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Barkat Ali and ors. Vs. Official Liquidators of Travancore National - Court Judgment

LegalCrystal Citation
Subjectcompany
CourtChennai
Decided On
Reported inAIR1943Mad111
AppellantBarkat Ali and ors.; and Dewan Bahadur S. Rm. Ct. S. Sabarathnam Chettiar
RespondentOfficial Liquidators of Travancore National; and Quilon Bank Ltd. (In Liquidation) and ors.
Cases ReferredCree v. Somervail
Excerpt:
- .....is based. in in re dronfield silkstone coal co. (1881) 17 ch. d. 76 jessel m.r., dealing with a company incorporated under the english companies act, 1862, which was formed for the purpose of carrying on the trades or businesses of coal miners, the memorandum of association of which authorised the company to do all things whatsoever which the com-pany shall consider to be in any way connected with the trades, businesses or purposes aforesaid or any of them, held that such a company could not purchase its own shares in spite of the provisions in the articles of association that it could be made. he gave three reasons for it: (1) the purchase goes beyond the memorandum of association and was not authorised by it because it does not confer a power to traffic in shares; (2) it would be.....
Judgment:
ORDER

Venkataramana Rao, J.

1. Application No. 2964 of 1939 is by S. RM. CT. S. Sabarathnam Chettiar under Section 184, Companies Act, to rectify the share register by removing his name and putting the name of Messrs. Kothari & Sons in his stead alleging that they and not he should be included in the list of contributories as a contributory for twenty shares numbered 89153 to 89172. His case is that in April 1938 he sold and delivered the said shares to Messrs. Kothari & Sons and received the price therefor and that from that day Kothari & Sons were the legal owners of the scares. In the affidavit filed by him he states that he under-stands from Kothari & Sons that the Travancore National and Quilon Bank Ltd., purchased the said shares in which case the bank would have no right in law to proceed against him with reference to these shares and that his liability to pay the uncalled share capital had ceased to exist. On behalf of Kothari & Sons an affidavit has been filed that they put through the transaction solely as brokers, that they sold the shares to the bank with the bona fide belief that the order was placed by the said bank on behalf of some undisclosed principal that the shares must in law be deemed to be purchased by the bank and that any liability in respect there of ceased to exist. They also raised a further contention that the transaction was entered into by them on the representation of the officers of the bank through its secu-rities department that it was purchase made by the bank on behalf of certain customers of the bank and that therefore the transaction was perfectly legal and proper. But it is now admitted that as a fact the purchase was by the bank for itself and not on behalf of a customer. Application No. 3078 of 1989 is by H.C. Kothari one of the partners of Kothari & Sons to have their name removed from the share register in respect of 10 shares on the ground that he sold the said shares on 20th April 1938 to the bank and the same allegations that were made in regard to the belief that the bank was purchasing for its constituents was also made in this case in paras. 6 and 7 of the affidavit filed on their behalf.

2. When the applications were taken up, Mr. Venkatarama Sastri frankly conceded that he could not state that any officer of the bank made the representation in question or that any specific representation was made to his clients that the shares were being purchased for a customer. He confined himself to two contentions and irivited my decision on them as they would apply to all the cases wherein his client has sold the shares to the bank. He outlined his first contention thus. Though the purchase by a company with a limited liability incorporated under the Companies Act in India or in England or under the Companies Regulation in Travancore would be illegal and ultra vires, the contract having been made by the bank which is a foreign corporation outside the terrirorial limits of Travancore wherein it was incorporated must be held to be legal because to such a purchase neither the Travancore Regulation nor the Companies Act would apply and there would be consequent extinction of liability for any unpaid calls in respect of those shares and there is nothing in the general law of contracts which would prohibit such a purchase.

