2.2  Query:      

Allotment of shares against a debt of the company- whether to be treated as “allotted for cash”.

“Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and, if no cash has actually been so received whether the position as stated in the account books and the balance sheet is correct, regular and not mis-leading.”

3. According to the querist, it is a well settled matter that where shares are allotted against an adjustment of amount which is a bona fide debt payable in money at once by the company, then shares are deemed to have been allotted for cash. This has been held in the landmark judgment in R. Spargo’s Case 1873 8. Ch A. 407. Consequently, allotment of shares against amounts due to the subscribers of the memorandum and articles association of the company in question for preliminary expenses incurred by them in the formation of the company are deemed to have been allotted for cash as there was a bona fide debt payable in money at once by the company to them which was adjusted against the amount receivable for shares as detailed in the subsequent paragraphs. At the first meeting of the board of directors of company the amount of preliminary expenses aggregating Rs. 1,44,000 was approved. It is on the same day that the Board has allotted shares to the subscribers for an aggregate amount of Rs. 2,000. The balance of Rs. 1,42,000 due to the subscribers was remitted by cheque to them subsequently.

4. The querist has also stated that this matter has been clarified by the Institute of Chartered Accountants of India in paragraphs 8.5 and 8.6 of the ‘Statement on Auditing Practices’, compliance with which has been made mandatory as follows:

“8.5 The law requires a distinction to be made between shares subscribed for in cash and shares subscribed for consideration other than in cash. Shares subscribed for in cash should include only the following kinds of subscription:-

                       (a)       where the subscription amount is received either in cash or by cheque;

(b)        where the amount is adjusted against a bona fide debt payable in money at once by the company. (This arises from the principle in Spargo’s case 1873 Ch. A. 407).

8.6 The question whether the legal position as stated above has been modified in any way by the provisions of Section 227(1A)(f) of the Companies Act, 1956, has now been considered by an eminent Counsel. The Counsel has advised that Spargo’s case is still good law and that the provisions of Section 75(1)(a) are not incompatible with those of Section 227(1A)(f). Extracts from the advice received from Counsel are given in Appendix A.”

5. According to the querist, the same opinion has been reiterated in paragraphs 2.29 and 2.30 of the mandatory Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India, as below:

                        “2.29    Clause (f) requires the auditor to inquire:

“Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been so received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.”

2.30 It should be noted that the reference is to “books and papers”. “Papers” would presumably refer to the Return of Allotment filed by the company under Section 75 of the Act. The law on the subject has hitherto been that, where the consideration for issue of shares is an adjustment against a bona fide debt payable in money on demand by the company, the shares are deemed to have been subscribed in cash (vide the decision in Spargo’s Case, 1873, 8 Ch. A. 407). According to the legal opinion obtained by the Institute, the expression “shares allotted for cash” may also include shares allotted against debt. Therefore, in cases which are covered by the decision in Spargo’s case, no comment is required by the auditor, even though the company may have in the Return of Allotment under Section 75, shown such shares as allotted against adjustment of a debt.”

6. The querist has stated that even the Company Law Department has, vide its Circular 8/32(75) 77 – CL/V, dated March 13, 1978, clarified as follows:

“I am directed to refer to this Department’s circular letter No. 8/4/69, dated 18.11.1969 and to say the views conveyed therein have since been re-examined. The Department is now of the view that the allotment of shares by a company to a person in lieu of a genuine debt due to him is in perfect compliance of the provisions of section 75(1). In this connection, it is clarified that the act of handing over cash to the allottee of shares by a company in payment of the debt and the allottee in turn returning the same cash as payment for the shares allotted to him is not necessary for treating the shares as having been allotted for cash. What is required is to ensure that the genuine debt payable by a company is liquidated to the extent of the value of the shares.”

7. The querist has sought the opinion of the Expert Advisory Committee as to whether such shares allotted against the preliminary expenses are deemed to have been “allotted for cash” for purposes of meeting with the requirements of Section 227 (1-A)(f) of the Companies Act, 1956.

                                                                          Opinion                              September 25, 1996

1. The Committee notes the extracts from the Statement on Auditing Practices and the Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India, reproduced in paras 4 and 5 of the query. The Committee also notes the Company Law Department’s Circular 8/32(75) 77-CLV dated March 13, 1978, as reproduced by the querist in para 6 of the query.

2. The Committee is, therefore, of the opinion that the preliminary expenses legally payable by the company would be considered as a bona fide debt, and shares allotted there against would be considered as shares allotted for cash.

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