# [1971] 2 S.C.R. 483

- **Citation:** [1971] 2 S.C.R. 483
- **Court:** Supreme Court of India
- **Decided:** 1970-09-25
- **Bench:** J. C. Shah, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1971-2-s-c-r-483-5150
- **Pages:** 14

## Headnote

Companits Act (7 of 1913)-Fully paid up share-Forfeiture ofE:Oect-Sale of forfeited slwre-lf illegal-Right of member to proeeetls
of Side-Indian Contract Act (9 of 1872), s. 14--Scope of,
Under the scheme of the articles of association of the Calcutta Stock
Exchange Association Ltd., the Committee is authorised under art .. 21 to
expel or suspend a member on the ground inter alia that he refused to
abide by the decision of Committee in any matter which is under the
articles or under the bye-laws referred to the Committee. Under an. 22,
a member declared a "defaulter" because he fails to fulfil any engagement between himself and any other member within six months from
the date on which he bas been declared a defaulter ceases to be a member
of the Exchange automatically.
Upon his ceasing to be a member and
upon a resolution being passed by the Committee expelling a member
his share stands forfeited.
The share so forfeited is deemed to be the
propeny of the Exchange. Such forfeiture involves the extinction of all
interest in and also air 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.
But the Committee must sell, reallot or othe'rwise dispose of
the share for the satisfaction of the debts, which may then be due and
owing by the defaulter to the Exchange or to any of its members arising
out of transactions or dealinas in sto.cks and shares.
The net proceeds
of the sale shall be applied towards the satisfaction of the debts, liabilities
or engagements of the shareholder and the residue, if any, paid to the
member or his legal representatlv"'
The appellant failed to carry out a direction to pay a certain sum arisina out of a share transaction and the Committee after notice, declared
him a defaulter. Six months later, after notice to the appellant, the Com·
mittee resolved that the share standing in his name shall be forfeited to
the Exchange and that the appellant be expelled from the membership
of the Exchange.
The Exchange thereafter disposed Df the share for
Rs. SS,000. The appellant challenged the action taken by the Exchange·
but the suit w~ dismissed.
In appeal to this Coun,
HELD : (I) It is not necessary that a resolution expelling a member
and a resolution declaring him a defaulte'r should both be JlllSSed before
his share is forfeited by the Exchange. The word and is used to indicate
an alternative and does not make the two conditions cumulative, because,
it would lead to the anomalous result that a member would have to be
expelled by the Committee under art. 2l and would also automatically
cease to be a member under art. 22. [490 A·CJ
Sura;mall Mohtu v. B•llabhdas Mohta, I.L.R 63 Cal. 531, approved.
. 484
SUPREME COURT REPORTS
(1971) 2 S.C.R •
In any event, in the present case, a resolution declaring the appellant
a defaulter was passed ~nd six months later the appellant was expelled
from the membership of the Exchange and it was resolved thai his share
shall stand forfeited. L490 C-D]
(2) (a) Regulatioa 24 in Table A in the First Schedule to the Companies Act, 1913, provides for the exercise of the power to forfeit a
share when there is 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 a share which was not fully paid up. Subject
to the provisions of the Companies Act a company and its members are
boun.d by the provisions contained in its articles of association.. The
·Articles regulate the internal management of the company and define the
pow~rs of its officers.
In the absence of any provision contained in the
Act which prohibits a company from forfeiting a share for failure on the
part of a member to carry out an undertaking or engagement the articles
of a company which provide that in certain events membership rights of
a share-holder including his right to the

## Text

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483
NAIU:SH CHANDRA SANY AL
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CALCUTfA STOCK EXCHANGE ASSOCIATION LTD.
September 25, 1970
[J. C. SHAH AND A. N. GROVER, JJ.]
