Case Law Companies Act Cosmosteels Private Ltd Vs Jairam Das Gupta and Ors

Case Law Companies Act

Cosmosteels Private Ltd Vs Jairam Das Gupta and Ors

 

DATE OF JUDGMENT16/12/1977

 

BENCH: DESAI, D.A.

BENCH: DESAI, D.A. BEG, M. HAMEEDULLAH (CJ) BHAGWATI, P.N.

 

CITATION: 1978 AIR  375 1978 SCR  (2) 422 1978 SCC  (1) 215 CITATOR INFO : R 1980 SC 517  (11)

 

ACT: Companies Act, (Act 1 of 1956), SS. 77, 100-104. 397, 398  & 402–Distinction between the procedures u/s 100-104 and (u/s 402-While  granting relief u/s 402, for reduction  of  share capital  protanto,  the  procedures  u/s  100-104  are   not necessary–Objects  behind procedures prescribing the  Court to give notice-Notice u/s 400 is not necessary at  appellate stage-No  injury has been caused to the interveners by  non- issue of the notice.

 

 

HEADNOTE: In  Appeal  No. 1347(N) 1977 by special  leave  against  the interlocutory orders dated 21-4-1977 of the Company Judge of the  Calcutta High Court in the company petition No.  85/75, filed by the respondents u/ss. 397/398 of the Companies Act, ‘1956, complaining of oppression by majority and praying for certain  reliefs against the appellants and also the  orders dated  25-4-1977 of the Division Bench against  that  order, this  Court  made  an order on 31-5-1977,  in  terms  of  an agreement  reached between the par-ties.  By one  such  term the company was directed to purchase 1300 shares held by the respondents- petitioners.  The price of the shares was to be determined by Messrs.  Price Water House and Peet, Chartered Accountants  and Auditors, as on the date of the  filing  of the petition u/ss. 397-398, on the basis of the existing  as also contingent and anticipated debts, liabilities,  claims, payments  and  receipts  of  the’  company.   The  Chartered Accountants were to determine the value of the shares  after examining  accounts and calling for  necessary  explanations and after giving opportunity to both the groups to be  heard in  the  matter and the determination of the  value  by  the Chartered  Accountants was to be final and binding  and  not open  to  any  challenge  by  either  side  on  any   ground whatsoever.

After  such  determination of  the  value  the company  has to purchase the shares, and, on such  purchase, the  share  capital  of the company  was  to  stand  reduced protanto.  The order made it ;fear that if the value of  the shares  is  more than Rs. 65/- per share, the  company  will have  to pay the balance, and, if it is less than  Rs.  65/- per share, the respondents who have to sell the shares, will have  to  refund the difference between. the  price  of  the shares calculated at the rate of Rs. 65/- per share and  the rate  determined by the Chartered Accountants  and  Auditors within four weeks from the date of determination.  After the appeal was thus disposed of, the interveners, claiming to be the  creditors of the company to the extent of 40 lakhs,  in their  petition dated 22-8-1977 requested the Court  (i)  to permit them to be heard and (ii) to postpone the purchase of shares by the company until such time as the company  adopts proceedings in a competent court by following the  procedure laid  down  by  the Companies  Act,  1956,  particularly  in Sections 100 to 104 for reduction of the share capital.   In the   alternative   they  prayed  for   safeguarding   their interests by modifying the Court’s order  dated 31-5-1977. Rejecting the petition to interfere with its order dated 31- 5-1977, the Court, after hearing the interveners,

