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HIGH COURT OF CALCUTTA
LAHIRI, BACHAWAT, JJ.
Sri Gopal Jalan And Co. - Appellant
Versus
Calcutta Stock Ex Change Association Ltd - Respondent
Decided on : Aug 18, 1959
INDIAN COMPANIES ACT, 1956 - SECTION 75 - RETURN OF ALLOTMENT - FORFEITED SHARES - RE-ISSUE - WHETHER ALLOTMENT OF SHARES - INTERPRETATION OF SECTION 75.
Fact of the Case:
The Calcutta Stock Exchange Association Limited, a company limited by shares, forfeited 70 shares out of its issued capital of 277 fully paid up ordinary shares of Rs. 1,000/- each. The applicant, a shareholder of the Association, alleged that the Association was duty-bound to file a return of allotment in respect of the re-issue of these forfeited shares. The Association contended that the forfeiture operated as an extinguishment of the forfeited shares and that the re-issue of shares was an issue of new shares, not subject to the requirement of filing a return of allotment under section 75 of the Indian Companies Act, 1956.
Finding of the Court:
The court held that the forfeiture of shares did not extinguish the shares but that they continued to exist as units of the paid-up and issued share capital. The court further held that the re-allotment and re-issue of forfeited shares did not amount to an allotment of shares within the meaning of sub-section (1) of section 75 of the Indian Companies Act, 1956, and that the Association was not under an obligation to file a return of allotment in respect of the re-issue of the forfeited shares.
Issues: 1. Whether the forfeiture of shares extinguished the shares or whether they continued to exist as units of the paid-up and issued share capital? 2. Whether the re-allotment and re-issue of forfeited shares amounted to an allotment of shares within the meaning of sub-section (1) of section 75 of the Indian Companies Act, 1956?
Ratio Decidendi: 1. The court held that the forfeiture of shares did not extinguish the shares but that they continued to exist as units of the paid-up and issued share capital, relying on the following reasons: a) The statutory form of the annual return under section 159 of the Indian Companies Act, 1956, set out in Part II of Schedule V of the Act, shows that the forfeited shares and the amount paid thereon continue to be part of the issued capital. b) The statutory form of the balance-sheet set out in Part I of Schedule VI, read with section 211 of the Act, shows the amount paid up on the forfeited shares as part of the subscribed and paid up share capital of the company. c) The forfeited share also continues to exist as a unit of movable property though as long as it remains with the company it cannot be described as an interest of a member in the company. 2. The court held that the re-allotment and re-issue of forfeited shares did not amount to an allotment of shares within the meaning of sub-section (1) of section 75 of the Indian Companies Act, 1956, relying on the following reasons: a) The allotment of shares referred to in sub-section (1) of section 75 is obviously a matter relating to the issue of shares. b) An issue of a share creates a movable property in the shape of the issued share. There can be no issue of a share which has already been issued and which is already an existing article of property. c) The company has the power either to sell or to re-allot the forfeited shares. Obviously, a sale of the forfeited shares cannot be considered to be an allotment and issue of those shares. d) Usually, instead of selling the forfeited shares, the company re-allots and re-issues them. Such re-allotment and re-issue is a mode of disposal of the existing shares and is not an allotment and issue of shares.
Final Decision: The court dismissed the appeal with costs.
1. THIS appeal is from an order of P. B. Mukharji, J., refusing to direct the Calcutta Stock Exchange Association Limited to file a return of allotment of shares under section 75 of the Indian Companies Act. 1956. The applicant is one of the shareholders of the Calcutta Stock Exchange Association Limited. The Association is a company limited by shares. The issued capital of the company consists of 277 fully paid up ordinary shares of Rs. 1,000/- each. Out of these shares, 70 shares were forfeited by the Association and later re-issued by it. The applicant alleges that it is the duty of the Association to file return of allotment in respect of the re-issue of these shares.
2. THE forfeiture of shares is authorised by the Articles of Association of the Calcutta Stock Exchange Association Limited. Article 21 authorised the Committee of the Association to expel or suspend any member in certain events. Articles 22, 24 and 27 are as follows :-
Article 22:-
"any member who has been declared a defaulter by reason of his failure to fulfill any engagement between himself and any other member or members and who fails to fulfill such engagement within six months from the date upon which he has been so declared a defaulter shall at the expiration of such period of six Calendar months automatically cease to be a member. "
Article 24:-
"upon any member ceasing to be a member under the provisions of article 22 hereof and upon any resolution being passed by the Committee expelling any member under the provisions of Article 21 hereof or upon any member being adjudicated insolvent the share held by such member shall ipso facto be forfeited. "
Article 27:-
"any share so forfeited shall be deemed to be the property of the Association, and the Committee shall sell, re-allot and otherwise dispose of the same in such manner to the best advantage for the satisfaction of all debts which may then be due and owing either to the Association or any of its members arising out of transactions or dealings in stocks and shares."
It is now well-settled that these Articles are lawful and that forfeiture of shares on grounds other than nonpayment of calls is valid and is not in contravention of the Indian Companies Act: see Calcutta Stock Exchange Association, Ltd. v. S. N. Nundy and Co., (1) I. L. R. (1950) 1 Cal. 235; Naresh Chandra Sanyal v. Ramani Kanto Roy (2) 49 C. W. N. 502.
The point in dispute is whether the company is bound to file a return of allotment in respect of the re-allotment and re-issue of these forfeited shares. P. B. Mukharji, J., held that the company is not bound to file such a return and he accordingly dismissed the application. Mr. Maitra contends that the forfeiture operates as an extinguishment of the forfeited shares so that the re-issue of shares is really an issue of new shares in the share capital of the company and that as such the company is bound to file a return of allotment. I am unable to accept this contention.
3. UPON forfeiture of shares the original subscriber ceases to be a member in respect of the forfeited shares. The effect of forfeiture is thus described by Lord Watson in Trevor v. Whit-worth, (3) 12 App. Cas. 409 at 424 and 428-9:
"when a share is forfeited or surrendered, the amount which has been paid upon it remains with the company, the share-holder being relieved of liability for future calls, whilst, the share itself reverts to the company, bears no dividend, and may be re-issued. When shares are forfeited or surrendered and not re-issued, that affects only the nominal amount of the shares so far as unpaid; when they are brought and not reissued that diminishes the paid-up as well as the nominal capital."
4. THE forfeited share reverts to the company, but it continues to exist as a unit of the paid-up and issued share capital. The statutory form of the annual return under section 159 of the Indian Companies Act, 1956, set out in Part II of Schedule V of the Act Shows that the forfeited shares and thee amount p
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