AI Drafter 
TaxTMI 
TaxTMI 
1965 (1) TMI 17
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....mpanies Act, 1956 (1 of 1956) (hereinafter referred to as "the Act") made by the appellant in the High Court. Most of the facts are not seriously in dispute and it is necessary to set them out in detail in order to decide the main point raised on behalf of the appellant, namely, that the affairs of the company were being conducted in a manner oppressive to him and his group of members. The company was floated as a private limited company on December 1, 1950, with an authorised capital of Rs. 25 lakhs. Originally, the shares were held by two groups of shareholders equally, except a few shares. These groups of shareholders may for our purposes be taken to be represented by Patnaik and Loganathan. The company raised a sum of Rs. 36 lakhs by the issue of two series of debentures which were guaranteed by the Government of Orissa between 1952 to 1954. In 1954, the appellant was approached by Dr. Mohanty, then Secretary to the Government of Orissa (Industries Department), which was naturally interested in the company having guaranteed debentures to the tune of Rs. 36 lakhs, for helping the company which was in financial and administrative difficulties. The appellant was requested to he....
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....and the one odd share was held by all the three, namely, Jain, Patnaik and Loganathan, jointly. In September, 1956, a resolution was passed by the board of directors referring the question of conversion of the company to a public limited company to a sub-committee consisting of the appellant, Loganathan and Patnaik. About the same time, an application was made to the Controller of Capital Issues for the sanction of the issue of further shares to the extent of Rs. 39 lakhs out of the authorised capital of rupees one crore and for the issue of debentures to the extent of Rs. 64 lakhs. In this application it was stated that the shares were intended to be issued privately to the existing shareholders and/or their nominees. In December, 1956, a resolution was passed by the board of directors for converting the company into a public limited company and for amending the articles of association in consequence at the next annual general meeting. This was necessary as the company wanted to borrow from the Industrial Finance Corporation which however made advances only to public limited companies. On January 11, 1957, the company was converted into a public company and the articles of asso....
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....directors on March 1, 1958, and the differences between the three groups which had already begun came to the surface at that time. The appellant proposed to the board of directors that the new shares should be issued to the existing shareholders as provided in section 81 of the Act. Patnaik on the other hand proposed that a general meeting should be called for the purpose of passing a resolution for the issue of new shares and for the manner and proportion in which shares were to be offered privately to the shareholders and other persons and for such other incidental matters as provided in the section. It is apparent from this conflict between the appellant group and Patnaik and Loganathan groups in this meeting that the groups of Patnaik and Lognathan did not want the appellant's group to get roughly one-third of the new shares. The fear of Patnaik in this connection was that if shares were offered privately to the existing shareholders, the appellant might get all of them, for the groups of Patnaik and Loganathan did not have the money to subscribe to the new shares if offered in the first instance to the existing shareholders. Thus if the appellant got all the new shares, his gr....
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.... group for a declaration that the resolutions dated March 29, 1958, were ultra vires, illegal, void and not binding on the appellant, the company and its shareholders with a prayer for permanent injunction restraining the defendants in the suit (namely, the other two groups) and their servants and agents from giving effect to or acting in any way in pursuance of the said resolutions and further restraining each of the defendants, their servants and agents from issuing and allotting the new shares in terms of the impugned resolutions. That suit was filed in the court of the Subordinate Judge, Cuttack. It is necessary here to refer to the details of that suit. It is enough to say that an ex parte interim injunction was obtained on the same day, restraining the company and other defendants from issuing and allotting the new shares to persons other than the existing shareholders and giving effect to the resolutions in that regard passed at the meeting held on March 29, 1958. The company then made an application for setting aside the ex parte interim injunction. This matter came up before the court on May 15, 1958. At that time an offer was made on behalf of the company that, in view of....
