Sri Gopal Jalan & Company Vs.
Calcutta Stock Exchange Association Ltd. [1963] INSC 146 (9 May 1963)
09/05/1963 SARKAR, A.K.
SARKAR, A.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1964 AIR 250 1964 SCR (3) 698
CITATOR INFO:
E 1970 SC1750 (10) R 1971 SC 422 (11,13)
ACT:
Company--Allotment of shares-Forfeiture of
shares-Forfeited shares reissued-If filing of return compulsory--The Companies
Act, 1956 (1 of 1956),s. 75.
HEADNOTE:
The respondent-company did not file any
return of the reissued forfeited shares under s. 75 (1) of the Act and
therefore the appellant-shareholdar moved 'the High Court for an order
requiring it to do so.
Held that the words ,allotment of
shares" have been used in 75 to indicate the creation of shares by
appropriation out 699 of the unappropriated share capital to a particular
person.
When a share is forteited and re-issued it is
not allotment in the sense of appropriation of share out of the authorised and
unappropriated capital so as to bring the shares into existence. A re-issue of
a forfeited share is not an allotment of share within the meaning of s. 75 (1)
but a sale and that being so, no question of filing any return in respect of
such re-issue arises.
In re Florence Land and Public Works Company,
(1885) L. R. 29 Ch. D. 421; Mosely v. Koffyfontain Mines Limited, (1911) 1 L.
R. Ch. 73; The Calcutta Stock Exchange Association Ltd.
v. S. N. Nundy & Co., (1930) 1 1. L. R.
Cal. 235; Naresh Chandra Sanyal v. Ramani Kanta Ray, (1945)2 I.L.R. Cal. 105;
Morrison v. Trustees etc. Insurance
Corporation, (1899) 68 L. J. Ch. 11, discussed.
In re V. G. M. Holdings, Limited (1942) 1 Ch.
D. 235, disapproved.
Held further that sub-s. (5) of s. 75 has
been enacted as ex abundanti cautela, that is to say, to prevent any argument
being raised that a return has to be filed of the re-issued shares forfited for
nonpayment of calls.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 512 of 1961.
Appeal by special leave from the judgment and
order dated August 18, 1959, of the Calcutta High Court in Appeal from Original
Order No. 106 of 1957.
S. K. Kapur, S. Murthi, P. M. Kukhi and .K.
K. Jain, for the appellant.
H. N. Sanyal, Solicitor-General of India and
B. P. Maheshuari, for the respondent.
1963. May 9. The judgment of the Court was
delivered by SARKAR. J.-The question in this appeal is, what is the meaning to
be ascribed to the word ",allotment" occurring in S. 75 (1) of the
Companies 700 Act, 1956? That section requires a company to file a return of
the allotment of its shares with the Registrar within a month of the making of
the allotment. The appellant who has been accepted as a shareholder in the
respondent Company for the purposes of the present proceedings, complained that
the Company had not filed the return required by that section, and therefore,
moved the if High Court at Calcutta under s.614 of the Act for an order
requiring it to do so.
The shares with which this case is concerned
bad been forfeited by the Company under its articles. A reference to some of
these articles is necessary before we proceed further. Article 21 of the
Articles of Association of the Company authorised its Committee to expel or
suspend a member in certain events. The present is not a case involving an
exercise of power under this articte. Articles 22, 24 and 27 are in these terms
:
Article 22: "Any member who has been
declared a defaulter by reason of his failure to fulfil any engagement between
himself and any other member or members and who fails to fulfil such engagement
within six months from the date upon which he has been so declared defaulter
shall at the expiration of such period of six calendar months automatically
cease to be a member." Article 24: "'Upon any member ceasing to be a
member under the provisions of article 22 hereof and upon any resolution being
passed by the Committee expelling any member under the provisions of Article 21
here of or upon any member being adjudicated insolvent the share held by such
member shall ipso facto be forfeited."' Article 27:"Any share so forfeited
shall be deemed to be the property of the Association, 701 and the Committee
shall sell, re-allot and otherwise dispose of the same in such manner to the
best advantage for the satisfaction of all debts which may then be due and
owing either to the Association or any of its members arising out of'
transactions or dealings in stocks and shares." The appellant's contention
is that the Company from time to time forfeited various shares under these
articles and it appeared from its balance sheet that seventy of such forfeited
shares had been reissued at a nominal face value of Rs. 1,000/but no return of
such re-issue of the forfeited shares had been filed by the Company. The
Company in its affidavit in answer to the petition admitted these facts. It was
also said that these forfeited shares had been issued for much larger sums but
nothing turns on that in this case.
