Calcutta High Court
Jaladhar Chakraborty And Ors. vs Power Tools And Appliances Co. Ltd. And ... on 11 October, 1991
Equivalent citations: (1992)2CALLT64(HC), [1994]79COMPCAS505(CAL)
Author: Ruma Pal
Bench: Ruma Pal
JUDGMENT Ruma Pal, J.
1. This is an application under Sections 237, 397, 398, 402, 403 and 406 of the Companies Act, 1956 (referred to as "the Act"). Of the six petitioners, petitioners Nos. 1, 2 and 3 together with respondent No. 4 are trustees of a public charitable trust. The said petitioners and . respondent No. 4 are shareholders in Power Tools and Appliances Co. Ltd. (hereinafter referred to as "the company") as trustees of the said trust. The total shareholding of the petitioners in the company is 28,200 of which 24,700 equity shares are" held by the trustees. Respondents Nos. 2, 3, 4 and 5 are representing the present directors of the board of the company. These respondents hold about 75 per cent. of the shares in the company.
2. Allegations of oppression and mismanagement have been made against the management of the company by the petitioners. The petitioners have asked, inter alia, that the board of directors be superseded.
3. The admitted facts of the case are :
The authorised share capital of the company is Rs. 25,00,000 divided into 2,20,000 of equity shares of Rs. 10 each and 3,000 of 12% cumulative redeemable preference shares of Rs. 100 each. The paid-up capital of the company is Rs. 16,18,760.
4. The objects of the company, as appearing from its memorandum of association, are as follows :
"(a)(i) T6 canvass as commission agents on behalf of foreign and local manufacturers, their agents and distributors, orders from local and foreign importers and their agents or representatives ;
(ii) To act as agents, sub-agents, representatives, brokers, nominees, distributors and stockists for foreign and local factories, merchants, shippers, forwarders, manufacturers, producers, growers, builders, patentees and specialists ;
(b) To acquire by purchase, lease, exchange or otherwise, lands, buildings and any rights over and connected with lands or buildings, and to retain the same for the purpose of the company's business or to turn the same to account as may seem expedient ;
(c) To manufacture, import, export, buy, sell, exchange, alter, manipulate and generally deal in all goods, merchandise, materials and metal, wood and timber work to any description."
5. It is not disputed that the principal business of the company is to act as a commission agent and distributor of machinery and equipment for East European countries and the USSR, as well as for indigenously manufactured machine tools. The company has servicing centres for fuel pumps and automobiles at Calcutta and at Secunderabad in Andhra Pradesh. The company used to manufacture machine components and tools at its unit at Durgapur. The Durgapur unit of the company was closed in September, 1977.
6. Till 1987, the petitioners were in management of the company. Since 1987, the present management are in control of the company.
7. In the first two weeks of September, 1990, the management served notices on the shareholders of the company for the twentieth annual general meeting to be held on October 1, 1990. The resolution which was sought to be passed related to the increase in the authorised share capital of the company. The notice was accompanied by an explanatory statement under Section 173 of the Companies Act, 1956. The reason given in the explanatory statement for the increase in the authorised share capital of the company had been stated to be an anticipated increase in the business of the company and a consequent need for finance.
8. The resolution which was sought to be passed at the twentieth annual general meeting reads as follows :
"Resolved that the authorised share capital of the company has increased from Rs. 25,00,000 (rupees twenty-five lakhs) divided into 3,000 12 1/2% cumulative redeemable preference shares of Rs. 100 each and 2,20,000 equity shares of Rs. 10 each to Rs. 50,00,000 (rupees fifty lakhs) divided into 3,000 12 1/2% cumulative redeemable preference shares of Rs. 100 each and 4,70,000 equity shares of Rs. 10 each by the creation of 2,50,000 equity shares of Rs. 10 each and that Clause V of the memorandum of association be altered accordingly."
9. The explanatory statement annexed with the notice reads as follows :
"The present authorised share capital of the company is Rs. 25,00,000 (rupees twenty-five lakhs.) The directors of the company anticipate the volume of the stock-and-sale business is likely to be increased. In order to finance the said business activities a considerable capital is necessary. Your directors, therefore, thought it prudent to increase the authorised share capital of the company. The resolution at items (4) and (5) of the notice are respectively to increase the authorised share capital of the company and to clear Clause V and Article 5 of the memorandum and articles of association of the company respectively.
None of the directors of the company is concerned or interested in these resolutions."
10. This application was moved on September 25, 1990 (referred to as the main petition). An interim application was moved by summons dated September 25, 1990, in the main application (referred to as "the first interlocutory application"). An interim order was obtained restraining the respondents from taking any resolution relating to the increase of the authorised share capital at the ensuing general meeting and restraining the respondents from transferring any portion of premises No. 4/B, Hemanta Basu Sarani, Calcutta, belonging to the company.
