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TMI Blog1993 (5) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... Road, Palghat. Respondent No. 6 is K. Santhosh Hebbar, managing director of the company. Respondent No. 7 is the chairman of the company and respondent No. 8 is the company director, L. Viswanathan. Respondent No. 9 is the Union of India, represented by the Secretary, Company Law Administration, New Delhi. Respondents Nos. 1 to 4 are the petitioners in C.P. No. 27 of 1988. Respondent No. 1 was the first petitioner in C.P. No. 27 of 1988 who is the father of respondents Nos. 2, 3 and 4. As a unit, respondents Nos. 1 to 4 in both the appeals held 7 out of the total 28 equity shares issued by the company. The appellants in M.F.A. No. 65 of 1992 are the company, managing director, chairman and a director. As stated earlier, appellant in M.F.A. No. 64 of 1993 is another director who was the fourth respondent in C.P. No. 27 of 1988. The case of respondents Nos. 1 to 4 as against appellants Nos. 2 to 4 in M.F.A. No. 65 of 1992 and the appellant in M.F.A. No. 64 of 1993 is that they are entitled to get reliefs under sections 397 and 398 of the Act on account of the fact that the affairs of the company are being conducted in a manner prejudicial to public interest and in a manner oppressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese appeals, we feel that it requires a short resume of the statement of facts which are given in detail, is necessary. Now, we turn to the facts. The company in question is the Palghat Exports Pvt. Ltd. It was incorporated on 22nd June, 1984. The petitioners before the company court who are respondents herein are admittedly shareholders. They have got legitimacy to file a petition under sections 397 and 398 of the Act, since they held 7 out of the total 28 equity shares issued by the company. The objects of the company set out in the memorandum and articles of association include as the main objects, export and import. Of course, there are ancillary objects also. The memorandum contains a head of objects-other objects. This includes the conduct of restaurants and hotels. Petitioner No. 1 before the company court paid Rs. 35,000 on May 22, 1985, for the purchase of 7 shares. It is the case of the petitioners that one of the directors, P. Ramkumar, represented that the object of the company was to carry on the business of import and export of commodities. Even before the allotment of shares and even before the payment of the price of 7 shares of Rs. 35,000, the company started re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental store. The building was taken on rent on April 1, 1985. On May 7, 1985, the third appellant and the fourth appellant were appointed as additional directors and the second appellant was made the managing director. The business commenced on May 19, 1985. On May 7, 1985, it was resolved to have 26 shares more and out of 26, the board resolved to issue 7 shares to the petitioners before the company court. The business was a failure and on January 14, 1986, the board passed a resolution to wind up the business and to dispose of the movable assets. The company petition was filed seeking the relief only in July, 1988. The first respondent in the appeal is the father of respondents Nos. 2, 3 and 4 (petitioners before the company court). The first respondent had filed C.P. No. 6 of 1987 invoking the remedy under section 237A of the Act for inspection of the affairs of the company. The same was dismissed on March 9, 1988. The appellants herein submitted before the company courts that the petition deserves to be dismissed. The company court framed necessary issues and took both oral and documentary evidence. The first respondent was examined as PW-1 and the auditor of the company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the matters complained of, make such order as it thinks fit." "398. Application to Company Law Board for relief in cases of mismanagement. ‑‑(1) Any members of company who complain- (a)that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company ; or (b)that a material change (not being a change brought about by, or in the interests of any creditors including debenture-holders, or any class of shareholders, of the company) has taken place in the management or control of the company whether by an alteration in its board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company, may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399, (2) If, on an application under sub-section (1), the Company Law B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 952 widened the scope and area still further. The remedy was extended by not confining it to cases of minority oppression, but also the cases of mismanagement of company affairs in a manner prejudicial to the interests of the company. In 1963, the provision of the Companies Act, 1956, was amended extending the scope of the provision to include where the affairs of the company were being conducted in a manner prejudicial to the public interest. At the foreground, when we examine the factual situation emerging in the case, we have to caution ourselves that the oppression is the core element to be proved and the nature of oppression to be tested in the context of "cause for winding up". But it has to be remembered that the provision is intended to avoid winding up and to mitigate and alleviate oppression. The relief under section 397 of the Act is geared to help the members who were oppressed. The relief under section 398 of the Act is geared to save the company and it is in the interest of the company alone and not to any particular member/members. The right of members to apply under section 397 of the Act is hedged in with certain restrictive conditions. This is to avoid frivolous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 pertinent to note that in Harmer Ltd.'s case [1959] 29 Comp Cas 305 (CA), it was held that "the word 'oppressive' meant burdensome, harsh and wrongful". Further, it was held 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". It was also held that "the result of applications under section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision." The facts of the case should disclose and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi), (10) In a company where there are only two shareholders and who are directors and one director who has got majority shares refuses to cooperate with the affairs of the company and exhibiting mutual lack of confidence not to be settled otherwise than by taking it to court, by mutual domestic policy-Combust Technic Pvt Ltd., In re [1986] 60 Comp Cas 872 (Cal), (11) If the directors refuse to register shares in the name of the complaining petitioners with an object to retain control over the affairs of the company-Kumar Exporters P. Ltd. v. Naini Oxygen and Acetylene Gas Ltd. [1986] 60 Comp Cas 984 (All). We have cited the aforesaid instances as illustrations. Certainly they are not exhaustive. There are instances where the court refused to accept certain acts not amounting to oppression for the purpose of invoking section 397 of the Act. In Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh Ltd.) , AIR 1962 