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In Re: Mirza Ahmed Namazi; in Re: the Indian Companies Act, Vii of 1913; in Re: the Madras Taxi and Motor Transport Service, Limited - Court Judgment

LegalCrystal Citation
CourtChennai
Decided On
Judge
Reported in83Ind.Cas.94
AppellantIn Re: Mirza Ahmed Namazi; in Re: the Indian Companies Act, Vii of 1913; in Re: the Madras Taxi and
Cases ReferredBallerby v. Rowlandand Marwood
Excerpt:
companies act (vii of 1913), sections 6, 30 - company's articles of association--power of company to accept surrender of shares--forfeiture--liability of shares-holder on forfeiture--presumption as to regularity of entry of forfeiture--list of contributories--omission to place before creditors effect of--memorandum of association, liability of signatory of, on liquidation for shares noted therein. - .....on the register he could only have got rid of his liability by a regular transfer, and it is impossible to say he transferred the shares.10. cairns, l. j., observed 'the provisions of the act are intended to meet this case, and must be strictly pursued.'11. the contention of the sixth respondent that there was no allotment of shares to him before he withdrew his offer to take shares is, on the face of it, untenable. as regards the number of shares exhibit o clearly shows that he was the owner of 250 shares in august 1921. apart from that, he having signed the memorandum of association and paid rs. 500 for 250 shares and one of the conditions of the memorandum being that a director should have 250 shares and he having acted as a director cannot now be heard to say that he was owner of.....
Judgment:

Devadoss, J.

1. This is a Judge's Summons to show cause why the alleged surrender of the shares held by respondents Nos. 1 and 2 and the forfeiture of the shares held by the respondents Nos. 3 to 6 should not be declared to be invalid and why all the respondents herein should not be directed to pay to the liquidators, the respective call amounts and allotment monies due in respect of the shares held by them and for incidental reliefs. There are nine respondents to this application. Respondents Nos. 2, 7, and 9 do not appear and they are declared ex parte. The third respondent is dead and the application is withdrawn as against him. The eighth respondent admits his liability and his letter is filed as Exhibit K.

2. The contention of the first respondent is that he surrendered the shares to the Company and the surrender was accepted by the Directors. On behalf of the liquidator, who has taken out that Judge's summons, it is alleged that there are four Directors in Madras at the time when the resolution accepting the surrender was passed and three only signed the resolution. There is no evidence that a fourth Director was present in Madras at the time; for the evidence of Bhanu Prasad on the point is only hearsay. But, under Rule 107 of the Articles of Association of the Madras Taxi, and Transport Service, Limited, four is the quorum for a Director's meeting. The resolution which was passed in circulation accepting the surrender of the firs' respondent's share was signed by only three persons. On behalf of that respondent Mr. Narasimhachari contends that Rule 114 says that a resolution in writing signed by all the Directors present in Madras shall be as valid and effectual as if it had been passed at a meeting of the Directors duly called and constituted and so a resolution passed in circulation and signed by only three persons is valid. The argument that Rule 114 cuts down the number required for a quorum is opposed to common sense; for, if that contention is good, a resolution may be passed by two Directors in circulation. When Rule 107 provides that the quorum for a meeting of the Directors for despatch of business shall be four, it cannot be said that it was intended that the quorum should be cut down to any number less than four if there is no meeting for the despatch of business and it is to be transacted by getting, the consent of the Directors in circulation.

3. Granting for argument's sake that the resolution is according to the rules, I am unable to accept the contention that the surrender of shares is permitted by law so as to enable the Directors or the Company to reduce its capital. Rule 118 (5) gives power to the Directors to accept surrender of shares by shareholders; but this power which is an unusual power, granting that it is valid, is subject to restrictions: Table A of the Indian Companies Act does not contain any clause empowering any Company to accept surrender of shares. The Indian Companies Act permits forfeiture of shares on certain grounds; but to give an unlimited or wide power to a Company to accept surrender of share is, I think, opposed to the principle that a Company cannot buy its own shares and to the principle that a Company can reduce its capital only with the permission of the Court and on such terms and conditions as it may impose. The power given by Rule 118 (5) is very wide. It is in these terms: 'to accept from any member on such terms and conditions as shall be agreed a surrender of his shares or stock or part thereof, Whatever might have been the view as regards the power of a Company to accept surrender of shares, I think it is well-settled now that a Company cannot exercise wide powers of accepting a surrender. It can only accept a surrender under conditions and limitations under which shares can be forfeited. Reliance is placed upon Snell's case, In Re: Natal Investment Co. (1870) 5 Ch. App. 22 : 21 L.T. 445 : 18 W.R. 30 In that case Sir G. M. Giffard, Lord Justice, held that the surrender of shares by Snell was valid. The main reason for the learned Lord Justice holding that Snell's surrender was valid was that his name was not entered on the register of share-holders and that no specific shares were allotted to him though for purposes of the Act he was a share holder. He found that the substance of the transaction was that both parties were offering to sever their connection with each other and that the Articles of Association contained a power to cancel shares and that there was nothing in the form preventing the parties from carrying out their intention. Snell's case (1870) 5 Ch. App. 22 : 21 L.T. 445 : 18 W.R. 30 cannot be considered to be good law in view of the decision of the Court of Appeal in Ballerby v. Rowlandand Marwood's Steamship Co. Ld., (1902) 2 Ch. 14 : 71 L.J.Ch. 541 : 50 W.R. 566 : 88 L.T. 671 : 18 T.L.R. 582 : 9 Manson 291 Cozens Hardy, L.J. lays down the law thus:

