9911796707
TMI Blog1992 (9) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... on passed at the extraordinary general meeting of the company on November 12, 1987, declining to appoint the petitioner as director and direct that the petitioner shall continue as a whole time director of the company with all such powers as originally conferred upon him and that he is entitled to draw remuneration as such ; 3.direct amendment of the articles of association of the company by providing that the petitioner shall be a director of the company for life and that he shall not be removed from his office without the permission of this hon'ble court ; 4.give necessary directions to ensure that in the management of the affairs, business and funds of the company, the petitioner shall have equal participation to the same extent as respondent No. 2 ; 5.enquire into and determine the loss caused to the company as a result of the wrong decision of the second respondent to retrench eleven workers of the company in the year 1984 and direct recovery of the said amount from the second respondent personally 6.enquire into and determine the amounts paid by the company as return on capital brought in by Sri B.K.P. Rao (fourth respondent) in the guise of consultancy fee to him and his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries such as press-tools, punching dies, blanking dies, compound dies, progressive dies, plastic moulding dies for compression moulds, injection moulds, transfer moulds, moulding dies for gravity and pressure die-castings, forging dies, sintering dies, jigs and fixtures for machining, assembly, erection and installation operations. 3.To carry on the business of manufacturers of pressed parts, deep draw parts, formed parts, coined parts, stampings and laminations, strips and bands using both ferrous and non-ferrous sheets. 4.To carry on the business of manufacturers of plastic moulded parts using compression moulding, injection moulding, transfer moulding, blow moulding, film-blowing, and other techniques. 5.To carry on the business of manufacturers of machines, machined parts, machine elements, components, machine tools, hardware, fastenings, clutches and couplings, clamps, bearings, gears, springs, beltings, agricultural and other implements, rolling stocks, foundry equipment." In addition to these main objects, the memorandum of association also specifies several objects incidental or ancillary to the attainment of the main objects and it also specifies several other obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained from the bank on concessional terms on the basis that the petitioner and the second respondent were unemployed engineers. They also filed a joint affidavit on February 11,1976, to the effect that they were unemployed engineers and secured seed money assistance from the Government of Karnataka in a sum of Rs. 75,000; that the petitioner and the. second respondent also by mutual agreement inducted one Sri B.S.N. Rao, who was earlier working as the chief executive in a reputed engineering company at Bangalore, as a director and shareholder ; that at the instance of the second respondent, his father-in-law, respondent No. 4, was also inducted into the company in order to raise capital in the year 1976 ; that it was decided to issue in all 100 shares--25 shares to each of the four individuals. The work of the company also was divided between the petitioner and the second respondent ; that in the annual returns filed up to September 15, 1976, and November 16, 1977, it is shown that 25 shares held by respondent No. 4 have been transferred to his wife, Smt. B.K. Anupama Rao, respondent No. 3 ; that this transfer was not made in accordance with the procedure prescribed for transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit to improve its profitability ; that the petitioner worked out the details and found that some of the existing machines were required to be sold and new machines were required to be acquired ; that in this process eleven workers were retrenched. However, the second respondent refused to agree to sell two machines which had become obsolete ; that as a result of it, new machines could not be acquired ; that at the same time the company lost the services of eleven skilled workers who were retrenched; that these retrenched workers have raised disputes and the same are pending and this has resulted in exposing the company to substantial claims on account of back-wages, etc. The petitioner and the second respondent also started two partnership firms one called "ACE Industries" in which the petitioner's wife and the wife of the second respondent were equal partners and another partnership firm called "Electro Fab" ; that in Electro Fab the petitioner and the second respondent were partners each holding 50 per cent. interest and the profits and losses were to be shared equally ; that the office of these two firms were located in the premises of the first respondent-company; that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany ; that the company agreed to give return on his investment of Rs. 25,000 in the company at the prevailing bank rate of interest in the form of consultation fee to be paid in the name of his son, Sri A. Ananthakrishna Rao, during the period when Sri B.K.P. Rao was in the service of Binny Ltd. that Ananthakrishna Rao was a young man with no experience and was in fact working as a trainee in Kirloskar Electric Co. Ltd. ; that he did not render any assistance to the company ; that this arrangement of paying the amount in the form of consultation fee was continued and paid to Sri B.K.P. Rao even after his retirement from the company ; that it was pointed out by the petitioner that the company could not afford to continue this arrangement and that it was a serious drain on the company's resources ; as such it should be discontinued ; that at this stage differences between the petitioner and the second respondent escalated further and resulted in a deadlock in the management of the company; that the second respondent held out a threat to the petitioner that he and his relative, respondent No. 3, held majority of shares, as such they could throw the petitioner out from the company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 10, 1987 ; that the second respondent by his reply dated November 7, 1987, informed that the board was not competent to meet and discuss when the extraordinary general meeting of the company convened by the second respondent was to be held on November 12, 1987 ; that in the extraordinary general meeting of the company held on November 12, 1987, the petitioner was present ; that two other persons by name Sri Keshavan, claiming to be an advocate and Sri Vijaya Krishna, claiming to be a chartered accountant, were kept present in the said meeting which was not permissible ; that the second respondent did not put the resolution proposing to elect the petitioner as a director to vote by show of hands; that he straightaway directed vote by poll ; that the polling slips were distributed and votes were cast by three members, i.e., the petitioner and respondents Nos. 2 and 3 ; that at that time Sri Keshavan and Vijayakrishna both attempted to participate in the meeting and tried to interfere with the petitioner's right to vote ; that the request of the petitioner to direct these two persons to withdraw from the meeting was overruled by the second respondent ; that respondents Nos. 2 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by failing to comply with the provisions of the articles of association ; that even though the company has been in existence for more than one decade, it has not maintained the minutes of the board of directors meeting ; that the share certificates have not been printed and the members' register and other statutory registers have not been maintained ; that there is a deadlock in the company and as such in the facts and circumstances of the case, it is just and equitable to wind up the company as the affairs of the company are being conducted in a manner oppressive to the petitioner who is a member of the company. But, in the facts and circumstances of the case, the winding up of the company would unfairly prejudice the petitioner and as such it is necessary to bring to an end the oppression carried out by the second respondent. That at the extraordinary general meeting held on November 12, 1987, respondents Nos. 2 and 3 have exercised their voting rights in a manner prejudicial to the interest of the company and its members ; that the decision to vote against the petitioner was motivated by their desire to oust the petitioner from the management and control of the company; that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a body corporate incorporated under the Act ; that the business of the first respondent did not arise out of any previous partnership ; that there was no understanding of equal partnership in the venture between the petitioner and the second respondent; that respondents Nos. 2 and 4 were solely responsible for conceiving the business venture ; that the petitioner had no role at all to play when the business venture was conceived ; that it is not true that Hajee and Khanapure resigned because the company did not commence any business ; that Khanapure resigned as a result of differences of opinion on the salary to be paid to him ; that the allegation that the second respondent had no entrepreneurial experience or technical knowledge is grossly incorrect apart from being unjustifiedly malicious; that at no point of time there was any understanding between the petitioner and the second respondent that they would be equal partners in the first respondent-company ; that there was no justification, need or reason for such an understanding to be arrived at ; that the petitioner held one share and respondent No. 2 held two shares ; that the difference in the shareholding commenced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany from its inception and was practically responsible for the venture itself ; that the petitioner did not object to the allotment of shares to Mrs. B.K. Anupama Rao ; that in the meeting of the board of directors held on August 14, 1976, wherein the petitioner was present, it was resolved to allot 25 shares to Mrs. B.K. Anupama Rao without her being co-opted as a director of the board ; that the petitioner's claim of expertise and technical skill was per se false ; that the entire process of selection of plant and machinery, placing orders therefor, inspection and installation, etc., were supervised by B.S.N. Rao and not by the petitioner. That in the board meeting held on October 1, 1976, there was allocation of responsibilities amongst the petitioner, the second respondent and B.S.N. Rao. The petitioner was to look after the marketing, appointment of personnel, their promotions, disciplinary proceedings against them and their removal, liaison with banks, and placing of orders for machinery. That the allegation that B.K.P. Rao transferred 25 shares to his wife Smt.B. K. Anupama Rao is not factually correct; that in the board meeting held on August 14, 1986, the initial allotm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent-company as