HELD  : (i) Section 77 envisages that, on the purchase by  a company  of its own shares, reduction of its  share  capital may  be effected and sanctioned in either of  two  different modes  :  (i)  according  to  the  procedure  prescribed  in Sections  100 to 104; or (ii) under section  402,  depending upon the circumstances in which reduction becomes necessary. [427E-F] (ii) Section  77  of the Companies Act, 1956  prohibits  the company  from  buying its own shares unless  the  consequent reduction of capital is effected and sanctioned in pursuance of Sections 100 to 104 or Section 402.  It places an embargo on the company purchasing its own shares so as to become its own  member,  but  the embrago is  lifted,  if  the  company reduces its share capital protanto. [427E] 423 (iii)     Section 77 leaves no room for doubt that reduction of  share  capital  may  have to be  brought  about  in  two different  situations by two different modes.   Undoubtedly, where  the company has passed a resolution for reduction  of its  share  capital and has submitted it to  the  Court  for confirmation,  the procedure prescribed by Sections  100  to 104 will have to be followed, if they are attracted.  On the other  hand, where the Court, while disposing of a  petition under  Ss. 397 and 398, gives a direction to the company  to purchase shares of its own members, consequent reduction  of the share capital is bound to ensue, and, before making such a direction it is not always necessary to give notice of the consequent  reduction of the share capital to the  creditors of  the  company.  No such requirement is laid down  by  the Act.  The two procedures ultimately bringing about reduction of  the  share capital are distinct and separate  and  stand apart from each other; and one or the other may be  resorted to according to the situation.  That is the clearest  effect of the disjunctive ‘or’ in S. 77. [428H, 429AB] (iv) Where the reduction of share capital is necessitated by directions  given by the Court in it petition under ss.  397 and 398, the procedure prescribed in Sections 100 to 104  is not  required to be followed in order to make the  direction effective. [428G]

(v)  It  would  not  be correct to  say  that,  whenever  it becomes  necessary to reduce the capital of a  company,  the reduction  can  be  brought  about  only  by  following  the procedure prescribed in Ss. 100 to 104.  Sections 100 to 104 specifically prescribe the procedure for reduction of  share capital  where  the Articles of the company permit  and  the company  adopts a special resolution which can  only  become effective on the Court according sanction to it.   Reduction of  share capital may also take pursuant to a  direction  of the Court requiring the company to purchase the shares of  a group  of members while granting relief u/s 402.   Both  the procedures,  by which reduction of capital of a company  may be effected, are. distinct and separate and stand apart from each other. [427F-H] (vi) The scheme of Ss. 397 to 406 is to constitute a code by itself   for   granting   relief   to   oppressed   minority shareholders and for granting appropriate relief, a power of widest  amplitude,  inter alia, lifting the ban  on  company purchasing  its share under Court’s direction, is  conferred on  the  Court.   When the Court  exercises  this  power  by directing a purchase of its shares by the company, it  would necessarily involve reduction of the capital of the company. Such a power of the Court is not subject to a resolution to be adopted by the members of the company which, when  passed with,  statutory majority, has to be submitted to Court  for confirmation.  No canon of construction would permit such an interpretation in which the statutory power of the Court for its  exercise  depends upon the vote of the members  of  the company. [428C-E] (vii)     If reduction of share capital can only be  brought about by resorting to the procedure prescribed in Ss. 100 to 104, it would cause inordinate delay and the very purpose of granting   relief  against  oppression  would  stand   self- defeated. [428E-F]

(viii) When minority shareholders complain of  oppression by  majority  and seek relief against  oppression  from  the Court under Ss. 397 and 398 and the Court, in a petition  of this  nature, considers it fair and just to direct the  com- pany to purchase the shares of the minority shareholders  to relieve  oppression, if the procedure prescribed by Ss.  100 to 104 is required to be followed, the resolution will  have to be first adopted by the members of the company, but  that would  be  well nigh impossible because  the  very  majority against  whom relief is sought would be able to veto  it  at the threshold and the power conferred on the Court would be frustrated.  That could never have been the intention of the Legislature. [428F-H] (ix) The object_behind prescribing this procedure requiring, in special circumstances as contemplated in Section  101(3), the  court  to  give notice to the  creditors  is  that  the members  of  the  company may not unilaterally  act  to  the detriment  of  the creditors behind their back.  If  such  a procedure  were not prescribed, the Court might, unaware  of all  the facts, be persuaded by the members to  confirm  the resolution  and that might cause, serious prejudice  to  the creditors.   But  such a situation would not  be  likely  to arise in a petition 424 under  Ss. 397 and 398.  In such a petition the Court  would be  in a better position to have all the relevant facts  and circumstances  before  it and it would be  the  Court  which would  decide  whether to direct purchase of shares  of  the members by the company.  Before giving such a direction, the Court  Would certainly, keep in view all the relevant  facts and circumstances, including the interest of the  creditors. Even  if the petition is being disposed’ of on a  compromise between  the parties, yet the Court, before sanctioning  the compromise,   would  certainly  satisfy  itself   that   the direction proposed to-be given by it pursuant to the consent terms, would not adversely affect or jeopardise the interest of the creditors.  Therefore, it cannot be said that  merely because  s. 402 does not envisage consent of  the  creditors before  the  Court gives direction for  reduction  of  share capital  consequent upon purchase of shares of some  of  the members  by  the  company. there is  no  safeguard  for  the creditors.

