Madras High Court
G. Kasturi And Another vs N. Murali And Others on 17 July, 1990
JUDGMENT Mishra, J.
1. One set of appeals by G. Kasturi, the managing director of Kasturi and Sons Ltd., as well as the company, Kasturi and Sons Ltd., and another set of appeals by Dr. Nalini Krishnan are preferred against the order disposing of three company applications, bearing Nos. 342, 343 and 344 of 1990, in Company Petition No. 36 of 1990, filed by respondents Nos. 1 to 3 herein. The respondents, N. Murali, N. Ram and Mrs. G. Narasimhan, have filed the said company petition under sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as "the Act"). The petitioners in the company petition have stated that the first petitioner holds 540 equity shares of Rs. 100 each in the capital of the company, while the second petitioner holds 3,800 equity shares of Rs. 100 each. The third petitioner is a shareholder of 1,186 equity shares of Rs. 100 each. The nominal capital of the company is Rs. 100 lakhs divided into 1,00,000 equity shares of Rs. 100 each and the issued, subscribed and fully paid-up capital of the company is Rs. 88 lakhs dividend into 88,000 equity shares of Rs. 100 each. They have also stated that they have the consent of the members of the company entitled to apply under section 399(1) of the Act, holding an aggregate of 9,260 shares of Rs. 100 each in the capital of the company for presenting the company petition. A letter of consent signed by the members so entitled authorising the petitioners to present the petition on their behalf is annexed to the petition. The first petitioner/respondent has been the general manager of the company since July, 1977, and is a director of the company since 1980. The second petitioner/respondent was the director of the company during the period from 1977 to 1980 and is at present an associate editor of The Hindu, a newspaper belonging to the respondent/appellant company. The first respondent/appellant is a director of the company since 1954 and has been managing director since July, 1977. He has been the editor of the publications of the company since 1965. The second respondent/appellant, Dr. Nalini Krishnan, is a director of the company since 1964.
2. The petitioner/respondents have alleged in the company petition that the third respondent company is a closely-held and family-owned company and all the shares in the capital of the company are held by the members of four families, who are descendants of Kasturi Srinivasan and Kasturi Gopalan, the founders of the respondent/appellant company. The respondent/appellant was originally a partnership business carried on by Kasturi Srinivasan and his brother, Kasturi Gopalan, who founded the company by converting their partnership business into a limited company for the purpose of developing the activities and also to avail of increased credit facilities from bankers and other institutions. According to the petitioner/respondents, as part of the family arrangement and understanding, the shareholding in the company was to be equally held by the four descendant families of the original promoters of the company, viz., Kasturi Srinivasan and Kasturi Gopalan, but the family of the first respondent, the first appellant in O.S.A. Nos. 80 to 82 1990 (one of the appellants before us) has consistently been postponing the effect of the settlement in respect of the petitioners'/respondents' family by unlawfully retaining and refusing to transfer to the petitioners 1.6% of the shareholding in the company held by the family of the first respondent in excess of 25% to which alone they are entitled. The shareholding of the company as per the register of members is as follows :
"Petitioners' family 23.4% Family of the first respondent 26.6% Family of the second respondent 25% Family of Mr. S. Rangarajan 25.% (Wholetime director and publisher)"
3. The board of directors of the company consists of four directors, one drawn from each family. The present board of directors consists of N. Murali (the first petitioner), G. Kasturi (the first respondent), Dr. Mrs. Nalini Krishnan (the second respondent) and S. Rangarajan (wholetime director and publisher of The Hindu). Under the control, superintendence and direction of the board of directors of the company, the company is jointly managed by the managing director (the first respondent) and two whole time directors (the first petitioner and S. Rangarajan, publisher of The Hindu). Ever since the company was formed, it has been managed jointly, as if it was an extension of the partnership and even though one of the directors had been designated as managing director, no resolutions have been passed by the company in general body meeting or by the board of directors of the company or by virtue of the memorandum or articles of association or by virtue of any agreement with the company entrusting the first respondent with substantial powers of management which would not otherwise be exercisable by him either under the Act or the articles of association of the company. On the other hand, the board consisted of mostly wholetime directors assigned to function in their respective spheres of management and be responsible to the board. In effect, both the managing director and the wholetime directors were placed on par so far as their powers and functions were concerned in their respective areas and it had always been the established custom and practice that the directors entrusted with specific functions did not interfere with the functions of the wholetime directors, whether he be a managing director or a wholetime director. According to the petitioners/respondents, the designation "managing director" conferred upon any one director was only a designation given to that person but did not invest him with any substantial powers of management which would not have been otherwise exercisable by him under the Act or the articles of association of the company. That is why in the company's application to the Central Government, while seeking approval for the appointment of the managing director and the wholetime director, the nature of services to be rendered by the managing director had been described as "editor and in-charge of printing", whereas in such application, the first petitioner/respondent had been described as "in charge of general administration, accounts, circulation and advertisement departments.". On that basis and on the basis of a similar description in other documents, the petitioner/respondents state :
"... Thus, there can be no doubt that the functions of the first respondent is limited to that of being an editor and in charge of printing. The functions relating to general administration, accounts, circulation and advertisement are under the charge of the first petitioner and the functions of being a printer and publisher and circulation are under the charge of Sri S. Rangarajan, the other wholetime director ..."
4. After alleging that "the company has deliberately chosen this form of management under which the functions of each of the three wholetime directors, including the managing director, have been clearly spelt out" in the company petition, the petitioners therein have stated that the company had been functioning under a form of joint management consisting of a managing director and wholetime directors, each exercising certain powers, duties and responsibilities by virtue of the nature of services being performed. While it being so, the managing director, since October, 1989, has been assuming substantial powers of management of the affairs of the company and maintaining that he alone is responsible for the day to day supervision of all the departments of the company and thus assuming illegal, arbitrary and non-existent powers. The attitude and style of functioning of the first respondent/appellant had changed substantially since October, 1989, when certain events took place.
5. Such events since October, 1989, as described in the company petition and emerged from other petitions and documents available on record can be divided into three parts and described as genesis, conflicts and crisis.
6. Genesis :
The second petitioner/respondent, who is the associate editor of The Hindu, carried some sort of investigations (investigative journalism) relating to the Bofors issue simultaneously in Switzerland, Sweden and India. The first instalment of the information gathered in the course of the investigation was published in The Hindu. The second instalment report relating to Bofors, however, was not published as the first respondent/appellant, who is the editor of The Hindu, decided against publication of such report. According to the petitioners/respondent, "the Government of the day did not want disclosures to be published since it did not suit them" and the first respondent succumbed to their pressure. Besides that, the first respondent/appellant was also motivated by other extraneous considerations and was also irked by the prominence received by the second petitioner/respondent. When the first respondent/appellant refused to publish the second instalment of the report Bofors issue, on October 11, 1989, the second petitioner/associate editor (respondent), it appears, left for New Delhi, and on the following day, held a press conference. In the press statement which was widely published, he said :
"I have invited, on a specific invitation basis, media representatives because I wish to deal with the Bofors scandal and a very unusual situation for independent and ethical journalism which has arisen right now. It is a situation affecting the newspaper of which I am associate editor, which means the No. 2 person in the editorial structure. It is a situation concerning the unacceptable attitude of the editor, Mr. G. Kasturi, to our persistent, detailed and on-going expose of the Bofors scandal and the Government of India's role in it.
The editor of the Hindu, the No. 1 person in the editorial hierarchy, has 'decided' arbitrarily, capriciously and in a manner highly derogatory of the traditions, norms and values of independent, ethical journalism, to discontinue the expose of the Bofors scandal in the columns of The Hindu. This he has done at a critical stage in the development of our detailed and many-sided investigation which began in April, 1987, and which, from April, 1988, has seen the extensive publication of documents (in facsimile, so that readers can make up their own mind) on the scandal. Every one of these documents, without exception, referred to the competent authorities in Sweden and has been authenticated. They have been accepted by all fair-minded people who have read the expose as major evidence on the scandal. Hundreds of thousands of our readers, and millions of people in various parts of India, are looking forward to reading the next instalment of the continuing story, especially ... considering the fact that when we began our new round of publication of documents and analysis, we ended the first and very detailed instalment (published in the issue of October 9, 1989), with the promise 'to be continued' ...
