TMI Blog1963 (4) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... an one-tenth of the issued share capital of the Company. The application is made for the petitioner on behalf of and for the benefit of the consenting shareholders and the petitioner. The authorized capital of the Company is ₹ 1 Crore consisting of shares of ₹ 100,00 each. All the shares are Equity shares. The subscribed capital is 61,000 shares of ₹ 100.0.0 each fully called. Prior to 1954, the Company was exclusively controlled and managed by Sri B. Patnaik (respon-dent-2) and Sri C. S. Loganathan (respondent-4) who between themselves held the majority shares. Sometime in 1954, Dr. H. B. Mohanty, the then Secretary of the industries Department, Government of Orissa, informed the petitioner that the Company was in financial and administrative difficulties and requested him to help the Company by providing finance, arranging loan from Banks and other sources and further by providing necessary administrative guidance. The petitioner agreed to the proposal. The shares in the Company were held originally by Sri Narayan Swami, respondents 2 and 4, Sri J. S. Tarapor-wala and a Company called the Kalinga Industrial Development Corporation Ltd., which was controlle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad made an application to the Government of Orissa for a loan of ₹ 65 lacs and the Orissa Government advised the Company to apply through Industrial Finance Corporation for such loan. As the industrial Finance Corporation gave loans only to public limited companies, it was decided to convert the Company into a public Company to enable it to apply for and obtain loan from the said Corporation. After the Company was converted into a public Company, the Controller of Capital issues on behalf of the Government of India sanctioned issue of 39,000 Ordinary shares on 18th December, 1957. One of the terms of the said sanction was : Subject to the provisions of Section 81 of the Companies Act 1956 it is a condition of this consent that the new shares should in the first instance be offered to the existing share-holders with the right of renunciation attached. After all the above financial arrangements had been made through the efforts and guarantee of the petitioner, and upon receipt of the aforesaid sanction, respondents 2 to 4 in collusion and conspiracy with each other wrongfully, illegally and surreptitiously hatched a plot to oust and exclude the petitioner and his group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner and proportion in which such shares are to be issued. On the date fixed, the meeting was held under the Chairmanship of respondent No. 2. At the said meeting the shareholders controlled by respondents 2 and 4 combined and by preponderance of the voting power of their group passed resolutions completely excluding the existing shareholders from taking fresh issue of shares. The votings were 38,165 in favour and 19,083 against the said resolutions. These resolutions were designed to compel the petitioner ana his group to sell their shares for undervalue or at a very nominal value to respondents 2 and 4 and their groups. It was not genuinely intended to make the Company broad based, otherwise the shares would have been issued to the public in general and would have been Sub-scribed at premium. The resolutions are ultra vires the Companies Act, 1956. Neither the Board of Directors nor the shareholders of the Company by majority resolution can interfere with the pre-emptive rights given to the Equity Shareholders. The resolutions were also not passed in bona fide exercise of their powers and were passed mala fide in abuse of powers conferred by the Act solely with a view to outvo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful ana in oppression and fraud of the minority shareholders. Miscellaneous Appeal was filed against the order of the Subordinate Judge vacating the interim injunction which was dismissed by Mr. justice Rao in Misc. Appeal No. 77 of 1958 on 26th September 1958. On 21st September 1960 at 11 O'clock, respondents 2, 4 and their groups convened another Extra-ordinary General Meeting for considering the passing of the following resolution-- Whereas the Capital of the Company now consists of ₹ 1 Crore divided into 1,00,000 Ordinary or Equity shares of ₹ 100/- each Resolved that the Capital of the Company be increased from ₹ 1 Crore to ₹ 3 Crores by creation of additional 1,00,000 Equity shares of ₹ 100/- each ranking pan pass with the existing shares and 1,00,000 6 1/2 per annum Cumulative Redeemable Income-tax free preference shares of ₹ 100/- each and such preference shares snail confer on their holders the rights and privileges attached thereto by the new Article to be inserted in the Articles of Association and specified in the resolution No. 3 hereinafter mentioned. In the Explanatory statement attached to the Notice dated 25th August ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and are acting unfairly to the petitioner and his group. The facts and circumstances of the case would justify the making of a winding-up order on the ground that it is just and equitable that the company should be wound up. But the winding up of the Company would unfairly prejudice the petitioner and the other members of the minority group, and the matters complained of can be removed by appropriate orders of the Court. The affairs of the Company have been conducted in a manner prejudicial to the inter est of the Company. There has also taken place a material change in the management and control of the Company by alteration in its Board of Directors and by fraudulent changes introduced in the ownership of the Company's shares, and it is likely that the affairs of the Company would continue in a manner prejudicial to the interest of the Company. Appropriate orders should be passed for removing the oppression with a view to bring to an end the matters complained of. (F) A large number of reliefs have been sought. Amongst others, the substantial renets are : (i) Removal of the present Board of Directors consisting of respondents 2 to 5. (ii) Reconstitution of the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpansion. The profits made by the Company increased from year to year and the Company paid dividends to the shareholders at the rate of three per cent till 31st March 1958 and at six per cent thereafter. The reserve of the Company also progressively increased, and the Company was on a very sound position and there was scope for further development. The petitioner, who is very rich as compared with tha other share-holders, has all along insisted that the shares be issued to the existing shareholders only knowing it very well that it may not be possible for the other share-holders to acquire those shares with the result that he might be able to acquire absolute majority in