TMI Blog1969 (11) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... n their hands. M/s. Shyam K. Gupta Company, Auditors, opposite party No. 7, have been impleaded by the petitioners on the allegation that they have been colluding in concealing irregularities and frauds of opposite parties Nos. 1 to 3. The Central Government, opposite party No. 9, is probably impleaded only because section 400 of the Act requires a notice of such a petition to be sent to the Central Government. The real targets of the attack of the petitioners are the three opposite parties, who according to the petitioners, have functioned in various capacities contrary to the provisions of the Act and realised salaries illegally from the company. The petitioners also allege that the three opposite parties are defrauding the company, misappropriating funds, and embezzling money. So far as H. S. Mathur, opposite party No. 1, the former managing director, is concerned, it is in evidence that a suit was filed by the company for the recovery of Rs. 15,621 from him on the ground that he had illegally drawn Rs. 825 as salary as a managing director from April 1, 1961, to October 27, 1962, without obtaining either the sanction of the Central Government as required by section 269(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to obtain refund of excess payments. Information was also required to be given, within ten days, whether steps had been taken to regularise increase of the sitting fees of directors from Rs. 25 to Rs. 100 per meeting by obtaining the approval of the Central Government under section 310 of the Act or to show that the excess amount paid had been refunded. The only specific item mentioned by the petitioners of alleged embezzlement is that an annual expenditure of fuel was shown as ranging from Rs. 7,000 to about Rs. 14,000 in different years whereas it was said to be always less than Rs. 100 every year. It was, however, stated in the petition that, in the balance sheet, the expenditure for fuel had been shown as amalgamated in subsequent years with expenditure for "steam coal". The counter-affidavit of the contesting opposite parties shows that they furnished details of all expenditure to the Registrar, but, as the Registrar was not satisfied, the company was prosecuted under sections 216 and 218 of the Act for failure to furnish information from 1958 to 1961 and that the managing director was convicted. As regards the alleged expenditure on the specific item of fuel, the contesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that writ petitions were filed in this court by them as well as in the Supreme Court against the reinstatement of petitioner No. 1 as ordered by the Labour Court, Meerut, and these were ultimately dismissed. The contesting opposite parties alleged that petitioner No. 1, who had also been employed by the company, was dismissed for insubordination and want of efficiency as an engineer employed by the company. The contesting opposite parties also alleged that the petitioners were disappointed at the results of the election of directors at a general meeting of the company held on 30th of September, 1965. Among the grounds of the petition, taken in paragraph 18, is that elections of opposite party No. 1 as director and opposite; party No. 2 as managing director were illegal and that the minutes of the meeting had been fabricated. On the above-mentioned allegations, the petitioners have prayed for the removal of opposite party No. 2 from the office of the managing director and of the other contesting opposite parties from directorship of the company. They pray that petitioner No. 1 may be appointed the managing director and that the other directors may be chosen by this court from amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioners may be questionable. It may be that the dominant object of the petitioners is to secure control of the company and to punish the contesting opposite parties for actions which are not liked by the petitioners whose personal interests are injured. Nevertheless, if a case for any order under either section 397 or section 398 of the Act is made out, the petitioners' motives or objects will not matter. Section 397 of the Act undoubtedly empowers this court to make such orders "as it thinks fit" but only "with a view to bringing to an end the matters complained of". The matters complained of must be proved to establish : "(a) that the company's affairs are being conducted in a manner prejudicial to public interest or 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." It is, therefore, an essential prerequisite for a petitioner under section 397 of the Act to prove that, apart from any prejudice to the interests of members, a win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at interference with internal management of companies should take place only on good and compelling grounds. Learned counsel for the contesting opposite parties relied on Smt. Soma Vati Devi Chand v. Krishna Sugar Mills Ltd. AIR 1966 Punj. 44 , to contend that the jurisdiction of the court, under sections 397 and 398 of the Act, described as "summary" by the learned counsel, does not extend to determination of contested questions of fact requiring "investigation". The case cited deals with the jurisdiction of the court under section 155 of the Act relating to rectification of register of members. The principle contained there is not applicable to the wide equitable jurisdiction conferred by sections 397 and 398 of the Act. If courts have refused to enter into contested questions of fact in proceedings under sections 397 and 398, it is not because there is a limitation upon the jurisdiction of the court confining it to uncontested questions of fact. Indeed, such a restriction upon the powers of the court would defeat the very object of a remedial power which can rarely be exercised without contest on facts. But, inasmuch as the jurisdiction of the court under the Act is, as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g wrong. In Bengal Luxmi Cotton Mills case ( supra ) B. C. Mitra J. went so far as to hold that: "......to