TMI Blog1987 (1) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... l of Rs. 25,000 and the profits and losses were to be shared almost equally between them. This firm was reconstituted with effect from April 1, 1976, by the addition of petitioner No. 3, Smt. Tara Devi and Smt. Padmadevi Gupta also as partners. The shares of all the five partners as well as their contribution to the capital were equal. A further reconstitution of the firm was made with effect from August 10, 1979. By this reconstitution, respondent No. 2, Brijmohan Mishra, and Smt. Padmadevi Gupta ceased to be partners of the firm ; but Smt. Shukla Devi Mishra, wife of respondent No. 2, Brijmohan Mishra, became a partner along with the three petitioners. The capital of the firm was increased to Rs. 2,00,000 and each of the four partners contribution was Rs. 50,000 and the profits and losses were to be shared equally by all the four partners. The partnership was converted into a company, "Durga Pesticides Pvt. Ltd", on November 18, 1980. The registered office of the company is situated at 13, Industrial Estate, Burhanpur, and the share capital of the company is Rs. 5,00,000 divided into 5,000 equal shares of Rs. 100 each. The main object of the company was to take over, purchase an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., Rs. 24,000 annually. A separate agreement was also executed by the petitioners and respondent No. 1, on May 15, 1981, incorporating these conditions, but on August 17, 1981, the petitioners made a grievance that they were not permitted to enter into the factory premises and to discharge their advisory role as directors. This event was repeated on September 3, 1981. A meeting of the board of directors was called by petitioner No. 2 on September 22, 1981. This meeting was attended by the petitioners and not by respondent No. 1 who challenged the authority of petitioner No. 2 to call the meeting, saying that petitioner No. 2 has no power to call the meeting. In that meeting, the resolution dated May 8, 1981, was superseded and petitioner No. 2 was appointed as chairman-cum-managing director and the next meeting of the board of directors was fixed for September 29, 1981, but no such meeting took place. Respondent No. 1, by notice dated September 25, 1981, called a meeting of the board of directors on October 5, 1981, at the office of the M.P. Finance Corporation at Indore. On that day, the petitioners attended the meeting but not respondent No. 1 and so nothing happened on tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the petitioners were absent and respondents Nos. 1 to 5 alone were present. By a resolution passed in the meeting, the appointment of respondent No. 1 as chairman-cum-managing director for a period of five years from May 8, 1981, was confirmed and respondents Nos. 2 to 5 were appointed as directors of the company. The petitioners then filed a petition under sections 397 and 398 of the Companies Act on July 9, 1982, for relief against oppression and mismanagement. It is also alleged that petitioners Nos. 1 and 2 hold degrees of M.Sc. in Chemistry and being unemployed graduates obtained a loan from the M.P. Finance Corporation and also from the Director of Industries and a plot was allotted in the industrial area at Burhanpur in their names for establishment of a factory in the name of Durga Pesticides ; petitioners Nos. 1 and 2 were the active partners, the remaining two partners being ladies, they were sleeping partners ; the plot on which the factory is built was also allotted in the names of petitioners Nos. 1 and 2 as unemployed graduates ; petitioners Nos. 1 and 2 alone have the technical know-how for running the factory and the respondents were made permanent directors under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al meeting within 18 months of the incorporation of the company as required under section 166 of the Companies Act; respondent No. 1 is refusing to recognise and acknowledge the creditors and depositors of the company affecting the credibility, reputation and goodwill of the company; respondent No. 1 is guilty of falsifying the books of account by manipulating entries thereof by wrongly advising its auditor to change the entry of deposit or debt initially standing in the name of the relations of the petitioners by adjusting them against the names of the petitioners and forfeiting the said advances and deposits towards losses suffered by the company; the petitioners are also not being paid their annual remuneration of Rs. 24,000 each; respondent No. 1 was appointed as managing director in order that the dues of the M.P. Finance Corporation would be cleared but she did not care to pay anything to the corporation with the result, a civil suit has been filed by the corporation for realisation of the loan advanced by it with interest; in that suit, the property of the company has been attached; the overdraft facility from the bankers was misused and the raw material which was pledged wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d May 8, 1981, came to be passed appointing respondent No. 1 as managing director for a period of five years and she was put in charge of the management of the company; an agreement was also executed on the same day incorporating these terms; petitioner No. 2 had no jurisdiction to call a meeting of the board of directors on September 22, 1981, and the petitioners could not have passed the resolution superseding the earlier resolution dated May 8, 1981; in faithful implementation of the resolution and the agreement, respondent No. 1 has streamlined the administration and improved the working of the company; petitioner No. 2 and husband of petitioner No. 3 wanted to be employed in the company on a flat salary of Rs. 3,000 per month; at all relevant times, they ceased to be directors of the company; the petitioners have full access to the factory premises and to the books of account; the respondents also offered to give them documents on depositing the fees; notices of the meetings were sent to the petitioners under certificate of posting, but they deliberately remained absent; and thereby they ceased to be directors of the company; before