1. AHO. 13/61-- This appeal arises out of an application by Sri Shanti Prasad Jain under Sections 397, 398, 402 and 403 of the Companies Act, 1956 (hereinafter caned the Act). As there are large number of appeals and the descriptions of the parties as appellants and respondents may lead to confusion, the parties would be described in this judgment as petitioner and respondents in terms or the petition dated 14th September, 1960. The petitioners case is as follows :--
(A) Kalinga Tubes Limited (hereinafter to be reterred to as the Company) is a Company incorporated under the Indian Companies Act having its registered office at Chod-war in Cuttack district. The petitioner is a holder of 3000 shares of the value of Rs. 100.0.0 each. Those shares are fully paid up and all calls due have been duly paid. The petitioner obtained consent in writing under Section 399 or the Act of the shareholders holding 13,083 shares. The holdings of the petitioner and of the consenting share-holders constitute more than one-tenth of the issued share capital of the Company. The application is made for the petitioner on behalf of and for the benefit of the consenting shareholders and the petitioner. The authorised capital of the Company is Rs. 1 Crore consisting of shares of Rs. 100,00 each. All the shares are Equity shares.
The subscribed capital is 61,000 shares of Rs. 100.0.0 each fully called. Prior to 1954, the Company was exclusively controlled and managed by Sri B. Patnaik (respon-dent-2) and Sri C. S. Loganathan (respondent-4) who between themselves held the majority shares. Sometime in 1954, Dr. H. B. Mohanty, the then Seretary of the industries Department, Government of Orissa, informed the petitioner that the Company was in financial and administrative difficulties and requested him to help the Company by providing finance, arranging loan from Banks and other sources and further by providing necessary administrative guidance. The petitioner agreed to the proposal.
The shares in the Company were held originally by Sri Narayan Swami, respondents 2 and 4, Sri J. S. Tarapore-wala and a Company called the Kalinga Industrial Development Corporation Ltd., which was controlled by respondents 2 and 4. Subsequently an Agreement was entered into amongst the petitioner, respondents 2 and 4, Sri Narayan Swami and Sri Taraporewala, the terms whereof were recorded in writing on 27th July 1954. In terms of the agreement, shares were being held in equal proportion amongst the petitioner and respondents 2 and 4, and the agreement was duly acted upon in all respects. The 250 shares held by Sri Narsing Rath were purchased from him and were equally distributed amongst them. The one excess share was registered in joint names of the three parties. The petitioner was appointed as the Chairman and one of his nominees was appointed as the Director of the Company.
Sri Narayan Swami agreed to act as the Managing Director of the Company on condition that he would obtain prior concurrence and approval of the Chairman in all matters of administrative policy. As a result of misunderstanding between Sri Narayanswami and respondents 2 and 4, the former resigned and therefore respondent 2 was appointed as the Managing Director on the same understanding that he would act in consultation with the petitioner in all matters of administrative and business policy and obtain the petitioner's prior concurrence and approval. Through the efforts of the petitioner and primarily upon his guarantee, the Chartered Bank agreed to grant over-draft facilities to the Company to the extent of Rs. 60 lacs and the Indian Bank agreed to grant similar facilities to the extent or another Rs. 50 lacs, and limits for Letters of Credit to the extent of Rs. 1.15 crores from the Chartered Bank ana Rs. 1 Crore from the Indian Bank were also obtained and the Company was able to meet its need for working capital and for capital expenditure.
The Company started functioning smoothly and efficiently and profits were earned by the Company. An application for sanction of issue of 39,000 Ordinary shares of Rs. 100.0.0 each was made on 17th September 1956 by the company to the Government of India under the Capital issues (Control) Act, 1947 mentioning that the additional shares would, be issued to the existing Directors, shareholders and tneir nominees. The Company was converted into a public company on 11th January 1957.
The shareholders of the private Company continued to be the shareholders of the public company. While the Company was a private company, it had made an application to the Government of Orissa for a loan of Rs. 65 lacs and the Orissa Government advised the Company to apply through Industrial Finance Corporation for such loan. As the industrial Finance Corporation gave loans only to public limited com-panies, it was decided to convert the Company into a public Company to enable it to apply for and obtain loan from the said Corporation. After the Company was converted into a public Company, the Controller of Capital issues on behalf of the Government of India sanctioned issue of 39,000 Ordinary shares on 18th December, 1957. One of the terms of the said sanction was :
'Subject to the provisions of Section 81 of the Companies Act 1956 it is a condition of this consent that the new shares should in the first instance be offered tothe existing share-holders with the right of renunciationattached.' After all the above financial arrangements had been made through the efforts and guarantee of the petitioner, and upon receipt of the aforesaid sanction, respondents 2 to 4 in collusion and conspiracy with each other wrongfully, illegally and surreptitiously hatched a plot to oust and exclude the petitioner and his group from the management and control in respect of the affairs of the Company which they are entitled to exercise and in fact exercised in terms of the Agreement. In furtherance of execution of the said plot, the groups headed by respondents 2 and 4 have been trying to utilise the proposed issue of fresh capital in a manner oppressive to the petitioner and his group and contrary to the terms of the sanction order. The petitioner and his group are in a minority while respondents 2 and 4 and their groups are in majority.
(B) In paragraph 15 of the application, the wrongful, fraudulent and mala fide acts of respondents 2 and 4 have been mentioned.
(i) All issues of fresh shares in the past were distributed amongst the three groups in proportion to their shareholding so as not to disturb the equilibrium envisaged under the Agreement. No two groups had the power to pass any special resolution requiring 75% majority.
(ii) Respondents 2 and 4 have fraudulently and cor-lusively combined for the purpose of utilising the issue of fresh capital to secure absolute control and to give to the Board of Directors (in which respondents 2 and 4 and their nominees have majority) the absolute power to allot shares to whomsoever they like and therehv increase their voting strength to the extent of 75% necessary for passing special resolution. It was a part of their plan that the petitioner and his group should fie totally excluded from subscribing to the new issue of share capital of the Company and to oust and exclude the petitioner and his group from the management of the affairs 01 the Company, a right which they hitherto enjoyed and were entitled to enjoy in terms of the Agreement.
(iii) With the aforesaid end in view, respondents 2 and 4 caused a meeting of the Board of Directors to be held on the 1st March 1958, wherein the petitioner presided. No indication was given in the meeting that fresh issue of shares should not be offered to the existing shareholders. Though the petitioner objected and voted against the resolution, it was carried by majority of votes at the Board meeting by wrongful and illegal combination.
(iv) Thereafter a notice was issued by the Company to convene an Extra-ordinary General Meeting of share-holders on Saturday, the 29th March, 1958, at 11 A.m. for consideration of matters mentioned in the agenda ot which the relevant item was 'The manner and proportion in which such shares are to be issued.' On the date fixed, the meeting was held under the Chairmanship of respondent No. 2.
At the said meeting the shareholders controlled by respondents 2 and 4 combined and by preponderance of the voting power of their group passed resolutions completely excluding the existing shareholders from taking fresh issue of shares. The votings were 38,165 in favour and 19,083 against the said resolutions. These resolutions were designed to compel the petitioner ana his group to sell their shares for undervalue or at a very nominal value to respondents 2 and 4 and tneit groups. It was not genuinely intended to make the Company broad based, otherwise the shares would have been issued to the public in general and would have been Sub-scribed at premium. The resolutions are ultra vires the Companies Act, 1956. Neither the Board of Directors nor the shareholders of the Company by majority resolution can interfere with the pre-emptive rights given to the Equity Shareholders. The resolutions were also not passed in bona fide exercise of their powers and were passed mala fide in abuse of powers conferred by the Act solely witn a view to outvoting the petitioner and his group in clear oppression of the minority shareholders.
(c) The petitioner and his group filed Title Suit No. 21 of 1958 in the Court of the Subordinate Judge or Cuttack on the 18th April 1958 for a declaration that the resolutions passed at the General Meeting on 29th March 1958 were ultra vires, illegal and void and are not binding on the Company and for a permanent injunction restraining the defendants from giving effect to the same. On the 18th April 1958, the Subordinate Judge granted interim injunction against the defendants. The interim injunction was vacated on the 30th July 1958. After some hours on the very day, the Subordinate Judge passed another order postponing the operation of his earlier order tor two days to enable the petitioner to move the High Court for an interim injunction. Taking advantage of the tact that the injunction order stood vacated for two to three hours, respondents 2 and 4 hurriedly and with uncanny haste and by playing a trick caused the 39,000 Ordinary shares allotted to respontents 6 to 12 at a meeting OT the Board held at 10.30 a.m. on 30th July 1958.
At the said meeting, 4 Directors were present. They were respondents 2 and 4, Sri. B. Venkataraman, as representing the Government of Orissa, and Sri D. E. Sabhar-wala, as representing the petitioner's group. The resolution was supported by respondents 2 and 4 and was opposed by Sri Sabharwala. Sri Venkataraman deliberately remained neutral and by his silence helped respondents 2 and 4 to get the resolution carried. The petitioner was absent from India at the time and taking advantage of his absence and of the fact that the interim injunction stood vacated for a few hours, respondents 2 and 4 allotted the said shares privately to respondents 6 to 12 who were their nominees and/or Benamdars and/or friends in whom respondents 2 and 4 are interested and who are under their complete control in the matter of exercise of voting power. Only 5 per cent of the money was paid with the application and the Managing Director was empowered to increase the time at his discretion for payment of allotment money.
The petitioner has reasons to believe that the consideration for subscription of the said shares was advanced by respondents 2 and 4 and their groups. The allotment of 39,000 Ordinary shares to respondents 6 to 12 was mala fide, illegal, wrongful ana in oppression and fraud of the minority shareholders. Miscellaneous Appeal was tiled against the order of the Subordinate Judge vacating the interim injunction which was dismissed by Mr. justice Rao in Misc. Appeal No. 77 of 1958 on 26th September 1958. On 21st September 1960 at 11 O'clock, respondents 2, 4 and their groups convened another Extra-ordinary General Meeting for considering the passing of the following resolution--
'Whereas the Capital of the Company now consists of Rs. 1 Crore divided into 1,00,000 Ordinary or Equity shares of Rs. 100/- each.
Resolved that the Capital of the Company be increased from Rs. 1 Crore to Rs. 3 Crores by creation of additional 1,00,000 Equity shares of Rs. 100/- each ranking pan passu with the existing shares and 1,00,000 6 1/2 per annum Cumulative Redeemable Income-tax free preference shares of Rs. 100/- each and such preference shares snail confer on their holders the rights and privileges attached thereto by the new Article to be inserted in the Articles of Association and specified in the resolution No. 3 hereinafter mentioned.'
In the Explanatory statement attached to the Notice dated 25th August 1960, it was stated that the management considered it to be necessary and desirable tnat the shares of the Company should be offered to the outsiders, that is, to the persons other than the existing snare-holders to make the Company broad based. The sole object of the meeting held on 21st September 1960 and to pass the said resolution in furtherance of a continuing and continuous process of oppression of the petitioner and his group and with a view to completely exclude them from all control in the affairs of the Company and to deprive them from the financial advantages to be gained by them by issue of new shares at par and to retain such advantages exclusively to themselves so that ultimately they would be forced to sell their holdings to respondents 2 and 4 and their groups at a nominal value. If the resolution is allowed to be passed, respondents 2 and 4 and their groups will acquire more than 75% of the voting strength and also enormous financial advantage to themselves. Respondents 2 and 4 and their groups com-bined together and voted against re-election of the new tioner and his nominee at the General Meetings in which they respectively retired and offered for re-election.
(D) In paragraph 27 of the application, details of mis-management are narrated. The identical facts referred to in connexion with the oppression of minority have been substantially relied upon pertaining to mismanagement. Over and above it has been averred that respondents 2 and 4 in breach and violation of the Agreement withdrew Rs. 7 lacs from the bills of the Company without making payment to the petitioner one-third thereof. It was further averred that the respondent 2 carried on the administration without consulting the petitioner who was the Chairman at the time and that accounts were not shown to the petitioner and his group.
(E) The petitioner averred that although in form the Company was a public limited Company, in reality it was a partnership mainly amongst the three groups represented by the petitioner, respondents 2 and 4. In view of the wrongful acts of respondents 2 and 4 and their groups, who have combined together, there has arisen a justitiable lack of confidence which has been caused by lack of probity in the conduct of Company's affairs. Respondents 2 and 4 are more concerned with the benefits personal to themselves than with the welfare of the Company and are acting unfairly to the petitioner and his group. The facts and circumstances of the case would justify the making of a winding-up order on the ground that it is just and equitable that the company should be wound up.
But the winding up of the Company would unfairly prejudice the petitioner and the other members of the minority group, and the matters complained of can be removed by appropriate orders of the Court. The affairs of the Company have been conducted in a manner prejudicial to the inter est of the Company. There has also taken place a material change in the management and control of the Company by alteration in its Board of Directors and by fraudulent changes introduced in the ownership of the Company's shares, and it is likely that the affairs of the Company would continue in a manner prejudicial to the interest of the Company. Appropriate orders should be passed for removing the oppression with a view to bring to an end the matters complained of.
(F) A large number of reliefs have been sought. Amongst others, the substantial renets are :
(i) Removal of the present Board of Directors consisting of respondents 2 to 5.
(ii) Reconstitution of the Board of Directors of the Company with at least two permanent representatives from the petitioner's group and to ensure equal representation in the Board of the three groups of shareholders.
(iii) Directions be given for suitable alterations in the Articles of Association with a view to incorporate the provisions of the Agreement dated 27th July 1954 so as to give effect to equal representation in the Board of Directors and equal shareholdings amongst the three groups :--
(iv) For a declaration that the resolutions passed at the Board meeting on 1st March 1958 and at the General Meeting on 29th March 1958 are illegal and ultra vires;
(v) For a declaration that the resolution of the Board of Directors of the Company dated 30th July 1958 allowing 39,000 Ordinary shares are illegal and ultra vires :
(vi) For a declaration to be given to respondents 6 to 12 to sell the said 39,000 shares to the Company upon payment of the money actually paid thereon.
(vii) For a declaration to the Company to offer we same to the existing shareholders as on 29th July 1958 in proportion to their respective holdings, and
(viii) Injunction restraining the Company and respondents 2 to 5 from placing before the General Meeting of the Company proposed to be held on 21st Sept. 1960 any resolution with regard to the increase of share capital by creation of additional One Lac Equity shares.
2. The cases of all the respondents are almost identical. It would be sufficient to refer in detail to the affidavit of Sri B. Patnaik (respondent 2). The petitioner's allegations making out a case under Sections 397 and 398 are denied. Respondent 2's case is that Sri Jain (the petitioner) wanted to take an absolute control of the company, and the Company succeeded after strenuous efforts in protecting itself from passing to the absolute control of the petitioner. Having got the Company into somewhat better position than what it was initially, the petitioner tried to stop the flow of capital to the Company and threatened to withdraw his guarantee for Cash and Credit facilities with Company's Bankers and tried to stop raising of the capital from the shareholders and wrongfully instituted Title Suit No. 21 of 1958 and obtained ex parte interim injunction by suppression of all material facts. The Company went into production in April 1955 and made rapid progress in its expansion.
