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Shanti Prasad JaIn Vs. Kalinga Tubes Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtSupreme Court of India
Decided On
Judge
Reported inAIR1965SC1535; [1965]35CompCas351(SC); (1965)1CompLJ193(SC); [1965]2SCR720
ActsCompanies Act, 1956 - Sections 81, 397 and 398
AppellantShanti Prasad Jain
RespondentKalinga Tubes Ltd.
DispositionAppeal dismissed
Cases ReferredWholesale Society Ltd. v. Meyer
Excerpt:
company - oppression - sections 81, 397 and 398 of companies act, 1956 - fight between two groups of business magnates for control of certain company - appellant chairman of company alleging that affairs of company were conducted in manner oppressive to him and his group of members - suit filed by appellant that certain resolution regarding allotment of shares filed was ultra vires and thus not binding on appellant - prayer for permanent injunction restraining defendants too filed - trial court and single judge of high court ordering against appellant - division bench of high court holding against appellant and observing that no alleged oppression established so as to justify an order under section 397 - appeal before supreme court - appellant contended that allotment of new shares to.....wanchoo, j.1. these fourteen appeals on certificates granted by the high court of orissa raise common questions of law and fact and will be dealt with together. they are a consequence of a fight between two groups of business magnates for the control of messrs. kalinga tubes limited (hereinafter referred to as the company). they arise out of an application under sections 397, 398, 402 and 403 of the companies act, 1956 (1 of 1956) (hereinafter referred to as ' the act') made by the appellant in the high court. most of the facts are not seriously in dispute and it is necessary to set them out in detail in order to decide the main point raised on behalf of the appellant, namely, that the affairs of the company were being conducted in a manner oppressive to him and his group of members.2......
Judgment:

Wanchoo, J.

1. These fourteen appeals on certificates granted by the High Court of Orissa raise common questions of law and fact and will be dealt with together. They are a consequence of a fight between two groups of business magnates for the control of Messrs. Kalinga Tubes Limited (hereinafter referred to as the company). They arise out of an application under Sections 397, 398, 402 and 403 of the Companies Act, 1956 (1 of 1956) (hereinafter referred to as ' the Act') made by the appellant in the High Court. Most of the facts are not seriously in dispute and it is necessary to set them out in detail in order to decide the main point raised on behalf of the appellant, namely, that the affairs of the company were being conducted in a manner oppressive to him and his group of members.

2. The company was floated as a private limited company on December 1, 1950, with an authorised capital of Rs. 25 lakhs. Originally, the shares were held by two groups of shareholders equally, except a few shares. These groups of shareholders may for our purposes be taken to be represented by Patnaik and Loganathan. The company raised a sum of Rs. 36 lakhs by the issue of two series of debentures which were guaranteed by the Government of Orissa between 1952 to 1954. In 1954, the appellant was approached by Dr. Mohanty, then Secretary to the Government of Orissa (Industries Department), which was naturally interested in the company having guaranteed debentures to the tune of Rs. 36 lakhs, for helping the company which was in financial and administrative difficulties. The appellant was requested to help the company by providing finance and by arranging loans from banks and other sources and further by providing the necessary administrative guidance. The appellant agreed to do so and, consequently, on July 27, 1954, an agreement was entered into between the appellant, and Patnaik and Loganathan. To this agreement, the company was not a party. We shall refer in detail to the various terms of the agreement later. In brief, however, the agreement provided that the appellant would be allotted shares in the company equal to those held by Patnaik and Loganathan after increasing the share capital of the company. Thus the company would have three groups of shareholder represented by the appellant, Patnaik and Loganathan holding equal number of shares, besides a French company and one Rath, who between themselves held shares worth Rs. 4 lakhs. These shareholders, however, were not party to the agreement. It was also provided that these three groups of shareholders would have equal number of representatives on the board of directors of the company, namely, two each for the time being. The appellant also undertook to arrange for cash credit facilities to the limit of Rs. 50 lakhs on the security of raw materials and finished goods of the company. And finally, the appellant, Jain, was to be the chairman of the company. This agreement was followed by certain resolutions passed by the company on August 16, 1954, by which some of the terms of the agreement were substantially carried out, the authorised capital was increased to rupees one crore (though it was issued later in instalments), and the appellant was made the chairman of the company. It may, however, be noted that the resolutions did not refer to the agreement in terms and no change was made in the articles of association of the company to bring them in conformity with all the terms of the agreement. In January, 1955, Narayanaswami, who had been appointed managing director, resigned and Patnaik was appointed the managing director. In April, 1955, the company started production. Some time thereafter the share capital was further subscribed up to Rs. 61 lakhs and the three groups, namely, the appellant Jain, Patnaik and Loganathan held one-third of the shares leaving out shares held by the French company. Mr. Rath had sold his shares numbering 250 and these shares were equally divided between the three groups and the one odd share was held by all the three, namely, Jain, Patnaik and Loganathan, jointly. In September, 1956, a resolution was passed by the board of directors referring the question of conversion of the company to a public limited company to a sub-committee consisting of the appellant, Loganathan and Patnaik. About the same time, an application was made to the Controller of Capital Issues for the sanction of the issue of further shares to the extent of Rs. 39 lakhs out of the authorised capital of rupees one crore and for the issue of debentures to the extent of Rs. 64 lakhs. In this application it was stated that the shares were intended to be issued privately to the existing shareholders and/or their nominees. In December, 1956, a resolution was passed by the board of directors for converting the company into a public limited company and for amending the articles of association in consequence at the next annual general meeting. This was necessary as the company wanted to borrow from the Industrial Finance Corporation which however made advances only to public limited companies. On January 11, 1957, the company was converted into a public company and the articles of association were amended. Even so, no attempt was made to incorporate the terms of the agreement dated July 27, 1954, in the articles of association so amended.