[430EH] In  the instant case, there is no scope for apprehension  on behalf  of  the  interveners that  the  reduction  of  share capital to be effected under the Court’s direction,  without reference  or  notice to creditors,  would  adversly  affect their interests because : (1) As per the order of the  Court dated  31st May, 1977 while ascertaining the break-up  value of  the  shares  on the date of filing  the  petition  under Sections 397 and 398, the Chartered Accountants and Auditors will have to take into account the assets of the company  as also   the  existing,  contingent  and  anticipated   debts, liabilities,  claims, and demands etc., as revealed  in  the accounts of the company for the last five years, which would indisputably  include the claims made by the interveners  in the  two  suits filed by them to the extent  to  which  they appear  genuine and well founded and. (ii) the order of  the Court  did  not fix any minimum price at  which  the  shares shall be purchased by the company. [431A-C, D] (x)  A  right  to notice by reason of any  rule  of  natural justice,  which a party may establish, must depend  for  its existence  upon  proof of an interest which is bound  to  be injured by not hearing the party claiming to be entitled  to a notice and to be heard before an order is passed.  If  the duty  to give notice and to hear a party is  not  mandatory, the  actual order passed on a matter must be shown  to  have injuriously affected the interest of the party which was  to be given no notice, of the matter. [431G] In  the instant case, after hearing the intervener-, it  was found  that  no interest of theirs has been injured  by  not hearing them before the order was passed.  The order  passed by  this  Court on 31st May, 1977, is not  vitiated  on  the ground  of non-issue of notices to them under  the  inherent powers  of  the Court under Rule 9 of  the  Company  (Court) Rules, 1959, even though there was no statutory duty to hear them. [431H. 432A] (xi) Undoubtedly, when a petition is made to the Court under Ss.  397  and 398, it is obligatory upon the Court  to  give notice u/s 400 of the petition to the Central Government and it  would  be  open  to the Central  Government  to  make  a representation  and if any such representation is made,  the Court  would  have  to take  it  into  consideration  before passing the final order in the proceeding.  But Section  400 does  not  envisage  a  fresh notice to  be  issued  at  the appellate stage. [432C-D] (The  Court  directed to expedite the suit Nos.  729/74  and 933/76 filed by the interveners in the Bombay High Court and dispose off within a period of six months).

 

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Misc.  Petition No. 7962 of   1977. (Application for Intervention) Civil Appeal No. 1347(N) of 1977 Shankar  Das  Ghosh, J. B. Dadachanji, K. J. John  and  Shri Narain  for the Appellants in the Appeal and Opp.  party  in CMP. 7962/77. A.   K. Sen, R. P. Bhatt, E. C. Agrawala, S. S. Khanduja and S. Sahni for Respondents Nos. 1-6. 425 Niren  De and S. V. Tambvekar for the  applicant/Interveners (Bharat Refineries). The Judgment of the Court was delivered by DESAI, J.-This miscellaneous petition by Interveners  raises a  short  but interesting question in the field  of  Company Law. Briefly   stated,   the  facts  leading   to   the   present miscellaneous  petition are that Company Petition.No. 85  of 1975  was  filed by Jairam Das Gupta and others  (for  short ‘Gupta Group’) in the Calcutta High Court under ss.  397-398 of the Companies Act, 1956, complaining of oppression by the majority,  and praying for various reliefs.  Respondents  in this  petition were Cosmosteels Private Limited  (for  short ‘the Company’) and three others who would be referred to  in this  judgment  as  ‘Jain Group.  By an order  made  by  the Company  Judge on 21st April 1977 the Board of Directors  of the  Company  was  superseded  and  one  Mr.  Sachin  Sinha, Advocate,  was  appointed  as  Administrator  to   discharge various  functions  set out in the order.   The  Court  also appointed  Mr.  N. Chakraborty, a Chartered  Accountant  and Auditor to investigate into the accounts of the Company  and one  Mr.’ A. K. Dey, Engineer and Surveyor for valuation  of the  assets of the Company and further the Auditor  and  the Surveyor after investigation of the accounts and  evaluation of the assets of the Company were to determine the  break-up value  of the shares as on the date of the petition and  on the  determination of such break-up value the  Administrator was  to  call  upon the Jain Group to  purchase  the  shares belonging to the Gupta Group within a period of three months from  the  date  of  service of  notice  failing  which  the Administrator  was  directed to purchase the shares  of  the Gupta Group for the Company at the break-up value determined as  hereinabove mentioned.

