Case Summary
| Citation | Shanti Prasad Jain v. Kalinga Tubes Ltd.AIR 1965 SC 1535 |
| Keywords | Companies Act, shareholders, financial difficulties, shares |
| Facts | In this case, the shareholders of the company originally consisted of two groups. There were some financial difficulties for the company, and the petitioner agreed to supply finance on the terms that he would be allotted shares equal to those held by the two groups after sharing the capital. The company was not party to the agreement, so it converted into a public limited company to obtain advances from Industrial Finance Corporation. The majority of shareholders, who were respondents, issued fresh shares after conversion to outsiders also, whereas the petitioner suggested in the meeting of the Board of Directors that fresh shares should be allotted to the existing shareholders according to Section 80 of the Companies Act, 1956. The petitioner applied under Section 397 of the Companies Act, 1956 (corresponding to Section 241(1)(a)), on the grounds of oppression. The Single Judge Bench declared that it was oppressive and mismanagement due to continuing oppression of minority shareholders. The Division Bench held that the agreement of 1954 did not have any binding effect on the company irrespective of its nature in 1957 when it was converted into a public company from a private company. Then the appeal was filed before the Supreme Court. |
| Issues | Whether the majority power was exercised in good faith would be oppression of mismanagement? |
| Contentions | |
| Law Points | The SC’s ruling highlighted that the public company formed in 1957 was not obligated by the 1954 agreement and could allocate shares as decided in general meetings under Section 81 of the Companies Act, 1956. Merely opting to offer shares to others instead of existing shareholders, as decided in the 29th March 1958 meeting, didn’t inherently oppress minority shareholders. Majority shareholders weren’t obliged to adhere to the minority shareholders’ stance on share allotment. The Court noted the apprehension of the Patnaik group during the issuance of new shares that the appellant group might seize majority control. Consequently, shares were designated to others in the general meeting to prevent this.If new shares were not allotted to existing shareholders due to this concern, it could not be deemed oppressive to the minority. Regarding the lack of confidence and differences among shareholders in early 1958, it was emphasized that mere distrust does not constitute oppression unless it demonstrates unfair treatment of minority rights. |
| Judgement | The Court, while dismissing the appeal, ultimately determined that the allotment of shares to outsiders by the majority shareholders would not constitute oppression against the minority appellant group. |
| Ratio Decidendi & Case Authority |
Full Case Details
K. N. WANCHOO, J. – These appeals are a consequence of a fight between two groups of
business magnates for the control of Messrs. Kalinga Tubes Limited (hereinafter referred to as
the Company). They arise out of an application under Sections 397, 398, 402 and 403 of the
Indian Companies Act, No. 1 of 1956 (hereinafter referred to as the Act) made by the
appellant in the High Court. Most of the facts are not seriously in dispute and it is necessary
to set them out in detail in order to decide the main point raised on behalf of the appellant,
namely, that the affairs of the Company were being conducted in a manner oppressive to him
and his group of members.
- The Company was floated as a private limited company on December 1, 1950 with an
authorised capital of Rs. 25 lacs. Originally, the shares were held by two groups of shareholders equally, except a few shares. The Company raised a sum of Rs. 36 lacs by the issue
of two series of debentures which were guaranteed by the Government of Orissa between
1952 to 1954. In 1954, the appellant was approached by Dr. Mohanty, then Secretary to
Government of Orissa (Industries Department) which was naturally interested in the
Company having guaranteed debentures to the tune of Rs. 36 lacs, for helping the Company
which was in financial and administrative difficulties. The appellant was requested to help the
Company by providing finance and by arranging loans from banks and other sources and
further by providing the necessary administrative guidance. The appellant agreed to do so and
consequently on July 27, 1954, an agreement was entered into between the appellant,and
Patnaik and Loganatha. To this agreement, the Company was not a party. The agreement
provided that the appellant would be allotted shares in the Company equal to those held by
Patnaik and Loganathan after increasing the share capital of the Company. Thus, the
Company would have three groups of share- holders represented by the appellant, Patnaik and
Loganathan holding equal number of shares, besides a French company and one Rath, who
between themselves held shares worth Rs. 4 lacs. These share- holders, however, were not
party to the agreement. These three groups of share-holders would have equal number of
representatives on the Board of Directors of the Company, namely, two each for the time
being. The appellant also undertook to arrange for cash credit facilities to the limit of Rs. Lacs
on the security of raw materials and finished goods of the Company. And finally, the
appellant Jain was to be the chairman of the Company. This agreement was followed by
certain resolutions passed by the Company on August 16, 1954 by which some of the terms of
the agreement were substantially carried out, the authorised capital was increased to rupees
one crore and the appellant was made the chairman of the Company. It may, however be
noted that the resolution did not refer to the agreement in terms and no change was made in
the Article of Association of the Company to bring them in conformity with all the terms of
the agreement. In January 1955, Narayanswamy who had been appointed Managing Dirctor
resigned and Patnaik was appointed the Managing Director. In April 1955, the Company
started production. Sometime thereafter the share capital was further subscribed upto Rs. 61
lacs and the three groups, namely, the appellant Jain, Patnaik and Loganathan held one-third
of the shares leaving out shares held by the French company. In September 1956, a resolution
was passed by the Board of Directors referring the question of conversion of the Company to
a public limited company to a sub-committee consisting of the appellant, Loganathan and
Patnaik. About the same time, an application was made to the Controller of Capital Issues for
the sanction of the issue of further shares to the extent of Rs. 39 lacs out of the authorised
capital of rupees one crore and for the issue of debentures to the extent of Rs. 64 lacs. In this
application it was stated that the shares were intended to be issued privately to the existing
share-holders and/or their nominees. In December 1956, a resolution was passed by the Board
of Directors for converting the Company into a public limited company and for amending the
Articles of Association in consequence at the next annual general meeting. This was
necessary as the Company wanted to borrow from the Industrial Finance Corporation which
however made advances only to public limited companies.On January 11, 1957, the Company
was converted into a public company and the Articles of Association were amended. Even
so, no attempt was made to incorporate the terms of the agreement dated July 27, 1954 in the
Articles of Association so amended.