the Company and gain absolute control thereof. The oral agreement is ultra vires the memorandum of Articles of Association of the Company and is illegal and opposed to public policy, it was never acted upon. Sri Jain and Sri Sabharwala retired by rotation at the Annual General Meetings. The petitioner did very little to procure finances for the Company Besides introducing the Company to the Chartered Bank. The draft notice with the agenda was approved by the petitioner in the meeting of the Board of Directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar reasons. On 13th October 1955 the Board of Directors or the Company sanctioned the transfer of ₹ 3,40,000/- to respondents 2 and 4 at the request of Kalinga industrial Development Corporation Limited. The Board resolutions were confirmed by another Board meeting presided over by the petitioner on 12th January 1956. On 31st March 1956 respondents 2 and 4 utilized the said sum of ₹ 3,40,000/-each for obtaining an allotment of new shares issued by the Company. The inspection of accounts was never sought for prior to the filing of the application. 3. Respondents 6 to 12 filed affidavits asserting that they are independent and respectable persons of substantial means, and that they purchased the shares bona fide and are not nominees or Benamdars of respondents 2 and 4 and are not under their control. The purchases were made by way of investment. 4. The petitioner filed another affidavit on the 8th February 1961 further elaborating the case that the Company was agreed to be run on partnership principles as will appear from the tenor of the Agreement and the subsequent conduct and the correspondence of the parties, and that respondents 2 and 4, having induced the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneficial to the Company. (vi) Injunction order dated 18th April 1958 was not obeyed by the Company and the allotment was rushed through with indecent haste. (vii) Inspections of the applications for allotments or 39,000 shares and the account books of 1958 were nor granted by the majority mala fide. (viii) The attempt to raise capital of the Company from ₹ 1 Crore to 3 Crores was in pursuance of persistent policy to oust the petitioner and his group. 6. The learned Judge accordingly allowed the application under Sections 397 and 398 of the Act. Reliefs granted have been mentioned in paragraph 55 of his judgment. 7. The following issues arise for determination on the arguments of the parties. (I) Is the petition demurrage and liable to dismissal in limine? (II) Is the application not maintainable under Section 399(3) as the consent in writing obtained prior to the transfers is invalid after the transferees were made parties? (III) Is the agreement dated 27th July 1954 in the nature of a partnership between the petitioner respondents 2 and 4 and their groups? Is the agreement enforceable against the Company after its conversion into a public Company? Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which justify a winding-up order. no doubt, if there is any slip in the statement the Court can allow an amendment so that the real point may be tried; but, subject to this power of amendment, it is not enough or a sufficient case to be shown in evidence; a sufficient case must be stated on the petition. In (1875) 19 EQ 416, In Re Steam Stoker Co; their Lordships said : It is their right to say that the petition affords materials upon which alone the Court is bound to decided Upon the objection, therefore, it is my duty to order that this petition be dismissed. It follows that the affidavits which have been filed in opposition are useless. The objection is in its true sense a demur to the petition. Supposing every line and letter of the petition to be true, it is unsustainable, and one sees at once how serious and evil such a practice as this might become. In (1937) 11 Ch. 392, In Re, Cuthbert Cooper and Sons Ltd., their Lordships said :-- For the purpose of determining whether the petition should be granted or not, it is necessary for me to look at the allegations in the petition, and I do not propose to travel beyond that. All these decisions have been accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As the allegation in the petition in respect of claim under Section 210 showed that there was acute conflict bet-ween the parties and the petition was granted on an allegation that the affairs of the Company required investigation, the petitioners were justified in supplementing the statutory affidavit by exhibiting documents and by filing affidavits. His Lordship said that he could imagine a few cases of petition presented under Section 210 in which it was wise, or even possible, to rely merely on the statutory affidavit. In Gower's Modern Law, there is a passage that the Court should have power to impose upon parties whatever settlement the Court considers just and equitable. But the result of the procedure of the English High Court was ill adapted for the exercise of inquisitorial and Salvationist role thus imposed upon the Court. Reliance is also placed on AIR 1958 Mad 587, Syed Mohamed AM v. Sundaramoorthy which did not accept the aforesaid view by saying that the Indian Courts are not hampered by such rigid technicalities of procedure by which the English Courts are bound. It has been authoritatively laid down in AIR 1951 SC 280, Bishundeo Narayan v. Seogeni Rai th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants nave paid all calls and other sums due on their shares. (3) Where any members of a Company are entitled to make an application in virtue of Sub-section (1) any one or more of them having obtained the consent in writing or the rest, may make the application on behalf and for the benefit of all of them. The petitioner obtained consent in writing of members holding not less than one-tenth of the issued share capital of the Company, and initially the application was not open to objection. Bijoy Kumar Mall, K. C. Dalai and the Central Bank of India Ltd., the transferees, were made additional parties subsequent to the filing of the application and no fresh consent was obtained. It is argued that the consenting members have given no consent for getting relief against the transferees from the original allottees, and, as such, the application is not maintainable. The application is under Sections 397 and 398 on the grounds of oppression of minority and of mismanagement in the affairs of the company and reliefs ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows from the fact that there is this entity called a company is that, in order to obtain what is equivalent to a dissolution 01 partnership, the machinery for winding up has to be resorted to. The view that a Private Limited Company is in substance a partnership has never subsequently been dissented from. In 1924 AC 783, Loch v. John Blackwood Ltd., their Lordships of the Privy Council approved the aforesaid view and observed : The Board specially refers to the accurate and careful opinion of Warrinaton L. J. in that case. In (1958) 3 All ER 66 their Lordships accepted the aforesaid preposition : The Company was in substance, though not in law, a partnership consisting of the society and the respondents. Whatever may be the other different legal consequences following on one or other of these forms of combination one result, in my opinion, followed in the present case from the method adopted, which is common to partnership, that there should the good faith between the constituent members. 