TaxTMI 
TaxTMI 
1981 (11) TMI 157
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....rchase by contract or otherwise acquire, from Alkapuri Studios or others complete right and title in respect of no objection certificate or any certificate relating to licence or licences for studio-laboratories, etc.; to let out and maintain and conduct the necessary laboratory or laboratories, studios, theatres and picture-houses and to establish, conduct and carry on the business of processing, developing and printing picture negatives, sound negative pictures and sound positives and picture-cum-sound positives films and prepare prints of the motion pictures or films ; to buy, take on hire or other-wise acquire all necessary machinery, cameras, instruments, apparatus, chemicals and other necessary materials for processing, developing and printing of the motion pictures, materials and where with for setting, dressing and decoration, ornaments, furniture and other articles and things in connection therewith ; to purchase, take on lease and otherwise acquire the land required for such business and to undertake or carry out all or any of the functions, operations, services or works in connection therewith ; to establish, construct, purchase, acquire, conduct, manage, control and sup....
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.... director of the company. However, according to the petitioners, this position of the second respondent having vacated office as director of the company because of the fiction of law was realised for the first time in 1978. In the meantime, admittedly, respondent No. 2 continued to function as the director of the company and participated in the deliberations as such. It is the case of the petitioners that respondent No. 2 had absented himself from three consecutive meetings of the board of directors of the company held between October, 1976, and January, 1977, without obtaining leave of absence from the board even though notices of the meetings were sent to him under certificate of posting. According to the petitioners, the second respondent, therefore, ceased to be a director of the company with effect from January 22, 1977, in view of section 283(1)(g) of the Act. The change was also reported by the company to the Registrar of Companies under section 303 of the Act in the prescribed form on January 25, 1977. The receipt of the said letter was acknowledged by the Registrar of Companies by his letter, dated February 3, 1977. Accordingly, the petitioners contended that the second r....
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.... and 10 submitted their respective income-tax verification certificates but the second respondent failed to do so even though he was reminded about the same time and again. The second respondent deliberately failed to submit the income-tax verification certificate with a view to depriving the company of the benefit of import licences to which it was legitimately entitled. Such behaviour on the part of the second respondent is clearly calculated to cause prejudice to the company, its shareholders and even so far as public interest is concerned. Several legal proceedings have also cropped up as a result of the intransigent attitude of the second respondent and the Bham group of shareholders. The second respondent filed a suit in the Court of Civil Judge (Junior Division) at Baroda, being Suit No. 427 of 1977, on April, 1977, for a declaration that he continued to be the director of the company and for an injunction that no meeting of the board of directors should be called without giving notice thereof to him. The petitioners contend that an ad interim injunction was obtained in the said proceedings by the second respondent restraining the company from operating its bank accounts wi....
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....ising powers of director except with the prior permission of the trial court with liberty to him to attend all meetings of the board and participate therein without the right to vote was initially granted but the said order was modified on July 18, 1978, conceding the right to vote. The Patel group of shareholders made a representation to the Company Law Board, Government of India, on December 17, 1977, about the injunction obtained by the Bham group which resulted in the company being unable to have the accounts passed and comply with the provisions of the Act. The Company Law Board, by its letter, dated December 21, 1978, regretted its inability to intervene in the matter due to pending litigations. The petitioners further contend that as a result of a series of representations made by the second respondent, the State of Gujarat had reduced the subsidy from Rs. 3,00,000 to Rs. 2,00,000 out of which Rs. 1,60,000 was withheld in view of the allegations made by the second respondent and, as such, the conduct of the second respondent had caused monetary loss to the company. According to the petitioners, the Bham group of shareholders have adopted this negative attitude with a view t....
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....iad, and Civil Appeal No. 26 of 19 79, pending in the District Court at Btroda be transferred for trial and disposal to the High Court. So far as the Appeal from Order is concerned, it arises out of the order passed in Civil Suit No. 233 of 1977 by the learned Civil judge (Senior Division), Nadiad, rejecting the application for grant of interim injunction to restrain the present second respondent from representing to be a director of the company and from exercising his rights as such. The second respondent, who is the main contesting party, in his affidavit-in-reply, contends that the petition is not maintainable inasmuch as : (i) on the allegations made in the petition itself no case for winding up of the company on just and equitable grounds is made out; and (ii) an earlier Petition No. 37 of 19/8, brought on similar allegations was not admitted by P. D. Desai J. He concedes that article 38 of the articles of association of the company was deleted whereupon he ceased to be the managing director of the company. Even after he ceased to be the managing director of the company, it is an admitted fact that he continued to reside in the premises which were allotted to him for residenc....