Every surrender of shares, whether fully paid up or not, involves a reduction of capital, which is unlawful, except when sanctioned by the Court under the Companies Acts of 1867 and 1877. Forfeiture is a statutory exception, and is the only exception. For I regard a surrender, under circumstances which would justify a forfeiture, as merely equivalent to a forfeiture.

4. Collins, M. R. quotes with approval the following observation of the learned Master of the Rolls in In Re: Dronfield Silkstone Coal Co. (1881) 17 Ch. D. 76 : 50 L.J.Ch. 387 : 44 L.T. 36l : 29 W.R. 768:

There is no reference in the Acts to surrenders of shares; but these have been admitted by the Courts, upon the principle, as I understand it that they have practically the same effect as forfeiture,' the main difference being that the one is a proceeding in invitum, and the other a proceeding taken with the assent of the shareholder, who is unable to retain and. pay future calls on the shares.

5. The principle, therefore, applicable to cases of surrender is that the surrender is good if it amounts to' a forfeiture. It is not open to a share-holder to surrender at will his share, especially when he has to meet future calls and it is not open to a Company to accept surrender of shares unless the act of the Company can be brought within the rules relating to forfeiture of shares. To hold that a Company can by a resolution of its Directors accept surrender of shares would be to allow a Company to reduce its capital at its pleasure. The surrender of the shares by the first respondent being illegal, he continues to be a shareholder and he thereby becomes a contributory and the amount claimed from him on that basis is not disputed.

6. Respondents Nos. 4 and 5 contend that their shares have been forfeited and they are not liable as contributors. There is no evidence that any resolution was passed by the Directors as required by Rule 26 of the Articles of Association and no notice was given to respondents Nos. 4 and 5 that their shares had been forfeited. Mr. Anandalwan who appears for respondents Nos. 4 and 5 contends on the authority of Knight's case, In Re: North Hallenbeagle Mining Co. (1867) 2 Ch. App. 321 : 36 L.J.Ch. 317 : 15 L.T. 546 : 15 W.R. 294 that there is an entry in the registers to the effect that his clients' shares have been forfeited and, therefore, their shares must be considered to have been forfeited. That case does not help him. What was held in that case was that an entry of forfeiture in the books of the Company must be presumed to have been properly made after a resolution to that effect was passed by the Directors. Here the matter does not rest on mere presumption; there is evidence that no resolution was passed by the Directors' as required by Rule 26; granting, for argument's sake that there was a forfeiture, that does not relieve respondents' Nos. 4 and 5 from their responsibility to the Company's creditors to the extent of the amounts due by them. The Company was registered on the 1st June 1921 and went into voluntary liquidation in March 1922 and respondents Nos. 4 and 5 cannot escape their liability to pay the amounts due on their shares as the winding up proceedings were started, before the lapse of one year from the alleged date of forfeiture. In Creyke's case, In Re: Blakely Ordnance Co. (1869) 5 Ch. App. 63 : 39 L.J.Ch. 124 : 21 L.T. 572 : 18 W.R. 103 it was held that the liability of a past member is entirely created by the Companies Act, 1862, and it is immaterial whether his shares have been transferred or have been extinguished by forfeiture. The Indian Companies Act, 1913, is almost a re-production of the English Act and the liability of the shareholder is not taken away either by transfer or by forfeiture of his shares. Hardly any liability was incurred by the Company after the date of the alleged forfeiture.

7. Mr. Anandalwan's next contention is 'that there was no list of contributories prepared and, therefore, his clients are not liable as contributories. Exhibit A is the list of contributories prepared by the liquidators appointed by the Company. Bhanu Prasad, one of the liquidators, swears that Exhibit A was placed before the creditors' meeting. Subramanya Iyer, a representative of one of the creditors was asked to preside at the meeting of the creditors and he says that Exhibit A was placed before the meeting of the creditors and they had an opportunity of perusing its contents and it was also read out to them. Exhibit A is the list of assets and liabilities of the Company and contains other information as well. That he presided over the meeting is clear from Exhibit VII A which contains the minutes of the meeting of the creditors. Mirza Ahmed Namazi another liquidator also proves that. Exhibit A was placed before the meeting. It is unnecessary to prove that Exhibit A was prepared and placed before the meeting of the creditors in order to make respondents Nos. 4 and 5 responsible as 'contributories. All that is required is that a list of contributaries shall be prepared. The amounts due from the respondents Nos. 4 and 5 are not disputed. Therefore, they are bound to pay the amount due on their shares as contributories to the liquidators.

