1965 (1) TMI 17 - SC - Companies Law

Whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders? Held that - The case of the appellant based on the agreement of July 27, 1954, therefore must fail and it must be held that even if that agreement was not carried out by the company, which was not bound by it, there can be no case of oppression of the appellant. The slight delay in the payment of the full value of the shares cannot therefore in the circumstances be said to be so prejudicial to the interests of the company as to call for any action under section 398 of the Act. It has not been shown that view of certain actions taken by the new management without consulting the appellant, the company was landed in any difficulty and loss of profit which would show mismanagement of its affairs. The appellant asked for production of certain documents in April, 1961, and those documents were made available for inspection by the appellant and were produced in court. It was for the appellant to take inspection of those documents if he so desired and the appeal court was right in pointing out that the learned single judge was not correct in drawing an adverse inference against the company that it had disobeyed the orders of the court and had not produced the documents called for and had given no opportunity to the appellant for their inspection. It seems to us that the appeal court was right in this view and no case has been made out even prima facie for action under this part of section 398 of the Act. Appeal dismissed.

Issues Involved:
1. Oppression of minority shareholders under Section 397 of the Companies Act, 1956.
2. Mismanagement of the company's affairs under Section 398 of the Companies Act, 1956.
3. Validity of the resolutions passed on March 1, 1958, and March 29, 1958.
4. Binding nature of the agreement dated July 27, 1954, on the public company.

Issue-wise Detailed Analysis:

1. Oppression of Minority Shareholders Under Section 397 of the Companies Act, 1956:

The appellant alleged that the affairs of the company were being conducted in a manner oppressive to him and his group of minority shareholders. The main contention was based on the agreement dated July 27, 1954, which provided for equal shareholding among three groups and equal representation on the board of directors. The appellant argued that the new shares issued in 1958 were allotted to nominees or benamidars of the majority groups, Patnaik and Loganathan, thus diluting the appellant's shareholding and control, which amounted to oppression.

The court noted that the agreement was not binding on the company, especially after it became a public limited company in 1957. The new shares were issued in accordance with Section 81 of the Companies Act, 1956, which allowed the company to issue shares to persons other than existing shareholders if decided by a general meeting. The court found that the seven persons to whom the new shares were allotted were independent and not benamidars of the majority groups. Therefore, the action of the majority shareholders in issuing new shares to outsiders was not considered oppressive.

The court emphasized that mere loss of confidence between shareholders does not constitute oppression unless it springs from a desire to oppress the minority in the management of the company's affairs. The court concluded that the appellant's proprietary rights as a shareholder were not seriously affected by the issue of new shares, and the actions taken in March and July 1958 did not amount to oppression under Section 397.

2. Mismanagement of the Company's Affairs Under Section 398 of the Companies Act, 1956:

The appellant claimed that the affairs of the company were being conducted in a manner prejudicial to its interests, citing the delayed payment for new shares, the removal of Rs. 7 lakhs from the company's coffers, and the loss of the appellant's support.

The court found that the delay in the payment of the full value of the shares did not significantly prejudice the company's interests, as a substantial portion of the share money was received in the financial year 1959-60. The withdrawal of Rs. 7 lakhs was found to be a legitimate transaction, as the amount was owed to the Kalinga Industrial Development Corporation Limited, the former managing agent of the company. The loss of the appellant's support was not considered prejudicial to the company, as it was able to carry on without it.

The court concluded that no case of mismanagement under Section 398 was made out, as the actions of the majority shareholders did not result in any significant prejudice to the company's interests.

3. Validity of the Resolutions Passed on March 1, 1958, and March 29, 1958:

The appellant challenged the validity of the resolutions passed on March 1, 1958, and March 29, 1958, which decided to issue new shares to persons other than existing shareholders. The court found that the resolutions were in accordance with Section 81 of the Companies Act, 1956, and were not vitiated in any way. The objection regarding the notice for the general meeting on March 29, 1958, was not raised in the petition and was therefore not considered by the court.

4. Binding Nature of the Agreement Dated July 27, 1954, on the Public Company:

The appellant argued that the agreement dated July 27, 1954, which provided for equal shareholding and representation on the board, was binding on the company. The court found that the agreement was not binding on the company, especially after it became a public limited company in 1957. The company was free to issue shares as decided by the general meeting in accordance with Section 81 of the Companies Act, 1956.

The court concluded that the agreement did not provide for future allotment of shares and was not binding on the company. The actions taken by the majority shareholders in issuing new shares to outsiders were not considered oppressive or prejudicial to the company's interests.

Conclusion:

The appeals were dismissed, and the court upheld the decisions of the Division Bench of the High Court, finding no case of oppression under Section 397 or mismanagement under Section 398 of the Companies Act, 1956. The resolutions passed on March 1, 1958, and March 29, 1958, were found to be valid, and the agreement dated July 27, 1954, was not binding on the public company.

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