Alpha Ltd has received an application for transfer of 5,000 equity shares of Rs 10 each fully paid-up in favour of one Mr Rehan. On scrutiny of the application form it was found that Rehan is a minor. Under the circumstances, the following issues are considered:
1. What would be the contractual liability of a minor?
2. Whether shares can be allotted to Rehan by way of transfer?
Section 11 of the Indian Contract Act, 1872 provides as to who are competent to contract and reads as follows:
“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
Section 3 of the Majority Act, 1875 sets out the age of majority as eighteen years. The minor lacks the capacity to contract. The reason being that the minors are presumed to be naïve, inexperienced, and easily taken advantage of, hence some protection is required. Contract, which obviously involves obligations on the part of the parties to it, is one such instance.
In Mohori Bibi v. Dharmodas Ghosh (1903) 30 Cal. 539 : 39 IA 114 (PC), it was held that “a minor is wholly incompetent to enter into a contract”. The judicial recognition to the principle that minors should be exempted from contractual obligations can be seen in the aforesaid case. Hence, an agreement by a minor in India to take shares is void and, hence, he cannot be a member of a company.
In Palaniappa Mudaliar v. Official Liquidator, Pasupathi Bank Ltd, Madras, (1942) 12 Comp Cases 89 at 91 it was held that if an application for shares is made by a father as guardian of his minor child and the company registers the shares in the name of the child describing him as a minor, neither the minor nor the guardian can be placed on the list of contributories at the time of winding-up.
In Fazalbhoy Jaffar vs The Credit Bank of India [1914], it was held that if the name of the minor continues on the Register of members and neither party repudiates the allotment, the minor does not incur any liability on the shares during minority.
In view of the above position of law, no contractual liability could be imposed on a minor in case of shares not fully paid up.
Accordingly, Issue No. 1 is addressed.
In case of fully-paid shares, minor's name may be admitted in the Register of members, if he happens to acquire the same by way of transfer or transmission. In Dewan Singh vs Minerva Films Ltd (1959) 29 Comp Cases 263 (P&H), the Punjab High Court held that there is no legal bar to a minor becoming a member of a company by acquiring shares (by way of transfer) provided the shares are fully paid up and no further obligation or liability is attached to them. Similarly, in S. L. Bagree v. Britannia Industries Ltd [1980], CLB upheld transfer in favour of a minor.
The position with respect to a minor becoming a member of a company would be in terms of the following two circulars issued by the Department of Company Affairs in this regard:
i) Circular No. 8/18/(41)/63-PR, dated November 2, 1963: Government of India Publication, Clarifications and Circulars on Company Law, 1977 Edition, page 23; and
ii) Letter No. 8/18(41)/63-PR, dated March 31, 1964: Government of India Publication, Clarifications and Circulars on Company Law, 1977 Edition, page 23).
In view of the above, it can be concluded that there is no objection to a minor being admitted as a member in respect of fully-paid shares provided he happens to acquire the same by way of transfer or transmission. Hence, in the present case, fully paid shares can be transferred to Mr. Rehan without any contractual liability.
Thus, Issue No. 2 is accordingly addressed.
1. What would be the contractual liability of a minor?
2. Whether shares can be allotted to Rehan by way of transfer?
Section 11 of the Indian Contract Act, 1872 provides as to who are competent to contract and reads as follows:
“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
Section 3 of the Majority Act, 1875 sets out the age of majority as eighteen years. The minor lacks the capacity to contract. The reason being that the minors are presumed to be naïve, inexperienced, and easily taken advantage of, hence some protection is required. Contract, which obviously involves obligations on the part of the parties to it, is one such instance.
In Mohori Bibi v. Dharmodas Ghosh (1903) 30 Cal. 539 : 39 IA 114 (PC), it was held that “a minor is wholly incompetent to enter into a contract”. The judicial recognition to the principle that minors should be exempted from contractual obligations can be seen in the aforesaid case. Hence, an agreement by a minor in India to take shares is void and, hence, he cannot be a member of a company.
In Palaniappa Mudaliar v. Official Liquidator, Pasupathi Bank Ltd, Madras, (1942) 12 Comp Cases 89 at 91 it was held that if an application for shares is made by a father as guardian of his minor child and the company registers the shares in the name of the child describing him as a minor, neither the minor nor the guardian can be placed on the list of contributories at the time of winding-up.
In Fazalbhoy Jaffar vs The Credit Bank of India [1914], it was held that if the name of the minor continues on the Register of members and neither party repudiates the allotment, the minor does not incur any liability on the shares during minority.
In view of the above position of law, no contractual liability could be imposed on a minor in case of shares not fully paid up.
Accordingly, Issue No. 1 is addressed.
In case of fully-paid shares, minor's name may be admitted in the Register of members, if he happens to acquire the same by way of transfer or transmission. In Dewan Singh vs Minerva Films Ltd (1959) 29 Comp Cases 263 (P&H), the Punjab High Court held that there is no legal bar to a minor becoming a member of a company by acquiring shares (by way of transfer) provided the shares are fully paid up and no further obligation or liability is attached to them. Similarly, in S. L. Bagree v. Britannia Industries Ltd [1980], CLB upheld transfer in favour of a minor.
The position with respect to a minor becoming a member of a company would be in terms of the following two circulars issued by the Department of Company Affairs in this regard:
i) Circular No. 8/18/(41)/63-PR, dated November 2, 1963: Government of India Publication, Clarifications and Circulars on Company Law, 1977 Edition, page 23; and
ii) Letter No. 8/18(41)/63-PR, dated March 31, 1964: Government of India Publication, Clarifications and Circulars on Company Law, 1977 Edition, page 23).
In view of the above, it can be concluded that there is no objection to a minor being admitted as a member in respect of fully-paid shares provided he happens to acquire the same by way of transfer or transmission. Hence, in the present case, fully paid shares can be transferred to Mr. Rehan without any contractual liability.
Thus, Issue No. 2 is accordingly addressed.
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