Supreme Court Upholds Bank in Recovery Suits; Irregular Allotment of Shares Not Void. Directors' Interested Votes Rendered Allotment Irregular, But Company's Affirmation and Director's Estoppel Made It Binding Under Section 91B(1) of Indian Companies Act, 1913.

Civil appeals against High Court decrees in suits for recovery of loans advanced by the respondent bank

Appellants sought reversal of the Bombay High Court decrees and dismissal of the bank's suits for recovery of outstanding loan amounts

The respondent bank filed suits to recover loans from the appellants after the borrowers failed to repay; the trial court dismissed the suits but the High Court decreed them, prompting the appeals

Trial Court dismissed Special Suit No. 39 of 1954 and Special Suit No. 78 of 1954 on 23 April 1955; Bombay High Court in First Appeal No. 819 of 1955 and First Appeal No. 820 of 1955 decreed the suits on 11 August 1960

Whether the allotment of shares to the first appellant's nominees was invalid due to lack of quorum after excluding the interested director's vote under Section 91B(1) of the Indian Companies Act, 1913 Whether the loan of Rs 1,00,000 could be recovered in the absence of cash payment Whether the share allotment and loan transactions were intended to be operative

Appellants contended that the first appellant was interested in the share allotment and his vote should be excluded under Section 91B(1); without his vote there was no quorum, so the allotment was invalid and the consideration paid out of loans could not be recovered Appellants argued that no cash amount was advanced by the bank to the first appellant and therefore the suit to recover Rs 1,00,000 as a loan was not maintainable Appellants claimed that the share allotment and loans were sham transactions and the parties did not intend to create real liability Respondent bank contended that the allotment, though irregular, was affirmed by the company and the appellants were estopped from challenging its validity Respondent bank submitted that payment could be made by transfer entries in books of account and cash was not necessary under Section 50 Illustration (a) of the Indian Contract Act, 1872

An allotment of shares by a board meeting in which an interested director votes is irregular, not void, when the interested director's vote is excluded and quorum is lost; the company may elect to affirm the irregular allotment, and the interested director is estopped from challenging validity after dealing with the shares as owner. Payment of a debt may be effected by transfer entries in books of account without physical passing of cash, as per Illustration (a) to Section 50 of the Indian Contract Act, 1872.

The allotment of the shares at the meeting, to the nominees of the first appellant was not void. Moreover, the first appellant was a party to the resolution allotting shares and dealt with the shares on the footing that the allottees were the holders with a clear knowledge of all circumstances, and therefore, was estopped from contending that the allotment was invalid. To support a plea of payment, it is not necessary to show that cash passed. Illustration (a) to s. 50 of the Indian Contract Act, 1872, shows that payment may be made by means of transfer entries in books of account.

The Bank of Poona Ltd. (now The Sangli Bank Ltd.) filed Special Suit No. 39 of 1954 on 18 March 1954 against Ramkisan Ramratan Somani and Ramnath for recovery of Rs 22,964-13-0, and Special Suit No. 78 of 1954 on 24 April 1954 against Narayandas Shreeram Somani for recovery of Rs 1,09,099-14-4. The trial court dismissed both suits on 23 April 1955. The bank preferred First Appeal No. 819 of 1955 and First Appeal No. 820 of 1955 to the Bombay High Court, which decreed both suits on 11 August 1960. The appellants filed Civil Appeal Nos. 801 and 802 of 1962 before the Supreme Court, which were heard together and dismissed on 15 March 1965.

• Indian Companies Act, 1913: Section 91B(1), Section 277(1)
• Indian Contract Act, 1872: Section 50, Illustration (a)