- The question of the issue of new shares came up before a meeting of the Board of
Directors on March 1, 1958, and the differences between the three groups which had already
begun came to the surface at that time. The appellant proposed to the Board of Directors that
the new shares should be issued to the existing share-holders as provided in S. 81 of the Act.
Patnaik on the other hand proposed that a general meeting should be called for the purpose of
passing a resolution for the issue of new shares and for the manner and proportion in which
shares were to be offered privately to the share-holders and other persons and for such other
incidental matters as provided in the section. It is apparent from the conflict between the
appellant group and Patnaik and Loganathan groups in this meeting that the group of Patnaik
and Loganathan did not want the appellant’s group to get roughly one-third of the new shares.
The fear of Patnaik in this connection was that if shares were offered privately to the existing
share-holders, the appellant might get all of them, for the groups of Patnaik and Loganathan
did not have the money to subscribe to the new shares if offered in the first instance to the
existing share-holders. Thus if the appellant got all the new shares, his group would become
the majority share-holder and would thus get control of the Company. Consequently, Patnaik
put forward the resolution already referred to at the meeting of the Board of Directors on
March 1, 1958 which provided for calling a general meeting for directions as to the issue of
new shares, which directions it was hoped would override the provisions of S. 81 of the Act.
Patnaik’s resolution was passed and the appellant’s proposal was outvoted for the obvious
reason that the Patnaik and Loganathan groups held the majority of shares. In consequence a
general meeting of share-holders was called for the purpose on March 29, 1958. - The appellant did not attend the meeting of March 29, 1958 though he was present by
proxy. Patnaik presided at that meeting. Two resolutions were put forward at that meting, one
on behalf of the appellant’s group and the other on behalf of Patnaik and Loganathan groups.
The appellant’s resolution proposed that the new shares should be offered to the existing
share-holders of the Company in the proportion of their share-holdings and the offer should
remain open for a period of fifteen days with the right to accept or renounce the whole or part
of the offer in their names or in the names of their nominee or nominees and if a share-holder
did not accept within that period the offer should be deemed to have been declined. The
second resolution on behalf of the Patnaik and Loganathan groups proposed that the new
shares should not be offered or allotted to the existing share-holders or to the public and that
they should be allotted privately in the best interest of the Company at the sole discretion of
the directors to such persons as might have applied or thereafter apply on the condition that at
least 5 per centum of the face value of the shares applied for was paid as application money
and 10 per centum of the face value was paid on allotment and the balance paid as and when
called upon in accordance with the Articles of Association of the Company. As was to be
expected, the resolution put forward on behalf of the appellant was lost and the resolutions put
forward on behalf of Patnaik and Loganathan groups as to the allotment of new shares were
passed. Thus in that meeting there was a complete breach between the three groups.
- This was followed on April 18, 1958, by a suit by the appellant and some other shareholders of his group for a declaration that the resolutions dated March 29, 1958 were ultra
vires, illegal, void and not binding on the appellant, the Company and its share-holders with a
prayer for permanent injunction restraining the defendants in the suit (namely, the other two
groups) and their servants and agents from giving effect to or acting in any way in pursuance
of the said resolutions and further restraining each of the defendants, their servants and agents
from issuing and allotting the new shares in terms of the impugned resolutions. That suit was
filed in the Court of the Subordinate Judge, Cuttack. It is necessary here to refer to the details
of that suit. It is enough to say that an ex parte interim injunction was obtained on the same
day, restraining the Company and other defendants from issuing and allotting the new shares
to persons other than the existing share-holders and giving effect to the resolutions in that
regard passed at the meeting held on March 29, 1958. The Company then made an application
for setting aside the ex parte interim injunction. This matter came up before the Court on May
15, 1958. At that time an offer was made on behalf of the Company that in view of the urgent
necessity for funds, the Company might be permitted to issue two-thirds of the shares,
keeping back one-third which would have gone to the appellant if the shares had been offered
to the existing share-holders; but this was not accepted on behalf of the appellant. The hearing
of the injunction matter was postponed on several dates and it appears that the Patnaik and
Loganathan groups continued to call meetings of the Board of Directors on the dates fixed in
the suit, and the agenda always provided for the allotment of the new shares. Eventually on
July 30, 1958 the Subordinate Judge delivered judgment and vacated the injunction at about
11 a.m. A meeting of the Board of Directors was being held on the same day from 10.30 a.m.
and as soon as a message was received that the injunction had been vacated the new shares
were allotted to seven persons who had applied for the same along with the application
money. This happened about mid-day and the return as required by the Act was duly filed
with the Registrar of Companies at 12.40 p.m. The same day, an application was made at 12-
40 p.m. on behalf of the appellant before the Subordinate Judge praying that the order
vacating the injunction be stayed till the appellant obtained orders from the High Court where
he wished to appeal. The company’s lawyer, however, intimated to the Court that the shares
had already been allotted. Even so, the Court passed an order staying the operation of its
judgment order delivered earlier for two days. The matter was then taken in appeal to the
High Court by the appellant. The appeal was dismissed in September 1958. There was a
letters patent appeal following the dismissal but that was not pressed and was eventually
dismissed in November 1960.
