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TMI Blog1991 (10) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... ded. The admitted facts of the case are : The authorised share capital of the company is Rs. 25,00,000 divided into 2,20,000 of equity shares of Rs. 10 each and 3,000 of 12% cumulative redeemable preference shares of Rs. 100 each. The paid-up capital of the company is Rs. 16,18,760. The objects of the company, as appearing from its memorandum of association, are as follows: "( a )( i )To canvass as commission agents on behalf of foreign and local manufacturers, their agents and distributors, orders from local and foreign importers and their agents or representatives; ( ii )To act as agents, sub-agents, representatives, brokers, nominees, distributors and st6ckists for foreign and local factories, merchants, shippers, forwarders, manufacturers, producers, growers, builders, patentees and specialists; ( b )To acquire by purchase, lease, exchange or otherwise, lands, buildings and any rights over and connected with lands or buildings, and to retain the same for the purpose of the company's business or to turn the same to account as may seem expedient; ( c )To manufacture, import, export, buy, sell, exchange, alter, manipulate and generally deal in all goods, merchandis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share capital of the company. The resolution at items (4) and (5) of the notice are respectively to increase the authorised share capital of the company and to clear clause V and article 5 of the memorandum and articles of association of the company respectively. None of the directors of the company is concerned or interested in these resolutions." This application was moved on September 25, 1990 (referred to as the main petition). An interim application was moved by summons dated September 25, 1990, in the main application (referred to as "the first interlocutory application"). An interim order was obtained restraining the respondents from taking any resolution relating to the increase of the authorised share capital at the ensuing general meeting and restraining the respondents from transferring any portion of premises No. 4/B, Hemanta Basu Sarani, Calcutta, belonging to the company. On April 24, 1991, respondents Nos. 1 to 5 filed an application for dismissal of the main petition (referred to as "the second interlocutory application"). The grounds for dismissal of the main application were (1) that by three several letters petitioners Nos. 5, 6 and 7 had informed the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show a loss and thereby deny the petitioners the benefit of their shareholdings. It was, therefore, submitted that non-declaration of dividend for such a long period, exceeding a decade was really manipulated to oppress the petitioners. (2)Siphoning off of the monies of the company by letting out the company's immovable properties at low rates. It is alleged that by letting out the properties at low rates that the management had in fact, made a secret profit: (3)The attempt to increase the authorised share capital and subsequently the subscribed capital of the company were in fact early at tempts on the part of the management to reduce the petitioners to a further minority. There was no genuine need for increase of the capital of the company either subscribed or authorised. There was no evidence of such need. The allegations of mismanagement against the present management by the petitioners are quoted as follows : "( i )Since 1980, no dividend has been declared by the respondent company although the company made profits. By scrutinising the balance-sheet, it will be evident that the management of the respondent-company from time to time defrauded the shareholders by ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether any interest is being accrued on the same. ( vii )It also appears from the said balance-sheet that the company is borrowing substantial sums from the bank and/or financial institutions by paying 18 per cent. interest whereas there is a term deposit of Rs. 20,00,000 earning not more than 10 per cent. per annum. ( viii )Respondents Nos. 2 to 5 have caused several constructions in the registered office as stated hereinbefore as well as in the factory situated in Kasaba Road, Calcutta, under the guise of repair and maintenance. The said cost of construction should have been accounted for in the capital expenditure account and should have been included in the list of assets of the company. The said manipulation has been done only for the purpose of defrauding the shareholders of the company, specially the minority group." On behalf of respondents Nos. 1 to 5 it has been submitted that : ( i )The grounds urged did not amount to mismanagement under section 397 or 398 of the Act. Non-declaration of dividend since 1968 was untenable in law and fact. The petitioners were in fact in management till 1987. In any event, it was not a ground for winding up the company. Reliance has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajya Lakshmi v. Indian Motor Co. ( Hazaribagh ) Ltd. [1962] 32 Comp Cas 207 (Cal). It has been further contended that the petitioners by obtaining the order of injunction have caused loss to the company. By not being able to raise the necessary finance the company has been unable to acquire the imported goods, as a result of which the goods have now been subjected to an increase in duty. The respondents should not be compelled to purchase the petitioners' shares as the petitioners have not been able to make out any ground justifying the grounds for any relief under section 397 or 398 of the Act. ( vii )The final submission of the respondents was that the application was not maintainable. The offer by