Case Laws Companies Act Raymond Synthetics Ltd Vs Union of India

Case Laws Companies Act

Raymond Synthetics Ltd Vs Union of India

PETITIONER:
RAYMOND SYNTHETICS LTD. AND ORS.

Vs.

RESPONDENT:
UNION OF INDIA AND ORS.

DATE OF JUDGMENT04/02/1992

BENCH:
THOMMEN, T.K. (J)
BENCH:
THOMMEN, T.K. (J)
MOHAN, S. (J)

CITATION:
1992 AIR 847 1992 SCR (1) 481
1992 SCC (2) 255 JT 1992 (1) 463
1992 SCALE (1)264
ACT:
Companies Act, 1956-Section 73-Public Limited company-
Listing shares on stock exchange-Procedure-When allotment of
shares becomes void-When liability to repay application
money and interest arises-Permission-When deemed to be
refused or granted.
Securities Contracts (Regulation) Act, 1956-Section 22-
Appeal-When lies-Pending appeal-Effect.
Companies Act, 1956-Section 73, (1A) (2), (2A), (2B),
2(31), 5-Interest-Payment of-Company’s liabilities-
Circumstances-Situation in pre and post Companies
(Amendment) Act, 1974 – Liability of Directors-Scope of-“An
Officer in default”-Construction.
Companies Act, 1956-Section 73(2)-“Forthwith”-
Construction of-Legislative intention.
Companies Act, 1956-Section 73(1) (2) (3)-Application
money-Company’s right or obligation to credit bank
accounts-Effect-Purposes for usages of such money.
Companies Act, 1956-Section 73(2)-Interest-Assessment
period-Calculation-Starting point-Construction-Legislation
intention.
Companies Act, 1956-Section 73-Ambiguous section-
Construction-Method.
Interpretation of Statut-Ambiguous section-Construction
(Section73, Companies Act, 1956)
Companies Act, 1956-Section 73 (2A)-When applicable-
“Due”-Construction-“Due” and “payable” not same- “Penal” not
penalty-Administrative inconveniences cannot be pleaded.

 

HEADNOTE:
The appellant-company was registered under the
Companies Act, 1956. It obtained the consent of the
Government of India to
482
issue 7,20,00,000 equity shares of Rs. 10 each at par and
33, 90, 000 fourteen per cent secured redeemable non-
convertible debentures of Rs. 100 each at per.
One of the conditions attached to the consent order was
“The company shall scrupulously adhere to the time limit of
10 weeks from the date of closure of the subscription list
for allotment of all securities and despatch of allotment
letters/certificates and refund orders.”
On 12.7.1990 the company issued prospectus for the
issue of the shares and debentures, stating therein that the
company had sought the permission of the stock exchanges at
Indore, Ahmedabad, Bombay, Calcutta and Delhi for dealing in
equity shares and debentures in terms of the prospects; that
interest at the rate of 15 % per annum on the excess
application money would be paid to the applicants as per the
guidelines issued by the Ministry of Finance on July 21,
1983 and September 27, 1985; that the public issue would
open on August 20, 1990 and close on August 23, 1990; and
that it would not be extended beyond August 31, 1990.
The issue opened on August 20, 1990. The company
received 26,32,894 applications for equity shares together
with an aggregate sum of Rs. 225,25,51,247 in respect of a
public issue of Rs. 25 crores.
The shares issue was close on 23rd August 1990. On
October 15,1990 the Board of Directors of the company
approved the allotment of shares. Prior to 1.11.1990, it
secured the requisite permissions of the stock exchanges at
Indore, Ahmedabad, Bombay Calcutta and Delhi to deal in the
shares offered in the prospects.
The company had to despatch 25,50,604 refund order,
which were printed in Bombay and they were meant to be
despatched from Delhi. The company despatched 8,55,226
refund orders from New Delhi at the rate of approx. 1,00,000
refund orders per day.
On 26th October, 1990 a consignment of 6,69,999 refund
orders were despatched from Bombay to Delhi. As a result of
a fire that broke out on the way, many refund orders were
destroyed and about 50 % of the consignment was missing
after the accident.
In consultation with the Madhya Pradesh Stock Exchange
and the Company’s Bank, instructions were issued by the
Company to
483
stop payment of all refund orders with a view to avoiding
any possible fraud or misuse. As a result of the
countermanding of all the refund orders and the printing of
new refund orders, delay occurred in the despatch of newly
printed orders.
For issuing the refund orders, at the request of the
company, the Madhya Pradesh Stock Exchange granted extension
of time till November 30,1990 and further extended till 19th
December, 1990.
The Bombay Stock Exchange refusing the grant extension
of time informed the company that it was bound to pay
interest by reason of the delay in the despatch of refund
orders.
The refund orders were not despatched until 12th
November, 1990. The Government of India and the Securities
and Exchanges Board of India-Respondents Nos. 1 and 2
respectively, insisted that the company should pay interest
to the investors for the period of the delay in making the
refund in accordance with the provisions of section 73 of
the Companies Act from 1st November (the expiry date of the
period of 10 weeks from the date of the closure of the
subscription lists) till the date of posting of the refund
orders.
The company filed a writ petition in the High Court
apprehending that the Government might direct the stock
exchanges to delist the shares of the company by reason of
its failure to pay interest and also initiate actions
against it.
In the High Court, the respondent No. 1 submitted that
the liability to pay the excess amount arose on the expiry
of 10 weeks from the date of closure of the subscription
lists.
The respondent No. 2 contended that the liability arose
on the date of allotment.
The company-the appellant contended that on the facts
of the case, the liability arose on at the end of the period
as extended by the Stock Exchanges at Indore in terms of the
prospectus.
The High Court dismissed the writ petition, holding
that the company was liable to pay interest at the
prescribed rates for the period of delay and the liability
for same arose on the expiry of 8 days from the date of
allotment of the shares, and not from the date of expiry of
10 weeks, where allotment was made earlier to that date.
484
This appeal was filed by the Company against the High
Court’s judgment by special leave, on the question, whether
the High Court was right in discarding, for computation of
interest, the time limit of 10 weeks running from the date
of closure of the subscription lists, notwithstanding that
the allotment had been made prior to the date of expiry of
10 weeks.
The appellant contended that the company was entitled
to retain the excess amount for the period mentioned in the
prospectus and consequently no liability to pay interest
could arise until the expiry of that period; that as the
Madhya Pradesh Stock Exchange had extended time for refund
till 19th December, 1990, the liability of the company to
repay the excess amount did not arise until then; that the
interest became payable only after 8 days from the expiry of
the period as extended by the Madhya Pradesh Stock Exchange;
and that the interest was payable as a penalty and therefore
a reasonable and rational construction of the statute to be
made in regard to the commencement of the liability of the
company to repay the excess amount by taking into account of
the relevant circumstances which caused the delay.
The respondents submitted that the liability to repay
the excess amount arose on the date of allotment of the
shares, that the liability arose forthwith and any delay
beyond the period of 8 days from the day on which the
liability arose attracted interest that the expression
`forwith’ had to be understood as an immediate liability
ascertainable with reference to the date of allotment, but
subject to a period of grace of 8 days.
Allowing the appeal, this Court,
HELD : 1.01 As per Dr. Justice T.K. Thommen :-
A public limited company has no obligation to have its
shares listed on a recognised stock exchange. But if the
company intend to offer its shares or debentures to the
public for subscription by the issue of a prospectus, it
must, before issuing such prospectus, apply to one or more
recognised stock exchanges for permission to have the shares
or debentures intended to be so offered to the public to be
dealt with in each such stock exchange in terms of section
73. [496 G]
1.02 Sub-section (1) of section 73, as amended by the
485
Companies (Amendment) Act, 1988 has application only to a
company intending to offer shares or debentures to the
public for subscription by the issue of a prospectus. Until
this sub-section was inserted, listing of public issues was
not compulsory. [497 B-C]
1.03. Sub-section (1A) of Section 73 as amended by the
Companies (Amendment) Act, 1988 makes it necessary for the
company to state in its prospectus the name of each of the
recognised stock exchanges whose permission for listing has
been sought by the company. [497 G]
1.04. Any allotment of shares will become void if
permission is not granted by the stock exchange or each such
stock exchange, as the case may be, before the expiry of 10
weeks from the date of the closing of the subscription
lists. The validity of the allotment is made dependent on
securing the requisite permission of each stock exchanges
whose permission has been sought. [497 G-498 A]
1.05. The liability to repay the application money
arises only upon refusal of the stock exchange to grant the
permission sought by the company before the expiry of 10
weeks from the date of closing of the subscription lists.
[498 A]
1.06 There is a deemed refusal if permission is not
granted by the stock exchange before the expiry of 10 weeks
from the date of closing of the subscription lists, and upon
the expiry of that date, any allotment of shares made by the
company becomes void. [498B]
1.07. Sub-section (1A) postulates that any allotment
made becomes void at the end of 10 weeks from the date of
the closing of the subscription lists if by that time the
requisite permission of the stock exchange has not been
obtained. But this consequence is postponed till the
dismissal of any appeal preferred under section 22 of the
Securities Contracts (Regulation) Act, 1956. Nevertheless,
the permission, if not obtained with 10 weeks, is deemed not
to have been granted. [504 F-G]
1.08. It is the legislative intent to delay the result
postulated under sub-section (1A) i.e., rendering the
allotment void, until the period of 10 weeks has expired or
until the dismissal of the appeal.
1.09. The liability to repay the excess money in the
present case arose on 1.11.1990 which was admittedly the
date of expiry of 10 weeks from the date of the closing of
the subscription lists, and consequently the liability to
pay interest at the rate specified in sub-
486
section (2A) arose on the expiry of 8 days from 1.11.1990.
[498 C-D]
2.01. From the decision of the stock exchange refusing
permission, an appeal will lie under section 22 of the
Securities Contracts (Regulation)Act, 1956. [498 C]
2.02. Pending the decision in appeal, the allotment
made would not be void, and the decision of the concerned
stock exchange is made dependent on the result of the
appeal. [498 C]
2.03. The fact that an appeal is pending does not
postpone the result contemplated in sub-section (2) in
regard to the liability to repay the amounts and the
interest accruing thereon if the amounts are not repaid
within 8 days after the liability arose. [505 A]
3.01 Sub-section (1A) of Section 73 postulates two
circumstances in which interest becomes payable, namely,
where the permission has not been applied for before issuing
the prospects and the company has thus acted in violation of
the law or where permission, though applied for, has not
been granted. In the former case, apart from the other
consequences which may flow from the company’s disobedience
of the law, the liability to pay interest arises as from the
date of receipt of the amounts, for the company ought not to
have received any such amount in response to the prospectus
issued by the company in disobedience of the requirements of
subsection (1). In the latter case, the liability to pay
interest does not arise until the expiry of 8 days after the
company became liable to repay the amounts received by
reason of its failure to obtain the necessary permission as
referred to in sub-section (1A). [499 C-D]
3.02. Section 73, as it stood prior to 1975, contained
no specific provision compelling the company or its
directors to repay the amounts received in excess of the
aggregate of the application money relating to the shares or
debentures in respect of which allotments have been made.
Sub-section (2A) was inserted by the Companies
(Amendment)Act, 1974 inserted to cover cases where
permission of the stock exchange has been obtained, but the
shares or debentures have been over-subscribed and the
company is consequently in possession of excess amounts.
The amended sub-section made the company liable to repay the
excess amounts forthwith, but did not made the company
liable to pay interest on such excess amounts. But a
liability was cast on the directors. If the excess amount
was not repaid within 8 days from the day the company became
liable to
487
repay it, the directors were made jointly and severally
liable to repay such amount with interest. The proviso to
sub-section (2A), which like the proviso to sub-section (2),
as they stood prior to 1988, provided that a director was
not liable to repay the money with interest if he proved
that the default in payment of the money was not on account
of any misconduct or negligence on his part. [500 C-E]
3.03. Owing to the absence of a specific provision
imposing liability on the company to pay interest on the
over-subscribed amounts, and also owing to the absence of
any provision to exempt directors who were not directly in
charge of the administration of the company and the need to
make listing of public issues compulsory, further amendments
to the section became necessary. Accordingly the Amendment
Act of 1988 introduced several amendments to section 73, one
of them being the substitution of a part of sub-section (2A)
making the company and every director of the company who is
`an officer in default’ jointly and severally liable to
repay the excess money with interest. [500 F-H]
3.04. A `director of a company who is an officer in
default’ appearing in sub-section (2A) must be understood
with reference to the definition of `an officer who is in
default’ contained in section 2 (31) read with section 5.
