1950 (2) TMI 6 - HC - Companies Law

Court clarifies prospectus statements, validates resolutions by disqualified directors, upholds share forfeitures. Shareholders lose rescission right.

Shiromani Sugar Mills Ltd. Versus Debi Prasad

The court upheld that the statement in the prospectus regarding promises made by promoters did not constitute fraudulent misrepresentation. It clarified ... Prospectus – Registration of, Shares – Power, to issue of at discount, Directors – Power of and Winding up - Liability as contributories of present and post members Issues Involved:1. Fraudulent misrepresentation by the promoters.2. Failure to fulfill promises made at the time of share purchase.3. Invalidity of resolutions due to disqualified directors.4. Validity of resolutions forfeiting shares.Issue-wise Detailed Analysis:1. Fraudulent Misrepresentation by the Promoters:The court examined whether the original contract for the purchase of shares was procured by fraudulent misrepresentation. It was stated that 'to constitute a binding contract to take shares in a company when such contract is based upon application and allotment, it is necessary that there should be an application by the intending shareholder, an allotment by the directors of the company of the shares applied for, and a communication by the directors to the applicant of the fact of such allotment having been made.' The court noted that a shareholder induced by fraudulent conduct is entitled to rescind the contract provided it is done within a reasonable time after discovering the fraud. The learned Judge upheld the contention that the prospectus contained a misrepresentation, specifically the statement 'the managing agents with their friends, promoters and directors have already promised to subscribe shares worth Rs. 6,00,000.' However, the court found no specific pleadings or proof that this statement was a misrepresentation or that it induced the opposite parties to purchase the shares. The court concluded that the statement was not a misrepresentation of fact and that any misunderstanding by the opposite parties was their own fault.2. Failure to Fulfill Promises Made at the Time of Share Purchase:The court discussed the promises held out to the opposite parties at the time of the purchase, such as the statement that 'our shareholders will be highly and satisfactorily benefited by way of dividend.' The court held that these were not representations of fact but rather puffing, which must be allowed in a prospectus. The court emphasized that such statements do not imply the existence of facts that were non-existent and did not form a material term in the contract. The court also noted that the learned Judge had erroneously taken into account various acts of breach of rules by the directors, which do not entitle the shareholders to rescind their contract of purchase of shares.3. Invalidity of Resolutions Due to Disqualified Directors:The court examined whether the resolutions passed by the directors were invalid because the directors voting for the resolutions had ceased to be directors. It was found that several directors had not paid the necessary allotment and call moneys in time, thereby disqualifying themselves. However, the court relied on Article 181 of the Articles of Association, which states that 'all acts done by any committee of Directors or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there are some defects in appointments of any such directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid as if every such person has been duly appointed and was qualified to be a Director.' The court concluded that the resolutions allotting the shares and making calls for the money were valid despite the directors' disqualification.4. Validity of Resolutions Forfeiting Shares:The court also examined the validity of the resolutions forfeiting the shares due to non-payment of allotment and call moneys. The court held that the act of forfeiting the shares was valid for the same reasons that validated the resolutions of allotment and calls. The liability of the opposite parties to pay the moneys demanded by the Official Liquidator arose before the forfeiture and was not wiped off by it. The court emphasized that the shareholders' contract to purchase shares is only voidable, not void, on account of misrepresentation in the prospectus, and that the shareholders had lost their right to rescind the contract due to laches and the winding up of the company.Conclusion:The court allowed all the applications and decreed the suits, but did not allow any costs to the Official Liquidator. The company was ordered to bear its costs of both courts itself due to the misconduct of its directors and managing directors.