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A I _, c D E r G B 483 NAIU:SH CHANDRA SANY AL ,,, CALCUTfA STOCK EXCHANGE ASSOCIATION LTD. September 25, 1970 [J. C. SHAH AND A. N. GROVER, JJ.] Companits Act (7 of 1913)-Fully paid up share-Forfeiture of E:Oect-Sale of forfeited slwre-lf illegal-Right of memberto proeeetls of Side-Indian Contract Act (9 of 1872), s. 14--Scopeof, Under the schemeof thearticlesof association of the Calcutta Stock Exchange AssociationLtd., the Committee is authorised under art .. 21 to expel or suspenda memberon theground inter alia thathe refusedto abide by thedecision of Committee in anymatterwhich is under the articles or underthe bye-laws referredto the Committee.Under an. 22, amemberdeclareda "defaulter" because he failsto fulfil any engage mentbetweenhimself andanyother memberwithin six months from the date on which he basbeendeclareda defaulterceases to be a member oftheExchangeautomatically.Upon his ceasing to be a memberand upona resolutionbeing passed by the Committeeexpelling a member his share standsforfeited.The shareso forfeited is deemedto bethe propenyof theExchange. Such forfeitureinvolves the extinctionof all interest in and also air claimsand demandsagainst the Exchangein res pect of theshareand all other rightsincidentalto theshare,but not theliabilityof theerstwhilemember to discharge his liabilitiesto the Exchange.But the Committee must sell, reallotor othe'rwise dispose of the sharefor thesatisfactionof the debts, whichmay thenbe dueand owing by thedefaulter to theExchangeor to anyof itsmembersarising outof transactions or dealinas in sto.cks andshares. The net proceeds ofthe sale shallbe appliedtowardsthe satisfactionof the debts, liabilities or engagements ofthe shareholder andthe residue,if any,paid to the memberor his legal representatlv"' The appellantfailed to carry out a direction to paya certainsum aris ina out of asharetransactionand the Committeeafter notice,declared hima defaulter. Six monthslater, after noticeto theappellant,the Com· mittee resolvedthat the sharestandingin hisnameshall be forfeited to theExchangeand thatthe appellant be expelledfrom the membership oftheExchange.The Exchangethereafterdisposed Df the share for Rs. SS,000. The appellantchallengedthe actiontaken by theExchange· but the suit w~ dismissed. In appealto thisCoun, HELD: (I) It is notnecessarythat a resolutionexpelling a member anda resolutiondeclaring him a defaulte'rshould both be JlllSSed before his share is forfeited by the Exchange.The word and is usedto indicate analternativeand doesnot makethe two conditionscumulative, because, it would lead to theanomalous result thata memberwould have to be expelled by theCommitteeunder art. 2l and would also automatically ceaseto bea memberunder art. 22. [490A·CJ Sura;mall Mohtu v. B•llabhdas Mohta, I.L.R 63 Cal. 531, approved. . 484 SUPREME COURT REPORTS (1971) 2 S.C.R • In any event, in the presentcase, a resolutiondeclaring the appellant adefaulter was passed ~nd six monthslater the appellant was expelled fromthe membershipof the Exchange and it was resolved thai his share shallstandforfeited. L490 C-D] (2) (a)Regulatioa24 in TableA intheFirstScheduleto the Com paniesAct, 1913,provides for the exerciseof thepowerto forfeita share when there is default in payingcalls, but no inference follows there fromthat the shareof a membercould be forfeited only for non-payment ·Of a callmadein respectof a sharewhich was not fullypaid up. Subject totheprovisionsof theCompaniesAct a companyand its membersare boun.d by the provisions containedin its articles of association..The ·Articles regulate the internalmanagementof thecompanyand definethe pow~rs of its officers. Intheabsenceof any provisioncontained in the Act which prohibitsa companyfrom forfeitinga sharefor failureon the part of a memberto carry out an undertakingor engagementthe articles of a companywhich providethat in certainevents membership rights of a share-holderincluding his right to