14. Prior to the execution of the Agreement, the largest shareholders of the Company were respondents 2 and 4 who held 21,000 shares out of 25,000 shares, that is 84% the Fren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties will thus hold respectively equal number of shares of the face value of ₹ 10,50,000 each registered in their own names or their nominees separately. (4) Each of the three parties will have an equal number of their representatives as Directors on the Board of the Company which for the time being shall be two Directors from each of the three groups-- (5) Ordinary Shares of the face value of ₹ 4 lacs held by the French Company (Rs.3,75,000) and Mr. Rath (Rs.25,000) will continue to be held by them as heretofore, and none of the parties hereto will have any interest so that the shareholding in the Company of all the three parties hereto will remain equal and in the same proportion. (6) The loss of approximately ₹ 7 lacs incurred by Kalinga Tubes Ltd. upto 30th June, 1954 would continue to stand financed free of any interest by Kalinga industrial Development Corp. Ltd. private limited company of the parties of the 2nd and 3rd parts hereto or by the 2nd and 3rd parties hereto themselves until Kalinga Tubes Ltd., have earned a profit to the tune of ₹ 10 lacs. The parties of the 2nd and 3rd parts hereto are responsible to bear this entire loss in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tubes Ltd. for the aforesaid cash credit arrangement with Banks. (9) Sri S. P. Jain will be the Chairman of the Company and Sri Narayanswami will be the Managing Director. The first party will always have the right to appoint at any time at his option one of the Directors representing his group on the Board of Kalinga Tubes Ltd. as the Join Managing Director of the Company and the person so selected by the 1st Party shall be with the approval of other parties hereto. Certain clauses of the agreement were clearly acted upon. In Clause (9) the stipulation was that Shri S. P. Jam would be the Chairman of the Co. and Sri Narayanswami would be the Managing Director. Soon after the petitioner was elected as the Chairman of the Company. Respondent 2 resigned. The petitioner continued as Chairman from 1954-55 to 1957-58 for a period of 4 years. Sri Narayanswami was appointed as the Managing Director. He resigned. In 1955 and in his place respondent 2 was elected to be the Managing Director. To the extent respondent 2 was elected as the Managing Director, there is distinct departure from the terms of the agreement. Clauses 1, 2, 3 and 5 relate to holding shares in equal proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip of partnership would govern their mutual relationship, the question is merely academic in view of the absence of dispute during the period it was a private Company when the three groups were working nar-moniously and substantially in terms of the Agreement. 16. The more important question to be answered is whether the Agreement can be enforced against the public Company in its working. Even though the essential terms of the agreement were followed for some time after the formation of the public company, it was certainly not in pursuance of any contractual obligation. Mr. Mitra contends that even dehors the agreement, on the date of the formation of the Public Company, the position amongst the parties was that there was equality of holdings in the shares and equality of representation in the Board of Directors. Working under this status quo, there was an equilibrium in the relationship of the three groups and the management was harmonious ana beneficial to the interest of the Company and that is exactly on this basis that the affairs of the Company should be conducted. The Articles of Association of the Company were altered after the Company was converted into a public compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. The Articles of Association constitute the contractual obligation amongst the shareholders of the company. The fact that the affairs of the Company were managed with holding of shares in equal proportion amongst the 3 groups for a period of about 4 years by itself cannot create a right in favour of the petitioner and his group to claim that it must continue in the same manner contrary to the terms of the Articles of Association even when the Company becomes public. Such a claim would also be contrary to the provisions of Section 81 of the Act which lays down that General body of the share-holders can direct fresh issue of shares in a different manner. It would also not be compatible with dynamic concept of industrial expansion. for instance, the expansion scheme would require large capital In Crores and any one of the groups may not be in a position to subscribe its proportionate shares as any one or both of the residual groups can do. The balance is bound to be disturbed and the equilibrium lost even if the affairs of the Company would be conducted wholly bona fide. Under Clause (8) of the Articles of Association, the number of Directors shall not be less than 5 or more than 9, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es may fall to be applied to both alike. But this is not to say that we can import the detailed provisions of the Partnership Act into the Companies Act, still less we can ignore the specific requirement of Section 210. In (1937) 1 Ch. 392. Mr. Justice Simonds observed : Whether it be a matter of articles of association or articles of partnership, the rights of parties are determined by those articles and the question whether it is right for me applying here the principles of partnership to the question of dissolution to wind up this Company or not largely depends on what are the contractual rights of the parties ,as determined by the articles of association in this case. In accordance with the Articles of Association the Directors are to retire by rotation in this case though they are always eligible for re-election. Only if the majority groups be tied down to the theory that they must re-elect a new member from the same group, the agreement can be honoured. The burden of the entire argument is that within the frame-work of the Article of Association, there