there was no such understanding that they would be equal partners ; that the allegation that the petitioner was completely all along in charge of the production activities of the company is not correct. From October 1, 1976, duties of each of the directors were specified. The responsibility of production was of B.S.N. Rao and not of the petitioner. The petitioner had no knowledge or experience either of the shop floor or of production. Therefore, the petitioner being solely in charge of the production is not only untenable but factually incorrect. There was a concept of reorganisation but it is not true that the petitioner worked out details of reorganisation as alleged in the petition. Eleven workers were retrenched because they were found to be surplus and the petitioner was a consenting party to it. It is true that respondent No. 2 unreasonably refused to participate in the economic reorganisation of the company or that he objected to the sale of two machines or that the said machines had become obsolete ; that the second respondent was agreeable for sale of such machines but the offers received for the machines were not satisfactory. Therefore, the petitioner a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort out differences of opinion between the petitioner and the second respondent ; that: out of 25 shares held by Smt. B.K. Anupama Rao, 12 shares were offered to the petitioner and 13 shares were offered to the second respondent by Sri B.K.P. Rao; that the petitioner has deliberately withheld the latter portion of the letter of B.K.P. Rao, which states that he was willing to sell 13 shares held by his wife to the second respondent; that the offer was made to K.P. Rao and not to the petitioner directly ; that failure of negotiation regarding the sale and purchase of shares was due to the unreasonable attitude adopted by the petitioner ; that the petitioner valued the shares at Rs. 896.98 per share whereas the third respondent valued them at Rs. 7,000 per share. That Sri B.K.P. Rao had invested Rs. 25,000 in the shares of the company and no dividend was declared ; that he was also advising the company ; further he had advanced a loan of Rs. 50,000 to meet its immediate requirement ; that B.K.P. Rao was paid Rs. 300 from October 12, 1978, up to August 17, 1984, by cheques ; that the petitioner is a consenting party as the cheques were signed by him ; that the payment of Rs. 300 per m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd respondent had been appointed as chairman of the board. Therefore, the question of the second respondent unilaterally assuming the chair did not arise ; that the petitioner did not at any time object to the convening of the meeting as alleged by him ; that on the contrary, he was a consenting party to the entire proceedings ; that no objection of any nature was raised by the petitioner during the proceedings of the meetings ; that the presence of Sri Keshavan was not illegal; he was duly appointed as legal adviser of the first respondent-company at the board meeting held on May 4, 1987 ; the allegation that the voting by poll was straightaway resorted to without in the first instance taking a vote by show of hands is grossly incorrect and denied as false. The voting on the resolution nominating the petitioner as director was in the first instance held by show of hands. However, before the results of such poll were declared, one of the shareholders, viz., Smt. Anupama Rao, demanded a poll in pursuance of which a poll was conducted ; that it is grossly incorrect to aver that the petitioner took objection to the need to appoint a third director, viz., Dr. Ghatge ; that at no time D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been maintained. The relevant extracts therefrom will be produced separately. That it is factually incorrect to say that the affairs of the company are being conducted in a manner oppressive, to the petitioner. The petitioner himself refused to sign the cheques ; that the alleged rift between the petitioner and the second respondent is not due to the desire of the second respondent to take control of the company and to oust the petitioner ; that on the contrary, the conduct of the petitioner in using the company's time, contacts, infrastructural facilities and experience to set up an independent private limited company with the petitioner and his wife as directors would only support the contention of the second respondent that the petitioner sacrificed the interest of the first respondent-company in preference to his own private limited company. Therefore, if there were any calculated motives, it was attributable entirely to the petitioner himself who had engaged in setting up another parallel company in competition with the first respondent-company ; that the petition has been filed only to harass the second respondent and to impede the functioning of the first respondent-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of his case, the petitioner has given evidence as PW-1 and has also examined Sri Sadashiva Rao, partner of K.P. Rao and Co., chartered accountants of the first respondent-company as PW-2 and has produced 49 documents which are marked as exhibits P-1 to P-49. In support of their case, the respondents have examined respondent No. 2 as RW-1 and got marked 37 documents as exhibits R-1 to R-37. In addition to these the respondents have produced 13 other documents, the genuineness of which is challenged by the petitioner. Therefore, those documents are marked for identification purpose as exhibits 1 to 13. Having regard to the pleadings of the parties, evidence adduced by them and the arguments advanced on both sides, the following points arise for consideration : 1.Whether this is a case to which the principles of partnership are attracted ? 2.Whether the petitioner proves that the affairs of the first respondent-company are being conducted in a manner oppressive to him, and prejudicial to the interests of the first respondent ? 3.Whether the petitioner proves that the transfer of 25 equity shares held by Sri B.K.P. Rao (respondent No. 4) in favour of his wife, Smt. B.K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny incorporated under the Act and as such the principles enunciated in Ebrahimi's case [1972] 2 All ER 492 ; [1973] AC 360, are not attracted. Further, the facts and circumstances of the case do not warrant the application of the principles of partnership ; that the first respondent-company has not come into existence or formed out of an existing partnership. The specific case of the petitioner is that there has been an understanding between the second respondent and the petitioner, when he joined the first respondent that he and the second respondent would be equal partners in the venture of the first respondent. Of course, if the case of the petitioner as to such an understanding between him and the second respondent is found established as a matter of course the principles of partnership are required to be applied. If, on the contrary, no such agreement or understanding is found as existing between the petitioner and the second respondent, it will have to be seen whether the facts proved warrant application of the principles enunciated in Ebrahimi's case [1972] 2 All ER 492 ; [1973] AC 360. In Ebrahimi's case [1972] 2 All ER 492 ; [1973] AC 360, 379 as noticed by the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be 'sleeping' members), of the shareholders shall participate in the conduct of the business ; (iii)restriction upon the transfer of the members' interest in the company--so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere... A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in." In Hind Overseas' case [1976] 46 Comp Cas 96 (SC) there was a petition filed for winding up under section 433(f) of the Act. The learned company judge dismissed the petition holding that the principle of dissolution of partnership applied to companies either on the ground of complete deadlock or on the ground of being domestic or family companies. A complete deadlock would be created where the board has two real members or the ratio of shareholding is equal. In the case of domestic or family companies, the courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition. The question that is raised in this appeal is as to what is the scope of section 433(f) of the Act. Section 433 provides for the circumstances in which a company may be wound up by the court. There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Section 222(f) of the English Companies Act, 1948, is in terms identical with the Indian counterpart, section 433(f). It is now well established that, the sixth clause, namely, 'just and equitable' is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp Cas 1 ; AIR 1955 SC 74. In that case, according to the assessee, the dividend income received by her in respect of the shares held by her in the tea company was to the extent of 60 per cent. agricultural income in her hands and, therefore, pro tanto exempt from tax. While the Revenue contended that dividend income was not agricultural income and, therefore, the whole of the income was liable to tax. The Income-tax Appellate Tribunal held that the dividend income could not be treated as agricultural income in the hands of the shareholder and decided in favour of the Revenue. However, it agreed that its order gave rise to a question of law, and formulated the following question and referred it to the High Court (at page 3) : "Whether 60 per cent. of the dividend amounting to Rs. 2,750 received by the assessee from the two tea companies is agricultural income and as such exempt under section 4(3)(viii) of the Act." The High Court upheld the order of the Tribunal, but granted leave to appeal to the Supreme Court. It was held by the Supreme Court that the words "revenue derived from land" occurring in the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company is not the real structure and that in reality it is a partnership. Therefore, it is not possible to hold that the decision in Bacha F. Guzdar's case [1955] 25 Comp Cas 1 (SC) is of any assistance to decide the point under consideration. In Bird Precision Bellows Ltd., In re [1984] 1 Ch 419, Nourse J. held thus : "The classical definition of partnership which subsists between persons carrying on a business in common with a view of profit. It seems to me that that is exactly what Mr. Armstrong, Mr. Bird, Mr. Nin, Mr. Rowden and Pipe-Chem were doing. More particularly, and with reference to the typical and important elements previously referred to, I find the following facts in relation to the company and the roles which Mr. Armstrong and Mr. Nin were intended and expected to play, and did play, in its affairs. First, the company represented an association which was formed on the basis of a personal relationship involving mutual confidence. Mr. Bird accepted in his evidence in chief that there was trust between himself and Mr. Armstrong and Mr. Nin, although he said that it was no more than in any other business connection. That is quite enough. The personal relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the shareholders. 