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Vishwanath Prasad Jallan and anr. Vs. Holyland Cinetone Ltd. - Court Judgment

LegalCrystal Citation
Subject Company
CourtAllahabad
Decided On
Reported inAIR1939All739
AppellantVishwanath Prasad Jallan and anr.
RespondentHolyland Cinetone Ltd.
Excerpt:
- - if the majority were unwilling to proceed with the matter and by their conduct automatically caused the winding up of the company, they were perfectly entitled to do so......and gurucharan prasad had paid a further sum of rs. 2000 each on 18th april 1936 and durga prasad paid a sum of rs. 2000 on 17th november 1936. on the 29th december there was a meeting at which gurucharan prasad, shyam sunder lal and s.n. mitra were present. they passed a resolution that a notice should issue formally to all the defaulting directors to make payment of the sums due from them. they warned the directors that their shares would be forfeited if they did not pay the sums due on or before 15th january 1937. then there was a meeting on 19th january 1937 at which jagannath prasad, gurucharan prasad, shyam sunder lal and durga prasad were present and this meeting passed a resolution forfeiting the shares. the applicants did nothing about this matter at the time but the.....
Judgment:
ORDER

Allsop, J.

1. This is an application by Vishwanath Prasad Jallan and Piare Lal Srivastava containing three prayers, namely (1) that the register of the members of the Holyland Cinetone Co. Ltd., should be rectified and that the names of the applicants should be included in the said register, (2) that it be declared that the applicants are still directors and members of the company, and (3) that it be declared that the action taken after 26th January 1936 is void and illegal and does not bind the company and its share-holders. It is admitted that the first prayer only can be granted under the provisions of Section 38, Companies Act. This Court cannot give the other declarations asked for and I may say at once that the application in so far as it asks for those declarations is hereby rejected. There re-mains the question whether the names of the applicants should be entered in the register of the members of the company. In order to understand the dispute between the parties it is necessary to set forth certain facts in the history of the company.

2. The Memorandum and Articles of Association were subscribed by 17 persons on 18th November 1935. The capital authorized was 25 lacs, of which 10 lacs were to be issued. There were to be 20,000 ordinary shares of Rs. 100 each and 5000 preferential shares of the same value. It was set forth that the qualification of a director was that he must have subscribed for 100 shares and that he must have paid all calls or any other moneys due to the company. Twelve of the signatories of the Memorandum and Articles of Association undertook to purchase 100 shares each and they were to be the first directors of the company. Their names were Madhorams and Gurucharan Prasad Khattri, Harnarain Moolchand, Gopal Lal Khanna, Durga Prasad, Bindbasni Prasad, Madangopal Kedia, Vishwanath Prasad Jalan, Vishnushankar, Kedarnath Singh, Thakur Chhedi Singh and Piare Lal Srivastava. It is to be noticed that the applicants are included in the list. Each of the directors undertook in the Memorandum to subscribe for 100 shares and no more. Of the other five signatories, three undertook to purchase five shares each and the other two to purchase one share each.

3. A meeting of the directors was held on 14th December 1935, and four managing directors were elected, namely Madhoramsand, Gurucharan Prasad Khattri, Bindbasni Prasad and Madangopal Kedia. Doubtless the directors purported to act under Article 115 of the Articles of Association, but this Article sets forth that the directors shall elect from amongst themselves five directors constituting the Board of Managing Directors of the company. It is to be noticed that only four were elected. The Managing Directors under the Articles of Association have been given very large powers. A meeting of this Board of Managing Directors was held on 26th December 1935, and it was decided at the meeting that the subscribers to the Memorandum who were directors should be asked to pay Rs. 2000 to the company. This resolution was based on Article 7 of the Articles of Association which says that the amount payable on application for each share offered to the public for subscription shall be 20 per cent of the nominal amount of the share and another 20 per cent, shall be payable on the allotment of the share. The Managing Directors were asking the directors to pay on their shares the percentage corresponding with that which any member of the public would have to pay on application for shares, Rs. 2000 being 20 per cent, of Rs. 10,000, the price of the shares which each of the directors had contracted to purchase. On 17th January 1936 the secretary of the company who happened at that time to be the applicant, Piare Lal Srivastava, wrote a letter to all the directors drawing their attention to provisions of Section 85, Companies Act, and indicating that they would cease to be directors if they did not pay the sum of Rs. 2000 each on or before 26th January 1936. Section 85, Companies Act, lays down that it shall be the duty of every director, who is by the Articles required to hold a specified share qualification and who is not already qualified, to obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the Articles. The 26th January 1936 was the end of the period of two months next after 25th November 1935, the date of Registration. Madhoramsand, Gurucharan Prasad Khattri, Durga Prosad and Madangopal Kedia each paid a sum of Rs. 2000 on 25th January 1936.

