2013 (10) TMI 621 - HC - Companies Law

Oppression and mismanagement of company - Application for Rejection of Plaint under Order 7 Rule 11 of the CPC Held that - The application of principles of partnership to the concept of company was not alien and while deciding the question of oppression the utmost good faith exercised by a shareholder will be relevant - if a simpliciter declaration for cancellation was sought the bona fides of the plaintiff could not be doubted - By seeking framing of a scheme for administration of the asset of defendant No. 1 the plaintiffs are seeking to by-pass the provisions of the Companies Act which contemplates convening board meetings as any decision in respect of defendant No. 1 which was an asset company must be by a resolution - It was quite possible that such relief had been sought as the plaintiffs have been reduced to a minority - In that event the plaintiffs ought to have restricted themselves to a derivative action - Instead the main relief sought is administration of the assets of defendant No. 1 by fair participation of the plaintiffs. The plaintiffs have sought to set aside some of the board resolutions so far so good but the prayer for administration in the light of the prayer for declaration was misdirected - Both the prayers cannot be allowed - The plaintiffs have not abandoned either of the reliefs - Another reason for this order was misjoinder of the different causes of action which was apparent on a reading of the plaint and for which reason the plaint cannot be allowed in its present form.

Summary

Issues involved:
Application for rejection of plaint under Order 7, rule 11 of the Code of Civil Procedure, 1908.

Detailed Analysis:

1. Cause of Action Against Defendant No. 1:
- Defendant No. 1 argues that there is no cause of action against them as they were not a party to the agreement dated September 23, 1998, which forms the basis of the suit.
- Relies on legal precedents like Shanti Prasad Jain v. Kalinga Tubes Ltd. and V. B. Rangaraj v. V. B. Gopalakrishnan to support their position.

2. Opposing Arguments by Plaintiff's Counsel:
- Plaintiff's counsel argues that the suit is derivative in nature and the agreement of September 23, 1998, is essential to understand the changes in shareholding and alleged breaches.
- Emphasizes that the suit is for the protection of defendant No. 1 against delinquent shareholders and seeks management and administration of the company.
- Highlights the breach of negative covenant and the need for all shareholders to participate in the proceedings.

3. Defendant's Response and Interpretation of the Suit:
- Defendant argues that the suit is not for administration of shares but assets, citing Mrs. Bacha F. Guzdar v. CIT.
- Raises concerns about the lack of proper pleading for a derivative action and the absence of commonalty of interest among shareholders.

4. Judicial Evaluation and Decision:
- The court evaluates the rights of the parties based on the 1998 agreement, which led to changes in the shareholding pattern of defendant No. 1.
- Lists the reliefs sought, including the formation of a scheme for asset administration, accounts, and cancellation of share capital increase.
- Considers the application of partnership principles to company law and the need for fair participation of shareholders in asset management.
- Concludes that the suit is misdirected, highlights misjoinder of causes of action, and rejects the plaint under Order 7, rule 11 of the Code of Civil Procedure, 1908.

5. Final Order and Additional Direction:
- The court allows the application for rejection of the plaint and states that the suit cannot be entertained in its present form.
- Orders that any interim orders in place shall stand vacated.

This detailed analysis covers the arguments presented by both parties, the legal principles invoked, the court's evaluation, and the final decision rendered by the High Court of Calcutta in this case.