is nothing to prevent the majority group to re-elect the petitioner year by year as the Chairman of the Board of Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been pleaded. For the first time this contention appears to have been advanced in course of argument before Mr. Justice Barman. In ncne of the affidavits the petitioner swears that the notice was tricky, misleading or insufficient. The question is one of mixed question of fact and law, and it is not permissible to be taken at the stage of hearing for the first time. Under Section 172(1) of the Act, every notice of a meeting of a company shall specify the place and the day and hour of the meeting and shall contain a statement of the business to be transacted thereat. The relevant business to be transacted was the manner and proportion in which such shares are to be issued. Under Section 173(2), where any items of business to be transacted in the meeting are deemed to be special, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business. The business proposed to be transacted on 29th March 1958 was a special business. The question is if the notice was by itself sufficient and clear without further material facts being set out in the Explanatory Statement and was not tricky and misleading. The resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- in one case making outsiders as participants in the distribution of shares and in the other completely excluding them, item 2 in the agenda would clearly conceive all possible cases of distribution of shares including the one that the existing shareholders may be completely excluded. That the petitioner understood it that way is manifest from the fact that objection to the notice on this ground was never taken at any stage, and not even in the suit, until argument before the learned Company Judge, and the belated objection was taken about three years after issue of the notice. The learned Attorney-General, suggests a possible reason as to why this objection was taken at a belated stage. The suggestion is that the amendment to Section 81 came into force in December 1960. Under the amended Section 75 percent vote is essential for giving a contrary direction in the General meeting, while prior to the amendment, a bare majority would decide the matter. If this objection is up-held and the notice is declared invalid as being tricky, misleading or insufficient, the resolution dated 29th March 1958 would be without jurisdiction. Now the Company cannot have 75 percent vote to pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Explanatory statement was not clear and the agenda suggested in the notice, were likely to affect the rights of the existing shareholders contrary to the consent given by the Controller of Capital Issues ana the terms of the application. The point for determinatic, is not whether certain doubts arose in the minds of Bharat Nidhi Ltd. but whether from existence of doubt it can be concluded that the possibility of the existing shareholders being completely excluded from fresh allotment of snares was not apparent to its mind. 1 have no doubt that the apprehension was clear and it cannot be contended that the notice did not convey the idea of existing shareholders being completely excluded from getting any share by the resolution in the General Meeting. In his reply dated 20th March 1958, respondent 2 said that the notice was not defective in any manner and had the approval of the Solicitors and of the Board of Directors presided over by the petitioner, the Chairman. He also suggested that the representative of Bharat Nidhi Co. may propose any resolution as he would think fit. It is true that respondent 2's letter gave no reply in clarification of the doubts of Bhar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty (Palmers Company Precedents, Vol. I, pp. 483484). I have already held that the notice was clear to the petitioner and he does not assert that it was misleading, tricky or insufficient, me only absentee share-holder, who could have taken objection to the validity of the notice on both the grounds, was the French Company which, according to the common case of the parties, takes no interest in the management of the business affairs of the Company. If the Court was to protect any absentee member, it was the French Company. In re : Union Hill Silver Co; Ltd., (1870) 22 LT (NS) 400 the petitioner himself did not attend the meeting but his solicitor Mr. Pulbrook, who had qualified himself by taking one share was present on his behalf. Some of the shareholders who were residents at New York did not receive notice, It was observed that if the absentee shareholders think they are not bound, they may raise the question. In the meeting of the 29th March 58 Mr. Sabharwala of the petitioner's group was present though the petitioner was absent and he did not take any objection in the meeting that the notice was invalid on any of the aforesaid grounds and that the resolution should not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be referred to as 1913 Act), where the directors decide to increase the capital of the Company by issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member (irrespective of class). The contention is that this led to unfairness inasmuch as the holders of preference shares automatically obtained privileges where further capital was to issue. By amendment of Section 105-C, the Legislature merely gave powers to the Company in the General meeting to decide that the new issue of shares would be allotted not only to the equity share-holders but to preference share-holders as under the Act only two class of shares -- equity and preference -- have been retained. In this Company there are no preference shares. So the Company is bound : under Section 81 to issue the new shares only to the existing shareholders. He argues that it is permissible to look into the objects and history of the enactment and to find out the evil it was intended to remedy. According to him, prior to the enactment of Section 105-C in 1913 Act, the only restrictive enactment was that contained in Regulation 42 of Table A which was not compulsory. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equity shareholders or in between the two classes of shares --equity ana preference. The language of the section is plain and the powers given to the Company in general meeting to give directions to the contrary are wide and unrestricted. It is difficult to accept Mr. Mitra's contention on a plain reading of the section. We arrive at this conclusion independent of any authority as in no decisions cited before us, the Report of the Company Law Committee was taken into consideration. The same view has also been taken in Hindustan Commercial Bank Ltd. v. Hindustan General Electrical Corporation Ltd., AIR 1960 Cal 637 affirming a decision in re : Hindustan General Electric Corporation., Ltd., AIR 1959 Cal 672 and by Mr. Justice Rao in the interim injunction matter. 