thesharewill be forfeitedare binding. There is noprovisionthe IndianCompaniesAct 1913, which restricts theexercise -of therightof theExchangeto forfeitshares for non-payment ofa callonly,and the articlesof theExchangeexpressly provide that in the eventof a memberfailing to carryout the engagementand in the conditionsspecified therein his share shall standforfeited. ,[492 A-El (b) Under art. 27, the termsof whichare mandatory,the shares forfeitedto theExchangemust be re-allottedor otherwisedisposed of: .it cannot be retained by theExchange.A forfeitedshare is merely a share availableto thecompany for sale and remainsvested in it forthat pur· poseonly. By forfeitinga share. pursuant to theauthorityof thearticles ofassociationno reductionof capital is achieved. L491 F, H;492Al A B c D Therefdre, a~s. 22,24,26, 27 and 29 relatingto forfeitureof shares E are.valid.[492 D-E] Sri Gopal Jalan &o Co. v. CalcuttaStock ExchangeAssociationLtd., [1964] 3 S.C.R. 698, followed. CalcuttaStock ExchangeAssociationLtd. v. S. N. Nundy & Co. I.L.R. [1950]1 Cal.235,approved. (3)'There is nothingin theprocedure fol1owed whichrenderedthe forfeitureof theappellant'sshare illegal.The appellanthad ample notice of theproceedingsand the orderswere not madeagainsthim contrary to rulesof naturaljustice. [493 CJ ( 4 )(a) Under its articlesthe Exchangehas authorityto sell the share F andto appropriatethe saleproceedstowards satisfactionof thedebts, liabilitiesor engagements.But the balanceof theamountremainingdue G after satisfying the liabilitiesof theappellantdid notremainthe pro perty of theExchange.The appellant was entitledto theamount. Tlis is expresslyprovided for in art. 33. The expressionused in art. 29 'the forfeitureshall involveextinctionof all interest' is subject to the rights as by thearticlessaved and art. 33 saves the defaultingshare-holder's right to the balanceremaining with .the Exchange .. f,493 D-GJ (b) Evenassumingthat arts.24 and 31 reserve to theExchangetwo H distinct powers--thepower to forfeitand the powerto exercisea lien, andthatart. 33 onlyappliesto a salein enfo!'cement of a lienand not to a saleafterforfeiture,the balance on handafter satisfyingthe liability ., B c D B G N. C. SANYAL V. CALCUTTA STOCK EXCHANGE (Shah, J.) 485 of thedefaultermust still be returnedto thedefaulter,under s. 74 of the ContractAct. The power of theExchangeto forfeitthe sharesarises outof the articlesand its source is in contract. On theprinciple under· lying s. 74 of theContractAct the Exchangehad no right to hold,out ofthesaleproceedsof theshare,any amountin excessof theamountdue to it or to itsmembers. j,493 H; 494 A-Bl FatehChand v. BalkishanDas, [1964] 1 S.C.R.515, followed. (c)Thelegaltheoryof forfeiture is thata shareforfeited is only takenover by the companywith the objectof disposing_ of it to satisfy ita claims to enforcewhich the share was forfeitedand all other obliga tons arisingagainst him out of his membe'sbip. If the company is per" mitted to retainthe balanceof the amountafter satisfyingthe debts, liabilitiesand engagementsof theshare-holder,the transactionwould not be dilferent from one purchasingthe share -of the defaultingshare-holdef for a value equal to the amountof hisobligationand thatwouldbe illegal. (495 E-Hl ClVlL APPELLATE JURISDICTION: Civil AppealNo. 1626of 1966. AJ.>l_>eal fromthe judgment ai!ld decreedated July 7, 8, 1964 of.the CalcuttaHigh Courtin Appealfrom OriginalDecree No. 143of1960. R. B. Datar, fortheappellant. B. Sen, N. R. Khaitan and B. P. Maheshwari, for respondent. TheJudgmentof theCourt was delivered by- Sbah, J.