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1951 DIGILAW 258 (MAD)

Srivilliputtur Permanent Fund Limited, In Re v. .

1951-09-04

KRISHNASWAMI NAYUDU

body1951
Judgment :- KRISHNASWAMI NAIDU, J. This is a petition on behalf of the Srivilliputtur Permanent Fund Ltd. under Section 12 of the Indian Companies Act for confirmation of the special resolutions Nos. 1 and 2 altering the memorandum of association. The capital of the company was originally Rs. 1, 09, 956 divided into 1, 309 shares of Rs. 84 each to be paid in monthly instalments of one rupee and this was subsequently raised to Rs. 21, 00, 000 divided into 25, 000 shares. Under the rules of the company, the shareholders who subscribe regularly at Rs. 1 per month for 84 months should be paid a sum of Rs. 100, the difference between Rs. 84 and Rs. 100 representing the interest on the Deposits of Re. 1 which they pay every months towards the share capital. This is what is generally termed as recurring deposits in Nidhis and funds where a subscriber who subscribes one rupee a month for 84 months would be entitled to receive from the company a sum of Rs. 100. The result is that the share capital so formed is liable to be repaid to the shareholders, whereas under the Indian Companies Act, such shares cannot be repaid on demand since they form the capital of the company. In view of this anomaly and since the Nidhi was registered under the Indian Companies Act, the attention of the company was drawn to this defect in the memorandum of association and they were asked to rectify it by providing for a permanent share capital and the present amendments to the memorandum of association, it is stated, will satisfy the requirements of the Indian Companies Act. There can be no doubt that this system of holding share capital is not in accordance with law and the provisions of the Indian Companies Act. If recurring depositors who are wrongly termed as shareholders after completion of the 84 months demand what they are entitled to and recover Rs. 100 each and if there are no other recurring depositors, there will be no share money with the company to constitute its capital. It has therefore become necessary for this company to alter the capital structure and to provide for a permanent capital.The present alteration is to substitute in para. 100 each and if there are no other recurring depositors, there will be no share money with the company to constitute its capital. It has therefore become necessary for this company to alter the capital structure and to provide for a permanent capital.The present alteration is to substitute in para. 5 of the memorandum the following, viz., "that the share capital of the company was to be 1, 00, 000 divided into 1, 00, 000 shares of rupee on each". The second resolution is that the Fund may increase or reduce its share capital is such modes as they may be deemed necessary from time to time. By reason of the aforesaid alterations the company can not be assured of a share capital of Rs. 1, 00, 000 which would not be repayable to the depositors as is now the case. This is one of the defects, as pointed out by COUTTS TROTTER, C.J., in The Madras Native Permanent into limited companies, because their articles are usually drawn without regard either to the provisions of the memorandum or to the general law embodied in the Companies Act. It is to rectify this defect that the company has called for a meeting and passed the resolutions altering the memorandum of association. The respondents are husband and wife and they claim to be members of the company. They oppose the application on two grounds; firstly that the extraordinary meeting has not been properly called for and no notices of the meeting as required have been served on the members, that the respondents had no notice and that therefore the resolutions passed at such a meeting are irregular and the same should not be approved. The second objection is that the result of the alteration of the memorandum of association is in fact to reduce the capital and the proper procedure should be to file an application under Section 55 of the Indian Companies Act when notice of the meeting should be given not only to members but also to creditors and depositors and the question of reduction of share capital could be gone into. As regards the first of the objections, in so far as the first respondent is concerned, his name is stated to have been removed from the list of shareholders and he is therefore not entitled to the notice. As regards the first of the objections, in so far as the first respondent is concerned, his name is stated to have been removed from the list of shareholders and he is therefore not entitled to the notice. There appear to have been certain legal proceedings between himself and the company regarding such removal. With reference to the second respondent, wife of the first respondent, it is stated on affidavit, that a notice has been served on her in accordance with the mode prescribed in the rules of the company. In the reply affidavit of the petitioner, it is stated that the bill collector of the fund was entrusted with the serving of the notice of the meeting and in the return submitted by him he had made an endorsement to the effect