TMI Blog1990 (3) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... nd award such imprisonment as this hon'ble court deems just and appropriate; (4)remove the respondent from the office of director of the company; (5)pass temporary injunction restraining him from attending the board meeting of the company; (6)disqualify the respondent from holding any office of director in the company; (7)for costs of these proceedings and for interest on sums which the respondent is directed to restore to the company; and (8)grant such other and further reliefs as this hon'ble court deems fit to grant in the facts and circumstances of the case". According to the petitioners, the respondent who was the managing director of the third petitioner company, resigned from the office of managing director in May, 1987, and, thereafter, did not attend any of the board's meetings. Subsequently, an extraordinary general body meeting was convened to remove him from the office of the director; the meeting was scheduled to be held on December 21, 1987, but was not held in view of a civil court's order. The shareholding of the respondent is only 1.28 per cent. which he holds in trust and for the benefit of the second petitioner. The application for temporary injunctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acing orders for materials without disclosing the same to the other directors; ( c ) that the respondent, as the managing director, made certain fraudulent appointments, to his favorites, on exorbitant remunerations; and ( d ) that the respondent was guilty of embezzlements and misappropriations. All these are alleged to have resulted in loss to the company and are prejudicial to the interest of the public and of the company and its members. The question to be considered at the outset, therefore, is whether this petition is maintainable under section 398 of the Act. Section 398 reads: "398. Application to court for relief in cases of mismanagement. (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, 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 of its managing agent or sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffectuate the provisions contained in Schedule XI, it is necessary to interpret section 399 so as to uphold the maintainability of an application by the present management. Mr. Naganand's contention incorporates the provisions of Schedule XI into section 399, and makes them part of the latter's substantive elements. Section 539 says that it is attracted on an application made under section 398. Similarly, section 543 says that, "if in the course of the proceedings on an application made to the court under sections 397 and 398, it appears that any person,..........etc". In other words, these provisions of Schedule XI get attracted only in the course of a main application under section 397 (or section 398). The proceedings under the provisions of several sections stated in Schedule XI are to be subsequent to the lodging of the main application under section 399 ; they are only incidental or ancillary to the main proceedings; they are actually comparable to the proceedings envisaged by sections 539 to 544 as found in the body of the Act (i.e., those sections as found immediately after section 538 in the Act); those proceedings contemplated by the main sections 539 and 543 are the of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and, by that change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest, etc. While section 398(1)( a ) provides a remedy against the present management, sub-clause ( b ) provides for a remedy consequent upon a change in the management or control of the company. The purpose is to stop or prevent the prejudice or the likely prejudice to the public interest or interests of the company. This is made clear by sub-section (2) itself. The order of the court is to bring to an end or prevent the matters complained of. To bring to an end a thing or matter, that thing or matter should be in existence, at least on the date of the application for such a belief. Schedule XI to the Act is attracted only when, in proceedings under section 398, certain misfeasance, breach of trust or fraud comes to light. The several provisions contained in Schedule XI contemplate further independent proceedings against the person found to have been guilty of misfeasance, etc., in the course of the main proceedings under section 398. Section 398 nowhere states that a member of the company may apply under section 398 to take action against the past m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 in the light of these principles that we have to consider the facts in this case with reference to section 397". Some of the observations no doubt indicate that the provisions of section 397 can be invoked only by the minority shareholders. But it is possible to take the view that these observations were made in the context of the facts of the said case. It is unnecessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 543 (Schedule XI) is that a case for misfeasance has come to light in the course of a petition under section 397 or section 398. Therefore, from one point of view, the moment the present petition was filed and allegations came to be made against respondents Nos. 2 to 4 that they were guilty of misfeasance, a right to present an application under section 543 (Schedule XI) accrued to a creditor or member of the respondent company and, therefore, it is necessary that the present petition must be retained on the file, in order to enable either the petitioner company or any other creditor or member of the respondent company to make that application". The subsequent discussion also supports my view in this regard. At page 113, the court said: "I have no doubt whatsoever that a proceeding under section 397 or section 398 of the Act cannot be said to have started unless the petition under that section has come to be filed, numbered, and at least, some order of the court is obtained thereon. Till that stage, it cannot be said that a proceeding under section 397 or section 398 of the Act has started. In this view of the matter, it appears to me to be crystal clear that petitions under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners". Again, at page 100, it was observed (at page 805 of 34 Comp. Cas.) : "The language of sections 397 and 398 leaves no doubt as to the true intendment of the Legislature and it is transparent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the Legislature, which as I will presently show it could never have been, the language of sections 397 and 398 would have been different and the Legislature would not have confined the power of the court by limiting the purpose for which it can be exercised under the sections". However, Mr. Naganand referred to para 35, wherein it was held that (at page 812 of 34 C ..... 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