The Alote Estate & ANR Vs. R.B.
Seth Hiralal Kalyanmal & Ors  INSC 27 (20 February 1970)
20/02/1970 GROVER, A.N.
CITATION: 1971 AIR 920 1970 SCR (3) 740 1970
SCC (1) 425
Company--Shares in Company--Allotment in
consideration of allottee transferring land to Company--if in winding up
proceedings enquiry con be made into value of land without rectification of
The Appellants were allotted 18,000 fully
paid up shares in a company in consideration of transferring 6,000 acres of
agricultural land to the company for cultivation of sugar-cane. After a
petition was filed for winding up the company, two joint Liquidators were
appointed and they took steps to settle the list of contributories. 'While
these proceedings were pending an application was filed by Respondent No. 1
praying that an enquiry be made in respect of the price paid by the Appellant
for the 6,000 acres of land. It was urged that such enquiry would show the
value of the land to be well below the consideration for which the shares were
allotted and that the Appellants would therefore be liable as contributories in
respect of -the difference.
The company Judge held that in a proceeding
for winding up and while settling the list of contributories it was not open to
go behind the transaction entered into at the time of the formation of the
company and that the consideration which had been freely accepted by The
company could not be challenged as being inadequate in the absence of any
allegation of fraud However, the Division Bench, in appeal, held that an
inquiry would be necessary as there was an indication that the allottees of the
shares had paid only a fraction of the nominal value.
On appeal to this Court,
HELD: Allowing the appeal, It cannot he
disputed that a shareholder of fully paid up shares will not be placed on the
list of contributories or made to contribute towards the assets of the company
unless the register is rectified and it is determined in appropriate proceedings
that he is not a fully paid up shareholder. No steps were taken by the
liquidators to have the register rectified or the contract entered into by the
company with the appellants avoided by means of appropriate proceedings. Even
in the application filed by respondent No. 1 there was Do allegation of fraud.
The facts stated related more to inadequacy of price or consideration and not
to its being illusory or the like. The learned single judge was therefore right
and the Division Bench was in error in directing an inquiry into the question
whether the appellants bad paid consideration which was inadequate. [743 F, 744
C-D] In re Innes & Co., Limited,  2 Ch. Div. 254, 262, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1010 of 1966.
Appeal by special leave from the judgment and
order dated July 9, 1965 of the Madhya Pradesh High Court, Indore Bench in
Letters Patent Appeal No. 24 of 1962.
741 S.V. Gupte, N. D. Karkhanis and A. G.
Ratnaparkhi, for the appellants.
Mohan Behari Lal, for respondent No. 1.
C. K. Daphtary, C. P. Lal and N. N. Sharma,
for respondents. Nos. 2 to 4.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by special leave from a judgment of the division
bench of the Madhya Pradesh High Court reversing the order of the Company Judge
in an application made by respondent No. 1 for an inquiry into the allegation
that the consideration for 18,000 shares of the Vikram Sugar Mills Ltd. (now
under liquidation) valued at Rs. 18 lakhs was not fully paid up by the
shareholders, namely, the present appellants.
The facts may be succintly stated. Appellant
No. 1, the Alote Estate, was a firm consisting of two partners at the material
time. It came into existence in 1944 when Vikram Sugar Mills Ltd., hereinafter
called the "company", was proposed to be floated. The two partners of
the firm were His Highness Col. Sir Vikramsingh Rao Pawar, Ruler of the State
of Devas (Senior) and R. K. N. Gajapati Raju of Vaizagapatnam who died sometime
in 1946 with the result that the firm was dissolved. In 1947 the ruler of Dewas
(senior) was taken. in adoption by Her Highness the Senior Dowager
Maharanisaheba of Kohlapur. He assumed the name and title of His Highness Maj
Gen. Sir Shahaji Chhatrapati Maharaja of Kohlapur. After the constitution of
the firm called the Alote Estate, the company was incorporated in February
The firm held extensive agricultural, land
which was suitable for cultivation of sugarcane. It had transferred 6,000 acres
out of its holding to the company in lieu of 18,000 fully paid shares of Rs.
100/each which were registered in the name of the firm.
Respondent No. 1 was originally a director of
the company. He made a proposal for advancing debenture loan of Rs. 20 lakhs to
the company which proposal was accepted by the Board of Directors as also at an
extraordinary general meeting of the company on September 16, 1946. He was
appointed Managing Agent of the company. On the same date at the meeting the
shareholders of the company passed a resolution that out of 6,000 acres of land
acquired by the company from the Alote Estate 2,000 acres selected by
respondent No. 1 or his representative be returned and retransferred to the
Estate. In consideration of such transfer 9,000 shares were to be surrendered
by the Estate.
Effect was given to this resolution and in
the list of shareholders the number of shares held 742 by the firm was shown as
9,000 instead of 18,000 subject to confirmation by the court. A resolution was
passed on October 27, 1947 for reduction of the capital from 60 lakhs to Rs. 35
lakhs. The court was also moved for giving permission for reduction of the
.capital. On January 23, 1950, Prabhakar Parashuramji Pandita shareholder-filed
before the High Court a petition under ss. 166 and 162 of the Companies Act
1913 for winding up the company. On April 2, 1951 two joint liquidators were
The liquidators took steps to settle the list
of contributories and objections were raised by Ms Highness the Maharaja of
Kohlapur as also by the firm against inclusion of their names in that list.
