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Judgment
Satyanarayana Raju J.
This petition, under Rule 9 of the Companies (Court) Rules, 1959, is for a declaration that a transaction of sale of shares is not affected by S. 79 of the Indian Companies Act.
The Biochemical and Synthetic Products, Limited. Is the petitioner. The 1st respondent is the Registrar of Companies, Andhra Pradesh, and the 2nd respondent is the Under Secretary to the Government of India, Ministry of Industries and Commerce, Department of Company Law Administration.
The material facts which led up to this petition may be briefly stated. The Biochemical and Synthetic Products, Limited (hereinafter referred to as ''the company'') was registered as a public limited company under the provisions of the Companies Act, on May 27, 1943. The Office of the Company is situated at Sanatnagar, Hyderabad. The objects of the Company as set out in its Memorandum of Association, are to manufacture and deal in all kinds of harmones, ferments, vitamins, synthetic chemicals, biological products and other drugs. The authorised capital of the Company is Rs. 15,00,000/- (O. S.) divided into 1,50,000 ordinary shares of Rs.10/- (O.S.) each. In or about 1943, all the shares were issued for subscription at par, and all, except 42,413 shares, were fully paid up. With regard to the 42,413 shares, a sum of Rs.8/- (O.S.) was paid up, while the balance of Rs. 2/- (O. S.) remained unpaid, per share. After due notice to the defaulting share holders, the 42,413 shares were forfeited to the Company with effect from june 27, 1955. The present Managing Agents of the Company are tire Hyderabad Syndicate Private Limited.
At a meeting of the Board of Directors held on December 4, 1956, the following resolution was passed:
Taking into consideration the capital structure of the company and the existing losses in the balance sheet, the Board unanimously resolves to reissue and allot the 42413 forfeited shares to the Managing Agents, viz. The Hyderabad Syndicate (Private) Ltd. or to their assigns or/and nominees at O. S. Rs. 1-4-0 per share as fully paid and out of the total price of O.S. No 53016-4-0 eqal to I. G. Rs. 45,442-8-0 one half be collected in cash and the other half adjusted against the credit balance standing in the name of Messrs. Hyderabad Syndicate Private limited.
It is said that pursuant to the above resolution, the Managing Agents paid to the Company half the price in cash and the other half was adjusted against the amount due to them by the Company. On September 30, 1957, an extraordinary general body meeting of the Company approved the sale of the forfeited shares to the Managing Agents, as per the Board''s resolution of December 4, 1956. By their letter, dated December 7, 1957 the Company notified the Registrar of Companies about the completion of the sale transaction.
On September 3, 1958, the 2nd respondent intimated the Company as follows :
With reference to your letter dated the 7th December, 1957 addressed to the Registrar of Companies, Andhra Pradesh, I am directed to state that the reallotment of 42413 forfeited shares at a discount, not having been made in accordance with the provisions of Section 79(2) of the Companies Act, 1956, was void. No dividend can, therefore, be legally paid on these re-allotted shares. The holders of these shares cannot also exercise any voting rights in respect of them.
In the communication, dated February 10, 1959, the Company, through their advocate, endeavoured to persuade the 2nd respondent to hold that the sale of the forfeited shares was not re-allotment or issue within the meaning of S. 79. By his communication, dated March 6, 4959, the second respondent intimated the Company that the Government did not see any reason to change their earlier view that the re-allotment of the forfeited shares contravened the provisions of S. 79(2). Thereupon the petitioner filed this petition for the issue of a direction as mentioned above.
At the outset it may be mentioned that some of the shareholders of the Company intervened at an earlier stage but eventually withdrew their opposition to the petition. From the facts disclosed in their counter-affidavits, it would appear that out of the forfeited shares 11,667 shares were surrendered by the Company. It was averred by one of the shareholders that the Company''s former Managing Agents did not, in fact, own as many as 11,667 shares and it was not known how the Managing Agents could surrender shares of which they were not the owners.
In the reply-affidavit filed on behalf of the petitioner the fact that the Company''s former Managing Agents did not own 11,667 shares was not disputed. It was, however, mentioned that they were unable to say as to bow they surrendered those shares.
It is contended by Mr. Rajaram Iyer, learned Counsel for the petitioner, that the sale of the forfeited shares to the Hyderabad Syndicate Private Limited was not a re-allotment or issue within the meaning of S. 79 of the Companies Act, as all the 1,50,000 shares had been fully issued at par even in 1943 and that it was a sale and disposal of forfeited shares governed by Article 32 of Table A of Schedule I, which was within the powers of the Board of Directors who were entitled to dispose of them on such terms and in such manner as they thought fit, and that the sale is therefore quite in order and valid.
Mr. N. S. Raghavan, the learned Principal Government Pleader, on the other hand, has contended that the transaction amounted to a re-allotment of forfeited shares at a discount, which not having been made in accordance with the provisions of S. 79(2) is void.
The question for determination is whether the sale of 42,413 shares to the Hyderabad Syndicate Private Limited contravenes S. 79 of the Companies Act.
Section 79 runs as follows:
A Company shall not issue shares at a discount except as provided in this section.