- The case of the appellant was that the seven persons to whom the new shares were
allotted were nominees or benamidars of Patnaik and Loganathan and, therefore, these groups
really allotted the new shares to themselves through their benamidars. It was also alleged that
these seven persons only paid 5 per centum of the share money and this showed, even though
it was said that the Company was in urgent need of money, that the shares were allotted to
persons who were not in a position to pay the share money in full. The appellant contended
that the allotment of the new shares was made surreptitiously and deliberately with the sole
idea of defeating the rights of share-holders represented by him and his group and this
amounted to oppression of the minority share-holders. - To continue the narrative, it appears that an extraordinary general meeting of the
Company was called on September 21, 1960 to consider increasing the share capital from
rupees one crore on which it stood after the increase in 1958 to rupees three crores by issue of
additional equity shares numbering one lac of the value of rupees one crore and issue of
another one lac cumulative redeemable income-tax free preference shares of the value of
rupees one crore subject to such rights and privileges attaching to such preference shares as
might be specified in the new Article to be inserted in the Articles of Association. It was also
intended that these new shares should be offered to outsiders (i.e., other than the existing
share-holders) with a view to making the Company more broad-based. This meeting was
called by a notice issued on August 25, 1960. - It was the calling of this meeting which led to the application under S. 397, etc., on
September 14, 1960 by the appellant. It was urged in the application that this issue of new
shares was in furtherance of the continuing and continuous process of oppression of the
appellant and his group being the minority share-holders and was designed for the purpose of
completely excluding the appellant and his group from all control in the affairs of the
Company and to deprive the financial advantage to be gained by them by the issue of new
shares at par and to retain such advantage exclusively to the Patnaik and Loganathan groups
so that the appellant and his group might be forced to sell their holdings to the Patnaik and
Loganathan groups at a nominal value. That was why the new shares were being offered to
outsiders and not to the existing share-holders, the object being to offer the shares to
nominees and/or benamidars of the Patnaik and Loganathan groups and to such persons who
would be within their control. The result of this would be that Loganathan and Patnaik groups
would acquire more than 75 per centum of the voting strength of the Company and would be
in complete control of it and so gain enormous financial advantage for themselves. This
would cause irreparable loss and prejudice to the rights of the appellant and his group of
minority share-holders. It was alleged that this was being done by Patnaik and Loganathan
groups who were in control of the majority of shares. Finally it was urged that the affairs of
the Company were conducted in a manner prejudicial to the interest of the Company by
Loganathan and Patnaik groups and that there was mismanagement in conducting such
affairs. It was further alleged that the conduct of Loganathan and Patnaik groups towards the
minority share-holders was oppressive, burdensome, harsh and wrongful and the entire
manoeuvre was that these groups should be able to control over 75 per centum of the voting
strength in the Company. Further it was alleged that the conduct of these groups involved a
visible departure from the standard of fair dealing and violation of the conditions of fairplay
to which the appellant and his group as minority share-holders were entitled. In particular the
denial to the existing share-holders to subscribe to the new shares in proportion to their
respective holdings and the issue of such shares to benamidars of the Patnaik and Loganathan
groups was oppressive to the appellant and his group of minority share-holders and also
amounted to mismanagement of the affairs of the Company. This was also in breach and
violation of the agreement dated July 27, 1954 to which the Patnaik and Loganathan groups
were parties. Further it was said that although in form the Company was a public company in
reality it was a partnership consisting of three groups namely, the appellant’s group, and of
Loganathan and Patnaik groups. The last two groups had combined together against the
appellant group which had resulted in justifiable lack of confidence on the part of the
appellant and his group in the conduct of the affairs of the Company by the other two groups.
Such lack of confidence had been caused by lack of probity in the conduct of the affairs of the
Company by these two groups, which were acting to benefit themselves personally and were
not concerned with the welfare of the Company. The appellant and his group would not get
any relief by calling a general meeting of the Company, and the facts and circumstances
aforesaid would justify the making of a winding-up order on the ground that it was just and
equitable that the Company should be wound up. Therefore, the appellant prayed for
directions under S. 397 of the Act, as the winding-up of the Company which was in a
prosperous condition would unfairly prejudice the appellant and other members of the
minority group and redress against such oppression could be given by the High Court by
making suitable directions in that behalf. The affairs of the Company were being conducted
in a manner prejudicial to the interest of the Company for reasons already stated and there had
been a material change in the management or control of the Company by alteration in its
Board of Directors and by fraudulent changes introduced in the ownership of the Company’s
shares and by reason of the wrongful act and conduct of the Patnaik and Loganathan groups.
The appellant, therefore, prayed for the removal of the present Board of Directors, for reconstitution of the Board of Directors with at least two permanent representatives from his
group and for ensuring equal representation in the Board of the three groups of share-holders
and for alterations in the Articles of Association to incorporate therein the provisions of the
agreement dated July 29, 1954. The appellant also sought a declaration that the resolution
passed by the Board of Directors on March 1, 1958 and at the general meeting dated March
29, 1958, were null and void and were passed in abuse of the power of Patnaik and
Loganathan groups and in oppression of the minority share-holders and prayed that the said
resolutions be set aside in so far as they related to the issue and allotment of 39,000 new
shares. The allotment made on July 30 should be declared illegal and null and void as it was
made in abuse of the powers of the Patnaik and Loganathan groups and in oppression of the
minority share-holders and was not binding upon the Company, the appellant and his group.
It was prayed that directions be given to sell the said 39,000 shares by the allottees to the
Company payment of the amount actually paid thereon so far and the Company be permitted
to offer the same to the share-holders as on July 29, 1958 in proportion to their respective
share-holdings. An injunction was also prayed for restraining the Company from holding the
meeting on September 21, 1960. Finally it was prayed that orders be passed for investigation
into the conduct of the affairs of the Company by the Loganathan and Patnaik groups and
suitable directions be made with a view to regulating the affairs of the Company in future and
if necessary an administrator of the Company be appointed for carrying out such directions as
the High Court might be pleased to make for purposes of removing the oppression and the
acts of misconduct and mismanagement and for regulating the conduct of the affairs of the
Company. The seven persons to whom the new shares were allotted in July 1958 were also
made parties and injunction was prayed for restraining them from transferring those shares.
