TMI Blog1977 (1) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia undertaking and in due course a public limited company by name East Coast Breweries Distilleries Ltd. (opposite party No. 2 herein) was proposed to be formed. The Government of India issued the Letter of Intent on Febuary 11, 1969. The company was incorporated by the Registrar of Companies, Orissa, on 15th of April, 1969. The promoter had in the meantime purchased certain lands off the Paradeep Port with his own funds for the purpose of setting up the factory. The company was to have a share capital of Rs. 75 lakhs divided into seven lakh fifty thousand equity shares of ten rupees each. The promoter, his friends and relations purchased shares of the face value of seven and a half lakhs which were fully paid up. He started contacting financial institutions like the United Commercial Bank (opposite party No. 3 hereafter referred to as "the UCO Bank") and the Industrial Devlopment Bank of India (opposite party No. 4 hereafter referred to as "the IDBI") and was assured of their financial participation in the project. He also turned to the State Government of Orissa and the Industrial Development Corporation of Orissa Ltd. (opposite party No. 1 hereafter referred to as "the Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and agreed to by and between the parties that in the event of the failure of the public to subscribe to the issue, the Corporation as underwriter would hold the shares as trustees and transfer the same to the promoter, his associates, friends and nominees within a period of five years from the date the factory goes into production. Due to adverse financial circumstances and slump in the share market when the public issue was made, public subscription was not up to expectation and the Corporation came to hold the equity shares worth rupees twenty-four lakhs as underwriter. Under the underwriting contract, the Corporation was obliged to pay the full value of the shares within the time stipulated. The Corporation, however, committed long defaults in the payments of the calls. The estimated cost of the project had been put at Rs. 180 lakhs out of which it had been envisaged that Rs. 105 lakhs would be secured by loans. The IDBI agreed by their Letter of Intent dated November 2, 1973, to grant a term loan of Rs. 55 lakhs, the rate of interest being two per cent. above their normal lending rate per annum. The UCO Bank agreed to advance a term loan of Rs. 50 lakhs and a working capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by it. The Corporation main tained that its object was to promote industries by giving technical and financial assistance and not to take over shares and hold them. In January, 1974, the company informed the Corporation that three persons were will ing to buy the shares. The Corporation did not, however, communicate its willingness and consent for more than ten months and in the meantime the Government of India prohibited advances against shares by banks as a consequence of which the intending buyers receded from effecting the proposed arrangement. In the report of the statutory auditors as incorporated in the annual report of the company for the year 1974, the following note appeared : "....It is observed during audit that due to non-furnishing of guarantee by the Industrial Development Corporation of Orissa Ltd. to the Industrial Development Bank of India who are to finance the project the company could not obtain the loan from them in time. This unnecessary delay has boosted up the cost of the project in the form of pre-production expenses and interest on term loan availed from United Commercial Bank". On 14th of April, 1974, the term of office of the managing direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. I hope, you will find the same in order. As regards your points, I will be writing to the Government soon and on receipt of the decision, I will communicate to you. In the meantime, you may, however, call a meeting of the board of directors". On 28th of August, 1975, one Shri N. Padhi, a nominee-director of the Corporation on the company's board, purported to convene the 40th meeting of the company's board of directors to "...Discuss the notice given by I.D.C. of Orissa Ltd. (Corporation) to fix up a date and call for an extraordinary general meeting of the company for passing a resolution in the said extraordinary general meeting under section 284 of the Companies Act, 1956". This notice was cancelled on 30th of August, 1975, and the same Shri Padhi on 18th of September, 1975, purported to call another meeting of the board of directors to discuss the old term as also the proposal for delegation of powers in favour of the chairman of the board of directors of the company in the matter of day-to-day management. The meeting was convened on 22nd September, 1975. Two out-station directors objected on the ground of shortness of notice, but the meeting was held contrary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion taken in such meeting was not to be implemented without leave of the court. The Corporation, which is virtually the main and only contestant in the proceeding, filed its counter. The company also filed a counter separately. The UCO Bank and the IDBI in spite of notice did not enter contest. Both parties without any restriction kept on filing affidavits and counter-affidavits and when it was found that unless their conduct was regulated, the proceeding could not be taken up for hearing, a direction was given fixing