3. Trouble, however, seems to have arisen between the appellant and the other two groups as early as September, 1955, in consequence of an advertisement issued by the appellant in newspapers suggesting that his group was engaged in the manufacture of black and galvanised steel tubes and in this advertisement the emblem of the company was also printed, as if the company was part of the appellant's group. This led to strong protests by Patnaik and Loganathan and eventually the appellant withdrew the advertisement. However, the appellant continued to be the chairman of the company in spite of growing differences between him and Patnaik and Loganathan. Articles of association were further amended in November, 1957. At that time also nothing was put therein on the basis of the agreement dated July 27, 1954. In December, 1957, the Controller of Capital Issues sanctioned the issue of shares of the face value of Rs. 39 lakhs and debentures of the face value of Rs. 64 lakhs subject to the provisions of Section 81 of the Act. Real trouble started after this sanction for the issue of fresh shares. We shall have occasion to refer to Section 81 of the Act later; it is enough to say here that that section provides that the new shares would be offered in the first instance to the existing shareholders in proportion, as nearly as the circumstances admit, to the capital paid up on the existing shares at that date ' subject to any direction to the contrary which may be given by the company in general meeting'. So unless the company decided otherwise at a general meeting, the new issue of shares to the tune of Rs. 39 lakhs would have had to be offered under Section 81 of the Act to the existing shareholders in proportion to their existing shares. At that time, as already indicated, the appellant group held one-third share and Loganathan and Patnaik groups held two-thirds share except for certain shares held by the French company and, therefore, in the absence of a direction to the contrary at a general meeting, the new shares would also have gone in equal shares to the three groups subject to the shares which would go to the French company.

4. The question of the issue of new shares came up before a meeting of the board of directors on March 1, 1958, and the differences between the three groups which had already begun came to the surface at that time. The appellant proposed to the board of directors that the new shares should be issued to the existing shareholders as provided in Section 81 of the Act. Patnaik on the other hand proposed that a general meeting should be called for the purpose of passing a resolution for the issue of new shares and for the manner and proportion in which shares were to be offered privately to the shareholders and other persons and for such other incidental matters as provided in the section. It is apparent from this conflict between the appellant group and Patnaik and Loganathan groups in this meeting that the groups of Patnaik and Loganathan did not want the appellant's group to get roughly one-third of the new shares. The fear of Patnaik in this connection was that if shares were offered privately to the existing shareholders, the appellant might get all of them, for the groups of Patnaik and Loganathan did not haVe the money to subscribe to the new shares if offered in the first instance to the existing shareholders. Thus if the appellant got all the new shares, his group would become the majority shareholder and would thus get control of the company. Consequently, Patnaik put forward the resolution already referred to at the meeting of the board of directors on March 1, 1958, which provided for calling a general meeting for directions as to the issue of new shares, which directions it was hoped would override the provisions of Section 81 of the Act, Patnaik's resolution was passed and the appellant's proposal was outvoted for the obvious reason that the Patnaik and Loganathan groups held the majority of shares. In consequence a general meeting of shareholders was called for the purpose on March 29, 1958.

5. The appellant did not attend the meeting of March 29, 1958, though he was present by proxy. Patnaik presided at that meeting. Two resolutions were put forward at that meeting, one on behalf of the appellant's group and the other on behalf of Patnaik and Loganathan groups. The appellant's resolution proposed that the new shares should be offered to the existing shareholders of the company in the proportion of their shareholdings and the offer should remain open for a period of fifteen 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 and if a shareholder did not accept within that period, the offer should be deemed to have been declined. The second resolution on behalf of the Patnaik and Loganathan groups proposed that the new shares should not be offered or allotted to the existing shareholders or to the public and that they should be allotted privately in the best interest of the company at the sole discretion of the directors to such persons as might have applied or thereafter apply on the condition that at least 5 per centum of the face value of shares applied for was paid as application money and 10 per centum of the face value was paid on allotment and the balance paid as and when called upon in accordance with the articles of association of the company. As was to be expected, the resolution put forward on behalf of the appellant was lost and the resolutions put forward on behalf of Patnaik and Loganathan groups as to the allotment of new shares were passed. Thus in that meeting there was a complete breach between the three groups.

6. This was followed on April 18, 1958, by a suit by the appellant and some other shareholders of his group for a declaration that the resolutions dated March 29, 1958, were ultra vires, illegal, void and not binding on the appellant, the company and its shareholders with a prayer for permanent injunction restraining the defendants in the suit (namely, the other two groups) and their servants and agents from giving effect to or acting in any way in pursuance of the said resolutions and further restraining each of the defendants, their servants and agents from issuing and allotting the new shares in terms of the impugned resolutions. That suit was filed in the court of the Subordinate Judge, Cuttack. It is necessary here to refer to the details of that suit. It is enough to say that an ex parte interim injunction was obtained on the same day restraining the company and other defendants from issuing and allotting the new shares to persons other than the existing shareholders and giving effect to the resolutions in that regard passed at the meeting held on March 29, 1958. The company then made an application for setting aside the ex parte interim injunction. This matter came up before the court on May 15, 1958. At that time an offer was made on behalf of the company that, in view of the urgent necessity for funds, the company might be permitted to issue two thirds of the shares, keeping back one-third which would have gone to the appellant if the shares had been offered to the existing shareholders ; but this was not accepted on behalf of the appellant. The hearing of the injunction matter was postponed on several dates and it appears that the Patnaik and Loganathan groups continued to call meetings of the board of directors on the dates fixed in the suit, and the agenda always provided for the allotment of the new shares. Eventually, on July 30, 1958, the Subordinate Judge delivered judgment and vacated the injunction at about 11 a.m. A meeting of the board of directors was being held on the same day from 10-30 a.m. and as soon as a message was received that the injunction had been vacated the new shares were allotted to seven persons who had applied for the same along with the application money. This happened about midday and the return as required by the Act was duly filed with the Registrar of Companies at 12-40 p.m. The same day, an application was made at 12-40 p.m. on behalf of the appellant before the Subordinate Judge praying that the order vacating the injunction be stayed till the appellant obtained orders from the High Court where he wished to appeal. The company's lawyer however intimated to the court that the shares had already been allotted. Even so, the court passed an order staying the operation of its judgment order delivered earlier for two days. The matter was then taken in appeal to the High Court by the appellant. The appeal was dismissed in September, 1958. There was a letters patent appeal following the dismissal but that was not pressed and was eventually dismissed in November, 1960.

7. The case of the appellant was that the seven persons to whom the new shares were allotted were nominees or benamidars of Patnaik and Loganathan and therefore these groups really allotted the new shares to themselves through their benamidars. It was also alleged that these seven persons only paid 5 per centum of the share money and this showed, even though it was said that the company was in urgent need of money, that the shares were allotted to persons who were not in a position to pay the share money in full. The appellant contended that the allotment of the new shares was made surreptitiously and deliberately with the sole idea of defeating the rights of shareholders represented by him and his group and this amounted to oppression of the minority shareholders.

