TMI Blog1961 (11) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... any, where the petitioner's rival groups are alleged to have acted with the ulterior motive of gaining voting power to obtain control of the Company for the said rival groups and their nominees to the exclusion of the petitioner, his group and his nominees, in the circumstances hereinafter stated. 2. The petitioner represents what is known as the Jain Group in the Company Respondent No. 1 is the Company; respondent No. 2 Sri B. Patnaik,--who has since, after the last Elections in Orissa, become the Chief Minister of the State, and thereupon ceased to be a director in the Company,--represents what is known as the Patnaik Group including, among others, his wife respondent No. 3 Mrs. Gyan Patnaik and respondents Nos. 5 to 12 herein; respondent No. 4 Sri G.S. Loganathan, represents what is known as the Madras Group; besides these respondents, the Government of Orissa is represented by respondent No. 13 who is Secretary, Industries Department, Government of Orissa; respondents Nos. 14, 15 and 16 have subsequently been made parties herein as transferees of shares as hereinafter stated. 3. The course of events,--which led to the presentation of the petition, stated in a broad ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Company had already incurred oh the sale of pipes amounting to ₹ 7 lakhs it was distinctly understood that the same will be taken up by the Madras and the Orissa (Patnaik) Groups. All those discussions and correspondence were with a view to arrive at a basic working understanding among the three groups. A letter dated June 22, 1954 from Sri S.P. Jain to Sri Patnaik recorded the lines on which they all agreed to work jointly, namely, that Sri S.P. Jain undertook to supply further capital of the Company to the extent of ₹ 10,50,000 (Rupees ten lakhs fifty thousand) which is equal to the capital subscribed by each, namely, Sri Patnaik and Sri Loganathan, that the loss of ₹ 7 lakhs will be borne by Sri B. Patnaik and Sri Lognathan; that the responsibility of the future finances of the Company will be shared equally by Sri S.P. Jain, Sri Patnaik and Sri Lognathan; that Sri S.P. Jain will be the Chairman, Sri Patnaik will be the Managing Director and Sri Shithal Prasad (relation of Sri S.P. Jain) will be the joint Managing, Director; these terms on which the parties agreed to work jointly, were confirmed by Sri Patnaik in his letter to Sri S.P. Jain dated June 29, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this agreement that the constitution of the Board was changed and the managing agency resigned and that there are such other telling circumstances, purporting to show that the Agreement was acted upon; while the case of the rival groups is that these changes were brought about in ordinary course of business without reference to the agreement. During all this time Sri S.P. Jain acted as Chairman of the Company and gave all guidance and advice in the matter of management of the Company, and his influence, as a seasoned businessman, was also made use of in the interest of the Company; the instances of such guidance, advice and his administration of the Company are evident from the correspondence and other documents produced in this case. There can be no doubt as to this position that it was through the influence of Sri S.P. Jain that the bank facilities were obtained from the Chartered Bank of India which because of the personal guarantee given by Sri S.P. Jain, had advanced loans of several lakhs of rupees to the Company. Except for these credit facilities, which the Company received through the influence of Sri S.P. Jain, the Company could not have raised itself to its present s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Issues on an application made by the Company for the issue of 39,000 ordinary shares of ₹ 100/- each for total face value of ₹ 30 lakhs made on September 17, 1956, when the Company was still a private company; in Clause 7 of the said application it was stated that the cash issue will be private and that it would be issued to the existing directors, shareholders and/or their nominees: it was on the basis of this application that the Controller of Capital Issues had sanctioned the increase of share capital by his letter dated December 18, 1957 as aforesaid: in the meantime, the company had become a public company since January 1957. Now it was the allotment of these 39,000 new shares which became the proximate cause of trouble among the rival groups. The petitioner's case is that under the Agreement dated July 27, 1954, these 39,000 new shares were to be allotted to the three groups in equal proportion as existing shareholders or to their nominees. On March 1, 1958, a notice was issued for an extraordinary general meeting to be held on March 29, 1958 for the purpose of considering, inter alia, the manner and proportion in which such snares are to be issued as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pursuance of their decision to take steps for allotment of these shares issued a notice on June 21, 1958 for Board meeting to be held on June 30, 1958. The injunction application not having been disposed of, there was a subsequent notice of meeting issued by the Company on July 23, 1958 for a Board meeting to be held on July 30, 1958 including in the Agenda an item for consideration of allotment of these 39,000 shares subject to any order of the Court. Then ultimately on duly 30, 1958 the injunction order was vacated by the learned Subordinate Judge, whereupon the learned Advocate for the Jain Group applied for stay of operation of the said order vacating the injunction so that they might move the High Court; it is said that at that time the learned Advocate for the Company was present in Court and he also received a copy of the application for stay of operation of the order vacating the injunction, but, as fully discussed hereinafter, the allotment appears to have been rushed through with indecent haste and scramble, and allotment is stated to have been made within 40 minutes from the passing of the order vacating the injunction and everything was done as fait accompli--later on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an interim order was passed by this Court, inter alia, restraining the rival groups from placing before the said extra-ordinary general meeting which was to be held on, September 21, 1960 or considering any resolution or resolutions with regard to the increase of the share capital of the Company by creation of additional 1 lakh equity shares of ₹ 100/- each. The defence taken on behalf of the rival groups, is, in substance, a simple denial of all the allegations made in the petition. 