Panna Lal Sood vs The Jagatjit Distilling and Allied industries Limited

Kartar Singh, J.—This is an application for rectification or the Jagatjit Distilling and Allied Industries Company''s register u/s 38 of the Companies Act by entering the name of Panna Lal petitioner as holder of 15,500 shares Nos. 130871 to 131570, 131671 to 140870 and 145271 to 150870. The material facts bearing on the question of law involved may shortly be stated as follows:

Panna Lal, petitioner purchased 15,500 shares of the above-mentioned numbers of the Jagatjit Distilling & Allied Industries from Mr. L.P. Jaiswal Managing Director, respondent company and sent the scripts delivered to him by the transferor for being transferred in his favour to the company on 6th June 1947 along with the deed of transfer executed in his favour by Mr. Jaiswal. The petitioner also informed the company by a letter of 23rd June 1947, Ex. P. 4, that he was sending Rs. 575/4/- by means of a draft to cover the transfer charges. According to the allegations made by the petitioner in the application as well as in his statement recorded in Court, he did not hear from the company regarding the registration of shares in his name on the basis of transfer for some time and on 20th August 1947 he in the capacity of the Manager if the Traders Bank, New Delhi invited the immediate attention of the Company to return the share scripts that had been sent for transfer. This elicited no reply and another reminder was sent on 7-2-1949, complaining as to why share scripts were being withheld. This time he was, however, informed that the scripts could not be sent to him as they pertained to shares which had been forfeited on account of the fact that the call money was not paid. Accordingly another communication Ex. P. 8 was sent under registered cover asking company to return the scripts immediately as the company could not withhold the scripts in spite of the forfeiture of the shares. But the respondent company reiterated in their letter dated 25th February, 1949, Ex. P. 9 that the share scripts could not be sent to the petitioner as they related to forfeited shares. The petitioner further stated in Court that he had never received any notice of any call having been made by the company in respect of the unpaid amount of the shares and that he came to know only from the report of the Registrar Joint Stock Company, Patiala, that the shares in question were transferred in his name in 1-5-1948 and that the same had been forfeited on 5-5-1948 and on this information he was driven to file this application for the rectification of the company''s register as stated above. It was prayed inter alia that the resolution of 6-8-1947 in regard to the call money was ultra vires, illegal and inoperative because the item to consider the making of the said call did not appear on the agenda of the meeting called for 6-8-1947 and that the steps to enforce the call were taken at a time when the country was passing through a crisis of extreme severity and that under the circumstances the alleged forfeiture and removal of the name of the petitioner from the register of members of the respondent company was untenable and contrary to all canons of law and justice.

The application was supported by affidavit and was admitted to full hearing and notice was issued to the respondent company and intimation was also given to the Registrar, Joint Stock Companies, Patiala. The petition was resisted and hotly contested by the respondent company on various grounds. Some of these which form the subject of controversy may be summarised as under:

(a) That the petition was based on allegations which cannot be tried u/s 38 of the Companies Act as under the memorandum & Articles of Association, the Directors of the Company were vested with absolute discretion to make a call and the same cannot be challenged;

(b) That the shares were forfeited for non-payment of the call money and as such the Company was entitled not to return the scripts;

(c) That the averment made in paragraph No. 5 of the petition that the petitioner had no knowledge before February 1949 was wrong and that the petitioner knew all about the call long before;

(d) That the call was made on 6th August 1947, and was to be paid on or before the 30th September 1947, and that the notices were served through post as well as through the press and the final notice was given on 12th April 1948, that if the payment of the call money was not made by the 4th May 1948 the shares would be forfeited. It was claimed that in view of these circumstances the petition was misconceived and the move of the petitioner was mala fide and was made in order to harass the Company.

On one of the hearings arguments were heard on the preliminary objection with regard to the maintainability of the application u/s 38 but in view of the fact that reference was made to the merits of the case in the course of arguments opportunity was given to both sides to adduce evidence in the form of affidavit or otherwise and the decision on preliminary objection was also held over to be given along with the final disposal of the case. Both sides now have filed their affidavits as well as produced certain documents which have been duty exhibited on the record. Furthermore the petitioner, Panna Lal has come into the witness-box as his own witness while Mr. C.K. Khanna, Secretary of the Company was examined on behalf of the respondent. Some other witnesses were summoned by the petitioner but they were given up and full dressed arguments followed.

