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Dr. S. Mangalam Srinivasan Versus Mani Forgings Private Limited, Mrs. Lakshmi Vasan, Mr. S. Ramachandran and Mr. S. Subramanian

2004 (10) TMI 620 - COMPANY LAW BOARD, CHENNAI

C.P. No. 27/2004 - Dated:- 20-10-2004 - K.K Balu For Appellant: Anita Sumanth, Adv. For Respondents: T.K. Bhaskar, Adv. for Respondents 1, 3 and 4 and Srinath Sridevan, Adv. for Respondent 2 K.K. Balu, 1. In the company petition filed by the petitioner under Sections 397 and 398 of the Companies Act, 1956 ("the Act") alleging acts of oppression and mismanagement in the affairs of M/s Mani Forgings Private Limited ("the Company") and seeking various reliefs against the Company .....

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on falling under the provisions of Sections 397 and 398, entitling the petitioners for any relief. There are no pleadings to the effect that the facts of the present case would justify the making of a winding up order on just and equitable grounds, but such winding up of the Company would unfairly prejudice the petitioner, as stipulated in Section 397(2)(b) or that it is likely that the affairs of the Company are conducted in a manner prejudicial to public interest or prejudicial to the interest .....

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per cent of the paid-up capital and claiming to be the Managing Director has substantial powers of management and therefore cannot have any grievance on account of the alleged acts of oppression and mismanagement in the affairs of the Company. There has been no agreement in support of the petitioner's claim for the office of Managing Director and the petitioner cannot have any special rights to be the Managing Director in the absence of any arrangement or agreement in this behalf. • In .....

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partnership. • All the grievances of the petitioner, being personal in nature, cannot be agitated in a petition under Section 397 or 398 but shall invoke the common law for necessary redressal of her grievances. Shri T.K. Bhaskar, in support of his legal submissions relied on the following decisions: - • R. Ramanathan Chettiar v. A. & F. Harvey Ltd. - (1967) XXXVII CC 212, wherein the Companies Tribunal, while considering the preliminary issue whether the petition is maintainable u .....

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e petition which would indicate that by reason of the material change in the management or control of the Company, there is any likelihood of its affairs being managed prejudicial to the interests of the Company or prejudicial to public interest, so as to bring the petition within the meaning of Section 398. The Tribunal dismissed the company petition without going into the merits, since the facts alleged in the petition and its annexures did not make out cause of action under Sections 397 and 3 .....

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the averments in the amended petition. • Ashoka Betelnut Company P. Ltd. v. M.K. Chandrakanth -1997-1-L.W. 616- to show that both conditions in Clause (a) or Clause (b) of Sub-section (2) of Section 397 must exist before the court can entertain an application under that section. Where there are no allegations followed by proof thereof to support a winding-up, such a petition cannot be entertained. It must further be proved that an act of winding up should not be made as it would unfairly pr .....

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rder on the ground that it was just and equitable that the company should be wound up. • Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. - (2001) 105 CC 493 - to show that one of the conditions precedent for granting relief under Section 397 is that the petitioner should prove that winding up of the company would unfairly prejudice the petitioners who are complaining of oppression, that otherwise the facts would justify the making of a winding up order on just and equitable grounds. &bull .....

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stituted by further evidence either by affidavits or oral and documentary evidence. • Azhar Hussain v. Rajiv Gandhi - 1986 (Supp) Supreme Court Cases 315 - to show that a petition filed under the Representation of the People Act, 1951 was dismissed in view of the petitioner's failure to furnish the material facts and particulars as mandated in Section 83, which are essential to clothe the petition with complete cause of action relating to charge of corrupt practice. • Maharashtra P .....

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- to show that in an application for the winding up of a company under the just and equitable clause, allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. There must be material to show that when "just and equitable clause" is invoked, it is just and equitable not only to the persons applying for the winding up but also to the company and to all its shareholders. 2. Shri Srinath Sridevan, learne .....

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ition must, therefore, be rejected without resorting to completion of the pleadings and considering the company petition on merits wasting the time and incurring huge costs by both the parties in support of which learned Counsel relied on the following decisions:- • Ravinder Singh v. Janmeja Singh - (2000) 8 Supreme Court Cases 191 - to show that no evidence can be led on a plea not raised in the pleadings and that no amount of evidence can cure any defect in the pleadings. • Hari Shan .....

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zance of mere evidence. 3. Ms. Anita Sumanth, learned Counsel appearing for the petitioner opposed the plea of demurrer which according to her should be confined to the question of law and not of facts and substantiated the same as under: - • If a petitioner has the right to apply as envisaged under Section 399 and complain that the affairs of the Company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members, the CLB may make a .....

