal and the usual notices relating to the complaints
placed before the sub-committee or the full committee were served upon Sanyal,
that such notices were pasted on the notice board of the exchange, that the
appellant had opportunities at all stages of the proceedings to come before the
exchange and refute the charges made against him and that at no stage of the
proceeding until September 1, 1942, did Sanyal appear before the sub-committee
or the full committee. The High Court was of the view that the order had not
been made against Sanyal contrary to the rules of natural justice. It is true
that Johurmull Daga complained about the default committed by Sanyal on
December 9, 1941, and the meeting of the subcommittee was held on December 10,
1941. Granting that the letter of the sub-committee enclosing a copy of the
complaint dated December 9, 1941, sent by post to Sanyal may not have reached,
him because he had left
There is no substance in the
plea that the committee had no jurisdiction to order sale of the share
forfeited. Article 27 declares that the forfeited share is the property of the
exchange and that the committee of the exchange shall sell, re-allot or
otherwise dispose of the share, for satisfaction of all debts due by the member
to the association or to its members out of transactions in shares and stocks.
Under its articles the exchange has authority to sell the share and to
appropriate the sale proceeds towards satisfaction of the debts, liabilities or
engagements.
But we are unable to agree with the view taken by the High Court that the balance of the amount remaining due after satisfying the liabilities of Sanyal remained the property of the exchange and that Sanyal had no right thereto. Under the stipulations contained in articles 21, 22, 24, the share of the defaulters of expelled members stands forfeited. The share of Sanyal by express resolution was forfeited for failure to fulfil his obligation. After applying the amount realised on sale of the share towards satisfaction of the debts, liabilities and engagements of Sanyal to the exchange and its members, the balance remaining in the hands of the exchange had to be held for and on behalf of the appellant. That is expressly provided in article 33. The expression used in article 29 "the forfeiture shall involve the extinction of all interest" is subject to those rights as by the articles are saved, and article 33 saves to the defaulting shareholder whose share is forfeited the right of the balance remaining with the exchange. Even assuming that articles 24 and 31 reserve to the exchange two distinct powers—the power to forfeit and the power to exercise a lien, and that article 33 only applies to sale in enforcement of a lien, and not to a sale under article 27, we are of the view that the balance on hand after satisfying the liability of the defaulter must still be returned to the defaulting shareholder. The power to forfeit does not imply authority to appropriate the balance remaining in hand after satisfying the liabilities and obligations of the defaulter to the exchange and its members. Any such implication would be contrary to the intendment of section 74 of the Contract Act.
The power of the exchange to
forfeit the shares arises out of the articles and its source is in contract.
Forfeiture of share is in the nature of imposition of a penalty. Section 74 of
the Indian Contract Act provides :
"When a contract has been
broken, if a sum is named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive from the party
who has broken the contract reasonable compensation not exceeding the amount so
named or, as the case may be, the penalty stipulated for….".
In Fateh Chand v. Balkishan Das this court in
dealing with a case in which a claim for damages for breach of contract to sell
a lien of immovable property arose, pronounced that the expression "the
contract contains any other stipulation by way of penalty" comprehensively
applies to every covenant involving a penalty—whether it is for payment on
breach of contract of money, or delivery of property in future, or for
forfeiture of right to money or other property already delivered. Duty not to
enforce the penalty clause but only to award reasonable compensation is
statutorily imposed upon courts by section 74 of the Indian Contract Act. In
all cases, therefore, where there is a stipulation in the nature of penalty for
forfeiture of an amount deposited pursuant to the terms of a contract which
expressly provides for forfeiture, the court has jurisdiction to award such sum
only as it considers reasonable, but not exceeding the amount specified in the
contract as liable to forfeiture. The same principle, in our judgment, would
apply in the case in which there is a stipulation in the contract by way of a
penalty, and the damages awarded to the party complaining of the breach will
not in any case exceed the loss suffered by the complainant party. It was
observed at page 526 in Fateh Chand's case :
"The section (section 74)
is clearly an attempt to eliminate the somewhat elaborate refinements made
under the English common law in distinguishing between stipulations providing
for payment of liquidated damages and stipulations in the nature of penalty.
Under the common law a genuine preestimate of damages by mutual agreement is
regarded as a stipulation naming liquidated damages and binding between the
parties : a stipulation in a contract in terrorem is a penalty and the court
refuses to enforce it, awarding to the aggrieved party only reasonable compensation.
The Indian Legislature has sought to cut across the web of rules and
presumptions under the English common law, by enacting a uniform principle
applicable to all stipulations naming amounts to be paid in case of breach, and
stipulations by way of penalty".
The court also observed at page
530 :
"Section 74 declares the
law as to liability upon breach of contract where compensation is by agreement
of the parties pre-determined, or where there is a stipulation by way of
penalty. But the application of the enactment is not restricted to cases where
the aggrieved party claims relief as a plaintiff. The section does not confer a
special benefit upon any party; it merely declares the law that notwithstanding
any term in the contract pre-determining damages or providing for forfeiture of
any property by way of penalty, the court will award to the party aggrieved
only reasonable compensation not exceeding the amount named or penalty
stipulated".
Granting that article 33 deals
with those cases in which lien alone is enforced and not in cases where
forfeiture is levied, and the obligation of the defaulting shareholder is
determined by article 29, in our judgment, on the principle underlying section
74 of the Contract Act, the exchange had no right to hold out of the sale
proceeds of the share any amount in excess of the amount due to it or to its
members.
The exchange may not purchase
its own shares. If it does so, it amounts to reduction of capital. The legal
theory of forfeiture is that a share forfeited is only taken over by the
company with the object of disposing it of to satisfy its claim to enforce
which the share was forfeited and all other obligations arising against him out
of his membership. The company is given this right to recover the loss suffered
by it by reason of the breach of contract committed by the shareholder. If the
company is permitted to retain the balance of the amount after satisfying the
debts, liabilities and engagements of the shareholder, the transaction would
not be different from one purchasing the share of the defaulting shareholder
for a value equal to the amount of his obligations. That would be plainly
illegal. We are, therefore, unable to agree with the High Court that the
exchange was entitled to retain the balance after satisfying the debts,
liabilities and engagements of the appellant to the other members or to the
exchange.
The decree passed by the High
Court is set aside and the case remanded to the High Court for determining the
extent of the liabilities of the appellant to the exchange not only in respect
of the transactions with Johurmull Daga but in respect of all other outstanding
liabilities of the appellant to other members of the exchange and to the.
exchange which are. enforceable under the articles. The appellant is entitled
to receive from the exchange the balance remaining due after deducting the
aggregate amount or value of the obligations. He will be entitled to interest
on the balance at the rate of 6% per annum from the date of the institution of
the suit. Parties will bear their own costs throughout.
This appeal was filed in forma
pauperis. The appellant will pay the court-fee payable on the memorandum of
appeal if he had not been permitted to
appeal in forma pauperis.
[1985] 58 COMP. CAS. 247 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
New
Samundri Transport Co P. Ltd.
PREM CHAND JAIN AND RAJENDRA NATH MITTAL, JJ.
Company Petition No. 189 of 1974
JUNE 3, 1983
Laxmi Grover and H.S. Sawhney
for the Petitioner.
Mohivderjit Singh Sethi and Atul
Lekhanpal for the Respondent.
Prem Chand Jain, J.—Dilbhajan
Singh and others have filed this petition under s. 155 of the Companies Act,
1956 (hereinafter referred to as "the Act"), for rectification of the
register of the members of the company. Originally, the petition was filed by
eight petitioners. The names of petitioners Nos 1 and 6 were struck off, vide
order dated December 1, 1978. Dalip Singh, petitioner No. 3, has died and his
legal representatives have not been brought on record. In this situation, the
present petition would be deemed to have been filed by five petitioners, i.e.,
Smt. Mohinder Kaur, Mota Singh, Smt. Basant Kaur, Smt. Ravinder Kaur and Smt. Gurmej Kaur.
In order to appreciate the
controversy, certain salient features of the case may be noticed :
The petitioners are the
shareholders of New Samundri Transport Co. (P.) Ltd., Ferozepur (hereinafter
called "the company". Smt. Mohinder Kaur holds 210 shares, Mota Singh
Granthi 210 shares, Smt. Basant Kaur 420 shares, Ravinder Kaur 840 shares and
Gurmej Kaur 420 shares worth Rs. 10 each, on which 75% has been paid up. The
respondent company was registered as a private limited company with its
registered office at Ferozepur in terms of the memorandum and articles of
association of the company. The authorised capital of the company is Rs. 4
lakhs divided into 40,000 equal shares of Rs. 10 each. The shares are paid up
to the extent of 70%. Some of the petitioners had moved an application under
ss. 397 and 398 of the Act (Petition No. 30 of 1973) in which serious
irregularities of fraud against the managing director of respondent No. 1 had
been alleged. That petition, to start with, was contested but later on was got
dismissed as withdrawn. In that petition, the respondent company had filed a
written statement in which the factum of the petitioners being the shareholders
in the company was never challenged. It is further averred that in that company
petition, an application on behalf of respondent No. 1 had been filed for the
amendment of the written statement in which it was averred that the company had
forfeited the shares of the petitioners for non-payment of the amount due from
them. It is only then that the petitioners had come to know about the alleged
forfeiture of the shares. That application was rejected by B.R. Tuli, J. (as
his Lordship then was) on January 4, 1974, vide order in Company Application
No. 55 of 1971. Letters Patent Appeal against that judgment was also dismissed.
The special leave petition in the
It is further averred that in
Company Application No. 55 of 1971, it had also been alleged that the New
Samundri Transport
|
No. of shares |
Originally held by |
Transferred to |
|
210 |
Smt. Mohinder Kaur |
Sohari Singh s/o Dalip Singh |
|
210 |
Mota Singh Granthi |
Sohan Singh s/o Dalip Singh |
|
420 |
Basant Kaur |
Ravinder Kaur w/o Joginder Singh |
|
840 |
Ravinder
Kaur |
Jaswant Singh s/o Daulat Singh |
|
420 |
Gurmej Kaur |
Amrik Singh s/o Daulat Singh |
The petitioners allege that forfeiture
of the shaaes of the company in this manner can neither be justified under the
provisions of law nor by any provision in the articles of association; that no
notice whatsoever for the forfeiture of the shares was served on the
petitioners; that the procedure prescribed for forfeiture of the shares under
reglns. 29 to 35 was never followed and that the forfeiture of the shares of
the company is void ab initio. It is on these grounds that a prayer has been
made that the register of members be rectified and the names of respondents
Nos. 2 to 6, in whose favour the transfer of shares has been made, be deleted
from the register of members of the company. A further prayer has been made
that damages be also awarded to the petitioners for the wilful fraud played by
the respondents by violating the provisions of the articles of association and
the Act.
The petition has been contested
on behalf of the respondents in which material allegations made in the petition
have been controverted and the action of forfeiture of the shares has been
defended. The petitioners chose to file replication in which the allegations
made in the written statement have been controverted.
This petition was tried by me.
I had heard arguments in this petition. The learned counsel for the parties did
not refer to any piece of evidence on the record. The only point that required
determination was whether for the acts done and the alleged losses incurred by
the petitioners during the period when their group had run certain buses
separately in the name and style of New Samundri Bus Service, could their
shares be forfeited ?
Finding that the aforesaid
point of law was of considerable importance, I directed that the same be
decided by a larger Bench. That is how we are seized of the matter.
Before I deal with the legal
point, it would be appropriate to trace a little history of the case. The
respondent company was bifurcated into two groups by mutual agreement on August
13, 1970. One group was named Gurdas Singh group and the other as Gardhara
Singh group. Under that mutal agreement, the possession of the buses and
permits falling to the respective shares of the groups was also taken. Later
on, a question arose whether the bifurcation had been done in accordance with
law or not. B. R. Tuli J., on July 28, 1972, held that there has been no
splitting up of the company into two groups and all the buses with permits and
other properties of the company taken by these groups must be restored to the
present company, i.e., New Samunduri Transport Co (P.) Ltd., Ferozepur. Shri
Sewa Singh was appointed as a receiver for the purpose of carrying on the whole business
of the company after taking into
possession all the buses, permits and
properties from both the groups. It is after this order of the learned judge
that on July 2, 1973, the board of directors passed a resolution,
copy of which is Ex. R.W. 11/5, by which the shares of the petitioners were
transferred. It may be observed at this stage that the main plea of the
respondents justifying the transfer is that as the petitioners had not paid the
claim of the company, their shares were forfeited on July 2, 1973. The claim
which is laid against the petitioners is for the period when under the
agreement they had formed separate groups and had run certain buses and had
incurred some losses to the company.
It was vehemently contended by
Mr. Grover that for the alleged loss of the company, the shares of the
petitioners could not be forfeited, that the shares could be forfeited only
when a call is made or money is borrowed by the shareholders and the same
becomes payable, and that there could be no lien on, or forfeiture of, fully
paid up shares. What was sought to be argued by the learned counsel was that,
in the instant case, for the period for which the two groups worked separately,
there were claims and counter-claims and accounts had been submitted and for
the alleged loss, the board of directors of its own could not legally forfeit
the shares of the petitioners.
On the other hand, Mr. Sethi,
learned counsel for the respondents, very vehemently argued that the
petitioners had obtained certain benefits under the agreement, i.e., that they
had been given certain buses and permits to ply ; that, after the order of B.R.
Tuli, J. dated July 28, 1972, the petitioners were bound to return the buses
and the other property of the company in the same condition as it was handed
over to them; that whatever benefit was taken by the petitioners under the
contract (the agreement separating the original company into two groups), they
were liable to return the same and that as the benefits earned by the
petitioners as a result of the bifurcation of the original company were not
being returned, their shares could legally be forfeited. Mr. Sethi had also
referred to certain evidence in order to show that the petitioners created a
huge liability and, as such, the action of forfeiture was justified.
After giving our thoughtful
consideration to the entire matter, we find that there is considerable force in
the contentions raised by Mr. Grover, learned counsel for the petitioners.
On the respective contentions
of the learned counsel for the parties and on admitted facts, the question that
arises, for determination is whether for the losses incurred by certain
shareholders in running the business of the company, can their shares be
forfeited ? Relevant provisions with regard to creation of lien on the shares
of the members of the company and with regard to enforement of the lien by sale
of the shares by the company, to
which our attention was drawn, are contained in reglns. 9 and 10 in Table
"A", Schedule I, entitled "REGULATIONS FOR MANAGEMENT OF A
COMPANY LIMITED BY SHAEES" to the Act and read as under:
"9. (1) The company shall
have a first and paramount lien—
(a) on every share (not being a fully-paid share), for all moneys (whether presently payable or not) called, or payable at a fixed time, in respect of that share; and
(b) on all shares (not being fully paid shares) standing registered in the name of a single person, for all moneys presently payable by him or his estate to the company:
Provided that the board of
directors may at any time declare any share to be wholly or in part exempt from
the provisions of this clause.
(2) The company's lien, if any,
on a share shall extend to all dividends payable thereon.
10. The company may sell, in
such manner as the board thinks fit, any shares on which the company has a lien
:
Provided that no sale shall be
made—
(a) unless a sum in respect of which the lien exists is presently pay able ; or
(b) until the expiration of fourteen days after a notice in writing stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the share or the person entitled there to by reason of his death or insolvency"
Regulation 9 deals with the
company's right of lien on the shares. This regulation has two clauses. Clause
(a) envisages a situation where the shares are not fully paid up and a call is
made for all moneys, whether presently payable or not, or payable at a fixed
time. Clause (b) envisages a situation where the shares, not being fully paid
up shares, stand registered in the name of a single person and the money is
presently payable by him or his estate to the company. Regulation 10 provides
the sale of the shares on which the company has a lien. Thus, a joint reading
of the aforesaid regulations would go to show that the lien of the company is
on those shares which are not fully paid up and when some money becomes
presently payable on those shares or a call is made for all moneys (whether
presently payable or not or payable at a fixed time) in respect of those
shares. No other provision was brought to our notice under the Act which might
have some bearing on the question of forfeiture of shares or lien of the
company. It was argued by Mr. Sethi, learned counsel for the respondents, that
the buses were run for two years by the petitioners' group and heavy losses
were incurred by them and for the losses which had been incurred, the
petitioners would be termed debtors and each one of them would be jointly and
severally liable. According to the learned counsel, the amount of loss incurred
by the petitioners would be the amount presently payable. To us, this argument
does not appear to be sound and plausible. It was as a result of the order of
B.R. Tuli, J., dated July 28, 1972, that the original company would be deemed
not to have been bifurcated into two groups ; with the result that during the
period when the two groups worked separately, if some losses were incurred,
then those losses would be of the company which have to be met out of the
assets of the company. For the alleged losses incurred during the period when
the two groups worked separately, the petitioners would not become the debtors
of the original company. Moreover, the company may have some grudge against a
particular shareholder if he has caused some loss to the company, but
forfeiture of shares of all the shareholders without finding out or determining
the individual liability and without giving separate notice to all of them,
would certainly be illegal and improper. There is nothing on the record to show
as to which individual shareholder was responsible for causing the loss, or
whether the loss had occurred as a result of mismanagement or was it a loss in
the ordinary course of business. Viewed from any angle, the petitioners cannot
be termed as debtors for the alleged loss.
Mr. Sethi, learned counsel, had
also relied on ss. 65 and 70 of the Indian Contract Act, 1872, for the
proposition that the petitioners were bound to return the assets which they got
under the mutual agreement. In support of this proposition, the learned counsel
placed reliance on Mulamchand v. State
of M.P., AIR 1968 SC 1218, State of West Bengal v. B.K. Mondal and Sons, AIR
1962 SC 779, and New Marine Coal Co. (Bengal) P. Ltd. v. Union of India,
AIR 1964 SC 152. In our view, these provisions of the Indian Contract Act,
1872, and the judgments cited by the learned counsel have no relevance to the
facts of the case in hand. Under the agreement, two groups separated and
started running two separate companies. By virtue of an order of this court
passed by B.R. Tuli, J., dated July 28, 1972, it was held that bifurcation was
illegal and not sustainable in the eye of law with the result that the New
Samundri Transport Co. (P.) Ltd., i.e., the old company, continued to remain in
existence and the petitioners and respondents continued to be its shareholders.
Whatever business was done by the two groups separately was the business of the
old company. Whatever losses suffered during that period were by the company.
For such losses, the individual shareholders could not be held as debtors.
Faced with this situation, Mr.
Sethi, learned counsel for the respondents, sought to raise a point that no
relief should be granted to the petitioners in this petition and they be
directed to seek their remedy in the civil court as complicated questions of fact
were involved in the petition which could not properly be determined in this
petition. In support of his contention, the learned counsel placed reliance on
the judgments in Dewan Singh v. Minerva Films Ltd. [1959] 29 Comp Cas 263
(Punj), S. Bhagat Singh v. Piar Bus
Service Ltd. [1960] 30 Comp Cas 300 (Punj), People's Insurance Co. Ltd. v.
C.R.E. Wood and Co. Ltd. [1961] 31 Comp Cas 61 (Punj), Smt. Soma Vati Devi Chand v. Krishna Sugar Mills
Ltd., AIR 1966 Punj 44, and Public Passenger Service Ltd. v. M.A. Khadar [1966]
36 Comp Cas 1 (SC) and a few others. We are afraid, we are unable to
agree with this submission of the learned counsel. No complicated question of
fact is involved in this petition. On a pure question of law, a reference was
made and the same has been decided without any difficulty. In this view of the
matter, the petition cannot be thrown out on the ground that the petitioners
should seek relief in the civil court.
No other point arises for
consideration.
For the reasons recorded above, we allow this petition and direct
that the names of the petitioners be restored and that of the respondents be
deleted and necessary rectification in the register of members be made. In the
circumstances of the case, we make no order as to costs.
Companies Act
[2005] 61 SCL 134 (
HIGH COURT OF
v.
Grob Tea Co. Ltd.
Ashim Kumar Banerjee, J.
A.P.O. No. 235 of 2004
October 15, 2004
CLB cannot
direct forfeiture of shares acquired in violation of Securities and Exchange
Board of
Section 111A of the Companies Act, 1956, read
with regulations 7 and 10 of the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 - Transfer of shares - Rectification of register
on - Whether in case of violation of regulations 7 and 10 of 1997 Regulations,
section 111A(3) empowers company to apply for rectification - Held, yes -
Whether, in both cases, CLB is entitled to properly direct parties so that
mischief is undone but cannot direct forfeiture of entire shareholding for such
violation - Held, yes
Section 397, read with section 111A, of the
Companies Act, 1956 and regulations 7 and 10 of Securities and Exchange Board
of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 -
Oppression and mismanagement - Appellants holding 14.12 per cent shares of
company filed petition under section 397 - Company contended that very
acquisition of shares by appellants being in violation of Takeover Regulations
was invalid and, therefore, petition was not maintainable - On application
under section 111A, CLB directed forfeiture of shares held by appellants and,
accordingly, dismissed petition under section 397 as not maintainable - Whether
for violation of Takeover Regulations, CLB could direct forfeiture of shares -
Held, no - Whether since on date of presentation of section 397 proceeding,
rightly or wrongly, appellants were having 14 per cent shares approximately,
section 397 proceeding was maintainable as on that date and order of CLB to
that extent was to be set aside - Held, yes
Facts
Pursuant to raid in the premises of the
company in question, the income-tax authorities found certain hidden income and
directed payment of tax, which the company complied. Thereafter, the company,
in its meeting of the shareholders, attempted to bring that liability in the
accounts of the company to the detriment of the company and its shareholders.
Being aggrieved, the appellants, holding 14.12 per cent shares of the company,
filed proceedings under sections 397 and 398. The company contended that since
the very acquisition of shares by the appellants was unlawful being in
violation of the Takeover Code, the aforesaid proceeding was not maintainable.
During the pendency of the said proceedings, the company also made an
application under section 111A(3) for rectification of its shareholder register
by deleting the names of the appellants. The CLB, by a common order, held that
under regulation 7, shares acquired beyond 5 per cent would be invalid and
shareholder register required rectification under section 111A(3). Accordingly,
the CLB forfeited the shares and dismissed section 397 proceedings.
On appeal :
On a plain reading of regulation 7, it would
appear that the regulation clearly stipulates ‘acquirer’ whereas regulation 10
under Chapter III includes specifically ‘persons acting in concert’. The two
Chapters are having totally independent approach. Chapter II obligates the
persons to inform and suffer penalty because of non-compliance. Chapter III
puts a complete restriction on acquisition. In the later situation, the
acquisition itself is wrongful and is ipso facto invalid and null and void
whereas Chapter II provides for penalty only. In case of violation of Chapter
II or Chapter III, section 111A(3) empowers the company to apply for
rectification. In both the cases, the CLB is entitled to properly direct the
parties so that the mischief is undone. However, it could not be conceived as
to how and under what circumstances the CLB could direct forfeiture of the
entire shareholding. Even if there had been violation of regulation 7, then it
would be absolutely improper to sustain order of forfeiture. [
Therefore, the order of forfeiture as directed
by the CLB was set aside. [
On the date of presentation of section 397
proceeding, rightly or wrongly, the appellants were having 14 per cent shares
approximately. Since the forfeiture was bad, on the date of presentation of the
petition, the appellants were having more than 10 per cent shareholding and as
such the section 397 proceeding was maintainable as on that date and the order
of the CLB to that extent was also to be set aside. [
Therefore, interest of justice would be
subserved if the company was directed to buy-back the shares of the appellants
at the value prevailing as on the date of presentation of section 397 proceeding.
The appellants were also directed to sell their shares at the said value. [
In case
the appellants did not want to sell their shares in the company, the company
would be free to delete their names from the shareholder register after depositing
the value of those shares at the aforesaid rate in any nationalized bank
earmarked for payment to the appellants. The company would also be entitled to
proceed to dispose of their assets as they were contemplating in accordance
with law without taking the appellants in confidence. [
Arun Kumar Bajoria v. SEBI [W.P. No. 331 of
2001, dated 27-3-2001] dissented from. [
Mega Resources v. Bombay Dyeing & Mfg. Co.
Ltd. [2002] 1 CLJ 347/36 SCL 100 (para 3), Karamsad Investments Ltd. v. Nile
Ltd. [2001] 108 Comp. Cas. 58/34 SCL 269 (AP) (para 4), Mega Resources Ltd. v.
SEBI [2001] 3 CLJ 179/36 SCL 569 (AP) (para 4), Bombay Dyeing & Mfg. Co.
Ltd. v. Arun Kumar Bajoria [2001] 4 CLJ 115/34 SCL 320 (para 16), Shirish
Finance Investment (P.) Ltd. v. M. Sreenivasulu Reddy [2002] 109 Comp. Cas.
913/35 SCL 27 (Bom.) (para 16) and Arun Kumar Bajoria v. SEBI [W.P. No. 331 of
2001, dated 27-3-2001] (para 17).
P.C. Sen, Siddhartha Mitra, Rajratna Sen for the Appellant. Sudipta Sarkar, S.N.
Mukherjee, Sanjib Banerjee, Ratnanko Banerjee, B.N. Surana and Arvind
Jhunjhunwala for the Respondent.
Judgment
1. The moot question involved in this appeal is
whether the Take Over Code contemplates identical consequences in case of
breach of Chapter II or Chapter III under Regulation 97.
2. Appellants held 14.12 per cent shares in the
company. The company in its meeting of the shareholders wanted to bring in an
unaccounted sum as liability towards the company. Being aggrieved by that the present
proceeding under sections 397 and 398 was filed by the appellants. The said
sums surfaced when there was raid by the Income-tax Authorities on 6th August,
1998. The Income-tax Authorities found hidden income of Rs. 1 crore and
directed payment of tax of Rs. 66.28 lakhs. The company had to pay the said
sum. The management attempted to bring that liability in the accounts of the
company to the detriment of the company and its shareholders. During the
pendency of the section 397 proceeding the respondents made an application
under section 111A(3) of the Companies Act, 1956 for rectification of its
Shareholder Register by deleting the names of the appellants as according to
them such transfer was in violation of the Take Over Code. In section 397
proceeding the management contended that since the very acquisition of shares
was unlawful the proceeding under sections 397 and 398 was not maintainable.
Company Law Board heard both the proceedings and by a common order allowed
rectification and dismissed section 397 proceeding. Hence this appeal.
3. The Company Law Board while allowing
rectification relied on their own judgment in the case of Mega Resources v.
Bombay Dyeing & Mfg. Co. Ltd. [2002] 1 CLJ 347. According to the Board
under regulation 7 shares acquired beyond 5 per cent would be invalid without
compliance of the provisions of the said regulation and Shareholder Register
required rectification under section 111A(3).
4. The Company Law Board also considered two
Single Bench decisions, one unreported decision of this Court in the case of
Bombay Dyeing Ltd. and other of the Hon’ble Andhra Pradesh High Court in the
matter of Karamsad Investment Ltd. v. Nile Ltd. [2001] 108 Comp. Cas. 58. The
Company Law Board also considered the judgment of Security Appellate Tribunal
in the case of Mega Resources Ltd. v. SEBI [2001] 3 CLJ 179 (AP). The Company
Law Board while rectifying the Shareholder Register observed that the subject
shares stood forfeited as the acquisition was illegal.
5. Mr.
P.C. Sen, learned Counsel appearing for the appellants contended that Chapter
II of the Take Over Code puts a mandate on the acquirer to inform the
appropriate authority, for non-compliance the penalty was provided for whereas
Chapter III restrains acquisition of more 15 per cent of shares. According to
Mr. Sen Chapter II provides for certain obligation, non-compliance cannot
attract forfeiture of the shares whereas under Chapter III acquisition of more
than 15 per cent was prohibited and thus illegal. The Company Law Board according
to Mr. P.C. Sen misconstrued these two chapters by holding that the Chapter II
also contemplates forfeiture of shares. Mr. Sen heavily relied upon the
judgment in the case of Nile Ltd. (supra) with regard to the construction of
the relevant regulations. According to him that was the correct law that should
govern the instant issue. Commenting on the unreported decision of this Court
Mr. Sen contented that the unreported decision relied upon, was pronounced by
the learned Single Judge of this Court in a writ proceeding where a show-cause
notice was challenged. According to him the writ petitioner in the said case
also challenged the validity of regulation 7 which the learned Single Judge
declined.
6. Mr. Sen also assisted me in having his
version on the interpretation of the relevant regulation which I would discuss
hereinafter.
7. Mr. Sudipta Sarkar, learned Counsel appearing
for the respondents contended that section 111A(3) empowers the company to
apply for rectification in case of any violation irrespective of Chapter II or
Chapter III. Mr. Sarkar also contended that Security Appellate Tribunal is a
specialized body having expertise and the direction of the said Tribunal in the
case of Mega Resources (supra) should be
taken into consideration by this Court. Mr. Sarkar, however, in his usual
fairness did not seriously support forfeiture of shares by the Company Law
Board.
8. The Securities and Exchange Board of India
Act, 1992 (hereinafter referred to as “SEBI Act”) was enunciated to control
inter alia stock markets to protect the interest of the investors in securities
and to promote the development of and to regulate the securities market. Under
the said Act section 15A provides for penalty for failure to furnish
information in terms of the said Act and/or regulations made thereunder. In
terms of section 15A the penalty has been provided for disclosure of
acquisition of shares by making public announcement whereas section 15J
provides for adjudication of the penalty. A comprehensive procedure has been laid
down in the said Act with regard to the trial of the said offences as well as
appeal to be made thereunder.
9. In terms of the said SEBI Act, Take Over Code
called as SEBI Regulation, 1997 came into operation in 1997. Regulations
2(i)(b) and (e), 7 and 10 being relevant herein are quoted below:
“2(i)(b) ‘acquirer’ means any person who,
directly or indirectly, acquires or agrees to acquire shares or voting rights
in the target company; or acquire or agrees to acquire control over the target
company, either by himself or with any person acting in concert with the
acquirer;
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2(i)(e) “person acting in concert” comprises,—
(1) person who, for a common objective or
purpose of substantial acquisition of shares or voting rights or gaining control
over the target company, pursuant to an agreement or understanding (formal or
informal), directly or indirectly co-operative by acquiring or agreeing to
acquire shares or voting rights in the target company or control over the
target company,
(2) without prejudice to the generality of this
definition, the following persons will be deemed to be persons acting in
concert with other persons in the same category, unless the contrary is
established:
(i) a company, its holding company, or
subsidiary of such company or company under the same management either
individually or together with each other;
(ii) a company with any of its directors,
or any person entrusted with the management of the funds of the company;
(iii) directors of companies referred to in sub-clause
(i) of clause (2) and their associates;
(iv) mutual
fund with sponsor or trustee or asset management company;
(v) foreign
institutional investors with sub-account(s);
(vi) merchant
bankers with their client(s) as acquirer;
(vii) portfolio
managers with their client(s) as acquirer;
(viii) venture
capital funds with sponsors;
(ix) banks with financial advisers, stock
brokers of the acquirer of any company which is a holding company, subsidiary
or relative of the acquirer:
Provided that sub-clause (ix) shall
not apply to a bank whose sole relationship with the acquirer or with any
company, which is a holding company or a subsidiary of the acquirer or with a
relative of the acquirer, is by way of providing normal commercial banking
services or such activities in connection with the offer such a confirming
availability of funds, handling acceptances and other registration work;
(x) any
investment company with any person who has an interest as director, fund
manager, trustee, or as a shareholder having not less than 2 per cent of the
paid up capital of that company or with any other investment company in which
such person or his associate holds not less than 2 per cent of the paid up
capital of the latter company.
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7. Acquisition of 5 per cent and more shares
or voting rights of a company.—(1) Any acquirer who acquires shares or voting
rights which (taken together with shares or voting rights, if any, held by him)
would entitle him to more than five per cent shares or voting rights in a
company, in any manner whatsoever shall disclose the aggregate of his
shareholding or voting rights in that company, to the company.
(2) The disclosures mentioned in
sub-regulation (1) shall be made within four working days of—
(a) the
receipt of intimation of allotment of shares; or
(b) the
acquisition of shares or voting rights as the case may be
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(3) Every company, whose shares are acquired in a manner referred to in sub-regulation (1), shall disclose to all the stock exchanges on which the shares of the said company are listed the aggregate number of shares held by each of such persons referred above within seven days of receipt of information under sub-regulation (1).