Companits Act (7 of 1913)-Fully paid up share-Forfeiture ofE:Oect-Sale of forfeited slwre-lf illegal-Right of member to proeeetls
of Side-Indian Contract Act (9 of 1872), s. 14--Scope of,
Under the scheme of the articles of association of the Calcutta Stock
Exchange Association Ltd., the Committee is authorised under art .. 21 to
expel or suspend a member on the ground inter alia that he refused to
abide by the decision of Committee in any matter which is under the
articles or under the bye-laws referred to the Committee. Under an. 22,
a member declared a "defaulter" because he fails to fulfil any engagement between himself and any other member within six months from
the date on which he bas been declared a defaulter ceases to be a member
of the Exchange automatically.
Upon his ceasing to be a member and
upon a resolution being passed by the Committee expelling a member
his share stands forfeited.
The share so forfeited is deemed to be the
propeny of the Exchange. Such forfeiture involves the extinction of all
interest in and also air 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.
But the Committee must sell, reallot or othe'rwise dispose of
the share for the satisfaction of the debts, which may then be due and
owing by the defaulter to the Exchange or to any of its members arising
out of transactions or dealinas in sto.cks and shares.
The net proceeds
of the sale shall be applied towards the satisfaction of the debts, liabilities
or engagements of the shareholder and the residue, if any, paid to the
member or his legal representatlv"'
The appellant failed to carry out a direction to pay a certain sum arisina out of a share transaction and the Committee after notice, declared
him a defaulter. Six months later, after notice to the appellant, the Com·
mittee resolved that the share standing in his name shall be forfeited to
the Exchange and that the appellant be expelled from the membership
of the Exchange.
The Exchange thereafter disposed Df the share for
Rs. SS,000. The appellant challenged the action taken by the Exchange·
but the suit w~ dismissed.
In appeal to this Coun,
HELD : (I) It is not necessary that a resolution expelling a member
and a resolution declaring him a defaulte'r should both be JlllSSed before
his share is forfeited by the Exchange. The word and is used to indicate
an alternative and does not make the two conditions cumulative, because,
it would lead to the anomalous result that a member would have to be
expelled by the Committee under art. 2l and would also automatically
cease to be a member under art. 22. [490 A·CJ
Sura;mall Mohtu v. B•llabhdas Mohta, I.L.R 63 Cal. 531, approved.
. 484
SUPREME COURT REPORTS
(1971) 2 S.C.R •
In any event, in the present case, a resolution declaring the appellant
a defaulter was passed ~nd six months later the appellant was expelled
from the membership of the Exchange and it was resolved thai his share
shall stand forfeited. L490 C-D]
(2) (a) Regulatioa 24 in Table A in the First Schedule to the Companies Act, 1913, provides for the exercise of the power to forfeit a
share when there is 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 a share which was not fully paid up. Subject
to the provisions of the Companies Act a company and its members are
boun.d by the provisions contained in its articles of association.. The
·Articles regulate the internal management of the company and define the
pow~rs of its officers.
In the absence of any provision contained in the
Act which prohibits a company from forfeiting a share for failure on the
part of a member to carry out an undertaking or engagement the articles
of a company which provide that in certain events membership rights of
a share-holder including his right to the share will be forfeited are binding.
There is no provision the Indian Companies Act
1913, which restricts
the exercise -of the right of the Exchange to forfeit shares for non-payment
of a call only, and the articles of the Exchange expressly provide that
in the event of a member failing to carry out the engagement and in
the conditions specified therein his share shall stand forfeited. ,[492 A-El
(b) Under art. 27, the terms of which are mandatory, the shares
forfeited to the Exchange must be re-allotted or otherwise disposed of: .it
cannot be retained by the Exchange. A forfeited share is merely a share
available to the company for sale and remains vested in it for that pur·
pose only.
By forfeiting a share. pursuant to the authority of the articles
of association no reduction of capital is achieved. L491 F, H; 492 Al
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Therefdre, a~s. 22, 24, 26, 27 and 29 relating to forfeiture of shares
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are. valid. [492 D-E]
Sri Gopal Jalan &o Co. v. Calcutta Stock Exchange Association Ltd.,
[1964] 3 S.C.R. 698, followed.
