1957 (3) TMI 19 - HC - Companies Law

Directors' Implied Agreement for Shares: Liability & Appeal Decision

Zamir Ahmed Raz Versus Dr. DR. Banaji

The court concluded that the respondents, by acting as directors of Filmland Ltd. and attending board meetings, had implicitly agreed to acquire the ... Directors - Only individuals to be directors Issues Involved:1. Whether the respondents are liable to be placed on the list of contributories under section 184 of the Indian Companies Act.2. Interpretation of Articles 100 and 104-A of the company's Articles of Association.3. Applicability of section 30(2) of the Indian Companies Act regarding the definition of a member.4. Analysis of relevant case law to determine the existence of an implied contract to acquire qualification shares.Issue-Wise Detailed Analysis:1. Liability of Respondents as Contributories:The primary issue is whether the respondents, appointed as directors of Filmland Ltd., are liable to be placed on the list of contributories under section 184 of the Indian Companies Act. The respondents attended board meetings and acted as directors but did not acquire the necessary qualification shares within the stipulated time. The court examined whether their actions constituted an implied contract to acquire these shares, thus making them liable as contributories.2. Interpretation of Articles 100 and 104-A:Article 100 of the company's Articles of Association stipulates that a director must hold ordinary shares of the nominal value of Rs. 10,000 within two months of appointment. Article 104-A states that a director who fails to obtain the required shares within the specified time shall ipso facto vacate office. The court needed to determine whether the two-month period allowed directors to resile from their position or if it implied a commitment to acquire the shares, thus creating a contract.3. Applicability of Section 30(2) of the Indian Companies Act:Section 30(2) defines a member as someone who agrees to become a member and whose name is entered in the company's register of members. The court noted that the respondents did not meet this definition strictly, as their names were not on the register. However, the court explored whether their actions as directors implied an agreement to take the shares, thus fulfilling the membership criteria indirectly.4. Analysis of Relevant Case Law:The court reviewed several cases to determine if an implied contract existed:- Isaacs' Case (Anglo-Austrian Printing and Publishing Union): A director who acted as such without acquiring qualification shares was held liable as a contributory because it was inferred that he had agreed to take the shares.- Hercynia Copper Co. Case: A director who did not act but was named and accepted the office was also held liable to be placed on the list of contributories.- Wheal Buller Consols Case: A director who acted without acquiring the necessary shares was not held liable as there was no implied contract to take additional shares.The court distinguished these cases based on the specific language of the articles of association and the actions of the directors.Judgment Summary:The court concluded that the respondents, by acting as directors and attending board meetings, had implicitly agreed to acquire the qualification shares within the stipulated two months. This constituted an implied contract under Article 100, making them liable to be placed on the list of contributories. The court emphasized that the two-month period was not a grace period to resile but a timeframe within which the directors were expected to fulfill their obligation to acquire the shares.The judgment settled the list of contributories as submitted by the liquidator, with the respondents required to pay the costs of the application fixed at Rs. 120.Separate Judgment Analysis:Chagla, CJ., in a separate judgment, emphasized that the articles and the Companies Act provided for automatic vacation of office if the qualification shares were not acquired within the specified time. He argued that this provision negated the possibility of an implied contract to acquire shares, as the directors would automatically vacate office without such shares. He concluded that there was no contract, express or implied, obligating the respondents to acquire the shares, and thus they should not be placed on the list of contributories.Final Outcome:The appeal was allowed, and the order placing the respondents on the list of contributories was set aside. The respondents were awarded costs, with the liquidator ordered to pay Rs. 120 from the company's assets. The appellants' attorneys were granted liberty to withdraw the sum of Rs. 500 deposited in court.