ORDER
1. This is an application under Section 111 of the Companies Act, 1956. (hereinafter referred to as “the Act”), seeking rectification of the register of members of Fortran Cirkit Electronics Private Limited, the first respondent (hereinafter referred to as “the company”). Originally, the petitioner had sought for removal of his name from the register of members and entry of the name of the second petitioner in view of the transfer of shares effected by petitioner No. 1 in favour of petitioner No. 2. Later, he made an amendment to the prayer on the ground that the impugned shares had been later forfeited by the company and resold to respondent No. 7 and as such he has sought for entry of his name first in the register by removing the name of respondent No. 7 and later entry of petitioner No. 2.
2. The facts of the case are, that, 10,090 equity shares in the company were issued as fully paid shares to the petitioner who was one of the promoters of the company as well as subscriber to the memorandum and articles of association. These shares were issued on various dates during the period from September 27, 1984, to July 31, 1986. At the time of incorporation of the company, the petitioner was a non-resident Indian and he returned to India permanently on August 17, 1986, after obtaining transfer of residence with effect from September 19, 1986. The share certificates were authorised to be issued in various board meetings and respondent No. 3 who is the present managing director of the company was authorised to sign the share certificates. These shares were pledged by petitioner No. 1 as security with respondent No. 2 for availing of various credit facilities and presently the share certificates are with respondent No. 2. The petitioners and the then directors of the company entered into an agreement with petitioner No. 2 for sale of all the shares in the company, and consequently petitioner No. 1 transferred the shares at face value to petitioner No. 2 some time in November, 1987. The necessary transfer documents were executed on May 15, 1993, and were lodged with the company. However, the other directors who were parties to the agreement did not transfer their shares. While the transfer deeds were with the company, the company had issued notice to petitioner No. 1 on July 12, 1993, calling upon him to pay the consideration amount of Rs. 10,09,000 being the face value of the impugned shares, alleging that no money was paid on the shares at the time of allotment even though they were issued as fully paid. To substantiate non-payment towards shares, the company had relied on two stamped receipts alleged to have been executed by petitioner No. 1 on January 31, 1987, for Rs. 8.5 lakhs and Rs. 1.59 lakhs. According to the petitioner, the stamped receipts (vouchers) were not genuine and the shares were issued to him as fully paid in consideration of the various sums of money the petitioner had spent for the benefit of the company. He had also relied on various statutory documents filed with the Registrar of Companies in this regard. Therefore, according to the petitioner, not only is the forfeiture wrong and invalid but also the failure to enter the name of petitioner No. 2 is wrong and invalid and as such he has sought for rectification of the register of members.
3. According to the reply filed by respondents Nos. 1, 3 and 4, the entire issue of the impugned shares as fully paid was a fraudulent act on the part of petitioner No. 1, who was in control of the company at the relevant time. Even though he was a non-resident Indian at the time of allotment and issue of shares, no Reserve Bank of India permission had been obtained nor had been produced by petitioner No. 1 at any time later. The statutory documents filed with the Registrar of Companies in respect of issue of shares was a collusive action between the then auditor of the company and one Shri P. Caliph, one of the then directors of the company. The nonpayment of money towards share consideration came to the knowledge of the company only some time in April, 1993, while verifying the records from the inception of the company to collect details for the Income-tax Department, at which time two stamped vouchers signed by petitioner No. 1 undertaking to pay Rs. 10,09,000 as consideration for the shares were discovered, ft is, therefore, clear that no amount towards consideration for shares was paid by petitioner No. 1. In view of this, the company had issued repeated notices to petitioner No. 1 calling upon him to remit the amount towards consideration and on failure on the part of the petitioner to do so, the shares were forfeited after due notice to petitioner No. 1 and were resold to respondent No. 7. Under these circumstances, the issue of shares without receipt of consideration was a fraudulent act and hence the action of the board of directors of the company was valid and as such, the prayer of the petitioner should be rejected.
