Forfeiture of debentures was unjustified when Co. had option to file civil suit for recovery of outstanding amount

Case details: J.S.W. Steel Ltd. v. Abhishek Kumar - [2021] 129 taxmann.com 142 (Rajasthan)

Judiciary and Counsel Details

• • Arun Bhansali, J.
  • R.K. Thanvi, Sr. Adv., B.L. Dhaka and R.J. Punia for the Appellant.
  • Abhinav Jain for the Respondent.

Facts of the Case

In a given case, the plaintiffs had applied for and were allotted Secured ‘Zero’ interest Fully Convertible Debentures (‘FCD’) of defendant-company. The plaintiffs were required to pay the value of debentures in three instalments of Rs. 2,000/- each. The debentures were to be converted into 100 shares of the face value of Rs. 10/- with Rs. 50/- as premium. The first instalment was paid along with the application and the second instalment were also paid on receiving notice in this regard. Both the instalments were received by the defendant.

However, a letter was received, whereby the plaintiffs were informed that the company had forfeited the plaintiffs’ right to receive the equity shares and the principal amount paid by the plaintiffs thereof.

The plaintiffs contested the action of the defendant, however, no action was taken by the defendant company. It was claimed that the amount of the second call was sent by cheque, however, the cheque was returned and therefore, the amount was sent by the draft and as such, the defendant was not entitled to forfeit the right to receive shares.

The appellant-plaintiffs filed applications under Order IX, Rule 7 read with section 151 CPC, and however, the said applications were rejected by the trial court.

The trial court concluded that the plaintiffs had not indicated that when did they receive the information and demand for the third instalment and that the payment of the third instalment was made, has not been proved by producing a copy of the cheque/draft and therefore, only on account of the proceedings being ex parte, the plaintiffs could not succeed and consequently, dismissed the suits.

High Court Held

On being aggrieved the decision, the second appeal had been filed by the defendant company. The Appellate Court held that as the company had power under section 122 to file civil suits for recovery of an outstanding amount of debentures, it could not forfeit same on the ground of non-payment of instalment. Since provisions of section 122 provide for specific performance of a contract to subscribe for debentures and same can be enforced by a decree, action pertaining to allotment or forfeiture of debentures can be questioned before civil courts and, therefore, forfeiture of debentures by the company was unjustified

Case Review

• • Shashi Prakash Khemka v. NEPC Micon [2019] 103 taxmann.com 273/152 SCL 482 (SC)
  • Eternit Everest Ltd. v. Neelmani Bharatiya  [1999] 20 SCL 407 (Raj.) (para 26) distinguished.

List of Cases Referred to

• • Eternit Everest Ltd. v. Neelmani Bharatiya  [1999] 20 SCL 407 (Raj.) (para 14)
  • Shashi Prakash Khemka v. NEPC Micon [2019] 103 taxmann.com 273/152 SCL 482 (SC) (para 14)
  • Bhagwan Dass Chopra v. United Bank of India AIR 1988 SC 215 (para 18)
  • Morgan Ventures Ltd. v. Blue Coast Hotels & Resorts Ltd. [2010] 104 SCL 516 (Bom.) (para 23)
  • Gopal Krishan Baliga v. Poona Industrial Hotel Ltd.  [1999] 22 SCL 90 (Bom.) (para 23)
  • Larsen & Toubro, In re [2014] 182 Comp Case 43 (CLB) (para 24).