1. This is an appeal from an order of Stone, J., and arises out of the liquidation of the Madras Cloth Market Ltd. The Managing Directors of the company were the firm of Callianjee & Sons, whose sole proprietor was Ramjee Callianjee. He held 5,000 fully paid up shares in the company in his own name. On 10th September 1924, he being on that date indebted to the company to the extent of Rs. 36,000, borrowed Rs. 2,00,000 from the P. & O. Bank and gave them an equitable mortgage of some of his immoveable property and the 5,000 shares already referred to as security for the loan. In 1925 the Bank filed a suit (C.S. No. 283 of 1925) against Callianjee & Sons, on the equitable mortgage obtaining a preliminary decree for sale on 4th September 1925, and a final decree on 9th October of the same year. On 22nd February 1926, the liquidation of the Madras Cloth Market Ltd., was ordered by the High Court. Upto this time no notice of the equitable mortgage had been given by the Bank to the company.
2. Such a notice was given after the company went into liquidation. On 7th October 1929, Callianjee & Sons became insolvents and the assets of that firm became vested in the Official Assignee of Madras. In the course of the winding up the liquidator got in the assets of the company and collected and discharged debts; and he has paid Re. 1 per share to the contributories of the company except Ramjee Callianjea or the Bank which got the equitable mortgage over Ramjee Callianjee's shares. The P. &. O. Bank, as equitable mortgagees, applied to the liquidator for the 5,000 shares covered by the equitable mortgage. The Official Liquidator contended, and contends here, that the Bank are not entitled to be paid the value of those shares because the company are entitled to set off those shares of Ramjee Callianjee against Rs. 36,000 owing to the company by Ramjee Callianjee. It is admitted that the Official Liquidator has a sufficient fund oat of which to pay the Bank's claim, should this appeal be dismissed. Stone, J. held that the company in liquidation has no lien on these shares or right to set off Ramjee Callianjee's debt to them against those shares and that the Bank were entitled to the shares by reason of the equitable assignment of the shares to them by Eamjea Callianjee. He expressed some doubt as to whether the case was with the principle enunciated in In re Peruvian Railway Construction Co., Ltd. (1915) 2 Ch. D. 144 and held that case did not govern this. Mr. Grant on behalf of the respondents stated here that he did not base his claim on that case at all and that it need not be considered.
3. We have had some difficulty in this case because there is nothing but the briefest order to help us but, as I understand it, the learned trial Judge has allowed the bank's claim because the equitable assignment was prior in date to the liquidation. The case has been argued before us as if it were in the Court of first instance and unquestionably the point raised here is one of very considerable importance. It is necessary to refer to the material articles of association of the company. The first of them is Article 20, which gives the company a first and paramount lien upon all the shares other than fully paid up shares registered in the name of each member, whether solely or jointly with others, for moneys from time to time due or payable on any account whatever to the company. It is conceded by the appellants that the company could not under this article claim a lien on Ramjee Callianjee's shares because those are fully paid up shares whereas Article 20 deals only with partly paid shares. Then Article 22 says that the company shall not be bound to recognize any equitable interest in shares other than that of a registered holder. Then Article 28, which is the important article here, gives the board power to refuse to register or acknowledge any transfer of shares whilst the share-holder executing the transfer is indebted to the company on any account whatsoever.
4. In the present case, Ramjee Callianjee's indebtedness of Rs. 36,000 was not one in respect of his shares, but on an entirely independent account; and it is clear from Ex parte Stringer (1882) 9 Q.B.D. 436 that a company which has an article of association similarly worded would be entitled to decline to register a transfer if the member is indebted to them on any account whatsoever, and that this power is not limited to an indebtedness for calls, and indeed that point is not contested here by the respondents. One of the contentions put forward by the appellants here, and indeed it was put in the forefront of their case, was that the proceeding, in which the bank's claim to the shares and the company's claim to set off against those shares Ramjee Callianjee's debt to them should be settled, was the adjustment of rights of contributories under Section. 192, Indian Companies Act (7 of 1913), which corresponds to Section 211, English Companies Act of 1929, which is the same as Section 170 of the Act of 1908 It is contended that the Bank are not contributories because the transfer to them by Ramjee Callianjee of his shares was never registered and no application for registration was ever made, and, if it had been, the company would have been entitled to refuse to register the transfer by reason of Article 28 of the articles of association because Ramjee Callianjee was indebted to them to the extent of Rs. 36,000. The respondents, besides contesting the argument that this is a matter arising out of Section 192, Indian Companies Act, argue that Ramjee Callianjee is not a contributory because he is the holder of fully paid up shares. This argument however appears to me not to be correct because in Buckley on the Companies Act, Edn. 10, in the notes to Section 170 of that Act at p. 401 it is stated:
A holder of fully paid shares is a contributory within the meaning of the Act; when all debts have been paid, a call may be made upon the partly paid share-holders to adjust the rights between them and the fully paid shareholders.
