25 September 1970
Supreme Court


Case number: Appeal (civil) 1626 of 1966






DATE OF JUDGMENT: 25/09/1970


CITATION:  1971 AIR  422            1971 SCR  (2) 483  1971 SCC  (1)  50

ACT: Companies Act (7 of 1913)-Fully paid up share-Forfeiture of- Effect-Sale of forfeited share-If illegal-Right of member to proceeds  of  sale-Indian Contract Act (9 of 1872),  s.  74- Scope of.

HEADNOTE: Under  the  scheme  of the articles of  association  of  the Calcutta  Stock Exchange Association Ltd., the Committee  is authorised under art. 21 to expel or suspend a member on the ground  inter alia that he refused to abide by the  decision of  Committee in any matter which is under the  articles  or under  the bye-laws referred to the Committee.   Under  art. 22,  a  member declared a "defaulter" because  he  fails  to fulfil  any engagement between himself and any other  member within  six  months  from  the date on  which  he  has  been declared  a defaulter ceases to be a member of the  Exchange automatically.   Upon his ceasing to be a member and upon  a resolution being passed by the Committee expelling a  member his  share  stands  forfeited.  The share  so  forfeited  is deemed to be the property of the Exchange.  Such  forfeiture involves  the  extinction of all interest in  and  also  all claims  and demands against the Exchange in respect  of  the share and all other rights incidental to the share, but, not the  liability  of  the erstwhile member  to  discharge  his liabilities  to the Exchange.  But the Committee must  sell, reallot   or  otherwise  dispose  of  the  share   for   the satisfaction  of the debts, which may then be due and  owing by  the defaulter to the Exchange or to any of  its  members arising  out  of  transactions or  dealings  in  stocks  and shares.   The  net  proceeds of the sale  shall  be  applied towards  the  satisfaction  of  the  debts,  liabilities  or engagements of the shareholder and the residue, if any, paid to the member or his legal representatives. The  appellant  failed  to carry out a direction  to  pay  a certain  sum  arising  out of a share  transaction  and  the Committee  after  notice,  declared him  a  defaulter.   Six months  later, after notice to the appellant, the  Committee resolved  that  the  share standing in  his  name  shall  be forfeited to the Exchange and that the appellant be expelled from   the  membership  of  the  Exchange.    The   Exchange



thereafter  disposed  of  the ’share for  Rs.  55,000.   The appellant  challenged the action taken by the  Exchange  but the suit was dismissed. In appeal to this Court, HELD : (1) It is not necessary that a resolution expelling a member  and  a resolution declaring him a  defaulter  should both  be  passed  before  his  share  is  forfeited  by  the Exchange.   The word and is used to indicate an  alternative and does not make the two conditions cumulative, because, it would lead to the anomalous result that a member would  have to be expelled by the Committee under art. 21 and would also automatically cease to be a member under art. 22. [490 A-C] Surajmall  Mohta  v. Ballabhdas Mohta, I.L.R  63  Cal.  531, approved. 484 In  any event, in the present case, a  resolution  declaring the  appellant a defaulter was passed and six  months  later the  appellant  was  expelled from  the  membership  of  the Exchange  and  it was resolved that his  share  shall  stand forfeited. [490 C-D] (2)(a) Regulation 24 in Table A in the First Schedule to the Companies Act, 1913, provides for the exercise of the  power to  forfeit a share when there is default in  paying  calls, but  no  inference  follows therefrom that the  share  of  a member  could  be forfeited only for non-payment of  a  call made  in  respect of a share which was not  fully  paid  up. Subject to the provisions of the Companies Act a company and its  members  are bound by the Provisions contained  in  its articles of association.  The Articles regulate the internal management  of  the  company and define the  powers  of  its officers.  In the absence of any provision contained in  the Act  which prohibits a company from forfeiting a  share  for failure on the part of a member to carry out an  undertaking or  engagement the articles of a company which provide  that in  certain  events  membership  rights  of  a   shareholder including  his  right  to the share will  be  forfeited  are binding.   There’ is no provision the Indian  Companies  Act 1913,  which  restricts  the exercise of the  right  of  the Exchange  to forfeit shares for non-payment of a call  only, and  the articles of the Exchange expressly provide that  in the  event of a member failing to carry out  the  engagement and  in  ,the conditions specified therein his  share  shall stand forfeited. [492 A-E] (b)  Under  art. 27, the terms of which are  mandatory,  the shares  forfeited  to the Exchange must  be  re-allotted  or otherwise  disposed  of  :  it cannot  be  retained  by  the Exchange.  