Sri Gopal Jalan and Company vs Calcutta Stock Exchange Association

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 512 of 1961

Decision Date: 9 May 1963

Coram: A.K. Sarkar, M. Hidayatullah, J.C. Shah

Sri Gopal Jalan & Company filed a petition against Calcutta Stock Exchange Association Ltd., and the case was heard by the Supreme Court of India. The judgment was rendered on 9 May 1963. The opinion was authored by Justice A. K. Sarkar, who was joined by Justices M. Hidayatullah and J. C. Shah. The citation of the decision is reported in the 1964 volume of the All India Reporter at page 250 and also appears in the 1964 Supreme Court Reports (Third Series) at page 698. The case is referenced in later reports, including the 1970 and 1971 Supreme Court law reports.

The dispute centered on the provisions of the Companies Act, 1956, specifically section 75 relating to the allotment of shares, the forfeiture of shares, and the re‑issuance of forfeited shares. The petitioner, being a shareholder of the respondent company, complained that the company had failed to file a statutory return concerning the re‑issued forfeited shares, as required under subsection (1) of section 75. Consequently, the petitioner approached the High Court seeking an order that would compel the respondent to file the return. The core issue for determination was the interpretation of the term “allotment of shares” as used in section 75(1).

The Court held that the expression “allotment of shares” in section 75 refers to the creation of shares by allocating a portion of the authorised but unappropriated share capital to a particular person. In other words, allotment involves the conversion of unissued capital into issued capital. The Court explained that when shares are forfeited and subsequently re‑issued, the transaction does not constitute an allotment within the meaning of the statute, because the shares already exist and are merely being transferred to a new holder. Accordingly, a re‑issue of forfeited shares is treated as a sale rather than an allotment, and no statutory return is required to be filed for such a re‑issue.

The judgment referred to several earlier authorities to support this reasoning. Decisions such as In re Florence Land and Public Works Company (1885) L. R. 29 Ch. D. 421, Mosely v. Koffyfontain Mines Limited (1911) 1 L. R. Ch. 73, The Calcutta Stock Exchange Association Ltd. v. S. N. Nundy & Co. (1930) 1 L. R. Cal. 235, Naresh Chandra Sanyal v. Ramani Kanta Ray (1945) 2 I.L.R. Cal. 105, and Morrison v. Trustees etc. Insurance Corporation (1899) 68 L. J. Ch. 11 were discussed, while In re V. G. M. Holdings, Limited (1942) 1 Ch. D. 235 was expressly disapproved.

The Court further observed that subsection (5) of section 75 had been inserted as a precautionary measure—ex abundanti cautela—to prevent any argument that a return must be filed for re‑issued shares that were forfeited for non‑payment of calls. This provision therefore reinforces the view that the filing requirement does not extend to re‑issues of forfeited shares.

In summary, the Supreme Court concluded that the statutory term “allotment of shares” under section 75(1) does not encompass the re‑issuance of forfeited shares, and consequently, the respondent company was not obligated to file a return in respect of such re‑issued shares. The judgment was delivered by Justice Sarkar, and the decision resolved the petitioner's request for a compulsory return filing order.

