Can the company take back/forfeit the shares of the share-holder/director due to the fraud committed by him?

Q. Can the company take back/forfeit the shares of the share-holder/director due to the fraud committed by him?

Ans: The Companies Act 1994 is silent on the issue whether a company can take back/forfeit the shares of the share-holder/director due to the fraud committed by him. However, it seems to be a principle of English law that shares can be forfeited only for a non-payment of calls.

Regulation no. 24 of Schedule-I to the Companies Act, 1994 provides that “a company can forfeit the shares of a share-holder if he fails to pay any call or installment of a call on the appointed day.”

However, there is no specific provision in the Companies Act, 1994 restricting the exercise of the right to non-payment of calls only. Sub-continental cases also support the proposition. Such as in Naresh Chandra Sanyal v Calcutta Stock Exchange Assn Ltd the Supreme Court held, “A company may by its articles lawfully provide for grounds of forfeiture other than non-payment of a call, subject to the qualification that the articles relating to forfeiture do not offend against the general law of the land and in particular the Companies Act, and public policy; that the forfeiture contemplated does not entail or effect a reduction in capital or involve or amount to purchase by the company of its own shares, nor does it amount to trafficking in its own shares.” Therefore, forfeiture for non-payment of calls is not the only form of forfeiture. Articles of Association permitting other forms of forfeiture are not ultra vires if they do not offend Companies Act or other law of the land.

Hence though there is no specific provision in the Companies Act 1994 on the issue whether a company can take back/forfeit the shares of the share-holder due to the fraud committed by him, a company may by its articles lawfully provide ‘fraudulence by a shareholder’ as a ground of forfeiture.

Now if such provision is not already incorporated in the Articles of Association, the company has the option to alter its articles by special resolution. Section 20 of the Companies Act 1994 stipulates that “Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may by special resolution alter, exclude from or add to its articles; and any alteration, exclusion or addition so made shall be as valid as if originally contained in the articles, and be subject in like manner to alteration, exclusion or addition by special resolution.”

According to Section 87 (2) of the Companies Act 1994, “A resolution shall be a special resolution when it has been passed by such a majority as is required for the passing of an extraordinary resolution and at a general meeting of which not less than twenty-one days’ notice specifying the intention to propose the resolution as a special resolution has duly been given: provided that if all the members entitled to attend and vote at any such meeting so agree, a resolution may be proposed and passed as a special resolution at a meeting of which less than twenty-one days’ notice has been given.” Again Section 87 (1) suggests that “An extraordinary resolution has to be passed by a majority of not less than three-fourths of such members entitled to vote as are present in person or by proxy.” That means a special resolution requires two criteria: (i) twenty-one days’ notice for the general meeting specifying the intention to propose the resolution as a special resolution & (ii) resolution has to be passed at the general meeting by a majority of not less than three-fourths of such members who are entitled to vote as are present in person or by proxy.

Now the question arises what would happen if the minority shareholders, who have not voted in favour of the special resolution, brings an action before the court against the resolution. There is specific provision in Section 233 of the Companies Act, 1994 as regard to protection of minority interest.

Section 233: Power of Court to give direction for protecting interest of the minority:

(a) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner prejudicial to one or more of its members or debenture-holders or in disregard of his or their interest;

(b) the company is acting or is likely to act in a manner which discriminated or likely to discriminate the interest of any member or debenture-holder;

(c) a resolution of the members, debenture-holders or any class of them has been passed or is likely to be passed which discriminates or is likely to discriminate the interest of one or more of the members or debenture-holder;

and pray for such order as , in his or their opinion, would be necessary for safeguarding his or their interest and also the interest of any other member or debenture-holder.

(a). to cancel or modify

(b). to regulate the conduct of the company’s affairs in future in such manner as is specified therein;

(c). to amend any provisions of the Memorandum and Articles of the company.

04. Where, by an order of the Court, any amendment is made in the memorandum or article of the company, the company shall not, without leave of the Court, make any amendment thereto or take any action which is inconsistent with the direction contained in the order.

05. A company shall within 14 days from the making of an order under this section, inform the Registrar in writing of such order and send him a copy thereof, and if the company makes default in complying with this sub-section, the company, and also every officer of the company who is in default, shall be liable to a fine not exceeding one thousand taka.

Section 233 read with section 195 contemplates that holders of one-tenth of shares in the case of a company having a share capital and one fifth of the members in case of a company not having a share capital, are eligible to apply. Again Dhaka High Court has held that unless the applicants are minority shareholders, i.e., less than fifty percent, they have no right to apply for protection under this section.

An application under this section is representative in character and shareholders have right to be added as party to the protection.

Therefore, we can narrow down our observations in the following manner:

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