A forfeited share is merely a shake available  to the company for sale and remains vested in it for that  pur- pose only.  By forfeiting a share pursuant to the  authority of  the articles of association no reduction of  capital  is achieved. [491 F, H; 492 A] Therefore,  arts.  22,  24,  26,  27  and  29  relating   to forfeiture of shares are valid. [492 D-E] Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., [1964] 3 S.C.R. 698, followed. Calcutta  Stock Exchange Association Ltd. v. S. N.  Nundy  & Co. I.L.R. [1950] 1 Cal. 235, approved. (3)  There  is  nothing  in  the  procedure  followed  which rendered  the forfeiture of the appellant’s  share  illegal. The  appellant had ample notice of the proceedings  and  the orders  were  not  made against him  contrary  to  rules  of natural justice. [493 C] (4)(a) Under its articles the Exchange has authority to sell the  share  and  to appropriate the  sale  proceeds  towards satisfaction of the debts, liabilities or engagements.   But



the balance of the amount remaining due after satisfying the liabilities of the appellant did not remain the property  of the  Exchange.   The appellant was entitled to  the  amount. This  is expressly provided for in art. 33.  The  expression used in art. 29 ’the forfeiture shall involve extinction  of all  interest’ is subject to the rights as by  the  articles saved and art. 33 saves the defaulting share-holder’s  right lo the balance remaining with the Exchange.[493 D-G] (b)  Even  assuming  that  arts. 24 and 31  reserve  to  the Exchange  two distinct powers-the power to forfeit  and  the power to exercise a lien, and that art. 33 only applies to a sale  in  enforcement  of a lien and not  to  a  sale  after forfeiture,  the  balance  on  hand  after  satisfying   the liability  485 of  the defaulter must still be returned to  the  defaulter, under s. 74 of the Contract Act.  The power of the  Exchange to  forfeit  the shares arises out of the articles  and  its source is in contract.  On the principle underlying s. 74 of the  Contract Act the Exchange had no right to hold, out  of the sale proceeds of the share, any amount in excess of  the amount due to it or to its members. [493 H; 494 A-B] Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515, followed. (c)  The  legal  theory  of  forfeiture  is  that  a   share forfeited is only taken over by the company with the  object of  disposing of it to satisfy its claims to  enforce  which the  share was forfeited and all other  obligations  arising against  him out of his membership.  If the company is  per- mitted to retain the balance of the amount after  satisfying the debts, liabilities and engagements of the  share-holder, the  transaction would not be different from one  purchasing the share of the defaulting shareholder for a value equal to the amount of his obligation and that would be illegal. [495 E-H]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1626 of 1966. Appeal from the judgment and decree dated July 7, 8, 1964 of the  Calcutta High Court in Appeal from Original Decree  No. 143 of 1960. R.   B. Datar, for the appellant. B.   Sen,   N.  R.  Khaitan  and  B.  P.   Maheshwari,   for respondent. The Judgment of the Court was delivered by- Shah,  J.-Naresh  Chandra Sanyal was the holder of  a  fully paid-up  share  of the Calcutta Stock  Exchange  Association Ltd.hereinafter  called the Exchange’.  As a member  of  the Exchange he was authorised to carry on business as a  broker in  shares,  stocks  and  securities  in  the  hall  of  the Exchange.   In  December 1941 Sanyal purchased  one  hundred shares  of  the  Indian  Iron &  Steel  ’Company  Ltd.  from Johurmull  Daga  &  Company, but did  not  arrange  to  take delivery of the shares on the due date.  Johurmull Daga  and Company  sold the shares pursuant to the authority given  to them by the Sub-Committee of the Exchange.  The  transaction resulted  in  a  loss of Rs.  438/10/-.   The  Sub-Committee directed Sanyal to pay the amount due by him, but he  failed to carry out that direction. On January 7, 1942 the complaint of Johurmull Daga & Company was referred to the Full Committee of the Exchange.   Sanyal failed  to pay the amount directed to be paid by him and  he was  by  resolution  dated  February  19,  1942  declared  a defaulter.   On  September 1, 1942, at a  meeting  at  which