A further, ,direction was  given that  if the Company was required to purchase the shares  of Gupta Group on the failure-of the Jain Group, the capital of the  Company would protanto stand reduced.  There were  also some  other  directions  which are,  not  relevant  for  the purpose  of this judgment.  Against this Order made  by  the Company  Judge, the Jain Group and the Company preferred  an appeal under the Letters Patent and certain interim  reliefs were sought.  On an undertaking given on behalf of the  Jain Group,  the  order superseding the Board  of  Directors  and payment of Rs. 7 lacs to certain parties was stayed but  the order  directing valuation of the shares was not stayed  and the proceeding for valuation was to go on.  The Company  was restrained  by an injunction of the Court from creating  any encumbrance on the assets of the Company and dealing with or disposing of its assets or spending any of its money  except in  usual course of business with a certain  ceiling  fixed. This, interim relief was modified by the order made on  25th April  1977 by which the Company was directed to  carry  out the order for payment of Rs. 7 lacs to the persons named  in the  order under appeal within a fortnight from the date  of the  order failing which the Administrator appointed by  the learned  trial  Judge was to take over  possession  for  the purpose of making payment of Rs. 7 lacs.  The direction  for investigation of the accounts of the Company was stayed  and simultaneously the proceeding for evaluation was also 426 stayed.  This order dated 25th April 1977 was, challenged in Special  Leave  Petition No. 2042 of 1977 preferred  by  the Company  and  the  Jain Group.  CMP. 3801/77  was  moved  on behalf of the appellants, for certain interim reliefs.  This Court  by an order dated 12th May 1977 granted stay of  the, order of the Division Bench dated 25th April 1977  directing refund  of Rs. 7 lacs by the Company and in default  by  the Administrator.

The  order  of injunction  granted  by  the learned trial Judge and confirmed by the Division Bench  was kept   alive  subject  to  the  same  condition  about   not encumbering the assets of the’ Company.  The appellants then sought  liberty  to  amend the  Special  Leave  Petition  by including  a prayer for special leave against the  order  of the  learned Company Judge dated 21st April 1977  which  was granted  by the Court and also special leave to  appeal  was granted.. The appeal came to be numbered as Civil Appeal No. 1347(N) of 1977.  The parties settled the dispute as per the consent  terms and requested this Court to make an order  in terms  of the consent terms.  The Court accordingly made  an order  on 31st May 1977 disposing of the appeal in terms  of the  consent terms.  The only term relevant for the  present purpose  is  the one by which the Company  was  directed  to purchase 1300 shares held by the Gupta Group.  The price  of the  shares  was to be determined by  Messrs.   Price  Water House  and Peet, Chartered Accountants and Auditors,  as  on the  date of the filing of the petition under sections  397- 398  on  the basis of the existing as  also  contingent  and anticipated   debts,  liabilities,  claims,   payments   and receipts of the Company.  The Chartered Accountants were  to determine  the value of the shares after examining  accounts and  calling  for necessary explanations  and  after  giving opportunity to both the groups to be heard in the matter and the determination of the value by the Chartered  Accountants was  to be final and binding and not open to any-  challenge by either side on any group whatsoever.  On the value  being so determined the Company had to purchase the shares and  on such purchase, the share capital of the Company was to stand reduced protanto. After the appeal was thus disposed of on 31st May 1977,  the interveners filed the present miscellaneous petition on 22nd August 1977 requesting the Court to permit them to intervene in the proceedings pending in Civil Appeal No. 1347 of  1977 and to postpone the purchase of shares by the Company  until such  time as the Company adopts proceedings in a  competent Court by following the procedure laid down by the  Companies Act,  1956,  and  particularly  sections  100  to  104   for reduction  of the share capital.  In the  alternative  there was  a prayer for safeguarding the claims of interveners  by modifying the order dated 31st May 1977.

