Case Law Companies Act S P Jain Vs Kalinga Tubes Ltd

PETITIONER:
S. P. JAIN

Vs.

RESPONDENT:
KALINGA TUBES LTD.

DATE OF JUDGMENT:
14/01/1965

BENCH:
WANCHOO, K.N.
BENCH:
WANCHOO, K.N.
GAJENDRAGADKAR, P.B. (CJ)
SIKRI, S.M.

CITATION:
1965 AIR 1535 1965 SCR (2) 720
CITATOR INFO :
RF 1976 SC 565 (29)
RF 1981 SC1298 (59,51)
R 1990 SC 737 (27)
R 1992 SC 453 (7)
ACT:
Companies Act (Act 1 of 1956), ss. 397 and 398-Scope of.

 

HEADNOTE:
In July 1954, two groups of shareholders led by P and 1,
who, together held an equal number of shares of the value of
Rs. 21 lakhs out of a total share capital of Rs. 25 lakhs in
the respondent company (then a private ate company), entered
into a private agreement with the Appellant, whereby, (i)
the share capital of the company was to be increased by Rs.
10 1/2 lakhs and shares of this value allotted to the
appellant so that the total shares held by him would be
equal to the holding of each of the other two groups; (ii)
each of these three groups of shareholders would have an
equal number of representatives on the Board of Directors;
(iii) the appellant undertook to arrange certain credit
facilities for the company; and (iv) the appellant was to be
the Chairman of the Board. In accordance with this
agreement, the appellant was made the Chairman and though
various resolutions were passed by the company to implement
the agreement, these resolutions did not in terms refer to
the agreement. and no change was made in the Articles of
Association of the company so as to embody the terms of the
agreement. Some time later, the subscribed capital of the
company was increased to Rs. 61 lakhs and the new shares
were so allotted as to maintain the parity in the share
holdings of the three groups. When one of the two minority
shareholders sold 250 shares, these were equally divided
between the three groups and one odd share was held by P, L
and the Appellant jointly.
In 1956-57, the company desired to raise a loan from the
Industrial Finance Corporation and as this Corporation made
advances only to public limited companies, in January 1957
the company was converted into a public company.
Appropriate amendments were made in its Articles of
Association, but even on this occasion, no attempt was made
to incorporate into the Articles the terms of the Agreement
of July 1954. After sanction had been obtained of the
Controller of Capital Issues for the issue of additional
share capital, the appellant suggested at a meeting of the
board of directors in March 1958 that the new shares should
be issued proportionately to the existing shareholders in
accordance with the provisions of Section 81 of the
Companies Act, 1956. On the other hand those representing
the P and L groups proposed that the new shares should be
offered privately in the best interests of the company at
the sole discretion of the directors; this proposal was made
because these two groups did not have money to subscribe for
the new capital and they feared that if shares were offered
in the first instance to existing shareholders, the
appellant could get all of them and thus acquire control of
the company. In view of the majority of the P and L groups
in the Board, their proposal was adopted and subsequently a
resolution to that effect was also accepted at a General
Meeting of the shareholders held in March 29, 1958. The
appellant thereafter instituted a suit to have the
resolution declared illegal and void and obtained an ex
parte injunction against the company from allotting shares
pursuant to this resolution. On July 13, 1958, the
appellant’s suit was dismissed by the Subordinate Judge and
the injunction vacated by him
721
at 11 A.M. The Board of Directors at a meeting held on that
date, immediately on receiving the news that the injunction
had been vacated, allotted the new shares to seven persons
who had previously applied for them. On the same day, the
appellant filed an appeal and applied for and obtained an
order staying the operation of the order of the Subordinate
Judge. Eventually these appeals were also dismissed and the
stay vacated.
In September 1960 another General meeting of the company was
called to approve a proposal to increase the share capital
of the company from Rs. 1 crore to Rs. 3 crores. It was
also intended that these new shares should be offered to
outsiders with a view to making the company more broad-
based.
At that stage the appellant filed a petition in the High
Court under Section 397 and 398 of the Companies Act, 1956,
complaining inter alia, that the issue of new shares was in
furtherance of a continuing oppression of the apperant’s
minority group; that by allotting such shares to benamidars
of P and L in disregard of the agreement of July 1954, it
was intended to exclude the appellant from all control of
the affairs of the company; that the resolutions passed in
March 1958 as to the manner of allotment of new shares
contravened s. 81 of the Companies Act, 1 956 and this
resolution as well as the hasty allotment on July 30, 1958
were in abuse of the power of the P and L groups and
oppressive of the minority. The petition was allowed by the
single Judge but this decision was reversed in appeal by a
Division Bench of the High Court. On appeal to the Supreme
Court.
HELD : (i) On the facts no case had been made out, of
oppression within the meaning of section 397.
For a petition under section 397 to succeed, it is not
enough to show that there is just and equitable cause for
winding up the company, though that must be shown as
preliminary to the application of section 397. It must
further be shown that the conduct of the majority share-
holders was oppressive to the minority as members and this
require.,, that events have to be considered not in
isolation but as a part of a consecutive story. There must
be continuous acts on the part of the majority shareholders,
continuing up to the date of the petition, showing that the
affairs of the company were being conducted in a manner
oppressive to some part of the members. The conduct must be
burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority
shareholders would not be enough unless lack of confidence
springs from oppression of the minority by a majority in the
management of the company’s affairs, and such oppression
must involve at least an element of lack of probity or fair
dealing to a member in the matter of his proprietary rights
as a shareholder. [937 C-F]
Elder v. Watson, (1952) S.C. 49; George Meyer v. Scottish
Cooperative Wholesale Society Ltd. (1954) S.C. 381; Scottish
Co-operative Wholesale Society Lid. v. Meyer and another,
[1958] 3 All. E.R. 66. Re. H. R. Harmer Ltd., [19581 3 All
E.R. 689; discussed and applied.
(ii) The agreement of July 1954 on which the case of
oppression was based was not binding even on the private
company and much less so on the public company when it came
into existence in 1957. It was really an agreement between
a non-member and two members of the company and although for
some time the agreement was in the main carried out, clearly
some of its terms could not be put in the articles of
association of the public company. As the company was not
bound by the
722
agreement, the mere fact that it was decided at the meeting
in March 1958 to offer the new shares to outsiders and not
the existing shareholders did not necessarily amount to an
oppression of the minority shareholders. The majority
shareholders were not bound to accept a proposal of the
minority shareholders that the new shares should be allotted
only to the existing shareholders. Furthermore the general
meeting having decided that new shares should not be issued
to the existing shareholders but to others, there was no
contravention of s. 81 of the Companies Act 1956 and the
resolution of March 28, 1958 was in accordance with law as
it stood at the time. [739 B-C; 740 G-H; 741 C-E; 745 D-F]
(iii) it could not be said that the allottees of new
shares were benamidars or stooges of the P or L group and
that by allotment of shares to them, the majority
shareholders were oppressing the minority. These allottees
were independent persons and the fact that the P and L
groups might be able to get the support of the holders of
the new shares did not necessarily mean oppression of the
appellant, for the new shareholders may support the P and L
groups on the ground that such support would be for the
benefit of the Company. [744 C-E]
(iv) The haste in issuing now shares upon the vacation of
the injunction of July 30, 1958 could not be held to be a
part of the design to oppress the minority. The company was
in need of money for expansion and its ability to obtain a
loan from the Finance Corporation depended upon the increase
of its subscribed share capital. The haste became necessary
because the injunction was vacated on that day and it was
felt that if immediate action was not taken and the new
shares allotted, there might be a further injunction and
consequent delay. The haste in the allotment of shares
arose out of circumstances brought about by the appellant’s
conduct. [743 A-E]
Held also, that no case had been made out for action under
section 398 on the ground that the affairs of the company
were being conducted in a manner prejudicial to its
interests. [749 C]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 734-747 of
1964.
Appeals from the judgment and order dated April 18, 1963 of
the Orissa High Court in A.H.O. No. 13 of 1961 and A.H.O.
Nos. 2 to 14 of 1962.