Sanyal  was  present, the Full Committee resolved  that  the share standing in his name be forfeited to the Exchange with effect  from September 1, 1942 and that Sanyal  be  expelled from the membership of the Exchange. 436Sup.Cl/71 48 6 Sanyal  then  instituted  an action in  the  High  Court  of Calcutta  on its original side claiming a  declaration  that the articles of the Exchange providing for "forfeiture of  a fully  paid up share were ultra vires and illegal" and  that "particularly  Arts. 21, 22. and 24 were invalid"; that  the share  held by him had not been "properly forfeited" by  the Exchange  and that forfeiture of the share  was  "irregular, void  and inoperative and was not binding upon him" He  also claimed  an order that he be restored to the  membership  of the  Exchange  and  that the  share  register  be  rectified accordingly.  In the alternative Sanyal claimed a decree for Rs.  55,0001- being the value of the share, or in any  event to  the surplus of the sale proceeds after "liquidating  the debts due by him to the Exchange." The suit was resisted  by the  Exchange.   The  Trial Court dismissed  the  suit.   In appeal  under the Letters Patent the decree  was  confirmed. With  special  leave Sanyal has appealed to  this  Court  in forma pauperis. The  relevant  Articles of Association of the  Exchange  are these               Art.  21-"The  Committee shall have  power  to               expel  or suspend any member or if being  firm               any member or authorised assistant of the firm               in any of the events following               (6)   If  the  member or if being a  firm  any               member  or  authorised assistant of  the  firm               refuses  to  abide  by  the  decision  of  the               Committee  in  any matter  which  under  these               articles  or under the Bye-laws for  the  time               being  in  force  is made  the  subject  of  a               reference to the Committee.               Provided  always  that in every  case  arising               under the provisions of sub,-section (5), (6),               (7) and (8) of this Article no resolution  for               the  expulsion of a member or if being a  firm               any member or authorised assistant of the firm               shall  be  valid unless passed by  a  majority               consisting of not less than two-thirds of  the               members   of  the  Committee  at   a   meeting               specially  convened  for the  purpose  and  at               which meeting not less than two thirds of  the               members   of  the  committee  at   a   meeting               specially  convened  for the  purpose  and  at               which  meeting not less than seven members  of               the Committee shah be present."                4 8 7               Art.  22-"Any member who has been  declared  a               defaulter  by reason of his failure to  fulfil               any  engagement between himself and any  other               member or members and who fails to fulfil such               engagements  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."               Art.  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."               Art.  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  mem-               bers  arising out of transactions or  dealings               in stocks and shares."               Art.  28-"Any member whose share has  been  so               forfeited  shall notwithstanding be liable  to               pay and shall forthwith pay to the Association               all   moneys  owing  by  the  member  to   the               Association  at  the time  of  the  forfeiture               together with interest thereon, from the  time               of forfeiture until payment at 12 percent  per               annum  and the committee may enforce the  pay-               ment   thereof,  without  any   deduction   or               allowance  for the value of the share  at  the               time of forfeiture."               Art.  29-"The  forfeiture  of  a  share  shall               involve the extinction  of all interest in and               also  of  all claims and demands  against  the               Association  in respect of the share, and  all               other  rights incidental to the share.  except               only such of those rights as by these Articles               expressly saved."               Art.  31-"The Association shall have  a  first               and  paramount lien upon the share  registered               in  the  name  of each  member  and  upon  the               proceeds  of  sale  thereof  for  his   debts,               liabilities and engagements.               488               Art. 32-"For the purpose of enforcing such hen               the  Association  may sell the  share  subject               thereto in such manner as, they think fit.               