14. A company was authorised by its Articles to purchase its own shares. W sold his shares to the company and before the price was paid, the company went into liquidation. Is W entitled to prove in the liquidation for the price of the shares.

Facts of the Case

A company, authorised under its Articles of Association to purchase its own shares, agreed to buy shares from a shareholder, W. W transferred his shares to the company, but before the agreed price could be paid, the company went into liquidation. W seeks to claim the price of the shares during the liquidation process. The central question is whether W can prove in the liquidation for the amount owed for the shares.

Issues in the Case

1. Can a shareholder claim payment from a company in liquidation for shares sold to the company?
2. Does the company’s insolvency affect W’s entitlement to payment?
3. How do the Articles of Association and company law principles interact with liquidation proceedings in such cases?

Legal Principles Covered

1. Section 68 of the Companies Act, 2013 – Restricts the purchase of shares by a company if the company is unable to pay its debts.
2. Doctrine of Ultra Vires – Acts beyond the company’s authority (even if authorized by Articles) may not be enforceable.
3. Liquidation Priority Rules – Under the Insolvency and Bankruptcy Code, creditors are ranked, and payments to shareholders are usually after debts are settled.
4. Case Reference: Trevor v. Whitworth (1887) 12 App Cas 409 – A company cannot buy its own shares if it renders itself unable to meet its liabilities; the contract is void to protect creditors.

Possible Judgement

The court may hold that W cannot prove the price of the shares in liquidation if the purchase renders the company insolvent or contravenes the Companies Act. Payment for shares purchased by a company during or prior to insolvency is typically subordinated to creditors’ claims. However, if the purchase was lawful and did not prejudice creditors, W may be entitled to claim. The outcome hinges on whether the contract was valid at the time of execution and the company’s financial position.

About Lawgnan

Understanding the nuances of share transactions in companies is essential for shareholders, directors, and legal professionals. If you are a shareholder planning to sell your shares to your company, or a company director handling internal share purchases, it is crucial to know your rights and obligations under Indian law. Cases like this demonstrate the importance of complying with company law provisions and protecting both the company’s and creditors’ interests. For a detailed guide, legal insights, and step-by-step explanations of shareholder rights in liquidation scenarios, visit lawgana.in and stay informed.