N. C. Chatterjee, S. Roy Chowdhury, M. L. Jhunjhunwala,
S. Murty and B. P. Maheshwari, for the appellant (in all
the appeals).
M. C. Setalvad, A. V. Viswanatha Sastri, Ranadeb Chaudhri,
M. K. Banerjee, J. B. Dadachanji, O. C. Mathur and
Ravinder Narain for respondent No. 1.
Ranadeb Chaudhurl and J. B. Dadachanji, for respondent No.
2. G. S. Pathak, B. Dutta and J. B. Dadachanji, for
respondent No. 3.
A.V. Viswanatha Sastri and J. B. Dadachanji, for respondent
No. 4.
723
Sachin Chowdhury, S. N. Andley, Rameshwar Nath and P.
L.Vohra,for the respondent Nos. 9, 10, and 12.
C.K. Daphtary, Attorney-General, J. B. Dadachanji, O. C.
Mathur and Ravinder Narain, for respondent No. 13.
Sachin Chowdhury, B. Sen, Dipak Dutta Chowdhury, for res-
pondent No. 14.
Niren De, Additional Solicitor-General and Rajinder Narain &
Co. for respondent No. 15.
S. V. Gupte, Solicitor-General and Rajinder Narain, & Co.
for respondent No. 16.
The Judgment of the Court was delivered by
Wanchoo, J. These fourteen appeals on certificates granted
by the High Court of Orissa raise common questions of law
and fact and will be dealt with together. They are a
consequence of a fight between two groups of business
magnates for the control of Messrs Kalinga Tubes Limited
(hereinafter referred to as the Company). They arise out of
an application under ss. 397, 398, 402 and 403 of the Indian
Companies Act, No. 1 of 1956, (hereinafter referred to as
the Act) made by the appellant in the High Court. Most of
the facts are not seriously in dispute and it is necessary
to set them out in detail in order to decide the main point
raised on behalf of the appellant, namely, that the affairs
of the Company were being conducted in a manner oppressive
to him and his group of members.
The Company was floated as a private limited company on
December 1, 1950 with an authorised capital of Rs. 25 lacs.
Originally, the shares were held by two groups of
shareholders equally, except a few shares. These groups of
shareholders may for our purposes be taken to be represented
by Patnaik and Loganathan. The Company raised a sum of Rs.
36 lacs by the issue of two series of debentures which were
guaranteed by the Government of Orissa between 1952 to 1954.
In 1954, the appellant was approached by Dr. Mohanty, then
Secretary to Government of Orissa (Industries Department)
which was naturally interested in the Company having
guaranteed debentures to the tune of Rs. 36 lacs, for
helping the Company which was in financial and
administrative difficulties. The appellant was requested to
help the Company by providing finance and by arranging loans
from banks and other sources and further by providing the
necessary administrative guidance. The appellant agreed to
do so and consequently on July 27, 1954, an agreement was
entered into
724
between the appellant, and Patnaik and Loganathan To this
agreement, the Company was not a party. We shall refer in
detail to the various terms of the agreement later. In
brief, however, the agreement provided that the appellant
would be allotted shares in the Company equal to those held
by Patnaik and Loganathan after increasing the share capital
of the Company- Thus the Company would have three groups of
shareholders represented by the appellant, Patnaik and
Loganathan holding equal number of shares, besides a French
company and one Rath, who between themselves held shares
worth Rs. 4 lacs. These shareholders however were not party
to the agreement. It was also provided that these three
groups of shareholders would have equal number of
representatives on the Board of Directors of the Company,
namely, two each for the time being. The appellant also
undertook to arrange for cash credit facilities to the limit
of Rs. 50 lacs on the security of raw materials and finished
goods of the Company. And finally, the appellant jain was
to be the chairman of the Company. This agreement was
followed by certain resolutions passed by the Company on
August 16, 1954 by which some of the terms of the agreement
were substantially carried out, the authorised capital was
increased to rupees one crore (though it was issued later in
instalments), and the appellant was made the chairman of the
Company. It may however be noted that the resolutions did
not refer to the agreement in terms and no change was made
in the Articles of Association of the Company to bring them
in conformity with all the terms of the agreement. In
January 1955, Narayanswami who had been appointed Managing
Director resigned and Patnaik was appointed the Managing
Director. In April 1955, the Company started production.
Sometime thereafter the share capital was further subscribed
up to Rs. 61 lacs and the three groups, namely, the
appellant Jain, Patnaik and Loganathan held one-third of the
shares leaving out shares held by the French company. Mr.
Rath had sold his shares numbering 250 and these shares were
equally divided between the three groups and the one odd
share was held by all the three namely Jain, Patnaik and
Loganathan, jointly. In September 1956, a resolution was
passed by the Board of Directors referring the question of
conversion of the Company to a public limited company to a
sub-committee consisting of the appellant, Loganathan and
Patnaik. About the same time, an application was made to
the Controller of Capital Issues for the sanction of the
issue of further shares to the extent of Rs. 39 lacs out of
the authorised capital of rupees one crore and for the
725
issue of debentures to the extent of Rs. 64 lacs. In this
application it was stated that the shares were intended to
be issued privately to the existing shareholders and/or
their nominees. In december 1956 a resolution was passed by
the Board of Directors for converting the Company into a
public limited company and for amending the Articles of
Association in consequence at the next annual general
meeting. This was necessary as the Company wanted to borrow
from the Industrial Finance Corporation which however made
advances only to public limited companies. On January 11,
1957, the Company was converted into a public company and
the Articles of Association were amended. Even so, no
attempt was made to incorporate the terms of the agreement
dated July 27, 1954 in the Articles of Association so
amended.
Trouble however seems to have arisen between the appellant
and the other two groups as early as September 1955 in
consequence of an advertisement issued by the appellant in
newspapers suggesting that his group was engaged in the
manufacture of black and galvanised steel tubes and in this
advertisement the emblem of the Company was also printed, as
if the Company was part of the appellant’s group. This led
to strong protests by Patnaik and Loganathan and eventually
the appellant withdrew the advertisement. However, the
appellant continued to be the chairman of the Company in
spite of growing differences between him and Patnaik and
Loganathan. Articles of Association were further amended in
November 1957. At that time also nothing was put therein on
the basis of the agreement dated July 27, 1964. In December
1957, the Controller of Capital Issues sanctioned the issue
of shares of the face value of Rs. 39 lacs and debenutres of
the face value of Rs. 64 lacs subject to the provisions of
s. 81 of the Act. Real trouble started after this sanction
for the issue of fresh shares. We shall have occasion to
refer to s. 81 of the Act later; it is enough to say here
that that sanction provides that the new shares would be
offered in the first instance to the existing shareholders
in proportion, as nearly as the circumstances admit, to the
capital paid up on the existing shares at that date “subject
to any direction to the contrary which may be given by the
Company in general meeting”. So unless the Company decided
otherwise at a general meeting, the new issue of shares to
the tune of Rs. 39 lacs would have had to be offered under
s. 81 of the Act to the existing shareholders in proportion
to their existing shares. At that time as already
indicated, the appellant group held one-third share
726
and Loganathan and Patnaik groups held two-thirds share
except for certain shares held by the French company and
therefore in the absence of a direction to the contrary at a
general meeting, the new shares would also have gone in
equal shares to the three groups subject to the shares which
would go to the French Company.
The question of the issue of new shares came up before a
meeting of the Board of Directors on March 1, 1958, and the
differences between the three groups which had already begun
came to the surface at that time. The appellant proposed to
the Board of Directors that the new shares should be issued
to the existing shareholders as provided in s. 81 of the
Act. Patnaik on the other hand proposed that a general
meeting should be called for the purpose of passing a
resolution for the issue of new shares and for the manner
and proportion in which shares were to be offered privately
to the shareholders and other persons and for such other
incidental matters as provided in the section. It is
apparent from this conflict between the appellant group and
Patnaik and Loganathan groups in this meeting that the
groups of Patnaik and Logan nathan did not want the
appellant’s group to get roughly one-third of the new
shares. The fear of Patnaik in this connection was that if
shares were offered privately to the existing shareholders,
the appellant might get all of them, for the groups of
Patnaik and Loganathan did not have the money to subscribe
to the new shares if offered in the first instance to the
existing shareholders. Thus if the appellant got all the
new shares, his group would become the majority shareholder
and would thus get control of the Company. Consequently,
Patnaik put forward the resolution already referred to at
the meeting of the Board of Directors on March 1, 1958 which
provided for calling a general meeting for directions as to
the issue of new shares, which directions it was hoped would
override the provisions of S. 81 of the Act. Patnaik’s
resolution was passed and the appellant’s proposal was
outvoted for the obvious reason that the Patnaik and
Loganathan groups held the majority of shares. In
consequence a general meeting of shareholders was called for
the purpose on March 29, 1958.
