12.9.8 (Certification of Transfer Splitting of Shares)

Where a shareholder desires to sell only some of the shares represented by a share certificate or to sell them to different buyers, then a problem may arise in that the transferor is required to hand over the share certificate to the buyer to be lodged along with the share transfer form with the company and this may not be possible in such a situation. Therefore, to overcome this problem, a practice has come into being whereby the transferor lodges the certificate and transfer form with the company with a request to certify  the transfer. The company obliges by endorsing a statement to the effect that a share certificate covering those transfers has been  lodged with the company.

The certification is normally done on the transfer form itself. When the transfer is lodged with the company and passed, the company cancels the old certificate and sends a 'certification of transfer’, for the shares transferred, to the transferee and a balance certificate/ticket, for those retained, to the transferor, The 'certification of transfer’ and the ‘balance ticket’ are exchanged for share certificates as and when they are ready. In case of shares being sold to two or more transferees, the certification of transfers is exchanged for the new certificates.

Section 112 provides that certification is merely a representation by the company to any person acting on the faith of it that there have produced to the company such documents, as on the face of them, show a prima facie title in the transfer, but in no way, it is a representation that the transferor has any title to the shares. However,  where any person acts on the faith of an erroneous certification made by a company negligently, the company shall be under the same liability to him as if the certification has been made fraudulently.

The 'Certification of transfer' to be valid should satisfy the following requirements:

(i) the instrument of transfer should be certificated with the words ‘Certificate lodged’ or words to the like effect; (ii) the person issuing the certification instrument must be a person authorized to issue such instruments of transfer on the company’s behalf; (iii) the certification must be signed by any officer or servant of the company or any other person, authorised to certificate transfers on company’ s behalf. Where a body corporate has been so authorised, it may be signed by any officer or servant of that body corporate.

However, it may be noted that there is no statutory obligation cast on the company

to certify transfers.

12.9.7 (Distinction between Transfer and Transmission)

The following are points of distinction between transfer and transmission  of shares.

            (i)         Transfer takes place by a voluntary and deliberate  act of the transferor while transmission is the result of operation of law.

            (ii)        In case of transfer, the transferor and  the transferee have to execute  an                 instrument of transfer, while the shares are transmitted  on the death,  insolvency of a member and instrument of transfer is not  required;   only a proof of his title to the shares is required.

            (iii) Transfer is the normal method of transferring  property in the shares, whereas transmission of shares take place only on death, insolvency of a shareholder.

12.9.6 (Transmission of Shares)

Transmission of shares takes place (i) when  the Registered shareholder dies or (ii) when he is adjudicated an insolvent; or (iii) if the Shareholder is a company, it goes into liquidation.

On the death of a shareholder, his shares vest in his legal representative.  The legal

representative can sell the shares without being registered,  if he does not wish to be registered as a member of the company. But subject to the provisions of the Articles, he is entitled to be put on the register of Members, if he so desires. For this purpose, the company is bound to accept production of Probate or Letter of Administration or Succession Certificate as  sufficient evidence of his title. In case the legal representative elects to become a member, he  must send a written and signed notice, called Letter of request, to the company notifying his decision. If he elects to transfer, he shall notify the election after executing a transfer of the shares. All rules relating to the right of transfer and registration of transfer will apply to such notice and transfer.

On the insolvency of a shareholder, his shares  vest in the official Assignee or official Receiver, who can sell and transfer the shares  or to get himself registered as a member

Where a shareholding company goes into liquidation,  the liquidator may sell and transfer the shares.

12.9.5 (Transfer of Shares under Depository System)

The Depositories Act, 1996 has paved the way for an alternate mode of effecting transfer of shares. Investors will, however, have the choice of continuing with the existing share certificates and adopt the existing mode of effecting their transfer.

The Depositories Act provides for the establishment of one or more depositories. Every depository will be required to be registered with the SEBI and receive a certificate of commencement of business on fulfillment of such conditions as may be prescribed. Investors opting to join the system will be required to be registered with one or more 'participants' who will be agents for the depositories. The participants will be custodial agencies like banks, financial institutions as well as Iarge corporate brokerage firms. Upon entry into the system, share certificates belonging to the investors will be 'dematerialised' and their names entered in the books of participants as beneficial owners. The investors' names in the register of companies concerned will be replaced by the name of depository as the registered

owner of the securities. The investors will, however, continue to enjoy the economic benefits from the shares as well as voting rights on the shares concerned.

Shares in the depository mode shall cease to have distinctive numbers. Issuers of new securities will give investors the option either to receive physical securities or to join the depository mode. While investors holding share certificates may opt to become beneficial owners in a depository system, those investors opting to exit from a depository will be allowed to do so and claim share certificates from the company by substituting their names as the registered owner in place of the depository.

