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Suresh Chandra Marwaha Vs. Lauls Private Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtPunjab and Haryana High Court
Decided On
Case NumberLetters Patent Appeal No. 189 of 1972
Judge
Reported in(1973)75PLR558
ActsCompanies Act, 1956 - Sections 155, 171 to 173, 397, 398 and 398(1)
AppellantSuresh Chandra Marwaha
RespondentLauls Private Ltd. and ors.
Appellant Advocate L.K. Gaur, Adv.
Respondent Advocate B.S. Kamthania, Adv.
DispositionAppeal dismissed
Cases Referred and Mrs. Gajarabai M. Patny v. Patny Transport
Excerpt:
.....control, to act contrary to the decisions of, or without the authority of, the 'duly constituted board of directors of the company. that there may well be oppression from the point of view of member-directors where a majority shareholder (that is to say, a shareholder with a preponderance of voting power) proceeds, on the strength of his control, to act contrary to the decision of, or without the authority of, the duly constituted board of directors of the company. it clearly shows that in that case the father was acting against the interest of the company and contrary to the wishes of the duly constituted board of directors. it is well known that every agenda of a meeting has a residuary clause 'to consider any other matter with the permission of the chairman 'the matter with regard..........directors consisted of navin deepak laul, arvind laul and shrimati shiv chandrika marwaha. at the meeting held on that date, shrimati shiv chandrika marwaha was absent and chander sagar gupta and gyan sagar gupta were present by invitation. as a result of the transfer of shares in favour of various persons, the management of the company changed. navin deepak laul and arvind laul ceased to be the directors of the company and their places were taken by chander sagar gupta and gyan sagar gupta. shrimati shiv chandrika marwaha continued to be a director and the appellant was also co-opted as a director on july 7, 1969. some differences seem to have arisen between the appellant and the other directors excluding his mother and one of the removal of the appellant from the directorship of the.....
Judgment:

1. The appellant, Suresh Chandra Marwaha, filed a petition under Sections 397 and 398 of the Companies Act against the respondents which was dismissed by the learned single judge on March 17, 1972, and this appeal under Clause 10 of the Letters Patent has been directed against that order.

2. The appellant is a shareholder of M/s. Lauls Private Ltd., Faridabad (hereinafter called ' the company '), holding 5 shares of Rs. 100 each. His mother, Shrimati Shiv Chandrika Marwaha, holds 754 shares and the petition has been filed with her support. Thus, the appellant and his mother hold more than 10 per cent. shares of the company and were entitled to file a petition under Sections 397 and 398 of the Companies Act.

3. The company was incorporated as a private company limited by shares in 1933 and its principal promoter was Shri S. R. Laul, advocate. Articles 6 and 8 of the company provided as under :

' 6. That no shares of this company shall be held by any person other than the descendants of Mr. S. R. Laul except such shares as have been or are transferred with the previous consent of the board of directors as laid down in Article 6 or are allotted to any outsider hereafter by the board I

Provided that this article shall not affect holding of shares by Shrimati Ishwara Devi Laul herself personally.

7. That all shares presently held by the shareholders on the death of Shrimati Ishwara Devi Laul or of any of the descendants of Mr. S. R. Laul without any direct issue of such descendant and on the extinction of the line, shall revert to Mr. S. R. Laul or in case of his earlier death to his direct descendants and shall be divisible amongst them according to Hindu law of inheritance subject always to the provisions of Article 6 above :

Provided that the provisions of this article shall not apply to bona fide outsider transferees or allottees or their representatives as are contemplated in Article 6 above but shall apply to all shares re-transferred to the original holder out of his holding, the holder shall include his or her descendants.

8. The provisions of Articles 6 and 7 shall also be applicable to all shares hereinafter allotted to any person by way of gift from or in consideration of money paid by Mr. S. R. Laul.'

4. Article 9 makes a provision for the transfer of shares by the board of directors who have been given the right to decide to transfer shares without assigning any reason, etc.

5. From time to time many relations of Shri S. R. Laul, other than his descendants, were allotted shares, as is clear from annexure III, wherein two sons-in-law, two daughters-in-law, one grand-daughter (daughter of a daughter) and one niece (brother's daughter) are mentioned. The appellant is the son of Shrimati Shiv Chandrika Marwaha, a daughter of Shri S. R. Laul.