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10. Acquisition of 15 per cent or more of the
shares or voting rights of any company.—No acquirer shall acquire shares or
voting rights which (taken together with shares or voting rights, if any, held
by him or by persons acting in concert with him), entitle such acquirer to
exercise fifteen per cent or more of the voting rights in a company, unless
such acquirer makes a public announcement to acquire shares of such company in
according with the Regulations.”
10. Regulation 2(i)(b) provides that an acquirer
means any person who directly or indirectly acquires or agrees to acquire
control over the company either by himself or with any person “acting in
concert”.
11. Regulation 2(i)(e) provides that person
“acting in concert” means person having a common objective to have subsequent
acquisition in the company to gain control.
12. Chapter II deals with the disclosure of shareholding and control in a
listed company.
13. Regulation 7 under Chapter II obligates the
acquirer to disclose his aggregate shareholding if it exceeds 5 per cent.
14. Chapter III deals with “subsequent
acquisition” over a listed company. Regulation 10 provides that no acquirer
shall acquire more than 15 per cent either by him or by persons “acting in
concert” without making a public announcement to such extent.
15. Section 111A(3) empowers the company to apply
for rectification of the Shareholder Register in case of acquisition of any
share in violation of SEBI regulation.
16. Precedents on the Subject:
(1)
(2) Mega
Resources [2002] (1) CLJ 347 (supra)
(3) Mega
Resources Ltd. [2001] 3 CLJ 179 (supra)
(4) Karamsad
Investment Ltd.’s case (supra)
(5) Shirish Finance Investment (P.) Ltd.
v. M. Sreenivasulu Reddy [2002] 109 Comp. Cas. 913
(6) Unreported decision in the case of
Arun Kumar Bajoria v. SEBI [W.P. No.
331 of 2001, dated 27-3-2001]
17. Summary of the Decisions:
(1) Bombay Dyeing & Mfg. Co. Ltd.’s case (supra) - The Company Law Board
considered regulation 7. The Company Law Board held that as per regulation 7
“an acquirer shall disclose” is a mandatory provision, non-compliance of the
same would attract rectification of Shareholders Register in terms of section
111A(3). The Company Law Board also observed that those acquisition in
violation of regulation 7 was invalid. However, since in the said case the
holding was brought down below 5 per cent no order was passed to the said
effect.
(2) Mega
Resources’ case (supra) - Here also the Company Law Board took a similar view.
(3) Mega Resources Ltd.’s case (supra) -
Here also Security Appellate Tribunal held that the shares acquired in
violation of regulation 7 mandated the acquirer to make the disclosure and as
such the penalty was liable to be imposed as provided in law.
(4) Nile Limited’s case (supra) - The
Single Bench of the Andhra Pradesh High Court held that there is clear
distinction between regulation 7 and regulation 10, regulation 7 obligates the
acquirer to intimate the same to the company whereas regulation 10 restrain
acquisition beyond 15 per cent. By this well versed judgment Chelameswar, J.
speaking for the Andhra Pradesh High Court made a clear distinction between
Chapter II and Chapter III in the said case. The Company Law Board in the said
case took a consistent view which was set aside by His Lordship and the matter
was remanded back to the Company Law Board to dispose of the same on the basis
of the observation made by His Lordship. His Lordship clearly held, “Even then
the legality of the acquisition is not affected but if the violation is
established, it might expose the case to penalties under regulation 45.”
(5) Shirish Finance & Investment
(P.) Co. Ltd.’s case (supra) - The Division Bench of the Bombay High Court in
this elaborate judgment analysed the entire Act and the regulation specially
the meaning of the word “acquirer” as well as “person acting in concert”. In
the said case a civil suit was also filed challenging the acquisition of shares
and also for rectification of the Shareholders Registrar. Their Lordships
ultimately held that the suit was maintainable. Their Lordships also held that
the respondents were acting in concert and their acquisition was void.
(6) Unreported decision in the case of
Arun Kumar Bajoria (supra) - In this
case learned Single Judge of this Court adjudicated the controversy raised in
the said writ proceeding by the petitioner challenging a show-cause notice
issued under the Take Over Code. While doing so His Lordship not only
considered the facts involved in the said case but also interpreted the
relevant provisions of the statute as well as the regulation. His Lordship
ultimately came to a finding that the show-cause notice was validly given and
dismissed the writ proceeding. An appeal from the said order is still pending
before the Division Bench as I am told by the learned Counsel appearing for the
parties. His Lordship while interpreting the regulation 7 came to a conclusion
that the provision of the regulation 7 was mandatory. His Lordship, however,
observed that “acquirer” in regulation 7 also includes “persons acting in
concert”.
My View :
18. On a composite reading of the aforesaid
decisions I am of the view that the Company Law Board was having a consistent
approach by holding that the non-compliance of regulatation 7 would attract
forfeiture. Although the same was not clearly spelt out by SEBI Appellate
Tribunal or by the Division Bench of the Bombay High Court the inner meaning of
the said decision would result in the same view. Learned Single Judge of this
Court in the unreported decision (supra) although not clearly spelt out, came
to an identical conclusion which could be inferred from the said decision.
19. On the other hand the Single Bench decision
of the Andhra Pradesh High Court is clear and unambiguous. His Lordship was
specific on the identical issue and held that forfeiture was not contemplated.
His Lordship’s view is absolutely correct in my view and I respectfully beg to
differ with the other decisions referred to above. With due respect to His
Lordship in the Single Bench decision of this Court I am in total disagreement
with the view where His Lordship held that the regulation 7 would include
“persons acting in concert”. However, the same may not be relevant herein and I
do not feel it necessary to refer the said issue to a Larger Bench or a
decision as I feel that the present issue can be resolved without going into
detail as to what has been held by His Lordship on the meaning of regulation 7.
20. On a plain reading of regulation 7 it would
appear that the regulation clearly stipulates “acquirer” whereas regulation 10
under Chapter III includes specifically “persons acting in concert”. In my view,
two chapters are having totally independent approach. Chapter II obligates the
persons to inform and suffer penalty because of non-compliance. Chapter III
puts a complete restriction on acquisition. In my view, in the later situation
the acquisition itself is wrongful and is ipso facto invalid and null and void whereas Chapter II provides for
penalty only. In case of violation of Chapter II or Chapter III, section
111A(3) empowers the company to apply for rectification. In both the cases the
Company Law Board is entitled to properly direct the parties so that the
mischief is undone. As in the case of Mega Resources the share ratio was
brought down during the pendency of the litigation and as such Company Law
Board did not issue any further direction. I am unable to conceive of a
situation as to how and under what circumstances the Company Law Board could
direct forfeiture of the entire shareholding. Even if hold that there had been
violation of regulation 7 even then it would be absolutely improper for me to
sustain order of forfeiture. In course of submission Mr. Sarkar appearing for
the company in his usual fairness contended that the appellants were free to
dispose of their shares in the market to bring down the mischief mark under
regulation 7. The Company Law Board could have directed so. Instead they
ordered forfeiture of the shares and directed deletion of their names from the
Shareholder Register resulting in loss of money for acquisition which was never
contemplated in Chapter II or in regulation 7 specifically.
Conclusion
21. In the result the appeal succeeds. The order
of forfeiture as directed by the Company Law Board is set aside.
22. Question now comes as to what further relief
the parties would be entitled to and what order this Court should pass to bring
to an end the act complained of.
23. On the date of presentation of section 397
proceeding rightly or wrongly the appellants were having 14 per cent shares
approximately. Since I have just now held that the forfeiture was bad, on the
date of presentation of the petition the appellants were having more than 10
per cent shareholding and as such the section 397 proceeding was maintainable
as on that date and the order of the Board to that extent is also set aside.
24. During the pendency of the appeal the
appellants filed an interim application which is also pending and awaiting its
disposal. In the said application it was contended that the company was
divesting of its assets. The company was having a substantial shareholding in
another company called Octovious Tea. The same was being divested. The tea
estate belonging to the company was also being divested as appears from the
notice issued by the Board of Directors. The respondents contended that because
of the death of the promoter of the company the present management decided to
divest of the said assets by observing regular formalities required in law.
25. I am also told that as on the date of
presentation of section 397 proceeding the value of the share was Rs. 73.40.
However, presently the value of the shares have gone down subsequently. The
respondent contended that although actual value of the share as on the date of
presentation of section 397 proceeding was much less the value of the shares
was artificially hiked up at the instance of the appellants.
Directions:
26. In this backdrop, I feel interest of justice
would be subserved if I direct the company to buy-back the shares of the
appellants @ Rs. 73.40 per share being the value as on the date of presentation
of section 397 proceeding. The appellants are also directed to sell their
shares at the said value.
27. In the case the appellants do not want to
sell their shares in the company, the company would be free to delete their
names from the Shareholder Register after depositing the value of those shares
at the aforesaid rate in any nationalized bank earmarked for payment to the
appellants. The company would also be entitled to proceed to dispose of their
assets as they were contemplating in accordance with law without taking the
appellants in confidence.
28. The company is directed to offer the price of
the shares within a period of fortnight from date. The appellants would also be
at liberty to tender their shares simultaneously on receipt of payment.
Needless to say, at the time of handing over of all those shares the appellant
would execute necessary transfer deeds and would comply with all formalities
required in law for transfer of this shares in favour of the company and/or
their nominee or nominees. Interim order of injunction already passed by this
Court would, however, continue for a period fortnight after long puja vacation
so that the share transfer could be effected in between.
29. APO No. 235 of 2004 is disposed of
accordingly. ACO No. 111 of 2004 is also disposed of accordingly.
30. There would be, however, no order as to costs.
31. Urgent xerox certified copy would be given to the parties, if applied
for.
[1966] 36 COMP.CAS. 1 (SC)
V.
K
SUBBA RAO, J. R. MUDHOLKAR AND R. S. BACHAWAT, JJ.
APPEAL NOS. 202 AND 203 OF 1965
August 30, 1965
JUDGMENT
BACHAWAT, J. - The
appellant is a limited company carrying on transport business in South Arcot District.
M.A. Khadar, the contesting respondent in Civil Appeal No. 202 of 1965, holds
13 shares and his brother M.J. Jabbar, the contesting respondent in Civil
Appeal No. 203 of 1965, holds 163 shares in the company. Articles 29 and 30 of
the articles of association of the company read:
"29.
The notice shall name a future day, not being less than seven days from the
service of the notice, on or before which such call or other money and all
interest and expenses that may have accrued by reason such non-payment are to
be paid and the place where payment is to be made, the place so named being
either the registered office of the company.....are usually made payable and
shall state that in the event of non-payment at or before the time and at the
place appointed the share in respect of which such payment is due, will be
liable to be forfeited.
30.
If the requisitions of any such notice as aforesaid be not complied with, any
share in respect of which such notice has been given may, at any time
thereafter before payment of all money due thereon with interest and expenses,
be forfeited by a resolution of the directors to that effect."
On
January 2, 1957, the board of directors of the company passed a resolution
calling the unpaid amount of Rs. 25 on each share. On January 3, 1957, a call
notice was issued to the shareholders requesting payment on or before January
19, 1957. The call notices were duly served on the contesting respondents. As
the call monies remained unpaid, the company issued the following notice dated
January 20, 1957, to the respondents under article 29:
“Sir,
As the call amount of the balance of Rs.
25 for every share held by you remains unpaid in respect of the notice dated
3rd January, 1957,issued in pursuance of the resolution of the Board, I hereby
issue this notice calling upon you to pay the called amount at the registered
office of the company on or before Wednesday the 30th January, 1957,
together with interest at six per cent. and any expenses that might have
accrued by reason of such non-payment.
Take further notice that in the event of
non-payment as mentioned above, the shares registered in your name will be
liable to be, once for all, forfeited without further notice and without
prejudice to any legal action that may be taken against you for recovering the
balance amount due from you treating the same as a debt due to and recoverable
as such by the company under article 14.
By order of the Board,
(Signed) A.R. Hassain Khan,
Managing Director."
In
spite of this notice, the respondents did not pay the call monies, and on
February 11, 1957, the board of directors passed a resolution under article 30
forfeiting the shares held by them. On November 8, 1957, the respondents filed
two separate applications under section 155 of the Companies Act, 1956, in the
High Court of Madras praying that the forfeitures be set aside and the
necessary rectifications be made in the share register of the company.
Ramachandra Iyer J. allowed the applications, and passed conditional orders for
rectification of the register, and his decision was affirmed by the appellate
court. The courts below held that, in the absence of particulars of interest
and expenses, the notice dated January 20, 1957, was defective and the forfeiture
was invalid. The company now appeals to this court on a certificate granted by
the High Court.
In
all standard articles of a company, the regulations relating to calls provide
for payment of interest on the unpaid call money at a certain rate from the date
appointed for its payment up to the time of actual payment, see regulation 14
of Table A in the First Schedule to the Indian Companies Act, 1913, regulation
16 of Table A in the First Schedule to the Companies Act, 1956, and Palmer's
Company Precedents, 17th edn., Part I, page 437 and the regulations relating to
calls are followed by regulations relating to forfeiture like articles 29 and
30 of the appellant-company. In the light of article 29 read with similar
regulations relating to calls, we would have no difficulty in holding that the
notice dated January 20, 1957, required payment of interest on the call money
from the date appointed for the payment thereof, that is to say, January 19,
1957, up to the time of the actual payment. Unfortunately, all the regulations
of the company relating to payment of calls have not been printed in the
paper-book, and in the present state of the record, we express no opinion on
the question whether the notice is defective in respect of the demand for
interest.
But
we agree with the High Court that the notice is defective in respect of the
demand for expenses. The amount of expenses incurred by the company by reason
of the non-payment was not disclosed. The respondents were not informed how
much they should pay on account of the expenses. The object of the notice under
article 29 is to give the shareholder an opportunity for payment of the call
money, interest and expenses. The notice under article 30 must disclose to the
shareholder presumably conversant with the articles sufficient information from
which he may know with certainty the amount which he should pay in order to
avoid the forfeiture. In the absence of particulars of the expenses, the
respondents were not in a position to know the precise amount which they were
required to pay on account of the expenses. A proper notice under article 29 is
a condition precedent to forfeiture under article 30. Here, the notice under
article 29 is defective, and the condition precedent is not complied with. The
slight defect in the notice invalidates it and is fatal to the forfeiture. The
courts below, therefore, rightly declared that the forfeiture was invalid.
Section
155(1)(a)(ii) of the Companies Act, 1956, allows rectification of the share
register if the name of any person after having been entered in the register
is, without sufficient cause, omitted therefrom. There is no sufficient cause
for the omission of the name of the shareholder from the register, where the
omission is due to an invalid forfeiture of his shares, and no finding that the
forfeiture is invalid, the court has ample jurisdiction under section 155 to
order rectification of the register. The High Court said that the shareholder
may approach the court under section 155 if he has sufficient cause. This mode of
expression was rightly criticised by counsel for the appellant. The issue under
section 155(1)(a)(ii) is not whether the shareholder has sufficient cause but
whether his name has been omitted from the register without sufficient cause.
As the forfeiture is invalid, the names of the respondents were omitted from
the share register without sufficient cause, and the jurisdiction of the court
under section 155 is attracted.
Counsel
for the appellant contended that the point as to the invalidity of the notice
dated January 20, 1957, was not open to the respondents in the absence of any
pleading on this point. In the affidavit in support of the application, the
respondents pleaded that the steps prescribed before there can be a forfeiture
have not been complied with. No further particulars were given, but the
contention as to the invalidity of the notice dated January 20, 1957, was
pointedly raised in the argument in the first court. The contention was allowed
to be raised without any objection. Had the objection been then raised, the
court might have allowed the respondents to file another affidavit. The
appellant cannot now complain that the pleadings were vague.
We
may now conveniently refer to certain events which happened after January 2,
1957, when the directors resolved to make the call and February 11, 1957, when
the shares were forfeited. On January 18, 1957, M.A. Jabbar, M.A. Khadar and
other shareholders filed Application No. 119 of 1957, in the Madras High Court
praying for reliefs under sections 402 and 237 of the Companies Act, 1956, and
obtained an interim order directing stay of collection of monies pursuant to
the notice dated January 3, 1957. The stay order was communicated to the
directors on January 21, 1957, after the notice of the intended forfeiture
dated January 20, 1957, was issued. On January 30, 1957, the court passed a
modified interim order restraining the forfeiture of the shares, and directed
M.A. Jabbar to pay the call money into court within one week. The call money
was not paid into court and on February 8, 1957, the court vacated the stay
order. Application No.119 of 1957 was eventually dismissed on April 10, 1957.
Counsel for the appellant contended that (1) by reason of the aforesaid
proceedings the respondents waived and abandoned their right to challenge the
forfeiture; (2) the order dated January 30, 1957, substituted a fresh notice of
intended forfeiture under article 29 in lieu of the original notice dated
January 20, 1957, and in the absence of compliance with this order, the
forfeiture is valid. Neither of these contentions was raised in the courts
below. We find nothing in the roceedings in Application No. 119 of 1957, from
which we can infer a waiver or abandonment by the respondents of their right to
challenge the validity of the notice dated January 20, 1957, and the subsequent
forfeiture. We also fail to see how the order of the court dated January 30,
1957, can amount to a notice under article 29. The only notice under article 29
is the one dated January 20, 1957, and as that notice is defective, the
forfeiture is invalid.
Counsel
for the appellant contended that the relief under section 155 is discretionary,
and the court should have refused relief in the exercise of its discretion.
Now, where by reason of its complexity or otherwise the matter can more
conveniently be decided in a suit, the court may refuse relief under section
155 and relegate the parties to a suit. But the point as to the invalidity of
the notice dated January 20, 1957, could well be decided summarily, and the
courts below rightly decided to give relief in the exercise of the
discretionary jurisdiction under section 155. Having found that the notice was
defective and the forfeiture was invalid, the court could not arbitrarily
refuse relief to the respondents.
Counsel
for the appellant points out that the respondents are the trade rivals of the
appellant and are anxious to cripple its affairs, and the appellate court
recorded the finding that the respondents were acting mala fide and
prejudicially to the interests of the appellant and their conduct in taking
various proceedings against the appellant is reprehensible. Counsel then relied
upon the well-known maxim of equity that "he who comes into equity must
come with clean hands", and contended that the courts below should have
dismissed the applications as the respondents did not come with clean hands.
This contention must be rejected for several reasons. The respondents are not
seeking equitable relief against forfeiture. They are asserting their legal
right to the shares on the ground that the forfeiture is invalid, and they
continue to be the legal owners of the shares. Secondly, the maxim does not
mean that every improper conduct of the applicant disentitles him to equitable
relief. The maxim may be invoked where the conduct complained of is unfair and
unjust in relation to the subject-matter of the litigation and the equity sued
for. The unwarranted proceedings under sections 402 and 237 of the Companies
Act, 1956, and other vexatious proceedings started by the respondents have no
relation to the invalidity of the forfeiture and the relief of rectification
and are not valid grounds for refusing relief.
In
the result, the appeals are dismissed. There will be no order as to costs.
Appeals dismissed.
[1950] 20
COMP CAS 55 (
v.
The
Ceramic Industries Ltd.
MUDHOLKAR, J.
SECOND APPEAL NO. 719 OF 1944
APRIL 16, 1949
R.G. Siras, for the Appellant.
J. P. Dwivedi, and .A.R. Chaubey for the Respondent.
Mudholkar, J.—This
appeal arises out of a suit for a declaration that shine certificates Nos. 520
and 530 held by the plaintiff in the "Ceramic Industries Company
Limited" continue to belong to him and that lie is a shareholder in that
company. The suit was decreed by the trial Court but dismissed by the lower
appellate Court.
It is an admitted fact that the appellant did purchase shares Nos. 529
and 530 in the defendant company. Each share is of the face value of Rs. 50 and
admittedly the appellant has paid only Rs. 20 in respect of each of them. A
notice was issued to him in common with other shareholders on the 15th January,
1941, calling upon him to pay the balance of the call money on or before the
31st January, 1941. Admittedly, the appellant did not pay his money. Thereupon
the managing agent of the respondent company sent a notice to the appellant on
the 20th March, 1941, styled as "Notice before forfeiture for non-payment
of call money". Despite receipt of this notice, the appellant did not pay
the call money. Thereafter, the managing agent of the respondent company
informed the appellant on the 3rd February, 1943, that his shares were
forfeited and that they would be sold by the company at his risk. Certain
correspondence ensued between the appellant and the respondent company after
this and the appellant was informed that his shares were sold by them to one
Seth Foolchand Motilal Banthia on the 5th February, 1943.
A number of contentions were taken by the appellant in the lowre Court
but as this is a. second at peal his learned counsel restricted his argument to
only one of them. The contention is that the notice dated the 20th March, 1941,
which was served upon him is not a valid notice. According to him, before a
forfeiture can be made, all the provisions prescribed in that behalf in the
Articles of Association of the company should be fully satisfied and unless
that is done the forfeiture is ineffective.
In support of his argument he has placed reliance on Pioneer Alkali
Works, Ltd. v. Amiruddin Shalebhoy Tyebji, Smt.
Premila Devi v. Peoples Bank of
In the
"This may seem to be somewhat technical; but in the matter of the
forfeiture of shares, technicalities must be strictly observed. And it is not,
as is sometimes apt to be forgotten, merely the person whose shares are being
forfeited who is entitled to insist, upon the strict fulfilment of conditions
prescribed for forfeiture. For, the forfeiture of shares may result in a
permanent reduction of the capital of a company."
The principle underlying these two cases supports the argument of the
learned counsel for the appellant. Thus it is necessary for the respondent
company to establish that the forfeiture was according to the provisions
contained in the Articles of Association. The relevant articles are Nos. 26 and
27. They are in the following terms:—
"(26) If any member fails to pay any call or instalment on or
before the day appointed for payment thereof, the directors may at any time
thereafter during such time as the call or instalment remains unpaid, serve
notice on such member or on the persons (if any) entitled to the share by
transmission requiring him to pay the same together with any interest that may
have accrued and any expenses that may have been incurred by the company by
reason of such non-payment and stating that in event of non-payment on
or before some day to be named in the notice (such day not being less than 14
days from the date of such notice) and at some place (either the registered
office of the company or at some other place at which calls of the company are
usually made payable) the shares in respect of which the calls was made or
instalment is payable will be liable to be forfeited.
(27) If the requisitions of
such notice are not complied with any shares in respect of which such notice
has been given may at any time thereafter before payment of all calls of
instalments or interest and expenses due in respect thereof, be forfeited by
the directors who shall record a minute to that effect. Such forfeiture shall
include ail dividends declared in respect of the forfeited shares and not
actually paid before the forfeiture."
It is clear from these articles
that the directors alone con decide about a forfeiture, that they must give
notice to the shareholder concerned stating clearly the amount payable and the
date by which the payments is to be
made and staling also that in the event of non-payment by a particular date the
share will be liable to be forfeited. It is further clear that it is only when
the notice-is not complied with that a forfeiture can be made and that the fact
of forfeiture has to be recorded in the minutes of the board of directors.
The notice relied upon by the respondent company is Exhibit D-20. 1
will reproduce the relevant portions of that notice:
"The directors have resolved that notice to be sent to the
shareholders requesting them to be more definite in paying the share calls and
that if the money is not paid within a month from the date of posting the
notice, the question of forfeiture of those shares will be considered by the
board of directors.
You are, therefore, requested to remit the said sum of Rs. 60 to the
registered office of the company, at Rabupeth, Chanda, on or before the 28th
April, 1941.
In the event of non-payment of the said call 011 or before the 20th
April 1941, the shares in respect of which such call was made will be liable to
be forfeited."
It. is clear from what I have quoted that the decision of the board of
directors is embodied solely in the first paragraph. The contents of the other
two paragraphs do not, on their face, appear to be authorised by the board of
directors, Now, in the first paragraph no specific date by which payment is to
be made is set out. It is a technical defect but it is defect and as such, even
by itself, it invalidates the notice. It is true that in the second and third
paragraphs a specific date is mentioned but there is nothing to show that this
date was the one resolved upon by the board of directors. Then, again, there is
a graver defect in the notice. The notice does not say that upon failure of the
appellant to pay the money within a month from the date of posting the notice,
the shares will be liable robe forfeited. What it says is that the question of
forfeiture will be considered by the board of directors. There is dearly a
difference between a liability to forfeiture and the possibility of a
forfeiture. As the matter was left so vague, it was, I think, not open to the
respondent company to forfeit those shares on the basis of such a notice.
There is also another and stronger reason why I think the forfeiture is
invalid. The notice on which reliance is placed was given on the 15th of
January, 1941, but the forfeiture took place on the 3rd January 1943, It is
admitted by the respondent company that soon after the notice of forfeiture was
given, the matter relating to the appellant's share was considered by the board
of directors and that though some other share were forfeited, his shares were
not forfeited. Considering this fact along with the contents of the notice, it
would be perfectly clear that it was not the intention of the board of
directors to give a notice of forefeiture to the appellant. It is true that the
managing agent did say that the shares would be forfeited unless payment was
made by the 20th April, 1941, but this action of his does not, on the face of
the notice, appear to have been authorised by the board of directors. It is
quite obvious that the managing agent cannot arrogate to himself the power or
authority of the board of directors and that what he says is no substitute for
a resolution by the board of directors.
It is, however, argued on the basis of Articles 74 and 76 of the Articles
of Association that the managing agents had all the powers of the board of
directions. In so far as the management of the concern is concerned, these
articles confer on them all the powers of the company itself but there is
nothing in the articles which oonfers upon the managing agent power other than
those of management. Now the right of a shareholder in hold a share and to
continue to be regarded in a sense one of the proprietors of the company is not
a matter which has any connection with the "management" of the
concern. Therefore, clearly the managing agent could on his sole authority, do
nothing which affected the rights of a shareholder.
I am, therefore, clear that the forfeiture of the appellant's shares
was without proper basis and is consequently invalid. What, then, is the effect
of this? Can the appellant get back all his right which the board of direction
have purported to take away from him? I am referred to Article 35 of the
Articles of Association which runs thus:
"An entry in the minute book of the directors of the company of
the forfeiture of any shares or that any shares have been sold to satisfy a
lien of the company shall be sufficient evidence as against all persons
entitled to such shares that such shares were properly forfeited or sold and
such entry and the receipt of the company for the price of such shares shall
constitute a good title to such shares. The directors may-cause the name of the
purchaser to be entered in the register as a member of the company in respect
of the shares sold to the purchaser and the purchaser shall not be bound to see
to the regularity of the proceedings or to the application of the purchase
money. The remedy of the former holder of such shares arid of any person
claiming under or through him shall be against the company exclusively and in
damages only."
It is clear from this that if shares which have been even invalidly
forfeited are sold by the company, the only remedy of the former holder of such
shares would be to claim damages from the company. See New Balkis Eersteling,
Limited v. Randt Gold Mining Company. The
shares have admitedly been sold by the respondent company on the 5th February,
1943. Therefore, all that the appellant can claim is damages. He has, however,
not made such a claim in the plaint and so the respondent company urges that
his suit ought to be dismissed as untenable. As no reliance was placed on
Article 35 in the Courts below, the appellant did not think it necessary to
amend his plaint and claim damages, at least in the alternative. It would be a
bit hard on him if the suit is dismissed for want of a proper prayer. No
question of limitation is involved as the prayer arises out of the same cause
of action as the one on which the relief for declaration is founded. In the
interests of Justice, I therefore think that the appellant should be allowed to
amend his plaint and so also should the respondent be allowed to amend his
written statement, if he wants to do so. This can only be done in the Court of
first instance. So I set aside the decree of the lower appellate Court and send
bad; the case to the Court of first instance for a fresh decision in advertence
to the above remarks. Costs shall abide the event.
[1939] 9 COMP CAS 1 (PC)
PRIVY COUNCIL
v.
Peoples
Bank of Northern India Ltd.
(In Liquidation)
LORD WRIGHT, LORD ROMER, LORD PORTER AND SIR
SHADI LAL. AND SIR GEORGE RANKIN
PRIVY COUNCIL
APPEAL NO. 84 OF 1937
OCTOBER 17, 1938
A.M. Dunne, K.C. and J.M. Prittgle for the Appellants.
Lionel C. Cohen, K.C. and W.
Wallach for the Respondents.
Lord Romer.—These are
three consolidated appeals from the order of the High Court of Judicature at
Article 34. —Notice requiring payment of arrears.—Whenever any
call, or instalment of a call, payable by any member shall not have been paid
on the appointed day, the Company may at any time thereafter during such time
as such call or instalment shall remain unpaid, send a notice requiring payment
by such further day, and at such place or places where the calls of the Company
are usually made payable, of such calls or instalments, in arrear, with
interest thereon, at the rate of 9 per cent. per annum from the day on which
such call or instalment ought to have been paid, and such notice shall state, that
in the event of non-payment at the time and place appointed of the arrear
incurred and interest thereon, together with such expenses (if any) as may be
incurred in and about the collection or recovery of such call or instalment and
interest or any of them, the share in respect of which such call was made will
be forfeited without further notice.
Article 35. —If such notice be net complied with, the share may
be forfeited, — the requisitions of any notice given pursuant to Cl. 34, shall
not be complied with, any share in respect of which such notice shall have been
given, may, without further notice at any time thereafter, unless payment of
all calls, interest, and expenses, due in respect thereof has been made, be
forfeited by a resolution of the Directors to that effect.
Article 36. —Forfeited shares
to become property of the Company. —Any shares forfeited under these Articles
shall be deemed to be the property of the Company, and may be sold or
re-allotted or otherwise disposed of, in such manner as the Directors shall
approve.
Article 37. —Forfeiture may be
remitted. —Until any share so forfeited shall be sold, re-allotted or otherwise
disposed of, the forfeiture thereof may, at the discretion and by a resolution
of the Directors, be remitted on such terms as the Board may in their
discretion think fit.
Article 40. —Calls to be made
at the discretion of Directors. —All calls in respect of shares shall be made
at the discretion of the directors and shall be payable to the person or
persons and at the time and place or places appointed by them.
Article 44. —Interest on calls
in arrears. —If the call or instalment of a call payable in respect of any
share is not paid by the day appointed for payment thereof the holder for the
time being of such share shall be liable to pay interest for the same at the
rate of Rs. 9 per cent. per annum from the day appointed for payment thereof to
the time of actual payment.
Article 45. —Power to receive
in advance moneys uncalled. —The directors may, if they shall think fit, receive
from any member willing to advance the same, all or any part of the moneys for
the time being remaining uncalled on his share beyond the calls then actually
made, and in case they shall so think fit they shall pay dividend upon the
moneys so paid in advance or upon so much thereof as shall from time to time
remain in advance of the calls then made upon the share, in respect of which
such advance has been made, in addition to the dividend payable on such part of
the capital as is actually called and paid up.
Article 46.—Power to pay
interest on advance in lieu of dividend. —If the Directors shall see fit to
receive in advance any such moneys, aforesaid they may pay interest upon the
same, or upon so much thereof as shall from time to time remain in advance of
the calls, at such rate not exceeding 6 per cent. per annum as they shall think
fit, such interest to be in lieu of the dividend provided by the preceding
clause upon such moneys so paid in advance.
On 29th September 1931, the
Bank suspended payment. Shortly afterwards a scheme of arrangement between the
Bank, its creditors-and shareholders was prepared, and after being approved in
the usual way at meetings of the creditors and share-holders was duly
sanctioned by the Court under Section 153 of the Indian Companies Act, upon
22nd December 1931. The details of that scheme are not relevant to these
appeals. But by 25th July 1932, it had become evident that the scheme was not
likely to attain the end which its promoters had in view, namely the successful
resuscitation of the business of the Bank, and accordingly on the
last-mentioned date an amended scheme of arrangement was brought before the
Court. In the meantime, the directors had, by resolution dated 15th March 1932,
made a call of Rupees 20 in respect of the "A" and "B"
shares, of which Rs. 10 was to be paid on or before 30th April 1932, and Rs. 10
on or before 20th May 1932. The amended scheme was in due course submitted to
meetings of the creditors and shareholders respectively, and having been approved
by them was sanctioned by the Court on 15th November 1932. The only provisions
of this scheme that are relevant to the present appeals are those contained in
Clause 6, which so far as material is in these terms:
"6. That for the purposes
of the revival of the Bank it be distinctly laid down that further calls on
capital of 'A' and 'B' class shares of which Rs. 50 and 25 lacs have been
respectively subscribed will not exceed 25 per cent., 20 per cent. having been
already called; thus leaving only a further call of 5 per cent. to be made.