-Naresh Chandra Sanyal wasthe holderof a fully paid-upshare of th~ Calcutta St0¢k ExchangeAssociation Ltd. hereinaftercalled 't'he Exchange'.As a memberof theExchange he was authorisedto carryon businessas a brokerin shares,stocks andsecuritiesin thehallof theExchange. In December1941 Sanyal purchased one hundredshares of theIndianIron & Steel CompanyLtd. fromJohurmullDaga & Company,but did not arrangeto takedeliveryof the shares on theduedate.Johurmull Dagaand Companysold the sharespursuantto theauthority givento themby the Sub-Committee of theExchange.The trans action resultedin a lossof Rs. 438/10/-. The Sub-Committee directed Sanyal to paythe amountdue by him,buthefailed to carryout thatdirection. On January7, 1942the complaintof JohurmullDaga & Com pany was referred to the FullCommitteeof theExchange. Sanyal failed to p'ly theamountdirected to be paidby himand he was !>y resolutiondated February19, 1942declareda defaulter. On September1, 1942, at a meetingat which Sanyal waspresent,the HFull Committee resolvedthat the sharestandingin hisnamebe forfeitedto theExchangewith effectfrom September1, 1942and thatSanyalbe expelledfrom the membership of the Exchange. 4-IA36.§up.CIJ7J 486 SUPREJ{E COURT REPORTS [1971J 2 S.C.R. Sanyal then i11stituted an actionin theHighCourtof Calcutta onits originalside claimin_g a di!claration that the articlesof the Exchangeproviding for "forfeiture of a fullypaid up share wue ultra vires and illegal" andthat"particularlyArts. 21, 22 and24 were invalid"; thatthe sharehekt by him had not been "properly forfeited" by theExchangeand thatforfeiture of the share was "irregular, voidand inoperativeand was not bindingupon him". He also Claimed an orderthat he be restoredto themembership oftheExchangeand thatthe shareregisterbe rectifiedaccordingly. In the alternative Sanyal claimeda d,!'_cree for Rs. 55,000/- being thevalue of the share,or in anyeventto thesurplus of thesale proceedsafter "liquidatingthe debts due by himto theExchange." Thesuit was resistedby theExchange.The TrialCourt dismiss ed thesuit.In appealunder the LettersPatent the decree was con firmed.With specialleave Sanyal has appealedto thisCourtin forma pauperis. The relevantArticles of Association of theExchange are these: Art. 21-"The Committeeshall havepowerto expel.or sus pendany niemberor if being firm any member or autfiorisen shall have a firstand paramount lienuponthe shareregisteredin thenameof each memberand uponthe proceedsof salethereoffor his debts, liabilities and engagements. " 488 SUPREME COURT REPORTS [ 1971]2 S.C.R. Art. 32-"For the purposeof enforcingsuch lien the Associ ationmay sell the sharesubjecttheretoin such manneras they think fit. .... " . Art. 3 3-"The nettproceedsof anysuchsale shallbe applied in or· towardssatisfactionof thedebts,liabilities, orengagements,residue (if any) paid to suchmem ber,his executors,administrators,committee, cura tor or other representatives~' The re,Jevant bye-Jaws of theExchangeare : "Settlement of Disputes.-All disputes,complaints and claims between by andagainstmembers shall, on the applicationof eitherparty,be decidedby the Com mitteeor bya Standingor SpecialSub-Committeeap pointedby theCommitteefor the purpose. In theevent ofthematterbeing decidedby theCommitteethe deci sion shallbe. finaland bindingupon all memberscon cernedbut anymemberaggrievedwith the decision of the Standingor SpecialSub-Committeemay, within ~even days of suchdecisionbeing, given,appealto the Commitieewhose decisionshall be final. In theevent ofanymemberor membersrefusing, neglecting or fail ing to observe,carry out or complywith any decisionof theCommittee,or if noappeal is preferred,with the de cisionof theStandingor ~cial Sub-Committee,such member or members so in defaultshall be dealtwith by theCommitteeunder the rules,regulations and/or bye .Jaws of theAssociationfor thetimebeingin force." Bye-Jaw 13-"Defaulters.-Any memberwho shall failto payany subscriptionor othermoneysdue by him totheAssociationon cfue date, or whoshall fail-to fulfil anyengagementbetween himself and anothermember ormembers may be declared a 'defaulter'by the Com mitteeand on suchdeclarationhis nameshall be posted as a. 