Just before the publication of the expose focussing on the secret part of the Swedish National Audit Bureau's Report, on the major implications and links with other aspects of I' affairs Bofors, Mr. Kasturi insisted to me that no more material should be published in the columns of The Hindu and that he, as editor, and no one else, could decide on this matter. At one point, he took the position that 'the whole thing must be published in one go' that he would need to read 'every word' of what might 'eventually' appear, in future stories or instalments, before he could consent to having 'any word' of the new round of expose published in The Hindu. Anyone who knows anything about the character of journalism knows the preposterous character and implications of this 'demand'.
In turn, I insisted that our investigation and expose, which has been widely recognised and supported for its independence, openmindedness, professionalism and balance, must continue without fear or favour. After blocking publication, Mr. Kasturi changed his mind at the very last minute and consented to the publication of the major expose of the secret part of the SNAB report in the issue of The Hindu, dated October 9, 1989.
During all this, Mr. Kasturi has been advocating, in our internal editorial discussions, the view that on the basis of what has been published in The Hindu, the Government of Mr. Rajiv Gandhi should have quit a long time if it had any sense of honour. He repeatedly expressed the view internally that because of the Bofors scandal alone, and its proven role in it, the corrupt Government had no right to continue in office. However, tragically, he failed to demonstrate the courage of his 'convictions' in the field of journalism.
On the positive side, in The Hindu's very detailed expose of June, 1988, the editor of The Hindu took a detailed interest in the layout of the documents and the material and made his own professional contribution to the presentation and highlighting of the material.
But, essentially after this, every time the question of publishing something major and original on the Bofors scandal arose, he countered the idea of publication with the question. `What is really new about this ? Isn't what we have already published enough to make clear to everyone who is involved ?' He also repeatedly stated that while he personally was convinced of the guilt of the Government in the Bofors affair, he was afraid that 'the institution is in great danger.' This was his perspective on The Hindu which was founded in 1878 and has seen many trials and challenges in its history. I repeatedly pointed out to the editor the failure to understand the significance of history which underlay his statement. Mr. Kasturi also expressed serious concern over the impact of the fallout from the Bofors expose on the interests of the 'family' behind the newspaper.
Without wishing to go into excessive detail, I would like to underline the point that Mr. Kasturi, editor of The Hindu, has been a severe obstacle in the path of conducting this important journalistic investigation, and especially the business of publishing documents and articles in detail, on Bofors.
The situation deteriorated in 1989 and became quite intolerable in September-October, 1989. A quite dishonorable and unethical break not backed up by any acceptable reason that can possibly meet the glare of a public or professional discussion - occurred after the publication of our major new article, spread over three pages of The Hindu on October 9, 1989. Ironically, when various newspapers round the country (including The Times of India) and in Sweden and other places round the world highlighted our newspaper's new contribution and acknowledged and discussed its major significance in editorials and new articles, the editor of The Hindu 'decided' capriciously - without consulting me as the co-author of the story, with direct editorial responsibility for it - to stop further publication, despite our promise to our readers, to our professional colleagues and to the nation."
7. This press statement also carried the opinion of the second petitioner/respondent that the editor's note published on page 1 of The Hindu of October 11, 1989, was a conspicuous insult to traditions of independent, intellectually and socially serious, and ethical journalism. And then it said :
"After this unilateral step was announced to the public without so much as the courtesy of consultation with me - for a professional journalist - an extraordinary step. I decided to step out of the four walls of The Hindu as an institution and into the public arena and explain the situation to the readers of various newspapers and to the people of this country. I decided to speak to my colleagues in the profession and ask for the hospitality of their columns to throw light on this vital national and ethical issue. I wonder whether this expose of what has happened within one major journalistic institution would be kept away from the readers of The Hindu through editorial censorship."
8. To this statement, which expressed the associate editor's resentment to the editor's alleged interference in the publication of the second instalment of Bofors story, the respondent/appellant (editor's) reply was published on October 13, 1989, as follows :
"It is unfortunate, to say the least, that Mr. N. Ram has made a statement of the kind newspapers are being asked to carry. Most parts of it do not call for any comment other that they reflect gross indiscipline, lack of decency and elementary manners on the part of the individual.
Certain other parts of the statement do call for an answer.
A reference has been made in the statement that there has 'clearly' been pressure from the Government on me to take the kind of decision I am supposed to have taken. It may be stated categorically that there has been nothing of the kind from either the Prime Minister or any Minister or any official.
Secondly, no decision was taken to discontinue the expose of the Bofors scandal in the columns of The Hindu. What was decided was not to publish the 'second instalment' that has been referred to because in my estimation there was nothing in it that was vitally indicative of who might have been the recipients of the Bofors pay-off and of something that can be traced to people of this country, high or low. Nor did it take the issue forward in any meaningful way.
The decision was not the product of any capriciousness on any part, for almost all members of the family, of which I happen to be the senior member, were of the view that the 'second instalment' did not merit serious enough attention to warrant publication. In the opinion of most of the members of the family, repeated publication of such material without any real advance posed the danger of turning serious newspapers into scandal sheets."
9. On October 15, 1989, the first respondent/appellant issued a note to the heads of news department and press department including process and photo composing sections informing them and asking them to comply with his instructions that no instruction or direction, oral or written, issued by the second petitioner/respondent, concerning publication of editorial, organisational matters, editorial policy and functioning of editorial departments at the head office and various bureaux in the country and abroad should be implemented without the editor's (the first respondent/appellant's) prior approval and clearance in writing. The first respondent/appellant also issued a show-cause notice to the second petitioner/respondent why he be not suspended from his position as an associate editor. The first petitioner/respondent along with Rangarajan, another director of the company, instituted C.S. No. 826 of 1989 on October 20, 1989, challenging the said notice and on their prayer in a petition for the said purpose, an order of ad interim injunction was granted. The said suit, however, was dismissed as withdrawn in November, 1989, consequent to a settlement of court between the parties concerned. The second petitioner/respondent (N. Ram), however, was not a party to the suit or to the settlement out of court. However, at a meeting of the board of directors held on November 15, 1989, at which meeting all the four directors were present, viz., G. Kasturi, N. Murali, Nalini Krishnan and S. Rangarajan, a resolution was passed stating :
"In view of Mr. N. Ram's willingness to come to an amicable settlement, it is hereby resolved to rescind the show-cause notice dated October 18, 1989, and the suspension order."
and in supersession of all the board's resolution, with respect only to the designation and/or functions of the persons named therein, it was resolved :
"Mr. N. Ram be designated associate editor and will be responsible directly to the editor."
10. By another resolution, Mr. N. Ravi, who is a full brother of the petitioners/respondents, viz., N. Ram and N. Murali, was designated as associate editor with administrative and supervisory functions in conjunction with the editor. Another member of the company, Mrs. Nirmala Lakshman, was designated as deputy editor directly responsible to the editor and one K. Venugopal was also designated as deputy editor directly responsible to the editor besides one Mrs. Malini Parthasarathy, who was also designated as deputy editor directly responsible to the editor. The boards's meeting dated November 15, 1989, also resolved to constitute an editorial board to decide policy matters as and when necessary with Messrs. G. Kasturi, S. Rangarajan, N. Ram, N. Ravi, Nirmala Lakshman, K. Venugopal and Malini Parthasarathy as members for the time being; the other decision being :
"In respect of differences of opinion among members of the editorial board, the decision of the board shall prevail.
Any member of the editorial board may call for a meeting which would then have to be convened."