4. On 26th January 1936 there was a mooting at which the resignation of Moolchand was accepted and Thakur Chhedi Singh was elected to the Board of Managing Directors, although he had not paid his sum of Rs. 2000. Moti Chand was elected to the Board either under Article 89 of the Articles of Association which gives the directors power to co-opt a qualified share-holder as a director or under Article 90 which empowers the directors to elect any share-holder as an honorary director to the Board it not being necessary for such director to hold a qualification share. Moti Chand had not paid anything at that time to the company and he was not one of the signatories of the Memorandum and Articles of Association. Then on 4th March 1936, there was another meeting of the directors at which those present were Madhoramsand, Durga Prasad and Madangopal Kedia. No notice of this meeting was sent to those directors who had not paid the sum of Rs. 2000. Presumably those who had paid had decided that the other directors could no longer act. It was originally set forth in the Articles of Association that the number of directors should not be less than 11 nor more than 21, but at this meeting the directors resolved that the minimum number should be reduced from 11 to 5 and that an extraordinary general meeting of shareholders should be held as soon as possible. The Articles required that there should be a quorum of five directors until it was otherwise determined, but that Article gave the directors power to regulate their meetings and proceedings as they thought fit and to determine the quorum necessary for the transaction of business.

5. A meeting of the directors was held again on 5th March 1936, but nobody appeared and the meeting was therefore adjourned by the general manager to the next day, the 6th March. On that date the directors present were Madhoramsand, Durga Prasad and Madangopal Kedia and they decided that the quorum should be reduced to three. A meeting of share-holders was called for 23rd March 1936, but it was adjourned for want of a quorum, the Article requiring that it was necessary for 15 members personally to be present to form a quorum at a general meeting. The meeting was adjourned to 30th March 1936, when it was attended by Madhoramsand, Durga Prasad and S.N. Mitra. This meeting proceeded to transact business under the provisions of Article 68 of the Articles of Association which allows an adjourned meeting to transact business even if a quorum has not been formed. This meeting reduced the minimum number of directors to four. On 11th April 1936 there was again a meeting of directors at which Madhoramsand, Durga Prasad, Madangopal Kedia and Gurucharan Prasad were present. They confirmed the resolution of 6th March 1936. They accepted the resignation of Moti Chand who had been elected on the 26th January and decided that legal action should be taken against those directors who had not paid the sum of Rs. 2000 which they had been required to pay. On 14th April 1936 a meeting of the share-holders took place, but it was adjourned to 21st April 1936 for want of a quorum, and on the 21st April the resolution of 23rd March 1936 was confirmed. The next meeting of the directors was held on 17th November 1936. Those present were Gurucharan Prasad, Madhoramsand, Madangopal Kedia and Durga Prasad. They elected Shyam Sunder (sic) Prasad and S.N. Mitra to be honorary directors. Article 90 of the Articles of Association states that the number of honorary directors shall in no case exceed three. At the same meeting Madangopal Kedia's resignation was accepted and it was decided that the directors should pay another sum of Rs. 2000, this being the equivalent of the sum which would be payable by members of the public on 100 shares at the time of allotment. On the same date Durga Prasad resigned his position as managing director and Jagannath Prasad and S.N. Mitra were appointed to the Board of Managing Directors.