23. Mr. Justice Burmart further held that the amendment of Section 81 by the Companies Act, 1960 (Act 55 of 1960) which came into force on December 28, 1960 supports the view that the new shares must be allotted only to the existing equity sharesholders. This view is based on an erroneous reading of the amended section as would appear from the following statement in the judgment : Ordinarily the pre-existing p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame field. Regulation 42 did not purport to deal with increase of capital which is within the competency of the directors to decide. Regulation 42 covered the field where the authorized capital of the company had to be increased. Mr. Roy Choudhury advanced two-fold contentions. Firstly, that as Regulation 42 of Table A of 1913 Act was made a part of the Articles of Association on 11th August 1954, when the authorized capital was raised from ₹ 25 lacs to ₹ 1 Crore, and by special resolution, the Company in its general meeting did not give a direction to the contrary that those 39,000 shares would not be issued to the existing shareholders but to outsiders, then Section 81 has no further application and the previous decision cannot be altered and the disputed 39,000 shares must be allotted to the existing shareholders. This contention has no force. There is no provision in the Act that if the Company in General Meeting has taken one decision at one time, it cannot be altered by a subsequent decision of the Company in the General meeting, so the subsequent meeting of the Company changing its view that it would be allotted to outsiders cannot be characterised as eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y after must be read together. By the other resolution it was resolved that the Directors were expressly authorised, subject to the aforesaid resolution, to issue and allot the said 39,000 ordinary shares privately in the best interest of the Company at the sole direction of the Directors to such persons as may have applied or may hereafter apply. This resolution clearly includes a group of persons who do not come within the purview of the existing share-holders and the public. In Palmer's Company Precedent, Part I, p. 58, the following passage occurs : Offer to the public -- what is an offer to 'the public' cannot be definitely stated. The Act contains no definition, and an offer 'to the public' is not a technical expression; it should therefore be read in its popular sense. Now, in common parlance, an offer to the public signifies an offer made by advertisement or circular to the general public, or some section thereof, as distinguished from an offer made privately, that is, to a select and small circle of friends, customers or connections. Both the resolutions together would mean that further shares would be issued to a select and small circle of frie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (C) After the Board meeting dated 30th July 1958 : Subscribed Capital ₹ 10000000= 100000 shares of ₹ 100/- each. Mr. Jain Group 19083.1/3 shares 19.10% Mr. Patnaik and Loganathan Group 36166.2/3 77.15% 39000 French Company 3750 3.79% 100000 100% (D) Position after the proposed meeting dated 21 September 1960 : Subscribed Capital ₹ 20000000/= 200000 shares of ₹ 100/- each. Mr. Jain Group 19083.1/3 shares 9.55% Mr. Patnaik and Mr. Loganathan Group 77166.2/31 88.58% 100000 French Company 3750 1.87% 200000 100% It would appear from an analysis of the chart that prior to the Board meeting dated 30th July 1958, the petitioner's group held 31.31 per cent of shares and, after that Board meeting, 19.10 per cent of shares. After the proposed meeting dated 21st September 1960, the shareholding of the petitioner's group would be reduced to 9.55 per cent. The gradual reduction in the percentage of the shareholding of the petitioner's group does not, however, establish that the allottees were under the control of the majority group. After the allotment on 30th July 1958, the voting strength of the allottees was never exercised so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it needed money urgently, the Balance Sheet for the years 1958-59 shows that for 39,000 Equity shares the calls that remained unpaid on 31st March 1959 were to the extent of ₹ 33 lacs and 15 thousand (Rs.33,15,000/-). The balance sheet for the years 1959-60 shows that ₹ 7,65,000/- was outstanding. It is necessary to mention certain facts to examine if the allotment was made with 'unseemly haste'. The plaint in T. S. 21/1958 was filed on 18th April 1958. On the very day an ex parte order of injunction was obtained by the petitioner on the following terms : I would direct issue of an interim injunction restraining the defendants from issuing and allotting 39,000 ordinary shares to persons other than the existing shareholders and from giving effect to the resolution of the Extraordinary Gene-ral Meeting of the shareholders on 29-3-1958. It is contended that in spite of the injunction order, effect was given to the resolution and applications for issue of shares of the Company during the pendency of the order of injunction were invited, Though this is a fact there is certainly no violation of the injunction order in terms. Moreover, no objection was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im injunction indicates that the application for interim injunction, was untenable. In such circumstances, it would be difficult to hold that the conduct of the majority groups in allotting the shares on 30th July 1958, when the injunction was vacated for a short time was mala fide. If they were convinced that their action was legal and justifiable, they were not to wait merely because their action would be construed to have been done in haste. The haste was justified by the subsequent result of the litigation in the injunction matter and cannot be characterised as indecent or unseemly. 