Contributory Liability

Corporate Laws II Introduction There are several factors makes a company stand apart from any other part of business. A company has separate legal entity, has perpetual succession, limited liability et cetera. All these and many more factors make a company different from any other form of business. The topic of this project which relates to the legal status and Scope of “contributory” under the companies act demands the author to analyse elaborate and enunciate on the contributory liability and the relevance and existence contributories in a company. The term contributory refers to the liability of a person to contribute to the assets of a company.

Such a liability is not of relevance when the company is a going concern, it comes into existence or become relevant only when the company ceases to be a going concern that is in the event of the company being wound up. With respect to the liability of a member in a going company that is before the liquidation of a company or before the company ceases to be a going concern the liability of a member as to contribute is measured by the contractual obligation arising from his membership in the company and in case of a company which is limited by shares the liability is measured with respect or in accordance with the amount to be paid which is limited by the memorandum of association. The project also tries to discuss the liability and the nature of liability of the contributories in the normal course when the winding up proceedings have been initiated and also in the course when the contributory dies and the legal representative of such contributory are instead made liable to fulfil the liability from the estate of the contributory. The project also discusses about the contributory liability of an insolvent member. Through this project the author has tried to analyse the relevance and the scope of the word contributory in the companies act using various case laws. Scope, Objective and Significance The main objective of this project work is to analyse and enunciate about the meaning relevance and the scope of word contributory in the companies act. The scope of the project has been restricted to the scenario which exists in India and the support of various case laws of the Indian courts has been taken in order to do justification with the topic.

Knowing about the scope, relevance and meaning of the word contributory is quite significant as it directly relates to the limited liability of a company which is one of the most important feature of a company. For the same the author has relied upon various books, cases, articles (both online and off-line), and online research databases. Research Question What is the meaning of contributory in the companies act? What is the scope and relevance of contributory? Chapterisation Chapter 1 – Contributories This chapter will deal with the different kinds of the contributories and will try to elaborate upon the different scenarios of the contributories. Chapter 2 – Contributories’ Liability This chapter will talk about the nature and the type of liability of the contributories and will try to elaborate upon the scope of contributory liability. Chapter 1 – Contributories The term winding up and dissolution differs in the sense that winding up is a means by which the dissolution of a company is brought about and its assets realized and applied in payment of its debts.

After satisfaction of the debts, if there is any balance, it is paid back to the members in proportion to the contribution made by them to the capital of the company. Once the process of winding up is completed, the company is dissolved. There can be dissolution without winding up under a scheme for amalgamation where the transferor company can be dissolved by an order of the court, without going through the process of winding up. An order of winding up a company does not by itself put an end to its existence although from the commencement of the winding up, the company ceases to carry on the business except required for beneficial winding up. Insolvency is a stage when a company is unable to pay its debt due to financial incompetency or when debts of the company have exceeded the assets of the company. There are two types of insolvency- personal insolvency and corporate insolvency, but here we are concerned only with the corporate insolvency. Insolvency is one of the grounds for winding up of a company. The relevance of the term contributory refers to every person liable to contribute to the assets of company in the event of its being wound up and includes a holder of any shares which are fully paid-up.

[1] The terms contributory and member is not interchangeable.

Every member would become a contributory whereas the converse is not true. In the case of Rajdhani Grains and Jaggery Exchange Ltd.,[2]it was said that a legal representative in case of a deceased member becomes a contributory but will not become a member till the name of such representative is entered in the Register of members. ‘Member’ as contributory A person other than a subscriber to the memorandum, can become a member only when he agrees in writing, no oral or implied agreement being sufficient. Mere entry in the register will no longer make a person a member. He must have agreed in writing to become a member, and the burden of proving this will be on the liquidator. But a person who has assented in his being treated as a member by attending meetings, receiving dividends, etc., will be estopped. A person whose name is present in the register would have to take steps to raise his objections or to have the register rectified, though the courts are very reluctant to order rectification after commencement of winding up.

[3] He must not stand by and wait and then, at a later stage, with knowledge that he has been held out to the public as a shareholder of the company, seek to have his name removed. Thus, where a person who knew that his name was entered in the register of shareholders of a company continued to have it for more than three years and took no action to have it removed from the register till he received the notice from the Official Receiver after the winding up of the company started, it was held that even assuming that the allotment of shares was void yet his application for excluding his name from the list of contributories was rightly dismissed by the court on the doctrine of holding out. The result of this doctrine of holding out is that if a person’s name is on the register with his consent, and he claims to have it removed on some ground or other, he must exercise the right promptly, otherwise, he forfeits it. Even where a name is, pursuant to a void contract placed on the register, delay after knowledge may be fatal.

[4] But where the transferor had notified to the company the fact of transfer but the company delayed the matter, he was allowed to have his name removed even when the winding up had commenced.

[5] The fact that the name was entered in the register on the basis of an insufficiently stamped transfer form is no defence when the company is in winding up.