While these proceedings were pending an application was filed by respondent No.
1 on October 31, 1961 praying that an inquiry be made in respect of the price
paid for 6,000 acres of land before the allotment of the shares 'and "to
hold the Alote Estate and His Highness the Maharaja of Kohlapur liable as
contributories to the extent of money's worth not found to have been fully paid
in addition to and independently of the liability for Rs. 9 lakhs" which
according to the joint liquidators was the amount of liability of the Maharaja
as a contributory. It was alleged, inter alia, that on an average the price per
acre -paid for 6,000 acres of land before the allotment of the shares was
approximately Rs. 30.
On that basis the Maharaja and the Alote
Estate were liable as contributories in the sum of Rs. 16 lakhs 'as the shares
were not fully paid by value in kind. The Maharaja and the Alote Estate in
reply took up the position that in the absence of rectification of register by
-appropriate action they were not liable to pay as contributories because they
held shares which were fully paid up. As regards the company's resolution to
give up 2,000 acres out of 6,000 acres and reduce the value of shares allotted
to 9 lakhs it was maintained that the same was an independent transaction and
its effect could be considered only in 'appropriate proceedings in accordance
The learned Company Judge by his order dated
July 31, 1962 held that in a proceeding for winding up and while settling the
list of contributories it was not open to go behind the transaction ,entered
into at the time of the formation of the company and that the consideration
which had been freely accepted by the company could not be challenged as being
inadequate in the absence of 'any allegation of fraud. He was further of the
view that the contention of respondent No. 1 that the valuation of the land was
Rs. 30 and not Rs. 300 per acre could not be inquired into and it was not
necessary to consider whether such inquiry was barred by limitation in view of
S. 235 of the Act. It was, however, observed that if the allegation of
respondent No. 1 was that the Alote Estate as an officer of the company was
guilty of misfeasance or breach of trust the application having been made more
than three years 743 from the date of first appointment of liquidators would be
clearly barred. Reference was made to numerous English and Indian decisions for
coming to the conclusion that a fully paid shareholder could not be called upon
to contribute towards the assets of the company in respect of such, shares held
by him. Other points were left for decision after the petition for confirmation
of the resolution of the company was disposed of.
Respondent No. 1 filed an appeal under the
Letters Patent. The division bench hearing the appeal seems to have been
influenced by the possibility that the land had been purchased by the Alote
Estate at a small fraction of value for which it had been sold to the company
largely owing to the Maharaja being all powerful in the conduct of its affairs.
It was considered that an inquiry would be necessary when there was a prima
facie indication that the allottee of the shares had paid only a fraction of
the nominal value.
Now S. 156 of the Act deals with the liability
as contributories. Clause (iv) of sub-s. (1) provides that in the case of a
company limited by shares no contribution shall be required from any member
exceeding the amount unpaid on the shares in respect to which he is liable as a
present or past member. Section 158 defines the term "contributory".
It means every person liable to contribute to the assets of a company in' the
event of its being wound up. Under s. 184 the court shall settle the list of
contributories with power to rectify the register of members in all cases where
rectification is required in pursuance of the Act. Sections 185 and 186 confer
power on the court to require delivery of property from a contributory and to
order payment of debts determined by it.
The material question, therefore, was whether
the appellants could be placed on the list of contributories.
It could hardly be disputed that a
shareholder of fully paid up shares will not be placed on the list of
contributories and made to contribute towards the assets of the company unless
the register is rectified and it is determined in appropriate proceedings that
he is not a fully paid up shareholder.
In England the rule which has been accepted
as settled is that although the court can inquire into_ an allegation that
owing to fraud the contract relating to fully paid up shares was vitiated but
unless the contract is impeached mere inadequacy of price is not sufficient of
itself to invalidate the contract. In the words of Vaughan Williams, L.J. in re
Innes & Co.('), Limited :
"You must show that, these shares not
having been paid for at -all, the contract for purchase was a colour(1) (1903)
2 Ch. Div. 254,262.
744 able transaction, and that in truth and
in fact, qua value, these shares were not part of the consideration......
As stated in Palmer's Company Law, 21st
Edition, pages 190191, the consideration for the allotment of shares may be
money or money's worth e.g., the transfer to the company of property. If a
valid contract is made for the acceptance by the company of specified property
in payment of shares the court will not whilst the contract stands inquire into
the value of the consideration even at the instance of -the liquidator. Where,
however, the contract is fraudulent or shows on the face of it that the consideration
given to the company is illusory or is clearly not equivalent to the nominal
value of the shares the shares cannot, to this extent, be treated as fully paid
and the shareholder may be held liable to pay for them in full. It is
significant that no steps were taken by the liquidators to have the register
rectified or the contract entered into by the company with the appellants
avoided by means of appropriate proceedings.
Even in the application filed by respondent
No. 1 in October 1961 there was no allegation of fraud. The fact stated related
more to inadequacy of price or consideration and not to its being illusory or
the like. In our judgment the learned single judge was right and the Division
Bench was in error in directing an inquiry into the question whether the
appellants had paid consideration which was inadequate.
The appeal is consequently allowed and the
order of the Division Bench is set aside and that of the learned single judge
restored with costs.