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TMI Blog1999 (11) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... ing directions that one or the other groups ought to be directed to buy out the other group in view of the circumstances prevailing in the company. 2. By an order dated 23-7-1999, Radhakrishnan, J, had directed that the main company petition be taken up pre-emptorily for hearing and final disposal on 19-8-1999. In view of the above, the respondents did not press for any ad interim relief. Since the assignment changed before company petition could be heard, it was directed that the respondents would be at liberty to move the Court for ad interim order in Company Application No. 466 of 1999. The matter was directed to be placed before the regular Judge taking company matters on 26-8-1999. It is in these circumstances the company petition along with the applications have come up for hearing before this Court. 3. In Company Application No. 77 of 1991, Dhanuka, J. by an order dated 13-3-1992 allowed some of the proposed amendments and disallowed some. In pursuance of the aforesaid order, the amendments have been duly carried out. 4. The matter came up for hearing for the first time on 26-10-1999. At that time, Mr. Manohar, the learned counsel appearing for respondent Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1965 SC 1535. ( iii ) Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC). Mr. Manohar submitted that if the unamended petition be looked at, then clearly no case has been made out and the petition deserves to be dismissed as disclosing no cause of action. According to Mr. Manohar, the first incident relied upon by the petitioner pertains to the year 1975. This incident pertains to the deceased father of petitioner No. 2. Mr. R. Kavasmanek was the original member. He died on 5-2-1977. He submitted that the petition has been filed 13 years after the death of Mr. Kavasmanek ( the deceased ), oppression cannot possibly relate to lineal descendants of a member. Oppression has to be of the member. The deceased had filed B.C.C. Suit No. 6360 of 1975 against the resondent Nos. 1 to 4 which was settled. Thus the issue is closed. 6. The second incident relates to delay in transmission of 3,360 shares of the deceased. Mr. Manohar stated that the first letter asking for the transmission of the shares is dated 18-9-1989, 12 years and 6 months after the death of the deceased. The company, however, transferred the shares on 9-2-1990. This, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another. It is the submission of Mr. Manohar that Articles of Association of a company have to be strictly construed in favour of free transferability of the shares. For this proposition, the learned counsel as relied on number of authorities. According to Mr. Manohar, the shares are property which are inherently transferable and this right to transferability is conferred both by the Companies Act as well as by article 51 of the Articles of Association. Any restriction on the transferability of shares whether in a private or public limited company must be found expressly and mentioned in the Articles of Association. It is not permissible to imply restrictions which are not to be found or clearly spelt out in the Articles of Association. For this proposition the learned counsel has relied on the case of Delavenne v. Broadhurst 1931 Ch.D 234. In this case it is held as follows : "We propose first to state the principles as we understand them. By section 22 of the Companies Act, 1862, which is reproduced as section 22 of the Companies (Consolidation) Act, 1908, it is provided that the shares in a company under these Acts shall be capable of being transferred in a manner provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders. It was voluntary. It did not single out the petitioners only. In view of the voluntary nature of the circular it can only be termed as an appeal to the shareholder to help the company in establishing the Foundation. This Foundation was set up as a section 25 company by respondent No.2. It is true that only respondent No. 2 and respondent No. 2 s wife are to be the Directors of the Foundation. Mr. Manohar submits that this by itself cannot amount to an act of oppression. 11. The seventh incident relates to the notice dated 6-1-1990 for holding of the EOGM on 5-2-1990, inter alia , for amendment of article 57 of the Articles of Association of the company. It is submitted that the amendment was necessary as the unamended article was proving to be cumbersome. In any event, Articles of Association can always be amended with the approval of the members of the company. Therefore, this cannot be said to be an act of oppression. It is further submitted by Mr. Manohar that the main thrust of the petition is on the dividend squeeze which is alleged to have been applied by the respondents in order to pressurise the petitioners to sell the shares commencing from 1988 till the filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual who is not a member of the company. 13. In reply, Mr. Chinoy, the learned counsel appearing for the petitioners, has submitted that a totally false picture of the case of the petitioner is sought to be projected by Mr. Manohar and Mr. Subramaniam. The events which are sought to be described as disjointed would clearly show that there have been continuous efforts by respondent No. 2 to take control of the company by firstly trying to oppress the deceased and thereafter trying to oppress the petitioners. It is submitted that the forerunner of the company was a partnership between the deceased and respondent No. 2. The company was formed in March, 1967 by the deceased and respondent No. 2 to acquire and/or purchase as a going concern the business of the partnership firm. The deceased and the second respondent were the first Directors of the company and were not liable to retire by rotation. The deceased was in fact the Chairman of the company. The company was a glorified partnership constituted by the deceased and the second defendant on the basis of close family ties and mutual confidence. He has stressed upon the close personal relationship between the parties. Dr. K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly paid up to shares amounting to Rs. 2 lakhs. Dr. Gharda was allotted 1,100 shares, the deceased was allotted 600 shares and Mrs. Warden was allotted 300 shares. 