9911796707
TMI Blog1963 (7) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... olding therein 22000 ordinary shares of that Company and it is not disputed that the petitioner Company has a right under Section 399 of the Act to file the present petition under sections 397 and 398 of the Act. The petitioner Company prays: (a) for the removal of respondents Nos. 2 to 7 from their office as Directors of the respondent Company; (b) for obtaining suitable directions for appointment of new Directors for regulation of the future conduct and We affairs of the respondent Company; and, (c) for appointment of a fit or proper person or a committee to conduct and manage the future affairs of the respondent Company. These are the main prayers in the petition. But, for the reasons to be presently stated, these prayers no longer survive. In addition to the aforesaid prayers, the petitioner Company also prays: (d) that respondents Nos. 2 to 4 or any one or more of them be ordered to pay or contribute such sums or sums of money to the assets of the respondent Company as and by way of compensation in respect of mal-practices, mismanagement; misappropriation, and breach of trust, committed by them or any of them such as are set out in the petition; and, (e) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent No. 2 became an ordinary Director of the respondent Company on 13th or August 1946 and continued to be so till 1st September, 1951, when he was elected Chairman of the Board of Directors. The respondent No. 2 continued to be the Chairman of the respondent Company thereafter and was its Chairman when the present petition was filed en 26tti of November 1958. However, he ceased to be the Chairman during the pendency of this petition as and from 31st of December 1958. The respondent No. 3 was co-opted as a Director of the respondent Company on 27th of August 1953 and the respondent No. 4 was co-opted as such a Director on 14th December 1954. Both these persons continued to be the Directors of the Company at the date when the present petition was presented but they ceased to be such Directors from 30th of June 1959 during the pendency of the petition. The Central Government made an order No. 33 (1Q5)-CL/56, dated 17th October 1956, under Section 235, clause (c) of the Act appointing witness V. H. Deshpande, a Chartered Accountant, as an Inspector to investigate into the affairs of the respondent Company and to make a report thereon to the Central Government. The witness made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an argument that the petition no longer survived and the same deserved to be dismissed forthwith. I propose to consider this argument just in a moment. Mr. Kaji, therefore, at the commencement of the hearing, stated, that the only prayers which the petitioner Company was now pressing were the prayer (d) and that part of the prayer (e) which was connected with that prayer (d). As already stated, prayer (d) is for an order requiring respondents Nos. 2 to 4 to pay or to contribute by way of compensation a sum or sums in respect of the malpractices, mismanagement, misappropriation and breach of trust alleged to have been committed by them. Mr. Kaji, therefore, staled that he would lead only suit evidence as was in the possession of the petitioner Company in support of the allegations which would sustain the aforesaid two prayers. For this purpose, Mr. Kaji examined Mr. Deshpande and certain other witnesses and produced quite a good mass of documentary evidence. Mr. Shelat, the learned counsel for the respondent Company, lent support to the evidence, adduced by the petitioner Company. None of the respondents led any evidence to counter the evidence adduced by the petitioner Company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayers made under Section 397 and/or Section 398 on the one hand and the prayers made under Section 543 (Schedule XI) on the other and that, until the allegations on the basis of which the prayer (d) was founded were finally determined- the petition must survive. The submissions which Mr. Kaji made at that stage were as follows; (1) in order to grant the prayer under Section 545 (Schedule XI), it was necessary for the Court to record a finding to the effect that a prima facie case of misapplies caution, misfeasance, and/or breach of trust in relation to the funds of the Company had been made out; and, (2) that, after such a finding was recorded, an application might be made in the present proceedings by a creditor or a member of the respondent Company and, thereupon, the Court was bound to undertake an examination of the delinquent persons and, then, to pass a suitable order for compensation in terms of prayer (d). Without deciding the validity of the above contentions, I permitted Mr. Kaji, at the commencement of the hearing, to lead evidence for and on behalf of the petitioner Company because, in my judgment, in any case, an application for compensation on the basis of malfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the person concerned may be criminally liable. The section confers powers upon the Court (I) to examine into the conduct of any person who has taken part in the promotion or formation of a Company or any director, managing agent, secretaries and treasures or manager, or any officer of the Company (hereafter for brevity's sake called the person concerned ) and (ii) to