Naresh Chandra Sanyal Vs. Calcutta
Stock Exchange Association Ltd. [1970] INSC 202 (25 September 1970)
25/09/1970 SHAH, J.C.
SHAH, J.C.
GROVER, A.N.
CITATION: 1971 AIR 422 1971 SCR (2) 483 1971
SCC (1) 50
ACT:
Companies Act (7 of 1913)-Fully paid up share-Forfeiture
ofEffect-Sale of forfeited share-If illegal-Right of member to proceeds of
sale-Indian Contract Act (9 of 1872), s. 74Scope of.
HEADNOTE:
Under the scheme of the articles of
association of the Calcutta Stock Exchange Association Ltd., the Committee is
authorised under art. 21 to expel or suspend a member on the ground inter alia
that he refused to abide by the decision of Committee in any matter which is
under the articles or under the bye-laws referred to the Committee. Under art.
22, a member declared a "defaulter"
because he fails to fulfilll any engagement between himself and any other
member within six months from the date on which he has been declared a
defaulter ceases to be a member of the Exchange automatically. Upon his ceasing
to be a member and upon a resolution being passed by the Committee expelling a
member his share stands forfeited. The share so forfeited is deemed to be the
property of the Exchange. Such forfeiture involves the extinction of all
interest in and also all claims and demands against the Exchange in respect of
the share and all other rights incidental to the share, but, not the liability
of the erstwhile member to discharge his liabilities to the Exchange. But the
Committee must sell, reallot or otherwise dispose of the share for the
satisfaction of the debts, which may then be due and owing by the defaulter to
the Exchange or to any of its members arising out of transactions or dealings
in stocks and shares. The net proceeds of the sale shall be applied towards the
satisfaction of the debts, liabilities or engagements of the shareholder and
the residue, if any, paid to the member or his legal representatives.
The appellant failed to carry out a direction
to pay a certain sum arising out of a share transaction and the Committee after
notice, declared him a defaulter. Six months later, after notice to the
appellant, the Committee resolved that the share standing in his name shall be
forfeited to the Exchange and that the appellant be expelled from the
membership of the Exchange. The Exchange thereafter disposed of the 'share for
Rs. 55,000. The appellant challenged the action taken by the Exchange but the
suit was dismissed.
In appeal to this Court,
HELD : (1) It is not necessary that a
resolution expelling a member and a resolution declaring him a defaulter should
both be passed before his share is forfeited by the Exchange. The word and is
used to indicate an alternative and does not make the two conditions
cumulative, because, it would lead to the anomalous result that a member would
have to be expelled by the Committee under art. 21 and would also automatically
cease to be a member under art. 22. [490 A-C] Surajmall Mohta v. Ballabhdas
Mohta, I.L.R 63 Cal. 531, approved.
484 In any event, in the present case, a
resolution declaring the appellant a defaulter was passed and six months later
the appellant was expelled from the membership of the Exchange and it was
resolved that his share shall stand forfeited. [490 C-D] (2)(a) Regulation 24
in Table A in the First Schedule to the Companies Act, 1913, provides for the
exercise of the power to forfeit a share when there is default in paying calls,
but no inference follows there from that the share of a member could be
forfeited only for non-payment of a call made in respect of a share which was
not fully paid up.
Subject to the provisions of the Companies
Act a company and its members are bound by the Provisions contained in its
articles of association. The Articles regulate the internal management of the
company and define the powers of its officers. In the absence of any provision
contained in the Act which prohibits a company from forfeiting a share for
failure on the part of a member to carry out an undertaking or engagement the
articles of a company which provide that in certain events membership rights of
a shareholder including his right to the share will be forfeited are binding.
There' is no provision the Indian Companies Act 1913, which restricts the
exercise of the right of the Exchange to forfeit shares for non-payment of a
call only, and the articles of the Exchange expressly provide that in the event
of a member failing to carry out the engagement and in ,the conditions
specified therein his share shall stand forfeited. [492 A-E] (b) Under art. 27,
the terms of which are mandatory, the shares forfeited to the Exchange must be
re-allotted or otherwise disposed of : it cannot be retained by the Exchange. A
forfeited share is merely a shake available to the company for sale and remains
vested in it for that purpose only. By forfeiting a share pursuant to the
authority of the articles of association no reduction of capital is achieved.