4. The points involved herein resolve themselves into the following broad questions, namely: (a) Whether the said Agreement, made between the representatives of the said three groups on July 27, 1954, when the Company was still a Private Company,--regarding inter alia, equal representation of the three groups in the Board of Directors and equal share-holding of the three groups in the same proportion,--was acted upon and continued to be binding on the Company. (b) Whether the conduct of the rival groups in the matter of allotment of the said 39,000 new shares and their subsequent conduct amounted to continuing and continuous process of oppression to minority shareholders including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , appears that the learned counsel for the Jain Group (plaintiffs in the said suit) contended that the learned Subordinate Judge misconceived the effect of the concessions made before him that the said Agreement dated July 27, 1954 was not binding and could not be enforced against the Company since the Company was not a party to it, and further that the learned Subordinate Judge wrongly came to the conclusion that it had no force now and need not be taken into consideration. Indeed, from the facts and circumstances, I am satisfied that the effect and legal implications of the Agreement were presumably not fully presented to the learned Subordinate Judge and thus the learned Subordinate Judge obviously was not in a position at that stage to appreciate the effect and implication of what was being submitted before him in that particular context. That apart, assuming that it was some sort of concession on which the Company now relies, even so, it was a concession with regard to a point of law and therefore there cannot be any question of estoppel arising from such admission. It is the settled position in law that when the facts are fully set out and admitted, a party's opinion a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation of the relevant provisions, with which aspect I shall deal later on when, coming to discuss the law. Apart from the legalistic approach, this court in its equitable jurisdiction, under Sections 397, 398, 402 and 403 of the Companies Act, 1956 has to decide whether the conduct of the rival groups in the matter of allotment of the said shares in the manner that they did, and their subsequent conduct amounted to oppression to any member or members (including the petitioner), and whether it amounted to such mismanagement as likely to be prejudicial to the interests of the Company. 12. The position, briefly stated, was this; At Board meeting on March 1, 1958 where Sri S.P. Jain presided as Chairman, the agenda, which was decided upon to be Considered at an extraordinary general meeting to be held on March 29, 1958, was as follows: AGENDA 1. To authorise the Directors to issue 39,000 ordinary shares of the face value of ₹ 100/- each. 2. The manner and proportion in which such shares are to be issued. 3. Miscellaneous. In the Explanatory Statement attached to the Agenda it was stated that it was necessary in the interest of the Company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion in the matter. Thus it is clear that the notice dated March 1, 1958 for the extraordinary general meeting to be held on March, 29,: 1958, containing an agenda referring to the manner and proportion in which the shares were to be issued, was kept conveniently vague and left the minority shareholders with the impression that all shareholders, including themselves, would get at certain shares out of the said 39,000 new shares, that the question was only what proportion of the new shares would be offered to them; the words manner and proportion in which such shares are to be issued naturally led the share-holders to believe that they will get a chance to be offered at least some proportion of the newly issued shares which had been sanctioned by the Controller of Capital Issues What indeed was the real motive of those in the management of the Company at that time, representing the majority shareholders, was kept absolutely in the background of their mind, which subsequently became exposed at the extraordinary general meeting on March 29, 1958 to the surprise of the minority shareholders: At the extraordinary general meeting of March, 29, 1958, -- where Sri S.P. Jain did not hap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an issue and the Jain Group naturally resented the entire move of the said rival groups. 