9911796707
TMI Blog1978 (4) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... abad, hereinafter referred to as "the company", was a private limited company carrying on chit fund business and having its registered office at Hyderabad with branches at various places in Maharashtra, Karnataka and Andhra Pradesh. The board of directors of the said company at its meeting held on September 25, 1974, adopted a resolution to call for a meeting of the creditors of the company to be held on July 1, 1974, for the purpose of adopting a resolution for taking the company into creditors' voluntary winding-up. At the extraordinary general body meeting of the said company held on July 1, 1974, the board of directors unanimously passed a special resolution that the company should be taken into creditors' voluntary winding-up. The creditors of the company also held a meeting on July 1, 1974, and unanimously passed a resolution directing the company to be wound up voluntarily. The petitioner was appointed as the voluntary liquidator of the company. It is the case of the voluntary liquidator that the company which had a branch at Warangal in the State of Andhra Pradesh, carried on chit fund business and that the 1st respondent herein is a member of group No. M.C.I., Chit Fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and conduct the auctions regularly for the full period of the chit, i.e. , forty months. The company was thus in the position of a trustee and was liable to render the above service in consideration of the commission reserved to it. They admit that the 1st respondent was the successful prize bidder at the auction held on July 19, 1971, and that he having offered a bid of Rs. 2,200 was actually paid Rs. 2,550 after deduction of the commission due to the company and the discount offered by him. But they deny having committed default in the payment of any subsequent instalments. They aver that the company suddenly closed its Warangal office without notice to any of the subscribers after holding the auction in April, 1972. It collected the 24th instalment from all its subscribers but failed to conduct any auction thereafter. The company thus committed a breach of the terms of the chit fund agreement which constitutes a branch of fundamental stipulation of the contract between the company and its subscribers resulting in the frustration of the contract. The respondent Nos. 1 and 3 contend that the undertaking to pay future instalments is inextricably linked up with the scheme of chit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice the liability of the prized subscribers to pay the future instalments, can be enforced". In Company Application No. 71/76 the same contentions as are raised in this application, viz. , that the liability of the prized bidder is that of a debtor and creditor, and he does not come within the category of a "contributory liable to contribute to the assets of the company in liquidation" and that the claim is barred by limitation, were raised and were considered by our learned brother, Sambasiva Rao J. He was of the view that the subscriber of a chit is a "contributory" within the meaning section 428 of the Companies Act. The liability of the subscriber is the liability of a "contributory" and it is payable only when the calls are made on him for enforcing the liability, He also held that the amount advanced to successful prize bidder is a debt due from him at the time when his liability commenced but is payable at the time specified in the calls made on him for enforcing the liability. Hence, the application filed within three years of the notice to contribute is within time. However, the correctness of the said view was once again canvassed by the petitioner herein before our l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remaining period of the chit. Thus, every subscriber was given an opportunity to become the successful prize bidder once and receive the amount, and correspondingly every subscriber was given the benefit of the discount earned by the chit fund by collecting from him a lesser amount than Rs. 125. While a subscriber who had not chosen to bid for the prize amount during the period of that chit had the option to stop payment of the chit amount at his discretion, the subscriber who had become the successful "prize bidder" was required to subscribe for the chit for the entire period and thus repay the prize amount for which purpose a promissory note and two surety bonds were taken from him. The successful prize bidder is a subscriber like any other subscriber ; only his liability to subscribe is irrevocable. The successful prize bidder undertakes the liability to repay the said amount on demand, by executing a promissory note, and furnishing two guarantors and a further security bond. The promissory note executed by the first respondent herein promising to repay the sum of Rs. 5,000 in cash by way of monthly subscription of Rs. 125 p.m. for 40 months to chit No. 16 is marked Ex. A-4 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the surety bonds are taken from the prize bidder by collateral security. A Bench of the Madras High Court in P.N. Raghavan v. S. Arumugham, AIR 1935 Mad. 385, held (head note): "A chit fund transaction is different from a loan transaction. It is not a case of borrowing. At the auction the person bidding the highest discount is regarded as the purchaser of the subject of the auction, i.e ., a present sum of money. The contract is one of sale, the auction purchaser purchasing the subject-matter of the chit immediately by offering, (1) the highest discount, and (2) a bond for the future payments of instalments. These two things together constitute the consideration for the purchaser." The same view was taken by our learned brother Sambasiva Rao J. (as he then was), in Company Application No. 108/73. None the less, though the transaction is one of sale, what is purchased is the amount of Rs. 5,000 offered as the prize amount by deducting the amount of discount offered by the subscriber. The bond that is given is a bond to pay the future instalments which are stipulated under the chit of which he is the subscriber. While the other subscribers have option to pay or not to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the promissory note cannot, therefore, be considered in isolation and divorced from the chit fund scheme which the company had undertaken to execute for the full period of 40 months. The mutual obligations arising between the company and the successful prize bidders have to be determined treating the entire chit fund scheme, promissory note and the surety bonds as constituting part of a single scheme. The rights and obligations of each of the parties thereto being inter-dependent, in our view, the liability under the promissory note and the guarantee and surety bonds cannot be enforced by the company, and now by the liquidator, without conducting the chit for the full period. In a sense the successful prize bidder is a debtor ; but as discussed above his liability to repay the amount cannot be enforced independently of the liability to conduct the chit for its full period. Points Nos. 1 and 2 are answered accordingly. Point No. 3: The next question and the more important one for the disposal of the present petition is whether a successful prize bidder is a "contributory" within the meaning of the Companies Act. A "contributory" is denned under section 428 of the Act