Rohit Bishnoi Company Project(vi Sem) New.docx

CONCEPT OF CALLS, SURRENDER, FORFEITURE AND LIEN OF SHARES

MANIPAL UNIVERSITY JAIPUR SCHOOL OF LAW

Submitted To:

Submitted By:

Mrs. Maryanka Singh

ROHIT BISHNOI 161401079 BA.LL.B (Hons.) Semester - VI Section – B

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CERTIFICATE This is to certify that the project entitled, “A study on law relating to risk prima facie passes with property” submitted by “ROHIT BISHNOI” in partial fulfilment of the requirement for the award of “BA.LLB (HONOURS) at the “MANIPAL UNIVERSITY JAIPUR” is an authentic work carried out by her under my supervision and guidance.

To the best of my knowledge, the matter embodied in the project has not been submitted to any other University / Institute for the award of any Degree or Diploma in the year 2018-2019.

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ACKNOWLEDGMENT We take this opportunity to express our humble gratitude and personal regards to Mrs. Maryanka Singh for inspiring us and guiding us during the course of this project work and also for his cooperation and guidance from time to time during the course of this project work on the topic.

Place: Jaipur

Name of Students

Date of Submission: 16th February, 2019

Rohit Bishnoi

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TABLE OF CONTENTS TOPIC NAME

PAGE NO

CERTIFICATE

2

ACKNOWLEDGEMENT

3

INTRODUCTION

5

What are Shares

5

Authorized and Issued Shares

5

CONCEPT OF CALLS ON SHARES

6

Legal Provisions Relating to the Calls

7

Procedure for making Calls

8

CONCEPT OF SURRENDER OF SHARES

8

CONCEPT OF FORFEITURE OF SHARES

9

Conditions for Forfeiture of shares

9

Procedure of Forfeiture of shares

10

Annulment of Forfeiture

10

CONCEPT PF LIEN OF SHARES

10

Lien of shares:

11

CASE

12

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INTRODUCTION

WHAT ARE SHARES Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically. When establishing a corporation, owners may choose to issue common stock or preferred stock. Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock. In contrast, preferred stock typically does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock. Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders.

Authorized and Issued Shares Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership. Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment. Example of Shares- As the 10-year bull market that began in 2008 stretched on, shares of companies continually reached new highs through 2017. So-called FANG (Facebook, Apple, Netflix and Google) tech stocks led the market rally, as their share prices soared by double digits in 2017 on strong earnings results. The increasing price meant that investors were willing to pay more to own shares of these companies. All told, the shares of the companies in the S&P 500

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Technology Select Sector traded up 34.57% in 2017. In 2018, the shares of companies on the stock market began to experience volatility due to economic and political uncertainty.

CONCEPT OF CALLS ON SHARES Reputed companies require the applicants to send the full value of the shares along with the applications. This is because, the Companies Act does not prohibit companies to collect the entire amount at the time of issue itself. But the usual practice of the companies is to collect a certain percentage of the face value of the shares on application and allotment and the balance in one or more instalments known as calls. A call may be defined as a demand made by the company on its shareholders to pay a part or the whole of the unpaid balance within a specified time. Lord Lindley says that the expression “Call” denotes both the demand for money and also the sum demanded. The following points should be noted, in this context, so that the reader can understand what a call really means. 1. Time for Making the Call: The call can be made at any time during the life time of the company or during the course of winding up. During the life time, the call should be made by the Board of Directors and during the course of winding up, it should be made by the liquidator. 2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the call is made. But, this liability arises only when the call is made and not before. 3. Debt Due: As soon as a call is made, the call amount shall become a debt due from the shareholders to the company. 4. Consequences of Default: If a shareholder fails to pay the call amount, the company can enforce payment of the amount together with interest or can forfeit the shares. 5. Calls and Other Payments: A call is different from other payments made by a shareholder. The amounts paid on application and allotment are not calls. Similarly, if a company requires the shareholders to pay the entire amount either on application or on allotment, it is not a call under this Act.

