TMI Blog1996 (1) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... main object of the company, as per exhibit A-1 memorandum of association, is to carry on the business of a hotel. Respondent Nos. 2 and 3 who originally subscribed five shares each at the time of formation of the company were appointed as directors under article 12 of the articles. By virtue of article 19, respondent No. 2 was appointed as the managing director. The petitioner was inducted as a director of the company in its first meeting on 7-6-1980, and five shares were allotted to him (exhibit A-2). Thereafter when the allotment of shares took place on 9-3-1981, he was allotted 45 shares (exhibit A-3). The shareholding of the second and third respondents was 25 each. The company (not petitioner, which is evidently a typographical mistake) purchased a plot of land in Dasapalla Hills, Visakhapatnam, admeasuring 1,300 square yards by sale deed dated 29-7-1980, for Rs. 27,000. The value of land has appreciated to more than Rs. 10 lakhs. Even till 1987 construc-tion of the hotel was not commenced. In the year 1987, the managing director had obtained permission of the municipal corporation of Visakhapatnam, for the construction of a multi-storeyed apartment on the plot of land. At thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion issued by this court, on 29-4-1988, Sri P. Venkateswarlu, advocate, who was appointed as the Commissioner, filed a report along with the inventory showing 16 items which consist of registers, the minutes books of the proceedings of the board of directors and the annual general meetings, etc. Documents however were not directed to be seized. 4. The second respondent filed a counter stating that the company is not a joint venture or in the nature of a partnership. The extent of the land purchased is 1,361 square yards and not 1,300 square yards and the value under three sale deeds was Rs. 81,660. In accordance with the decision of the board to take up the construction of the residential complex, the second respondent applied for necessary permission to the municipal corporation of Visakhapatnam. The allegation that he has excluded the petitioner from the management of the company is false, motivated and misleading. On the other hand, the petitioner was never taking any interest in the management of the company and was not attending any meetings in spite of notices. As finances were required, additional shares were issued in accordance with the articles and it was always ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siders, viz. , Gupta and Raju, were allotted five shares each and co-opted as directors. On 9-3-1981, the petitioner was allotted 45 shares, while respondent Nos. 2 and 3 put together were allotted 40 shares. Thus out of the total of 110 shares, 50 shares were held by the petitioner, 50 shares by respondent Nos. 2 and 3 while 10 shares were held by Gupta and Raju. In other words, the shareholding of the petitioner and respondent Nos. 2 and 3 was nearly 45.5 per cent each. Mr. S. Ravi submits that though earlier there was no partnership firm, if the corporate veil is pierced, the company is in substance a partnership firm. He submits that in view of the equal shareholding between the petitioner and respondent No. 2 representing his family and the outside shareholders being an insignificant minority and in view of the fact that it is a private limited company, the company has to be treated in substance as a quasi-partnership. 6. The leading case on this subject is Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, which has been noticed by the Supreme Court in Hind Overseas (P.) Ltd. v. Raghunathprasad Jhunjhunwalla [1976] 46 Comp. Cas. 91, where it is stated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are restrictions imposed in the article (exhibit A-1). Clauses 2A, 4, 5 and 6 of the articles read as follows: "Clause 2A. - The right to transfer shares shall be restricted as hereinafter provided. Clause 4. - The person proposing to transfer any share or shares hereinafter called the 'proposing transferor' shall give notice in writing to the company that he desires to transfer the same. Such notice shall constitute the company as his agent for the sale of the share or shares to any member of the company or to any person empowered by the directors as provided hereinafter at the value agreed to the proposing transferor and the transferee or at the fair value to be determined as hereinafter provided. The transfer notice shall not be revocable except with the sanction of the directors. Clause 5. - In case no sum be specified in the transfer notice as the fair value or in case the 'proposing transferor' and the purchasing member, do not agree as to the fair value of a share, such fair value shall be determined by the board of directors in consultation with the auditors of the company. Clause 6. - The directors may in their absolute and uncontrolled discretion refuse t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company by any group of shareholders. Regarding the reasoning about the division of shareholding amongst two family groups, the Supreme Court held that it cannot be the sole reason to hold that the company takes the image of a partnership and that the very fact that after the discussion the parties deliberately abandoned the idea of formation of a partnership would show that there was no intention to carry on the business as partners. It was also found that VDJ has categorically denied the allegation of RPJ that the company was in substance a partnership. With regard to the last reason, the Supreme Court held that the fact that RPJ and his associates were functioning as working partners and VDJ was a financial partner is a neutral factor. The Supreme Court did not lay down that in order to hold that a company in substance is a partnership, there should be earlier a partnership which must be converted later into a company. In fact the following observations indicate to the contrary: "Is this company, in substance a partnership or in the image of a partnership as claimed ? We may now address to this aspect strenuously emphasised by Mr. Sen. If, as in Ebrahimi's case [1973] AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 6 who are their children were allotted 30 shares each. As a result of this the total shares became 260 and the petitioner's shareholding was 19.23 per cent (50 shares), while the shareholding of respondent Nos. 2 to 6 put together was 76.92 per cent (200 shares) and the balance of 3.85 per cent (10 shares) belonged to outsiders. The petitioner says in his evidence that no offer was made to him to allot the additional shares and he was not invited to the board meeting where the decision to issue the shares was taken. He further says that as no hotel construction was commenced, there was no necessity to raise funds by way of share capital. It is submitted by RW-1 that at the time of increase of the capital in the year 1987, no shares were offered to the petitioner. It is admitted by RW-1 that there is a further increase of capital in the year 1992 after the filing of the company petition and the shareholding of respondent Nos. 2 to 6 has increased to 455 shares including the 5 shares transferred by A.S. Gupta, while the petitioner's shareholding stood at 50 only. RW-1 has not said that any offer was given to the petitioner in the year 1992. Of course, he denied the suggestion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to