TaxTMI 
TaxTMI 
2000 (8) TMI 1120
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....1991. 4. The arguments made on behalf of the appellants, being M. L. Bagri and his group, ranged for about a day and half in the beginning after which we called upon Mr. Nag to argue the case of the petitioner in the court below who, along with his family being wife and daughter are the cross appellants before us. Mr. Nag argued for some 15 days. In reply we could not hear Mr. Poddar, appearing for the appellant, for more than even one day in all, because we felt that the judgment appealed from has gone astray on such a basic and elemental matter, that hearing the parties any further would be a sheer wastage of time. We felt this matter to be very unfortunate that although the papers before us today run into several thousands of pages and although the most laborious arguments and counter arguments were prepared both in the court below and for our assistance, yet one of the essential and basic characteristics of the very sections upon which the application was founded was never paid any due attention by any of the persons involved in the matter of deciding the case. 5. We propose to indicate outright the elementary and essential point upon which we feel, there has been a serio....
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....r equitable and that an order for winding up would be unfair and unjust to the contending adversaries. If they succeed in showing this, no relief can be had under Section 397. 11. Even if the adversaries fail in showing this, i.e., they fail in showing that a winding up order on just and equitable ground would unfairly prejudice the adversaries, even then relief, inter alia, under Section 402 does not automatically follow as a consequence of success under Section 397. The petitioner under Section 397 has to satisfy the court on a further point. He must satisfy the court that although the facts are such that a just and equitable winding up of the company is called for, yet were the petitioners to apply for such a winding up and were the petitioners to be even successful in such a petition, yet such order of winding up would unfairly prejudice the petitioners under Section 397 themselves. That is why they come under Section 397 and they do not apply under Section 433(f), which is the section for just and equitable winding up. 12. In short, for the court to grant relief under Section 397, the respondents must fail to show that just and equitable winding up would unfairly prejudi....
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.... application was not summarily dismissed by the first court, yet the appeal should succeed on this preliminary issue alone. The above rule and form require, amongst other things, an allegation to be made, that winding up the company will unfairly prejudice the applying members. 17. The judgment of the earlier Division Bench was pronounced on March 11, 1998. 18. In the manner we read that ten-page judgment of the earlier Division Bench, we are of the opinion that it was clearly laid down by that Bench that throwing out a petition on the mere technicality of pleadings, and deficiencies in pleading contained in the petition would not serve the ends of justice. At the end of the judgment it was said that the contention of the appellant in so far as the maintainability of the petition was concerned, as argued by way of a preliminary point, was rejected. The Division Bench ordered that the appeal would be heard on the merits other than the preliminary points. 19. The maintainability of the petition under Sections 397 and 398 is, therefore, no longer in issue nor need we consider the averments contained in the petition in the light of the above rule and form referred to in the Co....
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....tion of account books and papers it is possible to value the net worth and then to value the shares of the aggrieved parties on a pro rata basis. 23. Sometimes such pro rata valuation is discounted to a certain degree when minority shareholdings are valued because a minority holding if sold out in the market is not likely to get the full pro rata worth. 24. Mr. Nag was at pains to demonstrate before us that what the trial court really ordered was not a valuation upon consideration of the books of account only. Mr. Nag sought to make out that the order in effect meant an investigation into the assets of the company itself by an examination not merely of the books, but also the physical examination and verification of the real property and other property held by the company. Mr. Nag was at pains to emphasize that according to him there are many valuable godowns owned by the company and that real property should be valued for properly valuing his clients' shares. There are other aspects of the case where the claim for money made by H. P. shows its face, but those we shall have to discuss later. 25. Now, on a winding up Mr. Nag's clients would get exactly what Mr. Nag ....
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....ority petitions that asking the question whether the company petitioner will be unjustly prejudiced on winding up, becomes an obviously unnecessary and empty exercise. 32. Such is the case where two groups of nearly equal shareholding fight with each other for the control of the company. If one were to wait during a battle of this type, and ask, if the company petitioners have made out the case that winding up of the company will unfairly prejudice them, the queries would be met with a simple and straightforward answer, that nobody wants a winding up, the two sets are fighting for the company not its winding up. 33. An example of a case of this nature, where the parties do not even have to advert to this issue, is the case of Ramashankar Prosad v. Sindri Iron Foundry P. Ltd., MANU/WB/0104/1966MANU/WB/0104/1966 : AIR1966Cal512 , which is a celebrated Division Bench judgment of our High Court. In vain one would look at the reports to find an answer to the question if the company petitioners have made out the case that just and equitable winding up will unfairly prejudice them because the question does not arise in a case of that nature. 34. Not so here, however, where with a....