'defaulter' on the noticeboard of theAssociation andso Jong as the nameremains so postedhe shallnot beat libertyto exerciseany of theprivilegesof member ship." Under theschemeof theAtticlesof Associationof the Ex change,the Committee is authorisedto expelor suspenda member onthe ground, inter alia, thathe refusesto abide by thedecision oftheCommitteein anymatterwhich is underthe Articles or underthe Bye-Jaws referredto theCommittee.A persondeclared a "defaulter" becausehe failsto fulfilany engagefuent between himselfand anyothermember or memberswithin six months from A B c D E F G B 'r t ... N, C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.)489 the date on which he hasbeendeclareda defaulter,ceases to bea memberof theExchangeand his share als,o standsforfeited. The share so forfeitedis deemll(! to be thepropertyof theExchange. Butthe Committeemust sell, re-allot or otherwisedispose of the sharefor satisfaction of the debtswhichmay then be dueandowing by the defaulterto the Exchainge or to ·any of.its membersarisisg B out oftransactions or dealingsin stocksand shares.Forfeiture of a shareinvolvesextinctionof allinterestin andalsoof allclaims and demandsagainst the Exchange in respectof theshareand all other rights inCidental totheshare,but not the liabilityof theerstwhile memberto discharge l.is liabilities to theExchange.The Exchange c D E F G H has a firstlien uponthe shareof a memberand u,pon the proceeds ofsalethereoffor his debtsand liabilities,and in enforcementof thelien,the Exchangemay sell the slrare.The net proceedsof the share subjectto thelien if soldwill be applied in or towards satis factionof thedebts,liabilities or engagementsof the shareholder andthe residue,if any,paid to suchmember,his executors, admi nistrators, committee,curator or other representatives. In this appealcounselfor Sanyal contended, thatunderthe Indian Gompanies Act,1913,a folly paid up sharecannotbe forfeitedfor failure to carryout anyengagementby theshareholderother than an en gagementto paya callmadeby theCompanyto pay unpaidcapital; thatthe procedure.followed by the Sub-Committee of theExchangewas irregularin that Sanyal had no notice ofthe meeting of theCommitteeto declarehim a defaul ter; thatthe Committeehad no authority under the Articles ofAssociationto directsale of theshare;and thatin anyevent Sanyal was entitledto thebalance re mainingon handwith the Exchangeafter satisfyinghis debts,liabilitiesand engagementsunder the Articlesof Association. For failureto abideby thedecisionof theCommittee in res pectof hisliabilityto paythe amountof lossdueto Johurmull Daga & Company Sanyal was declareda defaulter,and whenhe continuedto remaina defaulterfor six monthshe wasby resolu tionof theFullCommitteeexpelled from the membership of the Exchange.The Full Commit!~ also resolvedto forfeithis share. TheExchangethereafter disposed of thesharefor Rs. 55,000/-. Theargumentraised by counselfor Sanyal that a memberof the Exchangeforfeits his shareonly if a resolutionexpelling him and 490 SUPRRME COURT REPORTS (1971] 2 S.C.R. a resolutiondeclaring him a defaulterare passed is without subs tance.The conjuctive "and" betweenthe fil'st two clausesof Art. 24 is usedto indicatean alternative,and doesnot makethe two conditionscumulative.We agreewith the observationsof Panckridge, J ., in Surajma/lMohta v. Bal/abhdasMohta ( 1 ) that Art. 24 "is carelesslydrawn, because,on its literalapplication, be fore his sharecould be forfeited,a memberwould both haveto be expelledby theCommitteeunder article 21 and automatically ceaseto bea memberunder article 22. Clearly this cannotbe the intentionof thearticleand it is obviousthat by a slip,'and'has been substitutedfor "or"." In any eventthe FullCommitteepassed on February I 9, 1942 a.resolutiondeclaring the appellant a defaulter.The appellantdid not carry out his engagementsfor a periodof sixmonths there after.By resolutiondated September 1, 1942 at a meetingof the FullCommittee.the appellantwas expelledfrom the membership ·Of the Exchangeand it wasresolvedthat his share shallstand for feited. There is noprovisionin theIndianCompaniesAct, 1913, whichrestrictsthe exerciseof therightof th,e Exchangeto forfeit shares,for non-payment of a callonly. The IndianCompanies Act,1913,made no provisionrelating to forfeitureof shares. By 3. 