13. Immediately after the meeting of March 29, 1958, Sri S.P. Jain wrote a letter to the Secretary of the Company on April 2, 1958 stating therein that he understood from the proceedings of the meeting held on March 29, 1958 that some applications for allotments of some shares out of the proposed new issue of 39,000 shares had been received; in the said letter Sri S.P. Jain requested the Secretary to send to him the details of the said applications and similar details of such applications,--as may be received by the Company in future, including the name of the applicant, his profession, full address, number of shares applied for, and the amount sent with the application. The Secretary of the Company in his letter of reply dated April 5, 1958 to Sri S.P. Jain wrote that the applications were with the Managing Director and the Secretary requested Sri S.P. Jain to address direct to the Managing Director for the necessary information. Thereupon Sri S.P. Jain wrote to the Managing Director Sri B. Patnaik on April 8, 1958 stating that certain applications from individuals for allotment of shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary general meeting which was held on March 29, 1958,--along with the application moneys payable on such application on such shares, which shall not be less than 5 per cent of the nominal share under Section 69(3) of the Act. The Title suit No. 21 of .1958 was not filed until April 18, 1958. Therefore, for more than three weeks the moneys and the applications were lying with the Company, because the case of the respondents 1 and 2, in the said affidavit dated March 17, 1961, is that, after the Jain Group had filed the title suit on April 18, 1958 and obtained interim injunction, the applicants for shares were scared away and took back their applications and moneys during all these weeks when the applications and the moneys required to be sent along with the applications were presumably received before the general meeting on March 29, 1958. The Company cannot be heard to say, relying upon that abstract doctrine of onus of proof, that it was no part of its duty to produce the applications, unless it was called upon to do so. A practice has grown up in Indian procedure of those in possession of important documents or information lying by, trusting to the abstract doctrine of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied for leave to go out of India; in fact, he was absent from India till the end of September 1958. Although the suit was still pending, unfortunately the rival groups included in the Agenda of the notice of Board meeting to be held on July 21, 1958, the consideration and allotment of the said shares on the basis of the resolution of the extra-ordinary general meeting held on March 29, 1958 authorising the Board of Directors to issue and allot 39,000 shares; the Company, however, mentioned in the Agenda that it will be subject to any order of the Court of the Subordinate Judge in the pending suit. This explanation is not acceptable, because the fact remains that the conduct of the Company,--in including in the Agenda the consideration of the said resolution, passed at the general meeting on March 29, 1958, with a view to give effect to the same,--was by itself, violation of the said order of injunction; all these notices of the meeting,--including, in the Agenda, the consideration of allotment of the said 39,000 shares,--We undoubtedly with a view to give effect to the said resolution and thus it was in breach of the injunction order which was still continuing; the proceedings we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board, consideration of this matter was mentioned and lastly the reason why this information was suppressed from the Chairman and the writer of the letter; yet no reply was given to any of these letters by the managing Director of the Company. 15. Then we come to the crucial date, namely, July 30, 1958 on which the said 39,000 new shares were ultimately allotted to persons to the exclusion of the existing shareholders including the petitioner as one of the minority shareholder. Some time after 10.30 in the morning of that date when the court normally sits, the learned Subordinate Judge vacated the interim order of injunction in the said Title Suit No. 21 of 1958. Immediately an application was made by the learned Advocate for the Jain Group, who were plaintiffs in the said suit, for stay of operation of the said order vacating the injunction for three days, in order to be able to move the High Court for an order of stay of operation of the said order; as appears from records, the learned Advocate for the Company and the rival groups was present in court when the said prayer was made to the learned Subordinate Judge that the operation of his order vacating the injunction wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was going to allot the said 39,000 new shares; although no authority had been given by the Board to receive any offer, for the subscription of the said new shares or to entertain any application in respect thereof, yet certain applications appear to have been made by and received from the so-called independent parties for subscribing the said shares; none of these applications were ever produced or placed before the Board of Directors prior to the Board Meeting on July 30, 1958. In fact Sri S.P. Jain and Sri D.R. Sabharwal were trying to obtain information about these so-called applications for Shares but no information was supplied to Sri S.P. Jain in spite of repeated requests and he was deliberately kept in the dark. Furthermore, it is intriguing that, in course of hearing this application, on April 18, 1961, the Secretary of the Company annexed to his affidavit, filed on that date, the seven applications of seven persons to whom shares were allotted on July 30, 1958; these applications appear to bear dates from July 10 to July 14/15, 1958; those applications include one from Mrs. Swarn Obhrai of Gauhati, Assam, dated July 10, 1958. If these applications were genuine, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, neither the applicants could apply for the shares nor the Company Could receive or entertain such applications and application moneys which all were in violation of the injunction order. 18. In this back ground, I accept the petitioner's case that the purported allotment of the said 39,000 ordinary shares were surreptitiously and deliberately made solely with a view to defeating the rights of the minority shareholders represented by the petitioner and his group. The rival group rode roughshod over the minority group and appear to have dictated the general conduct of the Company's affairs and its policy with an intolerant dis-regard of the wishes of the minority group of share-holders and indeed in disregard of the best interests of the Company itself. 