11. On April 24, 1991, respondents Nos. 1 to 5 filed an application for dismissal of the main petition (referred to as "the second interlocutory application"). The grounds for dismissal of the main application were (1) that by three several letters petitioners Nos. 5, 6 and 7 had informed the company that they did not want to continue the proceedings under Section 397 or 398 of the Act: (2) that the remaining petitioners were trustees. Being trustees they were bound to act jointly and not on the basis of a majority. Admittedly, respondent No. 6, one of the trustees, had refused to join the other trustees. As such it was contended that the remaining petitioners who hold only 1,500 shares of the company were incompetent to proceed with the main petition.
12. During the pendency of the main petition a notice dated July 7, 1991, was served on the shareholders of the company by which the respondents sought to call an extraordinary general meeting of the company on August 16, 1991, for passing a resolution seeking to issue fresh shares up to the authorised share capital of the company. The new shares were to be offered to the existing shareholders under Section 81 of the Companies Act, 1956.
13. An application was moved by the petitioner on August 10, 1991, challenging the notice dated July 7, 1991 (referred to as "the third application"). The third application was heard by this court on August 13, 1991. An order was passed permitting the company to hold the meeting on August 16, 1991, pursuant to the notice dated July 7, 1991, for passing the resolution as indicated in the notice. The order dated August 13, 1991, further provided that the holding of the meeting and the passing of the resolution would be without prejudice to the rights and contentions of the petitioners and subject to the final order that would be passed on the main application. It was also directed that the company should not give effect to its resolution for a period of two weeks from the date of the meeting. The matter was listed for hearing on August 19, 1991.
14. From time to time the main petition appeared in the list and was adjourned by consent. The main petition was ultimately heard from August 28. 1991. Hearing was concluded on September 4, 1991.
15. The grounds of oppression alleged are :
(1) Non-declaration of dividend. It was, however, conceded that the failure of the company to declare dividend per se would not be an act of oppression, if this had been the result of business dealing in the ordinary course. However, it was submitted that such is not the case here. The company had admittedly made profits in the last four years, It was submitted that the accounts had been manipulated to show a loss and thereby deny the petitioners the benefit of their shareholdings.
It was, therefore, submitted that non-declaration of dividend for such a long period, exceeding a decade was really manipulated to oppress the petitioners.
(2) Siphoning off of the monies of the company by letting out the company's immovable properties at low rates. It is alleged that by letting out the properties at low rates that the management had in fact, made a secret profit:
(3) The attempt to increase the authorised share capital and subsequently the subscribed capital of the company were in fact early attempts on the part of the management to reduce the petitioners to a further minority. There was no genuine need for increase of the capital of the company either subscribed or authorised. There was no evidence of such need.
16. The allegations of mismanagement against the present management by the petitioners are quoted as follows :
"(i) Since 1980, no dividend has been declared by the respondent company although the company made profits. By scrutinising the balance-sheet, it will be evident that the management of the respondent-company from time to time defrauded the shareholders by manipulating the accounts. A comparative chart of yearly income of the respondent-company on account of commission, sale and value of stock will show that there is every scope for showing profit and consequently declaring dividend.
(ii) The company's present registered office is situated at No. 48, Hemanta Basu Sarani, Calcutta, which is a three-storeyed building situated in the heart of the city, specially the commercial area and adjacent to Stephen House, comprising an area of 16 cottahs of land. Respondents Nos. 2 to 5 caused unauthorised constructions and constructed mezzanine floors in each of the existing floor of the said building and let them out to various organisations and/or persons at a high premium which has not been shown in the accounts of the company.
(iii) It is curious to note that in or about 1987 tenancy was created by respondents Nos. 2 to 5 in favour of Banque Nationale De Paris at the rate of Rs. 10 per square feet while in the two years thereafter, i.e., in the year 1989, similar tenancy was created in favour of Messrs. Dalmia and Mehta Associates at the rate of Rs. 3 per square foot. It is impossible to believe that the rate of rent in B.B.D. Bag area can fall to such a large extent in one year. Your petitioners have every reason to disbelieve it and have caused enquiry to be made and come to know that the present rent prevailing in the said area to be Rs. 15 per square feet together with a premium at the time of creation of the tenancy.
(iv) The said respondents have let out various portions of the said building to Ardour India, Eastern Metal and Ferro Alloy Ltd., Process Chemicals Company and Vaijayanthi Enterprises at such low rent and it is obvious that they have misappropriated the premiums which must have been obtained in cash in consideration of the said tenancies being created without depositing the same in the till of the company and without accounting for the same to shareholders of the company.
(v) Had the actual rent and premium paid to the respondents been shown in the accounts of the company then there is every scope for recouping the alleged losses and thereby showing profits to the said company.
