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2016 (9) TMI 716 - CALCUTTA HIGH COURT

2016 (9) TMI 716 - CALCUTTA HIGH COURT - TMI - Oppression and mismanagement - allotment of shares to new additional directors appointed - Held that:- The act of appointing new additional directors by altering the articles of association of the company with the object of completely upsetting the control and management of the company's affairs constitutes an act of oppression. It is settled law that it is not open to the directors of a company to issue and allot shares in a manner by which an exis .....

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hapan reported [2004 (9) TMI 385 - SUPREME COURT OF INDIA ] their Lordships with regard to oppression held that if a member who holds the majority of shares in a company is being reduced to the position of minority shareholder in the company by mala fide act of the company or by its Board of Directors, such act must ordinarily be considered to be an act of oppression against the said shareholder and what relief should be granted would depend on the facts of the case. - The facts of the prese .....

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he provisions of the Companies Act, 1956 and also against the principle of legitimate expectation dismissed the company petition. The allotment is also in violation of Article 6B of the Articles of Association. - In view thereof the appeal succeeds. The Board Resolution dated May 31, 2013 and consequent allotment of shares in favour of the respondent Nos.3 and 4 are set aside. The judgment dated May 9, 2016 is set aside. - A.C.O. No.74 of 2016, A.P.O. No.190 of 2016 - Dated:- 14-9-2016 - T .....

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, 403 and 406 of the Companies Act, 1956. The control and management of one Astha Nursing Home being the respondent No.1 was the subject matter in the company proceeding initiated by the present appellants before the Company Law Board. The petitioners claim to be the majority shareholder of the respondent No.1 Company. The removal of the petitioners from the Board of Directors and reducing the petitioners to minority was challenged in the said proceeding. The petitioners Nos. 1 to 7 along with t .....

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t No.2 who were the only contributories to the company. The petitioner No.8 was appointed as a director of the company with effect from 20th June, 2009. The dispute arose after 31st May, 2013. Prior to 31st May, 2013 the issued and paid of capital of the company was ₹ 20.80 lacs consisting of 2,08,000 equity shares of ₹ 10/- each out of which the petitioners together hold 1,04,750 shares. The appointment of the respondent Nos.3 and 4 in the Board of Directors of the Company and allot .....

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es in favour of the respondent No.3 are in violation of Article 6B of the Articles of Association of the Company. At the time of incorporation of the said Company on 24th January, 2005 the authorized share capital of the respondent No.1 was ₹ 50,00,000/- divided into 5,00,000 equity shares of ₹ 10/- each and prior to 31st May, 2013, the issued, subscribed and paid up share capital was ₹ 20,80,000/- comprised of 2,08,000 equity shares of ₹ 10/- each, out of which the petit .....

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p of the Nursing Home. The respondent No.2 in breach of such confidence without obtaining any consent from the petitioners allotted a space about 250 sq.ft. to his relative to run a Cafeteria at the premises of the Nursing Home, without any advance or consideration. Besides, another portion of the Nursing Home premises, comprising of about 500 sq. ft is occupied the respondent No.5 himself towards a medicine shop without obtaining any consent from any of the petitioners at any point of time. In .....

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the Nursing Home and the respondent No.2 has run a comparative business from the said centre where ECG and other facilities are provided and thereby diverting the patients from the Nursing Home. The respondent No.2 wrongfully and with mala fide intention filed two sets of Form 32 annexing therewith a copy of the purported Memorandum of Understanding (MOU) dated 1st June, 2010, removing the petitioners No.1 to 8 from the Board of Directors of the respondent No.1 company and also appointing the r .....

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284 of the Companies Act. Inasmuch as no such notice has been filed with the Registrar of Companies. In addition, the respondents have filed one Form No.2 showing allotment of 5,776 equity shares of and in the respondent No.1 company in the name of the respondent No.3 and also, no notice for the purpose of allotment of such shares was ever served upon the petitioners Nos.1 to 8, who are the Directors and also the shareholders of the respondent No.1 Company. It was pleaded that there was no need .....

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pany or for the aforesaid issue and allotment of shares in favour of the respondent No.3. It was alleged that the respondents Nos. 2 and 3 have colluded and conspired between themselves to make material changes in the shareholding and also, in the constitution of the Board of Directors of the respondent No.1 Company in order to oust the petitioners from the control of the company. The respondent No.2 thereby has acted in breach of his fiduciary duty towards the company and its shareholders. The .....