11. The petitioners/respondents have detailed in the company petition the happenings from October, 1989, onwards alleging that the first respondent/appellant, who also functioned as chairman of the board of directors and presided over the meetings of the board was not conducting the meetings of the board properly, did not allow the members of the board including the first petitioner/respondent to participate and vote in the discussions, and alleged :
"... The first respondent has now completed his final act by arrogating to himself the power to write in the minutes book of the board of directors what the he wants to write and not what actually transpired at the meeting. The first respondent has thus embarked on a dangerous course not only seeking to oust the petitioners from the affairs of the company but also making them impotent and ineffective in the organisation ... The first respondent has deliberately planned series of acts to systematically eliminate the petitioners from any participation in the management of the company which is totally opposed to the practice followed when the company was a partnership earlier and after the partnership was converted into a company under the Companies Act representing the interests of all the families involved in the promotion of the newspaper and which had survived till October, 1989, on the basis of the good faith the families and the directors and the members had in each other in running the company."
12. Conflicts :
The genesis as above brought to fore the conflicts in the matter of editorial policy and the manner in which news items were to be edited between the associate editor, N. Ram, and the editor, G. Kasturi. It did not remain in the confines of the editorial rooms of The Hindu, but was made public by N. Ram, who came on record as quoted above that the editor of The Hindu, the No. 1 person in the editorial hierarchy, had decided arbitrarily, capriciously and in a manner highly derogatory of the traditions, norms and values of independent, ethical journalism to withhold publication of news concerning Bofors. This invoked a sharp response from the editor, G. Kasturi, who is on record saying that "most parts of it do not call for any comment other than that they reflect gross indiscipline, lack of decency and elementary manners on the part of the individual." Followed by a notice to N. Ram, and instructions to all concerned issued not to act upon the instructions of N. Ram without confirmation of the editor, but before it could go out of hands, a resolution was adopted at the meeting of the board of directors on November 15, 1989, as a result of which, the show-cause notice issued to N. Ram was withdrawn and he was designated as associate editor once again by the board of directors, but was made responsible directly to the editor and his full brother, N. Ravi, also designated as associate editor with administrative and supervisory functions in conjunction with the editor. Some other persons were made deputy editors and a editorial board was constituted to resolve any difference of opinion among members of the editorial board, which included N. Ram and his full brother, N. Ravi, besides other persons including the editor. With the withdrawal of Civil Suit No. 826 of 1989, this matter should have come to an end. It seems, however, that certain actions of the managing director (first respondent/appellant) with regard to the functioning of the first petitioner/respondent, N. Murali, added fuel to the fire. On October 20, 1989, the first respondent/appellant issued a memo and sent the same to the secretary of the company, the cashier and others in the accounts and administrative departments stating that the cheques and papers concerned with details about what they were meant for must be shown to him before they were despatched. The first petitioner/respondent on January 22, 1990, asked for an urgent meeting of the board of directors to consider the matter concerning the managing director's actions and oral instructions, which he described as dictatorial, arbitrary and highhanded. He also addressed a communication to the board of directors of the company on February 28, 1990, bringing to their notice the unpleasant happenings in the company allegedly as a result of the attitude of the first respondent/appellant, which according to the petitioners/respondents, "had affected the discipline and morale of the staff and also the smooth administration and functioning of the company." In raising the issue as to the functioning of the managing director of the company, S. Rangarajan, joined the first petitioner/respondent. This letter was replied to by the first respondent/appellant on March 8, 1990, saying that the managing director had been vested with substantial power of management of the affairs of the affairs of the company in terms of the statute. It was alleged in the company petition that the first respondent/appellant convened a meeting of the board of directors on March 15, 1990, but since S. Rangarajan was unable to attend the meeting, it was postponed. The first respondent/appellant accordingly informed the first petitioner/respondent that as soon as he was in a position to ascertain the convenience of the members of the board, a date would be fixed for the meeting. On March 29, 1990, the first respondent/appellant informed the other directors that a meeting had been convened on April 4, 1990, to discuss the issues raised by the first petitioner/respondent and S. Rangarajan. On April 4, 1990, however, the first petitioner/respondent submitted a note at the meeting raising various issues. How the first respondent/appellant had not been able to deal with the various complaints raised against him and how the first respondent/appellant to assume powers not vested in him were totally untenable and illegal and not authorised by law. He also stated in his note that the first respondent/the appellant's assumption of unlimited powers of management had led to confusion in the minds of the staff and the workers of the company leading to erosion of discipline and morale and thereby affecting the proper day-to-day functioning of the company. He also made certain personal allegations against the first respondent/appellant. The first respondent/appellant refused to accept the note at the meeting. The petitioners/respondents then allege :
"... To the shock and dismay of the first petitioner he found that all the submissions made by him at the fourth April meeting were totally blacked out by the first respondent who had hurriedly written the minutes in his own handwriting without recording any of the points raised by the first petitioner. The first petitioner again wrote a letter on 12th April, 1990 (annexure 16), protesting against this arbitrary and illegal act and behaviour of the first respondent in not faithfully recording in the minutes of what actually happened in the meeting. The first petitioner a few minutes before the convening of the board meeting on fourth April, 1990, came to know through Mr. S. Rangarajan that the first respondent had proposed to push through a resolution which was not an item in the agenda to double the number of directors in the board who would also act as wholetime directors from the existing 4 to 8 so that he can pack the board with his own persons thus rendering the first petitioner totally ineffective in his area. This was luckily and successfully thwarted due to the alertness of the first petitioner and Sri S. Rangarajan who objected to such a resolution being brought in at a meeting when it was not part of the agenda ..."
13. Crisis :
Thus, as alleged for the reasons of acts which according to the petitioners/respondents, are acts of oppression and mismanagement by the first respondent/appellant, they decided to move the court under sections 397 and 398 of the Act. Such acts of the first respondent/appellant which, according to the petitioners/respondents, gave rise to the cause to move the company court have been summarised by the learned company judge under three broad headings, viz., (1) Conduct of board meetings; (2) Violation of company law; and (3) Others, which are as follows :
"(1) Conduct of board meetings. - Adequate notice of meetings is not given. Chairing the meetings on agenda items relating to his own conduct.
Not allowing the members of the board to participate and vote.
Writing the minutes according to his liking and without reflecting the actual deliberations at the meetings.
Recording in the minutes book resolutions which are not passed, as having been passed.
Writing the minutes in the minutes book himself so that he can write whatever he wanted.
Not circulating the minutes to the directors.
(2) Violation of company law. - Violating the company law provisions in regard to :
(a) Powers of the managing director :
(Section 2(26) of the Act clearly indicates that substantial powers of management will not be exercisable by the managing director unless they are specially entrusted to him by any of the modes mentioned therein.)
(b) Directing the company to render free service to the relatives.
(c) Issuing advertisements, free of cost, which are in the nature of political donations.
(3) Others. - Unlawfully restraining and refusing to transfer 1.6% of the shareholding throwing to winds the established custom and practice in the company which in effect is a conversion of partnership with equal rights to each family.
Not realising the quasi-partnership nature of the company.
Asking the wholetime directors to report to him when the board has specifically divided the responsibilities amongst the three wholetime directors.
Interference in the day-to-day working and functions of other wholetime directors.
Exceeding the authority and power by assuming substantial powers of management and thereby usurping the powers of the board.
Bringing about a material change in the management and control of the company affecting the interests of the company and public interest.
Declaring the second petitioner as persona non grata and refusing to withdraw the notice issued on October 15, 1989, even after the so-called settlement was concluded.
Indulging in acts having adverse impact on the morale of the employees thereby affecting the company's interest.
Exercising parallel powers in areas designated to the other wholetime directors thereby causing a deadlock in the management of the company resulting in paralysing the administration and organisation.
Attempting to double the strength of the board by co-option of four wholetime directors so that the petitioners are reduced to a minority in the board and management.
Deliberately planning series of actions to systematically eliminate the petitioners from participation in the management of the company.
Announcing that the first and second petitioners did not represent The Hindu when they attended the international assembly at Manila in February, 1990. By various acts of omission and commission as illustrated in the petition, prejudicing the petitioners in the exercise of their legal and proprietary rights as shareholders."
