1937 (12) TMI 6 - HC - Companies Law

Summary

Issues: Application under Section 183(5) of the Companies Act for removal from list of contributories - Repudiation of liability based on alleged understanding of share purchase and fraudulent prospectus.

Analysis:
The judgment pertains to an application filed by an individual seeking the removal of their name from the list of contributories under Section 183(5) of the Companies Act. The applicant had purchased a deferred share of a company, which was later converted into four ordinary shares as part of a reconstruction scheme approved by the court. Subsequently, the company went into compulsory winding up, and the applicant was notified to show cause for the due amount on the shares. The applicant contested their liability on two grounds: first, alleging that the purchase was based on an understanding that proceeds would be invested in newspapers, and second, claiming the purchase agreement was void due to a fraudulent prospectus issued by the company.

Regarding the first ground, the court found no merit in the applicant's argument. The prospectus clearly outlined that shareholders subscribing to deferred shares were entitled to certain benefits related to newspapers, with deductions from dividends for subscriptions. The company had indeed supplied newspapers to shareholders as per the prospectus terms from 1924 to 1928, refuting the applicant's claim of non-supply as a basis for repudiating liability.

On the second ground of the fraudulent prospectus, the court acknowledged the principle that contracts induced by fraud are voidable at the option of the affected party within a reasonable time. However, the court emphasized that such repudiation must occur before the commencement of winding-up proceedings to protect the rights of third parties and prevent undue disruption to the company's operations. Citing legal precedents, the court highlighted that delaying repudiation until inclusion in the list of contributories is not permissible, as it implies waiver of the right to avoid the contract.

In conclusion, the court dismissed the applicant's claims, affirming their inclusion in the list of contributories. The judgment underscored the importance of timely action in repudiating contracts induced by fraud and upheld the rights of third parties in company matters. The application was dismissed with costs assessed at Rs. 16.