19. Much was argued, on behalf of the Company on the plea of mixed motive that if the true effect of the whole evidence is, that the Company and the rival groups truly and reasonably believed at the time of allotment of the said 39,000 new shares that what they did was for the interest of the Company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s quickly by offering the shares to the existing shareholders, who were ready to have them on full payment of the en-tire consideration; instead, the rival groups, with a view to oust the minority group, took recourse to measures by reason of which the Company's interest itself suffered, because on the one hand they were taking loans and paying interest to Banks and others, while the unpaid share moneys for the said 39,000 shares were being left outstanding even as late at 1960, that is to say, two years after the allotment of the said shares in July, 1958. Even in respect of the application moneys,--which the said seven applicants in their applications mentioned to have sent therewith,--there is nothing on record to show who drew the cheques in respect of the said application moneys, and whether they had been entered in the books of account of the Company. While the genuineness of these allotments of the said 39,000 shares was being challenged from the very beginning, the Company should have produced all the relevant books of Account showing the correct position; the non-production of the relevant documents leads this Court to draw an adverse inference against the Company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of additional one lakh of equity shares of ₹ 100/- each and one lakh preference shares as mentioned in the notice and for necessary alteration or the Memorandum and Articles of Association. The proposed resolution No. 4 mentioned in the said notice was as follows: 4. Resolved that subject to the sanction to issue of further equity and preference shares as aforesaid to be obtained from the Controller of Capital Issues the said shares or so much thereof have been sanctioned to be issued, shall be issued either at par or at such premium as the Directors think fit provided however that such equity and preference shares shall not be offered or allotted to the existing shareholders of the Company but that the Directors be and they are hereby expressly authorised sub-jest to such sanction as aforesaid to issue and allot such shares either, privately or to other persons not being existing shareholders or to the public by issue of prospectus as they think fit and on such terms and conditions as the Directors think fit and proper in the best interest of the Company and at the sole discretion of the Directors. In an Explanatory statement in the said Notice, regarding the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ups was to completely oust the minority group of share-holders. The sole object of convening the said meeting on September 21, 1960 and to pass the said resolution in furtherance of the continuing and continuous process of oppression of the petitioner and his group being the minority share-holders and with a view to completely exclude the petitioner and his group from all control in the affairs of the Company and to deprive them of the financial advantages to be gained by them by the issue of new shares at par and to retain such advantages to themselves, so that ultimately the petitioner and his group may be forced to sell their holdings to respondents 2 and 4 and their group at a nominal value; it was with this mala fide object and in view that the said shares were proposed to be offered to the so-called outsiders and not to the existing shareholders. If the said resolution was allowed to be passed, the petitioner and his group would have been deprived of their right to subscribe to the new shares in proportion to their existing holdings, and the respondents 2 and 4 in furtherance of their mala fide object would have packed the general meeting with their nominees, benamdars and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in which the Company's affairs should have been conducted. In the present case, to wind up the Company would, however, unfairly prejudice the petitioner and the other members of the minority group because the break-up value of the assets would not be sufficient for the purpose of properly compensating ail the shareholders with the consequence that the shares will go down and the assets of the Company will also go down; furthermore, as a result of liquidation, the said rival groups, taking advantage of the same, will acquire the assets for themselves; while on the other hand, if the oppression is removed, the company will prosper. These are the reasons why instead of petitioning for a winding up order, the Jain Group of shareholders seek herein to invoke the new remedy given by Section 397 of the Companies Act, 1956 which lays down the appropriate remedy; words of the section suggest that the legislature had in mind some remedy whereby the Company instead of being wound up, might continue to operate; the object of the remedy is to bring to an end the matters complained of , that is, the oppression; this remedy is available even when the oppression is so moderate that it o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions be set aside in so far as they purport to relate to the issue of allotment of the said 39,000 shares: (e) A declaration that the resolution of the Board of Directors of the Company dated 30th July 1958 purporting to allot 39,000 shares to the respondents Nos. 6 to 12 in proportions mentioned therein are illegal, null and void and ultra vires the provisions of law and/or were passed in the abuse of the powers of the respondents Nos. 2 and 4 and/or their groups and in oppression of the minority shareholders of the Company and are not binding upon the company and/or the petitioner and his