9911796707
TMI Blog1950 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... limited company, was formed with a large number of objects, the first and most important object being "to manufacture in India or abroad all kinds of sugar by up-to-date and latest scientific methods and machinery, and for this purpose to erect and construct a factory or factories at one or several places in or outside India." It was incorporated on 7th November, 1933, on which date the Memorandum of Association and the Articles of Association were registered with the Registrar of Joint Stock Companies. The prospectus was published on 16th October, 1933, and was registered with the Registrar on 26th February, 1934. On 24th November, 1933, a meeting of the promoters of the company unanimously elected the following persons as first directors: (1) Pandit D. P. Pandey, (2) Pandit P. P. Pandey, (3) Pandit S.K. Pandey, (4) Chaudhri Bhagwati Prasad, (5) Mahant Vishwanath Bharthi, (6) Pandit Ganga Narain Tewari, (7) Thakur Saran Singh, (8) Dr. P. C. Bhattacharjee, (9) Mukut Behari Lal, (10) Pandit Tirath Raj Pandey, (11) Sahu Baldeo Prasad, (12) Abdul Qadir Khan, (13) R. D. Sharma, ex officio, and (14) N. K. Varma. The authorised capital of the Company was fixed at Rs. 20,00,000 divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company. Some of them did not pay even the allotment money and others did not pay the first and second call moneys. Consequently their shares were forfeited through resolutions passed by the directors in three meetings held on 14th June, 1939, 23rd July, 1939, and 16th October, 1939. An order for the winding up of the company was passed on 7th December, 1941. The official liquidator then instituted the suits to recover the balance of the allotment and first and second call moneys. The suits were contested by the opposite parties. The grounds with which we are concerned in these applications were (1) that the original contract for the purchase of the shares was procured by the promoters of the company by fraudulent misrepresentation, (2) that the promises held out to the opposite parties at the time of the purchase were not carried out by the company and consequently the opposite parties were justified in not making further payment, (3) that the resolutions passed by the directors allotting the shares to the opposite parties were invalid because the directors voting for the resolutions had ceased to be directors and (4) that the resolutions forfeiting the shares also were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctly stated and also that it formed a material inducement to the plaintiff to take shares in the company." (See Hallows v. Fernie [1868] 3 Ch. App. 467, at p. 477) . In that case the plaintiff did not allege and prove that he "read the prospectus in a sense which involved an untruth, that it led him into an erroneous belief of the existence of a certain state of facts, and that this belief was a material inducement to him to become a purchaser of shares in the company," and the Lord Chancellor dismissed his suit. To adopt his Lordship's language, "whatever may be the fair meaning of the prospectus, and even if the plaintiff's construction of it is correct, he can only be entitled to succeed secundum allegata et probata" (page 478). The learned Judge has relied mainly upon one misrepresentation in the prospectus. It is the sentence, "the managing agents with their friends, promoters and directors have already promised to subscribe shares worth Rs. 6,00,000", printed in red on the cover of the prospectus. The opposite parties did not specifically plead that it is a misrepresentation and that they were induced by it to purchase the shares. There is no proof, and of course th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the steamers were guaranteed to steam 10 knots and being full rigged as clipper sailing ships were calculated to perform the voyage regularly from F to R in 25 days. Actually no steamships were in possession of the company when the prospectus was issued and it had not even entered into any contract for obtaining them. So it was contended that the statements were misrepresentations of fact, but the contention was overruled. Lord Chelmsford, L.C. held that the prospectus did not announce to the public in clear and unequivocal language that the promoters of the company actually possessed, or had contracted for the possession of six ships of the description mentioned. His Lordship observed at page 475: "There is a material distinction between the employment of words in a prospectus which can bear only one meaning and of those which are equivocal, and which different persons may interpret differently. In the latter case no prudent person would act upon his own construction without some inquiry. In construing a prospectus, the preliminary character of the document must always be taken into consideration. Every one knows that it is intended to usher a company into existence, and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... start its work of producing sugar very soon. These are not representations of fact. Some amount of puffing must be allowed in a prospectus; it must not amount to a misrepresentation of fact. It is stated in Palmer's Company Law, 19th Edition, page 347: "The statement that something will be done is not a statement of an existing fact so much as a contract or promise. It may, however, imply the existence of facts which are non-existent, or it may be material term in the contract." The statements in question do not imply the existence of facts which were really non-existent and there is no evidence that they formed a material term in the contract. The learned Special Judge has taken notice of certain nondisclosures in the prospectus. Under section 93 of the Companies Act a prospectus must state the number of shares fixed by the articles as the qualification of a director, the names and addresses of the vendors of any property purchased or acquired by the company, and the debts of, and parties to, every material contract. The prospectus does not contain this information. But there is no penalty prescribed in the Act for non-compliance with the provisions of section 93. When the