3.In the case of winding up of a company in the nature of quasi- partnership, it is only when complete deadlock in the company is created on account of lack of probity in the management of a company and there is no hope and possibility of smooth and efficient continuation of the company as a commercial concern, winding up may be ordered on the just and equitable ground. 4.Winding up may be refused if in the opinion of the court, some other remedy is available and the petitioner is acting unreasonably. 5.In the case of a small company which is in reality a partnership and the complaining petitioner is excluded from the management, it would be an act of oppression and would be prejudicial to the interest of the company. In such a case there would not be much difference between the interest of a company and the interest of a shareholder and, as such, the interest of a member who had ventured his capital in the business of a small private company might include the legitimate expectation that he would continue to be employed as director and therefore unfair prejudice would be caused to his interest as a member. Keeping in view the aforesaid principles of law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whole-time directors of the company from February 1, 1976. The petitioner continued to be the wholetime director till November 12, 1987. It is also relevant to notice that from February 1, 1976, there were only two wholetime directors till November 12, 1987, viz., the petitioner and the second respondent. After the retirement of B. S. N. Rao on May 24, 1978, the affairs of the company were being managed, and the administration was being carried on, by the petitioner and the second respondent only. The, specific case of the petitioner is that though the company was incorporated on March 17, 1975, no progress whatsoever was made. It was only after the petitioner joined the company, that the seed money was raised from the Government of Karnataka on the ground that the petitioner and the second respondent were unemployed graduates and that they had started the new venture for seeking self-employment. The term loan which was sanctioned earlier by the Canara Bank, Ulsoor branch, Bangalore, for the first respondent-factory was got released on satisfying the conditions; that the petitioner joined the company with a specific understanding that the petitioner and the second respondent wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough initially two strangers, viz., Khanapure and Haji Ibrahim Issack, were associated with the company, it was only for a very short period, of about ten months from March 17, 1975, to January 27, 1976. During this period, except incorporating the company, nothing more appears to have been done. The sale deed relating to the land for locating the factory came to be registered on January 27, 1976. In pursuance thereof, a certificate was obtained on January 30, 1976. Land tax was paid on February 19, 1976. A joint affidavit of the petitioner and the second respondent as per exhibit P-2 was sworn to on February 11, 1976, for the purpose of securing the seed money from the Government of Karnataka. In the affidavit it was stated that the petitioner and the second respondent were shareholders and directors of the first respondent-company ; that they were graduates in engineering and were unemployed ; that they wanted to start a new venture for seeking self-employment. On the basis of this, the petitioner and the second respondent obtained the seed money for the company. The term loan was drawn after the petitioner became a director of the company. The correspondence as evidenced by exhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent, were also required to be transferred in the proportion of 12 to the petitioner and 13 to the second respondent in order to maintain parity between the petitioner and the second respondent is also corroborated by the fact that there were negotiations in this regard between the petitioner, the second respondent and the fourth respondent in the presence of Mr. Sadashiva Rao, partner of K. P. Rao and Co., the auditors of the company. The second respondent also admits in his evidence that there were such negotiations. In para 8 of his deposition, the second respondent has stated thus : "The decisions relating to the affairs of the company used to be taken jointly by me and the petitioner. In March, 1985, the company received a notice from the Central Excise for clubbing the turnovers of the first respondent-company and Electro Fab. There were discussions between me, the petitioner and Sri Sadashivarao regarding the transfer of shares held by respondent No. 3. This discussion took place at the end of 1984." Again, in para 25 of his deposition, he has admitted that in that discussion he convinced the fourth respondent to sell the shares of his wife to him and the petitioner. Of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated thus : "I have received no benefit from the membership of the company except receiving remuneration as whole-time director of the company. I have contributed for the development of the company financially and technically. My contribution financially was much more than that of the second respondent as I had advanced money to the company at the initial stage without taking interest." In the cross-examination, it has been elicited by the respondents that the petitioner got from Industrial Accessories Corporation a sum of Rs.60,000 in lump sum ; that he had a ready cash of Rs. 1 lakh ; that he had a short-term fixed deposit in the Canara Bank, Ulsoor branch, of a sum of Rs. 1 lakh ; that he was working in the first respondent-company and looking after the project and was responsible for securing the sale deed pursuant to the agreement of sale. It was because of the discussion as to transfer of shares standing in the name of Smt. B.K. Anupama Rao, her husband, respondent No. 4, addressed a letter, exhibit P-5, dated January 11, 1985, offering 12 shares to the petitioner and 13 shares to the second respondent at the rate of Rs. 7,000 per share and also claimed a sum of Rs. 24,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers, the petitioner and the second respondent only continued as whole time directors of the company till November 12, 1987. Smt. B. K.' Anupama Rao did not attend the annual general meetings at any time. For the first time, she attended the extraordinary general meeting of the members of the company held on November 12, 1987. It is also relevant to notice that the petitioner and the second respondent took decisions jointly and carried on the affairs of the company. In addition to this, there is also another circumstance which also supports the case of the petitioner that the company was run by the petitioner and the second respondent on an understanding that they would be equal partners in the venture. The petitioner and the second respondent started two partnership firms known as Ace Industries and Electro Fab. The wife of the petitioner and the wife of the second respondent were the partners in Ace Industries. The petitioner and the second respondent were the partners in Electro Fab. Each of the partners had 50 per cent. interest. The offices of both these firms were located in the premises of the first respondent-company. The business of these two firms was carried on by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d physically and financially, for the development of the company. It may be pointed out here that by the end of March, 1984, as disclosed by the evidence on record, most of the liability regarding term-loan was discharged by the first respondent-company. The second respondent in his evidence has specifically stated that at present the company has no liability except the working capital liability and the term-loan liability not exceeding Rs. 50,000. Thus when the company came to stand on its own legs, the second respondent appears to have changed his mind and appears to have thought of taking full control over the company, if necessary, by ousting the petitioner from the management. It is because of this that differences arose between the petitioner and the second respondent which led to the ousting of the petitioner from the whole time directorship of the company and reducing him to a minority shareholder. This aspect will be dealt with while considering point No.2. It was contended by Sri N. Santhosh Hegde, learned senior counsel appearing for the respondents that no definite case was made out by the petitioner that there was an understanding between him and the second respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of the pleadings of the parties has to be appreciated. The second respondent admits the discussion that took place regarding the transfer of shares standing in the name of the third respondent in the proportion of 12 and 13 to the petitioner and the second respondent respectively. He even admits that the decisions relating to the affairs of the company used to be taken jointly by him and the petitioner. He also further admits that during the discussions held in the latter part of 1984 to bring about equality of shareholding between the petitioner and himself in the company, he convinced the fourth respondent to sell the shares of his wife to himself and the petitioner. The discussion also related to the price of shares of the third respondent. There cannot be smoke without fire. The discussion could not have gone to such an extent if there was no understanding between the petitioner and the second respondent that they would be equal partners in the venture. They would not have even started the two partnership firms in the premises of the company with 50 per cent. shares each. The affairs of the company would not have been carried on by the petitioner and the second responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second respondent to run the company on the principles of partnership. The third respondent is none other than the mother-in-law of the second respondent. The articles of association of the company also placed restriction upon the transfer of the members' interest in the company to ensure that the element of mutual confidence is not lost. The petitioner and the second respondent continued to be the directors of the company and shared the profits equally in the form of remuneration as no dividends were declared. In Hind Overseas' case [1976] 46 Comp Cas 91 (SC) the principles laid down in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL) were approved. On the application of the principles deduced from the various decisions considered in the earlier portion of this order, it is established in this case that the petitioner joined the company with an understanding between him and the second respondent that the company would be run by them on equal partnership basis. Accordingly, the business of the company and its affairs were carried on jointly by the petitioner and the second respondent on the basis that they were equal partners in the venture. Therefore, the principles of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed majority. The second respondent has admitted in his evidence that he was entertaining the idea when he issued the notice in October, 1987, calling for extraordinary general