This 25 per cent. call will be redistributed into 5 calls of 5 per cent. each
payable every half-year starting from 1st July 1932".
This clause is not expressed as
clearly as it might have been, but their Lordships entertain no doubt as to its
meaning. Before the month of March 1932, Rs. 50 had been called up on each of
the "A" and "B" shares. On 15th of that month a further Rs.
20 had been called up as already stated. The clause provided that for the
purpose of the revival of the Bank, i.e., for the purpose of the scheme, a
further call of Rs. 5 should be made in respect of such shares and no more. Had
the clause stopped there, the dates for payment of the Rs. 20 call would have
been those already fixed by the directors, viz., as to Rs. 10 thereof the 20th
April 1832, and as to the remaining Rs. 10 the 20th May 1932. The further call
of Rs. 5 would have become payable on such date as might be fixed by the
directors when making the call under Article 40, But the clause went on to fix
the dates on which both the Rs. 20 call already made and the Rs. 5 to be made
thereafter should be paid. The whole 25 per cent. was "redistributed"
and was to be paid in five instalments of 6 per cent. each payable on 1st July
1932, 1st January 1933, 1st July 1933, 1st January 1934 and 1st July 1934. It
only remained for the directors to pass a resolution making the further call of
Rs. 5 under Article 40, and such call would by virtue of the scheme become
payable on 1st July 1934. No further resolution was necessary in respect of the
Rs. 20. In the words of Clause 6, it had "already been called." The
resolution of 15th March 1932 therefore remained unaffected except that the
dates for the payment of the Rs. 20 were altered.
It is to be observed that one
effect of the amended scheme, when it came into operation on 15th November
1932, was to make the instalment payable on 1st July 1932, a call in arrear.
Another effect was that "A" and "B" shareholders who had
punctually paid the call made on 12th March 1932, were probably entitled to be
treated as having paid moneys on their shares in advance of calls within the
meaning of Articles 45 and 46. These circumstances no doubt introduced some
complication into the matter. But, it was nothing compared to the complications
introduced by the subsequent proceedings of the directors to which attention
must now be called. On 18th January 1933, they held a Board meeting. Their
Lordships regret to say that the record of proceedings supplied to them on
these appeals would seem to have been prepared with the view of making the
discovery of any particular document as laborious a task as possible. But a
diligent search, (for no assistance will be obtained from the index of
reference), will reveal a minute of this Board meeting. According to this
minute the directors, after referring to Clause 6 of the scheme, and recording
the fact that many shareholders had made default in payment of the 10 per cent,
calls made in the preceding March in whole or in part, passed the following
resolutions
(a) That the remaining call of 5per
cent. on "A" and "B" shares as provided for in clause 6 of
the Annexure A be made now under Article 34 payable on or before 26th February
1933, and that these shareholders who are partly or wholly in default of
already outstanding calls should be called upon under Article 35 to pay up the
arrears due with interest at 9 per cent. per annum calculated from due dates to
31st January 1933, at the registered office of the Company at Lahore, Bharat
Buildings, on or before the 26th day of
February 1933, in office hours, and that notices to this effect as required by
Articles 94 and 35 respectively be served on all 'A' and 'B' shareholders and
also on the defaulters, intimating to the latter, i.e., defaulters, at the same
time that in the event of non-payment at the time and place appointed all the
arrears incurred and interest thereon together with such expenses (if any) as
may be incurred in and about the collection or recovery of such calls and
interest or any other, the share in respect of which such calls were made will
be forfeited without further notice; and that a meeting of the Board will be
held on 27th February 1933, to effect forfeiture of the defaulters of the two
10 per cent. calls and the 5 per cent. call or any of them ; and that the
defaulters who pay up at least 5 per cent. on account of three calls (two of 10
per cent. each of 15th March 1932, and one of 5 per cent. of 18th January
1933), made before 26th February 1933, as an instalment under Clause 6 of the
revised scheme.
(b) A
compromise under Article 37 be offered to those share holders who accept the
following terms in regard to the amounts due on account of three calls
totalling 25 per cent. and interest due up to 31st January 1933, in terms of
Clause 6 of the Annexure A and but having paid 5 per cent. as per terms of
compromise proposed before 26th February 1933, and agreeing to pay the
remaining 20 per cent. of calls and interest due as above cited:
5¼ per cent. on all shares held by him on or before 15th June 1933,
6¼ per cent. on all shares held by him on or before 15th December 1933,
5¼ per cent. on all shares held by him on or before 15th June 1934,
5¼ per cent. on all shares held by him on or before 15th December 1934,
at the Head Office of the Bank between office hours on working days and
further agreeing that in the event of making a default in any of the
instalments as fixed here above, the Bank's Board could take the action as
provided for in Arts. 34, 35 and 36 of the Bank's Articles of Association.
These resolutions betray a complete Disappreciation on the part of the
directors of Clause 6 of the scheme. They had no right whatsoever to make the remaining
call of 5 per cent. payable on or before 26th February 1933. It is moreover
quite apparent that in passing this resolution they treated the clause
as in no way affecting the dates originally fixed for payment of the 20 per
cent. call made in March 1932, and that they were requiring payment of the
whole of this call (so far as not already paid) on or before 26th February
1933. This again they had no right to do. The most that they could have done in
respect of this 20 per cent. call was to send a notice under Art. 34 requiring
payment by 26th February 1933, of the two instalments of 5 per cent. payable on
1st July 1932, and 1st January 1933, with interest at 9 per cent. per annum
from those dates respectively, with an intimation that the shares would be
forfeited in default of payment of such instalments, interest and expenses as
mentioned in the Article. It would also have been within the competence of the
directors after any such forfeiture to offer a compromise under Art. 37 to
those members who had paid 6 per cent. before 26th February 1933. But they
would have had no conceivable right to make it a term of such compromise that
the instalments that were payable under the scheme on 1st July 1933, 1st
January 1934 and 1st July 1934, should be paid on any other dates.
It is perhaps understandable
that the directors should have failed to appreciate the true effect of cl. 6 of
the scheme and have thought that it in no way altered the dates for payment of
the 20 per cent. call made in March 1933. What is not so understandable is that
entertaining the views they did as to the meaning of the clause, they should at
the same meeting have passed the following resolution:
"Resolved that the
following sub-clauses be added to Art. 46 (by two extraordinary general meetings).
"That such shareholders
who had paid the 20 per cent. of two calls (10 per cent. each payable on 30th
April 1932, and 20th May 1932), before 18th January 1933 shall be paid interest
at the rate of 6 per cent. per annum from date of payment up to 31st January
1933, and thereafter interest will run on the non-adjusted balance out of the
remaining 15 per cent. as per cl. 3 hereof at the rate of 6 per cent. per annum
under Article 46 treating the balances at any time as an advance."
Article 46 was subsequently
amended in accordance with this resolution. What may be the meaning of the
words "non-adjusted balance out of the remaining 15 per cent. as per cl.
3" their Lordships are quite unable to determine. But it is plain that
interest could only be allowed to the shareholders who had already paid the two calls of 10 per cent. if those
calls were in truth payable on 1st July 1932, 1st January 1933, 1st July 1933
and 1st January 1934, instead of on 30th April 1932 and 20th May 1932; that is
to say if the dates originally fixed for payment had been altered by the
scheme. The calls would not otherwise have been paid in advance. But, however
this may be, the directors on 23rd January 1933 sent to the holders of the
"A" and "B" shares a notice of the further call of 5 per
cent. to be paid on or before 26th February 1933, stating that, in default of
payment on or before that date of this further call and of the two previous
calls of 10 per cent. each (which they described as payable on 30th April and
20th May 1932, respectively), with interest on such two previous calls at 9 per
cent. per annum from the date of the calls to 31st January 1933, the shares
would be forfeited without any further notice. It was also stated that shares
could be restored after forfeiture on the basis of the compromise mentioned in
resolution (b) passed on 18th January 1933. A draft copy of the compromise was
enclosed with each notice.
On 25th March 1933, another Board meeting was held. By resolutions
passed at this meeting the shares of such shareholders (including several of
the present appellants) as had neither made any payment in pursuance of the
notice nor accepted the terms of the compromise were forfeited. The shares of
those members (including the remaining appellants) who had paid 5 per cent. on
or before 25th March 1933, and had accepted the compromise were not forfeited
at this time. But later on, default was made by them in paying the instalment
of 5¼ per cent. payable under the comproraise on 15th June 1933; and by 11th
November 1933, the shares of all the appellants had been forfeited by the
directors.
On 22nd May 1935 an order was made for the winding up of the Bank, the
Official Liquidator being appointed the liquidator. By this time the names of
all the appellants had been removed from the register of members in respect of
the shares which the directors had purported to forfeit. In the cases where the
directors had been able to sell the share the purchasers' names had been
entered on the register. The Official Liquidator however inserted the names of
all the appellants in that their shares had not been validly forfeited and that
their names had been improperly removed from the register. In order to have it
determined whether this contention was well founded he applied to a Judge of
the High Court of Judicature at
In their Lordships' opinion the
learned Judges of the Division Bench came to a right conclusion. Upon
confirmation by the Court of the amended scheme of arrangement that scheme
became by virtue of Section 153, of the Indian Companies Act, binding upon the
creditors, the shareholders and the Bank alike. Its terms could thereafter only
be varied by order of the Court after the variation had been approved at
meetings of the creditors and shareholders. It was not therefore possible for
the Bank or its directors or shareholders whether by resolution or ratification
or otherwise to alter the dates fixed by cl. 6 of the scheme for payment of the
20 per cent. called upon March 1932 or the 5 per cent. called upon 18th January
1933. It necessarily follows that the resolution of the directors on the latter
date requiring the whole 25 per cent. to be paid with interest on or before
26th February 1933 was an attempt on their part to do something that was ultra
vires the Bank.
The offer to the shareholders
of the compromise was equally beyond the powers of the Bank or its directors.
For, apart from the fact that the powers conferred upon the directors by Art.
37 only arise after the share has been forfeited, neither the Bank nor its
directors could vary the scheme under the guise of a compromise with a
shareholder. The resolutions (a) and (b) of 18th January 1933, except in so far
as they made the call of 5 per cent. and the purported forfeitures of the
appellants shares that followed upon them were therefore inoperative and void.
It was said on behalf of the appellants
that, inasmuch as on 18th January 1933, the two instalments payable on 1st July
1932 and 1st January 1933, were in arrear, the Bank through its directors could
have validly forfeited the appellants' shares. This is true. But, it is plain
from the terms of the resolutions of 18th January 1933, and of the notice sent
to the shareholders on 23rd January 1933, and of the resolution of 25th March
1933, that the shares forfeited on this last date were being forfeited for
default in payment of the 25 per cent. by 26th February 1933. This latter resolution
was in these terms:
"The shareholders in respect of the following 'A' and 'B' class
shares having made default in respect of calls of 25 per cent., 20 per cent.
having been called on 15th March 1932, and 5 per cent. on 18th January 1933,
and having neither offered any compromise as allowed by the General Board
Resolution No. 2 dated 18th January 1933, nor having made any payment in terms
thereof, it is hereby resolved that these shares be and are forfeited..."
It was further contended on behalf of the appellants that inasmuch as
the shares of those who had paid at least 5 per cent. by 25th March 1933, were
not forfeited until later, and they were given further opportunities of
availing themselves of the compromise, the resolution just set out should be regarded
as merely for feiting the shares for non-payment of the 5 per cent. payable on
1st July 1932. This in their Lordships' judgment is an impossible contention in
view of the facts already detailed. It is true that had the shareholders
affected by the resolution paid 5 per cent., their shares would not have been
forfeited at that time. They would have been given a further opportunity of
paying. But from those who had paid nothing, the directors may well have
thought that nothing was likely to be obtained in the future. Their shares were
accordingly then and there forfeited; they were forfeited however for
non-payment of the 25 per cent. and not merely for non-payment of the 5 per
cent.
This may seem to be somewhat technical; but in the matter of the forfeiture
of shares, technicalities must be strictly observed. And it is not, as is
sometimes apt to be forgotten, merely the person whose shares are being
forfeited who is entitled to insist upon the strict fulfilment of the
conditions prescribed for forfeiture. For, the forfeiture of shares may result
in a permanent reduction of the capital of a company. It will suffice to take
the present case as an example. If the forfeitures are upheld the appellants
remain liable, no doubt, for the whole 25 per cent. called up in March 1932 and
in January 1933. But they will escape liability altogether in respect of the
uncalled 25 per cent. and this is a matter that vitally affects the creditors.
These creditors cannot be deprived of their right to have this 25 per cent.
made available for payment of their debts without due cause.
The creditors are, therefore,
entitled to see that the power of forfeiting shares is exercised strictly.
Where the power of a company to forfeit shares has arisen, the Articles of
Association usually contain provisions as to the sending of notices and the
like that may regarded as being inserted merely for the protection of the
shareholder affected. Such provisions may properly be regarded as being
directory only and capable of being waived by the individual shareholder. But
no waiver by him can confer upon the company or its directors a power of
forfeiture that they do not possess, as for example, a power to forfeit shares
for non-payment of calls that are not yet due.
It was, however, strenuously
contended on behalf of the appellants, both before the High Court and before
their Lordships, that the forfeitures in question had been ratified by the
whole body of creditors and shareholders. Such ratification, it was said, was
to be implied from the fact that various balance sheets with reports thereon of
the directors showing that the shares in question had been forfeited had been
issued to the shareholders; that the forfeiture of the shares had also been
mentioned and discussed at meetings both of creditors and shareholders; and
that no creditor or shareholder had ever challenged the validity of the
forfeitures.
In view, however, of the
binding character of the scheme sanctioned by the Court, no variation of or
departure from that scheme could be validated by the mere acquiescence of the
shareholders and creditors, as has already been pointed out in an earlier part
of their Lordships' judgment. But even if it be assumed that the forfeitures
could be made valid by ratification, there is no evidence to which their
Lordships' attention has been called to justify the conclusion that such
ratification was in fact given. As was said by Lord Chelmsford in Spackman v.
Evans at p. 234:
"To render valid an act of
the directors of a company which is ultra vires, the acquiescence of the
shareholders must be of the same extent as the consent which would have given
validity from the first, viz., the acquiescence of each and every member of the
company. Of course, this acquiescence cannot be presumed unless knowledge of
the transaction can be brought home to every one of the remaining
shareholders."
By-knowledge of the transaction
Lord Chelmsford clearly meant knowledge of the invalidity of the transaction.
Lord Cranworth in the same case said this (p. 194):
"Looking to all which was
thus done, I should certainly hold that the conduct of the continuing
shareholders amounted to a ratification of the illegal or irregular acts of the
directors, provided it be clear that the shareholders knew that they were
illegal or irregular..."
Much to the same effect was
said by Sir Barnes Peacock in delivering the judgment of this Board in Irvine
Union v. Bank of Australia at p. 375:
"Their Lordships think
that it would be competent for a majority of the shareholders present…at an
extraordinary meeting convened for that object, and of which object due notice
had been given to ratify an act previously done by the directors in excess of
their authority; and they are not prepared to say that if a report had been
circulated before a half-yearly meeting distinctly giving notice that the
directors had done an act in excess of their authority, and that the meeting
would be asked by confirming the report to ratify the act, this might not be
sufficient notice to bring the ratification within the competency of the
majority of the shareholders present at the half-yearly meeting."
There can in truth be no
ratification without an intention to ratify, and there can be no intention to
ratify an illegal act without knowledge of the illegality. In the present case
there is nothing whatsoever to show that in the balance sheets or reports or at
any meeting, the attention of the creditors or shareholders was called to any
illegality or irregularity in the forfeitures of the shares, or that at any
material time they had any knowledge of any such illegality or irregularity.
Least of all were they told that they were being invited by their silence or
otherwise to ratify the forfeitures that had taken place. It was on these
grounds that the plea of ratification was rejected, and in their Lordships'
opinion was rightly rejected, by the learned Judges of the High Court.
A belated attempt was made by
Mr. Pringle on behalf of some of the appellants to show that their shares had
been forfeited not for default in payment of the calls of 25 per cent. made in
March 1932 and January 1933, but, for default in payment of the calls of 50 per
cent. made on the original allotment of the "A" and "B"
shares. But no such contention was put forward in the High Court or in the
printed case for the appellants. The contention is indeed in flat contradiction
of some of the statements made in the case. In these circumstances it is far
too late to advance any such contention now.
It only remains to mention one
other matter. It is said by the appellants that the liquidator is attempting to
charge them with interest on the unpaid calls and that the liability of the
appellants as contributories is inconsistent with liability on them to pay such
interest. Upon this question their Lordships express no opinion. The only
question before them is whether the appellants have been rightly placed upon
the list of contributories; and this question should, in their Lordships'
judgment, be answered in the affirmative. What the result of this may be is a question
that will have to be determined hereafter in the course of the liquidation. It
does not arise on this occasion.
Their Lordships are of opinion
for the reasons they have given that these appeals should be dismissed with
costs, and they will humbly advise His Majesty accordingly.
[1931] 1 COMP. CAS.
85 (PAT.)
v.
Gaya Bank and Trades Association, Ltd.
ROSS AND SCROOPE,
JJ.
APPEAL NOS. 209, 212 AND 213 OF 1928
JULY 23, 1930
Rai Gurusaran Prasad, Siveshwar Dayal, K. Dayal and Chawdhry Mathura Prasad, for the Appellants.
Dhyan Chandra and Jugal K. Prasad, for the Respondent.
Ross, J.—These are three appeals against an order passed by the District Judge of Gaya disallowing the objections of the appellants to their inclusion in the list of contributories in the winding-up of the Gaya Bank and Trades Association Company, Limited. This company is registered under the Companies Act (Act VII of 1913). An order was passed by the High Court on 23rd July, 1925, for its winding-up.
Three points are taken in these appeals. The first is that the shares of the appellants having been forfeited more than a year before the commencement of the winding-up, they are not liable to contribute under s. 156(1)(i). The second point is that the claim is barred by Art. 112, Limitation Act, and the third is that, in the case of two appellants their liability, if any, should be limited to the extent of the assets of the deceased shareholders (whose representatives they are) coming to their hands. The principal question is that raised by the first contention and it is necessary in the first place to ascertain the facts.
The shares in question are shares of Rs. 100 each, payable in four instalments of Rs. 25. The first two instalments were paid. It appears from the minute-book of the company that as far back as 4th February, 1920, it was "resolved that the third call upon the shares at 25 per cent. be made according to law and due notices of at least three weeks be given to this shareholders for payment thereof (Ex. 1)."
Nothing seems to have followed from this resolution. On 9th September, 1922, a notice was issued for payment of the third call which stated that "in case of failure in payment the directors will be obliged to take other steps for its realisation by forfeiture or otherwise as the case may be (Ex. A-1)."
Then comes the notice upon which the appellants rely (Ex. B) dated 1st September, 1923. It runs as follows: "Dear Sir, please take notice that as per resolution of the directors of the Bank passed at a meeting held on 21st February, 1923, (which was confirmed at the annual general meeting of the shareholders of the bank held on 14th March, 1923) those shareholders who have not yet paid up the third call with interest due against them are requested to pay up the same within six weeks from the date of service of this notice, failing which the shares held by them will be forfeited as provided by the Companies Act, VII of 1913. You are, therefore, requested to pay up Rs. 50 third call for two shares Nos. 13 to 14 held by you in this company together with Rs. 7-7-5 interest up to 31st March, 1923, besides Current year's interest till date of payment at 5 per cent. per annum. Herein fail not."
The contention on behalf of the appellants is that on their failure to comply with this notice their shares were forfeited six weeks after the date of service thereof.
The articles of association have not been produced but s. 18 of the Act provides that in the case of a company limited by shares, if articles are not registered or if articles are registered in so far as the articles do not exclude or modify the regulations in Table A in Sch. I, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles. In the absence of proof to the contrary, therefore, it must be taken that Table A has been incorporated in the articles and, in fact, it appears from the letter-book produced in this case that in certain of the printed notices issued by the company there is a reference to Table A. The notice that I have quoted by reason of its reference to the provisions of the Companies Act, must, therefore, be taken to contain by implication a reference to the regulations in Table A. Article 24 of Table A provides for the notice by the directors requiring payment of a call. Article 25 provides for the naming of the date not earlier than the expiration of fourteen days from the date of the notice on or before which the payment required by the notice is to be made and requires that it shall state that in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited. Article 26 provides that "if the requirements of any such notice as aforesaid are not complied with any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the directors to that effect."
It seems to follow, therefore, from its terms themselves that the notice had not, by its own force, the effect of forfeiting the shares. Something more was necessary, viz., a subsequent resolution of the directors.
It will be seen that the notice quoted above refers to a meeting of the directors held on 21st February, 1923, and to an annual general meeting of the shareholders held on 14th March, 1923. The minute-book shows that at the first of these meetings, i.e., of 21st February, 1923, the directors resolved: "that the shareholders who have not yet paid up their call with interest may be asked to pay up the same within a period to be fixed by the managing directors according to law, and failing which their shares may be held to be liable to be forfeited. But this notice to be issued and the step to be taken after sanction of the shareholders at the general annual meeting to be held is obtained and not otherwise. The question of taking other steps to realize the call be also considered at the annual general meeting of the shareholders."
The minute-book further shows that at the aforesaid annual general meeting on 14th March, 1923, the following resolution was passed:
"Considered the resolution of the directors made at the meeting held on on 21st February, 1923, as regards realization of the third call on shares by forfeiture or otherwise. Resolved that notice of six weeks be issued to the shareholders asking them to pay up the third call with interest and in case of failure in payment their shares may be forfeited by a resolution of the directors to be issued hereafter."
The minute-book further shows that no such resolution was ever passed. Thus neither the terms of the notice nor the resolutions of the directors and of the shareholders seem to support the argument that the shares had been forfeited. And there is no other evidence of forfeiture.
But the learned advocate for the appellants contended, on the authority of Wollaston's case and of Knight's case, that the notice in itself by reason of the terms had the effect of forfeiting the shares and that no subsequent resolution of the directors was necessary for this purpose.
The authorities are thus summarized in Lindley on Companies, 6th Edition at page 728: "Moreover, a declared intention to forfeit not carried into effect, or not duly confirmed, is no forfeiture at all. Still, if there is power to forfeit, and a declared intention to forfeit and the shares intended to be forfeited are treated by the company and shareholder as forfeited, the company will be precluded from afterwards insisting that no forfeiture ever took place"; and again at page 1142; "if everything required to be done is substantially done by the company, and if the shares have been treated both by the company and by the shareholder as forfeited, the shareholder will not be a contributory."
Then follows a reference to Kinght's case and the learned author proceeds: "In the above case it will be observed that there was power to forfeit, an intention to forfeit, and a notice of that intention; and the intention was actually carried into effect although not with due regularity. But…… an intention to forfeit not carried into effect is no forfeiture at all."
The ordinary rule is that there is no binding forfeiture unless it be declared by the directors: see Edinburgh, Leith and Newhaven Ry. Co. v. Hebblewhite. This case was followed in Birmingham Bristol and Thames Junction Railway Co. v. Locke, where Lord Denman, C.J., said: "It was also objected that the company had precluded itself from treating the defendant as a proprietor by declaring (through its directors) his shares forfeited for non-payment of former calls. But the forfeiture dues not attach till it has been reported to, and sanctioned by a general meeting of the proprietors and the Court of Exchequer has held that notice of forfeiture does not excuse from payment of calls."
In London and Brighton Ry. Co. v. Fairclough it was conceded that the objection that the defendant had ceased to be a shareholder, his shares having been declared to be forfeited, was answered by the case of Edinburgh, Leith and Newhaven Ry. Co. v. Hebblewhite (supra p. 90).
That being the general rule, Woollaston's case (supra p. 90) may now be considered. The deed of settlement of the company in that case provided by cl. 101 for notice requiring payment within 21 days on pain of forfeiture and that in default of payment it should be lawful for the directors to declare the share to be forfeited. A resolution of the directors was passed that those shareholders who had not fully paid and satisfied their respective calls upon their subscribed shares, should receive notice to do so forthwith and that unless the said shares were fully paid and satisfied within 21 days from the date of the notice, then and in such case, the said unpaid shares should be irremediably forfeited to the sole and exclusive use of the company under and by virtue of cl. 101 of the deed of settlement. Thereafter a notice was sent to Woollaston that unless payment was made within 21 days, the shares would be irremediably forfeited. Along with this notice was sent a copy of the resolution. It was held that the shares were forfeited and that Woollaston was not liable to contribute. The question was whether the prospective resolution was good or not. Turner, L.J., said: "By this notice they made a plain declaration of forfeiture, to take effect upon a certain event which happened, and for three years this declaration was treated as having taken effect and as being in force. It is argued that cl. 101 does not give the directors powers to make such a prospective declaration of forfeiture, but only enables them to declare a forfeiture after the shareholder has been in default for the 21 days and that, in strictness, may be so, but this is a difference of form, not of substance……… The directors had power to declare a forfeiture in the events which happened, they clearly intended that there should be a forfeiture, and though their mode of declaring it may have been not strictly regular, the variation appears to me to be one of form and not of substance."
This case was considered in Bigg's case. In that case the directors passed a resolution that notice should be given to shareholders in arreares requesting payment by a certain date and intimating that unless payment was made, the shares would be then forfeited without further notice, the notice to contain a recital of the clauses in the articles of association relating to forfeiture of shares. A notice was duly given in these terms. Bigg paid the calls on some of his shares and stated at the company's office that as to the remaining shares he would submit to the forfeiture as provided by the notice. The directors subsequently decided that the shares of the shareholders who were solvent were not forfeited and among these was Bigg. It was held in that case that Bigg was liable to contribute. Page Wood, V.C., said: "I will first remark that the operation of these clauses of forfeiture must be considered to see whether or not some determination on the part of the directors is not first necessary. I apprehend that some direction on the part of the directors is necessary as regards the company, although no operation on the part of the directors is necessary as regards the shareholder beyond giving him the notice."
Woollaston's case (supra p. 90) was distinguished on the ground that the notice there was not merely a notice to pay on pain of forfeiture but also a notice of the resolution of the directors that the shares would be forfeited, and on the ground that the notice was accompanied by a copy of the resolution itself which, as the Vice-Chancellor pointed out: "was not only a resolution that the notice should be sent, but it was also a distinct embodiment of the decision of the directors, that the shares should, from that moment, be forfeited."
It was further pointed out that in that case the subsequent proceedings which took place were treated as of considerable importance, as undoubtedly they were, that for three years the parties who received the notice and the company who gave the notice acted upon it and therefore evidenced in the best possible manner their intention of proceeding upon it. The Vice-Chancellor said:
"The very circumstance that these matters were pressed into the consideration of the case seems to indicate a degree of doubt on the part of the Lords Justices as to what the immediate effect of the notice would have been if it had stood alone."
Now, the notice in the present case does not incorporate any resolution of the directors forfeiting the shares, nor could it have done so, because no such resolution was ever passed. I have quoted the resolution, and it is apparent that neither the directors nor the shareholders came to any decision actually forfeiting the shares. The notice in the present case is very similar to the notice of Bigg's case (supra p. 92) and in my opinion it did not amount to a forfeiture of shares. In Knight's case (supra p. 90) the facts were entirely different from the facts of the present case. There a notice was given requiring payment and stating that in default of payment the shares would become forfeited and the directors would forthwith pass a resolution to that effect whereupon, such shares so forfeited would become the property of the company. But in that case, after default was made, an entry was made in the book containing the list of shareholders showing that the shares in question had been forfeited and a memorandum was made in the register of new shares showing that the shares had been transferred to the company. Turner, L.J., pointed out that the shares could not have been transferred to the company and could not have been forfeited to the company without the resolution of the directors being passed; and it was therefore, considered that this was sufficient to afford evidence that there was a resolution passed by the directors to forfeit the shares. Cairns, L.J., said: "On the one hand, to have made these entries without authority would have been a gross breach of duty, or something worse, on the part of the officers who made the entries. On the other hand, if they were made with authority that authority would be, in substance if not actual form, the expression of the resolution of the directors to forfeit the shares for non-payment of calls. I, therefore, think that whatever objection there may be in form, there is none in substance to the forfeiture of the shares on the ground of the mode in which the resolution of the directors to forfeit the shares is expressed."
It is obvious that the decision in that case turned on the existence of facts which are not present in this case. I hold, therefore, that the present case is not within either Woollaston's case (supra p. 90) or Knight's case (supra p. 90), but falls under the general rule. It follows that the shares of the appellants have not been forfeited and that they are liable to contribute.
This concludes the question of limitation also. Once it is held that the appellants are contributories, then the case is governed by the decision in Jagannath Parshad v. U.P. Flour and Oil Mills Co., Ltd., Sorabji v. Isser Dass, and Vadiswara Ayyar v. Siva Subramanya. The law on this point is perfectly clear and there is no dispute about it. The fact that the calls were barred by time against the company is immaterial; as was said by Jessel, M.R., in In re Whitehouse & Co.:
"That is a new liability; he is to contribute; it is a new contribution. It is a mistake to call that a debt due to the company. It is no such thing. It is not, as has been supposed, in any shape or way a debt due to the company, but it is a liability to contribute to the assets of the company…….. It is quite true that a call made before the winding-up……. a debt due to the company, but that does not affect this new liability to contribution:"
The distinction is further illustrated by the converse case of Ladies Dress Association, Ltd. v. Pullbrook. There the shares had been forfeited more than a year before the liquidation and it was pointed out that a person in the position of the defendant was liable with regard to unpaid calls, not as contributory, either as present or past member of the company, but as a debtor of the company under the provisions of the articles of association: see also Art. 28 (Table A). The positions are quite distinct and the fact that the company in the present case could not realize the calls by reason of lapse of time is no answer to the liquidator's claim.
As to the third point, it is plain on the terms of s. 184 of the Act as well as on the general law that Anant Prasad Varma, appellant No. 3 in Appeal No. 209 of 1928 and Raghubans Sahay, appellant in Appeal No. 213 of 1928 are only liable to contribute to the extent of the assets, if any, which came to their hands from the deceased shareholders Harbans Lal and Bansi Lal and the order of the District Judge must be modified accordingly. With this modification of the order the appeals are dismissed with costs.
Scroope, J.—I agree.
[1934] 004 COMP CAS
280 (
HIGH COURT OF
v.
Flour & Oil Mills Co. Ltd.
TEK CHAND, J.
MISCELLANEOUS FIRST
APPEAL NO. 1383 OF 1933
JUNE 19, 1934
Shamair Chand, for the appellants.
Bhagwat Dyal and Kishen Dyal, for the respondent.
Tek Chand, J.—The Flour and Oil Mills Company Limited, Sonepat, went into voluntary liquidation on the 20th June, 1928. Subsequently an order was passed by this Court that the winding-up be done under the supervision of the Court, and it was ordered under Section 164 that all further proceedings be taken in the Court of the District Judge, Karnal. It is admitted that the company had made calls from the shareholders, which were payable on the 28 th February, 1925, and 30th November, 1925. It appears that the appellants did not pay the amount due on these calls and, as already stated, the company went into liquidation in June 1928. In 1930 and 1931 the liquidators issued notices to the appellants requiring them to pay the amount of the above calls for which they were shown liable in the books of the company. The appellants objected (1) that the claim was time-barred under article 112 of the Indian Limitation Act and (2) that they were not liable as their shares had been forfeited in 1925.
