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Mohanlal Ganpatram Vs. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Judge
Reported in(1964)0GLR804
ActsCompanies Act, 1956 - Sections 2, 3, 31, 172, 173, 210, 287, 293, 299, 300, 314, 330, 356, 397, 398, 400, 402, 406, 407, 539 and 543
AppellantMohanlal Ganpatram
RespondentShri Sayaji Jubilee Cotton and Jute Mills Co. Ltd.
Cases ReferredLiverpool Borough Bank v. Turner
Excerpt:
(i) company - remedy of shareholders - sections 2, 3, 31, 172, 13, 210, 287, 293, 299, 300, 314, 3330, 356, 397, 398, 400, 402, 406, 407, 539 and 543 of companies act, 1956 - power of court confined to making order for purpose of putting end to oppression or mismanagement on part of controlling shareholders - power of court under sections 397 and 398 very wide - necessity of interference under these section may arise in infinite variety of circumstances - legislature left discretion of court unfettered in matter of making appropriate order - such power can be exercised by court only for purpose of bringing end to oppressive prejudicial conduct in management of affairs of company. (ii) validity of resolution - sale challenged on ground that it effected without obtaining consent of company.....1. during the course of my experience at the bar and on the bench i have come across very few petitions under section 397 or 398 of the companies act, 1956, which have been brought to a conclusion. the remedy under section 397 or 398 as a weapon in the shareholders' armoury has proved more potent when brandished in terrorem than when actually used to strike and it has, therefore, in most cases served as an effective threat to induce those in control to behave reasonably towards all interests and in some cases where those in control have not behaved reasonably and the remedy has been invoked, the proceedings have mostly terminated in a compromise securing the interests sought to be prejudiced by those in control. this petition has been an exception and the only reason i can see for its.....
Judgment:

1. During the course of my experience at the bar and on the Bench I have come across very few petitions under section 397 or 398 of the Companies Act, 1956, which have been brought to a conclusion. The remedy under section 397 or 398 as a weapon in the shareholders' armoury has proved more potent when brandished in terrorem than when actually used to strike and it has, therefore, in most cases served as an effective threat to induce those in control to behave reasonably towards all interests and in some cases where those in control have not behaved reasonably and the remedy has been invoked, the proceedings have mostly terminated in a compromise securing the interests sought to be prejudiced by those in control. This petition has been an exception and the only reason I can see for its having run its full course is that there is absolutely no merit in it. I shall immediately proceed to state the facts giving rise to the petition. The facts are many and to some extent disputed and it is, therefore, necessary to set them out in some detail.

2. The company concerned in the petition is Shri Sayaji Jubilee Cotton and jute Mills Limited. I shall hereinafter refer to Shri Sayaji Jubilee Cotton and Jute mIlls Limited as the company. The company was incorporated on 3rd September, 1907 under the provisions of the Baroda Companies Act, Samvat year 1953. The authorised capital of the company is Rs. 3,35,000 divided into 6,700 shares of Rs. 50 each. The subscribed and paid up capital of the company is Rs. 2,60,550 divided into 5,211 shares of Rs. 50 each. There are in all 587 shareholders of the company. The registered office of the company is situate at Induprasad Rawal's Bungalow, Bindu Sarovar Road, Sidhpur.

3. The company was promoted for the purpose of running a textile mill at Sidhpur. Clause 6 of the memorandum of association of the company provided for appointment of a firm called Messrs. Prahladji Sevakram and Company as secretaries, treasurers and agents of the company. It was provided by this clause that Messrs. Prahladji Sevakram and Company, its partners and their heirs, legal representatives and assigns shall continue to act as secretaries, treasurers and agents of the company so long as the company was in existence unless of course the partners willingly gave up the office of secretaries, treasurers and agents. This clause also set out the commission which should be payable to Messrs. Prahladji Sevakram and Company for acting as secretaries, treasurers and agents of the company. It is not necessary to set out precisely the remuneration which was payable by the company to Messrs. Prahladji Sevakram and Company,but it is sufficient to state that a certain percentage of the sale proceeds of coarse and fine yarn and cloth as also of the amounts of the bills in respect of machinery, buildings and labour charges was payable to Messrs. prahladji Sevakram and Company. Articles 119 and 120 of the articles of association also made a similar provision in regard to the appointment and remuneration of messrs. Prahladji Sevakram and Company as secretaries, treasurers and agents of the company. Article 96 authorized the secretaries, treasurers and agents to borrow moneys for and on behalf of and on account of the company and to execute any promissory note, document or other writing for the purpose. Article 97 provided that if owing to reasons of financial stringency or otherwise it was not possible to borrow moneys for and on behalf of and on account of the company in the manner set out in article 96, the secretaries, treasurers and agents were entitled to borrow moneys by mortgaging, charging or selling the immovable properties or any part thereof, machineries, stores, goods or other movable and immovable properties of the company and the secretaries, treasurers and agents were also empowered to have financial dealings with the directors, agents, auditors ad servants of the company as also with outside firms and to purchase goods or and on behalf of and on account of the company on payment of adat or commission.

4. Pursuant to these provisions contained in the memorandum and articles of association the company entered into an agreement with Messrs. Prahladji Sevakram and Company on 1st August, 1917, appointing Messrs. Prahladji Sevakram and Company as secretaries, treasurers and agents of the company on the terms and conditions contained in the said agreement. The remuneration set out in the said agreement, to which I shall for the sake of convenience refer as the first managing agency agreement, was a little different from that specified in clause 6 of the memorandum of association and articles 119 and 120 of the articles of association, though again that is not a matter relevant for the purpose of the present petition. The clause of the first managing agency agreement material for the purpose of the present petition was clause 7 which in its English translation provides as follows :

'7. The money required by way of working capital for running the mill which you agents have to procure in accordance with the memorandum of association and articles 96 and 97 under heading 11 of the articles of association shall be brought on your behalf only by Shah Manilal Mulchand and his heirs and successors and such moneys shall be procured by Shah Manilal Mulchand, his heirs and successors on account of the mill on interest at the rate of six per cent. per annum and for the work of procuring money for working capital on interest at the rate of six per cent. per annum, purchasing cotton diligently for and on behalf of the mills, commission shall be paid to Shah Manilal Mulchand and his heirs and successors at the rate of 12 annas per cent. on the purchase price of cotton and the sale price of cloth and yarn as provided by article 97 of the articles of association and the board of directors shall have authority to execute and obtain the necessary documents for this purpose as provided in that article.'

5. With a view to implementing the provisions contained in this clause, a separate agreement dated 25th March, 1918, was entered into between the company and Shah Manilal Mulchand. It was expressly stated in this agreement. to which I shall hereafter refer as the adat agreement, that it was being entered into in accordance with the terms and conditions set out in the first managing agency agreement. A part of the argument advanced before me turned on some of the clauses of the adat agreement and it would, therefore, be desirable to set out the relevant clauses of the adat agreement in extenso. Clauses 1,2,4,5,16,17 and 19 of the adat agreement when translated ran as follows:

'(1). You have to lend moneys for working capital forever for smooth and troubleless running of the Mills Company forever and you shall be paid interest at the rate of six per cent. per annum thereon.

(2). For securing the amount lent by you in this manner, you shall be given possession of yearn and cotton in the godown in the compound of the mills and you shall be provided with a building in the mills' compound for the residence of persons who may be employed by you for the purpose of protecting the same and we will pay Rs. 25 p.m. by way of salary. This salary includes the salary to be paid to persons engaged by you at Ahmedabad for the purpose of purchasing store and coal.

(4). Moneys to be lent by you for working capital include moneys required for purchase of cotton, stores and coal and for payment of wages of labourers, commission of agents, dividend that may be declared and payment of interest and capital to persons putting deposits in the mills, etc., which may be required for working the mills.

(5). You shall be paid on behalf of the Mills Company, commission (haksai) at the rate of 12 annas per Rs. 100 on the total amount of sale proceeds of yarn and cloth and also 12 annas per Rs. 100 on the amount of purchase price of cotton in consideration of the work of lending and otherwise procuring moneys on interest at the rate of sic per cent. per annum as above and for sincerarly purchasing cotton at the market rate for the Mills Company and for sincerely selling yearn and cloth in the market in such a way as to benefit the Mills Company.

(6). You shall have to include the commission (haksai) on the purchase of cotton in your invoice for the cotton purchase and as you say that there is a custom to pay the amount of purchase of cotton on the next day after it is weighed, it will be credited to your account as per that custom but no interest is to be paid on the amount of commission (haksai). But that amount is to be credited to your account after settling the accounts at the end of the month of December. The commission (haksai) to be paid in consideration of the sale of yarn and cloth will be credited to your account after settling the accounts at the end of the month of December every year.

(16). The amount to be lent by you as working capital as stated in clause 1 above to be so lent by you; or you are at liberty to have it lent from other persons but in that case if more interest than that at the rate of six per cent. per annum is to be paid, then the said difference is to be paid by you. Similarly, if it is necessary to pay commission (haksai) more than at the rate of 12 annas as stated in clause 5 above, then the same is also to be paid by you.

(17). You, your successor and your administrators shall have to act according to the above conditions and you, your successors or your administrators shall not be removed by the Mills Company, till you act accordingly but if you or your successors or administrators commit breach of any of these conditions and if that is proved, then the Mills Company can remove you and make any other proper arrangements for running the mills and in that event you or your successors or administrators will have no right in the commission (haksai) of 12 annas.

(18). The documents of 31st May, 1917, is to remain in force except as regards the matters hereby specifically changed and this document shall have no effect over the document executed by the Mills Company in fovour of the agent's company on 1st August, 1917.'

6. The adat agreement was on its face made between the company and Shah Manilal Mulchand as an individual, but it appears that at some stage which it is difficult to point out with any precision or exactitude, instead of the individual Shah Mulchand, the firm carried on in the name of Shah Manilal Mulchand of which Shah Manilal Mulchand was at one time the sole proprietor, was treated as a party to the adat agreement and after the death of Shah Manilal Mulchand, individual, the adat agreement continued between the company and the firm of Shah Manilal Mulchand.

7. The company, after its formation, commenced carrying on the business of a textile mill and Messrs. Prahladji Sevakram and Company acted as secretaries, treasures and agents of the company in accordance with the terms and conditions set out in the first managing agency agreement. Shah Manilal Mulchand advanced moneys to the company from time to time and acted as agents for purchase of cotton and sale of yearn and cloth for and on behalf of the company in accordance with the terms and conditions set out in the adat agreement. The company prospered in course of time but after some years, the condition deteriorated and towards the end of May, 1935, Messsrs. Prahladji Sevakram and Company found it difficult to run the textile mill of the company. Messrs. Prahladji Sevakram and Company accordingly handed over the management of the business of the company to the board of directors on 31st May, 1935, and also tendered their resignation as secretaries, treasurers and agents of the company. The directors thereafter ran the textile mill of the company for a few months through a committee appointed for the purpose, by the textile mill of the company had soon to be closed down. Efforts were thereafter made to restart the textile mill and, as a result of the meetings of the shareholders and the creditors, a scheme was framed to reconstruction of the company and resuming the textile mill of the company. The scheme was sanctioned by the District Court, Mehasana, on 14th October, 1935. Under the scheme the creditors of the company were divided into three classes, the first class, described as A consisted of Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand and the respective partners of those firms, the second class, described as B consisted of other creditors of the company while the third class, described as C consisted of Tapodhan Gnati Utherjak Trust and other trust. The scheme provided that the debts due and owing to the creditors belonging to classes B and C should be discharged first in the manner set out in the scheme and that it was only after those debts were discharged that the debts due and owing to the creditors belonging to class A should be paid by the company. Messrs. Prahladji Sevakram and Company also agreed to withdraw their resignation as secretaries, treasurers and agents of the company and in the interest of the company, Messrs. Prahladji Sevakram and Company as also Shah Manilal Mulchand agreed to forgo the respective commission due and payable to them by the company under the first managing agency agreement and the adat agreement respectively until the debts due and owing to the creditors belonging to classes B and C were fully paid off. Under the scheme a sum of Rs. 45,000 was to be distributed immediately amongst the creditors belongings to classes B and C and certain other moneys were also required for the purpose of restarting the textile mill. The company, therefore, borrowed moneys from Shah Manilal Mulchand against a first charge on the liquid assets of the company. The textile mill was, thereafter, restarted on 13th February, 1937. On 30th August, 1940, an agreement was made between the company and Shah Manilal Mulchand by which Shah Manillal Mulchand agreed to advance moneys to the company up to the limit of Rs. 2,50,000 for the purpose of meeting the expenditure of running the textile mill such as purchase of cotton, stores, fuel, etc., and salary payable to labour and members of the staff. These moneys were to be advanced against a first charge on coal, stores and goods in process belongings to the company and a second charge on loose cloth and bales of cotton, cloth and yarn over which the Bank of Baroda Limited was entitled to a first charge in respect of the moneys advanced by it to the company. It was provided by this agreement that the moneys which had been advanced by Shah Manilal Mulchand to the company after the sanction of the scheme for the purpose of distribution of the first installment of Rs. 45,000 amongst the creditors of B and C classes and restarting the textile mill should be treated as having been advanced by Shah manilal Mulchand to the company under this agreement. The amounts advanced by Shah Manilal Mulchand to the company under this agreement were shown separately in the balance- sheets of the company from year to year and the last balance-sheet which showed the amount was the balance-sheet as at 31st December, 1942. The entire amount advanced by Shah Manilal Mulchand to the company under this agreement was returned some time in 1943, with the result that the balance- sheet as at 31st December, 1943, did not show any loan as outstanding from the company in this account.

8. As I have pointed out above, the textile mill of the company was restarted on 13th February, 1937, and between 1937 and 1946, the company made good profits from the working of the textile mill. The creditors belonging to classes B and C were regularly paid the installments in respect of their dues from out of the profits of the company and they were fully paid off by the end of 1941. Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand thereupon became entitled to receive commission from 1st January, 1942, and a resolution to that effect was passed by a meeting of the board of directors held on 1st May, 1942. The result was that right from 13th February, 1937, when the textile mill of the company resumed working up to 31st December, 1941m Messrs. Praladji Sevakram and Company and Shah Manilal Mulchand voluntarily gave up the respective commission to which they were entitled in order that the textile mill of the company may be restarted and the company may be able to get on its legs and develop into a healthy profit yielding unit. Shah Manilal Mulchand also with a view to securing the same advanced further moneys to the company on interest at the rate of six per cent. per annum. I shall have occasion to refer to these circumstances once again when I deal with the arguments bearing upon the question whether the directors and shareholders in control of the affairs of the company acted in a manner oppressive to the minority shareholders or prejudicial to the interests of the company.