[491 F, H; 492 A] Therefore, arts. 22, 24, 26, 27 and 29 relating to forfeiture
of shares are valid. [492 D-E] Sri Gopal Jalan & Co. v. Calcutta Stock
Exchange Association Ltd., [1964] 3 S.C.R. 698, followed.
Calcutta Stock Exchange Association Ltd. v.
S. N. Nundy & Co. I.L.R. [1950] 1 Cal. 235, approved.
(3) There is nothing in the procedure
followed which rendered the forfeiture of the appellant's share illegal.
The appellant had ample notice of the
proceedings and the orders were not made against him contrary to rules of
natural justice. [493 C] (4)(a) Under its articles the Exchange has authority
to sell the share and to appropriate the sale proceeds towards satisfaction of
the debts, liabilities or engagements. But the balance of the amount remaining
due after satisfying the liabilities of the appellant did not remain the
property of the Exchange. The appellant was entitled to the amount.
This is expressly provided for in art. 33.
The expression used in art. 29 'the forfeiture shall involve extinction of all
interest' is subject to the rights as by the articles saved and art. 33 saves
the defaulting share-holder's right lo the balance remaining with the
Exchange.[493 D-G] (b) Even assuming that arts. 24 and 31 reserve to the
Exchange two distinct powers-the power to forfeit and the power to exercise a
lien, and that art. 33 only applies to a sale in enforcement of a lien and not
to a sale after forfeiture, the balance on hand after satisfying the liability
485 of the defaulter must still be returned to the defaulter, under s. 74 of
the Contract Act. The power of the Exchange to forfeit the shares arises out of
the articles and its source is in contract. On the principle underlying s. 74
of the Contract Act the Exchange had no right to hold, out of the sale proceeds
of the share, any amount in excess of the amount due to it or to its members.
[493 H; 494 A-B] Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515, followed.
(c) The legal theory of forfeiture is that a
share forfeited is only taken over by the company with the object of disposing
of it to satisfy its claims to enforce which the share was forfeited and all
other obligations arising against him out of his membership. If the company is
permitted to retain the balance of the amount after satisfying the debts,
liabilities and engagements of the share-holder, the transaction would not be
different from one purchasing the share of the defaulting shareholder for a
value equal to the amount of his obligation and that would be illegal. [495
E-H]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1626 of 1966.
Appeal from the judgment and decree dated
July 7, 8, 1964 of the Calcutta High Court in Appeal from Original Decree No.
143 of 1960.
R. B. Datar, for the appellant.
B. Sen, N. R. Khaitan and B. P. Maheshwari,
for respondent.
The Judgment of the Court was delivered byShah,
J.-Naresh Chandra Sanyal was the holder of a fully paid-up share of the
Calcutta Stock Exchange Association Ltd.hereinafter called the Exchange'. As a
member of the Exchange he was authorised to carry on business as a broker in
shares, stocks and securities in the hall of the Exchange. In December 1941
Sanyal purchased one hundred shares of the Indian Iron & Steel 'Company
Ltd. from Johurmull Daga & Company, but did not arrange to take delivery of
the shares on the due date. Johurmull Daga and Company sold the shares pursuant
to the authority given to them by the Sub-Committee of the Exchange. The
transaction resulted in a loss of Rs. 438/10/-. The Sub-Committee directed
Sanyal to pay the amount due by him, but he failed to carry out that direction.
On January 7, 1942 the complaint of Johurmull
Daga & Company was referred to the Full Committee of the Exchange. Sanyal
failed to pay the amount directed to be paid by him and he was by resolution
dated February 19, 1942 declared a defaulter. On September 1, 1942, at a
meeting at which Sanyal was present, the Full Committee resolved that the share
standing in his name be forfeited to the Exchange with effect from September 1,
1942 and that Sanyal be expelled from the membership of the Exchange.