6. M/s. India Iron Traders Corporation, Motia Khan, Delhi, was a creditor of the company to the tune of about Rs. 4 lakhs. Failing to recover the amount from the company, the said firm filed a petition for the winding up of the company in this court on May 2, 1969. It appears from the averments in the petition and the annexures annexed thereto that a compromise was arrived at between some of the directors of the company and the partners of M/s. India Iron Traders Corporation under which the members of the Laul family owning 2,869 shares agreed to transfer their shares to Chander Sagar Gupta, a partner of M/s. India Iron Traders Corporation and his associates, for a consideration of Rs. 50 per share. A meeting of the board of directors was held on May 27, 1969, to give effect to the said transfers and to make Chander Sagar Gupta and Gyan Sagar Gupta, directors of the company, in place of Navin Deepak Laul and Arvind Laul. It may be noted here that on May 27, 1969, the board of directors consisted of Navin Deepak Laul, Arvind Laul and Shrimati Shiv Chandrika Marwaha. At the meeting held on that date, Shrimati Shiv Chandrika Marwaha was absent and Chander Sagar Gupta and Gyan Sagar Gupta were present by invitation. As a result of the transfer of shares in favour of various persons, the management of the company changed. Navin Deepak Laul and Arvind Laul ceased to be the directors of the company and their places were taken by Chander Sagar Gupta and Gyan Sagar Gupta. Shrimati Shiv Chandrika Marwaha continued to be a director and the appellant was also co-opted as a director on July 7, 1969. Some differences seem to have arisen between the appellant and the other directors excluding his mother and one of the removal of the appellant from the directorship of the company under Section 284 of the Companies Act (sic). That notice was considered by the board of directors in the meeting held on November 7, 1970, of which notice was given to the appellant and his mother and both went to attend the meeting but left on the ground that the holding of the meeting was contrary to the restraint order issued by the civil court in spite of the assurance of the chairman that the proceedings that were going to be conducted at the meeting would not violate the restraint order. After the appellant and his mother left, the board of directors co-opted two more directors, Ashok Kumar Gupta and Anand Prakash Jain, and sanctioned certain transfers of shares. One of the resolutions passed at the meeting was to convene an extraordinary general meeting of the company to be held on December 3, 1970, at 3 p.m. to consider and, if thought fit, to pass the following resolution as proposed by Subodh Kumar Gupta, one of the members of the company :

'Resolved that Shri S. C. Marwaha, one of the directors of the company, be and is hereby removed from the office of directors as he is guilty of activities prejudicial to the interest of the company.

Resolved further that the copy of the notice received from Shri Subodh Kumar Gupta, be forthwith sent to Shri Suresh Chandra Marwaha to enable him to make his representation, if any, to place before the general meeting.

Resolved further that if any representation is received from Shri Suresh Chandra Marwaha, the same be promptly circulated to all the share-. holders and placed before the general body meeting along with the notice of Shri Subodh Kumar Gupta.

Resolved further that the secretary of the company is strictly directed to comply with the provisions of the law, including the despatch of notice and explanatory note with other papers and all other matters relating to the meeting.'

7. The appellant was thus removed by a resolution of the company under Section 284 of the Companies Act.

8. On November 6, 1970, the appellant filed a suit challenging the transfer of shares in favour of respondents Nos. 2 to 26. That suit was withdrawn during the pendency of the petition under Sections 397 and 398 of the Companies Act. A petition under Section 155 of the Companies Act was, however, filed by Mrs. Abha Kumar, a sister of the appellant, in this court for rectification of the register of members on the ground that the transfer of shares in favour of respondents Nos. 2 to 26 was contrary to law and the articles of association of the company. That petition is still pending.

9. The appellant prayed for the following reliefs in his petition under Sections 397 and 398 of the Companies Act :

'(A) Restraining respondents Nos. 2, 4 and 26 (all directors) from acting or conducting the affairs of the company and day-to-day dealing of the company for and on behalf of the company in any way.