(vi) From the balance-sheet filed by the company as on March 31, 1990, a copy of which is annexed hereto and marked with the letter "E", there shows a term deposit of Rs. 20,00,000. Nowhere it has been kept and whether any interest is being accrued on the same.
(vii) It also appears from the said balance-sheet that the company is borrowing substantial sums from the bank and/or financial institutions by paying 18 per cent. interest whereas there is a term deposit of Rs. 20,00,000 earning not more than 10 per cent. per annum.
(viii) Respondents Nos. 2 to 5 have caused several constructions in the registered office as stated hereinbefore as well as in the factory situated in Kasaba Road, Calcutta, under the guise of repair and maintenance. The said cost of construction should have been accounted for in the capital expenditure account and should have been included in the list of assets of the company. The said manipulation has been done only for the purpose of defrauding the shareholders of the company, specially the minority group."
17. On behalf of respondents Nos. 1 to 5 it has been submitted that :
" (i) The grounds urged did not amount to mismanagement under Section 397 or 398 of the Act. Non-declaration of dividend since 1968 was untenable in law and fact. The petitioners were in fact in management till 1987. In any event, it was not a ground for winding up the company. Reliance has been placed on the decision in Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd., , Joseph (KM,],) v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp C0s 284 (Ker) and Ripon Press and Sugar Mill Co. Ltd. v. Gopal Chetty [1932] 2 Comp Cas 70 (PC).
(ii) Whether the grant of tenancy was at a low rate could not be determined unless the nature of the tenancy was examined. The tenancy complained of by the petitioners related to an unventilated mezzanine room covering an area of 254 square feet only. The tenant was an undertaking of the Government of Orissa. Therefore, allegations of surreptitious profit could not stand. In any event a single act could not constitute a ground either under Section 397 or 398 of the Act. Reliance has been placed on Sheik Mohanlal-Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj); Rao (V. M.) v. Rajeshwari Ramakrishnan [1987] 61 Comp Cas 20 (Mad) and Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd., .
(iii) The amount of Rs. 20 lakhs was retained in fixed deposit with the Banque Nationale de Paris and the Allahabad Bank for the purpose of obtaining credit facilities from the two banks. There was no unauthorised construction. Had there been such unauthorised construction as alleged, the Calcutta Municipal Corporation would have complained. In any event, it was not a matter which could be considered to be prejudicial to any shareholder.
(iv) There was genuine need to increase the share capital. The company had been appointed agent of a Russian company in respect of their products over the whole of India. Originally, the company was the Russian company's agent only for eastern India. The issue of right shares up to the authorised capital could not be construed as an attempt to reduce the petitioners to a minority as the fresh issue was to be made to existing shareholders at par.
(v) The notice dated July 17, 1991, seeking to increase the capital of the company was valid. The explanatory statement was candid. In any event, assuming that the explanatory statement was tricky or defective, this would not amount to oppression of the minority or mismanagement within the meaning of Section 397 or 398 of the Act. Reliance has been placed on Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal).
It has been further contended that the petitioners by obtaining the order of injunction have caused loss to the company. By not being able to raise the necessary finance the company has been unable to acquire the imported goods, as a result of which the goods have now been subjected to an increase in duty. The respondents should not be compelled to purchase the petitioners' shares as the petitioners have not been able to make out any ground justifying the grounds for any relief under Section 397 or 398 of the Act.
(vii) The final submission of the respondents was that the application was not maintainable. The offer by the petitioner trustees to sell the shares could not be made except with the consent of respondent No. 6. Reliance has been placed on Luke v. South Kensington Hotel Co. [1872J-11 Ch 121 (Ch D) and Tempest v. Lord Camoys Ltd. [1882] 21 Ch 571 (Ch D).
18. The final contention of the respondents is in the nature of a preliminary objection and is, therefore, disposed of at the outset. The allegation raised by the respondents is that the petition is not maintainable . on the ground that the bulk of the shares of the petitioners was held by four trustees jointly out of which one trustee had refused to participate. It is contended that the trustees could not have filed the application unless they acted jointly. The cases cited by the petitioner in support of this contention, namely, Luke v. South Kensington Hotel Co. [1872] 11 Ch 121 (Ch D) and Tempest v. Lord Camoys Ltd. [1882] 21 Ch 571 (Ch D), related to private trusts. Admittedly in this case the trust is a public charitable . trust. In Halsbury's Laws of England, Fourth Edition, Volume 48, (Third Edition, volume 38, para 1682) para 441, the law is stated as follows :
" In trusts of a public or charitable nature a majority of the trustees may as a rule bind the minority, but in a private trust where there is more than one trustee the concurrence of all is in general necessary in a transaction affecting the trust property, and a majority cannot bind the minority."
