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FACTS OF THE CASE
In this case, the appeals arise from complaints which was filed by the respondent in the Court of First Class Magistrate at Meerut under Section 207 of the Companies Act,1956[2]. The allegation which respondent( appellant in the Court at Meerut) put was the failure on the part of the appellant, who was the director-in-charge of M/s Iron Traders (Private) Ltd., to pay the respondent the dividends on the shares held by him, even when the dividends were declared by the company for the respective years. The appeals got disposed of with a common judgement for all the respondents as the question was common.
The appellant of this case then took the stand in the Court that the Court at Meerut was not having any authority to try this case as the company has its registered office at Delhi and therefore, the Court at Delhi has the power to try this complaint. The Magistrate at Meerut rejected this contention of the appellant and held that as the divident was to be paid at respondent’s registered address, i.e. Meerut, therefore, Meerut Court had the jurisdiction to try the complaints.
On appeal, the Sessions Judge upheld the decision of the Magistrate and even the High Court in revision rejected the contention of the appellant and confirmed the Magistrate decision as well as the Sessions Judge. The High Court stated that “ the objective behind the Companies Act,1956 is to ensure the prompt payment of dividend to a shareholder. That payment may either be made directly to the shareholder or by sending a cheque or warrant to his registered address. Therefore, in case of complaints related to non-payment, the shareholder is entitled to go against the company and its directors by filing a complaint at his residing place because the law demands the payment to him should have been made there.
ISSUE INVOLVED IN THE CASE
This case has one issue involved in this appeal to the Supreme Court that:-
“ whether the Court at Meerut had the jurisdiction to try the complaint related to the non-payment of the dividend to the shareholder, when the registered office of the company is situated at Delhi?”
CONTENTION OF THE PARTIES
Contention of the appellant:-
The appellant in this case contended that the Magistrate at Meerut had no jurisdiction to try this complaint and instead of it, the Magistrate or the Court at Delhi, where the registered office of the company is situated would have the jurisdiction. The appellant also contended on the views given by the High Court that this view is not in accordance with the Section 207 of the Companies Act, 1956. If the view of the High Court is taken to be correct, it would mean that the directors of companies would be liable to be prosecuted at many places where the shareholders of the company has their registered addresses on the allegations of non-payment of the dividend.
ANALYSIS OF THE CASE
The Court took into consideration many provisions of the Companies Act,1956 to come into the decision. By considering all the sections and interpretation of those, the Court tried to take a decision valid as per the law. Let us take a look at the provisions of the Companies Act, 1956 which were taken into consideration by the Hon’ble Supreme Court:-
- Section 205[3] of the Companies Act, 1956:-
Dividend to be paid only out of profits:-
(1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government :
Provided that –
a) if the company has not provided for depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960 it shall, before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years;
(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960 then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for deprecation in accordance with the provisions of sub-section (2) or against both;
(c) the Central Government may, if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation :
Provided further that it shall not be necessary for a company to provide for depreciation as aforesaid where dividend for any financial year is declared or paid out of the profits of any previous financial year or years which falls or fall before the commencement of the Companies (Amendment) Act, 1960.
(1A) The Board of directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.
(1B) The amount of dividend including interim dividend so deposited under sub-section (1A) shall be used for payment of interim dividend.
(1C) The provisions contained in sections 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend.]
(2) For the purpose of sub-section (1), depreciation shall be provided either-
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or
(c) on any other basis approved by the Central Government which has the effect of writing off by the way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid down by this Act or any rules made thereunder], on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case :
Provided that where depreciation is provided for in the manner laid down in clause (b) or clause (c), then, in the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to section 350.
(2A) Notwithstanding anything contained in sub-section (1), on and from the commencement of the Companies (Amendment) Act, 1974, no dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), except after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding ten per cent, as may be prescribed :
Provided that nothing in this sub-section shall be deemed to prohibit the voluntary transfer by a company of a higher percentage of its profits to the reserves in accordance with such rules as may be made by the Central Government in this behalf.
(2B) A company which fails to comply with the provisions of section 80A shall not, so long as such failure continues, declare any dividend on its equity shares.
(3) No dividend shall be payable except in cash :
Provided that nothing in this sub-section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount, for the time being unpaid, on any shares held by the members of the company.
(4) Nothing in this section shall be deemed to affect in any manner the operation of section 208.
(5) For the purposes of this section-
- “specified period” in respect of any depreciable asset shall mean the number of years at the end of which at least ninety-five per cent of the original cost of that asset to the company will have been provided for by way of depreciation if depreciation were to be calculated in accordance with the provisions of section 350;(b) any dividend payable in cash may be paid by cheque or warrant sent through the post directed to the registered address of the shareholder entitled to the payment of the dividend, or in the case of joint shareholder, to the registered address of that one of the joint shareholders which is first named on the register of members, or to such person and to such address as the shareholders or the joint shareholders may in writing direct.
The sub-clause (5) of this Section is incorporated in the Articles of Association of the company as well, Article 132 of AoA says that :-
“ Unless otherwise directed by the company in the General Meeting, any dividend may be paid by the cheque or warrant sent by the post to the registered address of the entitled member or in the case of joint holders to the registered address of that one whose name stands first on the register with regard to the joint holding and shall be made payable to the order of the person to whom it is sent”.
