TMI Blog1984 (6) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... in support of the order of admission of the petition. The company is a private limited company in which the shareholders are all descendants of one Amar Nath Bhaskar. The family tree will be helpful in understanding the composition of the four groups of family members who are involved in this litigation : Amar Nath Bhaskar B. N. Bhaskar BNB T. N. Bhaskar TNB Rajendra Nath Bhaskar RNB Ravindra Nath Bhaskar RB Vivek Vidur Vashishta Bharat Vinay Rajeev Sanjay Sanjeev The company is the successor in business of a partnership known as M/s Amar Nath Bhaskar and Sons (ANB and Sons). ANB and Sons commenced business on January 1, 1957, and a deed of partnership was drawn up on December 26, 1959. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . By another agreement, it was agreed that the company would take over the business of the firm as a going concern. Thus, with effect from April 1, 1973, the company became the sole owner of the business and the shares were held by the four groups of members of the families. The shareholding of the company, as on October 11, 1972, was as follows: Shares Amount (Rs.) % age "Shri B. N. Bhaskar 124 12,400 Shri Vivek N. Bhaskar 125 12,500 (S/o Shri B. N. Bhaskar) 40 Shri Vidhur Bhaskar 125 12,500 Shri Vashishta Bhaskar 125 12,500 Shri T. N. Bhaskar 149 14,900 20 Shri Bharat Bhaskar 100 10,000 (S/o Shri T. N. Bhaskar) Shri Rajendra N. Bhaskar 150 15,000 20 Shri Rajeev Bhaskar 100 10,000 (S/o Shri Rajendra N. Bhaskar) Shri Ravindra N. Bhaskar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1980, the total shareholding was 24,850 and this was distributed as follows : Group No. of shares %age BNB 12,650 50.8 TNB 7,250 29.2 RNB 4,950 20.0 Total 24,850 The business of the company continued to be carried on till July 20, 1980, on which date BNB died. The death of BNB brought to the surface differences and disputes that appear to have been simmering for quite some time. The allegations of the petitioner in this regard will be referred to a little later. But at this stage, it is sufficient to refer to one development. The ninth annual general meeting of the company was called for December 29, 1981. The agenda for the meeting included two items : (1) to reappoint Vivek who was shortly retiring by rotation as the director and managing director of the company ; and (2) to reappoint Mr. I. P. Kohal and Smt. Aruna Bhaskar, the brother-in-law and mother of Vivek, who had been co-opted as directors on the death of BNB for a further term. On receipt of this letter, RNB wrote a strong letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... junction against the company holding the annual general meeting on December 29,1981. Again, Vivek filed a suit (Suit No. 10 of 1982) alleging that Rajiv had agreed to sell the shares belonging to his group to Vivek,s group and seeking specific performance of the same. It was also alleged that RNB and Rajiv were interfering with the work of the company by writing letters to creditors, customers and bankers of the company so as to adversely affect the business of the company. Again, RB ;s group filed a petition under section 433 of the Companies Act seeking the winding up of a company known as Ishwar Industries Ltd. in which the BNB group held substantial shares. Almost simultaneously, on May 24, 1982, RNB and Rajiv filed this petition under sections 397, 398 and 433 of the Companies Act. The last paragraph of this petition which contains the prayer clause is in the following terms : "35( a ) In the circumstances, it is respectfully submitted that the facts and circumstances of the case would justify the making of winding-up order on the ground that it is just and equitable that the company be wound up and that the affairs of the company are being conducted in a manner oppressive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at when the petition was drafted on March 8, 1982, RNB, the first petitioner, was the eldest member of the family. Subsequently, he died on September 6, 1982, and the eldest member would be Vivek of the BNB group. The other interesting feature is that representation on the board of directors is sought only for the BNB, TNB and RNB groups though the deal by which the RB group has walked out of the company after transferring its shares in favour of the BNB and the TNB groups is attacked by the petitioners and a prayer has been made that those shares should be purchased by the company under the directions of the court. The two company petitions, the present one and the one seeking the winding up of Ishwar Industries Ltd., were heard together for the purposes of admission. When these proceedings were pending, considerable efforts were also made to bring out some reconciliation between the family members who constitute the various groups. Perhaps a suggestion was thrown out that the affairs of the two companies could be so arranged that the major shareholding in each of the companies remains with one group instead of being spread over among all the three groups. In the course of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and the business belonging to the whole family into the business and domain of one group of family members, namely, the BNB group. It is alleged that the share transfer from the RB group to the BNB and the TNB groups had been arranged clandestinely and in violation of the provisions of article 4 of the articles of association of the company. According to the petitioners, they came to know about this only "recently". The issue and allotment of 50 shares to BNBS Cements and Products P. Ltd. in which the BNB group held the entire shares was also designed with the same purpose. The petitioners further allegation is that the BNB family has conducted the affairs of the company in a manner grossly oppressive of the shareholders of the company including the petitioners and grossly prejudicial to the interest of the company. It is alleged that, after the company took over the partnership business, the profits have decreased as compared to that of the business when it was carried on in partnership. Apart from these allegations based on the history of the company s activities and the shareholdings, certain allegations regarding diversion of funds were made in paragraph 25 of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerns are borne by and/or shown in