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....se that the point of inadequacy of a winding up petition was both discussed and explained. 39. In company matters it is not wise to try and see the whole of the future. New facts and new cases are constantly arising. However, so long as Sub-section (2) of Section 397 remains unaltered in India, a case must be made out by the aggrieved petitioners that winding up would not serve his purpose at all. It might be made out in any manner the company petitioner sees fit and proper ; or the question might be shown to be an inappropriate and unnecessary question in the facts and circumstances of the particular case before the court, but if the question is not an unnecessary one, as here, then the aggrieved petitioner must obtain a favourable answer to it before getting relief. 40. We note here that in the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), it was said at page 778 of the reports as follows : "In an application under Section 210 of the English Companies Act, as under Section 397 of our Companies Act, before granting relief the court has to satisfy itself that to wind up the compa....
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....would not serve his client's purpose. 45. Mr. Nag gave us several authorities in this regard to show that by passing an order under Section 397 the court avoids a winding up, He showed us a Division Bench judgment in Pramod Kumar Mittal v. Andhra Steel Corporation Ltd. MANU/WB/0143/1982MANU/WB/0143/1982 and took us to the passage on the right column at page 647 (page 794 of 58 Comp Cas). He relied on the white paper leading to the adoption of Section 210, amongst others, of the English Companies Act, 1948. This is usually known as the Cohen Committee report. That command paper was presented to the English Parliament in June, 1945. At paragraph 60 of the said report it was said as follows : "In many cases, however, the winding up of the company will not benefit the minority shareholders, since the break-up value of the assets may be small, or the only available purchaser may be that very majority whose oppression has driven the minority to seek redress." 46. The prescience shown in this paragraph is peculiarly brought out by the Scottish Co-operative Wholesale Society Ltd.'s case [1959] 29 Comp Cas 1 (HL). There the oppressors bought the sha....
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....ught to be paid back by the company by seeking to make a book adjustment, trying to show a payment to another company Sumati in extinguishment of the liability of H. P. to Sumati on the oral instruction of H. P. that the debt to him be paid instead to Sumati. (iv) Another complaint was that certain roller boxes, about 14 in number were sold off at an aggregate price of Rs. 96,000, although those had been acquired in 1980 at a cost of Rs. 75,000. The complaint was that the boxes were still usable and unnecessarily sold. (v) It was also complained that a large amount of commission, of the order of Rs. 20,00,000 or so, although receivable by M. L. Bagri and/or his son, was got paid by Mitsubishi to the company so as to avoid tax incidence to M. L. himself, who utilised the losses of the company for setting off of the profit, treating the company as M. L.'s own. (vi) A very important complaint was that the continuing directorship of H. P. Bagri was sought to be terminated without giving him appropriate notices of board meetings ; the terminations were alleged to be of no effect and the stoppage of r....
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....s, then and in that event the complaint would sound more in the nature of a Section 398 grievance. We make it clear that in company matters it is not always easy to maintain a strict distinction and categorise complaints either under Section 397 or under Section 398 ; very often the same complaint has both the aspects. But the essential difference between the two sections must be borne in mind. 57. The difference between the two sections does not stop there. It has further legal and historical differences. 58. The primary legal distinction between Section 397 and Section 398 in founding the jurisdiction of the company court is this, that before granting relief for complaints which sound in oppression, the court must form an opinion of the appropriateness of a just and equitable winding up. 59. Not so with Section 398. 60. It is not an easy matter to prove circumstances requiring a just and equitable winding up of the company. That Section 398 does not contain this stringent requirement as a jurisdictional condition, must be borne in mind if the company court is to apply the correct law to the facts and circumstances of a particular case. 61. We have mentioned that th....