The interveners claim to be the creditors of the Company  to the  tune  of  Rs.  40 lacs.   They  say  that  the  ‘Cosmos Pioneer’,  an  Oil  tanker belonged to the  Company.   By  a Tanker  Time  Charter Party executed on 21st  November  1972 between  the Company on the one hand and Burmah,  Shell  Oil Storage and Distribution Co. of India Ltd., and ESSO Eastern Inc., on the other the vessel ‘Cosmos pioneer, was chartered in Indian Coastal waters for carriage of petroleum products. Pursuant  to this contract the vessel was loaded  at  Bombay Port on, 42 7 15th  June. 1973 for carrying cargo to the port  of  Kandla. On  the  voyage the vessel ran aground and was  stranded  on 18th June 1973 and the vessel and the cargo were  abandoned. Intervener No. 2 is the underwriter with whom the charterers had effected an insurance, covering the marine adventure  of the  aforesaid cargo and presumably on payment of  the  loss the  underwriter has been subrogated.  The interveners  have filed  two  suits  being  Suit  No.  729/74  by  the  inter- vener/petitioners  and  another suit No.  933/76  by  Bharat Refineries Ltd. and Hindustan Petroleum Corporation  against the  Company and the total amount sought to be recovered  in the  two  suits comes to Rs. 40 lacs.  Both  the  suits  are pending.   The interveners say that they are thus  creditors of the Company and before any reduction in the share capital of  the Company is effected, the creditors are  entitled  to notice  because  by  the reduction they  are  likely  to  be adversely affected. There was some dispute before us whether there was any subs- tance  in  the claims of the. interveners and  whether  they could  be  said to be creditors of the Company but  for  the purpose  of this judgment we will proceed on the  assumption that  they are creditors of the Company.  But even  on  this assumption,  can  it be said that the order  of  this  Court dated  31st May 1977 directing the Company to  purchase  the shares of the Gupta Group and providing that consequent upon this  purchase,  the  share capital  of  the  Company  would protanto  be  reduced,  is bad for want of  notice  to  the, interveners and other creditors of the Company ? Section 77 prohibits the Company from buying its own  shares unless  the consequent reduction of capital is effected  and sanctioned  in pursuance of sections 100 to 104 or  s.  402.

This section places an embargo on the Company purchasing its own shares so as,, to become its own member but the  embargo is lifted if the Company reduces its share capital protanto. It is clear that this section envisages  that on purchase by a Company of its own  shares, reduction of its share capital may  be effected and sanctioned in either of  two  different modes : (i) according to the procedure prescribed in ss. 100 to   104;  or  (ii)  under  s.  402,  depending   upon   the circumstances   in   which  reduction   becomes   necessary. Sections 100 to 104 specifically prescribe the procedure for reduction of share capital where the Articles of the Company permit and the Company adopts a special resolution which can only  become effective on thee Court according  sanction  to it. On the, other hand, reduction of share capital may  have to  be done pursuant to a direction of the  Court  requiring the  Company  to purchase the shares of a group  of  members while granting relief under s. 402.  Both the procedures  by which reduction of Capital of a Company may be’ effected are distinct  and separate and stand apart from each other.   It would  not,  therefore, be correct to say that  whenever  it becomes  necessary  to reduce the capital of a  Company  the reduction  can  be  brought  about  only  by  following  the procedure  prescribed in ss. 100 to 104.  There  is  another independent procedure prescribed in s. 402 and recognised by s. 77, by which reduction of the share capital of a  Company can be effected.But  both these 2-1146 SCI/77 428 procedures have one feature in common, namely, that there is Court’s intervention before the Company can reduce its share capital,  and  this is of vital importance  from  the  stand point of creditors of the Company.

 

Sections  100  to  104  provide  a  detailed  procedure  for reduction of share capital.  Without being exhaustive s. 100 mentions  three modes of reduction of share  capital,  viz., (i)  extinction or reduction of the liability on any of  the shares  in  respect  of  share capital  not  paid  up,  (ii) cancellation  of any paid up share capital which is lost  or is  unrepresented by available assets, and (iii) paying  off any  paid  up share capital.  Section 101  provides  that  a Company which has adopted a special resolution for reduction of share capital has to move the Court by a petition for  an order  confirming  the reduction.  A detailed  procedure  is prescribed  which the Court should ordinarily follow  before confirming  the  resolution.   This  procedure  has  to   be followed  where  the  proposed reduction  of  share  capital involves-  either the dimunition of liability in respect  of unpaid  share capital or payment to any shareholder of  any paid up share capital and in any other case if the Court  so directs.  But even in first mentioned two cases, sub-section (3)  confers a discretion on the Court to dispense with  the procedure  if  the  Court  having  regard  to  any   special circumstances,  thinks  proper  to  do  so.   The  procedure envisages  a Est of creditors to be settled and a notice  to be published which will enable the creditors whose names are included  in  the  Est  to object to  the  reduction  and  a provision has to be made in respect of dissenting creditors. Sections  397  and 398 enable the minority  shareholders  to move    the Court for relief against oppression by  majority shareholders.