436Sup.Cl/71 48 6 Sanyal then instituted an action in the High Court of
Calcutta on its original side claiming a declaration that the articles of the
Exchange providing for "forfeiture of a fully paid up share were ultra
vires and illegal" and that "particularly Arts. 21, 22. and 24 were
invalid"; that the share held by him had not been "properly
forfeited" by the Exchange and that forfeiture of the share was
"irregular, void and inoperative and was not binding upon him" He
also claimed an order that he be restored to the membership of the Exchange and
that the share register be rectified accordingly. In the alternative Sanyal
claimed a decree for Rs. 55,0001being the value of the share, or in any event
to the surplus of the sale proceeds after "liquidating the debts due by
him to the Exchange." The suit was resisted by the Exchange. The Trial
Court dismissed the suit. In appeal under the Letters Patent the decree was
confirmed.
With special leave Sanyal has appealed to
this Court in forma pauperis.
The relevant Articles of Association of the
Exchange are these Art. 21-"The Committee shall have power to expel or
suspend any member or if being firm any member or authorised assistant of the
firm in any of the events following (6) If the member or if being a firm any
member or authorised assistant of the firm refuses to abide by the decision of
the Committee in any matter which under these articles or under the Bye-laws
for the time being in force is made the subject of a reference to the
Committee.
Provided always that in every case arising
under the provisions of sub,-section (5), (6), (7) and (8) of this Article no
resolution for the expulsion of a member or if being a firm any member or
authorised assistant of the firm shall be valid unless passed by a majority
consisting of not less than two-thirds of the members of the Committee at a
meeting specially convened for the purpose and at which meeting not less than
two thirds of the members of the committee at a meeting specially convened for
the purpose and at which meeting not less than seven members of the Committee
shah be present." 4 8 7 Art. 22-"Any member who has been declared a
defaulter by reason of his failure to fulfill any engagement between himself
and any other member or members and who fails to fulfill such engagements
within six months from the date upon which he has been so declared a defaulter
shall at the expiration of such period of six calendar months automatically
cease to be a member." Art. 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
hereof or upon any member being adjudicated insolvent the share held by such
member shall ipso facto be forfeited." Art. 27-"Any share so
forfeited shall be deemed to be the property of the Association, 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." Art. 28-"Any member
whose share has been so forfeited shall notwithstanding be liable to pay and
shall forthwith pay to the Association all moneys owing by the member to the
Association at the time of the forfeiture together with interest thereon, from
the time of forfeiture until payment at 12 percent per annum and the committee
may enforce the payment thereof, without any deduction or allowance for the
value of the share at the time of forfeiture." Art. 29-"The forfeiture
of a share shall involve the extinction of all interest in and also of all
claims and demands against the Association in respect of the share, and all
other rights incidental to the share. except only such of those rights as by
these Articles expressly saved." Art. 31-"The Association shall have
a first and paramount lien upon the share registered in the name of each member
and upon the proceeds of sale thereof for his debts, liabilities and
engagements.
488 Art. 32-"For the purpose of
enforcing such hen the Association may sell the share subject thereto in such
manner as, they think fit.
Art. 33-"The nett proceeds of any such
sale shall be applied in or towards satisfaction of the debts, liabilities, or
engagements, residue (if any) paid to such member, his executors,
administrators, committee, curator or other representatives." The relevant
bye-laws of the exchange are:
"Settlement of Disputes.-All disputes,
complaints and claims between by and against members shall, on the application
of either party, be decided by the Committee or by a Standing or Special
Sub-Committee appointed by the Committee for the purpose. In the event of the
matter being decided by the Committee the decision shall be, final and binding
upon all members concerned but any member aggrieved with the decision of the
Standing or Special Sub-Committee may, within seven days of such decision being
given, appeal to the Committee whose decision shall be final. In the event of
any member or members refusing, neglecting or failing to observe, carry out or
comply with any decision of the Committee,-or if no appeal is preferred, with
the decision of the Standing or Special Sub-Committee, such member or members
so in default shall be dealt with by the Committee under the rules, regulations
and/or by laws of the Association for the time being in force." Bye-law
13-"Defaulters.--Any member who shall fail to pay any subscription or
other moneys due by him to the Association on due date, or who shall fail-to fulfill
any engagement between himself and another member or members may be declared a
'defaulter' by the Committee and on such declaration his name shall be posted
as a 'defaulter' on the notice board of the Association and so long as the name
remains so posted he shall not be at liberty to exercise any of the privileges
of membership." Under the scheme of the Articles of Association of the Exchange,
the Committee is authorised to expel or suspend a member on the ground, inter
alia, that he refuses to abide by the decision of the Committee in any matter
which is under the Articles or under the Bye-laws referred to the Committee. A
person declared a "defaulter" because he fails to fulfill any
engagement between himself and any other member or members within six months
from 489 the date on which he has been declared a defaulter, ceases to be a
member of the Exchange and his share also stands forfeited. The share so
forfeited is deemed to be the property of the Exchange. But the Committee must
sell, re allot or otherwise dispose of the share for satisfaction of the debts
which may then be due and owing by the defaulter to the Exchange or to any of
its members arising out of transactions or dealings in stocks and shares.
