1989 (12) TMI 245 - SC - Companies Law

Heirs of deceased shareholder can file oppression, mismanagement and just, equitable winding-up petition under ss 397, 398, 433(f)

SC upheld the HC's decision that legal heirs of a deceased shareholder, whose name continues on the register of members, are entitled to maintain a ... Maintainability of the petition - Legal Heirs - Oppression and mismanagement - winding up of the company - appellants were not members of the company as their names had not been recorded in the register of members - Whether the legal heirs of a deceased shareholder can be treated as members of the company fox the purpose of maintaining a petition under sections 397 and 398 of the Act - HELD THAT:- Admittedly, in the present case, the legal, representatives have been more than anxious to get their names put on the register of members in place of the deceased member who was the managing director and chairman of the company and had a controlling interest. It would, therefore, be wrong to insist that their names must be first put on the register before they can move an application under sections 397 and 398 of the Act. This would frustrate the very purpose or the necessity of action. It was contended on behalf of the appellant before the High Court that if legal representatives who were only potential members or, persons likely to come on the register of members are permitted to file an application under sections 397 and 398 of the Act, it would create havoc, as then, persons having blank transfer forms signed by members, and as such having a financial interest, could also claim to move an application under sections 397 and 398 of the Act. In our opinion, therefore, the High Court was preeminently right in holding that the legal representatives of a deceased member whose name is still on the register of members are entitled to petition under sections 397 and 398 of the Act. In the view we have taken, it is not necessary to consider the contention whether, as on the date of the petition, they were not members. In that view of the matter, it is not necessary for us to consider the decision of this court in Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1955 (12) TMI 21 - SUPREME COURT]. In view of the observations of this court in Life Insurance Corporation of India v. Escorts Ltd. [1985 (12) TMI 289 - SUPREME COURT], it is not necessary, in our opinion, to consider the contention made on behalf of the appellant before the High Court that the permission of the Reserve Bank of India had been erroneously obtained and consequently amounts to no permission. In the present context, we are of the opinion that the High Court was right in the view it took on the first aspect of the matter. We are of the opinion that the averments which a petitioner would have to make to invoke the jurisdiction of sections 397 and 398 of the Act are not destructive of the averments which are required to be made in a case for winding up under section 433 (f) on the just and equitable ground, though they may appear to be rather conflicting, if not contradictory. We are in agreement with the High Court that the petition must proceed up to a certain stage which is common to both winding up and invoking the jurisdiction of sections 397 and 398 and though there may be some difference in the procedure to be adopted, it is not such which is irreconcilable and cannot simultaneously be gone into. Indeed, these are made in the manner indicated before. It has to be borne in mind that a discretion is conferred on the court and it is only when the court is satisfied that the facts justify the making of a winding up order on the ground that it is just and equitable that the company should be wound up, but if the court is further of the opinion that it would be a remedy worse than the disease, then the court can examine whether the alternative relief by way of a direction under section 397 can be granted. This is a well-accepted remedy exercised by the courts. We are, therefore, of the opinion that the High Court was right in its view that a composite petition under sections 397, 398 and 433 (f) of the Act is maintainable. The appeal, therefore, must fail and is, accordingly, dismissed. Issues Involved:1. Maintainability of a petition under sections 397 and 398 by the legal heirs of a deceased shareholder.2. Whether a composite petition under sections 397, 398, and 433(f) of the Companies Act is maintainable.Detailed Analysis:1. Maintainability of a Petition Under Sections 397 and 398 by Legal Heirs:The primary issue was whether the legal heirs of a deceased shareholder could be treated as members of the company for the purpose of maintaining a petition under sections 397 and 398 of the Companies Act, 1956. The appellants argued that only a member whose name is entered in the register of members could file such a petition. They contended that there was no automatic transmission of shares upon the death of a shareholder and that the board of directors had the discretion to refuse the registration of shares in the name of legal heirs.The court examined the relevant provisions of the Companies Act, including sections 2(27), 41, and 109, as well as articles 25 to 28 of Table A of the Act, which deal with the transmission of shares. It was noted that section 41 defines a member as someone whose name is entered in the register of members, and section 109 validates the transfer of shares by a legal representative of a deceased member.The court referred to the English case of Jermyn Street Turkish Baths Ltd., In re [1970] 3 All ER 57, where it was held that personal representatives of a deceased member could maintain a petition under section 210 of the English Companies Act, which is similar to section 397 of the Indian Act. The court found this reasoning persuasive and concluded that legal representatives of a deceased member should be allowed to maintain a petition under sections 397 and 398, as they represent the estate of the deceased member whose name is still on the register of members.The court emphasized that this interpretation aligns with the equitable and just purpose of sections 397 and 398, which aim to provide relief in cases of oppression and mismanagement. The court rejected the view that legal representatives must first be registered as members before filing a petition, as this would frustrate the purpose of the provisions.2. Whether a Composite Petition Under Sections 397, 398, and 433(f) is Maintainable:The second issue was whether a combined petition under sections 397, 398, and 433(f) of the Companies Act was maintainable. The appellants argued that such a composite petition was not permissible.The court referred to the observations in Shanti Prasad Jain v. Kalinga Tubes [1965] 35 Comp Cas 351 and the reasoning of the Bombay High Court in Bilasraj Joharmal v. Akola Electric Supply Co. P. Ltd. [1958] 28 Comp Cas 549. It was noted that the averments required to invoke sections 397 and 398 are not destructive of those required for a winding-up petition under section 433(f) on the just and equitable ground. The court explained that a petition under sections 397 and 398 must state that the affairs of the company justify winding up but that winding up would unfairly prejudice the members.The court held that the procedural differences between the two types of petitions are not irreconcilable and can be simultaneously addressed. The court has the discretion to determine whether the facts justify a winding-up order and, if so, whether an alternative relief under section 397 would be more appropriate. This approach ensures that the remedy provided is not worse than the issue being addressed.Conclusion:The Supreme Court dismissed the appeal, affirming that legal heirs of a deceased shareholder whose name is still on the register of members can maintain a petition under sections 397 and 398 of the Companies Act. Additionally, the court upheld that a composite petition under sections 397, 398, and 433(f) of the Act is maintainable. The appeal was dismissed with costs assessed at Rs. 5,000.