The appellant did not attend the meeting of March 29, 1958
though he was present by proxy. Patnaik presided at that
meeting. Two resolutions were put forward at that meeting,
one on behalf of the appellant s group and the other on
behalf of Patnaik and Loganathan groups. The appellant’s
resolution proposed that the new shares should be offered to
the existing shareholders of the Company in the proportion
of their share-
7 27
holdings and the offer should remain open for a period of
fifteen days with the right to accept or renounce the whole
or part of the offer in their names or in the names of their
nominee or nominees and if a shareholder did not accept
within that period the offer should be deemed to have been
declined. The second resolution on behalf of the Patnaik
Loganathan groups proposed that the new shares should not be
offered or allotted to the existing shareholders or to the
public and that they should be allotted privately in the
best interest of the Company at the sole discretion of the
directors to such persons as might have applied or there-
after apply on the condition that atleast 5 per centum of
the face value of shares applied for was paid as application
money and 10 per centum of the face value was paid on
allotment and the balance paid as and when called upon in
accordance with the Articles of Association of the Company.
As was to be expected, the resolution put forward on behalf
of the appellant was lost and the resolutions put forward on
behalf of Patnaik and Loganathan groups as to the allotment
of new shares were passed. Thus in that meeting there was a
complete breach between the three groups.
This was followed on April 18, 1958, by a suit by the
appellant and some other shareholders of his group for a
declaration that the resolutions dated March 29, 1958 were
ultra vires, illegal, void and not binding on the appellant,
the Company and its shareholders with a prayer for permanent
injunction restraining the defendnats in the suit (namely,
the other two groups) and their servants and agents from
giving effect to or acting in any way in pursuance of the
said resolutions and further restraining each of the
defendants, their servants and agents from issuing and
alloting the new shares in terms of the impugned
resolutions. That suit was filed in the court of the
Subordinate Judge, Cuttack. It is unnecessary here to refer
to the details of that suit. It is enough to say that an ex
parts interim injunction was obtained on the same day
restraining the Company and other defendants from issuing
and allotting the new shares to persons other than the
existing shareholders and giving effect to the resolutions
in that regard passed at the meeting held on March 29, 1958.
The Company then made an application for setting aside the
ex parte interim injunction. This matter came up before the
court on May 15, 1958. At that time an offer was made on
behalf of the Company that in view of the urgent necessity
for funds, the Company might be permitted to issue two-
thirds of the shares, keeping back one-third which would
have gone to the appellant if the shares had been offered to
the existing shareholders; but this was not accepted on
behalf of
728
the appellant. The hearing of the injunction matter was
postponed on several dates and it appears that the Patnaik
and Loganathan groups continued to call meetings of the
Board of Directors on the dates fixed in the suit, and the
agenda always provided for the allotment of the new shares.
Eventually on July 30, 1958 the Sub-ordinate Judge delivered
judgment and vacated the injunction at about 11 a.m. A
meeting of the Board of Directors was being held on the same
day from 10-30 a.m. and as soon as a message was received
that the injunction had been vacated the new shares were
allotted to seven persons who had applied for the same along
with the application money. This happened about midday and
the return as required by the Act was duly filed with the
Registrar of Companies at 12-40 p.m. The same day, an
application was made at 12-40 p.m. on behalf of the
appellant before the Subordinate Judge praying that the
order vacating the injunction be stayed till the appellant
obtained orders from the High Court where he wished to
appeal. The Company’s lawyer however intimated to the court
that the shares had already been allotted. Even so, the
court passed an order staying the operation of its judgment
delivered earlier for two days. The matter was then taken
in appeal to the High Court by the appellant. The appeal
was dismissed in September 1958. There was a Letters Patent
appeal following the dismissal but that was not pressed and
was eventually dismissed in November 1960.
The case of the appellant was that the seven persons to whom
the new shares were allotted were nominees or benamidars of
Patnaik and Loganathan and therefore these groups really
allotted the new shares to themselves through their
benamidars. It was also alleged that these seven persons
only paid 5 per centum of the share money and this showed,
even though it was said that the Company was in urgent need
of money, that the shares were allotted to persons who were
not in a position to pay the share money in full. The
appellant contended that the allotment of the new shares was
made surreptitiously and deliberately with the sole idea of
defeating the rights of shareholders represented by him and
his group and this amounted to oppression of the minority
shareholders.
To continue the narrative, it appears that an extraordinary
general meeting of the Company was called on September 21,
1960 to consider increasing the share capital from rupees
one crore on which it stood after the increase in 1958 to
rupees three crores by issue of additional equity shares
numbering one lac of the value of rupees one crore and the
issue of another one lac cumulative
7 29
redeemable income-tax free preference shares of the value of
rupees one crore subject to such rights and privileges
attaching to such preference shares as might be specified in
the new Article to be inserted in the Articles of
Association. It was also intended that these new shares
should be offered to outsiders (i.e. other than the existing
shareholders) with a view to making the Company more broad
based. This meeting was called by a notice issued on August
25, 1960.
It was the calling of this meeting which led to the
application under s. 397 etc. on September 14, 1960 by the
appellant. It was urged in the application that this issue
of new shares was in furtherance of the continuing and
continuous process of oppression of the appellant and his
group being the minority shareholders and was designed for
the purpose of completely excluding the appellant and his
group from all control in the affairs of the Company and to
deprive the financial advantage to be gained by them by the
issue of new shares at par and to retain such advantage
exclusively to-the Patnaik and Loganathan groups so that the
appellant and his group might be forced to sell their
holdings to the Patnaik and Loganathan groups at a nominal
value. That was why the new shares were being offered to
outsiders and not to the existing shareholders, the object
being to offer the shares to nominees and/or benamidars of
the Patniak and Loganathan groups and to such persons who
would be within their control. The result of this would be
that Loganathan and Patnaik groups would acquire more than
75 per centum of the voting strength of the Company and
would be in complete control of it and so gain enormous
financial advantage for themselves. This would cause
irreparable loss and prejudice to the rights of the
appellant and his group of minority shareholders. It was
alleged that this was being done by the Patnaik and
Loganathan groups who were in control of the majority of
shares. Finally it was urged that the affairs of the
Company were conducted in a manner prejudicial to the
interest of the Company by Loganathan and Patnaik groups and
there was mismanagement in conducting such affairs. It was
further alleged that the conduct of Loganathan and Patnaik
groups towards the minority shareholders was oppressive,
burdensome, harsh and wrongful and the entire manoeuvre was
that these groups should be able to control over 75 per
centum of the voting strength in the Company. Further it
was alleged that the conduct of these groups involved a
visible departure from the standard of fair dealing and
violation of the conditions of fair play to which the
appellant and his group as minority shareholders were
entitled. In particular
730
the denial to the existing share holders to subscribe,. to
the new :shares in proportion to their respective holdings
and the issue of such shares to benamidars of the Patnaik
and Loganathan groups was oppressive to the appellant and
his group of minority shareholders and also amounted to
mismanagement of the affairs of the ,Company. This was also
in breach and violation of the agreement dated July 27, 1954
to which the Patnaik and Loganathan groups were parties.