3. Before dealing with this contention it is necessary to examine the reasons on which the incapacity of a limited liability company to purchase its own shares is based. In In re Dronfield Silkstone Coal Co. (1881) 17 Ch. D. 76 Jessel M.R., dealing with a company incorporated under the English Companies Act, 1862, which was formed for the purpose of carrying on the trades or businesses of coal miners, the memorandum of association of which authorised the company to do all things whatsoever which the com-pany shall consider to be in any way connected with the trades, businesses or purposes aforesaid or any of them, held that such a company could not purchase its own shares in spite of the provisions in the articles of association that it could be made. He gave three reasons for it: (1) the purchase goes beyond the memorandum of association and was not authorised by it because it does not confer a power to traffic in shares; (2) it would be void on general grounds because the purview of the whole Act of 1862 is utterly inconsistent with the notion that the company can be, registered as a member, of itself; and (8) the transaction would be invalid by reason of its being a dimunition of the capital of the company. In Hope v. International Financial Society (1876) 4 Ch. D. 327 James L.J. took a similar view. He observed that

either this is a purchase of shares in the sense of trafficking in shares, which is a purchase not authorised by the memorandum of association, or it is an extinguishment of the shares and therefore a reduction of the capital of the company.

4. The reasons given as aforesaid by both these learned Judges were accepted by the House of Lords in the leading case of Trevor v. Whitworth (1888) 12 A.C. 409 which may be said to have finally settled the law on the point. In that case a limited company was incorporated under the Companies Act of 1862 and the object stated in the memorandum of association was to acquire and carry on the business of flannel manufacturers and any other businesses which the company might consider to be in any way conducive or auxiliary there to or proper to be carried on in connection therewith. Though the articles empowered the company to purchase its own shares, it was held that such a company had no power under the Companies Act to purchase its own shares and that the purchase was therefore ultra vires and that the claim made by a shareholder who sold the shares to the company for the return of the price was held to be unsustainable. Lord Herschell after pointing out that the memorandum of association did not authorise the company to purchase ts own shares referred to the case in Ashbury Railway Carriage and Iron Co., Riche (1876) L.R. 7 H.L. 658 for the position that a com. pany could not employ its funds for the purpose of any transactions which did not come within the objects specified in the memorandum and observed that a company could not by its articles of association extend its power in this respect. After referring to the provisions of the Companies Act the learned Lord stated that:

Nothing can be stronger than these carefully worded provisions to show how inconsistent with the very constitution of a joint stock company, with limited liability, the right to reduce its capital was considered to be.

At p. 433 Lord Macnaghten observed thus:

The Act of 1862 requires that the objects for which a limited company is established shall be stated in its memorandum. Those objects cannot be enlarged by anything to be found in the articles, or by anything outside the memorandum. Whatever may fairly be regarded as incidental to the objects stated in the memorandum, the company is authorised to do. Everything beyond that is prohibited. Further, every limited company is required to state in its memorandum the amount of capital with which it proposes to be registered, divided into shares of a certain fixed amount. That is equivalent to a declaration that the capital is to be devoted to the objects of the company.

(The italics are mine). He went on to observe further in the later portion of his judgment that even if a power to purchase its own shares were found in the membrandum of association of a limited company, it would necessarily be void. He gave the reason for it thus:

There are two conditions of the memorandum-the condition defining the objects of the company, and the condition defining its capital-one or both of which would be affected by such a power.

5. Lord Watson in the same case observed thus at page 424:

It appears to me that as the Master of Rolls pointed out in In re Dronfield Silkstone Coal Co. (1881) 17 Ch. D. 76 it is inconsistent with the essential nature of a company that it should become a member of itself. It cannot be registered as a share holder to the effect of becoming debtor to itself for calls or being placed on the list of contributories in its own liquidation.

6. In spite of the concession made by Mr. Venkatarama Sastri I have dealt with this matter at length in order to deal with an argument of his pressed with some insistence based on a passage in Halsbury's Laws of England, namely:

A company's contracts are governed by the law of the country in which they are made and by the company's own constitution and not by the law of the country under whioh the company is incorporated, a contract made in a country under whose law it is valid being held good by the Courts of a country under whose law it would, if made there, be invalid: vide volume 6, page 261.

