. Explain the nature and extent of the liability of a contributory

Nature of Liability of Contributory (Section 429)

Sub-section(l) of Section 429 provides that the liability of a contributory shall create a debt accruing due from him at the time when his liability commenced, but payable at the times specified in calls made on him.for enforcing the liability.

The object of sub-section (1) of Section 429 is to make clear the time when the cause of action against a contributory on his failure to satisfy the calls made on him by the liquidator would arise. However, once a call has been made, the liability of the contributory to pay it becomes a statutory debt. A new liability to pay the unpaid balance commences. “It is settled in a long course of decisions that the members of a company in liquidation are liable in respect of unpaid calls even though the calls were made by the company before it went into liquidation and the suit of the company for its realisation had become barred by time. The principle of these decisions is that Section 429 creates a new liability on the shareholders in respect of such calls, which is distinct from and independent of the rights which the company had against them before the winding-up” [Pokhar Mal Vs. Flour and Oil Mills Co. Ltd. AIR [1934] Lah. 1015]. As the debt under the statute is a new creation, quite distinct and apart from any creditor’s claim to recover from the shareholder, as a contributory in the windingup, the unpaid share money will not be affected by the fact that prior to the winding up, the company had issued calls for the amount and allowed the recovery under these calls to become time barred [East Bengal Sugar Mills Ltd., In re (1914) 11 Compo Cas. 169 (Cal.)]. Since the power to make calls in a compulsory winding up is vested in the court under Section 470, the statutory liability of a contributory to pay can arise only under a call validly made, that is, a call made by the court and not by the liquidator himself [Associated Banking Corporation of India Ltd. V s. Mahomed Akbar AIR 1950 Born. 386]. The proper procedure seems to be that the Court shall first make an order for calls to be made, and liquidator in pursuance of the order shall make the calls.

Ex-contractu and Ex-lege Liability. Under Section 429, the liability of a member to be included in the list of contributories is not ex contractu, i.e., it does not arise as a result of the contract of membership; his liability is ex lege which means that it arises by reason of the fact that his name appears in the Register of members. Thus, a member shall be liable even where the allotment was void. Again, he cannot escape liability as a contributory where he had sold his shares to a purchaser who has not got the shares registered in his name.

Before a company goes into liquidation, the liability of a member to contribute is measured by the contractual obligation arising from membership. But after liquidation, Section 429 imposes a new liability on the shareholders in respect of unpaid calls made before or after the winding-up. Such calls can be recovered even if they are barred by limitation before the order of winding-up was made.

Extent of Liability of Contributories (Section 426). For determining liability of contributories, the list of contributories shall be prepared in two parts, viz., Ust A and Ust B.