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TMI Blog1970 (9) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... irection. On January 7, 1942, the complaint of Johurmull Daga & Company was referred to the full committee of the exchange. Sanyal failed to pay the amount directed to be paid by him and he was by resolution dated February 19, 1942, declared a defaulter. On September 1, 1942, at a meeting at which Sanyal was present, the full committee resolved that the share standing in his name be forfeited to the exchange with effect from September 1, 1942, and that Sanyal be expelled from the membership of the exchange. Sanyal then instituted an action in the High Court of Calcutta on its original side, claiming a declaration that the articles of the exchange providing for "forfeiture of a fully paid-up share were ultra vires and illegal" and that "particularly articles 21, 22 and 24 were invalid"; that the share held by him had not been properly forfeited by the exchange and that forfeiture of the share was "irregular, void and inoperative and was not binding upon him". He also claimed an order that he be restored to the membership of the exchange and that the share register be rectified accordingly. In the alternative Sanyal claimed a decree for Rs. 55,000, being the value of the share, or, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n stocks and shares". Article 28 : "Any member whose share has been so forfeited shall notwithstanding be liable to pay and shall forthwith pay to the Association all moneys owing by the member to the association at the time of the forfeiture together with interest thereon, from the time of forfeiture until payment at 12 per cent. per annum and the committee may enforce the payment thereof, without any deduction or allowance for the value of the share at the time of forfeiture". Article 29 : "The forfeiture of a share shall involve the extinction of all interest in and also of all claims and demands against the association in respect of the share and all other rights incidental to the share, except only such of those rights as by these articles expressly saved". Article 31 : "The association shall have a first and paramount lien upon the share registered in the name of each member and upon the proceeds of sale thereof for his debts, liabilities and engagements...............". Article 32 : "For the purpose of enforcing such lien the Association may sell the share subject thereto in such manner as they think fit.................." Article 33 : "The net proceeds of any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-allot or otherwise dispose of the share for satisfaction of all debts which may then be due and owing by the defaulter either to the exchange or to any of its members arising out of transactions or dealings in stocks and shares. Forfeiture of a share involves extinction of all interest in and also of all claims and demands against the exchange in respect of the share and all other rights incidental to the share, but not the liability of the erstwhile member to discharge his liabilities to the exchange. The exchange has a first lien upon the share of a member and upon the proceeds of sale thereof for his debts and liabilities, and in enforcement of the lien, the exchange may sell the share. The net proceeds of the share subject to the lien if sold will be applied in or towards satisfaction of the debts, liabilities or engagements of the shareholder and the residue, if any, paid to such member, his executors, administrators, committee, curator or other representatives. In this appeal counsel for Sanyal contended, that under the Indian Companies Act, 1913, a fully paid-up share cannot be forfeited for failure to carry out any engagement by the shareholder other than an engagemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to forfeiture of shares. By section 17(2) of the Act, a company could adopt the regulations contained in Table A in the First Schedule but the company was not bound to do so. Regulations 24 to 30 of Table A dealt with the power and the procedure relating to forfeiture of shares. Regulation 24, it is true, provided for exercise of the power to forfeit a share when there was default in paying calls, but no inference follows therefrom that the share of a member could be forfeited only for non-payment of a call made in respect of the share which was not fully paid up. In Calcutta Stock Exchange Association Ltd. v. S.M. Nandy & Co. ILR [1950] 1 Cal. 235, Harries C.J., after examining the provisions of the Companies Act, 1913, reviewed the decisions of the courts in England and of the High Court of Calcutta and observed that the Indian Companies Act as well as the English Companies Act contemplate, recognize and sanction forfeiture generally and not for non-payment of calls only ; that a company may by its articles lawfully provide for grounds of forfeiture other than non-payment of call, subject to the qualification that the articles relating to forfeiture do not offend against the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant, however, contended that in Sri Gopaljalan & Company's case (supra) the parties argued the case on the footing that the articles of association of the exchange were not invalid, whereas in the present case the validity of the articles is challenged. But the court in citing with approval the observations of Harries C.J. in S. N. Nandy's case (supra) did in effect pronounce upon the validity of the articles. A forfeited share is, therefore, merely a share available to the company for sale and remains vested in the company for that purpose only. By forfeiting a share pursuant to the authority of the articles of association, no reduction of capital is achieved. We are unable to agree with counsel' for Sanyal that forfeiture of shares is permissible only in cases expressly contemplated by Table A-Model articles, i.e, for non-payment of calls in respect of a share which is not fully paid up. Subject to the provisions of the Companies Act the company and the members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. They also establish a contract between the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a copy of the complaint dated December 9, 1941, sent by post to Sanyal may not have reached, him because he had left Calcutta, he had still ample notice of the proceeding of the subcommittee because intimation was given to him by the notice pasted on the board of the exchange. Sanyal raised no contention at any stage before the sub-committee or before the full committee that he had not received the notices of the meetings dated December 10, 1941, December 17, 1941, January 7, 1942, of the sub-committee and of the meeting dated February 19, 1942, of the full committee. Regularity of the proceedings of the committees at the various meetings is not challenged before us. We are unable to agree with the contention raised by counsel for Sanyal that the rules of natural justice were not complied with when the sub-committee and the full committee passed the impugned resolutions against Sanyal. There is no substance in the plea that the committee had no jurisdiction to order sale of the share forfeited. Article 27 declares that the forfeited share is the property of the exchange and that the committee of the exchange shall sell, re-allot or otherwise dispose of the share, for satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for....". In Fateh Chand v. Balkishan Das [1964] 1 SCR 515 ; AIR [1963] SC 1405, 1410, 1412 this court in dealing with a case in which a claim for damages for breach of contract to sell a lien of immovable property arose, pronounced that the expression "the contract contains any other stipulation by way of penalty" comprehensively applies to every covenant involving a penalty-whether it is for payment on breach of contract of money, or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by section 74 of the Indian Contract Act. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of a contract which expressly provides for forfeiture, the court has jurisdiction to aw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not purchase its own shares. If it does so, it amounts to reduction of capital. The legal theory of forfeiture is that a share forfeited is only taken over by the company with the object of disposing it of to satisfy its claim to enforce which the share was forfeited and all other obligations arising against him out of his membership. The company is given this right to recover the loss suffered by it by reason of the breach of contract committed by the shareholder. If the company is permitted to retain the balance of the amount after satisfying the debts, liabilities and engagements of the shareholder, the transaction would not be different from one purchasing the share of the defaulting shareholder for a value equal to the amount of his obligations. That would be plainly illegal. We are, therefore, unable to agree with the High Court that the exchange was entitled to retain the balance after satisfying the debts, liabilities and engagements of the appellant to the other members or to the exchange. The decree passed by the High Court is set aside and the case remanded to the High Court for determining the extent of the liabilities of the appellant to the exchange not only in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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