17(2)of theAct,a companycould adoptthe regulations r,ontain ed in TableA intheFirstSchedulebut theCompany was not bound'to do so. Regulations 24 to 30 ofTableA dealtwith the powerand the procedurerelating to forfeitureof shares.Regulation 24,it is true,provided tor exerciseof thepowerto forfeita share whenthere was defaultin payingcalls, but no inferencefollows therefromthat the share of a membercould be forfeitedonly for non-paymentof a callmadein respectof thesharewhichwas not fullypaid up. In The Calcutta Stock ExchangeAssociationLtd. v. S. N. Nund,v & Co.( 2), HarriesC.J. afterexaminingthe provisions of theCompanies Act 1913reviewedthe decisions of the Courts in England and of theHighCourt of Calcuttaand observedthat the IndianCompanies Act as well as theEnglishCompaniesAct con template, recognizeand sanction forfeiture generallyand not for non-paymentof callsonly;that a companymay hy its Articles law fullyprovidefor groundsof forfeitureother than non-paymentof call,subjectto thequalificationthat the Artidesrelating to for feiture do notoffendagainstthe generallaw of thelandand in particularthe CompaniesAct, and publicpolicy;and thatthe forfeiturecontemplateddoes not entailor effecta reductionin capital or involve or amountto purchaseby theCompanyof its (t) J.L.R. 61 Cal. 531. 121 I. L. R. [1950] l Cal. 235. A B c D E F G H A B c D G N, C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.) 491 own sharesnor doesit amount to traffickingin itsownshares.The Court in thatcase was concerneoto determinethe trueeffectof theArtidesof theExchangewhich fall to beinterpretedin this case. ThisCourtin Sri Gopal Jalan & CompalJY v. Calcucca Stock Exchange Association Ltd. (1) also consideredwhether forfeiture ofsharesresultedin reductionof capital con1rary to theprovisions oftheCompaniesAct wherepowerof forfeiture was givenby the Articlesfor failureto carryout aQ. undertakingor satisfyan obliga· tion of the memberto forfeitthe shares.The Courtin thatcase was interpretingthe Articleswhich fall to beinterpretedin this appeal.The Courtheld that the·Exchange was not liableto file any returnof theforfeitedshares under s. 75(i) of the Indian Com· paniesAct, 1956whenthe samewere re-issued.The Courtobserved that wh~ ashare is forfeitedand re-issued,there is no allotment, inthe sense ofappropriationof sharesout of theauthorisedand unappropriated c:ipital, andapprovedthe observationsof Harries, C.J.in S. N. Nundy's case(') that "on suchforfeitureall that hap· penedwas thatthe rightof theparticularshareholderdisappeared but the shareconsidered as a.i;nit of issuedcapitalcontinuedto exist and was keptin suspenseuntil ano(h.er shareholder was found for it". In he view ofthisCourt,the shares so forfeited may not be "allotted" in thesensein whichthat word is understoodin the CompaniesAct. The Courtalso pointedout thatre-issueof for· f~ted shares is not allotmentof thesharesbut onlya sale,for,if it were not so the forfeitureeven for non-paymentof callwouldbe invalid as involvingan illegalreductionof capital. Article27 of theExchangeit maybe recalled is in terms man· datory.The share.forfeitedto theExchangemust be re-allotted orotherwisedisposed of : itcannot be retained by theExchange. The shareafter forfeiturein thehandsof theCompany is subject to an obligationto disposeit of. On that accountthere is no re duction of capi(al by mere forfeiture. Mr. Datarappearingfor theappellanthowever contendedthat in Sri Gopal Jalan & Company's case(1) thepartiesarguedthe caseon thefootingthat Articlesof Associationof theExchange werenot invalid,whereasin thepresentcase the validityof the Articles is challenged.But the Court in citingwith approvalthe observationsof HarriesC.J. in S. N. Nuni,ly's case(')did in effect pronounceupon the validityof theArticles. Aforfeitedshare is, therefore,merely a shareavailableto the HCompany for sale and remainsvested in theCompanyfor that pur pose only. By. forfeitinga share purrnant totheauthorityof the (I) [1964] JS. C.R. 698. (2) I. L. R. [1950] I Cal. 235. 