4. According to respondent No. 2, the impugned shares are held by them as security for the due repayment of the seed capital and soft loans availed of, by the company. There is no record to show that, before exercising the right of transfer, the first petitioner had complied with the provisions of Section 82 of the Act, and clauses (5) and (6) of the articles of association of the company. The first petitioner did not obtain the approval in writing from respondent No. 2 and other financial institutions before the transfer of the impugned shares in favour of the second petitioner. By virtue of Section 84 of the Act, shares having been allotted to the first petitioner and duly registered, the second respondent cannot enquire into the validity or otherwise of the allotment. The company ought not to have forfeited and resold the impugned shares without obtaining the permission of the second respondent.
5. According to respondent No. 7, the impugned shares were forfeited by the company in accordance with law and were available for being reissued. He purchased these shares for valuable consideration and paid a sum of Rs. 3 lakhs by way of cheque No. 868716 to the company on November 15, 1993. Respondent No. 7 is a bona fide purchaser for value without notice of any defect in the title. He is willing to pay the balance of Rs. 7,09,000 to respondent No. 1.
6. The matter was heard on October 25,1996. Counsel for the petitioners, Shri C. Harikrishnan, argued to state that the board of directors does not have the powers to forfeit fully paid shares. Even assuming that the company had adopted the provisions of Table A of Schedule I, as per Articles 29 to 31 of Table A, the board could not have exercised the powers of forfeiture. These articles are applicable only in the case of failure to pay call-money. Failure to pay call-money would arise only in the case of partly paid shares and since the impugned shares were all issued as fully-paid, the question of applicability of Articles 29 to 31 does not arise. Even if any amount is due on the shares, the belated action of the company to forfeit shares after a period of 7 to 9 years after allotment and issue is hit by the provisions of the Limitation Act. If, according to the company, petitioner No. 1 had executed stamped vouchers undertaking to pay the money, the fact of which is denied by petitioner No. 1, the only course open to the company is to sue petitioner No. 1 for non-discharge of the undertaking. He further stated that the alleged collusion between the auditor and petitioner No. 1 along with another director in manipulation of various records filed with the Registrar of Companies can also not hold water, in the sense, the petitioner had ceased to be a director of the company as early as in 1987 and respondent No. 3 has been in the management and even the statutory records filed later showed that petitioner No. 1 was the holder of the impugned shares as fully paid-up. Therefore, according to Shri Harikrishnan, the forfeiture of the shares is invalid and beyond the powers of the board of directors. He further stated that the transfer-of the impugned shares to petitioner No. 2 was on account of an understanding arrived at between all the parties and respondent No. 3, who is the managing director of the company was also a party to that understanding and he was fully in the know of transfer of the impugned shares. The shares had been transferred for valuable consideration and on technical ground, while by refusing to register the shares, the company also exercised the authority to forfeit the shares. Further, the alleged non-receipt of the Reserve Bank of India permission can also not be looked into at this distant point of time as the petitioner, having been out of management of the company for so long, is not in a position to throw any light on this allegation. Therefore, he prayed for grant of prayers sought.
7. Shri V. S. Subramanian appearing for respondent No. 1 submitted that the act of forfeiture, is fully in accordance with law. The issue of shares by fraudulent means is void ab initio and, therefore, no relief could be granted to the petitioners. According to him, even though the petitioner, in his petition, has stated that the shares were issued in consideration of the various services rendered for the company, yet in his rejoinder the petitioner had submitted that the shares were issued for consideration of certain properties transferred to the company by the petitioner. Therefore, there is contradiction in his own statement and, as such, the same should not be given any credence. He further stated that because of the collusion with the auditors the accounts were so manipulated in the initial years when the shares were allotted and issued and that the value of assets had been increased to tally with the figures relating to the shares issued. Therefore, he prayed that a thorough investigation should be ordered by the Company Law Board to bring out the truth regarding the consideration alleged to have been paid and also how the account had been manipulated. According to him, being the managing director, petitioner No. 1 was in a position to manipulate the records and he has got the shares allotted to him as fully paid without payment of any consideration. Besides, he further stated that, while the Reserve Bank of India permission was obtained for allotment of shares to other non-resident Indians, no such permission had been received from the Reserve Bank of India regarding allotment of shares to petitioner No. 1. The non-payment of consideration towards shares is also corroborated, Shri Subramanian said, from the two stamped vouchers signed by the petitioner undertaking to pay the exact amount as consideration for the shares. The board of directors came to know of this non-payment towards shares only in 1993, when they had carried out a thorough check of all the records of the company right from the inception. According to Shri Subramanian, if the, shares had been allotted to the petitioners against transfer of properties, then it is for the petitioners to explain as to why he signed these two vouchers. In the absence of proper explanation from the petitioner in executing the vouchers the factum of non-payment for the shares has to be accepted. Even when the company came to know of the non-payment of consideration towards the shares, the company had followed the procedure as per the provisions of articles 29 to 31 of Table A by issuing a notice to the petitioner calling upon him to pay the amount. Only when the petitioner failed to pay the amount even after issue of repeated notices, the company, after due notice to the petitioner, forfeited the shares and later resold the same to respondent No. 7. He pleaded that before any order is issued, the entire matter should be investigated by an order of the Company Law Board.