The question of limitation is concluded by authority. It is settled in a long course of decisions that a member of a company in liquidation is liable in respect of unpaid calls even though the calls were made by the company before it went into liquidation and the suit of the company for their realization had become barred by time under Article 112 of the Indian Limitation Act: Sorabji v. Isher Das, Vaideswara Ayyar v. Sivasubrahmanya, Jagannath Prasad v. U.P. Oil Mills Ltd., Dehra Dun Mussourie Electric Tramway Co. In re and Pray an Prasad v. Gay a Bank Ltd. Compare Delhi Woollen Mills Co., Ltd. v. Durga Das and others. The principle of these decisions is that when a company goes into liquidation, Section 156 creates a new liability on the shareholders in respect of such calls, which is distinct from and independent of the rights which the company had against them before the winding up Hansraj Gupta v. Asthana and others and In re Whitehouse & Co. Mr. Shamair Chand for the appellant has not been able to cite any authority to the contrary. The decision of the lower Court on this point is therefore correct.
The second objection urged is that the appellants are not liable because in the notices issued to the appellants by the directors in 1925, before the company went into liquidation, it was stated that if the amounts called were not paid on the dates specified, their shares would be forfeited. It is, however, admitted that no resolution was passed by the directors actually forfeiting the shares, as was necessary under Article 52 of the articles of association of the company. There was, therefore, no valid forfeiture of the shares: Prayan Prasad v. Gaya Bank Ltd.
No other point was raised. The appeal fails and is dismissed with costs.
[1972] 42 COMP. CAS. 569 (KER.)
HIGH COURT OF KERALA
Travancore Electro Chemical
Industries Ltd.
v.
Alagappa
Textiles (
T.S. KRISHNAMOORTHY IYER AND P. UNNIKRISHNA
KURUP, JJ.
A.S. NO. 18 OF 1966
NOVEMBER 22, 1971
P.K. Subramania Iyer and C.S.
Ananthakrishna Iyer for the Appellant.
P.K. Kurien for the Respondent.
JUDGMENT
Krishnamoorthy Iyer, J.—The
defendant in O.S. No. 23 of 1962 on the file of the Sub-Court, Kottayam, is the
appellant. The plaintiff’s claim is for recovery of Rs. 90,000 with future
interest thereon at the rate of 6% per annum. The plaint is based on the
following facts.
The defendant is the Travancore
Electro Chemical Industries Ltd., which is a public limited company having its
registered office at Chingavanam, Kottayam. Alagappa Textiles Ltd., Alwaye,
hereinafter referred to as the “Alwaye company”, was a shareholder in the
defendant owning 900 shares of the face value of Rs. 100 each. The Alwaye
company had at the time of allotment paid Rs. 50 per share. The
defendant-company on December 9, 1947, decided by the resolution evidenced by
item No. 8 in exhibit D-29(g) minutes of the meeting of its board of directors
to make a call of Rs. 25, on every share on 2nd of January, 1948, the amount
being payable on or before 31st January, 1948. The Alwaye company committed
default in the payment of the call money. The defendant by resolution No. 9(a)
in the meeting of the board of directors evidenced by exhibit D-29(a) decided
to make the final call of Rs. 25 payable on or before 31st of December, 1948.
The Alwaye company committed default in the payment of this amount also.
It is the case of the defendant
that resolution No. 7 was passed by the directors in the meeting held on
October 23, 1948, evidenced by exhibit D-29(e) forfeiting the shares of the
Alwaye company for the default in the payment of the first call amount. The
Alwaye company went into voluntary liquidation on June 22, 1949. The case of
the plaintiff is for amounts due to the plaintiff from the Alwaye company. The
plaintiff passed the resolution, exhibit P-2, offering to take the assets both
movable and immovable of the Alwaye company in satisfaction of their claim for
Rs. 4,75,000. Exhibit P-2 resolution is dated 23rd June, 1949. The voluntary liquidator
of the Alwaye company transferred the immovable assets of the Alwaye company to
the plaintiff by exhibit P-23 dated February 28, 1950. There is no deed
evidencing the transfer of the movable properties of the Alwaye company in
favour of the plaintiff. The plaintiff claims to have become the transferee of
the 900 shares because of exhibit P-5 blank transfer signed by the voluntary
liquidator of the Alwaye company and handed over to the plaintiff along with
exhibit P-6, the share script issued to the Alwaye company by the defendant.
The plaintiff wrote exhibit D-9 letter dated 18th of September, 1950, to the
defendant informing them about the transfer of exhibit P-6 in their favour and
requesting the defendant to waive the forfeiture of the shares agreeing to pay
the sum of Rs. 45,000 being the arrears of call monies due from the Alwaye
company. The defendant by exhibit P-7 dated 16th November, 1950, expressed its
willingness to waive the forfeiture on the plaintiff paying Rs. 45,000 together
with interest at 5% from the due date within the time stipulated therein and on
production of the transfer deed to prove the transfer of shares in their
favour. The Alwaye company (sic plaintiff) along with their letter dated
December 3, 1950, sent a cheque for Rs. 25,000 towards payment for waiving the
forfeiture. In pursuance to the terms of exhibit P-7 the plaintiff is bound to
pay the balance of Rs. 20,000 and interest within a period of one month from
December 3, 1950. The defendant, therefore, while acknowledging the receipt of
Rs. 25,000 wrote exhibit D-16 to the plaintiff reminding them about the terms
of exhibit P-7 and also requesting them to produce the transfer deed or any
other document in original to prove about the transfer of the shares by the Alwaye
company in their favour. The plaintiff did not comply with the terms of exhibit
D-16. The defendant, therefore, wrote exhibit P-10, copy being exhibit D-14,
for expediting the matter. The reminder, exhibit P-11, dated February 16, 1951,
copy being exhibit D-13, sent by the defendant to the plaintiff did not have
any effect. The defendant, therefore, sent exhibit P-12 dated 13th March, 1951,
copy being exhibit D-12, informing the plaintiff that, if the conditions are
not complied with within a week’s time from the date of exhibit D-12, the
matter would be treated as closed. It is seen that thereafter besides paying
Rs. 20,000 the plaintiff did not pay the interest as demanded. It is also seen
that the plaintiff did not also produce any deed to evidence the transfer of
shares in their favour. It is seen from exhibit P-14 that the forfeited shares
were sold by the defendant-company in the year 1960. The suit is therefore
filed by the plaintiff for recovery of Rs. 90,000 being the damages sustained
by the plaintiff because of the wrongful sale of the 900 shares in the name of
the Alwaye company.
The plaint was subsequently
amended to declare that the forfeiture of the shares in the name of the Alwaye
company by the defendant is invalid and they were the property of the plaintiff
when they were sold in 1960. The plaintiff therefore alleged that the sale by
the defendant is unlawful and is a wrongful conversion of the shares belonging
to the plaintiff and on that ground the defendant is liable for the plaint claim
of Rs. 90,000.
It was contended by the
defendant that the forfeiture of shares is valid in view of the default on the
part of the plaintiff to pay the interest due and also to produce the transfer
deed, the defendant did not waive the forfeiture, the plaintiff is a defaulter
in the performance of the contract, the plaintiff has no locus standi to
impeach the forfeiture of the shares which stood in the name of the Alwaye
company and the suit is barred by limitation.
The learned judge found that
the forfeiture of the shares of the Alwaye company is invalid, that the
plaintiff is competent to question the same, that since the defendant has sold
the 900 shares the remedy of the plaintiff is only to a decree for damages for
Rs. 90,000 and that the suit is not barred by limitation. The learned judge,
therefore, granted a decree in favour of the plaintiff for the plaint amount
after deducting Rs. 6,328-6-11 being the interest on the call monies due on the
date of suit. This appeal is filed by the defendant against the decree of the
court below.
The points argued before us
are: (1) The plaintiff has no locus standi to impeach the resolution passed by
the defendant forfeiting the shares held by the Alwaye company. (2) The
forfeiture of the shares of the Alwaye company by the defendant is valid. (3)
Even if the forfeiture resolution is invalid the plaintiff is not entitled to
claim the sum of Rs. 45,000 paid by them, and (4) The suit is barred by
limitation.
Point No. 1. The claim of Rs.
90,000 as damages is on the ground that the plaintiff acquired the title to the
900 shares which the Alwaye company held with the defendant. This was sought to
be established by relying on exhibits P-2, P-3, P-4, P-4(a), P-5 and P-6. It is
admitted that the Alwaye company went into voluntary liquidation by the
resolution dated June 22, 1949. Exhibit P-3 dated 23rd June, 1949, is the note
submitted by the manager of the plaintiff to its directors. The said note
recommended that in view of the interest of the plaintiff in the Alwaye company
the former should purchase the assets of the latter company for a sum of Rs.
4,75,000. Exhibit P-2 is the minutes of the meeting of the directors of the
plaintiff held on 23rd June, 1949. In the said meeting a resolution was passed
on the basis of exhibit P-3 to purchase the assets of the Alwaye company for
Rs. 4,75,000. Exhibit P-4 is the general ledger of the plaintiff-company for
the year 1949 and exhibit P-4(a) (page 286) is the account of the plaintiff in
the name of the Alwaye company. In our view, exhibit P-4(a) does not in any way
help the plaintiff. On October 11, 1949, there is a credit entry of Rs.
4,40,903-9-3 under the heading “By conveyance assets”. Exhibit P-23 dated
February 26, 1950, is the sale deed executed by V.R. Annamalai, liquidator of
the Alwaye company, in favour of the plaintiff in respect of the immovable
properties of they Alwaye company for Rs. 2,50,000. Though there is a reference to exhibit P-23
by the learned judge, it was admitted before us that it was not relevant as it
does not deal with the movable properties belonging to the Alwaye company. What
is the other conveyance referred to in exhibit P-4(a) has not been explained.
It is, therefore, clear that exhibit P-23 cannot confer any title in favour of
the plaintiff in respect of the shares of the defendant held by the Alwaye
company.
Counsel for the plaintiff,
therefore, relied on exhibits P-2 to P-6 to establish title of the plaintiff to
the shares in question. Exhibit P-3 is only the note of the manager of the
plaintiff to the directors and exhibit P-2 resolution passed by the plaintiff
only authorised to make an offer to the Alwaye company for purchasing its
assets. The date when the offer was made and accepted by the Alwaye company is
not in evidence. Exhibit P-4(a) also does not throw any light on this matter.
Counsel, therefore, relied on exhibits P-5 and P-6. Exhibit P-5 is a blank
transfer alleged to have been signed by the voluntary liquidator on behalf of
the Alwaye company. Exhibit P-6 is the share certificate in respect of 900
shares issued by the defendant to the Alwaye company which is alleged to have
been handed over to the plaintiff along with exhibit P-5. The submission on
behalf of the plaintiff was that the plaintiff has acquired title to the shares
on the basis of exhibits P-5 and P-6 and thus the plaintiff is competent to
attack the validity of the forfeiture of shares by the defendant. Counsel for
the defendant contended that the forfeiture of the shares owned by the Alwaye
company was on October 23, 1948, and since the offer put forward on behalf of
the plaintiff to purchase the assets of the Alwaye company was only on June 23,
1949, the plaintiff is not competent to impeach the forfeiture. According to
counsel for the plaintiff, if the forfeiture of the shares by the defendant is
invalid, it is open to the Alwaye company to effect a transfer of the shares
even subsequent to October 23, 1948, and it is equally competent for the
plaintiff to attack the validity of the forfeiture. It is, therefore, necessary
to examine in some detail these rival contentions.
First of all we will examine
the legal effect of exhibits P-5 and P-6. Exhibit P-6 is the share certificate
in respect of the 900 shares issued by the defendant in favour of the Alwaye
company. Exhibit P-5 is the blank transfer form alleged to have been signed by
the liquidator Annamalai. There is no date in exhibit P-5. The name of the
transferor is not mentioned therein. As we already indicated, even if exhibit
P-5 is genuine, it could have been handed over only subsequent to the
forfeiture of the shares by the defendant. Though the defendant repeatedly
called upon the plaintiff to produce the transfer deed, it was not done. It is,
therefore, very doubtful whether exhibit P-5 was given to the plaintiff by the
Alwaye company then. Section 82 of the Companies Act, 1956, provides that the
shares of any member in a company shall be movable property, transferable in
the manner provided by the articles of the company. Article 57 of exhibit D-10,
which is the memorandum and articles of the defendant, enables the transfer of
the shares of the company by an instrument in writing in the usual common from
or in such form as may be prescribed by the directors from time to time. In
such circumstances, transfer of shares can no doubt be effected by blank
transfers also. But so far as the defendant is concerned, the company
recognises no person except those whose names are on the register of members of
the company. The blank transfer of shares may give rise to certain equities
between the transferor and the transferee but the latter on the basis of such
blank transfer can have no cause of action against the company excepting for
the rectification of the share register for registering the shares in the
transferee’s name. Since this aspect was argued very elaborately before us, we
shall examine this question with reference to the decisions placed before us.
In Buckley on the Companies
Acts, thirteenth edition, at page 608, the learned author says:
“....where the articles of association
do not require a deed, but permit transfers to be made by ‘instrument in
writing,’ a transfer in blank carries to the person whose name is subsequently
filled in as transferee, not only the equitable, but also the legal
interest—meaning, it is conceived, the legal right to call upon the company to
register the transfer. For there is no legal title to the shares until
registration ; or at any rate until all necessary conditions have been
fulfilled to give the transferee as between himself and the company a present
absolute and unconditional right to have the transfer registered.”
Under article 57 of exhibit
D-10 no deed is required for the transfer of shares. Shares can be transferred
by an instrument in writing. Article 58 provides that the transferor shall be
deemed to remain the holder of his share until the name of the transferee is
entered in the register of members in respect thereof. The said article also
provides that every instrument of transfer shall be signed by the transferor
and the transferee and in the case of a share held by two or more joint holders
or to be transferred to the joint names of two or more transferees by all such
joint-holders or by all such joint-transferees, as the case may be. It is,
therefore, clear that no rights can arise in favour of a transferee as between
him and the company until his name is registered as a shareholder in the books
of the company. When once the transfer is completed and recognised by the
company it relates back to the time when the transfer was first made. The legal
position emerging from the transfer as between the transferor and the
transferee before the latter is recognised as a shareholder by the company is
stated thus by Hidayatullah J. in Howrah Trading
Co.v. Commissioner of Income-tax:
“During the period that the
transfer exists between the transferor and the transferee without emerging as a
binding document upon the company, equities exist between them, but not between
the transferee and the company. The transferee can call upon the transferor to
attend the meeting, vote according to his directions, sign documents in
relation to the issuance of fresh capital, call for emergent meetings and,
inter alia, also compel the transferor to pay such dividend as he may have
received. See E. D. Sassoon and Co. Ltd. v. R.A. Patch approved in
Mathalone v. Bombay Life Assurance Co. Ltd. But these
rights though they, no doubt, clothe the transferee with an equitable
ownership, are not sufficient to make the transferee a full owner, since the
legal interest vis-a-vis the company still outstands in the transferor ; so
much so, that the company credits the dividends only to the transferor and also
calls upon him to make payment of any unpaid capital which may be needed.”
In Arjun Prasad v. Central Bank
of India
Das J. observed at page 37:
“It is clear, however, that all
the decisions are really one way, namely, that as between the parties to the
transaction and where the right of no third parties is involved, a registered shareholder
by duly executing a transfer in blank and by handing over the share certificate
to his creditor by way of security transmits his title to the shares, both
legal and equitable, and the transferee can fill up the blank and ask for the
registration of his name in the books of the company without the risk of his
right being defeated by the registered owner or by any other person deriving
title from the registered owner.”
Thus it is clear that a
transferee of shares under blank transfer whose name is not registered in the
books of the company is not the legal owner of the shares. Farwell J. in
Borland’s Trustee v. Steel Bros, and Co. Ltd., dealing
with a share, observed I
“‘A share’, observed the
learned judge, ‘is the interest of a shareholder in the company measured by a
sum of money, for the purpose of liability in the first place, and of interest
in the second, but also consisting of a series of mutual covenants entered into
by all the shareholders inter se in accordance with section 16, Companies Act,
1862. The contract contained in the articles of association is one of the
original incidents of the share. A share is not a sum of money settled in the
way suggested, but is an interest measured by a sum of money and made up of
various rights contained in the contract, including the right to a sum of money
of a more or less amount.”
It is thus clear that a
transferee who has not obtained registration of his name with the company has
no right as against the company and the company does not deal with him.
The plaintiff, therefore, on
the basis of exhibits P-5 and P-6 has no right to impeach the forfeiture of the
shares of the Alwaye company by the defendant without being registered as the
owner of the shares in the books of the defendant.
Counsel for the defendant
contended that the plaintiff by exhibit P-5 has not obtained title to the
shares for the reason that the names of the transferor and the transferee have
not been entered therein. Exhibit P-5 contains the signature of Annamalai, who
is the liquidator of the Alwaye company. Though there is nothing in exhibit P-5
to prove that Annamalai is the liquidator of the Alwaye company, this is clear
from exhibit P-23. Exhibit P-5 also does not indicate that Annamalai has signed
in his capacity as the liquidator of the Alwaye company. The column against the
transferor has been left blank. In Colonial Bank v. HepworthChitty J.
observed:
“According to a practice which
has extensively prevailed and has been recognised and acted upon by the
company, the transferor signs the transfer and power of attorney without
filling in the names of the transferee and attorney; and these blank transfers
readily pass on the market from hand to hand by delivery only until the
documents reach the hands of some holder who desires to be registered. His name
is then filled in by himself or on his behalf ....
The plain legal effect of this
recognised practice is, that the transferor who executes the transfer in blank
confers on the holder of the documents for the time being an authority to fill
in the name of the transferee; and each successive holder for the time being,
when the documents pass through several hands, passes on this authority. The
holders must of course be bona fide holders for value without notice.”
It thus follows that so long as
the plaintiff has not filled their name as the transferee in exhibit P-5 they
only remain the holder without intending to become the transferee. It was
argued that so long as the plaintiff has not completed exhibit P-5 by
incorporating their name as the transferee in exhibit P-5 there is no question
of their getting any title over the shares. There seems to be substance in this
contention. We, therefore, hold that by virtue of exhibit P-5 the plaintiff
cannot exercise any rights as a shareholder against the defendant and canvass
the validity of the forfeiture resolution.
At this stage it is necessary
to note an argument of counsel for the defendant. Learned counsel contended
that on the date of the transfer of shares by the Alwaye company to the
plaintiff, exhibit P-6 shares have already been forfeited by the defendant. As
a result of the forfeiture, Alwaye company ceased to be the owner of the shares
and they have no transferable interest or title in them for executing exhibit
P-5 in favour of the plaintiff. Exhibit P-5 does not contain any date. There is
also no evidence as to when it was executed. The forfeiture of the shares,
according to the defendant, is on October 23, 1948. Even though exhibit P-5 is
not dated in view of exhibit P-2 resolution dated June 23, 1949, even the offer
for the purchase of shares by the plaintiff to the Alwaye company was only long
subsequent to October 23, 1948. It is, therefore, clear that the purported
transfer is only after the forfeiture of the shares by the defendant.
Counsel for the plaintiff
contended, if the forfeiture of the shares was not in conformity with exhibit
D-10, articles of association, there is legally no forfeiture and it was
competent for the Alwaye company to transfer the shares even subsequent to
October 23, 1948. It is also significant that the plaintiff did not in spite of
the demand for that purpose by the defendant produce exhibit P-5 to show that
there was even a blank transfer by the Alwaye company to the plaintiff.
Forfeiture of shares in violation of articles of association may be invalid as
between the company and the shareholder whose shares have been forfeited. When
once the shares are forfeited by the company the forfeiture involves the
extinction of all the interests of the shareholder therein except those rights
in the shares which are saved by the articles of association. This is clear
from article 48 of exhibit D-10. The effect of article 48 read with article 45
is the removal of the membership of the holder of the shares from the registers
of the company. So long as he has not taken any steps to get his name restored
in the books of the company and thereby established that he continues to be the
member according to the register of the company it is not possible for him to
transfer the shares or it is not open to a transferee subsequent to the
forfeiture of the transferred shares to ignore the said forfeiture and contend
that the entire proceedings are void. Section 155 of the Companies Act itself
provides for rectification of the register at the instance of a person whose
name has been omitted therefrom without sufficient cause. The plaintiff in the
case before us has admitted in the plaint that the forfeited shares were also
sold by the company in the year 1960. This is also proved by exhibit P-14. It
is the case of the plaintiff that in view of article 54 of exhibit D-10 the
rights of the purchaser of the forfeited shares from the company will not be
affected by any irregularity or invalidity in the proceedings towards
forfeiture of the shares. The only right available to the shareholder will be
for damages against the company. If the blank transfer was subsequent to the
sale of the shares by the defendant the plaintiff cannot have any cause of
action at all against the company. It is here that the date on which exhibit P-5
was handed over to the plaintiff becomes important and it has not been
clarified by the plaintiff. In spite of the demands of the defendant the
plaintiff did not forward exhibits P-5 and P-6 to the defendant before suit.
Even if the Alwaye company has got the right to treat the forfeiture void and
to treat themselves as member of the defendant it is necessary for the
plaintiff on the basis of exhibit P-5 to get substituted as a member in the
registers of the defendant by an application under section 155 of the Companies
Act. Probably in view of the plea of the plaintiff that the forfeiture is void,
it may be open to the plaintiff to get the right as a member declared in the
suit itself. There is no such prayer in the suit. The plaintiff is, therefore,
not entitled to claim damages on the ground that they are damnified by the
forfeiture of the shares. In order to claim a relief by way of damages it is
necessary for the plaintiff to get their right as a member of the defendant
declared. It is only then that they can sustain a cause of action for damages
against the defendant.
The second point relates to the
validity of the forfeiture of the shares of the Alwaye company by the
defendant. The relevant articles contained in exhibit D-10 are articles 42 to
45. They read as follows :
“42. If any member fails to pay
money due from him in respect of any call made or instalment due on any share,
or any sum which by the terms of issue of any shares become payable at a fixed
time, whether on account of the amount of the share, or by way of premium, on
or before the day appointed for payment of the same, or any such extension
thereof, as aforesaid, or any interest due on such call or instalment, or any
expenses that may have been incurred thereon, the directors or any person
authorised by them for that purpose may, at any time thereafter during such
time as such money remains unpaid, give notice to such member or his legal
personal representative, or the person entitled to the share by transmission,
by writing sent to the registered address of such member or of such
representative or person (if any) through the post or by messenger, or if there
be no such representative or person, then by way of advertisement requiring him
to pay the money payable in respect of such share, together with such interest
and expenses.
43. The notice shall name a day
(not earlier than the expiration of fourteen days from the date of the notice)
and a place or places, on or before and at which such call or instalment or
such interest or expenses as aforesaid are to be paid, and the notice shall
also state that, in the event of non-payment at or before the time and at the
place or places so appointed, the share in respect of which the call,
instalment, interest, or expenses are owing, will be liable to be forfeited.
44. If the requisition of any such notice as aforesaid shall not be complied with, every or any share in respect of which the notice has been given may at any time thereafter, before payment of all calls or instalments, interest and expenses due in respect thereof, be forfeited by a resolution of the directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture.
45. When any share shall have been so forfeited, notice of the forfeiture shall be given to the member in whose name it stood immediately prior to the forfeiture, or to his legal personal representative or to the person entitled to the share by transmission, by writing sent to the registered address of such member, or of such representative or person, through the post or by messenger or, if there be no such representative of such person then by way of advertisement and an entry of the forfeiture with the date thereof shall forthwith be made in the register ; the provisions of this article are however directory only and no forfeiture shall in any manner be invalidated by any omission or neglect to give such notice or to make such entry as aforesaid.”
According to counsel for the
defendant exhibit D-29(e) dated October 23, 1948, is the resolution forfeiting
the shares of the Alwaye company by the defendant. Resolution No. 8 in exhibit
D-29(g), minutes of the meeting of the board of directors of the defendant
dated 9th of December, 1947, authorises the managing agents of the
defendant-company to take steps under the articles of association to make the
first call of Rs. 25 on 2nd of January, 1948, payable on or before 31st
January, 1948. The validity of the resolution making the first call was not
challenged before us. The plaintiff have in the plaint contended that exhibit
D-29(e) is not valid and apart from attacking specifically the validity of the
said resolution it is also pleaded that the forfeiture of the shares is
invalid. The forfeiture is generally attacked as invalid. Before considering
the question whether exhibit D-29(e) is sufficient under the articles of
association to effect a forfeiture of the shares of the Alwaye company it is
necessary to mention that the defendant did not treat exhibit D-29(e) as the
resolution affecting the forfeiture of the shares. The defendant has not in the
pleadings precisely stated that the forfeiture was as a result of exhibit
D-29(e). The plea of counsel for the defendant is that exhibit D-29(e) resolution
combined the ingredients mentioned in articles 42 and 44 of the articles and
memorandum of association evidenced by exhibit D-10. There was a lot of
discussion at the bar as to the legal effect of the resolution in exhibit
D-29(e). Before considering this question it will be advantageous to note the
conditions in articles 42 to 44 of exhibit D-10. When a member commits default
in the payment of the call money article 42 enjoins the issuance of a notice to
him to pay the call money. Article 43 stipulates that the said notice, among
other things, should indicate that in the event of non-payment of the amounts
mentioned in the notice as required therein the share in respect of which the
amount is owing will be liable to be forfeited. Article 44 enables the company
to forfeit the shares only in the event of non-compliance with such notice. Now
we shall extract the relevant resolution in exhibit D-29(e). It reads :
“Regarding the first call money
due from some of the company’s shareholders, it was resolved that notices be
issued to the shareholders as per list A sub-joined, informing them that if
payment of the amount due from them together with the interest from the date on
which the money became due at the rate of 6% per annum up to the date of
payment is not received at the company’s registered offices on or before the
30th November, 1948, shares standing in their names will stand forfeited.”
According to the defendant,
because of the default of payment on November 30, 1948, by the Alwaye company
their shares have been forfeited. In view of the words “will stand forfeited”
in exhibit D-29(e) counsel for the defendant contended that no separate
resolution as is enjoined by article 44 of the company of exhibit D-10 is
necessary. Counsel for the plaintiff attacked the validity of exhibit D-29(e)
as a resolution of forfeiture on three grounds. The first is that the
defendants themselves did not treat the said resolution as one such. (2) The
said resolution in accordance with its terms is incapable of being construed as
a resolution of forfeiture and (3) exhibit D-29(e) itself does not purport to
be a resolution of forfeiture. It is necessary to consider these objections.
We shall examine the plea
whether exhibit D-29(e) was intended and passed by the defendant as a resolution
forfeiting the shares. Exhibit D-45 is the notice issued by the defendant to
the Alwaye company in pursuance of exhibit D-29(e). The relevant portion of
exhibit D-45 reads :
“We now write to inform you
that the directors require you to pay the sum of Rs. 22,500 together with
interest thereon at the rate of 6% per annum from 31st January, 1948, till the
date of payment on or before 30th November, 1948, and that in the event of
non-receipt of the said call money and interest thereon, on or before the said
date at the registered office of the company the shares in respect of which
such call money is due will stand forfeited.”
Exhibit D-29(f) contains the
minutes of the proceedings of the board of directors of the defendant in the
meeting held on 29th September, 1949. In the said meeting the resolutions
passed in exhibit D-29(e) were considered and confirmed. Resolution No. 9 in
exhibit D-29(f) is in these terms :
“It was resolved that the
managing agents be authorised to consult the legal advisers and to issue final
notices of forfeiture in cases of defaulting shareholders who have not paid the
first call amount up to date and who have been served with proper notices as
per the board’s resolution dated October 23, 1948, in that respect.”
On the basis of the above
resolution counsel for the plaintiff pointed out that the final notice of
forfeiture contemplated in the above resolution are the notices mentioned in
article 43 and if the defendant had treated exhibit D-29(e) as the resolution
of forfeiture there was no necessity to make any reference to the payment of
the call money up to date of the resolution in exhibit D-29(f). On the other
hand, the interpretation given by defendant’s counsel was that the issuance of
final notices of forfeiture contemplated in resolution No. 9 in exhibit D-29(f)
are the notices referred to in article 44. It was also pointed out that the
defaulting shareholders who have not paid the first call amount up to date
referred to in exhibit D-29(f) can only mean those who defaulted to comply with
exhibit D-29(e) resolution. It is rather difficult to accept the interpretation
given by defendant’s counsel. If exhibit D-29(e) was intended or treated as the
resolution of forfeiture in conformity with the requirements of article 44 there
was no necessity at all to consult legal advisers for the issue of article 45
notices. Legal advice may be necessary if at all only for the issue of notices
under article 43 to avoid any forfeiture being invalidated by a defaulting
shareholder because of the non-compliance with the provisions in exhibit D-10
or in the Companies Act. Resolution No. 9 in exhibit D-29(f) for issue of
notices of forfeiture to defaulting shareholders who have not paid the first
call amount up to date (underlining is ours) is a
significant pointer to the conclusion that on the date of exhibit D-29(f) there
was no forfeiture of shares in respect of which the first call money was
remaining unpaid. There is also no justification to accept the plea of
defendant’s counsel that the words “up to date” in resolution No. 9 in exhibit
D-29(f) only mean till October 23, 1948, the date of exhibit D-29(e)
resolution. The notice, exhibit D-37, dated 26th/31st October, 1949, issued by
the defendant to Alwaye company will conclude this point. It will be useful to
extract the relevant portion in exhibit D-37 which is to the following effect:
“With reference to our
forfeiture notice No. 1964 dated November 1, 1948, in respect of 900 ordinary
shares of this company standing in your name we regret to state that the amount
due on the shares was not received by the company as per the notice and the
directors therefore have by their resolution dated September 29, 1949,
forfeited the said 900 ordinary shares.”
It is thus obvious that the
defendant did not treat the resolution in exhibit D-29(e) as the resolution
forfeiting the shares. The reference in exhibit D-37 is to resolution No. 9 in
exhibit D-29(f). It is necessary to point out at this stage that the resolution
in exhibit D-29(f) cannot be construed as a resolution of forfeiture as it has
authorised only the issue of the necessary notices. Counsel for the defendant
realising the difficulty to contend that resolution No. 9 in exhibit D-29(f)
amounts to a forfeiture was of course compelled to rely on exhibit D-29(e) as
the relevant resolution for the purpose. We do not think that we can entertain
the plea especially because the defendant-company itself did not intend the
said resolution as one such. In exhibit D-38 dated March 28, 1950, notice
issued by the defendant to the Alwaye company, it has been repeated that the
900 ordinary shares in the name of the Alwaye company were forfeited by the
resolution dated September 29, 1949. passed by the defendant’s board of
directors. Here again the reference is obviously to exhibit D-29(f).
The plaintiff had, by their
letter dated 18th of September, 1950, requested the defendant to give them an
opportunity to pay the call monies due on 900 shares of the Alwaye company and
waive the forfeiture. This request was considered by the board of directors of
the defendant in the meeting held on 8th August, 1951. Exhibits D-29(a) and (b)
are proceedings of the meeting and resolution No. 11(b) deals with the matter.
The said resolution also refers to exhibit D-29(f) as the resolution forfeiting
the shares of the defaulting shareholders.
We shall now take up the second
submission of plaintiff’s counsel that exhibit D-29(a) is incapable of being
construed as the resolution of forfeiture. The right of the defendant to
forfeit the share of a defaulting shareholder has to be exercised under article
44 of exhibit D-10. Before the exercise of such power a notice in terms of
article 42 of exhibit D-10 has to be issued to the defaulting shareholder and
the said notice has to be in accordance with the terms of article 43 of exhibit
D-10. It does not appear that prior to exhibit D-29(e) the board of directors
or any officer of the company authorised in that behalf issued a notice in
terms of article 43 to the defaulting shareholders. Article 43 provides that it
should state, among other things, that in the event of non-payment at or before
the time and at the place or places so appointed the share in respect of which
the call, instalment, interest, or expenses are owing, will be liable to be
forfeited. It is only after the default is committed to comply with the notice
that the right to forfeit the shares arises and it is not possible for the
defendant to pass a resolution of forfeiture in anticipation of any default. It
has been held that provisions relating to forfeiture of shares on default of
the shareholders will have to be strictly complied with. We do not think it
necessary to cite authorities in support of this proposition. We are,
therefore, satisfied that it is rot possible to combine articles 42 and 44. The
second submission of counsel for plaintiff has to be accepted.