19. I, therefore, hold the application as filed is maintainable.
20. Before considering the allegations of oppression and mismanagement made by the petitioners it is necessary to bear in mind the nature of the enquiry that the court is to conduct in dealing with cases under Sections 397 or 398 of the Act, This has been aptly summarized in Jermyn Street Turkish Baths Ltd., In re [1971] 3 All ER 184 ; 41 Comp Cas 999, 1020 (CA) by Buckley L.J. (at page 199) :
",We are not concerned in this case to consider whether the minority shareholders could succeed either in misfeasance proceedings against the directors or in a minority shareholders' action in the name of the company. We are concerned only to consider whether the affairs of the company were, when the petition was presented, being conducted in a manner oppressive to some part of the members of the company. What does the word 'oppressive' mean in this context ? In our judgment, oppression occurs when shareholders, having a dominant power in a company, either (1) exercise that power to procure that something is done or not done in the conduct of the company's affairs or (2) procure by an express or implicit threat of an exercise of that power that something is not done in the conduct of the company's affairs ; and when such conduct is unfair or to use the expression adopted by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd, v. Meyer [1958] 3 All ER 71 (HL) ; [1959] 29 Comp Cas 1 (HL) 'burdensome, harsh and wrongful' to the other members of the company or some of them, and lacks that degree of probity which they are entitled to expect in the conduct of the company's affairs : see Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 71 (HL) ; [1959] 29 Comp Cas 1 (HL) and H. R. Harmer Ltd., In re [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA)."
21. Although this case related to acts of oppression the observations are equally applicable to cases under Section 398.
22. The second consideration which has to be borne in mind is the principle of particularity and proof. As held in Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal) (at page 209) :
"The main defect of this application is that the facts alleged are not proved. It is essential to remember that under Section 397 of the Companies Act, the court has to be satisfied that there is oppression. It has to be satisfied that the affairs of the company are being conducted in a manner oppressive to any member or members of the company. The acts of oppression, therefore, have not only to be alleged with sufficient particulars but they must be proved also to the satisfaction of the court."
23. The third principle that has to be kept in mind is that the acts of oppression or mismanagement must be continuing ones. As stated in Sheth Mohantol Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd, [1964] 34 Comp Cas 777 (Guj) (at page 813) :
"The general principle manifest from the language of Sections 397 or 398 is that .the power of the court under both the sections is confined only to making an order for the purpose of putting an end to oppressive or prejudicial conduct and the court cannot make an order setting aside or interfering with past and concluded transactions which are no longer continuing wrongs."
24. The fourth aspect of the matter both under Sections 397 or 398 is that there must be evidence that on the facts stated the company was otherwise liable to be wound up.
25. The observations in Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd., may be noted in this connection. "... the court has to form an opinion on two essential points, that are set out in Section 397(2) of the Act. These two points are first, the one that I have already stated, namely, that the company's affairs are being conducted in a manner oppressive to any member or members of the company and, secondly, that to wind up the company would unfairly prejudice such member or members but that otherwise the facts 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. It is imperative that the court's opinion on both these points must be formed in the affirmative before any order could be made under Section 397 of the Companies Act. If the court is not satisfied on any one of these points and is of the opinion that either a company is not being conducted in a manner oppressive or that the facts do not justify the making of a winding up order, then no further question can arise under Section 397."
26. These observations are also apposite to applications under Section 398.
27. Keeping these four principles in mind the allegations of oppression made by the petitioners are considered first.
28. Regarding the first alleged act of oppression it is well established that non-declaration of dividend per se would riot be considered, oppression as such. In Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd., , it was held (at page 212) :
"It is then argued that the board of directors controlled by the managing agents has not been properly declaring dividends. In fact what is said in paragraph 21 of the petition is that dividend which is much below the actual profit earned by the company has been declared. I fail to see how this is an act of oppression to any member or members within the meaning of Section 397 of the Companies Act. The board of directors has a discretion to declare dividend and the rate of such dividend. There is no company law that I know which obliges a board of directors to use up all its profits by declaring dividend. No company law lays down that all profits must be declared and exhausted in paying dividends. Surely, failure to do so could not be a ground for an application for oppression under Section 397 of the Companies Act. Besides, that will also not be a ground for winding up a company as indicated by Lord Blanesburgh in the observation quoted above in the Privy Council decision in Ripon Press and Sugar Mill Co. Ltd. v. Gopal Chetty [1932] 2 Comp Cas 70 (PC)."
29. The test appears to be whether by deliberately not declaring dividend the respondent directors have caused the value of the shares to- fall so as to compel the minority to sell their shares to the majority. As held in Joseph (K.MJ.) v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp Cas 284 (Ker) (at page 301) :
"The conclusion is that the non-declaration of dividend did not affect the value of the shares and in fact the value at all times had remained above par."