Art.  33-"The nett proceeds of any  such  sale               shall be applied in or towards satisfaction of               the   debts,  liabilities,   or   engagements,               residue  (if  any) paid to  such  member,  his               executors, administrators, committee,  curator               or other representatives."               The relevant bye-laws of the exchange are:               "Settlement    of   Disputes.-All    disputes,               complaints  and claims between by and  against               members  shall, on the application  of  either               party,  be  decided by the Committee or  by  a               Standing or Special Sub-Committee appointed by               the  Committee for the purpose.  In the  event               of  the matter being decided by the  Committee               the decision shall be, final and binding  upon               all members concerned but any member aggrieved               with  the decision of the Standing or  Special               Sub-Committee  may, within seven days of  such               decision being given, appeal to the  Committee               whose  decision shall be final.  In the  event               of any member or members refusing,  neglecting               or  failing  to observe, carry out  or  comply               with  any decision of the Committee,-or if  no               appeal is preferred, with the decision of  the               Standing or Special Sub-Committee, such member               or  members so in default shall be dealt  with



             by the Committee under the rules,  regulations               and/or by laws of the Association for the time               being in force."               Bye-law 13-"Defaulters.--Any member who  shall               fail  to pay any subscription or other  moneys               due by him to the Association on due date,  or               who   shall  fail-to  fulfil  any   engagement               between himself and another member or  members               may be declared a ’defaulter’ by the Committee               and  on  such declaration his  name  shall  be               posted as a ’defaulter’ on the notice board of               the  Association  and  so  long  as  the  name               remains  so posted he shall not be at  liberty               to  exercise any of the privileges of  member-               ship." Under  the scheme of the Articles of Association of the  Ex- change,  the Committee is authorised to expel or  suspend  a member  on the ground, inter alia, that he refuses to  abide by  the  decision of the Committee in any  matter  which  is under  the  Articles or under the Bye-laws referred  to  the Committee.  A person declared a "defaulter" because he fails to  fulfil  any engagement between himself  and  any  other member or members within six months from 489 the  date on which he has been declared a defaulter,  ceases to  be  a member of the Exchange and his share  also  stands forfeited.   The  share  so forfeited is deemed  to  be  the property of the Exchange.  But the Committee must sell,  re- allot or otherwise dispose of the share for satisfaction  of the  debts which may then be due and owing by the  defaulter to  the  Exchange or to any of its members  arising  out  of transactions  or dealings in stocks and shares.   Forfeiture of  a share involves extinction of all interest in and  also of all claims and demands against the Exchange in respect of the share and all other rights incidental to the share,  but not the liability of the. erstwhile member to discharge  his liabilities to the Exchange.  The Exchange has a first  lien upon  the  share of a member and upon the proceeds  of  sale thereof for his debts and liabilities, and in enforcement of the lien, the Exchange may sell the share.  The net proceeds of the share subject to the lien it sold will be applied  in or  towards  satisfaction  of  the  debts,  liabilities   or engagements of the shareholder and the residue, if any, paid to  such member, his executors,  administrators,  committee, curator or other representatives. In this appeal counsel for Sanyal contended,               that  under the Indian Companies Act, 1913,  a               fully  paid up share cannot be  forfeited  for               failure  to  carry out any engagement  by  the               shareholder other than an engagement to pay  a               call  made  by  the  Company  to  pay   unpaid               capital;               that  the  procedure  followed  by  the   Sub-               Committee  of  the Exchange was  irregular  in               that  Sanyal had no notice of the  meeting  of               the Committee to declare him a defaulter;               that the Committee had no authority under  the               Articles of Association to direct sale of  the               share; and               that  in any event Sanyal was entitled to  the               balance  remaining on hand with  the  Exchange               after  satisfying his debts,  liabilities  and               engagements under the Articles of Association. For  failure  to abide by the decision of the  Committee  in respect  of his liability to pay the amount of loss  due  to