Ownership changes in the depository system will be made automatically on the basis of delivery vs. payment. There will be a regular, mandatory flow of in-formation about the details of ownership  in depository's record to the company concerned. If the latter has any reservations about the admissibility of share acquisition by any person on the ground that the transfer of the security conflicts with the provisions of SICA, 1985, the company will be entitled to make an application to the Company Law Board (CLB) for rectification of the ownership records with depository. During the pendency  of company's application with the CLB, the transferee would be entitled to all the rights and benefits of the shares except voting rights which will be subject to the orders of the CLB.

The Act provides for detailed regulations to be framed by SEBI as well as detailed bye-laws to be framed by the depositories with the approval of SEBI. The bye-laws will crystallize  the rights and obligations of participants and beneficial owners as well as procedures for ensuring adequate safeguards to protect the interests of investors. Any loss caused to beneficial owners due to the negligence of the depository or the participant will be required to be indemnified by the depository.

Insertion of new section, viz., s.111.A. Subject to the provisions of this section, viz., s.111A, the shares or debentures and any interest therein of a company, other than a private company and a deemed public company shall be freely transferable.

The Company Law Board may/ on an application made by a depository, the company, participant or investor or the Securities and Exchange Board of India within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of transmission was delivered to the company, as the case maybe, after such inquiry, as it thinks fit, direct the company or depository to rectify register or records if the transfer of the shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985. However the CLB may, at its discretion, make an interim order as to suspend the voting rights before making or completing such enquiry.

The provisions of this section shall not restrict the right of a holder of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting rights unless the voting rights have been suspended by an order of the Company Law Board.

Notwithstanding anything contained in this section,  any further transfer, during the pendency of the application with the  Company Law Board, of shares  or debentures shall entitle the transferee to voting  rights unless the voting rights  in respect of such transferee have also been suspended.

12.9.4 (Notice of Refusal )

Where a company refuses to register a transfer, whether in pursuance of any power of the company under its Articles or otherwise; it shall, within two months from the date on which the instrument of transfer was delivered to the company, send notice of refusal to the transferee and the transferor, giving reasons for such refusal.

Refusal by the company on the ground that the registration of transfer will create share certificates of less than marketable lot and would be in contravention of Articles shall not be valid. Company Law Board in Dipak Kumar jayantilal Shah v. The Atul Products Ltd. [Decided on 18.9.1992, Reported in Chartered Secretary , February 1993 issue] held, that there is no prohibition under the Companies Act or any other Act for holding share certificates below marketable lots. The provisions of law will override the provisions of Articles.

In this case, the appellant was holding five shares in the respondent company. He requested the company to transfer one share each in the names of four groups of joint holders. He submitted all the relevant documents for the purpose. The company refused registration of transfer on the ground that it would result in creating share certificates of less than marketable lot which would be in contravention of the provisions of the transferability as contemplated by the Articles. However, since the appellant had lodged four transfer forms alongwith one share certificate, the company was directed to register the transfer of share in the transfer form first considered by the Board.

Appeal against refusal. The transferor or transferee may appeal to the Company Law Board (CLB) against any refusal of the company to register the transfer or against any failure on its part within the period of 2 months, either to register [he transfer or to send notice of its refusal to register the same [s.111 (2)]. An appeal shall be made within two months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within four months from the date on which the instrument to transfer was delivered to the company.

The CLB while dealing with an appeal against refusal to register the transfer may, after hearing the parties, either dismiss the appeal or, by order, direct that the transfer shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order. However, the CLB may, at its discretion, make (a) such interim order, including any orders as to injunction or stay, as it may deem fit and just; (b) such orders as to costs as it thinks fi| and (c) incidental or consequential orders regarding payment of dividend or the allotment of bonus or rights shares.

If default is made in giving effect to the orders of the CLB under s.111, the company and every officer of the company who is in default shall be punishable with fine which may extend upto Rs 10,000 and with a further fine which may extend upto Rs 1000 for every day after the first day after which the default continues. Further, if default is made in complying with any of the provisions of s.111, the company

and every officer of the company who is in default, shall be punishable with fine which may extend upto Rs 500 for every day during which the default continues.

Applicability of s.111 to priuate companies. In Dr. Jitendra Nath Seha and Another v. Shymal Mondal [decided by CLB on 25.8.1992], it was observed that all the provisions of s.111 are applicable to a private company except to the extent provided in sub-s.(13).

Transfer of shares on the basis of pre-incorporation transfer deeds. A director of a company, prior to its incorporation, signed a transfer deed, as if the company was in existence at the relevant date. When later on the shares were submitted with the company for the purpose of registration of the transfe4, the company refused to register the same. On an appeal to the C.L.B, it was held that the transfer deed was not properly executed and the company was justified in refusing to register the transfer Ltd. [lnlec lnuestment (P) v. Dynamatic Hydraulics Ltd. (1989) 3 Comp. L.I. GLB)2421.