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.... is considered, it can hardly be a matter of mismanagement of the company to bring into its till money which is not even its due. No loss is shown to accrue to the company because of the bringing in of this commission. Mismanagement of the company, therefore, does not appear to be an appropriate complaint under this head. It has, therefore, got to be an oppressive act or it is not an appropriate head of complaint in this case at all. We do not see how paying the company of which H. P. was and still is a shareholder can be said to be oppressive to H. P. or his group. Because the first court proceeded in a sort of general excitement about the complaints, it failed to apply the necessary reason to the facts and circumstances. 70. We do not propose to deal with the complaints mentioned under the six items narrated above, excepting in a manner sufficiently to dispose of the broad aspect of those complaints. About the registered office shift and payment of commission into the company's till, we will not discuss the facts any further as further discussion is unnecessary. 71. When we said that Section 397 is historically different from Section 398 also we had a particular course ....
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....riate exceptions to this strict ancient rule of complete laissez faire. We have already mentioned the Cohen Committee Report which, amongst other things brought about Section 210 of the English Companies Act, 1948. It was designed to provide a remedy to minority shareholders for the purpose of relieving them from oppression, and also for relieving them from the grief of the rule in Foss v. Harbottle [1843] 2 Hare 461, 77. From 1948 to 1956, when the Companies Act was passed in India, the rule in Foss v. Harbottle [1843] 2 Hare 461 prevailed in India but not in England. 78. The report of the Parliamentary Committee of 1952 which resulted in the Companies Act of 1956, was handed up to us by Mr. Nag. 79. He also gave us the Supreme Court case of Raymond Synthetics Ltd. v. Union of India [1992] 73 Comp Cas 762 where the court has ruled as extremely significant, the contemporaneous construction placed upon an ambiguous section by the administrators entrusted with the task of executing the statute, the interpretation of which is in issue. The Report of the Company Law Committee, 1952, adopted, in regard to oppression Section 210 of the English Companies Act. Its remark at page 1....
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....case for winding up under the just and equitable rule at the instance of a contributory is difficult to establish and it is suggested that there is no sufficient reason for making the establishment of such a case an essential condition of intervention by the court." 82. Then at paragraph 204 the Committee made the following remark with regard to Section 210 : "The intention underlying Section 210 .... was ..... to cover complaint not only to the effect that the affairs of the company were being conducted in a manner oppressive .... but also to the effect that those affairs were being conducted in a manner unfairly prejudicial to the interest of those members." 83. After the Jenkins Committee Report England got Section 75 of the Companies Act, 1980. Sub-section (1) of Section 75 is as follows : "75. Power of court to grant relief against company where members unfairly prejudiced.--(i) Any member of a company may apply to the court by petition for an order under this section on the ground that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of some part....
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....ontaining the powers of the court is Section 461. If one were to look at the very modern minority cases in England one would find a reference neither to Section 210 nor to Section 75 but to Sections 459 and 461. We need not quote these sections as further research into comparative law between the two countries is unnecessary for our purpose. 92. We now take the point of removal from directorship, as that was, in our opinion, the strongest factual part of the case of H. P. This part of the case is intimately connected up with another aspect of company law, which is just and equitable winding up, on the principle and idea that the private company, a family company, quite often is a sort of quasi-partnership, 93. Before we go on to the law, we give the brief facts in this regard. 94. From the time H. P. joined the company in or about 1971, he had directorial status. When we looked at the first resolution giving him such status and we considered the wording of that resolution, we had some doubts as to whether it spelt out directorial status or not. But it would be most unjust to H. P. to rule at this distance of time that he did not have directorial status even at the beginnin....
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....lding of H. P., yet that general resolution was duly passed and thereafter a claim to directorial remuneration can no longer be made. 98. On the facts of this part of the case, were we to treat this as a ground for just and equitable winding up, we would have to rule, that unless a case for quasi-partnership by way of facts was made out, the respondents would have no case to answer for a petition for just and equitable winding up. Even if a case for quasi-partnership is made out, what the position will be in Indian law is still somewhat a matter for discussion and debate, into which we shall enter later. 99. The reason why we say that termination of directorship, even by suppression of notice, or termination of directorship by a bulldozer like 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. If he has been removed from directorship by outvoting of the majority, and the case is not a c....
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....er company, below seven ; (v) if the company is unable to pay its debts ; (vi) if the court is of opinion that it is just and equitable that the company should be wound up." 104. Under sub-heading (vi) the just and equitable jurisdiction was preserved. 105. However, the jurisdiction to wind up on just and equitable grounds was not exercised on the broad and general bases before the case of Loch v. John Blackwaad, Limited [1924] A. C. 783 (PC). 106. The rule that the courts followed before this decision was that the just and equitable sub-section would be construed ejusdem generis. The courts never used this sub-section as giving the company court a wide and general equity power to wind up like the Chancery Courts wielded in the matter of winding up partnerships. The best way to see how the change of just and equitable jurisdiction came about and how the court started using this jurisdiction in all its breath and scope, is to read the following passage from a book written by Mr. S. C. Sen, deceased, Barrister and Senior Advocate, when he was practising as a well-known and colourful member of the company Bar at Calcutta....