non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scinded, the liability of a shareholder to pay their price remains. Apart from the right to rescind the contract of purchase of shares, a shareholder has no right to withhold payment of the price. A shareholder's contract to purchase shares is only voidable, and not void on account of misrepresentation in the prospectus: Oakes v. Turquand [1867] LR 2 HL 325 , In re Scottish Petroleum Co. [1883] 23 Ch. D. 413 , and Tennent v. The City of Glasgow Bank [1879] 4 App. Cas. 615 . This means that the contract is valid till rescinded. But a shareholder has not unlimited time within which to rescind the contract; he must rescind it promptly, that is within reasonable time of his becoming aware of the fraud giving him the right to rescind. In In re Russian Iron Works Co., Kincaid's case [1867] 2 Ch. App. 412, at p. 426, Lord Cairns, L.J., considered delay of three months as fatal to a claim for rescission. The reason, as given in the connected Lawrence's case ( supra ) at page 424, is: "No attempt at repudiation took place for upwards of four months, and during this time Mr. Lawrence must be taken, in my opinion, to have known, not merely that his name was on the register, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders." It is laid dow in Tennent v. City of Glasgow Bank [1879] 4 App. Cas. 615 , that a shareholder of a joint stock company can throw back his shares upon the company at any time so long as it is a going concern. But when a joint stock company becomes insolvent and stops payment, a wholly different state of things arises and the shareholder's right to throw back shares is lost. In the present case, the shares were allotted to the opposite parties in 1934 and they have allowed their names to remain in the register of shareholders. They have taken absolutely no active steps to avoid the contract. They gave no indication of their intention to avoid the contract at any time; the earliest intention that they gave is through their written statements in the suit. It has been found by the learned Civil Judge that the assets of the company were in a very bad state from the very beginning. Sugar industry was a prosperous industry and this company could not start any business for five years. The directors and managing directors were inefficient and guilty of breaches of rules. Managing directors had to be changed repeatedly and a stage arrived when nobody was prepared to beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er which the creditors have a right which attaches upon the shareholders to compel them to contribute to the extent of their shares towards the payment of the debts of the company"; this is what Lord Chelmsford, L.C., said in the same case at page 350. Lord Cranworth, agreeing with the Lord Chancellor, said at page 363 that: "The winding up is but a mode of enforcing payment. It closely resembles a bankruptcy, and a bankruptcy has been called, not improperly, a statutable execution for the benefit of all creditors." Certain dicta of Lord Cairns, L.J., in Smith's case [1867] 2 Ch. App. 604 may suggest that his Lordship did not consider winding up as a bar to granting relief to a shareholder. His Lordship was of the view that if the shareholder went to the Court with promptitude to have the fraud redressed, the fact that the interest of creditors was involved in the winding up did not alter the matter and, "the question must be disposed of as if it were to be disposed of upon the bill at the time when the bill was filed and before any winding up, in which case the plaintiff would be entitled to the relief prayed by the bill." There the shareholder had gone to the court with promp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime; directors Nos. 4 and 12 did not pay any allotment money. The resolution for the first call was passed on 26th November, 1936, and the call money was to be paid within six months, that is by 26th May, 1937. Directors Nos. 4, 5, 8 and 11 to 14 did not pay the first call money at all and director No. 7 did not pay it in time. The resolution for the second call-money was passed on 5th July, 1937; though the prescribed period of time was six months, the resolution allowed a longer period which was illegal. Still directors Nos. 4, 5, 8 and 11 to 14 did not pay the call money at all and directors Nos. 1, 2 and 7 did not pay it within time. Thus all the directors except directors Nos. 10, 13 and 14 ceased to be directors under section 85 of the Companies Act, on 24th January, 1934, and directors Nos. 13 and 14 ceased to be directors on 26th May, 1937. In 1934 only three persons were qualified to act as directors whereas the quorum for a meeting was four. Consequently the resolutions allotting the shares and making calls for the money were passed in meetings in which there was no quorum. The Official Liquidator relied upon Article 181 which is couched in the same words as section 86 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointment as directors; the only defect is that they continued to act as directors even after their disqualification. There is no suggestion that they acted dishonestly in passing the resolutions of allotment and making the calls. It seems that they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification having ever been brought to their minds. The language of Article 181 fully protects their actions. Had it been a case of only one or two directors continuing to act as such despite the disqualification, I would have had no hesitation in forming the conclusion that I have. Here we have to deal with a large number of directors acting as such despite the disqualification. But there is no other circumstance from which it can be said that they were conscious of the fact of their disqualification and yet continued to act as directors. So I come to the conclusion, though not without some hesitation, that the acts of allotting the shares to the opposite parties and making the first and second calls were valid. For the same reason the act of forfeiting the opposite parties' shares also must be held to be valid. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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