7. Relying on this passage Mr. Venkatarama Sastri argued that the 'company's own constitution' referred to in the said passage is the memorandum of association and if there is no prohibition in the memorandum of association, the purchase by the company outside the limits of the country wherein it was incorporated would be valid. The cases which I have referred to above clearly establish that if the memorandum of association does not authorise the purchase of its shares, it would be illegal and void and according to Lord Macnaghten even if it had authorised such a purchase it would be so. In this case the memorandum of association of the bank does not authorise the purchase of any such shares. Therefore, by its very constitution, it was prohibited from purchasing its own shares. The following passage in the judgment of Lord Selbourne in Ashbury Railway Carriage and Co. v. Riche 7 Eng. & Irish A.C. at p. 6945 brings out this point clearly:

I think that contracts for objects and purposes foreign to, or inconsistent with, the memorandum of association are ultra vires of the corporation itself. And it seems to me far more accurate to say that the inability of such companies to make such contracts rests on an original limitation and circumscription of their powers by the law, and for the purposes of their incorporation, than that it depends upon some express or implied prohibition, making acts unlawful which otherwise they would have had a legal capacity to do.

8. Thus the legal incapacity of a company to purchase its own shares is not dependent upon the fact of the purchase being made either within the territorial limits of the place where the company was incorporated or outside its territorial limits but it is beyond the scope of its constitution. I would in this connexion like to refer to a passage in Lind-ley on Companies, vol. 2 where the learned author sums up the position clearly at page 1226:

Although a corporation duly created in one state is recognized as a corporation by other states, the transactions of that corporation are governed, not by the law of the state creating it, but by the law of the place where those transactions occur, and by the constitution of the corporation. This last is important; for the capacity of a corporation to acquire rights and incur obligations is limited by the object to attain which it is created, and these limits must be regarded whenever and wherever the extent of the corporate powers has to, be judicially decided.

9. If a company therefore purchases its own shares no matter where, a member who has sold the shares to the company cannot be removed from the register because the purchase must be deemed to have been not validly made as it is ultra vires of the company. In Bellerby v. Rolland & Marwood's Steamship Co., Ltd. (1902) 2 ch. 14 where a shareholder surrendered shares in consideration of the company releasing the shareholder from further liability in respect thereof it was held to be a purchase of the shares by the company and therefore illegal and null and void. On this principle, it was held that a shareholder who sold the shares and whose name was removed from the register was entitled to be restored to the register seven years after the transaction. The passage in Halsbury's Laws of England on which Mr. Venkatarama Sastri relied does not deal with a transaction of purchase by a company of its own shares but only with contracts entered into by the company in the ordinary course of its business. The case relied on for the proposition stated in the passage is Branley v. South Eastern Railway Co. 142 E.R. 1066. This case does not support the contention of Mr. Venkatarama Sastri. It only decides the general proposition, namely, the legality of the contract is determined by the lex loci contracts. The question in that case was whether the charge levied by the railway company in respect of a carriage of certain packed parcels from Boulogne to London was illegal on the ground that under the statute of incorporation they were prohibited from doing so. Earle C.J. pointed out that there was no such prohibition. That this is so is clear from the following observations of his at p. 1070:

As a general rule, the lex loci contractus governs in deciding whether there was illegality in the contract; and, according to the law of France, there was nothing illegal. The company were carriers under no legal restriction, and having capacity to make their own contracts as they might think most for their own interest.

Even if the railway legislation for England could be construed to have an extra-territorial effect, and to impose on an English railway company in France, the capacities and incapacities with whom they are affected in England, still that point does not now arise, because the statute creating the steam packet company leaves that company free to make any contracts for goods which they may choose. It contains no regulations for charges in respect of goods, although by Sections 16 and 17 it establishes a maximum for the charges in respect of passengers.