In this matter the appellant, who had been recognised as a shareholder of the respondent company for the purposes of the proceedings, alleged that the company had failed to file the return of allotment that is mandated by section 75(1) of the Companies Act. Consequently the appellant moved the High Court at Calcutta under section 614 of the Act, seeking an order compelling the company to file the required return. The shares that form the subject of the dispute had been forfeited by the company pursuant to its own articles of association. Before analysing the principal issue, it was necessary to refer to certain provisions of those articles. Article 21 of the company’s Articles of Association conferred on the Committee the authority to expel or suspend a member in specified circumstances; however, the present dispute did not involve the exercise of any power under that article. Articles 22, 24 and 27 are worded as follows. Article 22 provides that any member who has been declared a defaulter because of failure to perform any engagement with another member or members, and who does not fulfil that engagement within six months from the date of being so declared, shall automatically cease to be a member at the expiry of that six‑month period. Article 24 states that when a member ceases to be a member under the provisions of Article 22, or when the Committee passes a resolution expelling a member under Article 21, or when a member is adjudicated insolvent, the share held by that member shall ipso facto be forfeited. Article 27 declares that any share so forfeited shall be deemed the property of the Association, and that the Committee shall sell, re‑allot or otherwise dispose of the share in a manner that best serves the satisfaction of all debts then due to the Association or any of its members arising out of transactions or dealings in stocks and shares. The appellant contended that the company, from time to time, had forfeited various shares under these articles and that the company’s balance sheet showed that seventy of those forfeited shares had subsequently been re‑issued at a nominal face value of one thousand rupees. The appellant argued that the company had not filed a return of the re‑issuance of those forfeited shares as required by section 75(1). The company, in an affidavit filed in answer to the petition, admitted the existence of those facts. It was also mentioned that the forfeited shares had been issued for amounts substantially higher than the nominal value, but the appellant emphasized that the price at which they were re‑issued was irrelevant to the question of filing a return. For the purpose of this appeal, the relevant portion of section 75(1) reads: “Whenever a company having a share capital makes any allotment of its shares, the company shall, within one month thereafter, file with the Registrar a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupation of the allottees, and the amount, if any, paid or due and payable on each share.”

In this case the Court examined the effect of paragraph (5) of section 75, which states that the provision does not apply to the issue and allotment of shares that have been forfeited under a company’s articles because calls have not been paid. The appellant argued that a return under section 75 should have been filed for the shares that were re‑issued after forfeiture. The Company, on the other hand, contended that re‑issuing forfeited shares does not constitute an allotment of shares, and consequently no return was required under the section. This view was adopted by the learned Judge of the High Court when the petition was first presented, and it was also affirmed by the learned judges of the Division Bench on appeal from the trial judge’s decision. The Supreme Court agreed with the High Court judges, holding that a re‑issue of a forfeited share does not fall within the meaning of an allotment of shares under section 75(1).

The Court noted that the Companies Act contains no explicit definition of the word “alloment” either in this jurisdiction or in England. Nevertheless, the Court considered that the meaning of the term is well‑known and that no reported decision suggested any uncertainty about it. Referring to the judgment of Chitty J. in In re Florence Land and Public Works Company (1885) L.R. 29 C H D 421 at page 426, the Court quoted that “what is termed ‘allotment’ is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a lesser number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a lesser number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance. To my mind there is no magic whatever in the term ‘allotment’ as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. It is an appropriation, not of specific shares, but of a certain number of shares.” The Court observed that Chitty J.’s explanation reflects the ordinary understanding of allotment in company law.

Applying this understanding, the Court explained the usual process under the Act. A company that possesses share capital must state, in its memorandum, the total amount of that capital and its division into shares of a fixed nominal value, as required by section 13(4). This amount represents the company’s authorised capital. Subsequently, the company may issue shares in accordance with market conditions. Issuing shares essentially involves inviting applications for the shares. When applications are received, the company accepts them, and this acceptance is what is commonly described as an allotment. While it is possible for an allotment to occur without a prior application, the Court emphasized that no authority uses the term “allotment” to describe a transaction in which a person becomes a shareholder by any means other than the appropriation of a share from the previously un‑appropriated share capital. Consequently, the re‑issuance of forfeited shares does not meet the definition of allotment, and the requirement to file a return under section 75 does not arise in such circumstances.

In this case, the Court explained that a person becomes a shareholder only through the appropriation of a share from the company’s previously unappropriated share capital. The Court cited the observation of Farwell L. J. in Mosely v. Koffyfontain Mines Limited, noting that the words “creation,” “issue,” and “allotment” are each used with three distinct meanings familiar to businesspeople and lawyers. According to that observation, the first step in dealing with new capital is its creation, which means the capital does not exist until it is brought into existence. Once created, the capital may remain unissued for a long period, as it had in the present matter, because market conditions did not permit a favorable placement at that time. The second step is the issuance of the capital, which may occur on terms that appear expedient at the moment of issuance. The third step, as described, is the allotment of shares, which the Court defined by quoting Stirling J. in Spitzel v. Chinese Corporation, stating that an allotment is “an appropriation by the directors or the managing body of the company of shares to a particular person.” Lord Green M. R. was then quoted from In re V. G. M. Holdings, Limited, where he observed that the term “purchase” cannot properly describe the legal transaction by which a person, through application and allotment, becomes a shareholder, because no purchase occurs in that process. He further rejected the argument advanced by Mr. Wynn Parry that a share before issue is an existing article of property that a subscriber purchases, emphasizing that a share is a chose in action and that such a chose exists only after issuance. The Court summarized this distinction by stating that the issue of a share to a subscriber represents creation, whereas the purchase of a share from an existing holder represents the transfer of a chose in action. The Court affirmed, on the basis of the authorities already cited and many others that could be mentioned, that in company law the term “allotment” means the appropriation out of previously unappropriated capital of a certain number of shares to a specific person, and that until such allotment the shares do not exist as such. Consequently, the shares come into existence only on the basis of an allotment as described. The Court noted that counsel for the appellant was unable to cite any case where “allotment” was used to describe a transaction involving an already existing share that had previously been brought into existence by appropriation to a person out of the authorized capital.