492 SUPREME COURT REPORTS [1971] 2 S.C.R. Articlesof Association,no reductionof capital is achieved. We areunableto agreewith counselfor Sanyalthat forfeitureof share~ is permissibleonly in cases expresslycontemplatedby Table A ModelArticles i.e. for non-paymentof callsin respectof a share whichis notfullypaid up. Subjectto theprovisionsof the CoP-lpanies Actthe Company· 8 andthe membersare bound by the provisionscontained in the Articlesof Association.The Articlesregulatethe internal manage mentof theCompanyand definethe powers of its officers. They alsoestablisha contract.between the Companyand the members andbetweenthe members. inter se. The contract governs the ordi naryrightsand obligationsincidental to membershipin the Com pany. In theabsenceof anyprovisionscontained in theIndian CompaniesAct whichprohibita Companyfrom forfeitinga share .forfailureon thepart of thememberto carryout an undertaking oranengagementthe Articles of a Companywhich providethat incertainevents membershiprights of theshareholderincluding his. rightto theshare will be forfeitedare binding.The Articles ofAssociationof theExchangeexpressly provide that in theevent ofthememberfailing to carryout the engagementand in the con ditionsspecifiedtherein his shareshall standforfeited.Articles 22, 24, 26,27 & 29 of theExchangerelating to forfeitureof shares incertainevents are thereforevalid. c D There is in our judgmentnothing in theprocedurefoilowed by a the Sub-Committee and the FullCommitteewhich renderedthe forfeitureof Sanyal'sshare illegal. It is not in dispute that Sanyal incurredliability in favour of one of the membersof theExchange topayRs. 43 8-10-0 in thetransactionrelating •o the saleof Indian Iron & SteelCompany'sshares and he failed to dischargethat lia bility. He continuedto.remain in defaultfor six monthseven after P the resolutionof the F'ull Committee,and on thataccounthe ceas-. edto bea memberand his sh~.re was forfeited.The HighCourt hasfoundthat the copies of the lettersdated 9th, 10th, 16th, 17th and 20th December,1941 .• and of 8th January,11th & 19th February,1942, were sent to Sanyaland the usualnotices·relating tothecomplaintsplaced before the Sub-Committee or theFull Committee were servedupon Sanyal,that suchnotices were postedG onthenoticeboard of theExchangethat the appellanthad oppor tunities at allstagesof theproceedingsto comebeforethe Ex changeand refutethe chargesmade againsthim and that at. no stage of theproceedinguntil September1, 1942,did Sanyalappear beforethe Sub-Committeeor theFullCommittee.The HighCourt was of the view thatthe orderhad not beenmadeagainstSanyal 8 contraryto therules of naturaljustice. It is true that Johurmull Dagacomplainedabout the defaultcommittedby Sanyalon December 9, 1941and the meeting of theSub-Committee was held A B c D E F G H N. C. SANYAL V. CALCUTTA STOCK EXCHANGE (Shah, /.)49~ on December 10, 1941. Granting that the letter of the Sub-Com mittee enclosing a copy of the complaint dated December 9, 1941. &ent by post to Sanyal may not have reached him because he had leftCalcutta, he had still ample notice of the proceeding of the Sub, Committee because intimation was given to him by the notice posted on the bOard of the Exchange. Sanyal raised no conten· tionat any stage !Jefore the 'Sub-Committee or before the Full Committee that he had not received the notices of the meetings dated December 10, 1941, December 17, 1941,January7, 1942. of the Sub-Committee and of the meeting dated February 19, 1942 of the Full Committee. RegularitY. of the proceedings of t.he Com· mittees at the various meetings is not challenged before us. We are unable to agree with the contention raised by counsel. for Sjlnyal that the rules of natural justice were not complied with when the Sub-Committee and the Full Comm~ttee passed the impugned re• solutions against· Sanyal. There