Now s. 75, so far as material for our
purposes, is as follows:
S. 75. (1) Whenever a Company having a share
capital makes any allotment of its shares. the company shall, within one month
thereafter', (a) file with the Registrar a return of the allotments, stating
the number and nominal amount of the shares comprised in the allotment, the
names, addresses and occupation,; of the allottees, and the amount, if any,
paid or due and payable on each share;
x x x x x (5) Nothing in this section shall
apply to the issue and allotment by a company of shares 702 which under the
provisions of its articles were forfeited for non-payment of calls.
The appellant contends that a return should
have been filed of the re-issued forfeited shares under this section. The
contention of the Company is that the re-issue of forfeited shares does not
amount to allotment of shares and, therefore, it was not required to file any return
in respect of such re-issued shares under the section. This contention was
accepted by the learned Judge of the high Court before whom the appellant's
petition was first moved and also by the learned judges of the Division Bench
of that Court on appeal from the decision of the learned trial judge.
We agree with the learned Judges of the High
Court that a re-issue of a forfeited share is not an allotment of share within
s. 75(1). The word "alloment" has not been defined in the Companies
Act either in our country or in England.
But we think that the meaning of that word is
well understood and no decision has been brought to our notice to indicate that
any doubt has ever been entertained as to it.
As Chitty J. put it in In re Florence Land
and Public Works Company (1) (p.426). "What is termed 'allotment' is
generally neither more nor less than the acceptance by the company of the offer
to take shares. To take the common case, the offer is to take a certain number
of shares, or such a less number of shares as may be allotted. That offer is
accepted by the allotment either of the total number mentioned in the offer or
a less number, to be taken by the person who made the offer. This constitutes a
binding contract to take that number according to the offer and acceptance. To
my mind there is no magic whatever in the term 'allotment' as used in these
circumstances. It is said that the allotment is an appropriation of a specific
number of shares. It (1) (1885) L.R. 29. C h. D. 421.
703 is an. appropriation, not of specific
shares, but of a certain number of shares." The process described by
Chitty J.' is very familiar in Company law. Under the Act, a company having
share capital is required to state in its memorandum the amount of that capital
and the division thereof into shares of a fixed amount: see s. 13(4). This is
what is called the authorised capital of the company. Then the Company proceeds
to issue the shares depending on the condition of the market. That only means
inviting applications for these shares. When the applications are received, it
accepts them and this is what is generally called allotment. No doubt there may
be an allotment of shares without an application but no instance exists where
that word is used to describe a transaction whereby one becomes a share-holder
otherwise than by appropriation to him of a share out of the previously
unappropriated share capital.
So Farwell L. J. said in Mosely v.
Koffyfontain Mines Limited (1). "As regards the construction of these
particular articles it is plain that the words Creation', 'issue', and
"allotment' are used with the three different meanings familiar to
business people as well as to lawyers.
There are three steps with regard to new
capital; first, it is created; till it is created the capital does not exist at
all. When it is created it may remain unissued for years, as indeed it was
here; the market did not allow of a favourable Opportunity of placing it. When
it is issued it may, be issued on such terms as appear for the moment expedient.
Next comes allotment. To take the words of Stirling J. in Spitzel v. Chinese
Corporation, 80 L.T. 347, 351, he says: 'What is an allotment of shares ?
Broadly speaking, it is an appropriation by the directors or the managing body
of the company of shares to a particular person'." Lord Green M.R.
observed in In re V. G. M. Holdings, Limited, (2), "it seems to (1) (191
1) I.L.R. Ch. 73. 84.
(2) (1942) 1 Ch. D. 235.
704 Me that the word "purchase' cannot
with propriety be applied to the legal transaction under which a person' by the
machinery of application and allotment, becomes a share holder in the company.