9. On or about 26th September, 1948, Messrs. Prahladji Sevakram and Company tendered their resignation as secretaries, treasurers and agents of the company on condition of the company appointing Messrs. Prahladji Sevakram and Company Limited as secretaries, treasurers and agents of the company in their place and stead and it was accordingly resolved at an extraordinary general meeting of the company held on 26th September, 1948, that the resignation of Messrs. Prahladji Sevakram and Company be accepted and in its place and stead Messrs. Prahladji Sevakram and Company Limited be appointed secretaries, treasurers and agents of the company on the same terms and conditions for a period of twenty years from 1st October, 1948. Pursuant to this resolution an agreement was executed by the company in favour of Messrs. Prahladji Sevakram and Company Limited on 26th September, 1948, which agreement will be hereinafter referred to by me as the second managing agency agreement. A modification was thereafter made in the second managing agency agreement on 24th September, 1950, whereby it was provided that if and when the board of directors of the company were of the opinion that in view of the results of the working of the company in particular year, payment of commission at the rate already provided would be detrimental to the company, the board of directors were authorised to fix the amount of the commission payable to Messrs. Parhladji Sevakram and Company Limited at such lump sum figure as they thought fit. The second managing agency agreement with this modification continued in force until 31st December, 1956, when a new agreement was necessitated by reason of the enactment of the Companies Act, 1956, which came into force with effect from 1st April, 1956. A new agreement was accordingly entered into between the company and Messrs. Prahladji Sevakram and Company Limited on 10th January, 1958, after obtaining the requisite sanction of the Central Government and under this new agreement the remuneration payable to Messrs. Prahladji Sevakram and company Limited as managing agents of the company was fixed at ten per cent. of the net profits of the company in accordance with the provisions of the Companies Act, 1956, and the minimum remuneration was determined at Rs. 25,000 per year. This agreement was to be operative from 1st January, 1957. It may be pointed out at this stage that the managing agency of Messrs. Prahladji Sevakram and Company Limited thereafter came to an end on 15th August, 1960, by reason of the provisions contained in section 330 of the Companies Act, 1956.

10. Since the Companies Act, 1956, was coming into force from 1st April, 1956, and section 314 provided that except with the previous consent of the company accorded by a special resolution, no firm in which a director of the company or a relative of such director was a partner, should hold any officer or place of profit under the company carrying a total monthly remuneration of Rs. 500 or more except that of managing director, managing agent secretaries and treasurers, manager, legal or technical adviser, banker or trustee for the holders of the debentures of the company, a special resolution was passed at an extraordinary general meeting of the company held on 24th March, 1956, according the consent of the company to the continuance of the adat agreement between the company and Shah Manilal Mulchand inasmuch as the partners of Shah Manilal Mulchand were Chandrakant Bakubhai and his two brothers, Rameshchandra Bakubhai and Sanatkumar Bakubhai, of whom Chandrakant Bakubhai and Rameshchandra Bakubhai were the directors of the company.

11. Since 1949, the company started incurring losses and barring the year 1955 in which the company made a small profit, during all the rest of the years from 1949 up to 1961 the company consistently made losses. The carried forward loss at the close of the year 1961 amounted to Rs. 6,34,533 without taking into account depreciation for several years. Since the company consistently made losses prejudicially affecting the financial position of the company and there did not appear to be any sign of improvement of the final position in the future, the company decided to close down the textile mill and a notice was accordingly put up by R.G. Patel, manager of the company, on 25th April, 1957, stating that the financial position of the company was not sound and the textile mill was running into losses and there was no sign of improvement in the future of the financial position and the textile mill was, therefore, being closed. According to the company and its directors this position was reached because the machinery of the company had become old and besides the company was a small and uneconomic unit so far as the textile industry was concerned. the petitioners' case, however, was that the textile mill was deliberately closed down by the directors in charge of the affairs of the company with a view to extricating Shah Manilal Mulchand from their obligations under the adat agreement and enabling the directors and their relations to recover their moneys which were lying locked up in the business of the company. I shall consider these rival versions a little later when I examine the arguments advanced on behalf of the parties. To continue the narration further, on the textile mill of the company being closed down, the Major Mahajan Sangh, being a representative union of the employees of the company, preferred an application before the authority under the Payment of Wages Act for payment of retrenchment compensation and the claim preferred by them on behalf of the workmen aggregated to Rs. 7,66,074. Before I narrate the history of what happened on this application, I must point out that on 1st December, 1947, a letter was addressed by Chandrakant Bakubhai, Rameshchandra Bakubhai and Sanatkumar Bakuchai, as partners of Shah Manilal Mulchand, to the company terminating the adat agreement in view of the fact that the textile mill of the company had closed down. By this letter they also requested the company to make up accounts in respect of the dealings between Shah Manilal and the company and to do the needful in the matter. A meeting of the board of directors of the company was held on 8th December, 1957, to consider amongst others this letter received from the partners of Shah Manilal Mulchand. At this meeting were present Induprasad Prahladji, Chandrakant Bakubhai and Haridas Prabhudas Parikh, three of the directors of the company. After discussion and consideration of this letter it was unanimously resolved by the Board of directors that the adat agreement between Shah Manilal Mulchand and the company should be terminated as demanded by Shah Manilal Mulchand and that the amount due and payable to Shah Manilal Mulchand by the company should be paid off to Shah Manilal Mulchand. Chandrakant Bakubhai being interested in the transaction which formed the subject-matter of the resolution did not vote on the resolution. The adat agreement between Shah Manilal Mulchand and the company thus came to an end on 8th December 1957.

12. In the proceedings initiated by the Majoor Mahajan Sangh for payment of retrenchment compensation to the workmen of the company, an application was made for an interim injunction and on the application an interim injunction was issued by the authority under the Payment of Wages Act against the company and others parties who were parties to the proceedings restraining them form removing and/or selling the immovable properties of the company as also the buildings and machinery belonging to the company. At or about this time various amounts were due and owing from the company to Induprasad Prahladji, Chandrakant Bakubhai and some of their relations and a sum of over Rs. 2,00,000 was due and owing from the company to Shah Manilal Mulchand and the total indebtedness of the company to these parties aggregated to Rs. 13,35,946.48 nP. It appears that these parties demanded

13. payment of the amounts respectively due and payable to them by the company particularly since the textile mill of the company was closed and the company was not carrying on any business. A meeting of the board of directors of the company was accordingly held on 29th March, 1958, and three resolutions were passed for securing the amounts due and payable to these parties. Pursuant to these resolutions cotton, stores and loose machinery spares belonging to the company were pledged with Shah Manilal Mulchand to secure payment of the amount due and owing from the company to Shah Manilal Mulchand and in consideration Shah Manilal Mulchand agreed to give time to the company up to 28th March, 1959. The plant and machinery which constituted the rest of the movable properties of the company were also pledged by the company in favour of these parties including Shah Manilal Mulchand to secure payment of the amounts respectively due and payable by the company to them and in their turn they agreed to give time to the company to repay the said amounts up to 28th March, 1959. The company also created an equitable mortgage of its immovable properties in favour of the same parties to secure repayment of the amounts respectively due and payable to them by the company. Two memoranda of pledges were executed by the company in respect of the aforesaid pledges created by the company in favour of these parties and Shah Manilal Mulchand and a memorandum of equitable mortgage was executed by the company in respect of the aforesaid equitable mortgage made by the company in favour of Shah Manilal Mulchand. All these documents were executed on 29th March, 1958. Considerable reliance has been placed on behalf of the petitioners on these facts and the creation of these securities has been attacked as an act on the part of the directors constituting oppression of the minority shareholders including the petitioners and prejudicial management of the affairs of the company.

14. In or about 1959, a petition for winding up the company was filed in the High Court of Bombay by one Motiram Sevakram, a contributory of the company, on the ground that the substratum of the company was gone and that it was, therefore, just and equitable to wind up the company. The petition was resisted on behalf of the company and an affidavit in reply to the petition was filed on behalf of Rameshchandra Induprasad Rawal, a director of the company. Extracts from this affidavit have been quoted at length in theses proceedings and considerable reliance is placed on the statements in this affidavit when I examine the arguments based on reliance on the statements in this affidavit. It is sufficient at this stage to state that the petition was dismissed by the High Court of Bombay on the ground that it was not established that the substratum of the company was gone or that it was just and equitable to wind up the company.

15. The next stage in the narration of facts leading up to the filing of the present petition was reached on 30th NOvember, 1960, when the Government of Gujarat appointed a Committee of three experts, namely, C.H. Desai, General Manager of the Arvind MIlls LImited, Ahmedabad, J.A. GAndhi, General Manager of the Calico Mills Limited, Ahmedabad, and Dr. C.B. Patel, Director of Industries, Ahemdabad, to inquire into the position of the company with particular reference to the condition of the machinery of the textile mill of the company, the advisability of restarting the textile mill and the approximate cost of getting the textile mill restarted. The Committee made its report to the Government of Gujarat on 21st March, 1961. This report throws considerable light on the true cause of the closure of the textile mill and is of great assistance in the determination of the question whether the directors and controlling shareholders of the company were guilty of any acts of oppression or prejudicial management when they decided to close down the textile mill and to sell the block of the textile mill to Bharat Kala Bhandar Limited for the price of Rs. 11,40,000, on 9th September, 1961.

16. Before I proceed wit the narration of the history of the facts I may state here that after the textile mill was closed down on 25th April, 1957, the sale of the properties of the company was advertised in the issue of the Times of India on 17th, 20th and 22nd June, 1957, since the directors felt that it would not be possible to run the textile mill with the hope of making any profit and that it would be in the interests of the company to sell off its properties at a reasonable price. Pursuant to these advertisements only one offer was received by the company and that was from Messrs. Indian Textile Traders. By their letter dated 23rd July, 1957, Messrs. Indian Textile Traders made an offer for purchase of the machinery of the company for Rs. 6,07,500. The directors, however, found the offer to be too low and they accordingly did not pursue the same further. A number of persons interested in the purchase of the properties of the company came to see the properties but none of them gave a concrete offer of even Rs. 7 to Rs. 8 lakhs. Ultimately, in or about September, 1958, Mehsana Jilla Sarvodaya Audyogic Sangh made an offer to purchase the entire block of the company including the dead stock for the price of Rs. 9,75,000. The directors, having regard to the circumstances them prevailing, were of the view that this was a good offer in the interest of the company and an agreement was accordingly entered into between the company and the sangh on 22nd September, 1958, for the sale by the company to the sangh of the entire block of the company for the price of Rs. 9,60,000 and the dead stock of the company for the price of Rs. 15,000. A sum of Rs. 50,000 was paid by the sangh to the company as and by way of earnest under the agreement. It was a term of the agreement that the claim of the workmen for retrenchment compensation should be settled by the company and that nothing should be payable by the sangh in respect of the same and that if the claim f the workmen for retrenchment compensation was not settled within four months from the date of the agreement, the agreement should be treated as cancelled. The company in spite of its best efforts did not succeed in settling the claim of the workmen of or retrenchment compensation even though the period of four months provided by the agreement expired and the sangh accordingly returned the amount of Rs. 50,000 to the sangh on 24th January, 1959, cancelling the agreement and asking for the return of the amount of Rs. 50,000 paid to the company as and by way of earnest. the company accordingly returned the amount of Rs. 50,000 to the sangh on 24th January, 1959, and the agreement thus ended in a failure. The company thereafter could not obtain any other reasonable offer until some time in July, 1961, when the company obtained an offer from Bharat Kala Bhandar Limited for the purchase of the entire block of the company for the price of Rs. 11,40,000. On 8th July, 1961, a meeting of the board of directors was held at which it was stated that an oral offer for purchase of the entire block of the company was received from Bharat Kala Bhandar Limited and two resolutions were passed at the said meeting. By the first resolution Induprasad Prahladji Rawal and Rameshchandra Bakubhai were authorized to negotiate the terms and conditions of sale of the entire block of the company with Bharat Kala Bhandar Limited and to finalise the same as also to obtain the consent of the secured creditors to such sale. The second resolution authorized Hiralal Nagindas Desai and Haridas Prabhudas Parikh to execute the deed of sale in respect of the entire block of the company after the sale was finalised. It appears that Induprasad Prahladji Rawal and Rameshchandra Bakubhai thereafter carried on negotiations as offer in writing was made by S.M. Jhunjhunwala, advocate on behalf of Bharat Kala Bhandar Limited, to Messrs. Kanga and Company, solicitors on behalf of the company, by a letter dated 12th July, 1961. It is not necessary at this stage to set out the terms and conditions of the offer for I shall have occasion to consider the same in greater detail when I consider the question whether any of the material terms and conditions of the offer were omitted to be set out in the explanatory statement issued under section 172 of the Companies Act, 1956, while convening the extraordinary general meeting of the company for he purpose of obtaining the consent of the company under section 293 of the Companies Act, 1956. All that need be pointed out here is that the offer was accepted on behalf of the company by a letter dated 12th July, 1961, addressed by Messrs. Kanga and Company to S.M. Jhunjhunwala on behalf Bharat Kala Bhandar Limited. Another meeting of the board of directors was thereafter held on 21st July, 1961, and at this meeting the terms and conditions of the proposed sale of the block of the company to Bharat Kala Bhandar Limited were read out and were unanimously approved and a resolution was passed authorizing the chairman to convene an extraordinary general meeting of the company and to issue the requisite notice and explanatory statement in connection with the same. Pursuant to this resolution notices dated 7th August, 1961 were issued to the shareholders of the company convening an extraordinary general meeting of the company on 5th September, 1961, for the purpose of according consent to the sale of the block of the company to Bharat Kala Bhandar Limited. An explanatory statement was also issued along with the notices as required by section 172 of the Companies Act, 1956, and the notice and the explanatory statement were served on the shareholders. One of the grounds of attack leveled in the present petition was against the contents of the explanatory statement. It was contended on behalf of the petitioners that the explanatory statement did not comply with the requirements of section 172 of the Companies Act, 1956, and the resolution passed at the extraordinary general meeting of the company held on 5th September, 1961, according sanction to the sale was, therefore, not a valid resolution on which the company could sell its block to Bharat Kala Bhandar Limited. Of this more hereafter

17. The extraordinary general meeting of the company was scheduled to be held on 5th September, 1961. On 3rd, September, 1961, at about 12-30 p.m. some shareholders of the company wanted to lodge proxies and they, therefore, went to the registered office of the company. The registered office of the company was, however, closed, since 3rd September, 1961, happened to be a Sunday and those shareholders, therefore went to the residence of Induprasad Prahladji Rawal who was the chairman of the company. Induprasad Prahladji Rawal, however, refused to accept the proxies at his residence since the proxies were required to be lodged at the registered office of the company. Two of those shareholders, namely, Dahyalal Chhotalal and Babalal Prbhudas thereupon sent an express telegram to Induprasad Prahladji Rawal at 2-50 p.m. on the same day complaining against his having refused to accept the proxies which were tendered at hid residence at 1-25 p.m.

