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PETITIONER: SRI GOPAL JALAN & COMPANY

       Vs.

RESPONDENT: CALCUTTA STOCK EXCHANGEASSOCIATION LTD.

DATE OF JUDGMENT: 09/05/1963

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1964 AIR  250            1964 SCR  (3) 698  CITATOR INFO :  E          1970 SC1750  (10)  R          1971 SC 422  (11,13)

ACT: Company--Allotment of shares-Forfeiture of  shares-Forfeited shares   reissued-If   filing  of   return   compulsory--The Companies Act, 1956 (1 of 1956),s. 75.

HEADNOTE: The  respondent-company did not file any return of  the  re- issued  forfeited  shares  under s. 75 (1) of  the  Act  and therefore  the appellant-shareholdar moved ’the  High  Court for an order   requiring it to do so. Held  that  the words ,allotment of shares" have  been  used in   75 to indicate the creation of shares by  appropriation out  699 of the unappropriated share capital to a particular  person. When a share is forteited and re-issued it is not  allotment in the sense of appropriation of share out of the authorised and  unappropriated capital so as to bring the  shares  into existence.   A  re-issue  of a forfeited  share  is  not  an allotment  of  share within the meaning of s. 75 (1)  but  a sale and that being so, no question of filing any return  in respect of such re-issue arises. In  re Florence Land and Public Works Company, (1885) L.  R. 29 Ch.  D. 421; Mosely v. Koffyfontain Mines Limited, (1911) 1 L. R. Ch. 73; The Calcutta Stock Exchange Association Ltd. v.  S. N.  Nundy & Co., (1930) 1 1. L. R. Cal.  235;  Naresh Chandra Sanyal v. Ramani Kanta Ray, (1945)2 I.L.R. Cal. 105; Morrison v. Trustees  etc.  Insurance Corporation, (1899) 68 L. J. Ch. 11, discussed. In  re  V.  G. M. Holdings, Limited (1942) 1  Ch.   D.  235, disapproved. Held further that sub-s. (5) of s. 75 has been enacted as ex abundanti  cautela, that is to say, to prevent any  argument being raised that a return has to be filed of the  re-issued shares forfited for nonpayment of calls.

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JUDGMENT: CIVIL APPELLATE JURISDICTION :Civil Appeal No. 512 of 1961. Appeal  by special leave from the judgment and  order  dated August  18, 1959, of the Calcutta High Court in Appeal  from Original Order No. 106 of 1957. S.   K.  Kapur, S. Murthi, P. M. Kukhi and .K. K. Jain,  for the appellant. H.   N. Sanyal, Solicitor-General of India and B. P. Maheshuari, for the respondent. 1963.  May 9. The judgment of the Court was delivered by SARKAR.   J.-The  question in this appeal is,  what  is  the meaning to be ascribed to the word ",allotment" occurring in S. 75 (1) of the Companies 700 Act, 1956?  That section requires a company to file a return of  the allotment of its shares with the Registrar within  a month of the making of the allotment.  The appellant who has been accepted as a shareholder in the respondent Company for the purposes of the present proceedings, complained that the Company  had not filed the return required by that  section, and  therefore,  moved the if High Court at  Calcutta  under s.614 of the Act for an order requiring it to do so. The  shares  with  which this case  is  concerned  bad  been forfeited by the Company under its articles.  A reference to some  of  these  articles is  necessary  before  we  proceed further.   Article 21 of the Articles of Association of  the Company  authorised  its  Committee to expel  or  suspend  a member  in  certain  events.   The present  is  not  a  case involving an exercise of power under this articte.  Articles 22, 24 and 27 are in these terms :               Article 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               engagement  within  six months from  the  date               upon  which he has been so declared  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 here of 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,                701               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." The appellant’s contention is that the Company from time  to time  forfeited various shares under these articles  and  it appeared  from  its  balance  sheet  that  seventy  of  such forfeited  shares had been reissued at a nominal face  value of  Rs.  1,000/-  but  no return of  such  re-issue  of  the forfeited shares had been filed by the Company.  The Company in  its affidavit in answer to the petition  admitted  these facts.   It  was also said that these forfeited  shares  had