This definition includes the managing director or the whole
time director of a company. [500 H-501 A]
3.05. The liability imposed under sub-section (2A) on a
director of the company falls only upon a director who is
`an officer in default’, as defined under section 2 (31)
read with section 5(a) (b), and not upon any other director.
The nominees of the Government of financial institutions on
the board of directors of the company, but not directly in
charge of its administration as full time directors, are
exempted from personal liability. [501 A-B]
3.06. Sub-section (2A) provides for the accrual of
interest and the rates thereof. Unlike sub-section (2B)
providing for punishment by imposition of fine or
imprisonment, sub-section (2A) speaks only of interest which
is in contra-distinction to punishment and is not penal in
character. It merely provides a mode of calculation of the
amounts payable. Any consideration with reference to a
penal provision is of no relevance to the liability of the
company of its directors to pay interest in terms of sub-
section (2A). [503 E]
488
3.07. Sub-section (2B) concerns solely with default of
compliance with the requirement of sub-section (2A) namely,
repayment of excess money. Failure to repay the excess
money as required by sub-section (2A) visits the company and
every officer of the company who is in default (as defined
under section 5) with the stipulated punishment. This is,
of course, in addition to the payment of interest prescribed
under sub-section (2A). [503 H-504 A]
3.08. The interest provided under sub-section (2) is
payable to the applicants in terms of that sub-section
unless the money is returned to them within the specified
time, notwithstanding the pendency of an appeal mentioned in
the proviso to sub-section (1A). Subsection (3) has to be
so understood to be in harmony with the other provisions of
section 73. [506 C]
3.09. If the permission for listing sought under sub-
section (1) is not granted, the interest payable under sub-
section (2) is attracted. Sub-section (2) says that the
liability to repay the money received from applicants arises
forthwith either where the permission has not been sought
or, having been sought, it has not been granted. [504 H-505
A]
3.10. The accrual of interest under sub-section (2) is
not dependent or consequent on the nullity postulated insub-
section (1A). [505B]
4.01. The expression `forthwith’ does not necessarily
and always mean instantaneous. The expression has to be
understood in the context of the statue. Where, however,
the statute prescribes the payment of money and the accrual
of interest thereon at certain points of time, the
expression `forthwith’ must necessarily be understood to be
immediate or instantaneous, so as to avoid any ambiguity or
uncertainty. The right accrues or liability arises exactly
as prescribed by the statute. [502 H-503 A]
4.02. When `forthwith’ is used for determining the time
and mode of payment of the principal and interest, a liberal
or reasonable construction not to be adopted. The
legislature intended the expression `forthwith’ to refer to
a particular day on which the liability to repay the
principal amount arose and that is the day from which the
period of 8 days has to be computed, and on the expiry of
that period, interest begins to accrue. [503 B-C]
489
Keshav Nilkanth Joglekar v. The Commissioner of Police,
Greater Bombay, [1956] SCR 653 and Salim v. State of West
Bengal, [1975] 3 SCR 394, distinguished.
5.01. The right or obligation of the company to keep
the money in the bank is only for the period preceding the
decision of the stock exchange on the company’s request for
permission to list. Once the permission is expressly or
impliedly refused, the money has to be returned to the
applicants, notwithstanding the pendency of the company’s
appeal. The earlier part of the sub-section about
depositing the money in the bank is controlled by the latter
provision in the sub-section for return of the money as
required by sub-section (2). This is particularly so by
reason of the penalty specially provided in sub-section (3)
in the event of default of compliance with the requirement
of that sub-section. [505 H-506 B]
5.02. The money credited to the separate bank account
can be utilised for only two purposes: (1) for adjustment
against allotment of shares where listing is permitted; or
(2) for repayment where listing is not permitted or the
company is otherwise unable to allot shares. The company
has no right to deal with the money in any other manner or
keep it longer than permitted by the section. [506 G-H]
Palmer’s Company Law, 24th ed. para 24.31; 1955(1) WLR
1080, referred to.
6.01. Interest does not begin to run under sub-section
(2) until 8 days have elapsed from the date of expiry of the
period of 10 weeks commencing on the date of closure of the
subscription lists. The fact that the legislature has so
provided in cases where permission has been refused
expressly or by reason of the deeming provision is
sufficient indication of the legislative intent to give the
company reasonable time to repay the money. [507 B-C]
6.02. Companies generally make allotments as soon as
practicable after the necessary application has been made to
the recognised stock exchange for permission for listing.
Upon the issue of the prospectus after making such
application, amounts are received from the public in
consideration of which allotments are made in anticipation
of the requisite permission. Greater the reputation of the
company, larger are the amounts likely to be received. If
permission is not granted, the entire amounts received from
the public
490
have to be forthwith repaid. On the other hand, if
permission is obtained, but the amounts received from the
public are in excess of the aggregate of the application
money relating to the allotted shares or debentures. Such
excess amounts are forthwith repayable. Whether or not
permission will be obtained cannot be ascertained until the
period prescribed for the purpose has expired, namely, 10
weeks from the date of closing of the subscription lists.
Until the expiry of those 10 weeks, neither the subscribing
public nor the company will be in a position to decide
whether or not the allotments made are valid. This is a
period of uncertainty and it is for that reason that the
legislature has, been is a case of refusal to grant
permission, provided that the liability to repay the
application money arises upon the expiry of 10 weeks. [507
D-G]
6.03. The possibility of an appeal being allowed is,
not a ground to delay repayment. It should make no
difference whether it is as a result of the permission
having been refused, or permission having been granted and
excess amounts are received by reason of over subscription,
that repayment of money has to be made by the company. It
either event, the liability to repay the amounts arises
forth-with on the expiry of 10 weeks from the date of
closure of the subscription lists, and the interest will
begin to accrue thereon on the expiry of 8 days therefrom.
This construction is, just and reasonable from the point of
view of both the investor and the company, and has the
advantage of certainty, uniformity and easy application.
[507 G-508 A]
7. The section 73 is not free from ambiguities and
doubts. Having been amended in several respects, it has not
finally emerged with the clarity that admits of easy
construction. But the contemporaneous construction placed
upon an ambiguous section by the administrators entrusted
with the task of executing the statute is extremely
significant. This construction is, perfectly consistent
with the language and the object of the statute. It is a
practical and reasonable construction, particularly because
it affords the company reasonably sufficient time to
complete the formalities for despatch of the refund orders.
And the investor who has responded to the invitation
contained in the prospectus is not unduly kept waiting for
the return of the excess amounts due to him. [508 E-G]
Desh Bandu Gupta & Co. & ors. v. Delhi Stock Exchange
Association Ltd., [1979] 4 SCC 565 and K.P. Varghese v.
Income Tax Officer, Ernakulam & Anr., [1981] 4 SCC 173,
referred to.
491
Crawford’s Interpretation of Laws, 1989 Ed. -referred
to.
As per Mr. Justics S. Mohan (Concurring)
1.01. Sub-section (2A) of Section 73 of the Companies
Act comes into operation only where permission has been
granted by the recognised stock exchange or exchanges. The
words, “where permission has been granted” are of great
significance. Therefore, the contention that on the date of
allotment the liability to pay interest arises may not be
correct. Nor again, it would be correct to contend that the
mechanics of refund liability to pay arises on the date of
allotment since there is a failure of consideration in
respect of shares not allotted. [519 B-C]
1.02. The liability of the company to repay the excess
amount under Section 73 (2A) will arise only on the expiry
of 10 weeks from the date of the closure of subscription
lists. The interest begins to accrue thereupon at the end
of 8 days. [526 A]
2.01. The word “due” in the section 73 has been
substituted for the word “payable” in order to make it clear
that a mortgagor cannot redeem within the term of the
mortgage. The right of redemption arises when the principal
money secured by the mortgage has become due and may be
exercised at any time thereafter, subject of course to the
law of limitation. [520 C-D]
2.02. “Due”, means payable immediately or a debt
contracted but payable at a future time. “A debt is said to
be `due’the instant that it has existence as a debt; it may
be payable at a future time” it cannot be contended on the
strength of Section 530 `due’ and `payable’ is one and the
same even under S. 732 (a). [522 E-F]
Black’s Legal Dictionary, (5th Edition 488),
Venkataramiah’s Law Lexicon and Legal Maxims Vol. I, 713-
714; Wharton’s Law Lexicon, 14th Edition; Buckley on the
Companies Acts, 14th Edition, Volume I, referred to.
Bhaktawar Begum v. Husaini Khanam, (1914)36 All. 195;
41 I.A. 84; 23 I.C. 355; Bir Mohammad V. Nagoor, [1914] 27
Mad. L.J. 483; 25 I.C. 576 (which over-ruled Rose Ammal v.
Rajarathnam, (1900) 23 Mad. 23); Baroda Board & Paper Mills
Ltd. v. Income Tax Officer, Circle I, Ward E, Ahmedabad and
others, 1976 (46) company cases
492
25; Union of India v. Air Foam Industries (P) Ltd., AIR
1974 S.C. 1265 & 1271 (Para 7) referred to.
3. “Forthwith’ is not susceptible of a fixed time
definition, and the surrounding facts and circumstances
must be taken into consideration in determining the
question, and forthwith may be minutes, hours, days or even
weeks. It cannot be said that “forthwith” means E.O.
instanti. [526 E-F]
Dickerman v. Trust Co., 176 U.S. 193, 20 Sup., Ct. 311,
44 L.Ed. 423, 4 Tyrwh. 837; Edwards v. Ins. Co., 75 Pa 378;
Seammon v. Ins. Co., 101, III 621; 11 H.L. Cas. 337; Bennect
v. Ins 67 N.Y. 274; Pennsylvanis R.Co. v. Reichert, 58 Md.
261; Meriden Silver Plate Co. v. Flory 44 Ohio St. 437, 7
N.E. 753. 7 Dowl. 789″ 193, Soutern Reporter, 339 and 16
Soutern Reporter 33 @ 35 Col. I., Laws 1035, Ex Secs C. 10,
referred to.
Bouvier’s Law Dictionary-Referred to.
4. It cannot but be held that the payment of interest
is only compensatory and not penal. Merely because clause
10 uses the word “penal” it cannot be amount to penalty.
[526 F]
Mahalaxmi Sugar Mills Co. Ltd v. Commissioner of Income
Tax, Delhi, New Delhi, [1980] 3 SCR 421, referred to.
5. In view of the clear terms of the statute the
administrative inconvenience cannot be pleaded. [528 B-C]
Sanjeev Coke Manufacturing Co v. Bharat Cooking Coal
Ltd. & Another, [1983] 1 SCR 1000 1029, referred to.

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3498 of
1991.
From the Judgment dated 17/18.7.1991 of the Bombay High
Court in writ petition No. 2038 of 1991.
G. Ramaswamy, Attorney General, V.R. Reddy, Addl.
Solicitor General, Anil B. Divan, K.S. Cooper and T.R.
Andyaranjina, R.F. Nariman, S.A. Divan, B.R. Agrawala, Vinod
B. Agarwala, P.N. Kapadia, Pramod B. Agarwala, S.
Krishnachandani, Dr. Sumat Bhardwaj, Ms. Sandhaya Mehta for
M/s Gagret & Co., Ms. Sushma Suri, A.M. Khanwilkar, M.P.
Bharucha, R. Karanjawala, Mrs. M. Karanjawala, Mrs. V.S.
Rekha, A.R. Amin, K.J. John, Dr. A.M. Singhvi and Ajit
Pudussery for the appearing parities.