group and the said resolutions be set aside. (ee) A declaration that the transfer of the said 39,000 shares or any part thereof to the respondents 14, 15 and 16. Sri B.K. Mall, Sri K.C. Dalai and the Central Bank of India is illegal, null and void, inoperative and ultra vires the provisions of law and/or the said two respondents neither had nor have, nor ever acquired any right, title or interest in the said shares. (f) Directions be given to the respondents Nos. 6 to 12 as also respondents 14, 15 and 16 to sell the said 39,000 shares to the Company upon payment of the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion by the majority. The Committee considered that a step in the right direction would be to enlarge the power of the Court to make a winding up order by providing that the power shall be exercisable notwithstanding the existence of an alternative remedy; the Committee also took into consideration the position that in many cases, however, the winding up of the Company will not benefit the minority shareholders, since the break-up value of the assets may be small, or the only available purchaser may be that very majority whose oppression has driven the minority to seek redress, the Committee therefore suggested that- the court should have, in addition, the power to impose upon the parties to a dispute whatever settlement the court considers just and equitable. This discretion must be unfettered, for it is impossible to lay down a general guide to the solution of what are essentially individual cases. We do not think that the Court can be expected in every case to find and impose a solution; but our proposal will give the court a jurisdiction which it at present lacks, and thereby at least empower it to impose a solution in those cases where one exists. (Para 60 of the Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management or control of the company, it is likely that the affairs of the Company will be conducted in a manner prejudicial to the interests of the Company, the Court with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit; thus, the likelihood or apprehension of the effect of such material change is enough. In the present case, a solvent group of shareholders, namely, the Jain Group was excluded and in fact successfully ousted from having its legitimate share in the allotment of the newly issued shares, in the circumstances aforesaid thus there has been a material change in the ownership of the shares and in the management and control of the Company which, accordingly, gives rise to an occasion for invoking the jurisdiction of this Court under the said provisions of the Act. 27. The word oppression was defined by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd, v. Meyer (1958) 3 All ER 66 at p. 71 (House of Lords) where he accepted the dictionary meaning burdensome, harsh and wrongful , that is to say, what the ordinary man would understand is the meaning of the word; and the said definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppression of the other shareholders. 29. The principles laid down in the said English decision have been followed and reiterated by the courts in India. In the matter of Richardson and Cruddas Ltd., Life Insurance Corporation of India v. Haridas Mundhra the Calcutta High Court held that the powers of the Court under Section 402 of the Companies Act are very wide; the court may make any order for the regulation of the conduct of the Company's affairs upon terms and conditions, as may, in the opinion of the Court, be just and equitable in the facts and circumstances of the case; the section is an innovation in the Company's administration by the Court and the Court's power of managing under Section 402 has to be worked out with reference to the facts and circumstances of each case. In the Calcutta case, the Court appointed a special officer with an advisory Board to the total exclusion of the shareholders of the Company to function subject to the terms and conditions laid down in the order made by the Court. In a recent decision, the Calcutta High Court following the said English decision, expressed the view that where the directors failed to behave with scrupulous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in substance, is that the petitioner or his group cannot be fitted in the rotating group of directors and that it is impossible, according to the Company, to give effect to the said agreement of July 27, 1954 for proportional representation of the three groups without violating the statute; that, assuming the said Agreement of July 27, 1954 was a valid agreement, even then the Agreement, according to the Company, cannot be given effect under the articles of association of the Company, as they stand, which had varied the Agreement, if it was at all binding on the Company; that by virtue of Section 9(b) of the Act, such an agreement as repugnant to the provisions of the Act is or has become void. This argument, however, wholly overlooks the provisions of Section 265 of the Act providing for option to company to adopt proportional representation for the appointment of directors. Section 265 runs as follows:-- 265. Option to Company to adopt proportional representation for the appointment of directors: Notwithstanding anything contained in this Act, the Articles of a Company may provide for the appointment of not less than two-thirds of the total number of the directors of a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order under which it alters any part of the company's memorandum of articles of association, such alteration, made by the court, shall, in all respects, have the same effect as if it had been duly made by the Company in accordance with the provisions of the Act, and such alteration will be itself unalterable except by the leave of the Court or in manner indicated in the order; notwithstanding any other provision in the Act, the Company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Court, any alteration