the petitioner trustees to sell the shares could not be made except with the consent of respondent No. 6. Reliance has been placed on Luke v. South Kensington Hotel Co. [1872] 11 Ch 121 (Ch D) and Tempest v. Lord Camoys Ltd. [1882] 21 Ch 571 (Ch D). The final contention of the respondents is in the nature of a preliminary objection and is, therefore, disposed of at the outset. The allegation raised by the respondents is that the petition is not maintainable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58] 3 All ER 71 (HL) ; [1959] 29 Comp Cas 1 (HL) 'burdensome, harsh and wrongful' to the other members of the company or some of them, and lacks that degree of probity which they are entitled to expect in the conduct of the company's affairs: see Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 71 (HL) ; [1959] 29 Comp Cas 1 (HL) and H. R. Harmer Ltd., In re [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA)." Although this case related to acts of oppression the observations are equally applicable to cases under section 398. The second consideration which has to be borne in mind is the principle of particularity and proof. As held in Lalita Rajya Lahshmi v. Indian Motor Co. ( Hazaribagh ) Ltd. [1962] 32 Comp Cas 207 (Cal) (at page 209): "The main defect of this application is that the facts alleged are not proved. It is essential to remember that under section 397 of the Companies Act, the court has to be satisfied that there is oppression. It has to be satisfied that the affairs of the company are being conducted in a manner oppressive to any member or members of the company. The acts of oppression, therefore, have not only to be alleged with su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alita Rajya Lahshmi v. Indian Motor Co. ( Hazaribagh ) Ltd ., AIR 1962 Cal 127 ; [1962] 32 Comp Cas 207 , it was held (at page 212) : "It is then argued that the board of directors controlled by the managing agents has not been properly declaring dividends. In fact what is said in paragraph 21 of the petition is that dividend which is much below the actual profit earned by the company has been declared. I fail to see how this is an act of oppression to any member or members within the meaning of section 397 of the Companies Act. The board of directors has a discretion to declare dividend and the rate of such dividend. There is no company law that I know which obliges a board of directors to use up all its profits by declaring dividend. No company law lays down that all profits must be declared and exhausted in paying dividends. Surely, failure to do so could not be a ground for an application for oppression under section 397 of the Companies Act. Besides, that will also not be a ground for winding up a company as indicated by Lord Blanesburgh in the observation quoted above in the Privy Council decision in Ripon Press and Sugar Mill Co. Ltd. v. Gopal Chetty [1932] 2 Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. ) v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp Cas 284 (Ker) (at page 306): "In this case, we have the spectacle of two disgruntled directors who had themselves been participants in the various acts of mismanagement alleged figuring with injured innocence as complainants before the court. This circumstance itself to a large extent demolishes the bona fides of the allegations put forward." At the hearing of this application the court enquired whether the petitioners were willing to sell their shares in the company, to either the company or to the other respondents. The petitioners stated that they were willing but that they would not accept the par value of the shares. This in my view is clear proof that the value of the shares has not been affected by the non-declaration of the dividend. As far as the second allegation of oppression is concerned, in order to hold that the management had rented out properties at unreasonably low rates it is essential that there should be a comparative statement of the nature of the tenancy not only as regards the situation but also as regards space covered, the nature of the space and attendant facilities. It has been denied by the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission agent and distributor of machinery and equipment manufactured by Stranko Import, USSR for the whole of India." "The present management is trying to reopen the Durgapur unit of the company. For the said purpose of revival huge sums of money would be required and that is one of the reasons for enhancement of the authorised share capital of the respondent-company, I say having regard to the fact that the Durgapur unit is lying closed for sometime the same cannot be considered to be an undertaking within the meaning of the Companies Act, 1956." It is admitted by the petitioners that there has been an increase in the business of the company. The directors' report accompanying the balance-sheet for the year ending December 31, 1987, stated as follows: "Your directors are pleased to report that the profit of the company has considerably increased in comparison with the previous year. This is mainly due to increase in sales as well as commission earnings. As reported, your directors have already taken steps to revitalise manufacturing activities and hope that the result of this will be reflected in the current year's working." The directors report for the year ending on Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmitted to finance such margin money. This coupled with the devaluation of the rupee would mean a heavier financial burden on a company whose principal business is import. It is, therefore, not sufficient to say that the company has Rs. 20,00,000 in a term deposit (which is in any event now reduced to Rs. 18,00,000) which is used