8. To continue the narrative, it appears that an extraordinary general meeting of the company was called on September 21, 1960, to consider increasing the share capital from rupees one crore on which it stood after the increase in 1958 to rupees three crores by issue of additional equity shares numbering one lakh of the value of rupees one crore and the issue of another one lakh cumulative redeemable income-tax free preference shares of the value of rupees one crore subject to such rights and privileges attaching to such preference shares as might be specified in the new article to be inserted in the articles of association. It was also intended that these new shares should be offered to outsiders (i.e., other than the existing shareholders) with a view to making the company more broad based. This meeting was called by a notice issued on August 25, 1960.

9. It was the calling of this meeting which led to the application under Section 397, etc., on September 14, 1960, by the appellant. It was urged in the application that this issue of new shares was in furtherance of the continuing and continuous process of oppression of the appellant and his group being the minority shareholders and was designed for the purpose of completely excluding the appellant and his group from all control in the affairs of the company and to deprive the financial advantage to be gained by them by the issue of new shares at par and to retain such advantage exclusively to the Patnaik and Loganathan groups so that the appellant and his group might be forced to sell their holdings to the Patnaik and Loganathan groups at a nominal value. That was why the new shares were being offered to outsiders and not to the existing shareholders, the object being to offer the shares to nominees and/or benamidars of the Patnaik and Loganathan groups and to such persons who would be within their control. The result of this would be that Loganathan and Patnaik groups would acquire more than 75 per centum of the voting strength of the company and would be in complete control of it and so gain enormous financial advantage for themselves. This would cause irreparable loss and prejudice to the rights of the appellant and his group of minority shareholders. It was alleged that this was being done by the Patnaik and Loganathan groups who were in control of the majority of shares. Finally it was urged that the affairs of the company were conducted in a manner prejudicial to the interest of the company by Loganathan and Patnaik groups and there was mismanagement in conducting such affairs. It was further alleged that the conduct of Loganathan and Patnaik groups towards the minority shareholders was oppressive, burdensome, harsh and wrongful and the entire manoeuvre was that these groups should be able to control over 75 per centum of the voting strength in the company. Further it was alleged that the conduct of these groups involved a visible departure from the standard of fair dealing and violation of the conditions of fairplay to which the appellant and his group as minority shareholders were entitled. In particular the denial to the existing shareholders to subscribe to the new shares in proportion to their respective holdings and the issue of such shares to benamidars of the Patnaik and Loganathan groups was oppressive to the appellant and his group of minority shareholders and also amounted to mismanagement of the affairs of the company. This was also in breach and violation of the agreement dated July 27, 1954, to which the Patnaik and Loganathan groups were parties. Further it was said that although in form the company was a public company, in reality it was a partnership consisting of the three groups, namely, the appellant's group, and of Loganathan and Patnaik groups. The last two groups had combined together against the appellant group which had resulted in justifiable lack of confidence on the part of the appellant and his group in the conduct of the affairs of the company by the other two groups. Such lack of confidence had been caused by lack of probity in the conduct of the affairs of the company by these two groups, which were acting to benefit themselves personally and were not concerned with the welfare of the company. The appellant and his group would not get any relief by calling a general meeting of the company, and the facts and circumstances aforesaid would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up. Therefore the appellant prayed for directions under Section 397 of the Act, as the winding up of the company which was in a prosperous condition would unfairly prejudice the appellant and other members of the minority group and redress against such oppression could be given by the High Court by making suitable directions in that behalf. The affairs of the company were being conducted in a manner prejudicial to the interest of the company for reasons already stated and there had been a material change in the management or 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 by reason of the wrongful act and conduct of the Patnaik and Loganathan groups. The appellant therefore prayed for the removal of the present board of directors, for reconstitution of the board of directors with at least two permanent representatives from his group and for ensuring equal representation in the board of the three groups of shareholders, and for alterations in the articles of association to incorporate therein the provisions of the agreement dated July 29, 1954. The appellant also sought a declaration that the resolutions passed by the board of directors on March 1, 1958, and at the general meeting dated March 29, 1958, were null and void and were passed in abuse of the power of Patnaik and Loganathan groups and in oppression of the minority shareholders and prayed that the said resolutions be set aside in so far as they related to the issue and allotment of 39,000 new shares. The allotment made on July 30 should be declared illegal and null and void as it was made in abuse of the powers of the Patnaik and Loganathan groups and in oppression of the minority shareholders and was not binding upon the company, the appellant and his group. It was prayed that directions be given to sell the said 39,000 shares by the allottees to the company upon payment of the amounts actually paid thereon so far and the company be permitted to offer the same to the shareholders as on July 29, 1958, in proportion to their respective shareholdings. An injunction was also prayed for restraining the company from holding the meeting on September 21, 1960, Finally, it was prayed that orders be passed for investigation into the conduct of the affairs of the company by the Loganathan and Patnaik groups and suitable directions be made with a view to regulating the affairs of the company in future and if necessary an administrator of the company be appointed for carrying out such directions as the High Court might be pleased to make for purposes of removing the oppression and the acts of misconduct and mismanagement and for regulating the conduct of the affairs of the company. The seven persons to whom the new shares were allotted in July, 1958, were also made parties and injunction was prayed for restraining them from transferring those shares.

10. The application was opposed on behalf of the company, and its main contention was that the company was not a party to the agreement dated July 27, 1954, and was not bound by it. It was further contended that there was no mismanagement and the company and its affairs were not being conducted in a manner prejudicial to it. It was also contended that there was no oppression on the undisputed facts in the present case. The application was also opposed on behalf of Loganathan and Patnaik groups and their case was that they had not acted in any manner which could be said to be oppressive of the rights of the minority shareholders represented by the appellant. They also contended that the affairs of the company were not being mismanaged nor were they being conducted prejudicially to the interest of the company. Further the seven persons to whom the shares had been allotted on July 30, 1958, contended that they were not benamidars of the Patnaik and Loganathan groups. Their case was that they were independent persons of substance and had applied for the new shares themselves and not as benamidars of Loganathan and Patnaik groups. They denied that there was any oppression of the minority shareholders as alleged or that there was any mismanagement of the affairs of the company or any conduct which was prejudicial to the interest of the company. They contended that the resolutions of March 1, 1958, March 29, 1958, and July 30, 1958, were perfectly legal and proper and they were entitled to the shares which had been allotted to them.