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Legal Provisions Relating to the Calls The statutory provisions relating to the making of calls can be summed up as follows: 1. Call should Bona fide: The power to make call is generally in nature of a trust and so it can be exercised bona fide and for the benefit of the company. It should not be made for private ends. It means the directors or the liquidator can make the call only when there is a bona fide need for funds. 2. Uniformity: The calls should be made on a uniform basis on all the shares falling under the same class. If a call is made only on some shareholders of the same class but not on others or a greater amount is demanded from some shareholders and a lesser amount from others of the same class, the call is not valid. 3. Provisions of the Articles: The calls should be made strictly in accordance with the provisions of the Articles. If this is not done, the call will be invalid.

Procedure for making Calls Generally, the procedure for making calls is incorporated in the Articles of most companies. If a company has its own Articles, it should follow the provisions of its Articles. If not, the regulations specified in Table A of the Act shall apply. The following provisions of Table A can be noted at this stage. 1. The power to make calls generally vests in the Board of Directors. 2. The calls should be made by passing a resolution at the meeting of the Board. 3. The call money should not exceed 50% of the face value of the share at one time. However, companies may have their own Articles and raise this limit. 4. There must be at least 30 days interval between two successive calls. 5. When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the shareholders of the same class. 6. The notice should also specify the amount of the call, place of payment etc. and should be sent at least 14 days before the last date for payment. 7. The Board of directors has the power to revoke or postpone a call after it is made.

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8. Joint shareholders are jointly and severally liable for payment of calls. 9. If a member fails to pay call money, he is liable to pay interest not exceeding the rate specified in the Articles or terms of issue. The directors are free to waive the payment of interest. 10. If any member desires to pay the call money in advance, the directors may at their discretion accept and pay interest not exceeding the rate specified in the Articles. 11. A defaulting member will not have any voting right till call money is paid by him.

CONCEPT OF SURRENDER OF SHARES Surrender of shares means the return of shares by the shareholder to the company for cancellation. Holder in this case voluntarily abandons all his shares in favor of the company. A mere refusal to take up newly issued shares, to which a shareholder is entitled to, is not a surrender of shares. The power to accept surrender of shares cannot be exercised by a company unless expressly given by the Articles of Association. But no shares can, in any case, be surrendered to the company in consideration of the payment of money or money’s worth by the company. Such a surrender shall be ultra-vires the company since it would amount to purchase by the company of its own shares. There are only two cases where surrender of shares will be valid provided its acceptance by the company is authorized by the Articles of Association— 1. When shares are surrendered in exchange of the new shares of the same nominal value. There would be no reduction of share capital in such a case; and 2. When shares are surrendered as a short cut to forfeiture of shares when all the circumstances for forfeiture have arisen. Reduction of capital in such a case shall be valid. Provisions in the articles, for the acceptance of surrender of shares in all other cases except the above two, will be void. A member validly surrendering his shares to the company can nevertheless be held liable as a list B contributory in the event of winding up of the company within twelve months of his surrender of shares. Court may order for the restoration of the plaintiff’s name in the Register of Members after lapse of any number of years if the surrender of shares is proved to be illegal and provided that the shares have not been reissued in the meantime or otherwise dealt with by the company.

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CONCEPT OF FORFEITURE OF SHARES If a shareholder, who is called upon to pay any call fails to pay the amount, even after sending several reminders, the company may forfeit his shares. Forfeiture of shares results in a permanent reduction of the share capital.

Conditions for Forfeiture of shares A company can forfeit its shares only when the following conditions are satisfied: 1. Authority to Forfeit: The power to forfeit must be expressly given in the Articles. Accordingly, if no power is given in the Articles, no forfeiture can be made. 2. Default in Payment of Calls: The shares can be forfeited only for the non-payment of calls and not for the default in payment of any other debts. 3. In Accordance with the Articles: Forfeiture shall be valid only when the provisions of the Articles are strictly complied with. Even a slight deviation from the provisions shall render the forfeiture invalid. 4. Bonafide and for the Benefit of the Company: The right to forfeit shares is in the nature of trust and so it can be exercised bonafide and only for the benefit of the company. The power cannot be exercised hastly or for private ends. 5. Board Resolutions: Forfeiture will be effected only by means of a Board resolution. 6. Notice to Defaulting Shareholder: Notice precedent to forfeiture must be given to the defaulting shareholder. In the matter of forfeiture of shares, technicalities must be strictly observed.

