1989 (3) TMI 307 - HC - Companies Law

Proxies, Oppression and Mismanagement Right to apply under section 397 and 398, Company when deemed unable to pay its debts

Summary

Issues Involved:
1. Maintainability of the petition under Section 397 of the Companies Act, 1956.
2. Validity of proxies obtained by the company.
3. Allegations of oppression by the majority shareholders.

Detailed Analysis:

1. Maintainability of the Petition under Section 397 of the Companies Act, 1956:

The primary issue was whether the petition under Section 397, read with Section 399, of the Companies Act, 1956, was maintainable. The respondents contended that since the company was a banking company, any question pertaining to its management should be considered under the Banking Regulation Act, 1949. They argued that the Banking Regulation Act is a complete code in itself for banking companies, and thus, a petition under Section 397 of the Companies Act is not maintainable. The court agreed, stating that the Banking Regulation Act, particularly after the 1968 amendments, imposed "social control" over banking companies, making the Reserve Bank of India the ultimate authority in matters of management. Consequently, the court held that no banking company could be wound up under the "just and equitable" ground of Section 433(f) of the Companies Act, and thus, a petition under Section 397 is not maintainable.

2. Validity of Proxies Obtained by the Company:

The petitioners challenged the validity of proxies obtained by the company, claiming that proxies collected on August 28, 1988, should be declared invalid. They argued that the proxies should have been deposited by 10 a.m. on August 28, 1988, but since this time fell on a Sunday, the proxies should have been deposited by 5 p.m. on August 27, 1988. The court examined the statutory notice and the company's articles of association, which allowed proxies to be deposited up to 48 hours before the meeting. The court found that the chairman's note permitting proxies to be deposited until 10 a.m. on August 28, 1988, was in accordance with the law. The court also referenced Article 88 of the articles of association, which states that a vote given in accordance with the terms of an instrument of proxy is valid unless a written revocation is received before the meeting. Therefore, the court held that the proxies obtained by the company were valid.

3. Allegations of Oppression by the Majority Shareholders:

The petitioners alleged that the chairman and directors conducted the company's affairs in a manner oppressive to the minority shareholders by using the bank's machinery to get their candidates elected as directors. The court noted that for a petition under Section 397 to be successful, the petitioner must show that the company's affairs are being conducted in a manner oppressive to some part of the members/shareholders, and this oppression must be a continuing process. The court found that the petitioners' allegations constituted, at most, an isolated act of oppression and not a continuing process. Additionally, the court emphasized that the alleged oppressive acts did not amount to a "just and equitable" ground for winding up the company. Consequently, the court dismissed the petitioners' claims of oppression.

Conclusion:

The court dismissed the petition under Section 397 of the Companies Act, 1956, on the grounds that it was not maintainable for a banking company, as the Banking Regulation Act, 1949, governed such matters. The court also upheld the validity of the proxies obtained by the company and found that the petitioners failed to establish a continuing process of oppression by the majority shareholders. The court issued directions for the co-option of two directors by the chairman and mandated that the election be conducted before September 30, 1989. The judgment was kept in abeyance until April 8, 1989, as per the Supreme Court's observations.