Johurmull  Daga & Company Sanyal was declared  a  defaulter, and  when he continued to remain a defaulter for six  months he was by resolution of the Full Committee expelled from the membership  of  the  Exchange.   The  Full  Committee   also resolved  to  forfeit his share..  The  Exchange  thereafter disposed of the share for Rs. 55,000/-.  The argument raised by counsel for Sanyal that a member of the Exchange forfeits his share only if a resolution expelling him and 490 a resolution declaring him a defaulter are passed is without substance.   The  conductive  "and" between  the  first  two clauses  of Art. 24 is used to indicate an Alternative,  and does not make the two conditions cumulative.  We agree  with the  observations of Panckridge, J., in Surajmall  Mohta  v. Ballabhdas  Mohta(1)  that  Art. 24  "is  carelessly  drawn, because, on its literal application, before his share  could be forfeited, a member would both have to be expelled by the Committee  under article 21 and automatically cease to be  a member   under  article  22--Clearly  this  cannot  be   the intention  of the article and it is obvious that by a  slip, ’and’ has been substituted for "or"." In any event the Full Committee passed on February 19,  1942 ,a  resolution  declaring the appellant  a  defaulter.   The appellant did not carry out his engagements for a period  of six  months there, after.  By resolution dated September  1, 1942  at a meeting of the Full Committee the  appellant  was expelled  from  the membership of the Exchange  and  it  was resolved that his share shall stand forfeited. There  is  no provision in the Indian Companies  Act,  1913, which restricts the exercise of the tight of the Exchange to forfeit  :share-,,  for  non-payment of a  call  only.   The Indian  Companies Act, 1913, made no provision  relating  to forfeiture  of  shares.  By s. 17(2) of the Act,  a  company could  adopt  the regulations contained in Table  A  in  the First  Schedule  but  the Company was not bound  to  do  so. Regulations 24 to 30 of Table A dealt with the power and the procedure relating to forfeiture of shares.  Regulation  24, it is true, provided for exercise of the power to forfeit  a share  when  there  was  default in  paying  calls,  but  no inference follows therefrom that the share of a member could be forfeited only for non-payment of a call made in  respect of the share which was not fully paid up. In  The  Calcutta Stock Exchange Association Ltd. v.  S.  N. Nundy & Co.(2), Harries C.J. after examining the  provisions of  the  Companies Act 1913 reviewed the  decisions  of  the Courts  in  England and of the High Court  of  Calcutta  and observed  that  the  Indian Companies Act  as  well  as  the English  Companies Act contemplate, recognize  and  sanction forfeiture generally and not for non-payment of calls  only; that  a  company may by its Articles  lawfully  provide  for grounds of forfeiture other than nonpayment of call, subject to  the  qualification that the Articles  relating  to  for- feiture  do not offend against the general law of  the  land and in particular the Companies Act, and public policy;  and that the forfeiture contemplated does not entail or effect a reduction in capital or involve or amount to purchase by the Company of its (1) I. L R. 63 Cal. 531. (2) I. L. R. [1950] 1 cal. 235.  491 own  shares  nor does it amount to trafficking  in  its  own shares.   The Court in that case was concerned to  determine the  true effect of the Articles of the Exchange which  fall to be interpreted in this case. This  Court in Sri Gopal Jalan & Company v.  Calcutta  Stock