11. The application was heard in the first instance by a learned single judge of the High Court. He came to the conclusion that the way in which the Patnaik and Loganathan groups had acted in the matter of the issue of new shares was oppressive of the minority shareholders represented by the appellant and the subsequent conduct of the two groups amounted to continuing and continuous process of oppression of the minority shareholders and also amounted to mismanagement likely to be prejudicial to the interest of the company. He came to the conclusion that the persistent acts of the Loganathan and Patnaik groups showed that their motive was to oust the minority group of shareholders completely and the sole object of convening the meeting of September 21, 1960, and to pass the proposed resolutions was in furtherance of the continuing and continuous process of oppression of the appellant and his group, being the minority shareholders. Finally, it was held that in view of the oppression there was just and equitable cause for winding up the company. The learned judge therefore allowed the petition and granted certain reliefs to which it is unnecessary to refer.

12. This was followed by fourteen appeals to the Division Bench by the company and the various shareholders. These appeals were consolidated and heard together. The Division Bench came to the conclusion that the agreement of July 27, 1954, was not binding on the public company which came into existence after July 11, 1957, whatever might have been the position under the agreement when it was a private company. It also came to the conclusion that the seven persons to whom the new shares were offered were not benamidars of Loganathan and Patnaik groups but were independent persons of substance, even though they might be friends of the majority group of shareholders. But there was nothing to show that they were under the control of the majority group and therefore it could not be said that 75 per centum of the voting strength was concentrated in the hands of Loganathan and Patnaik groups except where these new allottees chose to vote with these groups. On a careful consideration of the facts, the Division Bench came to the conclusion that no such oppression had been established as would justify an order under Section 397 of the Act. As to mismanagement under Section 398, the Division Bench came to the conclusion that no case had been made out under that section. On this view of the matter, the appeals were allowed and the application of the appellant was dismissed and the parties were ordered to bear their own costs. Thereupon the appellant applied for and obtained certificates to appeal to this court and that is how the matter has come up before us.

13. We shall first take up the case under Section 397 of the Act and proceed on the assumption that a case has been made out to wind up the company on just and equitable grounds. This is a new provision which came for the first time in the Indian Companies Act, 1913, as Section 153. That section was based on Section 210 of the English Companies Act, 1948, which was introduced therein for the first time. The purpose of introducing Section 210 in the English Companies Act was to give an alternative remedy to winding up in case of mismanagement or oppression. The law always provided for winding up, in case it was just and equitable to wind up a company. However, it was being felt for some time that though it might be just and equitable in view of the manner in which the affairs of a company were conducted to wind it up, it was not fair that the company should always be wound up for that reason, particularly when it was otherwise solvent. That is why Section 210 was introduced in the English Act to provide an alternative remedy where it was felt that, though a case had been made out on the ground of just and equitable cause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the company was allowed to continue under such directions as the court may consider proper to give. That is the genesis of the introduction of Section 153C in the 1913 Act and Section 397 in the Act.

14. Section 397 reads thus :

' 397. Application to court Joy 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 the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up ;

the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. '

15. It gives a right to members of a company who comply with the conditions of Section 399 to apply to the court for relief under Section 402 of the Act or such other reliefs as may be suitable in the circumstances of the case, if the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. The court then has power to make such orders under Section 397 read with Section 402 as it thinks fit, if it comes to the conclusion that the affairs of the company are being conducted in a manner oppressive to any member or members and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts might justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. The law, however, has not defined what is oppression for purposes of this section, and it is left to courts to decide on the facts of each case whether there is such oppression as calls for action under this section.

16. We may in this connection refer to four cases where the new Section 210 of the English Act came up for consideration, namely : Elder v. Eider and Watson, [1952] S.C.49 ; George Meyer v. Scottish Co-operative Wholesale Society Ltd., [1954] S.C. 381 ; Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1958] 3 All E.R. 56; [1959] 29 Cas. 1 which was an appeal from Meyer's case, and In re H. R. Harmer Limited, [1938] 3 All E.R. 689 ; [1959] 29 Cas 305 . Among the important considerations which have to be kept in view in determining the scope of Section 210, the following matters were stressed in Elder's case as summarised at page 394 in Meyer's case :

' (1) The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted ; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders.

(2) It follows that the oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company's affairs.

(3) Although the facts relied on by the petitioner may appear to furnish grounds for the making of a winding up order under the just and equitable' rules, those facts must be relevant to disclose also that the making of a winding up order would unfairly prejudice the minority members qua shareholders.

(4) Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are ' treating the company and its affairs as if they were their own property ' to the prejudice of the minority shareholders--and in which just and equitable grounds would exist for the making of a winding up order . . . but in which the ' alternative remedy ' provided by Section 210 by way of an appropriate order might well be open to the minority shareholders with a view to bringing to an end the oppressive conduct of the majority.

(5) The power conferred on the court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order.'

17. Meyer's case was between a parent company and a subsidiary company and it was held that : ' (1) when a subsidiary company is formed with an independent minority of shareholders, the parent company must, if engaged in the same class of business, conduct the affairs of the subsidiary, even though these are in a sense its own, in such a way as to deal fairly with the subsidiary ; (2) that, if the parent company deliberately pursues a course calculated to destroy its subsidiary, with resulting loss to the minority shareholders, this may amount to oppression within the meaning of Section 210 to ; (3) that the conduct of a majority shareholder may amount to oppression notwithstanding the fact that his own shares depreciate in value pro rata with those of the minority ; and (4) that, even if the majority shareholder has virtually destroyed the substratum of the company by his oppressive conduct and it is conceded by all parties to be just and equitable that the company be wound up, the oppressed minority may nevertheless be entitled to a remedy under Section 210. '

18. These observations were approved by the House of Lords in appeal and it was held that ' whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with the subsidiary.'