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lack of attention to the affairs of the company by the petitioners, the company was unable to generate enough funds to meet its commitments and had run a huge liability. At this stage, the petitioners approached the respondent No.3 for taking over the management of the Company and also for looking after the affairs of the company in its entity. Accordingly, an MOU dated 1st June, 2010 was entered into between the respondent No.3 (Mr. Shiv Sharma) and the company and pursuant thereto for appoint .....

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ners to resign from the Board of Directors of the Company so as to facilitate him to be in the management of the Nursing Home. In spite of such requests, the petitioners have refused to resign. Consequently, in order to implement the terms of the MOU dated 1st June, 2010, the respondent had filed Form 32 showing the removal of the petitioners as Directors under Section 284 of the Companies Act, 1956, as the petitioners had agreed to be removed as Directors, which is recorded in the said MOU date .....

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al difficulty, the company entered into a MOU dated 1st June, 2010 with the respondents No.2 & 3. Under the MOU, the respondent No.3 invested ₹ 45 lacs in the company. The Company with the aforesaid fund could come out of the difficulty. The said Balance Sheet was signed by the petitioners also. More so, such funds had been utilized by the Company is out of its financial difficulties. Now, once the Company to come out of its financial difficulties, the petitioners have racked up few is .....

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op to the respondent No.2 for which the said respondent is paying rent. The petitioners have filed an affidavit dated November 10, 2006 before the Notary Public, Asansol directing that they have permitted the said respondent to rent the medicine shop within the Nursing Home premises. The Godown is being utilized by the company for its own benefit. The ECG Centre which is run and managed by the relative of the respondents No.2 & 3, is not opposite to the Nursing Home, but is at a distance of .....

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at the persons named in the Memorandum of Understanding would infuse funds in the company whereas the record would show that Inox Advisory Pvt. Ltd., Heaven Consultancy Pvt. Ltd., Kanupriya Agency Pvt. Ltd., Shiv Darbar Vinimay Pvt. Ltd. and Adarsth Pratishtan Pvt. Ltd. have paid a sum of ₹ 10,00,000/- by Chq No.014549 on 3rd June, 2010, ₹ 10,00,000/- by Chq No.014492 on 3rd June, 2010, ₹ 10,00,000/- by Chq No.015005 on 3rd June, 2010, ₹ 5,00,000/- by Chq No.014467 on 4th .....

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he Board could arrive at a conclusion that the shares issued in favour of the respondent No.3 or other entities on the basis of the Memorandum of Understanding, the authenticity of which the petitioners dispute is contrary to record and such finding is perverse. Mr. Mookherjee has relied upon the decision of the Hon ble Supreme Court in Kamal Kumar Dutta & Anr. Vs. Ruby General Hospital Ltd. & Ors. reported at (2006) 7 SCC 613 and Dale Carrington Investment Pvt. Ltd. & Anr. Vs. P.K. .....

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any had and still been paying regularly the monthly instalments and no default has been committed. In fact, prior to 2010, there were irregularities in paying monthly instalments when the Company was under active management of the respondent No.2, but subsequently, when the petitioners came in control of the Company, the Company started regular payment of instalments to the Bank and till date no default has taken place and as on December, 2015, approximately a sum of ₹ 60 to ₹ 62 lac .....

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h investors. In fact, the purported document, being the MOU dated 1st June, 2010 alleged to have been executed with the respondent No.3, as alleged by the respondent No.2 was never raised in any of the Board Meetings subsequent to such alleged execution and at no point of time the respondent No.2 raised any issue with regard to the execution of the MOU or for allotment of any share to the respondent No.3. It is submitted that the induction and/or appointment of the respondents No.3 and 4 as Dire .....

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Articles of Association of the Company. Mr. Mookherjee has relied upon the decision in Claude-Lila Parulekar (Smt) Vs. Sakal Papers Pvt. Ltd. & Ors. reported at (2005) 11 SCC 73 and also in the case of John Tinson & Co. Pvt. Ltd. & Ors. Vs. Surjeet Malhan (Mrs.) & Anr. reported at (1997) 9 SCC 651, wherein it was held that any allotment contrary to the Articles is void . It is being argued that there was no need for raising any fund by way of share capital by the Company at the .....