the books of Bhaskar Stoneware Pipes Pvt. Ltd. ( iv )Further, although Shri Vivek N. Bhaskar and Shri Vidhur Bhaskar are actively engaged in directing and managing the affairs of the above companies/concerns, they are drawing salaries, perquisites and facilities as managing director and joint managing director, respectively, exclusively from the pay-rolls of Bhaskar Stoneware Pipes Pvt. Ltd. and were debiting the said company for all their expenses for the other companies/concerns aforesaid. ( v )Further, funds have been diverted by payments of commission and other charges by the company to General Refractories Pvt. Ltd., which is believed to be a paper concern of the B. N. Bhaskar family. ( vi )It is reasonably believed and apprehended that there are other firms and concerns whom the company deals with, in which members of the B. N. Bhaskar family have substantial undisclosed interest, and from or through whom purchases are made or through whom sales are made on considerations other than the prevailing market prices, to the prejudice of the company. The petitioners crave leave to refer to and rely upon the company s records when produced. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or appeal, a petition under section 433, 397 or 398 can be admitted only where the contents of the petition itself, independent of what may or may not be stated by the respondents in their reply to a show-cause notice, clearly made out a prima facie case falling within the meaning of these sections. This requirement, he says, is not fulfilled in the present case. On the merits, he submits that the attempt of the petitioners to invoke the just and equitable clause by bringing in the analogy of a partnership and the principle of Ebrahimi s case [1972] 2 All ER 492 (HL) is untenable. The allegation in the petition that the company was in the nature of a firm with an inherent right to a defined ratio in shareholdings among all the groups of members or participation by all the groups in the management, counsel says, is totally unfounded and untenable in law. He points out that, right from the beginning, even when the business was being carried on by a firm, the part played by the family of BNB in the firm was predominant. Also, when the company was formed, its shareholding was more, it was represented by more members on the board of directors and, admittedly, even according to the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents and a rejoinder by the petitioners, certain accounts were produced before the learned judge and a better affidavit was also called for and filed. It is after consideration of all the materials placed before him and after counsel for both parties were heard that the learned judge decided to admit the petition. At the stage of admitting a petition, it is not necessary nor is it the practice to pass elaborate orders or record detailed findings. The contention that the petition is belated cannot also be accepted. According to the petitioners, they became aware of the transfer of shares of the RB group only after the death of BNB. That apart, it is really the proposal of the appellants, availing themselves of the scope offered by RNB s resignation to take over all the directorial position, that precipitated the current spate of litigation. Moreover, the acts alleged in para 25 continue till today and though they may have started quite some years ago, the petitioners cannot be estopped from voicing their objections thereto, merely because they have been silent earlier. We, therefore, reject these contentions. Turning to the merits, the first question that arises is whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way." He pointed out that to justify this superimposition of equitable considerations over legal rights, something more is needed than the mere fact that a company is a small one or a private company. Some such indications were (at page 500): "( i ) an association formed or continued on the basis of a personal relationship, involving mutual confidence this element will often be found where a pre-existing partnership has been converted into a limited company ;( ii ) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction on the transfer of the members ; interest in the company so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere." Sri Saharya contends that, though broadly endorsing the above decision, the Supreme Court has been more guarded in its approach. He pointed out that the partnership anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h running of the company or any grievance of the petitioners except that they may be outvoted on business affairs or domestic policy because the appellants have acquired the majority of the shareholding in the company. This, he says, is not a situation which can justify a winding-up order. We think that the exact scope and limits of the applicability of the principles laid down in Ebrahimi s case [1972] 2 All ER 492 (HL) to such a case as the present one need careful consideration. The question of applicability of section 433( f ) can arise in a variety of circumstances. In Hind Overseas' case [1976] 46 Comp. Cas. 91 (SC), it was not applied for the simple reason that the partnership analogy failed on the facts. The position here is much more complicated. We have set out earlier the history of the constitution of the present company. The details of the shares held by the various groups in the partnership as well as the shareholdings of the company commencing from 1963 till the death of RB in 1976 clearly show that the company was in the nature of a partnership between the four groups of family members. It is true that right from the beginning, the family of BNB had an upper h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the four groups of family members. Even granting that RNB had voluntarily resigned and the RB group had parted with their shares voluntarily, the situation has so developed that, with the proposals before the annual meeting of December, 1981, going through, the RNB group and as events have happened in the course of these proceedings, the TNB group have been completely eliminated and the company has passed into the virtual control of the BNB group as it did in Ebrahimi s case [1972] 2 All ER 492 (HL). The crux of the question seems to be not whether any group has been expelled or whether this was done lawfully or otherwise but