493
The Judgment of the court was delivered by
THOMMEN, J. The question which aries in this appeal
from the judgment of the Bombay High Court in writ petition
No. 2038 of 1991 is, when does a company become liable to
pay interest under section 73 (2A) of the Companies Act,
1956 (the “Act”). The answer to it depends on the answer to
the more fundamental and far more difficult question, i.e.
when does a company become liable to repay the money
received from applicants for shares or debentures in excess
of the aggregate of the application money relating to the
allotted shares or debentures. If such excess application
money is not repaid within eight days from the days on which
the company and every director `who is an officer in
default’ is liable to pay insterest at the specified rates.
The period of eight days has to be reckoned in accordance
with section 74. But it is not clear when exactly does the
liability to repay the excess money arise. Does it arise on
the date of the allotment, as found by the High Court, or on
the expiry of 10 weeks from the date of closing of the
subscription lists, referred to in sub-section (1A) of
section 73, or, as contended by the company, on the expiry
of the period mentioned in the prospectus? Whichever is the
correct date, interest becomes payable by the company and
its directors `in default’, if the excess money is not
repaid within the period of grace of eight days from the
date on which the company becomes liable to pay it. When
does that liability arise is the crucial question.
We shall presently examine the relevant provisions of
the section, but before we do so, it may be of interest to
refer briefly to the circumstances in which the alleged
liability of the appellant company has arisen.
The appellant is a company registered under the
provisions of the Companies Act, 1956. The company obtained
the consent of the Government of India vide its Order dated
May 31, 1990 to issue 7,20,00,000 equity shares of Rs. 10
each at par and 33, 90,000 fourteen per cent secured
redeemable non-convertible debentures of Rs. 100 each at
par. This Order was, made by the Government in exercise of
its power under the Capital Issues (Control) Act, 1947. One
of the conditions attached to the order reads:
“The company shall scrupulously adhere to the time
limit of 10 weeks from the date of closure of the
subscription list for allotment of all securities
and despatch of allotment letters/certificates and
refund orders.”
A prospectus was issued by the company on 12th July,
1990 for the issue of the aforesaid shares and debentures.
The prospectus stated, amongst
494
other things, that the company had sought the permission of
the stock exchanges at Indore, Ahmedabad, Bombay, Calcutta
and Delhi for dealing in equity shares and debentures in
terms of the prospectus; that interest at the rate of 15 %
per annum on the excess application money will be paid to
the applicants as per the guidelines issued by the Ministry
of Finance on July 21, 1983 and September 27, 1985; that the
public issue will open on August 20, 1990 and close on
August 23, 1990; and that it would not be extended beyond
August 31, 1990. When the issue thus opened on August 20,
1990, it received overwhelming response as a result of which
it was about 40 times over-subscribed. The company received
26,32,894 applications for equity shares together with an
aggregate sum of Rs. 225,25,51,247 in respect of a public
issue of Rs. 25 crores. In view of this public response,
the share issue was close on 23rd August, 1990. On October
15, 1990 the board of directors of the company approved the
allotment of shares. Shortly thereafter, it secured the
requisite permissions of the stock exchanges at Indore,
Ahmedabad, Bombay, Calcutta and Delhi to deal in the shares
offered in the prospectus. These permissions were obtained
prior to November 1, 1990. The company had to despatch
25,50,604 refund orders of an aggregate value of well over
Rs. 200 crores. These orders which were printed in Bombay
were meant to be despatched from Delhi. The company
despatched 8,55,226 refund orders from the Sarojini Nagar
Post Office , New Delhi at the rate of approx. 1,00,000
refund orders per day. On 26th October, 1990 a consignment
of 6,69,999 refund orders had been despatched from Bombay to
Delhi in a brake van of the Paschim Express. A fire broke
out on the way in the brake van as a result of which many
refund orders were destroyed. Almost 50 % of the
consignment was missing after the accident. In consultation
with the Madhya Pradesh Stock Exchange and the Company’s
Bank,instructions were issued by the Company to stop payment
of all refund orders with a view to avoiding any possible
fraud or misuse. As a result of the countermanding of all
the multi-colored refund orders and the printing of new
refund orders with distinctive colours etc., delay occurred
in the despatch of newly printed orders. At the request of
the company, the Madhya Pradesh Stock Exchange granted it
extension of time till November 30,1990 for issuing the
refund orders. Time for this purpose was further extended
by that stock exchange till 19th December, 1990. The
Bombay Stock Exchange, however, refused to grant extension
of time. It further informed the company that it was bound
to pay interest by reason of the delay in the despatch of
refund orders. The Securities and Exchange Board of India,
the second respondent, called upon the company by its letter
dated March 13,1991 to pay interest to the investors at
varying rates for the period from 1st November (which is
when the period of 10 weeks from the date of the closure of
the subscription lists expired) till the date of posting of
495
the refund orders. The refund orders were not despatched
until 12th November, 1990. The Government of India and the
Securities and Exchange Board of India insisted that the
company should pay interest to the investors for the period
of the delay in making the refund in accordance with the
provisions of section 73. Apprehending that the Government
might direct the stock exchanges to delist the shares of the
company by reason of its failure to pay interest, and also
initiate actions against it, the company filed a petition in
the High Court under Article 226 of the Constitution, but it
was dismissed by the impugned judgment.
The Bombay Stock Exchange seems to have understood that
the liability of the company arose on the expiry of 10 weeks
after the date of closure of the subscription lists.
Paragraph 23.2 of its publication of March 1991 quotes the
condition mentioned in the Order of the Government of India
dated 31.5.1990(which we have extracted above)to the effect
that the liability of the company for despatch for refund
orders arose only at the end of 10 weeks from the date of
closure of the subscription lists.
In the High Court, the Union of India and the
Securities and Exchange Board of India appeared to have
taken a divergent stand on the question. While the
Government of India submitted (as disclosed in its
affidavit, and as referred to by the High Court in the
impugned judgment) that the liability to pay the excess
amounts arose on the expiry of 10 weeks from the date of
closure of the subscription lists, the Securities and
Exchange Board of India contended that the liability arose
on the date of allotment. In the present appeal, however,
the Union of India support the stand of the Securities and
Exchange Board of India. On the other hand, the company
contended that, on the facts of this case, the liability
arose only at the end of the period as extended by the Stock
Exchange at Indore in terms of the prospects. The High
Court held:-
“…In our judgment, there is no difficulty in
fixing the date from which the liability of the
company to make repayment arises. In a case where
the allotment is completed before expiry of the 10
weeks, then from the date of allotment and in case
where the allotment is not completed till the
expiry of ten weeks from the date of closure of the
subscription list, then from the date of expiry of
ten weeks…”
The reason stated by the High Court for coming to this
conclusion is that the company knew that the excess amount
was on the date of allotment and there was no reason why the
company should delay payment till the end of 10 weeks in
case the allotment was made earlier. The High Court says-
496
“…In cases where the allotment is completed
before expiry of ten weeks, then the Company very
well knows the excess amount, which is to be repaid
and consequently the liability accrues forthwith to
repay the said amount. In case the Company fails
to repay the amount within the grace period of
eight days, then the Company would be liable to pay
interest to the investor inspite of the fact that
period of ten weeks from the date of closure of the
subscription list is not over…”
The High Court thus held that the company was liable to
pay interest at the prescribed rates for the period of delay
and the liability for the same arose on the expiry of 8 days
from the date of allotment of the shares, and not from the
date of expiry of 10 weeks, where allotment was made earlier
to that date. The High Court did not accept the contention
of the company that the time having been extended by the
Madhya Pradesh Stock Exchange till 19th December, 1990 in
accordance with the relevant provisions of the prospectus,
the company had no liability to pay interest.
The question for consideration, therefore, is whether
the High Court was right in discarding, for computation of
interest, the time limit of 10 weeks running from the date
of closure of the subscription lists, notwithstanding that
the allotment had been made, as in the present case, prior
to the date of expiry of 10 weeks.
`Listing means the admission of the securities of a
company to trading privileges on a Stock Exchange. The
principal objectives of listing are to provide ready
marketability and impart liquidity and free negotiability to
stocks and shares; ensure proper supervision and control of
dealings therein; and protect the interests of shareholders
and of the general investing public. (See para 1.1. of the
`Stock Exchange Listing’, publication of Bombay Stock
Exchange of March, 1991).
A public limited company has no obligation to have its
shares listed on a recognised stock exchange. But if the
company intends to offer its shares or debentures to the
public for subscription by the issue of a prospectus, it
must, before issuing such prospectus, apply to one or more
recognised stock exchanges for permission to have the shares
or debentures intended to be so offered to the public to be
dealt with in each such stock exchange in terms of section
73. We shall now read the provisions of section 73 insofar
as they are material:-
Sub-section (1) of section 73 read:
497
“S. 73 (1). Every company intending to offer shares
or debentures to the public for subscription by the
issue of a prospectus shall, before such issue,
make an application to one or more recognised
stock exchanges for permission for the shares or
debentures intending to be so offered to be dealt
with in the stock exchange or each such stock
exchange.”
This sub-section was inserted by the Companies
(Amendment) Act, 1988 with effect from 15.6.1988. It has
application only to a company intending to offer shares or
debentures to the public for subscription by the issue of a
prospectus. Until this sub-section was inserted, listing of
public issues was not compulsory.
This original sub-section (1) was substituted by the
Companies (Amendment) Act, 1974 with effect from 1.2.1975,
and substituted again and renumbered as the present sub-
section (1A) with effect from 15.6.1988 by the Companies
(Amendment) Act, 1988. Sub-section (1A) reads:
“73(1A). Where a prospectus, whether issued
generally or not, states that an application under
sub-section (1) has been made for permission for
the shares or debentures offered thereby to be
dealt in one or more recognised stock exchanges,
such prospectus shall state the name of the stock
exchange or, as the case may be, each such stock
exchange, and any allotment made on an application
in pursuance of such prospectus shall, whenever
made, be void if the permission has not been
granted by the stock exchange or each such stock
exchange, as the case may be, before the expiry of
ten weeks from the date of the closing of the
subscription lists:
Provided that where an appeal against the decision
of any recognised stock exchange refusing
permission for the shares or debentures to be dealt
in on that stock exchange has been preferred under
section 22 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956), such allotment shall not be
void until the dismissal of the appeal.”
This provision makes it necessary for the company to
state in its prospectus the name of each of the recognised
stock exchanges whose permission for listing has been sought
by the company. Any allotment of shares will become void if
permission is not granted by the stock exchange or each such
stock exchange, as the case may be, before the expiry of
10 weeks from the date of the closing of the subscription
lists. The validity of the allotment is thus made dependent
on securing the requisite
498
permission of each stock exchange whose permission has been
sought. The liability to repay the application money arises
only upon refusal of the stock exchange to grant the
permission sought by the company before the expiry of 10
weeks from the date of closing of the subscription lists.
This is clear from sub-section (1A) read with sub-section
(5). There is a deemed refusal if permission is not granted
by the stock exchange before the expiry of 10 weeks from the
date of closing of the subscription lists, and upon the
expiry of that date, any allotment of shares made by the
company becomes void.
However , from the decision of the stock exchange
refusing permission, an appeal will lie under section 22 of
the Securities Contracts (Regulation) Act, 1956. Pending
the decision in appeal, the allotment made would not be
void, and the decision of the concerned stock exchange is
made dependent on the result of the appeal. What is
significant is that it is the legislative intent to delay
the result postulated under sub-section (IA), i.e.,
rendering the allotment void, until the said period of 10
weeks has expired or until the dismissal of the appeal.
Sub-section (2), as amended in 1988, reads:
“S. 73(2). Where the permission has not been
applied under sub-section (I) or, such permission
having been applied for, has not been granted as
aforesaid, the company shall forthwith repay
without interest all moneys received from
applicants in pursuance of the prospectus, and, if
any such money is not repaid within eight days
after the company becomes liable to repay it, the
company and every director of the company who is an
officer in default shall, on and from the expiry of
the eighth day, be jointly and severally liable to
repay that money with interest at such rate, not
less than four per cent and not more than fifteen
per cent, as may be prescribed, having regard to
the length of the period of delay in making the
repayment of such money.”