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e decision in the case of Dale Carrington Investment Pvt. Ltd. (supra), to state that the fact of issue and allotment of shares to the respondents Group without any offer being made to the petitioners, is an act of oppression . In addition, it has been held in Dale Carrington Investment Pvt. Ltd. (supra) that the act to convert a majority shareholder into a minority shareholder has been considered to be an act of oppression and mismanagement both within the meaning of Sections 397 & 398 of t .....

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his contribution to the company and in this regard the learned Senior Counsel has referred to Paragraphs 6.2 and 6.4 of the Petition and Paragraph 6 of the rejoinder and submitted that the pleadings would show that the petitioners acknowledged the fact that at the time of inception and commencement of the company it was all along understood by and between the parties and the respondent No.2 that there shall be a collective effort and equal participation of all the parties in running the manageme .....

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and maintaining hospitals/nursing homes. Considering this, the Doctor Group joined hands with the Sharma Group and they kept their faith and trust upon the respondent No.2 in the construction and setting up the Nursing Home. For such purpose, the respondent No.2 has enjoyed his independence and freedom in setting up the Nursing Home. Respondent No.2 was the person instrumental in the construction and setting up of the Nursing Home and this fact has also been acknowledged by the petitioners. The .....

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or allowing the respondent No.2 to run the Nursing Home as agreed amongst them. The respondent No.2 being the only director from Sharma Group did not have final say although he was a founder member. The respondent No.1 company started incurring losses which resulted in non-payment of bank dues and by March, 2010 the respondent No.1 Company had an outstanding Bank loan of ₹ 189.56 lacs. The petitioners, thereafter, approached the Sharma Group with a proposal to take over management of the c .....

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e Nursing Home and their decision in this regard would be final and binding on the petitioners. The same further provided that the shareholding of the Sharma Group would be increased to 51%. The corresponding obligation on the part of Sharma Group was to invest and/or arrange sufficient funds to pay back bank term loans that were overdue and to subscribe for 5776 equity shares of and in the respondent No.1 Company. Under the said MOU, the Sharma Group shall take advice from Doctor Group for taki .....

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to also induct the other directors to enable the constitution of the Board of the respondent No.1 upon removal of the petitioner Nos. 1 to 8 as directors. This was with the object of ensuring that the Sharma Group had the control of the entire management of the respondent No.1 Company, which by reason of the pre-occupation of the Doctor Group with their profession had led to the financial trouble of the company. Accordingly, the respondents agreed to invest moneys into the company to take care .....

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s loan as capital induction would have to be against issuance and allotment of shares of corresponding value, which would disturb the agreed shareholding ratio of 51:49 agreed by and between the Sharma Group and the Doctors Group as recorded in the MOU. That the Sharma Group brought in such loans aggregating ₹ 45 lacs, which in turn were used to repay the dues of the banks. The aforesaid sums were spent by the respondent No.1 Company for making payment to its bankers, which payments were m .....

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e as well. Despite being obliged to perform their obligation under the MOU, the petitioners did not do so. It is in these circumstances that in order to give effect to the MOU the Sharma Group was compelled to issue and allot the said 5776 shares in the name of the respondent No.3 thereby increasing the shareholding of the Sharma Group in the Company to 51%, and to appoint the respondent Nos.3 and 4 as directors upon removing the petitioners from the Board. That the Sharma Group was entitled to .....

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the same signified an agreement by and between the Doctors Group and Sharma Group with regard to running of the Nursing Home and the object of the said MOU was clearly to increase the shareholding of Sharma Group, cessation of the petitioners No.1 to 8 from the Board of the Company and appointment of the respondents No.3 & 4 on the Board to give them majority and control over the affairs of the Company. In addition, despite being obliged to perform its obligation under the said MOU, the pet .....

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s regard, the learned Senior Counsel has referred to the decision in Jaladhar Chakraborty & Ors. Vs. Power Tools & Appliances Co. Ltd. & Ors. reported at (1994) 79 Comp. Cas. 505: 1992 (2) CLT 64 (HC) to argue that under Sections 397 and 398 of the Companies Act, 1956, the interest of the Company must be considered to be paramount. It was argued that there cannot be any doubt that the MOU dated 1st June, 2010 was in the interest of the respondent No.1 Company upon the shareholders of .....