Exchange   Association  Ltd.(1) also  considered   whether forfeiture  of  shares  resulted  in  reduction  of  capital contrary to the provisions of the Companies Act where  power of forfeiture was given by the Articles for failure to carry out an undertaking or satisfy an obligation of the member to forfeit the shares.  The Court in that case was interpreting the  Articles which fall to be interpreted in  this  appeal. The Court held that the Exchange was not liable to file  any return of the forfeited shares under S. 75(i) of the  Indian Companies Act, 1956 when the same were re-issued.  The Court observed that when a share is forfeited and re-issued, there is no allotment, in the sense of appropriation of shares out of  the authorised and unappropriated capital, and  approved the observations, of Harries, C.J. in S. N. Nundy’s  case(2) that  "on  such forfeiture all that happened  was  that  the right  of  the particular shareholder  disappeared  but  the share  considered as a unit of issued capital )continued  to exist and was kept in suspense until another shareholder was found  for  it".  In the view of this Court, the  shares  so forfeited  may not be "allotted’ in the sense in which  that word  is  understood in the Companies Act.  The  Court  also pointed  out  that  re-issue  of  forfeited  shares  is  not allotment of the shares but only a sale, for, if it were not so  the  forfeiture even for non-payment of  call  would  be invalid as involving an illegal reduction of capital. Article  27 of the Exchange it may be recalled is  in  terms mandatory.  The share forfeited to the Exchange must be  re- allotted or otherwise disposed of : it cannot be retained by the  Exchange.  The share after forfeiture in the  hands  of the  Company is subject to an obligation to dispose  it  of. On  that  account there is no reduction of capital  by  mere forfeiture. Mr. Datar appearing for the appellant however contended that in  Sri Gopal Jalan & Company’s case(1) the  parties  argued the case on the footing that Articles of Association of  the Exchange  were not invalid, whereas in the present case  the validity  of the Articles is challenged.  But the  Court  in citing with approval the observations of Harries C.J. in  S. N. Nundy’s case(2) did in effect pronounce upon the validity of the Articles. A forfeited share is, therefore, merely a share available to the  Company for sale and remains vested in the Company  for that  purpose only.  By forfeiting a share pursuant  to  the authority of the (1) [1964] 3,S.  C. R. 698. (2) I. L. R. [1950] 1 Cal. 235. 492 Articles   of  Association,  no  reduction  of  capital   is achieved.   We are unable to agree with counsel  for  Sanyal that  forfeiture  of  shares is permissible  only  in  cases expressly  contemplated by Table A Model Articles  i.e.  for non-payment  of  calls in respect of a share  which  is  not fully paid up. Subject  to the provisions of the Companies Act the  Company and the members are bound by the provisions contained in the Articles of Association.  The Articles regulate the internal management  of  the  Company and define the  powers  of  its officers.   They  also  establish  a  contract  between  the Company  and the members and between the members  inter  se. The  contract  governs the ordinary rights  and  obligations incidental to membership in the Company.  In the absence  of any  provisions contained in the Indian Companies Act  which prohibit  a Company from forfeiting a share for  failure  on the  part  of the member to carry out an undertaking  or  an engagement  the Articles of a Company which provide that  in



certain   events  membership  rights  of   the   shareholder including  his  right  to the share will  be  forfeited  are binding.   The  Articles  of  Association  of  the  Exchange expressly provide that in the event of the member failing to carry  out  the engagement and in the  conditions  specified therein  his share shall stand forfeited.  Articles 22,  24, 26, 27 & 29 of the Exchange relating to forfeiture of shares in certain events are therefore valid. There  is in our judgment nothing in the procedure  followed by  the Sub-Committee and the Full Committee which  rendered the  forfeiture  of Sanyal’s share illegal.  It  is  not  in dispute  that Sanyal incurred liability in favour of one  of the  members  of  the Exchange to pay Rs.  438-10-0  in  the transaction  relating  to the sale of Indian  Iron  &  Steel Company’s shares and he failed to discharge that  liability. He continued to remain in default for six months even  after the resolution of the Full Committee, and on that account he ceased to be a member and his share was forfeited.  The High Court  has found that the copies of the letters  dated  9th, 10th,  16th,  17th  and  20th December,  1941,  and  of  8th January, 11th & 19th February, 1942, were sent to Sanyal and the  usual notices relating to the complaints placed  before the  Sub-Committee  or the Full Committee were  served  upon Sanyal, that such notices were posted on the notice board of the  Exchange  that the appellant had opportunities  at  all stages  of the proceedings to come before the  Exchange  and refute the charges made against him and that at no stage  of the  proceeding until September 1, 1942, did  Sanyal  appear before  the Sub-Committee or the Full Committee.   