The profits made by the Company increased from year to year and the Company paid dividends to the shareholders at the rate of three per cent till 31st March 1958 and at six per cent thereafter. The reserve of the Company also progressively increased, and the Company was on a very sound position and there was scope for further development. The petitioner, who is very rich as compared with tha other share-holders, has all along insisted that the shares be issued to the existing shareholders only knowing it very well that it may not be possible for the other share-holders to acquire those shares with the result that he might be able to acquire absolute majority in the Company and gain absolute control thereof. The oral agreement is ultra vires the memorandum of Articles of Association of the Company and is illegal and opposed to public policy, it was never acted upon. Sri Jain and Sri Sabharwala retired by rotation at the Annual General Meetings. The petitioner did very little to procure finances for the Company Besides introducing the Company to the Chartered Bank.
The draft notice with the agenda was approved by the petitioner in the meeting of the Board of Directors held on 1st March 1958. By the resolution of 29th March 1958 it was intended to exclude the existing shareholders from participating in the new shares in the best interest of the Company. The resolution was not in breach of the conditions on which the sanction was given by the Controller of Capital Issues. The value of the existing shares in the Company would never go down by the issue o.f such shares to outsiders. Under the terms of the sanction of the Controller of Capital Issues, the issue had to be made privately and not publicly by issue of prospectus or through advertise ment. The Board accepted the applications for shares which had already been made. The petitioner and his group never made any such application. The issue of shares was not made with indecent haste. The question of allotment of shares was before the Board on several occasions previously and could not be taken up in view of the pending injunction.
The persons to whom shares were issued on 30th July 1958 are all respectable and independent persons of substantial means and they are not under the control of respondents 2 and 4. The allottees paid 5 per cent along with their application and subsequently made further payments of the allotment money and other money. A total sum of Rs. 35,000/- was received from the said aliottees in respect of the shares, and in most cases these payments were made by cheques. But for the allotments the Company would have been deprived of this sum which was urgently needed, After the allotment of 30th July 1958, the present shareholdings of the petitioner and his group are less than 20% (twenty per cent) and the Company can pass a special resolution without the concurrence of the petitioner and his group. The petitioner retired at the Annual General Meeting of the Company held on 17th October 1958.
He offered himself for re-selection but was not re-elected by the shareholders. The suit had already Been files against the Company by the date of the re-election and he had caused immense injury to the Company by preventing it from raising capital for several months. In the circumstances, the share-holders were justified in their lack of confidence in the petitioner. Sri Sabharwala continued to be a Director of the Company and attended the Board meeting until he retired at the Annual General meeting held on 30th December 1959. He was not re-elected for similar reasons. On 13th October 1955 the Board of Directors or the Company sanctioned the transfer of Rs. 3,40,000/- to respondents 2 and 4 at the request of Kalinga industrial Development Corporation Limited. The Board resolutions were confirmed by another Board meeting presided over by the petitioner on 12th January 1956. On 31st March 1956 respondents 2 and 4 utilised the said sum of Rs. 3,40,000/-each for obtaining an allotment of new shares issued by the Company. The inspection of accounts was never sought for prior to the filing of the application.
3. Respondents 6 to 12 filed affidavits asserting that they are independent and respectable persons of substantial means, and that they purchased the shares bona fide and are not nominees or Benamdars of respondents 2 and 4 and are not under their control. The purchases were made by way of investment.
4. The petitioner filed another affidavit on the 8th February 1961 further elaborating the case that the Company was agreed to be run on partnership principles as will appear from the tenor of the Agreement and the subsequent conduct and the correspondence of the parties, and that respondents 2 and 4, having induced the petitioner to participate in the Company effectively on the basis of the Agreement, are estopped from contending that the agreement is not binding. With regard to the question of mismanagement in the affairs of the Company, further affidavits were put in. Respondent 2 put in another affidavit on 17th March 1961 denying the allegations made in the further counter-affidavit of the petitioner. On the 24th Marcn 1961 by an order of the Court, the transferees, K. C. Dalai, Bijoykumar Mall and the Central Bank of India, were made parties to the petition. Respondent 8 first transferred his shares to Sri K. C. Dalai who transferred those to the Central Bank of India Limited. Thus Sri B. K. Mall, transferee from respondent 11 on 10th April 1959, and the Central Bank of India, Madras, have acquired shares to the tune of 9000 and 30,000 respectively.
5. The learned Company Judge came to the following conclusions :--
(i) The agreement dated 27th July 1954 was binding on the Company was and acted upon and could be the basis of an enforceable right and that it was not ultra vires the statute or the Articles of Association of the Company.
(ii) The allotment of 39,000 shares on 30th July 1958 was in contravention of Section 81 of the Act. the allotment being the first allotment after the Company be-came a public Company, Section 81 had no application, under Section 81, the pre-emptive right of the existing shareholders could not be affected by any resolution passed at the General Meeting of the Company.
(iii) Notice dated 1st March 1958 did not give any information to the shareholders that no allotment would be made in favour of the existing shareholders. There was no Explanatory Statement under Section 173 of the Act clarity-ing the position. The resolutions passed by the General Meeting on 29th March 1958 were ultra vires and illegal.
(iv) Fresh consent under Section 399(3) of the Act is not essential after the addition of the Central Bank of India and Sri B. K. Mall, the transferees from respondents 6 to 12.
(v) There has been a change in the management ana in the shareholdings resulting in the mismanagement In the affairs of the Company, and the Company's affairs were being conducted in a manner prejudicial to the interest 01 the Company. The resolution relating to 39,000 shares was to injure the minority and for domination of the majority and is not beneficial to the Company.
(vi) Injunction order dated 18th April 1958 was not obeyed by the Company and the allotment was rushed through with indecent haste.
(vii) Inspections of the applications for allotments or 39,000 shares and the account books of 1958 were nor granted by the majority mala fide.
(viii) The attempt to raise capital of the Company from Rs. 1 Crore to 3 Crores was in pursuance of persistent policy to oust the petitioner and his group.
6. The learned Judge accordingly allowed the appli-cation under Sections 397 and 398 of the Act. Reliefs granted have been mentioned in paragraph 55 of his judg-ment.
7. The following issues arise for determination on the arguments of the parties.
(I) Is the petition demurrage and liable to dismissal in limine?
(II) Is the application not maintainable under Section 399(3) as the consent in writing obtained prior to the transfers is invalid after the transferees were made parties?
(III) Is the agreement dated 27th July 1954 in the nature of a partnership between the petitioner respondents 2 and 4 and their groups? Is the agreement enforceable against the Company after its conversion into a public Company? Is it contrary to the Articles of Association and to the provisions of thff Companies Act 1956?
(IV) Are the resolutions passed on 29th March 1958 invalid on the grounds.
(a) Was the notice dated 1st March 1958 misleading, tricky and insufficient?
(b) Were the resolutions contrary to Section 81 of the Act?
(c) Were the resolutions infructuous as allotments can-not be made in terms of resolutions?
(d) Is the allotment of 39,000 shares made mala fide to friends under the control of the majority groups to increase their voting strength?
(V) Is the notice dated 25th August 1960 for holding an Extraordinary General Meeting in 21st Sept. 1960 to In-crease the share capital from Rs. 1 Crore to Rs. 3 Crores mala fide with a view to usurp powers, and is such subsequent conduct admissible after the date of the application?
(VI) Has the petitioner made out a case under Section 397 of the Act?
(VII) Has the petitioner established the case under Section 398 of the Act?
(VIII) If the application is maintainable, what reliefs should be granted?
8. Issue (1) : -- The learned Attorney-General contends that the petition does not make But a case under Sections 397 and 398 of the Act and the petitioner could not be permitted to supplement the allegation by subsequent affidavits filed. To appreciate the contention, it is necessary to mention the dates when the various affidavits were filed. The petition was filed on 14th September 1960. The Company filed its counter affidavit on 19th September 1960. Respondent 2 filed his rejoinder on 2nd December 1960. The Court ordered that by 15th February 19S1 all rejoinders were to be filed. The petitioner filed all rejoinders on 8th February 1961. On 17th March 1961 respondent 2 filed another affidavit without leave of the Court, and on 13th April 1961 the petitioner filed a counter affidavit in reply to this affidavit without leave of the Court. The learned Attorney-General contends that the subsequent affidavits filed by the petitioner should not be taken into consideration to supplement the averments made in the petition and that the petition is demurrable.
9. It is necessary to discuss the legal position on the basis of the authorities cited. In (1875) 10 Ch. A. 188, In Re, Wear Engine Works Co; their Lordships observed :
'We wish it to to be understood that a winding-up petition must allege facts which justify a winding-up order. nO doubt, if there is any slip in the statement the Court can allow an amendment so that the real point may be tried; but, subject to this power of amendment, it is not enough or a sufficient case to be shown in evidence; a sufficient case must be stated on the petition.'
In (1875) 19 EQ 416, In Re Steam Stoker Co; their Lordships said :
'It is their right to say that the petition aftords materials upon which alone the Court is bound to decide.....
Upon the objection, therefore, it is my duty to order that this petition be dismissed. It follows that the affidavits which have been filed in opposition are useless. The objection is in its true sense a demur to the petition. Supposing every line and letter of the petition to be true, it is unsustainable, and one sees at once how serious and evil such a practice as this might become.'
In (1937) 11 Ch. 392, In Re, Cuthbert Cooper and Sons Ltd., their Lordships said :--
'For the purpose of determining whether the petition should be granted or not, it is necessary for me to look at the allegations in the petition, and I do not propose to travel beyond that.'
All these decisions have been accepted as laying down good law in Buckley's Company Law, 13 Edition at p. 4/1. The summary is as follows :--
'An order will not be made if a sufficient cause is not stated on the petition, even if such a case is proved in evidence. If a sufficient case is not alleged, the petition may fie called demurrable and the respondent may object to the evidence being read at all until the demurrer has been decided.'
In AIR 1942 Bom 231, In Re Cine Industries and Recording Co. Ltd. and AIR 1949 Mad 675, Seethiah v. Venkatasubbiah the same principle has been followed. This rule of pleadings in winding-up has been made applicable also to cases of pleadings under Section 210 of the English Companies Act, 1948, corresponding to Section 397 of the Act. In 1952 SC 59, Elder v. Elder and Watson this principle was enunciated and this case was approved in (1958) 3 All ER 689, In re, H. R. Harmer Ltd., where it was conceded that at the time of presentation of the petition the facts should justify the making of a winding-up order on the ground that it is just and equitable that the Company should be wound up. At page 705 of the Report their Lordships observed :
'It must be established that on the date of the presentation of the petition the affairs of the Company were being conducted in a manner oppressive to the petitioner.'
In the same Report at p. 66, (Scottish Co-operative Wholesale Society v. Meyer, 1958-3 All ER 66, the House of Lords concluded that the crucial date is the date on which the petition was presented. There can therefore be no doubt in. the legal position that the case under Sections 397 and 398 must be determined with reference to facts transpiring on the date of the presentation of the petition and on the basis of the averments made in the petition itself. Mr. Rai Choudhury tried to distinguish all these on the ground that most of them relate to winding up application prior to the introduction of Section 210 of the English Act. But no distinction can be made on that ground and as I nave already said even cases dealing with Section 210 also lay down the same principle. This also, is not very much different from the rule of pleading under the Civil Procedure Code which lays down that all material facts but not evidence must be pleaded.
In (1950) 2 All ER 408, Re : S. A. Hawken Ltd; which is a case under Section 210. Justice Wynn-Parry observed :
'As the allegation in the petition in respect of claim under Section 210 showed that there was acute conflict bet-ween the parties and the petition was granted on an allegation that the affairs of the Company required investigation, the petitioners were justified in supplementing the statutory affidavit by exhibiting documents and by filing affidavits.'
His Lordship said that he could imagine a few cases of petition presented under Section 210 in which it was wise, or even possible, to rely merely on the statutory affidavit. In Gower's Modern Law, there is a passage that the Court should have power to impose upon parties whatever settlement the Court considers just and equitable. But the result of the procedure of the English High Court was ill adapted tor the exercise of inquisitorial and Salvationist role thus imposed upon the Court. Reliance is also placed on AIR 1958 Mad 587, Syed Mohamed AM v. Sundaramoorthy which did not accept the aforesaid view by saying that the Indian Courts are not hampered by such rigid technicalities of procedure by which the English Courts are bound. It has been authoritatively laid down in AIR 1951 SC 280, Bishundeo Narayan v. Seogeni Rai that in cases of fraud full particulars must be alleged and there cannot be any departure from them in evidence. General allegations are insufficient evert to amount to an averment of fraud of which any Court ought to take notice, however strong language in which they are couched may be.
10. On a summary of the legal position, it is sufficiently clear that in a petition under Sections 397 and 398 of the Act, all material facts must be pleaded. If the facts transpiring on the date of the petition and alleged in the petition are not sufficient to make out a case for winding up on just ana equitable ground, then facts arising subsequent to the filing of the application cannot be resorted to for the purpose, and the absence of allegations on the pleadings cannot be substituted by further evidence either by affidavits or oral and documentary evidence.
11. In this case the entire question is academic, we called upon the learned Attorney-General to give us a list of new facts which were not alleged in the original petition but were introduced by subsequent affidavits. Mr. Choudhury furnished us a list and on examination we find that essentially the subsequent affidavits filed by the petitioner either repeat the material facts already pleaded in different forms or supply some fresh materials in reply to the materials given in the counter affidavit of the contesting respondents. it is, therefore, not necessary to examine in detail as to in what manner the departure has been made in the pleading as essentially, in our view, there has been no departure in material facts. The subsequent affidavits are more or less pieces of evidence in support of the averments of material facts pleaded in the petition. Respondent 2 also filed a subsequent affidavit, as already stated, even without permission of the Court. Most of the subsequent affidavits merely place facts already pleaded by both parties. The subsequent affidavits would, therefore, be taken into consideration, but facts transpiring subsequent to the petition would be excluded from consideration.
12. Issue (II) : Section 399 so far as relevant maybe quoted :
'(1) The following members of a Company shall nave the right to apply under Sections 397 or 398 :--
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants nave paid all calls and other sums due on their shares.
(3) Where any members of a Company are entitled to make an application in virtue of Sub-section (1) any one or more of them having obtained the consent in writing or the rest, may make the application on behalf and for the benefit of all of them.'
The petitioner obtained consent in writing of members holding not less than one-tenth of the issued share capital of the Company, and initially the application was not open to objection. Bijoy Kumar Mall, K. C. Dalai and the Central Bank of India Ltd., the transferees, were made additional parties subsequent to the filing of the application and no fresh consent was obtained. It is argued that the consenting members have given no consent for getting relief against the transferees from the original allottees, and, as such, the application is not maintainable. The application is under Sections 397 and 398 on the grounds of oppression of minority and of mismanagement in the affairs of the company and reliefs have been :sought on that footing. Admittedly the consenting members belong to the petitioner's group and it would not have been difficult for the petitioner to tile their consent. Essentially the reliefs are not affected by the inclusion of the transferees in the place of original allottees. Reliance has been placed on Makhanlal v. Amrit Banaspati Co; Ltd., AIR 1953 All 326 and Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao, AIR 1956 SC 213.
The validity of the petition must be judged on the facts as they were at the time of its presentation, and the petition would not cease to be maintainable by reasons of events subsequent to its presentation. The Supreme Court held that subsequent withdrawal of consent would not invalidate the original consent. It principally supports the petitioner. The point arising in this case is that whether consent or the requisite strength would cease to be valid, merely because the transferees were added as parties. It would not, as there is no alteration in the nature of the relief and the transferees merely stepped into the shoes of the transferor. AIR 1953 All 326 has no application as consent was given with full appreciation of the facts and reliefs.