a date beyond which no further papers were to be received. The Corporation denied most of the allegations referred to above and supported its stand that the company required a restructuring. It was pleaded that allegations did not make out a case that the affairs of the company are being managed in a way which calls for winding up of the company on just and equitable grounds and when no case for winding up on just and equitable grounds had been made out, the application was liable to be rejected in limine. It was next contended that "oppression" referred to in section 397 must relate to the manner in which the affairs of the company were being conducted and the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company to ignore that appearance and in a counter, the stand of the Corporation was supported. In answer to the notice issued to the Central Government, the Registrar of Companies informed the Registrar of the court by a letter dated March 30, 1976, that it had been decided that no representation would be made to the court in this proceeding. After the hearing of the application had been almost complete, it was found out that the notice had not been appropriately served on the two financial institutions the UCO Bank and the IDBI. Since both of them had a stake in the matter, it was considered appropriate to issue further notice to them. The UCO Bank appeared and filed an affidavit on October 11, 1976, pointing out that the company had already defaulted in discharge of its obligations in regard to repayments and wanted to file a further affidavit with reference to facts and produce documents, but nothing more has been done. The IDBI filed an affidavit on October 25, 1976, wherein reference was made to the negotiation of the company through its managing director for grant of a term loan and about its sanction subject to terms. It was further averred that the application und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the requisite number of shares have given their consent authorising the petitioner to present and prosecute the application. The application, therefore, does not suffer from the technical defect with reference to section 399 of the Act. ( ii )Maintainability of the application was also challenged on the ground of the absence of the State of Orissa as a party to the petition. It was contended that the State, apart from being the largest single member shareholder, was in the group constituting the majority from whom oppression was alleged. In answer to this objection, counsel for the petitioner pointed out that there was no requirement in the Act to implead any particular party in an application like the present one and the court rules which prescribe the forms (see Forms 43 and 44) for making of applications under the respective sections do not provide for impleading parties as such. The scheme of the Act and the Rules seem to suggest that public notice has to be given of the application and persons interested are required to appear and place their representations in the court. This submission on behalf of the petitioner receives support from the decision in the case of In re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to bringing to an end the matters complained of, make such order as it thinks fit. 398. (1) Any members of a company who complain ( a )that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or ( b )that a material change (not being a change brought about by, or in the interests of, any creditors including debenture-holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company ; 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 that the affairs of the company are being conducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition and has not a rigid meaning and is elastic and takes its colours from the statute in which it occurs, the concept varying with the time and state of society and its needs. Thus, what is public interest to-day may not be so considered a decade later. In any case, the expression cannot be considered in vacua, but must be decided on the facts and circumstances. In the case of a company Intended to operate in a modern welfare State, the concept of public interest takes the company outside the conventional sphere of being a concern in which the shareholders alone are interested. It emphasises the idea of the company functioning for the public good or general welfare of the community, at any rate, not in a manner detrimental to the public good. It is the policy of the State to-day that the corporate sector must work with efficiency. The companies which face stalemate should be helped to overcome the same so that they may get into production and production may be on the increase. With more of industrial and commercial activity, the scope for employment would be on the increase. The company in question has already taken a sizeable loan from financial institutions and it is in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative Wholesale Society Ltd, v. Meyer [1959] 29 Comp. Cas. 1 , 8 (HL). The Law Lord spoke thus : "My Lords, upon the facts as I have outlined them and as they appear in greater detail in the judgments of their Lordships of the First Division, it appears to me incontrovertible that the society have behaved to the minority shareholders of the company in a manner which can justly be described as oppressive. They had the majority power and they exercised their authority in a manner 'burdensome, harsh and wrongful' I take the dictionary meaning of the