30. Again, at page 304, the court held :
"It is true that dividends were not declared from 1962-63 to 1971-72. This allegation was made to support the further allegation that it was deliberately done to corner the shares. We have already shown that the shares did not suffer from devaluation and that no evidence was made available to show that any transfer of shares took place below par. That there was deliberate attempt on the part of the company to oppress the minority shareholders by non-declaration of dividends has not been made out, though, in our opinion, no satisfactory explanation was given why-dividends were not declared even during the period when the company was making profit."
31. Coming to the facts of this case it has been conceded by the respondents that mere non-declaration of dividend would not amount to mismanagement. The respondents have given an explanation as to why dividend was not being declared.
32. According to the respondents, prior to their taking over that management of the company and during the tenure of the management of the company under the petitioners, the company had cumulative losses amounting to Rs. 4,38,989. It is stated that whatever profits had been earned by the company subsequently have been utilised for the purpose of wiping out such loss. This has not been specifically denied by the petitioners in their affidavit in reply. Secondly, it is stated that it was necessary to build up the company's reserves for the purpose of the business. It has, however, been stated by the petitioners that the respondents have manipulated the accounts so as not to declare dividend. It has not been stated, however, as to what manipulations have taken place. In any event the period for which the dividend was not declared, even according to the petitioners, included a period during which the petitioners themselves were in management and as observed in Joseph (KM.J.) v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp Cas 284 (Ker) (at page 306):
"In this case, we have the spectacle of two disgruntled directors who had themselves been participants in the various acts of mismanagement alleged figuring with injured innocence as complainants before the court. This circumstance itself to a large extent demolishes the bona fides of the allegations put forward."
33. At the hearing of this application the court enquired whether the petitioners were willing to sell their shares in the company, to either the company or to the other respondents. The petitioners stated that they were willing but that they would not accept the par value of the shares. This in my view is clear proof that the value of the shares has not been affected by the non-declaration of the dividend.
34. As far as the second allegation of oppression is concerned, in order to hold that the management had rented out properties at unreasonably low rates it is essential that there should be a comparative statement of the nature of the tenancy not only as regards the situation but also as regards space covered, the nature of the space and attendant facilities. It has been denied by the respondents that any tenancy was granted in favour of Ardour India or Process Chemical Company or Vaijayanti Enterprises as alleged by the petitioners. It has been admitted that a tenancy has been granted after the present management came into control of the company to M/s. Eastern Metal and Ferro Alloy Ltd., an Orissa Government undertaking. The tenancy is in respect of 254 square feet of an unventilated office space at the mezzanine level on the third floor. There is no proof by the petitioners that a similar space would fetch a higher rent. Further, it is stated that the Banque National de Paris was granted a tenancy in respect of a much larger area and that the corporation rates and taxes were being borne by the said bank. As already noted, it is not possible for the court to come to any conclusion regarding the inadequacy of the rent unless all the relevant factors can be compared. Even assuming that the petitioners had wrongly let out premises there is nothing to show that the respondents have in fact profited thereby nor can a single act of letting out be termed as oppression. As already noted it is necessary for the act to be a continuing one for the court to interfere. Under Section 397 "to bring to an end" such conduct.
35. The last allegation of oppression made by the petitioners relates to the issue of shares. The first Issue of shares challenged in this case relates to the increase of the authorised share capital. The second issue relates to the increase of the subscribed capital.
36. As far as the first notice is concerned, the mere attempt to increase authorised share capital cannot be faulted unless the petitioners can prove that the sole motive for seeking such increase in the capital of the company was to oppress the petitioners. That there was a need for finance has been sought to be justified in the affidavit in opposition of the respondents in which it has been stated :
"I say that after we have assumed management of the company since about 1987, the business of the company has expanded. The company is also carrying on business as importer and seller of machinery. I say, after the new management has taken over in 1987, the old business of the company has also expanded manifold. Previously the old business of sole agency was restricted to Eastern India only, but as non-exclusive dealer for the rest of India. But now the said company is the sole commission agent and distributor of machinery and equipment manufactured by Stranko Import, USSR for the whole of India,"
"The present management is trying to reopen the Durgapur unit of the company. For the said purpose of revival huge sums of money would be required and that is one of the reasons for enhancement of the authorised share capital of the respondent-company, I say having regard to the fact that the Durgapur unit is lying closed for sometime the same cannot be considered to be an undertaking within the meaning of the Companies Act, 1956."
37. It is admitted by the petitioners that there has been an increase in the business of the company. The directors' report accompanying the balance-sheet for the year ending December 31, 1987, stated as follows :
" Your directors are pleased to report that the profit of the company has considerably increased in comparison with the previous year. This is mainly due to increase in sales as well as commission earnings. As reported, your directors have already taken steps to revitalise manufacturing activities and hope that the result of this will be reflected in the current year's working."
38. The directors report for the year ending on March 31, 1989, is as follows :
" Your directors are pleased to inform you that V/o Stranko Import, Moscow, appointed your company as the agent of their machine tools throughout India. Your directors expect the commission earnings of the company will be increased considerably. The company contemplates to import machine and machine tools from V/o Stranko Import, Moscow, directly for stock and sales. As regards manufacturing activities your directors are taking active steps in this direction."
