Delhi High Court
Bhaskar Stoneware Pipes Private Ltd. ... vs Rajinder Nath Bhaskar And Another on 1 June, 1988
JUDGMENT S. Ranganathan, J.
1. This is an appeal from an order of Goswamy J. directing that a petition under section 397, 398,and 433 of the Companies Act, 1956, be admitted but at the same time withholding citation until further orders. The only question that calls for consideration in this appeal, therefore, is whether Company Petition No.41 of 1982 should be admitted or not.
2. The company in question is Bhaskar Stoneware Pipes Pvt. Ltd. (hereinafter referred to as "the company"). But, in order to appreciate the circumstances in which the litigation has started, it is necessary to refer to some earlier events particularly as, on behalf of the petitioner-respondents, considerable reliance has been placed on the earlier history in support of the order of admission of the petition.
3. The company is a private limited company in which the shareholders are all descendants of one Amar Nath Bhaskar. The family tree will be helpful in understanding the composition of the four groups of family members who are involved in this litigation:
Amar Nath Bhaskar : --------------------------------------------------- : : : : B.N.Bhaskar T. N. Bhaskar Rajendra Nath Ravindra Nath BNB TNB Bhaskar Bhaskar : : RNB RB : : : : --------------- : --------------- Sanjeev : : : : : : Vivek Vidhur Vashishta : Rajeev Sanjay ----------------- : : Bharat Vinay
4. The company is the successor in business of a partnership known as M/s Amar Nath Bhaskar and Sons (ANB and Sons.) ANB and Sons commenced business on January 1, 1957, and a deed of partnership was drawn up on December 26, 1959. The partners in this firm were RNB, RB, Vivek,Vidhur and Bhrat of whom Bhrat was a minor. The shares of the partners were as follows: Vivek-Vidhur = 40%; Bhrat = 20%; RNB = 20%; and RB=20%. It may be pointed out that even at this stage the family of RNB (represented by Vivek and Vidhur) had a higher shares in the firm than the other families.
5. The partnership underwent several reconstitutions. With effect from April 1, 1969, the 20% shares of TNB family was distributed between TNB (15%) and Bhrat (5%). With effect from December 2, 1968, the share of TNB family was re-allocated between TNB and Bhrat at 12% and 8%. On September 5, 1969, BNB family was represented by four member (BNB, Vivek, Vidhur and Vashishta) each having 10% share ; TNB and Bharat had 12% and 8%, the aggregate being 20% . The 20% of RNB family was also distributed between RNB and Rajeev at 12% and 8% and RB had 20% share. With effect from January 1, 1973, the share of the RB family was split up between RB and his son, Sanjay. It will be observed that despite the several changes, the share of each family remained intact; only inter se the members of each family, there was such re- distribution as suited their convenience.
6. It was decided to convert the business of the partnership into that of a company. A company was, therefore, floated and got incorporated on October 11, 1972. The transition of the business from the partnership to the company was achieved in the following manner. On January 1, 1973, the partnership was reconstituted by including the company as a partner along with others. The share position was as follows : 36% for BNB family (9% each in the hands of BNB, vivek, Vidhur and Vashishta); and 18% for TNB family, 18% to TNB family, and 18% to RB family (each having a father and son in the firm, the father having 10.8% and the son having 7.2% ). The balance of 10% was taken by the company. In this manner, though the company became a partner in the firm, the mutual proportion of shares between the four groups remained constant. It was 40:20:20:20 earlier and it now became 36:18:18:18. Another agreement was executed on April 1, 1973, by which the members of the four families agreed that the partnership be dissolved with effect from March 31, 1973, and that the interests in the partnership be valued on a certain basis in lieu of which shares were to be allotted to each of the partners. By another agreement, it was agreed that the company would take over the business of the firm as a going concern. Thus, with effect from April 1, 1973, the company became the sole owner of the business and the shares were held by the four groups of members of the families.
7. The shareholding of the company, as on October 11, 1972, was as follows:
Shares Amounts(Rs.) %age Shri B.N. Bhaskar 124 12,400 Shri Vivek N.Bhaskar 125 12,500 40 (S/o Shri B.N. Bhaskar) Shri Vidhur Bhaskar 125 12,500 Shri Vashishta Bhaskar 125 12,500 Shri T.N. Bhaskar 149 14,900 Shri Bharat Bhaskar 100 10,000 20 (S/o T. N. Bhaskar) Shri Rajendra N. Bhaskar 150 15,000 Shri Rajeev Bhaskar 100 10,000 20 (S/o Shri Rajendra Bhaskar) Shri Ravindra N. Bhaskar 250 25,000 20
8. The board of directors of the company as on October 11, 1972, were RNB, TNB, RNB, Vivek and Vidhur. It will thus be seen that the shareholding of the company among the various groups retained the same proportion as before and all the four groups were also represented on the management of the company although the family of BNB had a somewhat upper hand due to a larger shareholding and by reason of more of its members being directors of the company. It may be mentioned here that the company was carrying on a business in the manufacture and sale of stoneware pipes and all types of refractories.