To begin with under the preliminary objection that the application is not maintainable u/s 38 the contention of the learned Counsel for the respondent was two fold. Firstly that Section 38 of the Companies Law deals with cases where (a) the name of any person is fraudulently or without sufficient cause entered in or omitted from the register of a company or (b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member, and that for these reasons only an application u/s 38 can be made while the case in hand is one of forfeiture of shares and the remedy lies by way of regular suit and not for the rectification of company''s register because no name of any person has been fraudulently or without sufficient cause entered in or omitted from the register of members. Secondly, that even if an application is maintainable and in order u/s 38 the point involved is a complicated one and affects the question of title and consequently should not be considered in summary proceedings as Section 38 contemplated. Reliance was placed on ''Jawahar Mills, Ltd., Salem v. Shah Mulchand & Co., Ltd.'', reported in (1949) 19 Com Cas 138 (Mad) as well as on ''Union Indian Sugar Mills Co., Ltd.'', v. Jaibeo'', 44 All 151, ''Matheran Sleam Tramway Co., v. B.N. Lang'', 33 Bom LR 184, ''Kasiviswanathan Chettyar v. Indo Burma Petroleum Co., Ltd.'', 162 Ind Cas 127 (Rang) and ''Ramesh Chandra v. Jogini Mohan'', 47 Cal 901.

In '' 44 All 151 '', certain property including the share in question in company known as Union Indian Sugar Mills Company, Limited was held by a family jointly and one Debi Dat who happened to be the Managing Director of the Company alleged that he had separated from the branches of the family and that an elaborate partition was carried with the result that the shares now in dispute were made over to him as part of his share. Their Lordships on the appraisement of the particular facts or that case held that a question of title was involved and the discretionary power of the Court was not judicially exercised u/s 38. On page 154, it was further observed that it is a matter of discretion whether the Court will exercise the summary jurisdiction and in a complicated or doubtful case the jurisdiction ought not to be exercised, but when the legal title of the applicant is clear the order ought to be made. Now in this case there is no dispute with regard to the title of the applicant and transfer of shares has admittedly been made in his favour. The sole question is as to whether any notice was served upon him in regard to the forfeiture or even if it was served whether such notice was valid notice inasmuch as the petitioner''s name was registered as a transferee of these shares on 1-5-1948 and the shares were forfeited on 5-5-1948, admittedly without giving any fresh notice.

In the Bombay case, reported in '' 33 Bom LR 184'', also the application was made u/s 38 of the Companies Act for the rectification of the register of members and the principle governing the Court''s discretion u/s 38 was discussed but it was held that S. 38 of the Companies Act was widely worded and it was a matter of discretion for the Court whether in any particular case it would hear the petition or leave the parties to a separate suit. This dictum rather furnishes an answer to the contention of the respondent''s Counsel and it appears that the scope of Section 38 is not so limited as urged by the learned Counsel for the respondent company.

The other authority relied upon is one of Rangoon High Court reported in '' 162 Ind Cas 127 (Rang)'', wherein it was held that where the directors carry out the provision of Articles of Association in a bona fide manner they cannot be said to be acting without sufficient cause and that it is a misreading of those words in Section 38 Companies Act, to suppose that they confer upon the Court jurisdiction to make a roving inquiry as to whether what has happened is desirable or even reasonable. This apparently does not exclude the jurisdiction of the Court u/s 33 and what is guarded against is that the proceedings u/s 38 do not require any roving inquiry but it does not imply that the bona fides of the company are not to be considered even by way of affidavits or by examining parties in order to adjudicate upon the question in dispute as to whether the removal of the name of the shareholder from the Company''s register was warranted by the circumstances and exigencies of the case.

In '' 47 Cal 901'' the proposition has been further explained and it was held that in a simple case where an immediate rectification is essential, it may be desirable to apply u/s 38, but if the case involves complicated question of title, an action should be brought.

