Case: The Alote Estate &amp; Anr Vs. R.B. Seth Hiralal Kalyanmal &amp; Ors

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 companys a 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.5. 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 Section 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 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.6. Respondent No. I 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.7. Now Section 156 of the Act deals with the liability as contributories. Clause (iv) of sub-section (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 of 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 Section 184 the Court shall settle the list of contributories 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.8. 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.9. 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 LJ, in In re Innes and Co. Ltd., (1903) 2 Ch Div 254, at page 262."You must shew that, these shares not having been paid for at all, the contract for purchase was a colourable transaction, and that in truth and in fact, qua value, these shares were not part of the consideration...."As stated in Palmers Company Law, 21st Edition, pages 190-191, the consideration for the allotment of shares may be money or moneys 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 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]As stated in Palmers Company Law, 21st Edition, pages 190-191, the consideration for the allotment of shares may be money or moneys 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 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.