13. Issue (III) :-- There are abundant materials that the petitioner's group gave substantial financial assistance and guidance in business management and policy, and the controversy need not be further pursued. The nature of the Company, when it was private, was in substance a partnership. In (1916) 2 Ch 426 In re, Yenidje Tobacco Co. Ltd., Cozens Hardy M. R. observed :
'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?'
Warrington Lord Justice expressed himself in saying :
'In substance, therefore, it seems to me these two people are really partners. It is true they'are carrying on the business by means of the machinery of a limited company, but in substance they are partners; the litigation in substance is an action for dissolution of the partnership, and I think we should be unduly bound by matters of form if we treated either the relations between them as other than that of partners or the litigation as other than an action brought by one for the dissolution of the partnership against the other; but one result which of course follows from the fact that there is this entity called a company is that, in order to obtain what is equivalent to a dissolution 01 partnership, the machinery for winding up has to be resorteo to.'
The view that a Private Limited Company is in substance a partnership has never subsequently been dissented from. In 1924 AC 783, Loch v. John Blackwood Ltd., their Lordships of the Privy Council .approved the atoresaid view and observed :
'The Board specially refers to the accurate and careful opinion of Warrinaton L. J. in that case.'
In (1958) 3 All ER 66 their Lordships accepted the aforesaid proposition :
'The Company was in substance, though not in law, a partnership consisting of the society and the respondents. Whatever may be the other different legal consequences following on one or other of these forms of combination one result, in my opinion, followed in the present case from the method adopted, which is common to partnership, that there should the good faith between the constituent members.'
14. Prior to the execution of the Agreement, the largest shareholders of the Company were respondents 2 and 4 who held 21,000 shares out of 25,000 shares, that is 84% the French Company held 3750 shares (15%) and Mr. Narsingh Rath 250 shares (1%). Admittedly the French Company takes no interest in the management of the affairs of the Company. The shares were allotted to the French Company towards remuneration for its collaboration. Respondents 2 and 4 constituted the 'brain' of the company and their will was the will of the Company.
Even though by no resolution of the Board the Agreement was made binding on the Company, respondents 2 ano 4 entered into the agreement with full understanding that the affairs of the Company would be managed in accordance with the Agreement and the inter se obligation and duties amongst the 3 partners would be determined in accordance with the Agreement. The Agreement cannot be said to Be binding on the Company in the sense that it was executed on behalf of the Company; on the theory the Company was essentially a partnership in between respondents 2 and 4 prior to the agreement, the subsequent conduct of the affairs of the Company should be tested by the touchstone of the terms of the agreement, quoted .below :--
'Memorandum of Oral Agreement between Sri S. f. Jain of 11, Clive Row, Calcutta of the 1st Part, Sri B. Patnaik of Cuttack of the 2nd Part, Sri C. S. Loganathan, Sri J. H. Tar^ore and Sri T. S. Narayanswami all of Madras of the third Part in regard to the Kalinga Tubes Ltd., a private limited Company, with its registered Office at Cuttack.
(1) Shares of the face value of Rs. 21 lacs in Kalinga Tube Ltd. held by the 2nd party and 3rd party in their names and/or their nominees and their Company Kalinga Industrial Development Corporation Ltd. would be held and kept registered by the 2nd party and 3rd party in their own names and/or their noimnees separately in equal proportion of Rs. 10,50,000/-each and for that purpose they would arrange transfer of the shares out of the names of Kalinga Industrial Development Corporation Ltd. as early as possible.
(2) The 1st Party, his nominee and/or the Companres with which he is associated shall subscribe 10,500 Ordinary shares of the value of Rs. 10,50,000 in Kalinga Tubes Ltd. and the same will be allotted to him and his nominees to the Company as soon as the Authorised Capital of the Company is increased and the requisite sanction of the Controller of Capital Issue, Government of India, is received.
(3) All the three parties will thus hold respectively equal number of shares of the face value of Rs. 10,50,000 each registered in their own names or their nominees separately.
(4) Each of the three parties will have an equal number of their representatives as Directors on the Board of the Company which for the time being shall be two Directors from each of the three groups--
(5) Ordinary Shares of the face value of Rs. 4 lacs held by the French Company (Rs. 3,75,000) and Mr. Rath (Rs. 25,000) will continue to be held by them as heretofore, and none of the parties hereto will have any interest so that the shareholding in the Company of all the three parties hereto will remain equal and in the same proportion.
(6) The loss of approximately Rs. 7 lacs incurred by Kalinga Tubes Ltd. upto 30th June, 1954 would continue to stand financed free of any interest by Kalinga industrial Development Corp. Ltd. private limited company of the parties of the 2nd and 3rd parts hereto or by the 2nd and 3rd parties hereto themselves until Kaliga Tubes Ltd., have earned a profit to the tune of Rs. 10 lacs. The parties of the 2nd and 3rd parts hereto are responsible to bear this entire loss in their own account and in view of that loss continuing in the books of the Company and to be set off against profits in future, the parties of the 2nd and 3rd parts hereto shall personally, jointly and severally, compensate Sri S. iP. Jain by paying him the sum equivalent to one third amount of this loss in any manner mutually agreed upon so that Sri S. P. Jain and/or his nominees as shareholders in Kalinga Tubes Ltd. have not ultimately to bear any part of this loss and Kalinga Tubes will pay the amount of loan due to Kalinga Industrial Develp. Corp. Ltd. or the 2nd and 3rd parties themselves or their nominees, as the case may be only against payment of the aforesaid sum to Shri S. P. Jain by the 2nd and 3rd parties.
(7) Sri Jain and Sri Loganathan will arrange unsecured and interest bearing loan to Kalinga Tubes Ltd. for further working capital as and when required upto a total limit of Rs. 10 lacs in equal proportion. This sum may be utilised both for capital expenditure and/or otherwise for the existing Plant only.
(8) The First Party would arrange a Cash Credit facility with any Bank or Banks to Kalinga Tubes Ltd. not exceeding at any time the limit of Rs. 50 lacs on the security of raw materials and finished goods of the Company. The sum available out of Rs. 10 lacs to be financed in terms of para (7), hereinbefore would be utilised along with funds of the Company Tor financing of stocks and margin therefore. It, including the balance available out of the above sum of Rs. 10 lacs and after taking into accounts other funds with the Company any further sum or security is required towards margin only in the aforesaid cash credit facility up to Rs. 50 lacs, the same will, be provided by the 1st Party upto an extent of Rs. 5 lacs either as an interest bearing advance to Kalinga Tubes Ltd. or in any other form suitable for the purpose according to the convenience of the First Party.
For any such accomodation upto Rs. 5 lacs towards margins to the Banks against stocks, the 1st Party or his nominees making the accomodation available shall have a second charge on the assets of the Company forming security of the Bank's 1st charge. If so required, the Directors of the 2nd party and 3rd parties hereto in the Kalinga Tubes Ltd. shall also execute their personal guarantee along with the Directors of the First Party in the Kalinga Tubes Ltd. for the aforesaid cash credit arrangement with Banks.
(9) Sri S. P. Jain will be the Chairman of the Company and Sri Narayanswami will be the Managing Director. The first party will always have the right to appoint at any time at his option one of the Directors representing his group on the Board of Kalinga Tubes Ltd. as the Join Managing Dfrector of the Company and the person so selected by the 1st Party shall be with the approval of other parties hereto.
Sd. B. Patnaik Sd. S. P. Jam.27-7-54. 27-7-54.Sd. C. S. Loganathan Sd. T. S. Narayanswami,Sd. J. R. Tarpore.'Certain clauses of the agreement were clearly acted upon. In Clause (9) the stipulation was that Shri S. P. Jam would be the Chairman of the Co. and Sri Narayanswami would be the Managing Director. Soon after the petitioner was elected as the Chairman of the Company. Respondent 2 resigned. The petitioner continued as Chairman from 1954-55 to 1957-58 for a period of 4 years. Sri Narayanswami was appointed as the Managing Director. He resigned. In 1955 and in his place respondent 2 was elected to be the Managing Director. To the extent respondent 2 was elected as the Managing Director, there is distinct departure from the terms of the agreement.
Clauses 1, 2, 3 and 5 relate to holding shares in equal proportions by the petitioner and respondents 2 and 4. Ulti- mately the petitioner's group got 10,500 shares and the shareholdings amongst the three groups became equal, 250 shares belonging to Sri N. Rath, when purchased, were also distributed equally amongst the 3 groups and one extra share was divided equally to the extent of one-third each. To the extent that the shares were ultimately held in equal proportions, the Agreement was acted upon.
Clauses 7 and 8 relate to arrangement as to tutura financing. The petitioner was required under Clause (8) to arrange Cash and Credit facilities from the Banks for Rs. 50 lacs and to provide Rs. 10 lacs for the capital expenditure of the Company. The Bank facilities were arranged by the petitioner from the Chartered Bank to the extent of over Rs. 50 lacs. The petitioner and his group provided capital expenditure even more than Rs. 10 lacs.
Under Clause (4) the representation of the three groups would be equal in the Board of Directors. That this was not adhered to would be clear from the various annual reports and statements of accounts. This was a clear departure.
15. It is manifest that the contentions of either side are not wholly correct, and the truth lies midway, in spirits and substance, all the 3 groups adhered to the terms of the Agreement; but in strict letters it cannot be said that all the terms were acted upon fully. The relationship amongst the 3 groups, in the matter of the conduct of the affairs of the Company, would be examined on the tooting that they were partners so long as the Company continued to be a private Company. But one remarkable feature cannot be lost sight of that at no time there was an attempt to incorporate the terms of the Agreement in the Articles of Association.
In paragraph 36(c) of the application, there is a prayer that directions be given for suitable alteration and changes in the Articles of Association with a view to incorporate the provisions of the said agreement between the parties. There Is an express admission that the terms of the Agreement never constituted a part of the Articles of Association. The Articles of Association were amended on 11th August 1954, a few days after the agreement was executed. There was absolutely no difficulty in incorporating the terms when the Company was a purely private Company. Though the principles governing relationship of partnership would govern their mutual relationship, the question is merely academic in view of the absence of dispute during the period it was a private Company when the three groups were working nar-moniously and substantially in terms of the Agreement.
16. The more important question to be answered is whether the Agreement can be enforced against the public Company in its working. Even though the essential terms of the agreement were followed for some time after the formation of the public company, it was certainly not in pursuance of any contractual obligation. Mr. Mitra contends that even dehors the agreement, on the date of the formation of the Public Company, the position amongst the parties was that there was equality of holdings in the shares and equality of representation in the Board of Directors. Working under this status quo, there was an equilibrium in the relationship of the three groups and the management was harmonious ana beneficial to the interest of the Company and that is exactly on this basis that the affairs of the Company should be conducted. The Articles of Association of the Company were altered after the Company was converted into a public company twice on llth January 1957 and 15th November 1957. On the 15th November, Article (1) was substituted by the following Articles :--
'The regulation contained in Table A in the First Schedule of the Companies Act 1956 in so far as tney are not hereby modified or altered shall apply to this Company.'
Article (2) was deleted by a resolution on 11th January 1957. Original Article (2) (b) and (c) were as follows :--
'(b) Any invitation to the public to subscribe any share and debenture is hereby prohibited.
(c) The Directors may at their absolute discretion refuse to register any transfer of shares to any person not already a member of the Company.'
Under the Agreement, the shareholdings were to be confined only to the 3 groups. By deletion of Article (2) (b), the restriction that there should be no invitation to the public to subscribe to any shares was removed. This was done to bring it in consonance with the definition of public company. Section 3 (1) (iii) defines a private Company --
' 'Private Company' means a company which, by its articles,--
(a) restricts the right to transfer its shares, if any :
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of the Company.'
Sub-clause (iv) -- ' 'public company' means a Company which is not a private Company.' The two most distinguishing features between a private company and a public Company are restriction on right to transfer its shares ana prohibition of invitation to the public to subscribe to any shares. Under Section 111 of the Act, the public company has the power to refuse the transfer; but this is subject to appeal to the Central Govt. After the conversion into a public Company, neither the terms of the agreement nor the status quo existing prior to the dispute can be worked out. The equal shareholdings must be disturbed the moment there is invitation to the public to subscribe to any shares and the moment there is recognition of the principle of transterability, It is however, contended that there is nohting in the. Articles of Association prohibiting the other two groups not to honour equal shareholdings and equal representation in the Board of Directorate. This is altogether a different matter.
The contractual obligation amongst the parties can no longer be worked out with reference to the theory of. part nership. The Articles of Association constitute the contractual obligation amongst the shareholders of the company. The fact that the affairs of the Company were managed with holding of shares in equal proportion amongst the 3 groups for a period of about 4 years by itself cannot create a right in favour of the petitioner and his group to claim that it must continue in the same manner contrary to the terms of the Articles of Association even when the Company becomes public. Such a claim would also be contrary to the provisions of Section 81 of the Act which lays down that General body of the share-holders can direct fresh issue of shares in a different manner. It would also not be compatible with dynamic concept of industrial expansion. fOR instance, the expansion scheme would require large capital In Crores and any one of the groups may not be in a position to subscribe its proportionate shares as any one or both of the residual groups can do. The balance is bound to be disturbed and the equilibrium lost even if the affairs of the Company would be conducted wholly bona fide. Under Clause (8) of the Articles of Association, the number of Directors shall not be less than 5 or more than 9, and no provision was made for equal representation.
If it was to be enforced srictly in accordance with the spirit of the Agreement, one finds no reason why in point of fact there was subsequent departure. As to transteraninty, the illustration that on 1st of March 1958 respondent 2 transferred 5 of his shares to 5 employees of the Company and respondent 4 transferred 5 of his shares to another 5 employees does not establish any case negativing the aforesaid view. By then the Company had become a public company and normally transfer is recognised. The transfers were merely in the name of the employees and they are not likely to act against the wishes of those in management. But if they wanted to take a different view, nothing can stand in their way and the result would be the titling of the balance ana the loss of equilibrium. In Nov. 1957, respondent 2 transferred 1000 shares of his own holdings to Sri S. L. Rapoor and respondent 4 transferred a large block of shares to the Bank of India on 21st August 1959. The transferees can exercise their right of voting in defiance of the wishes or the transferors.
It is undoubtedly open to the three groups to impose voluntary restraint upon themselves. But Court cannot cons-true or impose such a restraint in the absence of any Article. To accept such a contention would be to give the Agreement a sanctity which cannot fit in with the Articles of Association and the provisions of the statute. The only case cited on the application of the theory of principles of partnership to a public company is 1924 AC 783. That case is strictly an authority for elucidation of the legal concept underlying 'just and equitable rule'. In this case the principle of partnership was applied as it was practically a family concern. Their Lordships said :
'Although taking the form of a public company, the concern was practically a domestic and family concern.' The Lord President rules in 1952 SC 59 as 'I accept it that a 'just and equitable' application must be viewed in one way when applied in relation to a large company and in a very different way when applied for in relation to domestic concerns such as were betore the Court in (1916) 2 Ch 426; (1924) AC 783. I also accept it that in the familiar 'deadlock' type of case the partnership and the small company may be virtually indistinguishable and identical principles may fall to be applied to both alike. But this is not to say that we can import the detailed provisions of the Partnership Act into the Companies Act, still less we can ignore the specific requirement of Section 210.' In (1937) 1 Ch. 392. Mr. Justice Simonds observed : 'Whether it be a matter of articles of association or articles of partnership, the rights of parties are determined by those articles and the question whether it is right for me applying here the principles of partnership to the question of dissolution to wind up this Company or not largely depends on what are the contractual rights of the parties ,as determined by the articles of association in this case.' In accordance with the Articles of Association the Directors are to retire by rotation in this case though they are always eligible for re-election. Only if the majority groups be tied down to the theory that they must re-elect a new member from the same group, the agreement can be honoured. The burden of the entire argument is that within the frame-work of the Article of Association, there is nothing to prevent the majority group to re-elect the petitioner year by year as the Chairman of the Board of Directors and have two members of the petitioner's group in the Board of Directors. It is difficult to appreciate why no Chairman would be elected from any of the other groups and the equilibrium would be disturbed unless the petitioner is elected as the Chairman. Sections 255 to 259 of the Act prescribe how Directors are to be appointed and proportion of those who are to retire by rotation, filling up vacancies and right of persons other than retiring Directors to stand for directnrsnip etc. in respect of a public Company. The terms in the agreement for proportional representation do not fit in with the aforesaid provisions.