A company may issue at a discount shares in the Company of a class already issued, if the following conditions are fulfilled, namely-
i) the issue of the shares at a discount is authorized by a resolution passed by the company in general meeting, and sanctioned by the Court;
ii) the resolution specifies the maximum rate of discount (not exceeding ten per cent, or such higher percentage as the Central Government may permit in any special case) at which the shares are to be issued;
iii) not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business; and
iv) the shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by the court or within such extended time as the court may allow.
Where a company has passed a resolution authorising the issue of shares at a discount, it may apply to the Court for an order sanctioning the issue; and on any such application, the Court, if having regard to all the circumstances of the case, it thinks proper so to do, may make an order sanctioning the issue on such terms end conditions as it thinks fit.
Every prospectus relating to the issue or the shares shall contain particulars of the discount allowed on the issue of the shares or of so much of that discount as has not been written off at the date of the issue of the prospectus.
If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees.
Admittedly, the Company sold 42,413 shares of the face value of Rs. 10/- (O.S.) each, in respect of which Rs. 8/- (O.S.) alone was paid and the balance of Rs. 2/- (O.S.) was due on each share, at Rs. 1-4-0 allowing a discount of annas 12 per share. It is to be observed that the Company purported to reallot those shares as fully paid up shares.
As pointed out by the Earl of Halsbury, L. C. In Randt Gold Mining Co. v. New Balkis Eersteling, Ltd., (1903) 1 KB 461, the amount subscribed, which is to make the share holder a partner in the concern, must be paid and by no expedient nor indirect arrangement can the company evade the obligation of possessing the capital which the legislature has enjoined shall be the capital upon which it is to trade. The limited liability system, which is the corner stone of the Companies Act is, in the words of the Lord Chancellor,
a sort of partnership in which the liability of each member of the partnership was to be limited to an amount ascertained by what has been called the ''face value'' of the share.
When a shareholder does not pay the full money which he has agreed to pay by taking the shares, he ceases to be a member of the company and his shares are forfeited; but nevertheless he remains liable to pay what he has been called upon to pay. The Legislature, no doubt, provides that the shares in the Company, which belonged to the defaulting shareholder, shall be capable of being sold to another person,
but, though the other person is to be relieved from any liability for calls made previously to his becoming a holder of the shares, there is nothing whatever which suggests that he should be relieved from paying the balance still remaining unpaid on the shares.
It is open to the Directors to re-allot the forfeited shares giving credit for the money already received, in which event, the new allotee would be liable only for the unpaid capital in respect of the forfeited shares.
In the present case, the Directors purported to re-allot the forfeited shares as fully paid up shares or payment of a sum of Rs. 1-4-0 per share. The result is that the Company has suffered a loss of Rs. 0-12-0 on each of these shares. It is, therefore, plain enough that the shares were issued at a discount and this was done without the sanction of the Court as required by Sec. 79 of the Companies Act. u/s 79(3) of the Act there is an embargo on the Company reissuing the shares at a discount without obtaining the necessary permission of the Court.
Sri Rajaram Iyer relied upon Article 32 in Table A as validating the transaction. The said Article reads:
A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit.
At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks fit.
As supporting his contention, the learned counsel, for the petitioner has relied upon the case of Morrison v. Trustees, Executors and Securities Insurance Corporation (1898) 79 LT 605. There the facts were as follows--The articles of association of a company provided that the directors might sell, re-allot, or otherwise dispose of forfeited shares in such manner as they thought fit. A number of shares on which at least 3 pounds per share had been paid having been forfeited, the directors entered. Into an agreement for the sale of these shares with 2 pounds 5 shillings credited as paid up, for 30 shillings per share. It was held that the company could deal with the shares as partly paid up to an extent not exceeding the amount which had been paid up on each at the time of forfeiture, and that the transaction did not amount to an issue of shares at a discount. Chitty L.J. observed :
These shares had been forfeited, and under the articles such shares may be sold upon such terms as the directors think fit. Why is not that valid? In this case the shares have had a certain amount already paid up upon them, and ''it is not proposed to sell them'' in such a way that the company will not in the result get the full nominal amount of the shares. This is a sale of the shares credited with so much paid upon them. It is not an issue of shares. It does not come within the principle which forbids the issue of shares at a discount, and the transaction is not contrary to the principle of the Companies Acts. (Italics (here in single quotation marks - Ed.) mine).
The ratio of the decision is that the company could deal with the shares as partly paid up to an extent not exceeding the amount which had been paid up on each at the time of the forfeiture. The decision lays emphasis on the fact that where it is proposed to sell the shares in such a way that the company will in the result get the full amount of the shares, the transaction does not amount to the issue of shares at a discount.
From the facts already narrated, it is clear that the present case does not fall within the scope of the above decision. Here, what was done by the company was to sell the shares in such a way that the Company did not in the result get the full nominal amount of the shares. The principle of the above decision is therefore not applicable to the instant case.
For the above reasons, it must be held that the re-allotment of 42,413 shares not having been made in accordance with the provisions of S. 79 (2) of the Companies Act, is void. On this conclusion, this petition fails and is dismissed with the costs of the respondent.