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PETITIONER: THE ALOTE ESTATE & ANR.

       Vs.

RESPONDENT: R.B. SETH HIRALAL KALYANMAL & ORS

DATE OF JUDGMENT: 20/02/1970

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. HEGDE, K.S.

CITATION:  1971 AIR  920            1970 SCR  (3) 740  1970 SCC  (1) 425

ACT:      Company--Shares in Company--Allotment in  consideration of  allottee transferring land to Company--if in winding  up proceedings  enquiry con be made into value of land  without rectification of Company’s registration.

HEADNOTE:      The  Appellants  were  allotted 18,000  fully  paid  up shares  in a company in consideration of transferring  6,000 acres of agricultural land to the company for cultivation of sugar-cane.   After a petition was filed for winding up  the company, two joint Liquidators were appointed and they  took steps  to settle the list of contributories.   ’While  these proceedings  were  pending  an  application  was  filed   by Respondent No. 1 praying that an enquiry be made in  respect of  the price paid by the Appellant for the 6,000  acres  of land.   It was urged that such enquiry would show the  value of the land to be well below the consideration for which the shares were allotted and that the Appellants would therefore be liable as contributories in respect of -the difference.      The company Judge held that in a proceeding for winding up and while settling the list of contributories it was  not open  to go behind the transaction entered into at the  time of  the formation of the company and that the  consideration which  had been freely accepted by The company could not  be challenged  as  being  inadequate  in  the  absence  of  any allegation of fraud However, the Division Bench, in  appeal, held  that  an inquiry would be necessary as  there  was  an indication that the allottees of the shares had paid only  a fraction of the nominal value.      On appeal to this Court,      HELD:Allowing the appeal,      It cannot he disputed that a shareholder of fully  paid up  shares will not be placed on the list of  contributories or  made  to contribute towards the assets  of  the  company unless  the  register is rectified and it is  determined  in appropriate  proceedings  that  he is not a  fully  paid  up shareholder.  No steps were taken by the liquidators to have the  register rectified or the contract entered into by  the company with the appellants avoided by means of  appropriate

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proceedings.   Even in the application filed  by  respondent No.  1 there was Do allegation of fraud.  The  facts  stated related more to inadequacy of price or consideration and not to its being illusory or the like.  The learned single judge was  therefore right and the Division Bench was in error  in directing   an  inquiry  into  the  question   whether   the appellants bad paid consideration which was inadequate. [743 F, 744 C-D]     In re Innes & Co., Limited, [1903] 2 Ch.  Div. 254, 262, referred to.

JUDGMENT:     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1010  of 1966.     Appeal  by  special leave from the  judgment  and  order dated July 9, 1965 of the Madhya Pradesh High Court,  Indore Bench in Letters Patent Appeal No. 24 of 1962. 741     S.V.  Gupte, N. D. Karkhanis and A. G. Ratnaparkhi,  for the appellants.     Mohan Behari Lal, for respondent No. 1.     C.  K.  Daphtary,  C.  P. Lal  and  N.  N.  Sharma,  for respondents.  Nos. 2 to 4.     The Judgment of the Court was delivered by     Grover,  J.  This is an appeal by special leave  from  a judgment  of the division bench of the Madhya  Pradesh  High Court  reversing  the  order  of the  Company  Judge  in  an application made by respondent No. 1 for an inquiry into the allegation  that the consideration for 18,000 shares of  the Vikram  Sugar Mills Ltd. (now under liquidation)  valued  at Rs.  18  lakhs was not fully paid up  by  the  shareholders, namely, the present appellants.     The facts may be succintly stated.  Appellant No. 1, the Alote  Estate, was a firm consisting of two partners at  the material  time.  It came into existence in 1944 when  Vikram Sugar  Mills  Ltd., hereinafter called  the  "company",  was proposed  to be floated.  The two partners of the firm  were His  Highness Col.  Sir Vikramsingh Rao Pawar, Ruler of  the State  of  Devas  (Senior) and R. K.  N.  Gajapati  Raju  of Vaizagapatnam who died sometime in 1946 with the result that the firm was dissolved.  In 1947 the ruler of Dewas (senior) was  taken. in adoption by Her Highness the  Senior  Dowager Maharanisaheba  of Kohlapur.  He assumed the name and  title of His Highness Maj  Gen.  Sir Shahaji Chhatrapati  Maharaja of Kohlapur.  After the constitution of the firm called  the Alote Estate, the company was incorporated in February 1944. The  firm  held  extensive  agricultural,  land  which   was suitable  for cultivation of sugarcane.  It had  transferred 6,000  acres  out of its holding to the company in  lieu  of 18,000  fully  paid  shares of Rs.  100/-  each  which  were registered in the name of the firm.      Respondent  No.  1  was originally a  director  of  the company. He made a proposal for advancing debenture loan  of Rs.  20 lakhs to the company which proposal was accepted  by the  Board of Directors as also at an extraordinary  general meeting  of  the  company on September  16,  1946.   He  was appointed  Managing Agent of the company.  On the same  date at  the  meeting the shareholders of the  company  passed  a resolution  that out of 6,000 acres of land acquired by  the company  from  the  Alote Estate  2,000  acres  selected  by respondent  No.  1  or his representative  be  returned  and retransferred  to  the  Estate.  In  consideration  of  such transfer 9,000 shares were to be surrendered by the  Estate.