Calcutta Stock Exchange Association Ltd. v. S. N. Nundy & Co. I.L.R.
[1950] 1 Cal. 235, approved.
( 3) 'There is nothing in the procedure fol1owed which rendered the
forfeiture of the appellant's share illegal. The appellant had ample notice
of the proceedings and the orders were not made against him contrary
to rules of natural justice. [493 CJ
( 4 )(a) Under its articles the Exchange has authority to sell the share
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and to appropriate the sale proceeds towards satisfaction of the debts,
liabilities or engagements. But the balance of the amount remaining due
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after satisfying the liabilities of the appellant did not remain the property of the Exchange. The appellant was entitled to the amount. Tl\is
is expressly provided for in art. 33. The expression used in art. 29 'the
forfeiture shall involve extinction of all interest' is subject to the rights as
by the articles saved and art. 33 saves the defaulting share-holder's right
to the balance remaining with .the Exchange .. f,493 D-GJ
(b) Even assuming that arts. 24 and 31 reserve to the Exchange two
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distinct powers--the power to forfeit and the power to exercise a lien,
and that art. 33 only applies to a sale in enfo!'cement of a lien and not
to a sale after forfeiture, the balance on hand after satisfying the liability
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N. C. SANYAL V. CALCUTTA STOCK EXCHANGE (Shah, J.) 485
of the defaulter must still be returned to the defaulter, under s. 74 of the
Contract Act.
The power of the Exchange to forfeit the shares arises
out of the articles and its source is in contract. On the principle under·
lying s. 74 of the Contract Act the Exchange had no right to hold, out
of the sale proceeds of the share, any amount in excess of the amount due
to it or to its members. j,493 H; 494 A-Bl
Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515, followed.
( c) The legal theory of forfeiture is that a share forfeited is only
taken over by the company with the object of disposing_ of it to satisfy
ita claims to enforce which the share was forfeited and all other obligatons arising against him out of his membe\'sbip. If the company is per"
mitted to retain the balance of the amount after satisfying the debts,
liabilities and engagements of the share-holder, the transaction would not
be dilferent from one purchasing the share -of the defaulting share-holdef
for a value equal to the amount of his obligation and that would be illegal.
(495 E-Hl
ClVlL APPELLATE JURISDICTION: Civil Appeal No. 1626 of
1966.
AJ.>l_>eal from the judgment ai!ld decree dated July 7, 8, 1964
of
.the Calcutta High Court in Appeal from Original Decree No.
143of1960.
R. B. Datar, for the appellant.
B. Sen, N. R. Khaitan and B. P. Maheshwari, for respondent.
The Judgment of the Court was delivered bySbah, J.-Naresh Chandra Sanyal was the holder of a fully
paid-up share of th~ Calcutta St0¢k Exchange Association Ltd.-
hereinafter called 't'he Exchange'. As a member of the Exchange
he was authorised to carry on business as a broker in shares, stocks
and securities in the hall of the Exchange. In December 1941
Sanyal purchased one hundred shares of the Indian Iron & Steel
Company Ltd. from Johurmull Daga & Company, but did not
arrange to take delivery of the shares on the due date. Johurmull
Daga and Company sold the shares pursuant to the authority
given to them by the Sub-Committee of the Exchange. The transaction resulted in a loss of Rs. 438/10/-. The Sub-Committee
directed Sanyal to pay the amount due by him, but he failed to
carry out that direction.
On January 7, 1942 the complaint of Johurmull Daga & Company was referred to the Full Committee of the Exchange. Sanyal
failed to p'ly the amount directed to be paid by him and he was
!>y resolution dated February 19, 1942 declared a defaulter. On
September 1, 1942, at a meeting at which Sanyal was present, the
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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.