whatsoever which is inconsistent with the order. It was in this view of these provisions that, in both the cases cited above, the Calcutta High Court removed and reconstituted the Board because the Court has such powers to remove and reconstitute the Board, although such removal and reconstitution may involve contravention of certain provisions of the statute as also the memorandum and articles of association of the Company. In the present case, I am satisfied that the acts complained of all refer to the continuing and continuous conduct of the affairs of the Company, and that the affairs of the Company have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be reserved, namely, two each for Industrial Finance Corporation and Government of Orissa as aforesaid, thus, leaving only five, as rotating directors whereas under Section 265 it has to be two-thirds of the maximum number (nine), that is to say, six; therefore, the six rotating directors, according to the principle of proportional representation as proposed, and the four ex-officio non-rotating directors, the total number being 10 exceed the permissible maximum number of directors, namely nine. The company's point is that these difficulties in the way of getting proportional representation under Section 265, can only be solved by Central Government under Group B powers of Central Government (Sections 408, 409 and onward); provisions accordingly have been made placing such powers with the Central Government under Group B, powers, whereby express powers have been given to the Central Government to deal with reconstitution of the Board and introduce proportional representation under Section 265; Sections 408 and 409, giving powers to the Central Government, deal with the same subject-matter and the same circumstances as in Sections 397 and 398 and onward under which powers h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of such ex-officio directors cannot exceed one-third of the permissible limit of nine, that is to say, three; therefore, the Industrial Finance Corporation and the Government of Orissa, taken together cannot have more than three directors in the Board under the articles of association of the Company. I do not, therefore, accept any of the Company's contentions on this point. 36. That apart, Section 10 of the Companies Act, 195S-gives exclusive jurisdiction to the High Court with regard to the powers conferred by, among other sections, Sections 397 to 407 (both inclusive) all under Group A powers of court for prevention or corruption and mismanagement under Chapter VI of the Act. Under Section 399(4) the Central Government may, if in its opinion circumstances exist which make it just and equitable as to do, authorise any member of the Company to apply to the Court under Section 397 or 398. Section 400 provides for notice to be given to the Central Government of applications under Sections 397 and 398; in the present case also, notice was given to the Central Government and the representation of the Central Government under the section dated December 5, 1960 has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company will be deemed to have availed itself of the option given to it under Section 265 and so there is no scope left for the Central Government to exercise its powers under Section 408. 38. In the light of the above, I order and direct the Board to be reconstituted in terms of the order hereinafter fully stated. 39. Re: Reliefs in respect of the said new 39,000 shares: Now, on the question of reliefs in respect of the allotment of the said 39,000 new shares in the manner it was done, under the circumstances aforesaid, the petitioner relied on the provisions of Section 81 of the Companies Act 1958, relating to further issue of capital. The relevant provisions of Section 81 (Prior to the amendment made on December 28, 1960), as applicable in the present context, are set out as follows: 81. Further issue of capital. (1). Where at any time subsequent to the first allotment of shares in a Company, it is proposed to increase the subscribed capital of the Company by the issue of new shares, then subject to any directions to the contrary which may be given by the Company in a general meeting, and subject only to those directions. (a) such new shares shall be offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agenda for the meeting on March 29, 1958 the subject which was to be considered was the manner and proportion in which such shares were to be issued presumably to the existing share-holders, as the Jain Group of shareholders understood the Agenda to mean. The object of Section 81 is to prevent discrimination amongst shareholders and prevent the directors from offering shares to outsiders before they are offered to the shareholders; so long as these two requirements are complied with, the action of the directors in selecting the time when they will issue the shares as also the proportion in which they should be issued is a matter left to their discretion; this is of course subject to the general exception that the directors are not to act against the interest of the Company or mala fide, the statutory right of the existing shareholders to acquire the new shares continues till the time limited has expired and that right can only be lost if he declines to accept the shares prior to the expiry of the time-limit; the section limits the powers of directors to dispose of the further issue of capital in any manner that they may think most beneficial to the Company; they are under a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares on July 30, 1958 pursuant to the said resolution was invalid. The notice dated March 1, 1958 for the extra-ordinary general meeting held on March 29, 1958, should have contained the draft or substance of the resolution that was to be passed at the said meeting which purported to give directions contrary to Section 81(1)(a) of the Act; the particular nature of the business should have been stated as also all necessary information and the actual purpose of the meeting; there is nothing to show from the notice that a resolution would be passed that the said 39,000 shares shall not be offered or allotted to the existing holders of the equity shares in the Company or to the public; thus the notice for the general meeting on March 29, 1958 was bad, and accordingly whatever resolution was passed was ineffective owing to the absence of the notice of the actual resolution which was to be passed giving directions contrary to Section 81(1)(a) of the Act which gave the existing shareholders the right to be offered the new shares in the first instance. 