He does not purchase anything when he does that. Mr. Wynn Parry endeavored heroically
to establish the proposition that a share before issue was an existing article
of property, that it was an existing bundle of rights which a shareholder could
properly be said to be purchasing when he acquired it by subscription in the
usual way. I am unable to accept that view. A share is a chose in action. A
chose in action implies the existence of some person entitled to the rights in
action as distinct from rights in possession, and, until the share is issued,
no such person exists. Putting it in a nutshell, the difference between the
issue of a share to a subscriber and the purchase of a share from an existing
share holder is the difference between creation and the transfer of a chose in
action." It is beyond doubt from the authorities to which we have earlier
referred, and there are many more which could be cited to show the same
position, that in Company law 'allotment' means the appropriation out of the
previously unappropriated capital of a company, of a certain number of shares
to a person. Till such allotment the shares do not exist as such. It is on
allotment in this sense that the shares come into existence. Learned counsel
for the appellant has not been able to cite any case where the word
"allotment' has been used to describe a transaction with regard to an
existing share, that is, a share previously, brought into existence by
appropriation to a person out of the authorished capital. In every case the
words 'allotment of shares' have been used to indicate the creation of shares
by appropriation out of the unappropriated share capital to a particular
person. We find no reason why the word "allotment' in s. 75 should have a
different sense. It is said that sub-s. (5) of s. 75 furnishes such a reason.
We Will 705 deal with that argument later. Our attention-has not been drawn to
any other provision in our Companies Act which would support the contention
that the Act includes within the word "allotment' a transaction with a share
after it has been first created by appropriation out of the authorised share
capital to a particular individual. As the learned Judges of the High Court
pointed out, s. 75 occurs in Part III of the Act which deals with
"'Prospectus And Allotment, And Other Matters Relating To Issue Of Shares
Or Debentures". Sections 69 to 75 are classed under the subheading
'Allotment' and the only kind of allotment that is dealt with in these sections
is the appropriation of shares to individuals out of the un-appropriated share
capital of the company. In these circumstances it would be impossible to give
to the word 'allotment' in s. 75 (1) a different meaning.
Now it is quite clear that when a share is
forfeited and reissued it is not allotment in the sense of appropriation of
share out of the authorisbed and un-appropriated capital so as to bring the
shares into existence. In the present case both sides proceeded on the basis
that the articles of the company dealing with forfeiture of shares which we
have earlier set out are valid articles. In other words, it has not been
disputed that the Company may validly forfeit shares in terms of those
articles. We accept that basis and proceed on the assumption that it is
correct. In the High Court at Calcutta there was a difference of opinion as to
the validity of these articles but the later view is that the articles are
valid. The reason for the view has thus been put in the latest case in the
Calcutta High Court, namely, the Calcutta Stock Exchange Association Limited v.
S. N. Nundy. and Company(1). Harries C. J.
dealing with the very articles with which we are concerned observed at p.
264, "'In the present case, the Articles
relating to forfeiture do not, in my view, offend against the (1) [1950] 1
I.L.R. Cal. 235.
706 provisions of the Companies Act, as they
do not contemplate a reduction of capital or a purchase of shares or a
trafficking in shares Now, obviously, -A if upon forfeiture, the shares had ceased
to exist qua shares and become merged in the unissued capital of the Company,
then there would have been a reduction of the capital and such a forfeiture
would have been invalid. The reason why it was held that the forfeiture was
valid was that on such forfeiture all that happened was that the right of the
particular shareholder disappeared but the share considered as a unit of issued
capital continued to exist and was kept in suspense until another shareholder
was found for it: see Naresh Chandra Sanyal v. Ramani Kanta Bay (1). We have to
examine the present case on this basis.
If, therefore, the shares which the Company
forfeited have to be considered as shares already Created and as continuing in
existence as such in spite of the forfeiture, obviously they could not be
allotted in the sense in which that word is understood in the Company law as we
have earlier stated.
In Morrison v. Trustees etc. Insurance
Corporation the articles of the Company gave power to forfiet shares for
non-payment of calls -and further provided that "any share so forfeited
shall be deemed to be the property of the Company 'and the directors may sell,
reallot or otherwise dispose of the same in such manner as they think
fit". It was held that the Company could re-issue the forfeited shares
giving credit for the money already received in respect of them. The contention
that the transaction amounted to the issue of a share at a discount was
rejected.
