2005 (3) TMI 797 - HC - Indian Laws

Appeal Succeeds: Court Overturns CLB Order on Winding Up, Advises Pursuing Company Suit for Control Dispute Resolution.

The HC allowed the appeal, overturning the CLB's order. It determined that the petitioners did not establish a case under Section 397 for winding up, as ... Oppression and Mismanagement - Allotment of shares - Equitable to wind up the company - NRI investments in shares and balance by resident Indians - value of the imported second hand equipments - Whether the petitioners being qualified doctors would be more suitable for controlling the company having a hospital as the only project - HELD THAT:- It would appear from the said Section that a petitioner who files an application under Section 397, he has to satisfy two ingredients to make out a case under Section 397(a) that to wind up the company would unfairly prejudice the member or members who have the grievance and are the applicants before the court; and (b) that otherwise, 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. After analysing the facts of this case it appears to me that two groups are fighting to take control over the company. It have not been able to find out any fact nor has been shown by Dr. Dutta before the Company Law Board which would prejudice the petitioners Dr. Kamal Kumar Dutta and Dr. Binod Prasad Sinha if the company in question were to be wound up. There is no pronouncement in the decision of the Company Law Board as to whether a just and equitable winding up would unjustly prejudice Dr. Dutta and his group or not. It further appears from the facts placed before me by the parties that it would be apparent that Dr. Dutta by way of relief asked a control over the company and if I try to find out an answer, the answer would automatically that none of the parties wants a winding up. Two groups are fighting for company and not for its winding up. I do not have any hesitation to come to a conclusion that the Company Law Board in the instant case did not deal with the said aspect of the matter and not even investigate on those facts and failed to make a conclusion that whether the facts are such that a just and equitable winding up of the company is called for, yet such order of winding up would unfairly prejudice the petitioners and when passed the said order. Then I could have been hesitant to interfere with the order so passed by the Company Law Board. But as has been pointed out by Mr. Sen and I do accept the contention of Mr. Sen since I do not find that the decisions cited by Mr. Sarkar would help him to come across the said hurdle. Since I am of the opinion that the petitioner has failed to fulfil the pre-conditions to have an order u/s 397/398 and the Company Law Board did not deal with the matter at all, I do not have any hesitation to set aside the order passed by the Company Law Board. I also express my opinion following the decision of the Division Bench of our High Court in Bagree Cereals P. Ltd. v. Hanuman Prasad Bagri [2000 (8) TMI 1120 - CALCUTTA HIGH COURT] that the termination of the directorship, even by suppression of notice, or termination of directorship by a show of majority, would not entitle the terminated person to petition for just and equitable winding up is, that there is an appropriate remedy by way of a company suit, which can give the terminated director every relief. If notice has been suppressed, he can file a suit for injunction and declaration and get himself reinstated as a director or if he has been removed from a directorship, he could have filed a suit for declaration. The facts as pleaded by Dr. Dutta, a suit would give him a remedial measure and cannot ordinarily find a petition for just and equitable winding up and I feel that he could obtain each and every adequate relief in the suit court. I am of the opinion that Section 397 contained the essential requirement of the finding of a just and equitable winding up. It appears that the finding of the jurisdictional issue should contain a legal patent error. Granting of relief u/s 398 does not require to make out a case that it is just and equitable to wind up the company. Therefore, I do not have any hesitation to set aside the order passed by the Company Law Board. Thus, the appeal is allowed. Issues Involved:1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act.2. Validity of the cessation of directorship under Section 283(1)(g) of the Companies Act.3. Allotment of shares and whether it was done in a manner that was oppressive.4. Refusal to allot shares towards the value of imported second-hand equipment.5. Whether the case justified the winding up of the company on just and equitable grounds.Issue-wise Detailed Analysis:1. Allegations of Oppression and Mismanagement:The appellants alleged various acts of oppression and mismanagement in the affairs of the company. The grievances included the denial of share allotment to Dr. Kamal Kumar Dutta, the exclusion of Dr. Dutta and Dr. Binod Prasad Sinha from directorship, and the improper allotment of shares to others. The Company Law Board (CLB) found that the company's actions, particularly the allotment of shares and the exclusion of directors, were not completely bona fide and deserved to be set aside. The CLB ordered that the petitioner directors continue as directors and stipulated that notices for all board meetings be issued by registered post with 21 days' notice.2. Validity of the Cessation of Directorship:The company claimed that Dr. Dutta and Dr. Sinha had vacated their office under Section 283(1)(g) of the Companies Act. The CLB held that the stand of the company regarding the vacation of office by the petitioner directors could not be sustained. It declared that the petitioner directors would continue as directors of the company and invalidated the decisions taken in board meetings due to the lack of valid notices to the petitioner directors.3. Allotment of Shares:The appellants challenged the allotment of shares made by the company, alleging it was done to dilute their shareholding and convert them from majority to minority shareholders. The CLB found that the allotment of shares was not bona fide and declared that the shares allotted in the board meetings on March 12, 1996, and July 24, 1996, would not have voting rights until the outcome of the proceedings in the Calcutta High Court was known. No further shares would be allotted against the share application money with the company.4. Refusal to Allot Shares for Imported Equipment:Dr. Dutta contended that he was denied the allotment of shares towards the value of imported second-hand equipment despite RBI approval. The CLB noted that the issue of allotment of shares for second-hand equipment was pending in a writ proceeding before the Calcutta High Court and therefore did not delve into the matter in the Section 397 petition.5. Just and Equitable Winding Up:Mr. P. C. Sen, representing the appellant-company, argued that for the exercise of powers under Section 397, it must be shown that it is just and equitable to wind up the company and that such winding up would unfairly prejudice the petitioner. The High Court found that the CLB did not address whether the case made out by the petitioners justified the winding up of the company on just and equitable grounds. The court emphasized that a petitioner under Section 397 must satisfy two conditions: that the company's affairs are being conducted in an oppressive manner and that winding up the company would unfairly prejudice the petitioner. The court concluded that the CLB failed to make a finding on these essential points and set aside the CLB's order.Conclusion:The High Court allowed the appeal, setting aside the CLB's order. It emphasized that the petitioners failed to make out a case under Section 397 that a winding-up order would unjustly prejudice them. The court noted that the dispute between the two groups was about control over the company, not its winding up. The court also observed that the petitioners could seek adequate relief through a company suit rather than a petition for winding up. The judgment highlighted the necessity for the CLB to form an opinion on both the oppression and the just and equitable winding up conditions before granting relief under Section 397.