law may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful; but a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, the object of which is to cause or commit the oppression of persons against whom those acts are directed; that the test is whether the issue of shares is simply or solely for the benefit of the director ; that if the shares are issued in the larger interests of the company, the decision to issue shares cannot be struck down on the ground that it incidentally benefited the directors in their capacity as shareholders. It was also held that the fact that by the issue of shares the directors succeed, also or incidentally, in maintaining their control over the company or in newly acquiring it, does not amount to an abuse of their fiduciary power; that what is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. The Supreme Court further laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by RW-1, permission of the Municipal Corporation of Visakhapatnam, for construction of residential flats was applied for in 1987 and the company began construction of a residential complex which is clear from the purchase bills of construction material exhibits B-27 to B-33, which according to RW-1, relate to construction of residential flats. It was only after this the court granted injunction in C.A. No. 82 of 1988, on 27-6-1988, that the construction was stopped. RW-1 made a feeble attempt to say that the injunction is against construction of hotel but when he was confronted with the copy of the order of the injunction he resiled, which he could not but do so. RW-1 categorically admits that increase in the capital was for the purpose of constructing residential flats and that the objects of the company do not permit flats. In fact, he said he was manager for construction of residential flats. At the meeting of the board of directors held on 13-12-1986, a copy of the minutes of which was filed by respondent No. 2 in C.A. No. 184 of 1990, it was resolved to apply for permission to the Municipal Corporation of Visakhapatnam for construc-tion of a residential complex and at the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the office is valid or not cannot be decided in this proceeding as there is not adequate material. Regarding lack of probity it has been observed by the Delhi High Court in Bhaskar Stoneware Pipes ( P. ) Ltd. v. Rajinder Nath Bhasker [1985] 63 Comp. Cas. 184, 201: "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." There, the court found that all along there was proportionate parity in shareholding which was sought to be disturbed and the breach of the implied understanding with a view to consolidate the power in one group was indicative of oppression as revealing lack of probity and fair dealing. Though that was the prima facie view of the court, this case is apposite to the facts of the present case. Mr. S. Ravi, the learned counsel for the petitioner, submits that in view of ingredients ( i ), ( ii ), ( iv ) and ( v ) it has to be held that the affairs of the company are being conducted in a manner oppressive to the interests of the petitioner and relies on Shanti Prasad Jain's case ( supra ), wherein it was observed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra ). In that case, the complaint of the minority shareholders that no dividend was declared by the company although the company made profits for a number of years by manipulating the accounts; that those who were in the management caused unauthorised constructions in the company's building and let them to various persons at a high premium which had not been shown in the accounts of the company; that various portions of the building had been let at low rents and that the respondents had misappropriated the premiums. It was held by the single Judge of the Calcutta High Court that non-declaration of the dividend could not by itself amount to mismanage-ment, that there was sufficient reason given by the respondents for failure to give dividends, that the manipulation of the accounts was not proved by the petitioners, that there was no material to prove that the premises in question could fetch a higher rent or the directors had profited thereby and that a single act of letting did not amount to oppression. It was further held that the acts of oppression or mismanagement must be continuing ones. The decisions of Chander Krishan Gupta's case ( supra ) and Palghat Exports (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove decisions lay down that there must be continuous acts of oppression up to the date of filing the petition under section 397 and that isolated past acts or future apprehended acts are not enough. There is no dispute about this proposition which has been authoritatively laid down by the Supreme Court in Shanti Prasad Jain's case ( supra ). Whether the particular acts constitute oppression depend on the facts of each case and in the above cases on the facts it was held that there was no oppression. 21. In the instant case, the construction of flats, as already seen, is beyond the objects of the company which is to construct a hotel. It is clear that when once the residential complex is constructed the question of con-struction of a hotel will not arise and that the company will not be able to achieve its object. The factor coupled with the fact that the second respondent is a builder and is a partner in three other construction firms shows that respondent No. 2 wanted to make use of the land for the purpose of constructing the residential flats after converting the petition- er into an insignificant minority shareholder. Issuing additional shares to the respondents to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands. True it is that in this, as in other respects, your Lordships are giving a liberal interpretation to section 210. But it is a new section designed to suppress an acknowledged mischief..." (p. 33) So, the normal rule is that the oppressor has to buy the shares of the oppressed shareholders, though in exceptional cases as in C.P. No. 8 of 1981, dated 10-6-1988, decided by His Lordship B.P. Jeevan Reddy (as he then was), the oppressed shareholders were directed to buy the shares of the oppressor. Then the next question is, at what rate have the shares to be purchased by respondent Nos. 2 to 6. In Bird Precision Bellows Ltd.'s case [1985] 3 All ER 523 (CA), which was also a case of quasi-partnership, it was held that the price has to be fixed on the basis of the market value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment has notified the cost inflation index by Notification No. S.O. 600(E), dated 19-8-1994, published in [1994] 209 ITR (St.) 77, for the purpose of computation of capital gains under section 48 of the Income-tax Act, 1961. The table is as follows: Sl. No. Financial year Cost inflation index ( 1) (2) (3) 1. 1981-82 100 2. 1982-83 109 3. 1983-84 116 4. 1984-85 125 5. 1985-86 133 6. 1986-87 140 7. 1987-88 150 8. 1988-89 161 9. 1989-90 172 (1) (2) (3) 10. 1990-91 182 11. 1991-92 199 12. 1992-93 223 13. 1993-94 244 14. 1994-95 259 According to this table if the cost of an asset is taken as Rs. 100 in the financial year 1981-82, the cost will be Rs. 150 in the financial year 1987-88 and Rs. 199 in the year 1991-92. The table commences from the financial year 1981-82. As the land purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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