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TMI Blog1988 (11) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission said to have been committed by original respondents Nos. 2 and 3 in the company petition who are in charge of the management of the company. It is alleged that they are conducting the affairs of the company in a manner oppressive to its shareholders and also in a manner prejudicial to the interest of the company. At the admission stage, this petition was opposed vehemently by the present applicants. Ultimately, after hearing both the parties, this court (G.T. Nanavati J.) was pleased to admit the company petition to final hearing on November 14, 1986. So far as interim relief is concerned, Company Application No. 57 of 1986 was moved by the respondents (original petitioners). The learned judge did not grant interim relief as prayed for therein. Against admission of the company petition, the original applicants preferred O.J. Appeal No. 13 of 1987 in this court. They also challenged the order passed by G.T. Nanavati J. in Company Application No. 57 of 1986 on November 14, 1986, refusing to grant interim relief. They first moved the Supreme Court by way of a petition for Special Leave to Appeal (Civil) No. 15518 of 1986. That petition was allowed to be withdrawn with libe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isposal of Company Petition No. 62 of 1986, to stay further proceedings in Company Petition No. 62 of 1986 and connected matters ; ( d )to stay the operation of interim orders passed in the aforesaid proceedings". In the affidavit, it has been contended that the petition as filed by the respondents is not maintainable on the following grounds : (1)On the date of presentation of the petition, i.e. , April 19, 1986, the petitioner did not hold 10% of the issued share capital of the first respondent-company. That the issued share capital was raised to Rs. 7.15 crores. Pursuant to the decision of the extraordinary general meeting of the shareholders held on January 15, 1986, the board of directors at the meeting held on February 28, 1986, resolved to raise the issued share capital and application forms were sent to the shareholders inviting them to subscribe to the issued higher share capital. In these circumstances, since the issued share capital was increased to Rs. 7.15 crores and application forms for subscribing to the shares so issued were posted to the shareholders, the decision for increasing the issued share capital has been acted upon and made irreversible. Under the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he passing of an order of winding up would unfairly prejudice the petitioners nor have they made any averments in that behalf. Under the circumstances, the petition deserves to be dismissed not only because it fails to make out an adequate case for the passing of a winding up order but also because it does not make out a case that the passing of an order of winding up would unfairly prejudice the petitioners. This objection is also raised in para 41G of the affidavit-in-reply to the company petition. On the basis of the aforesaid preliminary objections, the following preliminary issues are sought to be raised by the applicants with a request to try them as such : (1)Whether, in view of section 399 of the Companies Act, the petitioners can maintain and prosecute the petition under sections 397 and 398 against respondent No. 1 company ? (2)Whether the petitioners held 10% of the issued share capital of the company on the date of the presentation of the petition ? (3)Whether the petitioner and those who support the petition had given valid consent on the date of the presentation of the petition so as to ensure that persons holding at least 10 % of the issued share capital of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, there would be no meaning at all in not hearing all the issues arising in the petition together. It is, therefore, contended that there is no case for raising any preliminary issues and trying them as such. Mr. Anil Diwan, learned counsel for the applicants, in support of this application, contended that the proceedings under sections 397 and 398 of the Act are a complete code by themselves. That the court has ample power under section 402 of the Act to pass appropriate orders in public interest and in the interest of the company and all the shareholders. That this type of proceedings is not strictly speaking analogous to a suit between two private parties but these are proceedings in which members of the public are vitally interested and consequently, the provisions of Order 14, rule 2 of the Code cannot be pressed into service for deciding the present proceedings. It was submitted that the provisions of Order 14, rules 1 and 2 of the Code apply in their full vigour to suits before the civil court and that they do not automatically apply to proceedings of the present nature before the company court and that this court has ample jurisdiction to raise and try any issue as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the aforesaid rival contentions, the following points arise for my determination : (1)Whether the provisions of Order 14, rule 2 of the Code apply to a company petition under sections 397 and 398 of the Act ? (2)Whether the suggested issues can be tried as preliminary issues? (3)What order ? Point No. 1 : So far as the first point is concerned, it is necessary to look at the relevant statutory provisions. Section 10 of the Act deals with jurisdiction of courts and sub-section (1) thereof states that the court having jurisdiction under this Act shall be : "( a ) the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situated, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to the High Court in pursuance of subsection (2) ; and" Sections 397 to 409 occur in Chapter VI which deals with prevention of oppression and mismanagement. The concerned relevant provisions prior to their amendment by the Companies (Amendment) Act, 1988, are provided as under. As per section 397(1), any member of a company who complains that the affairs of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit. Then follows section 399 which deals with right to apply under sections 397 and 398. It will be necessary to extract the entire section as under : "399. (1) The following members of a company shall have the right to apply under section 397 or 398 : ( a )in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares ; ( b )in the case of a company not having a share capital, not less than one-fifth of the total number of its members. (2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member. (3) Where any members of a company are entitled to make an application in virtue of sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. (4) The Central Government may, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and prescribe requirements about relevant averments to be contained in the petition and the format of notice to be issued to the Central Government and other procedural details for effectively carrying out the orders passed under these provisions by the