1970 (2) TMI 69 - SC - Companies Law

Court sets aside order holding shareholders liable without proper legal grounds. Inquiry needed for alleged inadequate consideration.

The Court allowed the appeal, setting aside the Division Bench's order and restoring the Company Judge's decision. Shareholders with fully paid up shares ... Whether the consideration for 18,000 shares of the Vikram Sugar Mills Ltd. (now under liquidation) valued at ₹ 18 lakhs was not fully paid up by the shareholders, namely, the present appellants? Held that:- 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 equivlent 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. Appeal allowed. Issues:- Allegation of consideration not fully paid for shares of a company- Inquiry into liability of shareholders as contributories- Interpretation of relevant sections of the Companies Act, 1913- Legal principles regarding fully paid up shares and shareholder liabilityAnalysis:The judgment involved an appeal regarding an inquiry into the allegation that the consideration for 18,000 shares of a company was not fully paid up by the shareholders. The facts revealed that the company received 6,000 acres of land in exchange for the shares. The respondent sought an inquiry into the value of the land and the liability of certain shareholders as contributories. The Company Judge initially held that the consideration accepted by the company could not be challenged without fraud allegations and that fully paid shareholders cannot be called upon to contribute towards company assets.The Division Bench reversed the Company Judge's order, emphasizing the need for an inquiry due to the possibility of inadequate consideration for the shares. The judgment delved into the relevant sections of the Companies Act, particularly focusing on the liability of contributories. It highlighted that a shareholder with fully paid up shares should not be placed on the list of contributories unless determined otherwise through appropriate proceedings.The judgment discussed legal principles from English law, stating that mere inadequacy of price is not enough to invalidate a contract for fully paid up shares unless there is fraud or the consideration is illusory. It emphasized the importance of rectifying the register or avoiding contracts if necessary. The Court found that no fraud allegations were made, and the concern was more about the inadequacy of price rather than the invalidity of the consideration.In conclusion, the Court allowed the appeal, setting aside the Division Bench's order and restoring the Company Judge's decision. The judgment reiterated the principle that shareholders with fully paid up shares should not be held liable as contributories without proper legal grounds.