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aph 53); b) Nanalal Zaver & Anr. Vs. Bombay Life Assurance Co. Ltd. & Ors. reported at AIR 1950 SC 172; (Paragraph 27); c) Needle Industries (India) Ltd. & Ors. Vs. Needle Industries Newey (India) Holding Ltd. & Ors. reported at (1981) 3 SCC 333; (Paragraph 121, 111) It was submitted that the petition is liable to be dismissed on the ground of suppression as the petitioners have deliberately suppressed the MOU dated 1st June, 2010 and deliberately misrepresented the facts in conn .....

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the said MOU had lost its force and stood terminated. The said paragraphs, according to the learned Senior Counsel, represent a deliberate attempt on the part of the petitioners to avoid the MOU of 1st June, 2010 with the conscious knowledge that the said MOU had not only been executed but also been given effect to. The petitioners realizing the implication of the said MOU with the mala fide object disclosed an alleged minutes of a meeting of the Board of Directors dated 27th November, 2010 whic .....

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the basis thereof had prayed for a repayment holiday for a period of nine to ten months. On a comparison of the MOU dated 1st June, 2010 disclosed by the petitioners with the MOU disclosed by the Sharma Group in their reply, it would appear that the terms of both the documents are essentially the same. The documents disclosed by the Sharma Group contain signatures of most of the petitioners. In view of the positive evidence that in performance of the obligations under the said MOU the Sharma Gro .....

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nd in this regard reliance was placed on the decisions:- (a) Sangramsingh P. Gaekwad & Ors. Vs. Shantadevi P. Gaekwad & Ors. reported at (2005) 11 SCC 314 (Paragraph 196, 197, 198); (b) S.P. Chengalvaraya Naidu Vs. Jagannath & Ors. reported at (1994) 1 SCC 1 (Paragraph 6). It was submitted that the agreement is sacrosanct and an agreement entered into between the two groups of shareholders who are essentially the partners in the company must be honoured. The directors are required to .....

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2 All ER 961 wherein the House of Commons held that for the purpose of Section 459 of the 1985 Act (which is equivalent to Sections 397 and 398 of the Companies Act, 1956), although a member of a company would not ordinarily be entitled to complain of unfairness unless there had been some breach of the terms on which he had agreed that the company s affairs should be conducted, equitable considerations might make it unfair for those conducting the affairs of the company to rely on their own stri .....

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he respondent No.2, who represents the Sharma Group. As such, the consideration of equity clearly prevents the petitioners from relying on their strict legal right in opposing the issuance and allotment of the said 5776 shares in favour of the Sharma Group and in appointing Additional Directors to the Board of the company upon removing the petitioners therefrom, particularly as allowing the petitioners to do so would amount to allowing the petitioners to take advantage of their own wrong and fur .....

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same as their acts have clearly been without probity. In this regard the learned Senior Counsel has relied upon the following decisions:- (a) Anugraha Jewellers Ltd. & Anr. Vs. K.R.S. Mani & Ors. reported at (2002) 111 Comp. Cases 501 (Mad) (Paragraphs 8,9,17,18); (b) Dalip Singh Vs. State of Uttar Pradesh & Ors. reported at (2010) 2 SCC 114 (Paragraph 2) (c) Vishnu Kumar Agarwalla & Anr. Vs. Sreelall Foreign Money Changers P. Ltd. & Ors. reported at (2008) 142 Comp. Cas. 15 .....

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0 was executed in the benefit of the company. Despite having admitted the execution of the said MOU, the petitioners have, however, attempted to suppress material facts and made false statements with the object of acting contrary to the terms of the said MOU. Such false and misleading statements clearly demonstrate the intention of the petitioners to act against the interest of the company. Inasmuch as the petitioners acts lack probity, they are in any event not entitled to any relief in the ins .....

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itigation. Even if it is assumed that the respondent No.2 does not represent Sharma Group but the support of the other respondents of the actions of the respondent No.2 is clear and implicit. The dispute centres around a Memorandum of Understanding. There are two Memorandum of Understanding disclosed in the proceeding in which the surname Sharma is common but the first name is different, namely, Sanu Sharma in the first agreement and Shiv Kumar Sharma in the second agreement. The respondent No.2 .....