8. Mr. Narasimhachari on behalf of the sixth respondent contends that he is responsible only in respect of 30 shares. His contention that he did not take 250 shares rests upon the fact that share certificates were not issued to him. Sixth respondent was one of the signatories to the Memorandum of Association. What he says now is that he changed his mind after sighing his Memorandum of Association and wrote Exhibit L resigning his Directorship and asking that 30 shares might be considered to be fully paid up and that the balance should be returned to him. Every person applying for share's was asked to deposit Rs. 2 per share and 'sixth respondent who signed the Memorandum of Association paid Rs. 500 for 250 shares. The Company was registered on the 1st of June. It began to work from the 15th of June 1921. The 'allotment of shares was made on the 14th July, the resolution to allot shares having been made on the 14th June. The sixth respondent took part in a meeting of the Directors on the 11th 'June 1921 (Exhibit D-l) and signed the resolution. His resignation of the 'Directorship was only on the 30th June 1921 and his letter offering to take 30 fully paid up shares was written on the 13th July 1921. The Managing Agents wrote Exhibit N on the 30th July 1921 accepting the resignation with regret and intimating that there was no provision in the articles for refunding money on shares already paid up and drew the attention of the sixth respondent to Article 93 of the Articles of Association. Article 93 is in these terms:

A first Director may act before acquiring this qualification but shall in any case acquire the same within one month from his appointment, and unless he shall do so he shall be deemed to have agreed to take the said shares from the Company and the same shall be forthwith allotted to him accordingly.

9. The Managing Agents were perfectly right in intimating to the sixth respondent that, inasmuch as he signed the Memorandum of Association and acted as Director, he must be deemed to have the 250 shares allotted to him. The matter did not rest there. On the 25th August 1921, the sixth respondent wrote Exhibit O to the Managing Agents offering to sell 250 shares for Rs. 450. It is quite clear, therefore, that in August 1921 the sixth respondent was a shareholder of the Company. His present contention that he wrote a letter asking that he should be treated as a shareholder only in respect of 30 fully paid up shares before the actual allotment was made on. the 14th July is not a valid contention. Apart from Rule 93 of the Articles of Association, the Indian Companies Act makes it obligatory on a signatory to the Memorandum of Association to be responsible for the shares which are shown as being his in the Memorandum of Association. Section 6 (3) of the Indian Companies Act requires that each subscriber shall write opposite to his name the number of shares he takes. By Section 30 those who sign the Memorandum of Association of a Company shall be deemed to have agreed to become members of the Company, and on its registration should be entered as members on its register. The sixth respondent having held himself out as the owner of so many shares is bound, so far as the creditors of the Company are concerned, to pay up the amount due on those shares: Evan's case, In Re: London, Hamburgh and Continental Exchange Bank (1867) 2 Ch. App. 427 : 36 L.J.Ch. 501 : 16 L.T. 253 : 15 W.R. 543. Evan signed the Memorandum of Association of a Company as the holder of 10 shares and acted for a short time as a Director of the Company. No shares were ever allotted to him and his name was never on the register. The Court of Appeal held that his name ought to have been in the register and that he was contributory in respect of 10 shares. Sir G.J. Turner, L. J., referred to Section 23 of the Act which is similar to Section 30 of the Indian Act, and stated:

It was, therefore, the plain duty of Mr. Evens to enter his own name on the register. This, however, he did not do, but went on leaving the matter exactly as it stood. Then, can he take advantage of his own neglect? for if he had entered his name on the register he could only have got rid of his liability by a regular transfer, and it is impossible to say he transferred the shares.

10. Cairns, L. J., observed 'the provisions of the Act are intended to meet this case, and must be strictly pursued.'

11. The contention of the sixth respondent that there was no allotment of shares to him before he withdrew his offer to take shares is, on the face of it, untenable. As regards the number of shares Exhibit O clearly shows that he was the owner of 250 shares in August 1921. Apart from that, he having signed the Memorandum of Association and paid Rs. 500 for 250 shares and one of the conditions of the Memorandum being that a Director should have 250 shares and he having acted as a Director cannot now be heard to say that he was owner of only 30 shares. He is, therefore, liable as a shareholder to the extent of 250 shares.

12. The Judge's summons is ordered in the terms prayed for with taxed costs except as against the third respondent against whom the application has been withdrawn.


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