Under Section 9(b) of the Act, any provision contained In any agreement to the extent to which it is repugnant to the provisions of the Act becomes void. a situation may be visualised when none of the two groups may combine together. The terms of the Agreement or its spirit are not inviolable nor is the position transpiring amongst the parties prior to the dispute following the spirit of the Agreement unalterable. So long as the Company was a private company, It is one thing that they would act in accordance with the spirit of the Agreement. But the position cannot be viewed from that narrow and static angle after it emerged as a public Company. If the contention of the petitioner is accepted, even if the other two groups honestly want to make the Company broad based by issuing shares to the public having absolutely no connection with them, they would be unable to do so if the terms of the Agreement were to be adhered to, however bona fide their action may be.
Even though the affairs of the Company were being run for a period of about 4 years substantially in accordance with the terms of the Agreement, and that a proper balance of the rights of the majority and minority shareholders is essential for the smooth functioning of the Company, the working of the Company cannot be restricted to allotment of shares amongst the 3 groups in equal proportions and to equal representation in the Board of Directors in the context of its being a public company with dynamic schemes of industrial expansion and statutory provisions giving the General Body of shareholders larger rights incompatible with restrictions embodied in the Agreement. Issue IV (a)
17. The notice is challenged as fraudulent and contrary to the statute. None of the grounds have been pleaded. For the first time this contention appears to have been advanced in course of argument before Mr. Justice Barman. In ncne of the affidavits the petitioner swears that the notice was tricky, misleading or insufficient. The question is one of mixed question of fact and law, and it is not permissible to be taken at the stage of hearing for the first time. Under Section 172(1) of the Act, every notice of a meeting of a company shall specify the place and the day and hour of the meeting and shall contain a statement of the business to be transacted thereat. The relevant business to be transacted was 'the manner and proportion in which such shares are to be issued.'
Under Section 173(2), where any items of business to be transacted in the meeting are deemed to be special, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business. The business proposed to be transacted on 29th March 1958 was a special business. The question is if the notice was by itself sufficient and clear without further material facts being set out in the Explanatory Statement and was not tricky and misleading. The resolution proposed by respondent 2 in the meeting of the Board of Directors on the 1st March 1958 is as follows :--
'Resolved that an Extraordinary General Meeting of the Company be convened on Saturday, the 29th day of March 1958, for the purpose of considering and, if thought fit, passing the necessary resolution for the issue of 39,000 Ordinary shares and the manner and proportion in which shares are to be offered privately to the shareholders, and other persons and for other incidental matters, subject to the provisions of the Companies Act.' The petitioner proposed the following amended resolution :
'Resolved that the Extraordinary General Meeting of the Company be convened on Satuarday the 29th day of March 1958 for the purpose of considering and if though fit passing the necessary resolution for the issue of 39,000 Ordinary shares privately to the shareholders as per the provisions of the Companies Act.' The petitioner was presiding over the Directors' Meeting. After further discussion on the subject, the resolution proposed by respondent 2 was passed by the majority though the petitioner voted against it. The draft notice was approved by the Board. The petitioner's opposing resolution made it absolutely clear that the 39,000 shares were to be issued privately to the existing shareholders, while respondent 2's resolution clearly stated that they would be issued to the existing shareholders and also to persons other than shareholders subject to the provisions of the Act.
18. According to Mr. Mitra, the meaning of 'manner and proportion' referred to in Item 2 relates only to the manner and proportion in which shares should be distributed to the existing shareholders and others, and would never convey any meaning that the existing shareholders should be completely excluded from the new shares. The argument for the Company is that the resolution directly tocussed attention on the question that the existing shareholders may not get shares at all, and all the new shares may be Issued to others.
If the two resolutions proposed on 1st March 1958 would not have been there, a mere bald statement about the manner and proportion in which shares are to be issued, mighty be somewhat misleading, or, at any rate, not conveying a clear meaning, but in the context of events that the two proposed resolutions definitely referred to two different concepts -- in one case making outsiders as participants in the distribution of shares and in the other completely excluding them, item 2 in the agenda would clearly conceive all possible cases of distribution of shares including the one that the existing shareholders may be completely excluded. That the petitioner understood it that way is manifest from the fact that objection to the notice on this ground was never taken at any stage, and not even in the suit, until argument before the learned Company Judge, and the belated objection was taken about three years after issue of the notice.
The learned Attorney-General, suggests a possible reason as to why this objection was taken at a belated stage. The suggestion is that the amendment to Section 81 came into force in December 1960. Under the amended Section 75 percent vote is essential for giving a contrary direction in the General meeting, while prior to the amendment, a bare majority would decide the matter. If this objection is up-held and the notice is declared invalid as being tricky, misleading or insufficient, the resolution dated 29th March 1958 would be without jurisdiction.
Now the Company cannot have 75 percent vote to pass the resolution as the petitioner's group admittedly controlled 31 percent of the shares prior to the issue of the 39,000 shares. This argument appeals to me. Otherwise it is difficult to conceive why no objection would be taken till the stage of argument before the learned Company Judge. The petitioner himself approved the draft notice and it can hardly be said that he himself had been misled. This conclusion is reinforced by the fact that immediately on receipt of the notice, Bharat Nidhi Ltd., a Jain concern, addressed a letter DA 12/17th March 1958. Relevant contents of the letter are as follows :
'The agenda of the Notice under Item No. 2 states that the Extraordinary General meeting is to decide the manner and proportion in which further shares are to be Issued. Under Section 81 of the Companies Act, 1956 and in accordance with the Company's application to the Controller of Capital Issues and Condition No. 6 of the Controller's Consent accorded vide his letter No. T 391-CCI/5 dated 18-12-57, such shares should in the first instance, be ottered to the persons who, at the date of the offer, are holders of shares in the Company in proportion to their holdings, the offer to include the right to renounce the shares offered in favour of any other persons. The aforesaid section, ot course, provides that any directions to the contrary may be given by the Company in General meeting. The company's application to the Controller of Capital Issues seeking consent for this issue, however, does not stipulate any other manner. The Explanatory Note to the Notice also does noi make any indication of the proposed issue in any other manner. There is even no draft of a Resolution proposed by the Board to be placed before the Extra-ordinary General Meeting for consideration by the shareholders.
'In these premises, we do hope that the new shares shall in the first instance be offered to the holders in proportion of their holdings in accordance with Section 81(1)(a) of the Companies Act. If our presumption may not be correct, please let us know immediately.' The letter sufficiently evidences that Bharat Nidhi Limited was apprehensive that by item 2 of the Agenda the existing shareholders may be excluded from allotment of new shares If a direction to the contrary is given in the General Meeting under Section 81 of the Act. No doubt there was a protest that the Explanatory statement was not clear and the agenda suggested in the notice, were likely to affect the rights of the existing shareholders contrary to the consent given by the Controller of Capital Issues ana the terms of the application. The point for determinatic, is not whether certain doubts arose in the minds of Bharat Nidhi Ltd. but whether from existence of doubt it can be concluded that the possibility of the existing shareholders being completely excluded from fresh allotment of snares was not apparent to its mind.
1 have no doubt that the apprehension was clear and it cannot be contended that the notice did not convey the idea of existing shareholders being completely excluded trom getting any share by the resolution in the General Meeting. In his reply dated 20th March 1958, respondent 2 said that the notice was not defective in any manner and had the approval of the Solicitors and of the Board of Directors presided over by the petitioner, the Chairman. He also suggested that the representative of Bharat Nidhi Co. may propose any resolution as he would think fit.
It is true that respondent 2's letter gave no reply in clarification of the doubts of Bharat Nidhi Ltd., but it is equally true that the doubts entertained by it were that the shareholders may be exclued from getting the new shares. it was contended that the very proposed resolution of respondent 2 in .the meeting of the Board of Directors on 1st March 1958 was itself fraudulent as there was nothing for respondent 2 to entertain doubt in the legal position. From the minutes of the meeting it appears that respondent 2 stated that in any event the legal position was not clear and it would be much better to have necessary issues done through the Company in the General meeting.
The legal position with regard to Section 81 was not very clear. In fact the Section has been interpreted differently on either side. The entertainment of doubt, even if wrong, cannot be characterised as fraudulent. The learned Attorney-General advanced certain contentions with regard to the notice on the ground of waiver and the effect of want or objection on the transfer of shares. It is not necessary to consider those contentions in view of my finding that the notice gave clear information of the subject-matter of the resolution passed on 29th March 1958 and the petitioner was never misled by it.
19. Mr. Mitra cites various decisions to the ettect that those notices should be so framed that those who run may read. It must not be misleading or equivocal and must be fairly and clearly framed. If the notice does not giva a full and clear idea of what was intended to be transacted in the meeting, then the passing of resolution on the basis of such notice is ultra vires. As a resolution passed in the General meeting binds both the dissenting and absentee shareholders, the Court is more particular to protect the absentee shareholders and not the dissenting one.
The decisions cited are Alexander v. Simpson, (1889) 43 Ch D. 139, Pacific Coast Coal Mines Ltd. v. Arbuthnot, 1917 A Cas 607 (618) and Tiessen v. Henderson, (1899) 1 Ch D 861 (866). The correctness of the principle laid down in those decisions cannot be disputed. But there is also authority for the view that those who were present at the meeting and raised no objection cannot object later. The absentee shareholder is protected, because having received the notice and with more or less care looking at ,the notice, he conies to the conclusion that on the whole he will not oppose the scheme! but leave it to the majority (Palmers Company Precedents, Vol. I, pp. 483484). I have already held that the notice was clear to the petitioner and he does not assert that it was misleading, tricky or insufficient, me only absentee share-holder, who could have taken objection to the validity of the notice on both the grounds, was the French Company which, according to the common case of the parties, takes no interest in the management of the business affairs of the Company. If the Court was to protect any absentee member, it was the French Company.
In re : Union Hill Silver Co; Ltd., (1870) 22 LT (NS) 400 the petitioner himself did not attend the meeting but his solicitor Mr. Pulbrook, who had qualified himself by taking one share was present on his behalf. Some of the shareholders who were residents at New York did not receive notice, It was observed that if the absentee shareholders think they are not bound, they may raise the question. In the meeting of the 29th March 58 Mr. Sabharwala of the petitioner's group was present though the petitioner was absent and he did not take any objection in the meeting that the notice was invalid on any of the aforesaid grounds and that the resolution should not be passed on the basis of such a notice and all the votes in support of the petitioners group were cast.
Issue IV (b).
20. It has been contended that the resolution for issue of 39,000 shares on 29th March 1958 was contrary to Section 81 of the Act. This Section does not apply to a private Company. Under Sub-section (1) where at any time subsequent to the 1st allotment of shares in a company It is proposed to increase the subscribed capital of the Company by the issue of new shares, then, subject to any directions to the contrary which may be given by the company in General meeting, and su'bject only to those directions--(a) such new shares shall be offered to the persons who, at the date of offer, are holders of the equity shares of the Company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date, it is clear that the existing equity shareholders have the pre-emptive right to the issue of new shares in proportion to then shareholdings.
But this pre-emptive right : is subject to the overriding condition that any direction to the contrary which may be given by the Company in General Meeting and to the further condition that it is applicable only to allotment subsequent to the first allotment of shares. The learned company Judge was of the opinion that the allotment of 39,000 shares constituted the first allotment of the shares of the company as a iPublic Company, and consequently no direction to the contrary can be given in the General Meeting. I am unable to accept this view. The Company was a private Company and by operation of law it became a public company from the date of its conversion on 11th Jan. 195/-. Even in the application the petitioner admits that the shareholders of the private Company became the shareholders of the public Company.
It follows as a matter of necessary logic that the snares issued by the Company when it was a private Company became the shares issued by the public Company by operation of law. So though in point of fact 39,000 shares were the first issue of the Company after it became public, it cannot be treated as the first allotment of shares of the public company in the eye of law. So the issue of 39,000 shares. must be treated as shares issued subsequent to the first : allotment.
21. Mr. Mitra contends that under Section 105C of the Companies Act, 1913 (hereinafter to be referred to as 1913 Act), where the directors decide to increase the capital of the Company by issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member (irrespective of class). The contention is that this led to unfairness inasmuch as the holders of preference shares automatically obtained privileges where further capital was to issue. By amendment of Section 105-C, the Legislature merely gave powers to the Company in the General meeting to decide that the new issue of shares would be allotted not only to the equity share-holders but to preference share-holders as under the Act only two class of shares -- equity and preference -- have been retained.
In this Company there are no preference shares. So the Company is bound : under Section 81 to issue the new shares only to the existing shareholders. He argues that it is permissible to look into the objects and history of the enactment and to find out the evil it was intended to remedy. According to him, prior to the enactment of Section 105-C in 1913 Act, the only restrictive enactment was that contained in Regulation 42 of Table A which was not compulsory. There was no fetter then upon the discretion of the directors-who could issue new shares to their friends and nominees. Regulation 42 was inserted to protect the minorities as it did not cover the case of increase of subscribed share capital and Section 105-C was introduced to distribute the new shares to the existing shareholders irrespective of class. He relies on paragraph 52 of the Report of the Company Law Committee, 1952. The Committee was of opinion that Section 105-C was a prolific source of trouble since its insertion in 1936. Relevant portions of paragraph 52 are as follows :--
'In order to resolve conflicting judicial decisions and to clarify the intention of the legislature, as we understand them, we propose that this section should be concerned with all increases in the subscribed capital of a company after the first allotment has been made .....Under the existing section when it applies, new shares have been offered to all shareholders irrespective of class. We consider it obviously unfair that holders of preference shares should automatically obtain privileges where further capital is to be issued, and our recommendation restricts the right of taking up further shares to the holders of the equity capital in the Company, unless the company in general meeting sanctioning the issue decides to the contrary.'
22. This paragraph prima facie supports Mr. Mitra's contention. But the Report of the Committee does not appear to have been carried out in Section 81, the relevant portion of which may be quoted :
'81. Further issue of capital. -- (1) Where at any time subsequent to the first allotment of shares in a company, it is proposed to increase the subscribed capital of the company by the issue of new shares then, subject to any direction to the contrary which may be given to the Company in general meeting, and subject only to those directions--
(a) such new shares shall be offered to the persons who on the date of the offer, are holders of the equity shares of the Company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date;' If Mr. Mitra's contention is correct, the necessary words should have been incorporated in Section 81 to clarify that the wide powers of the Company in general meeting is to be restricted only to a decision as to whether the new shares should be allotted only to the equity shareholders or in between the two classes of shares --equity ana preference. The language of the section is plain and the powers given to the Company in general meeting to give directions to the contrary are wide and unrestricted. It is difficult to accept Mr. Mitra's contention on a plain reading of the section. We arrive at this conclusion independent of any authority as in no decisions cited before us, the Report of the Company Law Committee was taken into consideration. The same view has also been taken in Hindusthan Commercial Bank Ltd. v. Hindusthan General Electrical Corporation Ltd., AIR 1960 Cal 637 affirming a decision in re : Hindusthan General Electric Corporation., Ltd., AIR 1959 Cal 672 and by Mr. Justice Rao in the interim injunction matter.