18. The extraordinary general meeting of the company was thereafter held on 5th September, 1961. At this meeting an objection was raised on behalf of some of the shareholders that the resolution giving consent to the sale of the block of the company to Bharat Kala Bhandar Limited could be passed only as a special resolution and not as an ordinary resolution and that the resolution could not, therefore, be carried unless there was 3/4th majority of votes in favour of the resolution. The objection was not well founded and was, therefore, negatived by the chairman. Certain other objections were also taken by these shareholders who did not want the resolution to be passed and a statement was handed in by them to the chairman containing those objections. Those objections were in the opinion of the chairman frivolous and were, therefore, rejected by him. Of these objections, the only one relevant for the purpose of the present petition which has been relied upon by the learned advocate appearing on behalf of the petitioners is that based on non-compliance with the requirements of section 172 of the Companies Act, 1956. After the objections were overruled by the chairman the resolution was put to vote and on demand being made, poll was taken and the resolution was passed by a majority of 2,015 votes against 966 votes. The resolution was thus carried by a large majority and the company in general meeting gave its consent to the sale of the block of the company to Bharat Kala Bhandar Limited.

19. Immediately on the same day Dahyalal Chhotalal Patwa, for and on behalf of himself and certain other shareholders of the company, sent a telegram to Bharat Kala Bhandar Limited stating that the intended purchase of the block of the company by Bharat Kala Bhandar Limited was illegal since the meeting of the shareholders was illegal and that if Bharat Kala Bhandar Limited purchase the block of the company, they would do so on their own responsibility. The telegram was addressed to Bharat Kala Bhandar Limited at Nagda. Bharat Kala Bhandar Limited had in fact no office at Nagda ; it was a limited company having its registered office at Calcutta. The result was that this telegram was not received by Bharat Kala Bhandar Ltd. and was returned with the postal remark that the address was not known. Dahyalal Chhotalal Patwa, for and on behalf of himself and certain other shareholders of the company, also addressed a registered letter to Bharat Kala Bhandar Limited on the same day pointing out that the meeting of the shareholders was illegal and forwarding along with the letter a copy of the statement of objections to Bharat Kala Bhandar Limited by registered post at the address of the company at Sidhpur. The letter was received by one Shankerlal Ramlal Sharma, who accepted it signing the acknowledgment on behalf or Bharat Kala Bhandar Limited and forwarded it to a company called Bharat Commerce and Industries Limited, Nagda. It appears that one Durgaprasad Birla, the Chief Executive Officer of Bharat Commerce and Industries Limited, Nagda, held a power-of-attorney from Bharat Kala Bhandar Limited and he carried on negotiations on behalf of Bharat Kala Bhandar Limited for the purchase of the block of the company. Since the negotiations for the purchase of the block of the company were going on from about, July, 1961, Durgaprasad Birla had sent Sankerlal Ramlal Sharma, who was a clerk in Bharat Commerce and Industries Limited, Nagda, to Sidhpur in or about July, 1961, for the purpose of keeping a watch on the machinery of the company, so that none of the machinery of the company might be removed or damaged during the tendency of the negotiations. Shankerlal Ramlal Sharma was staying in a bungalow situate in the mill premises at Sidhpur and he was keeping a watch on the machinery with the help of two jamadars taken by him. It was this Sankerlal Ramlal Sharma who received the letter dated 5th September, 1961, on behalf of Bharat Kala Bhandar Limited when it was tendered by the postman. After receiving the letter he forwarded it to Bharat Commerce and Industries Limited, Nagda. Considerable controversy centered round this incident since one of the contentions raised in the course of the arguments before me was that by this letter, dated 5th September, 1961, which also contained a copy of the statement of objections and which was received on 8th September, 1961, by Shankerlal Ramlal Sharma, Bharat Kala Bhandar Limited acquired notice of the fact that the resolution passed at the meeting of the company held on 5th September, 1961, was invalid and that the company was, therefore, not entitled to sell its block to Bharat Kala Bhandar Limited and that even though this notice was acquired by Bharat Kala Bhandar Limited on 8th September, 1961, being the date on which Shankerlal Ramlal Sharma received this letter, Bharat Kala Bhandar Limited proceeded to purchase the block of the company and were, therefore, not entitled to rely on the doctrine of indoor management for the purpose of contending that any irregularity in the passing of the resolution could not affect the purchase of the block of the company made by them on 9th September, 1961. Having regard to this contention, this incident to which I have just referred assumed great importance and the question which was debated before me was whether receipt of the letter dated 5th September, 1961, by Shankerlal Ramlal Sharma could be said to affect Bharat Kala Bhandar Limited without knowledge of the invalidity of the resolution on 8th September 1961, being the date of receipt of the letter by Shankerlal Ramlal Sharma. This question was of course based on the hypothesis that the resolution was an invalid resolution.

20. Pursuant to the agreement of sale constituted by the aforesaid two letters dated 12th July, 1961, and the resolution passed at the extraordinary general meeting of the company held on 5th September, 1961, the possession of the entire block of the company was handed over by the company to Bharat Kala Bhandar Limited on 9th September, 1961, and the entire price was paid off by Bharat Kala Bhandar Limited to the company on the same day. The block of the company consisted of movable as well as immovable properties. The price of Rs. 11,40,000 was accordingly apportioned between the movable and immovable properties of the company. A sum of Rs. 2,50,000 was apportioned as the price of the immovable properties while the balance of Rs. 8,90,000 was apportioned as the price of the movable properties. The sale of the movable properties was completed by delivery of possession while in respect of the immovable properties, a deed of sale dated 9th September, 1961, was executed by the company in favour of Bharat Kala Bhandar Limited in Bombay. It may be pointed out here that the secured creditors of the company, namely, Induprasad Prahladji Rawal, Chandrakant Bakubhai and their relations and Shah Manilal Mulchand in whose favour securities were created on 29th March, 1958, as mentioned above, gave their consent to the sale of the block to Bharat Kala Bhandar Limited and they accordingly joined as confirming parties in the deed of sale. The result was that on 9th September, 1961, the property in the movable properties of the company passed in favour of Bharat Kala Bhandar Limited and the entire price of Rs. 11,40,000 was paid off by Bharat Kala Bhandar Limited to the company. The transaction was thus carried out it its entirely on 9th September 1961, and the only thing which thereafter remained was registration of the deed of sale. On receiving the amounts of the purchase price from Bharat Kala Bhandar Limited, the company paid off the amounts due and owing by it to its secured creditors. It may be pointed out that apart from these secured creditors, there were no other creditors of the company. Out of the amount of the purchase price an aggregate sum of Rs. 4,69,962 was paid off by the company to four directors who were among the secured creditors of the company and an aggregate sum of Rs. 6,62,223 was paid off by the company to the remaining secured creditors. A total amount of Rs. 11,32,185 was thus utilised for making payments towards discharge of the debts of the secured creditors, but even then an aggregate sum of Rs. 1,64,789.90 nP. remained due and payable by the company to them.

21. On taking possession of the movable and immovable properties of the company, Bharat Kala Bhandar Limited put up its board on the mill premises on 9th September, 1961. The board contained the address of Bharat Kala Bhandar Limited. Dahyalal Chhotalal Patwa thereupon sent another telegram to Bharat Kala Bhandar Limited on 9th September, 1961, for and on behalf of himself and certain other shareholders of the company. The text of the telegram was the same as the text of the previous telegram which has been addressed to Bharat Kala Bhandar Limited at Nagda and which had come back with the postal remark that the addressee was not known. Telegram was received by Bharat Kala Bhandar Limited and by a letter dated 14th September, 1961, Bharat Kala Bhandar Limited informed Dahyalal Chhotalal Patwa that the purchase of the movable and immovable properties of the company had been completed, possession had been taken and payment had been made by them before receipt of the telegram and that under the circumstances Dahyalal Chhotalal Patwa and his friends would be well advised not to proceed further in the matter.

22. In the meantime on 13th September, 1961, a suit, being Civil Suit No. 107 of 1961, was filed in the court of the Civil Judge, Junior Division, Sidhpur, by two shareholders of the company, namely, Dahyalal Chhotalal Patwa and Pravinkumar Shyamaladas Parikh. The company and its directors were impleaded as defendants in the suit but Bharat Kala Bhandar Limited was not made a party defendant. In the suit these two shareholders alleged various irregularities in connection with the holding of the extraordinary general meeting of the company on 5th September, 1961, and contended that the resolution passed at the said meeting was invalid, inoperative and null and void. The only relief which they claimed in the suit was a declaration that the resolution passed at the said meeting was illegal, inoperative and null and void and was not binding on the company or its shareholders and an injunction restraining the company and its directors from acting upon the said resolution. No relief was claimed against Bharat Kala Bhandar Limited. Immediately after filing the suit, an application for interim injunction was made on behalf of these two shareholders and on the application and ad interim injunction was granted restraining the company from acting upon the resolution dated 5th September, 1961. No ad interim injunction was issued against the Sub-Register of Assurances. The Sub- Registrar of Assurances at Bombay, however, refused to register the deed of sale since a copy of the ad interim order issued by the court of the Civil Judge, Junior Division, Sidhpur, was served upon him. Bharat Kala Bhandar Limited thereupon preferred a Special Civil Application No. 742 of 1962 in the High Court of Bombay under articles 226 and 227 of the Constitution on 7th May, 1962, for a writ of mandamus requiring the Sub-Registrar of Assurances to register the deed of sale. At the hearing of the Special Civil Application when it was pointed out that there was no ad interim order restraining the Sub-Registrar of Assurances from registering the deed of sale, it was stated by the Advocate-General of the State of Maharashtra appearing on behalf of the Sub-Registrar of Assurances that the deed of sale would be registered by him forthwith. The deed of sale was thereafter registered by the Sub-Registrar of Assurances on 6th August, 1962.

23. The petitioners, being two of the shareholders of the company, in the meantime filed the present petition after obtaining the consent of the shareholders mentioned in the list, exhibit 'C' to the petition, for various reliefs under sections 397 and 398 of the Companies Act, 1956. On the aforesaid facts the petitioners alleged that the affairs of the company were being conducted in a manner oppressive to the petitioners and the shareholders supporting them as also in a manner prejudicial to the interests of the company and that these facts justified the making of a winding up order against the company on the ground that it was just and equitable that the company should be wound up but to wind up the company would unfairly prejudice the petitioners and the other shareholders supporting them since, in the event of winding up, they would ;not get anything from the assets of the company. The petitioners accordingly invoked the powers of the court under sections 397 and 398 of the Companies Act, 1956, and prayed for various reliefs with a view to bringing to an end the matters complained of by them in the petition. The two main reliefs claimed by the petitioners in the petition were, firstly, that the sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited should be set aside and the said movable and immovable properties should be directed to be reconveyed to the company and the directors of the company should be ordered to deposit in court the sum of Rs. 11,40,000 being the price received from Bharat Kala Bhandar Limited in respect of the said movable and immovable properties and, secondly, that the directors of the company should be ordered to be removed from their office of directors of the company and suitable directions should be given for the appointment of new directors as also for the regulation and conduct of the company and its affairs in future and some fit and proper persons should be appointed to manage the affairs of the company in future. In addition to these two reliefs which as I said above were the main reliefs prayed for in the petition, it was also claimed in the petition that the directors of the company or any one or more of them should be ordered to pay or contribute such sum or sums to the assets of the company as and by way of compensation in respect of mismanagement and malpractices committed by them in relation to the affairs of the company as the court might think fit, though I may point out that this relief was not seriously pressed on behalf of the petitioners.

24. On the petition being admitted, notice was issued to the Central Government under section 400 of the Companies Act, 1956. The Central Government has, however, not filed any affidavit in response to the notice. At the date when the petition was filed, no one was made a party respondent to the petition and that was permissibly done having regard to the form prescribed for such petitions by the Companies Court Rules, 1959. But when the petition came up for hearing it was felt that it would be desirable to add the company, its directors and Bharat Kala Bhandar Limited as party respondents to the petition since the reliefs claimed in the petition were directed against them. I, therefore, made an order on the application of the petitioners on 27th February, 1963, and pursuant to that order, the company, its directors and Bharat Kala Bhandar Limited were added as respondents to the petition. Notices of the petition were served on them and they appeared and filed their respective affidavits and contested the petition.

