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Mrs. Gajarabai M. Patny and ors. Vs. Patny Transport (Private) Ltd., Secunderabad - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAndhra Pradesh High Court
Decided On
Case NumberCompany Petition No. 14 of 1963 and Appln. Nos. 82, 83 and 126 of 1964
Judge
Reported inAIR1966AP226
ActsCompanies Act, 1956 - Sections 397 and 398; Companies Act, 1913 - Section153C
AppellantMrs. Gajarabai M. Patny and ors.
RespondentPatny Transport (Private) Ltd., Secunderabad
Appellant AdvocateR. Raghavan, Adv.
Respondent AdvocateK. Ramgopal, Adv.
DispositionPetition Partly allowed
Excerpt:
.....sections 397 and 398. - - section 397(1) 'any members of a company who complain that the affairs of the company are being conducted 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 to apply in virtue of section 399 (2) if, on any application under sub-section (1) the court is of opinion: the court may with a view to bringing to an and the matters complained of, make such order as it thinks fit. ' 398 (1). any members of a company who complain: may apply to the court for an order under this section, provided such members have a fight so to apply in virtue of section 399. (2) if, on any application under sub-section (1), the court is of opinion that..........in these circumstance, the proper order to be made in my view is to direct the directors of the company to transfer the shares held by m. h. patny in terms of his will, which in fact has been given effect to by them by crediting the dividends in accordance i herewith. with respect to the other prayers t do not think there is any justification for their being granted in these proceedings. the petitioners did not lay claim to the shares transferred in the name of harsha karmarkar and padmabai patny. at any rate, this prayer involves rectification of register. it should be done only in other proceedings. except for the high-handedness in dealing with the payment of dividend and transfer of shares there is no justification for appointment of a committee of shareholders to manage the.....
Judgment:
ORDER

Jaganmohan Reddi, J.

1. This is a petition under Sections 397 and 398 of the Indian Companies Act, 1956, to direct the Managing Director of the respondent company to cancel the allotment of 50 shares to the Executive Director and remove her from the Board of Directors and also for the recovery of the lemuneration paid to her illegally from 15-8-1960; to cancel the allotment of 60 shares to the Managing Director's son Harsha P. Karmarkar; to invalidate the appointment of Technical Director; and for the appointment of a committee of share-holders of a Board of Directors to manage the affairs of the company, on the ground of oppression to the petitioners and mismanagement of the company.

2. The several grounds on which the aforesaid reliefs have been asked are that some of the shares of the company are illegally transferred, some shares were not transferred, that dividends of the company have not been paid, that the Directors of the respondent company were paid in excess towards their remuneration and that no notice was given of the general body meeting held on 28-9-1962. The petitioners allege mat they constitute more than 1/10th of the share capital, i.e., out of 2000 shares, the 1st petitioner is the holder of 580 fully paid up shares; the second petitioner 50 shares, and the third petitioner 40 shares; that in the managing agency firm of Kumarswamy and Company, which consisted of three partners A. Kumarswamy, P. G. Karmarkar and M. R. Patny, of whom Kumarswamy, according to his own declaration, was only a benamidar of M. R. Patny, the husband of the 1st petitioner, and father of the second and third petitioners, that the said Kumarswamy died on 20-2-1939, leaving 151 shares standing in his name which were purported to be transferred on 16-2-1959 to Jaikumar M. Patny, another son of the late M. R. Patny by his first wife, on the basis of a will of Kumarswamy, and that after the death of M. R. Patny on 22-9-1960, the said P. G. Karmarkar purporting to act for the non-existing firm of Kumaraswamy and Company executed a transfer form for transfer of 50 shares to Padmabai Patny, wife of Jaikumar M. Patny, for a sum of Rs. 5000 predating the said transfer form to 15-8-1960 In order to make her also a Director so that the three of them might rule as they pleased, that the said P. G. Karmarkar again purporting to act on behalf of the non-existent Kumaraswamy and Company, wrongfully transferred 60 shares to the name nf his son Harsha P. Karmarkar, predating the transfer form to 15-8-1960 that though the late M. R. Patny by his will dated 10-2-1980 bequeathed his 200 shares to his two minor sons, Surajkumar and Chandrakumar, petitioners 3 and 2 and though the directors recognised the rights of the minors under the will and credited the dividends of the minors in the account books of Patny & Company, (Private) Ltd., they refused to transfer the shares in the names of the minors in spite of the fact that previously they had, on the basis of the will, transferred 50 and 40 shares of Kumaraswamy & Company in the names of the minors; that for the year 1961-62, though the dividends were declared on 28-9-1963 at the 16th annual general body meeting, the Directors have withheld payment in spite of repeated demands; that for the same year viz. 1961-62 the director's remuneration was shown as Rs. 21,000 instead of Rs. 18,000 and the auditors have also not cared to reply to the letter asking them as to how this excess payment of Rs. 3,000 was authorised: and that for the general body meeting hero on 28-9-1962, the Managing Director deliberately lid not give notice of the said meeting to the petitioners, and when the petitioners wrote and enquired on 28-9-1962, no reply was given.