23. Mr. Justice Burmart further held that the amendment of Section 81 by the Companies Act, 1960 (Act 55 of 1960) which came into force on December 28, 1960 supports the view that the new shares must be allotted only to the existing equity sharesholders. This view is based on an erroneous reading of the amended section as would appear from the following statement in the judgment :
Ordinarily the pre-existing position of law cannot be interpreted with reference to subsequent amendment. Butthere may be cases when subsequent amendment merely givesrecognition to the pre-existing position of law. If the viewof Mr. Mitra would be correct, the position could have beenclarified in the amendment in 1960 which was subsequentto the decisions of the Calcutta High Court in the aforesaidtwo cases.
24. It remains now to consider one more argument advanced by Sri Rai Choudhury with reference to Regulation 42 in Table A of the First Schedule of 1913 Act. The relevant portions of the Regulation 42 are--
'Subject to any direction to the contrary that may be given by resolution sanctioning the increase of share capital, all new shares shall, before issue, be. offered to such persons as at the date of the offer are entitled to receive notice from the Company of general meeting in proportion, as nearly as the circumstances admit, to the amount of the existing shares to which they are entitlea.....
'The intention of the Legislature is clear from the change in Section 81 by amendment, made on December 28, 1960, by which the clause 'subject to any directions to the contrary' etc. has been deleted.' On a reference to the amended Section 81 it would appear that this clause was not deleted. It was merely brought into Sub-section (1A) which runs to the effect :
'Notwithstanding anything contained in Sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in Clause (a) of Sub-section (1) in any manner whatsoever --
It was not a compulsory Regulation and it is no longer a part of Table A of the Act. Regulation 42 of Table A of 1913 Act was made a part of the Articles of Association of the Company on 11th August 1954. On that clay, by a special resolution passed in an Extra-ordinary meeting, the authorised capital was increased from Rs. 25 lacs to Rs. 1 Crore by the creation of 75,000 Equity shares ot Rs. 100/- each. The disputed 39,000 shares are within the authorised limit of Rs. 1 Crore. in AIR 1950 SC 172, Nanalal v. Bombay Life Assurance Co., it has been authoritatively ruled that Section 105-C becomes applicable only when the directors decide to increase capital within the authorised limit by issue of further shares. Regulation 42 and Section 105-C do not cover the same field. Regulation 42 did not purport to deal with increase of capital which is within the competency of the directors to decide. Regulation 42 covered the field where the authorised capital of the company had to be increased.
Mr. Roy Choudhury advanced two-fold contentions. Firstly, that as Regulation 42 of Table A of 1913 Act was made a part of the Articles of Association on 11th August 1954, when the authorised capital was raised from Rs. 25 lacs to Rs. 1 Crore, and by special resolution, the Company in its general meeting did not give a direction to the contrary that those 39,000 shares would not be issued to the existing shareholders but to outsiders, then Section 81 has no further application and the previous decision cannot be altered and the disputed 39,000 shares must be allotted to the existing shareholders.
This contention has no force. There is no provision in the Act that if the Company in General Meeting has taken one decision at one time, it cannot be altered by a subsequent decision of the Company in the General meeting, so the subsequent meeting of the Company changing its view that it would be allotted to outsiders cannot be characterised as either illegal or without jurisdiction. On 18th November 1957, the Article of Association of the Company was amended by a special resolution. Article (1) was substituted by the following article--
'(1) The Regulations contained in Table A in the First Schedule of the Companies Act, 1956 in so far as they are not hereby modified or altered, shall apply to this Company.'There is no provision in Table A of the Act corresponding to Regulation 42 of Table A of the 1913 Act. Secondly, that by this substitution, Regulation 42 of Table A of 1913 Act is still a part of the Articles of Association as the language is that Table A in First Schedule of the Act in so far as they are not hereby modified or altered shall apply to this Company. Mr. Roy Chowdhury contends that Regulation 42 of Table A of 1913 Act was a part of the Articles of Association and has not been modified by anything in Table A of the Act which contains no corresponding provision. There is no substance in this contention. By the amendment, the entire Table A of 1913 Act was substituted by the entire Table A of the Act. Consequently Regulation 42 of 1913 Act goes out of the Articles of Association as being a part of Table A of 1913 Act. After 15th November 1957, Regulation 42 of 1913 Act is no longer a part of the Articles of Association of the Company. Under Section 31 of the Act, any alternation made in the Articles of Association by special resolution shall, subject to the provisions of this Act, be as valid as if originally contained in the Articles and be subject in like manner to alteration by special resolution. The argument of Sri Roy Choudhury that Section 81 cannot I have any force is not acceptable.
Issu'e IV (c).
25. Mr. Mitra challenges the validity of the resolutions passed on 29th March 1958 on the further ground that those cannot at all be given effect to. According to one of the resolutions, 39,000 ordinary shares of Rs. 100/- each shall not be offered or allotted to the existing holders of equity shares in the Company or to the public. He contends that the existing shareholders with the members of the public exhaust all persons to whom the shares could be issued, and if no shares are issued either to the existing shareholders or to the public, then no allotment can at all be made. am unable to accept this contention. This resolution and the next resolution passed immediately after must be read together. By the other resolution it was resolved that the Directors were expressly authorised, subject to the aforesaid resolution, to issue and allot the said 39,000 ordinary shares privately in the best interest of the Company at the sole direction of the Directors to such persons as may have applied or may hereafter apply. This resolution clearly includes a group of persons who do not come within the purview of the existing share-holders and the public. In Palmer's Company Precedent, Part I, p. 58, the following passage occurs :
'Offer to the public -- what is an offer to 'the public' cannot be definitely stated. The Act contains no definition, and an offer 'to the public' is not a technical expression; it should therefore be read in its popular sense. Now, in common parlance, an offer to the public signifies an offer made by advertisement or circular to the general public, or some section thereof, as distinguished from an offer made privately, that is, to a select and small circle of friends, customers or connections.'
Both the resolutions together would mean that further shares would be issued to a select and small circle of friends, customers or connections. Doubtless 'small circle of friends or customers or connections' are members of the public. But by the express resolutions they were excluded cut of the public as referred to in the resolution. 'To the public' also may mean no offer to be made by advertisement or circular to the general public. I do not find any force in the aforesaid contention :
Issue IV (d).
26. It has been further contended that the allottees are friends of the majority group, and the allotment had been made purposefully to them by the majority group with mala fide intention to increase their voting strength and not bona fide in the interest of the Company at large. In the petition there was an allegation that the allottees are nominees, benamdars and friends of the majority group. But before us, Mr. Mitra conceded that the petitioner had failed to prove that the allottees were the benamdars or nominees of the majority group. It has been equally conceded by the learned Attorney-General that the allottees are friends of the majority group, but he asserts that they are not under the control of the majority group. The only point of difference in this regard therefore is whether the allottees are under the control of the majority group and whether the latter controls the voting strength of the allottees for the purpose of retaining control over the administration in the management and affairs of the Company to the exclusion of the minority. I am satisfied that the necessary materials have not been proved to indicate that the original allottees, though friends, were under the control of the majority group.
27. By the injunction order of the Court, the proposed meeting to be held on 21st September 1960 was prohibited, The voting strength of the different groups would be as would appear from the following chart supplied to us by Mr. Mitra :
(A) Prior to Agreement dated 27th July 1954 :
Subscribed Capital - ... ... ... Rs. 25,00,000/= 25,000 shares of Rs. 100.0.0 each.
Mr. Patnaik and Mr. Loganathan Groups ... 21000 shares ... 84%
French Company ... ... ... 3750 ,, ... 15%
Mr. Rath ... ... ... ... 250 ,, ... 1%
... 25,000 ,, ... 100%
(B) Prior to Board Meeting dated 30th July 1958 :
Subscribed Capital - ... Rs, 61,00,000/= 61000 shares of Rs. 100/- each.
Mr. Jain Group ... ... ... 19088.1/3 shares ... 31.31%
Mr. Patnaik and Mr. Loganathan Group ... 36166.2/3 ,, ... 62.62%
French Company ... 3750 ,, ... 6.07%
... 61,000 ... 100%
(C) After the Board meeting dated 30th July 1958 :
Subscribed Capital - ... ... ... ... Rs. 10000000= 100000 shares of Rs. 100/- each.
Mr. Jain Group ... ... ... 19083.1/3 shares ... 19.10%
Mr. Patnaik and Loganathan Group ... ... 36166.2/3 ... 77.15%
French Company ... ... 3750 ... 3.79%
... 100000 ... 100%
(D) Position after the proposed meeting dated 21 :
September 1960 :
Subscribed Capital - ... ... ... Rs. 20000000/= 200000 shares of Rs. 100/- each.
Mr. Jain Group ... ... ... 19083.1/3 shares ... 9.55%
Mr. Patnaik and Mr. Loganathan Group ... 77166.2/31 ... 88.58%
French Company ... ... ... 3750 ... 1.87%
... 200000 ... 100%
It would appear from an analysis of the chart that prior to the Board meeting dated 30th July 1958, the petitioner's group held 31.31 per cent of shares and, after that Board meeting, 19.10 per cent of shares. After the proposed meeting dated 21st September 1960, the shareholding of the petitioner's group would be reduced to 9.55 per cent. The gradual reduction in the percentage of the shareholding of the petitioner's group does not, however, establish that the allottees were under the control of the majority group. After the allotment on 30th July 1958, the voting strength of the allottees was never exercised so as to lead to the conclusion that they are under the control of the majority group. Even if the allottees would exercise their voting power in support of the majority group, it would not necessarily establish, without proof of further facts, that they ars under the control of the majority group.
28. Mr. Mitra seriously argues that the allottees belong to different places. Out of 39,000 ordinary shares, initially the allotments were made in favour of Mr. M. N. Ghosh, a businessman of Calcutta, Mrs. Swaran Objraj, a resident of Gouhati, Sri Motilal Pundit, Sri Gopal Chandra Patnaik, Sri Bansidhar Mohanty and Sri Narayan Prasad Sahu of Cuttacte and Yubaraj of Sonepur. All these persons have filed affida-vits to show that they were privately intimated that new shares would be issued by the Company and accordingly the invested their money by way of investment and that the are not under the control of the majority group. It is true that there is a queer coincidence that all these persona hailing from different parts of India simultaneously came to know the fact of issue of new shares.
The learned Attorney-General frankly states that there is no gainsaying the fact that they were intimated about the new issue of shares by respondents 2 and 4 and that it shares were to be issued privately it must be issued to the friends and that by itself does not establish that they are under the control of the majority group. These persons are men of independent status and it would be difficult to accepl the argument that they are under the control of the majority group without proof of further facts. Besides it cannot also be argued with any force that for all time to come that these Independent and well-to-do persons would be under the thumb of the majority group. Though, if the voting powers of these allottees could be utilised by the majority group, 75 per cent of the vote would concentrate in their hands, by itself, it does not establish that there is combination. The fact that at the time of hearing the allottees and their subsequent transferees support the case of the Company does not in any way advance the petitioner's case. They are bound to support the Company if they are satisfied that it is being properly managed.
29. It is next argued that the 39,000 shares were quickly allotted with 'unseemly and indecent' haste. Though the Company proclaimed that it needed money urgently, the Balance Sheet for the years 1958-59 shows that for 39,000 Equity shares the calls 'that remained unpaid on 31st March 1959 were to the extent of Rs. 33 lacs and 15 thousand (Rs. 33,15,000/-). The balance sheet for the years 1959-60 shows that Rs. 7,65,000/- was outstanding. It is necessary to mention certain facts to examine if the allotment was made with 'unseemly haste'. The plaint in T. S. 21/1958 was filed on 18th April 1958. On the very day an ex parte order of injunction was obtained by the petitioner on the following terms :
'I would direct issue of an interim injunction restraining the defendants from issuing and allotting 39,000 ordinary shares to persons other than the existing shareholders and from giving effect to the resolution of the Extraordinary Gene-ral Meeting of the shareholders on 29-3-1958.'
It is contended that in spite of the injunction order, effect was given to the resolution and applications for issue of shares of the Company during the pendency of the order of injunction were invited, Though this is a fact there is certainly no violation of the injunction order in terms. Moreover, no objection was taken either before the Subordinate Judge or before Mr. Justice Rao that the injunction order had been violated. Therefore the issuing of invitation and calling for application are no mala fide con-duct on the part of the Board of Directors or violation of the injunction order. After the injunction order was passed, the Board of Directors' meetings to make a decision on the o.uestion of allotment till the injunction order was vacated, were being adjourned from time to time.
On 23rd July 1958 the Company gave notice of the Board Meeting to be held on 30th July 1958 at 10.30 A. M. On 29th July 1958 Mr. Sabharwala of the petitioner's group wrote to the Managing Director that the list of applicants for allotment of shares which was to be considered at the Board meeting had not been so far placed before the Board, nor had the same been intimated to the other Directors, to which no reply was given. On 30th July 1958 the Board meeting was held at 10.30 a.m. The interim injunction was vacated by the Subordinate Judge at about 10-30 a.m. Immediately after, an application was made before the Subordinate Judge on behalf of the petitioner's group asking for stay of operation of the order. Within an hour or two before stay of the operation of the order was granted by the Subordinate Judge, the allotments were made and the return of the allotments was filed with the Registrar of the Companies. From these facts it is strongly contended that the entire transaction was carried through unseemly haste and Mr. Justice Burman accepted this contention.
30. From the mere fact that things were done in quick succession, it cannot be said that things were done with unseemly haste. It is the common case of the parties that the Company was in urgent need of capital. Whether in fact the capital was subsequently raised or not is another question. The allotments were made for raising capita! to enable the Company to raise loans from the Industrial Finance Corporation. It is difficult to accept the argument because a suit had been filed, it was the duty of the Company not to allot shares but to wait till the disposal of the litigation. That would indeed be an extraordinary expectation. Jain Group's case for interim injunction did not appeal to the subordinate Judge, who vacated it, and to Mr. Justice Rao, who dismissed the appeal. The course of decisions pertaining to interim injunction indicates that the application for interim injunction , was untenable.
In such circumstances, it would be difficult to hold that the conduct of the majority groups in allotting the shares on 30th July 1958, when the injunction was vacated for a short time was mala fide. If they were convinced that their action was legal and justifiable, they were not to wait merely because their action would be construed to have been done in haste. The haste was justified by the subsequent result of the litigation in the injunction matter and cannot be characterised as indecent or unseemly.
31. Adm.ittedly 15 per cent of the value of the shares issued were realised immediately after. The injunction matter was finally disposed of by Mr. Justice Rao in September 1958. Excepting an amount of Rs. 7,65,000/-the balance was realised by August 1959. Rs. 7 lacs and odd were outstanding against the Yuvaraj of Sonepur who was undisputedly financially solvent for paying the amount at any time. The learned Attorney General explains that there was delay in payment as the amount was not called on account of injunction order. There had been further delay in getting the amount even after the disposal of the injunction matter. But the explanation is not wholly unsatisfactory. Whether in point of fact the amount was paid soon after, or, after some delay. It is not very pertinent to the question as admittedly the Company was in need of capital at the time of the allotment of shares.