meeting of the members of the first respondent-company on November 12, 1987. The exchange of letters between the petitioner and the second respondent, marked as exhibits P-9 to P-16, indicated that the petitioner was not treated properly by the second respondent. It is not in dispute that the massive financial liability of the company was discharged before differences arose between the petitioner and the second respondent and seed money had also been paid back. The second respondent has also admitted in his evidence that at present the company has no liability except the working capital liability and the term-loan liability not exceeding Rs. 50,000. This is a case, as already pointed out, though the first respondent is a company incorporated under the Act, but in reality it was being run on the understanding between the petitioner and the second respondent that they would be equal partners in the company The third respondent is none other than the mother-in-law of the second respondent. She became the hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to increase the company's share capital from £2,000 to £3,650 by the creation of a further 1,650 ordinary shares all of which were to carry voting rights. The directors other than the aunt were to receive 200 shares each and the balance of 850 shares were to be placed in trust for long service employees of the company. The secretary wrote to the plaintiff on November 1, 1974, setting out the proposals and enclosing notice of an extraordinary general meeting to be held on November 27, 1974, to approve the setting up of a trust for the company's employees, to increase the company's capital and to provide for the proposed allotments. On November 22, 1974, the plaintiff's solicitor wrote a letter to the aunt pointing out that the scheme would reduce the plaintiff's shareholding to under 25 per cent. and stating that the plaintiff was opposed to it. The aunt replied that she was fully aware of the implications of the changes in the company's structure but intended to support the scheme. The plaintiff's solicitor attended the meeting on November 27, 1974, as her proxy and proposed an adjournment. The aunt voted against the adjournment and three resolutions were then passed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner from participating in the affairs of the company by the second respondent and exclusion of the petitioner from the management of the affairs of the company by not continuing him as a director is an act which attracts the equitable considerations and also goes to prove that the ulterior motive of respondents Nos. 2 and 3 was to cause prejudice to the interest of the petitioner and deprive him from the legitimate expectation of continuing as a whole time director, and to reduce him to a mere shareholder. In a company like that of the first respondent which was being run on mutual confidence and on equal participation in the management of the company, the act of discontinuation or exclusion of the petitioner from the management of the company would be nothing but unfairly prejudicial to the interest of the petitioner because the legitimate expectation of the petitioner that he would continue to be employed as director is frustrated by the contrived act of respondents Nos. 2 and 3. As pointed out in Ebrahimi's case [1972] 2 All ER 492 ; [1973] AC 360 (HL), in a company like the first respondent shareholder's participation in the management of the company forms part of the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights to have the affairs of the company conducted in the way laid down in the Companies Act, in utter disregard of the functions of the board by committing all its powers to one member of the respondents' group. The overthrow of the petitioners may not have been caused by the show of arms as alleged in the petition but there can be little doubt that it was achieved by subterfuge in disregard of company procedure. The conduct of the respondents on and after January 22, 1963, had no vestige of probity or rectitude." It is also further observed that while it is true that the oppression was not of long duration having at best commenced only a few weeks before the matter was brought into court, but there can be no doubt that its effect was continuous and would have persisted but for the intervention of the court. It is further observed that it is not necessary that the petitioner who comes to court for redressal under section 397 should have submitted himself to oppression over a period before he can invoke the powers of the court. If the oppression is of short duration but is of such a lasting character that redress is impossible by calling board meetings or general meetings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first respondent-company. He has also further deposed that he discussed the matter with the second respondent before he started Supangitha Engineers (P.) Ltd. ; that the second respondent wanted to join Supangitha Engineers (P.) Ltd. along with their common friend, Sri B.T. Bhandari ; that the petitioner agreed to the suggestion ; that pursuant to it, Form No. 1A mentioning the names of three promotors, the petitioner, the second respondent and Sri B.T. Bhandari, was filed on February 20, 1985. The fact that exhibits R-14 to R-16 and R-18 to R-23 relating to Supangitha Engineers (P.) Ltd. were received by the petitioner at the address of the first respondent-company did not in any way go to prove that the first respondent neglected the duties as whole time director of the first respondent-company. This fact also did not go to prove that the interests of the first respondent-company suffered in any manner. No doubt, as admitted by the petitioner, for some time, the registered office of Supangitha Engineers (P.) Ltd. was located in the premises of the first respondent-company before it was shifted to Bommasandra Industrial Area in the middle of 1987. He has also further deposed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of might have been restrained by injunction in so far as they were acts done without the authority of the board. As to this, I do not think that a wrongdoer in this field can well complain that the person wronged might have chosen another remedy. Then fifthly, counsel said that the acts complained of were not in their result oppressive, because it cannot be demonstrated that the company suffered any loss from any of them. I cannot agree. The acts complained of were, I should say for the most part, calculated to damage the company in one way or the other. Sixthly, counsel said that the acts complained of might have been lawfully done by calling a general meeting and passing the requisite resolutions, ordinary or special. As to this, I think that the sons were at least entitled to require that the proper procedure should be applied. Then seventhly, counsel said that this is not a case of discrimination between different shareholders or classes of shareholders. I agree, but see no reason for holding that section 210 is necessarily confined to cases of discrimination, though it is to be expected that cases calling for its application would most usually take that form. Finally, couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to section 397." From the aforesaid observation made in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535, it is clear that if the conduct of the majority shareholders is harsh and wrongful and involves at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder, it can be held that the affairs of the company are being conducted in a manner oppressive to some part of the members. In the instant case, it has already been pointed out that the company is a small domestic comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights of shareholders and does not undermine the understanding of the shareholders on the basis of which the company is run. Therefore, it is not possible to hold that this decision is of any assistance to the respondents. Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi). In this case, a petition under sections 397, 398, 402 and 403 was filed by one group of shareholders called the S group against another group called the A group. Both the groups had equal shares in the company. The S group contended that it had been completely excluded ; that there was lack of probity on the part of the management ; that there were a number of persistent contraventions of the provisions of the company law by the respondents ; that the meeting held in March, 1980, wherein respondent No. 2 was reappointed as managing director was illegal. The court found that the instances of violation of the provisions of the Act referred to by the petitioners could not be complained about in the proceedings under section 397 or 398 of the Act ; that the resolution passed at the meeting in March, 1980, continued the existing state of the management; that even if the meeting was illegal, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the facts and circumstances of the case on hand discussed earlier, it is not possible to apply the ratio of this case. Further, in this case, the petitioner has sought for winding up of the company in the event it is not otherwise possible to remedy the grievances. Shantilal Manibhai Patel v. Laxmi Film Laboratory and Studios P. Ltd. [1984] 56 Comp Cas 110 (Guj). In this decision, after referring to Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC) and Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 (SC) it has been held that the principles of dissolution of the partnership would be applicable only if the company is a domestic concern, that it must also be shown that an irresolvable deadlock in the administration of the company has resulted because of the groupism amongst the shareholders and the directors of the company ; and that it has rendered it impossible for the company to transact ; that the only alternative is to wind up the company. In the instant case, as already pointed out, the petitioner has sought for winding up alternatively only as a last resort. It is also not necessary to order for winding up if it is possible to provide an alternative soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting was illegal because of non-compliance with the provisions of the Act would not also be sufficient to establish the oppression. In the instant case, the acts and conduct of respondents Nos. 2 and 3 did result in oppression of the petitioner as it affected the right of the petitioner as a member of the company. Therefore, the respondents cannot derive any sustenance from this decision. Raghunath Swarup Mathur v. Har Swarup Mathur [1970] 40 Comp Cas 282 (All). In that case, a petition under sections 397 and 398 of the Act was filed for removal of opposite party No. 2 from the office of the managing director and of the other contesting opposite parties from directorship of the company. The petitioners also further prayed for appointing petitioner No. 1 as managing director and other directors to be chosen by the court from amongst the petitioners or other shareholders. The petitioners also further prayed for a direction to opposite party No. 1 to refund a sum of Rs. 15,021 paid to him from April 1, 1961, to