8. Shri V. S. Ganesh Sharma, advocate for respondent No. 2, reiterated the submissions made in the pleadings. Shri R. Venkataraman, advocate, for respondents Nos. 3 and 4 concurred with the arguments of Shri Subra-rnanian, advocate, for respondent No. 7 and stated that his client was a bona fide purchaser of shares for consideration and the interest of his client should be protected by whatever order is passed by the Company Law Board.
9. We have perused the pleading and heard the arguments of counsel. The issues that emerge for our consideration are :
(i) Whether the forfeiture of the impugned shares is on justifiable grounds and is backed by provisions of law ?
(ii) Whether the name of the first petitioner should be entered in the register of members in the place of respondent No. 7 ?
(iii) Whether the name of the second petitioner is to be thereafter entered in the register of member ?
10. The following are the admitted facts in this case :
The impugned shares were issued as fully paid on various dates from 1984 to 1986. These shares, on the basis of having been fully paid, were pledged in favour of the second respondent for financial assistance availed of by the company. The shares were forfeited in the year 1993, i.e., after a gap of nearly seven to nine years after allotment as fully paid shares. The company does not have powers under its articles to forfeit the shares, but in view of its having adopted Table A of the Companies Act, it has the power to do so by virtue of the provisions of articles 29 to 31 of Table A. Annual returns filed right from the year of allotment to 1993 contained the name of the first petitioner as holder of the impugned shares as fully paid-up.
11. The disputed facts in this case are :
While according to petitioner No. 1, the shares were allotted in consideration of various expenditure incurred by the petitioner for the benefit of the company, and, therefore, the company has received full consideration for the shares before allotment, it is the contention of the company that no money was paid towards the shares and it has relied on the two stamped vouchers dated January 31, 1987, through which the petitioner admitted his liability towards consideration for the shares of Rs. 10.09 lakhs.
12. Articles 29, 30 and 31 of Table A read as follows :
“29. If a member fails to pay any call or instalment of a call on the day appointed for payment thereof, the board may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued.
13. 30. The notice aforesaid shall-
(a) name a further day (not being earlier than the expiry of 14 days from the date of service of the notice) on or before which the payment required by the notice has to be made, and
(b) state that in the event of non-payment on or before the day so named the shares in respect of which the call was made will be liable to be forfeited.
31. If the requirements of any such notice as aforesaid are not complied with any share in respect of which the notice has been given may at any time thereafter before the payment required by the notice has been made be forfeited by a resolution of the board to that effect.”
14. It is the contention of counsel, for the petitioner that article 29 of Table A does not authorise the directors to forfeit a fully paid share inasmuch as this article covers only cases where call has been made by a company and the same has not been paid by a shareholder. In the instant case, according to counsel, the company has not shown any proof of any call having been made and that the same had not been paid by petitioner No. 1. It is the contention of counsel of the respondent-company that since, petitioner No. 1 had fraudulently issued the shares to himself as fully paid, it issued notices in 1993 calling upon him to pay the consideration for the shares, and as such, the same should be treated as a notice of call and since petitioner No. 1 failed to respond, the company was right in exercising the power of forfeiture under article 29.