Procedure of Forfeiture of shares The following procedure must be followed for forfeiture of shares: 1. The secretary shall prepare a list of defaulters i.e., the list of members who have not paid the call money up to the last date, and place it before the Board of Directors for necessary action. 2. The Board of Directors then passes a resolution instructing the secretary to send call notices to such defaulters.

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3. As per Board’s resolution, the secretary dispatches the notices under registered post to the defaulting shareholders asking them to pay the call dues within 14 days with interest at a specified rate. 4. If any defaulting member does not comply with the requirements of such notice, a second warning notice may be sent stating that if the call money is not received within 14 days from the date of notice, the forfeiture of shares will follow. 5. If this notice also proven ineffective, the secretary convenes a meeting of the Board of Directors and places the facts before it. The Board then passes a formal resolution to forfeit the shares.

Annulment of Forfeiture After the forfeiture of shares, if the defaulting shareholder likes to pay the amount due and requests the company to cancel the forfeiture of his shares, the secretary should take the following steps: 1. Board meeting is to be convened to settle the terms of annulment or cancellation of the forfeiture. This will be done by passing a resolution. Such resolution generally calls upon the defaulting member to pay off calls due together with interest. 2. A letter should be sent to the shareholder informing that on fulfilment of the conditions laid down by the Board, his name will be entered in the register of members.

CONCEPT PF LIEN OF SHARES The legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract. A lien exists, for example, when an individual takes out an automobile loan. The lien holder is the bank that grants the loan, and the lien is released when the loan is paid in full. Another type of lien is a mechanic's lien, which can be attached to real property if the property owner fails to pay a contractor for services rendered. If the debtor never pays, the property can be auctioned off to pay the lien holder.

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Lien of shares: A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a company lien on a share means that the member would not be permitted to transfer his shares unless he pays his debt to the company. The articles generally provide that the company shall have a first lien on the shares of each member for his debts and liabilities to the company. The right of lien is not inherent but must be clearly provided for in the articles. The articles may give the right of lien over share either for unpaid calls or for any other debt due by the member of the company. The company may have lien on fully paid-up shares. The lien also extends to the dividends payable on the shares. The death of a shareholder does not destroy the lien. The right of lien can be exercised even through the claim has become barred by law of limitation. Where the liability of the shareholder towards the company is disputed by him, it does not deprive the company of its right of lien on the shares. But a company will not be able to exercise its right of lien where the shareholder has mortgaged his shares before he has incurred any liability to the company and the company has notice of it. Similarly, a company will lose its lien if registers a transfer of shares subject to the lien.

From companies point of view the right to take another’s property if a particular obligation is not discharged. From company’s point of view if a shareholder indebted to the company, he cannot dispose of the shares without first paying the debt of the company. The right of the company on shares is called lien of shares. However company can exercise his right only if provided in AOA.