We shall now consider the third
submission on behalf of the plaintiff that exhibit D-29(e) does not amount to a
resolution forfeiting the shares of the Alwaye company. Even at the risk of
repetition we shall extract the resolution once again :
“Regarding the first call money
due from some of the company’s shareholders, it was resolved that notices be
issued to the shareholders as per list A subjoined, informing them that if
payment of the amount due from them together with the interest from the date on
which the money became due at the rate of 6% per annum up to the date of
payment is not received at the company’s registered offices on or before the
30th November, 1948, shares standing in their names will stand forfeited.”
A plain reading of the above
shows that it related only to the contents of the notice to be issued by the
officers of the company. One of the matters to be stated in the notice was that
on account of any default in complying with the terms of the notice the shares
will be forfeited. This does not amount to a resolution forfeiting the shares
of the company. When the intention is to inform the shareholders that the
shares will be forfeited if the amount is not paid, further action is necessary
to forfeit the shares after the expiry of the date mentioned in the notices.
Further, a reading of articles 42, 43 and 44 will show that the default to pay
the amount on the last date will not automatically entail forfeiture. If even
after the last date in the notice and before forfeiture the defaulting
shareholder pays the amount due no forfeiture is possible. We, therefore, find
that exhibit D-29(e) is not a resolution forfeiting the shares but only
authorises the officers of the defendant to issue the notice in terms of
article 43 of exhibit D-10. Exhibit D-29(e) was not also treated as a
resolution of forfeiture by the defendant. The expression “informing” in the
above resolution only indicates what should be the contents of the notice to be
issued and not an action on the part of the board of directors forfeiting the
shares.
We shall now consider the third
contention raised, namely, whether the plaintiff is entitled to get back the
sum of Rs. 45,000 paid by them to the defendant to waive the forfeiture of 900
shares standing in the name of the Alwaye company. In view of our finding that
the plaintiff has no title to the shares as against the defendant they cannot
have any cause of action to recover the value of 900 shares by way of damages
on account of wrongful conversion of those shares by sale to strangers in the
year 1960. It was on 18th September, 1950, that the plaintiff wrote to the defendant
requesting them to give an opportunity to the plaintiff to pay the call monies
due on 900 shares and waive the forfeiture. Exhibit D-18 is the reply given by
the defendant to the plaintiff which stated that the directors would be
agreeable to waive the forfeiture of the shares provided (1) the plaintiff
produce before the defendant the transfer deed conferring title deeds to the
shares on them, (2) on deposit with the defendant Rs. 25,000 immediately, and
(3) the balance of Rs. 20,000 together with the interest at 5% from the dates
on which calls were due up to date of payment within a month after the first
payment. Resolution No. M(b) passed by the board of directors of the defendant
in the meeting held on August 8, 1951, embodies the conditions. The resolution
is contained in exhibit D-29(a) and (b). The said resolution reads:
“Resolved that the forfeiture
of the shares be annulled as per article No. 50 of the articles of association
of the company and the shares be transferred to the name of Alagappa Textiles
(Cochin) Ltd., provided (1) the necessary transfer deed from Messrs. Alagappa
Textiles Ltd., Alwaye, or any other document in original showing that the
assets of Messrs. Alagappa Textiles Ltd., Alwaye, have been taken over by
Messrs. Alagappa Textiles (Cochin) Ltd. is received by the company, (2) also
that Messrs. Alagappa Textiles (Cochin) Ltd. deposit with the company
immediately Rs. 25,000 as part payment of the call monies due and agree to pay
the balance of call monies together with interest thereon at the rate of 5%
within a month.”
It is the common case that the
plaintiff after paying the first instalment of Rs. 25,000 paid the second
instalment of Rs. 20,000 on various dates after the expiry of the period fixed
by the defendant. The plaintiff did not pay the interest due as required and
did not also produce the evidence of transfer. The plaintiff, therefore, is a
defaulter in complying with the conditions stipulated by the defendant for
waiving the forfeiture. Counsel for the defendant contended that even though
the shares of the Alwaye company have been forfeited by the defendant still
under the terms of article 47 of exhibit D-10, the Alwaye company is liable to
pay all monies due at the time of, the forfeiture and, therefore, the defendant
is entitled to realise the sum of Rs. 45,000 from the Alwaye company. This
submission of counsel for the defendant cannot be disputed. But he further
contended that the sum of Rs. 45,000 paid by the plaintiff was in discharge of
the liability of the Alwaye company towards call monies due on the date of the
forfeiture and the said amount has been appropriated by the defendant towards
the debt and the plaintiff, therefore, is not entitled to claim the same.
However ingenious this argument may be, it has no substance. The payment of Rs.
45,000 by the plaintiff to the defendant was in pursuance of the contract
entered into between them for waiving the forfeiture. Though the plaintiff has
no locus standi legally to apply for waiving the forfeiture of shares, yet the
defendant was agreeable to do so if the plaintiff satisfied the conditions
imposed by the defendant for that purpose. It is true that the plaintiff was a
defaulter in the performance of those conditions and it was open to the
defendant to rescind the contract. Until the rescission of the contract the
money has to be kept by the defendant as money belonging to the plaintiff
having been paid in pursuance of the contract. The contract did not provide for
the discharge of the liability of the Alwaye company by the defendant. If the
conditions in the contract are complied with by the plaintiff then on receipt
of the amount mentioned therein the shares in the name of the Alwaye company
will have to be transferred to the plaintiff by the defendant. The plaintiff
did not agree to pay Rs. 45,000 towards the discharge of the liability of the
Alwaye company outstanding to the defendant on the date of the forfeiture of
the shares. Thus the plea of the defendant that the payment of Rs. 45,000 by
the planitiff was towards the discharge of the liability of the Alwaye company
to the defendant cannot be accepted.
Counsel for the defendant then
pointed out that even assuming that the payment of Rs. 45,000 was towards the
performance of the contract entered into by the parties since the plaintiff was
a defaulter in carrying out the terms thereof, the plaintiff is not entitled to
claim back the sum of Rs. 45,000. We do not find any merit in this submission.
When the plaintiff committed default in the performance of the contract and
when it was rescinded by the defendant, the latter is bound to return the sum
of Rs. 45,000. The defendant is no doubt entitled to claim damages, if any, on
account of the breach of the plaintiff. There is no claim for damages by the
defendant. We do not find any legal basis for the defendant’s claim to retain
the sum of Rs. 45,000.
The next submission of
defendant’s counsel on this point was that the right of the plaintiff to get
back Rs. 45,000 even if maintainable is barred by limitation. By exhibit D-24
dated October 14, 1953, by the defendant to the plaintiff the latter was
requested to pay Rs. 6,328-6-11 being the interest due on the call monies to
enable them to place the matter before the board of directors for waiving the
forfeiture. Thereafter, nothing happened until the sale of the forfeited shares
by the defendant in 1960. The suit was instituted in 1962 within three years of
the same. Subsequent to exhibit D-24 there is absolutely nothing to show that
the contract was rescinded by the defendant. The evidence as well as the
conduct of the parties show that the time limit fixed in the resolution passed
by the defendant-company for the payment of the amount for waiving the
forfeiture was waived by the defendant. Until the date of the sale of the
forfeited shares the plaintiff could have legitimately thought that if they
would pay the balance of interest and produce the transfer deed the defendant
would waive the forfeiture. Thus they are justified in treating the contract as
subsisting. The cause of action for the return of the amount paid by the
plaintiff can arise only after the contract was rescinded by the sale of the
shares to a third party. The suit having been filed within three years thereof
is not barred by limitation.
It is necessary to note one
further argument on the part of the defendant’s counsel. It was stated that the
plaintiff’s remedy is for a declaration that they are the owners of the shares
with the purchaser on the party array. We do not think that this remedy is
available in view of article 54 of exhibit D-10. Their claim, if at all, lies
only in damages.
It, therefore, follows that the
decree passed by the learned judge cannot be sustained to its full extent. The
plaintiff in view of our finding is only entitled to the return of the sum of
Rs. 45,000 with interest at the rate of 5% from the date of suit. We do not
think that the omission of a specific separate prayer for the return of Rs.
45,000 by the plaintiff in the plaint should deter us from granting them a
decree for the return of that sum. The claim for recovery of Rs. 90,000 by way
of damages is a larger relief and there is no legal bar in our allowing the
plaintiff a decree for Rs. 45,000. The plaintiff is not entitled to any other
relief.
We, therefore, set aside the decree and judgment of the court below
and pass a decree in favour of the plaintiff against the defendant for recovery
of the sum of Rs. 45,000 with interest thereon at the rate of 5% per annum from
the date of suit till date of recovery. The appeal is allowed to the above
extent and dismissed otherwise. The parties will bear their costs throughout.
[1969] 39 COMP. CAS. 33 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
Sirpur
Paper Mills Ltd.
P. JAGANMOHAN REDDY, CJ.
AND MADHAVA REDDY, J.
O.S. APPEAL NO. 2 OF 1963
June 11, 1968
T. Atlanta Babu and Chalapathi Rao for the Aappellant.
J.V. Suryanarayana Rao and D. Narasaraju for the Respondent.
Jaganmohan Reddy, C.J.—This
is an appeal against the judgment of Satyanarayana Raju J. (as he then was)
dismissing the application of the appellants made under section 155 of the
Companies Act praying, inter alia, that this honourable court:
(a) direct the
rectification of the register of members of the first respondent-company by
re-entering the names of Abdul Karim Babu Khan, Bishiruddin Babu Khan and
Sharfuddin Babu Khan as the holders of shares Nos. 103326 to 103765 in the
register.
(b) grant a decree for
Rs. 40,000 as damages against the first respondent in favour of the petitioners
and the second respondent (who was subsequently transposed as the third
petitioner).
(c) for costs.
The allegation of the petitioners is that they were the holders of
1,840 shares in the respondent-company apart, from 440 shares on which they had
paid the allotment and application money amounting to Rs. 25 per share. So far
as the latter shares are concerned, they were called upon by the respondent to
pay the balance of Rs. 75 per share, the time for which was being extended
periodically. In or about March, 1952, the first petitioner sent to the first
respondent a sum of (O.S.) Rs. 60,000 towards arrears of call money, which
amount was adjusted by the respondent-company towards arrears of interest and
part payment of call monies on shares on which these amounts were due. The
board of directors at their meeting held on 4th March, 1954, further extended
time for payment of cad monies up to 31 st May, 1954. The board also decided to
waive interest in the case of shareholders who paid their arrears before that
date and to forfeit those shares where arrears were not paid.
The first petitioner, presumably on behalf of himself and the other
petitioners, wrote to the first respondent on 17th April, 1954, disputing the
adjustment towards interest of the amount of Rs. 60,000 sent by him and claimed
that the interest ought to have been waived. Thereafter, certain correspondence
ensued between the petitioners and the first respondent and by a letter
purported to be dated 26th May, 1954, the first petitioner sent a cheque for
Rs. 16,086-4-0 towards the arrears of call money. As this amount had not fully
discharged the arrears of call, he sent another cheque for Rs. 13,241-12-9 on
11th June, 1954, under protest. The company acknowledged the receipt of both
these cheques and informed the first petitioner that the amounts were kept
under suspense. On 1st June, 1954, the first petitioner says he received a
notice informing him that the 440 shares stood forfeited as on 1st June, 1954.
With this letter the amounts of the two cheques were returned.
The petitioner alleged that the forfeiture was illegal because (1) the
procedare prescribed in articles 39 to 42 of the articles of associatior of the
company was not complied with ; (2) that since they sustained damage by reason of
this illegal forfeiture they are entitled to recover the sum of Rs. 40,000.
In so far as the first point is concerned, it was urged before
Satyanarayana Raju J. that the notice required to be sent by the
respondent-company, in accordance with article 40 of the articles of
association, was not sent to the petitioners or, at any rate, it was not
received by them ; (2) even if it was received, the particulars as prescribed
in article 41 have not been furnished nor was he intimated the place at which
the amounts had to be paid.
The company in its counter stated that the petitioners have been in
default in respect of 440 shares now claimed by the petitioners and in spite of
several opportunities being given and
time being extended they did not pay the amounts ; that the allegation that
they are not liable to pay interest is untenable having regard to article 34 of
the articles of association under which a shareholder is liable to pay interest
at 9% per annum from the date appointed for the call money or installments till
the date of actual payment; as such the petitioners were bound to pay interest
on the arrears of call money unless specifically exempted by a proper
resolution passed by the board of directors; and that the board of directors in
fact did condone the payment of interest for a particular period and, even
after the condonation, interest which accrued on the arrears of call monies was
due from the petitioners. It was further averred that though the forfeiture and
confirmation of the forfeiture took place as long ago as 1954, the petitioners
did not take any action till the date of filing of the petition and that,
therefore, it is not a case in which the court ought to exercise its
jurisdiction in directing rectification of the share register. The claim for
damages was also described as absolutely untenable. In any case, the respondent
averred, the petition is barred by limitation and the petitioners are not
entitled to any dividend as is claimed.
The learned company judge considered the two questions arising out of
the averments in the petition and the counter, viz., (1) whether the forfeiture
of the shares was valid, and (2) if not, whether the petitioners are entitled
to damages.
In considering the first question he came to the conclusion that
exhibit B-3 dated 20th March, 1954, the receipt of which was denied by the
first petitioner, was posted by the respondent-company and that in the ordinary
course of business it must be presumed to have reached the petitioners. In view
of this finding as well as on a consideration of other letters and
correspondence, the learned judge held that the procedure prescribed in
articles 39 to 42 was complied with and that the petitioners, notwithstanding
time being extended till 31st May, 1954, did not pay the amount by that date
but had only paid a part of the arrears on 2nd June, 1954, after the expiry of
the period specified and not in full. In this view, he dismissed the petition.
Before us the learned advocate for the appellants reiterated the same
contentions and had strenuously urged that exhibit B-3 was not issued on the
date it is purported to have been issued and must have been subsequently got
up. He relied upon the difference in the ink in exhibit B-5 of the entry
pertaining to the subject of the letter which states that it is in respect of
extension of time while the letter which is purported to have been issued under
that entry deals with forfeiture of shares. This contention, it may be stated,
was urged before the learned company judge and was rejected not only on a
perusal of the entry but also on a consideration of the evidence of R.W. 1, an
assistant in the share department of the company.
We have also inspected the register, exhibit B-5. While, no doubt, the
ink in the entry is different in some columns, there can be no question that
the entry was made at the time when it was purported to have been made. The
subsequent entries which are not challenged come according to the time and
serial number which itself shows that no entry was left blank for the purposes
of subsequently bringing into existence some other letter—an allegation which
has not been made and in our view would be farfetched if it had been. A perusal
of exhibit B-3 would show that it is an office copy of a pro forma issued to
all the defaulting shareholders in which they were informed that their shares
will stand forfeited if the amount was not paid by 31st August, 1954. The fact
that time was given till 31st August, 1954, might have been considered by the
respondent-company in making an entry in the despatch register as an extension
of time. No significance, in our view, can be attached to this entry as
negativing the despatch of the letter.
It was contended that, if exhibit B-3 was in fact issued, it should
have been sent by registered post as indeed the other letters of similar
purport were sent previously by registered post. While it is true that this
letter was sent by ordinary post, this by itself cannot justify a conclusion
that the letter was not sent by ordinary post or was not received by the first
petitioner. Section 53 of the Companies Act prescribes the mode of service of
notices. Sub-section (2) thereof states that:
"Where a document is sent by post,—
(a) service thereof shall be
deemed to be effected by properly addressing, prepaying and posting a letter
containing the document, provided that where a member has intimated to the
company in advance that documents should be sent to him under a certificate of
posting or by registered post with or without acknowledgment due and has deposited
with the company a sum sufficient to defray the expenses of doing so, service
of the document shall not be deemed to be effected unless it is sent in the
manner intimated by the member".
This provision clearly shows that the normal mode of serving is by
posting the notice unless, of course, the shareholder intends it to be served
in a particular v ay, for which he must deposit the costs.
Apart from this, a finding of fact arrived at by the learned company
judge is conclusive and cannot be assailed in an appeal under section 155(4) of
the Companies Act. An appeal against a judgment or order of the company judge
will only lie on the grounds mentioned in section 100 of the Code of Civil
Procedure. It is not disputed that the grounds upon which an appeal will lie
under section 100, Civil Procedure Code, could only be in respect of a decision
being contrary to law or to some usage having the force of law ; or the
decision having failed to determine some material issue of law or usage
having the force of law ; or a substantial error or defect in procedure
provided by the code or by any other law for the time being in force which may
possibly have produced an error or defect in the decision of the case upon the
merits. The grounds upon which an appeal lies under section 100 do not,
therefore, admit of a finding of fact being reversed unless that finding can be
challenged under any of the grounds enumerated above. We are, therefore, clear
in our minds that the finding that a letter in terms of exhibit B-3 was sent by
the respondent-company and that the same was received or at least presumed to
have been received by the petitioners, cannot be interfered with and we
accordingly hold that exhibit B-8 was in fact received by the petitioners. We
are also fortified in this conclusion by the subsequent letter written by the
first petitioner to the respondent-company which indicates that he must have
bad knowledge of the contents of the letter.
The second contention of the
learned advocate for the petitioners is that, even assuming that exhibit B-3
has been served, the procedure prescribed in articles 39 to 42 has not been
complied with. In order to understand this contention, it is necessary to give
below the contents of the articles :
"39. If any member fails
to pay any call or installment on or before the day appointed for the payment
of the same, the directors may at any time thereafter, during such time as the
call or installment remains unpaid, serve a notice on such member requiring him
to pay the same, together with any interest that may have accrued, and all
expenses that may have been incurred by the company, by reason of such
non-payment.
40. The notice shall name a day
not being less than fourteen days from the date of the notice, and a place, or
places, on and at which such call or installment and interest and expenses as
aforesaid are to be paid. The notice shall also state that in the event of
non-payment at or before the time and at the place appointed, the shares, in
respect of which the call was made or installment is payable, will be liable to
be forfeited.
41. If the requisitions of any
such notice as aforesaid are not complied with, any shares in respect of which
such notice has been given may, at any time thereafter, before payment of all
calls or installments, interest and expenses, due in respect thereof, be
forfeited by a resolution of the directors to the effect. Such forfeiture shall
include all dividends deck red in respect of the forfeited shares and not
actually paid before the forfeiture.
42. When any share shall have
been so 'forfeited' notice of the resolution shall be given to the members in
whose name it stood immediately prior to the forfeiture, and an entry of the
forfeiture with the date thereof, shall forthwith be made in the
register".
A perusal of the above articles
would show that (1) before shares are forfeited the directors must have a
notice served on such a member who is
in default of payment of call, requiring him to pay the same together with any
interest that may have accrued and all expense that may have been incurred by
the company by reason of such non-payment; (2) that the notice shall call upon
the members to pay the amounts due as aforesaid at a specified place and on a
date not less than 14 days from the date of notice ; (3) that the notice will
further state that on default of payment at or before the time and at the place
appointed all shares in respect of which call was made or installment was
payable will be liable to be forfeited ; (4) if after receipt of the notice there
is non-compliance with the requisitions thereof, viz., arrears of calls or of
installments or interest or expenses have not been paid, the shares, in respect
of which default has taken place, will be forfeited by a resolution of the
directors. On such forfeiture the dividends declared in respect of the
forfeited shares and not actually paid before the forfeiture will also be
deemed to be forfeited ; (5) when any shares have been so forfeited notice of
the resolution shall be given to the member in whose name they stood
immediately prior to the forfeiture.
The question now before us is whether these terms have been complied
with by the respondent-company. We may at the very outset state that the
procedure prescribed for forfeiting shares has to be strictly complied with
inasmuch as not only a shareholder is deprived of his right in the
participation of the capital of the company but, in so far as the creditors of
the company are concerned, any forfeiture would mean reduction in the capital
by which they are likely to be adversely affected. For these reasons it has
been uniformly held by the highest courts that the requirements prescribed by
the articles of association of the company must be strictly adhered to. But,
even so, there are certain matters relating to service of notice, fixing of
time and place of payment of arrears which have been held to be directory,
while mandatory provisions are those relating to the intimation that arrears of
call, interest and expenses are due and of the amounts which have been paid.
The history of the call and the arrears which remain unpaid by the
petitioners-appellants is a long one. The respondent-company had decided in
1946 to increase its capital and for every one share held by the shareholder
the directors decided to allot two new shares. In terms of the resolution, the
petitioners were entitled to 1,517 shares. The petitioners applied for these
shares on February 27, 1946, by paying Rs. 5,600, though we think this is a
mistake for Rs. 5,500 as at the rate of Rs. 12-8-0 application money, the
amount required to be deposited by him at the time of the application is Rs.
5,500. The petitioners had to pay the balance of Rs. 12-8-0 per share making a
total of Rs. 25 per share being the application money and allotment money, but
this was not paid till nearly an year after, when an amount of Rs. 5,500 was
paid on June 14, 1947. The balance of the call money on shares applied for ought "to have been paid in
three installments, the first call of Rs. 25 per share to be paid on or before
27th February, 1947, the second call of Rs. 25 per share to be paid on or
before 31st August, 1947, and the third call of Rs. 25 on or before 15th April,
1948. Apart from paying the money on application and allotment, the latter of
which also was paid long after the due date, the petitioners did not pay the
calls on the due dates. Evidently, the company kept on extending time and in
several instances the first petitioner himself, though a director of the
company, was requesting for time. It is unnecessary for us to catalogue all
that correspondence which has been referred to by Satyanarayana Raju J., as he
then was. We will only refer to the important letters which throw light upon
the entire transaction.
On 18th December, 1950, the respondent wrote exhibit 6 to the first
petitioner in continuation of a previous letter dated 21st October, 1950,
drawing attention to the fact that a sum of (O.S.) Rs. 1,13,775 is due from him
and the members of his family in respect of 1,517 shares and that also a sum of
Rs. 1,633-14-4 is outstanding as interest on delayed payment of the allotment
money besides interest payable on calls in arrears. After setting out these
facts, the first petitioner was asked to arrange for payment of the dues on or
before 31st December, 1950, which is the last date for payment of the call
money as decided by the board of directors He was also informed that the
dividends amounting to Rs. 4,606 payable to him on his personal and joint
holdings will be adjusted against the dues and the dividend warrants would be
sent for discharge. In reply to this letter, the first petitioner on 2nd
January, 1951, informed the respondent-company that large amounts were due to
him from parties and as soon as he could collect them, he would pay them to the
company. In the meanwhile he sent a cheque for Rs. 20,394. The first petitioner
requested that this amount together with the sum of Rs. 4,606, being the
dividend payable to him on his personal and joint account, amounting to Rs.
25,000 be adjusted towards the arrears. No objection was raised in this letter
that no interest was due by him in respect of not only allotment money but also
arrears of call. The respondent-company by their letter dated 17/18th April,
1951, informed the first petitioner that the sum of Rs. 25,000 was adjusted
making 272 shares fully paid as per details given thereunder which included Rs.
6,800 each in respect of the first, second and third calls and Rs. 4,538-12-6
towards interest on calls. In this way Rs. 24,938-12-6 was adjusted and the
balance of Rs. 61-3-6 was kept in suspense account. Subsequently reminders were
sent for payment of arrears on other shares but nothing was paid till he
received the notice, exhibit B-6, dated 25th June, 1953, in the following
terms:
"The directors, at their meeting held on 6th June, 1953, have
decided to extend the time for payment of arrears of call money, up to 31st
August, 1953, as a last and
final concession and that the shares in respect of which there are arrears
thereafter be treated as forfeited without further notice after that date.
A sum of Rs. O.S./I-G.....................is still due from you in
respect of..........shares held by you. You are, therefore, requested to pay
the above amount with interest
due thereon up to the date of payment on or before 31st August, 1953, failing
which your shares will be treated as forfeited".
This letter, exhibit B-6, was sent by registered post acknowledgment
due and it was not disputed that the same was received as per acknowledgment,
exhibit B-8, in which the first petitioner signed in token of his having
received this letter on June 27, 1953. The original of it which has been
received by him has not been produced and, therefore, it if not possible to say
what is the amount stated by the company to have been due from the first
petitioner and what are the number of shares in respect of which that amount
was due. Inasmuch as the first petitioner is in possession of that letter and
has not produced the same, we must presume that the correct amount has been
demanded as being due in respect of the shares specified therein. There is no
doubt that only 330 shares seem to have been fully paid for and arrears were
due in respect of 1,187 shares. When the arrears were not paid, the board of
directors at their meeting held on 12th December, 1953, at which evidently the
first petitioner was not present, passed the following resolution, exhibit 26 :
"It was reported that in pursuance of the board's resolution
passed in the meeting dated 6th June, 1953, certain shareholders failed to pay
the call money by 31st August, 1953, and as directed by the resolution their
shares stood forfeited after the 31st August, 1953. The board discussed the
matter and deferred decision on confirmation of the forfeiture of the shares to
the next meeting".
It may be pointed out that earlier resolutions, exhibits P-24 and P-25,
dated 27th December, 1952, and 6th June, 1953, respectively, to which the first
petitioner was a party, show that not only a resolution as required by article
40 of the articles of association was passed directing notices to be served on
the shareholders who are in arrears that if they do not pay on or before 31st
August, 1953, their shares are liable to be forfeited but also a resolution was
passed that the time for payment was extended till 31st August, 1953, as a last
and final concession and that the shares be treated as forfeited thereafter,
without further notice and the shareholders be informed accordingly. The
constituted attorneys were authorised to take necessary action in this behalf.
It is pursuant to these resolutions that exhibit B-6 was issued. On receipt of
this notice, on default of payment of arrears, the shares could be treated as
forfeited, but the company deferred decision. Subsequently, however, the first
petitioner by his letter dated 2nd March, 1954 (exhibit P-27), sent a sum of
(H.S.) Rs. 60,000 received by the company on April 6, 1954, and requested that
this sum might be credited towards the call moneys on their shares. The
balance, it was stated, was being arranged and will be sent shortly. While
sending this amount the first petitioner wrote as follows:
"I am paying the arrears of calls on the express understanding
that you would kindly and justifiably waive the entire interest charged by you
on our arrears of call moneys as has been waived by the company in other cases
and more particularly in consideration of the peculiar circumstances I have
been undergoing all these years of which you are well aware".
This amount of Rs. 60,000 made a further number of 727 shares fully
paid after adjustment of arrears of call money and interest. In this way 1,057
shares became fully paid and arrears of call money was due in respect of 460
shares. On March 4, 1954, the board of directors including the 1st petitioner
passed a resolution, exhibit P-28, in the following terms :
"In pursuance of the decision of the board at the last meeting
held on 12th December, 1953, the question of forfeiture of shares of those
shareholders who failed to pay the call money by 31st August, 1953, vide
Board's decision dated 6th June, 1953, was considered. It was decided that
shares totalling 2,564 in all as per details given hereunder be and are hereby
forfeited provided the call money is not paid on or before the 31st May, 1954,
and the sharenolders whose shares are forfeited under this decision be informed
accordingly in terms of article 42 of the articles of association of the
company and, as regards waiving of interest, it was decided that in the case of
those who pay call money now, they be given the same benefit as was given to
one of the shareholders—vide Board's Resolution No. 8, dated December 12, 1953,
i.e., the interest be waived from July 1, 1952, to August 29, 1953, and that
interest be collected from them thereafter till the date of payment".
Pursuant to this resolution exhibit B-3 was issued, the issue and
receipt of which we have already held to have been proved.
This correspondence read together with the board's resolutions clearly
establishes that the appellants were informed of the arrears due from them in
respect of shares held by them. They were further informed of the interest
which they would be liable to pay. Whenever money was paid the same was
adjusted towards arrears of call and interest and the petitioners were informed
of these facts, except on the last occasion and even on that occasion no
protest was made that interest was illegally demanded or adjusted but only that
it should be waived which is more in the nature of a request for favour to be shown
than a challenge to the legality of the action taken by the respondent.
Mr. Chalapathi Rao contends that exhibit B-3 did not show the amount
due or the interest due, nor did it indicate the place where the amount should
be paid. We have already stated that in the earlier notices the amount due in
respect of calls was clearly set out and also the petitioners were"
informed that they would be liable to interest, which, even without that
intimation, under the articles of association, they were bound to pay unless
the board of directors exonerated them, which is not the case even according to
the petitioners. Exhibit B-3, it may be stated, was a notice intimating
forfeiture of shares and, therefore, it was not necessary to set out therein
the amount due or the shares in respect of which that amount was due. In so far
as the place of payment is concerned, it was clearly stated that the amount
should be paid in the registered office of the company, the address of which
was given at the very beginning of the letter head.
Relying on a decision of a single judge of the Calcutta High Court in
In re Bengal Electric Lamp Works, the learned
advocate or the petitioners contends that the address given in the letter
should be stated to be the registered office and, since that was not stated,
the forfeiture is illegal because the shareholder has not been told where the
amount should be paid. It may be stated that in that case Lort Williams J. was
considering the question of a defect in a notice where it omitted to state the
expenses which were required to be paid and, therefore, that notice was held to
be invalid. In that connection it was stated that there can be no waiver by the
shareholder of his right to object to the forfeiture of his shares by the
company and that even the smallest requirements should be complied with. While
there can be no exception to this principle, it is difficult to contend that
when the respondent had required that the amount of arrears be paid at the
registered office of the company and has given the address at the top of the
letter, it should be considered insufficient or that the shareholder,
particularly the first petitioner, who was a director of the company, did not
know where to pay the amount.
The decision, however, was dissented from by a Bench of the Madras High
Court consisting of Rajamannar C.J. and Raghava Rao. J. in Mahalakshmi Textile
Mills Ltd. v. Meyyappa Chetliar. But before we
deal with this case it is necessary to deal with two other cases of the Bombay
High Court which were considered by the Madras High Court as also by the
Calcutta High Court. In Pioneer Alkali Works Ltd. v. Amiruddin Shalebhoy
Tyebji,
Taraporwala J. held that the directors in their resolution must indicate the
time and place of payment of arrears and, if that is not done, a notice issued
pursuant to a resolution which did not specify these particulars is bad. This
decision was disapproved by a Bench of the same High Court in Dhanraj Keshrimal Jhalani v. H.H. Wadia,where Beaumont C.
J., after an exhaustive review of the case law in Johnson v. Little's Iron
Agency, held
that it is not necessary for a resolution making the call to specify the time
for payment or the person to whom or the place where the call is to be made nor
is it necessary to have a formal resolution of the directors specifying the
person to whom and the place where a call is to be made when the agents sign in
the notice of calls "by order of the board" as there is the presumption
that the agents act properly and even if such a resolution is necessary it is a
matter which the parties can waive. While referring to the observation of Lord
Esher, Master of the Rolls, in In re Cawley & Co. that he takes it
to be of the very essence of the call that the time and place for payment
should be determined, Beaumont C.J. observes at page 83 :
"If the learned Master of the Rolls intended to say that whatever
the articles might provide no resolution for a call could be valid, which did
not specify the time and place of payment, his opinion seems to me to be
directly at variance with the previous decisions quoted, and I respectfully
dissent from it".
After making these observations he referred to Pioneer Alkali Works v.
Amiruddin Shalebhuy
and said it was distinguishable and, at any rate, he observed:
"The judgment seems to me open to the same criticism as the
judgment under appeal, namely, that it attaches to the articles falling for
construction a meaning other than they naturally bear in deference to a
decision upon articles differently worded".
These observations were criticised by Lort Williams J. in In re Bengal
Electric Lamp Works Ltd:'s case. But, as pointed
out by Raghava Rao J., delivering the judgment of the Bench in Mahalakshmi
Textile Mills Ltd. v. Meyappa Chetttiar, the criticism
directed against the observations of Beaumont C.J. by Lort Williams J. was not
correct, because that criticism is only in general terms and does not attempt
to show specifically how or where exactly the Chief Justice's view of Jessel,
Master of the Rolls's judgment, or James I-J.'s judgment in Johnson v. Lyttle's
Iron Agency goes
wrong. The Bench held :
"It is not necessary that the persons to whom, and the place at
which, the call is to be paid, should be mentioned in the resolution making the
call or in the notices, making the call though these matters must be fixed by
the Board, because the articles so provide. In the absence of any evidence upon
the point, the court is entitled to assume that these notices were sent out by
the agents of the company with the
sanction of the directors, and that the directors had in fact appointed the
persons and the place to whom and at which the call is to be paid. A forfeiture
on non-payment of the call money cannot be attacked on the ground of any
irregularity or illegality because the particulars as to its payment were not
mentioned in the resolution making the call".