4-IA36.§up.CIJ7J
486
SUPREJ\{E COURT REPORTS
[1971J 2 S.C.R.
Sanyal then i11stituted an action in the High Court of Calcutta
on its original side claimin_g a di!claration that the articles of the
Exchange providing for "forfeiture of a fully paid up share wue
ultra vires and illegal" and that "particularly Arts. 21, 22 and 24
were invalid"; that the share hekt 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 d,!'_cree for Rs. 55,000/- being
the value of the share, or in any event to the surplus of the sale
proceeds after "liquidating the debts due by him to the Exchange."
The suit was resisted by the Exchange. The Trial Court dismissed the suit. In appeal under the Letters Patent the decree was confirmed.
With special leave Sanyal has appealed to this Court in
forma pauperis.
The relevant Articles of Association of the Exchange are
these:
Art. 21-"The Committee shall have power to expel .or suspend any niember or if being firm any member or
autfiorise<l assistant of the firm in any of the events
following :-.
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( 6) If the member or if being a firm any member
or authorised assistant of the firm
refuses
to
abide by the decision of the Committee in any
matter which under these articles or under the
Bye-laws for the time being in force is made the
subject of a reference to the Committee.
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Provided always that in: every case arising under the
provisions of sub-section _(5), (6), (7) and (8) of this
Article no resolution for the expulsion of a member or
if being a firm any member or authorised assistant of the
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firm shall be valid unless passed by a majority consisting
of not less than two-thirds of the members of the Committee at 3; meeting. specially convened for the purpose
and ar which meetmg nor less than two thirds of the
members of the committee at a meeting specially convened for the purpose and at which meeting not Jess
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than seven members of the Committee. shall be present.7'
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N. C. SANYAL V. CALCUTTA STOCK EXCHANGE (Shah, /.) 487
Art. 22-"Any member who has been declared a defaulter
by reason of his failure to fulfil any engagement
between himself and any other member or members
and who fails to fulfil such engagements within sL"C
months from the date upon which he has been so
declared a defaulter shall at the expiration of such
period of six calendar months automatically cease
to be a member."
Art. 24-"Upon any member ceasing to be a member under
the provisions of article 22 hereof and upon any
resolution being passed by t'he Committee expelling
any member un<:ter the provisions of Article 21
hereof or upon any member being adjudicated insolvent the share held by such member shall ipso·
facto be forfeited."
Art. 27-"Any share so forfeited shall be deemed to be the
property of the Association, and the Committee
shall sell, re-allot, and otherwise dispose of the same
in such manner to the best advantage for the satisfaction of all debts which may then be due and
owing either to the Association or any of its members arising out of transactions or dealings in stocks
and shares."
Art. 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 paym!lnt at 12 percent
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."
Art. 29-"The rorrenure of a' share shall involve the exi.inction of all interest in and also or all claims and demands agaitlst the Association in respect of the
share, and all other rights incidental to the share,
except only such of those rights as by these Article!'
expressly saved."
Art. 31-"The Associati<>n 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.
"
488
SUPREME COURT REPORTS
[ 1971] 2 S.C.R.
Art. 32-"For the purpose of enforcing such lien the Association may sell the share subject thereto in such
manner as they think fit. . . . . "
. Art. 3 3-"The nett proceeds of any such sale shall be applied
in or· towards satisfaction of the debts, liabilities,
or engagements, residue (if any) paid to such member, his executors, administrators, committee, curator or other representatives~'
The re,Jevant bye-Jaws of the Exchange are :
"Settlement of Disputes.-All disputes, complaints
and claims between by and against members shall, on the
application of either party, be decided by the Committee or by a Standing or Special Sub-Committee appointed by the Committee for the purpose. In the event
of the matter being decided by the Committee the decision shall be. final and binding upon all members concerned but any member aggrieved with the decision ofthe Standing or Special Sub-Committee may, within
~even days of such decision being, given, appeal to the
Commitiee whose decision shall be final. In the event
of any member or members refusing, neglecting or failing to observe, carry out or comply with any decision of
the Committee, or if no appeal is preferred, with the decision of the Standing or ~cial Sub-Committee, such
member or members so in default shall be dealt with by
the Committee under the rules, regulations and/or bye-
.Jaws of the Association for the time being in force."