In a petition under ss. 397 and 398,  section 402  confers  power upon the Court to grant  relief  against oppression,  inter  alia, by providing for the  purchase  of shares of any of the members of the Company by other members thereof or by the Company and in the case of purchase of its shares by the Company, the consequent reduction of the share capital of the Company.  Rule 90 of the Companies    (Court) Rules, 1959, provides-that where an order under ss. 397  and 398 involves reduction of capital, the provisions of the Act and  the  Rules relating to such matter shall apply  as  the Court may direct. The  question is: whether when on a direction given  by  the Court,  while  granting  relief against  oppression  to  the minority  shareholders  of the Company, to  the  Company  to purchase  the  shares of some of   its members  which  would ipso  facto  bring  about reduction  of  the  share  capital because a Company cannot be its own member, is it obligatory to serve a notice upon all the creditors of the Company ? It was  conceded that the procedure prescribed in sections  100 to  104  is not required to be followed where  reduction  of share capital is necessitated by the direction given by  the Court  in  a petition under- ss. 397 and  398.   Section  77 leaves  no room for doubt that reduction of a share  capital may have to be brought about in two different situations  by two  different  modes.  Undoubtedly, where the  Company  has passed  a resolution for reduction of its share capital  and has submitted it to the Court for confirmation the procedure prescribed by ss. 100 429 to 104 will have to be followed, if they are attracted.   On the  other  hand,  where the Court,  while  disposing  of  a petition  under  ss. 397 and 398, gives a direction  to  the Company to purchase shares of its own members, a  consequent reduction of the share capital is bound to ensue, but before granting  such  a  direction it is  not  necessary  to  give notice of the consequent reduction of the share capital  to the  creditors of the company.  No such requirement is  laid down  by the Act.  Two procedures ultimately bringing  about reduction of the share capital are distinct and separate and stand  apart  from each other and one, or the other  may  be resorted  to  according  to  the  situation.   That  is  the clearest effect of the disjunctive or in section 77.

The  scheme of sections 397 and 406 appears to constitute  a code  by  itself for granting relief to  oppressed  minority shareholders and for granting appropriate relief, a power of widest  amplitude,  inter alia, lifting the ban  on  company purchasing its shares under Court’s direction, is  conferred on  the  Court.   When the Court  exercises  this  power  by directing a purchase of its shares by the Company, it  would necessarily involve reduction of the capital of the Company. Is  such  power of the Court subject to a resolution  to  be adopted  by  the members of the Company which,  when  passed with  statutory majority, has to be submitted to  Court  for confirmation ? No canon of construction would permit such an interpretation in which the statutory power of the Court for its  exercise  depends upon the vote of the members  of  the Company.    This  would  inevitably  be  the  situation   if reduction of  share capital can only be brought  about  by resorting  to  the procedure prescribed in ss. 100  to  104. Additionally  it would cause inordinate delay and  the  very purpose  of granting relief against oppression  would  stand self  defeated  Viewed from a slightly different  angle,  it would be impossible to carry out the directions given  under s. 402 for reduction of share capital if the procedure under ss. 100 to 104 is required to be followed.