41. Their Lordships of the Privy Council in Pacific Coast Coal Mines Ltd. v. Arbuthnot 1917 AC 607 ; (AIR 1917 PC 52), held that r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a statement setting out all material facts concerning each such item of business. In the present case the material facts for the second item of business in the Agenda, namely the manner and proportion in which such shares are to be issued were neither mentioned in the notice nor set out in the Explanatory Statement annexed to the notice; in fact, the notice did not even indicate that the said new shares shall not be offered or allotted to the existing holders of the equity shares in the Company or to the public, nor did it state that the issue and allotment of the said 39,000 shares shall be at the sole discretion of the directors; indeed, it was suppressed that one of the conditions of the Controller's sanction for issue of the said 39,000 new shares was Condition No. 6, namely, that subject to the provisions of Section 81, the new shares should, in the first instance, be offered to the existing shareholders with the right of renunciation attached. Therefore, in view of such suppression of material facts, the resolutions passed at the said general meeting on March 29, 1958 in pursuance of such invalid notice are bad and not effective; accordingly the allotment of the said 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany could not, by reason of its liabilities, continue its business; and that it was advisable to wind-up the same''; no meeting was ever called to confirm this resolution. On these facts it was held that the resolution that was passed was invalid, because the notice did not show that it was intended to propose resolution that the Company was unable, by reason of its liabilities, to continue its business nor did it contain anything to show that it was proposed to pass such a resolution for winding up the Company as would not require confirmation by a subsequent meeting. It is evidently of great importance to shareholders that they should have proper notice of what subjects are proposed to be considered at a meeting, and in that particular case they had not such notice; the shareholders were entitled to have a notice which would give them to understand what resolution was going to be proposed at the meeting; it is of great importance that steps taken in the matter of such consequence should be perfectly regular; it was held that there was no sufficient notice and the resolution passed at the meeting was therefore irregular; if the proceedings are not taken regularly accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deceptive or misleading notice is invalid. 46. The said resolution, thus purporting to give directions contrary to Section 81(1)(a) in the said general meeting without valid notice in respect of the 39,000 shares as aforesaid,--must accordingly be set aside and the Company restrained from acting upon the said resolution, as it shows that the predominant motive of those voting for the said resolution in the form in which it was presented,--namely, that the said 39,000 share shall not be offered or allotted to the existing holders of the equity shares in the Company or to the public, was to injure the minority or to dominate for the sake of domination and not to protect the economic position of themselves or of the Company: and the said resolution was such that those voting for it could not reasonably have regarded it as beneficial to the Company: such discrimination against the existing shareholders and lack of candour in the notice convening the said extra-ordinary general meeting on March 29, 1958 vitiated the said resolution as also the allotment of the said 39,000 shares pursuant to the said invalid resolution. 47. I, therefore hold that the petitioner is entitled to reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as (respondent 16) and Bijoy Kumar Mall [respondent No. 14) each have to sell the proportionate number of shares, namely, one-third, to the petitioner and/or his nominees who are members of the Company. Thus the Central Bank of India, Madras, has to sell to the petitioner or his nominees 10,000 shares out of the said 30,000 shares, and Bijoy Kumar Mall also has to sell 3,000 shares out of his 9000 shares to the petitioner or his nominees all in terms of the order hereinafter fully stated : thus the petitioner and his group will have 13,000 shares out of the said 39,000 shares, being the one-third of the said new shares. 