(B) Restraining respondent No. 1, the company, from allowing respondents Nos. 2, 4 and 26 from acting as its directors and directing the company to elect new directors from the descendants of Shri S. R. Laul, Advocate, who are its valid and legitimate members.

(C) Restraining respondents Nos. 2 to 26 from voting for any business of the company or working of the company, for and on behalf of the company, or representing themselves as the members of the company or voting into power respondent No. 2 or his associates or in any way entrusting the management or handing over the control of the company to respondent No. 2 or his associates (benamis).

(D) Restraining all the respondents from distributing, selling out, or transferring of their shares, assets, machineries, fixtures, properties, or lands of the company, owned or possessed by it or belonging to it, without the prior permission of this hon'ble court.

(E) Restraining all the respondents from operating bank accounts, for and on behalf of the company, or incurring expenditure, raising loans, investing the funds of the company, or in any way appropriating the raw material, finished material or liquid cash taken from any Government or repayment of any loans taken by them for and on behalf of the company.

(F) Restraining the respondents from enjoying any fringe benefits, privileges, or other facilities granted or afforded by the respondent-company in any capacity.

(G) To remove the secretary, Shri Tirath Ram Kundi, from the secretaryship of the respondent-company, and to appoint a new impartial and qualified secretary for the company.

(H) Constituting a committee of management consisting of the descendants of Shri S. R. Laul, Advocate, alone shown in serial Nos. 26 to 31 in Annexure 'VIII' at page 82 of the petition to supervise, control and manage all the affairs of the company including its day-to-day affairs, correspondence, banking operation, business deals, and other incidental activities.

(I) Costs of the petition may also be awarded to the petitioner.

(J) Any other or further orders, which this Hon'ble High Court may deem fit and proper, under the circumstances of the case, may also be passed in favour of the petitioner and against the respondents.' The petition was contested by the respondents and 22 issues in all were framed out of which the following 7 issues were treated as preliminary issues :

' 1. Whether the petition should be stayed on the ground that two suits relating to the same subject-matter filed by the petitioner in the Court of the Subordinate Judge, Ballabgarh, are pending ?

2. Is the petition bad for misjoinder of parties ?

3. Whether the consent of Shrimati Shiv Chandrika Marwaha in upport of the petition constitutes a valid consent as contemplated by the Act and the Rules framed thereunder ?

4. Is the petition not maintainable on the principle of internal management as alleged in paragraph 7 of the reply ?

5. Has the petitioner given sufficient particulars of his allegations of activities oppressive to the petitioner and prejudicial to the interest of the company ?

6. Was the change in management brought about in May, 1969, in the interest of the creditors of the company and in the interest of the company ?

7. If issues Nos. 4, 5 and 6 are decided against the petitioner, is the petition maintainable under Sections 397 and 398 of the Act ' The learned single judge held issues Nos. 1 and 4 in favour of the appellant. Issues Nos. 2 and 3 were not pressed by the learned counsel for the respondents and issues Nos. 5 and 6 were decided against the appellant with the result that the petition was dismissed.

10. The learned single judge has pointed out that the appellant has not made any specific allegations of oppression of any member or members of the company and vague allegations have been made with regard to the management of the affairs of the company by the present management as being prejudicial to the interest of the company. We have gone through the petition and find that the entire case of the appellant depends on the validity of the transfer of shares effected on May 27, 1969, and November 7, 1970, in the meetings of the board of directors which have been challenged in the petition under Section 155 of the Companies Act by the appellant's sister, Mrs. Abha Kumar. Since the petition under Section 155 of the Companies Act is a better remedy, it is not proper to make investigation into the same facts in the petition under Sections 397 and 398 of the Companies Act, particularly because the names of respondents Nos. 2 to 26 cannot be removed from the register of members by an order passed in this case nor has any such relief been claimed. For the purpose of this petition and appeal, it will have to be presumed that all the members whose names are entered in the company's register of members are valid members. The present board of directors, having been constituted by the existing members, cannot be held to be improperly constituted. It is, therefore, necessary that the petition under Section 155 of the Companies Act should be decided first. As long as the present register of members of the company continues, those members cannot be restrained from exercising their individual and corporate rights as shareholders and most of the reliefs prayed for by the appellant cannot be granted.