19. In Harmer's case, it was held that ' the word ' oppressive ' meant burdensome, harsh and wrongful'. It was also held that ' the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the ' just and equitable' rule, but only to those cases of that character which have in them the requisiteelement of oppression.' It was also held that ' the result of applicationsunder Section 210 in different cases must depend on the particular facts ofeach case, the circumstances in which oppression may arise being soinfinitely various that it is impossible to define them with precision.'The circumstances must be such as to warrant the inference that ' therehas been, at least, an unfair abuse of powers and an impairment of confience in the probity with which the company's affairs are being conducted,as distinguished from mere resentment on the part of a minority at beingoutvoted on some issue of domestic policy'. The phrase 'oppressive to some part of the members' suggests that the conduct complained of' should at the lowest involve a visible departure from the standards of fairdealing, and a violation of the conditions of fairplay on which every shareholder who entrusts his money to a company is entitled to rely . . . But,apart from this, the question of absence of mutual confidence per se betweenpartners, or between two sets of shareholders, however relevant to awinding up, seems to me to have no direct relevance to the remedy grantedby Section 210. It is oppression of some part of the shareholders by themanner in which the affairs of the company are being conducted that mustbe averred and proved. Mere loss of confidence or pure deadlock does not. . . come within Section 210. It is not lack of confidence between shareholders per se that brings Section 210 into play, but lack of confidencespringing from oppression of a minority by a majority in the managementof the company's affairs and oppression involves ... at least an element oflack of probity or fair dealing to a member in the matter of his proprietaryright as a shareholder.'

20. These observations from the four cases referred to above apply to Section 397 also which is almost in the same words as Section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397, It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to Section 397.

21. The main plank of the appellant's case to prove oppression is the agreement of July 27, 1954, between himself and Patnaik and Loganathan. At that time he was not a member of the company. It is not disputed that the company was not a party to that agreement and is thus strictly speaking not bound by its terms. Bat even apart from this strict legal aspect of the matter, let us see what exactly the agreement provides. At that time Patnaik and Loganathan groups held shares of the value of Rs. 21 lakhs in the company, and the main provision of the agreement is that the share capital would be increased and the appellant would be given shares of the face value of Rs. 10,50,000 so that his holding should be equal to the holdings of the other two groups. It also provides that the three groups would have an equal number of representatives on the board of directors and the appellant would be its chairman. Other provisions of the agreement refer to matters of detail to which it is unnecessary to refer. It will be seen, however, that there is no provision in the agreement as to what would happen if and when the share capital was actually increased beyond the increase envisaged at the time of the agreement. There is also no provision in the agreement to the effect that the articles of association of the private company as it then was would be amended suitably to bring the provisions of the agreement with respect to shareholding and the board of directors into line with the agreement. Thus there is nothing in the agreement about the future in the matter of allotment of shares in case capital was actually increased thereafter. In this connection our attention is drawn to the fifth term of the agreement which is in these terms :

' Ordinary shares of the face value of Rs. 4 lakhs held by the French company (Rs. 3,75,000) and Mr. Rath (Rs. 25,006) will continue to be held by them as heretofore, and none of the parties hereto will have any interest therein so that the shareholding in the company of all the three parties hereto will remain equal and in the same proportion.'

22. It is urged that this term shows that the intention was that the shareholding of the three groups would remain equal for ever. We are not prepared to read this implication in this term. It was easy to provide in the agreement that whenever capital was actually increased, it would be divided equally between the three parties thereto. In the absence of such a provision we do not think that the fifth term is capable of the interpretation which is put on it on behalf of the appellant. It only deals with the shares worth Rs. 4 lakhs held by the other two persons and provides that besides those shareholdings capital shares would be held equally by the three parties. Therefore, as we read the agreement we cannot come to the conclusion that it provides that if in future there was an actual increase in capital that will necessarily be shared equally by the three parties.

23. However, it is said that the conduct of the three parties later on showsthat when there was actual increase of capital to Rs. 61 lakhs some timeafter July, 1954, this increase was shared equally by the three parties andfurther when Mr. Rath sold his holdings in the company they were purchased equally by the three parties so much so that one odd share out of 250 shares was held by the three parties jointly. This is undoubtedly so, anddoes give some colour to the argument that the three parties concerned inthe agreement intended that their shareholdings should remain equal evenlater. But this intention cannot be said to bind the company, much lessso when the company was not bound strictly speaking even by the expressterms of the agreement. So far as the company is concerned, it Was freeto dispose of shares as the directors or the shareholders in general meetingconsidered proper without regard to this agreement.

24. Another element came into the picture in January, 1957, when thecompany was converted into a public limited company. It is obvious thata public limited company was even much less bound by the agreement ofJuly, 1954, as compared to the private company. We have already pointedout that even when the company was private its articles of association werenot amended to bring them into line with the agreement and that showsthat the agreement was only between two groups of shareholders and Jain with respect to the state of affairs as it was at the time of the agreementWhen the company became a public limited company and it was decided toissue new shares of the value of Rs. 39 lakhs the question of allotment ofthese shares arose. By then some differences had developed between thethree groups. The appellant wanted the shares to be allotted to theexisting shareholders while the Patnaik and Loganathan groups wantedthe matter to be decided by a general meeting as evidenced by what happened in the meeting of the board of directors dated March 1, 1958. Itappears that the decision to issue new shares was taken some time in 1956,when the company was a private company. At that time the authorisedcapital was rupees one crore though only Rs. 61 lakhs had been issued. Thefresh issue of Rs. 39 lakhs worth of shares was thus intended to bring thesubscribed capital up to the limit of the authorised capital. The applicationto the Controller of Capital Issues was made for that purpose on September 17, 1956, At that time the intention was that the issue would be privateand would be made to the existing shareholders, directors and/or theirnominees. This was bound to be so as the company was then private. As, however, the company wanted a loan from the Industrial Finance Corporation and as that Corporation would only grant loans to a public company, the company was converted into a public company as already indicated in January, 1957.