Further it was said that although in form the Company was a
public company in reality it was a partnership consisting of
the three groups namely, the appellant’s group, and of
Loganathan and Patnaik groups. The last two groups had
combined together against the appellant group which had
resulted in justifiable lack of confidence on the part of
the appellant and his group in the conduct of the affairs of
the Company by the other two groups. Such lack of
confidence had been caused by lack of probity in the conduct
of the affairs of the Company by these two groups, which
were acting to benefit themselves personally and were not
concerned with the welfare of the Company. The appellant
and his group would not get any relief by calling a general
meeting of the Company, and the facts and circumstances
aforesaid would justify the making of a winding-up order on
the ground that it was just and equitable that the Company
should be wound up. Therefore the appellant prayed for
directions under s. 397 of the Act, as the winding-up of the
Company which was in a prosperous condition would unfairly
prejudice the appellant and other members of the minority
group and redress against such oppression could be given by
the High Court by making suitable directions in that behalf.
The affairs of the Company were being conducted in a manner
prejudicial to the interest of the Company for reasons
already stated and there had been a material change in the
management or control of the Company by alteration in its
Board of Directors and by fraudulent changes introduced in
the ownership of the Company’s shares and by reason of the
wrongful act and conduct of the Patnaik and Loganathan
groups. The appellant therefore prayed for the removal ,of
the present Board of Directors, for re-constitution of the
Board of Directors with at least two permanent
representatives from his group and for ensuring equal
representation in the Board of the three groups of
shareholders, and for alterations in the Articles of
Association to incorporate therein the provisions of the
agreement dated July 29, 1954. The appellant also sought a
declaration that the resolutions passed by the Board of
Directors on March 1, 1958 and at the general meeting dated
March 29, 1958,
731
were null and void and were passed in abuse of the power of
Patnaik and Loganathan groups and in oppression of the
minority Shareholders and prayed that the said resolutions
be set aside in so far as they related to the issue and
allotment of 39,000 new shares. The allotment made on July
30 should be declared illegal and null and void as it was
made in abuse of the powers of the Patnaik and Loganathan
groups and in oppression of the minority shareholders and
was not binding upon the Company, the appellant and his
group. It was prayed that directions be given to sell the
said 39,000 shares by the allottees to the Company upon
payment of the amounts actually paid thereon so far and the
Company be permitted to offer the same to the shareholders
as on July 29, 1958 in proportion to their respective
shareholdings. An injunction was also prayed for
restraining the Company from holding the meeting on
September 21, 1960. Finally it was prayed that orders be
passed for investigation into the conduct of the affairs of
the Company by the Loganathan and Patnaik groups and
suitable directions be made with a view to regulating the
affairs of the Company in future and if necessary in
administrator of the Company be appointed for carrying out
such directions as the High Court might be pleased to make
for purposes of removing the oppression and the acts of
misconduct and mismanagement and for regulating the conduct
of the affairs of the Company. The seven persons to whom
the new shares were allotted in July 1958 were also made
parties and injunction was prayed for restraining them from
transfering those shares.
The application was opposed on behalf of the Company, and
its main contention was that the Company was not a party to
the agreement dated July 27, 1954 and was not bound by it.
It was further contended that there was no mismanagement and
the Company and its affairs were not being conducted in a
manner prejudicial to it. It was also contended that there
was no oppression on the undisputed facts in the present
case. The application was also opposed on behalf of
Loganathan and Patnaik groups and their case was that they
had not acted in any manner which could be said to be
oppressive of the rights of the minority shareholders
represented by the appellant. They also contended that the
affairs of the Company were not being mismanaged nor were
they being conducted prejudicially to the interest of the
Company Further the seven persons to whom the, shares had
been allotted on July 30, 1958 contended that they were not
benamidars of the Patnaik and Loganathan groups. Their case
was that they were independent persons of substance and had
applied for the
7 32
new sham themselves and not as benamidars of Loganathan and
Patnaik groups. They denied that there was any oppression
of the minority shareholders as alleged or that there was
any mismanagement of the affairs of the Company or any
conduct which was prejudicial to the interest of the
Company. They contended that the resolutions of March 1,
1958, March 29, 1958 and July 30, 1958 were perfectly legal
and proper and they were entitled to the shares which had
been allotted to them.
The application was heard in the first instance by a learned
Single Judge of the High Court. He came to the conclusion
that the way in which the Patnaik and Loganathan groups had
acted in the matter of the issue of new shares was
oppressive of the minority shareholders represented by the
appellant and the subsequent conduct of the two groups
amounted to continuing and continuous process of oppression
of the minority shareholders and also amounted to
mismanagement likely to be prejudicial to the interest of
the Company. He came to the conclusion that the persistent
acts of the Loganathan and Patnaik groups showed that their
motive was to oust the minority group of shareholders com-
pletely and the sole object of convening the meeting of
September 21, 1960 and to pass the proposed resolutions was
in furtherance of the continuing and continuous process of
oppression of the appellant and his group, being the
minority shareholders,. Finally it was held that in view of
the oppression there was just and equitable cause for
winding-up the Company. The learned Judge therefore allowed
the petition and granted certain reliefs to which it is
unnecessary to refer.
This was followed by fourteen appeals to a Division Bench by
the Company and the various shareholders. These appeals
were consolidated and heard together. The Division Bench
came to the conclusion that the agreement of July 27, 1954
was not binding on the public company which came into
existence after July 11, 1957, whatever might have been the
position under the agreement when it was a private company.
It also came to the conclusion that the seven persons to
whom the new shares were offered were not benamidars of
Loganathan and Patnaik groups but were independent persons
of substance, even though they might be friends of the
majority group of shareholders. But there was nothing to
show that they were under the control of the majority group
and therefore it could not be said that 75 per centum of the
voting strength was concentrated in the hands of Loganathan
and Patnaik groups except where these new allottees chose to
vote with these groups. On a careful consideration of
733
the facts, the Division Bench came to the conclusion that no
such oppression had been established as would justify an
order under s. 397 of the Act. As to mismanagement under s.
398, the Division Bench came to the conclusion that no case
had been made out under that section. On this view of the
matter, the appeals were allowed and the application of the
appellant was dismissed and the parties were ordered to bear
their own costs. Thereupon the appellant applied for and
obtained certificates to appeal to this Court and that is
how the matter has come up before us.
We shall first take up the case under s. 397 of the Act and
proceed on the assumption that a case has been made out to
wind-up the Company on just and equitable grounds. This is
a new provision which came for the first time in the Indian
Companies Act, 1913 as s. 153-C. That section was based on
s. 210 of the English Companies Act, 1948, which was
introduced therein for the first time. The purpose of
introducing s. 210 in the English Companies Act was to give
an alternative remedy to winding up in case of mismanagement
or oppression. The law always provided for winding up, in
case it was just and equitable to wind up a company.
However, it was being felt for sometime that though it might
be just and equitable in view of the manner in which the
affairs of a company were conducted to wind it up, it was
not fair that the company should always be wound up for that
reason, particularly when it was otherwise solvent. That is
why s. 210 was introduced in the English Act to provide an
alternative remedy where it was felt that though a case had
been made out on the ground of just and equitable cause to
wind up a company, it was not in the interest of the
shareholders that the company should be wound up and that it
would be better if the company was allowed to continue under
such directions as the court may consider proper to give.
That is the genesis of the introduction of s. 153-C in the
1913-Act and s. 397 in the Act.
Section 397 reads thus :-
“Application to Court for relief in cases of
oppression(1) Any members of a company who
complain that the affairs of the company are
being conducted in a mariner oppressive to any
member or members (including any one or more
of themselves) may apply to the Court for an
order under this section, provided such
members have a right so to apply in virtue of
section 399.
up./65-13
734
(2) If, on any application under sub-section
(1), the Court is of opinion-
(a) that the company affairs are being
conducted in a manner oppressive to any
member or members; and
(b)that to wind up the company would unfairly
prejudice such member or members, but that
otherwise the facts would justify the making
of a winding up order on the ground that it
was just and equitable that the company should
be wound up;
the Court may, with a view to bringing to an
end the matters complained of, make such order
as it fit”
It gives a right to members of a company who comply with the
conditions of S. 399 to apply to the court for relief under
s. 402 of the Act or such other reliefs as may be suitable
in the circumstances of the case, if the affairs of a
company are being conducted in a manner oppressive to any
member or members including any one or more of those
applying. The court then has power to make such orders
under s. 397 read with s. 402 as it thinks fit, if it comes
to the conclusion that the affairs of the company are being
conducted in a manner oppressive to any member or members
and that wind up the company would unfairly prejudice such
member or members, but that otherwise the facts might
justify the making of a winding up order on the ground that
it was just and equitable that the company should be wound
up. The law however has not defined what is oppression for
purposes of this section, and it is left to courts to decide
on the facts of each case whether there is such oppression.
as calls for action under this section.