- The application was opposed on behalf of the Company, and its main contention was
that the Company was not a party to the agreement dated July 27, 1954 and was not bound by
it. It was further contended that there was no mismanagement and the Company and its
affairs were not being conducted in a manner prejudicial to it. It was also contended that there
was no oppression on the undisputed facts in the present case. The application was also
opposed on behalf of Loganathan and Patnaik groups and their case was that they had not
acted in any manner which could be said to be oppressive of the rights of the minority shareholders represented by the appellant. They also contended that the affairs of the Company
were not being mismanaged nor were they being conducted prejudicially to the interest of the
Company. Further the seven persons to whom the shares had been allotted on July 30, 1958
contended that they were not benamidars of the Patnaik and Loganathan groups. Their case
was that they were independent persons of substance and had applied for the new shares
themselves and not as benamidars of Loganathan and Patnaik groups. They denied that there
was any oppression of the minority share-holders as alleged or that there was any
mismanagement of the affairs of the Company or any conduct which was prejudicial to the
interest of the Company. They contended that the resolutions of March 1, 1958, March 29,
1958 and July 30, 1958 were perfectly legal and proper and they were entitled to the shares
which had been allotted to them. - We shall first take up the case under S. 397 of the Act and proceed on the assumption
that a case has been made out to wind-up the Company on just and equitable grounds. This is
a new provision which came for the first time in the Indian Companies Act, 1913 as S. 153-C.
That section was based on S. 210 of the English Companies Act, 1948 which was introduced
therein for the first time. The purpose of introducing S. 210 in the English Companies Act
was to give an alternative remedy to winding up in case of mismanagement or oppression.
The law always provided for winding up, in case it was just and equitable to wind up a
company. However, it was being felt for sometime that though it might be just and equitable
in view of the manner in which the affairs of a company were conducted to wind it up, it was
not fair that the company should always be wound up for that reason, particularly when it was
otherwise solvent. That is why S. 210 was introduced in the English Act to provide an
alternative remedy where it was felt that though a case had been made out on the ground of
just and equitable cause to wind up a company, it was not in the interest of the share-holders
that the company should be wound up and that it would be better if the company was allowed
to continue under such directions as the Court may consider proper to give. That is the genesis
of the introduction of S. 153-C in the 1913 Act and S. 397 in the Act.
It gives a right to members of a company who comply with the conditions of S. 399 to
apply to the Court for relief under S. 402 of the Act or such other relief as may be suitable in
the circumstances of the case, if the affairs of a company are being conducted in a manner
oppressive to any member or members including any one or more of those applying. The
Court then has power to make such orders under S. 397 read with S. 402, as it thinks fit, if it
comes to the conclusion that the affairs of the company are being conducted in a manner
oppressive to any member or members and that to wind up the company would unfairly
prejudice such member or members, but that otherwise the facts might justify the making of a
winding up order on the ground that it was just and equitable that the company should be
wound up. The law, however, has not defined what is oppression for purposes of this section,
and it is left to Courts to decide on the facts of each case whether there is such oppression as
calls for action under this section.
- Among the important considerations which have to be kept in view in determining the
scope of S. 210, the following matters were stressed in Elder’s case [1952 SC 49], as
summarised at p. 394 in Meyer’s case, [1954 SC 381]:
“1. The oppression of which a petitioner complains must relate to the manner in
which the affairs of the company concerned are being conducted; and the conduct
complained of must be such as to oppress a minority of the members (including the
petitioners) qua share-holders. - It follows that the oppression complained of must be shown to be brought about by
a majority of members exercising as share-holders a predominant voting power in the
conduct of the company’s affairs. - Although the facts relied on by the petitioner may appear to furnish grounds for the
making of a winding up order under the ‘just and equitable’ rules, those facts must be
relevant to disclose also that the making of a winding up order would unfairly prejudice
the minority members qua shareholders. - Although the word ‘oppressive’ is not defined, it is possible, by way of illustration,
to figure a situation in which majority share-holders, by an abuse of their predominant
voting power, are ‘treating the company and its affairs as if they were their own property’
to the prejudice of the minority share-holders – and in which just and equitable grounds
would exist for the making of a winding-up order… but in which the ‘alternative remedy’
provided by Section 210 by way of an appropriate order might well be open to the
minority share-holders with a view to bringing to an end the oppressive conduct of the
majority. - The power conferred on the Court to grant a remedy in an appropriate case appears
to envisage a reasonably wide discretion vested in the Court in relation to the order sought
by a complainer as the appropriate equitable alternative to a winding-up order.” - These observations from the four cases referred to above apply to S. 397 also which is
almost in the same words as S. 210 of the English Act, and the question in each case is
whether the conduct of the affairs of a company by the majority shareholders was oppressive
to the minority shareholders and that depends upon the facts proved in a particular case. As
has already been indicated, it is not enough to show that there is just and equitable cause for
winding up the company, though that must be shown as preliminary to the application of S. - It must further be shown that the conduct of the majority shareholders was oppressive to
the minority as members and this requires that events have to be considered not in isolation
but as a part of a consecutive story. There must be continuous act on the part of the majority
shareholders, continuing upto the date of petition, showing that the affairs of the company
were being conducted in a manner oppressive to some part of the members. 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 in the light of these
principles that we have to consider the facts in this case with reference to S. 397.
- The main plank of the appellant’s case to prove oppression is the agreement of July
27, 1954 between himself and Patnaik and Loganathan. At that time he was not a member of
the Company. It is not disputed that the Company was to a party to that agreement and is thus
strictly speaking not bound by its terms. But even apart from this strict legal aspect of the
matter, let us see what exactly the agreement provides. At that time Patnaik and Loganathan
groups held shares of the value of Rs. 21 lacs in the Company, and the main provision of the
agreement is that the share capital would be increased and the appellant would be given
shares of the face value of Rs. 10,50,000 so that his holding should be equal to the holdings of
the other two groups. It also provides that the three groups would have an equal number of
representatives on the Board of Directors and the appellant would be its Chairman. Other
provision of the agreement refer to matters of detail to which it is unnecessary to refer. It will
be seen, however, that there is no provision in the agreement as to what would happen if and
when the share capital was actually increased beyond the increase envisaged at the time of the
agreement. There is also no provision in the agreement to the effect that the Articles of
Association of the private company as it then was would be amended suitably to bring the
provisions of the agreement with respect to shareholding and the Board of Directors, into line
with the agreement. Thus there is nothing in the agreement about the future in the matter of
allotment of shares in case capital was actually increased thereafter. In this connection our
attention is drawn to the fifth term of the agreement which is in these terms:-
“Ordinary shares of the face value of Rs. 4 lacs held by the French Company (Rs.