On the contrary, the petitioner''s Counsel in reply to the preliminary objection relied upon ''Madhava Ramachandara v. Canara Banking Corporation'', AIR 1941 Mad 354 and In re: In Re: Peninsular Life Assurance Company Ltd., In the first case the shareholder of the Canara Banking Corporation Ltd., petitioned for the rectification of the Company''s register u/s 38 (1) of the Companies Act and on objection it was held that striking or expunging the member''s name from the register is an omission of his name within the meaning of Section 38 (1) (a). In In Re: Peninsular Life Assurance Company Ltd., an application was made for rectification of the share register of the Company by deleting certain shares standing that in the list of contributories settled by the Court he may be shown as an owner of 50 shares only. The application was considered u/s 38 as well as S. 184 of the Companies Act and it was held that Section 184 incorporates Section 38 and on an application under that section the Court has power to decide any question relating to the title of the aggrieved person to have his name omitted from the register of shareholder and generally to decide any question necessary or expedient to be decided for the rectification of the register.

On the examination of these authorities, it seems clear to me that the application is maintainable u/s 38 of the Companies Act but it is only to be considered as to whether any complicated question of law is involved as to warrant the institution of a regular suit or the rectification can be made by summary proceedings as applied for u/s 38 by the petitioner. In the light of the principle laid down in the above mentioned cases I am of the considered opinion that the respondent''s Counsel has failed to establish that there is any question of title involved between the parties or that the Court is confronted with any intricate question which should not be taken seisin of u/s 38 of the Companies Act. It appears that the respondent''s Counsel has tried to evade the issue and sought to take out the case from the ambit of Section 38 in order to drive away the petitioner to protracted litigation. Mr. Radhe Mohan Lal also drew my attention to an observation at page 146 of the Madras Case ''Jawahar Mills Ltd., Salem v. Official Receiver, Shah Mulchand Co., Ltd.'', (1949) 19 Com Cas 138 (Mad), which reads as follows:

There is no decided case in the reports in which the validity of a forfeiture was canvassed in a proceeding for rectification. Palmer on Company Law (1942 Edition) at page 110, refers to the case of Ystalyfera Gas Company, as an instance in point, but on a reference to the report the citation does not seem to be correct. There are no decisions, English or Indian, enabling us to determine the line of demarcation between the accrual of the power and the exercise of the power. That there is a distinction between the power of a company to forfeit share and the exercise of that power is clear from the decision of the Judicial Committee in ''Premila Devi''s case.'' (39) 20 Lah 1. Arts. 24 to 30 entitling ''forfeiture of shares'' in Table A, in our opinion lay down the further procedure to be followed after there was default in making the payment of a call or the installment of a call.

I have no dispute with the observation but I do not see in the light of the previous authorities discussed above and relied upon by the learned Counsel for the respondent as to how the jurisdiction is ousted u/s 38, where this Madras Case itself was decided u/s 38. Consequently there is no substance in the objection and the same is repelled. This brings me to the merits of the case.

Mr. A.N. Khanna on behalf of the petitioner contended that in the first place the position of the petitioner is that no notice with regard to the call money was served upon him and this has been stated in an affidavit filed by his client. The Counsel further argued that in paragraph 5 of the application it was definitely stated that the petitioner subsequent to the receipt of the letter dated 16th February 1948, from the respondent company discovered that a call of rupee one per share was made by the directors of the respondent company in pursuance of a resolution dated 6-8-1947 and in reply to this averment the respondent company in their written statement only stated that the allegation made in paragraph 8 of the petition was wrong but did not categorically state that they had actually served the petitioner with any notice from which it follows that no notice was served upon the petitioner and the position now taken up by the respondent company by producing a postal certificate receipt and a copy of the notice dated 24th February 1948, at late stage is not above suspicion. In support of the argument the Counsel further more drew my attention to the list of documents produced by the respondent on the first hearing and another list of the documents relied upon by the respondent comprising of more than a dozen documents and maintained that no reference was made to any notice given to the petitioner with regard to the call money.