make an order under section 397 or section 398 on the ground that a criminal complaint has been made against the directors or even on the ground that the directors had been convicted of a criminal offence, would be introducing into the law relating to companies, matters which are entirely foreign to company law and administration, and beyond the ambit of the jurisdiction which this court exercises." What the learned judge really meant seemed to be that powers of the court under sections 397 and 398 of the Act were neither intended to operate as substitutes for punitive criminal proceedings nor could be invoked solely because the directors of a company had made themselves criminally liable to be prosecuted. In Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 ; A.I.R. 1965 S.C. 1535 , the Supreme Court had occasion to consider the scope of sections 397 and 398 of the Act before the amendments of both these sections in 1963. As regards section 397 of the Act, it quoted with approval the views expressed by English courts, on the corresponding section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo sections could be said to have become more extended as a result. Nevertheless, the powers vested in the court continue to be discretionary and are designed for removal of an existing and not past oppressive or prejudicial course of conduct of the affairs of the company. They are, in my opinion, primarily intended for preventive purposes. The object of the exercise of these powers is either to prevent a winding up or to remove the continuation of harm or reasonable probability of injury to the interests of the company or to the wider public interests. Past acts and transactions may either afford evidence of what may be reasonably apprehended in future or may have to be undone only to prevent or remove what had wrongfully originated in the past but continues to exist and provides a sustainable cause of action at the time when the petition is filed. Purely punitive action, as distinct from preventive remedial action, does not fall directly within the purview of these provisions although certain forms of punitive action, such as those mentioned in Schedule XI, which is applied by section 406 of the Act to proceedings under sections 397 and 398 of the Act, may indirectly result from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing to do with claims for relief against any unfair or unjustifiable agreements which may have to be set aside or modified, under section 402( d ) and ( e ) of the Act, as necessary consequences of orders under sections 397 and 398 of the Act. A glance at the representations filed on behalf of the Central Government, under section 400 of the Act, shows that the claims for refund of salaries paid to opposite parties alleged to have been irregularly appointed without sanction of the Central Government, are also not well founded as the company either obtained the required approval or the excess payments were refunded. No question of setting aside a decree of a civil court, dismissing any such claim, could arise on the allegations of any fraud or collusion in such a case. The Central Government also seemed satisfied with the auditors' reports on the company's balance-sheets which, according to its representations dated November 28, 1967, were not adverse or qualified reports for the two preceding years. Several issues, including those on the alleged unfitness of each of the three opposite parties to act as directors, were framed in this case. The petitioners were given full oppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held on September 30, 1965. The petitioners allege that only fourteen members were present at it. A copy of the minutes (annexure "M" to the counter-affidavit) shows that fifteen out of twenty-five members were present. The petitioners allege that proxies were not allowed to be utilised at the meeting. The minutes disclose that ten members voted through proxies. The election of opposite party No. 1 as director was challenged on the ground that his proposer, Hari Mohan Mathur, opposite party No. 4, who is admitted to be a shareholder, had no right to propose a name for the office of a director. This objection appears to be utterly baseless. At least nothing was shown to substantiate the objection. It was also alleged that opposite party No. 2 received only two votes in his favour when he stood for directorship and that two votes were cast against him. This is clearly contradicted by the minutes of the meeting. It is also inconsistent with the petitioners 'allegation about the contesting opposite parties' control over a number of members which certainly exceeds two. The copy of the minutes of the meeting also discloses that petitioner No. 1 was present and stood for election to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence, by section 246 of the Act, in proceedings before a court of law. Such a report could provide the basis of action by the Central Government against a company under either section 397 or section 398 of the Act, as laid down by section 243 of the Act, or, for recovery of damages in respect of any fraud, misfeasance, or other misconduct in the management of the company's affairs, where this is necessary in public interest, as provided by section 244 of the Act. It could, therefore, be urged, in cases where a detailed inquiry into the conduct of the affairs of a company is called for, that a petition under either section 397 or section 398 of the Act, without applying for such an inquiry, under section 236 of the Act, is premature. Learned counsel for the petitioners contended that this is a fit case in which at least a declaration by order of this court, under section 237( a )( ii ) of the Act, that an investigation by an inspector is needed, is called for. After having considered this submission seriously, I have reached the conclusion that, although such a declaration may be made in a case under either section 397 or section 398 of the Act which cannot be properly proce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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