9. The company carried on its business and also made substantial profits year after year. One of the brothers, RB , died on November8, 1976, and at the time of his death, the shareholding of the company were as follows:
Group No. of shares % age BNB 9,900 40 RNB 4,950 20 TNB 4,950 20 RB 4,950 20
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Total 24,750
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As already mentioned, the business of the company was mainly conducted under the directions of BNB and the members of his family, Vivek and Vidhur. On September 4, 1977, RNB resigned from his directorship. The reason given for the resignation was that as he was having his own business in Madhya Pradesh and Uttar Pradesh and had stationed himself at Katni and also in view of his old age he was not in a position to deliver the goods as a director of the company. The shares held by the RB group, i.e., RB and Sanjay, were transferred in favor of the BNB group (to the extent of 10.8%) and the TNB group (to the extent of 9.2%) and this transfer of shares was approved at a meeting of the board of the company held on December 20, 1977. It may be mentioned that at his time, the board of directors consisted of BNB, TNB, Vivek and Vidhur. Some time in 1978, TNB died. Later, some time in 1980, the board of directors of the company issued 50 more shares to BNBS Cement Products Pvt. Ltd., a company in which only the BNB family held shares. It also appears that, at some point of time between November 8, 1976, and March 31, 1980, fifty shares had been issued and allotted to each of the five members of the family of BNB. Thus, as on March 31, 1980, the total shareholding was 24,850 and this was distributed as follows:
Group No. of shares % age BNB 12,650 50.8 TNB 7,250 29.2 RNB 4,950 20.0
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Total 24,840
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The business of the company continued to be carried on till July 20, 1980, on which date BNB died.
10. The death of BNB brought to the surface difference and disputes that appear to have been simmering for quite some time. The allegations of the petitioner in this regard will be referred to a little later. But at this stage, it is sufficient to refer to one development. The ninth annual general meeting of the company was called for December 29, 1981. The agenda for the meeting included two items: (1) to reappoint Vivek who was shortly retiring by rotation as the director and managing director of the company; and (2) to reappoint Mr. I.P. Kohal and Smt. Aruna Bhaskar, the brother-in-law and mother of Vivek, who had been co- opted as directors on the death of BNB for a further term. On receipt of this letter, RNB wrote a strong letter to Vivek on December 28, 1981. Apart from questioning the validity of the annual general meeting, RNB in this letter catalogued a number of grievances. His complaint was that, when the partnership of ANB and Sons was converted into a limited company, the parties did not intend that any family should be excluded from the management of the company or that there should be any charge in the partnership concept under which they had previously operated. According to him, both RB and himself had often had reservations regarding the manner in which BNB had operated the company. But, as he was the eldest brother, they had preferred to voluntarily resign rather than come into conflict with the eldest member of the family. This, however, did not mean that they intended to relinquish their rights in the family business. He complained against the way in which Vivek was conducting the business after the death of his father without taking the consent of the elder members of the family. He also protested against the manipulation done on the family of RB and himself after RB's death by taking advantage of the trust reposed in BNB and Vivek- the reference was obviously to the transfer of shares from RB's family about which RNB claimed to have received information just earlier for the first time from Bhrat. It was pointed out that others could not be expected to tolerate such a blatant invasion into their rights or the manipulation that Vivek had played to gain control of the company or permit the business to be converted from one of parity and partnership among the Bhaskar families to the private domain of a single family and to controlled by a person who had not earned the right either by age or by respect. He, therefore, called upon Vivek to withdraw the notice of the meeting and to hold a fresh annual general meeting of the company including in the agenda a proposal for the appointment of Rajiv, Bharat, Sanjeev and Vinay as directors in addition to Vivek and Vidhur and excluding Smt. Aruna and other outsiders who had been introduced as directors. It was also suggested that the question of having a managing director, if any, could also be decided at the meeting.
11. The above notice did not yield results. On the contrary, it catapulted the members of the family into litigation of various kinds. It appears, inter alia, that Rajiv filed a civil suit and obtained an injunction against the company holding the annual general meeting of December 29, 1981. Again, Vivek filed a suit (Suit No. 10 of 1982) alleging that Rajiv had agreed to sell the shares belonging to his group to Vivek's group and seeking specific performance of the same. It was also alleged that RNB and Rajiv were interfering with the work of the company by writing letters to creditors, customers and bankers of the company by writing letters to creditors, customers and bankers of the company so as to adversely affect the business of the company. Again, RB's group filed a petition under section 433 of the Companies Act seeking the winding up of a company known as Ishwar Industries Ltd. in which the BNB group held substantial shares. Almost simultaneously, on May 24, 1982, RNB and Rajiv filed this petition under section 397, 398 and 433 of the Companies Act.
12. The last paragraph of this petition which contains the prayer clause is in the following terms :
" 35(a). In the circumstances, it is respectfully submitted that the facts and circumstances of the case would justify the making of winding-up order on the ground that it is just and equitable that the company be wound up and that the affairs of the company are being conducted in a manner oppressive to the member of the company, other than the BNB family, and in a manner prejudicial to the interest of the company, and in a manner prejudicial to the public interest, and that a material change has taken place in the management and control of the company and in the ownership of the company's shares by reason of which the affairs of the company are being and will continue to tbe conducted in a manner oppressive and prejudicial to the shareholders of the company, other than the members of B. N. Bhaskar family, and in a manner prejudicial to the public interest and to the interest of the company.
(b) It is, however, submitted that if matters complained of could be rectified, the winding up of the company may be avoided.