Forfeiture of a share involves extinction of all interest in and also of all claims
and demands against the Exchange in respect of the share and all other rights
incidental to the share, but not the liability of the. erstwhile member to
discharge his liabilities to the Exchange. The Exchange has a first lien upon
the share of a member and upon the proceeds of sale thereof for his debts and
liabilities, and in enforcement of the lien, the Exchange may sell the share.
The net proceeds of the share subject to the lien it sold will be applied in or
towards satisfaction of the debts, liabilities or engagements of the
shareholder and the residue, if any, paid to such member, his executors,
administrators, committee, curator or other representatives.
In this appeal counsel for Sanyal contended,
that under the Indian Companies Act, 1913, a fully paid up share cannot be
forfeited for failure to carry out any engagement by the shareholder other than
an engagement to pay a call made by the Company to pay unpaid capital;
that the procedure followed by the Sub Committee
of the Exchange was irregular in that Sanyal had no notice of the meeting of
the Committee to declare him a defaulter;
that the Committee had no authority under the
Articles of Association to direct sale of the share; and that in any event
Sanyal was entitled to the balance remaining on hand with the Exchange after
satisfying his debts, liabilities and engagements under the Articles of
Association.
For failure to abide by the decision of the
Committee in respect of his liability to pay the amount of loss due to
Johurmull Daga & Company Sanyal was declared a defaulter, and when he
continued to remain a defaulter for six months he was by resolution of the Full
Committee expelled from the membership of the Exchange. The Full Committee also
resolved to forfeit his share.. The Exchange thereafter disposed of the share
for Rs. 55,000/-. The argument raised by counsel for Sanyal that a member of
the Exchange forfeits his share only if a resolution expelling him and 490 a
resolution declaring him a defaulter are passed is without substance. The
conductive "and" between the first two clauses of Art. 24 is used to
indicate an Alternative, and does not make the two conditions cumulative. We
agree with the observations of Panckridge, J., in Surajmall Mohta v. Ballabhdas
Mohta(1) that Art. 24 "is carelessly drawn, because, on its literal
application, before his share could be forfeited, a member would both have to
be expelled by the Committee under article 21 and automatically cease to be a
member under article 22--Clearly this cannot be the intention of the article
and it is obvious that by a slip, 'and' has been substituted for
"or"." In any event the Full Committee passed on February 19,
1942 ,a resolution declaring the appellant a defaulter. The appellant did not
carry out his engagements for a period of six months there, after. By
resolution dated September 1, 1942 at a meeting of the Full Committee the
appellant was expelled from the membership of the Exchange and it was resolved
that his share shall stand forfeited.
There is no provision in the Indian Companies
Act, 1913, which restricts the exercise of the tight of the Exchange to forfeit
:share-,, for non-payment of a call only. The Indian Companies Act, 1913, made
no provision relating to forfeiture of shares. By s. 17(2) of the Act, a company
could adopt the regulations contained in Table A in the First Schedule but the
Company was not bound to do so.
Regulations 24 to 30 of Table A dealt with
the power and the procedure relating to forfeiture of shares. Regulation 24, it
is true, provided for exercise of the power to forfeit a share when there was
default in paying calls, but no inference follows there from that the share of
a member could be forfeited only for non-payment of a call made in respect of
the share which was not fully paid up.