14. It is submitted by Mr. Chinoy that the company is nothing but a glorified partnership. There was a special underlying/understanding/ agreement embodied in the Articles of Association of the company that its ownership would vest in the members without disturbing their propor-tionality in shareholding. This according to Mr. Chinoy, was the very basis of the formation of the company and it was for this reason that article 57 was specially included in the Memorandum and Articles of Association. By now transferring the 3,000 shares to respondent No. 2, the principle of proportionality will be totally obliterated and the very purpose of forming a company would be frustrated. According to Mr. Chinoy, there was also a further special underlying obligation on the members of the company and those in management and control that its business affairs would be conducted bona fide in the interest of all the shareholders. The personal relationship, the trust and confidence flowing from the relationship and the special underlyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oy has also laid stress on the fact that respondent No. 2 is deliberately misconstruing article 57 of the Articles of Association. 3,000 shares of the Warden have been transferred by respondent No. 2 to himself. This has destroyed the proportionality principle underlying the formation of the company. According to the learned counsel, this in itself is sufficient to show that the majority is acting directly against the interest of the minority shareholders. The learned counsel has also submitted that the Foundation has been set up by respondent No. 2 only as a device to get over the tax difficulties. He has illustrated the points by making reference to certain pleadings. It is pleaded as a consequence of the retained profits the book value of the shares increased from Rs. 479 per share in 1986 to Rs. 6,599 per share in 1990. This resulted in the petitioners wealth-tax liability increasing tremendously. The meagre amount of dividend declared for the years 1988, 1989 and 1990 being 2.13 per cent, 1.14 per cent and 2.20 per cent of the net profits was not even sufficient to pay the wealth-tax on the shares. For the years 1988-90 the total tax liability of the petitioners on the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oticed above. 15. I have considered the arguments put forward by the learned counsel for the parties. The position with regard to amendment of the pleadings is no longer res integra. The law has been clearly set out in the case of Khimji M. Shah v. Ratilal D. Modi 1988 MLJ 38. In that case it is clearly held as follows: "6. Mr. Chinoy, who appeared for respondent Nos. 1, 2 and 4 to oppose the amendments, stated that he had no objection to respondent Nos. 6, 7 and 8 being added as party-respondents to the company petition No. 573 of 1984. He, however, submitted that rest of the amendments should not be allowed because, according to him, these amendments deal with the events subsequent to the filing of Company Petition No. 573 of 1984. It is his contention that such subsequent events cannot be gone into in deciding a company petition under sections 397 and 398 of the Companies Act. In support, he relied upon a decision in the case of Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213. In this case, the applicants had obtained the consent of not less than 1/10th of the members of the company while filing a petition under sections 397 and 398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of amendment. Under Rule 6 of the Companies (Court) Rules, 1859 the provisions of the Code of Civil Procedure, so far as applicable shall apply to all proceedings under the Companies Act. The provisions relating to amendment of pleadings would, therefore, apply to amendment of pleadings under the Companies Act. There is no bar to an amendment which incorporates subsequent events if the amendment is otherwise necessary for proper determination of issues between the parties. In the case of Promode Kumar Mittal v. Southern Steel Ltd. [1980] 50 Comp. Cas. 555 the Calcutta High Court observed in a petition under sections 397 and 398 of the Companies Act that the Court can take notice of all subsequent events to grant reliefs finally after trial in a company matter and the interim orders passed from time to time by the Court in all applications, the meetings held under the Chairman appointed by the Court, and the resolutions passed by majority shareholders and directors present therein are all relevant. In the case of Inder Kumar Jain v. Osra Bottling Co. (P.) Ltd. [1977] 47 Comp. Cas. 194 the Delhi High Court has held that on an analogy of Order VI Rule 17 of the Code of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own by the Supreme Court. Even the Supreme Court in Shanti Prasad Jain s case ( supra ) has held that facts and events leading upto the filing of the petition are relevant. Keeping the aforesaid proposition of law in view, the Court is now required to see as to whether sufficient facts have been pleaded to make out an arguable case of oppression as well as mismanagement. It is a settled proposition of law that whilst exercising powers under Order 7 Rule 11 the Courts act with utmost caution. Dismissal of a petition at the threshold leads to very serious consequences. The Courts in India as well as in England have been very reluctant to reject the plaint at the threshold. Order VII Rule 11 ( a ) of the C.P.C. provides that the Court may reject the plaint/petition if it discloses no cause of action. Similar provision occurring in Rules of Supreme Court Order 18 Rule 19 in England was considered in the case of Drummond-Jackson v. British Medical Association [1970] All E.R. 1094 wherein Lord Pearson observes as follows : "Over a long period of years it has been firmly established by many authorities that the power to strike out a statement of claim as disclosing no reasonable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no material had been placed on the record by the petitioners which would lead this Court to the conclusion that the minority has been oppressed. 