The  High Court  was  of  the view that the order had  not  been  made against Sanyal contrary to the rules of natural justice.  It is  true that Johurmull Daga complained about  the-  default committed  by Sanyal on December 9, 1941 and the meeting  of the Sub-Committee was held  493 on December 10, 1941.  Granting that the letter of the  Sub- Committee  enclosing a copy of the complaint dated  December 9,  1941,  sent by post to Sanyal may not have  reached  him because  he had left Calcutta, he had still ample notice  of the  proceeding of the SubCommittee because  intimation  was given  to  him  by the notice posted on  the  board  of  the Exchange.   Sanyal raised no contention at any stage  before the  Sub-Committee or before the Full Committee that he  had not received the notices of the meetings dated December  10, 1941,  December  17,  1941,  January 7,  1942  of  the  Sub- Committee and of the meeting dated February 19, 1942 of  the Full  Committee.  Regularity of the proceedings of the  Com- mittees at the various meetings is not challenged before us. We are unable to agree with the contention raised by counsel for  Sanyal  that  the rules of  natural  justice  were  not complied with when the Sub-Committee and the Full  Committee passed the impugned resolutions against Sanyal. There is no substance in the plea that the Committee had  no jurisdiction to order sale of the share forfeited.   Article 27 declares that the forfeited share is the property of  the Exchange  and that the Committee of the Exchange shall  sell reallot or otherwise dispose of the share, for  satisfaction of all debts due by the member to the Association or to  its members out of transactions in shares and stocks.  Under its Articles  the Exchange has, authority to sell the share  and to appropriate the sale proceeds towards satisfaction of the debts, liabilities or engagements" But  we are unable to agree with the view taken by the  High Court  that  the balance of the amount remaining  due  after satisfying  the liabilities of Sanyal remained the  property



of the Exchange and that Sanyal had no right thereto.  Under the stipulations contained in Arts. 21, 22, 24, the share of the  defaulter  or  expelled  member  stands  forfeited  for failure  to fulfil his obligation.  The share of’ Sanyal  by express  resolution  was  forfeited.   After  applying  the, amount realised on sale of the share towards satisfaction of the  debts,  liabilities and engagements of  Sanyal  to  the Exchange and its members, the balance remaining in the hands of  the  Exchange had to be held for and on be-half  of  the appellant.   That  is expressly provided in  Art.  33.   The expression used in Art. 29 "The forfeiture shall involve the extinction of all interest" is subject to those rights as by the Articles are saved, and Art. 33 saves to the  defaulting shareholder  whose  share  is forfeited  the  right  to  the balance  remaining with, the Exchange.  Even  assuming  that Articles  24  &  31 reserve to  the  Exchange  two  distinct powers-the  power  to forfeit and the power  to  exercise  a lien,  and that Art. 33 only applies to sale in  enforcement of  a lien, and not to a sale under Art. 27, we are  of  the view that the balance on hand after satisfying the liability of the defaulter must still be returned to the 494 defaulting shareholder.  The power to forfeit does not imply authority  to  appropriate the balance,  remaining  in  hand after  satisfying  the liabilities and  obligations  of  the defaulter  to  the  Exchange  and  its  members.   Any  such implication would be contrary to the intendment of s. 74  of the Contract Act. The  power of the Exchange to forfeit the shares arises  out of  the Articles and its source is in contract.   Forfeiture of  share  is  in the nature of  imposition  of  a  penalty. Section 74 of the Indian ,Contract Act provides :               "When a contract has been broken, if a sum  is               named in the contract as the amount to be paid               in  case  of such breach, or if  the  contract               contains  any  other  stipulation  by  way  of               penalty,  the party complaining of the  breach               is  entitled, whether or not actual damage  or               loss is proved to have been caused thereby, to               receive  from  the party who  has  broken  the               contract    reasonable    compensation     not               exceeding, the amount so named or, as the case               may be, the penalty stipulated for. In  Fateh  Chand v. Balkishan Das(1) this Court  in  dealing with a  case in which a claim for damages  for  breach  of contract  to  sell  :a lien  of  immovable  property  arose, pronounced  that the expression "’the contract contains  any other stipulation by way of penalty" comprehensively applies to  every  covenant involving a penalty whether  it  is  for payment  on  breach  of contract of money,  or  delivery  of property  in future, or for forfeiture of right to money  or other  property already delivered.  