14. The respondents/appellants, when appeared, disputed the allegations of alleged acts of mismanagement and oppression.
15. We notice, however, that the allegations of commission and omission are that of the managing director-cum-editor; some are in the capacity of the managing director and some in the capacity of the editor. The allegations with respect to the conduct of board's meetings are all against the managing director and so are the allegations with respect to the violation of company law.
16. In the above narration of facts leading to the crisis, one has to remember as revealed by the materials on record that the original partnership business of K. Srinivasan and K. Gopalan underwent the first change as private limited company incorporated on February 21, 1940 with shareholdings divided almost equally between the families of K. Srinivasan and K. Gopalan. Later, it is not in dispute, under a resolution in terms of section 21 of the Act and the approval of the Central Government, it was converted into a public limited company. After presenting the company petition in the court, the petitioners/respondents presented five applications, being Company Applications Nos. 341 to 345 of 1990. The relief claimed in Company Application No. 341 of 1990 was to restrain the respondents/appellant from holding the proposed meeting of the board of directors on 20th April, 1990; in Company Application No. 342 of 1990, to restrain the respondents from enlarging the present board of directors from the "existing four" pending disposal of the company petition; in Company Application No. 343 of 1990, to restrain the first respondent from chairing the meeting of the board of directors of the third respondent/appellant company pending disposal of the company petition; and for directing the next seniormost director to chair the meeting of the board of directors pending disposal of the company petition; in Company Application No. 344 of 1990 to direct the first respondent not to interfere with the duties of the other wholetime directors pending disposal of the company petition and in Company Application No. 345 of 1990 to restrain the respondents/appellant from considering item No. 1 of the agenda for the meeting of the board of directors of the company, that is to say, increasing the strength of the board of directors from the existing four.
17. The learned company judge has dismissed Company Applications Nos. 341 and 345 of 1990, allowed Company Applications Nos. 342 and 344 of 1990 as prayed for and Company Application No. 343 of 1990, restraining the first respondent/appellant from chairing the meeting of the board of directors, but said with respect to the other prayer therein that as and when occasion arose for the convening of the meeting of the board of directors, orders of the court would be obtained.
18. Before we venture into the contentions of the parties, we may for convenience refer to the relevant provisions of the law. Section 397 of the Act says :
"(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the court for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the court is of opinion -
(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
(b) 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; the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit."
19. Section 398 of the Act states :
"(1) Any members of a company who complain -
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change (not being a change brought about by, or in the interest of, any creditors including debenture-holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the film or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or, if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;
may apply to the court for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), 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 management or control of the 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 matter complained of or apprehended, make such order as it thinks fit."
20. Section 400 states :
"The court shall give notice of every application made to it under section 397 or 398 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order under that section."
21. We have already noticed that the petitioners/respondents have made one petition applying for relief under sections 397 and 398 of the Act. Section 399 of the Act says who may apply under sections 397 and 398 of the Act. The petitioners/respondents have claimed to comply with the requirements by bringing on record a consent in writing of such members of the company who together with the respondents/appellants hold not less than one-tenth of the issued share capital of the company. Their locus standi to move the applications are not under challenge. Sections 397 and 398, however, appear to have some ingredients in common, but some for section 397 and some for section 398 are exclusive and special. Section 397, before its amendment under the Act 53 of 1963, gave a right to the members of the company, who complied with the conditions of section 399, to apply to the board for relief under section 402 of the Act or such other reliefs as may be suitable in the circumstances of the case if the affairs of the company were being conducted in a manner oppressive to any member or members including any one or more of themselves. After the amendment by Act 53 of 1963, the right of members of the company to apply to the court for relief under section 402 of the Act or as may be suitable in the circumstances of the case on the ground when the affairs of the company were being conducted in a manner oppressive to any member or members including anyone or more of themselves, has been retained. But another ground has been introduced, viz., the complaint that the affairs of the company were being conducted in a manner prejudicial to the public interest. The court thus has power to make such orders under section 397 read with section 402 as it thinks fit if it comes to the conclusion that the affairs of the company are being conducted in a manner prejudicial to public interest or in any 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 would justify the making of a winding up order on the ground that it is just and equitable that the economy should be wound up. Section 398 of the Act speaks of the affairs of the company being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company. The first clause "being conducted in a manner prejudicial to public interest" is common to both sections 397(1) and 398, the clause that the affairs of the company are being conducted prejudicially to the interests of the company is exclusive to section 398. The other ground to attract the provisions of section 398 will require a proof of material change not being a change brought about by or in the interests of any creditors including debenture-holders or any class of shareholders of the company brought in the management or control of the company, whether by an alteration in the board of directors or of its managing agent or secretaries and treasurers or manager and by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. The court's power to make any interim order which it thinks fit, pending the making by it of a final order under section 397 or 398, as the case may be, for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable, is recognised by section 403 of the Act. The words "pending the making by it of a final order under section 397 or 398" in section 403 of the Act make it necessary first to test whether a prima facie case for an order under section 397 or 398 has made out by the person invoking the court's jurisdiction or not. The words "for regulating the conduct of the affairs upon such terms and conditions as appear to it to be just and equitable" clarify that the court is required to take for the purpose of interim order only such step which is necessary for regulating the conduct of the affairs and upon such terms and conditions as appear to it to be just and equitable. True, when and how a court should grant interim injunction may vary from fact to fact and case to case, but certain principles are universally accepted and applied. In no case, does a court grant an interlocutory injunction as of course ? In all cases of interlocutory injunction, the court usually has to consider whether the case is so clear and free from objection on equitable ground that it ought to interfere to preserve the property without waiting for the rights to be finally established. Halsbury's Laws of England, third edition, volume 21, page 365, paras 765 and 766 says :
"Where the plaintiff is asserting a right, he should show a strong prima facie case, at least, in support of the right which he asserts; but the mere fact that there is a doubt as to the existence of such a right is not sufficient to prevent the court from granting an interlocutory injunction, although it is a matter for serious attention. Where the application is to restrain the exercise of an alleged right, the plaintiff should show that there are substantial grounds for doubting the existence of the right. It requires a very strong case indeed to induce the court to interfere with an admitted right upon an alleged equity. In a matter merely pecuniary, the plaintiff must establish, not merely that there is a case to be tried, but that there is some probability of his succeeding at the trial.
The plaintiff must also as a rule be able to show that an injunction until the hearing is necessary to protect him against irreparable injury; mere inconvenience is not enough.
Where any doubt exists as to the plaintiff's right, or if his right is not disputed, but its violation is denied, the court, in determining whether an interlocutory injunction should be granted, takes into consideration the balance of convenience to the parties and the nature of the injury which the defendant, on the one hand, would suffer if the injunction was granted and he should ultimately turn out to be right, and that which the plaintiff, on the other hand, might sustain if the injunction was refused and he should ultimately turn out to be right. The burden of proof that the inconvenience which the plaintiff will suffer by the refusal of the injunction is greater than that which the defendant will suffer, if it is granted, lies on the plaintiff."
22. In para 778, Halsbury's Laws of England, third edition, volume 21, says :
"In general an injunction lies against a company regulated by the Companies Act, 1948, in circumstances in which it would lie against an individual. In addition, an injunction may lie against a company in relation to its powers or the conduct of its affairs as a corporation regulated by statute. If a company attempts to act ultra vires, it may be restrained by injunction at the instance of a shareholder.
If the acts of a company amount to an individual injury or wrong to an individual member of the company, that member will have a right of action against the company, and in a proper case may obtain an injunction against the company in aid of his right.
The principles applicable to individuals trading under identical or similar names apply equally to companies, and in a proper case a company will be restrained from using a style or name which is calculated to deceive."