5. And the case referred to in support of that statement is In re Anglesea Colliery Co. (1866) 2 Eq. 379. Mr. Grant contends that on the particular facts of the case fully paid share-holders were held to be contributories, but it is quite clear that in the opinion of the learned author of Buckley on the Companies Act fully paid share-holders are contributories without any qualification. This point was definitely raised in the argument of counsel in the case referred to, as appears from p. 385, of the report, and at p. 388, Vice Chancellor Wood in his judgment says:
No doubt the argument is a fair one. You who have fully paid up your shares are not contributories, and therefore your rights cannot be required to be adjusted; you have paid your 5 per share, and having fully paid up the amount, it is unnecessary to adjust your rights; although if there are any share-holders who have paid only 4-19-6 they will in that state of circumstances, have a claim to have their rights adjusted. The result would be that those who have paid in full would have no voice or controlling power in disposing of the assets; and these being distributed, the company is dissolved. They would therefore have no remedy whatever. I think that is not the scope of the Act. It appears to me that the sound construction of the Act requires that there should be given to that word 'contributory' the effect of providing for the final adjustment o the rights of all persons, who, if their shares were not paid up, would be in the position of contributing members.
6. On appeal in In re Anglesea Colliery Co. (1866) 1 Ch. 555, Turner, L.J., expressed the same opinion at p. 560, He there says:
Now it seems to me to be clear, beyond all doubt, that the purpose of the Act is, inter alia to adjust the rights of all the members of companies which should be wound up under it. Indeed, I do not see how the rights of those members who have not paid up in full could be adjusted without the rights of those members who have paid up in full being taken into account.
7. The proceedings before us were clearly an adjustment of the rights of the contributories that the bank are not contributories because they are not the registered holders of these shares and up to the date of this application in the trial Court, as I understand, it had not applied to have the transfer of these shares to them registered. But it seems that a suggestion was made that they should apply for a rectification of the register by getting the transfer of the shares registered. It is argued by the appellants that the bank are not entitled to have the transfer registered. That they must become the registered holders of the shares is clear beyond all question. They cannot be recognized as owners unless they are registered as such : In re Perkins; Ex parte Mexican Santa Barbara Mining Co. (1890) 24 Q.B.D. 613 and New London and Brazilian Bank v. Broklebank (1882) 21 Ch. D. 302. It is therefore important to see whether the company would be entitled to refuse to register the transfer of the shares to the bank. For the appellants it is contended that, as Ramjee Callianjee was indebted to the company on the date of the transfer of the shares by him to the bank, the company could, under Article 28 of the Articles of Association, decline to register the transfer. Against this there is the contention that the company would be only entitled to do so provided they had a first and paramount lien upon these shares. In support of the appellants' contention that the company were entitled to refuse to register the transfer of the shares the case of In re Cannock and Rugeley Colliery Co. (1885) 23 Ch. D. 363 was relied upon.
8. There by Article 17 of the Articles of Association of the company the directors might decline to register a transfer of any share or shares whilst the member making the transfer was either alone or jointly with any other person indebted to the company on any account whatsoever or if they should consider that the transferee or transferees was or were an irresponsible person or irresponsible persons. The company refused to register a transfer made by a share holder to the nominees of a bank as a security for advances on the ground that the transferor was indebted to the company. Subsequently the transferor filed a liquidation petition and a trustee in liquidation was duly appointed. The trustee with the consent of the bank and their nominees applied to the directors of the company to be registered as the owner of the shares. This application was refused. This case was really a question as between the transferees and the trustee and the transfer not having been registered, it was held that the trustee was not entitled to be registered as the title of the transferees was subject to the right of the company under Article 17 which was to refuse to transfer on account of the indebtedness to them of the shareholder-transferor. On p. 369 Earl of Selbourne, L.C. stated:
Article 17 of Association says that the directors may decline to register a transfer if the member making the same is indebted to the company, or if they shall consider that the transferee is an irresponsible person. The two cases thereby provided for are, to my mind, essentially different. The first case is that in which the transferor is indebted to the company. The provision is made for the company's benefit. I do not think that the declining to register under that provision is a non-approval of the transfer in the sense in which the term 'non-approval' is used in a subsequent article. The company only decline to register so as not to lose the right they have against the registered owner in respect of their debt. That refusal might be put an end to at any moment by payment of the debt.
