Shiromani Sugar Mills Ltd.

vs Debi Prasad on 20 February, 1950

Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

Equivalent citations: AIR1950ALL508, AIR 1950 ALLAHABAD 508

JUDGMENT

Desai, J.

1. This and civil Revisions NOS. 122 to 154 of 1945 are applications in revision under Section 25,
Small Cause Courts Act, against judgments passed by the Small Cause Court Judge, Gorakhpur, in
suits filed by the Official Liquidator of the Shiromani Sugar Mills Limited, Khalilabad against a
number of ex share-holders of the Shiromani Sugar Mills Ltd. for allotment, first call and
second-call moneys. There were as many suits as there are revisions; they were all of similar nature
and the same disputes were involved in all. They were consolidated by the learned Small Cause
Court Judge and tried together. He delivered one judgment dismissing all the suits.

2. The Company which was a public limited Company was formed with a large number of objects,
the first and most important object being :

"to manufacture in India or abroad all kinds of sugar by up-to-date and latest
scientific method and machinery, and for this purpose to erect and construct a
factory or factories at one or several places in or outside India."

It was incorporated on 7th November 1933 on which date the Memorandum of Association and the
Articles of Association were registered with the Registrar, Joint Stock Companies. The prospectus
was published on 16th October 1933 and was registerd with the Registrar on 26th February 1934. On
24th November 1933, a meeting of the promoters of the Company unanimously elected the following
persons as first Directors: (1) Pandit D. P. Pandey, (2) Pandit P. P. Pandey, (3) Pandit S. K. Pandey,
(4) Chaudhri Bhagwati Prasad, (6) Mahant Vishwanath Bharthi, (6) Pandit Ganga Narain Tewari,
(7) Thakur Saran Singh, (8) Dr. P. C. Bhattacharjee, (9) Mukut Behari Lal, (10) Pandit Tirath Raj
Pandey, (11) Sahu Baldeo Prasad, (12) Abdul Qadir Khan, (13) R. D. Sharma, ex officio and (14 N. K.
Varma.

3. The authorised capital of the Company was fixed at RS. 20,00,000 divided into Rs. 15,000
preferred shares of Rs. 100 each and RS. 50,000 ordinary shares of Rs. 10 each. The earned capital
according to the prospectus was Rupees 16,00,000 divided into Rs. 12,000 preference shares and
Rs. 40,000 ordinary shares. In most of these revisions we are concerned with only preference shares
and I shall deal only with them. Out of Rs. 100, the price of a preference share, Rs. 20 were payable
on application for the share, Rs. 30 were payable on the share being allotted and the balance of Rs.
60 was payable in such call or calls as might be decided by the Directors from time to time. Under
Article 32 of the Articles of Association a share became liable to forfeiture if the call or instalment or
allotment money was not paid by the share-holder within the fixed time. The business of the
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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

Company was to be conducted by Managing Agents, subject to the control of the Directors and
Messrs. Sharma, Varma and Company were the first Managing Agents. The maximum number of
Directors fixed under Article 172 are 17. The qualification of a Director as fixed under Article 156 was
"the holding of shares of Rs. 5,000 at least In the capital of the Company in his own name and
right."

Article 157 provided that:

"A Director may act as Director before acquiring his qualification but shall in any case
acquire the game within two months from his appointment and unless he shall do so
he shall be deemed to have agreed to take the said share from the Company and the
same shall be forthwith allotted to him accordingly,"

The office of a Director was vacated under Article 168 on his ceasing to hold the required number of
shares or stock to qualify him for office, or on his accepting any other office or place of profit under
the Company. One fourth of the number of Directors were to retire every year by rotation though
they were eligible for re-election. Four Directors formed a quorum for a meeting of the Directors.
Article 131 laid down that:

"All acts done by any committee of Directors or by any person acting as a Diretor
shall, notwithstanding that it be afterwards discovered that there are some defects in
appointments of any such directors or persons acting as aforesaid or that they or any
of them are disqualified, be as valid as if every such perion have been duly appointed
and was qualified to be a Director."

4. The defendants-opposite parties were all share-holders of the Company. Some of them did not
pay even the allotment money and others did not pay the first and second call moneys. Consequently
their shares were forfeited through resolutions passed by the Directors in three meetings held on
14th June 1939, 23rd July 1939 and 16th October 1939. An order for the winding up of the company
was passed on 7th December 1941. The official liquidator then instituted the suits to recover the
balance of the allotment and first and second-call moneys.