[6] A presumption of continuing membership arises from the fact of the presence of the name in the register even if a name could have been dropped for defaults in payment, etc. in terms of the company’s articles.[7]Where the membership was on the basis of an allotment which could have been avoided for misrepresentation in prospectus, etc., it cannot be avoided once the winding up is on.

[8] The same result will follow where the contract of allotment is subsequently found illegal or void.

[9] An entry in the register need not be substantiated by producing documents such as share scrips or letters of allotment.[10] Subscribers to the memorandum of association automatically become members on registration of the company and therefore liable as such to be placed in the list of contributories whether or not any shares were allotted to them or where shares were allotted but they had not paid for the shares.[11]It was held inModal Bank Ltd. v.Janwi Narain[12]that when the applicant accepted the offer for allotment of shares and consented to act as director, the contract was completed and, without any allotment, the person became a shareholder.

The fact that the share application money was paid in the form of a promissory note executed in favour of the bank was immaterial. Accordingly, the shareholder was held to be contribution, when the bank went into liquidation. Where an application for shares was subject to a condition to be accepted by the directors and the directors made the allotment but did not fulfil the condition; consequently therefore the allottee obtained a refund order, it was held that his name could not be entered in the list of contributories.[13] Contributory in case of death of a member On the death of a contributory, either before or after he has been placed on the list of contributories, his legal representatives and heirs shall be liable to contribute to the assets of the company in discharge of his liability, and they shall also be regarded as a contributory accordingly. They shall be liable in due course of administration to contribute to the assets.[14]Where an order of payment was made against a contributory who was dead, the court said that remedy of the liquidator lay against the estate of the deceased in due course of administration.[15] The liability of the legal representative of a deceased contributory is only a liability to pay out of the estate of the deceased and extends only to the extent of the value of the estate coming into the hands of the legal representatives.[16] The liability is co-extensive with the liability of the deceased contributory.[17] Contributories in case of insolvency of member Insolvent contributory or, where the contributory being a body corporate has been ordered to be wound up, not only monies due in respect of the contributory’s present liability but his liability for future calls also may be admitted to proof.[18] A member does not become a contributory until the winding up. In such case, his rights as a member will vest in his assignee in insolvency who will be the contributory. A shareholder ceases to be a contributory if he is adjudged insolvent.[19] As, after a contributory becomes insolvent, his estate vests in his assignee in insolvency, the contributory has no personal rights in relation to the company and cannot take any proceedings in his own name.[20] Fully paid shareholder is contributory It is now a judicially well-established position that a fully-paid holder of shares is a contributory.[21] A fully paid shareholder will not, however, be placed on the list of contributories, as he is not liable to make any contribution to the assets, except in cases where on distribution of surplus assets he has received a large sum of money and he should repay a portion of that money where later it was found that a debt due to inland revenue was not paid earlier.[22] It is doubtful whether the holders of new shares floated in winding up shall be treated as contributories and can be required by the court to pay the money to satisfy the debts and liability of the company in their capacity as contributories.[23] Chapter 2 – Contributories’ liability In a going company,i.e., before liquidation, the liability of a member to contribute is measured by the contractual obligation arising from his membership in the company, and in the case of a company limited by shares; it is measured by the liability to pay the amount limited by the memorandum of association. When a company passes into liquidation, a new liability arises and the shareholder becomes a contributory subject to the statutory liability under respective section and in the manner defined by it.[24] This principle does not apply to liability to pay the premium money on shares because that is a matter for contract between the member and the company.[25] A person who is a name lender only (benami), will be held liable as a contributory, though he is entitled to be indemnified by the beneficial owner.[26] Position of a nominee-shareholder is also the same.[27] A company cannot relieve a member of his liability by purchasing his shares, such purchase being against the Act.[28] Liability to pay interest on the call amount arises after the call has been made by the liquidator and from the date fixed for payment of the call money.[29] The liability is not taken away by any collateral contract under which payment of calls on the shares might depend on any special conditions which have failed.[30] The contributories may be of one class or of more than one class according as the memorandum and articles of the company have defined and grouped the members. The liability which the statute imposes, affects every member who has not paid the full amount remaining unpaid on his shares and he is required to contribute to the assets of the company to the extent of the amount so remaining unpaid. Section 295[31] provides that after a winding up order is made, the Tribunal may at any time pass an order requiring any contributory for the time being on the list of contributories to pay any money due to the company, from him or from the estate of the person whom he represents.

Any money required to be paid by such representatives shall be out of the estate only. In the case of an unlimited company, the Tribunal may allow the contributory to set off any money due to him or to the estate which he represents, from the company, on any independent dealing or contract with the company. But any money due to him as a member of the company in respect of any dividend or profit cannot be set off. Nature of Liability of Contributory The liability of a contributory extends only to the amount, if any, remaining unpaid on the shares held by him. In the case of a contributory, who holds fully paid shares, there is no liability. There is liability only in the case of partly paid shares, to the extent of share amount remaining unpaid. It was held in the case of In re, Apex Film Distributors, Ltd.[32] that liability can only be extinguished by payment. The liability of the contributories is not affected by the company’s articles or any agreement between the company and the members. Though the liability is a debt, the liability to pay the debt arises only if and when calls are made, and even then, only to the extent of the amount called. Where the unpaid share money has been mortgaged, this does not give the mortgagee a direct right to call upon the contributories to pay that money. He has to ask the liquidator to call upon the members to pay and then to handover the proceeds to the mortgagee. In this respect there is no difference whether the call is by directors or by a liquidator.[33] Conclusion The term contributory is basically used for communicating the liability of every member or shareholder to contribute to the assets of a company in case the company ceases to be a going concern.