Cal 127, the court held that denial of access to, or inspection of, the books of account of the company to the petitioner may not amount to an act of oppression. In N. Krishna Prasad v. Andhra Bank Ltd. [1983] 53 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion and mismanagement is rather in a nebulous state. But the Supreme Court has given very substantial guidelines for determining whether an act would amount to oppression within the meaning of section 397 of the Act. We may close this discussion referring to the quotation from Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 wherein the Supreme Court observed, after reviewing the English as well as Indian authorities, thus (at page 782): "It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder." We may also in this context refer to a decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 ; 803 ; AIR 1965 Guj 96, 98, wherein Bhagwati J., as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is discretionary in character because the words used are "the court may make an order as it thinks fit with a view to bringing to an end the matters complained of" as distinct from the power granted under section 398 of the Act wherein it is stated "the court may pass an order with a view to bringing to an end or preventing the matters complained of or apprehended..." Now, we think that it is time for us to discuss the various points raised by counsel for the appellants on the factual situation emerging in the case. Counsel for the appellants in M.F.A. No. 65 of 1993 submitted that the facts disclosed in the petition would not attract the exercise of power under sections 397 and 398 of the Act. This contention was raised mainly on the ground that at the time when the petition was filed, the business of the company was closed. It was emphasised that the business was closed in 1986 and as such the company which was not doing any business cannot form the subject-matter of action under sections 397 and 398 of the Act. The learned company judge has considered this question in detail and relied on Hindusthan Co-operative Society Ltd., In re, [1961] 31 Comp Cas 193 ; AIR 1961 Cal 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been referred to by the learned company judge. It has to be noted that the Gujarat High Court held that (i) sections 397 and 398 apply to present continuous wrongs ; (ii) the remedy is essentially preventive ; (iii) there must exist on the date of the petition a continuous course of oppressive, or prejudicial conduct of the affairs of the company; (iv) there is no power in the court to set aside or interfere with past and concluded transactions between a company and third party. We do not want to emphasise the fact that the remedy envisaged in section 397 of the Act is not intended to set at naught what has already been done by the controlling shareholders in the management of the affairs of the company. In Thakur Hotel ( Simla) Company ( Private) Ltd., In re [1963] 33 Comp Cas 1029, Tek Chand J. of the Punjab High Court in plain language observed thus (headnote) : "Mismanagement or misconduct of directors during earlier years is no ground for winding up a company under the "just and equitable" clause or for making an order under section 397 if the mismanagement had ceased at the time of the application. The object of section 397 is not "to rake up the past but to redeem the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat recommendation was not accepted and the English law remains the same as in Meyer [1959] 29 Comp Cas 1; [1959] AC 324 and H.R. Harmer Ltd., In re [1959] 29 Comp Cas 305 (CA) as modified in Jermyn Street Turkish Baths Ltd., In re [1971] 41 Comp Cas 999 (CA). We have now adopted that modification in India." The Madras High Court had an occasion to consider the question in great detail in V.M. Rao v. V.L. Dutt [1987] 61 Comp Cas 20 (Mad). The court formulated the following conditions for maintaining a petition, under sections 397 and 398 of the Companies Act, 1956, (at page 66) (a) it must be established that the oppression complained of affected a person in his capacity or character as a member of the company as harsh ; (b) there must be continuous acts constituting oppression up to the date of the petition (emphasis added) ; (c) the events have to be considered not in isolation but as part of a continuous story ; (d) it must be shown as a preliminary to the application of section 397 that there are just and equitable grounds for winding up the company ; (e) the conduct complained of can be said to be oppression only if it can be said that it is burdensome, harsh and wrongful and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38] 8 Comp Cas 131 (Ch D), which I have already mentioned, where Simmonds J. said : " For the purpose of determining whether the petition should be granted or not, it is necessary for me to look at the allegations in the petition, and I do not propose to travel beyond them." We may also refer to Lundie Brothers Ltd., In re [1965] 35 Comp Cas 827 (Ch D), wherein Plowman J. observed thus : 'It was suggested in the course of argument that it was really the evidence and not the allegations in the petition which was of importance in this matter. I entirely dissent from that proposition. It seems to me that it would be wrong for the court to travel outside the allegations in the petition, particularly in a case of this sort where the petition is based on the proposition that the respondents to it have been guilty of some oppression or some lack of probity". In C.P. Gnanasambandam v. Tamil Nadu Transports (Coimbatore ) Private Ltd. [1971] 41 Comp Cas 26 (Mad), the Madras High Court observed that (headnote) : "Events that happened subsequent to the institution of a winding up petition cannot be taken advantage of by the petitioner in support of the prayer for winding up". From the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led the petition for the purpose of obtaining the money he has invested in shares or for recovery of money from the company. The court said that the ulterior purpose of the petitioner makes the petition not bona fide and if the petition is not bona fide, the court is bound to reject it. We think, we have to quote what Plowman has said on this aspect of the matter. He has said that if the object of a petition under section 397 of the Act is to recover money from the controlling shareholders, it is an abuse of the process of the court and on that ground the petition should be dismissed. Now, we quote : "... in my judgment, this case must fail for different reasons. First and foremost is the reason that I do not regard this petition as a bona fide attempt to obtain relief under section 210 at all. It became obvious during Moss Simmons' cross-examination that he did not really want the relief for which he was asking in the petition and that its real object was to achieve a collateral purpose, namely, to get some satisfaction in regard to the repayment to Bellador Ltd. or to the Simmons group of companies, of the outstanding loan. Indeed, he made no bones about this in the witness-box. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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