compel the person concerned to repay or restore the money or property of the Company or to contribute any sum by way of damages. The exercise of the powers is made dependent upon an application being made to the Court by a creditor or member of the concerned Company. The persons against whom the order can be made are not merely the present director, managing agent, secretary and treasurer or manager or officer of the Company, but even against the past director, managing agent, secretary and treasurer or manager, or officer of the Company. The section further provides that misapplication, retention, misfeasance or breach of trust, for which repayment, restoration or compensation can be ordered, must appear in the course of proceedings under Section 397 or Section 398 of the Act. In other words, the section pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than the qualified shareholders wish to set right the affairs of a Company alleged to be under mismanagement, then, that shareholder has got, in the first instance, to satisfy the Central Government and to obtain, authority there from before presenting a petition under sections 397 and 398 of the Act. Section 397 is designed to put an end to an oppressive management or oppressive conduct of the affairs of a Company. Section 398 has been designed to put an end to the affairs of -. Company being conducted in a manner prejudicial to the interests of a Company or to prevent a change being made in the constitution of a Company or its control, which change is likely to lead to any such pre judicata management. From these provisions, it is crystal-deer that the sections are not intended to deal with any questions connected with the past management of a Company except in so far as such past management may indicate that it is necessary to take steps for the prevention of future oppression of one section of shareholders against another or to prevent a prejudicial management and conduct of its affairs. The dominant idea seems to be to confer powers on the Court which will enable it to put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions mentioned in Section 543 (Schedule XI) of the Act and one of the conditions mentioned is that, before an application for examination of the person concerned and an order for compensation are made against him, prima facie evidence must appear against such concerned person in the course of a proceeding under sections 397 or 398 of the Act. Therefore, a proceeding under Section 543 (Schedule XI) is an emanation from a proceeding under Section 397 or Section 398 of the Act and although the objects of sections 397 and 398 are different from the object of Section 543 (Schedule XI), there is a vital connection between the two in the sense that a proceeding under the latter section emanates from a proceeding under either of the two sections 397 and 398 of the Act. The above discussion, though it clears the ground for answering the first point for determination, does not necessarily answer that point. The controversy is whether the petition under Section 398 of the Act, (as the latter is the only section under which the present petition survives, as already stated) should or should not be retained on the file of this Court until either the proceeding under Section 543 (Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeding therein should terminate. Under the circumstances, I have regarded the initial address of Mr. Kaji as not a present and immediate prayer for dismissal of reliefs (a) to (c), but as only an expression of a desire to withdraw from those prayers as soon as either a prima facie case for misfeasance has come to light in the course of the present proceedings or, if his second submission is right, until this Court has recorded a finding to the effect that a prima facie case of misfeasance exists or does not exist or until this Court considers and decides his further submission that the petitioner Company should be permitted to apply for a Judge's Summons in relation to the acts of misfeasance alleged against respondents Nos. 2 to 4. Under the circumstances, though I agree with Mr. Bhatt's interpretation of Section 543 (Schedule XI) that, in order to make an application under Section 543 (Schedule XI), it is not necessary that a proceeding under Section 397 or Section 398 should be subsisting, 1 do not agree with him that, having regard to the facts of the case, the petition under Section 398 of the Act must be dismissed out right. 9. So far as the second point is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the determination of the question about the existence of a prima facie case. It could not have been the intention: of the Legislature that wherever any such prima facie case comes to light in a proceeding under Section 397 or Section 393, the further proceedings must be stayed until, the person against whom the prima facie case appears is joined as a party. If any such procedure were to be followed, the case under Section 397 or Section 398 may never come to an end. Moreover, the petitioner under Section 397 or Section 398 may be unwilling to join the person concerned being proceeded against under Section 543 (Schedule XI). In some cases, the petitioner under Section 397 or Section 398 himself may be found to be guilty of misfeasance under that particular section. In my judgment, the scheme of Section 543 (Schedule