15. We feel, that for us to decide this, we need not go into the details as to whether the petitioner paid the money or not. It is an admitted position that the shares were issued as fully paid and nearly for nine years, they were treated as such and as a matter of fact petitioner No. 1 had even pledged the shares as fully paid for availing of the loan facilities for the company. In other words, on the strength of these shares as fully paid, the financial institutions had lent financial assistance to the company. Any way, we had the benefit of going through the relevant ledger accounts for the respective years 1985 and 1986. In the ledger accounts maintained for “Advance for Foreign Machinery Suppliers Account”, there are six debit entries with a notation that these advances had been paid by the promoters from their non-resident Indian accounts to suppliers in West Germany. Corresponding credit entries for these advances had been given on the personal account of both petitioner No, 1 and respondent No. 3. Out of the total amount standing in their credit, including the credits given towards advances for supply of machinery, shares have been issued to both petitioner No. 1 and respondent No. 3 by debiting their accounts. While the account of debit towards shares in respect of petitioner No. 1 is Rs. 10.09 lakhs, it is Rs. 12.95 lakhs in respect of respondent No. 3. Even though, during the arguments, it was contended by counsel for the respondent-company that there is no proof as to the payment of advance to foreign suppliers as well as receipt of machinery thereof, we are unable to accept these contentions for the following reasons.
16. The amount of advance to foreign suppliers as seen from the ledger account as noted earlier is nearly Rs. 20 lakhs and a similar amount has been given as credit in the respective personal accounts of these two litigants, The balance-sheet for these years reflects additions to fixed assets of a considerable sum of money. We are not in a position to subscribe to the contention of counsel for the respondent that the auditor of the company in collusion with petitioner No. 1 had manipulated the accounts of the company for the reason, that, if it is so, even the shares of respondent No. 3 which have been issued by virtue of credit entries in the account for advances made to the foreign suppliers could be treated as not supported by consideration. Even though, for the above, we can draw a1 prima facie opinion on the factum of consideration having been paid towards the impugned shares, we do not propose to do so, in view of our findings below.
17. The shares had been forfeited nearly nine years after the shares were issued as fully paid on the ground that consideration for the shares had not been paid, by the first petitioner. Even assuming that money was due on the date of allotment, the forfeiture after nine years would be against the provisions of the Limitation Act. Article 112 of the Indian Limitation Act, 1908, laid down that the period of limitation for a suit for recovery of call money by a company registered under any statute or Act was three years from the date when the call was payable. This article has now been omitted in the 1963 Act, and it would come under Section 114 of thc-1963 Act, by which the limitation for cases not covered by the Act would be three years. Therefore, assuming that the consideration for the shares was payable on the date of allotment, the right of recovery of the call money would expire after three years from the date of allotment.
18. Normally, in a case of allotment of shares, a company may call for the entire face value of the shares on allotment or it may call for a portion of the face value. In a case, where a company has allotted shares for part of the face value it issues a call notice for the balance money in one or more instalments. Therefore, in the normal course, no share is allotted unless otherwise some money has already been received by the company and the question of forfeiture of shares would arise only when, on the basis of calls made for the balance of amount, the same is not paid by a shareholder. This is a unique case before us, where shares, after having been issued as fully paid, have been forfeited after a period of nine years on the ground that at the time of allotment no money had been paid by the shareholder. The purpose of forfeiture of shares is twofold. One is by way of depriving the shareholder the benefit of the shares and the other is to dispose of the shares later to realise the value of the shares. If the company could not have realised the money after a period of three years in view of the limitation, it cannot, in an indirect way realise the same amount by re-issue after the forfeiture. In other words, according to us even in the case of forfeiture, the period of limitation has to be complied with. In this connection, it is worthwhile referring to the Division Bench judgment in Kotah Transport Ltd. v. State of Rajasthan [1967] 37 Comp Gas 288 (Raj) wherein the company had allotted as fully paid-up shares worth Rs. 1 lakh, free of cost to the Kotah Government, Later, the shares were transferred to the State of Rajasthan. These shares were forfeited by the company. The articles of the company contained more or less similar provisions as in articles 29 to 31 of Table A. Considering these articles, the court observed (page 298} “A bare perusal of article 29 would show that it can come into play only in a case where any member fails to pay any call or instalment on or before the date appointed for payment of the same. So, it was only in the case of the member’s failure to pay the call or instalment on or before the appointed date for payment that the directors were authorised to issue a notice requiring such member to pay the same together with interest.