25. The petition as originally framed proceeded on the assumption that the adat agreement between the company and Shah Manilal Mulchand was subsisting at the date of the petition and the aforesaid conduct of the directors and the controlling shareholders was actuated by the motive of extraction Shah Manilal Mulchand from its obligation to supply finance for the working capital of the company at the rate of six per cent. per annual under the adat agreement. Such was in fact the allegation made in paragraph 9 of the petition. The affidavit in reply made by Induprasad Prahladji Rawal on behalf of the company, however, pointed out in paragraph 12 that the adat agreement was cancelled between the company and Shah Manilal Mulchand and that fact was clearly stated in the balance-sheet and profit and loss account of the company for the year ended 31st December, 1957. When this was pointed out in the affidavit in reply, the first petitioner in his affidavit in rejoinder contended in paragraph 7 that the resolution, dated 8th December, 1857, passed by the board of directors of the company terminating the adat agreement between the company and Shah Manilal Mulchand was not valid in law and was brought about by the directors interested in Shah Manilal Mulchand with a view of extracting Shah Manilal Mulchand from its obligations under the adat agreement. Though the allegation that this resolution was invalid and was actuated by a collateral motive to benefit Shah Manilal Mulchand was made in the affidavit in rejoinder, no such allegation was incorporated in the petition and the petition continued on the basis that the adat agreement was subsisting between the company and Shah manilal Mulchand at the date of the petition. When this position came to the notice of the petitioners after the hearing of the petition had commenced and had proceeded for some time, the petitioners applied for leave to amend the petition by adding paragraph 9A after paragraph 9. By the proposed paragraph 9A the petitioner sought to contend that the resolution dated 8th December, 1957, passed by the board of directors cancelling the adat agreement between the company and Shah Manilal Mulchand was illegal, invalid and not binding on the company for three reasons, namely, (1) of the three directors present at the meeting, Chandrakant Bakubhai being a partner of Shah Manilal Mulchand was interested in the resolution but he had not disclosed the nature of his concerned or interest as required by section 299 of the Companies Act, 1956 ; (2) Chandrakant Bakubhai was interested in the cancellation of the adat agreement and yet he took part in the discussion on the resolution; and (3) the presence of Chandrakant Bakubhai could not be counted for the purpose of forming a quorum at the time of any such discussion and there was accordingly no quorum and besides the resolution was also oppressive to the petitioners and other shareholders of the company and prejudicial to the interests of the company. The application for leave to amend the petition was opposed on behalf of the respondents. The main ground of opposition was that the fact that the resolution dated 8th December, 1957, was passed by the board of directors was mentioned in the balance-sheet and profit and loss account of the company for the year ended 31st December, 1957, and the petitioners were, therefore, aware of the said fact and the ground sought to be added by the proposed paragraph 9A was accordingly within the knowledge of the petitioners at the date of the petition and the petitioners could have taken the same in the petition if they so chose. It was contended on behalf of the respondents that the petitioners not having taken this ground in the petition as originally framed though it was available to them at the date of the petition and was within their knowledge, the petitioners should not be allowed to amend the petition after the hearing of the petition had commenced and proceeded for some time. It was also pointed out that in a petition under section 397 or 398 of the Companies Act, 1956, the court was not concerned with the question whether a particular resolution passed by the board of directors was illegal, invalid or not binding on the company on the ground of violation of any of the provisions of the Companies Act, 1956, but the only question was whether the action of the directors or controlling shareholders, whether wrongful or not, amounted to oppression of the minority shareholders or was prejudicial to the interests of the company and that the proposed amendment inasmuch as it sought to raise a contention that the resolution dated 8th December, 1957, passed by the board of directors was illegal, invalid and not binding on the company should not, therefore, be allowed. These grounds of opposition submitted on behalf to the respondents were, however, in my opinion, not well founded and I, therefore, allowed the proposed amendment. The petition, as is clear from paragraph 9, proceeded on the assumption, albeit wrong, that the adat agreement between the company and Shah Manilal Mulchand subsisted at the date of the petition. It is true that there was no justification for the petitioners to proceed on this assumption since they must be aware at the date of the resolution of the board of directors dated 8th december, 1957, which fact was mentioned in the balance-sheet and profit and loss account of the company for the year ended 31st December, 1957, but whether there was justification or not, the petition did proceed on the basis that the adat agreement was subsisting at the date of the petition. When it was pointed out in the affidavit in reply that the adat agreement was cancelled by the resolution of the board of directors dated 8th December, 1957, the petitioners immediately in their affidavit in rejoinder came forward with the contention that the said resolution was illegal, invalid and not binding on the company. Of course the petitioners should have, as soon as the true position was brought to their notice by the affidavit in reply, taken immediate steps to put the petition in order by applying for the necessary amendment, but the petitioners did not do so and it was only after the petition had gone on before me for some time that the application was made for leave to amend the petition. That, however, cannot be a sufficient ground for refusing leave to amend the petition. If the factual position is that the adat agreement was not subsisting between the company and Shah Manilal Mulchand at the date of the petition but was cancelled by the resolution dated 8th December, 1957, the petitioners must be given an opportunity to amend the petition by challenging the said resolution as constituting conduct oppressive to the petitioners and other shareholders of the company and prejudicial to the interest of the company. Of course it is not a proper subject-matter of inquiry in a petition under section 397 or 398 of the Companies Act, 1956, to consider whether a particular action of the directors or controlling shareholders is illegal, invalid or not binding on the company as being in violation of any provision of law and the only question with which the court is concerned in such a petition is whether the action of the directors or controlling shareholders is oppressive to the minority shareholders or is prejudicial to the minority shareholders or is prejudicial to the interests of the company. A particular action of the directors or controlling shareholders may be in violation of any provisions of law in the sense that some particular provision of law may not have been complied with before taking such action and yet such action may be very much in the interests of the company and the shareholders. On the other hand another action of the directors or controlling shareholders may be wholly within the limits of the law and yet it may be oppressive to the minority shareholder or prejudicial to the interests of the company. What the court is concerned to inquire in a petition under section 397 or 398 of the Companies Act, 1956, is whether the action of the directors or controlling shareholders complained of is such that it can be said that the affairs of the company are conducted in a manner oppressive to the minority shareholders or prejudicial to the interests of the company. If, therefore, a mere allegation had been made in the proposed amendment that the resolution of the board of directors dated 8th December, 1957, was illegal, invalid and not binding on the company by reason of violation of any of the provisions of the Companies Act, 1956, I should have been disinclined ; to allow such amendment. But the proposed amendment sought to challenge the said resolution not only on the ground that it was illegal, invalid and not binding on the company as having been passed in violation of the provisions of the Companies Act, 1956, but also on the ground that it was oppressive to the petitioners and other shareholders of the company and prejudicial to the interest of the company. I, therefore, made an order allowing the proposed amendment and pursuant to the order made by me, the proposed amendment was carried out by the petitioners on 29th March, 1963, by introducing paragraph 9A after paragraph 9 in the petition. An affidavit in reply to paragraph 9A of the petition was made on 3rd April, 1963, by Chandrakant Bakubhai on behalf of the company and the directors.

26. This, however, was not the end of the applications for leave to amend the petition. Yet another application for leave to amend the petition was made on behalf of the petitioners on 18th April, 1963. Extensive amendments were sought in the petition on this occasion. By this paragraph the petitioners wanted to aver facts showing that the letter dated 5th September, 1961, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited was received by Shankerlal Ramlal Sharma on behalf of Bharat Kala Limited on 8th September, 1961, and that Shanderlal Ramlal sharma was an agent of Bharat Kala Bhandar Limited authorized to receive the letter on behalf of Bharat Kala Bhandar Limited. Since the averments in this paragraph did not seek to introduce any new ground of attack but merely amplified the allegations already contained in the petition, I allowed the amendment in so far as it related to this paragraph even though the amendment was applied for at a very late stage of the proceedings after the learned advocates appearing on behalf of the petitioners and Bharat kala Bhandar Limited had concluded their respective arguments and the learned advocate appearing on behalf of the directors was addressing the court. By the amendment the petitioners also wanted to introduce certain averments in paragraph 13 of the petition alleging that certain machinery of the company therein specified was attached to the earth and/or permanently fastened to things attached to the earth and was, therefore, immovable property and not movable property as recited in the deed of sale and since the said machinery was not covered by the deed of sale there was no valid and effective sale of the said machinery in favour of Bharat Kala Bhandar Limited and Bharat Kala Bhandar Limited had accordingly not become the owners of the said machinery. These averments sought to introduce a new ground of attack against the sale of the said machinery effected by the company in favour of Bharat Kala Bhandar Limited and the ground of attack was a ground which could not be a relevant subject-matter for inquiry in a petition under section 397 or 398 of the Companies Act, 1956, since there was no allegation, and in fact there could not be any, that by reason of the facts stated in these averments the directors or controlling shareholders had acted in any manner oppressive to the minority shareholders or prejudicial to the interests of the company. Besides, this ground to attack was sought to be introduced at a very late stage of the proceedings when the case of the petitioners was closed and the learned advocate appearing on behalf of Bharat Kala Bhandar Limited had already concluded his reply to the arguments urged on behalf of the petitioners and the learned advocate appearing on behalf of the directors was addressing the court. I, therefore, rejected the amendment in so far as it sought to introduce these averments in paragraph 13 of the petition. Certain other amendments were also desired by the petitioners, one amendment being by the introduction of certain averments in paragraph 23 of the petition and the other amendment being by the introduction of paragraph 23A after paragraph 23 of the petition. These amendments were also rejected by me since they did not add anything to the petition beyond merely setting out the evidence, which evidence was already on record in the shape of the affidavits and documents filed by the parties. The petitioners also sought to add prayers (f)(i) and (f)(ii) after prayer (f) in the petition. These prayers were consequential upon the averments made in the petition and merely amplified the relief which was already sought in prayer (a) of the petition. I, therefore, allowed the introduction of these prayers by way of amendment. In reply to these amendments permitted by me, two affidavits in reply were filed on behalf of Bharat Kala Bhandar Limited, one made by Pratapvardhan Deva, the constituted attorney of Bharat Kala Bhandar Limited and the other made by Shankerlal Ramlal Sharma. On these affidavits an application was made on behalf of the petitioners for an order that Pratapvardhan Deva and Shanderlal Ramlal Sharma should be produced for cross-examination by the petitioners and I, accordingly, made an order directing the attendance of Pratapvardhan Deva and Shankerlal Ramlal Sharma for such cross-examination. Pratapvardhan Deva and Shankerlal Ramlal Sharma were thereafter cross-examined on behalf of the petitioners and their evidence was recorded by me and the arguments were thereafter concluded.

27. Before I examine the various arguments which were advanced before me on the merits of the petition, I must refer to two objections of a preliminary nature which were urged by Mr. I.M. Nanavati, learned advocate appearing on behalf of Bharat Kala Bhandar Limited, in answer to the petition in so far as the petition was directed against Bharat Kala Bhandar Limited Mr. C.C. Gandhi, learned advocate appearing:on behalf of the company, and the learned Advocate-General appearing on behalf of the directors, also supported Mr. I.M. Nanavati in these preliminary objections. The first preliminary objection was that in a petition under section 397 or 398 of the Companies Act, 1956, the court has no jurisdiction to set aside a transfer effected by a company in favour of a third party except in a case falling under section 402(f). The argument briefly was that sections 397 and 398 of the Companies Act, 1956, were on a true construction aimed at putting an end to a continuing state of affairs and not at compensating the minority shareholders for a wrong which was no longer a continuing wrong and that the remedy given by those sections being a preventive remedy, no order could be made by the court setting aside a transfer already past and concluded between a company and a third party unless such order was expressly authorized as in a case covered by section 402(f). The petitioners were, therefore, not entitled, so ran the argument, to have the sale of the movable and immovable properties of the company effected in favour of Bharat Kala Bhandar Limited set aside even if the allegations made by them in the petition were well-founded and they were in a position to show that such sale was a link in the chain of conduct which could be said to be oppressive to the petitioners and other minority shareholders or prejudicial to the interests of the company. The second preliminary objection which was urged in the alternative was that even if the power of the court under sections 397 and 398 of the Companies Act, 1956, extended to making an order setting aside a transfer already made by a company in favour of a third party, such power could not be exercised in the present case, since Bharat Kala Bhandar Limited was, on the facts and circumstances of the case, protected by the doctrine of indoor management. The validity of these preliminary objections turned on the true interpretation to be put on the provisions of sections 397 and 398 of the Companies Act, 1956. I shall, therefore, immediately proceed to examine the scope and ambit of these sections.

28. Sections 397 and 398 are part of a fascicles of sections commencing from section 397 and ending with section 407 and this fascicles of sections occurs in section A dealing with powers of court under Chapter VI headed 'Prevention of oppression and mismanagement'. Under section 397 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 petition the court which, if satisfied that the company's affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding-up order on the ground that it is just and equitable to do so but that this would unfairly prejudice such member or members, may make such order as it thinks fir with a view to bringing to an end the matters complained of. This section corresponds to section 210 of the English Companies Act, 1948. Section 398 considerably enlarges the scope of the remedy by providing that any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial t the interests of the company or 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, may apply to the court and the court may, if it is of the opinion that the affairs of the company are being conducted aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid make such order as it thinks fir with a view to bringing to an end or preventing the matters complained of or apprehended. It is obvious that this remedy provided by section 398 is of a much wider nature than the remedy under section 397, since unlike the remedy under section 397, it is not limited by the requirement that the facts must be such as justify the making of the winding up order against the company on the ground that it is just and equitable to do so. The question of construction which arises for determination on these provisions is as to what is the extent of the power of the court under sections 397 or 398. Does the power of the court extend to the making of an order, setting aside or interfering with past and concluded transactions between a company and a third party which are no longer continuing wrongs or is the power of the court confined to the making of an order preventing future oppression or mismanagement Mr. S.B. Vakil, learned advocate appearing on behalf of the petitioners, pleaded for the former construction on the ground that such construction would enlarge the power of the court rather than limit it and in support of this plea he relied on the well-known rule of interpretation that in the case of provisions of a remedial nature, which sections 397 and 398 undoubtedly were, the construction to be made should be such as will suppress the mischief and advance the remedy and add force and life to the cure and remedy according to the true intent of the makers of the Act, pro bono publico. Now Mr. S.B. Vakil is certainly right in his submission that sections 397 and 398 being designed to suppress an acknowledge mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. The reasons are as follows :

29. Prior to the enactment of the Companies Act, 1956, the statute relating to companies was the Indian Companies Act, 1913. There was in the Indian Companies Act, 1913, section 153C which corresponded to sections 397 and 398 of the Companies Act, 1956. This section was introduced in the Indian Companies Act, 1913, by Act LII of 1951 following the enactment of section 210 in the English Companies Act, 1948. The genesis of the provisions contained in section 397 and 398 of the Companies Act, 1956, is therefore, to be found in section 210 of the English Companies Act, 1948. Now the position which obtained prior to the enactment of section 210 of the English Companies Act, 1948, was that even if the affairs of a company were being conducted in a manner oppressive to some part of the shareholders or in a manner prejudicial to the interests of the company, the aggrieved shareholders had no effective remedy to put an end to such conduct, for unless the case fell within any of the three recognized exceptions to the rule in Foss v. Harbottle (1) (1843) 2 Hare 461., the court had not jurisdiction to interfere with the internal management of the company and even in a case falling within any of the three recognized exceptions to the rule in Foss v. Harbottle (1) (1843) 2 Hare 461., all that the aggrieved shareholders could do was to challenge an act already done by the controlling shareholders as part of such conduct and they could not take any effective steps to prevent the continuance of such conduct. The only remedy which the aggrieved shareholders had was just and equitable to do so. That remedy was however totally inadequate for it meant killing the company for the purpose of putting an end to the oppression and mismanagement. But killing the company would be a singularly clumsy method of ending oppression and mismanagement and such a course might well turn out to be against the interests of the minority shareholders. The liquidation of the company may result in the sale of its asset at break-up value which may be small and the minority who, urged by the oppression of the majority, petitions for a winding up order may in effect play its opponent's game, for the only available purchaser of the assets of the company may be the very majority whose oppression has driven the minority to seek redress. Hence, the Cohen Committee recommended an alternative and less drastic expedient for bringing to an end oppressive conduct on the part of those in control of the company and this expedient is now embodied in section 210 of the English Companies Act, 1948. Following the enactment of this section the legislature introduced section 153C in the Indian Companies Act, 1913, providing an alternative remedy for putting an end to oppression or mismanagement on the part of the controlling shareholders. The remedy given by section 153C was a more effective and less drastic remedy then the remedy of winding up for if there was oppression or mismanagement, the aggrieved shareholders could, instead of applying for winding up the company in order to put an end to such oppression or mismanagement, apply for relief under the section and the court could make such order as it thought necessary with a view to putting an end to such oppression or mismanagement and preventing its recurrence. When the Companies Act, 1956, was enacted, what was originally section 153C was split up into sections 397 and 398 and the scope of the remedy was expanded by removing in cases covered by section 398 the requirement that the aggrieved shareholders must make out a case for winding up under the just and equitable clause before they can apply for relief under that section. The object and purpose of the remedy, however, remained the same, namely, to curse the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. It is in the light of this background that the principle of interpretation relied on by Mr. S.B. Vakil must be applied and applying that principle of interpretation the widest power may be inferred for the court to interfere in the internal management of a company with a view of putting an end to oppression or mismanagement on the part of controlling shareholders so as to advance the remedy and suppress the mischief. But no power, I am afraid, can be inferred by the application of that principle of interpretation to set aside or interfere with past and concluded transactions between a company and third parties which are no longer continuing wrongs, unless the sections by use of clear and unambiguous language confer such power on the court.