Under ss. 100 to 104 the Company has to first adopt a special resolution  for reduction  of  share  ,capital if its  articles  so  permit. After such a resolution is adopted winch, of necessity  must be passed by majority, and it being a special resolution, by a statutory majority, it will have to be submitted for  con- firmation  to  the Court.  Now, when  minority  shareholders complain  of oppression by majority and seek relief  against oppression  from  the Court under ss. 397 and  398  and  the Court  in  a petition of this nature considers it  fair  and just  to direct the Company to purchase the shares  ,of  the minority   shareholders  to  relieve  oppression,   if   the procedure  prescribed by ss. 100 too 104 is required  to  be followed,  the resolution will have to be first  adopted  by the  members  of  the Company but that would  be  well  nigh impossible because the very majority against whom relief  is sought  would  be able to veto a at the  threshold  and  the power  conferred  on the Court would  be  frustrated.   That could  never  have  been the intention  of  the  Legislature Therefore,  it is not conceivable that when a direction  for purchase  of shares is given by the Court under s.  402  and consequent reduction in share capital is to be effected  the Procedure, prescribed for reduction of share capital in  ss. 100  to 1-04 should be required to be followed in ,Order  to make the direction effective. 430 A very serious apprehension was voiced by Mr. De that if the Court directs the Company to purchase the shares of some  of its.  members while granting relief against oppression,  the Company would part with its funds which would jeopardise the security of the creditors of the Company and that if such  a direction  for reduction of share capital can be,  given  by the  Court behind the back of the creditors,  the  Creditors would be adversely affected and therefore, it was  contended that,  even  though,  while giving direction  under  s.

 

402 directing the Company  to purchase the shares  of  its members, it is not obligatory upon the Court to give  notice to  the  creditors,  such notice ought to be  given  in  the interests  of the creditors.  This apprehension is,  in  our opinion, unfounded.  Even when the Court is moved to confirm the resolution for reduction of share capital under ss.  100 to  104,. the Court may in its discretion dispense with  the procedure  prescribed in that group of sections  [devide  s. 101(3)].  Undoubtedly,  the Court would use  the  discretion only upon proof of special circumstances as contemplated  by s.  101(3), but when such discretion is used, the  creditors would  have no opportunity to object to the reduction.   The opportunity  to  object  would thus depend  upon  the  Court exercising  its discretion one way or the other.  It may  be noticed  that until the Company submits its  resolution  for reduction of share capital to the Court, the creditors  have no say in the matter and, therefore, the Court is  empowered to  ascertain the wishes of the creditors by  following  the procedure  prescribed  in sections 101 to 104.   The  object behind  prescribed this procedure requiring save in  special circumstances as contemplated in section 101,(3), the  Court to  give notice to the creditors is that the members of  the Company  may  not unilaterally act to the detriment  of  the creditors behind ‘their back.

If such a procedure  were not  prescribed, the Court might, unaware of all the  facts, be  persuaded by the members to confirm the  resolution  and that  might  cause  serious  prejudice  to  the   creditors. But  such  a  situation would not be likely to  arise  in  a petition  under  ss. 397 and 398.  In such  a  petition  the Court would be better in a position to have all the relevant facts and circumstances before it and it would be the  Court which  would decide whether to direct purchase of shares  of the members by the Company.  Before giving such a  direction the  Court  would certainly keep in view  all  the  relevant facts  and  circumstances,  including the  interest  of  the creditors.   Even I the petition is being disposed of  on  a compromise  between  the  parties,  yet  the  Court,  before sanctioning  the compromise, would certainly satisfy  itself that  the direction proposed to be given by it  pursuant  to the consent terms, would not adversely affect or  jeopardise the interest of the creditors.  Therefore, it cannot be said that merely- because s. 402 does not envisage consent of the creditors before the Court gives direction for reduction  of share capital consequent upon purchase of shares of some  of the  members by the Company, there is no safeguard  for  the creditors. But quite apart from that, it is clear on the facts  of this  case  that  the apprehension of Mr.  De  is  not  well founded.  The order of the Court dated 31st May 1977 clearly provides  that the Chartered Accountants and  Auditors  will determine the value of the shares as on 431 the date of filing of the petition under ss. 397 and 398 on the   basis of  the  existing  as  also   contingent   and anticipated debts, liabilities claims, demands and  receipts of the Company (underlining is ours) and for the purpose  of determining  the value, they will be at liberty  to  examine the accounts of the Company for the last five years.  There- fore, while ascertaining the break-up value of the shares on the  date of filing of the petition under ss. 397  and  398, the  Chartered  Accountants and Auditors will have  to  take into account the assets of the Company as also the existing, contingent  and  anticipated  debts,  liabilities,   claims, demands, etc. This  would  indisputably  include the claims  made  by  the interveners in the two suits filed by them to the extent  to which they appear genuine and well-founded.