SaIe of shares by tax recovery officer. Who should sign the transfer deed?. In Swadeshi Polytex Ltd.v. Swadeshi Mining and Manufacturing Co. Ltd. (1987) 62 Comp. Cas.683 (All), it was held, that when the Tax Recovery Officer is required to transfer shares to a person who has purchased them, the Tax Recovery Officer may execute such documents or make such endorsement as required and in that event the execution and the endorsement made shall have the same effect as an execution,/endorsement made by the party.

Therefore, when shares are acquired from the Tax Recovery Office1, he is competent to execute the document of sale.

Transfer of shares after winding up - whether valid? The question was considered in the case of H.L. Seth a. Wearwell Cycle Co. (lndia) Ltd. (In liquidation) (1988) 64 Comp. Cas.497 (Delhi). The Delhi High Court held that as between transferor and transferee, a transfer of shares executed after the commencement of winding up is valid, whether it was executed in performance of a contract made before or after ' that time.

12.9.3 (Procedure of Transfer)

Section 108 requires the transfer to be in a Proper instrument of transfer known as Share Transfer Form which is required to be presented to the Registrar of Companies before it is signed and filled up by the transferor. The Registrar will stamp or otherwise endorse thereon the date on which it is so presented to him. However, the transfer form is not necessary in case of transfer of securities effected through the depository as per the Depositories Act, 1996.

A company shall not register a transfer of shares, unless a proper instrument of transfer duly stamped and executed by the transferor and by the transferee, has been delivered to the company along with the share certificate. A reading of s.108 of the Companies Act, 1956 and s.12 of the Indian stamp Act,1899, clearly shows that the instrument of transfer of shares should bear the requisite stamps and the adhesive stamps should be cancelled at the time of affixation of such stamps and execution of the document. If these requirements are not complied with, then the

instrument, although bearing an adhesive stamp but not cancelled, cannot be said to be an instrument 'duly stamped'. Accordingly, transfer shall not be valid  [Nuddea

Tea Co. Lt d. v. Ashok Kumar Saha &+ Other s (1988) 64 Comp. Cas.775].

Time of stamping the transfer-deed. Is it necessary that stamps be affixed before deed is executed or they could be affixed anytime before delivery. ln Prafulla Kumar Rout v. orient Engg. works (P) Ltd. (1986) 60 Comp. Cas. 65 (ori.) it was observed that all that s.108 (IA) (b) requires is that before delivery the stamps should be affixed and it does not require the stamps to be affixed prior to execution of the documents.

However, in Mathrubhumi Printing &+ Publishing Co. Ltd. a. Vardhaman Publishers Ltd. (1992) 73 Comp. Cas 80 (Ker), the Kerala High Court observed:

If the instrument is not properly executed or the stamp affixed to the instrument is not cancelled before execution or at least at the time of execution, the said instrument must be deemed to be unstamped.

Cancellation of the stamps by the staff of the company does not make transfer instrument duly stamped. The contention of the company that stamps were cancelled by them (the company) before the Board of Directors considered the transfer shall not be upheld as valid [Subhash Chander v. vardhman Spg. & Gen. Mills Ltd. (CLB Order dt. 12.11.1993)].

Lodging the transfer. Every instrument of transfer completed in all respects, be delivered to the company:

            (i) in the case of shares dealt in or quoted on a recognised stock exchange, at any time before the date on which the Register of members is closed, for the first time after the date endorsed by the Registrar or within 12 months from the date of such endorsement, whichever is later;

            (ii) in any other case, within two months from the date of such endorsement.

Section 110 provides that the application for the registration of transfer may be made either by the transferor or the transferee. where it is made by the transferor and relates to partly paid-up shares, the company must give notice of application by prepaid registered post to the transferee. Lf the transferee does not object to the transfer within two weeks from the receipt of the notice, then his name may be entered on the register of members. With regard to an application by the transferee or by the transferor relating to fully paid-up shares, no such notice is required.

Transfer of shares held in joint names. In case of shares held in joint names, the transfer form must be signed by all of them, unless a specific authorisation is made in favour of any or some of them. Thus, in Shanta G. Pommeret v. Sakel papers(p) Ltd. (1990) 69 Comp. Cas. 65(Bom.) where though four persons were shown as transferors of shares, only three had signed the shares, only three had signed the share transfer form and fourth had not authorised the other to sign on his behalf, it was held, that transfer of shares was not valid.

Transfer when complete? Transfer becomes compete and the transferee becomes a

shareholder only when the transfer is registered in the company's register [Mathrubhumi Printing & Publishing Co. Ltd. o. Vardhaman Publishers Ltd. (1992)73 Comp. Cas.80 (Ker.)].