is no substance in the plea that the Committee had no· jurisdiction to order sale of the sh;u:e forfeited. Article 27 declares that the foreited share is the property of the Exchange. and. that the Committee of the Exchange shall sell. reallotor otherwi.Se dispose of the share, for satisfaction of all debts due by the member to the Association or to its I1¥1mbers out of transactions in shares and stocks. Under its Articles the Exchange has, authority to sell the share and to app.rqp~iate the salti proceeds towards satisfaction of the debts, liabilities or engagements, But we are unable to agree with the view taken by the High Courtthat the balance of the amount remaining due after satisfying. the liabilities of Sanyal remained the property of the Exchange and that Sanyal had no right thereto. Under the stipulationscontained in Arts. 21, 22, 24, the share of the defaulteror expelled member stands forfeited for failure to fulfil his obligation. The share of Sanyal by express resolution was forfeited. After applying the amount realised on sale of the share towards satisfaction of the debts, liabilities and engagements of Sany al to the Exchange and its members, the balance remaining in the hands of the Exchange had to be held for and on behalf of the appellant. That is expressly provided in Art. 33. The expression used in Art. 29 "Thefor feiture ... shall involve me extinction of all interest" is subject to those rights as by the Articles· are saved, and Art. 33 saves to the defaulting shareholder whose share is forfeited the right to the balance remaining with the Exchange. Even assuming that Arti· cles 24 & 31 reserve to the Exchange two distinctpowers-the power to forfeit and the power to exercise a lien, and that A.rt. 3 3 only applies to. sale in enforcement of a lien, and not to a sale under Art. 27, we are of the view thatthe balanceon handafter satisfying the liability of the defaulter must still be returned to the- 494 SUPREME COURT REPORTS [1971] 2 S.C.R. defaulting ~hareholtler. The powerto forfeitdoes not imply authorityto appropriatethe balanct remaining in handafter satis fyingthe liabilitiesand obligationsof thedefaulterto theExchange andits members.Any suchimplicationwould be contraryto the i,IJ.tendment of s. 7 4of theContractAct. .Thepowerof theExchange to forfeitthe sharesarises out of theArticlesand its source is in contract.Forfeitureof share is in thenatureof impositionof a penalty. ·Section 74of tr.e Indian ·Contract Actprovides: "When a contracthas beenbroken,if a sum is nam edin thecontract as theamountto bepaidin caseof suchbreach,or i.f the contractcontainsany other sti pulationby way of penalty,the partycomplainingof thebreach is entitled,whether or notactual dam age or loss is provedtohavebeen causecl thereby,to receivefrom the party who hasbrokenthe contract re asonablecompensationnot exceedingthe amount so namedor, as thecasemaybe, the penaltystipulated for. .. In FatehChand v. Balkishan Das(') ·this Court in dealingwith acasein whicha claimfor damag~s for breachof contractto sell •a lienof immovableproperty arose, pronouncedthat the expression "the contractcontains any other stipulation by way of penalty" comprehensivelyapplies to every covenantinvolvinga penalty whether it is for paymenton breachof contract of money,or deli very of propertyin future,or forforfeitureof rightto moneyor otherpropertyalready delivered.Duty not to enforcethe penalty clausebut onlyto awardreasonablecompensation is statutorily 'imposed upon courtsby s. 7 4 of the Indi'll(n ContractAct. In all ·cases, therefore,where there is a stipuationin thenatureof ·penalty for forfeitureof anamountdepositedpursuant to theterms ofa contractwhich expresslyprovides for forfeiturethe Courthas jurisdictionto awardsuch sum only as it considersreasonable,but notexceedingthe amountspecifiedin thecontract as liableto for feiture.The sameprinciples,in ourjudgment,would apply in the casein whichthere is a stipulationin thecontract by way of