whether there has been breach of a basic mutual understanding. It is difficult, therefore, to say that a prima facie case has not been made out for the applicability of Ebrahimi s [1972] 2 All ER 492 (HL) principle here. Mr. Saharya tried to show to us that the purchase by the BNB group of the shares of the RB group in 1977 was not in violation of, but rather in accordance with, the terms of articles 4 and 5. We have gone through these articles, the language of which is quite cumbersome and involved and would like to express no conclusion one way or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a continuous 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 in the light of these principles that we have to consider the facts in this case with reference to section 397" Reference may also be made to paragraph 18 of the judgment where the observations in Harmer s case [1958] 3 All ER 689; [1959] 29 Comp. Cas. 305 (CA) have been extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one judge to another. An isolated order passed by a judge which is contrary to law will not normally support the inference that he is biassed ; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the judge is biassed and that the party complaining of the orders will not get justice at his hands." After referring to Kalinga Tubes case [1965] 35 Comp. Cas. 351 (SC), the court observed (at page 782): "It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of winding up, it is possible for the company s affairs, to be remedied by recourse to section 397 (or even section 398). We think that the learned single judge has come to the right conclusion that there is a prima facie case for admitting the petition under section 397 also so that the possibilities can be explored of remedying the situation rather than winding up the company. There is, therefore, a clear case for admission of the petition under section 397. We now turn to the applicability of section 398. Under this section (leaving out the words "prejudicial to public interest" which have not been relied on), what has to be established by the petitioner is that there has been a conduct of the affairs of the company in a manner prejudicial to the interests of the company or that a material change has taken place in the management or control of the company and in the ownership of the company s shares by reason of which it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. Here again, we shall leave out of consideration the words "prejudicial to public interest". While the transfer of shares and the disturbanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letting of the premises was no new development intended to prejudicially affect the interests of the company to the benefit of the BNB group. A more careful look, however, shows that the position is not so simple. It has been pointed out that the original lease deed of 1968 by which the rent reserved was Rs. 7,000 p.a. pertained only to the land and not to the buildings and machinery. Even assuming that the rent was increased to Rs. 14,000 p.a. to cover the buildings and machinery, it is pointed out that the present rent for the land, buildings and machinery is Rs. 18,000 and this is inclusive of electricity charges. Mr. Kaura urges that even in the case of BNBS Cements Products (P) Ltd., the appellants have not shown that the electricity charges were met by the said company. He submits that this is a crucial fact. He refers to an electricity bill issued by the electricity department to BNBS Cements and Products P. Ltd., in which the electric consumption is shown as 777 units per week or 3,100 units per month. The electricity consumption of the firm and the other company are said to be equally substantial. Mr. Kaura points out that on the above consumption, the electricity charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int managing director exclusively from the pay-rolls of Bhaskar Stoneware Pipes Pvt. Ltd. Though they were also actively engaged in directing and managing the affairs of the companies/concerns of their group, referred to above, they were debiting the company for all their expenses. This again has not been met with any specific denial. It has been argued that if Vivek and Vidur chose to receive no remuneration from the other concerns, there is no detriment to the company. This argument is untenable. If Vivek and Vidur are serving all the concerns including the company and only the company pays them, the presumption is that they are being paid for all their services unless there is something to show that they agreed to serve the other companies free. It is also necessary to enquire whether all their expenses debited to the company s account pertain to their services to the petitioner company alone or pertain also to their services to the other concerns. As we have said repeatedly earlier, this is not the stage to completely go into details of various allegations and find out how far they are proved or not proved. What is important is only to find out whether a prima facie case has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1959, it is absolutely clear that even petitions other than a winding-up petition have to be posted for admission in the first instance. There was also some discussion before us as to whether the mere existence of acts of oppression or mismanagement is sufficient to bring a case under section 397. Mr. Kaura urged that, if this is shown, it will also automatically follow that it is just and equitable to wind up the affairs of the company. This argument does not appear to be correct. Section 397 requires two conditions to be fulfilled before an order is passed under that section : ( i ) that there are acts of oppression and mismanagement; and ( ii ) that the affairs of the company are such that it is just and equitable to wind up the company. It is only in a case where a winding up is otherwise peremptory under the just and equitable clause that the court may decide that short of winding up, a remedial procedure should be adopted under section 397. We have already pointed out that in this case both the conditions have been fulfilled. It is, therefore, not necessary for us to consider whether the petitioners are entitled to the admission of the petition under section 397 even if a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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