5. The suits were contested by the opposite parties. The grounds with which we are concerned in
these applications were (1) that the original contract for the purchase of the shares was procured by
the promoters of the Company by fraudulent misrepresentation, (2) that the promises held out to
the opposite parties at the time of the purchase were not carried out by the Company and
consequently the opposite parties were justified in not making further payment, (3) that the
resolutions passed by the Directors allotting the shares to the opposite parties were invalid because
the Directors voting for the resolutions had ceased to be Directors and (4) that the resolutions
forfeiting the shares also were invalid for the same reason. The learned Judge upheld all these
contentions of the opposite parties and dismissed the suits. In these applications the official
liquidator challenges the learned Judge's findings on these four points.

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

6. As stated by Baggallay L. J. in In re Scottish Petroleum Co. (1893) 28 Ch. D. 413 at p. 430 : (49 L.
T. 348) :

"To constitute a binding contract to take-shares in a company when such contract is

bated upon application and allotment, it is necessary that there should be an
application by the intending share-holder, an allotment by the director of the
company of the shares applied for, and a communication by the directors to the
applicant of the fact of such allotment having been made."

The purchase of shares is governed by the same law as the purchase of goods. Every person who has
agreed to become a share-holder of a company is liable to pay the price of the share in accordance
with the Articles of Association. This proposition, "is subject to the application of the
well-recognised rule in equity that a person who has been induced to enter into a contract by the
fraudulent conduct of-those with whom he bag contracted is entitled to rescind such contract
provided he does so within a reasonable time after his discovery of the fraud." (Baggallay L. J. , In re
Scottish Petroleum Co., (1883) 23 Ch. D. 413 at p. 429 : (49 L. T. 348).) Sir G. J. Turner L. J.
observed in In re Reese River Silver Mining Co., (1867) 2 Ch. A. 604 at page 609 :

"If it can be shown that a material representation which is not true is contained in the
prospectus, or in any document forming the foundation of the contract between the
company and the share-holder, and the share holder comes within a reasonable time,
and under proper circumstances, to be released from that contract, the Court are
bound to relieve him from it, and to take his name off any list of share-holders."

7. The misrepresentation must be of a material fact, the share-holder must have been induced by it
and he must plead and prove so. James L. J observed in Eaglesfield v. Marquis of Londonderry,
(1877) 4 Ch. D. 693 at p. 709 : (35 L. T. 822) that the misrepresentation "must be a
misrepresentation of a matter of fact." A share-holder, "cannot obtain relief without distinctly
alleging and proving that the' particular statement was a material inducement to his purchasing his
shares;"

"the precise misrepresentation must be distinctly stated and also that it formed a
material inducement to the plaintiff to take shares in the company:" (see Hallows v.
Fernie, (1867-68) 3 Ch. A. 467 at p. 477 : (18 L. T. 340), per Lord Chelmsford L. C.).

In that case the plaintiff did not allege and prove that he "read the prospectus in a
sense which Involved an untruth, that it led him into an erroneous belief of the
existence of a certain stats of facts, and that this belief was a material inducement to
him to become a purchaser of shares in the company,"

and the Lord Chancellor dismissed his suit. To adopt his Lordship's language "whatever may be the
fair meaning of the prospectus, and even if the plaintiff's construction of it is correct, he can only be
entitled to succeed secundum allegata et probata" (page 478)

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

8. The learned Judge has relied mainly upon one misrepresentation in the prospectus. It is the
sentence "the Managing Agents with their friends, promoters and directors have already promised
to subscribe share worth Rs. 6,00,000,"