for the purpose of obtaining guarantees from the banks and security deposits for the execution of jobs. In any event, there is no question of reducing the petitioners to a minority as article 69 of the articles of association of the company provides as follows: "Subject to other provisions of these articles and subject to any directions to the contrary that may be given by the meeting that resolves upon the increase of capital where the board decide to increase the capital of the company by the further issue of additional shares, such shares shall be offered to the persons who at the date of the offer, are holders of the equity shares of the company, in proportion as nearly as circumstances admit to the capital paid up on those shares at that date and such offer shall be made by notice specifying the number of shares offered and limiting a time not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 81 of the Act. The offer of the shares has been made to all shareholders so that the petitioners may participate in the fresh issue. In the case of Needle Industries ( India ) Ltd. v. Needle Industries Newey ( India ) Holdings Ltd. , AIR 1981 SC 1298, 1340 ; [1981] 51 Comp Cas 743 , it was alleged as a ground of oppression that issue of shares had been made without offering the same to the foreign shareholders. The allegation of oppression was negatived by the Supreme Court on the ground that even if the offer had been made, the foreign shareholders could not have availed of the same because of F.E.R.A. regulations. The court further held (at page 813 of 51 Comp Cas): "Whether one looks at the matter from the point of view expressed by this court in Nanalal Zaver [1950] 20 Comp Cas 179 (SC) or from the point of view expressed by the Privy Council in Howard Smith [1974] AC 821, the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the directors. If the shares are issued in the larger interest of the company, the decision to issue the shares cannot be struck down on the ground that it has incidentally benefited the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of any provision of law is not a proper subject-matter of inquiry in a petition under section 397 or 398 of the Companies Act, 1956. If an action of the directors is illegal or invalid, the company of the shareholders may take appropriate action in a court of law challenging the validity of such action, but a petition under section 397 or 398 is not an appropriate remedy for the purpose. The only question with which the court is concerned in a petition under section 397 or 398 is whether the action of the directors whether within the law or outside the law is oppressive to the minority shareholders or is prejudicial to the interests of the company." As far as the third, fourth and fifth allegations are concerned these allegations cannot be accepted. The tenancy according to the petitioners had been granted to M/s. Dalmia Mehta. This has been denied by the respondents. Secondly, before one can deduce that there was any question of a tenancy being granted at low rates evidence of comparable tenancies has to be adduced. This aspect has been dealt with under the heading of oppression. There is also no evidence that the company is going to let out any other properties at low ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put forward by the petitioners are sustainable, I hold that the petitioners have not been able to establish a case of mismanagement under section 398 of the Act. This leaves the question of whether the company is liable to be wound up. Although the application is maintainable since it is well established that the maintainability of a petition has to be judged on the petition as filed, nevertheless the court cannot ignore the fact that three of the petitioners are no longer opposing the management. In this case the petitioners have annexed a chart relating to the profits earned by the company from December, 1980, up to 1990. That chart shows that there was no dividend declared since 1981. There was a term deposit of Rs. 19 lakhs in 1987. The term deposit in 1988 to March, 1989, increased to Rs. 25,00,000 and in 1990 the same was reduced to Rs. 20,00,000. The sale figure shows a gradual increase from a slump in 1982 to 1984 where the figures range between Rs. 6,32,000 to Rs. 9,58,530 to Rs. 19,45,354 in 1987, Rs. 37,21,847 in 1988-89 and Rs. 46,18,123 in 1990. As far as the stock was concerned immediately prior to 1987, the stock is given as Rs. 2,90,891 this was increased in 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y stamped with the purpose of 'bringing to an end the matters complained of. Therefore, wide as the power of the court is following from the words of the expression 'such order as it thinks fit' it is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed 'to bringing to an end the matters complained of. The marginal note of section 397 of the Companies Act shows also that the purpose of the order of the court in this section is to give 'relief in case of oppression'." The decision in Needle Industries (India) Ltd. v. Needle Industries Newey ( India ) Holdings Ltd. , AIR 1981 SC 1298 ; [1981] 51 Comp Cas 743 , 845, does not assist the petitioners. In that case the Supreme Court had held against the petitioners and found that there was no oppression. But the Supreme Court found that the Indian shareholders had purchased the shares at a price less than what had initially been offered by them. The Indian shareholders had all along offered to purchase the shares at a premium. They resided from this stand at a meeting held on May 2, of which adequate notice had not been given to the foreign shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X
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