JUDGMENT
This is an appeal against the judgment and decree of Mack, J. in Appln. No. 4621 of 1949 in O.P No. 94 of 1949 dismissing the application of the appellant Lakshmi Narasa Reddi for excluding his name from the list of contributories settled by the Official Receiver in Sri Films Ltd., in liquidation. The relevant facts are briefly these. Sri Films Ltd went into liquidation by an order of this Court on the original side on 4th July, 1949. It seems to have been started as a private company, limited, in an informal kind of way, in December 1945; for, the minutes show that it was in existence on 26th December, 1945. One Lakshminarayana, one of the partners of Lakshmi and Co., the managing agents of Sri Films Ltd. was the moving spirit, getting subscribers and shareholders. Under the Articles of Association, the directors were the normal persons to allot shares. But there is also an article giving wide powers, including, obviously, the power to allot shares, to the managing agents. This Lakshminarayana is alleged by the appellant to have been his class-mate and intimate friend. The minutes book shows a meeting of Board of Directors on 23rd February, 1946, though it is not clear when these directors were elected. The next meeting of the Board of Directors recorded in the minutes book is on 6th April, 1946 when the appellant was elected as the Chairman of the Board of Directors and the fact said to have been intimated to him, though he denied it. It is admitted that the appellant signed an application, Ex. R-1, on 31st March, 1946, applying for five shares of Rs. 1,000 each in Sri Films Ltd. But according to him he did so nominally and without any intention at all of taking any share in this company and simply because Lakshminarayana who was his friend and class-mate, assured him that the application was only intended to lend prestige to the company, as the appellant was then the Chairman of Nellore Municipality, in the public eye, as the inclusion of his name in the list of shareholders would induce other people to subscribe and pay for shares, though he need not pay himself a pie towards the five shares applied for by him. The appellant admitted that he was receiving notices, informing him from time to time of the directors meetings and also of the general body meetings and that the company was dealing with him as a director. He denied that he had received the originals of Exs. R. 3 and R. 4 though his learned Counsel before us did not want to argue against the finding of Mack, J. to the contrary, regarding this. He urged that even if he had received Exs. R-3 and R. 4, they would not bind him as there was no valid application by him, remitting Rs. 1,000 per share, as shown in the form of application or Rs. 250 per share as demanded later on from him, or 5 per cent, of the share money as required by S. 101 of the Indian Companies Act. He admitted that on 10th April, 1946 the managing agent required him to send his consent to be Chairman of the Board of Directors but added that he did not reply to that letter for obvious reasons namely to avoid any obligation to pay for the shares. But, in spite of this, the managing agent drew a bill against him, for Rs. 5.000 the value of the five shares, and sent it through his bankers, the Andhra Bank Ltd., Nellore, for collection. The appellant then instructed his bankers orally to dishonour that bill which was accordingly dishonoured. According to the appellant, he met Lakshminarayana later on and protested to him that it was unfair to worry him for payment when he had repeatedly told him that he was not interested in the concern and had merely lent his name to inveigle other shareholders, as requested by Lakshminarayana, and asked Lakshminarayana to take early steps to remove his name from the Register of members. The appellant went on to say that the company issued a notice on 22nd May 1947, calling for a general body meeting of the company to be held on 15th June 1947 the agenda for the meeting including an item to consider the forfeiture of shares of the shareholders who were in arrears that the meeting was held on 15th June, 1947 and that the appellant understood that a resolution was passed then giving the defaulting shareholders a month's time to pay the balance, failing which the defaulters were to forfeit their shares as a matter of course, and that the appellant's name was removed that day from the list of directors as he was a defaulting shareholder. The appellant went on to say that he considered that his shares stood forfeited automatically, as he did not pay any money within the time fixed, and that he therefore kept quiet without taking any action to remove his name from the register of shareholders under the bona fide impression that nothing further need be done by him. But to his surprise, when the company went into liquidation by an order of this Court on the original side on 4th July 1949, a notice was sent to him by the Official Receiver on 4th August 1949, to show cause why his name should not be included in the list of contributories regarding the said sum of Rs, 5,000 due in respect of his five shares. He went and showed cause before the Official Receiver, protesting that he had never intended to be a real shareholder of the company, for the reasons mentioned already, and that, even if he had become a shareholder, he had ceased to be one after the resolution of the company, dated 15th June 1947, and that he was therefore not liable to be included in the list of contributories, or bound to contribute anything. The Official Receiver, nevertheless, included him in the list of contributories for Rs. 5,000 in respect of his five shares. So, he filed the petition which was dismissed by Mack, J., who rejected his contention that there was no valid acceptance by the company of his application for five shares as there was no resolution by the company or the directors allotting the shares to him. Mack, J., went on to say:
“Even assuming bis intention at the time he signed Ex. R. 1 to be true, and that be never intended to pay for shares himself, he was not acting honourably as Chairman of the Municipality in lending his signature to a document to induce other people to become shareholders on the mistaken impression that be had himself become one to the tune of Rs. 5,000. It is regrettable that in this matter a liability has been sought to be evaded on grounds such as these”.