11. The appellant has not adopted an above-board method. He has filed the petition under Sections 397 and 398 of the Companies Act himself with the support of his mother without making his sister a party, while the petition under Section 155 of the Companies Act has been filed by his sister, to which the appellant and his mother have not been made parties. The counsel of the petitioner in each petition is the same and the game seems to be quite clear that if the decision goes against the petitioner in one case, the petitioner in the other will say that he or she is not bound by that decision because he or she was not a party thereto. Unless the transfer of shares in favour of respondents Nos. 2 to 26 is held to be invalid, no relief can be granted to the appellant in the present case as it cannot be said that the board of directors of the company is not properly constituted at present.

12. The whole case of the appellant is that, because of transfers of shares, a change in the management of the company has taken place and the present board of directors is managing or will manage the affairs of the company in a manner prejudicial to the interests of the company and the minority shareholders represented by himself, his mother and sister. Otherwise, no instances have been stated in the petition as to the acts of mismanagement by the present board of directors except that the appellant has been removed from the directorship of the company and has been deprived of all the consequential benefits as a director. That grievance is as a director and not in the capacity of a shareholder. It is well settled that only oppression in the character of a member has to be complained of and not in any other capacity. Reference in this connection may usefully be made to the judgment of their Lordships of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535. In C.L. Joseph v. Jos [1964] 34 Comp Cas 931 ; AIR 1965 Ker 68, the learned judge held that a shareholder has two kinds of rights, namely, individual rights and corporate rights. Every shareholder can enforce his individual rights singly but corporate rights have to be enforced by the majority. As I have said above, the appellant has not alleged the infringement of any individual right of his as a shareholder. All that he has submitted is that the shares should have been offered to him for purchase before the members holding them had transferred them in favour of respondents Nos. 2 to 26, in support of which no provision of law or the articles of association of the company has been cited, and that he should not have been removed from the directorship of the company. The matter with regard to the validity of the transfer of shares is pending in this court in a petition filed under Section 155 of the Companies Act and his removal from directorship was by the company in a general meeting held in accordance with Section 284 of the Companies Act. It cannot, therefore, be said that any right of the appellant as a shareholder has been oppressed by the present management.

13. The learned counsel referred to In re H. R. Harmer Ltd, [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA), In re Albert David Ltd. [1964] 68 CWN 163 (Cal), Ramshankar Prasad v. Sindri Iron Foundry (P.) Ltd. [1966] 70 CWN 520 (Cal) and Asansol Electric Supply Co. v. Chunnilal Daw, AIR 1972 Cal 19, which are all distinguishable. In Inre Albert David Ltd. [1964] 68 CWN 163 (Cal), it was held that :

' The right to appoint a director is a very valuable right of a shareholder and when this right is infringed, his right qua shareholders is also affected. The shareholder in such a case is entitled to apply under Section 397 of the Act.'

14. In the present case, the appellant was a director and was removed by a resolution of the company as provided in Section 284 of the Companies Act and it has not been shown how the resolution removing him from directorship was illegal. It is only improper or illegal removal from directorship that may affect the right of a shareholder but not the removal in accordance with the provisions of the Act. In Ramshankar Prasad v. Sindri Iron Foundry (P.) Ltd. [1966] 70 CWN 520 (Cal), the facts were that the minority of shareholders drove away the majority of shareholders and thereafter usurped the functions of the majority. The learned judges held :

' What is it but shameful and shameless departure from the standards of fair dealing the visibility of which is all too clear to all except to the blind What is it but a gross and naked violation of ' the conditions of fair play? If the Saraogi group are the directors, they are shareholders too by virtue of having invested Rs. 5 lakhs. Did they entrust that much to the company relying on the doctrine : might is right--a doctrine the Prosad group translated into practice on March 13, 1963, after having made earlier preparations to that end by faked meetings and faked resolutions Certainly not. They parted with such a heavy sum in favour of the company in the sure belief that decency and probity would rule the affairs of the company and that right would be might, not vice versa. So, the Saraogi group are very much affected as well. Surely, it is no disqualification for a shareholder too qua shareholder to be a director. And by being a director he does not lose his separate entity as a shareholder.'