3,75,000) held by them as heretofore, and none of the parties hereto will have any
interest therin so that the shareholding in the Company of all the three parties hereto
will remain equal and in the same proportion”.
It is argued that the intention was that the shareholding of the three groups would remain
equal for ever. We are not prepared to read this implication in this term. It was easy to provide
in the agreement that whenever capital was actually increased, it would be divided equally
between the three parties thereto. It the absence of such a provision we do not think that the
fifth term is capable of the interpretation which is put on it on behalf of the appellant. It only
deals with the shares worth Rs. 1 lacs held by the other two persons and provides that besides
those shareholdings capital shares would be held equally by the three parties. Therefore, as
we read the agreement we cannot come to the conclusion that if provides that if in future there
was an actual increase in capital that will necessarily be share equally by the three parties. - However, it is said that the conduct of the three parties later on shows that when there
was actual increase of capital to Rs. 61 lacs sometime after July 1954, this increase was
shared equally by the three parties and further when Mr. Rath sold his holdings in the
Company they were purchased equally by the three parties so much so that one odd share out
of 250 shares was held by the three parties jointly. This is undoubtedly so, and does give
some colour to the argument that the three parties concerned in the agreement intended that
their shareholdings should remain equal even later. But this intention cannot be said to bind
the Company, much less so when the Company was not bound strictly speaking even by the
express terms of the agreement. So far as the Company is concerned, it was free to dispose of
shares as the directors or the shareholders in general meeting considered proper without
regard to this agreement.
- Another element came into the picture in January 1957 when the Company was
converted into a public limited company. It is obvious that a public limited company was
even much less bound by the agreement of July 1954 as compared to the private company.
We have already pointed out that even when the Company was private its Articles of
Association were not amended to bring them into line with the agreement and that shows that
the agreement was only between two groups of shareholders and again with respect to the
state of affairs as it was at the time of the agreement. When the Company became a public
limited company and it was decided to issue new shares of the value of Rs. 39 lacs the
question of allotment of these shares arose. By then some differences had developed between
the three groups. The appellant wanted the shares to be allotted to the existing shareholders
while the Patnaik and Loganathan groups wanted the matter to be decided by a general
meeting as evidenced by what happened in the meeting of the Board of Directors dated March
1, 1958. It appears that the decision to issue new shares was taken sometime in 1958 when the
Company was a private company. At that time the authorised capital was rupees one crore
though only Rs. 61 lacs had been issued. The fresh issue of Rs. 39 lacs worth of shares was
thus intended to bring the subscribed capital upto the limit of the authorised capital. The
application to the Controller of Capital Issues was made for that purpose on September 17, - At that time the intention was that the issue would be private and would be made to the
existing shareholders, directors and/or their nominees. This was bound to be so as the
Company was then private. As, however, the Company wanted a loan from the Industrial
Finance Corporation and as that Corporation would only grant loans to a public company, the
Company was converted into a public as already indicated in January 1957. - The contention of the appellant, however, is that when the share capital was decided
to be increased by fresh issue within the limit of rupees one crore, regulation 42 of the First
Schedule to the 1913 Act was in force and that regulation required that direction to the
contrary as to allotment of shares should be given by the resolution sanctioning increase of
share capital. This was, however, not done at the time when the authorised share capital was
decided to be increased in 1954 and consequently the new shares had to be allotted to the
existing shareholders under regulation 42. At that time, however, the Company was private
and the shares had to be issued to the existing shareholders and no question of any direction to
the contrary arose if the Company was to retain its private character. The sanction of the
Controller of Capital Issues came in December 1957 when the Company had become a public
limited company, and the question of allotment arose thereafter. By that time the Act (i.e., the
1956-Act) had been passed and regulation 42 of the First Schedule to the 1918-Act was no
longer in force. Instead it had been replaced by S. 81 of the Act, which provides that “where
at any time subsequent to the first allotment of shares in a company, it is proposed to increase
the subscribed capital of the company, by the issue of new shares, then, subject to any
direction to the contrary which may be given by the company in general meeting and subject
only to those directions, such new shares shall be offered to the persons who at the time of the
offer are holders of equity shares of the company, in proportion as nearly as circumstances
admit, to the capital paid up on those shares at that time.” Further sub-s. (3), of S. 81 provides
that the section shall not apply to a private company. Thus S. 81 specifically applies to public
companies only and comes into play when subscribed capital (as distinct from authorised
capital) has to be increased. Therefore, when the question of actually issuing new shares arose
after the sanction of the Controller, regulation 42 was no loner in force as it had been
repealed, and action had to be taken in accordance with S. 81 of the Act. Section 81 does not
require that direction to the contrary must be given by the resolution sanctioning the increase
of share capital as under regulation 42 of the First Schedule to the 1913-Act. Consequently it
was open to the public company in 1958 when it proposed to increase the subscribed capital
after the sanction of the Controller to act under S. 81 and this was what was done by the
resolution of March 28, 1958 at the general meeting. The general meeting decided that new
shares should not be issued to the existing shareholders but should be issued to others
privately. The resolution of March 29, 1958 was in accordance with the law as it stood when
it was passed and cannot be said to be vitiated in any way.
