1970 (9) TMI 61 - SC - Companies Law

Whether 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? Held that - 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 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.

Issues Involved:
1. Forfeiture of fully paid-up shares under the Indian Companies Act, 1913.
2. Validity and interpretation of articles of association of the Calcutta Stock Exchange.
3. Compliance with natural justice in the forfeiture process.
4. Entitlement to the balance of sale proceeds after satisfying liabilities.

Issue-wise Detailed Analysis:

1. Forfeiture of Fully Paid-Up Shares under the Indian Companies Act, 1913:
The appellant contended that under the Indian Companies Act, 1913, a fully paid-up share cannot be forfeited for failure to carry out any engagement other than an engagement to pay a call made by the company to pay unpaid capital. The court found no provision in the Act restricting the exercise of the right to forfeit shares only for non-payment of calls. The Indian Companies Act, 1913, made no provision relating to forfeiture of shares, and a company could adopt regulations contained in Table A but was not bound to do so. The court referenced previous judgments, including Calcutta Stock Exchange Association Ltd. v. S.M. Nandy & Co., where it was held that forfeiture could be for reasons other than non-payment of calls, provided it did not offend public policy or the Companies Act. The court concluded that forfeiture of shares pursuant to the articles of association does not result in a reduction of capital and is valid.

2. Validity and Interpretation of Articles of Association of the Calcutta Stock Exchange:
The appellant challenged the validity of articles 21, 22, 24, 27, and 29 of the exchange's articles of association. The court held that the articles of association regulate the internal management of the company and are binding on the members. The articles provided that a member failing to carry out an engagement would have his share forfeited. The court found these articles valid and binding, as there was no provision in the Indian Companies Act prohibiting such forfeiture. The court also clarified that the conjunctive "and" in article 24 indicated an alternative, not a cumulative condition, for forfeiture.

3. Compliance with Natural Justice in the Forfeiture Process:
The appellant argued that the procedure followed by the sub-committee of the exchange was irregular and that he had no notice of the meeting declaring him a defaulter. The High Court found that notices were sent to the appellant and pasted on the notice board of the exchange. The appellant had opportunities to refute the charges but failed to appear before the committees. The court agreed with the High Court that the procedure followed was in compliance with natural justice and that the appellant had ample notice of the proceedings.

4. Entitlement to the Balance of Sale Proceeds after Satisfying Liabilities:
The appellant contended that he was entitled to the balance remaining after satisfying his debts, liabilities, and engagements. The court disagreed with the High Court's view that the balance remained the property of the exchange. Article 33 of the articles of association expressly provided that the balance should be returned to the defaulting shareholder. The court held that the power to forfeit does not imply the authority to appropriate the balance remaining after satisfying liabilities. The principle underlying section 74 of the Indian Contract Act, which deals with penalties, applied, and the exchange could not retain any amount in excess of the liabilities.

Conclusion:
The Supreme Court set aside the decree of the High Court and remanded the case for determining the extent of the appellant's liabilities to the exchange and its members. The appellant was entitled to receive the balance remaining after deducting his liabilities, with interest at 6% per annum from the date of the suit. The appellant, who filed the appeal in forma pauperis, was directed to pay the court-fee payable on the memorandum of appeal.

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