16. There are two diametrically opposed propositions given on the interpretation of article 57 of the Articles of Association. As noticed earlier, it is the claim of the respondents that article 57 does not apply to intra member transfers. On the other hand it has been pleaded as well as argued that the shares have to be sold only to the members in order to maintain the principle of proportionality which was the underlying idea of the incorporation of the company. 17. Keeping the aforesaid facts and circumstances in view, it would not be possible for this Court to hold that the petition is demurrable. Once the petition is held to be maintainable, the petitioners are entitled to bring on record all matters which are germane to decide the issue of oppression. The Orissa High Court in the case of Kalinga Tubes Ltd. ( supra ) framed various issues in paragraph 7 of the judgment. Issue No. 1 was as follows : "( i ) Is the petition demurrable and liable to dismissal in limine ?" (p. 197) The Division Bench noticed the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in reply to the materials given in the counter affidavit of the contesting respondents. It is, therefore, not necessary to examine in detail as to in what manner the departure has been made in the pleading as essentially, in our view, there has been no departure in material facts. The subsequent affidavits are more or less pieces of evidence in support of the averments of material facts pleaded in the petition. Respondent 2 also filed a subsequent affidavit, as already stated, even without permission of the Court. Most of the subsequent affidavits merely place facts already pleaded by both parties. The subsequent affidavits would, therefore, be taken into consideration, but facts transpiring subsequent to the petition would be excluded from consideration." (p. 198) Thus the two affidavits were treated as pieces of evidence in support of the averments of material facts pleaded in the petition. The two affidavits were, therefore, taken into consideration excepting the facts transpiring subsequent to the petition but the subsequent events were excluded only for the purpose of deciding the question of whether the petition is demurrable. I am of the opinion that once the Court comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also for adding certain prayer clauses to the effect that the Resolution of the company dated 10-11-1992 be set aside. Another application being Company Application No. 755 of 1993 in Company Petition No. 62 of 1986 was filed. Judge s Summons were also taken out for permitting the petitioner to amend the Petition No. 62 of 1986 on 3-9-1993. The proposed amendment was for challenging Resolution dated 10-11-1992 and the issue of prospectus dated 24-8-1993. This was clearly a case of bringing subsequent events on the record in order to establish the facts already pleaded in the petition. 19. The learned single Judge of the Gujarat High Court noticed the judgment of the Madras High Court in the case of S. Narayanan v. Century Flour Mills Ltd. [1987] 1 Comp. LJ. 25 . In that case section 397 was being considered by the Madras High Court. Certain transactions had taken place subsequent to the filing of the petition which was sought to be brought on record by amendment. It was submitted that the subsequent allegations cannot be looked into nor are the applicants entitled to rely upon them. While repelling the said submissions, the Court observed as follows : "Section 397 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 536. Relying on the aforesaid two judgments, the learned single Judge permitted the amendments incorporating therein the subsequent events. 20. This judgment of the learned single Judge was taken in appeal before the Division Bench being O.J. Appeal Nos. 26 of 1993 to 30 of 1993 with Civil Application Nos. 54 of 1993 to 58 of 1993. The appeal was decided by a Division Bench consisting of G.T. Nanavati B.C. Patel, JJ. The Division Bench whilst upholding the judgment of the learned single Judge noticed the submissions made before the learned single Judge to the effect that the facts and events which are sought to be introduced as additional facts and grounds establishing the mismanagement and oppression are already made in the petition. It was also averred that the amendments seek to bring events which have transpired recently, i.e., subsequent to the filing of the petition and which have a necessary and direct bearing on the manner in which respondent Nos. 2 and 3 have and are continuing to mismanage the company and oppress its shareholders. It was also submitted that the amendment was on the same subject matter and the amendment was also with a view to avoid multiplicity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent events to grant relief finally after the trial of the Company matter, as held by the Calcutta High Court in the case of Pramode Kumar Mittal v. Southern Steel Ltd. [1980] 50 Comp. Cas. 555." The Division Bench was referring to the judgment of this Court in the case of Khimji M. Shah case ( supra ). The Division Bench also held that it is necessary that with a view to see that there is no multiplicity of proceedings, amendments should be allowed. The aforesaid decision of the Division Bench makes it clear that the decision of the Supreme Court in Shanti Prasad Jain s case ( supra ) was not dealing with the case of amendment application and is, therefore, not applicable to the facts and circumstances of this case. 21. At this stage the Court is not required to decide the petition on merits. The petition could be held to be demurrable only if the claim put forward cannot be established even if all the allegations made in the petition are accepted to be true. Such is not the position here. Very complicated questions of fact and law have been raised. It is only at the final hearing of the petition that the Court would be able to decide the issues as to whether the divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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