In The Calcutta Stock Exchange Association
Ltd. v. S. N. Nundy & Co.(2), Harries C.J. after examining the provisions
of the Companies Act 1913 reviewed the decisions of the Courts in England and
of the High Court of Calcutta and observed that the Indian Companies Act as
well as the English Companies Act contemplate, recognize and sanction
forfeiture generally and not for non-payment of calls only;
that a company may by its Articles lawfully
provide for grounds of forfeiture other than nonpayment of call, subject to the
qualification that the Articles relating to forfeiture do not offend against
the general law of the land and in particular the Companies Act, and public
policy; and that the forfeiture contemplated does not entail or effect a
reduction in capital or involve or amount to purchase by the Company of its (1)
I. L R. 63 Cal. 531.
(2) I. L. R. [1950] 1 cal. 235.
491 own shares nor does it amount to
trafficking in its own shares. The Court in that case was concerned to
determine the true effect of the Articles of the Exchange which fall to be
interpreted in this case.
This Court in Sri Gopal Jalan & Company
v. Calcutta Stock Exchange Association Ltd.(1) also considered whether
forfeiture of shares resulted in reduction of capital contrary to the provisions
of the Companies Act where power of forfeiture was given by the Articles for
failure to carry out an undertaking or satisfy an obligation of the member to
forfeit the shares. The Court in that case was interpreting the Articles which
fall to be interpreted in this appeal.
The Court held that the Exchange was not
liable to file any return of the forfeited shares under S. 75(i) of the Indian Companies
Act, 1956 when the same were re-issued. The Court observed that when a share is
forfeited and re-issued, there is no allotment, in the sense of appropriation
of shares out of the authorised and unappropriated capital, and approved the
observations, of Harries, C.J. in S. N. Nundy's case(2) 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". In the view of this Court, the shares so forfeited may not be
"allotted' in the sense in which that word is understood in the Companies
Act. The Court also pointed out that re-issue of forfeited shares is not
allotment of the shares but only a sale, for, if it were not so the forfeiture
even for non-payment of call would be invalid as involving an illegal reduction
of capital.
Article 27 of the Exchange it may be recalled
is in terms mandatory. The share forfeited to the Exchange must be re allotted
or otherwise disposed of : it cannot be retained by the Exchange. The share
after forfeiture in the hands of the Company is subject to an obligation to
dispose it of.
On that account there is no reduction of
capital by mere forfeiture.
Mr. Datar appearing for the appellant however
contended that in Sri Gopal Jalan & Company's case(1) the parties argued
the case on the footing that Articles of Association of the Exchange were not
invalid, whereas in the present case the validity of the Articles is
challenged. But the Court in citing with approval the observations of Harries
C.J. in S. N. Nundy's case(2) did in effect pronounce upon the validity of the
Articles.
A forfeited share is, therefore, merely a
share available to the Company for sale and remains vested in the Company for
that purpose only. By forfeiting a share pursuant to the authority of the (1)
[1964] 3,S. C. R. 698.
(2) I. L. R. [1950] 1 Cal. 235.
492 Articles of Association, no reduction of
capital is achieved. We are unable to agree with counsel for Sanyal that
forfeiture of shares is permissible only in cases expressly contemplated by
Table A Model Articles i.e. for non-payment of calls in respect of a share
which is not fully paid up.
Subject to the provisions of the Companies
Act the Company and the members are bound by the provisions contained in the
Articles of Association. The Articles regulate the internal management of the
Company and define the powers of its officers. They also establish a contract
between the Company and the members and between the members inter se. The
contract governs the ordinary rights and obligations incidental to membership
in the Company. In the absence of any provisions contained in the Indian Companies
Act which prohibit a Company from forfeiting a share for failure on the part of
the member to carry out an undertaking or an engagement the Articles of a
Company which provide that in certain events membership rights of the
shareholder including his right to the share will be forfeited are binding. The
Articles of Association of the Exchange expressly provide that in the event of the
member failing to carry out the engagement and in the conditions specified
therein his share shall stand forfeited. Articles 22, 24, 26, 27 & 29 of
the Exchange relating to forfeiture of shares in certain events are therefore
valid.
There is in our judgment nothing in the
procedure followed by the Sub-Committee and the Full Committee which rendered
the forfeiture of Sanyal's share illegal. It is not in dispute that Sanyal
incurred liability in favour of one of the members of the Exchange to pay Rs.