10. (The italics are mine.) The question is not whether a transaction entered into in respect of shares between an applicant and his vendee is a valid transaction according to the law of the place where the contract was entered into but whether on the strength of such a transaction the applicant is entitled to have his name removed from the register and the vendee can be put in his name instead. Whether a vendee has a valid title by the said transaction in order to entitle him to be placed on the register is a question which must be regulated by the provisions of the Travancore Regulation under which the company, was incorporated. In Copin v. Adamson (1874) 9 Ex. 345 Kelly C.B., defined the legal position of a person who becomes a shareholder in a foreign company thus:

I apprehend that it is now established by the law of this country that one who becomes a shareholder in a foreign company, and therefore and thereby a member of that company-such a company existing in a foreign country, and subject in all things to the law of that country-himself becomes subject to the law of that country, and to the artioles or constitutions of that company construed and interpreted according to the law of that country in all things and as to all matters and all questions existing or arising in relation to or connected with the acts and affairs and the rights and liabilities of such company and its members severally and collectively.

11. It is thus clear that before a person who is a shareholder on the register of the company can get himself removed and another person can come in his stead, both must con-form to the regulations of the company. In Dulaney v. Merry & Son (1901) 1 Q.B, 536 Chennell J. observed thus:

Of course registered stock, such as Consols, can only be transferred according to the regulations under which the register is kept, but this... seems to depend on the special nature of the property.

12. A shareholder as a member of the company has certain corporate rights and is subject to certain corporate liabilities. Only a person who is on the register is in the full sense of the word owner of the shares: vide Maneckji Pestonji Bharucha v. Wadilal Sarabhai & Co. 50 Bom. 360. The company only knows him and deals with him. When he purports to transfer his share, what he transfers includes the right to get on the register of shareholders and to become a member in his stead The transfer therefore must be operative to divest him of this right of his and vest it in the transferee. If he effects a sale which in law is void because it is in favour of a person who is under a legal incapacity to purchase, he does not cease to be the legal owner and he remains on the register and so long as he is there, he is subject to the liabilities attaching to his membership. Therefore, if a company purchases its own shares, the effect of it is that the vendor in point of law does not cease to be the legal owner of the shares. I have already pointed out that the purchase of the shares by the bank is not warranted by its memorandum of association. Further the articles of association prohibit the purchase of shares by, the company. Article 5 runs thus: 'The funds of the bank shall not be expended in the purchase of or in loan upon the security of its own shares.' Therefore the contention of Mr. Venkatarama Sastri is unsustainable.

13. I shall now deal with some of the cases on which Mr. Venkatarama Sastri placed reliance. Three of the said cases are Henry Ayers v. South Australian Banking Co. (1871) L.R. 3 P.C. 548 Baroness Wenlock v. River Dee Co. (1887) 36 Ch. D. 674 and Jenkin v. Pharmaceutical Society of Great Britian (1921) 1 Ch. 892. All these cases relate to transactions of associations incorporated by the Royal Charter. The distinction between a company incorporated under an Act of Parliament and an association incorporated under a Royal Charter is well established. Parwell L.J. in Attorney-General v. Manchester Corporation (1906) 1 Ch. 643 points out the difference between a statutory corporation and a corporation incorporated by a Royal Charter thus:

The former can do such acts only as are authorised directly or indirectly by the statute creating it; the latter (speaking, generally) can do everything that an ordinary individual can do: vide page 651.

14. It has therefore been held that even though a corporation incorporated by a Royal Charter may have exceeded its powers in entering into a contract though it may entail forfeiture, the transaction would nevertheless be valid. In Henry Ayers v. South Australian Banking Co. (1871) L.R. 3 P.C. 548 a sale of certain property though it was in excess of the powers contained in the charter incorporating it was held to pass property though the Crown might take advantage of it as a forfeiture of the charter. Peterson J. observes similarly in Jenkin v. Pharmaceutical Society of Great Britian (1921) 1 Ch. 892 'And even if the charter expressly prohibits a particular act the corporation can at common law do the act.' To a similar effect are the observations of Bpwen L.J. in Baroness Wenlock v. River Dee Co. (1887) 36 Ch. D. 674 Both Mr. Venkatarama Sastri and Mr. Krishnaswami relied on Cree v. Somervail (1879) 4 A.C. 648. It seems to me that the observations of Lord Blackburn in that case are definitely against the contention of Mr. Venkatarama Sastri. At p. 666 the learned Lord observed thus:

The case in Ashbury Railway carriage and Iron Co., v. Riche (1876) L.R. 7 H.L. 653 in this House determines that the true construction of the Companies Act, 1862, is that the companies incorporated under, it are authorised to treat in the manner authorised by the memorandum of association and in no other and that it is not only beyond the authority of the managing body to enter into any contract beyond its scope, but also ultra vires of the company itself. And this certainly goes a great way to establish that the application of the funds of the company to the purchase of those shares was an application of their funds to an illegitimate purpose. In that case the transaction was hot held to be ultra vires. The three directors whose names were entered on the register though they were said to be holding the side shares in trust for the company, were held liable as individuals for the calls. In regard to the funds of the company that were utilised by them for the purchase, the question whether they were entitled to refund or not was left open. I am therefore definitely of the opinion that the purchases made by the bank of its own shares are ultra vires of the Company and absolutely void, and the liability of the applicant cannot be said to have been extinguished.

15. I shall now deal with the second contention of Mr. Venkatarama Sastri based on estoppel. His contention is that the bank is estopped from pleading that it purchased the shares for itself and not for a constituent because it must be deemed to have made a representation that the purchase was for a constituent on the faith of which his client Kothari and Sons acted. But he was frank enough to concede that if the bank were one incorporated under the Indian Companies Act, the fact that its officers made the representation would not avail as an estoppel against the company. The concession of Mr. Venkatarama Sastri is correct because the law is absolutely clear on the point. It is thus stated in Halsbury's Laws of England, vol. 13 at page 474:

A party cannot by representation, any more than by other means raise against himself an estoppel so as to create a state of things which he is under a legal disability from creating. Thus a corporate body cannot be estopped from denying that they have entered into a contract which it was ultra vires for them to make. No corporate body can be bound by estoppel to do something beyond its powers.

16. But what Mr. Venkatarama Sastri says is that the bank is a foreign corporation and therefore that plea would not avail. I have already pointed out that the purchase by a foreign corporation of its own shares wherever the purchase was made is ultra vires of the corporation and absolutely void. Therefore the same principle would apply. As pointed out in Everest and Strode on Estoppel, Edn. 3, p. 309, in such a case the remedy if at all can only be against the officers who made the representation on the faith of which the contracts were entered into. I shall however go into the question whether in fact there is ground for such an estoppel even as a fact. No plea of estoppel as such was taken. Mr. Venkatarama Sastri admitted that it was so but his contention is that paras. 6 and 7 of the affidavit of Mr. Narayanaehari filed on behalf of his clients are enough to raise the plea. I have already referred to the fact that Mr. Venkatarama Sastri has conceded that no specific representation by any officer of the bank or any specific representation that the purchase was being made on behalf of a constituent was made and this concession, Mr. Venkatarama Sastri said, would apply to all the purchases made by his client in respect of all the shares sold by him to the bank which are the subject-matter of several applications now pending. What is relied on is a tacit or implied representation. (After going through the evidence his Lordship proceeded.) On a consideration of the entire evidence, I have no hesitation in coming to the conclusion that Kothari and Sons were aware that the bank was purchasing for itself its own shares through them in order to avoid the inconvenient consequences of the ran on the bank and the possible collapse. It is not therefore open to Messrs. Kothari and Sons to rely on any plea of estoppel. I therefore hold that there has been no valid transfer of the shares by the sale to the bank.

17. In the result, so far as application No. 3078 of 1939 is concerned, H.C. Kothari must be considered to remain in law as the owner of the shares and his name cannot be directed to be removed from the share register. The application is dismissed with costs of the Official Liquidators, Rs. 200 (Rs. 100 for solicitors and Rs. 100 for counsel). So far as application No. 2964 of 1939 is concerned the applicant remains in law as the owner of shares and his name cannot be directed to be removed from the share register, but for the determination of such rights as he may have against Kothari and Sons, the parties are agreed that they may be referred to a regular suit and I accordingly do so. As this is a matter of considerable importance to the creditors, I permitted Mr. Thiruvenkatachari for the petitioning-creditor and Mr. Vepa for the other creditors to take part in the proceedings.


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