Bye-Jaw 13-"Defaulters.-Any member who shall
fail to pay any subscription or other moneys due by him
to the Association on cfue date, or who shall fail-to fulfil
any engagement between himself and another member
or members may be declared a 'defaulter' by the Committee and on such declaration his name shall be posted
as a. 'defaulter' on the notice board of the Association
and so Jong as the name remains so posted he shall not
be at liberty to exercise any of the privileges of membership."
Under the scheme of the Atticles of Association of the Exchange, the Committee is authorised to expel or suspend a member
on the ground, inter alia, that he refuses to abide by the decision
of the Committee in any matter which is under the Articles or
under the Bye-Jaws referred to the Committee. A person declared
a "defaulter" because he fails to fulfil any engagefuent between
himself and any other member or members within six months from
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N, C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.)489
the date on which he has been declared a defaulter, ceases to be a
member of the Exchange and his share als,o stands forfeited. The
share so forfeited is deemll(! to be the property of the Exchange.
But the Committee must sell, re-allot or otherwise dispose of the
share for satisfaction of the debts which may then be due and owing
by the defaulter to the Exchainge or to ·any of.its members arisisg
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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 l.is liabilities to the Exchange. The Exchange
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has a first lien upon the share of a member and u,pon the proceeds
of sale thereof for his debts and liabilities, and in enforcement of
the lien, the Exchange may sell the slrare. 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 Gompanies Act, 1913, a folly
paid up share cannot be forfeited for failure to carry out
any engagement by the shareholder other than an engagement to pay a call made by the Company to pay
unpaid capital;
that the procedure. followed by the Sub-Committee of
the Exchange was irregular in that Sanyal had no notice
of the meeting of the Committee to declare him a defaulter;
that the Committee had no authority under the Articles
of Association to direct sale of the share; and
that in any event Sanyal was entitled to the balance remaining on hand with the Exchange after satisfying his
debts, liabilities and engagements under the Articles of
Association.
For failure to abide by the decision of the Committee in respect of his liability to pay the amount of loss due to Johurmull
Daga & Company Sanyal was declared a defaulter, and when he
continued to remain a defaulter for six months he was by resolution of the Full Committee expelled from the membership of the
Exchange. The Full Commit!~ also resolved to forfeit his share.
The Exchange thereafter disposed of the share for Rs. 55,000/-.
The argument raised by counsel for Sanyal that a member of the
Exchange forfeits his share only if a resolution expelling him and
490
SUPRRME COURT REPORTS
(1971] 2 S.C.R.
a resolution declaring him a defaulter are passed is without substance. The conjuctive "and" between the fil'st two clauses of Art.
24 is used to indicate an alternative, and does not make the two
conditions cumulative.
We
agree with the observations of
Panckridge, J ., in Surajma/l Mohta v. Bal/abhdas Mohta ( 1) that
Art. 24 "is carelessly drawn, because, on its literal application, before his share could be forfeited, a member would both have to be
expelled by the Committee under article 21
and automatically
cease to be a member under article 22. Clearly this cannot be the
intention of the article and it is obvious that by a slip, 'and' has been
substituted for "or"."
In any event the Full Committee passed on February I 9, 1942
a .resolution declaring the appellant a defaulter. The appellant did
not carry out his engagements for a period of six months thereafter. By resolution dated September 1, 1942 at a meeting of the
Full Committee .the appellant was expelled from the membership
·Of the Exchange and it was resolved that his share shall stand forfeited.