23. This rule of prima facie case, balance of convenience and irreparable injury, has never been ignored by Indian courts. They are with necessary modifications and subject to peculiar facts of the case being applied by the courts in India. It has thus to be seen whether the petitioners/respondents have complained before the court that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves or not and whether such facts exist which 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 not possible to see any public interest interfered with by the acts of commission and omission alleged in the conduct of the board meeting or alleged violation of the company law provisions by the managing director. There has, however, been an attempt to introduce as an act against public interest, the decision of the managing director (editor) to withhold publication of the second instalment of news on Bofors issue. Section 397(1) talks of complaint that the affairs of the company "are being conducted in a manner prejudicial to public interest". The words "are being conducted" must mean several acts in continuity and not one isolated act. The expression "interest" in this context also must receive a meaning different from the interests of a reader of a news item, who as a member of the public, may have one or the other opinion. Public interest cannot be allowed to be confused with public opinion. John Burke in Stroud's Judicial Dictionary of Words and Phrases, volume 3, third edition, page 2381, has elucidated that the expression "a matter of public or general interest" does not mean that which is interesting as gratifying curiosity or a love of information or amusement, but in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liability are affected", a definition which has been noticed by the learned company judge also. In fact, the learned company judge has dealt with this aspect of the case more than needed, but held that non-publication of such news item as one released by N. Ram was an act prejudicial to the public interest. We have difficulty in accepting this conclusion. Our first reason not to do so is that a decision regarding publication of a news item would be in public interest or not cannot in any manner be said to affect or prejudice public interest. Whether interest of the public is in prejudice or not will be known only after publication but not before. That the publication of the second instalment served a greater public interest can thus be no ground to say that its non-publication went against the public interest. Moreover, the two opinions reflected in the editor, Kasturi, deciding against publication and N. Ram's insisting for publication, were/are limited to the different of opinion of opinion between the associate editor and the editor incidentally though the editor happens to be the managing director and the associate editor, and ex-director and a member of the company, that is to say, a shareholder. The associate editor, N. Ram, opined that the editor had decided arbitrarily, capriciously and in a manner highly derogatory of the traditions, norms and values of independent, ethical journalism. The editor thought, in his estimation there was nothing in it that was vitally indicative, of who might have been the recipients of the Bofors pay off, and of something that can be traced to people of this country, high or low or it could take the issue forward in any meaningful way. Since N. Ram was the associate editor, the editor's view prevailed. Ram then went beyond the role of associate editor and made a press statement and released the second instalment of Bofors news which, according to Ram, himself was a result of investigative journalism by him in collaboration with Chitra Subramaniam exclusively for The Hindu. In the press statement, it was Ram, who first called the editor's action as arbitrary, capricious and in a manner highly derogatory of the traditions, norms and values of independent, ethical journalism. Editor's reply was to the effect of calling Ram's press statement as reflecting gross indiscipline, lack of decency and elementary manners on the part of the individual. Could this be a matter thus affecting public interest ? N. Ram, the associate editor, has earned laurels as stated in the petition. Public, according to the petitioners/respondents, could have been denied information if Ram had not chosen to go and publish the second instalment of Bofors news. The Hindu suffered injury because Ram as a member of the company and associate editor blamed the editor of caprice, arbitrariness, etc. Viewed in this manner, it is difficult to find any injury to the public interest by non-publication of the second instalment of Bofors news, but there has been some injury to the interests of the company by a dispute which N. Ram raised giving adjectives to the editorial decision of G. Kasturi, who besides the editor, was the managing director also. It is not necessary at this stage to investigate whether, as the editor, Kasturi would have replied to the allegation of the associate editor or not. But it has to be acknowledged at this stage that the board of directors, viz., G. Kasturi, N. Murali, Nalini Krishnan and S. Rangarajan, were within their rights to bring on the agenda of the board's meeting the issue which involved consideration of the conduct of the editor and the associate editor including such actions which were taken concerning the editorial affairs of The Hindu. L' affairs Bofors never remained exclusive to The Hindu. N. Ram saw to it that it was published elsewhere instead of fighting for its publication in The Hindu. The editor responded by issuing instructions to all departments to prevent N. Ram from using The Hindu's authority without the editor/managing director's permission. True, N. Ram was not a party to the civil suit in which notice of suspension given to him had been challenged, that is to say, C.S. No. 826 of 1989. It is also true that he was not present at any of the Board's meetings including the meeting held on November 15, 1989. His co-petitioner, N. Murali, incidentally his full brother, who has made complaints regarding the interests of the family, was one of the plaintiffs in the said suit. He was present at the Board's meetings including the meeting held on November 15, 1990, in his capacity as a wholetime director/member of the board. A decision was taken in his presence to designate N. Ram as associate editor directly responsible to the editor. A further decision was taken to resolve any difference of opinion among members of the editorial board in which both N. Ram and G. Kasturi were included. There is no complaint before the court against the decision of the board taken on November 15, 1989, that it was either wrongly recorded or in any manner impaired by the managing director/editor or any other member of the board. As a consequence of the settlement arrived at, it is said that the notice calling upon Ram to show cause has been withdrawn. As a consequence of the withdrawal of the notice and settlement in terms of the board's resolution dated November 15, 1989, it is admitted the suit was withdrawn. The present action by way of a petition under sections 397 and 398 of the Act is evidently not an independent act of N. Ram. By joining with N. Murali, N. Ram has accepted N. Murali's acts as his acts. Thus, all that had been done at the meeting of the board of directors dated November 15, 1989, and consequent to that must be deemed to have been done with the knowledge and consent of N. Ram also. That being the situation, Bofors issue, its publication and consequent actions of the editor or the managing editor or even the board of directors are not such issues which can be said to provide any basis of a complaint that something has been done by the managing director which is prejudicial to the public interest. We would have preferred to keep away from the controversy whether there had been such acts of oppression in the affairs of the company by any member or members which will attract section 397 of the Act or not, had there been no elaborate arguments advanced on behalf of the parties before us, to meet the requirements whether the facts would justify the making of the winding-up order on the ground that it was just and equitable that the company should be wound up, the petitioners/respondents have made certain allegations. They have stated as culled out by the learned company judge that by refusing to transfer 1.6% of the shareholding in favour of the family of the petitioners/respondents; by not realising the quasi-partnership nature of the company; by asking the wholetime directors to report to the managing director when the board had specifically divided among the three wholetime directors their specific functions; by interfering in the day-to-day working and functioning of other wholetime directors; by exceeding the authority and power by assuming substantial powers of management thereby usurping the powers of the board; by bringing about a material change in the management and control of the company affecting the interests of the company and public interest; by declaring the second petitioner as persona non grata and refusing to withdraw the notice issued on October 15, 1989, even after the so-called settlement; by indulging in acts having adverse impact on the morale of the employees thereby affecting the company's interest; by exercising parallel powers in areas designated to the other wholetime directors thereby causing a deadlock in the management of the company resulting in paralysing the administration and organisation; by attempting to double the strength of the board by co-option of four wholetime directors so that the petitioners are reduced to a minority in the board and management; by deliberately planning series of actions to systematically eliminate when they attend international assembly at Manila and by various acts of omission and commission as illustrated in the petition, prejudicing the petitioners in the exercise of their legal and proprietary rights as shareholders, the managing director and his supporting director in the board have indulged in acts of oppression of the members of the company, having minority shareholding, the managing director has given rise to a cause of action under section 397 of the Act on the ground that the affairs are being conducted in a manner oppressive to members of the company. That the company's affairs are being conducted in a manner oppressive to any member or members has always been read to mean such acts which are qua member, that is to say affecting any legal and the proprietary right of a member of the company as a shareholder. In the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1964] CLJ 117; AIR 1956 SC 1535; 35 Comp Cas 351, the Supreme Court has proceeded on the assumption that a case has been made out to wind up the company on just and equitable grounds and noticed that section 397 of the Act was based on section 210 of the English Companies Act, 1948. The Supreme Court also noticed that the purpose of introducing section 210 in the English Companies Act was that it was to give an alternative remedy to winding up in case of mismanagement or oppression. The Supreme Court has said (at page 363) :
"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 some time 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 by wound up for that reason, particularly when it was otherwise solvent. That is why section 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 clause to wind up a company, it was not in the interest of the shareholders 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 ..."