In the judgment the Court explained that the creation of a share occurs only when a share is allotted by appropriating a portion of the company’s authorized but unissued capital to a specific person. The expression “allotment of shares” has always been used to describe this process of bringing a share into existence through such appropriation. Consequently, the Court saw no justification for interpreting the term “allotment” in section 75 of the Companies Act in any way that differed from this established meaning. Although it was suggested that subsection (5) of section 75 might provide a different interpretation, the Court indicated that it would address that contention later and, at the present stage, found no other provision in the Act that supported the view that “allotment” could include a transaction involving a share after that share had already been created by appropriation of authorized capital.

The Court noted that the learned judges of the High Court had pointed out that section 75 forms part of Part III of the Companies Act, which deals with “Prospectus and Allotment and Other Matters Relating to Issue of Shares or Debentures”. Sections 69 to 75 are grouped under the heading “Allotment”, and the only type of allotment contemplated in these sections is the allocation of unissued share capital to individual persons. In this context, the Court held that it would be impossible to assign a meaning to “allotment” in subsection (1) of section 75 that departed from the standard definition of creating a share by appropriation.

The Court further clarified that when a share is forfeited and later re‑issued, such a transaction does not constitute an allotment in the sense of creating a share from unissued capital. In the case before it, both parties had accepted that the company’s articles of association containing provisions on the forfeiture of shares were valid. The Court therefore proceeded on the basis that the company was duly entitled to forfeit shares under those articles. Although the Calcutta High Court had earlier been divided on the validity of those articles, the later authority – the decision in Calcutta Stock Exchange Association Limited v S N Nundy & Co. (1950 1 I.L.R. Cal. 235) – upheld their validity. The Court quoted the observation of Justice Harries C.J. at page 264, stating that the articles relating to forfeiture did not offend the provisions of the Companies Act because they did not involve a reduction of capital, a purchase of shares, or any trafficking in shares. The Court emphasized that, had the forfeited shares ceased to exist as shares and merged back into the company’s unissued capital, such a forfeiture would have amounted to a reduction of capital and would therefore have been invalid. The judgment concluded that the forfeiture was valid because the shares, although forfeited, remained as units of issued capital held in suspense until a new shareholder could be found.

In the judgment the Court explained that the validity of a forfeiture lay in the fact that, when a share was forfeited, the right of the particular shareholder to that share disappeared, but the share itself, as a unit of issued capital, continued to exist. The share remained in a state of suspense until another person was found to take it over, as noted in the earlier decision of Naresh Chandra Sanyal v. Ramani Kanta Bay. The Court therefore decided to examine the present dispute on that same principle. If the shares that the Company had forfeited were to be regarded as shares that had already been created and that continued to exist despite the forfeiture, then they could not be allotted in the ordinary sense of the word “allot” as used in company law, a point the Court had already emphasized.