31. Admittedly 15 per cent of the value of the shares issued were realized immediately after. The injunction matter was finally disposed of by Mr. Justice Rao in September 1958. Excepting an amount of ₹ 7,65,000/-the balance was realized by August 1959. ₹ 7 lacs and odd were outstanding against the Yuvraj of Sonepur who was undisputedly financially solvent for paying the amount at any time. The learned Attorney General explains that there was delay in payment as the amount was not called on account of injunction order. There had been further delay in getting the amount even after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajority acts in oppression of the minority, the latter were to petition the Court to wind up the company on the ground that it is just and equitable to do so. In many cases, however, it is not in the interest of the oppressed minority to have the Company, wound up. The liquidation of a Company may result in the sale of its assets at break-up value, without fegard to the value of the good-will or 'know-how' of the Company, and the minority shareholder who, urged by the majority shareholder's oppression, petitions for a winding up order, may, in effect, play his opponent's game. In an attempt to meet such cases, the Legislature gave the oppressed minority a remedy alternative to the petition for compulsory winding-up order under the just and equitable clause. Section 433(f) of the Act lays down that a Company should be wound up by the Court if it is of opinion that it is just and equitable that the company should be wound up. Section 397 prescribes the powers of the Court for prevention of oppression. Section 397 Is as follows : Application to Court for relief in cases of oppression : (1) Any members of a company who complain that the affairs of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reted the new remedy is not likely to be accorded. (II) The section gives no guidance as to the meaning of the word 'oppressive'. The dictionary meaning of the word is burdensome, harsh and wrongful . (III) The result of an application under Section 210 must depend on the particular facts of each case. The circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision. (IV) Oppression is usually exerted by a person with predominating voting power which is employed for his own advantage to the detriment of the helpless minority. (V) Conduct, which is technically legal and correct, may nevertheless be such as to justify the application of 'just and equitable' jurisdiction, and conversely conduct involving illegality and contravention of the Art may not. suffice to warrant the remedy of winding up where the alternative remedy is available. (VI) Where just and equitable jurisdiction has been applied, the circumstances have always been such as to warrant interference when at least there has been an unfair abuse of powers and impairment of confidence in the probity with which the company's af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and equitable clause in this particular case must be viewed in relation to a large public company. The core of Mr. Mitra's argument that the status quo conceived in the terms of the Oral Agreement should be maintained cannot be taken into consideration in exercise of jurisdiction under Section 397. Non-distribution of one-third shares to the petitioner in proportion to the existing shareholdings had undoubtedly led to lack of confidence and private animosity between the majority group and the minority group in the matter of policy and administration of the Company, but the Directors of the Company concerned with the management of the affairs cannot be charged with fraud, misfeasance or misconduct towards any parts of its members, it cannot be said that the Directors controlling the Company have abused their powers resulting in injury to the rights of the minorities unless it is assumed that the minorities are entitled as of right to proportionate one-third distribution of the newly issued shares. The minority shareholders have no proprietary right to the proportionate distribution of the fresh issue of shares The conclusion is based on the findings already recorded under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were declared invalid as the Company was in need of further capital and the fiduciary power of the directors was exercised merely for the purpose of maintaining their control over the affairs of the Company. The case is distinguishable on facts of this case. This is a case of mere loss of confidence amongst different groups of shareholders and there is no oppression of the minority in the conduct of the affairs of the Company. The petitioner has failed to make out a case u'nder Section 397. ISSUE VII : 35. In paragraph 27 of the petition the allegation is that the affairs of the Company are being conducted by respondents 2 and 4 in a mariner prejudicial to the interests of the Company. Particulars of mismanagement and prejudicial manner of conducting the affairs of the Company have been already set out. The particulars given in paragraph 27(a) and (e) relate to the fact of majority groups denying the minority shareholders of their rights to subscribe to the issue of new shares of the Company in oroportion to respective holding and to their attempts to gain absolute control over the Company with considerable financial advantages to themselves, depriving the minority group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst time on 16th October 1957 long after the withdrawal and only when misunderstanding grew amongst them. On 19th October 1957, he wrote to respondent 2 as follows : You told me sometime back that a sum of ₹ 3,50,000/-has been taken by you and ₹ 3,50,000 have been taken by Loganathan. I request you and. Mr. loganathan, in terms of that agreement to jointly pay me one third of ₹ 7,00,000/- i.e. ₹ 2,33,333/-. 33nP plus interest from the date the money has been taken from the Company. You told us that half of ₹ 2,33,333.33nP i.e. ₹ 1,16,666.67 will be paid by you and half will be paid by Mr. Loganathan. I, therefore, request you to kindly arrange to pay me your portion of the money with interest and arrange the other half to be paid by Mr. Loganathan. An early remittance and reply will oblige. The letter clearly shows that respondent 2 promised to pay one-third share of the petitioner, and there was no objection on the part of the petitioner to the withdrawal which was definitely after the profits accrued. It merely amount its to a breach of personal covenant to the petitioner and neither in terms of the agreement or otherwise it is a breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why with better management the Company shall not be able to declare dividends at equal rates. It is not known in what circumstances the Indian Tube Company Limited is declaring large dividends and whether the same circumstance prevailed in this Company. Until the necessary date for comparison of both are available, no adverse inference can be drawn against the Company from the fact of mere declaration of smaller dividends. Under the agreement with the Industrial Finance Corporation and the Government of Orissa, the Company cannot declare any dividend higher than 6 per cent until the loans are paid up. Reference has been also made to certain irregularities pointed out by Mr. Agarwalla in the Annual General Meeting of the Company held on 29th December 1960 and to the increase in the rate of selling commission and advances made by the Company and administrative expenses. Reply has been given on behalf of the Company with regard to these matters, but it is unnecessary to refer to those facts as they are alleged to have come into existence subsequent to the filing of the petition, and by mere allegation of those facts, a case of mismanagement has not been established. The petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such change it is likely that the affairs of the Company would be conducted in a manner prejudicial to its interests. That being the position, the question of interference by the Court with a view to bringing to an end or preventing the matters complained of does not arise. 