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fy any need for making such averments in the company petition. The fulfillment of requirements or otherwise under Section 397(2)(a) & (b) being a question of fact, the plea of demurrer does not arise. By virtue of Order XIV Rule 2 of the Civil Procedure Code, 1908, a suit must be tried as a whole on all issues. However, trial of preliminary issues is permissible only where the preliminary issue is a pure issue of law, and (a) it touches upon the question of jurisdiction of the court; or (b) .....

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f the Code would apply in their entirety to proceedings under Sections 397 and 398 of the Act. Whether the facts alleged in the company petition would make out a case or cause of action falling under Sections 397 and 398, being a question of fact cannot be adjudicated as a preliminary issue by the CLB. • The company petition containing the allegations of oppression and mismanagement must be read as a whole, which must be construed in accordance with its substance and not its form. The alleg .....

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funds of the Company by the respondents, which would establish a deadlock situation in the affairs of the Company justifying an order of winding up of the Company on just and equitable grounds, by which the shareholders including the petitioner would be put to irreparable loss and hardship, in complete fulfillment of the requirements of Sections 397 and 398. This Bench by an order dated 20.06.2004 restrained the respondents from operating the bank account which has been floated by the second res .....

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pass appropriate orders in terms to secure the relief sought for hereinafter", would justify the making up of a winding up order on just and equitable grounds. • The grievances of the petitioner in her capacity as a shareholder are not personal in nature, but they entirely relate to the grave acts of commission and omission in the affairs of the Company and therefore the CLB is the competent forum to intervene and pass appropriate orders. Ms. Anitha, learned Counsel in support of her .....

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cific pleadings to that effect. • Vijay Krishan Jaidka v. Jaidka Motor Co. Ltd. - (1997) 1 Comp LJ 268 - to show that in case of a family company equitable reliefs could be considered, if oppression is established. • The High Court of Bombay in Maharashtra Power Development Corporation Ltd. v. Dabhol Power Co. - (2003) 117 CC 506 held that the company in that case was not a family company in the nature of a quasi partnership and that no equitable considerations exist which would justif .....

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bull; Jer Rutton Kavasmaneck v. Gharda Chemicals Ltd. - (2001) 106 CC 25 - to show that a petition under Section 397 can be thrown out only if the case put forward is unarguable and the petition can be held demurrable only if the claim put forward cannot be established even if all the allegations made in the petition are accepted to be true. • Eastern Linkers Pvt. Ltd. v. Dina Nath Sodhi - (1984) 55 CC 462 - to show that a petitioner must establish to sustain a petition under Section 397 th .....

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ga Tubes Ltd. - (1965) XXXV CC 351 - wherein the Supreme Court held that in a petition under Section 397, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397. • M. Moorthy v. Drivers and Conductors Bus Service P. Ltd. -(1991) 71 CC 136 - to show that a court may find out from the pleading whether there is evidence to fulfill the requirements of Sections 397 and 398. • In r .....

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equitable, but essential in the interests of both the parties that the company should be wound up. In the said case, the parties refused to meet on matters of business, continued quarrelling and there was no scope for reconciliation and friendly cooperation between the parties and there was lack of confidence between the parties justifying dissolution of the partnership. 4. Shri Bhaskar, learned Counsel, in his reply submitted: The applicability of the provisions of Order XIV Rule 2 of the CPC t .....

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its own procedure. Moreover, Order XIV Rule 2 is not a rule of natural justice, but only rule of procedure and hence inapplicable to the proceedings before the CLB. 5. I have considered the elaborate arguments of learned Counsel. The short question that arises for my consideration is whether the company petition is demurrable and liable to be dismissed in limini. Before answering the issue, I think it fit, that certain material provisions of the Act must be borne in view. A plain reading of Sect .....

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st or in a manner oppressive of any member or members; (ii) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; and (iii) that the winding up order would unfairly prejudice the members. It is, therefore, clear that it is for the CLB to form an opinion on the facts alleged in the petition whether the requirements of Section 397(2)(a) and (b) have been duly met before making such orders as it thinks fit und .....

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any. Such change may take place due to alteration in the Company's Board of Directors or manager or in ownership of its shares or membership or in any other manner whatsoever. At this juncture, the provisions of Section 83 of the Representation of the People Act, 1950, relied on by the respondents assumes importance which reads as under:- 83. Contents of petition. - (1) An election petition - (a) shall contain a concise statement of the material facts on which the petitioner relies; (b) shal .....