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been  issued for much larger sums but nothing turns on  that in this case.               Now  s.  75,  so  far  as  material  for   our               purposes, is as follows:               S.    75.  (1)  Whenever a  Company  having  a               share  capital  makes  any  allotment  of  its               shares.  the company shall, within  one  month               thereafter’, -               (a)   file with the Registrar a return of  the               allotments,  stating  the number  and  nominal               amount   of  the  shares  comprised   in   the               allotment,    the   names,    addresses    and               occupation,; of the allottees, and the amount,               if any, paid or due and payable on each share;               x          x          x           x          x               (5)   Nothing  in this section shall apply  to               the issue and allotment by a company of shares               702               which  under  the provisions of  its  articles               were forfeited for non-payment of calls. The appellant contends that a return should have been  filed of  the re-issued forfeited shares under this section.   The contention of the Company is that the re-issue of  forfeited shares   does  not  amount  to  allotment  of  shares   and, therefore, it was not required to file any return in respect of such re-issued shares under the section.  This contention was  accepted by the learned Judge of the high Court  before whom  the appellant’s petition was first moved and  also  by the  learned judges of the Division Bench of that  Court  on appeal from the decision of the learned trial judge. We  agree with the learned Judges of the High Court  that  a re-issue  of a forfeited share is not an allotment of  share within  s. 75(1).  The word "alloment" has not been  defined in  the Companies Act either in our country or  in  England. But  we  think  that  the  meaning  of  that  word  is  well understood and no decision has been brought to our notice to indicate that any doubt has ever been entertained as to  it. As Chitty J. put it in In re Florence Land and Public  Works Company   (1)  (p.426).  "What  is  termed  ’allotment’   is generally  neither more nor less than the acceptance by  the company  of  the offer to take shares.  To take  the  common case,  the offer is to take a certain number of  shares,  or such a less number of shares as may be allotted.  That offer is accepted by the allotment either of the total number men- tioned  in  the offer or a less number, to be taken  by  the person  who  made  the offer.  This  constitutes  a  binding contract  to  take that number according to  the  offer  and acceptance.   To my mind there is no magic whatever  in  the term ’allotment’ as used in these circumstances.  It is said that the allotment is an appropriation of a specific  number of shares.  It (1)  (1885) L.R. 29.  C h. D. 421.  703 is  an.  appropriation,  not of specific shares,  but  of  a certain number of shares." The  process  described by Chitty J.’ is  very  familiar  in Company law.  Under the Act, a company having share  capital is  required to state in its memorandum the amount  of  that capital  and  the division thereof into shares  of  a  fixed amount: see s. 13(4).  This is what is called the authorised capital of the company.  Then the Company proceeds to  issue the  shares depending on the condition of the market.   That only means inviting applications for these shares.  When the applications are received, it accepts them and this is  what is  generally  called allotment.  No doubt there may  be  an

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allotment  of shares without an application but no  instance exists  where  that word is used to describe  a  transaction whereby  one  becomes  a  share-holder  otherwise  than   by appropriation  to  him  of a share  out  of  the  previously unappropriated share capital. So  Farwell  L.  J. said in  Mosely  v.  Koffyfontain  Mines Limited   (1).   "As  regards  the  construction  of   these particular  articles it is plain that the  words  Creation’, ’issue’,  and "allotment’ are used with the three  different meanings familiar to business people as well as to  lawyers. There are three steps with regard to new capital; first,  it is created; till it is created the capital does not exist at all.   When it is created it may remain unissued for  years, as  indeed  it  was  here; the market did  not  allow  of  a favourable Opportunity of placing it.  When it is issued  it may, be issued on such terms as appear for the moment  expe- dient.  Next comes allotment.  To take the words of Stirling J.  in Spitzel v. Chinese Corporation, 80 L.T. 347, 351,  he says:  ’What is an allotment of shares ?  Broadly  speaking, it is an appropriation by the directors or the managing body of  the  company of shares to a  particular  person’."  Lord Green  M.R. observed in In  re V. G. M.  Holdings,  Limited, (2), "it seems to (1) (191 1) I.L.R. Ch. 73. 84. (2) (1942) 1 Ch.  D. 235. 704 Me that the word "purchase’ cannot with propriety be applied to  the  legal  transaction under which  a  person’  by  the machinery  of  application and allotment,  becomes  a  share holder  in the company.  He does not purchase anything  when he  does  that.   Mr. Wynn Parry  endeavored  heroically  to establish  the proposition that a share before issue was  an existing article of property, that it was an existing bundle of  rights which a shareholder could properly be said to  be purchasing when he acquired it by subscription in the  usual way.   I am unable to accept that view.  A share is a  chose in action.  A chose in action implies the existence of  some person  entitled  to the rights in action as  distinct  from rights  in  possession, and, until the share is  issued,  no such   person  exists.   Putting  it  in  a  nutshell,   the difference between the issue of a share to a subscriber  and the purchase of a share from an existing share holder is the difference  between creation and the transfer of a chose  in action." It  is  beyond doubt from the authorities to which  we  have earlier  referred,  and there are many more which  could  be cited  to  show  the  same position,  that  in  Company  law ’allotment’  means the appropriation out of  the  previously unappropriated capital of a company, of a certain number  of shares  to a person.  Till such allotment the shares do  not exist  as such.  It is on allotment in this sense  that  the shares  come  into  existence.   Learned  counsel  for   the appellant has not been able to cite any case where the  word "allotment’  has  been used to describe a  transaction  with regard  to an existing share, that is, a  share  previously, brought  into existence by appropriation to a person out  of the authorished capital.  In every case the words ’allotment of shares’ have been used to indicate the creation of shares by appropriation out of the unappropriated share capital  to a  particular  person.   We  find no  reason  why  the  word "allotment’  in s. 75 should have a different sense.  It  is said  that sub-s. (5) of s. 75 furnishes such a reason.   We Will 705 deal  with that argument later.  Our attention-has not  been