40. There is no provision in the English Act, 1948 corresponding to Section 398 of the Act. The Company Law Committee, 1952, in its recommendation, suggested the incorporation of this section. A passage in para 198 at p. 149 of the said Report may be quoted -- We have carefully examined the scope of this Section (Section 210 of the English Act) and consider that not only can it be suitably adapted to the circumstances of this country, but its scope may be appropriately enlarged to cover not only the cases of oppression to a minority of shareholders, but also of gross mismanagement of the affairs ot the Company which cannot otherwise be suitably dealt with under the other provisions of the Act. We accordingly recommend the enactment of 2 sections : On the basis of this Report, Section 398 was enacted. It was rightly observed in an unreported decision of the Calcutta High Court in Company Petn. No. 69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Company, objected to the inspection and asked for specific dates of the minutes of the Board Meeting. The Court was of opinion that the petitioner was entitled to inspect the minutes of the Board which were in the possession of the Company at least for the periods when the petitioner was one of the Directors. The Company filed an application on 14th April 1961. Para 3 may be quoted -- The said books, documents and papers are being produced and kept in the court-room every day since 10th April, 1961. On the 10th April 1961 an oral application was made to his Lordship Mr. Justice Burman on behalf of the petitioner for an order directing the Company to allow inspection to his representatives P. R. Krishnamurty and Shamlal Agarwalla who were present in the court-room of the Director's minute book as also the Minutes Book of the General Meeting. Pursuant to the said direction, the Company handed over and allowed inspection of the said books to the said gentlemen and inspection thereof has been completed. In the application also there was a reference to other documents of which inspection has been given. The Company in paragraph 7 stated that the various documents of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. 47. I entirely agree with my learned brother that the appeal should be allowed, but as I do not feel inclined to accept the grounds on which Mr. Justice Barman rejected the notice dated 1-3-1958 for the general meeting of 29-3-1958 as misleading and insufficient, I think it is proper to state briefly my own views on the subject. The relevant facts have already been stated in the judgment of my learned brother, but at the cost of repetition at some points, I would like to indicate briefly the facts and the circumstances that led to the Issue of the said notice for the meeting on 29-8-1958. 48. The appellant Kalinga Tubes Limited, hereinafter des-cribed as 'the Company' was incorporated on 1-12-1950 as a private Limited Company with a share-capital of 25 lacs divided into 25,000 shares of one hundred rupees each. Originally the shares of the Company were held by Mr. B. Palnaik, Mr. C. S. Loganathan, Mr. T. S. Narayanswami and Mr. J. S. Taraporewalla, and the Kalinga Industrial Development Corpo ration Limited, a Company which was practically controlled by Messrs. B. Patnaik and C. S. Loganathan. After the inception of the Company in 1950, it proceeded to acquire land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of seventy-five thousand more shares of the value of ₹ 100/-each. On 12-8-1954 a meeting of the Board of Directors was held wherein Mr. Jain was co-opted as an additional Director of the company and was elected Chairman of the Board of Directors in place of Mr. B. Patnaik. As sanction of the Controller of Capital Issues was necessary under Act 29 of 1947, Capital Issues (Control) Act, before issue of the share capital, applications were made from time to time to the said Controller and necessary sanctions were obtained until share capital to the extent of 61,000 was issued. The French Company was not interested in further acquisition of any share. In the meantime Sri N. Rath transferred his 250 shares which were shared equally by the three groups. In the result excluding the 3750 shares held by the French Company each of the parties to the agreement held equal number of shares that is, 19,083-l/3rd. 52. Things went on well between the parties for sometime and the Company started production on 1-4-1955 ana began to earn profits. With a view to expand the business of the Company, the necessity of raising more funds was felt and it was decided to issue the balance of 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors : Resolved that an extraordinary General Meeting of the Company be convened on Saturday the 29th March 1958 for the purpose of considering and if thought fit to pass necessary resolution for the issue of 39,000 ordinary shares and the 'manner and proportion in which the shares are to be offered 'privately' to the share-holders and 'other persons' and for other incidental matters subject to the provisions of the Companies Act. Mr. Jain, however, proposed amendment to the said resolution which was to the following effect : Resolved that an Extraordinary General Meeting of the Company be convened on Saturday the 29th March 1958, for the purpose of considering and if thought fit for passing the necessary resolution for the issue of 39,000 shares privately to the Share-holders as per the provisions of the Indian Companies Act. Thus, both parties agreed to refer the matter to the General Meeting. The only difference between them was whether the entire shares should be issued to the existing share-holders only or to the other persons as well. After discussion on the matter, the resolutions were put to vote and the resolution proposed by Mr. Patnaik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and that a copy of the draft resolution to be placed in the General Meeting should have accompanied the notice itself. In reply to the above letter Mr. Patnaik as Managing Director of the Company sent a communication on 20-3-58 informing the Bharat Nidhi Ltd., that the notice was drafted by the solicitor of the Company and had received the approval of the Board of Directors including its Chairman, Mr. Jain and in any case it was open to the parties to put forward any resolution in the General Meeting as they liked. 