We may in this connection refer to four cases where the new
s. 210 of the English Act came up for consideration, namely,
(1) Elder v. Elder and Watson,(1), (2) George Meyer v.
Scottish Cooperative Wholesale Society Ltd.(2), (3) Scottish
Co-operative Wholesale Society Ltd. v. Meyer and another(3),
which was an appeal from Meyer’s case(2), and (4) Re. H. R.
Harmer Limited(4). Among the important considerations which
have to be kept in view in determining the scope of s. 210,
the following matters were stressed in Elder’s case(1) as
summarised at p. 394 in Meyer’s case(2) :-
“(1) The oppression of which a petitioner
complains must relate to the manner in which
the affairs of the
(1) [1952] S. C. 49:
(3) [1958] 3 All. E.R. 66:
(2)[1954] S. C. 181:
(4)[1958] 3 All. E.R. 689.
735
company concerned are being conducted; and the
conduct complained of must be such as to
oppress a minority of the members (including
the petitioners) qua shareholders.
(2) It follows that the oppression
complained of must be shown to be brought
about by a majority of members exercising as
shareholders a predominant voting power in the
conduct of the company’s affairs.
(3) Although the facts relied on by the
petitioner may appear to furnish grounds for
the making of a winding up order under the
‘just and equitable’ rules, those facts must
be relevant-to disclose also that the making
of a winding up order would unfairly prejudice
the minority members qua shareholders.
(4) Although the word ‘oppressive’ is not
defined, it is possible, by way of
illustration, to figure a situation in which
majority shareholders, by an abuse of their
predominant voting power, are ‘treating the
company and its affairs as if they were their
own property’ to the prejudice of the minority
shareholders-and in which just and equitable
grounds would exist for the making of a
winding up order…. but in which the
‘alternative’ remedy provided by S. 210 by way
of an appropriate order might well be open to
the minority shareholders with a view to
bringing to an end the oppressive conduct of
the majority.
(5) The power conferred on the Court to
grant a remedy in an appropriate case appears
to envisage a reasonably wide discretion
vested in the Court in relation to be order
sought by a complainer as the appropriate
equitable alternative to a winding-up order.”
Meyer’s case was between a parent company and a subsidiary
company and it was held that “(1) when a subsidiary company
is formed with an independent minority of shareholders, the
parent company must, if engaged in the same class of
business, conduct the affairs of the subsidiary, even though
these are in a sense its own, in such a way as to deal
fairly with the subsidiary; (2) that, if the parent company
deliberately pursues a course calculated to destroy its
subsidiary, with resulting loss to the minority
shareholders, this may amount to oppression within the
meaning of sec. 210; (3) that the conduct of a majority
shareholder may amount to oppression notwithstanding the
fact that up./65-
736
his own shares depreciate in value pro rata with those of
the minority; and (4) that, even if the majority shareholder
has virtually destroyed the substratum of the company by his
oppressive conduct and it is conceded by all parties to be
just and equitable that the company be wound up, the
oppressed minority may nevertheless be entitled to a remedy
under sec. 210.”
These observations were approved by the House of Lords in
appeal and it was held that “whenever a subsidiary is formed
as in this case with an independent minority of
shareholders, the parent company must, if it is engaged in
the same class of business, accept as a result of having
formed such a subsidiary an obligation so to conduct what
are in a sense it-, own affairs as to deal fairly with the
subsidiary.”
In Harmer’s case(1), it was held that “the word ‘oppressive’
meant burdensome, harsh and wrongful”. It was also held
that “the section does not purport to apply to every case in
which the facts would justify the making of a winding up
order under the ‘just and equitable’ rule, but only to those
cases of that character which have in them the requisite
element of oppression”. It was also held that “the result
of applications under s. 210 in different cases must depend
on the particular facts of each case, the circumstances in
which oppression may arise being so infinitely various that
it is impossible to define them with precision”. The
circumstances must be such as to warrant the inference that
“there had been, at least, an unfair abuse of powers and an
impairment of confidence in the _probity with which the
company’s affairs are being conducted, as distinguished from
mere resentment on the part of a minority at being outvoted
on some issue of domestic policy”. The phrase “oppressive
to some part of the members” suggests that the conduct
complained of “should at the lowest involve a visible
departure from the standards of fair dealing, and a
violation of the conditions of fair play on which every
shareholder who entrusts his money to a company is entitled
to rely. … But, apart from this, the question of absence
of mutual confidence per se between partners or between two
sets of shareholders, however relevant to a winding up seems
to have no direct relevance to the remedy granted by S. 210.
It is oppression of some part of the shareholders by the
manner in which the affairs of the company are being
conducted that must be averred and proved. Mere loss of
confidence or pure deadlock does not come within s. 210. It
is not lack of confidence between shareholders per se that
brings s. 210 into play, but lack of confi-
(1)[1958] 3 All. E.R. 689.
737
dence springing from oppression of a minority by a majority
in the management of the company’s affairs, and oppression
involves at least an element of lack of probity or fair
dealing to a member in the matter of his proprietary rights
as a shareholder.”
These observations from the four cases referred to above
apply to s. 397 also which is almost in the same words as s.
210 of the English Act, and the question in each case is
whether the conduct of the affairs of a company by the
majority shareholders was oppressive to the minority
shareholders and that depends upon the facts proved in a
particular case. As has already been indicated, it is not
enough to show that there is just and equitable cause for
winding up the company, though that must be shown as
preliminary to the application of s. 397. It must further
be shown that the conduct of the majority shareholders was
oppressive to the minority as members and this requires that
events have to be considered not in isolation but as a part
of a consecutive story. There must be continuous acts on
the part of the majority shareholders, continuing up to the
date of petition, showing that the affairs of the company
were being conducted in a manner oppressive to some part of
the members. The conduct must be burdensome, harsh and
wrongful and mere lack of confidence between the majority
shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression
of a minority by a majority in the management of the
company’s affairs, and such oppression must involve at least
an element of lack of probity or fair dealing to a member
in the matter of his proprietary rights as a shareholder.It
is in the light of these principles that we have to consider
the facts in this case with reference to s. 397.
The main plank of the appellant’s case to prove oppression
is the agreement of July 27, 1954 between himself and
Patnaik and Loganathan. At that time he was not a member of
the Company. It is not disputed that the Company was not a
party to that agreement and is thus strictly speaking not
bound by its terms. But even apart from this strict legal
aspect of the matter, let us see what exactly the agreement
provides. At that time Patnaik and Loganathan groups held
shares of the value of Rs. 21 lacs in the Company, and the
main provision of the agreement is that the share capital
would be increased and the appellant would be given shares
of the face value of Rs. 10,50,000 so that his, holding
should be equal to the holdings of the other two groups. It
also provides that the three groups would have an equal num-
ber of representatives on the Board of Directors and the
appellant would be its Chairman Other provisions of the
agreement refer
738
to matters of detail to which it is unnecessary to refer.
It will be seen, however, that there is no provision in the
agreement as to what would happen if and when the share
capital was actually increased beyond the increase envisaged
at the time of the agreement. There is also no provision in
the agreement to the effect that the Articles of Association
of the private company as it then was would be amended
suitably to bring the provisions of the -agreement with
respect to shareholding and the Board of Directors into line
with the agreement. Thus there is nothing in the agreement
about the future in the matter of allotment of shares in
case capital was actually increased thereafter. In this
connection our attention is drawn to the fifth term of the
agreement which is in these terms -.-
“Ordinary shares of the face value of Rs. 4
lacs held by the French company (Rs. 3,75,000)
and Mr. Rath (Rs. 25,000) will continue to be
held by them as heretofore, and none of the
parties hereto will have any interest therein
so that the shareholding in the Company of all
the three parties hereto will remain equal and
in the same proportion.”