printed in red on the cover of the prospectus. The opposite parties did not specifically
plead that it is a misrepresentation and that they were induced by it to purchase the
shares. There is no proof, and of course there is no finding of the learned Judge, that
the Managing Agents with their friends, promoters and directors had not promised to
subscribe to shares worth Rs. 6,00,000. I do not know how this statement could be
assailed as a misrepresentation of fact, The only fact asserted was of the existence of
promise. Unless it were false, there was no misrepresentation of fact. It was not
asserted that the Managing Agents, etc. had subscribed to shares worth Rs. 6,00,000.
When it was said that they had only promised, it meant that they had not carried out
their promise, otherwise the statement would have been that they had already
subscribed to shares worth Rs. 6,oo,000 Nobody should have been misled by this
statement and nobody should have understood it to mean that, shares worth six lacs
of rupees had already been-subscribed to. If the opposite parties misunderstood this
statement to mean that the shares had' already been subscribed to and applied for
shares under that misapprehension, they are to blame themselves and not the
promoters of the company. In Smith's case: (1867)-2 Ch, A. 604) the prospectus
contained the statement that the property which the company had contracted for
consisted of 50 acres of land "containing several very valuable claims, some of which
are in full operation, and making large daily returns." No claims were in full
operation and the statement to the contrary was false. But it was based on a report
received and honestly believed by the Directors. Sir G. J. Turner L. J. held that it was
a misrepresentation of fact and observed at page 611:

''If the company had confined themselves to saying 'we have received reports from
which we believe and have reason to believe, that these mines are in full operation,
and are making daily large returns,' it might, and no doubt would, have been very
difficult for Mr. Smith to be relieved from the contract, but the company, instead of
thus referring to the information' received, stated the circumstances as facts."

What the directors could have said in that case to avoid their liability was stated by the directors; in
the present case. In Hallows v. Fernie: (1867-3 Ch. a. 467 : 18 L. T. 340) the prospectus contained
statements that the company would commence operations with six screw steamships of 20,000 tons
and 300 h. p., each and having capacity of 2,000 tons of cargo and that the steamers were
guaranteed to steam 10 knots and being full rigged as clipper sailing ships were calculated to
perform the voyage regularly from F to R in 25 days. Actually no steamships were in possession of
the company when the prospectus was issued and it had not even entered into any contract for
obtaining them. So it was contended that the statements were misrepresentations of fact, but the
contention was overruled. Lord Chelmsford L. C. held that the prospectus did not announce to the
public in clear and unequivocal language that the promoters of the company actually possessed, or
had contracted for the possession of 6 ships of the description mentioned. His "Lordship observed at

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

p. 475 :

"There is a material distinction between the employment of words in a prospectus

which can bear only one meaning and of those which are equivocal, and which
different persons may interprets differently. In the latter case no prudent person
would act upon his own construction without some inquiry. In construing a
prospectus, the preliminary character of the document must always be taken Into
consideration. Every one knows that it Is intended to usher a company into existence,
and not to describe its actual formation; no one is surprised to find that a future
sense must be given to words in the past or present tense which it contains".

His Lordship further observed at p. 476 :

"After the elaborate examination of this first part of the prospectus in the argument
before me, its meaning cannot be regarded as so entirely free from doubt, that a
person has a right, without inquiry, and acting entirely upon his own views of its
proper construction, to purchase shares in the company, and then complain that he
has been deceived. Because, if the words are susceptible of different meanings, he is
deceived not by the words, but by his construction of them."

9. When there is absence of proof that the Managing Agents, etc., had not made the promise, the
existence of the promise is not falsified by the breaking of it. The Managing Agents, etc. might not
have kept their promise, but the opposite parties are not entitled to say that they were misled by
their promising. Every document, as against its author, must be read in the sense which it was
intended to convey. As observed by Lord Chelmsford in Peek v. Gurney, (1873) 6 H. L. 877 at p. 886
: (43 L. J. Ch, 19) a prospectus may contain statements, which are perhaps literally true, yet really
false in the sense in which the promoters should know, they would be understood by the public. The
promoters in the present case could not possibly have intended the impugned statement in the
prospectus to mean that shares worth Rs. 6,00,000 had already been subscribed to. Even if it
amounted to misrepresentation, there is no proof that it induced the opposite parties to buy the
shares. The learned Judge has mentioned that the Directors had not paid the application money for
the qualification shares. This is immaterial. The Directors had two months within which to acquire
the qualification shares. If their names were mentioned in the prospectus without their having
acquired the qualifications shares, it does not mean that it contained a misrepresentation of fact,
Even if the Directors did not acquire the qualification shares within two months, Article 157 of the
Articles of Association forced the shares upon them. It is stated in the prospectus that "our
shareholders will be highly and satisfactorily benefited by way of dividend.'

