Fully paid shares in winding up: contributory liability cannot rest on mere inadequacy of consideration.

In winding-up proceedings, liability of contributories is confined to amounts unpaid on shares, and a shareholder holding fully paid shares cannot be placed on the contributories list unless the register is first rectified or the allotment contract is properly impeached. Mere inadequacy of consideration for shares issued in exchange for property does not, by itself, justify inquiry into whether the shares were fully paid. Only where fraud is shown, or the consideration is plainly illusory or clearly not equivalent to the nominal value, can the character of the shares be questioned. On the facts stated, no rectification or fraud was alleged, so inquiry into consideration was impermissible.

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Issues: Whether, in winding-up proceedings and while settling the list of contributories, the court could inquire into the adequacy of the consideration for shares treated as fully paid up and fasten further liability on the shareholders without prior rectification of the register or proof that the share allotment transaction was fraudulent or illusory.

Analysis: The statutory scheme on contributories confines liability to the amount unpaid on the shares, and the court settles the list of contributories with power to rectify the register where necessary. A shareholder of fully paid shares is not liable to be placed on the contributories list unless the register is first rectified or the underlying contract for allotment is impeached in appropriate proceedings. The accepted rule is that, so long as the contract stands, mere inadequacy of consideration for shares allotted in exchange for property cannot by itself be investigated to displace the character of the shares as fully paid. Only where fraud is shown, or where the consideration is on its face illusory or clearly not equivalent to the nominal value, can the shares be treated as not fully paid. No step had been taken to rectify the register or avoid the allotment contract, and the application did not allege fraud but only inadequacy of price.

Conclusion: The inquiry into adequacy of consideration was impermissible, and the shareholders could not be treated as contributories on that basis.

Final Conclusion: The order directing inquiry was set aside and the single judge's refusal to investigate the adequacy of the share consideration was restored.

Ratio Decidendi: In winding up, a court cannot go behind a subsisting contract for allotment of fully paid shares to examine mere inadequacy of consideration as a basis for contributory liability unless the register is first rectified or the transaction is impeached for fraud or evident illusoriness.

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