On the other hand the respondent''s Counsel controverter the argument and averred that the copy of the notice dated 24-2-1948, is forthcoming from the record of the company and was further supported by the sworn testimony of the Secretary as well as by the postal certificate receipt which by no stretch of imagination can he taken as a fictitious one. It was urged that even if this notice was not shown in the list of documents there was no reason to doubt the genuineness of the document. Be that as it may, the matter, does not improve for the simple reason that this copy of notice is dated 24-2-1948 which shows that notice was given to the petitioner at much later stage inasmuch as initial notices for the call money were issued in August 1947 and the call money was admittedly made upon Mr. L.P. Jaiswal and not on the petitioner. It is also significant to note in this connection as argued by the petitioner''s Counsel that notice of call money was initially made upon Mr. L.P. Jaiswal although the application for transfer with the company was pending earlier having been made in June 1947. Mr. Khanna maintained that even if any notice was issued to the petitioner it was done so seemingly with the avowed object of realising the money from the petitioner and not from the transferor to whom notice had been given initially. Mr. A.N. Khanna in this respect bitterly attacked the company and stated that to all intents and purposes the company wanted to benefit Mr. L.P. Jaiswal who was their Managing Director and thought of issuing notice to the transferee petitioner at later stages although he had not become a member of the Company because transfer was not registered in his name until then and the company resorted to the device of having registered the transfer a few days earlier i.e., on 1-5-1948 and forfeited the shares on 5-5-1948. This aspect of the question however will be considered while dealing with the question of good or bad faith of both sides in dealing with this affair.

The question on the anvil at present is one of the notice whether it was issued at all or not and in consideration all the facts and circumstances I am of the opinion that some notice might have been issued by the company to the petitioner although there is no clear evidence as to its service. The contents furthermore are not known and it is again difficult to find as to whether notice was a regular one for the purpose of demand made upon him. The next contention of the learned Counsel for the petitioner is that even assuming that notice was served upon the petitioner and the money was not paid then the company could have rejected the transfer proposal and shares should not have been registered in the name of the petitioner. The argument was further stressed that this registration even after non-compliance as alleged by the respondent company with the call money is indicative of the fact that the company wanted to benefit the transferor and take undue advantage of the position of the transferee and fraudulently struck off the name of the petitioner from the company''s register.

The other contention in this respect raised by the learned Counsel for the petitioner is that call could not be made in the eye of law upon Mr. Panna Lal, Petitioner before he had become a shareholder in the register of the company u/s 30 (2) of the Companies Act. In this respect it was urged that Section 30 (2) of the Companies Act contemplates not only agreement to become a member of a company but also the registration of his name. Reliance was placed on ''Karachi Oil Products Ltd. v. Shree Narendra Singhji", 51 Bom LR 1012, wherein it was held that forfeiture is treated very strictly by the Courts and directors seeking to enforce it must pursue exactly the course of procedure marked out by the articles. A slight irregularity is as fatal as the greatest. Hence if the call, in respect of which the forfeiture is made is not validly made or if the notice on which the forfeiture is founded is inaccurate in requiring payment of interest from a wrong date, e.g., the forfeiture is liable to be held invalid. The Counsel maintained that in this case the call as alleged by the respondent was made upon the petitioner before his name was registered and as such the call even if the notice was given was invalid and not warranted by the provisions of Section 30. Reference was also made to Art. 29 of the Memorandum of Articles of Association which reads as follows:

If any member fails to pay any call or installment on or before the day appointed for the payment of the same the Directors may, at any time thereafter during such time as the call or installment remains unpaid, serve a notice on such member requiring him to pay the same, together with any interest that may have accrued and all expenses that may have been incurred by the company by reason of such nonpayment.