10. There is also the evidence of a Director to the effect that the shareholders were told that the
company would start its work of producing sugar very soon. These are not representations of fact.
Some amount of puffing must be allowed in a prospectus; it must not amount to a misrepresentation
of fact. It is stated in Palmer's Company Law, 19th Edition, p. 347 :

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

"The statement that something will be done is not a statement of an existing fact so
much as a contract or promise. It may, however, imply the existence of facts which
are non-existent, or it may be material term in the contract".

11. The statements in question do not imply the existence of facts which were really nonexistent and
there is no evidence that they formed a material term in the contract.

12. The learned Special Judge has taken notice of certain non-disclosures in the prospectus. Under
Section 93, Companies Act a prospectus must state the number of shares fixed by the Articles as the
qualification of a Director, the names and addresses of the vendors of any property purchased or
acquired by the company, and the debts of, and parties to, every material contract. The prospectus
does not contain this information. But there is no penalty prescribed in the Act for non-compliance
with the provisions of Section 93. When the non-compliance involves misstatement of a material
fact, there will, of course, be a right of rescission under the general law. But otherwise the omission
of any of the particulars will not per se entitle a shareholder to rescission of his contract to take
shares. It will not do for promoters of a company to plead that everything which is stated in the
prospectus is liter-rally true; they must be able to meet the objection, ''not that it does not state the
truth as far as it goes, but that it conceals most material facts with which the public ought to have
been made acquainted, the very concealment of which gives to the truth which is told the character
of falsehood"; see Oakes v. Turquand, (1867) 2 H. L. 325 at p. 342 : (36 L. J. Ch. 949) per Lord
Chelmsford L. C. "Half a truth is no better than a downright falsehood"; Gluckstein v. Barnes,
(1900) A. C. 240 at p. 250.

According to Peek v. Gurney, (1873) 6 H. L. 377 : (43 L. J. Ch. 19), if there is such a partial and
fragmentary statement of fact, as that the withholding of that which is not stated makes that which
is stated absolutely false, it would form ground for an action for misrepresentation. In Rex v.
Kylsant. (1932) 1 K. B. 442 : (101 L. J. K. B. 97) Avory, J. held the prospectus to be false because--

"The falsehood in this case consisted in putting before intending investors, as

material on which they could exercise their judgment as to the position of the
company, figures which apparently disclosed the existing position, but in fact hit it"
(p. 448).

Judged according to these authorities, the omissions in the present case do not
amount to a misrepresentation; what is left out does not make what is stated false.

13. The learned Judge has gone out of his way In taking into consideration the various acts of breach
of rules; if the managing directors and other directors committed any breach of rules, the
shareholders may have other remedy against them but not that of rescinding the contract of
purchase of shares. They might have acted dishonestly and inefficiently and filed false declarations
before the Registrar, but even that would not entitle the share-holders to rescind their contract. The
learned Judge has observed that on account of these breaches and acts of dishonesty and
inefficiency, the share-holders were justified in withholding further payment of their allotment and
call moneys. He has not quoted any authority in support of his view. So long as the contract of

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

purchase of shares is not rescinded, the liability of a share-holder to pay their price remains. Apart
from the right to rescind the contract of purchase of shares, a share-holder has no right to withhold
payment lot the price.

14. A share-holder's contract to purchase shares is only voidable, and not void on account of
misrepresentation in the prospectus: Oakes v. Turquand (1867 2 H. L. 325 : 86 L. J. Ch. 949), In re
Scottich Petroleum Co., (1883-23 Ch. D. 413 : 49 L. T. 348) and Tennent v. The City of Glasgow
Bank, (1879) 4 A. C. 615. This means that the contract is valid till rescinded. But a share-holder has
not unlimited time within which to rescind the contract; he must rescind it promptly, that is within
reasonable time of his becoming aware of the fraud giving him the right to rescind. In Kincaid's ease,
In re Russian Iron Works Co. ; (1867) 2 Ch. a. 412 at p. 426, Lord Cairns L. J., considered delay of
three months as fatal to a claim for rescission. The reason' as given in the connected Lawrence's case
at page 424, is :

"No attempt at repudiation took place for upwards of four months, and during this
time Mr. Lawrence must be taken, in my opinion, to have known, not merely that his
name was on the register, and that he was so held out to the world as a share-holder
in and member of the company but also ..."