It is, therefore, prayed that this Hon'ble Court be pleased :
(i) To pass an order requiring the company to purchase 50 shares issued to BNBS Cements and Products P. Ltd., and the shareholding mentioned in annexure E here to representing the erstwhile shareholding of the Ravindra Nath Bhaskar in the company at value of Rs. 50 per share paid therefore.
(ii) To reconstitute the board of director of the company so that the B. N. Bhaskar family, T. N. Bhaskar family and Rajendra Nath Bhaskar family each have two directors on the board of director of the company with the eldest as chairman ; or
(iii) Alternatively, the company be wound up ; and/or
(iv) To pass such other order(s) as this Hon'ble Court in the circumstances deem fit."
13. In other words, the petitioners alleged that there are circumstances which render it just and equitable that the company should be wound up but that if, short of winding up, the company's affairs could be rectified, it could be ordered accordingly. The prayer was that this should be done (a) by the company repurchasing the shares issued to BNBS Cement Products P. Ltd., as well as the shareholdings which were got transferred from the members of the RB group to the members of the RNB and TNB groups, namely, BNB, could each be represented on the board of directors of the company, and (c) that the eldest of such directors should be appointed chairman. It is interesting to point out at this juncture that the suggestion that the eldest should be the chairman was apparently prompted by the circumstance that when the petition was drafted on March 8, 1982, RNB the first petitioner, was the eldest member of the family. Subsequently, he died on September 6, 1982, and the eldest member would be Vivek of the BNB group. The other interesting feature is that representation on the board of directors is sought only for the BNB, TNB, and RNB groups though the deal by which the RB group has walked out of the company after transferring its shares in favor of the BNB and the TNB groups is attacked by the petitioners and a prayer of the has been made that those shares should be purchased by the company under the directions of the court.
14. The two company petitions, the present one and the one seeking the winding up of Ishwar Industries Ltd., were heard together for the purposes of admission. When these proceedings wee pending, considerable efforts were also made to bring out some reconciliation between the family members who constitute the various groups. Perhaps a suggestion was thrown out that the affairs of the two companies could be so arranged that the major shareholding in each of the companies remains with one group instead of being spread over among all the three groups. In the course of these negotiations, Vivek entered into an arrangement with the TNB group under which he purchased the entire shareholding of the TNB group in the present company; in exchange, it was stated that the shares of the BNB group in Ishwar Industries Ltd., had been passed on the TNB group. As a result of this exchange, the shareholding of the BNB group in the present company has gone up to 80% and this has further worsened the position and accentuated the grievances of the petitioners in the present petition. Thus, attempts at reconciliation have not only proved unsuccessful; they have to some extent resulted in a deterioration of the petitioners' position in the company, as they view it. It is in these circumstances that it has become necessary for us to hear this appeal and to dispose it of one way or the other.
15. The case of the present petitioner was broadly as follows : The cardinal fact in this case is that the business of the company was started in 1957 as a partnership concern in which all the group of members were represented in the proportion 4:2:2:2, a proportion which was being kept up right through despite various changes in the constitution of the firm. The incorporation of the company in 1972 was not intended to introduce any conceptual change in the family nature of the business or in the partnership concept under which it was working. The manner of distribution of shares all along till 1976 clearly shows that the inter se proportion of shareholdings among the family were represented on the board of directors of the company. This idea of keeping the parity among the groups constant was also, according to the petitioners, incorporated in the articles of association of the company, particularly articles 4 and 5. According to the petitioners, BNB, after the death of RB, had been conducting the affairs of the company in such manner that the petitioners had their own reservations about it. However, rather than coming into conflict with the eldest member of the family leading to a partition and dissolution of the business, the first petitioner voluntarily resigned from the board of directors of the company. It is alleged that BNB, taking advantage of the position of trust occupied by him and in breach of the articles of the company, entered into transactions designed to convert the company and the business belonging to the whole family into the business and domain of one group of family members, namely, the BNB group. It is alleged that the share transfer from the RB group to the BNB and the TNB groups had been arranged clandestinely and in violation of the provisions of article 4 of the articles of association of the company. According to the petitioners, they came to know about this only "recently". The issue and allotment of 50 shares to BNBS Cement and Products P. Ltd. in which the BNB group held the entire shares was also designed with the same purpose. The petitioners' further allegation is that the BNB family has conducted the affairs of the company in a manner grossly oppressive of the shareholders of the company including the petitioners and grossly prejudicial to the interest of the company. It is alleged that, after the company took over the partnership business, the profits have decreased as compared to that of the business when it was carried on in partnership. Apart from these allegations based on the history of the company's activities and the shareholdings, certain allegations regarding diversion of funds were made in paragraph 25 of the petition which have apparently weighed considerably with the learned judge. The contents of this para may be set out here as much of the arguments before us have turned on its contents;
"25. It is submitted that these poor result of the company hav been caused and achieved by the diversion of funds from the coffers of the company to support and promote various concerns, companies and activities of B. N. Bhaskar family at the cost and detriment of the company and for their own benefit by, inter alia, the following means :
(i) The B. N. Bhaskar family has the following family concerns/companies known to the petitioners :
(a) B. N. Bhaskar and Sons, a partnership concern, in which all the partners belong to the B. N. Bhaskar family.