The liability is limited and extends only to such amount of share which are unpaid. If a shareholder has fully paid up shares then even if he is in the list of the contributories he is not liable to pay any amount as the shares are fully paid up. It is now a judicially well-established position that a fully-paid holder of shares is a contributory. A fully paid shareholder will not, however, be placed on the list of contributories, as he is not liable to make any contribution to the assets, except in cases where on distribution of surplus assets he has received a large sum of money and he should repay a portion of that money where later it was found that a debt due to inland revenue was not paid earlier. In case of a company which is a going concern, this liability is decided on the basis of the contractual terms on whose basis the membership is granted to the member. The contributory liability shifts can shift like in case of a deceased person, the liability shifts from the deceased person to the legal representative of that person. Insolvent contributory or, where the contributory being a body corporate has been ordered to be wound up, not only monies due in respect of the contributory’s present liability but his liability for future calls also may be admitted to proof. A member does not become a contributory until the winding up. Thus, the liability of a contributory is directly related to the limited liability facet of the company form of business.

Contributories’ existence is a matter of concern only in case of the liquidation or winding up of a company, the liability is primarily on the member but it might shift in case of deceased person. 1 | Page

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[1] Companies Act 2013 2(26), Companies Act 1956 426

[2] Re [1983] 54 Comp. Cas. 166

[3] Somasundaram Pillai v. Official Liquidator, Madras(1967) 37 Com Cases 440 (Mad)

[4] Lakshmi (R.) Narasa Reddy v. Official Receiver Sree Films Ltd.AIR 1951 Mad 890,893,894

[5] Darjeeling Bank Ltd., Re,(1960) 30 Com Cases 50:AIR 1959 Cal 335

[6] Yamuna Das Kanoujia v. Behar Engineers and Contractors Ltd.(1944) 14 Com Cases 163 (Pat).

[7] Punjab Flying Club, Re,(1934) 4 Com Cases 206 (Lah)

[8] Jagannath Prasad v. Official Liquidator(1938) 8 Com Cases 123

[9] Hansraj Gupta v. Asthana(1932) 2 Com Cases 548 [10] L.N. Reddi v. Official Receiver, Sree Films Ltd.(1951) 21 Com Cases 201 (Mad) [11] Babulal v. Naraina Sugar & General Mills Ltd.(1958) 28 Com Cases 155 (Punj) [12] (1932) 2 Com Cases 137 (Lah) [13] Indian Merchants Bank Ltd. v. Joginder SinghAIR 1928 Lah 234. [14] British India Banking and Industrial Corpn. Ltd. v. Shiva Chedambaria(1935) 5 Com Cases 43,45 [15] Bose (T.N.) v. Pandit Yogeshwar,(1941) 11 Com Cases 296,297 (Lah). [16] See Bayswater Trading Co.Ltd.,(1970) 1 All ER 608 at 610 [17] Agriculturist Cattle Insurance Co., Re,(1870) 5 Ch App 725. [18] SeeMcMahon, Re, Fuller v.McMahon(1900) 1 Ch 173 [19] SeeWolverhampton Steel & Iron Co.Ltd.,(1977) 3 All ER 467 [20] Cape Breton Co. In Re,(1881) 19 Ch D 77. [21] SeeRe, Phoenix Oil and Transport Co.Ltd.,(1957) 3 All ER 218 [22] Re, Aidall Ltd.,(1933) Ch 323 [23] Dulleep Singh v. Official Liquidator, Punjab and Haryana High Court, Chandigarh(1988) 2 PLR 378,379 (P&H). [24] Hansraj Gupta v. Asthana,(1932) 2 Com Cases 548 [25] Niemann v. Smedley[1973] VR 769;Vedelago In Re(1992) 8 ACSR 135 (Aust) [26] Murshidabad Loan Office Ltd. v. Satish Chandra Chakravarty(1943) 13 Com Cases 159. [27] Peninsular Life Assurance Co., Re, (1936) 6 Com Cases 32 (Bom). [28] Sabaratnam Chettiar v. Official Liquidator, Travancore National and Quilon Bank Ltd.(1943) 13 Com Cases 61. [29] Pars Ram Brij Kishore v. Jagraon Trading Syndicate(1936) 6 Com Cases 347. [30] Dehra Dun Mussoorrie Electric Tramways Co. v. Official LiquidatorAIR 1930 All 357 [31] Companies Act 2013 [32] (1960) 30 Com Cases 357 [33] Official Receiver, Link Industries Ltd. v. Ramanathan Chettiar(1962) 32 Com Cases 395 (Mad)

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