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Issues: (i) Whether the allotment of 9,000 equity shares in favour of the fifth respondent could be cancelled under sections 397 and 398 of the Companies Act, 1956 on the ground that the underlying agreement had allegedly failed for want of consideration and breach. (ii) Whether the respondents could be restrained from selling the company's properties without approval of the general body.
Issue (i): Whether the allotment of 9,000 equity shares in favour of the fifth respondent could be cancelled under sections 397 and 398 of the Companies Act, 1956 on the ground that the underlying agreement had allegedly failed for want of consideration and breach.
Analysis: The grievance arose from an alleged breach of the 1975 agreement under which the fifth respondent had supplied plant and machinery and in part satisfaction of the amount due, shares were issued in 1976. The relief sought was cancellation of those shares on the footing that the agreement did not come into effect as expected. Relief under sections 397 and 398 is confined to existing and continuing oppression or mismanagement and is preventive in character. Past and concluded transactions, or a dispute that essentially sounds in breach of contract, do not constitute a basis for invoking those provisions. The cancellation sought was therefore outside the proper scope of the jurisdiction under those sections and lay, if at all, before a competent civil forum.
Conclusion: The request to cancel the impugned shares was rejected as not maintainable under sections 397 and 398.
Issue (ii): Whether the respondents could be restrained from selling the company's properties without approval of the general body.
Analysis: The sale issue had already been the subject of proceedings before the Kerala High Court, which required that any sale of the company's properties could take effect only after approval of the general body and after notice to all members. That safeguard remained operative and binding. In view of that protection, the apprehension that the properties would be sold without shareholder approval was sufficiently addressed. The respondents also stated that they would act in accordance with the High Court's directions and seek approval of the general body before effecting any sale.
Conclusion: No further restraint was granted, and the grievance regarding proposed sale of the company's properties did not warrant interference.
Final Conclusion: The company petition failed on the substantive claims, though the respondents were required to proceed with any sale of assets only in accordance with the existing requirement of general body approval and subject to the rights of secured and statutory creditors.
Ratio Decidendi: Sections 397 and 398 are available only against present and continuing oppression or mismanagement and cannot be used to undo a concluded contractual transaction or obtain cancellation of shares on a pure breach of contract claim.
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