as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o others. Even from out of the profits earned as a result of these several transactions, the company may have to pay dividends to its members. Such dividends not having been retained by the company, do not constitute the assets of the company. The company being a separate legal entity by itself, as distinct from its members, the principal asset, which it can claim and which it cannot shred, is its share capital unless of course the company resolves to reduce its share capital. Once the liability of the company is limited and the shares are not fully paid up, each of the members of the company or shareholders as they are generally termed, would be liable to pay the balance of the unpaid share money when the company makes a call. When these members are called upon to pay the unpaid share capital and the same is paid, that forms the asset of the company. In the event of the company going into liquidation voluntary or under orders of the court, the liquidator is entitled to call upon the members to pay the unpaid share capital. Every member of the company by becoming its member, undertakes only to pay the balance of the amount due in respect of the shares held by him. The only mode of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd received, it is a liability which has to be discharged towards the company irrespective of whether it is in liquidation or it continues to be a going company. The amount which a debtor may repay does not necessarily go towards the assets of the company. It is a liability which has nothing to do with the liquidation proceedings or winding up of a company. It is also significant to note that every "contributory" is declared entitled, under sub-section (3) of section 439, to file a petition for winding up of a company. It could never have been the intention of the Legislature that a debtor or any person liable to pay any amount to the company should also be entitled to file a petition for winding up. Such a person has no interest in the company or its working and cannot have a say in the matter of winding up of the said company. Sub-section (2) of section 440 declares that the court shall not make a winding up order on a petition presented to it for voluntary winding-up unless it is satisfied that the voluntary winding-up or winding up subject to the supervision of the court cannot be continued with due regard to the interest of the creditors or contributories or both. It is signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Co., AIR 1926 All. 101, the question whether a "debtor" of a company could be deemed to be a contributory directly arose for consideration. Mukerjee J., with reference to section 158 of the Indian Companies Act (7 of 1913) which contained a definition of the term "contributory" in words identical to the definition in section 428, held that "a mere debtor of a company in liquidation is not a 'contributory' of the company". The principal reason for coming to this conclusion was stated thus: "A debtor of a company is liable to pay at all times, never mind whether the company is going on or it has gone into liquidation. If that be so, it cannot be said that the debtors are liable to contribute to the assets of the company, in the event of its being wound up." It is well known that the Indian Companies Act is based on the Companies Act of England. In England the term "contributory" was never understood as including a mere debtor. In Halsbury's Laws of England, 4th Edn., Vol. 7, p. 1212, it is stated thus : "Since every member of the company is primarily liable to contribute, subject to the proviso limiting the amount which he can be called upon to pay, a holder of fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay moneys, which moneys, when paid, will be part of the assets of the company, and in that sense he is liable to contribute to the assets, but that does not make him a contributory within the meaning of the Act. Again, a person who has taken shares in the name of a trustee is, as between him and his own trustee, the person liable to contribute, but that does not make him a contributory as between him and the company. The company may get at him, as it has in several instances, through and in the name of the trustees. But still the equitable liability is to the trustee only, and there is no privity or direct right of any kind as between the company and the ceslui que trust. If an officer of the company has misappropriated assets, he may be made to refund them to the liquidator as part of the assets, but that does not make him a contributory" As held by the Supreme Court in Howrah Trading Co. v. CIT [1959] 29 Comp. Cas. 282, 287; 36 ITR 215, 218, 219; AIR 1959 SC 775: "A glance at the scheme of the Indian Companies Act, 1913 (as also of the Companies Act of 1956) shows that the words 'member', 'shareholder' and 'holder of a share' have been used inter-changeably in that Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability incurred by them by becoming the successful prize bidders, and which they are bound to discharge irrespective of whether the company is a going concern or has gone into liquidation, is not a "contribution" to the assets of the company by the members of the company, but the discharge of their own liability as debtors or otherwise. Therefore, they are not "contributories" within the meaning of section 428 of the Companies Act. The liquidator, therefore, is not entitled to include them in the list of contributories or call upon them to pay the amount by way of a petition under section 518(1)( b ) read with section 470 and section 519 read with sections 477 and 478 of the Act. However, they are certainly entitled to recover the amounts due from the successful prize bidder as stated above for they have undertaken to repay the amount as per the terms and conditions stipulated therein. Whether there has been a breach of the terms and conditions subject to which they undertook to repay the amount or not, is a matter with which we are not concerned presently in these petitions. We are also not concerned with the question whether these amounts could be otherwise recovered and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount due from a "contributory". As already held by us a successful prize bidder of a chit fund cannot be deemed to be a "contributory" within the meaning of section 428 of the Companies Act. Consequently the date on which the call was made by the liquidator is not the date on which the right to file the petition arose or the time began to run. Further, the present call is purported to be pursuant to resolution for voluntary winding up ; it is not a case of winding up by court at the instance of the creditors. Section 458A of the Act makes a special provision in the matter of exclusion of time in computing the period of limitation only in the case of winding up by the court in the following words : "Notwithstanding anything in the Indian Limitation Act, 1908 (9 of 1908), or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application in the name and on behalf of a company which is being wound up by the court, the period from the date of commencement of the winding up the company to the date on which the winding up order is made (both inclusive) and a period of one year immediately following the date of the winding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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