55. In the usual course, the extraordinary General Meeting was held on 29-3-1958 and in the absence of Mr. Jain, Mr. Patnaik was voted to the Chair on the proposal of Mr. D. R. Sabarwall of Jain Group. In the said meeting the following resolution was moved by Mrs. Gyan Patnaik : Whereas the further issue of 39,000 ordinary shares in the Company, each of the face value cf ₹ 1007-has been duly sanctioned by the Controller of Capital Issues, as per terms and conditions appearing in his letter No. R-391-CCI-5 dated 18-12-1957. Resolved that the said 39,000 ordinary shares of ₹ 100/- each shall not be offered or allotted to the existing holders of the equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst his decision, an appeal was preferred before a Division Bench of this Court which however was not pressed and was dismissed on 28-11-60. 56. In the meanwhile, the Company proposed to convene another Extra-ordinary General Meeting on 21-9-60 with a view to increase its share capital from one Crore to three Crores. Mr. Jain filed an application under Sees. 397 and 398 of the Companies Act (Company Act case No. 10/60) on 14-9-60 alleging acts of oppression and mismanagement and praying inter alia for a declaration that the resolution regarding the allotment of 39,000 ordinary sltares passed in the meeting of the Board of Directors on 29-3-58 was ultra vires, and that the said allotments should be confined only to the existing share-holders including the l/3rd share of his group, and to restrain the Company from passing a resolution to increase share-capital from one crore to three crores as proposed to be done in the General meeting of 21-9-60, and for re-constitution of the Board of Directors with at least two of their permanent representatives in the Board of Directors so as to ensure equal representation of the three parties. Barman, J., by his order dated 20-11-61 held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on 29-3-58 was a special business within the meaning of Section 173 and as such an explanatory statement setting out all material facts concerning each item of business ought to accompany the notice. As seen above, there was, however, one explanatory statement relating to the further issue ot 39,000 ordinary shares by the Company. It was urged that the said explanatory note related only to item No, 1 of the agenda and not to item 2. This contention appears to be somewhat erroneous. Items Nos. 1 and 2 were manifestly co-related and dealt with one and the same subject-matter, namely, the issue of further shares. No doubt, nothing has been specifically mentioned in the explanatory statement about the manner and proportion in which the shares were to be issifed, but the further question is in what precise manner any explna-tory note could have been given in respect of this item of the agenda. The manner and proportion in which the said 39,000 shares were to be issued was itself a matter for the General Meeting to decide. The Board of Directors could not possibly visualise each and every kind of such manner and proportion in which the shares could fie issued so as to incorporate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the convening of an extraordinary general meeting. But all that he wanted was that such issues should be confined only to the existing share-holders as per the provisions of the Companies Act. Thus, both the parties wanted that the matter should be decided in an extraordinary general meeting in accordance with the provisions of the Companies Act, the only difference between them being if the issue of shares was to be confined to the existing shareholders or not. No doubt, such new shares shall have to be offered to the persons who at that date of the offer are holders of the equity shares of the Company in proportion as nearly as circumstances admit to the capital paid up on those dates as contemplated under Section 81(1)(a) of the Companies Act, but under the provisions of the said section it is also open to the general meeting to give any contrary direction in the matter. Once the matter is left to the General Meeting, for decision, it is no more open to the Directors or any individual share-holder to make any grievance if the general meeting gives any direction contrary to the manner of issue provided under Section 81(1)(a) of the Act. It cannot be disputed that by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and thus the above section had no application to it, whereas by the time the sanction was given by the Controller the Company bad already been converted to a public one and thus attracting the provisions of Section 81. One of the grievances pointed out in that letter was that the explanatory note to the notice did not give any indication of the proposed issue in any other manner. In what other manner the proposed shares were to be issued, as I have said above, could not possibly be exhaustively given in any explanatory note as the final say rested with the General meeting. Mr. Patnaik the Managing Director in his reply dated 23-3-1958 pointed out that the matter had to be decided by the share-holders in the General meeting, wherein it was open to the party to put forward any resolution as it thought fit. 61. It was further contended that the notice of the general meeting was not accompanied by a copy of the resolution according to the previous practice of the Company. On this point also there is no specific allegation in any of the affidavits. If any such practice would have been pleaded in the affidavit, the opposite party may as well have repudiated the same or given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have already indicated how on the resolution of Mrs. Gyan Patnaik, an amendment was moved on behalf of the Jain group which was lost. Thus not only Mr. Jain's group were fully aware of the implication of the notice, but they also fully participated in the proceedings and put forth their own view point before the general meeting which, however, refused to accept the same. 63. It is well settled that where a share-holder by his conduct shows that he knew the real effect of work to be transacted at a meeting he cannot complain of the notice on the ground of its insufficiency, AIR 1928 PC 180, Parashuram Dataram v. Tata Industrial Bank Ltd. This view was also followed by a Division Bench of the Calcutta High Court in a case reported in Lalita Rajyalaxmi v. Indian Motor Company (Hazaribagh) Limited, AIR 1962 Cal 127. In this case the effect of the non-compliance of Section 173(2) of the Companies Act also came up for consideration. Their Lordships held that how much is all material facts and what is the nature and extent of interest under Section 173(2) are questions of fact dependable on the facts of each case and a party who knew the real nature of the transaction cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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