It is apparent from these decisions that the provision relating to the
time and place are not mandatory but directory and the resolution need not
contain the particulars as long as a company has directed the issue of the same
by its authorised agents, giving necessary particulars, viz., time and place at
which the payment should be made.
In In re North Hallenbeagle Mining Company the question
whether the issue of notice of forfeiture was mandatory or directory was
considered. Sir H. M. Cairns L.J. observed at page 328 :
"The question seems to me to be this—Is that provision (23rd
clause 'where any share has been so declared to be forfeited, notice of such
forfeiture shall be given to such shareholder') what I may term a mandatory or directory
provision, the convenience of which is obvious; or is it a statement of
something which is of the essence of the forfeiture, and without which a good
forfeiture cannot take place ? In the first place, the words I have read do not
make the notice expressly of the essence of the forfeiture. They are merely, in
form at all events, directory words. But, in the next place, there is this very
remarkable circumstance, that the notice which is there to be given is spoken
of as a notice of forfeiture which has actually taken place. Moreover, the
forfeiture is clearly, on that clause, to date, not from the giving of any
notice, but from a resolution of the directors declaring a forfeiture".
At page 329 he further observed :
"These circumstances lead me to the conclusion
that the clause which I have read is simply directory, and that neither the
company, nor anybody representing the company, could set up as a bar to the
validity of the forfeiture the circumstance that no notice had been given under
this clause".
In any case the resolutions to which we have referred have stated the
time of payment at and also authorised the constituted attorneys to give notice
and this notice fixed the place of payment, and thus all the requirements, in
our view, have been complied with.
It is again contended that the resolution of the board of directors of
4th March, 1954, is a prospective resolution and, therefore, a further
resolution was necessary to forfeit the shares. What is meant by a prospective
resolution has not been stated by the learned advocate. As we understand a
prospective resolution, it is a resolution forfeiting shares in respect of the
calls which have not yet fallen due.
But where arrears have fallen due and several demands have been made and
forfeiture notices have been given and the non-payment of monies on due dates
entailed forfeiture according to the resolution of the board of directors, a
further resolution that the shares are forfeited unless the amounts are paid on
a particular date, would not amount to a prospective resolution, because the
directors are entitled to forfeit the shares there and then but instead they
gave effect to that decision as and from a particular date, merely to give the
shareholder a facility. This cannot, in our view, be said to be a prospective
resolution.
In what is known as Woollaston's case a similar
question was considered by Lord Justice Turner, who, at page 173, observed as
follows:
"By this notice, they made a plain declaration of forfeiture, to
take effect upon a certain event which happened, and for three years this
declaration was treated as having taken effect and as being in force......It is
not as if the directors had made
a prospective declaration of forfeiture as to a class of shareholders whose
calls should afterwards fall into arrear ; they were dealing with shareholders
who were already in arrear ; and it could not make any material difference in
the exercise of their discretion as to forfeiture, whether they waited till the
expiration of the twenty-one days from the notice before declaring it, or
declared it conditionally before sending the notice. The directors had power to
declare a forfeiture in the events which happened, they clearly intended that
there should be a forfeiture, and, though their mode of declaring it may have
been not strictly regular, the variation appears to me to be one of form and
not of substance".
In our view the requirements of articles 39 to 42 have been fully
complied with and even apart from it, if there be any defect of any of the
requirements, even that has been satisfied, in that the first petitioner, being
a director of the company, took part in every resolution of the board dealing
with the forfeiture of his shares; not only was he a party to the resolution in
respect of a number of shares to be forfeited but also the details thereof,
which seem to have been considered by the board at the time of the resolution,
as they specifically referred to "as per details given below".
The learned advocate states that the requirements relating to the
forfeiture cannot be waived, but we have the high authority of their Lordships
of the Privy Council in Jones v. North Vancouver Land and Improvement Company, where one of the
plaintiffs, the husband of a shareholder (wife) who was a director of a company
had himself seconded a resolution for forfeiture of the shares of his wife
along with others of which notice was given to the wife at the address at which
both have lived and of which knowledge was imputed to his wife. It was held
that the plaintiffs, viz., the husband and wife had by their conduct
disentitled themselves to the relief prayed for ; that the notice fulfilled all
the requirements of the Canadian Companies Act; and that any objections to the
absence of due formalities in the service on the husband of acts to which he
was a party, and to the illegality of the allotment, calls and forfeiture of
the shares due to technical irregularities in the original appointment of the
husband and others as directors, must be disallowed. Their Lordships observed
at page 328 :
"The principles laid down in Prendergast v. Turton and by Lord
Lyndhurst on the appeal, and in the line of cases which followed it,
fortunately it would seem, in the interest of that honesty and fair dealing
which ought to regulate the conduct of commercial affairs and the management of
companies such as this, are strong enough to defeat such mischievous designs.
These authorities show that the plaintiffs must in this case be held to have by
their own conduct disentitled themselves to the relief they pray for".
In the view we have taken there are no merits in this appeal and it is
accordingly dismissed with costs.
[1981] 51 COMP. CAS. 38 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
Canara
Bank Ltd.
CHENNAKESAV REDDY, J.
Civil Revision
Petition No. 2281 of 1976
SEPTEMBER 14, 1977
R. Vaidyanathan for the Petitioner.
M.L. Ramakrishna
Rao for the Respondent.
JUDGMENT
Chennakesav Reddy, J.—This revision petition by the defendant
arises out of a suit for recovery of money filed by the plaintiff, Canara Bank,
before the Munsif Magistrate,
The facts leading to the litigation between the parties are these : G.
Raghunathamall Bank Ltd. (hereinafter called the "transferor-bank")
was a public limited banking company incorporated under the Hyderabad Companies
Act (Act IV of 1320 Fasli). The authorised capital of the said transferor bank
was O.S. Rs. 1,00,00,000. The issued capital of O.S. Rs. 25,00,000 was divided
into 25,000 ordinary shares of O.S. Rs. 100 each of which O.S. Rs. 25 was
payable on application and O.S. Rs. 25 on allotment and the remaining amount of
each share as and when it might be called up.
The defendant applied for 25 shares and deposited Rs. 625 with the
application. He was allotted only 12 shares. A sum of Rs. 300 was accordingly appropriated
towards the amount payable on allotment in respect of the shares allotted to
him.
The board of directors of the transferor-bank by a resolution dated
June 13, 1960, decided to call from each shareholder I.G. Rs. 12.86 equivalent
to O.S. Rs. 15 per share out of the uncalled portion of O.S. Rs. 50.
Accordingly a notice dated August 16, 1960, was issued to the defendant calling
upon him to deposit a sum of Rs. 154'32 nP. payable by him in respect of his 12
shares on or before September 15, 1960, and informing him that in default of
payment on the due date, interest would be charged at the rate of 5 per cent,
per annum. The transferor-bank was amalgamated with the plaintiff-bank with
effect from September 4, 1961, as per the scheme of amalgamation sanctioned by
the Govt. of India, Ministry of Finance, Dept. of Economic Affairs, under
notification No. F. 4(86)-BC/-l published in Part II, section 3(ii) of the Gaz.
of India, Extry., dated August 28, 1961. As per para, (i) of the said
scheme of amalgamation, the plaintiff-bank was empowered to call upon every
person who, on the prescribed date, i.e., September 4, 1961, was registered as
the holder of a share in the transferor-bank to pay within three months the
uncalled amount remaining unpaid by him in respect of such shares and the
called amount in arrears, if any. In pursuance of the said scheme, the
plaintiff-bank issued a notice to the defendant on September 4, 1961, calling
upon him to pay the first call money and the balance of the uncalled capital amounting
to Rs. 514’32 nP. which became payable by virtue of the said scheme of
amalgamation with interest within three months. On December 5, 1961, the
defendant was reminded by the plaintiff-bank to pay the said sum with interest
and a further notice dated March 15, 1962, was caused to be served on the
defendant. But the defendant failed to pay. On July 24, 1963, the
plaintiff-bank gave a registered notice to the defendant calling upon him to
pay the calls due on or before August 20, 1963, with interest and also
intimating him that if he failed to pay the calls due, the shares of the
defendant and the amount paid so far would stand forfeited. As the defendant
did not comply with the notice, the board of directors of the plaintiff-bank at
their meeting held on September 10, 1963, forfeited the said shares and the
money paid by the defendant already in respect of the shares allotted to him
and a notice thereof was given to the defendant under certificate of posting.
Notwithstanding the forfeiture, the plaintiff-bank are entitled to recover the
arrears of call money with interest amounting to Rs. 713’14 nP. under art. 30
of the memorandum and articles of association of the transferor-bank and as per
para. 2 of the forfeiture notice. Hence, the plaintiff-bank filed this suit.
The defendant totally denied
his liability to pay the amount to the plaintiff-bank. He denied even the very
foundation of the claim that he had made any application to G. Raghunathamall
Bank Ltd. for the allotment of shares. He also denied the receipt of any notice
dated August 16, 1960, from the bank or the notice of forfeiture dated August
24, 1963, or the intimation of the forfeiture of his shares and monies paid by
him. It was contended on behalf of the defendant, inter alia, that the Munsif
Magistrate had no jurisdiction to entertain the suit, that under the provisions
of the Companies Act, 1956, and the Banking Regulation Act, 1949, the High
Court alone had jurisdiction to try the suit and that the amalgamation was not
in accordance with the provisions of the Banking Regulation Act.
On a consideration of the
entire material placed by the parties, the trial court held on the main issues
of jurisdiction and amalgamation against the defendant. However, the learned
Munsif Magistrate held that the plaintiff failed to prove that the defendant
applied for the allotment of shares, that there was no proof of the service of
notice of forfeiture on the defendant and that the suit was also barred by
limitation. Consequently, he dismissed the suit.
On appeal, the learned Chief
Judge,
The appellate court also,
accepting the evidence of P.W. 1, the manager of the plaintiff-bank who was
then in charge of the transferor-bank, held that the notices demanding the
payment of call money and forfeiture were duly served on the defendant and,
therefore, the suit was filed within time. Consequently, he reversed the decree
and judgment of the trial court and decreed the suit of the plaintiff-bank.
Hence this revision by the defendant.
The first and foremost
contention presented and persuasively argued by the learned counsel for the
petitioner-defendant is that by virtue of the provisions of s. 10 of the
Companies Act, 1956, read with s. 2 and s. 36-B of the Banking Regulation Act,
No. 10 of 1949, the jurisdiction of the civil court to try the suit is excluded
and the High Court alone has exclusive jurisdiction in the matter. It is,
therefore, necessary to scrutinise the relevant provisions of the Banking
Regulation Act of 1949 and the Companies Act, 1956.
Section 2 of the Banking
Regulation Act provides that the provisions of the said Act shall be
supplemental to and not except as expressly provided therein in derogation of
the Companies Act, 1956. In section 36B occurring in Part III, inserted by the
Banking Companies (Amendment) Act, 1953, the expression "High Court"
has been defined to mean the High Court exercising jurisdiction in the place
where the registered office of the banking company incorporated outside India,
where its principal place of business in India is situated. The next section
that is relevant is s. 45A occurring in Part III-A, under the heading
"Special provisions for speedy disposal of winding up proceedings".
It is enacted in s. 45A that the provisions occurring in this part and the
rules made thereunder shall override the provisions of any other law including
those contained in the Companies Act, 1956, and the Code of Civil Procedure
which are repugnant to the provisions in Part IIIA, and in so far as such law
is not so repugnant, such law shall continue to apply to all proceedings under
that part. Section 45B confers exclusive jurisdiction upon a High Court to
entertain and decide any claim by or against a banking company which is being
wound up.
The relevant provisions of the Companies Act, 1956, are s. 10(2)(b) and s. 616(b). Section 10 deals with the jurisdiction of courts and reads :
"(1) The court having
jurisdiction under this Act shall be—
(a) the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of sub-sec tion (2); and
(b) where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction concerned, in respect of companies having their registered offices in the district.
(2) the Central
Government may, by notification in the Official Gazette and subject to such
restrictions, limitations and conditions as it thinks fit, empower any District
Court to exercise all or any of the jurisdiction conferred by this Act upon the
court, not being the jurisdiction conferred—
(a) in respect of companies generally, by sections 237, 391, 394, 395 and 397 to 407, both inclusive;
(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees by Part VII (sections 425 to 560) and the other provisions' of this Act relating to the winding up of companies".
It is clear from the provisions
of s. 10(1) that except to the extent to which any jurisdiction is expressly
conferred on the District Court or District Courts subordinate to the High
Court by the Central Govt. by a notification in pursuance of the powers
conferred under sub-s. (2)(a), all residuary jurisdiction under the Act is
vested only in the High Court. However, under sub-s. 2(a), exclusive
jurisdiction is conferred on the High Court in respect of matters covered by
ss. 237, 391, 394, 395 and 397 to 407, both inclusive, of the Companies Act and
as regards the companies with a paid up share capital of one lakh of rupees and
others in respect of all matters covered by Part VII of the Act and other
provisions relating to winding up. Section 2(11) defines "the court"
to mean, with respect to any matter relating to a company, the court having
jurisdiction under the Act with respect to that matter relating to that
company, as provided in s. 10 and with respect to any offence against that Act,
the court of a Magistrate of the First Class, or, as the case may be, a
Presidency Magistrate, having jurisdiction to try such offence.
Section 616(b) enacts that the
provisions of the Act shall apply to the banking companies, except in so far as
the said provisions are inconsistent with the provisions of the Banking
Companies Act, 1949.
We may now look at the last
provision that requires to be looked up, viz., s. 9 CPC. Under s. 9, CPC,
jurisdiction is conferred on civil courts to try all suits of a civil nature
excepting the suits of which their cognizance is either expressly or impliedly
barred.
The claim of the plaintiff-bank
is based on the ground that the defendant failed to pay arrears of call money
and, therefore, the plaintiff-bank is entitled to recover the arrears of call
money and interest remaining due from the defendant after forfeiture of the
amount already paid by the defendant towards his shares. Under Sch. I of Table
A of the Companies Act, reglns. 29 to 35 provide for forfeiture of shares.
Under regln. 29 the board may serve a notice on a member who had failed to pay
any call money on the day appointed for payment thereof, requiring payment of
the call or instalment remaining unpaid. Regulation 30 states that the notice
given under regln. 29 shall state that, in the event of non-payment on or
before the day so mentioned, the shares in respect of which the call was made
will be liable to be forfeited. Regulation 31 provides for forfeiture for
non-compliance with the notice, by a resolution of the board to that effect.
Under regln. 33, a person whose shares have been forfeited shall cease to be a
member in respect of the forfeited shares, but shall, notwithstanding the
forfeiture, remain liable to pay to the company all moneys which, at the date
of forfeiture, were presently payable by him to the company in respect of the
share. In view of this regln. 33, there can be no doubt that the liability of
the defendant is one arising under the provisions of the Companies Act and,
therefore, one falling under s. 10.
Then the question is whether
the jurisdiction of a civil court is excluded over matters arising under the
Act in respect of which no notification has been issued under sub-s. (2)
conferring jurisdiction on the civil court. It is now well settled that ouster
of the jurisdiction of a civil court ought not to be lightly inferred. Yet,
vesting of exclusive jurisdiction in one court can be inferred, if impelled by
the object and scope of an enactment. Therefore, it is necessary to ascertain
whether the civil court's jurisdiction is ousted either expressly or by
necessary implication.
Section 45B of the Banking
Regulation Act expressly confers exclusive jurisdiction on the High Court to
entertain and decide any claim made by or against a banking company which is
being wound up. Therefore, the jurisdiction of the civil courts to entertain
suits which would ordinarily be within their jurisdiction remains unaffected
when such matters do not arise out of or in the course of winding up of the
banking company. Section 45B is
preceded by s. 45A which contains the non-obstante provision to the effect that
the provisions of Part III-A of the Act shall apply notwithstanding anything inconsistent
therewith in the Companies Act or the Code of Civil Procedure or any other law
for the time being in force. Thus, it is evident from the express language of
ss. 45A and 45B of Part III of the Banking Regulation Act, 1949, that exclusive
jurisdiction is conferred on the High Court only to decide any matter which
relates to, or arises out of, winding up of the banking companies. In other
words, jurisdiction of the civil courts in respect of matters, other than those
relating to winding up, remains unaffected.
Section 10 of the Companies Act also confers exclusive jurisdiction on
the High Court only in respect of matters covered by ss. 237, 391, 394, 395 and
367 to 497, both inclusive, and in respect of matters covered by Part VII of
the Companies Act with a paid up capital of one lakh of rupees and over and in
respect of other provisions relating to winding up of companies. Except in
respect of these matters, the ordinary jurisdiction of the civil courts to
decide the rights of parties is not excluded. This provision is not
inconsistent with s. 45B of the Banking Regulation Act, 1949.
It would be apposite at this stage to refer to some of the relevant
authorities on the question. The Madras High Court in Sree Krisha Jute Mills
Ltd. v. Krishna Rao, 17 Comp Cas 63; AIR 1947 Mad 322, held that the High Court
as the company court had no exclusive jurisdiction in all company matters. In
that case there was a requisition for an extraordinary general meeting given by
some shareholders of a company. The requisition wanted a change in the
incumbent of the post of secretary and treasurer of the company. But the
requisition was disregarded by the directors of the company. So the
requisitionists, thereupon, held their own meeting to remove the board of
directors and for appointing a fresh board and replacing the secretary and
treasurer "K" by one "R" a shareholder. Then "R"
filed an application in the High Court praying for a direction to "K"
to hand over to him the records, account books and pass books, keys, etc. But
the High Court held that the position of "R" was simply that of a
person who had been wrongfully deprived of his office, or of some property or
that he had been kept out of property wrongfully and he had a remedy by way of
suit in the ordinary course.
A Division Bench of the Kerala High Court in Star Tile Works Ltd. v. N.
Govindan, AIR 1959 Ker 254, held that a shareholder of a company was entitled
to sue against the company such as the right to vote or right to stand as
director of the company.
In Rathnavelusami Chettiar v. Manichavelu Chettiar [1951] 21 Comp Cas
93; AIR 1951 Mad 542, Raghava Rao J. held that a suit by the managing
director against a company for a declaration that his removal from the office
as the managing director was void, was maintainable, as the plaintiff in that
case was suing only in respect of an individual wrong and not a wrong in which
all the shareholders generally and as a body were interested. The learned judge
places reliance upon a decision of the Madras High Court in Subrahmanya Ayyar
[1932] 2 Comp Cas 147; AIR 1932 Mad 100, wherein the learned judges ruled (see
p. 168 of 2 Comp Cas):
"........the court has
jurisdiction to entertain a suit by shareholders against the company in respect
of the infringement of their individual rights as shareholders when the
interests of justice so require "
and a suit in substance to
establish and enforce the right of a shareholder to exercise his vote is,
therefore, maintainable at the instance of a single shareholder.
The case reported in Peoples' Bank of Northern India Ltd. v. Chanan Ram
[1933] 3 Comp Cas 314 (Lah) is more apposite and is directly on the point. In
that case also, a suit was filed by a company for recovery of arrears of
allotment money and call money due on shares allotted to the defendant. The
learned judge of the Small Cause Court, Lahore, ordered return of the plaint
for presentation to the proper court holding that the claim in the suit was not
cognizable by a Court of Small Causes. The High Court ruled that a suit by a
company which was not under liquidation is cognisable by a Court of Small
Causes. The Supreme Court in Shiromani Gurdwara
Parbandhak Committee v. Raja Shiv Rattan Dev Singh, AIR 1955 SC 576,
observed that the exclusion of the jurisdiction of the civil court in respect
of a suit or an issue which is normally within its competence can be brought
about only by clear and unambiguous language or by necessary implication
thereof.
The learned counsel for the
petitioner placed strong reliance on the decision of the Madhya Pradesh High
Court in Nava Samaj Ltd. v. Civil Judge, Class 1, Rajnandgaon, AIR 1966 MP 286,
for his contention that the suit by the plaintiff-bank was not cognizable by a
civil court. In that case, Dixit C.J. observed at page 291, col. 1 :
"The necessary implication
of s. 3 of the Act of 1913, as also of s. 10 of the Act of 1956, is to exclude
jurisdiction of other courts in regard to matters covered by the Companies Act.
In connection with the exclusion of jurisdiction of other courts, the line of
inquiry is not whether there is any provision besides s. 10 in the Companies
Act giving the company court exclusive jurisdiction in company matters. But it
is whether after having specified the courts having jurisdiction under the
Companies Act, the said Act contains an ' otherwise ' provision excluding the
jurisdiction of the company court in matters falling under the Companies
Act".
That case also arose out of a
suit filed by one of the shareholders wherein he questioned the validity of the
notice of the annual general meeting fixed for January 22, 1965, in regard to
items 4 and 5 of the agenda of the meeting. It was alleged that the explanatory
notice contained several suppressions of material facts and there was a
fraudulent attempt on the part of the directors and managing agents of the
company to deceive the shareholders of the defendant-company and have the said
resolutions passed without informing the shareholders of the 1st
defendant-company as to their rights in respect thereof as also to give
particulars of facts which were relevant for the purpose of the said
resolution. That undoubtedly was a case, as held by the learned judge, Pandey
J., falling within the well-established principle that the court will not
interfere with the internal management of companies. Pandey J. relied upon a
decision of the Privy Council in Burland v. Earle [1902] AC 83, 93, wherein
Lord Davey observed:
"It is an elementary
principle of the law relating to joint stock companies that the court will not
interfere with the internal management of companies acting within their powers,
and in fact has no jurisdiction to do so".
The principles that can be
discerned from the discussion devoted supra to the relevant statutory
provisions and precedents are :—All civil actions are cognizable by a civil
court under s. 9, CPC, unless the jurisdiction of the civil court is either
expressly or by necessary implication barred. Ordinarily ouster of jurisdiction
of a civil court ought not to be lightly inferred. Yet, vesting of exclusive
jurisdiction in one court can be inferred if impelled by the scope and object
of a statute. By s. 45B of Part III-A of the Banking Regulation Act, 1949,
exclusive jurisdiction to decide is conferred expressly on the High Court in
respect of matters relating to, or arising out of, winding up of banking
companies. So the jurisdiction of civil courts in respect of matters other than
those relating to winding up remains unaffected. Section 45A which precedes s.
45B further overrides the provisions of any law which is repugnant to Part
III-A. Section 616(b) of the Companies Act also provides that the provisions of
the Act shall apply to banking companies in so far as they are not inconsistent
with those of the Banking Regulation Act, 1949. So, any provision in the
Companies Act which is repugnant to or inconsistent with s. 45B of the Banking
Regulation Act shall not apply to banking companies. Section 10 of the
Companies Act also confers exclusive jurisdiction on the High Court only in
respect of matters specifically mentioned in sub-s. (2), and the section is
neither repugnant to nor inconsistent with s. 45B of the Banking Regulation
Act.
The case on hand is one for
recovery of money filed by a banking company against one of its
ex-shareholders. The claim indisputably is not one arising out of winding-up proceedings. I have, therefore, no
hesitation in holding that the civil court has jurisdiction to entertain the
suit.
The next submission of the learned counsel related to the factum of
validity of the amalgamation of the transferor-bank with the plaintiff-bank.
Both the courts below have found that the scheme of amalgamation was notified
under Ex. A-9 by the Govt. of India, which is the true copy of the said scheme
of amalgamation under s. 45(7A) of the Banking Regulation Act. The said
notification recites that the scheme of the said amalgamation of the transferor
bank with the plaintiff-bank has been sanctioned by the Central Govt. under s.
45(7A) of the Banking Rugulation Act. Subsection (7A) provides that the sanction
accorded by the Central Govt. under sub-s. (7) shall be conclusive evidence
that all the requirements of the section relating to amalgamation have been
complied with and a copy of the sanctioned scheme certified in writing by an
officer of the Central Govt. to be a true copy thereof, shall in all legal
proceedings be admitted as evidence to the same extent as the original scheme.
Exhibit A-9 is the true copy of the notification published in the Gaz. of India
and has been certified as the true copy by the Under-Secretary to the
Government. The seal of the Under-Secretary is also found under the signature.
There is a presumption under s. 114(e) of the Evidence Act with regard to the
regularity of the acts done by public servants in due discharge of their
official duties. In the circumstances, it must be held that Ex. A-9 is a true
copy. The contention of the learned counsel, Mr. Vaidyanathan, that Ex. A-9 is
not proved to be a true copy has been rightly rejected by both the courts
below. I have, therefore, no hesitation in upholding the conclusion of the
courts below that the scheme of amalgamation is valid and unassailable.
Then there remains the more formidable contention, namely, that the
forfeiture of the shares of the defendant was illegal. It is the plaintiff's
case that notice of forfeiture was sent to the defendant on July 24, 1963, but
the defendant failed to pay the call money on or before August 20, 1963, in
spite of repeated demands. It was stated in the said notice that if the
defendant failed to pay the calls due with interest thereon the shares of the
defendant and the monies paid would stand forfeited. Exhibit A-7 is said to be
the postal acknowledgment of the said notice. The defendant having failed to
pay the arrears as demanded in the notice, the board of directors of the
plaintiff-bank at their meeting held on September 10, 1963, forfeited the said
shares and monies paid by the defendant and a notice thereof was given to the
defendant under a certificate of posting. Exhibit A-11 is the office copy of
the notice sent after forfeiture to the defendant. But P. W. 1, the only
witness examined on behalf of the plaintiff-bank, admitted that the bank has
not filed any proof of service of the notice, Ex. A-11, dated September 16,
1963, on the defendant. Exhibit P-7 is only a postal acknowledgment. No office
copy of the order of forfeiture has been filed. What was sent and what was
received under Ex. A-7 is not clear. There is thus no proof of service of even
the notice of forfeiture. There is no escape from the conclusion that the
plaintiff-bank adduced no evidence to show that either the notice of forfeiture
or the subsequent resolution of the bank forfeiting the shares of the defendant
have been sent and served on the defendant. Further, the signature of the
defendant on Ex. A-7 has also not been established.
The purpose of the notice under regln. 29 of Sch. I of Table A of the
Companies Act is to give the shareholder an opportunity for payment of the call
money. So, before there can be any forfeiture, a proper service of notice is a
condition precedent to be fulfilled. Therefore, any irregularity either in the
contents of the notice as required under regln. 30 or in the service of notice
shall be fatal to the validity of the forfeiture. The Supreme Court in Public
Passenger Service Ltd. v. M.A. Khadar [1966] 36 Comp Cas 1; AIR 1966 SC 489
held that a defective notice of forfeiture of shares renders the subsequent
forfeiture invalid. In this case there is absolutely no proof of service of
notice of forfeiture.
In Karachi Oil Products Ltd. v. Kumar Shrec Narenderasinghji [1948] 18
Comp Cas 215; AIR 1950 Bom. 149 Bhagwati J. (as he then was) held that the
forfeiture is treated very strictly by the courts and the directors seeking to
enforce it must exactly pursue the course of procedure marked out by the
articles. A slight irregularity is as fatal as the greatest. Therefore, it must
be held that in this case there has been no valid forfeiture. When once it is
found that there was no valid notice of forfeiture and the forfeiture itself
was void, the suit filed on September 12, 1966, undoubtedly is time-barred.
Only the plaintiff-bank gets a fresh cause of action from the date of
forfeiture if the forfeiture is found to be valid. There was no valid notice of
forfeiture in this case and the resolution forfeiting the shares of the
defendant was consequently not valid. According to the plaintiff-bank the cause
of action arose on September 10, 1963, when the shares of the defendant were
forfeited in the meeting of the board of directors on the said date under art.
55 of the Limitation Act, 1963, and, therefore, the suit filed on September 12,
1966, was within time. But in view of the aforesaid finding as to the legality
of the forfeiture, it cannot be accepted that the cause of action arose on
September 10, 1963. Consequently, the suit was barred by limitation.
In the result, the judgment and decree of the appellate court are
set aside and the suit is dismissed with costs throughout. The civil revision
petition is accordingly allowed.
[1978] 48
COMP. CAS. 202 (
HIGH COURT OF
v.
Wearwell
Cycle Co. (
DALIP K. KAPUR J.
COMPANY
PETITION NO. 44 OF 1975.
MAY 28, 1976
K.L. Budhiraja for the petitioner.
D.D. Sharma for the Respondent.
D.K. Kapur J.—This
petition under section 155 of the Companies Act, 1956, prays for rectification
of the register of members of the respondent-company on the ground that the petitioner
is a holder of 1,738 cumulative 10% preference shares having the face value of
Rs. 100 each in the respondent-company, the distinct numbers of which are 15722
to 17509. It is claimed that the petitioner left the country in 1966 to live
with her husband in the United States of America and, except for a few
occasional visits to India, she has been living there ever since. In paragraphs
7, 8 and 9 of the petition, it is claimed that the shares of the petitioner
have been forfeited illegally and got transferred fraudulently by the directors
to themselves or their nominees or friends. It is claimed in paragraph No. 8 of
the petition specifically that the forfeiture is void as being in violation of
article 42 of the articles of association of the company. In paragraph No. 9,
it is claimed that no notice in compliance with article 43 of the articles was
given. In paragraph No. 10, it is claimed that the notice required by article
45 concerning the factum of forfeiture was also not given.
In reply, the company filed a
detailed affidavit taking several preliminary objections and also claiming on
the merits that the petitioner knew about the forfeiture at least in January,
1966, and the sale of the forfeited shares was advertised in Hindustan Times on
20th May, 1968. In answer to paragraph No. 8, it was stated that the petitioner
had misrepresented about there being no calls due and in fact she was liable
for filing a false affidavit and for perjury. It was further stated that a
notice of forfeiture was issued to the petitioner and has been got exhibited in
Suit No. 234/67, which is pending before a subordinate judge. As regards the
notices of calls, forfeiture, etc., it was claimed that the same were issued
when the petitioner's father was the managing director and the mother was also
a director of the respondent-company. In reply to paragraph No. 9, it is
claimed that a proper notice was issued according to the articles to the
petitioner. I found that from the affidavit filed in reply, it was not possible
to determine whether the notices given to the petitioner were in accordance
with the articles Nos. 42, 43 and 44 of the articles of association and, hence,
I gave the company further time to file an affidavit which has been filed on
27th May, 1976. The arguments were treated as part-heard. I have also been
given a copy of the memorandum and articles of association of the company.
The main question for
consideration in this case is whether the forfeiture of the shares of the
petitioner is valid and it has then to be seen as to how this matter is to be
decided on this petition. It is to be noted that the petition has been moved in
April, 1975, although the forfeiture took place about ten years earlier. There
is also evidence to show that the factum of forfeiture was known to the
petitioner at a much earlier date. Therefore, the preliminary objection that
the petition is very much belated has to be very carefully considered on
account of the considerable delay which has taken place in moving the petition.
It is also one of the
preliminary objections that the father of the petitioner, Shri K.C. Aggarwal,
has filed a suit before a subordinate judge concerning these very shares in
which he has challenged the forfeiture and also claimed that he was a benami
owner of these shares. It is further claimed that the petition was not
maintainable because the petition had not been instituted by the petitioner
herself, but by someone else who forged her signatures. Further, it is claimed
that the petition had been instituted at the instance of the said Shri K.C.
Aggarwal, and the petitioner knew about the forfeiture and the calls through
her parents, who were managing director and director of the company.
I think the preliminary
objections can be dealt with later and it is first necessary to ascertain
whether there is any substance in the claim that the shares were wrongfully
forfeited. The procedure under section 155 of the Companies Act, 1956, is a
summary procedure and, therefore, it is necessary to analyse the pleadings and
affidavits filed before the court on the merits of the claim that the
forfeiture is bad. As far as the petitioner's case is concerned, she has made
an allegation that the forfeiture is bad. The learned counsel for the
respondent-company urges that this does not discharge the onus of proof and
does not show that the forfeiture is bad. On the other hand, the method by
which the forfeiture has been brought about is known only to the company as the
notices have to be issued by the company and other formalities have also to be
fulfilled by the company. A shareholder necessarily has to make an allegation
and all the facts are in the knowledge of the company, who has to show what was
the procedure that was followed in bringing about the forfeiture of the shares
in question. It is also to be noticed that the shares had a face value of Rs.