12.9.2 (Power of the Board of Directors to Refuse Registration of Transfer of Shares)

Where the Articles give power to the Board to refuse registration of a transfer of shares, such power must be exercised by a resolution of the Board. The Board may refuse to register the transfer as long as they are acting in the interests of the company, but if they exercise their discretion to refuse mala fide, i.e., they act oppressively, or corruptly, Company Law Board or the Court will interfere and order registration. The articles may, of course, be specific and empower the Board of directors to refuse to register transfers on certain specific ground. As per s.111, if a company refuses to register the transfer of shares, it shall, within 2 months from the date of lodging the instrument of transfer, send notice of refusal to the transferor or transferee giving reasons for such refusal. The Company Law Board, on appeal, may direct the registration of the transfer.

12.9.1 (TRANSFER AND TRANSMISSION OF SHARES)

The Power to Transfer Shares. One of the most important features of a company is that its shares are transferable. Section 82 empowers every shareholder to transfer his shares in the manner laid down in the Articles and in accordance with the various provisions of law. Thus, a private company is statutorily obliged to place certain restrictions on the right of its members to transfer shares. One of the most common restrictions on transfer of shares in a private company is the "Pre-emption clause", which states that the intending transferor must offer his shares to the existing members of the company, before offering them to non-members, so long as a member can be found to purchase them at a fair price to be determined in accordance with the Articles.

In the case of public companies also, there may be some restrictions on the right of members to transfer shares. Regulation 21 (Table A)provides that the Board of directors may refuse to register the transfer of partly paid shares to a person of whom they do not approve. Further, the Board of Directors may refuse to register the transfer of any share on which the company has a lien. Regulation 22 also envisages certain conditions which may be introduced by a company in its Articles or restrict transfer of shares. It provides that the Board may also decline to recognize any instrument of transfer unless: (a) the instrument of transfer is accompanied by the certificate of the shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; and (b) the instrument of transfer is in respect of only one class of shares.

Right of a shareholder to transfer his share is always subject to provisions in

Articles of association[Mathrubhumi Printing and Publishing Co. Ltd. v, Vardhaman

Publishers Ltd. (1992) 73 Comp. Cas. 150 (Ker).

12.8.16 (Variation of Shareholders' Rights)

Section 106 provides that where the share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of no t less than three-fourths of the issued shares of that class or with the sanction of special resolution passed at their meeting. However, this variation is possible only if provision for such variation is contained in the Memorandum or Articles of the company and in the absence of such a provision, if the variation is not prohibited by the terms of issue of the shares of that class.

Section 107 provides that if the holders of 10 per cent of the issued shares of that class who had not assented to the variation apply to the Court within 27 days of the date of the consent or the passihg of the special resolution, the Court may, after hearing the interested parties, either confirm or cancel the variation. The company must, within 30 days of the service of the Court's order, forward a copy of the order to the Registrar. In the event of a default, the company and every officer in default is liable to fine upto Rs 500.

12.8.15 (Surrender of Shares)

Surrender of shares means voluntary return of sharesby the shareholder to the company for cancellation. There is no provision for the surrender of shares either in the Act or in Table Abut the Articles of some companies may allow it as a short cut to the long procedure of forfeiture, where their forfeiture is justified [Trevor v. Whiteworth (1887) 12 App. Cases 409]. In any other circumstances, surrender of shares cannot be accepted without sanction of the

Court, as this would amount to a reduction of capital. In Mangal Sain u. Indian Merchants Bank Authority, [AIR (1920) Lah.240] the objector who had been placed in the list of contributories contended that he had surrendered his shares and the directors had under a clear power in the Articles, accepted the same. Held, that a company can only accept a surrender under conditions and limitations under which shares can be forfeited, which did not exist in the present case.

Mere handing over of share certificates cannot constitute surrender of shares [Vasant

Investment Corpn. Ltd., In rc (1982) 52 Comp. Cas. 139 (Bom.)]

Since shares can be surrendered only where their forfeiture is justified, a company can accept surrender of partly paid-up shares only. The only exception where fully paid up shares may be accepted is when shares are surrendered in exchange for new shares of the same nominal value (but with different rights). It is because, in such a case, the capital is not reduced but only replaced.

Surrendered shares may be re-issued in the same way as forfeited shares. If this is done, no reduction in capital occurs, However, no consideration can be paid by the company in exchange of surrendered shares since it would amount to purchase of its own shares, which is specifically prohibited under s.77. Thus, where the surrender was accepted in consideration of the discharge of the registered holder from his liability in respect of them, it was held that it amounted to purchase of its own shares by the company and was thus ineffective (Bellerby v. Rowland & Marwood Steamship Co.).

12.8.14 (Lien on shares)

A lien, like a mortgage or pledge, is a form of security. It is an equitable charge on shares to secure any debt which may be due from the member of the company. The Act contains no reference to lien but the articles of companies normally give the company a lien on the shares of a member for money owed by him to the company. An article providing that company will have lien on shares of a member for his debts and liabilities to companies is valid [Canara Bank v. Thribhuvandas (1957)27 Comp. Cas. 647 . where shares are held in joint names of more than one person the company will have a lien on such shares in respect of a debt due by any one of the joint holder [Naranda v.The lndian Manufacturing Co. Ltd. 55 Bom. L.R.567].