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s the first party and the petitioner along with the respondent No.2 are the second party. The said agreement, however, was not given effect to. The respondent No.2, in short, contended that the Doctor Group has acted in breach of the Memorandum of Understanding dated 1st June, 2010 and it was incumbent upon the Doctor Group as well as the respondent No.2 to discharge and fulfil the obligations adumbrated in the Memorandum of Understanding dated 1st June, 2010. In order to appreciate the said arg .....

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hall take over all existing liabilities of company as on 31.05.2010 and shall liable to pay the said liabilities in time as per term decided with creditors. 3. That the party of First part shall hold 51% equity shares of the company and balance 49% shares shall continue to be held by existing shareholders and their relatives. 4. That the existing directors and its relatives holding 49% of equity shares of the company cannot sell its holding. If any persons holding the said shares want to exit fr .....

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s amount is refunded. 6. That the party of First par shall invest sufficient fund to initially repay bank term loan overdue and other over dues liabilities. Further, the party of First part shall invest sufficient fund for development of the company. 7. That the party of Second part will form a Doctor s committee for better running of the nursing home and for the development of individual departments. 8. That all the directors and its relatives can increase their shares whenever he/she wishes to .....

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company as on 31st May, 2010. Shiv Kumar Sharma shall also be liable to pay liabilities in time as per term decided with creditors. Shiv Kumar Sharma shall invest sufficient fund to initially repay bank term loan overdue and other overdue liabilities. Moreover, Shiv Kumar Sharma shall invest sufficient fund for development of the company. There was no material placed before the Company Law Board as to the liability existing as on 1st June, 2010. It appears that on 16th June, 2010, the Bank of I .....

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Mr. Jishnu Saha, the learned Senior Counsel has laid much stress on the payment of these ₹ 45 lacs. It appears from the balance sheet disclosed for the relevant year that the said amount was treated as share application money. The petitioners are pretentious in not acknowledging the source of the fund although it appears that the fund had come to the till of the Company and was certainly utilized. However, the fact remains that the said money was repaid by the company between 4th February .....

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liable to pay the said liabilities in time. There was no evidence before the Company Law Board that Shiv Kumar Sharma has infused any amount or he had arranged for the funds or that he had taken over all the existing liabilities as on 31st May, 2010 and was allowed to take over the management of the said company. It is true that the entire loan was repaid without any interest and the bank might have extended the repayment holiday which certainly has benefitted the company to some extent but the .....

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invested in the company by Shiv Kumar Sharma. This aspect of the matter is important when a plea of legitimate expectation is raised to justify an allotment of shares dehors the articles in favour of the respondent Nos.3 and 4. The respondent No.2 has failed to disclose any document between December, 2011 till the impugned Board resolution that any further sum was invested by the respondent No.2 or its alleged Group. It is an admitted position that no notice was ever served upon any of the share .....

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isions of the Chancery Division, namely, Cane v. Jones & Ors. reported at 1980 (1) WLR 1451 and In re Duomatic Ltd. reported at 1969 (2) Ch 365 that where the transactions are intra vires and honest, and especially if it is for the benefit of the company it cannot be upset if the assent of all the shareholders is given to it. It matters in the least whether the assent is given at different times or simultaneously. In that case absence of holding any meeting and passing any resolution would b .....

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e respondent Nos.3 and 4 are in the best interest of the company. Moreover, the respondents have failed to establish that the company was in financial doldrums and Shiv Kumar Sharma has saved the company with the infusion of the fund and thereafter made further investment for the development of the company. The Company does not appear to be in bad shape inasmuch as the bank loans are being repaid. The doctors have given their personal guarantees in consideration of the bank agreeing to grant loa .....

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es not contemplate complete exit of the Doctors Group from the management inasmuch as they have right to increase their shares whenever they desire. There cannot be any doubt that the Court ought not to confine itself to a narrow legalistic view and allow technical pleas to defeat the beneficial provision of the section and that in certain situations the Court is not powerless to do substantive justice between the parties, the facts of this case do not merit such a course of action to be taken a .....

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zed in Ramashankar Prosad & Ors. Vs. Sindri Iron Foundry (P) Ltd. & Ors. reported at AIR 1966 Cal 512. The act of appointing new additional directors by altering the articles of association of the company with the object of completely upsetting the control and management of the company's affairs constitutes an act of oppression. It is settled law that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are r .....

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