word". In the case of In re H.R. Harmer Ltd. [1959] 29 Comp. Cas. 305 (CA) the Court of Appeal gave the same meaning to the term. The Supreme Court in Shanti Prasad's case [1965] 35 Comp. Cas. 351, 363 (SC) referred to four English decisions in the cases of Elder v. Elder and Watson Ltd. [1952] SC 49, George Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954]SC 381, Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp. Cas. 1, 8 (HL) and In re H. R. Harmer Ltd. [1959] 29 Comp. Cas. 305 (CA) and accepted the meaning of "oppressive" to be burdensome, harsh and wrongful. The Court of Appeal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participation was worked out and after some amount of delay, the underwriting agreement was signed and the Government and the Corporation together came to hold about 82 per cent. of the total share capital. By the end of 1974 that was the position. As a result of the underwriting agreement, the Corporation got its representation on the company's board and the managing director of the Corporation became chairman of the board of directors of the company. The annual general meeting of the company was held on 31st of July, 1975, where the chairman presented the report of the board of directors for the year 1974. In that report, it was indicated : "Because of delay in concluding the loan agreement with the IDBI, the completion of the project consequently was also delayed resulting in escalation in the price of building materials. In addition, few new machineries were found to be absolutely necessary for installation, which were earlier not included in the original project estimate. All these have resulted in an over-run of about Rs. 45 lakhs. Your directors have already taken steps in arranging this loan from scheduled banks. The term loan agreement with IDBI would be concluded soo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been stated by the auditors or by the chairman in their respective reports, allegations have been made against him. So far as the period covered by the reports is concerned, I am not prepared to accept the changed version reflected in the counter-affidavit. On the other hand, the allegations made by the petitioner seem to be true as they are in accord with the undisputed material. The Corporation persuaded the company not to make the calls and at one time had clearly indicated that it was undergoing financial strain and was not in a position to meet the demand of calls if made then. The interests of the company were not kept in view and the Corporation was anxious to maintain its own position even at the cost of the company. If the money had been paid in good time, it is reasonable to conclude that there would not have been a set back in the installation of the machinery and the initial target for going into production may not have been disturbed. Again, the Corporation at one stage was anxious to unload its shares and had even requested the managing director of the company to arrange for their disposal. Though I am prepared to accept the contention of the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15, 1975....". A reference to the memorandum of association of the Corporation also shows that such promotion is one of the objectives. (See clauses 3, 4 and 5). It is true that there are other clauses which support the stand of the Corporation as pleaded in this case that the Corporation is entitled to hold shares in other companies (See clauses 15, 16 and 18) but, in this case, the Corporation on its own showing has joined the company to assist it to overcome an impasse and to unload the shareholding in due course. As already indicated, shares held by the State Government and the Corporation together were to the tune of 82 per cent. and that ratio did not change in 1975, when the Corporation started its move to restructure the company on the footing that as a result of the amendment of the Companies Act in 1974, such restructuring became necessary. The direction of the chairman that the managing director shall not exercise his powers long before the boards's resolution accepting the move, the posting of an employee of the Corporation as the assistant secretary of the company, the hasty moves to call urgent meetings of the board of directors for an extraordinary meeting of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 contended that removal of the managing director is a matter within the competence of the company and removal from office of managing director is not a matter concerning proprietary rights qua shareholder either of the managing director himself or for the matter of that for any other shareholder. Reliance has also been placed on the ratio in the case of In re Lundie Brothers Ltd. [1965] 35 Comp. Cas. 827 , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct which is oppressive within the meaning of the section ; in other words, each case has to be examined in the light of its own particular facts and, I would venture to add, in the light of the personality of the individual persons concerned". It has already been indicated that the promoter-managing director and his friends and associates had brought the company into existence and in the managing director, the board as also the general body, had full confidence until some time before the changed attitude of the Corporation came. The appointment of the promoter for a second term as managing director valid up to the year 1979 had already been approved by the general body and with the concurrence of the appropriate