TMI Blog1981 (9) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... n ; or ( ii )the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and ( b )may do so if, in the opinion of the Central Government, there are circumstances suggesting ( i )that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; ( ii )that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or ( iii )that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company." Counsel suggests that the discretion conferred on the court under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participating in the association are few, their relationship can be worked out within the confines of contract and agency. But when their number is large, a different form of organisation will be necessary. In the initial stages, these unincorporated bodies were developing in England on the lines of quasi-partnership with fluctuating membership. But as the law of contract arid agency could not be fully applied to a situation where the actual management of the business was in the hands of a few, with the bulk of the members forming the association waiting outside, the Chancery courts of England started to apply the equitable doctrine of trust to those larger bodies. Those in management of the business of the association were held to be occupying a fiduciary position, with certain fiduciary duties, in relation to the association and its members. Basically, the business association, or the company as it came to be called, rested on contract between the members; but in certain respects, the members in management ( i.e ., directors) were held to have fiduciary duties, as distinct from contractual. The sanctity of contract which was the philosophy of the 18th and 19th centuries, as modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d faith was affirmatively established by a petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the minimum to be established by individual shareholders before they could get any equitable relief from the Chancery courts ; in all other cases, the contract was supreme. The various provisions of the Companies Act relating to minority protection have to be examined in the above background if their true content is to be discovered. Chapter VI deals with "oppression and mismanagement". Section 397 enables the minority shareholders to approach the court with a grievance that the company's affairs are being carried on in a manner oppressive to them, and section 398 provides for a like complaint that the affairs of the company are carried on in a manner prejudicial to public interest or to the interests of the company. Oppression or mismanagement, in the context have been understood as conduct involving lack of probity or bona fides. When the directors of a company with their majority support conduct themselves in a manner inequitable, i.e ., when their conduct is tainted with lack of probity or selfish interest (as distinct from the interests of the company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the minority shareholders. While sections 235 to 237 deal with the circumstances under which investigation could be ordered, sections 238 to 241 deal with inspectors, their powers and the report they have to make. Once the report is made, follow-up measures are contemplated by sections 242 to 244. Section 242 provides for the prosecution of those found criminally liable. Section 243 empowers the Central Govt., through a person authorised by it, to apply for a winding-up on "just and equitable" grounds or to apply for the removal of the oppression and mismanagement. And section 244 conceives of proceedings in misfeasance. The purpose of the investigation is thus to find out whether those in charge of the affairs of a company are guilty of illegal conduct or of conduct trenching upon breach of fiduciary obligations. That is way section 237( b ) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct. Whether it be under section 235 when the Central Govt. acts on the application of a group of members, or under section 237 when it acts suo motu or under orders of court, the machinery for investigation is to be set in motion only in the context of a complaint r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip between the petitioner and the present management of the company is somewhat strained, and that the company petition itself was filed soon after his advertising agency was terminated. And, if the proceeding of the 56th annual meeting of the company is any guidance, there are at least two groups among the members, one supporting the present management and another loyal to the old. Though a number of allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner pressed only some of them at the hearing ; and I am dealing with only those allegations. The first relates to the alleged theft or loss of newsprint. At the 54th annual meeting held on January 29, 1977, a member complained that a large quantity of newsprint belonging to the company was stolen and sold in black market by some people. Since the management took no action, the question was again raised at the 55th meeting held on March 27, 1978. A committee was thereupon appointed to go into the matter and at the 56th annual meeting, the convenor of the committee informed members that there was a prima facie case. These are the bare averments in para 3 of the petition. There is no allegation that the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope for malpractice in 1974, the machinery for dealing with waste newsprint has since been strengthened and streamlined. The committee itself does not place the blame on the directors then in management; and the matter was allowed to be raised and discussed at three general body meetings, suggesting thereby that there was no attempt to stifle minority criticism or to suppress anything. In any event, the material available is insufficient to disclose a prima facie case regarding breach of fiduciary duties. I may add that the petitioner himself had suggested at the 56th meeting that a "memorial" be created to honour ex-manager, Krishnan Nair, for the valuable services rendered by him while in service. The next complaint is about irregularities and corruption in the purchase of a flat at Bombay. All that is stated in para. 4 of the petition is that there was such an allegation and that the committee had enquired into it. The petitioner's evidence as P.W. 1 does not also take us any further. Exhibit A-2 shows that the flat was purchased during the tenure of Sri V. M. Nair, and that the administrative officer of the company was responsible for negotiating the deal. According to thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recoverable, or that they were written off in order to benefit the directors or their favourites, or that the action was in any other way irregular or improper. Exhibits C-2 to G-10 show that the Board had decided to write off the amounts concerned at three different sittings. The amounts were outstanding from advertisers, agents and other people numbering about 160, Exhibit P-1 referred to in the petition is Ex. A-1 minutes of the 56th annual meeting; and the only question at the meeting relating to writing off was whether charges for printing the Janata Party posters for the Chickmagaloor election were also included in the amounts written off. The suggestion was denied and it was pointed out that the election itself was held during the previous financial year and that printing charges for posters had been fully realised. An Interesting interlude was a suggestion by someone that only printing charges due from the Congress party were being written off in the past. The amount written off during the year in question was Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was higher. A large amount is seen written off during 1979-80 also. Taking into account the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plications for the post, and that lie was allowed to draw large sums as T.A. advance without vouchers. It was, however, conceded at the hearing that the managing director was competent to appoint such officers without the Board's sanction and that there was no practice of inviting applications for such posts. The person concerned was working at Madras as the company's advertisement representative, and there is evidence to show that his appointment as P.R.M. was followed by an increase in advertisement revenues. The main attack was directed against payment of advances. R.W. 1 has given evidence that all payments were effected only against vouchers and that bills and accounts were being subsequently presented, verified and adjusted. The auditors have raised no objection. The reports of the directors and auditors, as also the balance-sheet and profit and loss accounts, were duly passed during every year. Counsel referred to some discrepancy in one of the answers given at the 56th annual general meeting, but the control and supervision of finances and accounts should normally be left to those in charge and the auditors, subject to acceptance by the general body. There is no evidence re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a letter from Chandran, in reply to the company's letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says that though the firm was a valuable customer, no fresh contract was given to it after Sri Chandran was appointed as director. He resigned from the firm by the end of March, 1979. Violation of section 299 is thus not made out. Paragraph 7 of the petition complains of the company's attempt to borrow one crore of rupees, when it has a paid up capital of less than nine lakhs only. The interest liability would be too much for the company, it is averred. It is added that "in the peculiar circumstances now obtaining in the company, there is every reason to suspect the bona fides of the management in the matter". The company's answer is that newspaper business had become highly competitive with other papers like Malyala Manorama starting editions from different centres and that it was, therefore, decided to expand the company's business by starting a Trivandrum edition of the Malhrubhumi and that the borrowing was intended to raise funds for the purpose. The decision to borrow was actu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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