This sub-section requires the company to repay
`forthwith’ all money received from applicants in response
to the company’s prospectus either where the company has not
applied for permission of the recognised stock exchange for
listing or where permission has been applied for but not
granted. If the company has issued a prospectus without
seeking permission for listing, it has clearly acted in
violation of the mandatory provisions of the Act, and the
company has no right to receive or retain any amount by way
of subscription in pursuance of its prospectus. On the
499
other hand, where permission has been sought, but has not
been obtained within 10 weeks from the date of closing of
the subscription lists, thereby rendering void any allotment
made, the company is bound to repay all such money
forthwith, but without interest. In the event of such money
not being repaid within 8 days after the liability to repay
arose, the company and every director of the company who is
`an officer in default’ are made jointly and severally
liable to pay the principal amount as well as interest
thereon from the date of expiry of the said 8 days. The
interest is payable at the prescribed rates varying from 4%
to 15%, dependent on the length of the period of delay in
making such repayment. This sub-section thus postulates two
circumstances in which interest becomes payable, namely,
where the permission has not been applied for before issuing
the prospectus and the company had thus acted in violation
of the law or where permission, though applied for, has not
been granted. In the former case, apart from the other
consequences which may flow from the company’s disobedience
of the law, the liability to pay interest arises as from the
date of receipt of the amounts, for the company ought not to
have received any such amount in response to the prospectus
issued by the company in disobedience of the requirements of
sub-section (I). In the latter case, the liability to pay
interest does not arise until the expiry of 8 days after the
company became liable to repay the amounts received by
reason of its failure to obtain the necessary permission as
referred to in sub-section (IA).
It may be mentioned in this connection that, prior to
the amendment of 1988, sub-section (2) did not make the
company liable to pay interest on the amounts repayable by
it in terms thereof, but only the directors were liable for
payment of such interest, apart from the principal amounts.
The proviso to the sub-section as it stood prior to 1988
exempted a director from such liability if the default was
not caused by his misconduct or negligence. As a result of
substitution of a proviso of the sub-section by the
Amendment Act of 1988, the company and every director of the
company `who is an officer in default’ are made jointly and
severally liable for payment of the principal amount as well
as interest.
We shall now read the crucial provision which is sub-
section (2A):-
“S.73 (2A). Where permission has been granted by
the recognised stock exchange or stock exchanges
for dealing in any shares or debentures in such
stock exchange or each such stock exchange and the
moneys received from applicants for shares or
debentures are in excess of the aggregate of the
application moneys relating to the shares or
debentures in respect of which
500
allotments have been made, the company shall repay
the moneys to the extent of such excess forthwith
without interest, and if such money is not repaid
within eight days, from the date the company
becomes liable to pay it, the company and every
director of the company who is an officer in
default shall, on and from the expiry of the eighth
day, be jointly and severally liable to repay that
money with interest at such rate, not less than
four per cent and not more than fifteen per cent,
as may be prescribed having regard to the length of
the period of delay in making the repayment of such
money”.
Sub-section (2A) was inserted by the Companies
(Amendment) Act, 1974 which came into force w.e.f. 1.2.1975.
Section 73, as it stood prior to 1975, contained no
specific provision compelling the company or its directors
to repay the amounts received in excess of the aggregate of
the application money relating to the shares or debentures
in respect of which allotments have been made. Sub-
section(2A) was inserted to cover cases where permission of
the stock exchange has been obtained, but the shares or
debentures have been over-subscribed and the company is
consequently in possession of excess amounts. The sub-
section, as inserted in 1975, made the company liable to
repay the excess amounts forthwith, but did not make the
company liable to pay interest on such excess amounts. But
a liability was cast on the directors. If the excess amount
was not repaid within 8 days from the day the company became
liable to repay it, the directors were made jointly and
severally liable to repay such amount with interest. The
proviso to sub-section (2A), which like the proviso to sub-
section (2), as they stood prior to 1988, provided that a
director was not liable to repay the money with interest if
he proved that the default in payment of the money was not
on account of any misconduct or negligence on his part.
Owing to the absence of a specific provision imposing
liability on the company to pay interest on the over-
subscribed amounts, and also owing to the absence of any
provision to exempt directors who were not directly in
charge of the administration of the company and the need to
make listing of public issues compulsory, further amendments
to the section became necessary.
Accordingly the Amendment Act of 1988 introduced
several amendments to section 73, one of them being the
substitution of a part of sub-section (2A) making the
company and every director of the company who is `an officer
in default’ jointly and severally liable to repay the excess
money with interest. A `director of a company who is an
officer in default’ appearing in sub-section (2A) must be
understood with reference to
501
the definition of `an officer who is in default’ contained
in section 2(31) read with section 5. This definition
includes the managing director or the wholetime director of
a company. So understood, the liability imposed under sub-
section (2A) on a director of the company falls only upon a
director who is `an officer in default’, as defined under
section 2(31) read with section 5(a) (b), and not upon any
other director. The nominees of the Government or financial
institutions on the board of directors of the company, but
not directly in charge of its administration as full time
directors, are exempted from personal liability. The rate
of interest payable under sub-section (2A) is, an seen
above, not less than 4 per cent and not more than 15 per
cent.
The sub-section requires the company to repay the over
subscribed amounts. These amounts are paid by persons who
have responded to the prospectus which was issued by the
company after making an application for permission in
accordance with sub-section (1). But when the subscription
lists are closed, the excess money is ascertained with
reference to the actual allotments made and so it becomes
repayable as the company has no right to retain it. The
question is, for the purpose of computing interest, did it
become repayable upon the date of allotment, as found by the
High Court and as contended by the respondents, or on some
other day.
The Additional Solicitor General, appearing for the
Union of India, Mr. K.S. Cooper, for the Securities &
Exchange Board of India, Mr. T.R. Andhyarujina, for the
Bombay Stock Exchange and Dr. A.M. Singhvi, for one of the
interveners, submit that the liability to repay the excess
amount arises on the date of allotment of the shares, for
the statute says that the liability arises forthwith and any
delay beyond the period of 8 days from the day on which the
liability arose attracts interest. The expression
`forthwith’ has to be understood as an immediate liability
ascertainable with reference to the date of allotment, but
subject to a period of grace of 8 days.
Mr. Anil B. Dewan, appearing for the company, on the
other hand, contends that the company is entitled to retain
the excess amount for the period mentioned in the prospectus
and consequently no liability to pay interest can arise
until the expiry of that period. Prospectus is an
instrument registered under section 60 of the Act and all
statements contained in it are matters permitted to be
inserted by the statue. The terms of the prospectus are
binding not only upon the company but also upon persons who
deal with the company in pursuance of the prospectus. One
of those terms concerns the repayment of excess money. It
reads:-
“…In case an application is rejected in full, the
whole of the
502
application money received will be refunded and
where an application is rejected in part, the
balance, if any, after adjusting money due in the
manner provided earlier in this Prospectus on
Equity Shares/Debentures allotted will be refunded
to the applicants within ten weeks of the date of
closing of the Subscription List or in the event of
unforeseen circumstances within such further time
as may be allowed by the Stock Exchange at Indore”
(emphasis supplied)
In the present case, counsel points out, time for
refund had been extended by the Madhya Pradesh Stock
Exchange till 19th December, 1990. Accordingly the
liability of the company to repay the excess amount did not
arise until then. In the circumstances, interest became
payable only after 8 days from the expiry of the period as
extended by the Madhya Pradesh Stock Exchange.
If Mr. Dewan’s argument were to be accepted, the
company would have incurred no liability to pay interest,
for time had been extended by the Madhya Pradesh Stock
Exchange. But this argument is clearly contrary to the
provisions contained in sub-section (4) of section 73 of the
Act which reads:_
“S. 73(4). Any condition purporting to require or
bind any applicant for shares or debentures to
waive compliance with any of the requirements of
this section shall be void”.
In the teeth of that sub-section, Mr. Dewan’s argument
on the point is totally without merit. Even if sub-section
(4) had not been inserted in section 73, Mr. Dewan’s
argument in this respect would have been equally
unsustainable, for no agreement can defeat or circumvent a
mandatory requirement of the statute. This is all the more
so in view of section 9 which specifically provides that the
provisions of the Act override the memorandum or articles of
association of the company or any agreement executed or
resolution passed by it. The statute requires the company
to pay interest in terms of sub-section (2A). That
provision says that the company should pay excess money
forthwith, failing which interest becomes payable at the end
of 8 days therefrom. Any inconsistent provision in the
prospectus is unenforceable and it can be of no avail to the
company.
It is true that the expression `forthwith’ does not
necessarily and always mean instantaneous. The expression
has to be understood in the context of the statute. Where,
however, the statute prescribes the payment
503
of money and the accrual of interest thereon at certain
points of time, the expression `forthwith’ must necessarily
be understood to be immediate or instantaneous, so as to
avoid any ambiguity or uncertainty. The right accrues or
liability arises exactly as prescribed by the statute.
Decisions such as Keshave Nilkanth Joglekar v. The
Commissioner of Police, Greater Bombay, [1975] SCR 653, and
Salim v. State of West Bengal, [1975] 3 SCR 394, deal with
the expression `forthwith’ in the context of preventive
detention demanding a liberal or reasonable construction.
But that is not the construction which has to be adopted
when `forthwith’ is used for determining the time and mode
of payment of the principal and interest. The legislature
intended the expression `forthwith’ to refer to a particular
day on which the liability to repay the principal amount
arose, and that is the day from which the period of 8 days
has to be computed, and on the expiry of that period,
interest begins to accrue.
It is further contended on behalf of the company that
in any view interest is payable as a penalty and, therefore,
a reasonable and rational construction has to be placed upon
the statute in regard to the commencement of the liability
of the company to repay the excess amount. Relevant
circumstances which caused the delay must be taken into
account in this regard. There is no substance in this
contention. As stated earlier, sub-section (2A) provides
for the accrual of interest and the rates thereof. Unlike
sub-section (2B) provides for punishment by imposition of
fine or imprisonment, sub-section (2A) speaks only of
interest which is in contradiction to punishment and is
not penal in character. It merely provides a mode of
calculation of the amounts payable. Any consideration with
reference to a penal provision is of no relevance to the
liability of the company or its directors to pay interest in
terms of sub-section (2A).
Sub-section (2B) on the other hand provides for
punishment. It reads:-
“S.73(2B). If default is made in complying with the
provisions of sub-section (2A), the company and
every officer of the company who is in default
shall be punishable with fine which may extend to
five thousand rupees, and where repayment is not
made within six months from the expiry of the
eighth day, also with imprisonment for a term which
may extend to one year”.
This sub-section concerns solely with default of
compliance with the requirement of sub-section (2A) namely,
repayment of excess money. Failure to repay the excess
money as required by sub-section (2A) visits the company and
every officer of the company who is in default (as
504
defined under section 5) with the stipulated punishment.
This is, of course, in addition to the payment of interest
prescribed under sub-section (2A).
Sub-section (5), as it stood prior to 1.2.1975, read:
“S. 73(5). For the purpose of this section
permission shall not be deemed to be refused if it
is intimated that the application for permission
though not at present granted, will be given
further consideration”.
This sub-section was substituted by the Companies
(Amendment) Act, 1974 with effect from 1.2.1975 reading as
follows:-
“S.73(5). For the purposes of this section, it
shall be deemed that permission has not been
granted if the application for permission, where
made, has not been disposed of within the time
specified in sub-section (1).”
Sub-section (1) referred to in sub-section (5), as
substituted on 1.2.1975, is in fact the present sub-section
(1A), for, as stated earlier, the original sub-section (1)
was amended and renumbered as sub-section (1A) when the
present sub-section (1) was inserted by the Companies
(Amendment) Act, 1988 w.e.f. 15.6.1988. Consequently, the
words `the time specified in sub-section (1)’ appearing in
sub-section (5), as inserted w.e.f. 1.2.1975, denote the
period of 10 weeks mentioned in the present sub-section
(1A). This means that the permission for listing is deemed
not to have been granted, i.e., impliedly refused, if the
application for permission filed by the company has not been
disposed of before the expiry of 10 weeks from the date of
the closing of the subscription lists, as mentioned under
sub-section (1A).