24. Referring to four cases where section 210 of the English Act came up for consideration, namely, Elder v. Elder and Watson Ltd. [1952] SC 49; George Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954] SC 381 and Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66; [1959] 29 Comp Cas 1, which was an appeal from George Meyer's case [1954] SC 381 and H. R. Harmer Ltd., In re [1958] 3 All ER 689; [1959] 29 Comp Cas 305, the Supreme Court said (at page 364 of 35 Comp Cas) :
"Among the important considerations which have to be kept in view in determining the scope of section 210, the following matters were stressed in Elder's case [1952] SC 49, as summarised at page 394 in George Meyer' case [1954] SC 381 :
'(1) The oppression of which a petitioner complaints 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 shareholders.
(2) It follows that the oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company' affairs.
(3) 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.
(4) Although the word "oppressive" is not defined it is possible by way of illustration to figure out a situation in which majority shareholders by an abuse of their predominant voting power are "treating the company and its affairs as it they were their own property" to the prejudice of the minority shareholders 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 shareholders with a view to bringing to an end the oppressive conduct of the majority.
(5) 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."
25. The Supreme Court also notice that George Meyer's case [1954] SC 381 was between a parent company and a subsidiary company and it was held that (at page 365 of 35 Comp Cas) :
"(1) When a subsidiary company is formed with an independent minority of shareholders, the parent company must if engaged in the same class of business, conduct the affairs of the subsidiary, even though these are in a sense its own in such a way as to deal fairly with the subsidiary; (2) that, if the parent company deliberately pursues a course calculated to destroy its subsidiary, with resulting loss to the minority shareholders, this may amount to oppression within the meaning of section 210; (3) that the conduct of the majority shareholders may amount to oppression notwithstanding the fact that their own shares depreciate in value pro rata with those of the minority; and (4) that, even if the majority shareholders has virtually destroyed the substratum of the company by their oppressive conduct and it is conceded by all parties to be just and equitable that the company be wound up, the oppressed minority may nevertheless be entitled to a remedy under section 210."
26. According to the Supreme Court in H. R. Harmer Ltd.'s case [1958] 3 All ER 689; [1959] 29 Comp Cas 305 (CA), the word "oppressive" was held to mean burdensome, harsh and wrongful. It was also held in that case that (at page 365 of 35 Comp Cas) :
"The section does not purport to apply to every case in which the facts would justify the making of a winding up order under the 'just and equitable' rule, but only to those cases of that character which have in them requisite element of oppression."
27. It was also held in H. R. Harmer Ltd.'s case [1958] 3 All ER 689; [1959] 29 Comp Cas 305 (CA) that (at page 366 of 35 Comp Cas) :
"The result of applications under section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision. The circumstances must be such as to warrant the inference that 'there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy'. The phrase 'oppressive to some part of the members' suggests that the conduct complained of 'should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely .... But, apart from this, the question of absence of mutual confidence per se between partners, or between two sets of shareholders, however relevant to a winding up, seems to me to have no direct relevance to the remedy granted by section 210. It is oppression of some part of the shareholders by the manner in which the affairs of the company are being conducted that must be averred and proved. Mere loss of confidence or pure deadlock does not ... come within section 210. It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of lack company's affairs and oppression involves at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder.'"
28. After noticing the above with reference to section 210 of the English Act, the Supreme Court has said (at page 366 of 35 Comp Cas) :
"These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 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 clause for winding up the company, though that must be shown as preliminary to the application of section 397. 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 acts on the part of the majority shareholders, continuing up to 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 of 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 section 397."
29. In Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla, , section 433 of the Act had fallen for consideration. That case is relevant also on the question as to what may be a consideration to apply to the winding up petition. In a case where on piercing the veil it is found that in reality it is a partnership although constituted as the company, the management is more or less in the nature of a partnership. This case would also help to find out when a company may be said to be in substance a partnership. The Supreme Court reversed the judgment of the Calcutta High Court saying that merely because the shareholding is between two family groups it could not be said that the company thereby takes the image of a partnership. The Supreme Court referred to the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360, 379, wherein, after reviewing all the earlier cases, it was held as follows (at page 98 of 46 Comp Cas) :
"The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own : that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way ... The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements :
(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;
(ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members) of the shareholders shall participate in the conduct of the business;
(iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."
30. After stating as to what equitable consideration may include the Supreme Court noticed the facts in Ebrahimi's case [1973] AC 360 and the features thereof as follows (at page 100 of 46 Comp Cas) :
"(1) There was a prior partnership between the only two members who later on formed the company.
(2) Both the shareholders were directors sharing the profits equally as remuneration and no dividends were declared.
(3) One of the shareholders' son acquired shares from his father and from the second shareholder, Ebrahimi, and joined the company as the third shareholder-director with two hundred shares (one hundred from each) (4) After that, there was a complete ouster of Ebrahimi from the management by the votes of the other two directors, father and son.
(5) Although Ebrahimi was a partner, Nazar had made it perfectly clear that he did not regard Ebrahimi as a partner but regarded him as an employee in repudiation of Ebrahimi's status as well as of the relationship.
(6) Ebrahimi though ceasing to be a director lost his right to share in the profits through director's remuneration retaining only the chance of receiving dividends as a minority shareholder."
31. The Supreme Court also made a reference to the principles laid down in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426, which was the cornerstone of the arguments advanced on behalf of both the parties before the company judge as well as the appellated court. The question posed by the learned Master of the Rolls in Yenidje Tobacco Ltd.'s case [1916] 2 Ch 426 (at page 101 of 46 Comp Cas) :
"I think it right to consider what is the precise position of a private company such as this and in what respects it can be fairly called a partnership in the guise of a private company."
32. The Supreme Court then said (at page 101) :
"This was a company of two shareholders and two directors who had earlier traded separately but amalgamated their businesses and formed a private limited company. The constitution of the company was such that under its articles of association for any case of difference or dispute between the directors there was a provision for arbitration. In fact in one of such disputes a reference was made to arbitration which resulted in an award to which one of the two shareholders declined to give effect. It was proved in that case that the two directors were not on speaking terms, that the so-called meeting of the board of directors had been almost a farce or comedy, the directors would not speak to each other on the board, and some third person had to convey communications between them which ought to go directly from one to the other. Under the above situation, it was observed by the learned Master of the Rolls as follows :
'Is it possible to say that it is not just and equitable that that state of things should not be allowed to continue, and that the court should not intervene and say this is not what the parties contemplated by the arrangement into which they entered ? ... Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continue. I have treated it as a partnership and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company ? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order. It has been urged upon us ... that the just and equitable clause ... has ... been held ... not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the "just and equitable" clause as found in the Companies Act. .. If ever there was a case of dealock I think it exists here; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible.'"
33. The Supreme Court has then concluded (at page 102) :
"It is clear that although Yenidje Tobacco Ltd.'s case [1916] 2 Ch 426 was a case of a complete deadlock that was not stated to be the sole basis for a conclusion to wind up the company. The House of Lords in Ebrahimi's case [1973] AC 360 (HL) approved the decision in Yenidje Tobacco Co. Ltd.'s case [1916] 2 Ch 426. We may also point out that the House of Lords did not approve of the undue emphasis put on the contractual rights arising from the articles over the equitable principles, derived from partnership law : Cuthbert Cooper and Sons Ltd., In re [1937] Ch 392; [1938] 8 Comp Cas 131 (Ch D) :
The Supreme Court also referred to the Privy Council decision in Loch v. John Blackwood Ltd. [1924] AC 783, 793, wherein section 127 of the Companies Act, 1910, of Barbados, identical with section 433(f) of the Act was considered and in which, a passage from the case of Baird v. Lees [1924] SC 83 was quoted as follows (at page 102) :
"I have no intention of attempting a definition of the circumstances which amount to a 'just and equitable' cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company."