(b) Haryana Filters Pvt. Ltd., a company in which the B. N. Bhaskar family holds almost the entire shareholding.
(c) B. N. B. S. Cements and Products Pvt. Ltd., a company in which the B. N. Bhaskar family holds the entire shareholding.
(d) Dutt Minerals Pvt. Ltd., a company in which the B. N. Bhaskar family holds the entire shareholding.
(e) General Refractories Pvt. Ltd., a company of the B. N. Bhaskar family.
(ii) Land, building and machinery have been given by the company to B. N. Bhaskar and Sons, Haryana Filters Pvt. Ltd., and B. N. B. S. Cements and Products Pvt. Ltd., at the factory premises of the company at Amar Nagar, Distt. Faridabad, Haryana, at a very nominal rent. The company carriers on its pay-roll most of the staff of the said concerns/ companies, bears water, electricity and other fuel charges and expenses of the companies/concerns in its accounts as its own overheads. In addition, raw materials are supplied to the said companies/concerns from the inventories of Bhaskar Stoneware Pipes Pvt. Ltd. free of charge of at concessional rates.
(iii) The company accommodates within its office premises at Iswar Nagar, the office of B. N. Bhaskar and Sons, Dutt Minerals Pvt. Ltd. and Haryana Filters Pvt. Ltd. The said companies/concerns have nominal office staff on their pay-rolls, and utilise staff of the company for their work and/or carry their staff on the pay-roll of the Bhaskar Stoneware Pipes Pvt. Ltd. Further, most of the office and sales overheads, expenditure, transport, water, electricity and rental of the said companies/concerns are borne by and/or shown in the books of Bhaskar Stoneware Pipes Pvt. Ltd.
(iv) Further, although Shri Vivek N. Bhaskar and Shri Vidhur Bhaskar are actively engaged in directing and managing the affairs of the above companies/concerns, they are drawing salaries, perquisites and facilities as managing director and joint managing director, respectively, exclusively from the pay- rolls of Bhaskar Stoneware Pipes Pvt. Ltd. and were debiting the said company for all their expenses for the other companies/concerns aforesaid.
(v) Further, funds have been diverted by payments of commission and other charges by the company to General Refractories Pvt. Ltd., which is believed to be a paper concern of the B. N. Bhaskar family.
(vi) It is reasonably believed and apprehended that there are other firms and concerns whom the company deals with, in which members of the B. N. Bhaskar family have substantial undisclosed interest, and from or through whom purchases are made or through whom sales are made on considerations other than the prevailing market prices, to the prejudice of the company. The petitioners crave leave to refer to and rely upon the company's records when produced.
(vii) In addition, the petitioners reasonably believe that respondents Nos. 2 and 3 have diverted monies from the coffers of the company for other means, fo which the petitioners will crave inspection of the company's records."
16. When the petition was filed, notice was given to the respondents, i.e., the B.N.B. group. An affidavit in reply was filed by Vidhur Bhaskar dated April 12, 1982. Subsequently, another affidavit and certain annexures were filed by Vivek Bhaskar on May 14, 1982. Affidavits in rejoinder to these two affidavits were also filed on behalf of the petitioners. Counsel for the parties were then heard and ultimately, Goswamy J. passed an order is a very short one. But since some points have been made on the language of the order, the material portion thereof may be set out :
"I have heard learned counsel for the parties at length. The allegations contained in paragraph 25 of the petition deal with the diversion of funds of the company. The reply to the said allegations was not satisfactory and an additional affidavit to that effect has also been filed. Prima facie, I am not satisfied even with the additional affidavit. In case the allegations contained in the said paragraph are found to be correct, it would amount to managing the company in a manner which is prejudicial to the petitioner and the members of the company. The petition is, therefore, admitted. However, the citation is withheld till further orders. Notice be also issued to the Central Government for the 19th July, 1982. Further replies, if any, be filed before the next hearing."