15. In Smith's case, (1867-2 Ch. A. 604), he had notice on 13th December 1865 that the property
which the company had contracted to purchase was almost valueless, he received detailed
information about it on 19th January 1866, he filed his bill to rescind the contract on 6th February
1866, and Sir C. J. Turner L. J., held that he had come with promptitude, observing that "it time
were to be taken as running against him from 30th December 1865, he possibly might be considered
to have come too late."

16. In In re Scottish Petroleum Co., (1883-23 Ch. D. 413 : 49 L. I. 348), eighteen mouths' delay was
held to be fatal. The reason why a share-holder must be prompt in rescinding the contract is that the
register of share-holder is to be the creditors' guarantee, showing them to whom and to what they
have to trust. A shareholder knowing that he was induced by fraud to enter into the contract of
purchase of shares, cannot lie by, let his name remain in the register and let third parties enter into
contracts with the company on the faith of the register. In In re New Zealand Banking Corporation,
Sewell's case, (1868) 3 Ch, A. 131 at p. 138: (16 W. R. 381), Lord Cairns L. J. said :

"It appears to me that not having done so, and being aware that he was held out to
the public as the holder of twenty three shares, it is too late for him months or years
afterwards to enter into that question."

17. Even repudiation of shares, without taking active steps, is insufficient because the contract to
take shares stands on a different footing from another contract. Fry L. J, stated in In re Scottish
Petroleum Co., (1883-23 Ch. D. 413 at p. 438 : (49 L. T. 348):

"As regards such contracts the Legislature has interposed, and has provided that they
shall be made known in a particular way to shareholders and creditors; notice of

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

them is given to the world. Now the general principle is that no contract can be
rescinded so as to affect rights acquired bona fide by third parties under it. It is true
that the creditors and the other shareholders have not acquired direct interest under
the contract, but they have acquired an indirect interest."

The case of a Joint Stock Company is slightly different because there "while the Company is a going
concern, no creditor has any specific right to retain the individual liability of any particular
shareholders."

18. It is laid down in Tennent v. City of Glasgow Bank, (1879-4 A. C. 615), that a shareholder of a
joint stock company can throw back his shares upon the company at any time so long as it is a going
concern. But when a joint stock company becomes insolvent and stops payment, a wholly different
state of things arises and the shareholder's right to throw back shares is lost.

19. In the present case, the shares were allotted to the opposite parties in 1934 and they have
allowed their names to remain in the register of shareholders. They have taken absolutely no active
steps to avoid the contract. They gave no indication of their intention to avoid the contract at any
time; the earliest intention that they gave is through their written statements in the suit, It has been
found by the learned Civil Judge that the assets of the company were in a very bad state from the
very beginning. Sugar industry was a prosperous industry and this company could not start any
business for five years. The directors and managing directors were inefficient and guilty of breaches
of rules; Managing directors had to be changed repeatedly and a stage arrived when nobody was
prepared to become the managing director and the office had to be thrust upon a person who had
already proved himself unfit. No dividends were at all granted and general and statutory meetings
were not held as frequently as required under the Articles. All this state of affairs could not have
remained unknown to the shareholders and we are not dealing with one or two shareholders but a
very large number of them. Even when calls were made in 1936 and 1937 they did not repudiate the
shares. I have, therefore, no doubt that they have lost their right to rescind the contract by their
laches.

20. In addition to the laches, the winding up of the company raises another bar in the way of the
opposite parties to repudiate their shares. The law is that a share-holder cannot be relieved from his
shares after a winding up application; Kent v. Freehold Land and Brick-making Co., (1868) 3 Ch A.
493 : (37 L. J. Ch. 653), In re Scottish Petroleum Co., (1883-23 Ch. D. 413 : 47 L. T. 348), Tennet v.
City of Glasgow Bank, (1879-4 A. C. 615) and Hirji Khetsey v. Indian Specie Bank Ltd., A. I. R. (2)
1915 Bom. 27 : (27 I. C. 505). Sometime must be allowed to a shareholder when an investigation is
necessary as laid down in Smith's case: (1867-2 Ch. A. 604) and In re Scottish Petroleum Co.
(1883-23 Ch. D. 413 : 49 L. T. 348). If a shareholder has started active proceedings to be relieved of
his shares, the passing of a winding up order during their pendency would not prevent his getting
the relief. The reason why a shareholder cannot throw back his shares upon the Company after
winding up is that rights of third parties have intervened and, to adopt the language of Baggallay L.
J. in In re Scottish Petroleum Co., (1883-23 Ch. D. 413 at p. 429 : (49 L. T. 348), "Equities which
would be sufficient as between the shareholder and the company cannot be set up as against the
creditors or co-contributories,"

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

21. When the Legislature has provided the shareholders' register as the means of enabling persons
dealing with the Company to know to whom and to what they had to trust, it would be no answer to
a creditor that the shareholder sought to be charged had been induced by fraud to become a
shareholder just as it would be no answer to creditor that a partner sought to be charged had been
induced by fraud to become one; see Oakes v. Turquand (1867-2 H. L. 325) at p. 367 : (36 L. J. Ch.
949).