34. The Supreme Court also referred to another decision of the Privy Council in D. Davis and Co. Ltd. v. Brunswick (Australia) Ltd. [1936] 6 Comp Cas 227; AIR 1936 PC 114, which was from the decision of the full court of the Supreme Court of New South Wales. Section 84(e) of the New South Wales Companies Act, 1899, also provides for winding up, inter alia, on the just and equitable ground. In dealing with that clause, according to the Supreme Court, the Privy Council observed as follows (at page 239 of 6 Comp Cas) :
"The position of the court in determining whether it is just and equitable to wind up the company requires a fair consideration of all the circumstances connected with the formation and the carrying on of the company during the short period which had elapsed since 12th May, 1930 : and the common misfortune which had befallen the two shareholders in the company does not, in their Lordships' view, involve the consequence that the ultimate desires and hopes of the ordinary shareholders should be disregarded merely because there is a strong interest in favour of liquidation naturally felt by the holders of the preference shares .... Nor on the other hand can any general rule be laid down as to the nature of the circumstances which have to be borne in mind in considering whether the case comes within the phrase."
35. The Supreme Court then referred to the case of Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao , the case of Seth Mohanlal v. Grain Chambers Ltd. and Shanti Prasad Jain v. Kalinga Tubes Ltd. and stated (at page 104 of 46 Comp Cas) :
"Although the Indian Companies Act is modelled on the English Companies Act, the Indian law is developing on its own lines. Our law is also making significant progress of its own as and when necessary. Where the words used in both the Acts are identical, the English decisions may throw good light and reasons may be persuasive. But, as the Privy Council observed long ago in Ramanandi Kuer v. Kalawati Kuer, AIR 1928 PC 2, 4 :
'It has often been pointed out by this Board that where there is a positive enactment of the Indian Legislature, the proper course is to examine the language of that statue and to ascertain its proper meaning uninfluenced by any considerations derived from the previous state of the law or of the English law upon which it may have been founded.' If it was true in the twenties it is more apposite now that the background, conditions and circumstances of the Indian society, the needs and requirements of our country call for a somewhat different treatment. We will have to adjust and adapt, limit or extend, the principles derived from English decisions, entitled as they are to great respect, suiting the conditions of our society and the country in general always, however, with one primary consideration in view that the general interest of the shareholders may not be readily sacrificed at the altar of squabbles of directors or powerful groups for power to manage the company.
When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company and there is no hope of possibility of smooth and efficient continuance of the company as a commercial concern, that there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not a real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principle to the present company.
The principle of the 'just and equitable' clause baffle precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it should be so done in a particular case cannot be put in the strait-jacket of an inflexible formula.
In an application of this type allegations in the petition are or primary importance. A prima facie case has to be made of out before the court can take any action in the matter. Even admission of petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of the other interest have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition.
The question that is raised in this appeal is as to what is the scope of section 433(f) of the Act. Section 433 provides for the circumstances in which a company may be wound up by the court. There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Section 222(f) of the English Companies Act, 1948, is in terms identical with the Indian counter-part, section 433(f). It is not well established that the sixth clause, namely, 'just and equitable', is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, 'just and equitable'. Since, however, the matter cannot be left so uncertain and indefinite, the courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also borne out of recognition of equitable considerations generally. This is particularly so as section 35(6) of the English Partnership Act, 1890, also contains, inter alia, analogous provision for the dissolution of partnership by the court. Section 44(g) of the Indian Partnership Act also contains the words just and equitable'.
Section 433(f) under which this application has been made has to be read with section 433(2) of the Act. Under the latter provision where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
Again under sections 397 and 398 of the Act, there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate the relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company."
36. In yet another judgment in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), the Supreme Court once again went into the question as to what the word "oppression" may mean for the purpose of section 397 of the Act and what may provide just and equitable grounds for winding up a company and referred to several judgments including the one in Shanti Prasad Jain v. Kalinga Tubes Ltd. and the various judgments of the Privy Council and other courts of England and observed (at page 780 of 51 Comp Cas) :
"Neither the judgment of Bhagwati J. not the observations in Elder's case [1952] SC 49 are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder's case [1952] SC 49, a complaint was made that Elder had not received the notice of the board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one judge to another.
An isolated order passed by a judge which is contrary to law will not normally support the inference that he is biased; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the judge is biased and that the party complaining of the orders will not get justice at his hands."
37. The Supreme Court has then said (at page 782) :
"It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to conduct which lacks in probity, conduct which lacks in probity, conduct which is unfir to him and which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform has suggested the substitution of the word 'oppression' in section 210 of the English Act by the words 'unfairly prejudice' in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gower's Company Law, 4th edition, page 668). But that recommendation was not accepted and the English law remains the same as in George Meyer's case [1959] 29 Comp Cas 1; [1959] AC 324 (HL) and in H. R. Harmer Ltd., In re [1959] 1 WLR 62; [1959] 29 Comp Cas 305 (CA), as modified in Jermyn Street Turkish Baths Ltd., In re [1971] 3 All ER 184; [1971] 41 Comp Cas 999. We have not adopted that modification in India."
38. In the light of the law noticed by us above, is it possible, we put to ourselves, to say with reference to the aforementioned acts or other acts which are referred to in the company petition whether there had been any act of oppression by the management of the company against the petitioners/respondent affecting their legal and proprietary rights as shareholders. Our answer to it is obviously no. The admitted facts of this case reveal :
(1) The existing four members of the board of directors are so divided that at an meeting of the board of directors, unless S. Rangarajan, who on many occasions joined hands with N. Murali, decided on any issue to side with the managing director, G. Kasturi, no decision could be taken at any meeting of the board to the prejudice of any shareholder;
(2) The dispute with N. Ram related to the editorial policy of The Hindu, a publication of the company and was not with respect to any legal or proprietary right of N. Ram as a shareholder;
(3) The directions which Kasturi issued as managing director either concerning N. Ram or concerning N. Murali's activities were all related to activities of N. Ram as the associate editor of The Hindu and N. Murali as the general manager of the company.
(4) The resolutions of the board directors, which are complained of are all concerning the managing director's actions and actions otherwise of the board of directors with respect to the functions assigned to the editor, associate editor or deputy editor or constitution of the editorial board, concerning the internal management of the affairs of the company, which would in no way affect the legal or proprietary right of a shareholder.
39. There are, however, two complaints which require mention herein, in regard to the majority shareholders withholding shares which according to the petitioner/respondent should have been allotted to their family. This, however, is a cause, which if true, has existed since long, is evidently not a cause affecting legal or proprietary right of the petitioners/respondents or any other shareholder. In other words, a demand to have more shares than held/possessed by them, can hardly be described as an act of oppression, if not acceded to by the majority shareholders.
40. We have already referred to the judgment of the Supreme Court in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla , in which it has been pointed out when a company can be said to be one to which the character of quasi-partnership could be attributed. The Supreme Court has pointed out that the Indian law did not approve of the undue emphasis put on the contractual rights arising from the articles of association over the equitable principles derived from a partnership character is noticed, it is necessary to find the following facts as pointed out by the Supreme Court (at page 99) :
"The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements :
(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;
(ii) an agreement, or understanding that all, or some (for there may be 'sleeping' members) of the shareholders shall participate in the conduct of the business;
(iii) restriction upon the transfer of the member's interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."
41. There is some attempt in the petition to show that the first element is existing, but, admittedly, the next two elements are not present. It is not a case in which all shareholders ever participated in the conduct of the business of the company. It is also not a case in which there is any restriction upon the transfer of members' interest in the company. It is this element which goes against the plea that the company is more or less a partnership company. In all the cases qua partnership courts have held that the company was in substance a partnership if it was a small private company founded on a personal relationship involving mutual confidence between the members. In the chapter of winding up of the company in England by the court in Palmer's Company Law, volume I, 24th edition, at page 1370 (paras 88-07, 88-08 and 88-09), it is said :
"It has sometimes been suggested that there is an exhaustive list of situations that may fall within the scope of the 'just and equitable' clause, but it now seems that, although such classification may be convenient for purposes of presentation, the words 'just and equitable' require a more flexible interpretation. In the words of Lord Wilberforce, 'illustrations may be used, but general words would should remain general and not be reduced to the sum of particular instances.' By way of illustration, under this clause winding up orders have been made on the grounds :
That the Substratum of the company was gone. The substratum is held to be gone when the main object for which the company was formed has become impracticable ... that one of the principle shareholders refused to produce accounts or balance-sheets, or to pay dividends, he having a majority of the voting power;
That the petitioner was excluded from all participation in the business;
That, in the case of small private company, the company was in substance a partnership and the facts would justify the dissolution of a partnership.
