1989 (12) TMI 245 - SC - Companies Law

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

Issues Involved:
1. Maintainability of a petition under sections 397 and 398 by the legal heirs of a deceased shareholder.
2. Whether a composite petition under sections 397, 398, and 433(f) of the Companies Act is maintainable.

Detailed Analysis:

1. Maintainability of a Petition Under Sections 397 and 398 by Legal Heirs:

The primary issue was whether the legal heirs of a deceased shareholder could be treated as members of the company for the purpose of maintaining a petition under sections 397 and 398 of the Companies Act, 1956. The appellants argued that only a member whose name is entered in the register of members could file such a petition. They contended that there was no automatic transmission of shares upon the death of a shareholder and that the board of directors had the discretion to refuse the registration of shares in the name of legal heirs.

The court examined the relevant provisions of the Companies Act, including sections 2(27), 41, and 109, as well as articles 25 to 28 of Table A of the Act, which deal with the transmission of shares. It was noted that section 41 defines a member as someone whose name is entered in the register of members, and section 109 validates the transfer of shares by a legal representative of a deceased member.

The court referred to the English case of Jermyn Street Turkish Baths Ltd., In re [1970] 3 All ER 57, where it was held that personal representatives of a deceased member could maintain a petition under section 210 of the English Companies Act, which is similar to section 397 of the Indian Act. The court found this reasoning persuasive and concluded that legal representatives of a deceased member should be allowed to maintain a petition under sections 397 and 398, as they represent the estate of the deceased member whose name is still on the register of members.

The court emphasized that this interpretation aligns with the equitable and just purpose of sections 397 and 398, which aim to provide relief in cases of oppression and mismanagement. The court rejected the view that legal representatives must first be registered as members before filing a petition, as this would frustrate the purpose of the provisions.

2. Whether a Composite Petition Under Sections 397, 398, and 433(f) is Maintainable:

The second issue was whether a combined petition under sections 397, 398, and 433(f) of the Companies Act was maintainable. The appellants argued that such a composite petition was not permissible.

The court referred to the observations in Shanti Prasad Jain v. Kalinga Tubes [1965] 35 Comp Cas 351 and the reasoning of the Bombay High Court in Bilasraj Joharmal v. Akola Electric Supply Co. P. Ltd. [1958] 28 Comp Cas 549. It was noted that the averments required to invoke sections 397 and 398 are not destructive of those required for a winding-up petition under section 433(f) on the just and equitable ground. The court explained that a petition under sections 397 and 398 must state that the affairs of the company justify winding up but that winding up would unfairly prejudice the members.

The court held that the procedural differences between the two types of petitions are not irreconcilable and can be simultaneously addressed. The court has the discretion to determine whether the facts justify a winding-up order and, if so, whether an alternative relief under section 397 would be more appropriate. This approach ensures that the remedy provided is not worse than the issue being addressed.

Conclusion:

The Supreme Court dismissed the appeal, affirming that legal heirs of a deceased shareholder whose name is still on the register of members can maintain a petition under sections 397 and 398 of the Companies Act. Additionally, the court upheld that a composite petition under sections 397, 398, and 433(f) of the Act is maintainable. The appeal was dismissed with costs assessed at Rs. 5,000.

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