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....nder sections 397 and 398 of the Act is not maintainable as it is not the case of the petitioners that a situation has arisen which would necessitate the winding up of the company on just and equitable grounds if no relief is granted under the aforesaid provisions of the Act. He has endorsed and supported the stand taken by the second respondent in his affidavit-in-reply to the main petition. On the contrary, according to him, it is the majority group, that is, the Patel group, which has throughout acted against the interest of the company by refusing to offer further shares to the minority shareholders and by attempting to ease out the second respondent from the management of the company. As regards the premises occupied by the second respondent, he contends that the said premises were taken on rent in 1969-70 by the company for its office and was ultimately given to the managing director for his residence. The company vacated the premises by the end of 1973 and, thereafter, the second respondent continued to occupy the premises in his individual capacity to the knowledge of respondents Nos. 8, 9 and 10 as well as the second petitioner. According to him, article 38 of the memorand....
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....fits and, therefore, the majority shareholders, who are behind the petition, want to deprive the minority shareholders of their legitimate profits by purchasing their shares at a low price. He has denied the allegation that consequent to the removal of the second respondent as the managing director of the company a war of vendetta was started against the company and its present directors with the co-operation of respondents Nos. 3 to 7. He, therefore, contends that this petition which is filed under section 397 of the Act is not maintainable as the ulterior object of the petitioners and respondents Nos. 8, 9 and 10 is to oust the minority shareholders by purchasing their shares at a low price. Respondent No. 2 has filed his affidavit stating that the notices of the meetings of the board of directors convened on October 21, 1976, November 30, 1976, December 18, 1976, and January 22, 1977, were dispatched under certificate of posting on October 13, 1976, November 22, 1976, December 9, 1976, and January. 10, 1976, to him to the same address to which, in the past, notices were sent and received by him. He has produced the certificates of posting along with his affidavit as well as a p....
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....aspects separately in the order in which I have set them out. Article 38 of the articles of association of the company, as it stood before its deletion, provided that- "Shri Navnit Shivlal Bham shall be the permanent managing director of the company and shall be entitled to hold the office till the expiration of his term." This article was admittedly deleted by a special resolution passed at the extraordinary general meeting, held on December 7, 1973. Thereupon, the second respondent ceased to be the managing director of the company. This fact is also admitted by respondent No. 2 in his affidavit-in-reply. In para. 13 of the affidavit-in-reply, the second respondent states as under : "I say that the company, by its special resolution, dated December 7, 1973, deleted article 38 of the articles of association of the company and, thereafter, I ceased to be a managing director of the company." It is, therefore, obvious from the above averments that there is no controversy between the parties that, after the deletion of article 38, the second respondent ceased to be the managing director of the company. After the second respondent ceased to be the managing director of the company,....
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....to that sub-section, and shall also be liable to refund to the company any remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him for the period immediately preceding the date aforesaid in respect of such office or place of profit. According to the petitioners, after the deletion of article 38 of the articles of association of the company, at the extraordinary general meeting, held on December 7, 1973, the first general meeting of the company was held on September 24, 1974, and at the said meeting no special resolution as contemplated by section 314(1) was passed consenting to the second respondent occupying free of rent the premises taken on lease by the company and, consequently, with effect from September 25, 1974, the second respondent by virtue of section 314(2)(a) vacated the office as the director of the company. It is, however, an admitted fact that even after September 25, 1974, the second respondent was allowed to function as the director of the company without any objection from any quarter whatsoever. That is why the petitioners in para. 10 of the petition contend that the legal effect of section 314(2)(a) of the Act was realised ....
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....r of the company, by virtue of section 314(2)(a) of the Act, is sub-judice. It will be a question to be determined on evidence whether, after the deletion of article 38 of the articles of association at the extraordinary general meeting held on December 7, 1973, the second respondent by arrangement with the landlord became the direct tenant of the latter and was liable to pay the rent in respect of the demised premises. The second respondent has throughout in his affidavit-in-reply stated that he was always ready and willing to pay the rent to the landlord as a direct tenant and this question will also have to be examined by the Small Causes Court, Baroda, while dealing with the proceedings, namely, the standard rent application as well as the suit pending before it. The question will directly come up for consideration in Suit No. 233 of 1977, pending in the court of the Civil Judge (Senior Division), Nadiad, as it is founded on the ground that by virtue of section 314(2)(a) of the Act, the second respondent must be taken to have vacated the office with effect from September 25, 1974. In the said suit filed by respondents Nos. 8, 9 and 10, an ad interim relief was sought to restrai....