32. 10,200 Equity shares, were transferred by Mr. Loganathan to the Central Bank of India Limited by way of security for over-draft facilities. The said shares were transferred to the Bank of India Ltd. on 21st August 1959 and by virtu'e of the transfer the Bank of India has become a registered shareholder in the Company. On 24th October 1959 Mr. Obhrai [respondent 7), G. C. Patnaik (respondent 9), B. Mohanty (respondent 10). N. P. Sahu (respondent 12) and K. C. Dalai applied to the Central Bank of Madras for advances against the security of shares of KaMnga Tubes-Limited held by them and pledged their shares as securities for the loan advanced by the Bank to them individually an the 22nd August 1959. The Bank transferred the said, shares to its own name on 24th October 1959. It is thus the holder of shares of the value of Rs. 30 lacs. Some emphasis is laid on behalf of the petitioner's group that these transactions with the Central Bank of India by different allottees at the same time cannot be altogether one of pure chance coincidence.
The proceedings of the Extra-ordinary General Meeting of the Company held on 21st September 1960 at 11 a.m. show that the Central Bank of India Limited, Madras, and the Bank of India Limited Madras, were represented by proxy through Sri S. S. Loganathan (respondent 4). It is, there-fore, contended that 30,000 shares were really held by respondent 4 in the name of Central Bank of India, Madras. The Central Bank gf India, Madras has filed affidavit that It is neither controlled by respondent 4 nor were these shares purchased on behalf of respondent 4. In the absence of further materials it is difficult to hold that It is respondent 4 who purchased these shares. Similarly in the Annual General Meeting held on 29th December 1960, the Bank of India and the Central Bank of India were represented by proxy throu'gh respondent No. 4. The same argument applies here also. Issue VI :
33. Section 210 of the English Companies Act, 1948 corresponds to Section 397 of the Act. In England prior to 1948, the law was that if a majority acts in oppression of the minority, the latter were to petition the Court to wind up the company on the ground that it is just and equitable to do so. In many cases, however, it is not in the interest of the oppressed minority to have the Company, wound up. The liquidation of a Company may result in the sale of its assets at break-up value, without fegard to the value of the good-will or 'know-how' of the Company, and the minority shareholder who, urged by the majority shareholder's oppression, petitions for a winding up order, may, in effect, play his opponent's game. In an attempt to meet such cases, the Legislature gave the oppressed minority a remedy alternative to the petition for compulsory winding-up order under the just and equitable clause.
Section 433(f) of the Act lays down that a Company should be wound up by the Court if it is ofopinion that it is just and equitable that the company shouldbe wound up. Section 397 prescribes the powers of theCourt for prevention of oppression. Section 397 Is asfollows :
'Application to Court for relief in cases of oppression :
(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 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 oppressive to any member or members and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise thefacts would justify the making of a winding up order onthe ground that it was just and equitable that the companyshould be wound up, the Court may, with a view to bringing to an end the matter complained of, make such orderas it thinks fit.'
Thus the alternative remedy is available under two conditions
(i) the affairs of the Company are conducted in manner oppressive to some part of the members, and
(ii) the Court must find a case for winding-up order. under the just and equitable clause but such winding up would unfairly prejudice the members.
The rule of supremacy of the majority, usually referred to as the Rule in Foss v. Harbottle, (1848-2 Hare 461), is subject to considerable qualification which can be grouped under three heads :
(a) individual membership rights,
(b) qualified minority rights, and
(c) exceptions, properly called, to the Rule in Foss v. Harbottle, (1848-2 Hare 461) which are--
(i) an act which is ultra vires the Company or illegal;
(ii) an act which constitutes a fraud against the mino-rity and the wrongdoers are themselves in control of the Company; and
(iii) a resolution which requires a qualified majority but has been passed by simple majority.
The requirements of Section 397, in spite of its somewhat restrictive wording, should be interpreted liberally in order to carry out the intention of the Legislature which designs this remedy in order to suppress an acknowledged mischief.
In England there are very few decisions on the point. The two leading decisions on this topic, which have been relied upon by both sides, are reported in (1958) 3 All ER 66, and (1958) 3 All ER 689. The following essential principle can be extracted from the aforesaid two decisions in the very language of those eminent Judges deciding those cases;
(I) Though the section is to be liberally interpreted the new remedy is not likely to be accorded.
(II) The section gives no guidance as to the meaning of the word 'oppressive'. The dictionary meaning of the word is 'burdensome, harsh and wrongful'.
(III) The result of an application under Section 210 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.
(IV) Oppression is usually exerted by a person with predominating voting power which is employed for his own advantage to the detriment of the helpless minority.
(V) Conduct, which is technically legal and correct, may nevertheless be such as to justify the application of 'just and equitable' jurisdiction, and conversely conduct involving illegality and contravention of the Art may not. suffice to warrant the remedy of winding up where the alternative remedy is available.
(VI) Where just and equitable jurisdiction has been applied, the circumstances have always been such as to warrant interference when at least there has been an unfair abuse of powers and 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. Oppression required by the section must be oppression of the members in their character as such.
(VII) The essence of the matter seems to be that theconduct complained of should at the lowest level Involvea visible departure from the standard of fair dealing andviolation of the conditions of fair play on which everyshareholder, who entrusts his money to a company isentitled to rely.
(VIII) A just and equitable winding-up has never been ordered merely because of changes effected in the Board of Directors and very strong ground is needed to justify such a step. It does not assist the petitioner to assert that the shareholders took sides in the dispute for they had no option but to take sides.
(IX) It is not lack of confidence between the share holdsrs per se that bring Section 210 into play.....
Oppression involves as least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder. Persons concerned with the management of its affairs must in connection therewith ba guilty of fraud, misfeasance or misconduct towards the members, it does not include mere domestic disputes between directors or members or lack of confidence between the section of members and another section in the matter of policy and administration. Much less it covers mere private animosity between members and directors.
(X) The Section warrants the Court in looking at the business reality of the situation and does not confine them to a narrow legalistic view.
(XI) A 'just and equitable' jurisdiction must be viewed in one way when applied for in relation to a large public company and in a very different way when applied for in relation to a domestic concern. The detailed provisions of the Partnership Act cannot be imported into the Companies Act. It must be dealt with under the terms of Section 210.
(XII) There may well be circumstances which would justify winding up as being just and equitable which would not justify an application on the ground of oppression.
(XIII) The words 'being conducted' in a manner op-pressive invite attention not to events in isolation but to events considered as a part of consecutive story.
34. The exercise of jurisdiction under 'the just and equitable clause' in this particular case must be viewed in relation to a large public company. The core of Mr. Mitra's argument that the status quo conceived in the terms of the Oral Agreement should be maintained cannot be taken into consideration in exercise of jurisdiction under Section 397. Non-distribution of one-third shares to the peti-tioner in proportion to the existing shareholdings had undoubtedly led to lack of confidence and private animosity between the majority group and the minority group in the matter of policy and administration of the Company, but the Directors of the Company concerned with the management of the affairs cannot be charged with fraud, misfeasance or misconduct towards any parts of its members, it cannot be said that the Directors controlling the Company have abused their powers resulting in injury to the rights of the minorities unless it is assumed that the minorities are entitled as of right to proportionate one-third distribu-tion of the newly issued shares.
The minority shareholders have no proprietary right to the proportionate distribution of the fresh issue of shares The conclusion is based on the findings already recorded under Issues III to V that each individual act of the majority of Directors, who are in charge of the affairs of the Company, is legal, constitutional and for the benefit of the Company, as a whole, and after taking into consideration the series of events as a part of consecutive story and not each event in isolation. If the particular : alleged subsequent to the filing of the application are ruled out of consideration, there are no other facts constituting a part of a consecutive story leading to oppression excepting the single fact that the 39,000 shares were no distributed amongst the shareholders in proportion to their existing shareholdings. Even if it can be characterised as amounting to an act of oppression, it does not amount to a continuing and continuous process of oppression.
Mr. Mitra laid great stress on the following principle in Manner's case, 1958-3 All ER 689 :
'If there is oppression, it remains oppression even though the oppression is due simply to the controlling shareholders' overweening desire for obwef and control and not with a view to. his own pecuniary advantage. The result, rather than the motive is the material thing.'
This principle must be applied on the context of the facts of Harmer's case, 1958-3 All ER 689 in which the father considered that he was entitled. to disregard the resolutions of the Board as long as he held the voting control and he assumed powers which he did not possess and exercised them against the wishes of shareholders who had major beneficial interest but a minority of votes.
In (1920) 1 Ch. 77, Piercy v. S. Mills and Co. Ltd., their Lordships observed :
'I cannot look upon the Directors otherwise than as trustees for a public Company, and I must judge of the propriety of their conduct in this matter on the ordinary principle applicable to cases of trustee and cestui que trust. If shares are issued with indecent haste and scramble ..... for a different purpose, I have no doubt that the Court will interfere to prevent so gross a breach of trust. If they were issued with the immediate object of controlling the holders of greater number of shares in the Company and of obtaining the necessary statutory majority for passing a special resolution, then it will not be valid or bona fide exercise of power.'
The principle enunciated above is unquestionable. In that case, the four allotments of shares were declared invalid as the Company was in need of further capital and the fiduciary power of the directors was exercised merely for the purpose of maintaining their control over the affairs of the Company. The case is distinguishable on facts of this case. This is a case of mere loss of confidence amongst different groups of shareholders and there is no oppression of the minority in the conduct of the affairs of the Company. The petitioner has failed to make out a case u'nder Section 397.
ISSUE VII :
35. In paragraph 27 of the petition the allegation is that the affairs of the Company are being conducted by respondents 2 and 4 in a mariner prejudicial to the interests of the Company. Particulars of mismanagement and prejudicial manner of conducting the affairs of the Company have been already set out. The particulars given in paragraph 27(a) and (e) relate to the fact of majority groups denying the minority shareholders of their rights to subscribe to the issue of new shares of the Company in oroportion to respective holding and to their attempts to gain absolute control over the Company with considerable financial advantages to themselves, depriving the minority group from any effective voice in the affairs of the Company. These particulars are repetitions of what his been discussed in connection with the oppression of the minority.
36. Paragraph 27(c) alleges that respondents 2 and 4 in breach and violation of the Agreement dated 27th July 1954 withdrew a large sum of money amounting to Rs. 7 lacs from the tills of the Company and in spite of repeated requests failed to fefund : the sum to. the Company. This assertion has not at all been dealt with as a feature of mismanagement by the learned Company Judge apparently for the reason that in his view it constitutes no mismanagement. The reply of the contesting respondents is that on 13th October 1955 the Board of Directors of the Company sanctioned the transfer of Rs. 3,40,000/- to respondent 2 and another equal sum to respondent 4 at the request of the Kalinga Industrial Development Corporation Limited. On the 24th November 1955 these sums were transferred to the credit of respondents 2 and 4 and were withdrawn by them in accordance with the terms of the agreement as the Company made a profit of more than Rs. 14 lacs during the year ending 31st March 1956. This Board resolution was confirmed in the Board meeting presided over by the petitioner on 12th January 1956. The said sums were utilised by both of them for purchase of new shares issued by the Company. Mr. Mitra contends that the profit for the year ending 31st March 1956 was not ascertained till 19th December 1956 and respondents 2 and 4 should not have withdrawn these sums before the profits were ascertained by the Auditor.
There is no substance in this contention. The amounts were to be withdrawn after profits accrued. Profits did in fact accrue and it is immaterial when the Auditor submitted report. The only default was that the share payable to the petitioner out of the withdrawal was not paid, but to that extent respondents 2 and 4 were debtors to the petitioner. This does not in any way relate to the mismanagement of the affairs of the Company. Soon after withdrawal when the petitioner came to know of this in the Board meeting over which he presided on 12th January 1956, he did not take any objection. Neither he wrote any letter io respondents 2 and 4 for enforcing his claim. It was purely a personal claim against respondents 2 and 4. The petitioner took objection to the withdrawal for the first time on 16th October 1957 long after the withdrawal and only when misunderstanding grew amongst them. On 19th October 1957, he wrote to respondent 2 as follows :
'You told me sometime back that a sum of Rs. 3,50,000/-has been taken by you and Rs. 3,50,000 have been taken by Loganathan. I request you and. Mr. loganathan, in terms of that agreement to jointly pay me one third of Rs. 7,00,000/- i.e. Rs. 2,33,333/-. 33nP plus interest from the date the money has been taken from the Company. You told us that half of Rs. 2,33,333.33nP i.e. Rs. 1,16,666.67 will be paid by you and half will be paid by Mr. Loganathan. I, therefore, request you to kindly arrange to pay me your portion of the money with interest and arrange the other half to be paid by Mr. Loganathan. An early remittance and reply will oblige.'
The letter clearly shows that respondent 2 promised to pay one-third share of the petitioner, and there was no objection on the part of the petitioner to the withdrawal which was definitely after the profits accrued. It merely amoutits to a breach of personal covenant to the petitioner and neither in terms of the agreement or otherwise it is a breach in relation to the Company or in the management of its affairs. It is contended by Mr. Mitra that the balance sheet was not read and confirmed by the Board until 12th December 1956 and it was therefore not possible for the petitioner to know the fact of this withdrawal until it was printed and he got a copy thereof. Even accepting this to be true, the petitioner never seems to have put in any objection for a period of one year thereafter.
37. Paragraph 27 (d) relates to the fact that respon-dent-2 started making commitments in matters of sales, expan-sion project and appointments of managers according to his sweet will and without consulting the petitioner, who was at that time the Chairman of the Directors of the Company and without his approval. There is no evidence that there was any stipulation that respondent 2 as the Managing Director must act in consultation with the Chairman in the management of the Company's affairs. If on account of non-consultation the company was landed in difficulty resulting in loss of profits or mismanagement of its affairs, the position might be otherwise. But no such case has been made out and merely on the basis of non-consultation, which was not necessary, it cannot be said that the Company's affairs were mismanaged.
38. In paragraph 27 (f) the averment is that no accounts were shown to the petitioner and his group and unless the same are inspected and property scrutinised, the petitioner is not in a position to give full particulars of the several acts of frauds, misfeasance and other irregularities. It has not been established that the petitioner ever demanded inspection of the accounts before the petition was filed. Mr. Mitra gave us a list of instances when the accounts were sought for and inspection was never permitted.
All the instances are subsequent to the 14th September 1960, the date of filing of the petition. Facts and circumstances transpiring subsequent to the filing of the application must be ruled out of consideration. In the affidavit filed on 8th February 1961, further facts of mismanagement were mentioned in paragraph 11. Many of these allegations are thoroughly irrelevant for the purpose. For instance, the averment is that the Indian Tube Co. (1953) Limited has declared large dividends at 12i per cent and 14 per cent for the years ended 1958 and 1959 respectively and there is no reason why with better management the Company shall not be able to declare dividends at equal rates. It is not known in what circumstances the Indian Tube Company Limited is declaring large dividends and whether the same circumstance prevailed in this Company. Until the necessary date for comparison of both are available, no adverse inference can be drawn against the Company from the fact of mere declaration of smaller dividends. Under the agreement with the Industrial Finance Corporation and the Government of Orissa, the Company cannot declare any dividend higher than 6 per cent until the loans are paid up.
Reference has been also made to certain irregularities pointed out by Mr. Agarwalla in the Annual General Meeting of the Company held on 29th December 1960 and to the increase in the rate of selling commission and advances made by the Company and administrative expenses. Reply has been given on behalf of the Company with regard to these matters, but it is unnecessary to refer to those facts as they are alleged to have come into existence subsequent to the filing of the petition, and by mere allegation of those facts, a case of mismanagement has not been established. The petitioner ought to have made out a case by furnishing necessary evidence in proof of gross mismanagement.