The last two illustrations relate only to small private companies founded on a personal relationship involving mutual confidence between the members. If in such a case a member commits a breach of good faith which the members owe each other as the result of that personal relationship and thereby acts inequitably, equitable considerations, imported into section 222(f) by the words 'just and equitable' may apply and enable the court the winding up of the company. This was the case in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 where, without wishing to be exhaustive, Lord Wilberforce described the situations in which such equitable considerations may assert themselves thus. .."
42. Thus, the principle of quasi-partnership is applied to a small private company founded on a personal relationship involving mutual confidence as between the members.
43. The company before us is neither a small nor a private company. It is a public limited company. The absence of essential ingredients in the relationship of the members and the character of the company to qualify it to answer the description of the quasi-partnership company is enough in our view to hold that the petitioners/respondents have no justification to ask for interference by the court on just and equitable grounds. In the absence of any pleading showing that there has been any interference with the legal and proprietary right of the shareholders either by the managing director or by the board of directors, we hold that no case has been made out for invoking section 397 of the Act.
44. It is difficult to subscribe and accordingly accept the case of the petitioners/respondents that there has been such mismanagement of the affairs of the company or that the affairs of the company are being conducted in a manner prejudicial to the interest of the company. Interest of a shareholder to participate in the management of the company cannot be clubbed with the interests of the company. Certain shareholders may find a place as members of the board of directors, a wholetime director or a managing director. It shall be open to the shareholders to make changes in the constitution of the board of directors. They may, for reasons good or bad, remove a director and appoint anyone in his place. In the course of the management of the affairs of the company, they may decide to increase the number of directors of the company. A question may arise, viz., can it be said that once a member is elected or nominated as a director, he cannot be removed from office ? That has to be answered in the negative. No member of the company on his appointment as a director or a managing director can be above the law and the interests of the shareholders. Interests of the shareholders and that of the company must always be preferred over the interests of any one else irrespective of the position occupied by him. Still, since there has been some allegations such as that on some occasions the board of directors was equally divided on certain issues or that there were occasions when certain acts of the managing director were opposed by a wholetime director, which created situations due to and in which the interests of the company were likely to suffer, unless a deep and through examination of the issue as to the mismanagement or otherwise of the affairs of the company is made, it cannot definitely be said that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or otherwise.
45. It appears to us that the petitioners/respondents have no prima facie case for invoking section 397 of the Act, but they may have some semblance of a case for the purpose of section 398 thereof. This, however, will not be enough to give interim orders either to restrain the respondent/appellant, G. Kasturi, from functioning as managing director or the board of directors from deciding to increase the number of directors of the company. The balance of convenience in such a case should mean protecting the interests of the company over the interests of any individual/member of the company irrespective of whether he is a managing director or a wholetime director.
46. Some shareholders have applied in the appeal for being added as party respondents and heard. The respondents/appellants have filed a petition for bringing on record for the consideration of the court additional grounds on additional materials. We have decided the case on the basis of the materials before the learned company judge and we have not allowed ourselves to be influenced by other materials that are brought for the first time in appeals. We have referred to the facts stated in the counter-affidavit filed on behalf of the respondents/appellants before the learned company judge only for the purpose of noticing whether there is any controversy as to the facts or not. But we have proceeded with enough care and caution to decide the question of prima facie case only on the basis of the pleadings in the company petition. On the question of balance of convenience, when viewed in the backdrop of the controversies herein, we are of the opinion that, in the absence of anything on record to show that any legal or proprietary right of the petitioners/respondents is in jeopardy, we must hold that the balance of convenience is not in favour of granting any order of injunction to restrain the first respondent appellant, G. Kasturi, from chairing the meeting of the board of directors of the third respondent company or to restrain the respondent/appellant from enlarging the present board of directors from the existing four. We have, however, taken notice of two items of information on record that there is dispute as to whether the first respondent/appellant is still validly continuing as managing director/director of the board after attaining the age of 65 years when according to the petitioners, there was no notice for the special agenda for the said purpose when the board of directors resolved to let him continue him until the expiry of his term of five years and that N. Murali has since ceased to be a director of the company. We may stated in this regard that in the entire company petition, except for raising the question of want of notice, the petitioners/respondents have acknowledged the first respondent/appellant as the managing director in office. The first petitioner/respondent has disputed the allegation of the respondent/appellant that he has ceased to be wholetime director. This issue can be resolved by the board of directors at its meeting or by the shareholders at their meeting in accordance with law. However, we think it proper to state that until the disposal of the company petition, subject to the members of the company at a meeting deciding otherwise, the first respondent/appellant may continue as the managing director and the first petitioner/respondent may continue as a wholetime director. This, however, will not mean that we have accepted the case of the petitioners/respondents that he who is the general manager of the company since he is a wholetime director is independent of the control of the managing director. While taking notice of the fact that we have to told that in the capacity of the managing director, the first respondent/appellant could/can ask the first petitioner/respondent to obtain his approval regarding any monetary transactions and otherwise with respect to the affairs of the account, there may be something for the first petitioner/respondent to say with regard to his independent functions free from the control of the managing director, but at the same time, the first respondent/appellant may also be right in asserting that no general manager of the company, be he a wholetime director, is independent of the control of the managing director, who we think, shall in no way affect the first petitioner/respondent's legal and proprietary right as a shareholder, who in the capacity of the general manager, shall submit to the control of the managing director of the company. It is, therefore, in the interests of the company that the prayer in Company Application No. 344 of 1990 is also disallowed.
47. Before we part with this judgment, we desire to record that it will be in the interest of the company to give more representation in the board of directors to such other members of the company, who may take independent, positive and a fair view on such issues, which may appear to cause further disenchantment between the first petitioner/respondent on the one hand and the first respondent/appellant on the other. In the course of the hearing of the appeals, learned counsel for the shareholders and learned counsel for the appellants suggested the names of N. Ravi, who is the third brother of the first two petitioners/respondents and a shareholder of the company and Nirmala Lakshman, who is the sister of the second respondent/appellant in O.S.A. Nos. 97 to 1990. Before us, learned counsel for the petitioner/respondent, however, expressed the view that a person, who is not a shareholder may be named by the court as additional director besides the four, who constituted the board of directors. We do not, however, propose to put any stranger on the board of directors because it has been invariably pointed out that it should generally be left to the discretion of the shareholders and the members of the company to decide who may represent their interests in the management of the affairs of the company than to some one else to do the job. It shall be open to the board of directors to decide who may be added to the board of directors as a director. We hope, no problem shall arise as the first petitioner/respondent shall be present at such meetings of the board of directors where decision, if any, in this regard may be taken and besides him, S. Rangarajan shall also be present, who it appears, took a positive stand on many occasions in the past. It shall, however, be open to the parties to move the court when the occasion arises for any interference in the functioning of the board of directors on grounds, inter alia, covered by sections 397 and 398 of the Act.
48. In the result, these appeals are allowed. Company Application Nos. 342, 343 and 344 of 1990 are dismissed. No costs.
49. An oral application has been made under article 134A(b) of the Constitution of India on behalf of the petitioners/respondents for a certificate that a substantial question of law of general importance is involved in this case and that the matter need to be decided by the Supreme Court.
50. Apart from the fact that the appeal before us was confined to the interim orders and the main case is yet to be finally decided by the learned company judge, we have followed the laws laid down by the Supreme Court and applied them to the facts before us. There is no question of law, much less a substantial question of law general importance, involved in the instant case. All the questions that were raised before us have been answered by us in the light of the law declared by the Supreme Court of India. There is nothing which need a decision of the Supreme Court. The prayer for certificate is accordingly refused.