3. By Company application No. 82 of 1964. he petitioners sought to raise an additional ground, namely, that the resolution dated 2-11-1959, admitting Jaikumar M. Patny as a partner of the Managing Agency firm of Kumaraswamy & Company, and also appointing him as a Director is void for the reason that the meeting was not held and the proceedings do not bear the signature of the then managing Director. M. R. Patny. After the findings on the allegations of the peti-tioners (Paras 1 to 11) His Lordship proceeded.)

4. Having regard to the above findings, I has to be determined whether action can be taken under Sections 397 and 398 of the Indian Companies Act, the scope of which may now be examined. Sections 397 and 398 are as follows:

Section 397(1) 'Any members of a company who complain that the affairs of the company are being conducted 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 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 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 and the matters complained of, make such order as it thinks fit.'

398 (1). Any members of a company who complain:

(a) that the a Hairs of the company are being conducted in a manner prejudicial to the interests of company; or

(b) that a material change (not being a change brought about by, or in the interests of any creditors including debenture holders, or any class of share-holders, 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 firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership ol the company's shares, or if it has no share capital, in its membership, or in am other manager whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company; may apply to the court for an order under this Section, provided such members have a fight 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 matters complained of or apprehended, make such order as it thinks fit.'

These two Sections correspond to Section 210 of the English Act of 1948. and Section 153C of the previous Companies Act These provisions are designed to confer upon the court powers to pass suitable orders where the circumstances justify, to remove the oppressiveness or the matters complained of without the necessity of winding up of the company where such winding up would unfairly and materially prejudice the interests of the company or any part of its members. Prior to Section 153C of the previous Act the only provision that could be invoked was Section 162 of the old Act, and it the conditions mentioned therein were satisfied, there was no option but to pass an order for winding up of the company. But after the enactment of Section 153C even where fads and circumstances exist for an order of winding up to be passed, the court, taking into consideration the interests of the company and its members as a whole would make an order for its management by the court with a view to its being ultimately salvaged. It has also been held that where the facts alleged and proved do not make out case for winding up under Section 162 of the old Act, no order could be passed under Section 153C thereof.

As observed in In re, H H Harmer Ltd. 1958 (3) All ER 689 the purpose of the corresponding Section in the English Act is not so much to rake up the past as to redeem the future See also Rajahmundry Electric Supply Corporation v. Nageshwara Rao, (S) AIR 1956 SC 218, The true scope of the Section in my view is where there is discrimination by the majority of the shareholders or by the majority of the directors to the detriment of the minority, so as to amount to oppressiveness and derogatory to the interests of the company the powers under the Section can be exercised. The court has also power under that Section to impose upon the parties whatever settlement the court considers just and equitable to remove the main allegations of oppression and this discretion is unfettered though it should not be expected in every case that the court could find and impose a solution. Cases have gone to the extent of holding that the company could be ordered to purchase the minority's shares at a fair value if the facts in any particular case so justify it; see Narayana v. T. A. Mani. : AIR1960Mad338 . In In re, Hindusthan Co-operative Insurance Society, : AIR1961Cal443 . the directors of the company who had the majority backing did not call any general meeting of the company nor did they make any gesture to place before the share-holders the balance sheet of the year ending 31-12-1955. As a matter of tact, the shareholders of the company were not thought of by the Directors at all and were kept completely in the dark as to what was being done with regard to the company's affairs. Under the Articles of Association one third of the Directors were required to retire every year by rotation. But the Directors continued wrongfully to function as such and to hold the Board meetings and dealt with the company's money in any fashion they liked and to the prejudicial interest of the company even making material changes in the management or control of the company by alteration of its Board of Directors, It was held that was a ease where the powers under Sections 397, 398 and 402 should be justly invoked It was manifest that not only there had been oppression of the minority share holders of the company but also the affairs of the company had been conducted in manner oppressive and prejudicial to the interest of the company. The facts of that case are rather glaring of the instances of oppression which called for the exercise of the court's powers.