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Effect  was  given  to this resolution and in  the  list  of shareholders the number of shares held 742 by the firm was shown as 9,000 instead of 18,000 subject  to confirmation  by  the  court.  A resolution  was  passed  on October 27, 1947 for reduction of the capital from 60  lakhs to  Rs.  35  lakhs.  The court was  also  moved  for  giving permission  for reduction of the .capital.  On  January  23, 1950,   Prabhakar  Parashuramji  Pandita   shareholder-filed before  the High Court a petition under ss. 166 and  162  of the Companies Act 1913 for winding up the company.  On April 2, 1951 two joint liquidators were appointed.     The  liquidators  took  steps  to  settle  the  list  of contributories  and ,objections were raised by  Ms  Highness the  Maharaja  of  Kohlapur  as also  by  the  firm  against inclusion  of  their  names  in  that  list.   While   these proceedings were pending an application was filed by respon- dent  No. 1 on October 31, 1961 praying that an  inquiry  be made  in respect of the price paid for 6,000 acres  of  land before  the allotment of the shares ’and "to hold the  Alote Estate  and His Highness the Maharaja of Kohlapur liable  as contributories  to the extent of money’s worth not found  to have been fully paid in addition to and independently of the liability  for  Rs. 9 lakhs" which according  to  the  joint liquidators was the amount of liability of the Maharaja as a contributory.   It  was  alleged, inter  alia,  that  on  an average  the  price per acre -paid for 6,000 acres  of  land before the allotment of the shares was approximately Rs. 30. On that basis the Maharaja and the Alote Estate were  liable as contributories in the sum of Rs. 16 lakhs ’as the  shares were not fully paid by value in kind.  The Maharaja and  the Alote  Estate  in  reply took up the position  that  in  the absence of rectification of register by -appropriate  action they  were not liable to pay as contributories because  they held  shares  which  were fully paid  up.   As  regards  the company’s  resolution  to give up 2,000 acres out  of  6,000 acres and reduce the value of shares allotted to 9 lakhs  it was maintained that the same was an independent  transaction and  its  effect could be considered  only  in  ’appropriate proceedings in accordance with law.     The  learned Company Judge by his order dated  July  31, 1962  held  that in a proceeding for winding  up  and  while settling  the list of contributories it was not open  to  go behind  the  transaction ,entered into at the  time  of  the formation  of the company and that the  consideration  which had  been  freely  accepted  by the  company  could  not  be challenged  as  being  inadequate in  the  absence  of  ’any allegation  of fraud.  He was further of the view  that  the contention  of  respondent No. 1 that the valuation  of  the land  was  Rs.  30 and not Rs. 300 per  acre  could  not  be inquired  into and it was not necessary to consider  whether such  inquiry was barred by limitation in view of S. 235  of the  Act.  It was, however, observed that if the  allegation of respondent No. 1 was that the Alote Estate as an  officer of the company was guilty of misfeasance or breach of  trust the application having been made more than three years 743 from  the date of first appointment of liquidators would  be clearly barred.  Reference was made to numerous English  and Indian  decisions for coming to the conclusion that a  fully paid  shareholder  could not be called  upon  to  contribute towards the assets of the company in respect of such, shares held by him.  Other points were left for decision after  the petition  for confirmation of the resolution of the  company was disposed of.