- It is, however, urged that the notice for the general meeting of the 29th March, 1958
was not in accordance with S. 173, and so the proceedings of the meeting must be held to be
bad. The objection was, however, not taken in the petition and we have, therefore, not
permitted the appellant to raise it before us, as it is a mixed question of fact and law. We may
add that, though the objection was not taken in the petition, it seems to have been urged
before the appeal Court, Das, J. has dealt with it at length and we would have agreed with him
if we had permitted the question to be raised. This attack on the validity of what happened on
March 29, 1958 must thus fail. - We have already said that the public company which came into existence in 1957 was
not bound by the agreement of 1954 and could offer shares to such persons as it decided to do
in general meeting in accordance with S. 81. The mere fact that in the meeting of March 29,
1958 it was decided to offer shares to others and not to the existing shareholders would not
therefore necessarily mean oppression of the minority shareholders. The majority
shareholders were not bound to accept the view of the minority shareholders that new shares
should be allotted only to the existing shareholders. It also appears that the Patnaik group was
afraid at the time when the new shares were being issued that as they had no money the
appellant group would take up the entire new issue and would thus obtain majority control of
the Company. This they wanted to avoid and that is why the new issue was resolved in
general meeting to be issued to others and not to the existing shareholders. If this was the
reason why new shares were not issued to the existing shareholders it can hardly be said that
the action of the majority shareholders in passing the resolution which they did on March 29,
1958 was oppressive to the minority shareholders. The matter would have been different if the
seven persons to whom shares were eventually allotted in July 1958 were benamidars or
stooges of the Patnaik or Loganathan group, for in that case it may be said that these two
groups forming the majority in the general meeting had acted fraudulently and unfairly by
depriving the appellant of what he would have got under S. 81. But there can be no doubt that
the seven persons to whom the shares were eventually allotted are respectable persons of
independent means. There is nothing to show that they were stooges or benamidars of the
Patnaik and Loganathan groups. The action of the majority shareholders in allotting the new
shares to outsiders and not to the existing shareholders cannot therefore, in the circumstances
be said to be oppressive of the appellant and his group.
- It is true that by the beginning of 1958 there were difference between the appellant
and the Patnaik and Loganathan groups and there was loss of confidence between them. But
mere loss of confidence between these groups of shareholders would not come within S. 397
unless it be shown that this lack of confidence sprang from a desire to oppress the minority in
the management of the Company’s affairs and that there was at least an element of lack of
probity and fair dealing to a member in the matter of his proprietary right as a shareholder. It
cannot be said on the facts on record of this case that there was any lack of probity or fair
dealing towards the appellant in the matter of his proprietary right as a share-holder. It is true
that he did not get any part of the new issue but equally the Patnaik and Loganathan groups,
also did not get any part of it, for there is no doubt that the persons to whom the shares were
allotted eventually in July 1958 were not benamidars or stooges of the Patnik and Loganathan
groups. If the new allottees were benamidars or stooges of the Lognathan and Patnaik groups
there might have been lack of probity or fair dealing in allotting the shares to them. Further
the allotment of shares even at par did not in our opinion seriously affect the proprietary rights
of the appellant as a shareholder. It is urged that the issue of new shares at par to others would
depress the value of the existing shares. But the evidence shows that by 1958 the Company
which had gone into production in 1955 was making profits and there is no reason to suppose
that the same rate of profit would not have continued with the expansion envisaged by the
increase in share capital. Besides, as the shares of the Company were not quoted on the Stock
Exchange, it is impossible to say what impact the issue of new shares had on the value of the
existing shares and whether the value of existing shares was depressed, if at all, by the issue
of new shares. It is not a case where new shares were issued as bonus, for the issue of bonus
shares does necessarily affect the value of existing shares. But these were issued on payment
of cash for the purpose of expansion. In the circumstances we cannot necessarily infer that the
value of the existing shares would have been seriously affected by the issue of new shares at
par. So it cannot be said that this was done in order to affect the proprietary rights of the
appellant as a shareholder. The issue of new shares which was done in March and July 1958
cannot, therefore, in our opinion amount to oppression of the appellant as a minority
shareholder. - It is, however, urged that the haste with which the new shares were issued on July 30,
1958 shows a design to harm the appellant as a minority shareholder. It is no doubt true that
the shares were issued in haste. But as we have already indicated the Company was in need of
money for expansion and its getting the loan from the Industrial Finance Corporation also
depended upon the increase of subscribed share capital. Therefore, the haste with which the
shares were allotted on July 30, 1958 cannot really be said to be a part of a design to oppress
the minority. The haste became necessary because the interim injunction was vacated on that
day and it was felt that if immediate action was not taken and the new shares allotted, there
might be further injunction which would further delay the issue of shares and getting the loan
from the Industrial Finance Corporation. The haste, therefore, appears to have occurred
because of the action taken by the appellant in bringing a suit and getting a temporary
injunction. It was feared that even after the vacation of the temporary injunction the appellant
would go in appeal and get another injunction from the appeal Court. This fear was justified
because the Subordinate Judge’s Court two hours later withheld the operation of its order
vacating the temporary injunction. The haste in the particular circumstances of the case in
allotment of shares cannot, therefore, lead to any inference of oppression but arose out of
circumstances brought about by the appellant’s conduct.
- But it is urged that even though the Company was in urgent need of money it accepted
only 5 per centum with the application and 10 per centum on allotment and that the remainder
of the money did not come for a long time. Again it is true that the remainder of the money
did not come for sometime. It also appears that out of the seven persons who had applied to
take shares six had to take loans from the Central Bank of India Limited to pay up the
remainder of the money and that a part of the new capital (i.e., Rs. 7,65,000) was not received
even till the time when the application under S. 397 was made. But that again in our opinion
does not necessarily lead to the inference that there was oppression by the majority
shareholders of the appellant, once it is held that the seven persons to whom the new shares
were allotted were not stooges or benamidars of the Patnaik and Loganathan groups. There
might be reasons why those persons were not in a position to pay the entire money at once
and, therefore, borrowed money from the Bank to make up the full amount of the shares taken
by them. Further it appears that there was fight between the appellant group on the one side
and the Patnaik and Loganathan groups on the other for the control of the Company. If the
fear of Patnaik was correct that the appellant would have purchased all the shares worth Rs.