It is very clear from the reading of the Section 205 that even though sub-section (3) of it provides the company to pay the dividend only in cash but sub-section (3) authorises the company to pay the dividend even through a cheque or a warrant. That is the reason that the dividend can be said to have been paid in any case even if it is paid either through cash, or the cheque or warrant is sent by post to the registered address of the entitled shareholder.
- Section 206[4] of the Companies Act,1956:-
Dividend not to be paid except to registered shareholders or to their order or to their bankers.
- No dividend shall be paid by a company in respect of any share therein, except-
- to the registered holder of such share or to his order or to his bankers; or
- in case a share warrant has been issued in respect of the share in pursuance of section 114, to the bearer of such warrant or to his bankers.
- Nothing contained in sub- section (1) shall be deemed to require the bankers of a registered shareholder to make a separate application to the company for the payment of the dividend.
- Section 207[5] of the Companies Act,1956:–
Penalty for failure to distribute dividends within forty two days.
Where a dividend has been declared by a company but has not been paid, or the warrant in respect thereof has not been posted, withinforty- two days from the date of the declaration, to any shareholder entitled to the payment of the dividend, every director of the company; its managing agent or secretaries and treasurers; and where the managing agent is a firm or body corporate, every partner in the firm and every director of the body corporate; and where the secretaries and treasurers are a firm, every partner in the firm and where they are a body corporate, every director thereof; shall, if he is knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to seven days and shall also be liable to fine: Provided that no offence shall be deemed to have been committed within the meaning of the foregoing provision in the following cases, namely:-
- where the dividend could not be paid by reason of the operation of any law;
- where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with;
- where there is a dispute regarding the right to receive the dividend;
- where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
- where, for any other reason, the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company. Payments of interest out of capital.
Therefore, this Section 207 lays down that there is a commission of the offence when dividend is either not paid or a cheque or warrant has not been posted in that regard within the prescribed time. Once a dividend warrant is posted at the registered address of the shareholder, the dividend is deemed to be paid. The Section casts an obligation on company to pay the declared dividend to the entitled shareholder within 42 days from its declaration. It is to be noticed that the Section makes the failure to post the cheque or warrant an offense, not the non-receipt of the warrant by the shareholder. So, the liabilty of the company to pay within the prescribed time is satisfied once the dividend is paid or the cheque or warrant related to that is posted at the registered address of the shareholder.
- Section 36[6] of the Companies Act,1956:– This is the same as of Section 20 of the English Companies Act,1948:-
Effect of memorandum and articles.
- Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
- All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.
It is a well established fact that the Articles of Association make a contract between a company and its members in regard to their ordinary rights as members. And in a contract, a promise itself prescribes the manner of the fulfillment of the promise, the promisor can perform the promise in the prescribed way.
Therefore, the Articles of Association of this company becomes a contract between the company and its shareholders and as per the Article 132 of the AoA, which we discussed above and same as of Section 205(5) of the Companies Act,1956, the shareholders are entitled to be paid in the manner prescribed in the Articles alone. Therefore, Article 12 of Articles of Association authorises the company to make the payment as per the manner prescribed.
And as the obligation of the company comes to an end once the cheque or the warrant is posted to the registered address of the shareholder and the company has no obligation and there is no offense on part of the company on non-receiving of the cheque or warrant by the company, therefore the position or the place where the dividend warrant or cheque would be posted, that place is the one where the obligation of the company to pay is discharged.
DECISION
After considering all the scenarios which we discussed in the analysis part, Court came to the conclusion that the post office is the agent of the shareholder and the place where the obligation of the company to pay the dividend is discharged in case of payment through cheque and warrant and therefore, in this case, that place is Delhi. Therefore, the venue or place of the offense is Delhi and not Meerut, and that is the reason the Court at Delhi where offense took place would have jurisdiction to try the complaint. This should be both as per the law and common sense. The Court also stated that since the obligation to post the warrant arose at the company’s registered office, therefore, the alleged offense must be held to have taken place at the location of the registered office of the company not at the place where the dividend warrant or cheque to be received once posted.
Taking that view in consideration, the Supreme Court set aside the orders of the High Court and said the High Court was in error in holding that the Magistrate at Meerut had the jurisdiction to try this complaint. Therefore, the appeals got allowed by the Hon’ble Supreme Court in this case.
CONCLUSION
The Hon’ble Supreme Court gave a very remarkable decision by interpreting the provisions of the Companies Act,1956. The way the Court interpreted the sections and came into a valid point made this judgement a landmark one related to the jurisdiction of the cases of the company in case of non-failure of the payments of the dividend.
[1] Hanuman Prasad Gupta vs Hiralal, 1971 AIR 206, 1970 SCR (3) 788 https://thecorporate.ninja/wp-admin/post.php?post=1757&action=edit
[2] Companies Act, 1956 (Act No.1 of 1956)
[3] Companies Act, 1956, s. 205.
[4] Companies Act, 1956, s. 206
[5] Companies Act, 1956, s. 207.
[6] Companies Act, 1956, s. 36.