There is no provision in the Indian Companies Act, 1913,
which restricts the exercise of the right of th,e Exchange to forfeit
shares, for non-payment of a call only. The Indian Companies
Act, 1913, made no provision relating to forfeiture of shares. By
3. 17(2) of the Act, a company could adopt the regulations r,ontained 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 tor 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 The Calcutta Stock Exchange Association Ltd. v.
S. N.
Nund,v & Co.( 2 ), 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 hy its Articles lawfully provide for grounds of forfeiture other than non-payment of
call, subject to the qualification that the Artides relating to forfeiture do not offend against the general law of the land and in
particular the Companies Act, and public policy; and that the
forfeiture contemplated does not entail or effect a reduction in
capital or involve or amount to purchase by the Company of its
(t) J.L.R. 61 Cal. 531.
121 I. L. R. [1950] l Cal. 235.
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N, C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.) 491
own shares nor does it amount to trafficking in its own shares. The
Court in that case was concerneo to determine the true effect of
the Artides of the Exchange which fall to be interpreted in this
case.
This Court in Sri Gopal Jalan & CompalJY v. Calcucca Stock
Exchange Association Ltd. (1) also considered whether forfeiture
of shares resulted in reduction of capital con1rary to the provisions
of the Companies Act where power of forfeiture was given by the
Articles for failure to carry out aQ. undertaking or satisfy an obliga·
tion of the member to forfeit the shares. The Court in that case
was interpreting the Articles which fall to be interpreted in this
appeal.
The Court held that the·Exchange was not liable to file
any return of the forfeited shares under s. 75(i) of the Indian Com·
panies Act, 1956 when the same were re-issued. The Court observed
that wh~ a share is forfeited and re-issued, there is no allotment,
in the sense of appropriation of shares out of the authorised and
unappropriated c:ipital, and approved the observations of Harries,
C.J. in S. N. Nundy's case(') that "on such forfeiture all that hap·
pened was that the right of the particular shareholder disappeared
but the share considered as a.i;nit of issued capital continued to
exist and was kept in suspense until ano(h.er shareholder was found
for it". In \he view of this Court, the shares so forfeited may not
be "allotted" in the sense in which that word is understood in the
Companies Act. The Court also pointed out that re-issue of for·
f~ted shares is not allotment of the shares but only a sale, for, if
it were not so the forfeiture even for non-payment of call would be
invalid as involving an illegal reduction of capital.
Article 27 of the Exchange it may be recalled is in terms man·
datory. The share. forfeited to the Exchange must be re-allotted
or otherwise disposed of : it cannot be retained by the Exchange.
The share after forfeiture in the hands of the Company is subject
to an obligation to dispose it of. On that account there is no reduction of capi(al by mere forfeiture.
Mr. Datar appearing for the appellant however contended that
in Sri Gopal Jalan & Company's case(1) the parties argued the
case on the footing that 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. Nuni,ly's case(') did in effect
pronounce upon the validity of the Articles.
A forfeited share is, therefore, merely a share available to the
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Company for sale and remains vested in the Company for that purpose only. By. forfeiting a share purrnant to the authority of the
(I) [1964] JS. C.R. 698.
(2) I. L. R. [1950] I Cal. 235.
492
SUPREME COURT REPORTS
[1971] 2 S.C.R.
Articles of Association, no reduction of capital is achieved. We
are unable to agree with counsel for Sanyal that forfeiture of share~
is permissible only in cases expressly contemplated by Table AModel 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 CoP-lpanies Act the Company·
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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 Company and the members
and between the members. inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company. In the absence of any provisions contained in the Indian
Companies Act which prohibit a Company from forfeiting a share
. for failure on the part of the member to carry out an undertaking
or an engagement the Articles of a Company which provide that
in certain events membership rights of the shareholder including
his . right to the share will be forfeited are binding. The Articles
of Association of the Exchange expressly provide that in the event
of the member failing to carry out the engagement and in the conditions specified therein his share shall stand forfeited.