"The liability of the shareholders is not under a contract with the creditors, but it is a
statutable liability under which the creditors have a right which attaches upon the
shareholders to compel them to contribute to the extent of their shares towards the
payment of the debts of Company;"

this is what Lord Chelmsford L. C., said in the same case at page 350.

Lord Cranworth, agreeing with the Lord Chancellor, said at page 363 that:

"The winding up is but a mode of enforcing payment. It closely resembles a

bankruptcy, and a bankruptcy has been called, not improperly, a statutable execution
for the benefit of all creditors."

22. Certain dicta of Lord Cairns L. J. in Smith's case (1867) 2 Ch, A. 604) may suggest that his
Lordship did not consider winding up as a bar to granting relief to a shareholder. His Lordship was
of the view that if the shareholder went to the Court with promptitude to have the fraud redressed,
the fast that the interest of creditors was involved in the winding up did not alter the matter and,
"the question must be disposed of as if it were to be disposed of upon the bill at the time when the
bill was filed and before any winding up, in which case the plaintiff would be entitled to the relief
prayed by the bill, p. (617)."

There the shareholder had gone to the Court with promptitude and before the winding up
application was filed. What his Lordship said cannot be said to apply even when a share-holder
comes to Court after a winding up application has been filed. Smith's case, (1867-2 Ch. a. 604) went
up before the House of Lords, There the question was decided merely on the ground that there was
no delay and that the subsequent filing of the winding up application did not disentitle him to the
relief sought, Their Lordships did not say anything about Lord Cairns' dicta. In Hansraj Gupta v. N.
P. Asthana, 60 I. A. 1: (A. I. R. (19) 1932 P. C. 240), the Judicial Committee laid down that if a
person is on the share-holders' register with his knowledge and consent at the commencement of
the winding up, the invalidity under Section 105, Companies Act, 1913, of the contract in pursuance
of which he applied for, and was allotted shares is not a ground for removing his name from the list
of contributories because after the winding up his liability in respect of the shares arises ex lege and
not ex contractu. Therefore, I hold that the right of the opposite parties to avoid the contract of
purchase of the shares is barred not only by the enormous delay that has taken place but also by the
winding up of the company.