Duty not to enforce  the penalty clause but only to award reasonable compensation  is statutorily  imposed  upon  courts by s. 74  of  the  Indian Contract  Act.   In all cases, therefore, where there  is  a stipulation  in the nature of penalty for forfeiture  of  an amount  deposited pursuant to the terms of a contract  which expressly provides for forfeiture the Court has jurisdiction to  award such sum only as it considers reasonable, but  not exceeding the amount specified in the contract as liable  to forfeiture.   The  same principles, in our  judgment,  would apply  in the ,case in which there is a stipulation  in  the contract by way of a penalty, and the damages awarded to the party complaining of the breach will not in any case  exceed the loss suffered by the complainant party.  It was observed



at p. 526 in Fateh Chand’s case(,) :               "The section (s. 74) is clearly an attempt  to               eliminate  the somewhat elaborate  refinements               made   under   the  English  common   law   in               distinguishing between stipulations  providing               for payment of liquidated damages and               (1)   [1964] IS.  C.R. 515.                495               stipulatings in the nature of penalty.   Under               the  common  law  a  genuine  pre-estimate  of               damages  by mutual agreement is regarded as  a               stipulation  naming  liquidated  damages   and               binding between the parties : a stipulation in               a  contract in terrorem is a penalty  and  the               Court  refuses to enforce it, awarding to  the               aggrieved party only reasonable  compensation.               The  Indian  Legislature  has  sought  to  cut               across the web of rules and presumptions under               the English common law, by enacting a  uniform               principle   applicable  to  all   stipulations               naming  amounts to be paid in case of  breach,               and stipulations by way of penalty."               The Court also observed at p. 530               "Section  74 declares the law as to  liability               upon breach of contract where compensation  is               by agreement of the parties predetermined,  or               where  there  is  a  stipulation  by  way   of               penalty.  But the application of the enactment               is not restricted to cases where the aggrieved               party  claims  relief  as  a  plaintiff.   The               section does not confer a special benefit upon               any  party;  it merely declares the  law  that               notwithstanding any term in the contract  pre-               determining    damages   or   providing    for               forfeiture of any property by way of  penalty,               the  Court will award to the  party  aggrieved               only reasonable compensation not exceeding the               amount named or penalty stipulated." Granting  that Art. 33 deals with those cases in which  lien alone  is,  enforced and not in cases  where  forfeiture  is levied, and the obligation of the defaulting shareholder  is determined  by  Art. 29, in our judgment, on  the  principle underlying  S.  74 of the Contract Act the Exchange  had  no right  to  hold out of the sale proceeds of  the  share  any amount in excess of the amount due to it or to its members. The  Exchange may not purchase its own shares.  If  it  does so, it amounts to reduction of capital.  The legal theory of forfeiture  is that a share forfeited is only taken over  by the  Company with the object of disposing it of  to  satisfy its  claim to enforce which the share was forfeited and  all other obligations arising against him out of his membership. The Company is given this right to recover the loss suffered by  it by reason of the breach of contract committed by  the shareholder.   If  the Company is permitted  to  retain  the balance  of the amount after satisfying the debts,  liabili- ties  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 496 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. This  appeal  was filed in forma pauperis.   The  ’appellant will  pay the court fee payable on the memorandum of  appeal if he had not been permitted to appeal in forma pauperis. V.P.S.            Appeal allowed and case remanded. 497