17. Sri. Saharya, learned counsel for the appellants, has vehemently contended that teh petition should not have been admitted. His first contention of a preliminary nature is that the learned judge has not given a specific finding in his order either that circumstances had been shown to exist which prima facie satisfied him that it was just and equitable to wind up the company - a finding necessary for the purposes of section 433(f) and 397 - or that the affairs of the company were being managed in a manner prejudicial to public interest or to the interests of the company - a finding necessary for purposes of section 398 - and that, without such a specific finding, the order stands vitiated. He also urged that, unlike a writ petition or appeal, a petition under section 433, 397, or 398 can be admitted only wheel the contents of the petition itself, independent of what may or may not be stated by the respondents in their reply to a show-cause notice, clearly made out a prima facie case falling within the meaning of these sections. This requirement, he says, is not fulfillled in the present case. On the merits, he submits that the attempt of the petitioners to invoke the just and equitable clause by bringing in the analogy of a partnership and the principle of Ebrahimi's case [1972] 2 ALL ER 492 (HL) is untenable. The allegation in the petition that the company was in the nature of a firm with an inherent right to a defined ratio in shareholdings among all the groups of members or participation by all the groups in the management, counsel says, is totally unfounded and untenable in law. He points out that, right from the beginning, even when the business was being carried on by a firm, the part played by the family of BNB in the firm was predominant. Also, when the company was formed, its shareholding was more, it was represented by more members on the board of directors and, admittedly even according to the petitioners, the affairs of the company were being completely managed all along by the BNB group. According to learned counsel, the transaction of purchase of shares from the RB group in 1977 was in accordance with the articles. It was voluntarily made by the RB group and had been effected after the RB group had offered its shares to the other groups including the petitioners. Anyhow, the mere fact that one group of shareholders has purchased the shares of another group cannot bring the case within section 433, 397 or 398. This was no case of ouster from the management of any group. It is pointed out that neither the RNB group nor the RB group had been ousted from the management by RNB group. RNB had resigned voluntarily and for his own personal reasons set out in the letter dated September 4, 1977, and the RB group had voluntarily parted with its shares. But, even assuming that they ahd been excluded from the management, that alone cannot give them grounds to maintain a petition from winding up under the just and equitable clause. That clause has application only in year special circumstances where it is not possible to carry on the affairs of a company. In this case, there was no deadlock in the affairs of the company. In this case, there was no deadlock in the affairs of the company and its affairs were being managed quite smoothly and the company was running as well as it could. No development had taken place subsequent to 1977 justifying the course of action pursued by the petitioner. The petition was very much belated and liable to dismissal on this ground. Learned counsel also says that paragraph 25 of the petition does not make out any case of diversion of funds by the BNB groups or any case for the application of the just and equitable clause or any case of oppression of the minority group by the majority group.
18. We do not find any substance in the contentions of a preliminary nature urged by counsel for the appellants. There is sufficient indication in the record that the learned judge was satisfied, on the materials placed before him, that teh petitions should be admitted and that the question of the applicability of section 433, 397 and 398 needed further investigation. On the petition, notice was given to the respondents, because the learned judge was prima facie of the view that the allegations in the petition made out a case which needed a reply from the respondents. Thereafter, a reply affidavit was filed by the respondents and a rejoinder by the petitioners, certain accounts were produced before the learned judge and a better affidavit was also called for and filed. It is after consideration of all the materials placed before him and after counsel for both parties were heard that the learned judge decided to admit the petition. At stage of admitting a petition, it is not necessary nor is it the practice to pass elaborate orders or record detailed findings. The contention that the petition is belated cannot also be accepted. According to the petitioners, they became aware of the transfer of shares of the RB group only after the death of BNB. That apart, it is really the proposal of the appellants, availing themselves of the scope offered by RNB's resignation to take over all the directional position, that precipitated the current spate of litigation. Moreover, the acts alleged in para 25 continue till today and though they may have started quite some years ago, the petitioners cannot be estopped from voicing their objections thereto, merely because they have been silent earlier. We, therefore, reject these contentions.
19. Turning to the merits, the first question that arises is whether a prima facie case has been made out that the just and equitable clause in section 433 is attracted in the present case. The petitioner's case was that the company is in reality and in substance nothing more than a partnership based on certain mutual understandings among the partners and that any conduct of any group of members which will abuse the trust and confidence reposed or the understanding which forms the basic structure of the company would justify the affected group seeking the winding up of the company. This contention is largely based on the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL), the principles laid down in which have been endorsed by the Supreme Court in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla . In this case, the House of Lords approved of a wider and more liberal interpretation of the just and equitable clause. After discussing the earlier authorities in regard to this provision, Lord Wilberforce observed (at pages 499 and 500 of [1972] 2 All ER):
"... in my opinion these authorities represent a sound and rational development of the law which should be endorsed. 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 judicial 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, 1948, 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".
20. He pointed out that to justify this superimposition of equitable considerations over legal rights, something more is needed than the mere fact that a company is a small one or a private company. Some such indications were (at page 500):
"(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), ofthe shareholders shall participate in the conduct of the business; (iii) restriction on 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."
21. Sri Saharya contends that, though broadly endorsing the above decision, the Supreme Court has been more guarded in its approach. He pointed out that the partnership analogy was not only not accepted in Hind Overseas' case [1976] 46 Comp Case 91 (SC), but that the court also severely limited the scope of the above clause in the following passage (at page 104):
"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 on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, 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 the 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 principles to the present company".
22. He also refers to a passage from the decision in Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Case 91 (SC), where the court has cited with approval at passage from Loach's case [1924] AC 783 (PC) which reads as follows (at page 97 of 26 Comp Cas):
"It is undoubtedly true that at the foundation of applications for winding up, on the "just and equitable" rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore, the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, whenever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up".
23. He contends that in the present case there is not exclusion from management, deadlock or difficulty in the smooth running of the company or any grievance of the petitioners except that they may be outvoted on business affairs or domestic policy because the appellants have acquired the majority of the shareholding in the company. This, he says, is not a situation which can justify a winding-up order. We think that the exact scope and limits of the applicability of the principles laid down in Ebrahimi's case [1972] 2 All ER 492 (HL) to such a case as the present one need careful consideration. The question of applicability of section 433(f) can arise in a variety of circumstances. In Hind Overseas' case [1976] 46 Comp Case 91 (SC), it was not applied for the simple reason that the partnership analogy failed on the facts. The position here is much more complicated.