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....a of defeating the rights of shareholders represented by him and his group and this amounted to oppression of the minority shareholders. To continue the narrative, it appears that an extraordinary general meeting of the company was called on September 21, 1960, to consider increasing the share capital from rupees one crore on which it stood after the increase in 1958 to rupees three crores by issue of additional equity shares numbering one lakh of the value of rupees one crore and the issue of another one lakh cumulative redeemable income-tax free preference shares of the value of rupees one crore subject to such rights and privileges attaching to such preference shares as might be specified in the new article to be inserted in the articles of association. It was also intended that these new shares should be offered to outsiders (i.e., other than the existing share holders) with a view to making the company more broad based. This meeting was called by a notice issued on August 25, 1960. It was the calling of this meeting which led to the application under section 397, etc., on September 14, 1960, by the appellant. It was urged in the application that this issue of new shares ....
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....also in breach and violation of the agreement dated July 27, 1954, to which the Patnaik and Loganathan groups were parties. Further it was said that although in form the company was a public company, in reality it was a partnership consisting of the three groups, namely, the appellant's group, and of Loganathan and Patnaik groups. The last two groups had combined together against the appellant group which had resulted in justifiable lack of confidence on the part of the appellant and his group in the conduct of the affairs of the company by the other two groups. Such lack of confidence had been caused by lack of probity in the conduct of the affairs of the company by these two groups, which were acting to benefit themselves personally and were not concerned with the welfare of the company. The appellant and his group would not get any relief by calling a general meeting of the company, and the facts and circumstances aforesaid 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. Therefore the appellant prayed for directions under section 397 of the Act, as the winding up of the. company which was in a prosp....
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....ny be appointed for carrying out such directions as the High Court might be pleased to make for purposes of removing the oppression and the acts of misconduct and mismanagement and for regulating the conduct of the affairs of the company. The seven persons to whom the new shares were allotted id July, 1958, were also made parties and injunction was prayed for restraining them from transferring those shares. The application was opposed on behalf of the company, and its main contention was that the company was not a party to the agreement dated July 27, 1954. and was not bound by it. It was further contended that there was no mismanagement and the company and its affairs were not being conducted in a manner prejudicial to it. It was also contended that there was no oppression on the undisputed facts in the present case. The application was also opposed on behalf of Loganathan and Patnaik groups and their case was that they had not acted in any manner which could be said to be oppressive of the rights of the minority shareholders represented by the appellant. They also contended that the affairs of the company were not being mismanaged nor were they being conducted prejudicially to....
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.... to whom the new shares were offered were not benamidars of Loganathan and Patnaik groups but were independent persons of substance, even though they might be friends of the majority group of shareholders. But there was nothing to show that they were under the control of the majority group and therefore it could not be said that 75 per centum of the voting strength was concentrated in the hands of Loganathan and Patnaik groups except where these new allottees chose to vote with these groups. On a careful consideration of the facts, the Division Bench came to the conclusion that no such oppression had been established as would justify an order under section 397 of the Act. As to mismanagement under section 398, the Division Bench came to the conclusion that no case had been made out under that section. On this view of the matter, the appeals were allowed and the application of the appellant was dismissed and the parties were ordered to bear their own costs. Thereupon the appellant applied for and obtained certificates to appeal to this court and that is how the matter has come up before us. We shall first take up the case under section 397 of the Act and proceed on the assumption....
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....ons of section 399 to apply to the court for relief under section 402 of the Act or such other reliefs as may be suitable in the circumstances of the case, if the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. The court then has power to make such orders under section 397 read with section 402 as it thinks fit, if it comes to the conclusion that the affairs of the company 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 might justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. The law, however, has not defined what is oppression for purposes of this section, and it is left to courts to decide on the facts of each case whether there is such oppression as calls for action under this section. We may in this connection refer to four cases where the new section 210 of the English Act came up for consideration, namely : Elder v. Elder and Watson [1952] SC 49; George Meyer v. Scottish Co-operative Wholes....
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....ame class of business, conduct the affairs of the subsidiary, even though these are in a sense its own, in such a way as to deal fairly with the subsidiary ; (2) that, if the parent company deliberately pursues a course calculated to destroy its subsidiary, with resulting loss to the minority shareholders, this may amount to oppression within the meaning of section 210 ; (3) that the conduct of a majority shareholder may amount to oppression notwithstanding the fact that his own shares depreciate in value pro rata with those of the minority ; and (4) that, even if the majority shareholder has virtually destroyed the substratum of the company by his oppressive conduct and it is conceded by all parties to be just and equitable that the company be wound up, the oppressed minority may nevertheless be entitled to a remedy under section 210." These observations were approved by the House of Lords in appeal and it was held that "whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in ....
