1958 (3) TMI 24 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of oppression and breaches of trust by the directors.
2. Validity and fairness of the compromise proposed.
3. Procedural propriety in handling the petition and compromise.
4. Future regulation of the company's affairs.

Detailed Analysis:

1. Allegations of Oppression and Breaches of Trust by the Directors:
The petitioners, supported by 42 shareholders, alleged several prejudicial acts and breaches of trust by the directors, claiming oppression of the minority. The main charges included:
- Directors giving an unfair rebate of Rs. 1,35,000 to the Jupiter group while only Rs. 12,800 to outsiders.
- Fraudulent mortgages and charges over company properties to their close relations.
- Improper maintenance of company accounts.
- Directors using company resources for personal gain and charging the company exorbitantly for machinery and services.
- Directors closing the main entrance and creating a new one through Jupiter group property for personal advantage.
- Directors gaining personal advantage through contracts with Ceylon Theatres Ltd., resulting in a loss of Rs. 1,20,000 to the company.

2. Validity and Fairness of the Compromise Proposed:
The compromise proposed included:
- Directors giving up a claim of Rs. 1,38,000 by way of rebate.
- Exoneration of directors from all liability regarding the allegations.
- Acceptance of loan transactions in favor of respondents Nos. 9 to 13 as genuine.
- Management of the company by a committee of five members for three years.
- Cancellation of agreements between the company and the Jupiter group.

The learned judge accepted parts of the compromise, including the deletion of the Rs. 1,38,000 credit and exoneration of the directors. However, he refused to decide on the genuineness of the loan transactions, disallowed the committee management provision, and directed the election of new directors, disqualifying Jupiter group members from standing for one year.

3. Procedural Propriety in Handling the Petition and Compromise:
The appellant criticized the procedure, arguing that the serious charges were not investigated, and the directors were exonerated without enquiry. The court noted the lack of notice to Syed Mahomed Ali regarding the compromise application and the absence of a counter-statement from the directors denying the charges. The court emphasized that in matters of oppression by a powerful majority, it was essential for the directors to provide prima facie evidence to show no substantial basis for the charges. The court held that the interests of the company are paramount, and any compromise should be acceptable to the court.

4. Future Regulation of the Company's Affairs:
The learned judge's order included:
- Election of new directors under the articles of association.
- Disqualification of Jupiter group members from standing for election for one year.
- Provision for the retirement of directors in rotation.
- Appointment of a receiver pending the election of new directors.

The court agreed with the learned judge's approach to consider the compromise on its merits and adopt portions beneficial to the company. The court, however, found it inexpedient to start an inquiry into the charges, given the opposition from a small group led by Syed Mahomed Ali and the potential for increased acrimony and bitterness.

Conclusion:
The court modified the learned judge's order by deleting the clause exonerating the directors from liability and modifying the clause regarding the directors giving up their claim to Rs. 1,38,000. The appeal was dismissed with no order as to costs.