Sub-section (1A) postulates that any allotment made
becomes void at the end of 10 weeks from the date of the
closing of the subscription lists if by that time the
requisite permission of the stock exchange has not been
obtained. But this consequence is postponed till the
dismissal of any appeal preferred under section 22 of the
Securities Contracts (Regulation) Act, 1956 (see the proviso
to sub-section (1A) of section 73 of the Act).
Nevertheless, the permission, if not obtained within 10
weeks, is deemed not to have been granted.
If the permission for listing sought under sub-section
(1) is not granted, the interest payable under sub-section
(2) is attracted. Sub-section (2) says that the liability
to repay the money received from applicants arises forthwith
either where the permission has not been sought or, having
been
505
sought, it has not been granted. The fact that an appeal is
pending does not postpone the result contemplated in sub-
section (2) in regard to the liability to repay the amounts
and the interest accruing thereon if the amounts are not
repaid within 8 days after the liability arose. The accrual
of interest under sub-section (2) is not dependent or
consequent on the nullity postulated in sub-section (1A).
In this connection, reference may be made to sub-
section (3) which reads:-
“S.73(3). All moneys received as aforesaid shall
be kept in a separate bank account maintained with
a Scheduled bank until the permission has been
granted, or where an appeal has been preferred
against the refusal to grant such permission, until
the disposal of the appeal, and the money standing
in such separate account shall, where the
permission has not been applied for as aforesaid or
has not been granted, be repaid within the time and
in the manner specified in sub-section (2), and if
default is made in complying with this sub-section,
the company, and every officer of the company who
is in default, shall be punishable with fine which
may extend to five thousand rupees.”
(emphasis supplied)
This sub-section refers to the obligation of the
company to keep all amounts received from the subscribers in
a separate bank account maintained with a Scheduled bank.
Such money must so remain in the bank until the permission
has been granted by the stock exchange or until the disposal
of an appeal preferred against refusal to grant permission.
Where the permission has not been sought, the company has,
as seen above, acted in disobedience of the law, and the
amounts received from the investors must be credited to the
separate bank account and immediately returned to them
together with the interest which accrued for the period.
But where permission has been sought, but not granted, the
amounts so kept in the bank have to be repaid within the
time specified in sub-section (2). Default of compliance
with this requirement will make the company and every
officer in default (as defined under section 5) liable to be
punished with fine. This will, of course, be in addition to
the liability for payment of interest in terms of sub-
section (2).
The right or obligation of the company to keep the
money in the bank is only for the period preceding the
decision of the stock exchange on the company’s request for
permission to list. Once the permission is
506
expressly or impliedly refused, the money has to be returned
to the applicants, notwithstanding the pendency of the
company’s appeal. The earlier part of the sub-section about
depositing the money in the bank is controlled by the latter
provision in the sub-section for returns of the money as
required by sub-section (2). This is particularly so by
reason of the penalty specially provided in sub-section (3)
in the event of default of compliance with the requirement
of that sub-section.
Sub-section (3) may at the first blush appear to be
contradictory, but it is really not so, considering the
legislative intent to protect the legitimate claim of the
applicants for interest on the money paid by them. The
interest provided under sub-section (2) is payable to the
applicants in terms of that sub-section, unless the money is
returned to them within the specified time, not withstanding
the pendency of an appeal mentioned in the proviso to sub-
section (1A). Sub-section (3) has to be so understood to
be in harmony with the other provisions of section 73. This
is all the more explicit from sub-section (3A).
Sub-section (3A) says that the company shall not
utilise the amounts held in the separate bank account for
any purpose other than what is permitted by sub-section (3A).
Sub-section (3A) provides:-
“S.73(3A). Moneys standing to the credit of the
separate bank account referred to in sub-section
(3) shall not be utilised for any purpose other
than the following purposes, namely:-
(a) adjustment against allotment of shares, where the
shares have been permitted to be dealt in on the stock
exchange or each stock exchange specified in the prospectus;
or
(b) repayment of moneys received from applicants in
pursuance of the prospectus, where shares have not been
permitted to the dealt in on the stock exchange or each
stock exchange specified in the prospectus, as the case
may be, or, where the company is for any other reason unable
to make the allotment of share”.
The money credited to the separate bank account can be
utilised for only two purposes: (1) for adjustment against
allotment of shares where listing is permitted; or (2) for
repayment where listing is not permitted or the company is
otherwise unable to allot shares. The company has no right
to deal with the money in any other manner or keep it longer
than permitted by the section.
507
The money so kept in the separate bank account is held
by the company for and on behalf of the subscribers in a
fiduciary capacity. Such amount do not form part of the
general assets of the company. The relationship between
the applicants and the company in respect of the application
money so held in accordance with sub-section (3) is that of
`bailers and bailee and not of creditors and debtor’. See
Palmer’s Company Law, 24th ed. para 24.31; 1955 (1) WLR,
1080,1085.
Interest does not begin to run under sub-section (2)
until 8 days have elapsed from the date of expiry of the
period of 10 weeks commencing on the date of closure of the
subscription lists. The fact that the legislature has so
provided in cases where permission has been refused
expressly or by reason of the deeming provision is
sufficient indication of the legislative intent to give the
company reasonable time to repay the money.
Companies generally make allotments as soon as
practicable after the necessary application has been made to
the recognised stock exchange for permission for listing.
Upon the issue of the prospectus after making such
application, amounts are received from the public in
consideration of which allotments are made in anticipation
of the requisite permission. Greater the reputation of the
company, larger are the amounts likely to be received. If
permission is not granted, the entire amounts received from
the public have to be forthwith repaid. On the other hand,
if permission is obtained, but the amounts received from the
public are in excess of the aggregate of the application
money relating to the allotted shares or debentures, such
excess amounts are forthwith repayable. Whether or not
permission will be obtained cannot be ascertained until the
period prescribed for the purpose has expired namely, 10
weeks from the date of closing of the subscription lists.
Until the expiry of those 10 weeks, neither the subscribing
public nor the company will be in a position to decide
whether or not the allotments made are valid. This is a
period of uncertainty and it is for that reason that the
legislature has, in a case of refusal to grant permission,
provided that the liability to repay the application money
arises upon the expiry of 10 weeks. The possibility of an
appeal being allowed is, as stated above, not a ground to
delay repayment. It should make no difference whether it is
as a result of the permission having been refused, or
permission having been granted and excess amounts are
received by reason of over-subscription, that repayment of
money has to be made by the company. In either event, the
liability to repay the amounts arises forthwith on the
expiry of 10 weeks from the date of closure of the
subscription lists, and the interest will begin to accrue
thereon on the expiry of 8 days therefrom. This
construction is, in our view, just and reasonable from the
point of view of both the investor and
508
the company, and has the advantage of certainty, uniformity
and easy application.
The condition attached to the Order of the Government
of India dated 31st May, 1990, which we have extracted
above, indicates that the time limit of 10 weeks from the
date of closure of the subscription lists applied to refund
orders as well as to allotment of all securities and
despatch of allotment letters/certificates. The Government
of India thus understood that the liability of the company
to repay the amounts in terms of section 73 arose only at
the end of 10 weeks from the date of closure of the
subscription lists. This condition presumably applies to
repayment under sub-section (2) as well as under sub-section
(2A) of section 73. This is fully borne out by the
averments contained in the affidavit filed in the High Court
on behalf of the Union of India as well as by the oral
submissions on its behalf before the High Court on the
point. Similar appears to be the stand of the Bombay Stock
Exchange, as seen from its publication of March 1991 (para
23.2). The letter dated March 13, 1991 sent by the
Securities and Exchange Board of India, the 2nd respondent,
to the appellant company stating that interest was payable
from 1st November, 1990, which is the date of expiry of the
period of 10 weeks from the date of closure of the
subscription lists, roughly indicates how the 2nd respondent
construed the provision shortly before the proceedings
commenced in the High Court.
The section is not free from ambiguities and doubts.
Having been amended in several respect, it has not finally
emerged with the clarity that admits of easy construction.
But the contemporaneous construction placed upon an
ambiguous section by the administrators entrusted with the
task of executing the statute is extremely significant.
This construction is, in our view, perfectly consistent with
the language and the object of the statute. It is a
practical and reasonable construction, particularly because
it affords the company reasonably sufficient time to
complete the formalities for despatch of the refund orders.
And the investor who has responded to the invitation
contained in the prospectus is not unduly kept waiting for
the return of the excess amounts due to him. See Desh
Bandhu Gupta & Co. & Ors. v. Delhi Stock Exchange
Association Ltd., [1979] 4 SCC 565 and K.P. Varghese v.
Income Tax Officer, Ernakulam & Anr., [1981] 4 SCC 173. See
also Crawford’s Interpretation of Laws, 1989 Ed.
Neither the date of allotment, as found by the High
Court, nor the date specified in the prospectus, as
contended by the company, is relevant to the commencement of
liability for payment of interest on the excess money.
509
The liability of a company to repay the excess money
under section 73(2A) of the Act arises on the expiry of 10
weeks from the date of the closing of the subscription
lists, and the interest begins to accrue thereon at the end
of 8 days therefrom.
Accordingly the liability to repay the excess money in
the present case arose on 1.11.1990 which was admittedly the
date of expiry of 10 weeks from the date of the closing of
the subscription lists, and consequently the liability to
pay interest at the rate specified in sub-section (2A) arose
on the expiry of 8 days from 1.11.1990.
MOHAN, J. I had the advantage of perusing the draft
judgment of my learned brother. I concur with him.
However, some important points require to be amplified. The
points that arises for determination are:
(i) the scope of liability under Section 73 (2A) of the
Companies Act.
(ii) Meaning of the word “forthwith”
(iii) Whether the payment of interest is penal in
nature?
(iv) Whether administrative inconvenience could be
pleaded to avoid the statutory liability?
Section 73 occurs under Para III of the Companies Act 1956
(Central Act of 1/1956 hereinafter referred to as the Act).
This section deals with the allotment of shares
and debenturs. It has undergone important amendments in
1975 and 1988. Prior to amendment in 1975, Section 73 read
as under :_
“Allotment of shares and debentures to be dealt in
on stock exchanges. (1) Where a prospectus,
whether issued generally or not states that
application has been or will be made for permission
for the shares or debentures offered thereby to be
dealt in on a recognised stock exchange, any
allotment made on an application in pursuance of
the prospectus shall, whenever made, be void, if
the permission has not been applied for before the
tenth day after the first issue of the prospectus
or, if the permission has not been granted before
the expiry of (four weeks) be notified to the
applicant for permission by or on behalf of the
stock exchange.
(2) Where the permission has not been applied for
as aforesaid, or has not been granted as aforesaid,
the company shall forthwith repay without interest
all moneys received from ap-
510
plicants in pursuance of the prospectus, and, if
any such money is not repaid within eight days
after the company becomes liable to repay it, the
directors of the company shall be jointly and
severally liable to repay that money with interest
at the rate of five per cent per annum from the
expiry of the eighth day:
Provided that a director shall not be liable if he
proves that the default in the repayment of the
money was not due to any misconduct or negligence
on his part.
(3) All moneys received as aforesaid shall be kept
in a separate bank account maintained with a
Scheduled Bank so long as the company may become
liable to repay it under sub-section (2) ; and if
default is made in complying with this sub-section,
the company, and every officer of the company who
is in default, shall be punishable with fine which
may extend to five thousand rupees.
(4) Any condition purporting to require or bind
any applicant for shares or debentures to waive
compliance with any of the requirements of this
section shall be void.
(5) For the purpose of this section (it shall not
be deemed that permission has not been granted) if
it is intimated that the application for permission
though not at present granted, will be given
further consideration.
(6) This section shall have effect :
(a) in relation to any shares or debentures agreed
to be taken by a person underwriting an offer
thereof by a prospectus, as if he had applied,
therefor in pursuance of the prospectus; and
(b) in relation to a prospectus offering shares
for sale, with the following modifications namely –
(i) reference to sale shall be substituted
reference to allotment;
(ii) the persons by whom the offer is made,
and not the company, shall be liable under
sub-section (2) to repay money received from
applicants, and reference to the company’s
liability under that sub-section shall be
construed accordingly; and
(iii) for the reference in sub-section (3) to
the company and every officer of the company
who is in default, there
511
shall be substituted a reference to any person
by or through whom the offer is made and who
is knowingly guilty of, or wilfully authorises
or permits, the default.