We have perused the entire records, and heard the arguments of Mr. V. Ramaswami Aiyar, for the appellant, and of Mr. P. Satyanarayana Raju for the Official Receiver. Mr. V. Ramaswami Aiyar raised many contentions. He did not rely on the pleas of the appellant before Mack, J;, namely, that he had lent his name nominally as shareholder for five shares in order to inveigle other shareholders to subscribe and pay up and was therefore not liable, or that he had not received Exs. R. 3 and R-4, but only raised grounds of law said to make the appellant not legally liable to be included as a contributory and urged that mere dishonourable conduct, like the appellant's nominally applying for shares in order to inveigle other real shareholders into subscribing for shares in this company, would not be a bar to considering the legal objections urged by him. Of course, we agree that mere dishonourable conduct will be no bar to considering legal objections. There is a considerable distinction between law and morality. Thus, a man may subscribe nominally and bogusly a big sum for a charitable purpose, like Leprosy Relief Fund, Tuberculosis Fund, Maternity and Child Welfare Fund etc., with a clear understanding with the persons who went to him for subscription, that not a pie should be demanded from him, and that his subscription was only intended to make other men act on it as if it were real and pay up real amounts, though of smaller figures, and yet he may not be liable to pay a pie if he sets up and proves the above dishonourable understanding. But it is obvious that any such dishonourable conduct or understanding will not also relieve him from legal liability where it exists otherwise.
Mr. V. Ramaswami Aiyar for the appellant contended vigorously that there was no valid application for shares by the appellant, and so, no offer capable of being acted on and followed by allotment, as the appellant had not sent at least 5 per cent of the share money with his application, as required under S. 101(3) of the Indian Companies Act, S. 101(6), expressly making it impossible to waive this condition imposed by S. 101(3). This contention took Mr. P. Satyanarayana Raju by surprise, as it had not been urged before Mack, J., the only legal argument put forward before Mack, J., being that there was no resolution allotting the shares to the appellant. But Mr. Satyanarayana Raju soon recovered from the surprise, and discovered that this argument had not been urged before Mack, J., for an excellent reason, namely, that this company was a private company, to which S. 101 which is applicable only to public companies, would not apply. The Articles of Association produced by Mr. Satyanarayana Raju, clearly showed that this was only a private company, and the order dated 4th July 1949 also showed this.
Then it was urged, somewhat feebly by Mr. Ramaswami Aiyar's junior that S. 101(1) to (6) will apply to private companies also, since S. 101(8) says that Sub-S. (7) shall not apply to a private company, implying thereby that Sub. Ss. 1 to 6 would apply to private companies also. We are satisfied that there is no substance in this contention. S. 101 (1) expressly shows that the entire S. 101, with all its Subsections, applies only to public companies. S. 101(8) is only intended to clear a possible ambiguity caused by the phrasing of S. 101(7). So, this contention fails.