They need  not, therefore, have the slightest apprehension that their  interests are not safeguarded by the direction given by the Court.  It must  also  be made distinctly clear that the order  of  the Court  does not fix any minimum price at- which  the  shares shall be purchased by the company.  The order makes it clear that  if  the value of the shares is more than  Rs.  65  per share, the Company will have to pay the balance and if it is less than Rs. 65 per share the Gupta Group who have to  sell the shares, will have to refund the, difference between  the price  of the shares calculated at the rate of Rs. 65/-  per share  and the rate determined by the Chartered  Accountants and  Auditors  within  four  weeks from  the  date  of  such determination.  This pragmatic and flexible approach clearly safeguards  the  interests of the  creditors  including  the interveners.    There   could   have   been   a   legitimate apprehension  if some minimum price were fixed at which  the company  was  bound to purchase the shares.  Then  it  could have  been plausibly argued that if such minimum price  were higher than the real value of the shares, the company  would have  to  part  with  some of  its  funds  jeopardising  the security  of  the creditors.  Such not being  the  position, there  is  no  scope  for  apprehension  on  behalf  of  the interveners  that  the  reduction of  share  capital  to  be effected  under the Court’s direction without  reference  or notice to creditors would adversely affect their interests. We  may also point out that a right to notice by  reason  of any  rule of natural justice, which a party- may  establish, must  depend  for its existence upon proof  of  an  interest which  is  bound  to be injured by  not  hearing  the  party claiming  to be entitled to a notice and to be heard  before an order is passed.  If the duty to give notice and to  hear a  party  is  not mandatory, the actual order  passed  on  a matter  must  be  shown to  have  injuriously  affected  the interest  of  the  party which was given no  notice  of  the matter.   The  facts  discussed above by  us  show  that  no interest  of the interveners, on whose behalf we have  heard Mr.  De  at  length, has been injured by  not  hearing  them before the order was passed.

They have not shown us how the order could be different if they had    been    heard     by issuing  notices  to them under the inherent powers  of  the Court under rule 9 of the Company (Court) Rules, 1959,  even though there was no statutory duty to hear them.  Hence,  we hold that the order passed by this Court on 31st May 1977 is not vitiated on such a ground. 432 It was also urged that the Court was in error in making  the order without notice to the Central Government.  Section 400 provides.  that  the  Court  shall  give  notice  of   every application  made to it under ss. 397 or 398 to the  Central Government   and   shall   take   into   consideration   the representation, if any, made to it by that Government before passing a final order under that section.  It was urged that before this Court made the final order dated 31st May  1977, the  record does not show that any notice was given  to  the Central  Government  and,  therefore,  also  the  order   is vitiated.  We see no merit in this contention.  Undoubtedly, when  a petition is made to the Court under Ss. 397 and  398 it is obligatory upon the Court to give notice of the  peti- tion  to the Central Government and it would be open to  the Central Government to make a representation and if any  such representation is made, the Court would have to take it into consideration   before  passing  the  final  order  in   the proceeding.   But s. 400 does not envisage afresh notice  to be  issued  at the appellate stage.   The  present  petition under  ss. 397 and 398 was made to the Calcutta  High  Court and it was not disputed that before the learned single Judge finally  disposed  of  the  petition  inter  alia  directing purchase of shares of the Gupta Group by the Company, notice was  issued  to the Central Government. as envisaged  by  s. 400.  The Central Government apparently did       not appear and  make  any  representation. The  matter   came before  this Court initially against the interim order  made by  the  appellate Bench of the Calcutta High Court  in  the appeal  against the order of the learned single  Judge,  but subsequently  special  leave  was  obtained  for   appealing against  the order of the learned single Judge also  and  it was  after  this special leave was granted that  this  Court made the  final order.  Therefore,  there  was  no question of issuing fresh notice   to the Central Government under s. 400 and the contention must be negatived. Accordingly,  we find no merits in the  Civil  Miscellaneous Petition and it must be rejected. Before  parting  with this case we would like to  point  out that, unfortunately, though Suit Nos. 729/74 and 933/76 have been  filed’ by the interveners in the High Court at  Bombay as  far back as 1974,the written statements in  these  suits have  not been filed though more than 3 years have  elapsed. The decision in the suits may have a bearing on the value of shares  to be determined under the  directions  of this Court dated 31st May 1977. We, therefore, direct that  Suit Nos. 729/74 and 933/76 may be expedited and  they may  be  heard and disposed of without delay  at  any  rate, within a period of six months. S. R.

Petition rejected- 433

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