30. During to sections 397 and 398, I find that the language of these sections also far from conferring any power on the court to set aside or interfere with past and concluded transactions between a company and third parties which are no longer continuing wrongs, confines the power of the court to making an order for the purpose of putting an end to oppression or mismanagement on the part of controlling shareholders. It is undoubtedly true that the power of the court under sections 397 and 398 is very wide-- it is conferred in terms of the widest amplitude--and the court and make such order as it thinks fit, but this power is conditioned by the purpose for which it can be exercised, namely, 'with a view to bringing to an end the matters complained of' in a case under section 397 and 'with a view to bringing to an end or preventing the matters complained of or apprehended' in a case under section 398. These words indicate the confines within which the power of the court under sections 397 and 398 must operate. Now what are these confines The answer is clear from the language of sections 397 and 398. The remedy under section 397 can be invoked only when the affairs of the company are being conducted in a manner oppressive to a shareholders or shareholders and similarly the remedy under section 398 can be invoked only when the affairs of the company are being conducted in a manner prejudicial to the interests on the company. Of course when I say this I am referred only to the first part of section 398 and leaving out of consideration the second part to which I shall refer a little later. Sections 397 and 398 thus clearly postulate that there must be at the date of the application a continuing course of conduct of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company and it is this course of oppressive or prejudicial conduct which would form the subject-matter of the complained in the application. Now the purpose for which an order can be made under sections 397 and 398 being to bring to an end the matters complained of and the matters complained of in an application under these sections being a course of conduct on the part of controlling shareholders in the management of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company, it is clear that an order can be made under these sections only for the purpose of bringing to an end such course of oppressive or prejudicial conduct, that is, for the purpose of putting an end to oppression or mismanagement on the part of controlling shareholders so that there may not be in future such oppression or mismanagement. The language of sections 397 and 398 leaves no doubt as to the true intendment of the legislature and it is transparent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intend to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the legislature, which as I will presently show it could never have been, the language of sections 397 and 398 would have been different and the legislature would not have confined the power of the court by limiting the purpose for which it can be exercised under the sections. That the remedy provided by sections 397 and 398 is essentially preventive in character is also borne out by the second part of section 398 which applies when a material change has taken place in the management or control of a company and by reason of such change it is likely that the affairs of the company would be conducted in a manner prejudicial to the interests of the company and empowers the court in such a case to make an order with a view to preventing the matter apprehended, namely, the prejudicial conduct of the affairs of the company, so that such prejudicial conduct may not at all result from such change and may be totally prevented. Whereas the first part of section 398 applies to a case where the affairs of the company are being conducted in a manner prejudicial to the interests of the company and it is required to put an end to such existing course of prejudicial conduct, the second part of the second applies where there is not existing course of prejudicial conduct but prejudicial conduct is apprehended by reason of a material change in the management or control of the company and what is, therefore, required is the presentation of occurrence of such prejudicial conduct. These then are the confines within which the remedy provided by sections 397 and 398 operates. But it must be remembered that within these confines the remedy is a very potent and effective remedy, since the power it confers on the court is extremely wide and the court can pass such order as it thinks necessary for the purpose of putting an end to oppression or mismanagement on the part of controlling shareholders. The nature of the order would depend on the state of affairs prevailing in the company and the nature of the restrictions required to put an end to such state of affairs. The necessity of interference under these section may arise in an infinite variety of circumstances and the legislature has, therefore, left the discretion of the court unfettered in the matter of making an appropriate order. Such power can, however, be exercised by the court only for the purpose of bringing to an end oppressive or prejudicial conduct in the management of the affairs of the company.

31. This, in my opinion, is the true import of sections 397 and 398 and it is amply supported by the heading under which the sections occur. It is now well settled that heading of this kind can be referred to for the purpose of construction of the sections ranged under the headings. In Inglis v. Robertson (1) [1898] A.C. 616., Lord Herschell, called upon to construe section 3 of the Factors Act, 1889, relied upon the fact that the section appeared in a group of sections headed 'Dispositions by Mercantile Agents' and after referring to the headings of different parts of the Act, observed: 'These headings are not, in my opinion, mere marginal notes, but the sections in the group to which they belong must be read in connection with them and interpreted by the light of them.' Lord Collins also said much to the same effect in Toronto Corporation v. Toronto Railway (1) [1907] A.C. 315, 324., when he observed : 'This clause is the last of the fasciculus, of which the heading is `Track, & C., and Railways' and, as was held in Hammersmith Ry. Co. v. Brand (2) (1869) L.R. 4 H.L. 171., such a heading is to be regarded as giving the key to the interpretation of the clauses ranged under it, unless the wording is inconsistent with such interpretation.' These observations of Lord Herschell and Lord Collins were relied upon by the Court of Appeal in a recent decision in Qualter Hall & Company v. Board of Trade (3) [1961] 3 W.L.R. 825 ; [1962] 32 Comp. Cas. 591. It is, therefore, clear that the heading under which a section occurs can be referred to as throwing light on the interpretation of the section unless the language of the section is plainly contrary to such interpretation. The fasciculus of sections comprising sections 397 and 398 occurs in a chapter headed 'Prevention of oppression and mismanagement', the sub-heading being 'Powers of Court'. The heading read with the sub- heading clearly shows that sections 397 and 398 deal with powers of courts for prevention of oppression and mismanagement in the affairs of the company and that the remedy given by these sections is, therefore, of a preventive nature intended to prevent occurrence or continuance of oppression or mismanagement in the affairs of the company and is not intended to set at naught what has already been done by controlling shareholders in the course of such oppression or mismanagement which is past and concluded and no longer a continuing wrong.

32. Apart from the plain dictate of the language of sections 397 and 398 there are other considerations which weigh with me in taking the view that a past and concluded transaction between a company and a third party cannot be set aside on an application under section 397 or 398. Let us see what are the consequences to which the other construction must logically and inevitably lead and then consider whether the legislature could have possibly intended such consequences. The effect of accepting that construction would be that if a transaction has been entered into between a company and a third party as part of a continuous and continuing course of oppressive or prejudicial conduct, any shareholders who are aggrieved by such conduct would be entitled to ask the court to set aside such transaction. Now such transaction may not come within any of the three recognized exceptions to the rule in Foss v. Harbottle (4) (1843) 2 Hare 461. and yet the aggrieved shareholders would be entitled to challenge such transaction by taking proceedings in their own right under sections 397 and 398. The result would be that on this construction the exceptions to the rule in Foss v. Harbottle (1) (1843) 2 Hare 461., would be enlarged beyond the three well recognized exceptions and whenever any transaction is entered into by a company with a third party which is part of oppressive or prejudicial conduct on the part of those in management of the affairs of the company, it would be liable to be challenged at the instance of the aggrieved shareholders. Now could the legislature have intended to being about such a result which would have the effect of almost abrogating the rule in Foss v. Harbottle (1) (1843) 2 Hare 461. in so far as transactions with third parties are concerned Could the legislature have intended to strike a death-blow to the rule in Foss v. Harbottle (1) (1843) 2 Hare 461. which has held the field now for well-night over a hundred years and that too in this indirect manner I should be certainly slow to accept a construction which would have the effect of producing this consequence.

33. Not only would this consequence ensure but also the basic and fundamental principle on which the three well recognized exceptions to the rule in Foss v. Harbottle (1)(1843) 2 Hare 461. have been evolved would be completely set at naught. In all cases falling within the three well-recognized exceptions to the rule in Foss. v. Harbottle (1) (1843) 2 Hare 461. the aggrieved shareholders can sue a third party but that is permitted to be done merely as a matter of procedure ; the cause of action on which they sue is a cause of action properly belonging to the company, but since the persons in control of the management of the affairs of the company are themselves the alleged wrong-doers and will not, therefore, permit an action to be brought in the name of the company, the aggrieved shareholders are permitted to enforce the cause of action belonging to the company. But if the construction contended for by Mr. S.B. VAkil were accepted, the result would be that though a company may have no cause of action to sue a third party to set aside a transaction entered into by the comp0any with such third party, the aggrieved shareholders would be entitled to move the court and at the instance of the aggrieved shareholders the court would be entitled to set aside such transaction, provided only that such transaction was part of oppressive or prejudicial conduct on the part of those in control of the management of the affairs of the company. The aggrieved shareholders would in that event have a cause of action of their own and in taking proceedings under section 397 or 398, they would be enforcing their own cause of action and not a cause of action belonging to the company. One might well ask the question : Did the legislature intend to confer such a new cause of action on individual shareholders against third parties so as to entitle them to set aside transactions which the company could not I think not. If such were the intention of the legislature, I should have expected appropriate language and not language indicative only of preventive relief.

34. Another question also arise on the construction advocated by Mr. S.B. Vakil and it is difficult to find an answer to that question. If sections 397 and 398 are intended to confer a new cause of action on individual shareholders to set aside transactions entered into by the company with third parties, on what ground are those transactions liable to be impeached? No clue to the answer to this question is furnished by the sections save and except that the transactions would be liable to be set aside if they are part of a continuous and continuing course of oppressive or prejudicial conduct on the part of controlling shareholders. But this would mean that individual shareholders would have a right to ask the court to set aside any transaction entered into by the company with a third party on the mere ground that such transaction, though otherwise perfectly legal and valid and hence, incapable of being avoided by the company, was oppressive to the complaining shareholders or prejudicial to the interests of the company. Such a view would make it impossible for any outsiders to deal with the company and far from advancing the interests of the company would be clearly detrimental to the interests of the company, for it would scare away persons dealing with the company. How would an outsider dealing with the company know or even have the means of knowing whether the affairs of the company are being conducted in a manner oppressive to some part of the shareholders or prejudicial to the interests of the company The result would be that having entered into a transaction perfectly lawful and valid with a company, an outsider may suddenly discover one fine morning that his transaction is bad, because it was oppressive to some part of the shareholders or prejudicial to the interests of the company. Perfected titles to property would on this construction be rendered uncertain. Could the legislature have intended to bring about such a result The answer to my mind is plainly no.

35. Mr. S.B. Vakil sought to support the construction suggested by him by relying on section 402 which particularizes, without prejudice to the generality of the powers under section 397 or 398, what orders may be made by the court under either of the two sections. Mr. S.B. Vakil pointed out that section 402 enumerated by way of illustration the different kinds of orders which may be made by the court under section 397 or 398 and contended that clauses (e) (f) of section 402 clearly showed that a transaction entered into bay company with a third party could be set aside or interfered with by the court under section 397 or 398. The particular orders specified in section 402 as orders which may be made by the court under section 397 or 398 were, argued Mr. S.B. Vakil, illustrative of the kinds of orders which could be made by the court and since clauses (e) and (f) of section 402 provided for making of orders setting aside or interfering with transactions between a company and third parties in certain specified cases, it was obvious that the power of the court under section 397 or 398 extended to making of an order setting aside or interfering with transaction between a company and a third party provided that the other conditions of the section were satisfied. This contention, though at first blush attractive, is, in my opinion, fallacious and for several reasons.

36. In the first instance I do not think that clause (e) of section 402 can at all be availed of by Mr. S.B. Vakil. Clause (e) of section 402 does not really deal with a transaction between a company and a third party which is past and concluded and is no longer a continuing wrong. It talks of an agreement between a company and a third party which is subsisting at the date of the order and provides that such agreement may be terminated, set aside or modified by the order. Such an agreement would have continuing effect and if it is entered into as part of a course of oppressive or prejudicial conduct or has brought about a course of oppressive or prejudicial conduct, the court certainly can, for the purpose of bringing to an end such oppressive or prejudicial conduct, terminate, set aside or modify such agreement. Clause (e) of section 402 deals with a situation such as this and does not profess to strike at any past and concluded transactions between a company and third parties which are no longer continuing wrongs.

37. The question, therefore, remains to be considered only in so far as clause (f) of section 402 is concerned. Clause (f) of section 402 undoubtedly deals with past and concluded transactions between a company and third parties which are no longer continuing wrongs. But, I am afraid, it is not possible to say that this clause is illustrative of a general category of orders which can be made by the court under section 397 or 398, setting aside or interfering with transactions between a company and third parties which are past and concluded and are no longer continuing wrongs. If such were the position, the logical consequence would be that independently of clause (f) of section 402 the court would have power under sections 397 and 398 to set aside transactions amounting to fraudulent preference and such power would extend not only to transactions effected within three months but also to transactions effected beyond three months from the date of the application. But if that be so, it is difficult to see why the legislature should have introduced, in an illustrative provision like clause (f) of section 402, the limitation that the transaction amounting to fraudulent preference must have been effected within three months before the date of the application. The limitation would in such a case be clearly futile, for the court could always in the exercise of its power under section 397 or 398 set aside a transaction amounting to fraudulent preference, even though it was not within the period of three months. The limitation would have significance only if clause (f) of section 402 were not illustrative of a general power in the court under section 397 or 398 to set aside past and concluded transactions between a company and third parties but were intended to add to the power of the court under sections 397 and 398, for in that event there would be no power in the court under sections 397 and 398 to set aside a transaction amounting to fraudulent preference but clause (f) of section 402 would confer such power on the court, provided the transaction was within the period of three months. Realising this difficulty Mr. S.B. Vakil argues that the limitation was enacted in clause (f) of section 402 with a view to excluding from the general power of the court under sections 397 and 398, transactions amounting to fraudulent preference effected beyond three months from the date of the application. There are, however, several difficulties in the way of acceptance of this argument. Firstly, there are no words in clause (f) of section 402 which indicate that what was intended to be done by that clause was to remove from the range of the power of the court under sections 397 and 398 transactions amounting to fraudulent preference which were effected beyond three months from the date of the application . Clause (f) of section 402 merely describes the character of the transaction which can be set aside by the court and the description which is given is that such transaction must be a transaction amounting to fraudulent preference effected within three months before the date of the application. It does not say that a transaction amounting to fraudulent preference may be set aside only if it is effected within three months before the date of the application, nor does it contain any words indicating that only transactions amounting to fraudulent preference effected within the said period of three months may be set aside and no others. The provisions in clause (f) of section 402 is clearly not a provision which in any way derogates from the general power of the court under sections 397 and 398. As a matter of fact and that is the second difficulty, which Mr. S.B. Vakil has to meet, the provision in clause (f) of section 402 is a provision which is enacted without prejudice to the generality of the power conferred on the court under section 397 or 398 and it cannot, therefore, be construed as derogating from the power of the court under sections 397 and 398. As a matter of fact and that is the second difficulty, which Mr. S.B. Vakil has to meet, the provision in clause (f) of section 402 is a provision which is enacted without prejudice to the generality of the power conferred on the court under section 397 or 398 and it cannot, therefore, be construed as derogating from the power of th court under sections 397 and 398 or limiting that power to transactions amounting to fraudulent preference effected within three months before the date of the application. On the construction of Mr. S.B. Vakil, clause (f) of section 402 would act as a limitation on the power of the court under sections 397 and 398 and would have the effect of curtailing such power, which certainly is not the function of a section which professes to set out the particular orders which may be passed by the court without prejudice to the generality of the powers of the court under sections 397 and 398. Such a construction would have the effect of prejudicing the generality of the power of the court under sections 397 and 398 and would be contrary to the plain language of the enactment. Thirdly, it is difficult to see why the legislature should have provided a time limit of three months in regard to transactions amounting to fraudulent preference and not provided any time limit at all in regard to other transactions, when the vice which affected both the categories of transactions was the same, namely, they were part of a continuous and continuing course of oppressive or prejudicial conduct and there was an additional vice of fraudulent preference which affected the former transactions. If the legislature intended the power of the court under section 397 and 398 to be directed against all past and concluded transactions which were no longer continuing wrongs, it is difficult to see why the legislature should have made a distinction in favour of transactions amounting to fraudulent preference by providing that such transactions can be set aside only if they were effected within three months before the date of the application while other transactions though not suffering from the vice of fraudulent preference may be set aside whether they were effected within or beyond three months from the date of the application. For these reasons, I am of the view that clause (f) of section 402 is not illustrative of any general power in the court to set aside or interfere with past and concluded transactions between a company and third parties which are no longer continuing wrongs, but embodies an additional power conferred on the court to set aside transactions amounting to fraudulent preference effected within three months before the date of the application. Clause (f) of section 402 cannot, therefore, be relied upon by Mr. S.B. Vakil as affording any assistance to his argument.

