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TMI Blog2009 (1) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... ian. The blend in the appellants plaint is on a base of the classical exceptions to the rule in Foss v. Harbottle [1843] 2 Hase 461 (Ch.), it has a generous dollop of Loch v. John Blackwood Ltd. [1924] All ER 200 (PC) as Indianised by Hind Overseas (P.) Ltd. v. Ragunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 (SC) and it carries a suggestion that it be tasted with a side order of Clemens v. Clemens Bros. Ltd. The underlying theme of the plaint is that the first defendant is merely the corporate avatar and repository of ancestral Hindu family business in which partnership principles should apply such that the exercise of majority rights therein would be subject to equitable considerations. 2. The suit is on rebound, as any student of company law would know. The appellants petition of the late 1980s under sections 397 and 398 of the Companies Act was stultified on a reading of the petition that it carried only a directorial complaint that did not meet the exalted test of just and equitable winding up that an oppressed shareholder has to establish before progressing to seek any relief. In the judgment in Hanuman Prasad Bagri v. Bagrees Cereals (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay : "The fund to be so raised will be entirely used for the construction, development and modernization of the facilities to the properties of the Company at Kolkata and Nokha and also for acquisitions of new properties for starting warehousing business on a commercial basis." 6. According to the appellants the latent reason for the issue was to dilute the appellants shareholding percentage in the company and the stated reason for the increase was vague and irrational. The appellants say that nearly four years down the line, at the time of hearing of the appeal, nothing had been done with the money garnered by the company in furtherance of the reasons proffered for the issue. The appellants allege that the company s accounts for the year ended March 31, 2004 did not justify the issue and there was no commercial basis for increasing the paid-up capital of the company. They claim that the persons who had usurped control of the company had masterminded the issue for their personal aggrandisement without even intending to deploy the additional funds for the reasons given in obtaining the same. 7. Such conduct, the appellants assert, was illegal and the issue was liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... board line on which the case falls." 9. The respondents contend that there was no illegality about the offer made by the Board to the shareholders in February, 2005 and that if the Board felt that the company was in need of funds, the Court would scarcely take upon itself the burden of inquiring into the basis of the decision. They refer the Needle Industries (India) Ltd. s case ( supra ). "118. It is necessary to clear a misunderstanding in regard to the power of Directors to issue shares. It is not the law that the power to issue shares can be used only if there is need to raise additional capital. It is true that the power to issue shares is given primarily to enable capital to be raised when it is required for the purposes of the company but that power is not conditioned by such need. That power can be used for other reasons as, for example, to create a sufficient number of shareholders to enable the company to exercise statutory powers ( see Punt v. Symons Co. 1903 2 Ch. D. 506), or to enable it to comply with legal requirements as in the instant case. In Hogg v. Cramphorn, Buckley J., (1966) 3 All ER 420 Ch. D. (p. 267) agreed with the statement of law of By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The learned Single Judge held that mere allegation of mala fides or absence of bona fides would not suffice in such a case; that the plaintiffs were required to demonstrate that the decision to issue further shares was improper. The learned Judge noticed that a plausible explanation had been put forth by the company and its directors and merely because the plaintiffs had shown that the company had surplus funds would not be enough to make an order restraining the issue. 12. When this appeal was admitted on 6-4-2006 an interim order was made to the following effect: "There will be an unconditional stay for two weeks and the company shall not allot 18 per cent share to any other person/persons without the leave of the court. The petitioner shall deposit a sum equivalent to the price of 18 per cent shares in cash with the Registrar, Original Side of this High Court within two weeks from date. The Registrar shall keep the said amount in an interest bearing fixed deposit account with any nationalised bank. In default of payment of such amount the stay will stand vacated. Upon depositing the amount with the Registrar, Original Side such stay will continue until further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y - the principle would apply if the decision were that of the board of directors of a company. 15. That is not to suggest that a majority can ride roughshod over the minority and use its numerical superiority to subdue the minority voice in a company. The decision of the majority shareholders, however legally made, is subject to equitable considerations. But the complaining minority has to show - even in the absence of any palpable illegality - a degree of unfairness and the element of consequent prejudice. Needle Industries India Ltd. s case ( supra ) recognises the principle that if the directors incidentally benefit from an issue of further shares which can be shown to be otherwise for the benefit of the company, such incidental benefit would be overlooked. The appellants have, however, relied on such judgment to urge that the benefit to the directors (or the majority shareholders in this case) cannot be the dominant purpose, but it is a question of fact as to whether the further issue was motivated by self-interest or was incidental to augmenting the paid-up capital of the company. 16. A civil court would not sit in judgment over the commercial wisdom of corporators. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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