6. The next date with which we are concerned is 13th December 1936. By that time apparently an application had been made to the Registrar, Joint Stock Companies, that the company should be allowed to commence business and a certificate of commencement had been received from the Registrar. On that date the directors present were Gurucharan Prasad, S.N. Mitra, Jagannath Prasad, Shyam Sunder Lal and Durga Prasad. They saw the commencement certificate and decided that they would approach the defaulting directors individually in order to obtain payment. On 28th December at another meeting it was decided that further attempts should be made to obtain payment of this money. These efforts succeeded to some extent because Harnarain Mulchand paid Rs. 2000 on 18th January 1937. Madhoramsand and Gurucharan Prasad had paid a further sum of Rs. 2000 each on 18th April 1936 and Durga Prasad paid a sum of Rs. 2000 on 17th November 1936. On the 29th December there was a meeting at which Gurucharan Prasad, Shyam Sunder Lal and S.N. Mitra were present. They passed a resolution that a notice should issue formally to all the defaulting directors to make payment of the sums due from them. They warned the directors that their shares would be forfeited if they did not pay the sums due on or before 15th January 1937. Then there was a meeting on 19th January 1937 at which Jagannath Prasad, Gurucharan Prasad, Shyam Sunder Lal and Durga Prasad were present and this meeting passed a resolution forfeiting the shares. The applicants did nothing about this matter at the time but the company then sued them for a sum of Rs. 4000 each and it appears that a decree has been passed against one of them while the suit of the other is pending. The decree which has been passed is now in appeal. It is explained on behalf of the applicants that they did not really wish to have anything to do with the company and that they would be quite content to give up their shares if they were not required to pay Rs. 4000; but now they are in a position that they may be required, if the decree is upheld, to pay a sum of Rs. 4000 each and at the same time to lose their shares in the company, and they feel therefore that they are entitled to stand upon their strict rights to demand, if the resolution of forfeiture is invalid, that their names should be restored to the register of the members of the company.

7. The argument put forward in the first instance on behalf of the company was that the signatories to the memorandum became members of the company and were allotted shares automatically on the date when the company was registered and consequently on that date they were bound to pay a sum of 20 per cent of the value of their shares as they would have had to do if they had applied for shares on that date and a further 20 per cent as they would have to do if shares had been allotted to them on that date as members of the public. At a later stage in the arguments the company had to abandon this position because if it was the proper position, then a sum of Rs. 4000 was due from each of the original directors on 25th November 1935, and no director was qualified to act under the Articles of Association unless he had paid the sum of Rs. 4000 on or before 26th January 1936. If this is the true position, then none of the directors who continued to act on behalf of the company was entitled to do so because none of them had paid Rs. 4000 on or before 26th January 1936 and those who had acted would render themselves liable to a penalty of Rs. 50 a day under Section 85, Sub-section (2), Companies Act, provided that the argument of the company was correct that Sub-section (1) of Section 85 applied not only to the purchase of shares but also to the payment for these shares as part of the qualification for directorship under the Articles of Association. The directors who now purport to represent the company were on the horns of a dilemma. If this original argument of theirs was correct, they were liable at least to a severe penalty and if it was not correct, then they were certainly not entitled to forfeit the shares of the other directors merely because payments were not made on or before 26th January 1936.

8. The company therefore fell back upon the argument that these sums of 20 per cent. corresponding with application money mud 20 per cent, corresponding with application money were payable from the dates on which they were respectively demanded by the company. Learned Counsel for the company relied on Section 21(2), Companies Act, which says that any money payable by any member to the company under the Memorandum or Articles of Association shall be a debt due from him to the company. He maintains that this money which ho considers to be due from the directors was a debt payable on demand. On the other side, it is argued on behalf of the applicants that there is nothing in the Memorandum or Articles of Association which requires them to pay any sums corresponding with those which would be payable by members of the public subscribing for shares at the time of application or at the time of allotment. It is undoubtedly true that there is no such specific provision either in the Articles of Association or in the Memorandum. It seems to me that Section 21(2), Companies Act, does not help the company in this case. It is no doubt true that money becomes a debt when it is due under the Articles of Association and Memorandum, but I think that money does not j become due merely because signatories of the Articles of Association or the Memorandum, have undertaken to purchase shares land pay for them. Subscribers who are members of the public also promise to take up and pay for shares, but the amounts due from them at any time are only such part of the price of the shares as they are required to pay at a particular time, that is the part they are required to pay on application, the part they are required to pay on allotment and the part that they may be required to pay if the calls are made upon them in accordance with the provisions of the Articles of Association. From the model Articles set forth in table A of Schedule 1, Companies Act, it will appear if that a distinction is made between money which is due and money which is presently duo and in my judgment it is only money which is presently due which can be described as a debt. A question of this nature arose in Alexander v. Automatic Telephone Co. (1900) 2 Ch. 56 where some directors of a company sought to compel others to pay on their shares in the same proportion as had been paid by share-holders who were members of the public. The case was decided under an English Act in which there were provisions similar to those in Section 21, Indian Companies Act, and it was held that the directors were not legally bound to make the payments, but that the Court of Chancery would compel them to pay upon the ground that they had been acting in contravention of the trust which had been reposed in them as directors of the company.