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....idje Tobacco Company, Limited, In re [1916] 2 Ch. D 426. Lord Wilber-force's judgment in that case can be read, with respect, with pleasure and profit at any time. The case is to be found reported at Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 All ER 492 : [1973] A. C. 360 (HL). It is a decision given upon Section 210 of the 1948 English Act and, therefore, would have persuasive value in interpretation of Section 397 of our Act. That was a case of three Mahomedans operating an art gallery in London, where two of them, being father and son attempted to oust the third one contrary to the expectations amongst partners. That was a case also where relief was prayed for under Section 210, and alternatively winding up was also asked for. No relief under Section 210 was given but it was held both by Plowman J. and the House of Lords that the company deserved to be wound up. This was also a case where the business was originally a partnership. 111. No doubt if H. P. was in the position of a partner of M. L. Bagree and he was being sought to be bulldozed out of the board by M. L. Bagree by using M. L.'s superior voting power, H. P. could rely upon the decision of Ebrahimi v. W....
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....vidence contained in an Income Tax assessment order where the coming of H. P. from U. S. A. is recorded. 116. Mr. Poddar wished to rely upon the many Income Tax orders showing the absence of any trace of partnership with H. P., but we did not allow him further to burden the already burdened materials which today run into probably 3,000 pages. 117. We are quite convinced that upon the law which prevails in India on this subject and on the facts which are made out in this case, a winding up on just and equitable grounds cannot be had by H. P. on the footing that he had entered into a quasi-partnership with his elder brother. The youngest brother H. P. was and still is. He was allowed to join perhaps because he was a younger brother. This also we might accept, but these facts fall far short of establishing a strong case of quasi-partnership. 118. We are of the opinion that the case of just and equitable winding up could not at all be sustained on the facts of alleged directorial ouster. 119. Coming now to the other head of complaint about wheat quota allotment we find that the facts in this regard disclose neither oppression nor mismanagement. At the material time, the com....
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....company being Bagri Synthetics Ltd. The winding up notice resulted in an order dated August 21, 1989, by way of which H. P. was relegated to a suit and a sum of Rs. 5,74,662 was directed to be deposited. The suit was thereafter duly heard. The suit was decreed by one of us by a judgment and decree dated February 5, 1992, which was upheld by the appellate court on December 12, 1995. 125. We see here that when H. P. applied for winding up for non-payment of money by Bagri Synthetics to him, the company, i.e., Bagri Synthetics Pvt. Ltd. had taken the defence that they are not liable to repay the loan as they have, under instructions from Hanuman Prasad Bagri paid the money to one Brut Trading Co. Ltd. ; the company court found the proper order to be a relegation to a suit with a direction for deposit. 126. In broadly similar circumstances as to payment of H. P.'s money under H. P.'s instructions to another person than H. P. himself, H. P. makes a complaint in this company petition, this time asking not for winding up, but for relief under Section 397 or Section 398. 127. We are of the opinion that if a debt remained owing to H. P. from the company being the present co....
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.... Bagri. The administrator would be entitled to a monthly remuneration of Rs. 3,000 and he would be at liberty to appoint a clerk at a remuneration not more than Rs. 300. Mr. S. P. Basu, c/o. M/s. P. M. Mukherjee and Co., No. 11, Old Post Office Street, a chartered accountant and auditor on the panel of this court is hereby appointed to investigate into the accounts of the company and to value the shares of the company. The remuneration of the auditor shall be fixed by the administrator and is to be paid from out of the funds of the company. The remuneration of the administrator and his clerk shall also come out of the funds of the company. The audit and the valuation be made as expeditiously as possible. There shall also be a declaration that petitioner No. 1 continues to act as executive director of the company and is entitled to the remuneration as also money equivalent of perquisites as is available to a director as of date. The administrator is also directed to pay the same. It is further ordered that upon investigation of accounts, adjustment of accounts be effected and in the event of any sum found due and payable by one of the directors, the same ....