(7) No prospectus shall state that application has
been made for permission that the shares or
debentures offered thereby to be dealt in on any
stock exchange, unless it is a recognised stock
exchange”.
After amendment in 1975, Section 73 read as follows:-
“Allotment of shares and debentures to be dealt in
on stock exchanges. (1) Where a prospectus whether
issued generally or not states that an application
has been, or will be, made for permission for the
shares or debentures offered thereby to be dealt in
on one or more recognised stock exchanges, such
prospectus shall state the name or the stock
exchange or, as the case may be, each such stock
exchange, and any allotment made on an application
in pursuance of such prospectus shall, whenever
made, be void if the permission has not been
applied for before the 10th day after the first
issue of the prospectus, or, whether such
permission has been applied for before that day, if
the permission has not been granted by the stock
exchange or each such stock exchange, as the case
may be, before the expiry of 10 weeks from the date
of the closing of the subscription lists :
Provided that where an appeal against the decision
of any recognised stock exchange refusing
permission for the share or debentures to be dealt
in on that stock exchange has been preferred under
section 22 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956), such allotment shall not be
void until the dismissal of the appeal.
(2) Where the permission has not been applied for
as aforesaid, substituted for “or has not been
granted as aforesaid” by the Companies (Amendment)
Act, 1974, w.e.f. 1.2.1975 substituted for “five
per cent” ibid.
(2A) Where permission has been granted by the
recognised stock exchange or stock exchanges for
dealing in any shares or debentures in such stock
exchange or each such stock exchange and the moneys
received from applicants for shares or debentures
are in excess of the aggregate of the applicant
moneys relating to the shares or debentures
512
in respect of which allotment has been made,
the company shall repay the moneys to the
extent of such excess forthwith without
interest, and if such money is not repaid
within eight days, from the day the company
becomes liable to pay it, the Directors of the
Company shall be jointly and severally liable
to repay the money with interest at the rate
of twelve per cent per annum from the expiry
of the said eighth day :
Provided that a Director shall not be liable
if he proves the the default in the payment of the
money was not due to any misconduct or negligence on
his part.
(2B) If default is made in complying with the
provisions of sub-section (2A), the company
and every officer of the company who is in
default he shall be punishable with fine which
may extend to five thousand rupees, and where
repayment is not made within six months from
th expiry of the eighth day, also with
imprisonment for a term which may extend to
one year.
(3) All moneys received as aforesaid shall be kept
in a separate bank account maintained with a
Scheduled Bank (until the permission has been
granted, or where an appeal has been preferred
against the refusal to grant such permission, until
the disposal of the appeal, and the money standing
in such separate account shall, where the
permission has not been applied for as aforesaid or
has not been granted, be repaid within the time and
in the manner specified in sub-section (2); and
default is made in complying with this sub-section,
the company, and every officer of the company who
is in default, shall be punishable with fine which
may extend to five thousand rupees.
(3A) Moneys standing to the credit of the separate
bank account referred to in sub-section (3)
shall not be utilised for any purpose other
than the following purposes, namely:-
(a) Adjustment against allotment of shares, where
the shares have been permitted to be dealt in
on the stock exchange or each stock exchange
specified in the prospectus; or
(b) Repayment of moneys received from applicants
in pursuance of the prospectus, where shares
have not been permitted to be dealt in on the
stock exchange or each stock
513
exchange specified in the prospectus, as the
case may be, or, where the company is for any
other reason unable to make the allotment of
share.
(4) Any condition purporting to require or bind
applicant for shares or debentures, to waive
compliance with any of the requirement of the
section shall be void.
(5) For the purpose of this section it shall be
deemed that permission has not been granted if the
application for permission, where made, has not
been imposed of within the time specified in sub-
section (1).
(6) This section shall have effect –
(a) In relation to any shares or debentures
agreed to be taken by a person underwriting an
offer thereof by a prospectus, as if he had applied
therefor in pursuance of the prospectus; and
(b) In relation to a prospectus offering shares
for sale, with the following modifications namely-
(i) References to sale shall be substituted
for references to allotment;
(ii) The persons by whom the offer is made,
and not the company, shall be liable under
sub-section (2) to repay money received from
applicants, and references to the company’s
liability under that sub-section shall be
construed accordingly; and
(iii) For the reference in sub-section (3) to
the company and every officer of the company
who is in default, there shall be substituted
a reference to any person by or through whom
the offer is made and who is knowingly guilty
of or wilfully authorises or permits, the
default.
(7) No prospectus shall state that application has
been made for permission for the shares or
debentures offered thereby to be dealt in on any
stock exchange, unless it is a recognised stock
exchange.”
After amendment in 1988, Section 73 reads as under:-
“Allotment of shares and debenture to be dealt in
on stock exchange. (1). Every company, intending
to offer shares or debentures to the public for
subscription by the issue of a
514
prospectus shall before such issue, make an
application to one or more recognised stock
exchanges for permission for the shares or
debentures intending to the so offered to be dealt
with in the stock exchange or each such stock
exchange.
(1A) Where a prospectus, whether is issued
generally or not, states that an application under
sub-section (1) has been made for permission for
the shares or debentures offered thereby to be
dealt in one or more recognised stock exchange,
such prospectus shall state the name of the stock
exchange and any allotment made on an application
in pursuance of such prospectus shall, whenever
made, be void if the permission has not been
granted by the stock exchange or each such stock
exchange, as the case may be, before the expiry of
ten weeks from the date of the closing of the
subscription lists :
Provided that where an appeal against the decision
of any recognised stock exchange refusing
permission for the shares or debentures to be dealt
in on that stock exchange has been preferred under
section 22 of the Securities Contracts
(Regulations) Act, 1956 (42 of 1956), such
allotment shall not be void until the dismissal of
the appeal.
(2) Where the permission has not been applied for
under sub-section (1) or, such permission having
been applied for, has not been granted as
aforesaid, the company shall forthwith repay
without interest all moneys received from
applicants in pursuance of the prospectus, and, if
any such money is not repaid within eight days after
the company become liable to repay it, the company
and every director of the company who is an officer
in default shall, on and from the expiry of the
eighth day, be jointly and severally liable to
repay that money with interest at such rate, not
less than four per cent and not more than fifteen
pr cent, as may be prescribed, having regard to the
length of the period of delay in making the
repayment of such money.
(2A) Where permission has been granted by the
recognised stock exchange or stock exchanges for
dealing in any shares or debentures in such stock
exchange or each such stock exchange and the moneys
received from applicants for shares or debentures
are in excess of the aggregate of the application
moneys relating to the shares or debentures in
respect of which allotments have been made, the
company shall repay the moneys to the extent of
such excess forthwith without interest, and if
515
such money is not repaid within eight days, from
the day the company becomes liable to pay it, the
company and every director of the company who is an
officer in default shall, on and from the expiry
of the eighth day, be jointly and severally liable
to repay that money with interest at such rate, not
less than four per cent and not more than fifteen
per cent, as may be prescribed, having regard to
the length of the period of delay in making the
repayment of such money.
(2B) If default is made in complying with the
provisions of sub-section 2(A), the company and
every officer of the company who is in default
shall be punishable with fine which may extend to
five thousand rupees, and where repayments is not
made within six months from the expiry of the
eighth day, also with imprisonment for a term which
may extend to one year.
(3) All moneys received as aforesaid shall be kept
in a separate bank account maintained with a
Scheduled Bank until the permission has been
granted, or where an appeal has been preferred
against the refusal to grant such permission, until
the disposal of the appeal, and the money standing
in such separate account shall, where the
permission has not been applied for as aforesaid or
has not been granted, be repaid within the time and
in the manner specified in sub-section (2) and if
default is made in complying with this sub-section,
the company and every officer of the company who is
in default, shall be punishable with fine which may
extend to five thousand rupees.
(3A) Moneys standing to the credit of the separate
bank account referred to in sub-section (3) shall
not be utilised for any purpose other than the
following purposes, namely :-
(a) adjustment against allotment of shares, where
the shares have been permitted to be dealt in on
the stock exchange or each stock exchange specified
in the prospectus ; or
(b) repayment of moneys received from applicants in
pursuance of the prospectus where shares have
not been permitted to be dealt in on the stock
exchange or each stock exchange specified in
the prospectus, as the case may be, or, where
the company is for any other reason unable to
make the allotment of share.
(4) Any condition purporting to require or bind any
applicant
516
for shares or debentures to waive compliance with
any of the requirement of this section shall be
void.
(5) For the purposes of this section, it shall be
deemed that permission has not been granted if the
application for permission, where made, has not
been disposed of within the time specified in sub-
section (1).
(6) This section shall have effect –
(a) in relation to any shares or debentures agreed
to be taken by a person under writing an offer
thereof by a prospectus, as if he had applied
therefore in pursuance of the prospectus; and
(b) in relation to a prospectus offering shares for
sale, with the following modifications, namely –
(i) reference to sale shall be substituted for
references to allotment;
(ii) the persons by whom the offer is made,
and not the company, shall be liable under
sub-section (2) to repay money received from
applicants, and references to the company’s
liability under that sub-section shall be
construed accordingly; and
(iii) for the reference in sub-section (3) to
the company and every officer of the company
who is in default, there shall be substituted
a reference to any person by or through whom
the offer is made and who is knowingly guilty
of, or wilfully authorises or permits, the
default.
(7) No prospectus shall state that application has
been made for permission for the shares or
debentures offered thereby to be dealt in on any
stock exchange, unless it is a recognised stock
exchange”.
As the section reads now, every company is required
while it offers for public subscription issues of shares or
debentures by means of a prospectus, to make an application
for listing the security in one or more recognised stock
exchanges. Should the stock exchange not grant the
permission for listing, before the expiry of 10 weeks from
the date of closing the subscription lists, no allotment
could be made. In other words, the stock exchange has a say
in the matter of listing. It also requires to be stated
that the company, besides the Director, is made liable for
failure to repay the application money or the excess
application money along with interest.
517
Notes on clauses read as under :-
“Clause 10 provides for compulsory listing of all
public issues with recognised stock exchanges.
Presently, listing of public issues is not
compulsory. Further , as per the existing
provisions only the directors are liable for
failure to repay the application money or the
excess application money within the specified time,
if the company fails to pay”. “It is proposed to
make the company in addition to the directors who
commit the default liable to repay the application
money or excess application money alongwith
interest at a rate between 4% to 15% depending upon
the period of delay with a view to ensuring that
ordinary directors like nominee of govt. financial
institutions do not attract penal provisions, it is
further proposed that only the directors who is an
officer in default should be liable for
prosecution”.
As per provision to sub-section (1), an appeal may be
preferred under section 22 of the Stock Securities Contracts
(Regulations) Act, 1956. Such an appeal may be –
(i) against the decision of stock exchange refusing
permission ; and
(ii) if the stock exchange fails to dispose of the
application for permission within 10 weeks from the
date of closing of the subscription lists. This 10
weeks become important because of the deemed rejection
under sub-section (5).
Sub-section (1A) mentions the date of closing of the
subscription lists. Thus, it is a crucial date for
determining the expiry of 10 weeks for the grant of
permission by stock exchange. Equally that becomes the
crucial date for calculating the time for preferring an
appeal under section 22 of the Securities Contract
(Regulations) Act, 1956, as aforesaid against the refusal of
permission. No doubt, neither in this section nor elsewhere
it is stated as to when the company is required to close
subscription lists. Of course, that will depend upon the
facts of each case. Section 69 of the Act states that
unless minimum subscription is received, no allotment shall
be made of any share capital of the company offered to the
public for subscription. In fact, sub-section 5 of the said
section states categorically as follows :-
“If the conditions aforesaid have not been complied
with on the expiry of one hundred and twenty days
after the first issue of the prospectus, all moneys
received from applicants for shares shall be
forthwith repaid to them without interest; and if
518
any such money is not so repaid within one hundred
and thirty days after the issue of the prospectus,
the directors of the company shall be jointly and
severally liable to repay that money with interest
at the rate of six per cent per annum from the
expiry of the one hundred and thirtieth day :
Provided that a director shall not be so liable if
he proves that the default in the repayment of the
money was not due to any misconduct or negligence
on his part”.