38. Reference may also be made in this connection to section 406 which makes section 539 to 544 in the form set forth in Schedule XI applicable in relating to an application under section 397 or 398. Section 406 read with section 543 as set forth in Schedule XI enables the court in an application under section 397 or 398 to being to book delinquent directors managing agents, secretaries and treasures, managers and other officers of the company and to enforce the company's claim against them if they have misapplied or retained or before liable or accountable for any money or property of the company or committed any misfeasance of breach of trust in relation to the company. The court can, therefore, in cases covered by section 543 as set forth in Schedule XI award, on an application under section 397 or 398, at the instance of the aggrieved shareholders, compensation to the company and through the company to the aggrieved shareholders, in respect of past and concluded transactions which are not continuing wrongs. Just as clause (f) of section 402 enables the court to set at naught transactions amounting to fraudulent preference effected within three months before the date of the application under section 397 or 398, even though they are no longer continuing wrongs, so also section 406 enables the court to award compensation in respect of past and concluded transactions falling within section 543 as set forth in Schedule XI, even though they are no longer continuing wrongs. These are the only two cases in which on an application under section 397 or 398, the court is empowered to give relief in respect of past and concluded transactions which are no longer continuing wrongs and they are really in the nature of exceptions to the general principle manifest from the language of sections 397 and 398 that the power of the court under both the sections is confined only to making an order for the purpose of putting an end to oppressive or prejudicial conduct and the court cannot make an order setting aside or interfering with past and concluded transactions which are no longer continuing wrongs or giving compensation to the company or the aggrieved shareholders in respect of such transactions. In this view of the matter it is apparent that the preliminary objection raised by Mr. I.M. Nanavati on behalf of Bharat Kala Bhandar Limited and supported by Mr. C.C. Gandhi on behalf of the company and the learned Advocate-General on behalf of the directors is well founded and the petition in so far as it claims that the sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited should be set aside and the said movable and immovable properties should be directed to be restored to the company must, therefore, fail. Since this is the only claim made against Bharat Kala Bhandar Limited, the petition must stand dismissed as against Bharat Kala Bhandar Limited.

39. The first peliminary objection raised by Mr. I. M. Nanavati on behalf of Bharat Kala Bhandar Limited being successful, it is not really necessary for me to consider the second preliminary objection urged by Mr. I.M.Nanavati on behalf of Bharat Kala Bhandar Limited, since that preliminary objection was urged only as an alternative to the first preliminary objection and on the basis that the first preliminary objection was not well founded. Since, however, full arguments were advanced before me on this preliminary objection and two of the deponents of the affidavits, namely, Pratapwardhan Deva and Shankarlal Ramlal Sharma were cross-examine on the behalf of the petitioners on his preliminary objections. I do not think it would be right on my part to refuse to deal with this preliminary objection and to record my opinion on the same. The contention of Mr. I.M.Nanavati relating to his preliminary objection was that even if the power of the court under section 397 and 398 extended to making an order setting aside a transfer already made by a company in a favour of a third party such power could not be exercised in the present case since Bharat Kala Bhandar Limited had no knowledge at the date when it purchased the movable and immovable properties of the company that there were irregularities in the passing of the resolution dated 5th September, 1961 , or that the affairs of the company where being conducted in a manner oppressive to the petitioners and other minority shareholders or prejudicial to the interests of the company and that the sale was a part of such conduct so as to render the sale liable to be set aside under section 397 or 398 and Bharat Kala Limited was, therefore, protected by the doctrine of indoor management. Now it is a well settled rule of company law that an outsider dealing with a company is affected with notice only of its public documents and that if everything appears to be regular so far as it can be seen from the public documents, the outsider when dealing with the company is entitled to assume that all internal regulations of the company have been complied with, unless of course he has knowledge to the contrary or there are suspicious circumstances putting him on inquiry. This rule has come to be known as the rule in Turquand's case (1) (1856) 6 E. & B. 327. since it was formulated for the first time in the famous case of Royal British Bank v. Turquand (1) (1856) 6 E. & B. 327. It was on this rule that Mr. I.M. Nanavati relied in support of his preliminary objection. This rule could obviously be invoked by Mr. I.M. Nanavati only if he could show : (1) that Bharat Kala Bhandar Limited had no knowledge that any irregularities were committed in passing the resolution dated 5th September, 1961, or that the sale was a part of the directors and controlling shareholders, nor were there any suspicious circumstances which might have put Bharat Kala Bhandar Limited on inquiry in regard to these matters ; and (2) that these matters were matters relating to the internal management of the company. Unless these two conditions were satisfied, the doctrine of indoor management which is another name for the rule in Turquand's case (1) (1856) 6 E. & B. 327 could not come into play. So far as the second condition was concerned, there was little dispute that it was satisfied since the questions whether there were any irregularities in the passing of the resolution dated 5th September, 1961, and whether there was any oppressive or prejudicial conduct on the part of the directors and controlling shareholders and the sale was a part of such oppressive or prejudicial conduct were manifestly questions relating to the internal management of the company and no information in regard to them could possibly appear in the public documents of the company. The real debate centered round the question whether the first condition was satisfied. Mr. S.B. Vakil sought to counter the argument of Mr. I.M. Nanavati by giving two answers. The first answer was that the sale was completed in favour of Bharat Kala Bhandar Limited only on 6th August, 1962, when the deed of sale was registered by the Sub-Registrar of Assurances at Bombay, and prior to that, notice of invalidity of the resolution dated 5th September, 1961, was given by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited by his telegram dated 9th September, 1962, which was acknowledged by Bharat Kala Bhandar Limited by its letter dated 14th September, 1961, and that Bharat Kala Bhandar Limited had, therefore, knowledge of the invalidity of the resolution dated 5th September, 1961, before it completed the purchase of the properties of the company. The Second answer which Mr. S.B. Vakil gave was that even if 9th September, 1961, be taken as the date at which it should be considered whether Bharat Kala Bhandar Limited had knowledge of the invalidity of the said resolution dated 5th September, 1961, notice of invalidity of the said resolution was given by Dahyalal Chhotalal Patwa by his letter dated 5th September, 1961, which was received by Shankarlal Ramlal Sharma on 8th September, 1961, and Bharat Kala Bhandar Limited had, therefore, notice of invalidity of the said resolution on 8th September, 1961, i.e., a day prior to 9th September, 1961. Now both these answers given by Mr. S.B. Vakil are in my opinion not well founded and do not meet the argument advanced by Mr. I.M. Nanavati based on the doctrine of indoor management.

40. Turning first to the contention of Mr. S.B. Vakil that the date at which it must be considered whether Bharat Kala Bhandar Limited had notice of invalidity of the resolution dated 5th September, 1961, should be taken to be 6th September, 1962, I agree with Mr. S.B. Vakil that so far as the immovable properties of the company are concerned, though the sale deed conveying the said immovable properties to Bharat Kala Bhandar Limited was executed on 9th September, 1961, the sale of the said immovable properties was not completed until 6th August, 1962, when the deed of the sale was registered by the Sub-Registrar of Assurances, BOmbay. Until the registration of the deed of sale was completed-and that happened on 6th August, 1962-it could not be said that the sale of the immovable properties of the company was completed in favour of Bharat Kala Bhandar Limited (vide Ram Saran Lall v. Domini Kuer (1) A.I.R. 1961 S.C. 1747). If, therefore, the sale had been considerable force in the contention of Mr. S.B. Vakil that the sale was not completed until 6th August, 1962, and that prior to the completion of the sale, Bharat Kala Bhandar Limited had received knowledge of the invalidity of the resolution dated 5th September, 1961. But as the matter stands, the sale comprised not only the immovable properties but also the movable properties of the company and so far as the movable properties were concerned, the sale was completed on 9th September, 1961 by physical delivery of the same to Bharat Kala Bhandar Limited at Sidhpur. The position, therefore, was that though the sale of the immovable properties was completed on 6th August, 1962. the sale of the movable properties was completed on 9th September, 1961. Now the sale of movable and immovable properties of the company was effected pursuant to one single agreement which clearly contemplated sale of the movable and immovable properties of the company as one unit and actually provided as a condition of the agreement that Bharat Kala Bhandar Limited should restart the textile mill which obviously could not be done if only the movable properties were purchased leaving out the immovable properties. the notice of the invalidity of the resolution : dated 5th September, 1961, should, therefore, have been received by Bharat Kala Bhandar Limited before 9th September, 1961, when the sale of the movable properties was completed and if no such notice was received by Bharat Kala Bhandar Limited until that date, Bharat Kala Bhandar Limited could not be deprived of the protection afforded by the doctrine of indoor management. The question which must, therefore, be considered is whether Bharat Kala Bhandar Limited had notice of the invalidity of the resolution dated 5th September, 1961, before 9th September, 1961.

41. For affection Bharat Kala Bhandar Limited with notice of the invalidity of the resolution dated 5th September, 1961, prior to 9th September, 1961, Mr. S.B. Vakil relied on the letter dated 5th September, 1961, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited which was received by Shankerlal Ramlal Sharma on 8th September, 1961. Mr. S.B. Vakil contended that the notice of the invalidity of the resolution dated 5th September, 1961, was given by the said letter and since Shankerlal ramlal Sharma who received the said letter was the agent of Bharat Kala Bhandar Limited, the notice of the invalidity of the said resolution received by Shankerlal Ramlal Sharma must be imputed to Bharat Kala Bhandar Limited and Bharat Kala Bhandar Limited must be regarded as having received notice of the invalidity of the said resolution on 8th September, 1961, when Shankerlal Ramlal Sharma received the said letter. This contention was pressed quite vigorously by Mr. S.B. Vakil and in order to make good this contention, Mr. S.B. Vakil cross-examined Pratapwardhan Deva and Shankerlal Ramlal Sharma, but I am afraid this contention cannot succeed. The principal of law on the point as to when notice to an agent can be imputed to his principal is well settled and no better statement of it can be found than in article 107 of Bowstead on Agency, twelfth edition, where it is enumerated as follows : ' Where any fact or circumstance, material to any transaction, business or matter in respect of which an agent is employed, comes to his knowledge in the course of such employment, and is of such a nature that it is his duty to communicate it to his principal the principal is deemed to have notice thereof, as from the time when he would have received such notice if the agent had performed his duty, and taken steps to communicate the fact and circumstance as he ought reasonably to have taken...... Knowledge acquired by an agent otherwise than in the course of his employment on his principal's behalf, or any fact or circumstance which is not material to the business in respect of which he is employed, is not imputed to the principal. Applying this principal, it is clear that notice of the invalidity of the resolution dated 5th September, 1961, could not be said to have been received by Bharat Kala Bhandar Limited before 9th September, 1961, even if the letter dated 5th September, 1961, was received by Shankerlal Ramlal Sharma on 8th September, 1961. In the first instance there is nothing to show that Shankerlal Ramlal Sharma was an agent of Bharat Kala Bhandar Limited for any purpose other than that of keeping a watch on the machinery of the company which was agreed to be purchased by Bharat Kala Bhandar Limited. It appears from the affidavits and the evidence of Pratapvardhan Deva and Shankerlal Ramlal Sharma that Shri D. P. Birla, the Chief Executive Officer of Bharat Commerce and Industries Limited, Nagda, was the constituted attorney of Bharat Kala Bhandar Limited and was attending to the preliminaries in connection with the purchase of the movable and immovable properties of the company on behalf of Bharat Kala Bhandar Limited. Shri D.P. Birla sent shankerlal Ramlal Sharma to Sidhpur in or about July, 1961, to keep a watch on the machinery of the company since the transaction of purchase was being finalised. It is true that Shankerlal Ramlal Sharma was not an employee of Bharat Kala Bhandar Limited but was serving as a clerk in Bharat Commerce and Industries Limited, Nagda, but since he was sent by Shri D.P. Birla who was acting on behalf of Bharat Kala Bhandar Limited to keep a watch on the machinery of the company, he was certainly an agent of Bharat Kala Bhandar Limited for the purpose of keeping a watch on the machinery of the company. But that was the only scope and ambit of the agency of Shankerlal Ramlal Sharma. He was not an agent of Bharat Kala Bhandar Limited for the purpose of receiving any letters on behalf of Bharat Kala Bhandar Limited or for the matter of that for any other purpose than keeping a watch on the machinery of the company. He was cross-examined by Mr. S.B. Vakil but he emphatically stated that apart from keeping watch on the machinery of the ;company, he had no other work in Sidhpur. It is an undisputed fact that he received the letter dated 5th September, 1961, which was addressed to Bharat Kala Bhandar Limited but from that circumstance alone it cannot be concluded that he was an agent of Bharat Kala Bhandar Limited for the purpose of receiving the said letter. It must be remembered that Bharat Kala Bhandar Limited had no office in Sidhpur up to 9th September, 1961, and Shankerlal Ramlal Sharma was the only person in Sidhpur until 9th September, 1961, who could be said to be a representative of Bharat Kala Bhandar Limited. The letter dated 5th September, 1961, which was addressed to Bharat Kala Bhandar Limited at the mill premises in Sidhpur would, therefore, naturally be delivered to Shankerlal Ramlal Sharma but that does not mean that Shankerlal Ramlal Sharma was an agent of Bharat Kala Bhandar Limited for the purpose of receiving the said letter. As a matter of fact Bharat Kala Bhandar Limited could not possibly have anticipated that any letters would be addressed to them at the mill premises in Sidhpur before the sale of the movable and immovable properties of the company was completed in their favour and they had taken possession of the same and there could not, therefore, have been any reason for them to authorize Shankerlal Ramlal Sharma to receive any letters on their behalf. The fact that Shankerlal Ramlal Sharma was not an agent of Bharat Kala Bhandar Limited for the purpose of receiving any letters is clearly borne out by the fact that the letter dated 5th September, 1961, when receive by Shankerlal Ramlal Sharma was forwarded by him not to Bharat Kala Bhandar Limited but to Bharat Commerce and Industries Limited, of which he was an employee. The letter dated 5th September, 1961, could not, therefore, have been received by Shankerlal Ramlal Sharma as an agent of Bharat Kala Bhandar Limited so as to constitute receipt of the said letter by Shankerlal Ramlal Sharma as received by Bharat Kala Bhandar Limited, the said letter could not have been received by Bharat Kala Bhandar Limited. Apart from that even if Shankerlal Ramlal Sharma had immediately forwarded the letter dated 5th September, 1961, to Bharat Kala Limited, the said letter could not have been received by Bharat Kala Bhandar Limited before 10th September, 1961, since the office of Bharat Kala Bhandar Limited was situate in Calcutta and it would have taken at least 48 hours for the said letter to reach from Sidhpur to Calcutta and that would have been after 9th September, 1961. It is, therefore, clear that even if the other conditions were satisfied so as to bring into play the principle of law stated above, Bharat Kala Bhandar Limited could not be deemed to have notice of the invalidity of the resolution dated 5th September, 1961, until after 9th September, 1961. Moreover, notice of the invalidity of the resolution dated 5th September, 1961, even if it could be said to have been received by Shankerlal Ramlal Sharma on 8th September, 1961, could not be imputed to Bharat Kala Bhandar Limited since the invalidity of the said resolution was not a fact or circumstance material to the business of the agency of Shankerlal Ramlal Sharma who was employed merely as an agent to keep a watch on the machinery of the company and it could not be said to have come to his knowledge in the course of his employment as agent of Bharat kala Bhandar Limited. For these reasons I am of the opinion that notice of the invalidity of the resolution dated 5th September, 1961, could not be said to have been received by Bharat Kala Bhandar Limited prior to 9th September, 1961, when Bharat Kala Bhandar Limited paid the full purchase price to the company agent delivery of possession of the movable and immovable properties of the company and in any event completed the purchase of the movable properties of the company. Bharat Kala Bhandar Limited was, therefore, clearly entitled to claim the protection of the doctrine of indoor management and neither the company nor the petitioners could ask the court to set aside the sale on the ground that there were irregularities committed in the passing of the resolution dated 5th September, 1961, and that it was not a valid resolution. Of course I may point out that the present petition being a petition under sections 397 and 398 it was not competent to the petitioners to challenge the sale on the ground that the resolution dated 5th September, 1961, was not a valid resolution and it was, therefore, entirely immaterial whether Bharat Kala Bhandar Limited had or had not notice of the invalidity of the said resolution. The only ground on which the petitioners could, if at all, subject to the first preliminary objection mentioned above, challenge the sale was that it was part of a continuous and continuing course of oppressive or prejudicial conduct and so far as that ground was concerned, Bharat Kala Bhandar Limited had certainly no notice of it prior to 9th September, 1961, or even prior to 6th August, 1962, and they could, therefore, successfully rely on the doctrine of indoor management in so far as the sale was sought to be challenged on that ground. I am, therefore, of the opinion that this preliminary objection urged by Mr. I.M. Nanavati on behalf of Bharat Kala Bhandar Limited is also well-founded and the petition must be dismissed in so far as it is directed against Bharat Kala Bhandar Limited.