Articles
22, 24, 26, 27 & 29 of the Exchange relating to forfeiture of shares
in certain events are therefore valid.
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There is in our judgment nothing in the procedure foilowed by a
the Sub-Committee and the Full Committee which rendered the
forfeiture of Sanyal's share illegal. It is not in dispute that Sanyal
incurred liability in favour of one of the members of the Exchange
to pay Rs. 43 8-10-0 in the transaction relating •o the sale of Indian
Iron & Steel Company's shares and he failed to discharge that liability. He continued to.remain in default for six months even after
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the resolution of the F'ull Committee, and on that account he ceas-.
ed to be a member and his sh~.re was forfeited. The High Court
has found that the copies of the letters dated 9th, 10th, 16th, 17th
and 20th December, 1941 .• and of 8th January, 11th & 19th
February, 1942, were sent to Sanyal and the usual notices·relating
to the complaints placed before the Sub-Committee or the Full
Committee were served upon Sanyal, that such notices were posted
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on the notice board of the Exchange that the appellant had opportunities at all stages of the proceedings to come before the Exchange and refute the charges made against him and that at. no
stage of the proceeding until September 1, 1942, did Sanyal appear
before the Sub-Committee or the Full Committee. The High Court
was of the view that the order had not been made against Sanyal
8
contrary to the rules of natural justice. It is true that Johurmull
Daga complained about the default committed by Sanyal on
December 9, 1941 and the meeting of the Sub-Committee was held
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N. C. SANYAL V. CALCUTTA STOCK EXCHANGE (Shah, /.)49~
on December 10, 1941. Granting that the letter of the Sub-Committee enclosing a copy of the complaint dated December 9, 1941.
&ent by post to Sanyal may not have reached him because he had
left Calcutta, he had still ample notice of the proceeding of the Sub,
Committee because intimation was given to him by the notice
posted on the bOard of the Exchange. Sanyal raised no conten·
tion at any stage !Jefore 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 t.he Com·
mittees at the various meetings is not challenged before us. We are
unable to agree with the contention raised by counsel. for Sjlnyal
that the rules of natural justice were not complied with when the
Sub-Committee and the Full Comm~ttee passed the impugned re•
solutions against· Sanyal.
There is no substance in the plea that the Committee had no·
jurisdiction to order sale of the sh;u:e forfeited. Article 27 declares
that the foreited share is the property of the Exchange. and. that the
Committee of the Exchange shall sell. reallot or otherwi.Se dispose
of the share, for satisfaction of all debts due by the member to the
Association or to its I1¥1mbers out of transactions in shares and
stocks. Under its Articles the Exchange has, authority to sell the
share and to app.rqp~iate the salti proceeds towards satisfaction of
the debts, liabilities or engagements,
But we are unable to agree with the view taken by the High
Court that the balance of the amount remaining due after satisfying.
the liabilities of Sanyal remained the property of the Exchange and
that Sanyal had no right thereto. Under the stipulations contained
in Arts. 21, 22, 24, the share of the defaulter or expelled member
stands forfeited for failure to fulfil his obligation. The share of
Sanyal by express resolution was forfeited.
After applying the
amount realised on sale of the share towards satisfaction of the
debts, liabilities and engagements of Sany al to the Exchange and
its members, the balance remaining in the hands of the Exchange
had to be held for and on behalf of the appellant. That is expressly
provided in Art. 33. The expression used in Art. 29 "The forfeiture . . . shall involve me extinction of all interest" is subject
to those rights as by the Articles· are saved, and Art. 33 saves to the
defaulting shareholder whose share is forfeited the right to the
balance remaining with the Exchange. Even assuming that Arti·
cles 24 & 31 reserve to the Exchange two distinct powers-the
power to forfeit and the power to exercise a lien, and that A.rt. 3 3
only applies to. sale in enforcement of a lien, and not to a sale
under Art. 27, we are of the view that the balance on hand after
satisfying the liability of the defaulter must still be returned to the-
494
SUPREME COURT REPORTS
[1971] 2 S.C.R.
defaulting ~hareholtler. The power to forfeit does not imply
authority to appropriate the balanct\ remaining in hand after satisfying the liabilities and obligations of the defaulter to the Exchange
and its members. Any such implication would be contrary to the
i,IJ.tendment of s. 7 4 of the Contract Act.