One thing that is striking as far as the sub-section is
concerned is, the repayment without interest before the
expiry of 150 days after the first issue of the prospectus
and the repayment with interest within 130 days after the
issue of the prospectus or specific in their terms unlike
Section 73. It cannot be gain said that the prospectus of
the company is an important document provided for under the
statute.
Section 2(36) defines “prospectus” as follows :-
“prospectus” means any document described or issued
as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits
from the public or inviting offers from the public
for the subscription or purchases of any shares in,
or debentures of, a body corporate”.
SEction 60 deals with registration of prospectus.
Under sub-section (3) it is provided that the Registrar
shall not register a prospectus unless the requirements of
sections 55, 56, 57 and 58 and sub-sections (1) and (2) have
been complied with. Section 62 deals with civil liability
for misstatements in prospectus, while section 63 deals with
criminal liability for misstatement in prospectus. In the
background of the legal provisions section 73 will have to
be analysed with regard to the liability to pay interest.
The date of allotment, according to Mr. Andhyarujina
and Mr. Cooper is the relevant date. Therefore, according
to the learned counsel, the crucial issue is the allotment.
It is also submitted that when permission is granted, it is
only a categorisation. It has already been seen that under
section 69(5), specific dates have been mentioned as 120 and
130 respectively. Sub-section 2(A) of Section 73 does not
mention any specific day. It also requires to be noticed
under sub-section 1(A) of this very section “10 weeks from
the date of closing of the subscription lists” is mentioned.
Both under sub-section (2) and 2(A), no such time has been
prescribed. Prior to 1988, sub-section (1) contemplated two
situations – (i) application to stock exchange being made
after issue within 10 days of issue or (ii)
519
application made before the issue and 10 weeks for stock
exchange to grant the application. Of course, if the
application is not granted within 10 weeks, there will be
deemed rejection under sub-section (5). But, unfortunately,
after the amendment of sub-section (1) and 1(A), sub-section
(2) has not been amended with reference to these amended
provisions. As the law stands at present, the question of
issue of prospectus without an application to stock exchange
cannot arise at all.
As careful reading of sub-section 2(A) will clearly
disclose that the said section comes into operation only
where permission has been granted by the recognised stock
exchange or exchanges. These words “where permission has
been granted” are of great significance. Therefore, the
contention that on the date of allotment the liability to
pay interest arises may not be correct. Nor again, it would
be correct to contend that the mechanics of refund liability
to pay arises on the date of allotment since there is a
failure of consideration in respect of shares not allotted.
On allotment, the money may become due. Thereafter the
money is held in a fiduciary capacity. But the more
important question is does it become payable? We will, now,
refer to Black’s Legal Dictionary as to the meaning of the
word “due” and “payable” (5th Ed. 448) are as under :-
“Due” – Just; proper; regular; lawful; sufficient;
reasonable, as in the phrases “due care”, “due
process of owing; payable; justly owed. That
which one contracts to pay or perform to another;
that which law or justice requires to be paid or
done. Owed, or owing, as distinguished from
payable. A debt is often said to be due from a
person where he is the party owing it, or primarily
bound to pay, whether the time for payment has or
has not primarily bound to pay, whether the time
for payment has or has not arrived. The same thing
is true of the phrase “due and owing”. Payable. A
bill or note is commonly said to be due when the
time for payment of it has arrived. The word “due”
always imports a fixed and settled obligation or
liability, but with reference to the time for its
payment there is considerable ambiguity in the use
of the term, the precise signification being
determined in each case from the context. It may
mean that the debt or claim in question is now
(presently or immediately) matured and enforceable,
or that it matured at some time in the past and yet
remains unsatisfied, or that it is fixed and
certain but the day appointed for its payment has
not yet arrived. But commonly, and in the absence
of any qualifying expressions, the word “due” is
re-
520
stricted to the first of these meanings, the second
being expressed by the term “overdue” and the third
by the word “payable”.
“Payable” -Capable of being paid; suitable to be
paid; admitting or demanding payment; justly due
legally enforceable. A sum of money is said to be
payable when a person is under an obligation to pay
it. Payable may therefore signify an obligation to
pay at a future time, but, when used without
qualification, term normally means that the debt is
payable at once, as opposed to “owing”.
As a matter of fact, these words assumed great
significance under section 60 of Transfer of Property Act.
The section was amended by Act 20 of 1929. The word “due”
in the section has been substituted for the word “payable”
in order to make it clear that a mortgagor cannot redeem
within the term of the mortgage”. “When the right of
redemption arises- the right of redemption arises when the
principal money secured by the mortgage that has become due
and may be exercised at any time thereafter, subject of
course to the law of limitation. In English law, the
mortgagor cannot redeem before the time fixed for payment.
Nevertheless there were a considerable number of Indian
cases in which it was held that the time fixed in the deed
was fixed for the convenience of the mortgagor and that he
could redeem before that time unless there was an express
stipulation to the contrary. These cases are bad law, for
th view taken in other case that the mortgagor cannot redeem
before the time fixed for payment is confirmed by the
decision of Judicial Committee in Bhaktawar Begam v. Husaini
Khanam, [1914] 36 All. 195. 41 I.A. 84, 23 I.C. 355 followed
in Bir Mohammad v. Nagoor, [1914] 27 Mad. L.J. 483, 25 I.C.
576 which treats Rose Ammal v. Rajarathnam, [1900] 23 Mad.
23 as overruled”.
In 1976 (46) Company Cases 25 in Baroda Board & Paper
Mills Ltd. v. Income-Tax Officer. Circle I, Warde-E,
Ahmedabad and others, it is held as under :-
“Mr. A.L. Shah who appears for the liquidator in
O.J. Appeal No. 2 of 1975 has urged before us that
the legislature has used in the context of the
priority of debts two distinct sets of words “debt
due” and “due and payable” and proper meaning
should be given to these sets of words, namely,
“debt due” and “due and payable” and distinction
must be made when the legislature has used two
different terminologies, namely, “due” in the
beginning of the clause and “due and payable” at
the end of the clause. He also wants us to
dissect the phrase “due and
521
payable” and he wants to emphasize that the debt
must have become due in the narrower sense of the
word of having come into existence and having been
payable with reference to enforceability of payment
and, in this sense, relying upon the decision of
D.A. Desai J., he has urged before us that the debt
must be existing at the relevant date and the event
which brought the debt into existence must have
occurred within the twelve months preceding the
relevant date and it must also have become payable,
meaning thereby that its payment could have been
enforced against the company, within the twelve
months before the relevant date. In view of the
decisions that we have already referred to,
particularly the passage from People v. Arguello as
approved by the Supreme Court in Kesoram
Industries’ case and in Raman Iron Foundry’s case,
it is not possible for us to accept this contention
of Mr. Shah. In our opinion, the only meaning that
could be attached to the word “due” occurring in
section 530 is that it must be presently due and
the words “due and payable” mean the same thing,
namely , that it must be presently payable.
Therefore, so far as section 530(1) (a) is
concerned, the revenue, taxess or rate, due from
the company to the Central or State Government or
to a local authority must be presently payable,
that is, that the liability could be enforced as at
the relevant date and, secondly, it must have so
become presently payable within the twelve months
immediately preceding the relevant date”.
In this connection we may refer to the case in Union of
India v. Air Foam Industries (P) Ltd., A.I.R. 1974 S.C. 1265
& 1271 (para 7), which reads as follows :-
“The first thing that strikes one on looking at
Clause 18 is its heading which reads; “Recovery of
Sums Due”. It is true that a heading cannot
control the interpretation of a clause if its
meaning is otherwise plain and unambiguous, but it
can certainly be referred to as indicating the
general drift of the clause and affording a key to
a better understanding of its meaning. The heading
of Clause 18 clearly suggests that this clause is
intended to deal with the subject of recovery of
sums due. Now a sum would be due to the purchaser
when there is an existing obligation to pay it in
present. It would be profitable in this connection
to refer to the concept of a `debt’ for a sum due
is to be found in Webb v. Stenton, [1883] 11 QBD
518 where Lindley. L. J., “…a debt is a sum of
money which is now payable or will become payable
in the future by reason of a
522
present obligation”. There must be debitum in
presenti; solvendum may be in presenti or in
future – that is immaterial. There must be an
existing obligation to pay a sum of money now or in
future. The following passage from the judgment of
the Supreme Court of California in People v.
Arguello, [1869] 37 Calif 524, which was apporoved
by this Court in Kesoram Industies v. Commr. of
Wealth Tax, [1966] 2 SCR 688 (AIR 1966 SC 1370),
clearly brings out the essential characteristics of
a debt.
“Standing alone, the word `debt’ is as applicable
to a sum of money which has been promised at a
future day as to a sum now due and payable. If we
wish to distinguish between the two, we say of the
former that it is a debt owing, and of the latter
that it is a debt due”.
This passage indicates that when there is an
obligation to pay a sum of money at a future date,
it is a debt owing but when the obligation is to
pay a sum of money in praesenti it is a debt due.
A sum due would, therefore, mean a sum for which
there is an existing obligation to pay in
presenti, or in other words, which is presently
payable. Recovery of such sums is the subject-
matter of Clause 18 according to the heading, That
is the dominant idea running through the entire
Clause 18″.
We will now refer to Venkataramiya’s Law Lexicon and
Legal Maxims Vol, I, 713, 714. “Due” – means payable
immediately or a debt contracted but payable at a future
time. In Wharton’s Law Lexicon, 14th Edn., it s meaning is
stated to be “anything owing. That which one contracts to
pay or perform to another; that which law or justice
requires to be paid or done. It should be observed that a
debt is said to be `due’ the instant that it has existence
as a debt; it may be payable at a future time”. Therefore,
it cannot be contended on the strength of Section 530 `due’
and `payable’ is one and the same even under S.732 (A).
However, as contended, if the liability to pay interest
arises from the date of allotment and the grace period after
eight days, what is to happen in cases where permission is
refused by the stock exchange? For the grant of such
permission 10 weeks are available. Therefore, a company
making allotment prior to the grant of permission cannot be
mulcted with the liability when the section itself comes
into play upon the grant of permission. Therefore, some
definite date is required. It cannot be lost sight of that
where permission is refused in the first instance there is
also the right of appeal under Section 22 of the Securities
Contracts (Regulations) Act, 1956. This too, has got an
important bearing. It cannot be held that after allotment
the mechanics
523
of refund would come into play and again after rejection of
permission, the money on all applications should be refunded
once over again.
Equally, the contention of Mr. Anil Divan that the
stock exchange will have power to extend the time cannot be
accepted. It may be a practice to do so. But it does not
mean the stock exchange can act contrary to clear wording to
this section. More so, when Sub-section (4) is clear in its
terms. Merely because the intending applicants agree to
abide by the prospectus that cannot be binding in the teeth
of this Sub-section.
For the sake of competition, reference may be made to
the corresponding provision of English Law. Buckley on the
Companies Acts, 14th Ed. Vol.I, while dealing with Section
51 which is the corresponding provision state as follows :-
“The Act does not require the prospectus to fix any
time for closing the subscription lists and, unless
and until an issue is fully subscribed, there is
nothing in law to require the company to close the
lists. It is the common practice, however, at any
rate in the case of prospectuses issued generally,
to state in the prospectus that the lists will be
closed on or before a particular date. In any case
to which this section applies the company will, by
reason of sub-s(3), be unable to employ any money
received from shareholders until either permission
to be listed has been obtained, or the lists have
been closed and the period indicated in sub-section
(1) has expired without the permission having been
refused. Note that the sub-section does not say,
‘if the permission has not been granted before the
expiration of three weeks etc.’ Presumable in
practice the stock exchange, when it has an
application for permission to be listed under
consideration and has not either granted or refused
permission within the three weeks period indicated
above, will notify the applicant under sub-section
(1) of an extension of the period.