42. But this does not mean the end of the petition. I would still have to consider whether the affairs of the company in the present case were conducted in a manner oppressive to the petitioners and other minority shareholders supporting them or prejudicial to the interest of the company, for if such be the position, it is clear that even though the sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited cannot be set aside. I can certainly grant relief to the petitioners and the minority shareholders by making an appropriate order under section 397 or 398 at least in so far as the company and its directors are concerned. Not it is not difficult to say when the conduct of the affairs of a company can be said to be prejudicial to the interest of the company, but the question as to when it can be said to be oppressive to any shareholder or shareholders is certainly not free from difficulty. The difficulty of defining oppression arisen from the fact that it can taken various forms. It is not possible to lay down any straight-jacket formula in which a particular conduct must fall in order to constitute oppression to one or more shareholders. Human ingenuity is such that there may be an infinite variety of ways in which oppression may be caused to some shareholders by the other. It is, therefore, neither possible nor expedient to define what oppression is. But a useful working rule about the meaning of oppression in this context is to be found in the following words of Lord Cooper in Elder v. Elder & Watson (1) [1952] S.C. 49., where the learned law Lord from Scotland said that 'the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair-play on which every shareholder who entrusts his money to a company is entitled to rely'. More succinctly, it may be said that the complaining shareholders must be under a burden which is 'unjust or harsh or tyrannical' or that there must be 'a lack of probity and fair dealing in the affairs of the company to the prejudice of' the complaining shareholders. Bearing this in mind, I shall now proceed to examine whether the petitioners have succeeded in establishing that the affairs of the company were being conducted in a manner oppressive to them and the other shareholders supporting them or prejudicial to the interests of the company.

43. Mr. S.B. Vakil summarized his contentions on this point by saying that there were six matters in respect of which, according to the petitioners, the affairs of the company were conducted in an oppressive or prejudicial manner. The first was the closure of the mill of the company on 23rd April, 1957. The second was the cancellation of the adat agreement between the company and Shah Manilal Mulchand on 8th December, 1957. The third was the making of the agreement dated 10th January, 1958, between the company and Messra. Prahladji Sevakram and Company Limited providing minimum remuneration of Rs. 25,000 per year to Messrs. Prahladji Sevakram and Company Limited. The fourth was the execution of the memorandum of equitable mortgage and the memoranda of pledge by the company in favour of Shah Manilal Mulchand and the other creditors on 29th March, 1958. The fifth was the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited and matters antecedent to such sale. And the sixth was the payment of the debts of the directors and their relatives out of the sale proceeds received by the company from Bharat Kala Bhandar Limited without retaining anything for the company. These were the matters on which Mr. S.B. Vakil founded his arguments and in respect of each of these matters, contended Mr. S.B. Vakil, the conduct of the affairs of the company was oppressive to the petitioners and the other shareholders supporting them as also prejudicial to the interest of the company.

44. Now the main pivot of the argument of Mr. S.B. Vakil in regard to all these matters was that right from the closure of the mill on 23rd April, 1957, up to the sale of the movable and immovable properties of the company and the distribution of the sale proceeds in payment of the debts of the directors and their relatives, the directors and the controlling shareholders were motivated by only one object, namely, that of extricating Shah Manilal Mulchand from its obligations under the adat agreement and enabling the directors to realise the investment which they had made in the company. According to Mr. S.B. Vakil all these steps which I have outlined in the preceding paragraph were taken by the directors and the controlling shareholders with a view to taking their moneys out of the company and to relieving shah Manilal Mulchand from its obligations under the adat agreement. I shall presently examine the facts with a view to showing the fantastic nature of this allegation, but before I do so, I must point out one basic and important fact, namely, that the directors and their relatives were not only creditors of the company but they were also holding a large block of shares in the company and if the allegations made on behalf of the petitioners are well-founded, it would mean that the directors and the controlling shareholders acted in a manner prejudicial to their own interests, for it is axiomatic that if any action was taken which was prejudicial to the interests of the company, it would not only hurt the interests of the minority shareholders but also the interests of the directors and the controlling shareholders and in the case of the later the injury would certainly be greater than the injury in the case of the former. There is no reason why the director and the controlling shareholders should have so conducted the affairs of the company that their own interests as shareholders be prejudiced. The only answer given by Mr. S.B. Vakil was that they did so in order to protect their interests as creditors. But this contention assumes that the condition of the company was such that unless the directors and the controlling shareholders acted in the manner they did, it would not have been possible for them to realise the moneys lent by them to the company. This would mean that the company was not in a position to continue to earn profits and that the financial condition of the company was bad without any prospect or likelihood of improvement. But if this be so, it is clear that whatever steps were taken by the directors and the controlling shareholders were neither oppressive to the minority shareholders nor prejudicial to the interests of the company. On the contrary they were the only right steps which could be taken by the directors and the controlling shareholders having regard to the position of the company.

45. The first matter complained of on behalf of the petitioners was the closure of the mill of the company on 23rd April, 1957. The argument urged on behalf of the petitioners in this connection was that the mill was deliberately closed down by the directors and the controlling shareholders and such closure was part of a scheme to bring the business of the company to a stand-still so as to create a situation where they would be able to sell the movable and immovable properties of the company and to realise their investments and extricate Shah Manilal Mulchand from its obligations under the adat agreement. Now the hollowness of their argument will be apparent if only a few of the facts are considered. In the first instance it is an incontrovertible fact that, since 1949, the company was incurring losses and it was only during the year 1955 that the company made a small profit. The losses were mounting up and whatever was the balance to the credit of the profit and loss account as a result of the profits made by the company during the previous years was wiped out and the carried forward loss at or about the time when the mill of the company was closed down was in the neighborhood of Rs. 4,76,849. Of course this was the carried forward loss as on 31st December, 1957, but the mill did not work from and after 23rd April, 1957, and the figure of Rs. 4,76,849 may, therefore, be taken as roughly representing the carried forward loss at or about the time of the closure of the mill. The management of the company, therefore, naturally felt that it would not be advisable to continue to run the mill, for such running would mean incurring of further losses and this in its turn would further affect the financial position of the company. The management, therefore, closed down the mill on 23rd April, 1957. The notice dated 23rd April, 1957, put up by the manager of the company clearly stated that the financial position of the company was not sound and the mill was running in losses and there was no sign of improvement of the financial position in the near future and the mill was, therefore, being closed. The report of the committee appointed by the Government of Gujarat to which I have already referred also stated that the losses incurred by the company in the years 1956 and 1957 led to the closure of the mill. Now it was not the allegation of the petitioners that the losses in the working of the company were deliberately caused by the directors and the controlling shareholders. It was also not alleged by the petitioners that the losses were incurred because of shortage of working capital. The losses were obviously incurred in the normal ;course of working of the company and having regard to the losses which the company thus suffered, it was natural that the directors and the controlling shareholders should decide to close down the mill. Apart from this it must be remembered that the machinery of the mill was old and the mill was a small and un-economic unit and it was obviously not possible to carry on the business of running the mill at a profit. Of course the allegation that the machinery was old and the unit of the mill was a small and un-economic unit was denied on behalf of the petitioners, but the report of the committee appointed by the Government of Gujarat clearly showed that unless a large rehabilitation programme was carried out and the spinning unit of the mill was renovated either by purchase of new machinery or by purchase of second-hand machinery in certain departments of the spinning unit, the mill could not function as an efficient unit and the only alternative was to scrap the unit. The committee stated in its report :

'A detailed study of the performance of each unit has been made in earlier chapters, but the overall impression left is that except for cards and the weaving shed, other units of machinery cannot give optimum performance. The continued activities of these machines are, therefore, to be disregarded and the Committee has come to the conclusion that if it is intended to run the mills efficiently, it can only be done if a large programme of rehabilitation is undertaken.

'That the mills cannot run long with existing equipment and if a programme for rehabilitating the spinning and the power units is not undertaken the only alternative is to scrap unit.'

46. These statements made by the Committee of Experts appointed by the Government of Gujarat clearly show that it was not possible to run the mill as an efficient profit-making unit unless a large scale rehabilitation programme was undertaken and the mill was worked only as a spinning unit after installing either new machinery in the spinning, winding and warping departments or second-hand machinery in the blow-room and ring-frame departments and new machinery in the other departments. This piece of evidence completely negatives the case of the petitioners that it was not necessary to close down the mill and that the mill could be continued to be worked at a profit but that at was deliberately closed down by the directors and the controlling shareholders for an ulterior object. Then again there is one other circumstance which also militates strongly against this case of the petitioners. Immediately after closing down the mill the company inserted an advertisement in three issues of the Times of India on 17th, 20th and 22nd June, 1957, inviting offers for sale of the movable and immovable properties of the company and though a number of persons came to see the said properties, no one made concrete offer of even Rs. 7,00,000 to Rs, 8,00,000 for the same. It was only in September, 1958, that the company could secure an offer of Rs. 9,75,000 from Mehsana Jilla Shankari Audyogik Sangha Limited, but that offer also did not materialise into a transaction of sale since the company could not settle the claim of the workmen for retrenchment compensation. No concrete offers were thereafter received until the offer of Rs. 11,40,000 made by Bharat Kala Bhandar Limited. If the mill was in good condition and it was possible to work the mill as it was at a profit, the company would not have found it so difficult to find a purchaser for the same. This circumstances also supports the case of the company and its directors that the machinery of the mill was old and it was a small and uneconomic unit and that it was not possible to run it at a profit and that was why it had to be closed down.

47. These circumstances apart, it is difficult to see how the closure of the mill could in any way benefit the directors and the controlling shareholders. In the first instance the closure of the mill would entail a heavy liability for payment of retrenchment compensation to the workmen and in fact such a liability was incurred and a claim of over Rs. 7,00,000 was made by the workmen against the company. Now at the time when the mill was closed down the directors and their relatives who had advanced money to the company were unsecured creditors. The sure result of closing down the mill would, therefore, be to give rise to a heavy liability for payment of retrenchment compensation which would swallow up a large part of the assets of the company leaving very little for payment of the debts of the directors and their relatives who were at that data unsecured creditors. If the directors wanted to realise the moneys lent by them and their relatives to the company, this would obviously by the most foolish way of getting about that business. It would have been more expedient for them to obtain decrees against the company--and it would have been easy to obtain such decrees since the amounts of the claims were admitted--and to attach and sell the movable and immovable properties of the company in execution of such decrees. In such a case they would have at least got the whole of the movable and immovable properties of the company in payment of their debts whereas by adopting this course, namely, closing down the mill, they created another creditor of a very large amount. Secondly, so far as Shah Manilal Mulchand was concerned, closure of the mill would mean killing the hen which was laying golden eggs. If the mill continued working, Shah Manilal Mulchand would go on getting adat under the adat agreement and it may be pointed out that the adat was definitely on the higher side. As pointed out by the committee appointed by the Government of Gujarat in its report, the commission of the selling agents, i.e., Shah Manilal Mulchand. Of course Shah Manilal Mulchand would have had to advance moneys for working capital but that would be against security of cloth and yarn and if the mill could run at a profit, there was no reason why Shah Manilal Mulchand should not advance moneys to the company as provided in the adat agreement and earn adat which was definitely on the higher said. It would be against the interest of Shah Manilal Mulchand to close down the mill unless it was really impossible to run it at a profit. It is, therefore, not possible to appreciate the contention of the petitioners that the mill was closed down in order to extricate Shah Manilal Mulchand from its obligations under the adat agreement was in the interest of Shah Manilal and there could be no question of Shah Manilal Mulchand truing to get out of its obligations under the adat agreement. As a matter of fact Shah Manilal Mulchand supplied whatever working capital was required under the adat agreement, but despite that the company continued incurring losses and the management had, therefore, no choice but to close down the mill, despite the fact that by so doing, Shah Manilal Mulchand could no longer earn adat under the adat agreement. It is therefore, not possible to take the view that the directors and controlling shareholders deliberately closed down the mill with a view to extricate Shah Manilal Mulchand out of its obligations under the adat agreement. The mill had obviously to be closed down because it could not work at a profit. I may also mention here one other fact which is of considerable significance and it is this, namely, that before the committee appointed by the Government of Gujarat, Chandrakant Bakubhai and Ramesh Bakubhai, two of the partners of shah Manilal Mulchand, who were also directors of the company, expressed a desire to start the mill and they actually stated that if the mill could be worked as a spinning unit, they were prepared to provide an additional finance of about Rs. 15,00,000, provided the Government was prepared to assist them in the matter of further finance which would be required for the purpose. If the mill was deliberately closed down with a view to enabling Shah Manilal Mulchand to extricate itself from its obligations under the adat agreement and the directors and their relatives to realise their investments, it is difficult to believe that Chandrakant Bakubhai and Ramesh Bakubhai should have made an offer to restart the mill as a spinning unit and to provide a further finance to the extent of about Rs. 15,00,000.