15. Reliance was placed by the learned judges on the judgment of the Court of Appeal in In re H. R. Harmer Ltd. [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305, 327. The following observations of Jenkins L.J. were quoted with approval :

' It appears to me that the sons as members, and not merely as directors, were oppressed by the singular conduct of the father. The oppression must, no doubt, be oppression of members as such, but it does not follow that the fact that the oppressed members are also directors is a disqualifying circumstance when the question of relief under Section 210 (corresponding to Section 397 of the Companies Act subject to one exception) arises. I think there may well be oppression from the point of view of member-directors where a majority shareholder (that is to say, a shareholder with a preponderance of voting power) proceeds, on the strength of his control, to act contrary to the decisions of, or without the authority of, the 'duly constituted board of directors of the company.'

16. In H. R. Harmer's case [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA), the facts were that the company consisted of the father and his two sons. The majority of shares were held by the father but all three of them were the only shareholders and directors of the company. The father went to Australia in January, 1948, and decided to open a branch there against the wishes of his sons. In 1954, the father purported to dismiss summarily a Mr. Edwards which was opposed by the two sons as directors but the father exerted his authority as the majority shareholder. On these facts, it was held by Jenkins L.J. that there may well be oppression from the point of view of member-directors where a majority shareholder (that is to say, a shareholder with a preponderance of voting power) proceeds, on the strength of his control, to act contrary to the decision of, or without the authority of, the duly constituted board of directors of the company. It clearly shows that in that case the father was acting against the interest of the company and contrary to the wishes of the duly constituted board of directors. No such case has been made out in the present case.

17. The learned counsel for the appellant lastly submitted that the affairs of the company were not being conducted in accordance with the provisions of the Companies Act or the articles of association of the company. The instance given was that in the meeting of the board of directors held on November 7, 1970, some shares were transferred about which there was no mention in the agenda which was issued for the meeting. No provision of law or the articles of association of the company has been brought to our notice obliging the board of directors to only transact that business for which agenda is issued. It is well known that every agenda of a meeting has a residuary clause ' to consider any other matter with the permission of the Chairman '. The matter with regard to the transfer of shares was considered in the meeting of the board of directors held on November 7, 1970, with the permission of the Chairman. No illegality was committed thereby. The learned counsel relied on Asansol Electric Supply Co. v. Chunnilal Daw, AIR 1972 Cal 19, for the proposition that no proceedings can be held with regard to an item which is not in the agenda. That judgment has no applicability because it related to a general meeting of the company and not to a meeting of the board of directors of the company. For general meetings, specific provision for issuance of an agenda has been made in Sections 171 to 173 of the Companies Act whereas no provision has been made as to the issuance of an agenda for the meeting of the board of directors. The ratio of that decision is, therefore, not applicable.

18. The learned counsel for the appellant then -relied on Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91 ; AIR 1956 SC 213 and Mrs. Gajarabai M. Patny v. Patny Transport (Private) Ltd. [1966] 36 Comp Cas 745 ; AIR 1966 AP 226 in order to show what is just and equitable for the winding up of the company. That question does not arise in the present case in view of the discussion made above.

19. Lastly, the learned counsel for the appellant submitted that the learned single judge erred in law in holding that the change in the management was brought about by and in the interests of the company's creditor--Messrs. India Iron Traders Corporation--and, therefore, no grievance can be made by the appellant under Section 398 of the Companies Act in view of what is contained in Section 398(1)(b) within brackets. The argument is that a creditor is only concerned with the recovery or realisation of the amount due to him and not with the management of the company's affairs. We are of the opinion that the argument of the learned counsel is clearly wrong. The legislature, while providing exception in Clause (b) of Section 398(1) of the Companies Act, clearly visualized that cases might occur in which financially hard-pressed companies might save themselves by arranging with their creditors to become shareholders and directors in lieu of remaining creditors for the whole or part of the amount due to them and that such a change occurring in the management will not afford a cause of action to any member under Section 398 of the Companies Act. In the present case, admittedly, the change in the management was brought about by and in the interests of a creditor of the company and the decision of the learned single judge on this point, with respect, is correct, which is upheld.

20. For the reasons given above, we find no merit in this appeal, which is dismissed with costs.


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