Fraudulent misfeasance upheld, but financial assistance ban held not to cover subscription for a company's own shares.
Fraudulent misfeasance was found where company funds were used in a fictitious scheme that routed money back to directors and defeated the company's right to call on shares, so that finding was upheld. On the financial assistance point, section 45 of the Companies Act, 1929 was held not to extend to money advanced to enable directors to subscribe for the company's own shares, because "purchase" in the prohibition was confined to acquisition of existing shares and did not include subscription for newly issued shares. The appeal therefore failed on the misfeasance finding, while the statutory prohibition was rejected as inapplicable to subscription.
Issues: (i) Whether the appellant was guilty of fraudulent misfeasance in the transactions impugned by the liquidator; (ii) Whether section 45 of the Companies Act, 1929 applied to money advanced by a company to enable directors to subscribe for its own shares.
Issue (i): Whether the appellant was guilty of fraudulent misfeasance in the transactions impugned by the liquidator.
Analysis: The finding of the trial judge that the transactions were fictitious and that the company had been defrauded of its right to calls on the shares was accepted. The evidence established a fraudulent scheme by which company funds were routed back to the directors and used to meet liabilities on shares issued to them.
Conclusion: The finding of fraudulent misfeasance was affirmed and stood against the appellant.
Issue (ii): Whether section 45 of the Companies Act, 1929 applied to money advanced by a company to enable directors to subscribe for its own shares.
Analysis: Section 45 prohibits a company from giving financial assistance for the purpose of or in connection with a purchase of its shares. The word "purchase" was held not to extend to acquisition of shares by subscription, as the Companies Act consistently distinguishes between issue, subscription, application and allotment on the one hand, and purchase or transfer on the other. A subscription creates a share rather than purchasing an existing one, so the statutory language could not be stretched to cover the transaction.
Conclusion: Section 45 did not apply to the impugned subscription transaction, and the contrary view was rejected.
Final Conclusion: The appeal failed because the fraudulent misfeasance finding was upheld, although the statutory prohibition on financial assistance was held inapplicable to a subscription for the company's own shares.
Ratio Decidendi: In a penal prohibition, the word "purchase" must be confined to the acquisition of existing shares and does not include subscription for shares to be issued by the company.
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