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ition shall also be accompanied by an affidavit in the prescribed form in support of the allegation of such corrupt practice and the particulars thereof.] (2) Any schedule or annexure to the petition shall also be signed by the petitioner and verified in the same manner as the petition. Section 83 explicitly stipulates, inter-alia, that an election petition must include a concise statement of the materials facts, full particulars of any corrupt practice, including the names of the parties allege .....

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ere is no mandate in Section 397 stipulating that the petitioners must plead that the facts would justify the making of a winding up order of the company on just and equitable grounds. By virtue of Section 397, it is for the CLB to form opinion on the facts alleged in the petition that the company's affairs are being conducted in a manner oppressive to any member or members and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts should ju .....

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of ₹ 100/- each. The petitioner holds 32.5 per cent of the share capital of the Company. The petitioner and second respondent are the only directors and the petitioner has been the Managing Director of the Company. The Company has been operating two units, viz., Unit-1 and Unit-2, manufacturing forgings. • The respondents 3 & 4, who are brothers of the petitioner are employed as consultants of the Company. With a view to help them certain shares were allotted in their favour, con .....

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dents 3 & 4 being merely the shareholders have no right to interfere with the day-to-day affairs or administration of the Company. • The fourth respondent falsely filed from No. 32 with the Registrar of Companies declaring that he has been appointed as director of the Company pursuant to an extraordinary general meeting said to have been held on 16.03.2004, when there were only two directors, viz., the petitioner and the second respondent. There was no meeting of the Board of directors .....

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3 & 4 representing to be directors of the Company have opened a bank account and started realising the cheques drawn in favour of the Company and collecting the receivables due to the Company for their personal use to the detriment of the petitioner. The respondents have in the process unlawfully enriched by themselves to the tune of ₹ 60 lakhs, at the cost of the petitioner and the Company. They have also removed a large volumes of materials comprising of dye and blocks and other mat .....

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nit 2, the respondents 2 & 3 unlawfully entered the premises, assaulted the Managing Director and threatened workers of the Company leading to suspension of the work and the police complaint lodged by the petitioner against respondents 3 & 4. I shall now consider a plethora of decisions cited by the learned Counsel in the light of the alleged acts of oppression and mismanagement in the affairs of the company, to consider whether the requirements of Section 397 and 398 are duly met by the .....

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he Supreme Court, while considering Section 397 held that it must be shown that there is just and equitable cause for winding up the company for granting any relief and further quoted the following summary given in Meyer's case which lays down certain important considerations to be kept in view in determining the scope of Section 397: • The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted; and the cond .....

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cts must be relevant to disclose also that the making of a winding up order would unfairly prejudice the minority members qua shareholders. • Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are 'treating the company and its affairs as they were their own property' to the prejudice of the minority shareholders - and in which just and equi .....

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just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners." A careful consideration of the findings of the Supreme Court, suggests that in order to be successful on the ground specified in Section 397(2)(b), the petitioners have to make out a case (emphasis supplied) for winding up of the company on just and equitable grounds. In R. Ramanathan Chettiar v. A. & F. Harvey Ltd., it is he .....

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on under Section 397. In Ashoka Betelnut Company P. Ltd. v. M.K. Chandrakanth, the Court came to the conclusion that the requirements of Section 397 must exist before the Court entertains an application under that section, thereby in my view, it is for the CLB to form opinion on the facts alleged in the petition, whether the requirements of Section 397 have been met, before making any order with a view to bringing to an end the matters complained of. In Rattan Singh v. Managing Director, Moga Tr .....

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n Ravinder Singh v. Janmeja Singh, Hari Shanker Jain v. Sonia Gandhi, Rajgopal v. Kishan Gopal and Azhar Hussain v. Rajiv Gandhi rendered under the Representation of people Act, 1951 are distinguishable from the provisions of Sections 397 and 398 and do not go to the aid of the respondents. The CLB must be satisfied that circumstances do exist which would justify the making of a winding up order on just and equitable grounds as held in Lt. Cdr. D.K. Chatterji v. Rapti Supertronics Pvt. Ltd. A pe .....

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to fulfill the requirements of Sections 397 and 398 as held in M. Moorthy v. Drivers and Conductors Bus Service P. Ltd. A careful perusal of the provisions of Sections 397 & 398 and the foregoing decisions reveal that neither Sections 397 and 398 nor the decisions mandate the requirement of averments that the facts would justify the making of a winding up order of the company on just and equitable grounds or that there is dead-lock in the affairs of the company, but in order to be successfu .....

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