1,73,800, being 1,738 preference shares of Rs. 100 each. The calls up to the
time of forfeiture were about 7½ per cent. according to the account filed by
the company ; the calls were in arrears to the extent of Rs. 12,000. Thus, at
least, Rs. 1,00,000 had been paid up on these shares and it follows that the
forfeiture would result in the loss of Rs. 1,00,000 to the petitioner without
any compensation.
The question of forfeiture and
lien on shares has been dealt with in articles 42 to 56 of the articles of
association of the respondent-company. In article 42, it is stated that if a
member fails to pay calls or instalments within the time allowed or within the
extended time, the directors may serve a notice on the member requiring him to
pay this sum together with interest and expenses that may have been incurred by
the company by reason of non-payment. Hence, the first step the company has to
take is to serve a notice on the shareholder calling upon him to pay the unpaid
calls. Article 43 requires that such notice shall specify another date which
shall be at least 14 days after the date of the notice where the money is to be
paid. The notice is also required to state that in case there is non-payment,
the shares will be liable to be forfeited. Thus, articles 42 and 43 have to be
read together. Article 44 states that if such notice is not complied with, any
shares which are the subject-matter of the notice, may be forfeited by a
resolution of the directors. The forfeiture will include all dividends and
bonuses declared in respect of the shares but not actually paid and will
include also other rights to incidentals. Article 45 requires that when the
shares have been forfeited, notice of the resolution has to be given to the
member and an entry has to be made in the register of members concerning the
forfeiture. Article 46 shows that the forfeiture shall be deemed to be the
property of the company and may thereafter sell, re-allot, etc., either to the
original holder or to any other person by public auction upon such terms and in
such manner as the directors may think fit. Article 47 shows that, on
forfeiture, the member concerned will cease to be a member of the company who
shall notwithstanding the forfeiture be liable to pay all calls, interest owed
in respect of the shares, together with interest thereon at 7%, and the
directors may enforce the payment if they think fit. Article 49 shows that upon
a duly verified declaration in writing, every other person to whom the shares
are sold, will get a good title and his title to such shares shall not be
affected by any irregularity or invalidity in the proceedings to such
forfeiture. Article 50 says that any forfeiture may until the shares are sold
or re-allotted in the discretion of the directors be remitted as a matter of
grace and not as a matter of right on payment to the company of the money which
was owed to the company. Out of the remaining articles, only article 56 is
important because it states that, upon any sale after forfeiture, etc., the
directors may cause the purchaser's name to be entered in the register and the
purchaser will not be bound to see to the regularity of the proceedings or the
application of the purchase money. After his name has been entered on the
register, the validity of the sale shall not be impeached by any person and the
remedy by any person aggrieved by the sale shall be in damages only and against
the company exclusively.
These articles have been
referred by me for the purpose of analysing the facts of the present case,
which I will now deal with. In the original reply to the petition and the
affidavit filed therewith, there was not any reference to the forfeiture
notices and other notices required to be given by the articles to the
petitioner. However, it was claimed that all the notices had been filed in Suit
No. 234/67, which was pending in the court of the Commercial Subordinate Judge,
Delhi. I had given time for filing a further affidavit which is before me. The
new affidavit is by Shri H.L. Seth, one of the directors of the company. He
states that he is the managing director of the company and claimed that the
shares were forfeited on 30th April, 1965, in a board meeting of the company.
It was stated in the resolution that the calls had not been paid since 1961.
The name of the petitioner is given as Miss Promila Aggarwal, Regent House,
Simla. It was further claimed that the forfeited shares were auctioned by
advertisement in Hindustan Times issued on 20th May, 1968, and then were
re-allotted to various persons, whose names are set out in the affidavit. It is
claimed that these persons have to be joined as parties because their shares
are being taken away. Article 56 of the articles, referred to earlier, states
that the petitioner cannot impeach the validity of the re-allotment and the
only remedy is by way of damages and the rectification petition is not
maintainable. It is claimed that Shri K.C. Aggarwal has claimed that he is the
real owner of these shares in Suit No. 234/67, and said there that Miss Promila
Aggarwal was only his benami or nominee. It was claimed that the petition was
being proceeded with by Shri K.C. Aggarwal himself who was also present in
court on 15th May, 1975, as recorded in the order of the court on that date. An
affidavit of Shri K.C. Aggarwal was also filed in these very proceedings. It
was claimed that Shri K.C. Aggarwal had taken away the minutes book of the
company from 1951 till December, 1963, which contained the resolution regarding
the calls. It was further claimed that the shares were allotted to Miss Promila
Aggarwal in May, 1958, when she was a minor. Thus, the registration of the
shares was bad ab initio and she could not become a shareholder in the eye of
law. It was further stated that there was a board meeting of the company on
21st December, 1963, in which it had been decided to call upon the shareholders
to make payment of the arrears in calls. The requisite notices were R-1 and
R-2. Those notices are in the form of notices sent to the shareholders asking
them to make calls and the notices stating that the shares had been forfeited,
respectively. Lastly, it was stated that a registered A.D. letter was sent to
Miss Promila Aggarwal on 14th January, 1964, from the Eastern Court Post
Office, New Delhi, but the letter had come back unserved with the remarks that
she was not traceable at the address. This closed envelope was claimed to be
exhibited in the court of Shri S.M. Aggarwal, Commercial Subordinate Judge, in
the aforementioned suit.
Thus, the case of the
respondent-company is that the notice required by article 42 was sent to the
petitioner but came back unserved. The question for consideration is whether a
notice which has come back unserved can be deemed to be a service of a notice,
as required by article 42. Further, if it is to be held that this is no service
at all, it has to be ascertained whether the forfeiture is to be held to be bad
and further whether the subsequent re-allocation of the shares to someone else
defeats the claim. The first question for decision is whether the service is
good when the notices have been returned unserved. It is provided in the
articles that a notice is deemed to be served if sent by registered post
acknowledgement due at the registered address of the shareholder. I do not
think that the deeming provision has any application if the notice comes back
unserved. I think the company is bound to enquire, especially in the case of a
shareholder whose shares are to be forfeited as to whether the shareholder's
address has not changed. When the shareholder happens to be the daughter of the
managing director, and that is the case of the respondent-company, I fail to
understand why the company could not ascertain the correct address from Shri
K.C. Aggarwal. I think that, in the circumstances, there is little doubt that
the company was only too anxious to somehow forfeit the shares and thus
appropriate a sum of Rs. 1,00,000. In my view, at least, on the facts of this
case, there is no doubt that the company did not make any enquiry as to the
proper address of the petitioner and it chose to forfeit the shares by passing
the resolution. It is well established that the power to forfeit is one which
is to be very strictly scanned by the court, as observed in Public Passenger Service Ltd. v. M.A. Khader,
a Division Bench judgment of the Madras High Court reported in [1962] 2
MLJ 113 ; AIR 1962 Mad 276, 279 :
"Where a power of forfeiture exists, it is to be treated as strictissimi juris. A very little inaccuracy in complying with the conditions precedent to a forfeiture is as against the company as fatal as the greatest."
The court also referred to the
judgment of the Court of Appeal in Johnson v. Lyttle's Iron Agency [1877] 5 Ch
D 687, 694 (CA) and quoted from the judgment therein. I repeat only one of
those quotations of Lord Mellish L.J., when he stated:
"I think it is clear that
a forfeiture of shares is, to all intents and purposes, the same thing as any
other forfeiture which deprives a man of his property. The rule at common law
was, that before any forfeiture can take place, all the conditions precedent
must have been strictly complied with."
It was held by the Privy
Council in Promila Devi v. Peoples Bank [1939] 9 Comp Cas 1, 11, by the
judgment of Romer L.J.:
"This may seem to be
somewhat technical, but, in the matter of forfeiture of shares, technicalities
must be strictly observed, and it is not, as is sometimes apt to be forgotten,
merely the person whose shares are being forfeited who is entitled to insist
upon the strict fulfilment of the conditions prescribed for forfeiture."
The judgment of the Madras High
Court also refers to the statement of law in Halsbury's Laws of England,
Simonds edition, volume 6, page 266, para. 552, that in the matter of forfeiture
of shares, technicalities must be strictly observed. Thus, I have no doubt that
the service on the petitioner was a most essential pre-requisite for effecting
the forfeiture. The forfeiture is, therefore, clearly void.
Now, the main difficulty which
arises at this stage is, what is the result of the further sale of these shares
to someone else. It has been stated in article 56 "that the validity of
the sale shall not be impeached by any person and the remedy of any person
aggrieved by the sale shall be in damages only and against the company
exclusively". I think the meaning of this is that the sale of the shares
cannot be impeached as far as the third parties are concerned but,
nevertheless, if the forfeiture is bad, the petitioner has to be made a shareholder
of the company to the extent of the forfeited shares. If the shares were never
forfeited, they could not also be transferred. In my view, this article merely
bars the impeaching of the sale of the shares. It does not bar the impeaching
of the forfeiture. If the forfeiture was bad it would mean that the
petitioner's name could not be struck off the register. If the petitioner's
name could not be struck off the register she must be shown on the register to
the extent of 1,738 shares. It is still open to the company to make calls in
respect of those shares. If the company has sold some shares to a third person
or others, the company must give those persons other shares because the
consequential loss is due to the fault of the company itself. Thus, there is no
difficulty in allowing the petition under section 155 of the Companies Act,
1956, on the ground that the petitioner's name has been wrongly excluded
without sufficient cause from the register of members. The company must,
therefore, take necessary steps to enter the petitioner's name in the register
of members concerning the shares in question and as far as the purchasers of
the shares are concerned, they can be allotted the shares with other numbers.
Alternatively, I see no difficulty in the petitioner being allotted 1,738
shares bearing different numbers from the shares which she formerly had. There
is no magic in the numbering of shares because every individual share is of the
same type. The shares will be paid up to the extent they were paid up at the
time of the forfeiture. As indicated, the company can still call upon the
petitioner to make the necessary payments on failure of which the shares will
be forfeited.
I have not dealt with the
preliminary objections earlier, but I do so now. As far as the delay in
bringing the petition is concerned, it was held in the aforementioned judgment,
Public Passenger Service Ltd. v. M.A. Khader [1962] 2 MLJ 113; AIR 1962 Mad
276, by the Madras High Court that mere laches or delay will not disentitle the
shareholder to an equitable relief. This view has also been expressed by the
Privy Council in Garden Gully United Quartz Mining Co. v. Hugh McLister [1875]
1 App Cas 39 (PC). The Supreme Court has expressed a similar view in Sha
Mulchand & Co. Ltd. v. Jawahar Mills Ltd. [1953] 23 Comp Cas 1 (SC), and
held there that mere acquiescence, waiver or laches does not defeat the grant
of an equitable relief. As regards the respondent's claim that Shri K.C.
Aggarwal has claimed these shares as benami and filed a suit thereof, I do not
think that that makes any difference to the rights of the petitioner. The
company can either claim that these shares belong to Shri K.C. Aggarwal or to
the petitioner. But it cannot claim that they belong to neither. If the shares
belong to Shri K.C. Aggarwal, then the forfeiture is bad. In any case, notices
were not sent to him. Hence, the forfeiture would be bad whether the shares
belong to Shri K.C. Aggarwal or to the petitioner. It is not the case of the
respondent-company that the shares belong to Shri K.C. Aggarwal, and hence the
contention of Shri K.C. Aggarwal on this question seems to be quite irrelevant.
There is a claim that the petition has not been signed by the petitioner but as
her affidavit accompanies the petition and she resides in America, I must
accept the fact that the petitioner has filed the petition. A point was raised
that the petitioner's name is Miss Promila Aggarwal in the books of the company
and she has filed the petition under her married name, Mrs. Promila Bansal. In
order to avoid any controversy, the company may enter the petitioner's name
under her original name of Miss Promila Aggarwal. As regards the contention
that the petition is mala fide, I do not see why the petition can be considered
to be mala fide only because Shri K.C. Aggarwal appeared once in this court
during these proceedings. The petition has to be judged on its own merits and
the question of mala fides does not enter into the controversy and clearly the
petitioner has been deprived of an investment of Rs. 1,00,000.
I accordingly reject all the
preliminary objections and allow the petition. I have already mentioned that
the result will be that the petitioner's name, i.e., Miss Promila Aggarwal,
will be restored to the register of members in respect of 1,738 preference
shares of the face value of Rs. 100 each. The company will be free to enforce
any calls that remain to be paid on those shares. On account of delay, I
disallow the petitioner any costs.
[1944]
14 COMP CAS 63 (MAD.)
HIGH
COURT OF
v.
Adoni Electric Supply Co., Ltd.
LEACH,
C.J.
AND
LAKSHMANA RAO, J.
Appeals Nos. 137,
190 and 216 of 1942
DECEMBER 23, 1943
U. Lakshmana, R. Karunakaran and M.S. Ramachandra Rao, for the Appellant.
V.S. Narasimhachar, A. Bhujanga Rao and D.R. Krishna Rao, for the Respondents.
Leach, C.J.—These three appeals arise out of different suits filed in the Court of the District Judge of Bellary. The cause of action was the same in each case and as the actions were tried together the trial Court dealt with them in one judgment. It will be convenient to adopt the same course here.
We will first state the facts in appeal No. 137 of 1942. The plaintiff
is a limited liability company. It was registered on the 3rd November 1932 with
a nominal capital of Rs. 3,00,000 divided into 3,000 shares of Rs. 100 each.
The object for which the company was formed was the supply of electricity to
the town of
The contention that the forfeiture was invalid is well founded Article 62 of the articles of association states that the notice shall name a day (not being less than fourteen days from the date of the notice) and a place or places on and at which the call or instalment and interest and expenses are to be paid. The notice issued to the appellant did not state where the payment should be made and did not correctly state the dates on which the calls were to be met. For the purpose of calculating interest it was necessary that correct dates should be stated. In Johnson v. Lyttles Iron Agency the Court of Appeal held that a forfeiture was invalid where the notice claimed interest from the date of the call, instead of from the date fixed for payment. In that case James, L.J., observed: "It was the established rule of the Court of Chancery and of the Courts of Common Law that no forfeiture of property could be made unless every condition precedent had been strictly and literally complied with. A very little inaccuracy is as fatal as the greatest. Here the notice is inaccurate. It is therefore bad and the forfeiture is invalid." The position is the same here and we must hold that the appellant's shares have not been forfeited.
If the appellant does not pay for his shares, the company can of course still forfeit them if it takes proper steps. The appellant is undoubtedly liable to the company in the principal sum of Rs. 5,000 with interest on Rs. 2,500 from the 20th October 1935 (the date on which he should have paid the application and allotment money), on Rs. 1,250 from the 10th November 1937 and on Rs. 1,250 from the 11th September 1938. As the appellant has signified his willingness to meet his liability we will vary the decree of the trial Court by declaring that the forfeiture is invalid and that the appellant is entitled to remain on the register as the holder of fifty shares, provided he pays Rs. 5,000, with interest as specified above, and the cost awarded by the lower Court within two months of this date. If he fails to make the payment within the time specified, his appeal will stand dismissed with costs and the memorandum of cross-objections will be allowed with costs. To this the appellant agrees.
The facts in Appeal No. 190 of 1942 are the same except that the appellant only subscribed for ten shares. By consent there will be a similar order passed here. Interest will run in respect of Rs. 500 from the 20th October 1935, on Rs. 250 from the 10th November 1937 and on Rs. 250 from the 11th September 1938. The appellant will also be allowed two months time in which to pay the principal and interest, plus the costs awarded by the trial Court. If he fails to make such payment in full his appeal will stand dismissed with costs.
The company is the
appellant in Appeal No. 216 of 1942. The respondent signed the memorandum of
association as a subscriber for ten shares. He pleaded that he was not liable
to pay as the promoter of the company had agreed to allot these shares to him
for legal services rendered in connection with the promotion of the company.
The District Judge held that the respondent was not liable because he
considered that it was a case where strictly legal considerations must give way
to equity. He went on to observe, "My difficulty in finding on this issue
arises mainly out of a chaotic muddle; industrial concerns so often pass
through amongst the names of Indian Company Law without skilled and expert
guidance by specialised lawyers who can guide them aright. A broad, liberal and
sympathetic view, therefore, I consider, has to be taken by Courts in dealing
with claims such as this, as to apply strict law without invoking equity might
result in substantial injustice." We certainly cannot subscribe to this
opinion. The case has to be decided on the law and only on the law. The
respondent subscribed to the memorandum of association and therefore is liable
to pay for his shares in cash. If he did in fact enter into an arrangement with
the promoter of the company under which he was to receive ten shares for his services, the position would not be
altered. The decree of the District Judge must be set aside with costs in the
trial Court. As the respondent is agreeable to the same order being passed in
this case as in the other appeals, there will be a declaration that the
respondent is entitled to remain on the register as a holder of ten shares,
provided he pays the principal sum of Rs. 1,000 with interest as payable by the
appellant in Appeal No. 190 of 1942 and the costs of the company in the trial
Court within two months. In default, the company will get a decree as prayed
for, with costs throughout.
[1949] 19 COMP CAS 286 (ALL.)
HIGH COURT OF
v.
Shiromani Sugar
Mills Ltd.
HARISH CHANDRA AND SAPRU, JJ.
First Appeal No. 405 of 1943
AUGUST 31, 1948
Walter Dutt, P.N.
Haksar and J.N. Chatterji, for the appellant.
G.S. Pathak, for the
respondent.
Sapru. J.—This appeal has been filed by the defendant.
The suit out of which it arises was instituted on 4th May, 1942, by the
Official Liquidators of the plaintiff company, the Shiromani Sugar Mills
Ltd. (in liquidation) for the recovery of a sum of money amounting to Rs.
7,817-8-0 which is made up, according to para. 9 of the plaint, as follows:—
|
|
|
Rs. |
A. |
P. |
|
On account
of application money |
... |
750 |
0 |
0 |
|
On account
of allotment money |
... |
1,500 |
0 |
0 |
|
On account
of 1st call |
... |
1,500 |
0 |
0 |
|
On account
of 2nd call |
... |
1,000 |
0 |
0 |
|
|
|
4,750 |
0 |
0 |
|
On account
of overdue interest up to date of forfeiture |
... |
2,067 |
8 |
0 |
|
Total |
... |
7,817 |
8 |
0 |
It was stated that the suit was within the period of
limitation as the cause of action arose on 5th May, 1939, when the plaintiff
company forfeited the shares under its Articles of Association. The case of the
plaintiff was that the defendant was a shareholder to the extent of 50
preference shares in the plaintiff company. According to the plaintiff an
application for preference shares was made by the defendant on 1st October,
1933, and along with that application a sum of Rs. 250 was paid by him. The defendant
admits that he had applied for 50 preference shares on 1st October, 1933, but
he contends that the sum actually paid by him was Rs. 111 and not Rs. 250 and
that as 5 per cent. of the share money, Rs. 5,000, was not paid along with the
share application, the allotment was not valid, having regard to the provisions
of Section 101 of the Indian Companies Act, 1913 (VII of 1913). Sub-section (1)
of Section 101 of the Act requires that a sum of at least 5 per cent. of the
share money should be paid to or received in cash by the company before the
allotment can be made.
The plaintiff's case is that, as a matter of fact, Rs. 250
were paid and we are satisfied that the plaintiff's story on this point is
true. (On this point his Lordship considered the evidence and continued:) We
are satisfied that, on the materials before us, we would be justified in
holding that the defendant paid a sum of Rs. 250 along with the share
application, that that represented 5 per cent. of the share money payable by
him and that for this reason the provisions of Section 101 of the Act must be
deemed to have been complied with.
The second point taken by the defendant was that the
forfeiture of shares was invalid because the notice intimating forfeiture
included two items which were barred by limitation. It has been further argued
that the resolution of forfeiture was invalid as it was passed by a committee of directors and that this
committee was not properly constituted. It appears that the plaintiff served a
notice on the defendant on 7th April, 1939. From this notice it would appear
that a demand was made for certain calls which were due and which had remained
unpaid on his shares. The first two demands totalling a sum of Rs. 2,250 were,
it is alleged, time-barred as they had fallen due on 15th December, 1933, and
25th January, 1934, and no steps had been taken to recover them within the time
fixed for limitation. The lumping together in one letter of demands which were
time-barred and demands which were not time-barred would, as has been argued by
learned counsel for the appellant, make the notice of forfeiture an illegal
one. The position in regard to the demands due on 15th December, 1933, and 25th
January, 1934, was that they represented a debt which had not been discharged.
It cannot be said that the debt was not there. All that can be urged is that it
would not have been open to the plaintiff-respondent to enforce payment of that
debt in a Court of law. Our reading of Section 28 of the Limitation Act (IX of
1908), is that in a case to which that section does not apply on the
determination of the period of limitation, the right itself is not
extinguished. It may be urged, and it is quite true, that the remedy is not
enforceable in a Court of law. That would not, however, extinguish the right or
change the character of the debt. Our view is supported by two authorities
which are to be found in Mohesh Lal v. Busunt Kumaree and Jokhu
Bhunjja v. Sitla Baksh Singh. In Mohesh
Lal's, case,
it was held that the Indian law of limitation merely bars the remedy, but does
not extinguish the right. In Jokhu Bhunjja's case it was held
that a secured creditor's remedy might be barred if he omitted to bring a suit
within 12 years from the accrual of the cause of action but his right was not
extinguished. It will be noted that Section 28 applies only to cases in which
the plaintiff sues for possession and a suit to recover the share money due
from a co-sharer by a company is by no means a suit for possession. The conclusion
at which we have arrived at after an examination of Section 28 and the two
authorities mentioned above is that the remedy was barred but that the right
was not extinguished.
The third point in regard to which argument was addressed to us was
that the resolution for forfeiture was invalid as it was passed by a committee
of directors and that this was contrary to Article 179 of the Articles of
Association which are to be found printed at p. 98 of the paper book. Article
179 authorises the directors to delegate any of their powers to a committee
consisting of such member or members as they think proper. Any committee so
formed shall, in the exercise Ok the powers so delegated, conform to any
regulations that may be imposed on it by the director. Article 179 is not
inconsistent with anything that is to be found in the Companies Act. In tact,
in para. 91 of Table A of Schedule I of the Companies Act (VII of 1913), there
will be found a provision authorising the directors to delegate any of their
powers to committees consisting of such member or members of their body as they
think fit. It is this provision which is to be found incorporated in Article
179 of the Articles of Association of the plaintiff company. We, therefore, see
no force in the argument that the resolution for the forfeiture of shares was
invalid. We may on this point also invite attention to Article 34 of the
Articles of Association of the plaintiff company which lays down that:—
"After the
forfeiture of any shares, notice of resolution shall be given to the member in
whose name it stood immediately prior to the forfeiture, and an entry of the
forfeiture with the date thereof, shall forthwith be made in the register but
no forfeiture shall be in any manner invalidated by any omission or neglect to
give such notice or to make such entry as aforesaid."
Another argument
which can be urged against the defendant appellant is that after forfeiture a
member does not pay as a contributory but he pays as a debtor. This will be
clear from a case reported in Habib Rowji v. Standard Aluminium and Brass Works
Ltd. It
was held in that case that by reason of Ai tide 32 of the Articles of
Association of the company before the Court, there was a special contract
whereby the defendant had agreed that in the event of his shares being
forfeited he would be liable to pay to the company all the moneys that were due
by him for allotment, calls and further calls made on the shares allotted to
him with interest, and that it was on that contract that plaintiffs were suing.
It was further laid down that the cause of action for that reason arose when
the company forfeited the shares and due to that circumstance the suit to
recover what was due from the defendant on his shares was within time. It was
observed by Coyajee, J., that having regard to the terms of Article 32 of the
Articles of Association of the company before them, i.e., the Bombay High Court
Bench, there was a new obligation giving the company a fresh cause of action
against the defendant and that the period of limitation for a suit to enforce
this new obligation began to run from the time the shares were forfeited. A
similar provision occurs in Article 34 of the Articles of Association in the
present suit. We are, therefore, satisfied that the liability of the defendant
is not barred by limitation and that the resolution of the Board of Directors
was not invalid. In point of fact, the question about the resolution of the
Directors being invalid was not specifically taken in the written statement. We
may point out that it finds no place in the grounds of appeal and it was argued
before us for the first time on the second day of the hearing of the appeal. We
are satisfied that it was open to the company to validly forfeit the shares and
that it could exercise its powers in respect of dues which were time barred. It
was pressed upon us that the forfeiture clause was in the nature of a penal
clause and was contrary to the spirit of Section 74 of the Contract Act. No
authority for this proposition was placed before us. The Companies Act does not
bar a forfeiture clause of this nature and indeed it specifically provides for
it. In Table A which represents a model for Articles of Association, para. 24
actually contains a forfeiture clause of this nature. Inasmuch as there is a
valid resolution for forfeiture in this case, we are satisfied that there is no
force in this contention.
From a perusal of
the application which was filed on behalf of the plaintiff on 6th October,
1942, it would appear that the defendant-appellant was a subscriber to the
Memorandum of Association. In the interrogatories which were served on the
defendant, he was specifically asked whether he was one of the original
subscribers to the Memorandum of Association and the Articles of Association
and whether he was one of those who got them registered. The answers to these
interrogatories were not given by the defendant himself, but by his Mukhtaram.
The answers were of an evasive nature. They were given on 16th March, 1943, and
what the Mukhtaram stated was that the defendant did not intentionally sign any
paper within his knowledge by virtue of which he could have become an original
subscriber to the Memorandum and Articles of Association. If it was added in
connexion with the signature on the application form, Mr. N.K. Verma obtained
the signature of the defendant on any paper by virtue of which the defendant
might have become an original subscriber to the Memorandum and Articles of
Association, the defendant had no knowledge of it. We take the Mukhtaram's
answer to mean that he was not in a position to deny that the defendant was an
original subscriber to the Memorandum of Association. That being the case, we
think that it was possible for the plaintiff company to put their case more
simple than they have done in their plaint.
An argument was
addressed to us in regard to certain proceedings under the Encumbered Estates
Act to which reference was made by the defendant in para. 3 of his written
statement. There was one issue on that point and a finding of the Court was
recorded against the defendant. Against that finding there was no ground of
appeal taken by the defendant-appellant. For this reason we consider it
improper to allow the defendant's counsel to argue the point raised by the
defendant in para. 3 of his written statement.
Another argument
was advanced that the defendant-appellant was not a member of the
plaintiff-company inasmuch as he had never made an application for membership
to the company. It was urged that what he had actually done was to make an
application to the promoters of the company before the company actually came
into existence. It was urged that a contract of that nature could not be
enforced by the company or the liquidators who are representing the company. We
may point out that this plea was neither taken in the written statement nor in
the grounds of appeal here. No issue was raised on this point. It is obvious
that it would be unjust to the plaintiff-respondent to allow this plea to be
raised at this stage of the case.
For the reasons
which we have given above, we consider that the judgment and the decree of the
lower Court are correct. We, therefore, affirm that judgment and decree and
dismiss the appeal with costs.
[1953] 23 COMP CAS 1 (SC)
SUPREME COURT OF
Sha Mulchand & Co. (in
liquidation)
v.
Jawahar
Mills Ltd.
[MEHR CHAND MAHAJAN, SUDHI RANJAN DAS, VIVIAN
BOSE
AND GHULAM HASAN, JJ.]
CIVIL APPEAL NO. 3 OF 1951.
DECEMBER 9, 1952
M.C. Setalvad, A. Balasubramaniam instructed and S. Subramaniam, for
the Appellant.
N. Rajagopala Aiyangar and M.S.K. Aiyangar, for the Respondents.
Das J. —This appeal
arises out of an application made by the Official Receiver representing Sha
Mulchand & Company Ltd. (in liquidation) under Section 38 of the Indian
Companies Act for rectification of the register of the Jawahar Mills Ltd.
Sha Mulchand & Company Ltd.
(hereinafter referred to as "the company") was incorporated in 1937
as a private limited company. At all material times it consisted of two
members, T.V.T. Govindaraju Chettiar and K.N. Sundara Ayyar. The Jawahar Mills
Ltd. (hereinafter called "the mills") was also incorporated in 1937
with an authorised capital of Rs. 10,00,000 divided into one lac shares of Rs.
10 each. The company was the managing agent of the mills from its inception and
applied for and was allotted 5,000 ten-rupee shares Nos. 15048 to 20047 on
which Rs. 5 per share had been paid. The company continued to act as the
managing agent of the mills till the 30th June, 1939, on which date it resigned
the managing agency. Prior to the company's resignation the two members of the
company had entered into an agreement with one M. A. Palaniappa Chettiar, a
partner of the incoming managing agency firm, upon certain terms which need not
be referred to in greater detail.
Within two months after the
change of managing agents, the mills made two calls, namely, one on the 22nd
August, 1939, for Rs. 2 per share payable on the first October, 1939, and the
other on the 1st October, 1939, for Rs. 3 payable on the 1st December, 1939.
The company did not pay either of the calls. On the 23 rd January, 1940,
Govindaraju Chettiar was adjudged insolvent on the application of Sundara
Ayyar. This insolvency of Govindaraju Chettiar was eventually annulled in 1944.
During this period Govindaraju Chettiar, in law, ceased to be a director of the
company, although it is alleged that he nevertheless continued to take part in
the management of the company.
By a resolution of the board of
directors of the mills passed on the 12th August, 1940, the new managing agents
were empowered to give notices to such persons as had not paid the allotment
money and the call money within the date fixed and to intimate them that in
default their shares would be forfeited. A notice was issued on the 16th
September, 1940, and two copies thereof are said to have been sent to Sundara
Ayyar and Govindaraju Chettiar. No payment having been made, the 5,000 shares
held by the company were forfeited by a resolution of the board of directors of
the mills. The auditor of the mills having pointed out that the purported
forfeiture was irregular and illegal, this forfeiture was cancelled.
By a resolution passed by
circulation on the 25th February. 1941, the board of directors of the mills
resolved that a notice be sent to the company informing it that it was in
arrears with calls to the extent of Rs. 25,000, that the amount must be paid on
or before the 31st March, 1941, and that, in default, its shares would be
forfeited. A notice dated the 15th
March, 1941, was accordingly addressed to the company and sent by registered
post with acknowledgment due. It appears that the notice was actually posted on
the 17th March, 1941, and was received by Govindaraju Chettiar on the 20th
March, 1941. The company did not pay the arrears of calls. On the 5th
September, 1941, the board of directors of the mills resolved that "the
5,000 shares Nos. 15048— 20047 standing in the name of the company have been
forfeited." On the 10th September, 1941, the mills wrote a letter to the
company informing the latter that the directors of the mills had at their
meeting held on the 5th September, 1941, forfeited the 5,000 shares. There is
no dispute that this letter which was sent by registered post was returned
undelivered. On the 1st October, 1941, an entry was made in the share ledger of
the mills recording that the 5,000 shares of the company had been forfeited. On
the 16th November, 1941, these 5,000 shares were re-allotted to 14 different
persons and on the 17th November, 1941, a letter was sent to the company
intimating that the forfeited shares had been re-allotted and calling upon the
company to send back to the mills all the documents relating to the original
allotment of the 5,000 shares to the company. In the meantime on the 26th
August, 1941, by an order made by the Registrar of Joint Stock Companies the
company was struck off the register of companies under Section 247 of the
Indian Companies Act. This order of the Registrar was published in the Official
Gazette on the 9th September, 1941, i.e., four days after the shares were
forfeited and one day before the notice intimating the fact of forfeiture was
sent in a registered cover which was, however, returned undelivered. Under
Section 247(5) of the Indian Companies Act the company stood dissolved on and
from the date of such publication.
The mills having come to know of the dissolution of the company applied
to the High Court (O.P. No. 10 of 1942) praying that the name of the company be
restored to the register of companies and that after such restoration was duly
advertised the company be wound up by the court. A similar application was made
on the 11th December, 1941, by the income-tax authorities (O.P. No. 11 of
1942). On the 23rd February, 1942, Sundara Ayyar filed an affidavit contending,
amongst other things, that the directors of the mills had no power to forfeit
the shares. On the 2nd April, 1942, however, O.P. No. 10 of 1942 was
compromised, and the mills received Rs. 11,000 from Sundara Ayyar in full
satisfaction of their claim against the company. On the 25th June, 1942, O.P.