24. We have set out earlier the history of the constitution of the present company. The details of the share held by the various groups in the partnership as well as the shareholdings of the company commencing from 1963 till the death of RB in 1976 clearly show that the company was in the nature of a partnership between the four groups of family members. It is true that right from the beginning, the family of BNB has an upper hand both in regard to the shares as well as in regard to the management. But while this is a relevant fact, it cannot be conclusive that the agreement was not in the nature of a partnership even when the company replaced the firm. The applicability of the analogy of a partnership depends not on the number of shares held by various persons but on whether there was a personal relationship, mutual trust and confidence, an unwritten but clear and distinct, if implied, understanding between the parties as to the manner in which the firm and then the company were to carry on their affairs. The details given earlier clearly show that a proportionate parity was maintained between the various groups. BNB group held 40% of the shares but each of the other three groups held 20% each. The position, thus, was that some sort of delicate balance was maintained between the four groups with a slight upper hand to BNB group perhaps because he was the eldest member or possibly because of the expertise of Vivek Bhaskar in this line of business. The shares were so maintained that while on the one hand, BNB could join hands with any of the other groups so as to obtain majority control, it was equally possible for the other three groups to join together to obtain control of the affairs of the company. Having regard to the history of the business and the manner in which the groups held the shares all along, there can be no doubt that the petitioner has a prima facie case to say that, though constituted as a company, the business was in substance a partnership, with an underlying basic obligation that the balance between the several groups should not be disturbed, as indeed it was not disturbed even though the shareholdings inside each family got reshuffled from time to time. The primary allegation of the petitioner is that the BNB group has tried to subvert this basic obligation which underlay the constitution of the firm as well as of the company. The purchase of the shares of the RB group by BNB and TNB (according to the petitioners, surreptitiously and illegally) as well as the allocation of 50 shares to a private limited company in which the BNB group alone was interested are, according to the petitioners, steps in breach of the basic understanding between the parties by which the BNB group attempted to make the company its own instead of being a company intended to subserve all the four groups of family members. Even granting that RNB has voluntarily resigned and the RB group had parted with their shares voluntarily, the situation has so developed that, with the proposals before the annual meeting of December, 1981, going through, the RNB group - and as events have happened in the course of these proceedings, the TNB group - have been completely eliminated and the company has passed into the virtual control of the BNB group as it did in Ebrahimi's case [1972] 2 All ER 492 (Hl). The crux of the question seems to be not whether any group has been expelled or whether any group has been expelled or whether this was done lawfully or otherwise but whether there has been breach of a basic mutual understanding. It is difficult, therefore, to say that a prima facie case has not been made out for the applicability of Ebrahimi's case [1972] 2 All ER 492 (Hl) principle here.
25. Mr. Saharya tried to show to us that the purchase by the BNB group of the shares of the RB group in 1977 was not in violation of, but rather in accordance with, the terms of articles 4 and 5. We have gone through these articles, the language of which is quite cumbersome and involved and would like to express no conclusion one way or the other at this stage. But we would only like to point out once again that under section 433(f), the issue is not one of legality or otherwise of a step taken so that, even the issue is not one of legality or otherwise of a step taken so that, even if this were quite a lawful transaction, its effect vis-a-vis section 433(f) would still need examination. That apart, the allotment of shares to BNBS Cements Products P. Ltd. has not been satisfactorily explained. It was suggested that this was done only in order to retain the company as a private limited company in view of the provisions contained in section 43A of the Companies Act. But, assuming that a private limited company was required to be made a shareholder in order to prevent the company from becoming a public limited company, there was no compulsion that such a private limited company should be one belonging to only on of the groups of the family members. This again is a matter which needs to be investigated. There is also the matter of allotment of 50 of shares to the family member of the BNB group. Thus, the history of the case between 1977 and 1980 prima facie indicates that there has been a move on the part of the BNB group to consolidate itself into a position of control to the detriment of the other groups and in particular the groups of the petitioners, For all these reasons, we are of opinion that at this stage a prima facie case has been made out for invoking the just and equitable clause of section 433.
26. Turning now to section 397 and 398, the scope of these provisions has been explained by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1956] 35 Comp Case 351 (SC) and Needle Industries (india) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Case 743 (SC). In the former case, after referring to the origin of section 397 and the English decisions, the court observed (at page 366):
"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 cause 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 continuous 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 or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to section 397."
27. Reference may also be made to paragraph 18 of the judgment where the observation in Harmer's case [1958] 3 ALL ER 689 ; [1959] 29 Comp Case 305 (CA) have been extracted. In that decision, it was pointed out that the circumstances to warrant interference under section 210 of the English Act corresponding to section 397 of the Indian Act must be such as to warrant the inference that there had been (at page 321 and 322 of 29 Comp Cas) :
"... 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 conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fairplay 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 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 the 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. Needle Industries (India) Ltd. case, [1981] 51 Comp Case 743 (SC), is the latest decision of the Supreme Court in regard to the provisions of section 397 and 398. It is necessary at this stage to refer to the somewhat involved facts of this case. The court pointed out that, while on the one hand it was not correct to say that every illegal act would per se constitute oppression, it was equally incorrect to suggest that the illegality of an action has no bearing upon its oppressiveness. The court observed (at page 780):
"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 biassed; 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 biassed and that the party complaining of the orders will not get justice at his hands".
29. After referring to Kalinga Tubes' case [1965] 35 Comp Case 351 (SC), the court observed (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 a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder".