authority, the agreement had been entered. The petitioner and his associates, or, for the matter of that, the group of shareholders supporting the managing director who admittedly are in the minority in the company were being represented in the board by two directors including the managing director and for good and proper reasons the term of appointment as managing director stood renewed up to 1979. Without any rhyme or reason and on untenable grounds, and with a motive t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To discuss the notice given by IDC of Orissa Limited to fix up a date and call for an extraordinary general meeting of the company for passing a resolution in the said extraordinary general meeting under section 284 of the Companies Act, 1956". As already indicated, Shri Padhi was a nominee director of the Corporation and the notice was for processing the decision of the Corporation for changing the management of the company. Undoubtedly, the company's managing director and the secretary were available and Shri Padhi was not the director who normally convened meetings of the board. As already noted, as early as 13th of July, 1975 (annexure 21), the chairman had put an embargo on the managing director's powers and to give an ex-post-facto approval to his action on 18th September, 1975 ( vide annexure 25), Shri Padhi gave notice for the adjourned meeting for the 40th board meeting on 22nd September in the conference hall of the Corporation where in addition to the earlier item, delegation of power in favour of the chairman of the board of directors of the company for day to day management was scheduled as an item for discussion. Many directors had protested to the shortness of not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real internal co-ordination were necessary. The loan from the UCO Bank had been taken on the guarantee of the managing director and the IDBI had agreed to advance loan on personal guarantee of the managing director and the Corporation acting together. Raising finance for purposes of capital was the greatest need of the day and any one interested in the real welfare of the company could not lose sight of this fact. If the managing director was kept away from the picture, it was not difficult to visualise that the company would have a set back in its allround move for raising of funds. There was absolutely no justification at such a juncture to make an attempt for restructuring of the company on a wholly untenable ground. I have no doubt, in the circumstances, that the move lacked bona fides and was an act against the interests of the company. It has already been indicated that the actions of the managing director until the end of December, 1974, had been approved as late as July of 1975, when the general body meeting was held. Nothing has been shown to justify a change of attitude within a few days after the annual general meeting was over and, therefore, I have no option but to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered. After deliberation, it was decided to postpone this item. In regard to delegation of power in favour of the chairman, for which the company was requested earlier, the item was discussed by the board. The members felt that in the interest of the organisation it would be appropriate to delegate sufficient administrative and financial powers in favour of the chairman in the day-to-day affairs of the company. After deliberation, the directors decided as follows : (1)That the powers already delegated by the board of directors of the company in favour of Shri N.K. Mohapatra, managing director, be and are hereby also delegated to Shri S.N. Das Mohapatra, chairman of the board of directors of the company ; (2)That the managing director, Shri N.K. Mohapatra, to whom the board of directors have delegated powers earlier could exercise such delegated powers with the supervision of the chairman". Some of the directors objected to the proceedings as would appear from annexures 31 and 32 to the application. Notice for the 41st meeting was given on November 19, 1975, also by Shri Padhi and the meeting was fixed to November 21, 1975. Notice for the 40th meeting was given on 18th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings of the board and cannot be taken as valid. The notice for the extraordinary general meeting was given by Shri Padhi on December 2, 1975, fixing the meeting to 26th of December, 1975. This extraordinary general meeting had been called to ratify the proposal of restructuring of the company and the main items for consideration were removal of the managing director and shifting of the registered office from Cuttack to Bhubaneswar. I have already found that the 41st meeting which decided to call the extraordinary general meeting on the 26th December was not a valid one. There is force in the contention that the requirements of section 284(4) of the Act have not been complied with. It may be noticed here that the meeting was held as scheduled, but its decisions have not become operative on account of this court's order made on 24th December, 1975. This issue has, therefore, to be decided in favour of the petitioner. Here I must note that notwithstanding clear allegations against the chairman of the company (who at the relevant time was the managing director of the Corporation) no counter-affidavit has been filed by him to clarify the position. Issue No. 5. Now comes the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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