Their Lordships of the Supreme Court in (S) : [1955]2SCR1066 which was a case under Section 153C have dealt with the meaning of the words 'Just and equitable' in Clause (vi) of Section 162 of the old Act. The argument in that case was that these words must be construed ejusdem generis with the matters mentioned in Clauses (i) to (v), that mere misconduct of the directors was not a ground on which a winding up order could be made, and that it was a matter of internal management for which resort must be had to the other remedies provided in the Act. it was held that these words are not to be construed eiusdem generis with the matters mentioned in Clauses (i) to (v) and that the question whether mismanagement of directors is a ground for a winding up ordei under Section 162 (vi) becomes a question to be decided on the facts of each case. Venkatarama Ayyar, J after referring to the several English and Indian cases and the two different views, viz., of construing it as ejusdem generis as expounded by Lord Cottenham L. C. in Spackman's case, (1849) 1 M & G 170 & the later different view adopted in In re, Amalgamated Syndicate, (1897) 2 Ch 600 and which view was finally settled and approved by their Lordships the Judicial Committee of the Privy Council in Loch v. John Blackwood, Ltd, (1964) AC 788, observed thus :

'When once it is held that the words 'Just and equitable' are not to be construed ejusdem generis, then whether mismanagement of directors is a ground for a winding up order under Section 162 (vi) becomes a question to be decided on the facts of each case. Where nothing more is established than that the directors have misappropriated the funds of the company, an order for winding up would not be just or equitable, because it it is a sound concern, such an order must operate harshly on the rights of the shareholders. But if, in addition to such misconduct, circumstances exist which render it desirable in the interest of the shareholders that the company should be wound up, there is nothing in Section 162(vi) which bars the jurisdiction of the court to make such an order.'

The following pages in 1924 AC 783. 788. 790 were cited with approval;

'It is undoubtedly true that at the foundation of application for winding up on the 'Just and equitable' rule, there must lie a justifiable lack or 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, wherever 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.'

These decisions lay down the proposition that where it is just and equitable, the court has, in circumstances which justify a winding up, power to make such orders as it thinks fit. The court has also power under these Sections to impose upon the parties whatever settlement the court considers just and equitable to remove the main allegations of oppression, which discretion is un fettered. This principle is embodied in Section 210 of the English Companies Act.

5. As I have found, the three Directors in this case, two of whom due to their private disputes with the petitioners, have brought a spirit of vindictiveness into the company's affairs and have, in a highhanded and unreasonable manner withheld transfer of the shares of M. R. Patny to the petitioners, though transferring some others in the managing agency under the self same will. They have also, while acting in this manner against the petitioners' interest transferred shares irregularly and contrary to law in favour of Mrs. Padmabai Patny and Harsha Karmarkar. which transfers according to the share Transfer Register, which transfers as on 16-2-59 while the transfer deeds, one of which was incomplete (Exs. B. 3 and B. 4), were purported to be dated 15-8-60. In my viaw, therefore the conduct of the directors would amount to oppression, inasmuch as it will involve violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The petitioners have certainly suffered from consciousness of unjust, harsh and high-hand-ed treatment. In these circumstance, the proper order to be made in my view is to direct the directors of the company to transfer the shares held by M. H. Patny in terms of his will, which in fact has been given effect to by them by crediting the dividends in accordance I herewith. With respect to the other prayers T do not think there is any justification for their being granted in these proceedings. The petitioners did not lay claim to the shares transferred in the name of Harsha Karmarkar and Padmabai Patny. At any rate, this prayer involves rectification of register. It should be done only in other proceedings. Except for the high-handedness in dealing with the payment of dividend and transfer of shares there is no justification for appointment of a committee of shareholders to manage the affairs of the company.

6. This petition is accordingly partly allowed. The parties will bear their own costs. Company Applications Nos. 82 and 126 of 1964 allowed. Company Application No. 83 of 1964 dismissed as not pressed.


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