39. Finally, the directors report for the year ending March 31, 1990, -contains the following statements :
"Your directors expect that the commission earnings of the company will considerably increase during the current year in view of the execution of the pending orders in hand. The directors also expect that the sales of the company will increase considerably."
40. All these would show that the volume of business had in fact increased.
41. Secondly, the need for further finance appears from the notice given for the nineteenth annual general meeting of the company which was to be held on October 30, 1989. The resolution which was to have been passed at that meeting related to the granting of power to the board of directors to borrow monies for the company's business. The respondents have produced letters from the bankers being the Bank of India dated June 12, 1991, by which the bank has reduced the working margin by 10 per cent. with effect from June 12, 1991. On June 29, 1991, the Bank of India also revised the rate of interest upwards in the company's cash credit account from 8 per cent. to 15 per cent. bank rate minimum 25 per cent. and bill purchase account from 8 per cent. to 14 per cent. over bank rate minimum 20 per cent. It is clear, therefore, that to meet the company's needs it would be a measure of practicality to raise the capital of the company so that the company did not have to depend upon institutional finance. It was also conceded by the petitioners that the business of the. company is basically of importing machinery. The court can take judicial notice of the fact that by reason of recent Reserve Bank of India directives relating to imports, at least 100% margin money is required to be deposited "over and above the customs duty and the cost of imported goods by the importer. It may also be noted that under the directive of the Reserve Bank of India, no bank is permitted to finance such margin money. This coupled with the devaluation of the rupee would mean a heavier financial burden on a company whose principal business is import.
42. It is, therefore, not sufficient to say that the company has Rs. 20,00,000 in a term deposit (which is in any event now reduced to Rs. 18,00,000) which is used for the purpose of obtaining guarantees from the banks and security deposits for the execution of jobs.
43. In any event, there is no question of reducing the petitioners to a minority as Article 69 of the articles of association of the company provides as follows ;
"Subject to other provisions of these articles and subject to any directions to the contrary that may be given by the meeting that resolves upon the increase of capital where the board decide to increase the capital of the company by the further issue of additional shares, such shares shall be offered to the persons who at the date of the offer, are holders of the equity shares of the company, in proportion as nearly as circumstances admit to the capital paid up on those shares at that date and such offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined ; and after expiration of such time, or on receipt of an earlier intimation from the members to whom such notice is given that he declines to accept the shares offered, the board may dispose of the same in such manner as they may think to be most beneficial to the company : Provided further that the further issue of capital may be offered to any persons if a special resolution to that effect is passed by the company in general meeting."
44. Therefore, the petitioners would be in a position to purchase the shares and retain theif percentage of the shareholdings.
45. It cannot be said in this background that the notice under Section 173 of the Act is tricky or vague. In any event as held by this court in Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. :
"Section 173 of the Companies Act concerns what is indicated in the marginal note of that section as 'explanatory statement to be annexed to notice.' Although it imposes by Section 175(2) an obligation that there shall be. annexed to the notice of meeting a statement of the type and nature which I have discussed above, the question is, does failure to comply with the details of Section 173(2) of the Companies Act make it a case ipso facto of oppression in conducting the affairs of the company within the meaning of Section 397(1) of the Companies Act ? I do not see how it can be the kind of oppression which Section 397 contemplates because breach of Section 173(2) can at best make the meeting called invalid and no more. If such a meeting is invalid then the Companies Act provides procedure for calling valid or regular meetings or for regularising irregular proceedings. That right is always open to every shareholder. But that does not mean that this failure to supply the fullest possible details in the explanatory note under Section 173(2) of the Companies Act will be visited with an application under Section 397 as typifying such failure to be an act of oppression within the meaning of Section 397."
46. As far the second notice is concerned relating to the issue of shares up to the subscribed share capital, the question of need for raising finance has already been dealt with above. The issue of shares is also under Section 81 of the Act, The offer of the shares has been made to all shareholders so that the petitioners may participate in the fresh issue. In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., , it was alleged as a ground of oppression that issue of shares had been made without offering the same to the foreign shareholders. The allegation of oppression was negatived by the Supreme Court on the ground that even if the offer had been made, the foreign shareholders could not have availed of the same because of F.E.R.A. regulations.
47. The court further held (at page 813 of 51 Comp Cas) :
"Whether one looks at the matter from the point of view expressed by this court in Nanalal Zaver [1950] 20 Comp Cas 179 (SC) or from the point of view expressed by the Privy Council in Howard Smith [1974] AC 821, the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the directors. If the shares are issued in the larger interest of the company, the decision to issue the shares cannot be struck down on the ground that it has incidentally benefited the directors in their capacity as shareholders. We must, therefore, reject Shri Seervai's argument that, in the instant case, the board of directors abused its fiduciary power in deciding upon the issue of rights shares."