It is urged that this term shows that the intention was that
the shareholding of the three groups would remain equal for
ever. We are not prepared to read this implication in this
term. It was easy to provide in the agreement that whenever
capital was actually increased, it would be divided equally
between the three parties thereto. In the absence of such a
provision we do not think that the fifth term is capable of
the interpretation which is put on it on behalf of the
appellant. It only deals with the shares worth Rs. 4 lacs
held by the other two persons and provides that besides
those shareholdings capital shares would be held equally by
the three parties. Therefore as we read the agreement we
cannot come to the conclusion that it provides that if in
future there was an actual increase in capital that will
necessarily be shared equally by the three parties.
However, it is said that the conduct of the three parties
later on shows that when there was actual increase of
capital to Rs. 61 lacs sometime after July 1954, this
increase was shared equally by the three parties and further
when Mr. Rath sold his holdings in the Company they were
purchased equally by the three parties so much so one odd
share out of 250 shares was held by the three parties
jointly. This is undoubtedly so, and does give some colour
to the argument that the three parties concerned in the
739
agreement intended that their shareholdings should remain
equal even later. But this intention cannot be said to bind
the Company, muchless so when the Company was not bound
strictly speaking even by the express terms of the
agreement. So far as the Company is concerned, it was free
to dispose of shares as the directors or the shareholders in
general meeting considered proper without regard to this
agreement.
Another element came into the picture in January 1957 when
the Company was converted into a public limited company. It
is obvious that a public limited company was even much less
bound by the agreement of July 1954 as compared to the
private company. We have already pointed out that even when
the Company was private its Articles of Association were not
amended to bring them into line with the agreement and that
shows that the agreement was only between two groups of
shareholders and Jain with respect to the state of affairs
as it was at the time of the agreement. When the Company
became a public limited company and it was decided to issue
new shares of the value of Rs. 39 lacs the question of
allotment of these shares arose. By then some differences
had developed between the three groups. The appellant
wanted the shares to be allotted to the existing
shareholders while the Patnaik and Loganathan groups wanted
the matter to be decided by a general meeting as evidenced
by what happened in the meeting of the Board of Directors
dated March 1, 1958. It appears that the decision to issue
new shares was taken sometime in 1956 when the Company was a
private company. At that time the authorised capital was
rupees one crore though only Rs. 61 lacs had been issued.
The fresh issue of Rs. 39 lacs worth of shares was thus
intended to bring the subscribed capital up to the limit of
the authorised capital. The application to the Controller
of Capital Issues was made for that purpose on September 17,
1956. At that time the intention was that the issue would
be private and would be made to the existing shareholders,
directors and/or their nominees. This was bound to be so as
the Company was then private. As, however, the Company
wanted a loan from the Industrial Finance Corporation and as
that Corporation would only grant loans to a public company,
the Company was converted into a public company, as already
indicated, in January 1957.
The contention of the appellant, however, is that when the
share capital was decided to be increased by fresh issue
within the limit of rupees one crore, regulation 42 of the
First Schedule to the 1913 Act was in force and that
regulation required that direction to the contrary as to
allotment of shares should be given
740
by the resolution sanctioning increase of share capital.
This was however not done at the time when the authorised
share capital was decided to be increased in 1954 and
consequently the new shares had to be allotted to the
existing shareholders under regulation, 42. At that time,
however, the Company was private and the shares had to be
issued to the existing shareholders and no question of any
direction to the contrary arose if the Company was to retain
its private character. The sanction of the Controller of
Capital Issues came in December 1957 when the Company had
become a public limited company, and the question of allot-
ment arose thereafter. By that time the Act (i.e. the 1956
Act) had been passed and regulation 42 of the First Schedule
to the 1913 Act was no longer in force. Instead it bad been
replaced by s. 81 of the Act, which provides that “where at
any time subsequent to the first allotment of shares in a
company, it is proposed to increase the subscribed capital
of the company, by the issue of new shares, then, subject to
any direction to the contrary which may be given by the
company in general meeting and subject only to those
directions, such new shares shall be offered to the persons
who at the time of the offer are holders of equity shares of
the company, in proportion as nearly as circumstances admit,
to the capital paid up on those shares at that time”.
Further sub-s. (3) of s. 81 provides that the section shall
not apply to a private company. Thus S. 81 specifically
applies to public companies only and comes into play when
subscribed capital (as distinct from authorised capital) has
to be increased. Therefore when the question of actually
issuing new shares arose after the sanction of the
Controller, regulation 42 was no longer in force as it had
been repealed, and action had to be taken in accordance with
s. 81 of the Act. Section 81 does not require that
direction to the contrary must be given by the resolution
sanctioning the increase of share capital as under
regulation 42 of the First Schedule to the 1913 Act.
Consequently it was open to the public company in 1958 when
it proposed to increase the subscribed capital after the
sanction of the Controller to act under s. 81 and this was
what was done by the resolution of March 28, 1958 at the
general meeting. The general meeting decided that new
shares should not be issued to the existing shareholders but
should be issued to others privately. The resolution of
March 29, 1958 was in accordance with the law as it stood
when it was passed and cannot ‘be said to be vitiated in any
way.
It is however urged that the notice for the general meeting
of the 29th March, 1958 was not in accordance with s. 173,
and so
741
the proceedings of the meeting must be held to be bad. This
objection was however not taken in the petition and we have
therefore not permitted the appellant to raise it before us,
as it is a mixed question of fact and law. We may add that,
though the objection was not taken in the petition, it seems
to have been urged before the appeal court. Das J. has
dealt with it at length and we would have agreed with him if
we had permitted the question to be raised. This attack on
the validity of what happened on March 29, 1958 must thus
fail.
We have already said that the public company which came into
existence in 1957 was not bound by the agreement of 1954 and
could offer shares to such persons as it decided to do in
general meeting in accordance with s. 81. The mere fact
that in the meeting of March 29, 1958 it was decided to
offer shares to others and not to the existing shareholders
would not therefore necessarily mean oppression of the
minority shareholders. The majority shareholders were not
bound to accept the view of the minority shareholders that
new shares should be allotted only to the existing
shareholders. It also appears that the Patnaik group was
afraid at the time when the new shares were being issued
that as they had no money the appellant group would take up
the entire new issue and would thus obtain majority control
of the Company. This they wanted to avoid and that is why
the new issue was resolved in general meeting to be issued
to others and not to the existing shareholders. If this was
the reason why new shares were not issued to the existing
shareholders it can hardly be said that the action of the
majority shareholders in passing the resolution which they
did on March 29, 1958 was oppressive to the minority
shareholders. The matter would have been different if the
seven persons to whom shares were eventually allotted in
July 1958 were benamidars or stooges of the Patnaik or
Loganathan group, for in that case it may be said that these
two groups forming the majority in the general meeting had
acted fraudulently and unfairly by depriving the appellant
of what he would have got under s. 81. But there can be no
doubt that the seven persons to whom the shares were
eventually allotted are respectable persons of independent
means. There is nothing to show that they were stooges or
benamindars of the Patnaik and Loganathan groups. The
action of the majority shareholders in allotting the new
shares to outsiders and not to the existing shareholders
cannot therefore in the circumstances be said to be
oppressive of the appellant and his group.