This lien extends to the dividends as well. The Articles may provide for a lien even after the death of the shareholder [Allen v. Gold Reefs of west Africa (1900) 1Ch.566].].

A lien of a company is transferable. Thus, for example, if the company has a lien on X's shares for a debt and X borrows the money from y to pay the debt, X may request the company to transfer its lien to Y.

Howeve4 the company must not enter either on the Register of members or on the share certificate any notice of lien it may have.

Enforcement of lien. Company can enforce its lien on shares by the sale of those shares incase the member defaults in payment of the amount due against him. In the absence of an express power of sale in the Articles, the permission shall have to be sought from the Court.

In case the amount received on sale of such shares is more than the amount due, the excess shall be payable to the former owner. Power to sell should be exercised after a notice has been given to the shareholder requiring him to pay the debt due to the company within a specified time. It should be made clear that the company intends to sell shares in enforcement of the lien.

But a company cannot enforce the lien by forfeiting the shares. A provision in the Articles to such effect is void amounting to reduction of capital without an order of the Court.

If a shareholder mortgages his shares and the mortgagee gives notice thereof to the company, the mortgagee has a priority over the company if the shareholder's Iiability to the company was incurred after the notice of the mortgage has been given to the company [Bradford Banking Co. u. Briggs (1886)12A.C.29]. But the Articles may provide that the company is not bound to recognise such interest of third parties. Even there the ordinary rules of law and equity will be applicable [Rninfold v.James Keith, etc. Co. (7905)2Ch.147].

The death of the shareholder does not destroy the lien [Allen a. GoId Rcefs of West Asia (7900)7Ch.6561]. Company's lien will not be lost by reason of the debt becoming time barred because lien can be enforced without seeking the assistance of the Court [Unit company a. Diamond Sugar Mills AIR (1971) Cal.18].

Lien and forfeiture compared

            (1) Forfeiture involves reduction of capital, in case the forfeited shares are cancelled and not reissued. Lien never involves a reduction of capital because the shares are necessarily sold if the member defaults in payment.

            (2) Lien is a form of security of a debt. Forfeiture is a penal proceeding. Forfeiture can be done for reasons other than non-payment of calls, e.g., in the case of Naresh Chandra Sanyal v. The Calcutta  Stock Exchange Association Ltd., (supra) the shares of the stockbroker of the Exchange were forfeited for not carrying out his commitment with his client. But lien cannot be exercised for reasons other than the non-payment of a debt.

            (3) In case of lien, the former holder is entitled to, on the sale of the share, the amount in excess of the amount due. In case of forfeiture, nothing is payable to the former holder.

12.8.13 (Forfeiture of Shares)

Forfeiture of shares means taking them away from the member. This is a serious step for not only does it deprive the shareholder of his property but also, unless the shares are re-issued, it involves a reduction of capital.

Shares cannot be forfeited unless authorised by the Articles: The following rules should be noted in connection with forfeiture of shares:

            (1) In accordance with the articles. The forfeiture to be valid must be in accordance with the provisions contained in the articles. As per Table A, shares can be forfeited only against non-payment of calls. The articles of the company may, however, lawfully incorporate any other grounds of forfeiture [Per Shah J. in Naresh Chandra Sanyal v. The Calcutta Stock Exchange Assn. Ltd AIR(1971)SC 422].But it cannot be for the non-payment of the other debts; that would amount to unauthorized reduction of share capital [Hopkinson v. Mortimer Harley & Co. (1917) 1 Ch. 646]. Where the articles authorised the directors to forfeit the shares of a shareholder, who commences an action against the company or the directors, by making a payment of the full market value of his shares . Held such a clause was invalid as it was against the rights of a shareholder [Hope v. International Finance Society (1876)4 Ch. D.598].

            (2) Proper notice. Articles of a company normally follow ‘Table A’ with regard to forfeiture of shares. Table A provides that a notice requiring payment of the amount due together with any interest accrued must be served. The notice must mention a further day (not less than 14 days from the date of service of the notice) on or before which the payment is to be made. The notice must also mention that in the event of non-payment the shares will be liable to forfeiture.

Any irregularity either in contents or in service of notice would invalidate forfeiture of shares [Bhawandas Garg v. Canara Bank Ltd. (1981) 51 Comp. Cas, 38(A.P.)]

            Examples. (i) Where the notice on which the forfeiture was founded was inaccurate in requiring payment of interest from the date of the call instead of   the date when the call was payable, the forfeiture was Held invalid [Johnson v. Lyttle’s Iron Agency (1877) Ch.D.687].

            (ii) Where a notice for the forfeiture was sent by registered post A.D and was returned unserved, the forfeiture was Held invalid [Promilla Bansal v. Wearwell Cycle Co. (India) Ltd. (1978) 48 Comp. Cas.202(Delhi)].