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....er the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though hat must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a....
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....r ever. We are not prepared to read this implication in this term. It was easy to provide in the agreement that whenever capital was actually increased, it would be divided equally between the three parties thereto. In the absence of such a provision we do not think that the fifth term is capable of the interpretation which is put on it on behalf of the appellant. It only deals with, the shares worth Rs. 4 lakhs held by the other two persons and provides that besides those shareholdings capital shares would be held equally by the three parties. Therefore, as we read the agreement we cannot come to the conclusion that it provides that if in future there was an actual increase in capital that will necessarily be shared equally by the three parties. However, it is said that the conduct of the three parties later on shows that when there was actual increase of capital to Rs. 61 lakhs some time after July, 1954, this increase was shared equally by the three parties and further when Mr. Rath sold his holdings in the company they were purchased equally by the three parties so much so that one odd share out of 250 shares was held by the three parties jointly. This is undoubtedly so, and....
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.... a public company as already indicated in January, 1957. The contention of the appellant, however, is that when the share capital was decided to be increased by fresh issue within the limit of rupees one crore, regulation 42 of the First Schedule to the 1913 Act was in force and that regulation required that direction to the contrary as to allotment of shares should be given by the resolution sanctioning increase of share capital. This was however not done at the time when the authorised share capital was decided to be increased in 1954 and, consequently, the new shares had to be allotted to the existing shareholders under regulation 42. At that time, however, the company was private and the shares had to be issued to the existing shareholders and no question of any direction to the contrary arose if the company was to retain its private character. The sanction of the Controller of Capital Issues came in December, 1957, when the company had become a public limited company, and the question of allotment arose thereafter. By that time the Act (i.e., the 1956 Act) had been passed and regulation 42 of the First Schedule to the 1913 Act was no longer in force. Instead, it had been re....
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.... question to be raised. This attack on the validity of what happened on March 29, 1958, must thus fail. We have already said that the public company which came into existence in 1957 was not bound by the agreement of 1954 and could offer shares to such persons as it decided to do in general meeting in accordance with section 81. The mere fact that in the meeting of March 29, 1958, it was decided to offer shares to others and not to the existing shareholders would not therefore necessarily mean oppression of the minority shareholders. The majority shareholders were not bound to accept the view of the minority shareholders that new shares should be allotted only to the existing shareholders. It also appears that the Patnaik group was afraid at the time when the new shares were being issued that as they had no money the appellant group would take up the entire new issue and would thus obtain majority control of the company. This they wanted to avoid and that is why the new issue was resolved in general meeting to be issued to others and not to the existing shareholders. If this was the reason why new shares were not issued to the existing shareholders, it can hardly be said that th....
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....ss the value of the existing shares. But the evidence shows that by 1958, the company, which had gone into production in 1955, was making profits and there is no reason to suppose that the same rate of profit would not have continued with the expansion envisaged by the increase in share capital. Besides, as the shares of the company were not quoted on the stock exchange, it is impossible to say what impact the issue of new shares had on the value of the existing shares and whether the value of existing shares was depressed, if at all, by the issue of new shares. It is not a case where new shares were issued as bonus, for the issue of bonus shares does necessarily affect the value of existing shares. But these were issued on payment of cash for the purpose of expansion. In the circumstances we cannot necessarily infer that the value of the existing shares would have been seriously affected by the issue of new shares at par. So it cannot be said that this was done in order to affect the proprietary rights of the appellant as a shareholder. The issue of new shares, which was done in March and July, 1958, cannot therefore in our opinion amount to oppression of the appellant as a minori....