court. Section 141 of the Code is another important provision which is required to be noticed at this stage. It reads as under : "The procedure provided in this Code in regard to suits shall be followed as far as it can be made applicable, in all proceedings in any court of civil jurisdiction". It is true, as submitted by Mr. Diwan for the applicants, that proceedings under section 397 of the Act are not like suits between private parties and it is also true, as held by the Supreme Court in the case of Cosmosteels P. Ltd. v. Jairam Das Gupta [1978] 48 Comp. Cas. 312, that these provisions represent a complete code by themselves. However, the question remains whether the provisions of Order 14, rule 2 of the Code apply to these proceedings or not. The combined thrust of section 141 of the Code and rule 6 of the Companies (Court) Rules clearly indicates that the provisions of Order 14, rule 2 of the Code would apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order 23, rule 3 and would be bound to pass a decree or order in terms of the compromise. In this connection, it was held (at p. 651 of 50 Comp Cas) : "Basically, the provisions of both these sections provide for relief in cases of oppression of minority shareholders and in cases where the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. Wide powers are given under these sections to the court to pass an order which will be in the interests of the company. Similar powers are given when relief is asked for in the case of mismanagement. In such a situation, where the petitioners ask for relief from oppression or mismanagement, any compromise which deals with the manner in which the affairs of the company will be conducted in future must be scrutinised by the court before the court gives its sanction to the compromise. In the case of such a petition, the parties to the petition cannot insist on an order being passed simply on the ground that the parties to the litigation have agreed to it In the case of a. compromise, therefore, which is arrived at in a petition under sections 397 and 398 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the suit created by any law for the time being in force, and for that purpose may, if it thinks fit postpone the settlement of the other issues until after that issue has been determined, and may deal with the suit in accordance with the decision on that issue". After the amendment in this provision in 1976, it becomes clear that the Legislature has frowned upon trial of suits piecemeal. The reason is obvious. If, on a preliminary issue, the suit is tried and if the issue is decided one way or the other, it would lead to further proceedings by way of appeal or revision. A number of years would lapse and ultimately when the highest court which is approached in the hierarchy decides the matter one way or the other, a stage may be reached where the suit has to be tried further and that would involve a lot of delay and the parties would get completely exhausted and exasperated by the passage of time underlying such piecemeal trial of suits. With a view to avoiding such delay and exasperation to the litigant public, this provision of Order 14, rule 2 in the amended form has been brought in the statute book. Consequently, the underlying principle of this provision is a laudable and a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote that, by way of general practice, when such petitions are moved, they are placed for admission unlike suits. The concerned company judge issues notice to the other side to have their say in the matter before deciding to admit the petition to a final hearing. At that stage, all preliminary objections about the maintainability of the petition can obviously be pointed out by the other side to the learned company judge. If, despite these objections being raised and considered, the learned company judge decides, in his discretion, to admit the petition, there is no reason why such dispute should be further raised by way of preliminary issue and, bifurcating the trial of the main petition on merits, this issue should be tried as a preliminary issue, if it is not a pure issue of law pertaining to jurisdiction of the court or dealing with the question of the petition being barred by any provision of law. If any interim relief is granted in these proceedings against the other side, it has every right to prefer an O.J. appeal before a Division Bench of the High Court and get appropriate relief. That remedy is always available to the other side against whom interim relief is granted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings may even fail on merits on account of paucity of data and absence of relevant evidence which may have been lost by passage of years. This would frustrate effective use of the provisions of sections 397 and 398 of the Act and the very purpose underlying these provisions would get frustrated and would get blunted by passage of time. If, on the other hand, Order 14, rule 2, is applied in its full vigour to such a petition, all that would happen is that save and except pure preliminary issues as contemplated by Order 14, rule 2, all other issues would be tried at the same time by the High Court, all evidence would be led and a comprehensive decision would be rendered at the earliest by the learned single judge so that all concerned parties may know where they stand on issues of maintainability of the petition as well as on merits and a final decision can be rendered at the same time so that, once and for all, these proceedings come to an end before the first court with the result that the appellate court also can go into these questions comprehensively in appeal against the decision of the first court. This situation would result if the provisions of Order 14, rule 2 are appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s require at least affidavit evidence to be led as fairly stated by learned advocate for the applicants. Therefore, they are not pure questions of law but are mixed questions of law and fact. Consequently, they cannot be tried as preliminary issues as enjoined by Order 14, rule 2 but even that apart, preliminary issues which are sought to be raised and argued by the applicants do not touch upon the jurisdiction of the court nor do they raise any question regarding the main proceedings being barred by any express provisions of law. The alleged non-maintainability of a petition under section 399 of the Act, on account of the personal disability of the concerned petitioners for moving the petition, cannot be equated to bar of proceedings under any express provision of law. But even assuming that such bar can be involved under section 399 of the Act, such objection cannot be decided without going into the factual controversy as to whether, on the date of the petition, the petitioners commanded shares worth 10% of the issued capital. This is the additional reason why such issues cannot be raised and tried as preliminary issues in the present proceedings. None of these preliminary issues ..... X X X X Extracts X X X X X X X X Extracts X X X X
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