438-10-0 in the transaction relating to the sale of Indian Iron & Steel
Company's shares and he failed to discharge that liability.
He continued to remain in default for six
months even after the resolution of the Full Committee, and on that account he
ceased to be a member and his share was forfeited. The High Court has found
that the copies of the letters dated 9th, 10th, 16th, 17th and 20th December,
1941, and of 8th January, 11th & 19th February, 1942, were sent to Sanyal
and the usual notices relating to the complaints placed before the
Sub-Committee or the Full Committee were served upon Sanyal, that such notices
were posted on the notice board of the Exchange that the appellant had
opportunities at all stages of the proceedings to come before the Exchange and
refute the charges made against him and that at no stage of the proceeding
until September 1, 1942, did Sanyal appear before the Sub-Committee or the Full
Committee. The High Court was of the view that the order had not been made
against Sanyal contrary to the rules of natural justice. It is true that
Johurmull Daga complained about thedefault committed by Sanyal on December 9,
1941 and the meeting of the Sub-Committee was held 493 on December 10, 1941.
Granting that the letter of the SubCommittee enclosing a copy of the complaint
dated December 9, 1941, sent by post to Sanyal may not have reached him because
he had left Calcutta, he had still ample notice of the proceeding of the
SubCommittee because intimation was given to him by the notice posted on the
board of the Exchange. Sanyal raised no contention at any stage before the
Sub-Committee or before the Full Committee that he had not received the notices
of the meetings dated December 10, 1941, December 17, 1941, January 7, 1942 of
the SubCommittee and of the meeting dated February 19, 1942 of the Full
Committee. Regularity of the proceedings of the Committees at the various
meetings is not challenged before us.
We are unable to agree with the contention
raised by counsel for Sanyal that the rules of natural justice were not
complied with when the Sub-Committee and the Full Committee passed the impugned
resolutions against Sanyal.
There is no substance in the plea that the
Committee had no jurisdiction to order sale of the share forfeited. Article 27
declares that the forfeited share is the property of the Exchange and that the
Committee of the Exchange shall sell reallot or otherwise dispose of the share,
for satisfaction of all debts due by the member to the Association or to its
members out of transactions in shares and stocks. Under its Articles the
Exchange has, authority to sell the share and to appropriate the sale proceeds
towards satisfaction of the debts, liabilities or engagements" But we are
unable to agree with the view taken by the High Court that the balance of the
amount remaining due after satisfying the liabilities of Sanyal remained the
property of the Exchange and that Sanyal had no right thereto. Under the
stipulations contained in Arts. 21, 22, 24, the share of the defaulter or
expelled member stands forfeited for failure to fulfill his obligation. The
share of' Sanyal by express resolution was forfeited. After applying the,
amount realised on sale of the share towards satisfaction of the debts,
liabilities and engagements of Sanyal to the Exchange and its members, the
balance remaining in the hands of the Exchange had to be held for and on
be-half of the appellant. That is expressly provided in Art. 33. The expression
used in Art. 29 "The forfeiture shall involve the extinction of all
interest" is subject to those rights as by the Articles are saved, and
Art. 33 saves to the defaulting shareholder whose share is forfeited the right
to the balance remaining with, the Exchange. Even assuming that Articles 24
& 31 reserve to the Exchange two distinct powers-the power to forfeit and
the power to exercise a lien, and that Art. 33 only applies to sale in
enforcement of a lien, and not to a sale under Art. 27, we are of the view that
the balance on hand after satisfying the liability of the defaulter must still
be returned to the 494 defaulting shareholder. The power to forfeit does not
imply authority to appropriate the balance, remaining in hand after satisfying
the liabilities and obligations of the defaulter to the Exchange and its members.
Any such implication would be contrary to the intendment of s. 74 of the
Contract Act.
The power of the Exchange to forfeit the
shares arises out of the Articles and its source is in contract. Forfeiture of
share is in the nature of imposition of a penalty.
Section 74 of the Indian ,Contract Act
provides :
"When a contract has been broken, if a
sum is named in the contract as the amount to be paid in case of such breach,
or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is
proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding, the amount so named or, as
the case may be, the penalty stipulated for.