30. It seems to us that the facts of the present case, judged in the light of these observations, justify the admission of the petition under section 397. We have already discussed the applicability of the just and equitable clause to the present case which is also a requirement of section 397. The other part of the requirement, viz., oppression or mismanagement (to put it broadly) is also made out prima facie on the materials before us. This petition does not seem to be the outcome of a mere resentment at bing outvoted or some conduct which has no relevance, not isolated but a consistent series of acts, a lack of probity and fair dealing and burdensome, harsh and perhaps also wrong conduct on the part of one group of shareholders which have unfairly prejudiced the proprietary rights of another group of shareholders. Briefly put, these acts consist of the slow and steady enlargement by the BNB group of its shareholdings so as to reduce the other groups to a minority by the transfer and allotment of shares and the conduct by the BNB group of convening an annual general meeting in which directors belonging to the BNB group alone are sought, and also bound, to be appointed as directors of the company. Besides, there is also conduct which seems detrimental not only to this group but also to the interest of the company as a whole as alleged in paragraph 25 of the petition to which we shall make reference a little later while dealing with the applicability of section 398.
31. Section 397 read with section 433(f) and section 434(2) makes it clear that a court will not proceed to wind up a company merely because it is just equitable to do so, particularly in circumstances such as the present, where the occasion for winding up is mutual lack of confidence and breach of fundamental understanding between the various groups of shareholders, if some way could be found out for continuing the company as a running concern after removing the misunderstanding and setting right the acts of the group of the shareholders which constitute the "oppressing" group. The court has, therefore, to consider in all such cases whether, short of winding up, it is possible for the company's affairs, to be remedied by recourse to section 397 (or even section 398). We think that the learned single judge has come to the right conclusion that there is a prima facie case for admitting the petition under section 397 also so that the possibilities can be explored of remedying the situation rather than winding up the company. There is, therefore, a clear case for admission of the petition under section 397.
32. We now turn to the applicability of section 398. Under this section (leaving out the words "prejudicial to public interest" which have not been relied on), what has to be established by the petitioner is that there has been a conduct of the affairs of the company in a manner prejudicial to the interests of the company or that a material change has taken place in the management or control of the company and in the ownership of the company's shares by reason of which it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. Here again, we shall leave out of consideration the words "prejudicial to public interest". While the transfer of shares and the disturbance of the shareholding ratio cannot be said to be prejudicial to the interest of the company as a whole, we agree with the learned single judge that the allegations contained in paragraph 25 of the petition make out a prima facie case to show this.
33. Mr. Saharya contends that the allegations contained in the above paragraph are vague and general and that they have been adequately answered by the reply affidavits filed by the appellants in the company petition. We have been taken by counsel for both sides through the contents of this paragraph, the affidavits filed by the two parties and the documents and material on record and we are unable to agree with Shri Saharya either that the allegations are vague and general or that they have been satisfactory answered by the appellants. While the allegations contained in sub-paras (vi) and (vii) may be described as general in nature, the other sub-paragraphs spell out definite, specific and concrete allegations which, if proved and found to be correct full hearing, would show that the funds of the company are being diverted from its coffers to benefit, support and promote companies, concerns or individuals in which or in whom the BNB group alone is interested and not the company as a whole. At this stage of admission, a detailed discussion of all these grounds is not proper or called for and, hence, we shall only touch upon some of these grounds to indicate that the prima facie case has been made out and that a further enquiry is called for.
34. The first of the petitioners is that the land, building and machinery of the company have been given on lease to a firm and tow companies belonging to the BNB group at a very nominal rent. The answer given by the respondents is that the firm had been a tenant in the premises even during the days of ANB and Sons. It is said that the rent was originally Rs. 7,000 which has since been raised to Rs. 14,000 and then Rs. 18,000 per year. One of the companies, BNBS Cements and Products Ltd. is said to be occupying a portion of the company's premises as tenant and the other has been paying a monthly rent of Rs. 1,400 since 1973 inclusive of electricity charges. It is also stated that the company had a lot of surplus land and so these leases were entered into in order to get some income instead of keeping the surplus land idle. It is, therefore, suggested that the letting of the premises was no new development intended to prejudicially affect the interest of the company to the benefit of the BNB group. A more careful look, however, shows that the position is not to simple. It has been pointed out that the original lease deed of 1968 by which the rent reserved was Rs. 7,000 p.a. pertained only to the land and not to the buildings and machinery. Even assuming that the rent was increased to Rs. 14,000 p.a. to cover the buildings and machinery, it is pointed out that the present rend for the land, buildings and machinery is Rs. 18,000 and this is inclusive of electricity charges. Mr. Kaura urges that even in the case of BNB Cements & Products (P) Ltd., the appellants have not shown that the electricity charges were met by the said company. He submits that this is a crucial fact. He refers to an electricity bill issued by the electricity department to BNBS Cements and Products P. Ltd., in which the electric consumption is shown as 777 units per week or 3,100 units per month. The electricity consumption of the firm and the other company are said to be equally substantial. Mr. Kaura points out that on the above consumption, the electricity charges borne by the company in respect of the running of the other concerns would far exceed the rend allegedly received from them by the company and the position would be that a substantial part of the electric bills of the other firm and companies is being met out of the funds of the present company. There is a similar allegation regarding the office premises at Ishwar Nagar. It is not possible to decide the merits of all these allegations at this stage but it does prima facie appear that no satisfactory explanation has been given in respect of the allegations made by the petitioners.