742
it is true that by the beginning of 1958 there were
differences between the appellant and the Patnaik and
Loganathan groups and there was loss of confidence between
them. But mere loss of confidence between these groups of
shareholders would not come within S. 397 unless it be shown
that this lack of confidence sprang from a desire to oppress
the minority in the management of the Company’s affairs and
that there was at least an element of lack of probity and
fair dealing to a member in the matter of his proprietary
right as a shareholder. It cannot be said on the facts on
record of this case that there was any lack of probity or
fair dealing towards the appellant in the matter of his
proprietary right as a shareholder. It is true that he did
not get any part of the new issue; but equally the Patnaik
and Loganathan groups also did not get any part of it, for
there is no doubt that the persons to whom the shares were
allotted eventually in July 1958 were not benamidars or
stooges of the Patnaik and Loganathan groups. If the new
allottees were benamidars or stooges of the Loganathan and
Patnaik groups there might have been lack of probity or fair
dealing in allotting the shares to them. Further the
allotment of shares even at par did not in our opinion
seriously affect the proprietary rights of the appellant as
a shareholder. It is urged that the issue of new shares at
par to others would depress the value of the existing
shares. But the evidence shows that by 1958 the Company
which had gone into production in 1955 was making profits
and there is no reason to suppose that the same rate of
profit would not have continued with the expansion envisaged
by the increase in share capital. Besides, as the shares of
the Company were not quoted on the Stock Exchange, it is
impossible to say what impact the issue of new shares had on
the value of the existing shares and whether the value of
existing shares was depressed, if at all, by the issue of
new shares. It is not a case where new shares were issued
as bonus, for the issue of bonus shares does necessarily
affect the value of existing shares. But these were issued
on payment of cash for the purpose of expansion. In the
circumstances we cannot necessarily infer that the value of
the existing shares would have been seriously affected by
the issue of new shares at par. So it cannot be said that
this was done in order to affect the proprietary rights of
the appellant as a shareholder. The issue of new shares
which was done in March and July 1958 cannot therefore in
our opinion amount to oppression of the appellant as a
minority shareholder.
It is however urged that the haste with which the new shares
were issued on July 30, 1958 shows a design to harm the
appel-
743
lant as a minority shareholder. It is no doubt true that
the shares were issued in haste. But as we have already
indicated, the Company was in need of money for expansion
and its getting the loan from the Industrial Finance
Corporation also depended upon the increase of subscribed
share capital. Therefore, the haste with which the shares
were allotted on July 30, 1958 cannot really be said to be a
part of a design to oppress the minority. The haste became
necessary because the interim injunction was vacated on that
day and it was felt that if immediate action was not taken
and the new shares allotted, there might be further
injunction which would further delay the issue of shares and
getting the loan from the Industrial Finance Corporation.
The haste therefore appears to have occurred because of the
action taken by the appellant in bringing a suit and getting
a temporary injunction. It was feared that even after the
vacation of the temporary injunction the appellant would go
in appeal and get another injunction from the appeal court.
This fear was justified because the Subordinate Judge’s
court two hours later withheld the operation of its order
vacating the temporary injunction. The haste in the
particular circumstances of the case in allotment of shares
cannot therefore lead to any inference of oppression but
arose out of circumstances brought about by the appellant’s
conduct.
But it is urged that even though the Company was in urgent
need of money it accepted only 5 per centum with the
application and 10 per centum on allotment and that the
remainder of the money did not come for a long time. Again
it is true that the remainder of the money did not come for
sometimes It also appears that out of the seven persons who
had applied to take shares six had to take loans from the
Central Bank of India Limited to pay up the remainder of the
money and that a part of the new capital (i.e. Rs. 7,65,000)
was not received even till the time when the application
under S. 397 was made. But that again in our opinion does
not necessarily lead to the inference that there was
oppression by the majority shareholders of the appellant,
once it is held that the seven persons to whom the new
shares were allotted were not stooges or benamidars of the
Patnaik and Loganathan groups. There might be reasons why
those persons were not in a position to pay the entire money
at once and therefore borrowed money from the Bank to make
up the full amount of the shares taken by them. Further it
appears that there was a fight between the appellant group
on the one side and the Patnaik and Loganathan groups on the
other for the control of the Company. If the fear of
Patnaik was correct that the
7 44
appellant would have purchased all the shares worth Rs. 39
lacs for want of money on the part of Patnaik and Loganathan
groups and would thus have obtained a dominating position in
the Company, the action of the majority shareholders in
preventing such domination by one group only and taking
action for that purpose cannot in the circumstances be said
to be oppressive of the minority shareholders. It is well
to remember that if the appellant had got the entire new
issue of Rs. 39 lacs because of the inability of the Patnaik
and Loganathan groups to take up their two-thirds shares,
the majority control would have vested in one group. But
the action of the majority shareholders in issuing new
shares to others and not to the existing shareholders has
brought about a position where, after the issue of new
shares even the Patnaik and Loganathan groups have no longer
a majority and they have to carry the holders of the new
shares with them in order to carry on the work of the
Company. The new holders are not the stooges and benamidars
of the Patnaik and loganathan groups and therefore after the
action taken in March and July 1958 the Company cannot be
said to be dominated by any group but has become more broad-
based as a public company should really be The fact that
the Patnaik and Loganathan groups may be able to get the
support of the holders of new shares does not necessarily
mean oppression of the appellant, for the new shareholders
may support the Loganathan and Patnaik groups on the ground
that such support would be for the benefit of the Company.
Finally it is urged that the whole object of the Patnaik and
Loganathan groups was to get control over 75 per centum of
shares of the Company, for a voting strength of 75 per
centum is required to pass a special resolution without
which complete control of a company is impossible.
Therefore it is said that Loganathan and Patnaik groups so
manoeuvred the affairs that they should be able to get over
75 per centum of the voting strength. It is urged that if
the new shares had been divided equally between the three
groups the Patnaik and Loganathan groups would not have been
able to control over 75 per centum shares. This argument
again would have some force if the new shares had been
allotted to stooges and benamidars of the Patnaik and
Loganathan groups. But as the shareholdings stand, after
the action of March and July 1958, the position is that
roughly Patnaik and Loganathan groups between themselves
have got shares worth Rs. 38 lacs, the appellant has got
shares worth Rs. 19 lacs and shares worth Rs. 39 lacs are
held by the new
745
allottees and shares worth about Rs. 4 lacs by the French
company. So unless the Patnaik and Loganathan groups are
able to persuade the new allottees always to vote with them
they would not be in control of over 75 per centum of
shares. The argument that all this was done to give the
Patnaik and Loganathan groups control over 75 per centum of
shares in the Company does not therefore appear to be well-
founded when we remember that the new allottees are not
stooges or benamidars of these two groups. The fact that
the shares were issued presumably to the friends of Patnaik
and Loganathan groups is hardly of any significance in the
matter of oppression, for if shares are issued privately
they are bound to go to friends of the directors.
The case of oppression therefore based on the agreement of
july 1954 as the sheet-anchor of the appellant’s case must
fail. In the first place that agreement was strictly
speaking not binding even on the private company-it was
muchless binding on the public company when it came into
existence in 1957. The agreement did not contain any
specific provision as to future issue of capital. Further
at the time when the agreement took place the appellant was
not even a member of the private company and it was really
an agreement between a non-member and two members of the
Company, which would go to show that the agreement could in
no circumstances bind the Company. It is true that for
sometime the agreement was in the main carried out when the
capital was actually increased up to Rs. 61 lacs, the
appellant getting one-third of it barring the French
company’s shares When, however, the Company was made into a
public company some of the terms of the agreement could not
be put even in the Articles of Association of the public
company. But it is said that if the Patnaik and Loganathan
groups had behaved like honourable men, the agreement could
still have been carried out after the Company became a
public company and that these two groups did not behave
honourably when they gave the go-by to the agreement
completely. There is some force in the contention that
Loganathan and Patnaik groups, when they were -in need of
the appellant, took his help; it also does appear that when
the Company had turned the corner and it was felt that the
appellant’s help was not absolutely necessary, these two
groups thought it unnecessary to carry out the spirit of the
agreement (though not the terms for the terms had nothing to
do with the future increase of capital and its
distribution). But can it be said that the conduct of the
affairs of the Company was carried on oppressively merely
because these two groups which in March and July 1958 were
in
746
majority did not carry out the spirit of the agreement ? We
have given anxious consideration to this aspect of the
matter and we feel that, though the Patnaik and Loganathan
groups did take advantage of the help given by the appellant
when the Company was in a difficult situation the fact that
when new issue was made on behalf of the public company,
they decided to make it more broad based and issue the
shares to others and not to the existing shareholders,
cannot be said to be oppressive of the then minority
shareholders, namely, the appellant’s group. We have
already pointed out that it cannot be said to have been
proved in this case that the appellant suffered in his
proprietary rights as a shareholder and in these
circumstances it cannot be said that the action taken in
March and July 1958 in the allotment of the new shares
amounted to such oppression of the appellant as would
justify an order under S. 397.