a penalty,and the damagesawarded to thepartycomplainingof the breach will notin anycaseexceedthe loss suffered by the com plainantparty. It was observedat p. 526 in FatehChand's .case( 1 ): ' '- "The section (s. 74) is clearly an attempt to eliminate thesomewhatelaborate refinementsmade underthe English commo,n law in distin!!uishingbetween stipula tions providingfor paymentof liquidateddamages and (I) [1964] I S. C.R. 515. A B c D E G H B c D E JI' G H N; C. SANYAL v. CALCUTTA STOCK EXCHANGE (Shah, J.) 495 stipulatingsin thenatureof penalty. Under thecommon lawa genuine pre-estimateof damagesby mutual agree ment is regarded as a stipulationnaming liquidated damagesand bindingbetweenthe parties:a stipulation ina contract in terrorem is apenaltyand the Court re fusesto enforceit, awardingto theaggrievedparty only reasonable comw:nsation. TheIndianLegislaturehas soughtto cu.t a.cross the webof i:ules and presumptions underthe Englishcommonlaw, by enactinga uniform principleapplicableto allstipulationsnaming amounts tobepaidin case of breach, and stipulationsby way of penalty." TheCourtalso observed at p. 530 : "Section 74 declaresthe lawas to liabilityupon breachof contract where compensation is byagreement ofthepartiespre-determined, or where there is a stipula tion by wayof penalty.But the applicationof the enact ment is not. restrictedto ca.ses where the aggrieved pi.rty · claimsrelief as a plaintiff.The sectiondoes not confer aspecialbenefit upon any party;it merelydeclaresthe lawthatnotwithstandingany termin thecontract pre determiningdamages or providing for forfeitureof any propertyby wayof penalty,the Courtwill awardto the partyaggrievedonly reasonaJ>le compensationnot ex ceeding the amountnamed or penalty stipulated." Grantingthat Art.33 dealswith thosecases in whichlien alone is enforcedand not in caseswhereforfeiture is levied,and the obliga tionof thedefaultingshareholder is determinedby Art.29, in our judgment,on theprincipleunderlying ~· 74 of theContractAct theExchangehad no ri&ht to holdout of thesaleproceedsof the shareany amountin excessof theamountdue to it or to its members. TheExchangemay not purchaseits ownshares. If it doesso, itamountsto reductionof capital.The legaltheory of f!Jrfeiture is that a shareforfeited is only takenover by theCompany with theobjectof disposingit of to satisfyits claiin to enforce which theshare was forfeitedand all otherobligationsarising against him out of hismembership.. TheCompany is giventhis right to re coverthe losssufferedby it byreasonof thebreachof contract committedby theshareholder. If theCompany is permitted to retainthebalance of theamountafter satisfyingthe debts, liabili tiesandengagements of the shareholder,the transactionwould not bedifferentfrom one purchasingthe shareof thedefaulting share holderfor a valueequal to theamountof hisobligations.That wouldbe plainlyillegal. We are thereforeunable to agreewith the 496 SUPREME COURT REPORTS [1971] 2 S.C.R. High Courtthat the Exchange was entitledto retainthe balance aftersatisfyingthe debts,liabilitiesand engagementsof theappel lantto theothermembersor to theExchange. Thedecreepassedby theHigh Court is set asideand the case remandedto theHighCourtfor determiningthe extentof thelia bilitiesof theappellantto theExchangenot onlyin respect of the transactionswith J ohurmul Daga but in respectof allotherout standingliabilitiesof the appellant to othermembersof the Ex changeand to the Exchangewhich are enforceableunder the Arti cles.The appellantis entitledto receivefrom the Exchangethe balanceremainingdue afterdeductingthe aggregateamount or valueof theobligations.He will be entitledto intereston the balanceat therateof 6%per annumfrom the dateof theinstitu tion of thesuit.Partieswill beartheir own coststhroughout. Thisappeal was filed in formapauperis. The appellant will pay the court fee payableon thememorandumof appeal if hehad not beenpermittedto appealin formapauperis. V.P.S. Appealallowedand case remanded. A B c |
