TMI Blog1965 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 398 of the Act. Appeal dismissed. - 734 TO 747 OF 1964 - - - Dated:- 14-1-1965 - P.B. GAJENDRAGADKAR, K.N. WANCHOO AND S.M. SIKRI, JJ. N.C. Chatterjee, S. Roy Chowdhry, M.L. Jhunjhunwala, S. Murthy, and B.P. Maheshwari for the Appellant. M.C. Setalvad, A.V. Viswanatha Sastri, Ranadeb Chaudhuri, M.K. Banerjee, J.B. Dadachanji, O.C. Mathur, Ravinder Narain, Ranadeb Chaudhuri, G.S. Pathak, B. Dutta, Sachin Chaudhury, S.N. Andley, Rameshwar Nath, P.L. Vohra, C.K. Daphtary, B. Sen, Dipak Dutta Chowdhury, Niren De and S.V. Gupte for the Respondent. JUDGMENT Wanchoo, J. These fourteen appeals on certificates granted by the High Court of Orissa raise c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty 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 lakhs 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, Narayanaswami, who had been appointed managing director, resigned and Patnaik was appointed the managing director. In April, 1955, the company started production. Some time thereafter the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o nothing was put therein on the basis of the agreement dated July 27, 1954. In December, 1957, the Controller of Capital Issues sanctioned the issue of shares of the face value of Rs. 39 lakhs and debentures of the face value of Rs. 64 lakhs subject to the provisions of section 81 of the Act. Real trouble started after this sanction for the issue of fresh shares. We shall have occasion to refer to section 81 of the Act later; it is enough to say here that that section 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 lakhs would have had to be offered under section 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 and Loganathan and Patnaik groups held two-thirds share except for certain shares held by the French co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atnaik 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 shareholdings 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 6r 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 and 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 thereafter apply on the condition that at least 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 order 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ups 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 fairplay to which the appellant and his group as minority shareholders were entitled. In particular the denial to the existing sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders, 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 completely 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 the Division Bench by the company and the various shareholders. These appeals were consolidated and heard togethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 section 153C in the 1913 Act and section 397 in the Act. Section 397 reads thus : "397. 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 manner 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. (2) If, on any application under sub-section (1), the court is of opinion ( a ) that the company's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 fairplay 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 me to have no direct relevance to the remedy granted by section 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 section 210. It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of the company's affairs and oppr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 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 number of representatives on the board of directors and the appellant would be its chairman. Other provisions of the agreement refer 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 lakhs held by the French company (Rs. 3,75,000) and Mr. Rath (Rs. 25,000) will continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 lakhs 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, some time in 1956, when the company was a private company. At that time the authorised capital was rupees one crore though only Rs. 61 lakhs had been issued. The fresh issue of Rs. 39 lakhs 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 issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 section 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 section 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 section 173, and so the proceedings of the meeting must be held to be bad. This objection was however not taken in the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng shareholders cannot therefore in the circumstances be said to be oppressive of the appellant and his group. 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 section 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 some time. 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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 lakhs, the appellant has got shares worth Rs. 19 lakhs and shares worth Rs. 39 lakhs are held by the new allottees and shares worth about Rs. 4 lakhs by the French company. So unless the Patnaik and Loganathan groups are able to persuade the new allottees always to vote wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct of the affairs of the company was carried on oppressively merely because these two groups which in March and July, 1958, were in 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 section 397. Reference then may be made to the proposed increase of shares for which a meeting was called on September 21, 1960, and which g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of section 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 section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 can not 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 lakhs and withdrew his support from the company. If the company was able to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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