39. These are all instances of mismanagement alleged to have been established. Even if those facts are accepted, no case has been made out under Section 398 of the Act. Section 398 may be quoted --
'398. Application to Court for relief in cases of mismanagement--
(1) Any members of a Company who complain --
(a) that the affairs of the Company are being conducted in a manner prejudicial to the interests of the Companny; 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 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 in the constitution or control of the firm 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 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, provid-ed 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 and control of the Company, it is likely that the affairs of the Company will bo conducted as aforesaid, the Court may, with a view to bring ing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.'
There are no materials that the affairs of the Company were being conducted in a manner prejudicial to its interests. Admittedly the Company has expanded its business and sale; and is making considerable profits. Though a material change has taken place in the management or control of the Company by an alteration in its Board of Directors inasmuch as the petitioner and his group are no longer in the Board of Directors, and in the ownership of the Company's shares also, there are no materials that by reason of such change it is likely that the affairs of the Company would be conducted in a manner prejudicial to its interests. That being the position, the question of interference by the Court with a view to bringing to an end or preventing the matters complained of does not arise.
40. There is no provision in the English Act, 1948 corresponding to Section 398 of the Act. The Company Law Committee, 1952, in its recommendation, suggested the incorporation of this section. A passage in para 198 at p. 149 of the said Report may be quoted --
'We have carefully examined the scope of this Section (Section 210 of the English Act) and consider that not only can it be suitably adapted to the circumstances of this country, but its scope may be appropriately enlarged to cover not only the cases of oppression to a minority of shareholders, but also of gross mismanagement of the affairs ot the Company which cannot otherwise be suitably dealt with under the other provisions of the Act. We accordingly recommend the enactment of 2 sections :'
On the basis of this Report, Section 398 was enacted. It was rightly observed in an unreported decision of the Calcutta High Court in Company Petn. No. 690 of 1961, A.H.M. Aby Saleque v. Mukhlur Rahaman, that Section 398 covers cases involving gross mismanagement of the aftairs of the Company. The particulars alleged in paragraph 27 or the petition and in the subsequent affidavit do not make out a case of mismanagement, much less a case of gross mismanagement. In my view, the application under Section 398 is wholly misconceived. Facts identical with those alleged under Section 397 have been made the basis of an application under Section 398. The two sections cover two different fields though there may be some degree of over lapping in the facts and circumstances of each case. In the unreported Calcutta case, the facts were telling for a find-Ing of mismanagement. Those facts are completely absent here.
In AIR 1956 SC 213, their Lordships made it deaf that whether mismanagement of directors is a ground for a winding up order becomes a question to be decided on the facts of each case. Where nothing more is established than that the directors are misappropriating the funds of the Company, an order for winding up would not be just and equitable, because if 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 may exist which render it desirable that the company should be woundup, the Court has jurisdiction to so direct. In the factJ of that particular case, mismanagement of the affairs of the Company was made out.
41. With regard to production of documents the learned Company Judge found that the Company did not produce documents called for by the petitioner from which necessary evidence to establish mismanagement can be gathered. He drew adverse inference for non-production of such documents. Reference was made to certain decisions of the Privy Council and Supreme Court. To examine the correctness of this finding, it is necessary to mention certain facts. A petition was filed by the petitioner on 5th April, 1961 asking for production of certain documents as mentioned in paragraph 5 of the petition.
The Company was directed by the Court on 7th April 1961 to produce these documents by 10th April 1961. On 9th April 1961 Mr. Roy Choudhury for the petitioner prayed for inspection of the minutes of Board Meeting of the Com pany for the period in which the petitioner was one of the Directors. Mr. R. Choudhury, counsel for the Company, objected to the inspection and asked for specific dates of the minutes of the Board Meeting. The Court was of opinion that the petitioner was entitled to inspect the minutes of the Board which were in the possession of the Company at least for the periods when the petitioner was one of the Directors. The Company filed an application on 14th April 1961. Para 3 may be quoted --
'The said books, documents and papers are being produced and kept in the court-room every day since 10th April, 1961. On the 10th April 1961 an oral application was made to his Lordship Mr. Justice Burman on behalf of the petitioner for an order directing the Company to allow inspection to his representatives P. R. Krishnamurty and Shamlal Agarwalla who were present in the court-room of the Director's minute book as also the Minutes Book of the General Meeting. Pursuant to the said direction, the Company handed over and allowed inspection of the said books to the said gentlemen and inspection thereof has been completed.'
In the application also there was a reference to other documents of which inspection has been given. The Company in paragraph 7 stated that the various documents of which inspection is being sought for by the petitioner are being so sought solely with the object of fishing out a new case. A counter was filed on behalf of the petitioner on 18th April 1961. In paragraph 12 it was averred that the documents already directed to be produted are available in Court under Orders of this Hon'ble Court and the petitioner should be allowed to inspect them and there is no justification for revising the said order. On 18-4-1961 the Company filed an application saying that there was a due inspection of the several applications for issue of shares and some other documents. There is no further order of the learned Company Judge. On the basis of the aforesaid affidavits and counter affidavits the only irresistible conclusion is that all the documents called for were produced in Court and were available for inspection. Some of the documents were definitely inspected by the petitioner.
There is no other evidence whether other documents produced in Court in accordance with the Court's direction were actually inspected or not. But one thing is absolutely clear that even if these were not inspected, it is the petitioner who is to blame. It is ultimately the Court who must enforce its own orders for inspection. The petitioner never brought to the notice of the Court that inspection was refused by the Company and there was disobedience of the orders of the Court. In the absence of such a complaint, the legitimate inference is that the petitioner inspected relevant documents and had no necessity to inspect further documents. In the circumstances, no adverse inference can be drawn against the Company that it disobeyed the orders of the Court and did not produce the documents, called fcr and gave no opportunity to the petitioner for inspection.
42. The petitioner has failed to make out even a prima facie case under Section 398.
Issue -- VIII :
43. The application is not maintainable under Section 397 and Section 398 of the Act. The petitioner is not therefore entitled to any relief.
44. The identical points arise in all the other appeals and need not be further discussed.
45. In the result, the application dated 14th September 1960 fails and is dismissed. The Judgment of the learned Company Judge dated 20th November 1961 is set aside and the appeals are accordingly allowed.
46. Parties to bear their own costs.
47. I entirely agree with my learned brother that the appeal should be allowed, but as I do not feel inclined to accept the grounds on which Mr. Justice Barman rejected the notice dated 1-3-1958 for the general meeting of 29-3-1958 as misleading and insufficient, I think it is proper to state briefly my own views on the subject. The relevant facts have already been stated in the judgment of my learned brother, but at the cost of repetition at some points, I would like to indicate briefly the facts and the circumstances that led to the Issue of the said notice for the meeting on 29-8-1958.
48. The appellant Kalinga Tubes Limited, hereinafter des-cribed as 'the Company' was incorporated on 1-12-1950 as a private Limited Company with a share-capital of 25 lacs divided into 25,000 shares of one hundred rupees each. Originally the shares of the Company were held by Mr. B. Palnaik, Mr. C. S. Loganathan, Mr. T. S. Narayanswami and Mr. J. S. Taraporewalla, and the Kalinga Industrial Development Corpo ration Limited, a Company which was practically controlled by Messrs. B. Patnaik and C. S. Loganathan. After the inception of the Company in 1950, it proceeded to acquire lands for erection of Factory buildings and purchase of plants ana machineries for their main business of manufacturing steel tubes, It also raised a loan to the tune of about 36 lakhs by issue of debentures which were guaranteed by the Government of Orissa.
49. The respondent Mr. S. P. Jain showed his inclination to join the Company and for that purpose necessary correspondence went on for sometime between the parties. On 27-7-1954, a memorandum of oral agreement was drawn between Mr. Jain on the First part, Mr. Patnaik as the second part and Messrs C. S. Loganathan, J. S. Taraporewalla and R. S. Narayan of the third part. On the date of the said agreement, the entire capital of 25 lacs had already been issued. 21,000 shares of the face value of 21 lakhs were held by the second and third parties to the agreement in their names or in the names of their nominees and in the name of Kalinga Development Corporation Limited, and of the balance of four thousand shares of the face value of four lakhs, 3750 shares were held by a French Company and 250 shares by Mr. N. Rath.
50. To the aforesaid agreement of 27-7-1954 neither the French Company nor Mr. Rath was a party. In the said agreement which was practically the foundation of the present litigation, it was agreed that the French Company and Mr. Rath will continue to hold their respective shares as before, but the 21,000 shares held by second and third par-ties to the agreement and their Company the Kalinga Industrial Development Corporation Limited, would be held and registered in their names or in the names of their nominees separately in equal proportion of 10,500 shares each, and similarly Mr. Jain of the first part or his nominee or the companies with which he is associated would be given 10,500, so that the shareholdings of the three groups (mentioned in the judgment under appeal as Jain Group, Patnaik Group and the Madras Group) shall always remain equal, with proportional representation in the Board of Directors. Since the entire authorised capital of 25 lakhs had already been issued and it was not possible to issue 10,500 shares to the Jain Group without increasing the authorised capital, it was agreed that the capital should be increased.
51. By a special resolution passed in an extra-ordinary General Meeting held on 11-8-1954, the authorised capital was increased from 25 lakhs to one crore by creation of seventy-five thousand more shares of the value of Rs. 100/-each. On 12-8-1954 a meeting of the Board of Directors was held wherein Mr. Jain was co-opted as an additional Director of the company and was elected Chairman of the Board of Directors in place of Mr. B. Patnaik. As sanction of the Controller of Capital Issues was necessary under Act 29 of 1947, Capital Issues (Control) Act, before issue of the share capital, applications were made from time to time to the said Controller and necessary sanctions were obtained until share capital to the extent of 61,000 was issued. The French Company was not interested in further acquisition of any share. In the meantime Sri N. Rath transferred his 250 shares which were shared equally by the three groups. In the result excluding the 3750 shares held by the French Company each of the parties to the agreement held equal number of shares that is, 19,083-l/3rd.
52. Things went on well between the parties for sometime and the Company started production on 1-4-1955 ana began to earn profits. With a view to expand the business of the Company, the necessity of raising more funds was felt and it was decided to issue the balance of 39 thousand shares (One Crore minus 61,000). For that purpose an application was made to the Controller of Capita! Issues on 17-9-1956 for permission to issue the remaining 39,000 shares privately to the existing Directors-shareholders and their nominees. During the pendency of this application before the Controller, the Company was converted to a public Limited Company with effect from 11-1-1957 and for that purpose, necessary alterations in the Articles of Association were made. On 24-1-1957 the Controller was also informed about the conversion of the Company into a public Limited Company.
On 18-12-1957 the Controller gave necessary sanction to the Company to issue privately the said 39,000 ordinary shares of the value of 39 lakhs subject to certain conditions being 'subject to the provisions of Section 81 of the Companies Act 1956' which is a condition to the consent that the new shares should be in the first instance be offered to the existing share-holders with the right of renunciation attached. This condition was obviously added because the Company had by then become a Public Limited Company. There cannot be any controversy between the parties that the very same persons who held shares as members of the Private Ltd. Co. continued to remain as such in the Public Limited Company and the issue of new shares were in the nature of issue of new capital after the first allotment as contemplated under Section 81 of the Act. The real controversy, however arose between the parties regarding the issue and allotment of these 39,000 shares.
53. A meeting of the Board of Directors under the Chairmanship of Mr. Jain was held on 1-3-58. In the said meeting a controversy arose whether the said new shares should be issued to the existing share-holders only or to outsiders or to both and whether necessary direction has to be obtained from the General Meeting for that purpose. Mr. Patnaik was of the opinion that in view of some of the provisions of the Companies Act and in view of the condition imposed by the Controller of Capital Issues that the fresh shares shall be issued subject to the provision of Section 81 of the Companies Act, the matter could be decided only by a General Body Meeting, and for that purpose, an extraordinary General Meeting should be called. Mr, Patnaik therefore, proposed the following resolution in the aforesaid meeting of the Board of Directors :
'Resolved that an extraordinary General Meeting of the Company be convened on Saturday the 29th March 1958 for the purpose of considering and if thought fit to pass necessary resolution for the issue of 39,000 ordinary shares and the 'manner and proportion in which the shares are to be offered 'privately' to the share-holders and 'other persons' and for other incidental matters subject to the provisions of the Companies Act.'
Mr. Jain, however, proposed amendment to the said resolution which was to the following effect :
'Resolved that an Extraordinary General Meeting of the Company be convened on Saturday the 29th March 1958, for the purpose of considering and if thought fit for passing the necessary resolution for the issue of 39,000 shares privately to the Share-holders as per the provisions of the Indian Companies Act.'
Thus, both parties agreed to refer the matter to the General Meeting. The only difference between them was whether the entire shares should be issued to the existing share-holders only or to the other persons as well. After discussion on the matter, the resolutions were put to vote and the resolution proposed by Mr. Patnaik was passed by majority, Mr. Jain voting against the same. The Board also approved the draft Notice for convening the Extraordinary General Meeting on 29-3-1958 which runs as follows :
'NOTICE is hereby given that an extraordinary General Meeting of the Share-holders of Messrs. Kalinga Tubes Limited will be held at its Registered Office at Chouduar in Cuttack on Saturday the 29th day of March 1958 at 11 a.m., for the purpose of considering the following matters and passing the necessary resolutions in connection therewith
1. To authorise the Directors to issue 39,000 ordinary shares of the face value of Rs. 100/- each.
2. The manner and proportion in which such shares are to be issued.
By order of the Board of
The 1st. March 1958.
N. B. -- Any share-holder who is entitled to attend and vote is entitled to appoint one or more proxiesto attend and vote instead of himself and that the proxy need not be a member.
The Controfler of Capital Issues has by letter No. E. 391-CCI/57 dated 18th December 1957, consented to the issue of 39,000 Ordinary Shares by the Company of the face value of Rs. 100/- each on certain terms and conditions. The consent of the Central Government has been obtained to the issue by the said order of which complete copy is open to public inspection at the head office of the Company. It must be distinctly understood that in giving this consent Government of India do not take any responsibility for the financial soundness of any of the scheme or for the correctness of any of the statements made or informations expressed with regard to them.
It is necessary in the interest of the Company to increase its share capital and the moneys are urgently needed by the Company for the purpose of expansion of its business.'
54. On receipt of the said notice Messrs Bharat Nidhi Ltd., one of the share-holders of the Company belonging to Jain Group sent a letter on 12th March 1958 to the Managing Director of the Company complaining that the issue of new shares should be offered to the existing share-holders in proportion to their , holding and not to any outsiders. They also pointed out that in the Explanatory Statement to the said notice there was no indication as to any other manner in which the shares were proposed to be issued and that a copy of the draft resolution to be placed in the General Meeting should have accompanied the notice itself. In reply to the above letter Mr. Patnaik as Managing Director of the Company sent a communication on 20-3-58 informing the Bharat Nidhi Ltd., that the notice was drafted by the solicitor of the Company and had received the approval of the Board of Directors including its Chairman, Mr. Jain and in any case it was open to the parties to put forward any resolution in the General Meeting as they liked.