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CASE Calcutta High Court Unity Company Private Ltd. vs Diamond Sugar Mills and Ors. On 18 November, 19681 Author: A Sen Bench: A Sen JUDGMENT A.N. Sen, J. 1. Unity Company Private Ltd., the plaintiff herein (hereinafter referred to as the plaintiff or the plaintiff company) was the owner and registered holder of 25,000 shares of Diamond Sugar Mills Ltd., the defendant No. 1 (hereinafter referred to as the defendant company). The said shares are fully paid up and, the shares are of the face value of Rs. 10/- per share. The defendant company claimed a lien over the said shares owned by the plaintiff company in respect of a debt of the plaintiff company to the defendant company and in exercise of the said lien the defendant company had sold the shares to other parties who happen to be and/or are represented by the other defendants in this suit. In this suit the plaintiff company challenges the validity of the sale of the plaintiff's said shares by the defendant company. The plaintiff had originally instituted this suit against the defendant company. By subsequent amendment of the plaint the other defendants who are the purchasers of the said 25,000 shares and the present registered holders thereof have been impleaded and brought on record in this suit. One of the original defendants Pannalal Beriwal who was the purchaser of 10,000 shares out of the said 25,000 shares died during the pendency of the suit and the defendant Nos. 2 to 10 are the heirs and legal representatives of the said Pannalal Beriwal. The defendant No. 3 Gopi Kissen Agarwal who is an heir and legal representative of Pannalal Beriwal is also himself a purchaser and the present registered holder of 5,000 shares out of the said 25,000 shares. The defendant No. 4 Sanwalram Agarwal, another heir and legal representative of Pannalal Beriwal is the purchaser and the present registered holder of another lot of 5,000 shares out of the said 25,000 shares and the defendant No. 5 Amarnath Agarwal who is also an heir and legal representative of Pannalal Beriwal is the purchaser and registered holder of another lot of 5,000 shares out of the said 25,000 shares which form the subject-matter of dispute in the present suit. 2. The case of the plaintiff as made in the plaint may be stated. In paragraph 1 of the plaint, the plaintiff states that the plaintiff is and at all material time was the holder of 25,000 shares in the defendant company and the particulars of the said shares are given. In paragraph 2 of the plaint, the plaintiff alleges that the defendant company demanded payment from the plaintiff a sum of Rs. 1,10,000/- alleged to be due to the defendant company by the plaintiff company on account of money lent and advanced by the defendant company to the plaintiff company in 1948 and in the said letter the defendant company claimed to exercise an alleged lien on the said shares belonging to the plaintiff if the said amount was not paid by the plaintiff to the defendant company. In paragraph 3 of the plaint, the plaintiff avers that no amount whatsoever was due by the plaintiff to the defendant company in June 27, 1956, all advances made by the defendant company to the plaintiff having been liquidated several years prior thereto and the plaintiff 1

AIR 1971 Cal 18

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further states that in any event the alleged advances were barred by the law of limitation. In paragraph 4 of the plaint, it is stated that by letter dated 8th October, 1937 the defendant company informed the plaintiff that in exercise of the alleged power and lien as contained in the Articles of Association of the defendant company the said 25,000 shares standing in the plaintiff's name had been sold by the defendant company @ Rs. 5/- per share and a sum of Rupees 1,25,000/- had been realized by virtue of such alleged sale and it was further aliened in the said letter that after giving credit for the said amount to the plaintiff a sum of Rs. 42,940-1-0 still remained due and payable by the plaintiff to the defendant company, In paragraph 5 of the plaint the plaintiff makes the case that the plaintiff was and is not indebted to the defendant company in any sum whatsoever and the alleged sale of the said shares in exercise of the alleged lien contained in the Articles of Association of the defendant company is void, inoperative and not binding on the plaintiff. In paragraph 6, it is stated that no sale of the said shares in fact took place as alleged or at all and the purported sale of the said shares by the defendant company is mala fide and the sum of Rs. 5/- per share alleged to have been realized by the defendant company in respect thereof is grossly inadequate and is far below the market rate of the said shares. It is stated in paragraph 7, that the plaintiff is still the owner of the said shares. It is claimed in paragraphs 7 (a), 7 (b), 7 (c), 7 (d) and 7 (e) which were introduced by amendment of the plaint, that the purported forfeiture of the said shares by the defendant company by its resolution dated 25th May, 1957 and allotment of the said shares to the alleged purchasers of the said shares and entering their names on the share-register of the defendant company and issuing fresh certificates in their favor and expunging the name of the plaintiff company from the share register of the defendant company are wrongful and illegal and not binding on the plaintiff company and that the share register of the defendant company should be rectified by deleting the names of the alleged purchasers therefrom and recording the name of the plaintiff as the lawful owner of the said shares. In para 8 the plaintiff alleges that the defendant are denying the plaintiffs title to the said 25,000 shares. In para 9 of the plaint, the plaintiff in the alternative claims damages from the defendant company in respect of the said shares for Rupees 12,50,000/@ Rs. 50/- per share, being the value thereof on 18th October, 1957. On the basis of the aforesaid material averments the plaintiff has asked for the following principal reliefs: (i) A declaration that the plaintiff continues to be the owner of the 25,000 shares in the defendant company. (ii) A declaration, if necessary, that the purported sale of the said shares by the defendant company is void, inoperative and not binding on the plaintiff. (iii) A declaration that the forfeiture of the said shares by the defendant company and the allotment of the same to the said Pannalal Beriwal since deceased and the defendants 3, 4 and 5 is void, inoperative and not binding on the plaintiff. (iv) A declaration that the said resolution of the Board of Directors of the defendant company dated 25th May, 1957 is void, illegal and not effective and is not binding on the plaintiff. (v) Rectification of the share register of the defendant company by deleting the name of the said Pannalal Beriwal since deceased and of the defendants Nos. 3, 4 and 5 and by putting in the name of the plaintiff as the owner of the said shares.