No. 11 of 1942 was also compromised and Sundara Ayyar paid up the claim of the
income-tax authorities. The two petitions for restoration of the company were
accordingly dropped.
On the 27th June, 1942, Sundara Ayyar filed a suit against the mills
and others including Palaniappa Chettiar claiming a declaration that the
forfeiture by the mills of the 5,000 shares was illegal and inoperative and
directing the mills to pay to the plaintiff and the third defendant
representing the estate of Govindaraju Chettiar the value of the forfeited
shares with dividend or interest thereon and directing Palaniappa Chettiar to
pay the plaintiff and the third defendant the sum of Rs. 25,000. This suit was
dismissed on the 17th November, 1943, on the ground that Sundara Ayyar, who was
only a number of the dissolved company, had no locus standi and could have no
relief personally. Sundara Ayyar filed an appeal therefrom which was dismissed
as against the mills but the case was remanded to the trial court for the trial
of his claim as against the fourth defendant Palaniappa Chettiar.
During the pendency of Sundara Ayyar's appeal he, on the 12th August,
1944, filed O.P. No. 199 of 1944 for the restoration of the company. On that
application an order was made on the 16th February, 1945, that the name of the
company be restored to the register of companies, that the company be deemed to
have continued in existence as if its name had never been struck off, that such
restoration be advertised and that the company be wound up by the court and the
Official Receiver do forthwith take charge of the assets and liabilities of the
company. It was further ordered that the Official Receiver do recognise that as
between the mills and the company, the mills should be regard ed as having been
duly paid only Rs. 11,000 out of the total dept of Rs. 25,550 due to the mills.
By an order made on the 21st January, 1946, leave was given to the Official
Receiver to take appropriate steps regarding the 5,000 shares purported to have
been forfeited by the mills. Accordingly on the 5th March, 1946, the Official
Receiver, in the name of the company, took out the present summons calling upon
all parties concerned to show cause why the share register of the mills should
not be rectified by restoring the name of the company to the said register in
respect of 5,000 shares numbering 15048-20047 and why such other alternative or
consequential relief should not be granted to the applicant as might be just
and necessary in the circumstances of the case.
The mills contended, in opposition to that application, that the shares
had been properly forfeited, that the company was, on the principles of
estoppel, acquiescence and laches, precluded from challenging the forfeiture,
that the application was barred by limitation and that the shares having
already been allotted to other persons, who had not been made parties to the
application, no order for rectification of the register in respect of those
shares could be made.
The summons came up for hearing
before Mr. Justice Clark. The learned Judge, by his judgment dated the 15th
November, 1946, held that the notice dated the 15th March, 1941, which was
posted on the 17th March, 1941, and delivered on the 20th March, 1941, and on
which the resolution of forfeiture passed on the 5th September, 1941, was
founded, was not in conformity with the provisions of articles 29 and 30 of the
articles of association of the company which required 14 clear days notice. The
learned Judge further held that the plea of estoppel, acquiescence and laches
was untenable, that article 49 of the Limitation Act did not apply either expressly
or by way of analogy to the present application and that article 120, which
prescribed a period of six years from the date when the right to sue accrued,
would, by analogy, apply to the present proceedings and that so applied the
present proceedings must be held to be within time. Having disposed of the
controversy on the above points it remained to consider the form of the order
which could properly be made on the application. It is quite clear that the
specific shares having already been allotted to 14 different persons and those
persons not being then before the court, the court could not then and there
direct rectification of the register by restoring the name of the company to
the share register of the mills in respect of those identical shares. There was
nevertheless nothing to prevent the court even at that stage to give notice of
the application to the persons to whom the shares had been re-allotted and/or
those who were holding the shares at the time and after thus adding them as
parties thereto to make the appropriate order of rectification and, if thought
fit, to also award damages to the company. There were, however, 16,000 shares
of Rs. 10 each yet unissued. After discussing the matter with learned advocates
on both sides to which discussion a reference will be made hereafter, the
learned Judge, in the belief that the advocates for the parties had agreed as
to the form of the order, directed that the mills do rectify their register by
inserting the name of the applicant company as owner of 5,000 shares out of the
unissued shares of Rs. 10 each and that on such insertion the company do on or
before the 15th January, 1947, pay to the mills Rs. 25,000, being the amount of
calls in arrears.
Pursuant to further directions
given by the learned Judge on the 7th January, 1947, the mills on the 10th
January, 1947, received Rs. 25,000 and allotted 5,000 shares. Although the
mills thus acted upon the order they, nevertheless, on the 6th February, 1947,
filed an appeal against the order. That appeal came up for hearing before a
Bench consisting of Satyanabayana Rao and Viswanatsa Sastri JJ, It was not
disputed before the appeal court that the forfeiture was invalid, but the contentions urged were that
by reason of the irregularity the forfeiture was only voidable and not void and
that as the forfeiture was only voidable it was open to the company to waive or
abandon its right to dispute the validity of the forfeiture and that in fact,
by its conduct, it had done so, that the claim to rectify the register was
barred by limitation and that in any event rectification was impossible because
the shares were not available in specie, the same having been re-allotted to
other persons. The learned Judges by their judgment dated the 11th March, 1949,
held that the forfeiture was invalid, that the application was not barred by
limitation, for it was covered by article 120 of the Limitation Act. The
learned Judges recognised that where a period of limitation was prescribed for
a suit or a proceeding mere delay was no bar unless it was of such a character
as would lead to an inference of abandonment of the right or unless it was
established that the person against whom the action or proceeding was
instituted was actually prejudiced by reason of such delay. The learned Judges
agreed with the trial court that no plea of acquiescence, waiver or estoppel
had been established in the present case. The learned Judges, nevertheless,
thought that the question of abandonment of the right and prejudice to the
appellant by reason of the delay stood on a different footing. Then after
referring to certain conduct on the part of Gevindaraju Chettiar and Sundara
Ayyar the learned Judges concluded that by reason of the long delay in reviving
the company and in taking proceedings under Section 38 of the Indian Companies
Act the mills had been induced to put themselves in a situation in which it
became impossible for them to restore the company to the register in respect of
those 5,000 shares and that in view of this conduct, if the applicants were
Govindaraju Chettiar and Sundara Ayyar, it would have been a case in which
relief would have been refused in the light of the principles which the learned
Judges deduced from the judicial decisions referred to by them. Then referring
to the decision in Smith, Stone & Knight v. Birmingham Corporation and
certain text books the learned Judges took the view that it was too late in the
day to adhere to the strict formalism laid down in Salomon's case and that as
the tendency of modern decisions was to lift the veil of corporate personality
and disregard the corporate form, the conduct of its only two members had
disentitled the company from claiming the relief of rectification. The learned
Judges further held that there was no legal basis on which the form of the
order could be supported. On reading the judgment of the trial Judge and after
hearing the senior advocate appearing for the mills the learned Judges felt
unable to agree that the learned advocate had agreed to the substitution of the
5,000 out of the unissued shares
for the 5,000 forfeited shares. The result was that the appeal was allowed and
the order of the trial Judge was set aside. The company by its Official
Receiver has now come up before this court with leave granted by the High Court
under Sections 109 and 110 of the Code of Civil Procedure.
The appeal court, it will be observed, reversed the decision of the
trial Judge and decided the appeal against the company on two grounds only,
namely, (1) that the company had by the conduct of its two members abandoned
its right to challenge the forfeiture, and (2) that the form of the order could
not be supported as one validly made under Section 38 of the Indian Companies
Act. The learned Attorney-General, appearing in support of this appeal, has assailed
the soundness of both these grounds. The learned Attorney-General contends, not
without considerable force, that having, in agreement with the trial court,
held that no plea of acquiescence, waiver or estoppel had been established in
this case, the appeal court should not have allowed the mills to raise the
question of abandonment of right by the company, inasmuch as no such plea of
abandonment had been raised either in the mills' affidavit in opposition to the
company's application or in the mills' grounds of appeal before the High Court.
Apart from this, the appeal court permitted the mills to make out a plea of
abandonment of right by the company as distinct from the pleas of waiver,
acquiescence and estoppel and sought to derive support for this new plea from
the well known cases of Prendergast v. Turton, Clarke & Chapman v. Hart and
Jones v. North Vancouver Land and Improvement Co. A perusal of the relevant
facts set out in the several reports and the respective judgments in the above
cases will clearly indicate that apart from the fact that some of them related
to collieries which were treated on a special footing, those cases were really
cases relating to waiver or acquiescence or estoppel. Indeed in Clark's case
while Lord Chelmsford referred to the decision in Prendergast's case as a case
of abandonment of right, Lord Wensleydale read it as an instance of
acquiescence and estoppel. Unilateral act or conduct of a person, that is to
say, act or conduct of one person which is not relied upon by another person to
his detriment is nothing more than mere waiver, acquiescence or laches while
act or conduct of a person amounting to an abandonment of his right and
inducing another person to change his position to his detriment certainly
raises the bar of estoppel. Therefore, it is not intelligible how, having held
that no plea of waiver, acquiescence or estoppel had been established in this
case, the appeal court could, nevertheless, proceed to give relief to the mills
on the plea of abandonment by the company of its rights, if the facts on record
were not sufficient to sustain the plea of waiver, acquiescence or
estoppel, as held by both the courts, we are unable to see how a plea of
abandonment of right which is an aggravated form of waiver, acquiescence or
laches and akin to estoppel could be sustained on the self-same facts. Further,
whatever be the effect of mere waiver, acquiescence or laches on the part of a
person on his claim to equitable remedy to enforce his rights under an
executory contract, it is quite clear, on the authorities, that mere waiver,
acquiescence or laches which does not amount to an abandonment of his right or
to an estoppel against him cannot disentitle that person from claiming relief
in equity in respect of his executed and not merely executory interest. (See
per Lord Chelmsford in Clarke's case at p. 657). Indeed, it has been held in
The Garden Gully United Quartz Mining Company v. Hugh McLister that mere laches
does not disentitle the holder of shares to equitable relief against an invalid
declaration of forfeiture. Sir Barnes Peacock in delivering the judgment of the
Privy Council observed at pages 66-57 as follows:—
"There is no evidence
sufficient to induce their Lordships to hold that the conduct of the plaintiff
did amount to an abandonment of his shares, or of his interest therein, or
estop him from averring that he continued to be the proprietor of them. There
certainly is no evidence to justify such a conclusion with regard to his
conduct subsequent to the advertisement of the 30th of May, 1869. In this case,
as in that of Prendergast v. Turton, the plaintiff's interest was executed. In
other words, he had a legal interest in his shares, and did not require a
declaration of trust or the assistance of a court of equity to create in him an
interest in them. Mere laches would not, therefore, disentitle him to equitable
relief: Clarke and Chapman v. Hart. It was upon the ground of abandonment, and
not upon that of mere laches, that Prendergast
v. Turton was decided."
Two things are thus clear, namely, (1) that abandonment of right is
much more than mere waiver, acquiescence or laches and is something akin to
estoppel if not estoppel itself and (2) that mere waiver, acquiescence or
laches which is short of abandonment of right or estoppel does not disentitle
the holder of shares who has a vested interest in the shares from challenging
the validity of the purported forfeiture of those shares. In view of the
decision of the courts below that no case of waiver, acquiescence, laches or
estoppel has been established in this case it is impossible to hold that the
principles deducible from the judicial decisions relied upon by the appeal
court have disentitled the company to relief in this case, The matter does not
rest even here. Assuming, but not conceding, that the principle of piercing the
veil of corporate personality referred to in Smith, Stone & Knight v. The
Birmingham Corporation can at all be applied to the facts of the present case
so as to enable the court to impute the acts or conduct of Govindaraju Chettiar
and Sundara Ayyar to the company, we have yet to inquire whether those acts or
conduct do establish such abandonment of right as would, according to the
decisions, disentitle the plaintiff from questioning the validity of the
purported declaration of forfeiture. There can be no question that the
abandonment, if any, must be inferred from acts or conduct of the company as
such or, on the above principles, of its two members subsequent to the date of
the forfeiture, for it is the right to challenge the forfeiture that is said to
have been abandoned. In order to give rise to an estoppel against the company,
such acts or conduct amounting to abandonment must be anterior to the mills'
changing its position to its detriment. The resolution for forfeiture was
passed on the 5th September, 1941. The five thousand forfeited shares were
allotted to 14 persons on the 16th November, 1941, and it is such allotment
that made it impossible for the mills to give them back to the company. In order,
therefore, to sustain a plea of abandonment of right or estoppel, it must be
shown that the company or either of its two members had done some act and/or
had been guilty of some conduct between the 5th September, 1941, and the 16th
November, 1941. No such act or conduct during such period has been or can be
pointed out. On being pressed advocate for the mills refers us to the conduct
of Sundara Ayyar in opposing O.P. No. 10 of 1942 filed by the mills and O.P.
No. 11 of 1942 by the income-tax authorities for restoring the company to the
register of companies and it is submitted that such conduct indicates that
Sundara Ayyar had accepted the validity of the forfeiture. This was long after
the mills had re-allotted the forfeited shares. Further, a perusal of paragraph
9 of the affidavit in opposition filed by Sundara Ayyar in O.P. No. 10 of 1942
will clearly show that he not only did not accept, the forfeiture as valid but
actually repudiated such forfeiture as wholly beyond the competence of the
board of directors of the mills. The reason for opposing the restoration of the
company may well have been that Sundara Ayyar desired, at all cost, to avoid
his eventual personal liability as a shareholder and director of the company.
In any case, Sundara Ayyar did make it clear that he challenged the validity of
the purported forfeiture of shares by the mills and in this respect this case
falls clearly within the decision in Clarke's case relied upon by the appeal
court. The only other conduct of Sundara Ayyar relied on by learned advocate
for the mills in support of the appeal court's decision on this point is that
Sundara Ayyar proceeded with his suit against Palaniappa Chettiar even after
his suit as well as his appeal had been dismissed
as against the mills. In that suit Sundara Ayyar sued the mills as well as
Govindaraju Chettiar and the Official Receiver of Salem representing the
latter's estate and Palaniappa Chettiar. In the plaint itself the validity of
the forfeiture was challenged. The claim against Palaniappa Chettiar was in the
alternative and it was founded on the agreement of the 30th June, 1939. The
suit was dismissed as against the mills only on the technical ground that
Sundara Ayyar had no locus standi to maintain the suit. The contention of the
company that the forfeiture was invalid and the claim for rectification of the
share register of the mills by restoring the name of the company connot
possibly have been affected by this decision. Sundara Ayyar's claim against
Palaniappa Chettiar was based on the agreement of 1939 and it was formulated as
an alternative personal claim. In view of the clear allegation in the plaint
that the forfeiture was invalid and not binding on the company, the
continuation of the suit by Sundara Ayyar to enforce his personal claim against
Palaniappa Chettiar cannot be regarded as an abandonment by Sundara Ayyar of
the right of the company. It must not be overlooked that the company stood
dissolved on that date and Sundara Ayyar had no authority to do anything on
behalf of the company. In our opinion there is no evidence of abandonment of
the company's right to challenge the validity of the purported forfeiture.
The second point on which the appeal court decided the appeal against
the company was that the form of the order made by the trial court could not be
supported as one validly made under Section 38 of the Indian Companies Act. It
will be recalled that having disposed of all the points of controversy against
the mills and in favour of the company the trial Judge had to consider the form
of the order which could properly be made in favour of the company. In the
summons the company had asked for rectification of the register by restoring
the name of the company to the register in respect of 5,000 shares numbering
15048 to 20047. It was agreed by learned advocates on both sides before the
trial court that it would, in the circumstances, be impossible to make an order
for rectification with respect to those specific shares which, as already
stated, had been re-allotted to other persons who were not parties to the
proceedings. The mills had also reduced its capital by having the face value of
the 84,000 shares which had been issued reduced by repaying to the shareholders
Rs. 5 in respect of each of those shares. There were, however, 16,000 unissued
shares of Rs. 10 each which were not affected by the reduction. While,
therefore, it was clearly impossible for the court to direct that the company
should be replaced on the register in respect of its original shares, the court
could, under Section 38, give notice to
the persons to whom the shares had been re-allotted or those claiming under
them and make them parties to the proceedings and then make an appropriate
order for rectification and, if necessary, also direct the mills to pay damages
under that section. This being the situation learned advocate for the mills had
to decide upon his course of action. What happened in court will appear from
the following extract from the judgment of the trial court:—
"It is agreed by both parties that the proper order will be for
the applicant company to be placed on the register in respect of 5,000 of the
unissued rupees 10 shares and I order accordingly. In this case as the parties
consent to the matter being disposed of by allotting to the applicant unissued
shares, there can, it seems to me, be no order for payment of the dividends.
Counsel for the respondent company leaves the solution of this difficulty to
me........................................ The suggestion of the applicant
company is that it is prepared to forego any claim to the accrued dividends if
it is not required to pay interest on the out standing call money. This seems
to me to be a very reasonable suggestion. . . . . . . . I direct accordingly
that on insertion of the name of the applicant company as owner of 5,000 of the
unissued shares the applicant company shall pay to the respondent company only
Rs. 25,000 being the amount of calls in arrears."
The appeal court, however, went behind this record of the proceedings
that took place before the trial court and heard the learned senior advocate as
to what had happened in court and after hearing the senior advocate for the
mills found itself unable to agree with the contention that the learned
advocate for the mills had agreed to the substitution of 5,000 unissued shares
for the shares forfeited. No affidavit of the learned senior advocate was filed
before the trial court for the rectification of what is now alleged to have
been wrongly recorded by the trial Judge as suggested by the Privy Council in
Madhu Sudan Chowdhn v. Musammat Chandrabati Chowdhrain and other cases referred
to in Timmalapalli Virabhadra Rao v. Sokalchand Chunilal & Others. While we
do not consider it necessary or desirable to lay down any hard and fast rule, we
certainly take the view that the course suggested by the Privy Council should
ordinarily be taken. It appears that at the time when the application was made
for leave to appeal to the Federal Court an affidavit sworn by G. Vasantha Pai,
the junior advocate for the mills was filed before the court dealing with that
application. Paragraph 5 of that affidavit runs as follows:—
"During the trial every question was argued on behalf of the
respondent company and no point was given up. This will be clear from the fact that till we reached the
penultimate paragraph of the judgment beginning 'It now remains to consider,
etc all the issues are dealt with by the learned Judge. The agreement was on
the specific form of the order on the basis of His Lordship's judgment and
without prejudice to the respondent company's rights. What was agreed to was
'proper order' on the basis of His Lordship's judgment which by then had been
dictated. The respondent company no more consented to the order than the
appellant consented to have his application dismissed when its counsel agreed
that it was impossible to make an order in terms of the Judge's summons."
The appeal court understood the stand taken by the learned senior
advocate as follows :—
"He seems to have agreed only as an alternative that if all his
contentions were overruled and the learned Judge thought that not withstanding
the difficulty in the way of granting the relief for rectification the
applicant company should be restored to the register, the only shares available
being the 16,000 shares of Rs. 10 each unissued, the applicant company could be
recognised as a shareholder in respect of 5,000 out of those
shares.............................."
It is quite clear from the judgment of the trial court, paragraph 5 of
the junior advocate's affidavit and the statement of the learned senior
advocate as recorded by the appeal court that the agreement was solely and
simply as to the specific form of the order, without prejudice to the mills,
right to challenge the correctness of the findings of the trial court on the
material issues. In other words, all that learned advocate for the mills
desired to guard himself against was that the agreement should not preclude the
mills from preferring an appeal against the decision of the learned Judge on
the merits. The reservation was as to the right of appeal challenging the
findings on the merits and the agreement was only as to the form of the order.
This limited agreement certainly implied that the mills agreed to be bound by
the order only if the mills failed in their appeal on the merits. In short, the
consent covered only the form of the order and nothing else so that if the
mills succeeded in their appeal the order would go, although advocate had
agreed to its form but that if the mills failed in their contention as to the
correctness of the findings of the trial court on the different questions on
merits it would no longer be open to them to challenge the order only on the
ground of the form of the order. In our judgment the mills cannot attack the
form of the order to which their counsel consented.
Learned advocate for the mills has raised the question of limitation.
He referred us to articles 48 and 49 of the Limitation Act but did not strongly press his objection founded
on those articles. We agree with the trial court and the court of appeal that
those two articles have no application to this case. A claim for the
rectification of the register simpliciter does not necessarily involve a claim
for the return of the share scrips and in this case there was, in fact, no
prayer for the return of shares or the scrips and, therefore, these two
articles can have no application. Learned advocate, however, strongly relies on
article 181 of the Limitation Act. That article has, in a long series of
decisions of most, if not all, of the High Courts, been held to govern only
applications under the Code of Civil Procedure. It may be that there may be
divergence of opinion even within the same High Court but the preponderating
view undoubtedly is that the article applies only to applications under the
Code. The following extract from the judgment of the Judical Committee in
Hansraj Gupta v. Official Liquidators, Dehra Dun Mussoorie Electric Tramway
Company is apposite:—
"It is common ground that the only article in that schedule which
could apply to such an application is article 181: but a series of authorities
commencing with Rai Manekbai v. Manekji Kavasji, has taken the view that
article 181 only relates to applications under the Code of Civil Procedure, in
which case no period of limitation has been prescribed for the application. But
even if article 181 does apply to it, the period of limitation prescribed by
that article is three years from the time when the right to apply accrued,
which time would be not earlier than the date of the winding up order, March
26, 1926. The application of the Liquidators was made on March 26, 1928, well
within the three years. The result is that from either point of view the
application by the liquidators, if otherwise properly made under and within the
provisions of Section 186 of the Indian Companies Act, is not one which must be
dismissed by reason of Section 3 of the Indian Limitation Act. It is either an
application made within time, or it is an application made for which no period
of limitation is prescribed. The case may be a casus omissus. If it be so, then
it is for others than their Lordships to remedy the defect "
Learned advocate for the mills, however, points out that the reason for
holding that article 181 was confined to applications under the Code was that
the article should be construed ejusdem generis and that, as all the articles
in the third division of the schedule to the Limitation Act related to
applications under the Code, article 181, which was the residuary article, must
be limited to applications under the Code. That reasoning, it is pointed out,
is no longer applicable because of the amendment of the Limitation Act by the
introduction of the present articles 158 and 178. These articles are in
the third division which governs applications but they do not relate to
applications under the Code but to one under the Arbitration Act, and,
therefore, the old reasoning can no longer hold good. It is urged that it was
precisely in view of this altered circumstance that in Asmatali Sharif v.
Mujahar Ali Sardar a Special Bench of the Calcutta High Court expressed the
opinion that an application for pre-emption by a non-notified co-sharer should
be governed by article 181 of the Limitation Act. A perusal of that case,
however, will show that the Special Bench did not finally decide that question in that case. In Hurdutrai Jagdish
Prasad v. Official Assignee of Calcutta a Division Bench of the Calcutta High
Court consisting of Chief Justice Harries and Mr. Justice Mukherjea who had
delivered the judgment of the Special Bench clearly expressed the view that
article 181 of the Limitation Act applied only to applications under the Civil
Procedure Code and did not apply to an application under Section 56 of the
Presidency Towns Insolvency Act. Mukherjea J. who also delivered the judgment
of the Division Bench explained the observations made by him in the Special
Bench case by pointing out that the entire procedure for an application under
Section 26 (F) of the Bengal Tenancy Act was regulated by the Civil Procedure
Code and, therefore, an application for pre-emption was, as it were, an
application made under the Civil Procedure Code. Subsequently in Sarvamangala
Dasi v. Paritosh Kumar Das G.N. Das J. who was also a member of the Special
Bench in the first mentioned case expressed the opinion, while sitting singly,
that article 181 was not confined to applications under the Code. His
Lordship's attention does not appear to have been drawn to the case of Hurdutrai
Jagdish Prasad. It does not appear to us quite convincing, without further
argument, that the mere amendment of articles 158 and 178 can ipso facto alter
the meaning which, as a result of a long series of judicial decisions of the
different High Courts in India, came to be attached to the language used in
article 181. This long catena of decisions may well be said to have, as it
were, added the words "under the Code" in the first column of that
article. If those words had actually been used in that column then a subsequent
amendment of articles 158 and 178 certainly would not have affected the meaning
of that article. If, however, as a result of judicial construction, those words
have come to be read into the first column as if those words actually occurred
therein, we are not of opinion, as at present advised, that the subsequent
amendment of articles 158 and 178 must necessarily and automatically have the
effect of altering the long acquired meaning of article 181 on the sole and
simple ground that after the amendment the reason on which the old construction
was founded is no longer
available. We need not, however, on this occasion, pursue the matter further,
for we are of the opinion that even if article 181 does apply to the present
application it may still be said to be within time. The period of limitation
prescribed by that article is three years from the time "when the right to
apply accrues". It is true that a further notice after the shares are
forfeited, is not necessary to complete the forfeiture of the shares (see
Knight's case), but it is difficult to see how a person whose share is
forfeited and whose name is struck out from the register can apply for
rectification of the register until he comes to know of the forfeiture. The
same terminus a quo is also prescribed in article 120 of the Limitation Act. In
O.RM.O.M. SP. (Firm) v. Nagappa Chettiar, which was a suit to recover trust
property from a person who had taken it with notice of the trust, by a
transaction which was a breach of trust, the Privy Council approved and applied
the principles of the earlier Indian decisions referred to therein to the case
before them and held that time began to run under article 120 after the
plaintiff came to know of the transaction which gave him the right to sue. On
the same reasoning we are prepared to extend that principle to the present
application under article 181. If article 181 applies then time began to run
after the company came to know of its right to sue. It is not alleged that the
company had any knowledge of the forfeiture between the 5th September, 1941,
when the resolution of forfeiture was passed and the 9th September, 1941, when
the company became defunct. After the last mentioned date and up to the 16th
February, 1945, the company stood dissolved and no knowledge or notice can be
imputed to the company during this period. Therefore, the company must be
deemed to have come to know of its cause of action after it came to life again
and the present application was certainly made well within three years after
that event happened on the 16th February, 1945. If article 181 does not apply
then the only article that can apply by analogy is article 120 and the
application is also within time. In either view this application cannot be
thrown out as barred by limitation.
The result, therefore, is that this appeal must succeed. We set aside
the judgment and decree of the High Court in appeal and restore the order of
the trial court. The appellant will be entitled to the costs of the appeal in
the High Court as well as in this court.
Bose J.—I agree with
the conclusions of my learned brothers and also with their reasoning generally
but lest it be inferred that I am assenting to a far wider proposition than is
actually the case, I deem it advisable to clarify my position about abandonment
and waiver. Though the usage of these words in cases of the present kind
has the sanction of high authority, they are, in my opinion, inapt and
misleading in this class of case. In order to appreciate this it will be
necessary to hark back to first principles.
In the first place, waiver and
abandonment are in their primary context unilateral acts. Waiver is the
intentional relinquishment of a right or privilege. Abandonment is the
voluntary giving up of one's rights and privileges or interest in property with
the intention of never claiming them again. But except where statutory or other
limitations intervene, unilateral acts never in themselves effect a change in
legal status because it is fundamental that a man cannot by his unilateral
action affect the rights and interests of another except on the basis of
statutory or other authority. Rights and obligations are normally intertwined
and a man cannot by abandonment per se of his rights and interests thereby rid
himself of his own obligations or impose them on another. Thus, there can be no
abandonment of a tenancy except on statutory grounds (as, for example, in the
Central Provinces Tenancy Act, 1920), unless there is acceptance, express or
implied, by the other side, It may, for example in a case of tenancy, be to the
landlord's interest to keep the tenancy alive; and so also in the case of
shares of a company. It may be to the interests of the company and the general
body of shareholders to refrain from forfeiture if, for example, the value of
unpaid calls exceeds the market value of the shares. Such a position was
envisaged in Garden Gully United Quartz
Mining Co. v. Hugh McLister. So also with waiver. A long catena of illustrative
cases will be found collected in B. B. Mitra's Indian Limitation Act,
Thirteenth Edition, pages 447 and 448.
This fundamental concept brings about another repercussion. Unless
other circumstances intervene, there is a locus poenitentiae in which a
unilateral abandonment or waiver can be recalled. It would be otherwise if the
unilateral act of abandonment in itself, and without the supervention of other
matters, effected a change in legal status. In point of fact, it is otherwise
when, as in the statutory example I have quoted, the law intervenes and determines
the tenancy. It is therefore, in my opinion, fundamental that abandonment and
waiver do not in themselves unilaterally bring about a change in legal status.
Something else must intervene, either a statutory mandate or an act of
acceptance, express or implied, by another person, or, as Lord Chelmsford put
it in Clarke & Chapman v. Hart, acts which are equivalent to an agreement
or a licence, or an estoppel in cases where an estoppel can be raised.
Next, there is, in my view, a fundamental difference between an
executory interest and an executed one. In the former, it is necessary to
resort to equitable reliefs to get enforced a right which is not at the date a
vested right: cases of specific performance and declaration of a trust are
examples, so also a prayer for relief from forfeiture. In cases of this kind,
conduct which would disentitle a person to equitable relief is relevant. No
hard and fast rule can or should be laid down as to what such conduct should
consist of but among the varieties of conduct which courts have considered
sufficient in this class of case is conduct which amounts to laches or where
there has been a standing by or acquiescence or waiver or abandonment of a
right, particularly when this would prejudicially affect third parties. This
sort of distinction is brought out by Lord Chelmsford in Clarke & Chapman
v. Hart.
The position is different when the interest is executed and the man has
a vested interest in the right, that is to say, when he is the legal owner of the
shares with the legal title to them residing in him. This legal title can only
be destroyed in certain specified ways. It is in my view fundamental that the
legal title to property, whether moveable or immoveable, cannot pass from one
person to another except in legally recognised ways, and normally by the
observance of certain recognised forms. Confining myself to the present case,
one of the ways in which the title to shares can pass is by forfeiture; but in
that case an exact procedure has to be followed. A second way is by transfer
which imports agreement. There again there is a regular form of procedure which
must be gone through. A third is by estoppel though, when the position is
analysed, it will be found that it is not the estoppel as such which brings
about the change. The expressions, abandonment, waiver and so forth, when used
in a case like the present, are only synonyms for estoppel and despite hallowed
usage to the contrary, I prefer to call a spade a spade and put the matter in
its proper legal pigeon-hole and call it by its proper legal name. These other
terms are, in my view, loose and inaccurate and tend to confuse, when applied
to cases of the present nature. A man who has a vested interest and in whom the
legal title lies does not, and cannot, lose that title by mere laches, or mere
standing by or even by saying that he has abandoned his right, unless there is
something more, namely, inducing another party by his words or conduct to
believe the truth of that statement and to act upon it to his detriment, that
is to say, unless there is an estoppel, pure and simple. It is only in such a
case that the right can be lost by what is loosely called abandonment or
waiver, but even then it is not the abandonment or waiver as such which deprives
him of his title but the estoppel which prevents him from asserting that
his interest in the shares has not been legally extinguished, that is to say,
which prevents him from asserting that the legal forms which in law bring about
the extinguishment of his interest and pass the title which resides in him to
another, were not duly observed.
Fazl Ali J. and I endeavoured
to explain this in Dhiyan Singh v. Jugal Kiskore. What happens is this. The
person estopped is not allowed to deny the existence of facts, namely the
actings of the parties and so forth which would in law bring about the change
in legal status, namely the extinguishment of his own title and the transfer of
it to another, for estoppel is no more than a rule of evidence which prevents a
man from challenging the existence or non-existence of a fact. Once the facts
are ascertained, or by a fiction of law are deemed to exist, then it is those
facts which bring about the alteration in legal status; it is not the estoppel
as such nor is it the abandonment or waiver per se. I prefer therefore to
adhere to what I conceive is the proper legal nomenclature. As I understand it
estoppel was the basis of the decision in Clark & Chapman v. Hart. See Lord
Wensleydale's judgment at page 1458 and the Lord Chancellor's at page 1453; so also in Garden Gully United Quartz Mining
Company v. Hugh McLister.
That there is no sufficient ground for estoppel in this case is shown by the facts set out in the judgment of my learned brothers. I agree that the appeal must succeed.