The next contention of Mr. Ramaswami Aiyar was that there was no valid acceptance of the appellant's application for shares and no valid allotment of the shares to him by a resolution of the company or the directors or even the managing agent. He relied on the rulings in In re Homer District Consolidated Gold Mines Ex parte Smith (1), In re Sly Spink and Co. (2), Pusarla Sanyasi v. Guntur Cotton Jute and Paper Mills Co. Ltd., (3), Bank of Peshawar v. Madhoram (4), Sukdevdoss Ramprasad v. Govindoss Chathurbhujadas and Co. (5), The Official Liquidator of the Bellary Electric Supply Co. Ltd., in Liquidation v. Kanniram Rowoothmal (6), Indian States Bank Ltd. v. Sardar Singh (7), Mutual Bank of India v. Sohan Singh (8). Ramlalsao v. M.E.R Malak(9) and Shiromani Sugar Mills Limited…(Plaintiff); v. Debi Prasad…(Defendant).(10) for the position that, in circumstances like these, where there was no satisfactory proof of allotment by the directors, or by the managing agent where he had power under the Articles of Association to allot shares, there was no valid allotment or binding contract and that the mere entry of five shares, share Nos. 91 to 95 in his name in the register of shareholders of this company on 31st March 1946 itself would be no proof of any valid allotment in the absence of proof of a valid order of allotment, and that the failure to deliver the share certificate to him would also show that the company itself was aware of the bogus nature of the entry of the five shares in his name in the register of shareholders. It was also urged that Ex. R-3 dated 16th April 1946 intimating to him the allotment of these five shares, mentioned the date of his application as 5th April 1946 instead of the correct date of 31st March 1946 found in the application itself, and did not mention the date of the allotment and that Ex. R. 4, dated 25th November 1946, asking him to pay the Rs. 5,000 in pursuance of his promise to Lakshminarayana to do so after his return from Hyderabad, did not also mention the date of the allotment, and that there could have been no real allotment as the allotment, according to the date shown in the register of the shareholders, was made on 31st March 1945 itself with no visible interval for the company or the directors to pass a resolution allotting the shares to him. This argument is of doubtful validity. If the managing agent, Lakshminarayana, had the right to allot shares, as the Articles of the Association show, he could have allotted them immediately to the appellant and there was sufficient time for such allotment. It, is not necessary to produce the order of allotment to prove the validity of an entry in the register of shareholders, though it is desirable to do so. As held by a Bench of the Bombay High Court in Mohamed Akbar v. Official Liquidator the liability of a member of a company to be included in the list of contributories under S. 156 of the Indian Companies Act is not ex contractu but ex lege, and arises by reason of the fact that the name of the person appears on the register of members of the company, and it is therefore no answer for the contributory against the claim of the company to say that, although his name appears on the register, he is not liable, because the allotment to him was void, or because he has sold his shares to another, and, in the absence of rectification of the register by an application by him under S. 38 soon after he comes to know that his name is entered in the register of members fraudulently or without sufficient cause, his liability becomes absolute under S. 156 of the Act, all the more so when winding up also has supervened, as here We may add that in the cases relied on by Mr. V. Ramaswami Aiyar the shareholders whose names appeared in the register of members were not proved to have knowledge of their names having been entered in that register, unlike here, where from the very beginning the appellant had such knowledge and continued to have it for more than three years and took no action till he received the notice dated 4th August 1949 from the Official Receiver after the winding up. The failure to deliver the share certificate to the appellant is, of course, of no consequence, and was not seriously pressed by Mr. V. Ramaswarni Aiyar for proving the appellant's non-liability to be a contributory. The appellant could claim the delivery of the share certificate only after he had paid Rs. 5,000, or whatever amount was due on the shares by that time, and, admittedly, he had paid not a pie and was not entitled to the delivery.