Reference then may be made to the proposed increase of
shares for which a meeting was called on September 21, 1960
and which gave further cause to the appellant to move the
application which he did on September 14, 1960. In that
meeting it was proposed to increase the share capital by
rupees two crores, one crore of which was to be in equity
shares and the other crore in preference shares. It is said
that this was part of the design to further reduce the
shareholdings of the appellant in the Company so that he may
be driven out of it, for after the issue of the new proposed
capital the appellant’s holding of equity shares would be
hardly 10 per centum of the entire equity capital. In the
first place, as the meeting of September 21, 1960 was never
held because of the injunction obtained by the appellant, we
cannot say how the new shares would have been issued and
whether they would have been offered to the public for
subscription to make the Company even more broad-based than
it was then If that was the intention that could hardly be
called oppression of the appellant. Apart from that we fail
to see why the appellant should be driven out of the Company
and should be compelled to sell his shares simply because
his proportion of equity capital is only 10 per centum of
the entire equity capital, for it is not in dispute that the
Company is doing well and the appellant will get his
dividends as any other shareholder. But if the appellant
means that it is not worth his while to invest his money in
a company in which he is unable to have an important-if not
a controlling-voice, this shows that the real basis for the
application in the present case was not the oppression of
the appellant as a minority shareholder but the feeling that
the appellant who hoped to get control
747
of the Company had been thwarted by what took place in March
and July 1958. If that is the real position, then it cannot
be said that the Loganathan and Patnaik groups acted with
lack of probity or fair dealing in thwarting the desire of
the appellant to get control of the Company; nor can such
conduct be said to be oppressive of a minority shareholder.
The case of the appellant based on the agreement of July 27,
1954 therefore must fail and it must be held that even if
that agreement was not carried out by the Company, which was
not bound by it, there can be no case of oppression of the
appellant.
We now come to the case under s. 398. It provides that any
members of a company who have rights to apply in virtue of
S. 399 may complain (i) that the affairs of the company are
being conducted in a manner prejudicial to the interests of
the company, or (ii) that a material change has taken place
in the management or control of the company and that by
reason of such change, it is likely that the affairs of the
company will be conducted in a manner prejudicial to the
interests of the company. On such application being made,
if the court is of opinion that the affairs of the company
are being conducted as aforesaid or that by reason of any
material change as aforesaid in the matter of management or
control of a company, it is likely that the affairs of the
company will be conducted as aforesaid, the court may, with
a view to bringing to an end or preventing the matters
complained of or apprehended, make such order as it thinks
fit. This section only comes into play as the marginal note
shows, when there is actual mismanagement or apprehension of
mismanagement of the affairs of the company. It may be
contrasted with s. 397 which deals with oppression to the
minority shareholders, whether there is prejudice to the
company or not In the present case, the appellant relies on
the following three circumstances to show that the affairs
of the Company were being conducted in a manner prejudicial
to its interests, namely-
(i) that when the new shares worth Rs. 39
lacs were issued in July 1958 only a small
part of the sharemoney was received in the
beginning;
(ii) that the Patnaik and Loganathan groups
removed Rs. 7 lacs from the coffers of the
Company;
(iii) that the Company lost the support of the
appellant.
It is true that when new shares of the value of Rs. 39 lacs
were issued, the Company received only 15 per centum of the
share
748
money to begin with, namely, 5 per centum with the
application and 10 per centum on allotment. But the
evidence shows that though there was some delay in the
receipt of 85 per centum of share money, shares worth Rs. 30
lacs were fully paid up in the financial year 1959-60, and
the only amount outstanding in that year was Rs. 7,65,000
(i.e. 85 per centum of shares worth Rs. 9 lacs). The slight
delay in the payment of the full value of the shares cannot
therefore in the circumstances be said to be so prejudicial
to the interests of the Company as to call for any action
under S. 398 of the Act.
As to the removal of Rs. 7 lacs from the coffers of the Com-
pany by the Loganathan and Patnaik groups, it does not
appear from the application of the appellant that his
complaint was that this sum was wrongfully removed by the
two groups and there was any fraud with respect to its
removal. The real complaint of the appellant in this
connection appears to have been that he was entitled to one-
third of this amount of Rs. 7 lacs under the agreement, and
his share of this amount was not given to him. This appears
from a letter written by the appellant to Patnaik on October
16, 1957 in which he asked that he should be paid his one-
third share of this sum of Rs. 7 lacs with interest. It is
not in dispute that the sum of Rs. 7 lacs was due from the
Company to the Kalinga Industrial Development Corporation
Limited and therefore the withdrawal of this amount from the
Company by the Patnaik and Loganathan groups which
controlled the Kalinga -Industrial Development Corporation
which was the managing agent of the Company before July 1954
cannot be said to amount to conducting the affairs of the
Company prejudicially to its interests, whatever may be the
rights of the appellant in the matter of getting one-third
of this amount from the Loganathan and Patnaik groups. If
he has any right under the agreement of July 27, 1954 in
this matter he can enforce it in such way as may be open to
him; but it cannot be said in the circumstances that this
withdrawal from the Company was in any way prejudicial to
the affairs of the Company, when it is clear that the
Company owed the amount to the former managing agent.
The last point that has been urged in this connection is
that the Company lost the support of the appellant in view
of the action taken by the Patnaik and Loganathan groups in
March and July 1958. Here again it is true that the
appellant was dissatisfied with what had happened in March
;and July 1958 with regard to the allotment of shares worth
Rs. 39 lacs and withdrew his support from the Company. If
the Company was able to
749
carry on without this support as it apparently was in 1958,
it cannot be said that the action which resulted in the loss
of the appellant’s support to the Company was necessarily
prejudicial to it, it may be that the appellant was sore
inasmuch as he must have felt that his assistance was taken
when the Company was in need of such assistance; but later
the Patnaik and Loganathan groups acted in the manner in
which they did when they felt that the appellant’s support
was no longer necessary to the Company. But if the
appellant’s support was no longer necessary to the Company
by 1958 the action of the Patnaik and Loganathan groups
which resulted in the loss of such support cannot be said to
be prejudicial to the interests of the Company. We
therefore agree with the High Court that no case has been
made out for action under s. 398 on the ground that the
affairs of the Company were being conducted in a manner
prejudicial to its interests.
Nor is there any ground for holding that because of the
change which took place in the management after July 1958 it
was likely that the affairs of the Company would be
conducted in a manner prejudicial to its interests. the
change that took place after July 1958 was that the
appellant no longer remained the chairman of the Company and
the Patnaik and Loganathan groups practically managed the
Company without the appellant. But as the High Court has
pointed out there were no facts before the court to come to
the conclusion that the change in management was likely to
result in the affairs of the Company being conducted in a
manner prejudicial to its interests. In this connection
reliance is placed on certain matters which transpired after
the application was filed on September 14, 1960. These
matters however cannot be taken into account for the
application has to be decided on the basis of the facts as
they were when the application was made Besides, as the
High Court has pointed out, it has not been shown that in
view of certain actions taken by the new management without
consulting the appellant, the Company was landed in any
difficulty and loss of profit which would show mismanagement
of its affairs.
Lastly it was stated in the application that accounts had
not been shown to the appellant and his group and in
consequence of this the appellant was not able to give full
particulars of the several acts of fraud, misfeasance and
other irregularities committed by the new management. But
as the High Court has pointed out, the appellant asked for
production of certain documents in April 1961 and those
documents were made available for inspection by the
appellant and were produced in court. It was
750
for the appellant to take inspection of those documents if
he so desired and the appeal court was right in pointing out
that the learned Single Judge was not correct in drawing an
adverse inference against the Company that it had disobeyed
the orders of the court and had not produced the documents
called for and had given no opportunity to the appellant for
their inspection. It seems to us that the appeal court was
right in this view and no case has been made out even prima
facie for action under this part of S. 398 of the Act.
The appeals therefore fail and are hereby dismissed with
costs, one set of hearing fee.
Appeals dismissed
751

 

 

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