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1933 (12) TMI 26 - HC - Companies Law

Issues Involved:
1. Ultra vires nature of the Bond scheme.
2. Illegality of the contracts under Section 23 of the Contract Act.
3. Recovery of money by subscribers.
4. Entitlement of subscribers to funds.
5. Equitable remedies and tracing orders.
6. Allocation of funds for charity and liquidation costs.

Issue-wise Detailed Analysis:

1. Ultra vires nature of the Bond scheme:
The Bond scheme was deemed ultra vires as it did not conform to the company's memorandum of association. The memorandum specified that the Special Donation Fund should be formed from donations of Rs. 50 or multiples thereof. The Bond scheme, involving subscriptions of Rs. 5 and Rs. 10, did not align with this requirement and thus fell outside the company's powers.

2. Illegality of the contracts under Section 23 of the Contract Act:
The contracts were considered illegal because they involved a lottery, which is prohibited under Section 294-A of the Indian Penal Code unless authorized by the government. The court held that the scheme's reliance on a drawing to determine prizes rendered it unlawful. The illegality of the object or consideration of these agreements made the contracts void.

3. Recovery of money by subscribers:
The court examined whether subscribers could recover their money under Section 65 of the Contract Act, which deals with restitution in cases of void agreements. Despite the contracts being void, the subscribers were not in pari delicto (equally at fault) with the company. The court noted that subscribers were a protected class under statutes against lotteries and thus could seek recovery.

4. Entitlement of subscribers to funds:
The court differentiated between various categories of subscribers:
- Those who contributed to the old Mysore Company were barred from recovery due to acquiescence.
- Subscribers who won and received prizes were also barred.
- Applicants for loans who applied after the last drawing were entitled to refunds unless they received their loans.
- Certificate-holders and Bond-holders were entitled to recover 70% of their subscriptions, less amounts paid out and expenses incurred.

5. Equitable remedies and tracing orders:
The Bond-holders' claim was for a tracing order, an equitable remedy. Despite doubts, the court allowed Bond-holders to recover 70% of their subscriptions, considering that they were not in pari delicto and should not be in a worse position due to the scheme being ultra vires. The court emphasized that equitable principles necessitated a fair outcome.

6. Allocation of funds for charity and liquidation costs:
The court directed that 30% of the subscriptions be allocated to charity, as per the memorandum. The liquidators were instructed to set aside funds for liquidation costs and distribute the remaining assets proportionately among the claimants. The court also fixed costs for various parties involved in the case, ensuring that these costs would be paid from the estate.

Conclusion:
The court concluded that the Bond scheme was ultra vires, and the contracts involving lotteries were illegal. However, subscribers were allowed to recover a portion of their contributions, except for those who had acquiesced or received prizes. The court emphasized the need to allocate funds for charity and cover liquidation costs, ensuring a fair distribution of remaining assets among the claimants.

 

 

 

 

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