Vaughan Williams L. J.. observed, "I do
not like the use of the word 'issue' with reference to the transaction with
regard to these shares. If they were being issued, the argument for the
appellant might possibly be right ; but they are not being issued. When we look
at the articles we see that what takes place on (1), [1945]2 I.L.R. Cal. 105,
(2) [1899] 68 L.J. CH 11.
707 a forfeiture of shares is that the power
of transferring them passes from the original shareholders to the company and
the company can then transfer the shares subject to the same rights and
liabilities as if they had not been forfeited". To the same effect are the
observations of Bacon V. C. in Ramwell's Case (1). Quite clearly, the view well
accepted in Company Courts has been that issue of the forfeited shares was not
allotment of them but only a sale.
If it were not go. the forfeiture itself
would be invalid as involving an ill,-gal reduction of capital. If the reissue
of a forfeited share is only its sale, then it is not an allotment and that
being so, no question of filing any return in respect of such reissue arises.
It remains now to deal with sub-s. (5) of s.
75. That does create a difficulty. It provides that no return need be filed in
respect of allotment of shares forfeited for nonpayment of calls. It gives rise
to an argument that the Art contemplates an "allotment" of shares
forfeited for nonpayment of calls for otherwise it would not be necessary to
provide that returns in respect of such allotment need not be filed. It is said
that being so, the word "allotment" in s. 75 (1) should be understood
as including the issue of shares forfeited for other reasons, for there is no
reason to make any distinction between shares forfeited for nonpayment of calls
and those forfeited for other reasons in the present context. This argument is
no doubt legitimate.
But having given it our best consideration,
we have come to the conclusion that it should be rejected. We think that sub-s.
(5) owes its origin to a confusion of ideas. Apart from it, all other
provisions of the Act clearly contemplate by allotment the creation of shares
out of the authorised and un-appropriated capital of the Company and not
reissue of shares already created by allotment in the manner aforesaid but
subsequently forfeited. There would be no justification for altering the
meaning of that word in any other part of the Act because of (1) [1881] 50 L J.
Ch. (N.S. 827).
708 the solitary provision occurring in
sub-s. (5) of s. 75 The Companies Act in force before the Act of 1956 was the
Act of 1913. Section 104 (1) of that Act corresponded to s. 75 (1) of the
present Act. In 1936there were large amendments made in the 1913 Act. Prior to
these amendments there was noprovision in s. 104 of the Act of 1913
corresponding to sub-s. (5) of s. 75 of the present Act. Therefore, upto 1936
there was, no reason to contend that the word "'allotment" in s. 104
(1) could at all include the re-issue of a forfeited share. The 1936 amendment
added sub-s. (4) to s. 104 and that sub-section contained provision similar to
sub-s. (5) of s. 75 of the present Act. We do not think that it could be
legitimately contended that by the amendment of 1936 the meaning of the word
",allotment"', in s. 104 (1) was altered. That being so, the word
""allotment" in s. 75 (1) must be understood without reference
of sub-s. (5) in the same way as that word in s. 104 (1) had to be understood
without reference to sub.s.(4) of that section.
It is safer to read sub-s. (5) of s. 75 as
having been enacted ex abundanti cautela, that is to say, to prevent any
argument being raised that a return has to be filed of the re-issued shares
forfeited for non-payment of calls. We also agree with the view expressed in
the High Court that the reason why only forfeiture for non-payment of calls was
mentioned in s. 104 (4) of the Act of 1913 and s. 75 (5) of the present Act is
that there has always been a great deal of doubt as will appear from the
difference of opinion in the Calcutta High Court to which we have earlier
referred, as to whether there can be any forfeiture of shares except for
nonpayment of calls which latter case had been expressly provided for by the
statute. The other cases of forfeiture had apparently not been mentioned
because if they had been it could have been legitimately argued that the
legislature considered such forfeiture valid and the legislature did not want
to give support to that argument.
709 We think for these reasons that the
appeal fails and we dismiss it with costs.
Appeal dismissed.
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