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drawn  to  any other provision in our  Companies  Act  which would  support the contention that the Act  includes  within the word "allotment’ a transaction with a share after it has been  first created by appropriation out of  the  authorised share  capital to a particular individual.  As  the  learned Judges  of the High Court pointed out, s. 75 occurs in  Part III of the Act which deals with "’Prospectus And  Allotment, And   Other   Matters  Relating  To  Issue  Of   Shares   Or Debentures".   Sections 69 to 75 are classed under the  sub- heading  ’Allotment’ and the only kind of allotment that  is dealt with in these sections is the appropriation of  shares to  individuals out of the unappropriated share  capital  of the company.  In these circumstances it would be  impossible to  give  to the word ’allotment’ in s. 75 (1)  a  different meaning. Now it is quite clear that when a share is forfeited and re- issued it is not allotment in the sense of appropriation  of share  out of the authorisbed and unappropriated capital  so as to bring the shares into existence.  In the present  case both  sides proceeded on the basis that the articles of  the company  dealing  with forfeiture of shares  which  we  have earlier set out are valid articles.  In other words, it  has not  been  disputed  that the Company  may  validly  forfeit shares in terms of those articles.  We accept that basis and proceed  on the assumption that it is correct.  In the  High Court  at Calcutta there was a difference of opinion  as  to the  validity of these articles but the later view  is  that the  articles are valid.  The reason for the view  has  thus been  put  in the latest case in the  Calcutta  High  Court, namely,  the Calcutta Stock Exchange Association Limited  v. S. N. Nundy. and Company(1).  Harries C. J. dealing with the very  articles  with which we are concerned observed  at  p. 264,  "’In  the  present  case,  the  Articles  relating  to forfeiture do not, in my view, offend against the (1) [1950] 1 I.L.R. Cal. 235. 706 provisions of the Companies Act, as they do not  contemplate a  reduction  of  capital  or a  purchase  of  shares  or  a trafficking in shares Now, obviously, -A if upon forfeiture, the shares had ceased to exist qua shares and become  merged in  the  unissued capital of the Company, then  there  would have  been a reduction of the capital and such a  forfeiture would  have been invalid.  The reason why it was  held  that the  forfeiture  was valid was 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:  see Naresh  Chandra Sanyal v. Ramani Kanta Bay (1).  We have  to examine the present case on this basis. If,  therefore, the shares which the Company forfeited  have to be considered as shares already Created and as continuing in  existence as such in spite of the forfeiture,  obviously they  could not be allotted in the sense in which that  word is understood in the Company law as we have earlier  stated. In  Morrison  v. Trustees etc.   Insurance  Corporation  the articles  of  the Company gave power to forfiet  shares  for non-payment  of calls -and further provided that "any  share so  forfeited  shall  be deemed to be the  property  of  the Company  ’and the directors may sell, reallot  or  otherwise dispose  of the same in such manner as they think fit".   It was  held  that  the Company could  re-issue  the  forfeited shares  giving  credit  for the money  already  received  in respect  of  them.   The  contention  that  the  transaction amounted to the issue of a share at a discount was rejected.