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....nce it cannot be said that he wilfully remained absent from the meetings of the board of directors without leave of absence consecutively on three occasions. It was pointed out on behalf of the petitioners, that along with the affidavit of respondent No. 10 a postal acknowledgment bearing the signature of the second respondent/dated November 7, 1973, is produced which shows that communication addressed in the same fashion had earlier reached the second respondent and, therefore, the notices sent to the same address must be presumed to have been received by the second respondent. It is, however, necessary to bear in mind that the postal acknowledgment is of November, 1973, while the resolution deleting article 38 from the articles of association was passed on December 7, 1973, that is, almost a month there-after. It was, thereafter, that the relations between the second respondent and the directors of the Patel group of shareholders became strained and it is in that context that the question whether these notices were in fact received by the second respondent requires to be considered. The second respondent has filed Suit No. 427 of 1977, in the Court of the Civil Judge (Senior Divi....
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....ngly. It would be convenient at this stage to dispose of appeal from Order No. 225 of 1978 which arises out of a suit instituted by respondents Nos. 8, 9 and 10 against the second respondent for a declaration that he vacated office as a director of the company by virtue of the application of section 314(2)(a) of the Act. That suit is again based on the allegation that, after the second respondent ceased to be the managing director of the company on the deletion of article 38 of the articles of association, he was not entitled to rent-free residential quarters since it amounted to a perquisite and as he continued to occupy the quarters for which the company was required to pay rent to the landlord, he must be deemed to have vacated the office by virtue of section 314(2)(a) of the Act. Now, as stated earlier, before this Suit No. 233 of 1977 was instituted, the second respondent had already filed a Standard Rent Application No. 12 of 1977 on January 15, 1977. Subsequently, a suit was filed by the landlord against the second respondent and the company for eviction of the demised premises. However, admittedly, before the resolution was passed deleting article 38, the board of director....
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....the second respondent is the direct tenant of the landlord, the learned trial judge was disinclined to grant the interim relief sought in Suit No. 233 of 1977 for the reasons set out in his order of February 22, 1978. I think, in the circumstances, the rejection of that application was proper and no interference in appeal is required. I would, therefore, dismiss the appeal from Order No. 225 of 1978 heard along with the company petition. That takes me to the second part of the company petition bearing on the question, whether the reliefs sought in clauses (a), (b) and(c ) of para. 31, namely, giving of directions to the Bham group of shareholders not to institute any legal proceedings or make false and baseless allegations/ representations to various State and Central Government authorities without the permission of the High Court or to direct the Bham group of shareholders to sell their 400 equity shares to the Patel group of shareholders, should be granted in the facts and circumstances of the case. That attracts the application of the provisions of sections 397 and 398 of the Act. Section 397 reads as under : "397. (1) Any members of a company who complain that the affairs of ....
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....he company's affairs in future; (b)the purchase of the shares or interests of any members of the company by other members thereof or by the company; (c)in the case of a purchase of its shares by the company as afore said, the consequent reduction of its share capital; (d)the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand and any of the following persons, on the other, namely : (i)the managing director, (ii)any other director, (iii)the managing agent, (iv)the secretaries and treasurers, and (v)the manager upon such terms and conditions as may, in the opinion of the court, be just and equitable in all the circumstances of the case ; (e)the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), after notice to the concerned party ; (f)the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397/398, which would, if made or done by or against an individual, be deemed in his insol....
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....)(a) of the Act, in my opinion, has no direct application. That is why, Mr. G. N. Shah, the learned counsel for the petitioners, rightly emphasised throughout the hearing of this company petition that the intervention of the court has become necessary under section 397 read with section 402 of the Act as the conduct of the second respondent is oppressive to the majority, that is, the Patel group of shareholders. It was, on the other hand, argued by Mr. Thakkar, the learned counsel for the second respondent, that nowhere in the petition has it been alleged that the facts would justify the making of a winding up order on the ground that it is just and equitable to do so but that as such an order would unfairly prejudice the interest of the petitioning members, it is not advisable to wind up the company. Mr. Thakkar emphasised that in order to bring the case within the purview of section 397 of the Act, the petitioning creditors must make out a case that but for the power granted to the court under section 397/402 of the Act, a stage had reached for winding up the company on just and equitable grounds, that is, under section 433(f) of the Act. The petitioners in order to succeed in t....
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....ern this court in reaching the conclusion whether ordinarily it would have directed the company to be wound up under section 433(f) of the Act, on the facts and in the circumstances placed on record. In support of this contention, strong reliance was placed by Mr. Shah on the decision of the House of Lords in Ebrahimi v. Westbonrne Galleries Ltd, [1973] AC 360. That was a petition brought by one Ebrahimi who for many years had been an equal partner with Nazar in a business dealing in Persian carpets. In 1958, they decided to incorporate the business and the two were appointed the first directors, each holding 500 shares. Shortly thereafter, Nazar's son entered the business and he too was made a director of the company. Ebrahimi and Nazar each transferred to him 100 of their shares. Thus, the majority of votes tilted in favour of Nazars, For some years the company did flourishing business and made good profits all of which were distributed amongst the directors as remuneration. A few years later, the relations between Ebrahimi and Nazar began to deteriorate and it was alleged that Nazar, who did most of the purchasing on behalf of the company in Persia, was diverting substantial pro....