.
The power of the Exchange to forfeit the shares arises out of
the Articles and its source is in contract. Forfeiture of share is in
the nature of imposition of a penalty. ·Section 74 of tr.e Indian
·Contract Act provides :
"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of
such breach, or i.f the contract contains any other stipulation by way of penalty, the party complaining of
the breach is entitled, whether or not actual damage or loss is proved to have been causecl 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.
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In Fateh Chand v. Balkishan Das(') ·this Court in dealing with
a case in which a claim for damag~s 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 penaltywhether 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 s. 7 4 of the Indi'll(n Contract Act. In all
·cases, therefore, where there is a stipuation 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 award such sum only as it considers reasonable, but
not exceeding the amount specified in the contract as liable to forfeiture. The same principles, in our judgment, would apply in the
case in which there is a stipulation in the contract by way of a
penalty, and the damages awarded to the party complaining of the
breach will not in any case exceed the loss suffered by the complainant party. It was observed at p.
526 in Fateh Chand's
.case(1) :
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"The section (s. 74) is clearly an attempt to eliminate
the somewhat elaborate refinements made under the
English commo,n law in distin!!uishing between stipulations providing for payment of liquidated damages and
(I) [1964] I S. C.R. 515.
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N; C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.) 495
stipulatings in the nature of penalty. Under the common
law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated
damages and binding between the parties : a stipulation
in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only
reasonable comw:nsation. The Indian Legislature has
sought to cu.t a.cross the web of i:ules and presumptions
under the English common law, by enacting a uniform
principle applicable to all stipulations naming amounts
to be paid in case of breach, and stipulations by way of
penalty."
The Court also observed at p. 530 :
"Section 74 declares the law as to liability upon
breach of contract where compensation is by agreement
of the parties pre-determined, or where there is a stipulation by way of penalty. But the application of the enactment is not. restricted to ca.ses where the aggrieved pi.rty
· claims relief as a plaintiff. The section does not confer
a special benefit upon any party; it merely declares the
law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any
property by way of penalty, the Court will award to the
party aggrieved only reasonaJ>le compensation not exceeding the amount named or penalty stipulated."
Granting that Art. 33 deals with those cases in which lien alone is
enforced and not in cases where forfeiture is levied, and the obligation of the defaulting shareholder is determined by Art. 29, in our
judgment, on the principle underlying ~· 74 of the Contract Act
the Exchange had no ri&ht to hold out of the sale proceeds of the
share any amount in excess of the amount due to it or to its
members.
The Exchange may not purchase its own shares. If it does so,
it amounts to reduction of capital. The legal theory of f!Jrfeiture
is that a share forfeited is only taken over by the Company with
the object of disposing it of to satisfy its claiin 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
496
SUPREME COURT REPORTS
[1971] 2 S.C.R.
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 respect of the
transactions with J ohurmul Daga but in respect of all other outstanding liabilities of the appellant to other members of the Exchange and to the Exchange which are enforceable under the Articles. The appellant is entitled to receive from the Exchange the
balance remaining due after deducting the aggregate amount or
value of the obligations. He will be entitled to interest on the
balance at the rate of 6% per annum from the date of the institution of the suit. Parties will bear their own costs throughout.
This appeal was filed in forma pauperis. The appellant will
pay the court fee payable on the memorandum of appeal if he had
not been permitted to appeal in forma pauperis.
V.P.S.
Appeal allowed and case remanded.
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