BARKAT ALI; AND DEWAN BAHADUR S RM CT S SABARATHNAM CHETTIAR Vs. OFFICIAL LIQUIDATORS OF TRAVANCORE NATIONAL AND QUILON BANK LTD(IN LIQUIDATION)

JUDGEMENT

(1.) Application No. 2964 of 1939 is by S. RM. CT. S. Sabarathnam Chettiar under Section 184, Companies Act, to rectify the share register by removing his name and putting the name of Messrs. Kothari & Sons in his stead alleging that they and not he should be included in the list of contributories as a contributory for twenty shares numbered 89153 to 89172. His case is that in April 1938 he sold and delivered the said shares to Messrs. Kothari & Sons and received the price therefor and that from that day Kothari & Sons were the legal owners of the scares. In the affidavit filed by him he states that he under-stands from Kothari & Sons that the Travancore National and Quilon Bank Ltd., purchased the said shares in which case the bank would have no right in law to proceed against him with reference to these shares and that his liability to pay the uncalled share capital had ceased to exist. On behalf of Kothari & Sons an affidavit has been filed that they put through the transaction solely as brokers, that they sold the shares to the bank with the bona fide belief that the order was placed by the said bank on behalf of some undisclosed principal that the shares must in law be deemed to be purchased by the bank and that any liability in respect there of ceased to exist. They also raised a further contention that the transaction was entered into by them on the representation of the officers of the bank through its secu-rities department that it was purchase made by the bank on behalf of certain customers of the bank and that therefore the transaction was perfectly legal and proper. But it is now admitted that as a fact the purchase was by the bank for itself and not on behalf of a customer. Application No. 3078 of 1989 is by H.C. Kothari one of the partners of Kothari & Sons to have their name removed from the share register in respect of 10 shares on the ground that he sold the said shares on 20 April 1938 to the bank and the same allegations that were made in regard to the belief that the bank was purchasing for its constituents was also made in this case in paras. 6 and 7 of the affidavit filed on their behalf.

(2.) When the applications were taken up, Mr. Venkatarama Sastri frankly conceded that he could not state that any officer of the bank made the representation in question or that any specific representation was made to his clients that the shares were being purchased for a customer. He confined himself to two contentions and irivited my decision on them as they would apply to all the cases wherein his client has sold the shares to the bank. He outlined his first contention thus. Though the purchase by a company with a limited liability incorporated under the Companies Act in India or in England or under the Companies Regulation in Travancore would be illegal and ultra vires, the contract having been made by the bank which is a foreign corporation outside the terrirorial limits of Travancore wherein it was incorporated must be held to be legal because to such a purchase neither the Travancore Regulation nor the Companies Act would apply and there would be consequent extinction of liability for any unpaid calls in respect of those shares and there is nothing in the general law of contracts which would prohibit such a purchase.

(3.) Before dealing with this contention it is necessary to examine the reasons on which the incapacity of a limited liability company to purchase its own shares is based. In In re Dronfield Silkstone Coal Co. (1881) 17 Ch. D. 76 Jessel M.R., dealing with a company incorporated under the English Companies Act, 1862, which was formed for the purpose of carrying on the trades or businesses of coal miners, the memorandum of association of which authorised the company to do all things whatsoever which the com-pany shall consider to be in any way connected with the trades, businesses or purposes aforesaid or any of them, held that such a company could not purchase its own shares in spite of the provisions in the articles of association that it could be made. He gave three reasons for it: (1) the purchase goes beyond the memorandum of association and was not authorised by it because it does not confer a power to traffic in shares; (2) it would be void on general grounds because the purview of the whole Act of 1862 is utterly inconsistent with the notion that the company can be, registered as a member, of itself; and (8) the transaction would be invalid by reason of its being a dimunition of the capital of the company. In Hope V/s. International Financial Society (1876) 4 Ch. D. 327 at p. 335 James L.J. took a similar view. He observed that either this is a purchase of shares in the sense of trafficking in shares, which is a purchase not authorised by the memorandum of association, or it is an extinguishment of the shares and therefore a reduction of the capital of the company.