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(vi) If necessary, cancellation of the share certificates issued by the defendant company in favor of the said Pannalal Beriwal since deceased and the defendants 3, 4 and 5. (vii) Alternatively, Rs. 12,50,000/- as damages or an enquiry into damages and a decree for such sum as may be found to be due on such enquiry. 3. The case of the defendants may now be noted. The defendant company in the written statement admits that prior to 21st May, 1957, the plaintiff company was the holder of 25,000 ordinary shares which form the subject-matter of the suit and makes the case that between January and July, 1948 the defendant company lent and advanced to the plaintiff company a sum of Rs. 1,40,000/-in 4 instalments for the purpose of the business of the plaintiff company and at its request, and in December 1949, the plaintiff company repaid a sum of Rs. 30,000/- in part payment of the said sum of Rupees 1,40,000/- leaving a balance of Rupees 1,10,000/-. The defendant company further makes the case that as the plaintiff company was unable to repay the said sum of Rs. 1,10,000/- immediately or in the near future, the plaintiff company through Babu Champalal Jathia appealed to the defendant company for sufficient time to repay the said balance sum of Rs. 1,10,000/- and also for facilities to repay the same in easy monthly instalments and it was agreed by and between the plaintiff company and the defendant company as follows:-(a) That the sum of Rs. 1,10,000/- would not become payable by the plaintiff company to the defendant company before 1st February, 1955. (b) That the plaintiff company would repay the said sum to the defendant company with interest thereon @ 6% per annum by monthly instalment of Rs. 5,000/-, the first of such instalment to be paid on 1st February 1955, and all subsequent monthly instalments on the first of each succeeding month. (c) That payments were to be made at the plaintiff's registered office. (d) That for the purpose of recovery of the said sum of Rs. 1,10,000/- and its interest thereon @ 6% per annum, the defendant company would be entitled to exercise all its rights provided under the Articles of Association in respect of the aforesaid 23,000 shares held by the plaintiff company in the defendant company. 4. It is the case of the defendant company that even after expiry of 1st February, 1955, and in spite of demands the plaintiff company failed and neglected to pay the said sum of Rs. 1,10,000/or any part thereof or any interest thereon either by monthly instalment of Rs. 5,000/- as agreed or at all and that it was resolved by the defendant company that the defendant company would enforce its lien on the said shares of the plaintiff as the plaintiff had failed and neglected to pay the sum of Rs. 1,10,000/- together with interest thereon or any part thereof by giving a notice to the plaintiff company in terms of the Articles of Association of the defendant company; and on or about 27th June, 1955, the defendant company called upon the plaintiff company to make payment of the said sum of Rupees 1,10,000/- with interest thereon @ 6% per annum within 7 days from the date of receipt of the said letter by the plaintiff company and also informed the plaintiff company that in default of such payment the defendant company in exercise of its lien on the said 25,000 shares would forfeit, sell and allot the same in accordance with the provisions