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Vaughan Williams L. J.. observed, "I do not like the use  of the  word  ’issue’ with reference to  the  transaction  with regard  to  these shares.  If they were  being  issued,  the argument  for  the appellant might possibly be right  ;  but they are not being issued.  When we look at the articles  we see that what takes place on (1), [1945]2 I.L.R. Cal. 105, (2) [1899] 68 L.J. CH 11.  707 a  forfeiture  of shares is that the power  of  transferring them  passes from the original shareholders to  the  company and the company can then transfer the shares subject to  the same  rights  and  liabilities  as  if  they  had  not  been forfeited".   To  the same effect are  the  observations  of Bacon V. C. in Ramwell’s Case (1).  Quite clearly, the  view well  accepted in Company Courts has been that issue of  the forfeited shares was not allotment of them but only a  sale. If it were not go. the forfeiture itself would be invalid as involving an ill,-gal reduction of capital.  If the  reissue of  a  forfeited share is only its sale, then it is  not  an allotment  and  that  being so, no question  of  filing  any return in respect of such reissue arises. It remains now to deal with sub-s. (5) of s. 75.  That  does create  a  difficulty.  It provides that no return  need  be filed  in  respect  of allotment  of  shares  forfeited  for nonpayment of calls.  It gives rise to an argument that  the Art contemplates an "allotment" of shares forfeited for non- payment of calls for otherwise it would not be necessary  to provide  that returns in respect of such allotment need  not be filed.  It is said that being so, the word "allotment" in s.  75  (1) should be understood as including the  issue  of shares  forfeited for other reasons, for there is no  reason to  make  any  distinction  between  shares  forfeited   for nonpayment of calls and those forfeited for other reasons in the present context.  This argument is no doubt  legitimate. But having given it our best consideration, we have come  to the  conclusion that it should be rejected.  We  think  that sub-s.  (5) owes its origin to a confusion of ideas.   Apart from it, all other provisions of the Act clearly contemplate by  allotment the creation of shares out of  the  authorised and unappropriated capital of the Company and not reissue of shares already created by allotment in the manner  aforesaid but subsequently forfeited.  There would be no justification for  altering the meaning of that word in any other part  of the Act because of (1) [1881] 50 L J. Ch. (N.S. 827). 708 the solitary provision occurring in sub-s. (5) of s. 75  The Companies Act in force before the Act of 1956 was the Act of 1913.  Section 104 (1) of that Act corresponded to s. 75 (1) of the present Act.  In 1936there were large amendments made in the 1913    Act.   Prior  to these amendments  there  was noprovision  in s. 104 of the Act of 1913  corresponding  to sub-s.  (5)  of s. 75 of the present Act.   Therefore,  upto 1936  there  was,  no  reason  to  contend  that  the   word "’allotment" in s. 104 (1) could at all include the re-issue of  a forfeited share.  The 1936 amendment added sub-s.  (4) to  s. 104 and that sub-section contained provision  similar to sub-s. (5) of s. 75 of the present Act.  We do not  think that  it could be legitimately contended that by the  amend- ment  of 1936 the meaning of the word ",allotment"’,  in  s. 104  (1) was altered.  That being so, the word  ""allotment" in s. 75 (1) must be understood without reference of  sub-s. (5)  in  the same way as that word in s. 104 (1) had  to  be understood  without reference to sub.s.(4) of that  section.

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It  is  safer  to read sub-s. (5) of s. 75  as  having  been enacted ex abundanti cautela, that is to say, to prevent any argument  being raised that a return has to be filed of  the re-issued  shares  forfeited for non-payment of  calls.   We also  agree with the view expressed in the High  Court  that the reason why only forfeiture for non-payment of calls  was mentioned in s. 104 (4) of the Act of 1913 and s. 75 (5)  of the  present Act is that there has always been a great  deal of  doubt as will appear from the difference of  opinion  in the  Calcutta High Court to which we have earlier  referred, as  to whether there can be any forfeiture of shares  except for nonpayment of calls which latter case had been expressly provided for by the statute.  The other cases of  forfeiture had  apparently not been mentioned because if they had  been it could have been legitimately argued that the  legislature considered such forfeiture valid and the legislature did not want to give support to that argument.  709 We  think  for these reasons that the appeal  fails  and  we dismiss it with costs. Appeal dismissed.