February 27, 1962, on the allegation that it was an excess payment of managerial remuneration paid to opposite parties Nos. 2 and 3 from April 1, 1961, up to the date of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it must be shown as a preliminary to the application of section 397 that there were just and equitable grounds for winding up the company ; (e) that the conduct complained of could be said to be oppression only if it can be said that it is burdensome, harsh and wrongful and the oppression involves at least an element of lack of probity and fair dealing to a member in matters of proprietary right as a shareholder. On the facts, it was held against the petitioner. Regarding the proposition laid down in this decision that there must be a continuous act constituting oppression up to the date of the petition, it has already been pointed out that what is material is the result of the act. In a given case if the act or conduct of the majority shareholders affects the proprietary right of the minority shareholders, it may be found sufficient for granting relief in a petition under sections 397 and 398 of the Act. Thus, I am of the view that the aforesaid decisions relied upon by learned counsel for the respondents are not in any way helpful to the respondents to support their contention that the facts and circumstances established in the case cannot be held to be sufficient to prove tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the petitioner and the second respondent. Exhibit P-36 contains the list of persons holding shares or stock in the company as on November 16,1977. According to exhibit P-36, 25 shares held by Sri B.K.P. Rao were transferred to his wife, Smt. B.K. Anupama Rao, respondent No. 3. The evidence also discloses that in the subsequent years, Smt. B.K. Anupama Rao has been shown as holding 25 shares of the first respondent-company. There was also a proposal to transfer 12 shares out of the 25 shares held by Smt., B.K. Anupama Rao to the petitioner and 13 to the second respondent. However, it did not fructify. This aspect has already been noticed in the previous portion of this order. The contention of the petitioner is that the transfer of 25 shares held by Sri B.K.P. Rao to his wife, Smt. B.K. Anupama Rao, was opposed to articles 19 and 20 of the articles of association of the first respondent-company because the procedure prescribed therein was not followed, as such the transfer of those shares by respondent No. 4 in favour of respondent No. 3 was invalid. On the contrary, it was the case of the respondents that Sri B.K.P. Rao did not hold the shares at any time. It was Smt. B.K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond respondent were appointed as whole time directors with effect from February 1, 1976, they were continued and there was no election to elect a director at any time till November 12,1987. The evidence also further discloses that the second respondent thought of ousting the petitioner only after the differences between them arose. The continuation of the petitioner and the second respondent as whole time directors of the first respondent-company from February 1, 1976, for over a period of 11 years was also indicative of the fact that there was an understanding between the petitioner and the second respondent, that they would be equal participants in the company and it was because of such an understanding, no election whatsoever was held to elect a director of the company. The petitioner and the second respondent were continued uninterruptedly as whole time directors from February 1, 1976. The background in which the extraordinary general meeting of the members of the first respondent-company was held on November 12, 1987, would go to show that it lacked bona fides and it was wholly intended to oust the petitioner from participating in the affairs of the company. The second respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no difference between the apparent and real structure of the company, it is normal for a majority shareholders to have control over the company. But in a case where the real structure of the company is different from the apparent structure and it is run on an understanding between the shareholders that they would be equal partners in the company and the company is a small and domestic company and it is formed without appealing to the public for purchasing the shares, it is not at all either normal or proper and fair to oust one of the directors of the company. Because in such a case, there will not be much difference between the interest of a shareholder and the company and participation in the affairs of the company becomes part of the proprietary rights of a shareholder. This was the situation obtaining in the first respondent-company. This aspect has been discussed under points Nos. 1 and 2. Therefore, the proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12,1987, in so far as it resulted in ousting the petitioner from the whole time directorship of the company and appointing one Dr. Ghatge as a director in place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is not entitled to represent the first reapondent-company. However, it is not necessary to issue any permanent injunction to the second respondent to this effect. A declaration made pursuant to the findings recorded on points Nos. 1, 2 and 4 to 6 would be sufficient to safeguard the interest of the petitioner as equal partner in the company. Point No. 8 is answered accordingly. Point No. 9.-As the present differences between the petitioner and the second respondent are due to the fact that there is no appropriate provision in the articles of association of the first respondent-company to the effect that the petitioner and the second respondent are equal participants, even though, in reality, they have been equal participants in the company, to avoid any such situation arising in future and to safeguard the interest of the petitioner and the second respondent and also of the first respondent-company and to ensure smooth working of the company, it is necessary to amend the articles of association of the first respondent-company to the effect that the petitioner and the second respondent are equal participants in the company. It has also been pointed out that the plenitude of powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 13 to the second respondent. This proposal though was sent to Mr. K.P. Rao, was in substance and in effect sent to the company itself because Mr. K.P. Rao was none other than the chartered accountant of the first respondent-company. Exhibit P-5 was sent by respondent No. 4 on behalf of his wife, respondent No. 3, in whose name the shares stood. As per article 19 of the articles of association of the first respondent-company the selling member shall have to give notice in writing to the company of his or her intention to sell the whole or part of his or her shares in the company. Exhibit P-5 was brought to the notice of the petitioner by Mr. K.P. Rao. Pursuant to exhibit P-5, the petitioner sent his reply, exhibit P-6, through Mr. K.P. Rao to respondent No. 4. In continuation of exhibit P-5 dated January 11, 1985, respondent No. 4 sent another letter dated February 11, 1985, exhibit P-7 to Mr. K.P. Rao along with exhibit P-7(a) giving the details as to how he arrived at the value of each share at Rs. 7,000. However, by the letter dated February 27, 1985, exhibit P-8, addressed to Mr. K.P. Rao, respondent No. 4 withdrew his offer to sell the shares and stated that the matter shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociation "The fair value of the share shall be such a sum of money, as the auditor for the time being of the company shall certify in writing, which value in his opinion is the fair value thereof, and so that in so certifying, the said auditor shall be deemed to be acting as an expert and not as an auditor". It is also permissible for the court to appoint any other person for the purpose of determination of the fair value of the shares held by respondent No. 3. As the parties were not able to arrive at an agreement with regard to the fair value of the shares when they negotiated through the chartered accountant of the company, I am of the view that it is just and necessary to appoint another person to value the shares held by the third respondent for the purpose of effecting transfer of the same to the petitioner and the second respondent in the proportion of 12 and 13 respectively. On the question as to who should be appointed to value the shares, it is necessary to hear the parties. Accordingly, point No. 10 is answered in the affirmative. However, the question as to who should be appointed to determine the fair value of the shares will be determined after hearing both sides in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 respectively. The fair value of the shares shall be determined by a person to be appointed by the court. Call this petition on June 5, 1992, at 2.30 p.m. to hear the parties for appointment of a person to determine the fair value of the shares. (vii) As it is held that the petitioner and the second respondent would be equal partners in the first respondent-company, it is just and appropriate to direct each party to bear his or her or its costs. It is ordered accordingly. JUDGMENT Shivashankar Bhatt, J. -- The respondents in the company petition are the appellants before us. The respondent herein filed the company petition under sections 397 and 398 of the Companies Act, 1956 ("the Act" for short), the respondent before us is referred to hereinafter as "the petitioner" for the sake of convenience. The petitioner alleged, inter alia, that he held 38 equity shares of Rs. 1,000 each fully paid though he is entitled to hold 50 equity shares. The nominal capital of the company is Rs. 5,00,000 divided into 500 shares. The company was incorporated in the year 1975, when there were only three directors, out of whom the second respondent, N.V. Rao (for short referred to as "NVR" t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd according to the petitioner NVR managed to oust the petitioner from the management of the company ; NVR saw to it that the petitioner was not elected as a director at the meeting of the general body held on November 12, 1987. Hitherto the petitioner was also being paid remuneration similar to the remuneration that was being paid to NVR. This was also stopped. All facilities given to the petitioner were withdrawn. The petitioner, in the circumstances, stated that the intention of NVR was to bring about a material change in the management and control of the company by an alteration in its board of directors and that it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company and its members. The petitioner asserted that himself and NVR were equal partners in the company and , the attempt made to oust the petitioner from the management was against the interest of the company and the petitioner. Further, the transfer of shares of Mr. B.K.P. Rao in favour of his wife was illegal and this illegal transfer resulted in NVR getting majority control; the company is a small private company to which the principles of partnership law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hold the same. The various other averments in the company petition were elaborately traversed. The company petition was filed shortly after the impugned extraordinary general meeting of the members in November, 1987, itself. The learned company judge formulated the following points for consideration : "1.Whether this is a case to which the principles of partnership are applicable ? 