49. Re : Reliefs in respect of future allotment. Lastly with regard to the future allotment of shares, the Company's move to increase the share capital in September 1960, was stopped by an injunction, passed by this Court, restraining the Company and the respondents herein from passing any resolution, allotting or offering any shares of the Company to outsiders without first offering the same to the existing shareholders in proportion to their holding as aforesaid. That move became abortive and it is infructuous. In the matter of future issue and allotment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract : because the order herein makes provision enabling the Company to increase the number of directors,--if the Industrial Finance Corporation of India desires,--by alteration of the Company's Articles of Association to provide for such increase in accordance with the provisions of law. That apart, there is a special provision under Section 25(2) of the Industrial Finance Corporation Act, 1948 which gives protection to such directors appointed by the Corporation, as provided therein. Assuming (but not deciding) that on an interpretation of Section 25 (2) the Industrial Finance Corporation cannot appoint a director on the Beard of the Company in excess of the maximum number by the Articles, and assuming that the Industrial Finance Corporation in future may insist on appointing more than one director in the Board of the Company, even so, in such a contingency, under the order made herein, the Company has the right to alter its Articles to provide for increase of the number of its directors beyond the maximum, fixed by the Articles, according to law. I find no ground for apprehension of any difficulty in the way of smooth working of the Company, according to the order made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edy available to them in law. Thus,--having regard to the exclusive jurisdiction of the High Court under Sections 397 to 407 both inclusive, read with Section 10 of the Companies Act 1956,--the decision in the said Misc. Appeal cannot operate as res judicata; indeed the question of granting reliefs against oppression to the minority shareholders and mismanagement of the Company's affairs under Sections 397, 398, 402 and 403 is the exclusive jurisdiction of the High Court alone, and no such reliefs, as prayed for herein, can be given in the said Title Suit; therefore, no order made in the said Title Suit can operate as res judicata, nor there can arise any question of alleged estoppel either in law or in facts of this case. 53. Then, point was taken, on behalf of respondent No. 16, Central Bank of India Ltd. that, at the time of presentation of this petition, the Central Bank of India Ltd. was not made a party, but it was subsequently added as a party respondent; that, thereafter, a fresh consent in writing having not been obtained, the petition is not maintainable as far as the added respondent is concerned. This argument, however, is wholly untenable as without any substanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar facts. In the particular context, Sections 397 to 407 (both inclusive) of the Indian Companies Act, 1953, are aimed at putting an end to the continuing state of affairs; not at compensating the petitioner for a wrong which, in the present case, is a continuing wrong; the petition ought to state in clear terms in the prayer the general nature of the relief sought, which indeed, in my opinion, has been stated in the present case; it is rarely wise or even possible to rely solely on statutory affidavit under the Companies (Court) Rules; where such allegations of oppressions, mismanagement and fraud are made, documents referred to in the petition should be proved by affidavit and a separate affidavit exhibiting documents should generally be filed where the petitioner must rely on documents it the petition is opposed, for they form part of his case, and the respondents to the petition are entitled to know what case is made out against them; in fact as soon as affidavit on opposition is filed, it is generally necessary or expedient to fortify the petitioner's case by filing further affidavit as evidence; the nature of further affidavit in support must, of course, depend on the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to function as directors of the Company with immediate effect. (ii) The Board of Directors of the Company is hereby reconstitute for a limited period mentioned in Clause (iii) hereunder in the following manner: The Board will consist of- directors as representing the Govt. of Orissa; director as representing the Industrial Finance Corporation of India : directors from the Patnaik Group to be nominated by respondent No. 2 Sri B. Patnaik; directors from the Loganathan Group to be nominated by respondent No. 4 Sri C.S. Loganathan; directors from the Jain Group to be nominated by the petitioner Sri Shanti Prasad Jain. Total 9 directors. (iii) All the directors on the Board reconstituted as above excepting the nominees of the Government of Orissa and the Industrial Finance Corporation of India, will hold office until the conclusion of the annual general meeting in respect of the financial year of the Company ending after the date of the first meeting of the Board reconstituted as above: such directors will be eligible for reappointment. (iv) The Board of Directors as mentioned in Clause (ii) above will, during the period of their office, have such powers an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joy Kumar Mall are, by this order, restrained from dealing, with or disposing of the said 30,000 shares and 9000 shares in their respective possession and/or exercising any-rights as shareholders in any manner whatsoever, save and except for the purpose of selling and transferring the same to Shanti Prasad Jain and/or his nominees who are members, of the Company as provided herein. (viii) If the petitioner Shanti Prasad Jain and/or his nominees who are members of the Company should fail and neglect to purchase the said 13,000 shares by making, payment as aforesaid within a period of one month from to-day, the order of injunction mentioned in Clause (vii) above would stand vacated. (ix) If the respondent Central Bank of India Ltd., and/or Bijoykumar Mall should fail or neglect to sell and transfer the said 13,000 shares or any portion thereof or to deliver the relative share certificates or any portion thereof, together with duly executed transfer deeds. to Shanti Prasad Jain and/or his nominees who are members. of the Company, within a period of one month from today against payment, then the petitioner Shanti Prasad Jain and/or his nominees who are members of the Company shal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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