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....ges or benamidars of the Patnaik and Loganathan groups. There might be reasons why those persons were not in a position to pay the entire money at once and therefore borrowed money from the bank to make up the full amount of the shares taken by them. Further, it appears that there was a fight between the appellant group on the one side and the Patnaik and Loganathan groups on the other for the control of the company. If the fear of Patnaik was correct that the appellant would have purchased all the shares worth Rs. 39 lakhs for want of money on the part of Patnaik and Loganathan groups and would thus have obtained a dominating position in the company, the action of the majority shareholders in preventing such domination by one group only and taking action for that purpose cannot in the circumstances be said to be oppressive of the minority shareholders. It is well to remember that if the appellant had got the entire new issue of Rs. 39 lakhs because of the inability of the Patnaik and Loganathan groups to take up their two-thirds shares, the majority control would have vested in one group. But the action of the majority shareholders in issuing new shares to others and not to the ex....
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.... The fact that the shares were issued presumably to the friends of Patnaik and Loganathan groups is hardly of any significance in the matter of oppression, for if shares are issued privately they are bound to go to friends of the directors. The case of oppression therefore based on the agreement of July, 1954, as the sheet-anchor of the appellant's case must fail. In the first place that agreement was strictly speaking not binding even on the private company- it was much less binding on the public company when it came into existence in 1957. The agreement did not contain any specific provision as to future issue of capital. Further, at the time when the agreement took place the appellant was not even a member of the private company and it was really an agreement between a non-member and two members of the company, which would go to show that the agreement could in no circumstances bind the company. It is true that for some time the agreement was in the main carried out when the capital was actually increased up to Rs. 61 lakhs, the appellant getting one-third of it barring the French company's shares. When, however, the company was made into a public company, some of the terms o....
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....shareholdings of the appellant in the company so that he may be driven out of it, for after the issue of the new proposed capital, the appellant's holding of equity shares would be hardly 10 per centum of the entire equity capital. In the first place, as the meeting of September 21, 1960, was never held because of the injunction obtained by. the appellant, we cannot say how the new shares would have been issued and whether they would have been offered to the public for subscription to make the company even more broad-based than it was then. If that was the intention, that could hardly be called oppression of the appellant. Apart from that, we fail to see why the appellant should be driven out of the company and should be compelled to sell his shares simply because his proportion of equity capital is only 10 per centum of the entire equity capital, for it is not in dispute that the company is doing well and the appellant will get his dividends as any other shareholder. But if the appellant means that it is not worth his while to invest his money in a company in which he is unable to have an important-if not a controlling-voice, this shows that the real basis for the application in t....
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....s removed Rs. 7 lakhs from the coffers of the company; (iii)that the company lost the support of the appellant. It is true that when new shares of the value of Rs. 39 lakhs were issued, the company received only 15 per centum of the share money to begin with, namely, 5 per centum with the application and 10 per centum on allotment. But the evidence shows that though there was some delay in the receipt of 85 per centum of share-money, shares worth Rs. 30 lakhs were fully paid up in the financial year 1959-60, and the only amount outstanding in that year was Rs. 7,65,000 (i.e., 85 per centum of shares worth Rs. 9 lakhs). The slight delay in the payment of the full value of the shares cannot therefore in the circumstances be said to be so prejudicial to the interests of the company as to call for any action under section 398 of the Act. As to the removal of Rs. 7 lakhs from the coffers of the company by the Loganathan and Patnaik groups, it does not appear from the application of the appellant that his complaint, was that this sum was wrongfully removed by the two groups and there was any fraud with respect to its removal. The real complaint of the appellant in this connectio....
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....cannot be said to be prejudicial to the interests of the company. We, therefore, agree with the High Court that no case has been made out for action under section 398 on the ground that the affairs of the company were being conducted in a manner prejudicial to its interests. Nor is there any ground for holding that because of the change which too place in the management after July, 1958, it was likely that the affairs of the company would be conducted in a manner prejudicial to its interests. The change that took place after July, 1958, was that the appellant no longer remained the chairman of the company and the Patnaik and Loganathan groups practically managed the company without the appellant. But as the High Court has pointed out there were no facts before the court to come to the conclusion that the change in management was likely to result in the affairs of the company being conducted in a manner prejudicial to its interests. In this connection reliance is placed on certain matters which transpired after the application was filed on September 14, 1960. These matters however cannot be taken into account for ''the application has to be decided on the basis of the facts as th....