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....principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership." In Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351, their Lordships observed that the mere loss of confidence between groups of shareholders would not come within section 397 unless it be shown that this lack of confidence sprang from a desire to oppress the minority in the management of the company's affairs and that there was at least an element of lack of probity or fair dealing as a shareholder. In In re Davis & Collett Ltd. [1935] 5 Comp. Cas. 467 (Ch. D) also, it was said that it may be "just and equitable" that a private company, the share capital of which is so held that it is substantially a partnership, should be wound up when a director has employed irregularities to purport to put himself in complete control of the affairs of the company excluding the other director or directors from its management. However, in the case of Rajahmuvdry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC), it was clarified that where nothing....
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....cle 38 of the memorandum with a view to remove Mr. Bham as managing director of respondent No. 1." It is, therefore, difficult to say that the fifth respondent is a member of the Bham group as alleged by the petitioners. He too has been removed from the board of directors of the company on the ground that he had failed to attend three consecutive meetings of the board without leave of absence and had, therefore, vacated the office of director of the company under section 283 of the Act. As has been discussed earlier, even the name of the second respondent was removed from the memorandum and articles of association of the company as a director of the company on the ground that he had vacated office under section 214(2)(a) and/or section 283 of the Act. The result is that at present the management of the affairs Of the company is in the hands of the Patel group of shareholders, namely, respondents Nos. 8, 9 and 10. It cannot, therefore, be urged on behalf of the company that these directors are conducting the business of the company in a manner prejudicial to the interest of the members including the petitioners. They are in a majority and are, therefore, in a position to overrule t....
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....pany which would not be in the interest of the majority of shareholders belonging to the Patel group. The next question is whether the conduct of the second respondent can be said to be "oppressive" for the exercise of power under section 397 of the Act. In Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; 29 Comp. Cas. 1 (HL), Lord Simonds defined "oppressive" as meaning "burdensome, harsh and wrongful". It was clarified that what was required was an oppressive course of conduct and not an isolated act or transaction for the exercise of power. In re Jermyn Street Turkish Baths Ltd. [1971] 1 WLR 1042, the Court of Appeal observed (pp. 1059 and 1060): "..............oppression occurs when shareholders, having a dominant power in a company, either (1) exercise that power to procure that something is done or not done in the conduct of the company's affairs or (2) procure by an express or implicit threat of an exercise of that power that some thing is not done in the conduct of the company's affairs ; and when such conduct is unfair or, to use the expression adopted by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324, 342 ; 29....
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.... clear that the second respondent is not allowed to participate in the affairs of the company but even if he were to participate, he could easily be overruled because respondents Nos. 8, 9 and 10 who form a block are in majority. It is, however, contended in the body of the petition that the second respondent has been guilty of acts of misconduct enumerated in clauses (a) to (h ) of para. 12 of the petition. These allegations are- "(a)he had issued a false certificate, dated May 18, 1973, to M/s. Ishwar Arts International for enabling them to procure entertainment tax exemption for their picture 'Pyasi Nadi' ; (b)he had collected a cheque of Rs. 12,000 on August 2, 1973, from M/s. Ishwar Arts International out of which he credited a sum of Rs 10,000 and refused to account for the remaining Rs. 2,000 ; (c)he, as managing director of the company, influenced a prospective producer of 'Okha Haran' to shoot the picture at Bombay and thus acted against the interest of the company ; (d)he refused to vacate the premises of the company and refused to surrender possession thereof to the company after he vacated office as managing director of the company ; (e)in order to usurp the said p....
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....and court by the company against the second respondent for recovering the amount in the hands of the second respondent out of the unaccounted amount of Rs. 2,000 and since that suit is pending, I do not consider it proper to make any further observations in regard to the said charge. Suffice it to say that merely on a charge of misappropriation of funds it cannot be said that a proper case for exercise of power under section 397 of the Act is made out. Besides, these are events which had taken place before the removal of the second respondent as the managing director of the company. So also allegation ( c) refers to his conduct as managing director of the company and has nothing to do with his conduct as director or shareholder of the company. The second respondent has answered this charge in para. 17 of his affidavit by stating that the producer of the picture was ready and willing to shoot it in the studio of the company but since the studio was not properly equipped and the terms and conditions offered to him were not acceptable, he refused to shoot it in the studio of the company. Now, this is a matter which cannot be decided on affidavits because the evidence of the producer o....