In Fateh Chand v. Balkishan Das(1) this Court
in dealing with a case in which a claim for damages for breach of contract to
sell :a lien of immovable property arose, pronounced that the expression
"'the contract contains any other stipulation by way of penalty"
comprehensively applies to every covenant involving a penalty whether it is for
payment on breach of contract of money, or delivery of property in future, or
for forfeiture of right to money or other property already delivered. Duty not
to enforce the penalty clause but only to award reasonable compensation is
statutorily imposed upon courts by s. 74 of the Indian Contract Act. In all
cases, therefore, where there is a stipulation in the nature of penalty for
forfeiture of an amount deposited pursuant to the terms of a contract which
expressly provides for forfeiture the Court has jurisdiction to award such sum
only as it considers reasonable, but not exceeding the amount specified in the
contract as liable to forfeiture. The same principles, in our judgment, would
apply in the ,case in which there is a stipulation in the contract by way of a
penalty, and the damages awarded to the party complaining of the breach will
not in any case exceed the loss suffered by the complainant party. It was
observed at p. 526 in Fateh Chand's case(,) :
"The section (s. 74) is clearly an
attempt to eliminate the somewhat elaborate refinements made under the English
common law in distinguishing between stipulations providing for payment of
liquidated damages and (1) [1964] IS. C.R. 515.
495 stipulatings in the nature of penalty.
Under the common law a genuine pre-estimate of damages by mutual agreement is
regarded as a stipulation naming liquidated damages and binding between the
parties : a stipulation in a contract in terrorem is a penalty and the Court
refuses to enforce it, awarding to the aggrieved party only reasonable
compensation.
The Indian Legislature has sought to cut
across the web of rules and presumptions under the English common law, by enacting
a uniform principle applicable to all stipulations naming amounts to be paid in
case of breach, and stipulations by way of penalty." The Court also
observed at p. 530 "Section 74 declares the law as to liability upon
breach of contract where compensation is by agreement of the parties
predetermined, or where there is a stipulation by way of penalty. But the
application of the enactment is not restricted to cases where the aggrieved
party claims relief as a plaintiff. The section does not confer a special
benefit upon any party; it merely declares the law that notwithstanding any
term in the contract predetermining damages or providing for forfeiture of any
property by way of penalty, the Court will award to the party aggrieved only
reasonable compensation not exceeding the amount named or penalty
stipulated." Granting that Art. 33 deals with those cases in which lien
alone is, enforced and not in cases where forfeiture is levied, and the
obligation of the defaulting shareholder is determined by Art. 29, in our
judgment, on the principle underlying S. 74 of the Contract Act the Exchange
had no right to hold out of the sale proceeds of the share any amount in excess
of the amount due to it or to its members.
The Exchange may not purchase its own shares.
If it does so, it amounts to reduction of capital. The legal theory of
forfeiture is that a share forfeited is only taken over by the Company with the
object of disposing it of to satisfy its claim to enforce which the share was
forfeited and all other obligations arising against him out of his membership.
The Company is given this right to recover
the loss suffered by it by reason of the breach of contract committed by the
shareholder. If the Company is permitted to retain the balance of the amount
after satisfying the debts, liabilities and engagements of the shareholder, the
transaction would not be different from one purchasing the share of the
defaulting shareholder for a value equal to the amount of his obligations. That
would be plainly illegal. We are therefore unable to agree with the 496 High
Court that the Exchange was entitled to retain the balance after satisfying the
debts, liabilities and engagements of the appellant to the other members or to
the Exchange.
The decree passed by the High Court is set
aside and the case remanded to the High Court for determining the extent of the
liabilities of the appellant to the Exchange not only in respect of the
transactions with Johurmull Daga but in respect of all other outstanding
liabilities of the appellant to other members of the Exchange and to the
Exchange which are enforceable under the Articles. The appellant is entitled to
receive from the Exchange the balance remaining due after deducting the
aggregate amount or value of the obligations. He will be entitled to interest
on the balance at the rate of 6% per annum from the date of the institution of
the suit. Parties will bear their own costs throughout.
This appeal was filed in forma pauperis. The
'appellant will pay the court fee payable on the memorandum of appeal if he had
not been permitted to appeal in forma pauperis.
V.P.S. Appeal allowed and case remanded.
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