            (iii) Resolution for forfeiture. A resolution of the directors is necessary to   enable the shares to be forfeited.

            (iv) Bona fide. The power to forfeit is in the nature of trust and must, therefore, be exercised for the benefit of the company. Thus, forfeiture for the purpose of relieving a friend from liability was Held to be invalid (Lord Walls Court’s case).

Even a slight irregularity in effecting a forfeiture would be fatal and render the forfeiture null and void. The aggrieved shareholder may bring an action for setting aside the forfeiture as well as for damages. His demand for damages can be proved even in a winding up [Re New Chili, etc. Co. (1890) 45 Ch. D.598].

Effect of forfeiture. The effect of forfeiture of shares is as follows:

            (1) The holder ceases to be a member of the company.

            (2) Liability for unpaid calls remains even after forfeiture of shares [Shiromani Sugar Mills v. Debi Pb. (1950) 20 Comp. Cas.296 (All). However, the payment of such amount cannot be enforced as a call but be sued for as a debt [Ladies Dress Assn. V. Pulbrookn (1909)2Q.B. App.376]. Similar view was expressed in the case of Bhagwati Pd. v. Shiromani Sugar Mills Ktd. (1949) 19 Comp. Cas.286 (All). The Court in this case observed that after forfeiture, a member does not pay as a contributory but he pays as a debtor. In the event of his shares being forfeited the shareholder would be liable to pay to the company all money that was due from him for allotments, calls and further calls made on the shares allotted to him with interest. There was thus a new obligation giving the company a fresh cause of action against the shareholder and thus, the period of limitation for a suit to enforce this new obligation begins to run from the time the shares were forfeited. Thus, the suit must be brought within three years from the date on which the shares were forfeited.

The company, however, cannot recover more than the difference between the sum due to the company in respect of the shares and the sum received by the company [Re Belton (1930) 2 Ch.48].

            (3) The former holder shall remain liable as a past member to pay calls if

liquidation takes place within one year of the forfeiture.

Re-issue of forfeited shares. It must be noted that the directors are not bound to forfeited sell shares forfeited for non-payment of calls [Bishambhar v. Agra Electric Stores Ltd. (1990) 1Ch.5661. This reduction of capital would not require sanction of the Court. It can be concluded from the above decision that if the shares are forfeited for reasons other than the non-payment of calls, re-issue of such shares should be obligatory.

Normally a company re-issues forfeited shares. The forfeited shares may be re-issued at any price provided that the total of sum paid by the former holder of the shares, together with the amount paid on re-issue and the amount remaining unpaid on shares is not less than the par (face) value because if it were, this would amount to an issue at a discount. This means that the discount on re-issue should not exceed the amount forfeited on those shares.

If the shares are reissued at a price more than their face value, as is normally the case, the excess is a premium and must, therefore, be transferred to the share premium account.

No Return of Allotment of the shares reissued need be filed with the Registrar [s.75(5)]. Such re-issue, however, cannot be called allotment.

Annulment of forfeiture. The Board of Directors may, if the former shareholder so requests annul (cancel) the forfeiture. The directors must, however, act bona fide and must pass a suitable resolution to that effect. On cancellation of the forfeiture the former holder is required to pay all calls due with interest and then his name is restored in the Register of members.

12.8.12 (calls on shares)

A member of a company is bound to pay the nominal amount of shares which he has purchased. As noted earlier, s.69 provides that not less, than five per cent of the nominal value of a share can be called by way of application money. The company may ask for some payment at the time of application for shares (but not less than 5 per cent of the nominal value) and another sum at allotment. The balance may be payable as and when called for.

            Example. A company issues shares of Rs 10 each on such terms as Rs 2  payable on application, Rs 4 on allotment and the remaining Rs 4 as and when  required. This balance of Rs 4 may called from the members in one or more installments. The installments so demanded are called ‘calls’

Thus, a call may be defined as a demand by a company, in pursuance of resolution of the Board of directors and in accordance with the regulations of its Articles and the provisions of the Companies Act, upon its members to pay the whole or part of the balance still due on each share.

The call can be made at any time by the directors of the company during the life-time of the company but once its winding up commences then it is only the liquidator who can call up the amount remaining unpaid, if it is necessary to do so.

12.8.11 (Annual Return)

Section 159 provides that every company having a share capital must prepare and file within sixty days from the date on which its annual general meeting is Held, or if no annual general meeting is Held, from the date when the meeting ought to have been Held, with the Registrar an Annual Return in accordance with Part I of Schedule V, which prescribes the contents as follows:

            (i) the address of the Registered office of the company;

            (ii) the name and address of the country where Foreign Register of members is kept;

            (iii) a summary of share capital and debentures: (a) the number of shares issued for cash; (b) the number of shares for consideration other than in cash; (c) the nominal amount of capital in respect of each class of shares; (d) the number of shares into which nominal capital is divided; (e) the number of shares taken up to the last annual general meeting; (f) the amount called up; (g) the total amount of commission paid; (h) the discount allowed on any shares or debentures; (i) the shares forfeited and the amount paid-up thereon; (j) the share warrants issued and surrendered.