9. In the course of the argument the Earl of Selbourne, L.C., asked the question 'would not the bank's nominees (transferees) be entitled to be registered on satisfying the company's claim?' And on p. 370 the consent of the bank to the proposed registration and these shares in the name of the trustee in liquidation is stated by the Earl of Selbourne to have been in order to get rid of the right of the company to a set off in respect of their claim. This case certainly supports the appellant's contention. But it must be observed that there were there no articles of association giving the company a lien on shares on account of the shareholder's indebtedness to the company. The position in that case was that as between the transferee and the trustee in liquidation, the former was the true owner but as between the transferee and the company the transferee could only become the registered owner of the shares on paying of the transferor's debt to the company. On the other side, there is a decision ten years earlier in date, viz., In re Stockton Malleable Iron Co. (1876) 2 Ch. D. 101, where it was held by Jessel, M.R., that a company could only refuse to register a transfer of shares belonging to a debtor shareholder in oases where under the articles they have a lien on those shares by reason, of that indebtedness. Two articles of association were in question there. Article 7 gave the company a first and paramount lien on all shares of any member for any moneys due to the company etc., and Article 16 enabled the company to decline to register any transfer of shares whilst the member making the transfer was indebted to the company on any account whatever. It was held that these two articles related to the same subject matter and that Article 16 was a mere. supplement to the 7th and not independent in the sense that the members whose shares could be dealt with under the 7th were different from the members whose shares could be dealt with under the 16th. On p. 103, Jessel M.R. says:
Then, as I read Article 16, it is that they may-decline to register that for which they have a lien under Article 7. Article 16 says they may decline to register any transfer o shares by a man who is indebted to them. Why may they decline to register? Because they have a lien. That seems to me the only reason why they may decline to register. It is against the interest of companies to fetter transfers. The more free the companies make the transfers the better for them and the better for their shareholders, and therefore the only object of fettering the transfer is to secure the lien of the company.
10. Where that case differs from the present one is that Article 7 gives the company a lien on all shares and Article 16 speaks clearly of shares and therefore the same class of shares as in the earlier article. In the present case Article 20 gives a lien only on partly paid up shares, whereas in Article 28, the refusal to register transfers article, merely shares are mentioned; and in Bradford Banking Co. v. Briqqs (1887) 12 A.C. 29 under the articles the company was given a first and permanent lien and charge upon every share. The question in that case was whether the company which had under Article 103 of its articles of association a first and permanent lien and charge available in law and in equity on every share for all debts due from the shareholder to the company could claim priority over the bankers who held the shares deposited with them as security for the balance due from the shareholders on current account even in respect of money which became due from the shareholder to the company after notice of the deposit had been given to the company.
11. It was held that the company could not claim such priority but could only do so by reason of their lien in respect of debts due to them before notice of the deposit. There was no question in that case as to the company's right to refuse to register transfers and there was no article similar to Article 28 in the present case although Article 100 of the articles of association of the company provided that no transfer of shares could take place without the approval of the Board of Directors. The appellants there claimed in the suit (1) an account of what was due to them for principal, interest and costs on the securities and to have their securities realised by foreclosure and sale, and (2) a declaration that the securities had priority over all lien (if any) of the respondent company on the shares created by their articles of association or otherwise. The point established was that a creditor cannot give credit on the security of property belonging to the debtor after he has notice that the property has so far been parted with by the debtor. If the creditor does so, his claim cannot prevail against the earlier claim. If in the present case the appellants had a lien on their shares by reason of the indebtedness of Ramjee Callianjee to them, than, as that indebtedness was prior in date to the equitable mortgage of the shares with the respondents and further as no notice of that deposit was given, they would be entitled clearly to priority over the respondents.
12. But, it is clear that under the articles of association no lien is given to them over fully paid up shares and it is conceded by Mr. Doraiswami Ayyar that the appellants do not claim to refuse to register the transfer by reason of any lien, but it is because Article 28 gives them a right to set off Ramjea's indebtedness to them against his shares; and Lord Selbourne's observations in the course of his judgment in ex parte Harrison; In re Cannoch and Rugeley Colliery Co. (1885) 23 Ch. D. 363 do describe the right of the company under the articles as a right to set off their claim. The difficulty in this case is caused by the use of the description in Article 28, of shares not fully paid up and in Article 23, of shares merely; but I think that it cannot have been intended to give the company any right to refuse to register a transfer of shares unless the company had a lien on those shares and it is only because of that right that the company would be entitled to refuse to transfer as was stated by Jessel. M.R., in In re Stockton Malleable Iron Co. (1976) 2 Ch. D. 101.
13. If this is the correct view, then the respondents are entitled to have the transfer to them of the shares registered and their claim to them recognized and the company having no lien are not entitled to set up Ramjee Callianjee's indebtedness to them in priority to the claim of the respondents. Therefore the learned trial Judge arrives at the correct result and this appeal must be dismissed with costs. Certify for two counsel on both sides. The Official Liquidator will take his costs out of the estate as provided for in Order 6, Rule 19, High Court Fees Rules of 1933.
Pandrang Rao, J.
14. I agree.