offering the shares to respondents Nos. 2 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say that the account books have been manipulated in order to deprive the petitioners and their relatives of their dues; it is denied that the affairs of the company are conducted in a manner prejudicial to public interest or oppressive to the petitioners. The learned company judge, on consideration of the entire case, came to the conclusion that none of the contentions advanced in support of the petition could be accepted and none of the allegations of oppression of the petitioners as shareholders and mismanagement of the affairs of the company are made out; the petitioners have not made out any case for grant of any relief to them either under section 397 or under section 398 of the Companies Act and the petition has, accordingly, been dismissed and the resolution dated May 8, 1981, has been upheld. It has further been held that the resolution is not contrary to clause 31 of the articles of association nor contrary to section 312 read with sections 252 and 291 of the Companies Act; the article in question permits the term of the managing director to exceed more than one year; the resolution dated May 8, 1981, was passed unanimously and an agreement was also executed on that day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petition which was filed on July 9, 1982, it has been alleged that the petitioners had no notice of the meetings; the petitioners had never defrayed the expenses as required under section 53 of the Companies Act to send notices by registered post; similarly, the petitioners were given option to purchase new shares, but they refused to purchase any share; D.P. Khanna, respondent No. 6, was duly nominated as a director of the company on September 17, 1981, by the M.P. Finance Corporation under the State Financial Corporations Act, 1951, as amended by the Amending Act of 1972; the first act of mismanagement alleged was of not holding any meeting which has been falsified ; the next act of mismanagement alleged was failure to hold the annual general meeting within 18 months of the incorporation of the company on November 18, 1980 ; since the annual general meeting was held on May 17, 1982, it was within 18 months, as the resolution dated September 22 , 1981, was invalid, respondent No. 1 was justified in flouting the same ; another act of mismanagement alleged was that a parallel company known as Amit Chemicals Pvt. Ltd. has been formed by the respondents in July, 1982 ; but that com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and since no notices were ever served on the appellants, they could not be penalised for not attending the meetings of the board of directors ; and no affidavit was filed in support of service ; ( vi ) respondents Nos. 2 to 5 were illegally inducted as additional directors on November 30, 1981, and they were allotted 2,920 shares by resolution dated December 26, 1981, thereby reducing the appellants into a minority and the spirit of partnership was given a go-by ; ( vii ) various acts of mismanagement have been committed by respondents Nos. 1 to 5 manipulating the accounts, diverting the resources of the company, not paying the dues of the creditors and remuneration to the appellants as directors ; and ( viii ) in view of all these various acts of oppression and mismanagement, the company judge should have enforced the resolution dated September 22, 1981, and should have put the appellant in charge of the management of the company. Shri M.P. Sapre, learned counsel for respondents Nos. 1 to 5, on the other hand, submitted that the appellants are for the first time raising the issue of not being given opportunity to lead evidence, when in fact, before the learned company judge, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used to subscribe to further shares, they cannot now make a grievance that they have been reduced to minority shareholders ; there is no oppression of the minority shareholders nor is there mismanagement; in fact, under the managing directorship of respondent No. 1, the liabilities of the company to the extent of Rs. 10,00,000 have been liquidated and the company is making progress ; the appellants have not proved any mismanagement against respondents Nos. 1 to 5, nor is there any evidence of diversion of funds nor tampering with the records ; the learned company judge has given cogent and valid reasons while dismissing the petition and there is no case for interference ; this court should permit respondents Nos. 1 to 5 to purchase the shares of the appellants in order to bring the dispute to an end for all time. This appeal is against rejection of the company petition under sections 397 and 398 of the Companies Act. Section 397 gives relief in case of oppression and the petitioner has to show that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member and that winding-up of the company would unfairly prej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next contention is that initially there was a partnership between appellants Nos: 1 and 2 and respondent No. 2 ; but subsequently, this partnership was dissolved and a new partnership was formed between the appellants and respondent No. 2, in the name of Durga Pesticides doing the same business. This partnership business was converted into a private limited company with these persons as permanent directors. The contention is that the intention of the parties was to continue the partnership with equal shares in the management, profit and loss and share in the business of the company. But this basic agreement of partnership has been flouted by inducting subsequently, respondents Nos. 2 to 5 as additional directors and then allotting shares to them. This argument is based on the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 ; [1973] AC 360 where the following guiding principles for application to private companies, of the "just and equitable" ground for dissolution as provided in the Partnership Act for dissolution of the partnership concern : ( i ) formation of the company based on personal relationship and mutual confidence (an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial consideration, whether having regard to the new provisions contained in the Companies Act, 1956, such as sections 397, 398, 408 and sections 388-B to 388-E, there should be any need at all to extend to private companies which have been deliberately incorporated as companies under the Companies Act and are legal entities" Ebrahimi's case [1972] 2 All ER 492 ; [1973] AC 360 (HL) has no application here. Although the partnership business was converted into a private limited company, each partner having equal share in the management and profits of the company, but after running the business for about 1 years and appellant No. 1 appointed as managing director, it appears that he was not in a position to run the company on sound lines and the company was not in a position to clear off its liabilities and was under serious financial stringency. Therefore, on April 19, 1981, it was resolved to hand over the management of the company to the M. P. finance Corporation which had served a notice for recovery of Rs. 4,89,600.14. It may be mentioned that this liability was taken over by the company from the partnership which had borrowed a sum of Rs. 4,18,500 from the M. P. Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir continuous absence for over three months at the meetings of the board of directors. She, accordingly, wrote a letter to the appellants intimating about their default, but instead of showing cause, they again remained absent at the next meeting held on March 19, 1982, when it was resolved that they have ceased to be directors of the company. Accordingly, respondent No. 1 wrote a letter dated April 19, 1982, informing the appellants about the fact that they ceased to be directors. Therefore, the appellants themselves abstained from the management of the company on their own volition and respondents Nos. 1 to 5 are not at all responsible for the same; firstly, the appellants handed over the complete management of the company to respondent No. 1 on May 8, 1981, and subsequently, they remained absent at the meetings of the board of directors, they ceased to be directors in view of section 283(1)( g ) read with sub-section (3) of the Companies Act. Now, the question remains as to whether the appellants had notice of these meetings. According to them, they never received any notice of these meetings and filed their affidavits to this effect. On the other hand, respondents Nos. 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey deliberately remained absent after they found themselves to be in a minority; and as has been observed by the learned company judge, took the plea later on, that they had no notice of the meetings. Curiously enough, the appellants have admitted the receipt of the letter dated April 19, 1982, informing them that they ceased to be directors of the company. According to the ordinary course of human nature and conduct, if the appellants had not received any notices of the meetings, they would have promptly protested about the same and challenged the resolution whereby they ceased to be directors. The total silence of the appellants belies the fact that they had no notices of the meeting. It is pertinent to note that respondent No. 6 who was a nominated director of the company did attend the meeting held on November 30, 1981, and he did not attend the subsequent meetings, but has been sending intimations and telegrams about his inability to attend the meetings showing that he had received the notices of the meetings which were despatched under the same set of certificates of posting. It is, therefore, clear that the appellants, deliberately did not attend the meetings which were held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with his representation against detention, he only appended the certificate of posting without enclosing a copy of the letter withdrawing his admission. Therefore, the Supreme Court refused to rely on the certificate of posting that the said letter was sent. Now, we are to consider whether the resolution and the agreement dated May 8, 1981, are invalid because they contravene clause 33 of the articles of association of the company and the resolution dated April 22, 1981, passed by these appellants is valid and binding on the parties. The only ground of attack on the resolution dated May 8, 1981, is that it contravenes article 33 of the articles of association of the company but this article itself provides that the term of appointment of the managing director shall be for a period of one year at a time and he shall be eligible for reappoint-ment and the term of appointment shall be subject to any contract or agreement between the directors. So, a director can be appointed under this clause even for a period of five years. It is not the case of the appellants that the agreement dated May 8, 1981, was executed by undue influence, coercion or fraud. They, in their rejoinder, have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds were not credited to the bank account. No particulars have been given to substantiate this allegation and not even a single instance proved. The bank has not come forward to make any grievance about the same. The last act of mismanagement is regarding non-payment of the dues of the appellants and the creditors. The appellants contended, that under the agreement dated May 8, 1981, they are entitled to be paid Rs. 24,000 per annum in view of the investment made by them; but nothing has been paid. The appellants cannot blow hot and cold in the same breath, after saying that the agreement is invalid and inoperative; and they cannot say that they be paid on the strength of such an invalid document. According to respondents Nos. 1 to 5, there are outstandings due to the extent of Rs. 2,00,000 against these appellants and their remuneration has been adjusted against their outstanding dues. The appellants also claimed that these respondents were given advance amounting to Rs. 90,000 for purchase of raw material; but no raw materials were purchased, nor any accounts furnished. It is true that there was some amount outstanding to the credit of the mother of appellant No. 2 in the books of ..... 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