25. The contention, of the appellant, however, is that when the share capital was decided to be increased by fresh issue within the limit of rupees one crore, regulation 42 of the First Schedule to the 1913 Act was in force and that regulation required that direction to the contrary as to allotment of shares should be given by the resolution sanctioning increase of share capital. This was however not done at the time when the authorised share capital was decided to be increased in 1954 and, consequently, the new shares had to be allotted to the existing shareholders under regulation 42. At that time, however, the company was private and the shares had to be issued to the existing shareholders and no question of any direction to the contrary arose if the company was to retain its private character. The sanction of the Controller of Capital Issues came in December, 1957, when the company had become a public limited company, and the question of allotment arose thereafter. By that time the Act (i.e., the 1956 Act) had been passed and regulation 42 of the First Schedule to the 1913 Act was no longer in force. Instead, it had been replaced by Section 81 of the Act, which provides that ' 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 directions to the contrary which may be given by the company in general meeting, and subject only to those directions, such new shares shall be offered to the persons who, at 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 '. Further Sub-section (3) of Section 81 provides that the section shall not apply to a private company. Thus Section 81 specifically applies to public companies only and comes into play when subscribed capital (as distinct from authorised capital) has to be increased. Therefore, when the question of actually issuing new shares arose after the sanction of the Controller, regulation 42 was no longer in force as it had been repealed, and action had to be taken in accordance with Section 81 of the Act. Section 81 does not require that direction to the contrary must be given by the resolution sanctioning the increase of share capital as under regulation 42 of the First Schedule to the 1913 Act. Consequently, it was open to the public company in 1958 when it proposed to increase the subscribed capital after the sanction of the Controller to act under Section 81 and this was what was done by the resolution of March 28, 1958, at the general meeting. The general meeting decided that new shares should not be issued to the existing shareholders but should be issued to others privately. The resolution of March 29, 1958, was in accordance with the law as it stood when it was passed and cannot be said to be vitiated in any way.

26. It is however urged that the notice for the general meeting of the 29th March, 1958, was not in accordance with Section 173, and so the proceedings of the meeting must be held to be bad. This objection was however not taken in the petition and we have therefore not permitted the appellant to raise it before us, as it is a mixed question of fact and law. We may add that, though the objection was not taken in the petition, it seems to have been urged before the appeal court. Das J. has dealt with it at length and we would have agreed with him if we had permitted the question to be raised. This attack on the validity of what happened on March 29, 1958, must thus fail.

27. We have already said that the public company which came into existence in 1957 was not bound by the agreement of 1954 and could offer shares to such persons as it decided to do in general meeting in accordance with Section 81. The mere fact that in the meeting of March 29, 1958, it was decided to offer shares to others and not to the existing shareholders would not therefore necessarily mean oppression of the minority shareholders. The majority shareholders were not bound to accept the view of the minority shareholders that new shares should be allotted only to the existing shareholders. It also appears that the Patnaik group was afraid at the time when the new shares were being issued that as they had no money the appellant group would take up the entire new issue and would thus obtain majority control of the company. This they wanted to avoid and that is why the new issue was resolved in general meeting to be issued to others and not to the existing shareholders. If this was the reason why new shares were not issued to the existing shareholders, it can hardly be said that the action of the majority shareholders in passing the resolution which they did on March 29, 1958, was oppressive to the minority shareholders. The matter would have been different if the seven persons to whom shares were eventually allotted in July, 1958, were benamidars or stooges of the Patnaik or Loganathan group, for in that case it may be said that these two groups forming the majority in the general meeting had acted fraudulently and unfairly by depriving the appellant of what he would have got under Section 81. But there can be no doubt that the seven persons to whom the shares were eventually allotted are respectable persons of independent means. There is nothing to show that they were stooges or benamidars of the Patnaik and Loganathan groups. The action of the majority shareholders in allotting the new shares to outsiders and not to the existing shareholders cannot therefore in the circumstances be said to be oppressive of the appellant and his group.

28. It is true that by the beginning of 1958 there were differences between the appellant and the Patnaik and Loganathan groups and there was loss of confidence between them. But mere loss of confidence between these groups of shareholders would not come within Section 397 unless it be shown that this lack of confidence sprang from a desire to oppress the minority in the management of the company's affairs and that there was at least an element of lack of probity and fair dealing to a member in the matter of his proprietary right as a shareholder. It cannot be said on the facts on record of this case that there was any lack of probity or fair dealing towards the appellant in the matter of his proprietary right as a shareholder. It is true that he did not get any part of the new issue ; but equally the Patnaik and Loganathan groups also did not get any part of it, for there is no doubt that the persons to whom the shares were allotted eventually in July, 1958, were not benamidars or stooges of the Patnaik and Loganathan groups. If the new allottees were benamidars or stooges of the Loganathan and Patnaik groups there might have been lack of probity or fair dealing in allotting the shares to them. Further the allotment of shares even at par did not in our opinion seriously affect the proprietary rights of the appellant as a shareholder. It is urged that the issue of new shares at par to others would depress the value of the existing shares. But the evidence shows that by 1958, the company, which had gone into production in 1955, was making profits and there is no reason to suppose that the same rate of profit would not have continued with the expansion envisaged by the increase in share capital. Besides, as the shares of the company were not quoted on the stock exchange, it is impossible to say what impact the issue of new shares had on the value of the existing shares and whether the value of existing shares was depressed, if at all, by the issue of new shares. It is not a case where new shares were issued as bonus, for the issue of bonus shares does necessarily affect the value of existing shares. But these were issued on payment of cash for the purpose of expansion. In the circumstances we cannot necessarily infer that the value of the existing shares would have been seriously affected by the issue of new shares at par. So it cannot be said that this was done in order to affect the proprietary rights of the appellant as a shareholder. The issue of new shares, which was done in March and July, 1958, cannot therefore in our opinion amount to oppression of the appellant as a minority shareholder.

29. It is, however, urged that the haste with which the new shares were issued on July 30, 1958, shows a design to harm the appellant as a minority shareholder. It is no doubt true that the shares were issued in haste. But, as we have already indicated, the company was in need of money for expansion and its getting the loan from the Industrial Finance Corporation also depended upon the increase of subscribed share capital. Therefore, the haste with which the shares were allotted on July 30, 1958, cannot really be said to be a part of a design to oppress the minority. The haste became necessary because the interim injunction was vacated on that day and it was felt that if immediate action was not taken and the new shares allotted, there might be further injunction which would further delay the issue of shares and getting the loan from the Industrial Finance Corporation. The haste therefore appears to have occurred because of the action taken by the appellant in bringing a suit and getting a temporary injunction. It was feared that even after the vacation of the temporary injunction the appellant would go in appeal and get another injunction from the appeal court. This fear was justified because the subordinate judge's court two hours later withheld the operation of its order vacating the temporary injunction. The haste in the particular circumstances of the case in allotment of shares cannot therefore lead to any inference of oppression but arose out of circumstances brought about by the appellant's conduct.