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of the Articles of Association of the defendant company after the expiry of the said period and would apply the sale proceeds towards payment and discharge of the said sum of Rs. 1,10,000/with interest @ 6% per annum. It is the further case of the defendant company that as inspite of the said notice the plaintiff company failed and neglected and/or refused to nay the said sum of Rs. 1,10,000/- with interest @ 6% per annum or any portion thereof within the aforesaid time or at all, the defendant company in exercise of its lien forfeited the said 25,000 shares of the plaintiff company and expunged the name of the plaintiff company from the register of members and the defendant company sold and allotted the said 25,000 shares @ Rs. 5/- per share to the following persons in the following manner, viz., 1. Shri Pannalal Beriwal 10,000 shares 2. Shri Gopi Kissen Agarwal 5,000 shares 3. Shri Sanwalram Agarwal 5,000 shares and 4. Shri Amarnath Agarwal 5,000 shares and the defendant company duly entered and/or registered the names of the said persons in the register of members of the defendant company. The defendant company states that the defendant company gave due notice to the plaintiff company of the said forfeiture and sale and allotment of the raid 25,000 shares and also called upon the plaintiff company to pay the defendant company a sum of Rs. 42,940/- and 1 anna which was still due and owing to the defendant company by the plaintiff company. The defendant company denies the allegations made in the plaint and denies in particular the case made by the plaintiff company that the plaintiff company had liquidated the debt several years earlier or that the loans advanced -by the defendant company were barred by limitation. In substance the case of the defendant company is that the plaintiff company had failed and neglected to pay its debt to the defendant company of the said sum of Rs. 1,10,000/- with accrued interest and the said debt was justly payable by the plaintiff company to the defendant company and the defendant company in exercise of its lien has forfeited the said shares and has sold and allotted the said shares to purchasers of the said shares and the name of the defendant company has been expunged from the register of members of the defendant company and the names of the purchaser have been recorded therein. It may be noted that the defendant company has filed a suit against the plaintiff company for recovery of the said balance amount alleged to be still due and payable by the plaintiff company to the defendant company after giving credit to the plaintiff company for the sale proceeds realized in respect of the said 25,000 shares of the plaintiff company. 5. The other defendants (hereinafter referred to as the purchaser defendants) hap-pen to be the heirs and legal representatives of the original defendant Pannalal Beriwal who had taken 10,000 shares and 3 of the other defendants namely, Gopikissen Agarwal, Sanwalram Agarwal and Amarnath Agarwal, the defendants Nos. 3, 4 and 5 herein are also purchasers of lots of the said 25,000 shares in their individual capacities. These defendants in their written statement deny the claim of the plaintiff and these defendants make the case that these defendants are in any event bona fide purchasers of the said shares for valuable consideration without any notice of any alleged claim of the plaintiff and the rights of these defendants in relation to the said shares cannot be affected by any alleged claim of the plaintiff company. The purchaser defendants

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further make the case that the plaintiff company with full knowledge that the defendant company was threatening to and intended to sell the said shares stood by and took no steps to prevent such sale and thereby made it possible for the defendant company to sell the said shares and impliedly represented and/or permitted these defendants (the purchaser defendants) to believe that the defendant company was entitled to sell the said shares and/or acquiesced in the said sale; and that these defendants are bona fide purchasers for value of the said shares and have acted on the basis of the said inaction and/or representations of the plaintiff and/or said beliefs. It is the case of these defendants that the plaintiff is therefore estopped from challenging the title of these defendants to the said shares and these defendants make the further case that the plaintiffs are guilty of laches and/or delay and have and/or must be deemed to have lost and/or waived their rights, if any, in the said shares, which these defendants deny.

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