39 lacs for want of money on the part of Patnaik and Loganathan groups and would thus have
obtained a dominating position in the Company, the action of the majority shareholders in
preventing such domination by one group only and taking action for that purpose cannot in
the circumstances by said to be oppressive of the minority shareholders. It is well to
remember that if the appellant had got the entire new issue of Rs. 39 lacs because of the
inability of the Patnaik and Loganathan groups to take up their two-thirds shares, the majority
control would have vested in one group. But the action of the majority shareholders in issuing
new shares to others and not to the existing shareholders has brought about a position where,
after the issue of new shares even the Patnaik and Loganathan groups have no longer a
majority and they have to carry the holders of the new shares with them in order to carry on
the work of the Company. The new holders are not the stooges and benamidars of the Patnaik
and Loganathan groups and, therefore, after the action taken in March and July 1958 the
Company cannot be said to be dominated by any group but has become more broad-based as a
public company should really be. The fact that the Patnaik and Loganathan groups may be
able to get the support of the holders of new shares does not necessarily mean oppression of
the appellant, for the new shareholders may support the Loganathan and Patnaik groups on
the ground that such support would be for the benefit of the Company. - Finally it is urged that the whole object of the Patnaik and Loganathan groups was to
get control over 75 per centum of shares of the Company, for a voting strength of 75 per
centum is required to pass a special resolution without which complete control of a company
is impossible. Therefore, it is said that Loganathan and Patnaik groups so manoeuvred the
affairs that they should be able to get over 75 per centum of the voting strength. It is urged
that if the new shares had been divided equally between the three groups the Patnaik and
Loganathan groups would not have been able to control over 75 per centum shares. This
argument again would have some force if the new shares had been allotted to stooges and
benamidars of the Patnaik and Loganathan groups. But as the shareholdings stand, after the
action of March and July 1958, the position is that roughly Patnaik and Loganathan groups
between themselves have got shares worth Rs. 38 lacs the appellant has got shares worth Rs.
19 lacs and shares worth Rs. 39 lacs are held by the new allottees and shares worth about Rs.
4 lacs by the French company. So unless the Patnaik and Loganathan groups are able to
persuade the new allottees always to vote with them they would not be in control of over 75
per centum of shares. The argument that all this was done to give the Patnaik and Loganathan
groups control over 75 per centum of shares in the company does not, therefore, appear to be
well founded when we remember that the new allottees are not stooges or benamidars of these
two groups. The fact that the shares were issued presumably to the friends of Patnaik and
Loganathan groups is hardly of any significance in the matter of oppression, for if shares are
issued privately they are bound to go to friends of the directors.
- The case of oppression, therefore, based on the agreement of July 1954 as the sheetanchor of the appellant’s case must fail. In the first place that agreement was strictly speaking
not binding even on the private company – it was much less binding on the public company
when it came into existence in 1957. The agreement did not contain any specific provision as
to future issue of capital. Further at the time when the agreement took place the appellant was
not even a member of the private company and it was really an agreement between a nonmember and two members of the Company, which would go to show that be agreement could
in no circumstances bind the Company. It is true that for sometime the agreement was in the
main carried out when the capital was actually increased upto Rs. 61 lacs, the appellant
getting one-third of it barring the French company’s shares. When, however, the Company
was made into a public company, some of the terms of the agreement could not be put even in
the Articles of Association of the public company. But it is said that if the Patnaik and
Loganathan groups had behaved like honourable men, the agreement could still have been
carried out after the Company became a public company and that these two groups did not
behave honourably when they gave the go-by to the agreement completely. There is some
force in the contention that Loganathan and Patnaik groups, when they were in need of the
appellant, took his help; it also does appear that when the Company had turned the corner and
it was felt that the appellant’s help was not absolutely necessary, these two groups thought it
unnecessary to carry out the spirit of the agreement (though not the terms, for the terms had
nothing to do with the future increase of capital and its distribution). But can it be said that the
conduct of the affairs of the company was carried on oppressively merely because these two
groups which in March and July 1958 were in majority did not carry out the spirit of the
agreement? We have given anxious consideration to this aspect of the matter and we feel that,
though the Patnaik and Loganathan groups did take advantage of the help given by the
appellant when the Company was in a difficult situation, the fact that when new issue was
made on behalf of the public company, they decided to make it more broad based and issue
the shares to others and not to the existing shareholders, cannot be said to be oppressive of the
then minority shareholders, namely, the appellant’s group. We have already pointed out that it
cannot be said to have been proved in this case that the appellant suffered in his proprietary
rights as a shareholder and in these circumstances it cannot be said that the action taken in
March and July 1958 in the allotment of the new shares amounted to such oppression of the
appellant as would justify an order under S. 397.
- Reference then may be made to the proposed increase of shares for which a meeting
was called on September 21, 1960 and which gave further cause to the appellant to move the
application which he did on September 14, 1960. In that meeting it was proposed to increase
the share capital by rupees two crores, one crore of which was to be in equity shares and the
other crore, in preference shares. It is said that this was part of the design to further reduce the
shareholdings of the appellant in the Company so that he may be driven out of it, for after the
issue of the new proposed capital the appellant’s holding of equity shares would be hardly 10
per centum of the entire equity capital. In the first place, as the meeting of September 21,
1960 was never held because of the injunction obtained by the appellant, we cannot say how
the new shares would have been issued and whether they would have been offered to the
public for subscription to make the Company even more broad-based than it was then. If that
was the intention that could hardly be called oppression of the appellant. Apart from that, we
fail to see why the appellant should be driven out of the Company and should be compelled to
sell his shares simply because his proportion of equity capital is only 10 per centum of the
entire equity capital, for it is not in dispute that the Company is doing well and the appellant
will get his dividends as any other shareholder. But if the appellant means that it is not worth
his while to invest his money in a company in which he is unable to have an important – if not
a controlling – voice, this shows that the real basis for the application in the present case was
not the oppression of the appellant as a minority shareholder but the feeling that the appellant
who hoped to get control of the Company had been thwarted by what took place in March and
July 1958. If that is the real position, then it cannot be said that the Loganathan and Patnaik
groups acted with lack of probity or fair dealing in thwarting the desire of the appellant to get
control of the Company; nor can such conduct be said to be oppressive of a minority
shareholder. The case of the appellant based on the agreement of July 27, 1954 therefore,
must fail and it must be held that even if that agreement was not carried out by the Company,
which was not bound by it, there can be no case of oppression of the appellant. - We now come to the case under S. 398. It provides that any members of a company
who have rights to apply in virtue of S. 399 may complain (i) that the affairs of the company
are being conducted in a manner prejudicial to the interests of the company, or (ii) that a
material change has taken place in the management or control of the company and that by
reason of such change, it is likely that the affairs of the company will be conducted in a
manner prejudicial to the interest of the company. On such application being made, if the
Court is of opinion that the affairs of the company are being conducted as aforesaid or that by
reason of any material change as aforesaid in the matter of management or control of a
company, it is likely that the affairs of the company will be conducted as aforesaid, the Court
may, with a view to bringing to an end or preventing the matters complained of or
apprehended, make such order as it thinks fit. This section only comes into play as the
marginal note shows, when there is actual mismanagement or apprehension of
mismanagement of the affairs of the company. It may be contrasted with S. 397 which deals
with oppression to the minority shareholders, whether there is prejudice to the company or
not. In the present case, the appellant relies on the following three circumstances to show that
the affairs of the Company were being conducted in a manner prejudicial to its interests,
namely –
(i) that when the new shares worth Rs. 39 lacs were issued in July 1958, only a small
part of the share-money was received in the beginning;
(ii) that the Patnaik and Loganathan groups removed Rs. 7 lacs from the coffers of
the company;
(iii)that the company lost the support of the appellant.