35. The second main allegation is that the company carries on its pay-roll most of the staff of other companies of the BNB group, bears their water, electricity and other fuel charges and bears most of the other overhead expenditure of the said companies and concerns in its accounts as its own overheads. There is no specific denial of this allegation in the replies filed by the respondents. All that has been stated is that these companies have their own staff. Counsel for the petitioner has produced before us the telephone directory as well as letterheads of various concerns to indicate that there is some common staff and that at least the telephone and telex charges of these concerns must be passing through the books of this company. Here again, no satisfactory explanation has been given in the reply affidavits filed on behalf of the respondents.
36. The third allegation contained in para 25 is that the company supplies raw materials to various other companies and concerns of the BNB group from the inventory of Bhaskar Stoneware Pipes Pvt. Ltd. free of charge or at concessional rates. All that the reply states is that the nature of the business of these companies is different. There is, however, no denial that at least some raw materials are supplied by the company to these other concerns and no details have been given regarding the extent of the supplies made or the rates at which they have been made. It has also been alleged that the funds of the company have been diverted to payment of commission and other charges to General Refractories Pvt. Ltd. which is believed to be a concern of the BNB family. In regard to this as well, there is no specific denial.
37. Finally, it is alleged that Vive and Vidhur are drawing their salaries, perquisites and facilities as managing director and joint managing director exclusively from the pay-rolls of Bhaskar Stoneware Pipes Pvt. Ltd. Though they were also actively engaged in directing and managing the affairs of the companies/concerns of their group, referred to above, they were debiting the company for all their expenses. This again has not been met with any specific denial. It has been argued that if Vivek and Vidhur chose to receive no remuneration from the other concerns, there is no detriment to the company. This argument is untenable. IF Vivek and Vidhur are serving all the concerns including the company and only the company pays them, the presumption is that they are being paid for all their services unless there is something to show that they agreed to serve the other companies free. It is also necessary to enquire whether all their expenses debited to the company's account pertain to their services to the petitioner company alone or pertain also to their services to the other concerns. As we have said repeatedly earlier, this is not the stage to completely go into details of various allegations and find out how far they are proved or not proved. What is important is only to find out whether a prima facie case has been made out. In our opinion, the answer is in the affirmative. The petitioners have given in par a 25 tangible materials to indicate prima facie that the funds of the company are being diverted to other concerns. Being out of management, they cannot, at this stage, give more definite or detailed particulars which they may or may not be able to adduce at the stage of hearing of the petitions. Though given adequate opportunity, the respondents in the petition have not been able to completely explain the position so as to persuade the court that there is even no prima facie case. The diversion of funds alleged by the petitioner, if correct, has resulted from the conduct of the affairs by the BNB group. The nature of these transactions is such as to show a systematic conduct of oppression of other groups. This diversion of the funds is also prejudicial to the company as a whole. We are, therefore, of the opinion that the allegations in paragraph 25 are quite adequate to make out a prima facie under section 397 and 398 of the Companies Act.
38. Before concluding, we would like to refer to certain incidental aspects that were touched upon in the course of arguments. Shri Saharya submitted that the petition filed in the case of Ishwar Industries and the present petition were heard together and that the petition in the case of Ishwar Industries had been dismissed. He submitted that the circumstances in both the cases were very much similar and that, as in the case of Ishwar Industries, this petition also should have been dismissed. We are unable to accept this submission. We find that in the case of Ishwar Industries, the facts were different and the petition for winding up was principally based on clause (a) of section 433, namely, inability of the company to pay its debts. That allegation not being substantiated, the petition was dismissed. But, that apart, each petition has to be considered on its own merits and for the reasons we have discussed above, we are of opinion that the present petition deserves to be admitted.
39. There was some discussion before us as to whether the question of admission is relevant only to a petition under section 433 and whether, as argued by Mr. Kaura, the petitions in so far as they pertain to sections 397 and 398 have to be automatically admitted. We have looked into this matter and, in the light of the Companies (Court) Rules, 1959, it is absolutely clear that even petitions other than a winding-up petition have to be posted for admission in the first instance. There was also some discussion before us as to whether the mere existence of acts of oppression or mismanagement is sufficient to bring a case under section 397. Mr. Kaura urged that, if this is shown, it will also automatically follow that it is just and equitable to wind up the affairs of the company. This argument does not appear to be correct. Section 397 requires two conditions to be fulfillled before an order is passed under that section: (i) that there are acts of oppression and mismanagement; and (ii) that the affairs of the company are such that it is just and equitable to wind up the company. It is only in a case where a winding up is otherwise peremptory under the just and equitable clause that the court may decide that short of winding up, a remedial procedure should be adopted under section 397. We have already pointed out that in this case both the conditions have been fulfillled. It is, therefore, not necessary for us to consider whether the petitioners are entitled to the admission of the petition under section 397 even if a case for winding up, otherwise that of acts of oppression and mismanagement, has not been made out.
40. For the above reasons, we are of the opinion that this appeal should be dismissed and we direct accordingly.