2.Whether the petitioner proves that the affairs of the first respondent-company are being conducted in a manner oppressive to him and prejudicial to the interest of the first respondent ? 3.Whether the petitioner proves that the transfer of 25 equity shares held by Sri B.K.P. Rao (respondent No. 4) in favour of his wife, Smt. B.K. Anupama Rao (respondent No. 3) is invalid ? 4.Whether the proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, and the resolutions passed at the said extraordinary general meeting of the first respondent-company are liable to be declared illegal and invalid and quashed ? 5.Whether the petitioner is entitled to continue as a whole time director of the first respondent-company with all such powers as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illegal, invalid and the same are quashed. The petitioner shall be deemed to have continued as a whole time director of the first respondent-company with such powers as originally conferred upon him and is entitled to draw the remuneration. It is further declared that in the management of the affairs business and funds of the first respondent-company, the petitioner shall have equal participation to the same extent as respondent No. 2. Any other person co-opted as a director or whole time director shall cease to be such and cease to function from today; (iv)the articles of association of the first respondent-company shall be amended within six months from today in conformity with the directions and declarations contained in this order ; (v)the prayer of the petitioner to declare the transfer of 25 equity shares of respondent No. 4 to respondent No. 3 is invalid, is rejected. The prayer of the petitioner to enquire into and determine the amount paid by the first respondent-company to respondent No. 4 and his son as consultancy fee and to direct recovery of the same, is rejected ; (vi)the third respondent is directed to transfer 25 shares held by her to the petitioner and the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 25 shares were allotted to and held by Mrs. B.K.P. Rao. The material on record also discloses that though NVR was on ordinary director as on February 1, 1976, he became a whole time director on August 1, 1976. The petitioner and NVR filed an affidavit dated February 11, 1976, before the Government (exhibit P-2) stating that they are the shareholders and directors of the company and they are educated and remained unemployed and that they have started this new venture for seeking self-employment. This affidavit was filed to obtain loan from the Government under a scheme framed by the State Government to facilitate unemployed engineers to start their own ventures. Exhibit P-46 is a notice of the first annual general meeting of the shareholders to be held on September 15, 1976, to reappoint NVR, the petitioner and B.S.N. Rao as directors. The business included, to sanction a sum of Rs. 2,000 per month with effect from February 1, 1976, to the petitioner as a whole time director, by way of remuneration. A similar remuneration was also to be sanctioned to NVR with effect from August 15, 1976, and to B.S.N. Rao from August 1, 1976. There is no dispute that the meeting was held and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity, the order directs the equalisation of the shares between the two by the sale of the shares held by Mrs. B.K.P. Rao to the petitioner proportionately. Admittedly, the company was incorporated in March,. 1975, at a time when the petitioner was not at all in the picture. The company was formed by three persons amongst whom there was no personal relationship ; probably they were friends at the most. Thereafter, when the petitioner joined the company the shareholding was only three out of which the petitioner had only one share while NVR held two shares. Subsequently two more shareholders joined and there was a fresh allotment of shares resulting in each shareholder holding 25 shares (out of a total of 100 shares issued by the company). After the resignation of B. S. N. Rao, the shareholding again changed with NVR having 37, the petitioner 38 and Mrs. B.K.P. Rao 25 shares. Therefore, on the face of it cannot be said that at any point of time the petitioner and NVR held shares in equal proportion without any other shareholder possessing some shares in the company. It is stated that NVR and the petitioner are relatives and they knew each other since their childhood and it is this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent. This understanding was reached in the presence of our company's auditors. The company's auditors are K.P. Rao and Co. One Mr. Sadashiva Rao of K.P. Rao and Co., was attending to the respondent-company's matters" Therefore, it is clear that, according to the petitioner, the understanding to maintain parity of shareholding between the petitioner and NVR was reached in the presence of the auditors for which purpose Mrs. B.K.P. Rao's shares were to be transferred to these two persons. The petitioner has examined the auditor, Sadashivarao, as PW-2. He nowhere corroborates this statement of the petitioner. On the other hand, PW-2 stated thus : "... In the year 1985 we tried to bring about harmony between the petitioner and the second respondent. To my knowledge there was no agreement or understanding arrived at between the petitioner and the second respondent regarding equalisation of shares. I say this because there were only discussions and negotiations. As there were only negotiations regarding transfer of shares held by the wife of Sri B.K.P. Rao, no value regarding transfer of the shares was determined. I do not know what was the reason for Sri B.K.P. Rao to withdraw the off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, who responded to the auditor by writing exhibit P-6. The petitioner sought clarification as to how the value of the share was arrived at. He termed the price of Rs. 7,000 per share, as astronomical. In this letter the petitioner further states that when B.S.N. Rao retired in the year 1977, instead of transferring his entire 25 shares to the petitioner for maintaining the necessary balance, only 15 shares were allotted to him by mistake. Therefore, he requested the auditor to go into the matter to ensure that no injustice is done to him. It is also stated here that the company had been paying 16 per cent. interest for all loans from shareholders and others equally and that the shares held by Mrs. B.K.P. Rao has been treated as a loan for the purpose of paying the interest. The petitioner values the share, and states that the value of each share will be Rs. 896.88 (though the face value of the share is Rs. 1,000). Exhibit P-7 is a letter written by B.K.P. Rao to the auditor explaining as to how he arrived at the value at Rs. 7,000 per share. The learned company judge has observed that B.K.P. Rao could not have withdrawn the offer and should have pursued the matter of selling the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of directors. 20. If the company shall within four calendar months after service of a sale notice find a member willing to purchase any share comprised therein (hereinafter described as the 'purchasing member') and give notice thereof to the selling member, the selling member shall be bound upon payment of the fair price to transfer that share to such purchasing member, who shall be bound to complete the purchase within seven days from the service of such last mentioned notice. The board of directors shall with a view to find a purchasing member, offer any shares comprised in a sale notice to the existing members of the company (other than the selling members) as nearly as may be in proportion to their holding of shares in the company, and shall limit the time within which such offer if not accepted will be deemed to have been declined ; and the board of directors shall make such other arrangements as regards the finding of a purchasing member for any shares not accepted by a member to whom they shall have been offered as aforesaid within such time as they may think just and reasonable. 21. The fair value of the share shall be such a sum of money, as the auditor for the time b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor by B.K.P. Rao, as a notice in writing issued to the company ; further, B.K.P. Rao did not constitute the company as his wife's agent to sell her shares. The learned company judge has overlooked the requirements of the article, when he held that, B.K.P. Rao could not have withdrawn his offer to sell his wife's shares. Article 19 is in the nature of a condition imposing a pre-exemption clause, and, therefore, it has to be strictly construed. A meticulous compliance with it is necessary to bind the intending seller. Because negotiations took place regarding the shares held by Mrs. Rao, the learned company judge found it as probabilising the petitioner's case that there was an understanding to put the petitioner on par with NVR. But nowhere had NVR in his deposition stated that negotiations pertained to the maintenance of parity. The discussion held because of notice received from the Central Excise Department in March, 1985. The letters of B.K.P. Rao and the petitioner's letters to the auditor K. P. Rao, show that B.K.P. Rao offered to sell shares at the rate of Rs. 7,000 per share, while the petitioner valued the shares below par. The discussion as to equalisation of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NVR, as could be seen from exhibit P-3 ; this resolution was passed on September 30, 1978, after B.S.N. Rao had ceased to be a full time director and there were only two full time directors. Therefore, it cannot be said that the petitioner rendered free service at the initial stage. The fact that B.S.N. Rao was also getting remuneration similar to other two directors, demolishes the petitioner's case that he and NVR are to own the company in equal shares. Though PW-1 asserted that his contribution financially was more, there is nothing to substantiate it. The petitioner stated that instead of transferring the entire 25 shares of B.S.N. Rao to him, only 13 shares were transferred to him, by mistake. But there is nothing on record to substantiate this theory of mistake. The shares of B.S.N. Rao were transferred to the petitioner and NVR in May, 1978 ; nowhere, thereafter the petitioner took any action to have this mistake rectified. B.K.P. Rao offered to sell the shares only in 1985. At least for 6 years, the petitioner was satisfied with his minority status, in the matter of shareholding. For the first time, in exhibit P-6, in the year 1985, the petitioner puts forth the theory of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook place between me and the second respondent in the year 1984. Therefore, I say that my relationship with second respondent was cordial