It is true that when new shares of the value of Rs. 39 lacs were issued, the Company
received only 15 per centum of the share money to begin with, namely, 5 per centum with the
application and 10 per centum on allotment. But the evidence shows that though there was
some delay in the receipt of 85 per centum of share money, shares worth Rs. 30 lacs were
fully paid up in the financial year 1959-60 and the only amount outstanding in that year was
Rs. 7,65,000 (i.e. 85 per centum of shares worth Rs. 9 lacs). The slight delay in the payment
of the full value of the shares cannot therefore in the circumstances be said to be so
prejudicial to the interests of the Company as to call for any action under S. 398 of the Act.
- As to the removal of Rs. 7 lacs from the coffers of the Company by the Loganathan
and Patnaik groups, it does not appear from the application of the appellant that his complaint
was that this sum was wrongfully removed by the two groups and there was any fraud with
respect to its removal. The real complaint of the appellant in this connection appears to have
been that he was entitled to one-third of this amount of Rs. 7 lacs under the agreement, and
his share of this amount was not given to him. This appears from a letter written by the
appellant to Patnaik on October 16, 1957 in which he asked that he should be paid his onethird share of this sum of Rs. 7 lacs with interest. It is not in dispute that the sum of Rs. 7 lacs
was due from the Company to the Kalinga Industrial Development Corporation Limited and,
therefore, the withdrawal of this amount from the Company by the Patnaik and Loganathan
groups which controlled the Kalinga Industrial Development Corporation which was the
managing agent of the Company before July 1954 cannot be said to amount to conducting the
affairs of the Company prejudicially to its interest, whatever may be the rights of the appellant
in the matter of getting one-third of this amount from the Loganathan and Patnaik groups. If
he has any right under the agreement of July 27, 1954 in this matter he can enforce it in such
way as may be open to him; but it cannot be said in the circumstances that this withdrawal
from the Company was in any way prejudicial to the affairs of the Company, when it is clear
that the Company owed the amount to the former managing agent. - The last point that has been urged in this connection is that the Company lost the
support of the appellant in view of the action taken by the Patnaik and Loganathan groups in
March and July 1958. Here again it is true that the appellant was dissatisfied with what had
happened in March and July 1958 with regard to the allotment of shares worth Rs. 39 lacs and
withdrew his support form the Company. If the Company was able to carry on without this
support as it apparently was in 1958, it cannot be said that the action which resulted in the
loss of the appellant’s support to the Company was necessarily prejudicial to it. It may be
that the appellant was sore inasmuch as he must have felt that his assistance was taken when
the Company was in need of such assistance; but later the Patnaik and Loganathan groups
acted in the manner in which they did when they felt that the appellant’s support was no
longer necessary to the Company. But if the appellant’s support was no longer necessary to
the Company by 1958 the action of the Patnaik and Loganathan groups which resulted in the
loss of such support cannot be said to be prejudicial to the interests of the Company. We,
therefore, agree with the High Court that no case has been made out for action under S. 398
on the ground that the affairs of the Company were being conducted in a manner prejudicial
to its interests.
- Nor is there any ground for holding that because of the change which took place in the
management after July 1958 it was likely that the affairs of the Company would be conducted
in a manner prejudicial to its interests. The change that took place after July 1958 was that
the appellant no longer remained the chairman of the Company and the Patnaik and
Loganathan groups practically managed the Company without the appellant. But as the High
Court has pointed out there were no facts before the Court to come to the conclusion that the
change in management was likely to result in the affairs of the Company being conducted in a
manner prejudicial to its interests. In this connection reliance is placed on certain matters
which transpired after the application was filed on September 14, 1960. These matters
however cannot be taken into account for the application has to be decided on the basis of the
facts as they were when the application was made. Besides as the High Court has pointed out,
it has not been shown that in view of certain actions taken by the new management without
consulting the appellant, the Company was landed in any difficulty and loss of profit which
would show mismanagement of its affairs. - Lastly it was stated in the application that accounts had not been shown to the
appellant and his group and in consequence of this the appellant was not able to give full
particulars of the several acts of fraud, misfeasance and other irregularities committed by the
new management. But as the High Court has pointed out, the appellant asked for production
of certain documents in April 1961 and those documents were made available for inspection
by the appellant and were produced in C-ourt. It was for the appellant to take inspection of
those documents if he so desired and the appeal Court was right in pointing out that the
learned Single Judge was not correct in drawing an adverse inference against the Company
that it had disobeyed the orders of the Court and had not produced the documents called for
and had given no opportunity to the appellant for their inspection. It seems to us that the
appeal Court was right in this view and no case has been made out even prima facie for action
under this part of S. 398 of the Act. - The appeals, therefore, fail and are hereby dismissed.
1 comment
[…] Click here to Read in English […]