            (iv) The total indebtedness of the company in respect of all charges (including mortgages) which are required to be registered with the Registrar under s.125.

            (v) List of present members and debenture holders and also of past members who have ceased to be members or debenture holders since the date of the last annual meeting, giving full particulars of the number of shares or debentures Held and details of transfer, if any.

            (vi) A list of its directors, managing directors, and managers, past and present.

With a view to avoid repetition of cumbersome particulars, notes appended to the Annual Return in Schedule V, it is provided that where any of the five preceding returns has given full particulars as to past and the shares Held and transferred by them, the Return in question may contain only such of the particulars as relate to persons ceasing to be or becoming members and to shares transferred or to changes in the number of shares Held since the date of one of these Returns.

Where any of the company’s shares are converted into stock, notice regarding which has been given to the Registrar, the list must state the amount of the stock Held by each member instead of shares so converted previously Held by him.

Signing of the annual return (s.161). The copy of the annual return to be filed with the Registrar shall be signed both by a director and by the manager or secretary of the company or where there is no manager or secretary, by two directors of the company ,one of whom shall be the managing director where there is one.

In case of a company whose shares are listed on a recognised stock exchange, the copy of such annual return shall also be signed by a secretary in whole-time practice.

If default is made in filing the Annual Return, the company and every officer in default is liable to be fined upto Rs 50 per day during the period of default.

12.8.10 (Register of Members)

Section 150 read with s.168 requires every company to keep a register of members ordinarily at its registered office. The Register must contain the following particulars:

            (i) the name, address and occupation of each member;

            (ii) the number of shares Held by each member, distinguishing each share by its number and amount paid-up;

            (iii) the date of entry in the register;

            (iv) the date on which a person ceased to be a member.

Where fully paid-up shares have been converted into stock, the fact that stock has been issued is to be entered against the name of the member in the Register.

Index of members. Section 151 requires every company with more than fifty members to keep an Index of Members, unless the Register itself is in the form of an index.

The Index of Members is required to be kept at the same place as the Register of Members.

The Register of members is open to inspection by members free of charge and by non-members on payment of one rupee for two hours a day during business hours.

A company may close the Register at any time by giving seven days’ previous notice by an advertisement in a newspaper circulating in the district in which the registered office of the company is situated. However, the aggregate number of days for which it can be closed in a year cannot exceed 45 days. Also, it cannot be closed for more than 30 days at a time.

Section 157 provides that a company with a share capital may, if authorised by its articles, keep in any country outside India a branch register of members resident there, called a Foreign Register. The Registrar of Companies must be informed of the place where this Register is kept. The foreign register is deemed part of the company’s principal register and must be kept in the same manner as the principal register.

Rectification of register of members. Section 111 provides for the rectification of the register of members by the Company Law Board on an application by any Person aggrieved such as member, transferor, transferee, the company. The Company Law Board may order for rectification of the register : (i) where the name of any person is, without sufficient cause, entered in or omitted from the Register of Members of a company; (ii) where default or unnecessary delay occurs in entering on the register the fact that a person has ceased to be a member of the company’

Where the Company Law Board has ordered the rectification of the Register, the rectification should be made and notice of rectification must be filed with the Registrar within 30 days of the order of the Company Law Board.

It is the duty of the company to maintain the register of members. A company cannot take advantage of its failure to maintain the prescribed register of members. Thus, in N. Satyaprasad Rao and others v. V.L.N Sastry & Others [(1988)64 Comp. Cas.492] was Held that where register does not incorporate name of all shareholders as members, those shareholders who have been issued share certificates can exercise rights as members.

12.8.9 (Liability of Members)

A member is also subject to certain liabilities and obligations either by the Act or by the Articles. Some of the important ones are stated hereunder:

            (1) If shares are not allotted for a consideration other than cash, then a member must pay the whole nominal value of his shares in cash.

            (2) It a member is holding partly paid-up shares and the company goes into liquidation, then he becomes liable as contributory to pay, if called upon lo do so, towards the assets of the company(s.429).

            (3) A person may be included in the ‘B’ list of contributories, as a past member and required to pay to the extent of the amount remaining unpaid on the shares which he held within one year prior to the commencement of winding up, if (i) on the commencement of winding up, debts exist which were incurred while he was a member; and (ii) the contributories of the 'A' list (i.e., present members) are not able to satisfy the contribution required from them in respect of their shares.

            (4) As mentioned earlier, the liability of members becomes unlimited and several, even in the case of a limited liability company (s.45).

            (5) A member is bound to the company by all the covenants of the Articles e.g., a company may have a paramount lien on a member's shares for any amount due from him to the company.