30. But it is urged that even though the company was in urgent need of money it accepted only 5 per centum with the application and 10 per centum on allotment and that the remainder of the money did not come for a long time. Again it is true that the remainder of the money did not come for some time. It also appears that out of the seven persons who had applied to take shares six had to take loans from the Central Bank of India Limited to pay up the remainder of the money and that a part of the new capital (i.e., Rs. 7,65,000) was not received even till the time when the application under Section 397 was made. But that again in our opinion does not necessarily lead to the inference that there was oppression by the majority shareholders of the appellant, once it is held that the seven persons to whom the new shares were allotted were not stooges or benamidars of the Patnaik and Loganathan groups. There might be reasons why those persons were not in a position to pay the entire money at once and therefore borrowed money from the bank to make up the full amount of the shares taken by them. Further, it appears that there was a fight between the appellant group on the one side and the Patnaik and Loganathan groups on the other for the control of the company. If the fear of Patnaik was correct that the appellant would have purchased all the shares worth Rs. 39 lakhs for want of money on the part of Patnaik and Loganathan groups and would thus have obtained a dominating position in the company, the action of the majority shareholders in preventing such domination by one group only and taking action for that purpose cannot in the circumstances be said to be oppressive of the minority shareholders. It is well to remember that if the appellant had got the entire new issue of Rs. 39 lakhs because of the inability of the Patnaik and Loganathan groups to take up their two-thirds shares, the majority control would have vested in one group. But the action of the majority shareholders in issuing new shares to others and not to the existing shareholders has brought about a position where, after the issue of new shares even the Patnaik and Loganathan groups have no longer a majority and they have to carry the holders of the new shares with them in order to carry on the work of the company. The new holders are not the stooges and benamidars of the Patnaik and Loganathan groups and therefore after the action taken in March and July, 1958, the company cannot be said to be dominated by any group but has become more broad-based as a public company should really be. The fact that the Patnaik and Loganathan groups may be able to get the support of the holders of new shares does not necessarily mean oppression of the appellant, for the new shareholders may support the Loganathan and Patnaik groups on the ground that such support would be for the benefit of the company.

31. Finally, it is urged that the whole object of the Patnaik and Loganathan groups was to get control over 75 per centum of shares of the company, for a voting strength of 75 per centum is required to pass a special resolution without which complete control of a company is impossible. Therefore, it is said that Loganathan and Patnaik groups so manoeuvred the affairs that they should be able to get over 75 per centum of the voting strength. It is urged that if the new shares had been divided equally between the three groups, the Patnaik and Loganathan groups would not have been able to control over 75 per centum shares. This argument again would have some force if the new shares had been allotted to stooges and benamidars of the Patnaik and Loganathan groups. But as the shareholdings stand, after the action of March and July, 1958, the position is that roughly Patnaik and Loganathan groups between themselves have got shares worth Rs. 38 lakhs, the appellant has got shares worth Rs. 19 lakhs and shares worth Rs. .39 lakhs are held by the new allottees and shares worth about Rs. 4 lakhs by the French company. So unless the Patnaik and Loganathan groups are able to persuade the new allottees always to vote with them they would not be in control of over 75 per centum of shares. The argument that all this was done to give the Patnaik and Loganathan groups control over 75 per centum of shares in the company does not therefore appear to be well-founded when we remember that the new allottees are not stooges or benamidars of these two groups. The fact that the shares were issued presumably to the friends of Patnaik and Loganathan groups is hardly of any significance in the matter of oppression, for if shares are issued privately they are bound to go to friends of the directors.

32. The case of oppression therefore based on the agreement of July, 1954, as the sheet-anchor of the appellant's case must fail. In the first place that agreement was strictly speaking not binding even on the private company--it was much less binding on the public company when it came into existence in 1957. The agreement did not contain any specific provision as to futureissue of capital. Further, at the time when the agreement took place theappellant was not even a member of the private company and it was reallyan agreement between a non-member and two members of the company,which would go to show that the agreement could in no circumstances bindthe company. It is true that for some time the agreement was in the maincarried out when the capital was actually increased up to Rs. 61 lakhs, theappellant getting one-third of it barring the French company's shares. When,however, the company was made into a public company, some of the termsof the agreement could not be put even in the articles of association of thepublic company. But it is said that if the Patnaik and Loganathan groupshad behaved like honourable men, the agreement could still have beencarried out after the company became a public company and that these twogroups did not behave honourably when they gave the go-by to the agreement completely. There is some force in the contention that Loganathanand Patnaik groups, when they were in need of the appellant, took his help ;it also does appear that when the company had turned the corner and it wasfelt that the appellant's help was not absolutely necessary, these two groupsthought it unnecessary to carry out the spirit of the agreement (though notthe terms, for the terms had nothing to do with the future increase of capital and its distribution). But can it be said that the conduct of the affairsof the company was carried on oppressively merely because these two groupswhich in March and July, 1958, were in majority did not carry out the spiritof the agreement We have given anxious consideration to this aspect ofthe matter and we feel that, though the Patnaik and Loganathan groupsdid take advantage of the help given by the appellant when the company 1was in a difficult situation, the fact that when new issue was made on be- *half of the public company, they decided to make it more broad-based andissue the shares to others and not to the existing shareholders, cannot besaid to be oppressive of the then minority shareholders, namely, the appellant's group. We have already pointed out that it cannot be said to have beenproved in this case that the appellant suffered in his proprietary rights as ashareholder and in these circumstances it cannot be said that the actiontaken in March and July, 1958, in the allotment of the new shares amountedto such oppression of the appellant as would justify an order under Section 397.

33. Reference then may be made to the proposed increase of shares forwhich a meeting was called on September 21, 1960, and which gave furthercause to the appellant to move the application which he did on September14, 1960. In that meeting it was proposed to increase the share capital by rupees two crores, one crore of which was to be in equity shares and theother crore in preference shares. It is said that this was part of the design to further reduce the shareholdings of the appellant in the company so that he may be driven out of it, for after the issue of the new proposed capital, the appellant's holding of equity shares would be hardly 10 per centum of the entire equity capital. In the first place, as the meeting of September 21, 1960, was never held because of the injunction obtained by the appellant, we cannot say how the new shares would have been issued and whether they would have been offered to the public for subscription to make the company even more broad-based than it was then. If that was the intention, that could hardly be called oppression of the appellant. Apart from that, we fail to see why the appellant should be driven out of the company and should be compelled to sell his shares simply because his proportion of equity capital is only 10 per centum of the entire equity capital, for it is not in dispute that the company is doing well and the appellant will get his dividends as any other shareholder. But if the appellant means that it is not worth his while to invest his money in a company in which he is unable to have an important--if not a controlling--voice, this shows that the real basis for the application in the present case was not the oppression of the appellant as a minority shareholder but the feeling that the appellant who hoped to get control of the company had been thwarted by what took place in March and July, 1958. If that is the real position, then it cannot be said that the Loganathan and Patnaik groups acted with lack of probity or fair dealing in thwarting the desire of the appellant to get control of the company; nor can such conduct be said to be oppressive of a minority shareholder. The case of the appellant based on the agreement of July 27, 1954, therefore must fail and it must be held that even if that agreement was not carried out by the company, which was not bound by it, there can be no case of oppression of the appellant.