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

23. But the case of the opposite parties does not rest only upon avoiding the contract of purchase of
shares ; they have another string to their bow which is that there was no valid contract at all. The
argument is that the Directors who voted for the allotment of the shares to them were disqualified to
act as Directors, that the allotment was ultra vires and that consequently no contract to purchase the
shares came into being at all, I have given the names of the original Directors ; they were appointed
as such on 24th November 1933. Under the Articles of Association, they were bound to acquire
shares of the minimum value of Rs. 5,000 within two months that is by 24th January 1934. If they
failed to acquire the shares, they were to be deemed to have acquired them. They were, therefore,
bound to pay the application and allotment moneys by 24th January 1931 and also the first and the
second call moneys. Directors Nos. 2, 4, 5 and 8 did not pay even the application money in full by
24th January 1934; Director No. 4, as a matter of fact, did not pay any application money. Directors
Nos. 1 to 9 and 11 and 12 did not pay the full allotment money in time ; Directors Nos. 4 and 12 did
not pay any allotment money. The resolution for the first call was passed on 36th November 1936
and the call-money was to be paid within six months, that is by 26th May 1937. Directors Nos. 4, 5, 8
and 11 to 14 did not pay the first call-money at all and Directors NO. 7 did not pay it in time. The
resolution for the second-call money was passed on 5th July 1937 ; though the prescribed period for
time was six months, the resolution allowed a longer period which was illegal. Still Directors NOS. 1,
5, 8 and 11 to 14 did not pay the call-money at all and Directors Nos. l, 2 and 7 did not pay it within
time. Thus all the Directors except Directors NOS 10, 13 and 14 ceased to be Directors under Section
85, Companies Act, on 24th January 1931 and Directors Nos. 13 and 14 ceased to be Directors on
26th May 1937. In 1934 only three persons were qualified to act as Directors whereas the quorum for
a meeting was four. Consequently the resolutions allotting the shares and making calls for the
money were passed in meetings in which there was no quorum, The Official Liquidator relied upon
Article 181 which is couched in the same words as s. 85, Companies Act, 1913, by which we are
governed in these applications. This Article, widely worded as it is, supports his contention that in
spite of the disqualifications of the Directors the resolutions passed by them are valid. In Hallows v.
Fernie, (1867-3 Ch. A. 467 : 18 L. T. 340) the objection to the allotment of shares on the ground that
the Directors who made the allotment did not possess the requisite-share qualification, was
overruled on the basis of a provision in the English Companies Act similar to that contained Section
86, Indian Companies Act. In Dawson v. African Consolidated Land and Trading Co., (1898) 1 Ch. 6:
(67 L. J. Ch. 47) a call made by Nielson a Director, was upheld though he had parted with all his
shares and thus become disqualified and was not re-elected as: such on acquiring fresh shares
before the call was made. Chitty L. J. emphasised the words "some defect in the appointment" and
expressed the view that the provision is not so framed as to render valid a resolution passed by any
persons who without a shadow of title assume to act as Directors of a company. There was' no defect
in the appointment of Nielson as Director; he only became disqualified subsequently on his parting
with his shares. His acting as Director in spite of the disqualification was held to be exactly within
the words of the Article and one of those defects, irregularities or whatever else one ought to call
them, which are remedied by Article 114 which is in almost the same words as our Article 181. An
identical article again came up for discussion in British Asbestos Co. Ltd. v. Boyd, (1903) 2 Ch. 439 :
(73 L. J. Ch. 31). Farwell J. stated at 'page 444:

" It is not, therefore, that the facts are not known, but that the knowledge of the
defect Is not present to the mind of any person to whom it is material at the time to

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 Shiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950

know it. As it is put in Buckley on the Companies Acts, 8th Edn. p. 230, the object of
an article like this and Section 67 of the General Act, Is to make the honest acts of de
facto Directors as good as the honest acts of de jure Directors."

In the present case, the Directors certainly knew that they had not paid the allotment and call
moneys, but there is nothing to indicate that the fact that they had thereby disqualified themselves
was present to their minds at the time when they allotted the shares and made the calls. There was
no defect in their appointment as Directors ; the only defect is that they continued to act as
Directors even after their disqualification. There is no suggestion that they acted dishonestly in
passing the resolutions of allotment and making the calls. It seems that they acted bona fide,
oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification
having ever been brought to their minds. The language of Article 181 fully protects their actions. Had
it been a case of only one or two Directors continuing to act as such despite the disqualification, I
would have had no hesitation in forming the conclusion that I have. Here we have to deal with a
large number of Directors acting as such despite the qualification. But there is no other
circumstance f com which it can be said that they were conscious of the fact of their disqualification
and yet continued to act as Directors So I come to the conclusion, though not without some
hesitation, that the acts of allotting the shares to the opposite parties and making the first and
second calls were valid.

24. For the same reason the act of forfeiting the opposite parties' shares also must be held to be
valid, The liability of the opposite parties to pay the moneys that are being demanded of them by the
Official Liquidator arose before and is not wiped off by, the forfeiture. The only effect of the
forfeiture is that the shares pass out of their hands the liability incurred previously to pay the
allotment and call-moneys remains.

25. Some of the opposite parties purchased only ordinary shares. This only affects the amounts due
from them : otherwise there is no difference between their cases and those of preferred
share-holders.

26. No other dispute wag raised before us.

27. I would, therefore, allow all these applications and decree the suits; but I would not allow any
costs to the Official Liquidator. The company must bear its costs of both Courts itself because it has
not come out clean from this litigation and though justice lies on its side as regards the
subject-matter of this litigation there is much for which its Directors and Managing Directors had to
account to the opposite parties.

Mushtaq Ahmad, J.

28. I agree.

29. We allow this application, set aside the decree of the' lower appellate Court and decree the
plaintiff applicant's suit. We make no order about the costs in all the three Courts.

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