till the second respondent refused to sell the uneconomical machines, in spite of the non-transfer of shares" Quite strangely, the petitioner did not mention anything about the alleged misunderstanding, in his letter, exhibit D-23, dated November 4, 1987, written to NVR. The understanding as to the shareholding was quite relevant to the subject-matter of co-opting two more directors referred in this letter. However, it is clear that by that time the dispute between them had come into the open, with NVR accusing the petitioner about non-signing the cheques and not attending to the company's affairs, etc. The allocation of work amongst the directors has been referred to already. PW-1 also admitted that "B.S.N. Rao was entitled to perform the functions relating to estimation, design, materials management, production, quality control as recorded at item (a) on page 27, of exhibit P-1." According to NVR, it was he who suggested the inclusion of B.S.N. Rao who was qualified and had wide experience on the shop-floor, though the petitioner, in the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y's business was to manufacture jigs and fixtures. Admittedly, the petitioner had no experience in the manufacture of these articles. Between 1970-73, PW-1 was in the service of Bradly and Co., Bombay, which was not manufacturing jigs and fixtures. Between 1973-75, he was working with the Industrial Accessories Corporation, which was also not manufacturing jigs and fixtures ; he retired from this firm in the middle of 1975, because he had a misunderstanding with the other partners. PW-2 also states that, the dispute between the petitioner and his earlier partners were settled by the auditors, K.P. Rao and Co. Regarding the allotment of shares to B.K.P. Rao, we find, that, the petitioner has tried to be evasive as to his knowledge, though, from the beginning, the petitioner was a party to the allotment of the shares, which, actually, stand in the name of Mrs. Rao. In exhibit P-16 dated August 11, 1987, addressed to NVR by the petitioner, the petitioner wrote : "Subsequently, when Mr. B.K.P. Rao offered to sell his 'share' to me at an exorbitant price of Rs. 7,000, I was shocked to learn and was wonderstruck as to when Mr. B.K.P. Rao had become a shareholder of the company, as I kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, which he had no right to possess. In his cross-examination made on November 23, 1988, PW-1 admits thus : "I have secured exhibits P-38, P-38A, P-39, P-40, P-41, P-42, P-43, P-44, P-45 and P-49 from the files of the first respondent-company. I do not know whether these documents formed part of one bigger file. I came into possession of these documents after the notice for extraordinary general meeting was served in October, 1987,I took out these documents from the files of the company and kept them with me. I did not inform the second respondent that I had removed the aforesaid documents from the files of the first respondent-company. I did not think it necessary to do so." In the light of these facts and circumstances, we are constrained to differ from the finding given by the learned company judge, and we hold that there was no specific undertaking that the petitioner was to have equal control or rights in the company, with NVR. One of the incidental arguments was that B.K.P. Rao should have been examined by NVR, as he belonged to his group and adverse inference has to be drawn against the contesting respondents. B.K.P. Rao or Mrs. Rao, could have spoken to only one aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of BSNR to him was "by mistake", while, as PW-1, he said : "At the time when the shares of B.S.N. Rao were transferred to me and the second respondent in the proportion of 13 : 12 respectively, I did not ask for transfer of all the shares to me because it was also agreed that the shares held by the third respondent should also be transferred to me and the second respondent in the proportion of 12 : 13 respectively to maintain the parity of shares. It was because of this the shares of B.S.N. Rao were not offered to all the shareholders of the company as required by the articles of association of the company. The fourth respondent was dodging the matter of transfer of shares held in the name of his wife-third respondent." This again shows that the petitioner changed his case, by the time he entered the witness box, on this aspect of the dispute. He also stated-- "I, as a director of the company, had been a party to the decision as to allotment of shares. There are documents in this regard, such as annual returns filed with the Registrar of Companies." As to his relationship with NVR, prior to his joining the company and his financial contribution, PW-1 said : "Before I be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of those 25 shares, by transfer of 12 shares to the petitioner and 13 shares to NVR. We have already held that there was no binding offer, earlier under exhibit P-5, etc., to sell these shares, as provided for, under the articles of association. If so, the said offer made in the year 1985 cannot now be enforced. However, these findings are not sufficient to non-suit the petitioner. The petitioner became a shareholder in February, 1976, he was also appointed a whole time director. The company did not declare any dividend. The return for the investment, as far as B.K.P. Rao and his wife are concerned, was either by way of alleged interest paid or consultation fee paid to B.K.P. Rao or his son. Other shareholders were appointed directors and were being paid monthly remunerations ; in addition, substantial perquisites were being provided to them. There can be no doubt that the petitioner has contributed his services for the prosperity of this company. Even though it is not possible to hold that there was an understanding between NVR and the petitioner to run the company as quasi-partners with equal shares, the circumstances justify the inference that the petitioner was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p Cas 91; AIR 1976 SC 565 was concerned with a winding up petition filed by one of the shareholders under section 433(f) of the Act. The main question was whether the principles applicable in the case of dissolution of partnership could be invoked in the case of that company. The petitioners held 1,875 shares, while the contesting respondents held 3,125 shares. The business was started in the name of the company formed for the said purpose ; the initial idea of constituting a partnership was abandoned, while forming the company, an erstwhile employee was also taken as a subscriber and a director, who subsequently resigned. The dispute arose between the petitioners' group (of RPJ) and another group (of VDJ).VDJ was alleged to have tried to oust RPJ from the management. In the circumstances, alleging complete lack of confidence and mutual trust and resultant deadlock in the management of the company, the group of RPJ filed the petition for winding up. The petitioners asserted that the company was in substance a partnership and circumstances justifying the dissolution of the firm existed. The point involved, was stated by the Supreme Court, at page 569 of AIR 1976 SC (at page 96 of 46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view that the general interests of the shareholders may not be readily sacrificed at the altar of squabbles of directors of powerful groups for power to manage the company. When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnerships cannot be liberally invoked. Besides, it is only when the shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, that there may arise a case of winding up on the just and equitable ground. In a given case the principles of dissolution of partnerships may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company. The principle of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that at no point of time the parties contemplated a partnership in substance and there was only a mere discussion about the advantages and disadvantages of partnership vis-a-vis a private limited company, but ultimately the company was formed. In these circumstances, the Supreme Court held that winding-up order was not the proper remedy. The Supreme Court was not dealing with the case under section 397, at all. In fact, the discussion shows that resort to section 397 was held to be more proper and appropriate than resort to section 433(f) in a case of dispute amongst two groups of shareholders, if the company was not a partnership in substance. The further observations at para 43 (See page 108 of [1976] 46 Comp. Cas.) (of the AIR Report, p. 576), indicate that the court may contemplate the exit of a group of shareholders in the interest of the company, in case such a course would enable the company to run smoothly. This decision, by necessary implication supports the principle that in the case of a petition under section 397, the court may make an appropriate order providing for the exit of one of the groups to enable the (small), company to run smoothly, if such an order is ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his money to a company is entitled to rely . . . But, apart from this, the question of absence of mutual confidence per se between partners, or between two sets of shareholders, however relevant to a winding up, seems to have no direct relevance to the remedy granted by section 210. It is oppression of some part of the shareholders by the manner in which the affairs of the company are being conducted that must be averred and proved. Mere loss of confidence or pure deadlock does not come within section 210. It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of the company's affairs, and oppression involving at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder'. These observations from the four cases, referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of dividends among the shareholders. He has undoubtedly a further right to participate in 'the assets of the company which would be left over after winding up' but not in the assets as a whole as Lord Anderson puts it." Therefore, if there was an understanding that persons investing in the shares of the company would be appropriately remunerated by way of salary and perquisites with a right to participate in the management of the company, in lieu of or in addition to, the dividends, the interest created by such an understanding has to be held as a component of the proprietary right of the said shareholder while applying equitable considerations. In Raghunath Swarup Mathur v. Har Swarup Mathur [1970] 40 Comp Cas 282 it was held by the Allahabad High Court, that under sections 397 and 398, interference in internal management of companies should take place only on good and compelling grounds ; powers under sections 397 and 398 are essentially preventive. At page 292, it was held : "The scope of remedial action under either of the two sections could be said to have become more extended as a result. Nevertheless, the powers vested in the court continue to be discretionary and are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awful exercise of power by the majority, the minority shareholder is bound by the same. Further, as