An allotment within this section is void, not
voidable as in an allotment in breach of Section
47″ sub-section (3) in Re Nanwa Gold Mines,
Ballantyne v. Nanwa Gold Mines Ltd. applications to
subscribe for shares were invited on the footing
that, if a resolution for reduction of capital was
not passed or not confirmed by the court, the
application moneys would be refunded and meanwhile
would be retained in a separate account. The
moneys were in fact put in a separate account in
the names of the company and its registrars. The
conditions
524
were not fulfilled and shortly afterwards a
receiver was appointed in a debenture-holders’
action. Harman J. held that the moneys in the
separate account were repayable to the subscribers
in full, basing his decision on the terms of the
invitation and not on the provisions of this sub-
section; but he expressed the view that the payment
into a separate account in compliance with the sub-
section would probably have the same effect”.
Palmer’s Company Law, 1982, Vol I, 264 states as
follows:-
“Refusal of Application to Deal – Where a
prospectus states that application has been or will
be made for the shares or debentures to be dealt
with on the stock exchange, any allotment made on
an application under the prospectus shall be void.
(1) if permission has not been applied for before
the third day after the first issue of the
prospectus; or
(2) if permission is refused before the expiration
of three weeks (subject to the extension by the
stock exchange to six weeks from the date of the
closing of the subscription lists (Sec. 51 (1).
It should be noted that under case (2) above, the
allotment is not void if the stock exchange merely defers
the decision on permission to deal, or does not arrive at a
decision within the stated time.
During the periods stated in cases (1) and (2) above,
the application money received by the company from
shareholders who applied for shares has to be kept on
separate account (Sec. 51 (3) ; “that appears”, as Harman J.
observed in Re Nanwa Gold Mines Ltd, “to be an attempt to
erect, so to speak, by statute a kind of trust for
applicant”, consequently, the application money thus kept on
separate account does not form part of the general assets of
the company which are charged by a debenture secured by a
floating charge. The relationship between the applicants
and the company which holds the application moneys on
separate account is that if bailers and bailee, and not of
creditors and debtor”.
Now, we will refer to the case in Nanwa Gold Mines Ltd.
Ballantyne v. Nanwa Gold Mines Ltd., [1955] I W.L.R. 1080 @
1085.
“Sub-section (3) provides that where money is sent
in on a provisional application: “All money
received as “aforesaid shall
525
be kept in a separate bank account so long as the
company may become liable to repay it under the
last foregoing sub-section; and, if default is made
in complying with this sub-section, the company and
every officer of the company who is in default
shall be liable to a fine not exceeding five
hundred pounds”. That appears to be an attempt to
erect so to speak, by statute a kind of trust for
applicants in a case of this sort. It is
irrelevant here, because in this case the directors
promised to do this very thing; No doubt that was
only a compliance with the statute; but they did
promise to do so and I think that their promise is
of contractual effect, so I need not consider
whether, if there was no promise but only the
statutory obligation, the position would be the
same. I incline to think it would be so, and that
the object of section 51(3) was to provide
protection for persons who pay money on the faith
of promises of this kind”.
As to the present position with regard to the liability
to refund under Sec. 73 2(A) it is important to bear in mind
that two notifications have come to be issued in exercise of
powers conferred under Section 642.
Notification No. GSR 614 (E) dated 3rd October, 1991,
called the Companies (Central Government’s) General Rules
and Forms (Second Amendment), 1991, which came into force on
1st November, 1991. In the above notification it is stated
as under:-
“If the company does not receive application money
for at least 90% of the issued amount, the entire
subscription will be refunded to the applicants
within ninety days from the date of closure of the
issue. If there is delay in the refund of
application money by more than 8 days after the
company becomes liable to pay the excess amount,
the company will pay interest for the delayed
period, at prescribed rates in sub-section (2) and
(2A) of Section 73. No statement made in this Form
shall contravene any of the provisions of the
Companies Act, 1956, and the rules made
thereunder”.
“Signature of Directors”
Again, notification No. S.O. 666(E) dated October 3,
1991 issued under sub-section (1) of Section 641 with
amendments in Schedule II to the said Act, under Part I
General Information, stated as under:-
“(f) Declaration about the issue of allotment
letters/refunds within a period of 10 weeks and
interest in case of any delay
526
in refund at the prescribed rate under Section
73(2)/2A”
Thus, the liability of the company to repay the excess
amount under section 73(2A) will arise only on the expiry of
10 weeks from the date of the closure of subscription
lists. The interest begins to accrue thereupon at the end
of 8 days.
As the meaning of the word “forthwith”, we will now
refer to Bouvier’s Law Dictionary for the meaning of the
word “forthwith”. “FORTHWITH. As soon as by reasonable
exertion, confined to the object, it may be accomplished.
(Approved in Dickerman v. Trust Co., 176 U.S. 193, 20 Sup,
Ct. 311, 44 L.Ed. 423). This is the import of the term; it
varies, of course, with every particular cases; 4 Tyrwh.
837; Edwards v. Ins Co., 75 Pa. 378. See Seammon v. Ins.
Co., 101, III 621; 11 H.L. Cas. 337. Bannect v. Ins 67 N.Y.
274; Pennsylvanis R. Co. v. Reichert, 58 Md. 261; Meriden
Silver Plate Co. v. Flory 44 Ohio St. 437, 7 N.E. 753. It
is not as promptly as immediately; in some cases it might
mean within a reasonable time; 7 Dowl. 789”. We will also
refer to 193 Soutern Reporter, 339 and 16 Soutern Reporter
33 @ 35 Col I. “As regards compliance with statute
requiring petition for judicial review of an executive
committee’s denial of primary election contest to be filled
“forthwith” the term “forthwith” is a relative one and means
within such time as to permit that which is to be done, to
be done lawfully and according to the practical and ordinary
course of things to be performed or accomplished, and it is
not to be used by way of a penalty when accidental
interventions of which party is not to be charged with
foresight have upset what otherwise would have been
reasonable calculations regarding available time. Laws
1035, Ex. Secs c. 10″. “Forthwith” is not susceptible of a
fixed time definition, and the surrounding facts and
circumstances must be taken into consideration in
determining the question, and forthwith may be minutes,
hours, days or even weeks”. Therefore it cannot be said
that “forthwith” means E.O. instanti.
It cannot but be held that the payment of interest is
only compensatory and not penal. Merely because clause 10
to which a reference has already been made uses the word
“penal” it cannot be amount to penalty. As useful reference
can be made in Mahalaxmi Sugar Mills Co. Ltd. v.
Commissioner of Income Tax, Delhi, New Delhi, [1980] 3 SCR
421. “4. Penalties – if any person defaults in payment of
excess imposed under sub-section (1) of Sec. 3, or ,
contravenes any provision of any rule made under this Act,
he shall without prejudice to his liability therefore under
sub-section (5) of Sec. 3 be liable to imprisonment upto six
months or to a fine not exceeding rupees five thousand or
both and in the case of continuing contravention in to a
further fine not exceeding rupees five thousand or both and
in the case of continuing contraventio in to a further fine
not exceeding rupees one thousand
527
for each day during which the contravention continues”. It
is apparent that section 3(2) requires the payment of cess
on the date prescribed under the rules. Rule 4 of the U.P.
Sugarcane Cess Rules, 1956 provides that the cess due on the
sugarcane entering into the premises during the first
fortnight to each calendar year must be deposited in the
government treasury by the twenty second day of that month
and the cess due for the remainder of the month must be
deposited before the seventh day of the next following
month. If the cess is not paid by the specified date, then
by virtue of s. 3(3) the arrear of cess will carry interest
at the rate of six per cent per annum from the specified
date to the date of payment. Section 3(5) is a very
different provision. It does not deal with the interest
paid on the arrears of cess but provides for an additional
sum recoverable by way of penalty from a person who default
in making payment of cess. It is a thing apart from an
arrear of cess and the interest due thereon.
Now, the interest payable on an arrear of cess under s.
3(3) is in reality part and parcel of the liability to pay
cess. It is an accretion to the cess. The arrear of cess
“carries” interest; if the cess is not paid within the
prescribed period a larger sum will become payable as cess.
The enlargement of the cess liability is automatic under
section 3(3). No specific order is necessary in order that
the obligation to pay interest is as certain as the
liability to pay cess. As soon as the prescribed date is
crossed without payment of the cess, interest begins to
accrue. It is not a penalty for which provisions has been
separately made by s. 3(5). Nor is it a penalty within the
meaning of s. 4, which provides for a criminal liability and
a criminal prosecution. The penalty payable under s. 3(5)
lies in the discretion of the collecting officer or
authority. In the case of the penalty under s. 4, no
prosecution can be instituted unless, under s. 5(1), a
complaint is made by or under the authority of the Cane
Commissioner of the District Magistrate. There is another
consideration distinguishing the interest payable under s.
3(3) from the penalty imposed under s. 3(5). Section 3(6)
provides that the officer or authority empowered to collect
the cess may forward to the Collector a certificate under
his signature specifying the amount of arrears including
interest due from any person, and on receipt of such
certificate the Collector is required to proceed to recover
the amount specified from such person as if it were an
arrear of land revenue. The words used in s. 3(6) are
“specifying the amount of arrears including interest”, that
is to say that the interest is part of the arrear of cess.
In the case of a penalty imposed under s. 3(5), a separate
provision for recovery has been made under s. 3(7).
Although the manner of recovery of a penalty provided by s.
3(7) is the same as the manner of recovery provided by s.
3(6) of the arrears of cess, the Legislature dealt with it
as something distinct from the recovery of the arrears of
cess including
528
interest. In truth, the interest provided for under s.3(3)
is in the nature of compensation paid to the Government for
delay in the payment of cess. It is not by way of penalty.
The provision for penalty as a civil liability has been made
under s. 3(5) and for penalty as a criminal offence under
s.4. The Delhi High Court proceeded entirely on the basis
that the interest bore the character of a penalty. It was
according to the learned Judges “penal interest”. The
learned Judge failed to notice s. 3(5) and s.4 and the other
provisions of the Cess Act”.
The last question will be that in view of the clear
terms of the statute whether the administrative
inconvenience could be pleaded. This could be decided with
reference to the case in Sanjeev Coke Manufacturing Co. v.
Bharat Coking Coal Ltd. & Another, [1983] 1 SCR 1000 @ 1029,
as follows:-
“…But in the ultimate analysis, we are not really
to concern ourselves with the hollowness or the
self-condemnatory nature of the statements made in
the affidavits filed by the respondents to justify
and sustain the legislation. The deponents of the
affidavits filed into Court may speak for the
parties on whose behalf they swear to the
statement. They do not speak for the Parliament.
No one may speak for the Parliament and Parliament
has said what it intends to say, only the Court may
say what it the Parliament meant to say. None
else. Once a statute leaves Parliament House, the
Court’s is the only authentic voice which may echo
(interpret) the Parliament. This the court will do
with reference to the language of the statute and
other permissible aids. The executive Government
may place before the court their understanding or
misunderstanding of what Parliament has said or
intended to say or what they think was Parliament’s
object and all the facts and circumstances which in
their view led to the legislation. When they do
so, they do not speak for Parliament. No Act of
Parliament may be struck down because of the
understanding of Parliamentary intention by the
executive government or because their (the
Government’s) spokesmen do not bring out relevant
circumstances but indulge in empty and self-
defeating affidavits. They do not and they cannot
bind Parliament. Validity of legislation is not to
be judged merely by affidavits filed on behalf of
the State, but by all the relevant circumstances
which the court may ultimately find and more
especially by what may be gathered from what the
legislature has itself said…”
529
Therefore, it has to be held that administrative
inconvenience can hardly be any ground.
Viewing the statutory provisions form the above
perspective, I agree with my learned brother that the
liability to repay the excess amount arose on November 1,
1990 and the liability to pay interest arose on the expiry
of eight days from November 1, 1990.
ORDER
For the reasons stated by us in our separate but
concurring judgments dated 4.2.1992, we allow the appeal to
the limited extent indicated by us and the judgment of the
High Court shall stand altered accordingly. In the
circumstances of this case, we make no order as to costs.
V.P.R. Appeal allowed.

 

 

Leave a Comment