34. We now come to the case under Section 398. It provides that any members of a company who have rights to apply in virtue of Section 399 may complain : (i) that the affairs of the company are being conducted in a manner prejudicial to the interests of the company, or (ii) that a material change has taken place in the management or control of the company and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. On such application being made, if 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 matter of management or control of a company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. This section only comes into play as the marginal note shows, when there is actual mismanagement or apprehension of mismanagement of the affairs of the company. It may be contrasted with Section 397 which deals with oppression to the minority shareholders, whether there is prejudice to the company or not. In the present case, the appellant relies on the following three circumstances to show that the affairs of the company were being conducted in a manner prejudicial to its interests, namely :

(i) that when the new shares worth Rs. 39 lakhs were issued in July, 1958, only a small part of the share-money was received in the beginning ;

(ii) that the Patnaik and Loganathan groups removed Rs. 7 lakhs from the coffers of the company;

(iii) that the company lost the support of the appellant.

35. It is true that when new shares of the value of Rs. 39 lakhs were issued, the company received only 15 per centum of the share money to begin with, namely, 5 per centum with the application and ro per centum on allotment. But the evidence shows that though there was some delay in the receipt of 85 per centum of share-money, shares worth Rs. 30 lakhs were fully paid up in the financial year 1959-60, and the only amount outstanding in that year was Rs. 7,65,000 (i.e., 85 per centum of shares worth Rs. 9 lakhs). The slight delay in the payment of the full value of the shares cannot therefore in the circumstances be said to be so prejudicial to the interests of the company as to call for any action under Section 398 of the Act.

36. As to the removal of Rs. 7 lakhs from the coffers of the company by the Loganathan and Patnaik groups, it does not appear from the application of the appellant that his complaint was that this sum was wrongfully removed by the two groups and there was any fraud with respect to its removal. The real complaint of the appellant in this connection appears to have been that he was entitled to one-third of this amount of Rs. 7 lakhs under the agreement, and his share of this amount was not given to him. This appears from a letter written by the appellant to Patnaik on October 16, 1957, in which he asked that he should be paid his one-third share of this sum of Rs. 7 lakhs with interest. It is not in dispute that the sum of Rs. 7 lakhs was due from the company to the Kalinga Industrial Development Corporation Limited and therefore the withdrawal of this amount from the company by the Patnaik and Loganathan groups which controlled the Kalinga Industrial Development Corporation, which was the managing agent of the company before July, 1954, cannot be said to amount to conducting the affairs of the company prejudicially to its interests, whatever may be the rights of the appellant in the matter of getting one-third of this amount from the Loganathan and Patnaik groups. If he has any right under the agreement of July 27, 1954, in this matter he can enforce it in such way as may be open to him ; but it cannot be said in the circumstances that this withdrawal from the company was in any way prejudicial to the affairs of the company, when it is clear that the company owed the amount to the former managing agent.

37. The last point that has been urged in this connection is that the company lost the support of the appellant in view of the action taken by the Patnaik and Loganathan groups in March and July, 1958. Here again it is true that the appellant was dissatisfied with what had happened in March and July, 1958, with regard to the allotment of shares worth Rs. 39 lakhs and withdrew his support from the company. If the company was able to carry on without this support as it apparently was in 1958, it cannot be said that the action which resulted in the loss of the appellant's support to the company was necessarily prejudicial to it. It may be that the appellant was sore inasmuch as he must have felt that his assistance was taken when the company was in need of such assistance; but later the Patnaik and Loganathan. groups acted in the manner in which they did when they felt that the appellant's support was no longer necessary to the company. But if the appellant's support was no longer necessary to the company by 1958, the action of the Patnaik and Loganathan groups which resulted in the loss of such support cannot be said to be prejudicial to the interests of the company. We, therefore, agree with the High Court that no case has been made out for action under Section 398 on the ground that the affairs of the company were being conducted in a manner prejudicial to its interests.

38. Nor is there any ground for holding that because of the change which took place in the management after July, 1958, it was likely that the affairs of the company would be conducted in a manner prejudicial to its interests, The change that took place after July, 1958, was that the appellant no longer remained the chairman of the company and the Patnaik and Loganathan groups practically managed the company without the appellant. But as the High Court has pointed out there were no facts before the court to come to the conclusion that the change in management was likely to result in the affairs of the company being conducted in a manner prejudicial to its interests. In this connection reliance is placed on certain matters which transpired after the application was filed on September 14, 1960. These matters however cannot be taken into account for the application has to be decided on the basis of the facts as they were when the application was made. Besides, as the High Court has pointed out, it has not been shown that in view of certain actions taken by the new management without consulting the appellant, the company was landed in any difficulty and loss of profit which would show mismanagement of its affairs.

39. Lastly, it was stated in the application that accounts had not been shown to the appellant and his group and in consequence of this the appellant was not able to give full particulars of the several acts of fraud, misfeasance and other irregularities committed by the new management. But as the High Court has pointed out, the appellant asked for production of certain documents in April, 1961, and those documents were made available for inspection by the appellant and were produced in court. It was for the appellant to take inspection of those documents if he so desired and the appeal court was right in pointing out that the learned single judge was not correct in drawing an adverse inference against the company that it had disobeyed the orders of the court and had not produced the documents called for and had given no opportunity to the appellant for their inspection. It seems to us that the appeal court was right in this view and no case has been made out even prima facie for action under this part of Section 398 of the Act.

40. The appeals, therefore, fail and are hereby dismissed with costs, one set of hearing fee.


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