48. In this case, the offer has in fact been made to all the shareholders. If the petitioners cannot avail of the offer by reason of any financial constraints or otherwise, this would not be a ground of oppression.
49. It may further be noted that 539 shares remaining after allotment to the registered members are to be offered to the members other than the directors. It cannot, in the circumstances of this case, be said that the notice for issue of fresh shares was either to benefit the directors or to convert the petitioners into a minority.
50. I cannot, therefore, hold that there has been any act of oppression of the minority shareholders of the company by the majority.
51. As far as the case on mismanagement is concerned, most of the allegations of mismanagement have also been put forward as acts of oppression. To the extent the allegations overlap, the same are not dealt with under this head separately.
52. The first allegation of mismanagement, viz., non-declaration of dividend has already been dealt with. Since no dividend had been declared when the petitioners were themselves in management, it does not He in the mouths of the petitioners to allege that this was an act of mismanagement.
53. As far as the second allegation of mismanagement is concerned this is completely devoid of particulars. It is not stated when the alleged unauthorised constructions were made, when such alleged constructions were let out, or who the "various organisations" were to whom the management granted tenancy. There is not an iota of evidence of high premium being paid. As in Section 397, the allegations under Section 398 of the Companies Act have to be made with particularity and established at least prima facie.
54. The allegation that the constructions made by the management are unauthorised do not merit consideration. There is no complaint made by the Calcutta Municipal Corporation. Even assuming that the construction is unauthorised as held in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co, Ltd. [1964] 34 Comp Cas 777 (at page 830) :
"The question whether a particular action of the directors was within the limits of the law or was in contravention of any provision of law is not a proper subject-matter of inquiry in a petition under Section 397 or 398 of the Companies Act, 1956. If an action of the directors is illegal or invalid, the company of the shareholders may take appropriate action in a court of law challenging the validity of such action, but a petition under Section 397 or 398 is not an appropriate remedy for the purpose. The only question with which the court is concerned in a petition under Section 397 or 398 is whether the action of the directors--whether within the law or outside the law--is oppressive to the minority shareholders or is prejudicial to the interests of the company."
55. As far as the third, fourth and fifth allegations are concerned these allegations cannot be accepted. The tenancy according to the petitioners had been granted to M/s. Dalmia Mehta. This has been denied by the respondents. Secondly, before one can deduce that there was any question of a tenancy being granted at low rates evidence of comparable tenancies has to be adduced. This aspect has been dealt with under the heading of oppression. There is also no evidence that the company is going to let out any other properties at low rates of rent. In my view there is no evidence as such either that the company had let out the company's properties at low rates or that the management have made any secret profit thereby. I also hold that a concluded act, namely, letting out of the company's property could not amount to a continuing act of mismanagement as envisaged under Section 398.
56. As far as the sixth and seventh allegations of mismanagement against the management are concerned these relates to the creation of a term deposit by the company. At the outset it may be stated that the allegation that the company had not disclosed whether any interest was accruing on the term deposit is incorrect as the very profit and loss account relied upon by the petitioners shows that interest had in fact accrued as on March 31, 1989, to the extent of Rs. 2,32,570.35 on the said term deposit.
57. Secondly, the respondents have stated that the deposit was necessary in order to obtain bank guarantees and security deposits to enable the companies to participate in tenders and contracts and also to provide margin money for issuance of letters of credit for the purpose of import of machinery from the foreign principal for a stock and sale. It is further stated that the management thought that utilisation of money from the cash credit or overdraft account of the company for the purpose of furnishing cash security would be unsound business practice as interest would have been payable on the same at the rate of 17.5% per annum.
58. It cannot be stated without more that the mere keeping of the moneys of the company in a term deposit is bad business practice or in any event such mismanagement as would warrant interference under Section 398 . of the "Act.
59. The last allegation of mismanagement relates to the description of construction as "repairs" instead of "assets". Firstly, it is not stated when such alleged construction was made. Secondly, it is not stated what are the nature of constructions which are complained of. There is no question of including a construction in a building as a separate asset of the company. Thirdly, even if the repairs are by way of constructions, the assets of the company are being added to. Furthermore it does not appear that the income-tax authorities or wealth-tax authorities have raised any dispute at the hearing of any of the company's assessments in this regard.
60. As none of the grounds put forward by the petitioners are sustainable, I hold that the petitioners have not been able to establish a case of mismanagement under Section 398 of the Act.
61. This leaves the question of whether the company is liable to be wound up. Although the application is maintainable since it is well established that the maintainability of a petition has to be judged on the petition as filed, nevertheless the court cannot ignore the fact that three of the petitioners are no longer opposing the management.