The Court then referred to the case of Morrison v. Trustees etc. Insurance Corporation, where the articles of that Company authorised the forfeiture of shares for non‑payment of calls and further provided that any share so forfeited would be deemed the property of the Company and that the directors might sell, re‑allot or otherwise dispose of it in any manner they thought fit. The Court held that the Company was entitled to re‑issue the forfeited shares while giving credit for the money already received in respect of those shares. The argument that such a transaction amounted to issuing a share at a discount was rejected. Vaughan Williams, L. J., observed that he did not favour using the word “issue” in relation to the transaction involving those shares. He explained that if the shares were being issued, the appellant’s argument might have some merit, but the shares were not being issued. He examined the articles and concluded that a forfeiture of shares meant that the power to transfer them passed from the original shareholders to the Company, and the Company could then transfer the shares subject to the same rights and liabilities as if they had not been forfeited. Similar observations were made by Bacon V. C. in Ramwell’s Case.

The Court noted that the view widely accepted in company courts was that the re‑issue of forfeited shares was not an allotment but merely a sale. If the re‑issue were treated as an allotment, the forfeiture itself would be invalid because it would involve an unlawful reduction of capital. Because the re‑issue was considered a sale, it did not constitute an allotment, and consequently there was no requirement to file any return in respect of such a re‑issue.

The discussion then turned to subsection (5) of section 75, which created a point of difficulty. That provision stated that no return needed to be filed in respect of the allotment of shares that had been forfeited for non‑payment of calls. This led to the argument that the articles contemplated an “allotment” of shares forfeited for non‑payment of calls; otherwise, it would not have been necessary to specify that returns in respect of such allotments were exempt. It was further submitted that, if this were the case, the word “allotment” in the provision should be understood to include the issue of shares forfeited for other reasons as well. The Court acknowledged the argument but indicated that it would consider it in the next part of the judgment.

In the matter of the interpretation of section 75(1) of the Companies Act, the Court considered an argument that the term “allotment” should be read to include the issue of shares that had been forfeited for reasons other than non‑payment of calls, on the basis that no distinction needed to be drawn between those two categories of forfeiture. The Court acknowledged that the argument was not without merit, but after careful deliberation it rejected the contention. The Court observed that subsection (5) of section 75 seemed to arise from a confusion of ideas, and that, apart from this isolated provision, every other part of the Act clearly meant by “allotment” the creation of fresh shares out of the authorised and unappropriated capital of the company, not the re‑issue of shares that had already been created by allotment and later forfeited.

The Court noted that there was no reason to alter the meaning of “allotment” in any other part of the legislation, since the only provision that might suggest a different meaning was the solitary provision in subsection (5) of section 75. Turning to the legislative history, the Court explained that before the Companies Act 1956 the governing statute was the Companies Act 1913. Section 104(1) of that earlier Act corresponded to the present section 75(1). Large amendments were made to the 1913 Act in 1936, and before those amendments there was no provision comparable to subsection (5) of the current section 75. Consequently, up to 1936 there was no basis for arguing that the word “allotment” in section 104(1) could include the re‑issue of a forfeited share.

The Court observed that the 1936 amendment introduced subsection (4) to section 104, which contained language similar to the present subsection (5) of section 75. However, the Court held that this amendment did not change the meaning of “allotment” in section 104(1). By the same reasoning, the term “allotment” in section 75(1) must be interpreted without reference to subsection (5), just as “allotment” in section 104(1) must be read without reference to its subsection (4). The Court therefore concluded that subsection (5) of section 75 was enacted ex abundanti cautela, i.e., as a precautionary measure to prevent any argument that a return must be filed for the re‑issued shares forfeited for non‑payment of calls.

Finally, the Court agreed with the High Court’s view that the specific mention of forfeiture for non‑payment of calls in section 104(4) of the 1913 Act and in section 75(5) of the present Act reflected a long‑standing uncertainty, as shown by the differing opinions in the Calcutta High Court, about whether forfeiture could occur for reasons other than non‑payment of calls – a situation expressly provided for by the statute. The Court noted that other types of forfeiture were not mentioned, because had they been, it could have been legitimately argued that the legislature considered those forfeitures valid and chose not to give them statutory support.

In the Court’s view, if the other categories of forfeiture had been included in the statutory language, it could have been reasonably argued that the legislature intended to recognize such forfeitures as valid. The omission of those categories, the Court observed, appears to have been deliberate so that the legislature would not be seen as endorsing that line of argument. Consequently, the Court held that, for the reasons just explained, the appeal could not succeed. Accordingly, the Court ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. The final order therefore recorded that the appeal was dismissed.