55. In the usual course, the extraordinary General Meeting was held on 29-3-1958 and in the absence of Mr. Jain, Mr. Patnaik was voted to the Chair on the proposal of Mr. D. R. Sabarwall of Jain Group. In the said meeting the following resolution was moved by Mrs. Gyan Patnaik :
'Whereas the further issue of 39,000 ordinary shares in the Company, each of the face value cf Rs. 1007-has been duly sanctioned by the Controller of Capital Issues, as per terms and conditions appearing in his letter No. R-391-CCI-5 dated 18-12-1957.
Resolved that the said 39,000 ordinary shares of Rs. 100/- each shall not be offered or allotted to the existing holders of the equity shares in the Company or to the Public.'
On behalf of the Jain Group, an amendment was moved to the following effect :
'That the 39,000 shares shall be offered to the existing share-holders of the Company in the proportion of the share-holdings so held by them and the offer shall remain open for a period of 15 days with the right to accept or renounce the whole or part of the offer in their names or in the names of their nominee or nominees if the shares are not accepted within the period allotted, the offer shall be deemed to have been declined by them.'
On this amendment a poll was demanded and the resolution of Mrs. Patnaik was carried by a vote of 38,165 as against 19,083, the French Company being absent from the meeting, in person or proxy. The result of the voting showed that the vote was cast on the basis of 2/3rd; l/3rd. On 18-4-58 Mr. Jain and two other companies with which he was associated filed a Title suit No. 21/58 in the Court of the Subordinate Judge of Cuttack against the Kalinga Tubes Ltd., and others for a declaration that the resolution passed at the aforesaid Extraordinary General Meeting of the Company on 29-3-58 was ultra vires, illegal and void and was not binding on the plaintiff and sought for a permanent injunction against the appellant-Company and others restraining them from giving effect to or acting in any other way in pursuance of the aforesaid resolution or to issue or allot any shares in terms of the said resolution, and obtained an interim injunction to that effect.
In the meanwhile the meetings of the Board of Directors were held from time to time, one of the objects of such meetings being to proceed to allot the shares in accordance with the resolution of the General meeting dated 29-3-58, but on account of the aforesaid injunction order they were unable to take into consideration the question of allotment of the fresh 39,000 shares. On 30-7-58 the day fixed for the meeting of the Board of Directors the Subordinate Judge vacated the interim injunction passed on 18-4-58. Immediately after the said injunction was vacated, the Board of Directors proceeded to allot all the 39,000 shares to persons other than the existing share-holders. Mr. Jain and others carried an appeal to the High Court against the aforesaid order of the Subordinate Judge and Mr. Justice Rao in Misc. Case No. 77/58 dismissed the appeal. Against his decision, an appeal was preferred before a Division Bench of this Court which however was not pressed and was dismissed on 28-11-60.
56. In the meanwhile, the Company proposed to convene another Extra-ordinary General Meeting on 21-9-60 with a view to increase its share capital from one Crore to three Crores. Mr. Jain filed an application u'nder Sees. 397 and 398 of the Companies Act (Company Act case No. 10/60) on 14-9-60 alleging acts of oppression and mismanagement and praying inter alia for a declaration that the resolution regarding the allotment of 39,000 ordinary sltares passed in the meeting of the Board of Directors on 29-3-58 was ultra vires, and that the said allotments should be confined only to the existing share-holders including the l/3rd share of his group, and to restrain the Company from passing a resolution to increase share-capital from one crore to three crores as proposed to be done in the General meeting of 21-9-60, and for re-constitution of the Board of Directors with at least two of their permanent representatives in the Board of Directors so as to ensure equal representation of the three parties.
Barman, J., by his order dated 20-11-61 held inter alia that the notice of the General Meeting of 29-3-58 was misleading in nature and the transaction of business in pursuance of the said notice in the meeting held on 29-3-58 was invalid. Therefore the allotment made on 30-7-58 in accordance with the directions of the General Meeting of 29-3-58 was equally invalid and was not a bona fide transaction and the allotment of 39,000 shares! was made with a view to oust the Jain Group. It was further directed in the aforesaid order that the transfer of 13,000 shares (1/3rd share of 39,0003 should be made to Mr. Jain and his group so that he might get his 1/3rd share in the further issue of capitals. It is against the said decision, the present appeal has been filed.
57. Regarding the other findings and reliefs given in favour of the petitioner, my learned brother has already elaborately dealt with the same. I would, however, Eke to add a few words of my own regarding the alleged invalidity of the notice of which considerable arguments were advanced by learned Counsel for both parties.
58. At the outset, I must say that the plea of invalidity of the notice was not taken either in the plaint which was filed in the Court of the Subordinate Judge or in the petitions and affidavits before the Honourable Company Judge of this Court. At a fairly late stage of the case, oral submissions were made challenging the validity of the notice for the Extra-ordinary General Meeting of 29-3-1958. On that ground alone, the point could have been left out of consideration. Since, however, a good deal of arguments had been advanced both on facts and on law touching the question of notice and in the judgment under appeal the learned Judge had knocked down the allotment of 39,000 shares mainly on the ground of insufficiency and invalidity of the notice, it is desirable to deal with this point at some length.
59. It was contended by the learned counsel for the respondent No. 1 that the notice for the General Meeting of 29-3-58 was an invalid one as it was not in accordance with Section 173 of the Companies Act. That section requires that for a meeting where some special business was to be carried on, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business. There cannot be any dispute that the further issu'e of capital that was scheduled to be decided on 29-3-58 was a special business within the meaning of Section 173 and as such an explanatory statement setting out all material facts concerning each item of business ought to accompany the notice. As seen above, there was, however, one explanatory statement relating to the further issue ot 39,000 ordinary shares by the Company. It was urged that the said explanatory note related only to item No, 1 of the agenda and not to item 2. This contention appears to be somewhat erroneous. Items Nos. 1 and 2 were manifestly co-related and dealt with one and the same subject-matter, namely, the issue of further shares.
No doubt, nothing has been specifically mentioned in the explanatory statement about the manner and proportion in which the shares were to be issifed, but the further question is in what precise manner any explna-tory note could have been given in respect of this item of the agenda. The manner and proportion in which the said 39,000 shares were to be issued was itself a matter for the General Meeting to decide. The Board of Directors could not possibly visualise each and every kind of such manner and proportion in which the shares could fie issued so as to incorporate them all in the explanatory statement. No doubt, Section 173 requires that the explanatory statement should reveal the material facts concerning each item of business, particularly the nature and extent of interest, if any, of any director on each such item. Here, however, no question arises about the disclosure of any interest of any director and the only question is whether the notice was invalid for want of necessary particulars in the explanatory statement.
As I have said above, the explanatory note given with the notice related to both the item Nos. 1 and 2 and that it was not possible under the circumstances to give any further explanatory note with particular reference to item No. 2. Further, it has also not been stated by respondent No. 1 in his petition as to what exactly were the material facts which ought to have been given in the notice, but had been so withheld from the members. As seen above, the very point regarding the invalidity and insufficiency of the notice has not been taken anywhere in any of the petitions and affidavits of respondent 1 and the question of the invalidity of the notice was urged only for the first time in course of the arguments at a belated stage of the case.
Had any such objection been taken in the petitionat the earliest instance, the appellant could as wellhave shown that no such material facts were relevant orcould 'have been given. In particular cases, the omissionto state the material facts may invalidate the noticeand consequently may hit the relative resolution passedin a meeting of the share-holders who might be completelymisled by the terms of the notice. In the present casehowever, no such situation arises. In the meeting of theBoard of Directors held on 1-3-58 where the draft noticeitself was approved, Mr. S. P. Jain himself was present'and was the Chairman of the said meeting. The questionregarding the manner and proportion of the further issueof shares was also raised there.
Out Mr. Patnaik moved a resolution to the effect that an extraordinary general meeting be called for 29-3-1958 to decide the 'manner and proportion' in which the further issue of 39,000 ordinary shares was to be made privately to the share-holders and 'other persons subject' to the provision of the Companies Act. To the said resolution, Mr. iain himself moved an amendment. He had raised no objection to the convening of an extraordinary general meeting. But all that he wanted was that such issues should be confined only to the existing share-holders as per the provisions of the Companies Act.
Thus, both the parties wanted that the matter should be decided in an extraordinary general meeting in accordance with the' provisions of the Companies Act, the only difference between them being if the issue of shares was to be confined to the existing shareholders or not. No doubt, such new shares shall have to be offered to the persons who at that date of the offer are holders of the equity shares of the Company in proportion as nearly as circumstances admit to the capital paid up on those dates as contemplated under Section 81(1)(a) of the Companies Act, but under the provisions of the said section it is also open to the general meeting to give any contrary direction in the matter. Once the matter is left to the General Meeting, for decision, it is no more open to the Directors or any individual share-holder to make any grievance if the general meeting gives any direction contrary to the manner of issue provided under Section 81(1)(a) of the Act.
It cannot be disputed that by the date of the meeting, theCompany had ceased to be a private limited company andhad become a public limited company and the very sameshare-holders of the private limited company continued tobe so in the public limited company and on that footing theissue of further capital of 39,000 shares was subsequentfo the first allotment and Section 81 in terms applies tosuch a case.
60. I have already said that Mr. Jain was not only present in the meeting of the Board of Directors on 1-3-58 out be also moved a counter-resolution regarding the manner and proportion of the issue of further shares and the notice for the general meeting was also drafted there. Mr. Jain when he left the meeting of the- Board of Directors, was supposed to have left with the clear impression that the whole matter including the manner and proportion of Issue of further shares was to be decided by the General meeting alone. It was contended on behalf of Mr. Jain that the resolution of Mr. Patnaik as passed by the Board of Directors gave a clear indication that the existing share-holders shall also be issued some shares along with the outsiders, as the terms of the resolution were that shares were to be Issued to the 'share-holders and other persons' and as such did not contemplate a case of complete exclusion of the existing share-holders. It was however urged that even a small ratio of proportion was to be issued to the existing share-holders according to the terms of the said resolution.
There is no force in this contention. The powers of the General Meeting are absolutely plenary in nature and are not restricted by the terms of the resolutions of the Board of Directors. The Board of Directors cannot dictate as to in what manner the general meeting would give its own deci- sion. In fact from the letter dated 12th/17th March 1958, the Bharat Nidhi Limited, a company with which Mr. Jain is associated, to the Managing Director of the Company It appears that the said Company was fully conscious of the powers of the general meeting, but all that was contended that the new shares should at the first instance have been offered in accordance with the provisions of Section 81(1)(a) and as envisaged in the application to the Controller.
It may be mentioned here that the application to the Controller of Capital Issues was made at a time when the Company was still a private limited company and thus the above section had no application to it, whereas by the time the sanction was given by the Controller the Company bad already been converted to a public one and thus attracting the provisions of Section 81. One of the grievances pointed out in that letter was that the explanatory note to the notice did not give any indication of the proposed issue in any other manner. In what other manner the proposed shares were to be issued, as I have said above, could not possibly be exhaustively given in any explanatory note as the final say rested with the General meeting. Mr. Patnaik the Managing Director in his reply dated 23-3-1958 pointed out that the matter had to be decided by the share-holders in the General meeting, wherein it was open to the party to put forward any resolution as it thought fit.
61. It was further contended that the notice of the general meeting was not accompanied by a copy of the resolution according to the previous practice of the Company. On this point also there is no specific allegation in any of the affidavits. If any such practice would have been pleaded in the affidavit, the opposite party may as well have repudiated the same or given some explanation for the deviation, if any, that was made in the present case. In the absence of any such pleadings, it is too late for the learned counsel for the appellant to contend that such was the practice in vogue in the Company. Section 173 of the Indian Companies Act does not contemplate any such resolution to accompany the notice. Barman, J. in his judgment under appeal was of the view that the notice for the extraordinary general meeting for 29-3-1958 should have contained a draft or substance of the resolution that was to be passed in the general Meeting.
With great respect, however, I would differ from that view as neither the provisions of the law nor the facts alleged in the case do support such a position. 1 have already held that the explanatory statement that accompanied the notice for the general meeting was comprehensive enough to include both items 1 and 2 of the agenda. In this view of the matter it cannot be said that the notice was not in compliance with the statutory requirements of Section 173 of the Companies Act and the meeting held on the basis of such notice or the resolution passed therein was in any way invalid.
62. Assuming, however, that some facts which were material to the notice had been omitted from it, the further question that arises for consideration is whether the mere omission of such facts would invalidate the notice and resolution passed in the meeting convened by the said notice would be held to be void and ultra vires. In the instant case, the parties were fully aware as to what exactly were the matters that had to be taken into consideration by the General meeting. Not only that they were present in their full strength but in person and by proxies in the General meeting, but they also moved an amendment to the resolution which was lost. As already stated, Mr. Patnaik was voted to the Chair on the proposal of Mr. D. R. Sabharwalla, a member cf the Jain Group. In the usual course, one would expect that any irregularity or invalidity in the notice should have been brought to the notice of the Chairman before proceeding on the business on tjje agenda, but no such thing was done.
If any such objection would have been taken to the notice, the Chairman might have accepted the same and taken steps to call a fresh meeting in accordance with the provisions of law, but instead the meeting was allowed to proceed. I have already indicated how on the resolution of Mrs. Gyan Patnaik, an amendment was moved on behalf of the Jain group which was lost. Thus not only Mr. Jain's group were fully aware of the implication of the notice, but they also fully participated in the proceedings and put forth their own view point before the general meeting which, however, refused to accept the same.
63. It is well settled that where a share-holder by his conduct shows that he knew the real effect of work to be transacted at a meeting he cannot complain of the notice on the ground of its insufficiency, AIR 1928 PC 180, Parashuram Dataram v. Tata Industrial Bank Ltd. This view was also followed by a Division Bench of the Calcutta High Court in a case reported in Lalita Rajyalaxmi v. Indian Motor Company (Hazaribagh) Limited, AIR 1962 Cal 127. In this case the effect of the non-compliance of Section 173(2) of the Companies Act also came up for consideration. Their Lordships held that how much is 'all material facts' and what is the 'nature and extent of interest' under Section 173(2) are questions of fact dependable on the facts of each case and a party who knew the real nature of the transaction cannot complain of the insufficiency of the notice.
In the instant case the real difficulty of Mr. Jain's group was that a majority of the share-holders did not support them and in that view of the matter any amount of elucidation in the explanatory note would not have been of any avail. Had they been in majority; they would have been able to pass their amendment to the resolution of Mrs. Gyan Patnaik. In fact it was open to any member to put forth an amendment which could not be ruled out by the Chairman provided It was not foreign to the ambit cf the agenda and was not counter to the original resolution itself. Apart from a member of the Jain Grou'p, it was also open to any other member to put forth any relevant amendment and carry the same through provided the majority supported the same. No mala fides can be attributed to a general meeting for passing any such resolution. The general meeting, unlike the Board of Directors, have also no fiduciary relation with the general body of share-holders.
64. It was contended that assuming that the shareholders of the Jain's group were present in the meeting of the Board of Directors held on 1-3-1958 and were thus aware of the full implications of the notice, the notice was still vague and invalid so far as the other share-holder such as the French Company was concerned, as the Court has as much to look to the interest of the absentee share-holders as those of the dissentient share-holders as the resolution passed in the general meeting binds them both. This approach-in the present context is purely academical. The French Company did not care to attend the meeting nor has it filed any objection that it was misled or prejudiced by any such notice on account of the absence of a proper explanatory note. In view of my finding that the explanatory note covered both the items and there was possibly nothing further to be added to it, no such question does arise for consideration.
65. Thus the contentions regarding the invalidity or insufficiency of notice and the consequent invalidity of this resolution regarding further issue of 39,000 shares cannot be accepted.
66. The appeal must accordingly be allowed.