XI) read in the light of the scheme of sections falling under Chapter VI appears to be that if evidence or materials come to be brought on the record of a proceeding under Section 397 or Section 398, then, it is open to a creditor or member of a Company to start proceeding against a delinquent director etc. under Section 543 (Schedule XI). If the section is not int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it would mean that a petition under Section 543 (Schedule XI) had come to be made before a prima facie case of misfeasance had come to light in a proceeding under Section 397 or section 398 of the Act. I have no doubt whatsoever that a proceeding under Section 397 or Section 398 of the Act cannot be said to have started unless the petition under that section has come to be filed, numbered, and at least, some order of the Court is obtained thereon. Till that stage, it cannot be said that a proceeding under Section 397 or Section 398 of the Act has started. In this view of the matter, it appears to me to be crystal clear that petitions under sections 397 or 398 and 543 (Schedule XI) cannot be combined together or simultaneously made, but that the petition under the latter section must follow after a prima facie case has come into light in the course of the proceedings under the former sections. 11. That brings me to the final point for determination whether an application under Section 543 (Schedule XI) should be an independent petition or whether it can be made as a sub-application under the main petition under Section 397 or Section 398 of the Act. The answer to this question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the judge to adjourn the same for hearing them in open Court. The rules also make a distinction in the procedure to be followed in the two kinds of applications. An application by petition is to be entered in one register and an application by Judge's summons is to be entered in another register. In the latter register, the number of the main proceeding to which the application relates has also to be entered. Therefore, so far as the rules are concerned, the rules make a distinction between a petition and an application by Judge's summons. Rules 10 and It are relevant for this purpose. Rule 10 provides that, unless otherwise provided by the rules or permitted by the Judge, all applications under the Act shall be made by a petition or by Judge's summons as thereinafter provided. Rule 11 mentions the applications which are to be made by petition. Amongst these applications is included, in Clause 19, an application under Section 543 (Schedule XI) in the course of proceedings under sections 397 and 398 of the Act. Clause (b) of Rule !1 provides that all other applications under the Act or under the rules shall be made by Judge's summons. Rule 12 provides that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be wasted if a separate petition were ordered to be hired, I fail to see how, even if an application by Judge's summons were to be permitted, all that has already been done in the present proceedings would be of any avail. Mr. Bhatt has all along proceeded on the basis that a separate and fresh application is required to be filed to sustain a petition under Section 543 (Schedule XI). It is because of this view that Mr. Bhatt probably has not entered into details which otherwise he would have done and has not adduced any independent evidence on behalf of his clients. It is quite clear that even if an application by Judge's summons were to be permitted, Mr. Bhatt would ask for further cross-examination of the witnesses already examined and that he would insist upon his right to lead his own evidence in rebuttal. Secondly, having regard to the evidence already adduced in the present proceedings, I have no doubt whatsoever that respondents Nos. 2 to 4 are not the only delinquents, but, there are 3 number of other persons who stand at least on the same footing as respondents Nos. 3 and 4. Thus, having regard to the evidence which has been recorded in the case, it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it should proceed to get the matter decided only against respondents Nos. 2 to 4. Even if ultimately it decides not to proceed against any other person, it is better that a separate and independent proceeding should be filed rather than that the petition under sections 397 and 398 should be kept indefinitely pending until the decision of the contemplated application under Section 543 (Schedule XI). Therefore, I am not disposed to grant the prayer of the petitioner Company to permit it to proceed under Section 543 (Schedule XI) by a Judge's summons. For the aforesaid reasons, in my judgment, the prayer embodied in Clause (d) and that part of prayer (c) which is connected with that prayer cannot be given to the petitioner Company in the present proceedings. The petitioner Company will have to take such steps as it may be advised for launching proceedings under Section 543 (Schedule XI) by filing a proper petition therefor. 13. Mr, Kaji finally requested me to give same suitable direction in the matter of the contemplated proceeding under Section 543 (Schedule XI). I fail to see why any such directions should be given by this Court. As already pointed out by me, the matter is n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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