1996 (11) TMI 316 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of oppression and mismanagement u/s 397 and 398 of the Companies Act, 1956.
2. Validity of the trial court's direction for the first appellant-company to purchase shares.
3. Applicability of the principle of 'lifting the corporate veil'.
4. Consideration of subsequent events in the company petition.
5. Compliance with section 397(2)(b) requirements.
6. Allegations of mala fides in filing the company petition.

Summary:

1. Allegations of Oppression and Mismanagement u/s 397 and 398:
The respondent filed a petition u/s 397 and 398 alleging oppression and mismanagement. The trial court found no evidence of mismanagement but concluded that the actions of the appellants were oppressive. The court directed the first appellant-company to purchase the respondent's shares, considering the paid-up capital and market value of assets.

2. Validity of the Trial Court's Direction:
The appellants argued that the direction to purchase shares was not legal, as section 77 of the Act was not considered. Additionally, the direction was vague regarding the amounts due and the market value of assets. The court found these arguments weighty and noted the lack of evidence for many allegations.

3. Applicability of 'Lifting the Corporate Veil':
The trial court lifted the corporate veil, treating the private limited company as a partnership. The appellants contended that this was inappropriate, citing the Supreme Court's observation in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla, which restricts the application of partnership principles to companies. The High Court agreed with the appellants, finding no proof of the requirements for lifting the veil.

4. Consideration of Subsequent Events:
The appellants argued that events like the exclusion of the respondent and the increase in share capital occurred after the filing of the petition and should not be considered. The court noted that the respondent did not amend the petition to include these events, and thus they could not be taken into account.

5. Compliance with Section 397(2)(b) Requirements:
The court found no plea or proof that section 397(2)(b) was satisfied. The trial judge did not provide a specific finding in this regard. The court emphasized that specific allegations and proof are necessary to invoke section 397.

6. Allegations of Mala Fides:
The appellants claimed the petition was filed in bad faith, as the respondent had not complied with a notice demanding payment of dues. The court did not find it necessary to address this contention due to the conclusions reached on other issues.

Conclusion:
The High Court allowed the appeal, setting aside the trial court's order and dismissing the company petition. The court found that the allegations of oppression were not substantiated by evidence, the principle of lifting the corporate veil was misapplied, and the requirements of section 397(2)(b) were not met. The direction for the company to purchase shares was also deemed unlawful and vague.