The Counsel argued that the word ''member'' is used in the article itself and no person can be treated as member so long as he is not registered in the company''s record as a shareholder. Reliance was placed upon ''Sawanmal Gopi Chand v. Shiv Charan'', 71 Ind Cas 814 (Lah) wherein it was held that where the Articles of Association of a Company provided that the company could decline to register without assigning any reason then so long as transferee''s name was not registered the transferor would continue to be the owner of the shares held. The learned Counsel concluded that in point of fact no call was made and even if it was made it was invalid inasmuch as the petitioner was not registered as a member at the time of call. Mr. Radhe Mohan Lal on behalf of the respondent had not much to say in reply to this significant contention of the petitioner and faintly argued that the petitioner knew all the time because he was an employee of Traders Bank and as borne out by the evidence he was the nominee of the Traders Bank whose Manager had been attending the Directors'' meeting. The Counsel sought to argue that the shares are benami in the name of the petitioner and it was the Traders'' Bank people who were actually holding the shares. The argument appears to be beside the point because the company itself registered the shares in the name of Panna Lal and the proposition of Benami is a misnomer and it is the petitioner in whose favour Mr. L.P. Jaiswal transferred the snares for consideration.

The learned Counsel for the respondent finally argued that the company carries on business at Kapurthala which is on the border of the province and in 1947 on account of disturbances there was some dislocation and the petitioner deliberately did not pay the call money and in 1948 when he saw that the company had prospered, he came forward to reclaim his shares and that his move is a mala fide one. It was also pointed out that the petitioner filed a suit at Delhi and then moved this Court for winding up the company and failed, which conduct shows that he was out to harass the company.

The position taken up by the petitioner''s Counsel was that it was Mr. L.P. Jaiswal, Managing Director who had sold the shares in favour of petitioner and the call if made at all on the petitioner was only to benefit Mr. Jaiswal as observed above and that the forfeiture of shares was made without any notice and as such was invalid and liable to be set aside. It was further argued that the conduct of the petitioner in filing a suit for injunction at Delhi or applying in this Court for winding up of the company was no bar in his way to safeguard his right because it was the conduct of the respondent company which roused him to move both ways; otherwise the petitioner''s interest in the company was already there to the extent of Rs. 80,000/- and there is no reason why he should have avoided the payment of Rs. 15,500/-which could again be claimed against him under the company''s law and under the articles of association and that the company had forfeited shares to the extent of Rs. 2 lakhs as per statement of their Secretary in Court and it appears that the Company was reaping benefit by way of forfeiture to and to its income otherwise they had not issued dividend after 194b. The Counsel averred that it was not that the company had been very prosperous and the petitioner thought of reclaiming his shares but he has come for rectification of the company''s register as the company fraudulently forfeited his shares.

In this connection again both sides relied upon the Madras ruling Jawahar Mills v. Official Receiver'', and Mr. Radhe Mohan Lal contended that in that case on similar grounds the application u/s 38 for the rectification was rejected on the score of inordinate delay and nonpayment of call money. The perusal of the judgment, however, reveals a different story because in this Madras case the call was made on 20th August 1939 and the resolution of forfeiture was passed on 25th November 1940. Subsequently several notices were issued one after the other, i.e., on 31st December, then for 20th February 1940, further on for 31st March and the last for 15th September 1941, and as such no less than four notices were issued sheer for the purpose of forfeiture which were not complied with. The application moreover was made on 5th March 1946 after five years and by that time the shares had changed several hands and it was rather impossible to deliver the scripts to the applicant. While in this case the scripts are in tact and have been produced in Court. Consequently, the Madras authority is distinguishable and as observed by the learned Judges the decision was arrived at on the particular facts of that case, and as such it has no bearing.

In the result the forfeiture of shares in question and the consequent omission of the name of the petitioner from the company''s register in this case was made under circumstances which are highly suspicious and I have no hesitation in holding that the forfeiture of the petitioner''s shares was invalid and the same must be set aside. The application is accordingly allowed with costs and it is ordered that the petitioner''s name be entered in the Company''s register as a holder of shares No. 130871 to 131570, 131671 to 140870 and 145271 to 150870. The necessary intimation shall go to the Registrar, Joint Stock Companies also u/s 39 of the Companies Act. The petitioner is also directed to deposit the amount of call money of Rs. 15,500/- within 14 days from today either at the registered office of the company or with its bankers, Imperial Bank of India. In default he shall have to bear the consequences according to law.

No arguments were addressed regarding the interest on this call money and I have not considered that aspect of the question. Counsel''s fee Rs. 250/- (rupees two hundred and fifty), Announced.