62. In this case the petitioners have annexed a chart relating to the profits earned by the company from December, 1980, up to 1990. That chart shows that there was no dividend declared since 1981. There was a term deposit of Rs. 19 lakhs in 1987. The term deposit in 1988 to March, 1989, increased to Rs. 25,00,000 and in 1990 the same was reduced to Rs. 20,00,000. The sale figure shows a gradual increase from a slump in 1982 to 1984 where the figures range between Rs. 6,32,000 to Rs. 9,58,530 to Rs. 19,45,354 in 1987, Rs. 37,21,847 in 1988-89 and Rs. 46,18,123 in 1990. As far as the stock was concerned immediately prior to 1987, the stock is given as Rs. 2,90,891 this was increased in 1988-89 to Rs. 14,94,857. In 1990 the stock position was Rs. 11,32,009. Similarly as far as the commission earned by the company is concerned, it appears from the chart that earnings from commissions ranged between Rs. 8,37,789 in 1983 to Rs. 13,72,673 in 1984. But, the company earned Rs. 23,80,982 in 1987, Rs. 30,64,890.12 in 1988-89 and Rs. 13,26,977 in 1990. Finally, on account of rent there is a similar upward increase from Rs. 2,29,520 in 1980 to 3,60,000 in 1986. This has been increased to Rs. 7,29,035 in 1988-89 and Rs. 7,63,194 in 1990.
63. Therefore, according to the petitioners' own admission there has been a marked increase in the profits earned by the company since the new management took over control of the company. The value of the shares is also above par hence the insistence by the petitioners that their shareholding in the company should be bought at the market value by the respondents. The company is, therefore, a profit making concern and this is certainly not a case where it could either be just or equitable to wind up the company.
64. The last question to be decided in this matter is whether the court can compel the company or the respondents to purchase the shares of the petitioner, AS noted above the petitioners are willing to sell their shares in the company at market value. The offer is not acceptable to the company or the respondents. In my view having held that there was no ground of oppression or mismanagement, there is no question of the court passing any order for bringing to an end any matter complained of either under Section 397 or 398. The substratum for passing any order under Section 397 or 398 is not available. As observed by Buckley L.J.. in Jermyn Street Turkish Baths Ltd., In re [1971] 41 Comp Cas 999, 1023 [19711 3 All ER 184 (at page 201) :
"If this could be regarded as an act of oppression, which in our opinion it cannot, it would not, we think, justify an order that one side should buy the shares of the other. So drastic a remedy would go far beyond what is necessary to put an end to this particular form of oppression."
65. Again, as observed in Lalita Rajya Lakshmi v. Indian Motor Co, (Hazaribagh) Ltd. :
"It is also proper to emphasise that the power of the court to make such order, as it thinks fit, under Section 397(2) of the Act is expressly stamped with the purpose of 'bringing to an end the matters complained of. Therefore, wide as the power of the court is following from the words of the expression 'such order as it thinks fit' it is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed 'to bringing to an end the matters complained of. The marginal note of Section 397 of the Companies Act shows also that the purpose of the order of the court in this section is to give 'relief in case of oppression'."
66. The decision in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., , does not assist the petitioners. In that case the Supreme Court had held against the petitioners and found that there was no oppression. But the Supreme Court found that the Indian shareholders had purchased the shares at a price less than what had initially been offered by them. The Indian shareholders had all along offered to purchase the shares at a premium. They resiled from this stand at a meeting held on May 2, of which adequate notice had not been given to the foreign shareholders. It was in that context that the Supreme Court held (at page 1360) :
"Even though the company petition fails and the appeal succeeds on the finding that the holding company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of May 2 were held in accordance with law..... There is no reason why we should not call upon the Indian shareholders to do what they were always willing to do, namely, to pay to the holding company a fair premium on the shares which were offered to it, which it could neither take nor renounce and which were taken up by the Indian shareholders in the enforced absence of the holding company. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a factor which, to some extent, has gone in their favour on the question of oppresion. Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify their unjust and unjustifiable enrichment at the cost of the holding company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended primarily to set right the course pf justice, in so far as we may."
67. In this case the respondents had never expressed any willingness to purchase the shares of the petitioners. There is also no act of inequity in this case as the illegal meeting in Needle's case [1981] 51 Comp Cas 743 (SC) of which justice demands rectification.
68. I do not read Needle's case [1981] 51 Comp Cas 743 (SC) as an authority for the proposition that even in cases where oppression and mismanagement are not found under Section 397 or 398 of the Act, the court can compel the company or the respondents to buy out the dissident shareholders.
69. For all these reasons this application is dismissed with costs and all interim orders are vacated.
70. Stay of operation of this judgment and order is prayed for and the same is allowed till November 25, 1991.
71. Let a xerox copy of this judgment be given to the parties upon the undertaking to apply for the certified copy of the judgment and payment of usual charges.