held by the Supreme Court, oppression involves at least an element of lack of probity or fair dealing 'to a. member in matters of his proprietary right as a shareholder and not any harsh or unfair treatment in any other capacity.' The contention of the petitioner relates to his position only as a director and not that his proprietary right as a shareholder is in any way affected. Therefore, the petitioner cannot maintain the petition under section 397 on this ground." In the instant case, the petitioner is aggrieved by his non-election as a director and, therefore, the above principle would apply to non-suit him, was Mr. Holla's contention. We do not think so. The facts of the present case are entirely different. Election as a director is part of the understanding to enable participation in the management and draw remuneration in lieu of the dividends. There is a further observation in the Madras case that the principle of the special relationship between the parties forming the substratum of the company could be invoked only in a case where originally the business was a partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned judge of the Delhi High Court, having held that a case of oppression was not made out, proceeded to make an order providing for one group of shareholders to purchase the shares of the other because, the two groups of shareholders lacked complete confidence and trust in each other and the two groups cannot run the company together. At page 250, the learned judge held : "It is evident that the two groups of shareholders lack complete confidence and trust in each other. The two groups cannot run the company together. In an effort to destroy each other they will not only destroy themselves but also the company. The only course which is open to me under these circumstances is to direct the sale of the shares by one group to the other." In Chander Krishan Gupta v. Pannalal Girdhari Lal P. Ltd. [1984] 55 Comp Cas 702 (Delhi), the same learned judge (B. N. Kirpal J.) found that the dismissal of the petition under section 397 would not solve the problem and, therefore, as a permanent solution, sale of the shares of one group to the other was held to be most appropriate and ordered accordingly. Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., AIR 1966 Cal512, is a decision of a Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioners were oppressed so as to bring the case under section 397 of the Companies Act. The cause of justice will not suffer by the court arriving at a conclusion on a consideration of all the evidence before it even if the original plaint was lacking in particulars." As to the relief, it was held at page 532 : "In my opinion, the company cannot function properly if these two warring groups continue to hold the shares. As a matter of fact, at the early stages of the hearing of the appeal, a suggestion was made that one of the two groups should buy up the other's holding but nothing tangible came out of the attempts made by counsel on that behalf. In my opinion, the special auditor should be directed to find out the fair value of the shares at the date of the petition as was directed by Lord Denning in Scottish Co-operative Wholesale Society Ltd.'s case [1959] AC 324 ; [1959] 29 Comp Cas 1. We also order the oppressor, i.e., the respondents to the petition to buy the shares of the petitioners. In case the respondents are unable or unwilling to buy the shares, the petitioners should have an option to buy the respondents' shares at the same price. The price is to be arrived at on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt to direct winding up of the company, the English law is summarised by Pennington in his Company Law (5th edition) at page 861 : "If it becomes impossible to manage a company's affairs because the voting power at board and general meetings is divided between two dissenting groups, the court will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and who hold an equal number of voting shares ; if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general meeting, and management decisions will cease to be made. In this situation the court will make a winding up order, even though there is a provision in the company's articles that one director shall have a casting vote at board meetings, or that disputes shall be settled by arbitration. Nevertheless, the petitioner must show that there is no likelihood of the deadlock being resolved in fact, and for this purpose he should set out in his petition or in his supporting affidavit the relevant provisions of the company's articles (if any) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was cited to support the contention that if the real motive of the petitioner is to gain some benefit for himself, the discretionary power should not be exercised by the court. This principle has no application to the facts of this case and, therefore, we do not propose to refer to other decisions regulating the discretionary jurisdiction and its non-availability to a petitioner whose conduct is blameworthy. Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL) is a leading case, frequently referred to. A subsidiary company of the appellant-company was formed to facilitate the appellant's manufacturing business ; in this subsidiary company, the appellant had majority shares, as against the shares, held by the respondents. The latter had, in fact, provided the formulae, knowledge and experience of the business. Dispute arose in connection with the desire of the appellant to have more shares by purchasing them from the respondents. The appellants got it recorded that the subsidiary company had served its purpose and should be liquidated. The respondents approached the court alleging oppression. It was held that the affairs of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Lord President Cooper's words on the first hearing of this case. He said ([1954] SC 381, 391) : 'In my view, the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view. The truth is that, whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with its subsidiary.'" The House of Lords affirmed the order directing the society (appellant) to purchase the shares of the minority. In this regard, it was observed as page 72 (at page 9 of 29 Comp Cas) : "Some criticism was made of the relief given by the order of the court. It was said that only that relief could be given which had as its object and presumably its effect the 'bringing to an end of the matters complained of and that an order on the society to purchase the respondents' shares in the company did not satisfy that condition. This argument is without substance. The matter complained of was the oppressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the English Companies Act. The father had the voting control (along with his wife) ; he assumed powers which he did not possess and exercised them against the wishes of his sons who had major beneficial interest, but a minority of votes. At page 698, the nature of the oppression to be established under section 210 was stated thus (at page 319 of 29 Comp Cas) : "This indicates that the oppression complained of must be complained of by a member of the company and must be oppression of some part of the members (including himself) in their or his capacity as members or a member of the company as such. Secondly, it is to be noted that the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the 'just and equitable' rule, but only to those cases of that character which have in them the requisite element of oppression. Thirdly, the phrase 'the affairs of the company are being conducted' suggests, prima facie, a continuing process and is wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company, whether de facto or de jure. Fourthly, the section gives no guidance as to the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce the plaintiff's shareholding. Section 210 was invoked against the aunt, with success. After discussing the law on the point, it was held at page 282 : "I think that one thing which emerges from the cases to which I have referred is that in such a case as the present Miss Clemens is not entitled to exercise her majority vote in whatever way she pleases. The difficulty is in finding a principle, and obviously expressions such as 'bona fide for the benefit of the company as a whole', 'fraud on a minority' and 'oppressive' do not assist in formulating a principle." "I have come to the conclusion that it would be unwise to try to produce a principle, since the circumstances of each case are infinitely varied. It would not, I think, assist to say more than that in my judgment Miss Clemens is not entitled as of right to exercise her votes as an ordinary shareholder in any way she pleases." Consequently, the impugned resolutions of the board or directors were set aside. This decision illustrates the principle that, exercise of voting power by the majority is not immune from judicial review, if the resultant action of the company could be considered oppressive to the minority share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect the fact that the petitioner's shares constituted a minority shareholding. At page 529, while considering the discretion of the court, it was observed : "It seems to me that the whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company ; and I find myself quite unable to accept that that discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed." On the facts, we find here that the company was formed by three unrelated persons and two of them left the company ; the petitioner and NVR purchased one share each of the outgoing shareholders resulting in NVR holding two shares and the petitioner one. Subsequently, another shareholder, BNR, joined them, who was also made a full-time director; the issued share capital was increased for reallocation of shares. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts Nos. 2 and 3 shall not be entitled to any interest thereon (because appellants Nos. 2 and 3 are so far in enjoyment of the company). For the purpose of this order, reference to the parties would also include their respective nominees.
(v)In case the petitioner, Suresh Rao, purchases the shares of appellants Nos. 2 and 3, the company and its affairs shall be handed over to him and liberty is given to Suresh Rao to move the company court for appropriate orders regarding the binding nature of the liabilities, if any, created subsequent to November 14, 1987, and the consequences of any alienation of the assets of the company.
(vi)While valuing the shares of the company the chartered accountants shall bear in mind the principle of valuation adopted in Bird Precision Bellows Ltd., In re [1984] 3 All ER 444.
(vii)N.V. Rao shall furnish all the requisite information for the valuation of the shares, to the two chartered accountants by September 28, 1992, with copies to Suresh Rao.
(viii)If any practical difficulty arises in implementing this order, parties may move the company court by an appropriate application, for clarification/directions.
The appeal is allowed accordingly. X X X X Extracts X X X X X X X X Extracts X X X X
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