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    Respondent  No.  1 filed an appeal  under  the  Letters Patent.  The division bench hearing the appeal seems to have been  influenced by the possibility that the land  had  been purchased  by the Alote Estate at a small fraction of  value for  which it had been sold to the company largely owing  to the  Maharaja  being  all powerful in  the  conduct  of  its affairs.   It  was  considered  that  an  inquiry  would  be necessary  when there was a prima facie indication that  the allottee  of  the  shares had paid only a  fraction  of  the nominal value.      Now  S.  156  of the Act deals with  the  liability  as contributories.  Clause (iv) of sub-s. (1) provides that  in the  case  of a company limited by  shares  no  contribution shall  be  required  from any member  exceeding  the  amount unpaid  on the shares in respect to which he is liable as  a present  or  past  member.  Section  158  defines  the  term "contributory".  It means every person liable to  contribute to the assets of a company in’ the event of its being  wound up.  Under s. 184 the court shall settle the list of contri- butories  with power to rectify the register of  members  in all  cases where rectification is required in  pursuance  of the Act.  Sections 185 and 186 confer power on the court  to require  delivery  of property from a  contributory  and  to order payment of debts determined by it.      The  material  question,  therefore,  was  whether  the appellants  could be placed on the list  of  contributories. It could hardly be disputed that a shareholder of fully paid up  shares will not be placed on the list of  contributories and  made  to contribute towards the assets of  the  company unless  the  register is rectified and it is  determined  in appropriate  proceedings  that  he is not a  fully  paid  up shareholder.      In England the rule which has been accepted as  settled is  that although the court can inquire into_ an  allegation that  owing to fraud the contract relating to fully paid  up shares  was  vitiated but unless the contract  is  impeached mere  inadequacy  of price is not sufficient  of  itself  to invalidate the contract.  In the words of Vaughan  Williams, L.J. in In re Innes & Co.(’), Limited :                   "You  must  shew that,  these  shares  not               having been paid for at -all, the contract for               purchase was a colour- (1) (1903) 2 Ch. Div. 254,262. 744               able  transaction,  and that in truth  and  in               fact, qua value, these shares were not part of               the consideration...... As stated in Palmer’s Company Law, 21st Edition, pages  190- 191,  the consideration for the allotment of shares  may  be money or money’s worth e.g., the transfer to the company  of property.  If a valid contract is made for the acceptance by the  company of specified property in payment of shares  the court  will not whilst the contract stands inquire into  the value  of  the consideration even at the  instance  of  -the liquidator.   Where, however, the contract is fraudulent  or shows on the face of it that the consideration given to  the company  is  illusory or is clearly not  equivalent  to  the nominal  value  of  the shares the shares  cannot,  to  this extent, be treated as fully paid and the shareholder may  be held liable to pay for them in full.  It is significant that no steps were taken by the liquidators to have the  register rectified  or the contract entered into by the company  with the appellants avoided by means of appropriate  proceedings. Even in the application filed by respondent No. 1 in October 1961  there  was no allegation of fraud.   The  fact  stated

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related more to inadequacy of price or consideration and not to  its  being illusory or the like.  In  our  judgment  the learned single judge was right and the Division Bench was in error in directing an inquiry into the question whether  the appellants had paid consideration which was inadequate.      The appeal is consequently allowed and the order of the Division  Bench is set aside and that of the learned  single judge restored with costs. R.K.P.S.                                       Appeal allowed 745