9. The Companies Act seeks to deal with a situation of this kind by the provisions of Section 103 which do not allow a company to commence business until every director has paid to the company on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription. In the case before me the directors who had signed the Memorandum of Association were bound to pay a sum of Rs. 4000 each before the company was entitled to commence business. Prom this it does not necessarily follow that they were liable to forfeiture of their shares if they did not make the payment. As I have already said there is no term in the Articles of Association or Memorandum by which the signatories contract to pay any sum on any particular date or any particular time or on demand or otherwise except in so far as the Articles allow the company to make calls on its members. The provision for calls was originally that the directors might from time to time make such calls as they thought fib upon the members in respect of all moneys unpaid on the shares held by them respectively and not by the condition of allotment thereof made payable at fixed times, and each member should pay the amount of every call so made on him to the persons and at the times and places appointed by the directors. There is no resolution of the Board of Directors requiring any members to make payments. There is only a resolution of the so-called Board of Managing Directors, but as I have already pointed out the Articles of Association required that the Board of Managing Directors should consist of five directors and four directors only were appointed. It seems to me therefore that these four directors were not entitled to exercise the functions of the Board of Managing Directors and the resolution passed by them requiring the other directors to pay these sums of Rs. 2000 was not valid. The directors(sic) so-called managing directors as a committee which could make a recommendation to them and, if the Board of Directors as such had passed a resolution that the recommendation of the managing directors that money should be demanded should be accepted, then possibly the directors would have had to pay these sums and if they had not paid them, they would have been sums presently due. In the circumstances of this case however I hold that these sums of Rs. 2000 were never presently due and consequently that the directors were not bound to make payments.

10. It has been urged on behalf of the company that the result is unfortunate because some directors have prevented the company from functioning properly. I do not think that any unfortunate result need have arisen if the proper procedure had been adopted. If the majority of the directors were unwilling to pay the sums which they should have paid under Section 103, Companies Act, than the company would not have been able to commence business and if it did not commence business within a certain period, then it could have been wound up on the application of any member. Once ifs was wound up, all the sums due on the shares would have been available to the company and any necessary expenses incur, red for promoting and registering the company could have been paid out and the whole matter would have come to an end. The company may say that it should not have been at the mercy of some of its directors, but on the other hand those directors are equally entitled to say that they should not have been at the mercy of the minority of their body. If the majority were unwilling to proceed with the matter and by their conduct automatically caused the winding up of the company, they were perfectly entitled to do so. I hold that these sums of Rs. 2000 were never presently due from the applicants and therefore, that their 'shares were not liable to forfeiture. I may add that there are provisions for forfeiture in the Articles of Association and it is at least doubtful whether all the provisions were observed so as to lead to forfeiture even if it could be said that there was a call upon the applicants, but I do not think that it is necessary to go into the details of that matter because I have already held that there was no proper call and for that -reason no money was due to be paid at any particular time by the applicants.

11. On the other hand, it seems to me that it is discretionary in the Court to pass an order for the rectification of the register of members and the fact remains that the Registrar of Joint Stock Companies has issued a certificate enabling the company to commence business which he would not have done if he had known that the present applicants as directors should have paid a sum of Rs. 4000 each before the date when he issued his certificate. In these circumstances I do not think that I should exercise my discretion in favour of the applicants unless they make the payment which they should have made to enable the company to commence business. Learned Counsel on behalf of the applicants has suggested that his clients, if they pay Rs. 4000, may find themselves in a very difficult position. He contends that all the proceedings of the company through the remaining directors after the 26th January 1936 were absolutely void and there may be many complications.

12. I do not think that any possible complications should prevent me from passing a conditional order in favour of the applicants because what I propose to do is to impose the condition that the applicants shall pay these sums of money within a certain time and that their applications shall be rejected if they do not pay the money. The money will be deposited in Court and what eventually happens to it may be left to subsequent decision. It may be that it will be utilized towards the payment of any decrees which may be ultimately passed in favour of the company or it may be that it will be paid to the company when all disputes are set at rest or finally it may eventually be returned to the applicants. I direct that the register of members of the company shall be rectified by the entry of the names of the applicants or either of them on condition that each of the applicants or either of them deposits a sum of Rs. 4000 in this Court on or before the 24th November 1939. If either applicant fails to make the deposit within that time, his application shall be rejected. I do not pass any order for the payment of costs because both parties seem to be in some measure to blame for the state of affairs which has arisen.


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