19. Similarly, it is clear from the language of article 34(A) that the provision regarding forfeiture could apply in the case of non-payment of any sum which by the terms of the issue of the share became payable at a fixed time. In the case of the petitioner-respondent, these two articles were wholly inapplicable in respect of the shares which were allotted in consideration of the grant of monopoly.” On this basis, the forfeiture was set aside.
20. The case before us is more or less similar in nature. The shares were issued as fully paid and there is nothing on record to show that any call was made towards the shares before they were issued as fully paid. No doubt in 1993, the company called upon the petitioner to pay the amount on these shares but such notice cannot be treated as notice having been issued under articles 29 and 30 of Table ‘A’. Therefore, we have no hesitation to hold that shares issued as fully paid cannot be forfeited under the powers vested in the board by articles 29 to 31 of Table A.
21. We can also view this matter in a different angle. Assuming that the petitioner had not paid for the shares, the company itself relies on two stamped receipts alleged to have been executed by the petitioner towards consideration for the shares. In other words, the shares could be deemed to have been issued as fully paid on the strength of the stamped receipts which are more or less like IOUs or promissory notes. With the receipt of these IOUs/promissory notes, the consideration for the shares have been received by the company in a form other than cash. If the petitioner has not paid the money due as per these IOUs/promissory notes, the course of action for the company would be to take legal proceedings in realizing this money. It cannot forfeit the shares, that too, after a period of nearly 7 to 9 years, on the ground that no consideration has been paid by the petitioner on the shares. On this score also, the act of the company in forfeiting the shares is invalid.
22. Another ground taken by the company is that there was no authorisation from the Reserve Bank of India for issue of shares to the petitioner who was a non-resident Indian at the time of allotment of shares. As far as this objection is concerned, we consider that it is too late in the day to raise this objection after having kept quiet for over a period of nearly 7 to 9 years especially when the petitioner had left the management as early as in 1987 and respondent No. 3 was functioning as managing director afterwards. Even otherwise the Supreme Court has held in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) that the Reserve Bank of India can issue post facto approval. Nothing is on record to show whether the matter was taken up with the Reserve Bank of India at any time in this regard. Therefore, we do not find much substance in this objection justifying forfeiture of the fully paid shares.
23. Counsel for the petitioner also rightly pointed out, with reference to Section 84 of the Companies Act, to state that a certificate under the common seal of the company specifying any shares held by any member, shall be prima facie evidence of the title of the members to such shares. Having issued shares indicating therein that they were fully paid and having availed of loan facilities from financial institutions on the strength of the same, the company cannot, after a gap of a long period of time, dispute the amount paid on the shares. The company is completely estopped from disputing the amount as indicated in the share certificates as fully paid.
24. Taking into consideration, all the above, we have no hesitation to hold that the forfeiture of shares is invalid and as such the name of the petitioner should be put back on the register of members by removing the name of respondent No. 7. As far as the question of respondent No. 7 having purchased the shares in good faith is concerned, since the amount of Rs. 3 lakhs paid by him for shares is with the company, the same shall be refunded to respondent No. 7.
25. As far as rectification of the register of members by removing the name of the petitioner No. 1 to be restored on the basis of this order and entry of the name of petitioner No. 2 is concerned, we find that the instrument of transfer suffers from various legal infirmities as has been pointed out by the company. In view of this, the request of petitioner No. 2 for entry of his name in the register cannot be considered. He may lodge with the company, proper instruments of transfer duly complying with all the provisions of law for consideration by the board of directors of the company.
26. Rectification of the register of members by putting the name of petitioner No. 1 and removing the name of respondent No. 7 shall be carried out within a period of 30 days from the date of receipt of this order and simultaneously an amount of Rs. 3 lakhs paid by respondent No. 7 will also be refunded to him by the company within this period. With these directions, we dispose of this petition.