            (6) In the case of company limited by guarantee, the member may be asked to

contribute to the extent of his guarantee at the time of winding up.

12.8.8 (Expulsion of a Member)

It cannot be denied that there are some members who, by creating various kinds of troubles for the management, try to wrest undue advantage for themselves. Can such members be expelled? The Department of Company affairs following the judgement in the case of Bajaj Auto Ltd. v. N.K Firodia [1971] Comp. Cas. 388 has expressed the view that the company cannot by amending the Articles given itself a power to expel a member. Such an amendment is opposed to the fundamental principales of the Companies’ jurisprudence and is ultra vires the company. Such a provision is repugnant to the various provisions in the Act pertaining to the rights of a member in a public limited company and cuts across the scheme of the Act as it has the effect of rendering nugatory the very power of the Company Law Board under s.111 and the powers of the courts under s.107 and 395 and is, therefore, void by the operation of the provisions of s.9.

However, it seems permissible for a company limited by guarantee or a company governed by s.25 to include a provision for expulsion of a member from the company (through forfeiting his shares), if his conduct or action is considered detrimental to the interest of the company.

12.8.7 (Rights of a Member)

A member of a company has a number of rights vis-a-

vis the company. These are conferred on him either by the Act or by the Articles of the company. Some of the most important rights of a member are:

            (i) To have the certificate of shares held ready for delivery to him within three months from the date of allotment;

            (ii) To have his name entered in the register of members if it had not been entered or has been wrongly removed;

            (iii) To transfer shares subject to the provisions of the Act and the articles;

            (iv) To receive notices of meetings, to attend meetings and to vote threat (either in person or by proxy);

            (v) To inspect the register of members and register of debenture holders and get extracts there from (s.163);

            (vi) To obtain copies of memorandum and articles on request and payment of the prescribed fees;

            (vii) To have the first option to buy any new shares on a further issue of shares by the company (s.81);

            (viii) To participate in the election of directors and appointment of auditors;

            (ix) To get a copy of the balance sheet and profit and loss account 21 days before the Annual General Meeting;

            (x) To apply to the Court to have any "variation of shareholders' rights" set aside (s.106);

            (xi) To obtain, on request, minutes of proceedings at general meetings (s.196);

            (xii) To participate in the removal of directors by passing an ordinary resolution (s.284);

            (xiii) To petition to the Court for prevention of mismanagement and oppression (s.399);

            (xiv) To petition to the Court for an order of injunction restraining the directors from going ahead with an ultra virus act;

            (xv) To petition for compulsory winding up;

            (xvi) To participate in passing a special resolution for voluntary or compulsory winding up;

            (xvii) To participate in the surplus assets, if any, on the liquidation of the company.

12.8.6 (Termination of Membership)

A person may cease to be a member of a

Company when:

            (i) he transfers his shares to another person and the shares are registered in the name of the transferee;

            (ii) his shares are forfeited by the company for non-payment of calls;
           
            (iii) he surrenders his shares to the company and the latter accepts the
surrender;

            (iv) his shares are sold by the company to enforce its lien and the buyer of these shares is registered as a member;

            (v) he dies and his legal representative gets his own name registered in the register of members or sells shares to a party who gets his name registered with the company;

            (vi) he is adjudged insolvent and the Official Receiver/Official Assignee either transfers the shares to a third party who gets registered as a member or disclaims shares;

            (vii) he was holder of redeemable preference shares which have now been redeemed by the company;

            (viii) he rescinds the contract of membership on the ground of fraud or misrepresentation;

            (ix) his shares are purchased either by another member of the company or by the company itself by an order of a Court under s.402;

            (x) he has got share warrants issued in exchange for share certificates of fully paid up shares; and

            (xi) on the commencement of winding up (but he will be liable as a contributory and is also entitled to a share in the surplus assets, if any).

As mentioned earlier, a company may be member of another company. In such a situation if the shareholding company is being wound up then the membership will come to an end if the Liquidator disclaims the shares.

12.8.5 (Joint Membership)

It is possible for two or more than two persons to hold shares jointly in a company. In that case all of them are not the individual members of the company. Instead, they are said to hold the shares jointly. There is no direct provision for joint membership, but there are a few indirect references. Therefore, Articles of a company provide for joint membership and sometimes the maximum number of persons who can be joint-holders of shares is given in the Articles (generally not more than four). Some provisions relating to joint-membership, are: (i) Only one share certificate is issued to them. (ii) All the members are jointly and severally liable to make payment of calls (Clause 15, Table A). (iii) A person whose name appears first in the order in which the names stands in the register of members, shall be entitled to vote (Clause 57, Table A). (iv)  A document may be served by the company on the joint-holders of a share by serving it on the joint-holder named first in the register of members in respect of the share [s.53(4 )]. (v) The names of the joint-holders may be entered in the register of members in the order in which they appear in the Application form or in the Share Transfer Form.