Even assuming that there was no valid allotment of the five shares to the appellant, and that the allotment was even void, we have no doubt whatever that the order of Mack J. dismissing the appellant's application, was correct on the “doctrine of holding out.” This doctrine has been stated in Palmer's Company Law, 19th Edn, by Topham K.C at page 105, as follows:
“The result of this doctrine of holding out is that if a person's name is on the register with bis consent, and he claims a right to have it removed on some ground or other, he must exercise the right promptly, otherwise, he forfeits it [see Re Scottish Petroleum Co., ]. Even where a name is, pursuant to a void contract, placed on the register, delay after knowledge may be fatal [see Re Railway Time Table Publishing Co. ].”
Mr. K.M Ghosh says at page 347 of his Indian Company Law, 8th Edn. as follows:
“Before a company goes into liquidation, the liability to contribute is measured by the contractual obligation arising from membership; but, after liquidation, this section (S. 156) imposes new liabilities on the shareholders in respect of unpaid calls made before or after winding up; and such calls can be recovered, though barred by limitation before the order of winding up was made. The liability of a member under this section in respect of the shares is absolute and flows from the fact of his being on the register of members in respect of those shares. The original contract may supply the reason for his name having been placed there, but, after the winding up, his liability arises ex lege and not ex contractu.”
Mr. Sen Gupta, in his “Indian Company Manual” 4th Edn. holds the same view.
The above views of the text book writers is amply borne out of authoritative rulings. The Privy Council has held in Hansraj Gupta v. Asthanna as follows:
“Whatever may have been the rights and liabilities of the testator before the winding up intervened, the position was altered by the happening of that event. At the commencement of the winding up, he was, aud bad for over three years been, entered on the register of shareholders as the bolder, of the shares now in question, with his full knowledge and assent. On the winding up, S. 156 of the Indian Companies Act came into play. His liability under that section in respect of the shares was absolute and flowed from the tact of his being on the register in respect of those shares. The original contract may supply the reason for his name having been placed on the register in respect of the shares, but after the winding up, his liability in respect of the shares arose ex lege and not ex contractu.”
These observations apply, almost completely, to the facts of this case. Even though, after the Independence of India and the severance of its ties with the King of England and the Privy Council, the ruling of the Privy Council is not absolutely binding on us, it is entitled to very great respect, as held by the Federal Court and the Supreme Court in several recent cases, and we have not the slightest hesitation in accepting the observations of the Privy Council quoted above as representing the correct position regarding the liability of a shareholder, like the appellant, for contribution under S. 156 of the Indian Companies Act. In The Garland Petroleum Co. (Madras) In re , Gentle J. has held:
“If any person whose name is included in the register of shareholders of a company becomes aware that circumstances are such that, if proceedings are brought against the company, he would succeed in having bis name removed and the register rectified he must do so promptly. He must not stand by and wait and then, at a later stage, with knowledge that he has been held out to the public as a shareholder of the company, seek to have his name removed. In the oases which I have quoted, the grounds were that the contract, under which the shares were obtained could be set aside as void.”
The case cited by Gentle J. included Re Scottish Petroleum Co. , Sewell's case , Lawrence Case and Central Railway Co. of Venezuela v. Kisch . Even a delay of a fortnight has been held to be fatal, and, here the delay is more than three years, and the circumstances set up shaky. We have no hesitation in agreeing with the conclusion of Gentle J. in that case. The same views, as held by the Privy Council and Gentle J. were expressed by a Bench of the Bombay High Court in Mahomed Akbar Abdulla Fazalbhoy… v. The Official Liquidator and by a Bench of the Allahabad High Court in Shiromani Sugar Mills Limited…(Plaintiff); v. Debi Prasad…(Defendant). . So, this contention must fail especially as winding up has also supervened, adding to the other ground of delay.
The last contention urged on behalf of the appellant was that the appellant's shares should have been forfeited and his name removed from the register of the member as per the resolution of the company Bated 15th June 1947. This argument too is untenable. It was admitted that the appellant's shares were not fortified as a matter of fact as per that resolution and that the company continued to treat the appellant as a shareholder. So, as per the ruling of Gentle, J., in Gurusami v. Indo Carnatic Bank Ltd. with which we fully agree, the appellant cannot object to being included in the list of contributories.
In the result, this appeal fails and is dismissed with costs
N.R.R