that left in her residence. In the endorsement made by the bill collector, it is found as against the name of the second respondent that the notice was personally handed over to her. What is required under the rules is that copies of notices should be given in the houses occupied by the respective shareholders. So long as the notice is served at the residential house of a member, that would be sufficient compliance of the rules and in this case the bill collector was stated that he handed over the notice to the second respondent personally. No doubt, there is no acknowledgment. But there is nothing to disregard the statement in the affidavit and the endorsement of the bill collector that such a notice had been handed over to her and left in the house in which she was residing. I therefore consider that notice of the meeting has been served on the second respondent. No doubt, there is no acknowledgment. But there is nothing to disregard the statement in the affidavit and the endorsement of the bill collector that such a notice had been handed over to her and left in the house in which she was residing. I therefore consider that notice of the meeting has been served on the second respondent. There is no other complaint from any of the shareholders excepting from these two persons who are husband and wife, and in view of the strained relations between the first respondent and the company's management, I am unable to attach much weight to the objection raised on behalf of the first respondent that notices of the meeting were not properly served on the members.The second objection is that the petition is filed under Section 12 of the Indian Companies Act and since the alteration in the memorandum of association involves the reduction of the share capital the procedure laid down in the Indian Companies Act for reduction of the share capital should have been followed, and the company having failed to adopt the procedure so laid down, the resolutions could not be said to have been validly passed and therefore they should not be confirmed by this court. The question therefore is whether this alteration amounts to a reduction of the share capital. It may at first sight appear to be a case of reduction of share capital, since the original share capital of Rs. 21, 00, 000 divided into 25, 000 shares has been now altered into a share capital of Rs. 1, 00, 000 divided into 1, 00, 000 shares of Rs. 1 each. But one has to consider whether in fact there was really a share capital to the company under the existing system. The share capital of Rs. 21, 00, 000 divided into 25, 000 shares cannot be said to really constitute the share capital, since it is under provision made by the company for receipt of deposits for a number of months - in this case 84 months - and will be payable to the depositors not only the amounts which they pad but the interest added to them amounting to Rs. 100. It may be that if the depositors who contribute Re. 1 each per month for 84 months regularly receive back each Rs. 100. It may be that if the depositors who contribute Re. 1 each per month for 84 months regularly receive back each Rs. 100 as they are entitled to under the memorandum of association, there will be no share capital left at all unless there are other depositors who are prepared to come and pay Rs. 1 each on the same terms, even which could not be secured to the company as its capital. The present structure of share capital cannot really be called the capital of the company. The company is now adopting a precarious system of having capital which is likely to disappear and automatically reduce itself under circumstances over which the company could have no control. It is to change this and bring into existence a permanent system of share capital that this alteration in the memorandum of association has been decided upon. It is also in pursuance of the several demands and reminders sent by the Registrar of Joint Stock Companies that the Fund should take steps for converting the share capital system, now in vogue in the Nidhi into a permanent share capital system that the company has thought it necessary to have the memorandum of association altered. I therefore consider that it could not in any view be taken to be a case of reduction of capital. It is introducing into the company a system of share capital as required under the company law, in effect, regularising what has been irregularly carried on all this time. In this view, the proper course for the company is to alter the memorandum of association giving notice to its members and applying to the court under Section 12 of the Indian Companies Act. I therefore consider that this alteration is necessary to carry on the business of the company more efficiently and economically and in accordance with the existing law governing the companies. I am satisfied that the alterations of the memorandum of association are necessary in the interests of the company and its creditors and depositors, since there is now a permanent share capital assured to those whose interests may be considered to be safe. The resolutions stated in the petition are therefore confirmed. Prayer (a) is ordered. Petitioner will have its taxed costs from out of the estate.Ordered accordingly.