48. The second step taken by the directors and the controlling shareholders which was attacked by the petitioners was the cancellation of the adat agreement between the company and Shah Manilal Mulchand on 8th December, 1957. The allegation of the petitioners was that this was also a deliberate act forming part of the scheme for relieving Shah Manilal Mulchand of its obligations under the adat agreement and enabling the directors and their relatives to take out their moneys from the company. But this allegation was patently unsustainable. The resolution accepting the termination of the adat agreement was passed by the board of directors on 8th December, 1957, in response to a letter dated 1st December, 1957, which was addressed by Shah Manilal Mulchand to the company. By this letter, Shah Manilal Mulchand pointed out that inasmuch as the company had stopped running the mill, Shah Manilal Mulchand wanted to terminate the adat agreement and Shah Manilal Mulchand accordingly gave notice to the company terminating the adat agreement. This letter was placed before the meeting of the board of directors held on 8th December, 1957. Now the position which obtained at that date was that the mill of the company had stopped working since 23rd April, 1957. Efforts were being made by the company to sell the mill and advertisements had actually appeared in three issues of the Times of India on 17th, 20th and 22nd June, 1957. There was a large claim of over Rs. 7,00,000 which was made by the workmen for retrenchment compensation. It was in this background that the board of directors had to consider the letter dated 1st December, 1957, and the question is whether under these circumstances can it be said that the acceptance of the termination f the adat agreement was an act which was oppressive to the minority shareholders or prejudicial to the interest of the company.

49. now it is clear from the adat agreement that the obligation of Shah Manilal Mulchand was co-extensive with the continuance of the mill and that if the mill closed down, the obligation of Shah Manilal Mulchand also came to an end. Clause (1) clearly showed that the obligation of Shah Manilal to advance moneys by way of working capital was an obligation to advance moneys so that the work of running the mill might go on smoothly without any difficulty or interruption. If the mill of the company was not working, obviously there could be no obligation on Shah Manilal Mulchand to advance moneys under this clause. Clause (2) provided that for the moneys to be advanced by Shah Manilal Mulchand to the company, Shah Manilal Mulchand was to be entitled to the security of cloth and yarn manufactured by the company. But if the company did not manufacture any cloth or yarn and the manufacturing business of the company came to an end, there could be no obligation to advance moneys. Clause (4) also emphasized that the moneys to be advanced by Shah Manilal Mulchand to the company were for the purpose of running the mill. Clause 95) set out the reciprocal obligations to be performed by Shah manilal Mulchand and the company. Shah Manilal Mulchand was to advance moneys to the company and to purchase cotton and sell cloth and yarn for and on behalf of the company and in consideration of this work, Shah Manilal Mulchand was to get As. 12 per cent, on the purchase price of cotton and the sale price of cloth and yarn by way of adat. The obligation of Shah Manilal Mulchand was a composite obligation consisting of three premises, namely, (1) to advance moneys to the company, (2) to purchase cotton for and on behalf of the company and (3) to sell cloth and yarn manufactured by the company and the consideration for this composite obligation was to obligation undertaken by the company to pay adat on the purchase price of cotton and the sale price of cloth and yarn. But if the company stopped its manufacturing business, there would be no cotton to be purchased and no cloth or yarn to be sold and in that event no adat would be payable to Shah Manilal Mulchand. There would in that event be failure of consideration so far as the obligation of Shah Manilal Mulchand to advance moneys to the company is concerned and that obligation would cease to exist. It is, therefore, clear that the continuance of the working of the mill was the basis of the adat agreement and as soon as the company closed down the mill, Shah Manilal Mulchand was entitled to tell the company that the adat agreement was at an end. When, therefore, Shah Manilal Mulchand by its letter dated 1st December, 1957, intimated to the company that the adat agreement was being terminated, the company had no choice but to accept the termination of the adat agreement. Moreover, it must also be remembered that under the adat agreement adat was to be paid by the company to Shah Manilal Mulchand at the end of every year but the company admittedly failed to pay the amount of such adat to Shah Manilal Mulchand and that was also an additional reason why the company could not insist on the continuance of the adat agreement when Shah Manilal Mulchand by its letter dated 1st December, 1957, put an end to it.

50. Quite apart from these circumstances, it is difficult to see how the termination of the adat agreement could be said to be against the interests of the company. As a matter of fact the continuance of the adat agreement was against the interests of the company and it was desirable that it should be put an end to. The adat payable by the company to Shah Manilal Mulchand was, as pointed out by the committee appointed by the Government of Gujarat, on the higher side and was actually more than what is payable according to normal practice. The only additional consideration which the company obtained from Shah Manilal Mulchand for paying adat at the rate provided in the adat agreement was that the company could get advances from Shah Manilal Mulchand at the rate of six per cent. per annum for its working capital. But there was no evidence to show that finances for working capital could not be obtained by the company from other sources at the rate of six per cent. per annum. I can understand an argument that it was not possible for the company to obtain finance from other sources at the rate of six per cent. annum and that it was, therefore, in the interests of the company to continue the adat agreement so that the company could obtain finance required for the purpose of its business from Shah manilal Mulchand at the rate of six per cent. per annum. But there was no such evidence and, in the absence of such evidence, it is difficult to see how the continuance of the adat agreement under which adat at an excessive rate was being paid by the company to Shah Manilal Mulchand was in the interests of the company. The mill of the company being closed down, the only sensible thing which the company could do was to accept the termination of the adat agreement, though I may say that even if the mill of the company had not closed down, even so, as I have already pointed out above, the acceptance of the termination of the adat agreement by the company could not possibly be regarded as being against the interests of the company.

51. I may also point out that I find it extremely difficult to understood the allegation of the petitioners that the directors and the controlling shareholders deliberately closed down the mill and accepted the termination of the adat agreement with a view to extricating Shah Manilal Mulchand from its obligations under the adat agreement. If Shah Manilal Mulchand wanted to get out of its obligations under the adat agreement, it was not necessary for the directors and the controlling shareholders to close down the mill, incur a heavy liability for payment of retrenchment compensation, lose the accruing profits, dislocate the business of the company and then accept the termination of the adat agreement. The directors and the controlling shareholders could have easily achieved this purpose by not passing a special resolution granting the consent of the company to the continuance of Shah Manilal Mulchand as selling agent under section 314 of the Companies Act, 1956. Since section 31 provided that except with the previous consent of the company accorded by a special resolution, no director of a company or a relative of such director, shall hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more, except certain offices or places of profit with which I am not concerned in the present case, and since the partners of Shah Manilal Mulchand were Chandrakant Bakubhai and his brothers, Ramesh Bakubhai and Sanatkumar Bakubhai, of whom Chandrakant Bakubhai and Ramesh Bakubhai were the directors of the company, a special resolution was passed by the company, 24th March, 1956, according the consent of the company to the continuance of the adat agreement. If the object of the directors and the controlling shareholders was to extricate Shah Manilal Mulchand from its obligations under the adat agreement, they could have easily carried out this object by not moving such a special resolution or even if such a special resolution was moved, then by defeating it. But the very fact that they got the special resolution passed shows that their object was not to put an end to the adat agreement. They could have also achieved the same purpose by making any one of the partners of Shah Manilal Mulchand a shareholder in Prahladji Sevakram and Company Limited who were the managing agents of the company. But adopting such a course they could have brought the case within section 356 of the Companies Act, 1956, and the adat agreement would have come to an end as offending that section. They need not have adopted this round about way which was highly detrimental to their own interests. I may also point out that there is an inherent fallacy underlying the argument of the petitioners in regard to this matter. If Shah Manilal Mulchand wanted to extricate itself from its obligations under the adat agreement, that would be so ordinarily if it found that the continuance of the adat agreement was not profitable and the continuance of the adat agreement would not be profitable only if it was ;not possible to run the mill at a profit even with the advances given by it to the company. But if that be so, then obviously the directors and the controlling shareholders were justified in closing down the mill rather than continuing working the mill and incurring further losses and if the mill was closed down, Shah Manilal Mulchand was entitled to put an end to the adat agreement and the directors were equally entitled to accept the termination of the adat agreement. If on the other hand the mill was capable of being continued to run at a profit, the directors and the controlling shareholders would have no reason to close it down nor would Shah Manilal Mulchand have any reason to close it down nor would Shah Manilal Mulchand have any reason to get rid of the adat agreement which was otherwise highly profitable to it. It may again be noted that it was always open to Shah Manilal Mulchand to put an end to the adat agreement. It may be that such an action on the part of Shah Manilal Mulchand would amount to a breach of the adat agreement. But there would hardly be any damage to the company. It is indeed strange that rather than let Shah Manilal Mulchand adopt such a course, the directors and the controlling shareholders should have acted in the manner in which they did, injuring not only their own interest as creditors but also their interests as shareholders.

52. There are two or three other circumstances which I may also recall at this stage. These circumstances completely negative the case put forward on behalf of the petitioners and show that in acting as they did, the directors and the controlling shareholders were not actuated by any ulterior object. The past conduct of the directors and the controlling shareholders speaks eloquently of their desire to protect and safeguard the interests of the company. In 1935 at a time when the company was in serious difficulties and the working of the company had almost come to an end, it was the managing agents and Shah Manilal Mulchand who came to the rescue of the company and not only agreed to postpone their claims against the company to the claims of other creditors but also agreed to forgo the commission respectively due and payable to them under the first managing agency agreement and the adat agreement for a period of several years. Right from 1937 up to the end of 1941, Messrs. Prahladji Sevakram and company and Shah Manilal Mulchand gave up their respective commission and Messrs. Prahladji Sevakram and company managed the affairs of the company and Shah Manilal Mulchand acted as purchasing and selling agents of the company without any remuneration. Even during the years 1957 to 1960, Messrs. Prahladji Sevakram and Company Limited gave up the minimum managing agency commission of Rs. 25,0o00 per year even though they were entitled to it under the terms of the managing agency agreement dated 10th January, 1958. This conduct on the part of the managing agents and Shah manilal Mulchand who practically controlled the majority shareholding in the company clearly shows that the directors and the controlling shareholders were not out to injure the interests of the company for the purpose of their personal benefit or aggrandizement. The position in which they found themselves in April, 1957, was that by reason of the machinery of the company being old and the mill being a small and uneconomic unit considerable losses were being incurred by the company and the losses were mounting up and they, therefore, felt that it was in the interest of the company to close down the mill for the purpose of avoiding further losses and they accordingly closed down the mill on 25th April, 1957, and thereafter when Shah Manilal Mulchand sought to terminate the adat agreement, they accepted the termination of the adat agreement by the resolution of the board of directors dated 8th December, 1957. There were no mala fides in this action of theirs nor was this action of theirs actuated by any ulterior object or motive and in my opinion it is impossible to take the view that this action was in any way oppressive to the minority shareholders or prejudicial to the interests of the company.

53. Realising this difficulty in his way, Mr. S.B. Vakil, on behalf of the petitioners, contended that in any event the resolution dated 8th December, 1957, was illegal and invalid since in passing it, the directors had committed a contravention of the provisions of sections 299 and 300 of the Companies Act, 1956, and moreover there was no quorum at the meeting of the board of directors which passed the said resolution. Now as I have already pointed out above, the question whether a particular action of the directors was within the limits of the law or was in contravention of any provision of law is not a proper subject-matte of inquiry in a petition under section 397 or 398 of the Companies Act, 1956. If an action of the directors is illegal or invalid, the company or the shareholders may take appropriate action in a court of law challenging the validity of such action but a petition under section 397 or 398 is not an appropriate remedy for the purpose. The only question with which the court is concerned in a petition under section 397 or 398 is whether the action of the directors-- whether within the law or outside the law--is oppressive to the minority shareholders or is prejudicial to the interests of the company. Having regard to this, it is obvious that once I have come to the conclusion that the resolution dated 8th December 1957, was not oppressive to the minority shareholders or prejudicial to the interests of the company, all further inquiry in regard to the said resolution must cease so far as this petition is concerned. But Mr. S.B. Vakil contended that the very fact that in passing the said resolution the directors had committed a contravention of a provision of law was sufficient without any further proof to establish that the said resolution was prejudicial to the interests of the company and that it was not even open to the company to show that it was not so prejudicial. Whether or not the said resolution was beneficial was, argued Mr. S.B. Vakil, irrelevant where there was violation of a provision of law in passing the said resolution. I cannot accept this connection. It may be that a resolution may be passed by the directors which is perfectly legal in the sense that it does not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interests of the company. Such a resolution can certainly be struck down by the court under section 397 or 398. Equally a converse case can happen. A resolution may be passed by the board of directors which may in the passing contravene a provision of law, but it may be very much in the interest of the company and of the shareholders. Such a resolution may be attacked as invalid in a suit or other appropriate proceeding, but not being oppressive to the minority shareholders or prejudicial to the interests of the company, it cannot be challenged in a petition under section 397 or 398. I do not subscribe to the proposition that every action of the directors which is in contravention of a provision of law must necessarily be prejudicial to the interests of the company. These two represent different angles of view and one may exist without the other. I am, therefore, of the opinion that it is not open to the petitioners in this petition to attack the validity of the resolution dated 8th December, 1957, on the ground that it was passed by the board of directors without a quorum and in contravention of the provisions of sections 299 and 300.

54. But even if it were open to the petitioners to challenge the validity of the resolution dated 8th December, 1957, on any such ground, I do not think there is any substance in the challenge. So far as the argument based on the point of quorum is concerned, it is patently unsustainable since on 8th December, 1957, there were only six directors of the company and under section 287 of the Companies Act, 1956, one-third of the total strength, namely, two, could form a quorum. There were three directors present at the meeting of 8th December, 1957. Of them of course one was Chandrakant Bakubhai, and since he was a partner of Shah Manilal Mulchand and was, therefore, interested in the resolution, his presence could in any way interested to pass to resolution. Mr. S.B. Vakil then contended that there was contravention of section 299 since Chandrakant Bakubhai had not disclosed the nature of his concern or interest in the termination of the adat agreement at the meeting of the board of directors held on 8th December, 1957, and that the resolution was, therefore, illegal and invalid. Now there are more answers than one to this contention. In the first place, the letter dated 1st December, 1957, addressed by Chandrakant Bakubhai, Ramesh Bakubhai and Sanatkumar Bakubhai as partners of Shah Manilal Mulchand to the company was placed before the board of directors and the board of directors had, therefore, notice that Chandrakant Bakubhai was a partner of Shah Manilal Mulchand and was, therefore, interested as such partner is the termination of the adat agreement. The nature of his concern or interest was thus disclosed by Chandrakant Bakubhai at the meeting of the board of directors. Secondly, in any event, the directors knew that Chandrakant Bakubhai was interested in the termination of the adat agreement as partner of Shah Manilal Mulchand and it was, therefore, entirely immaterial whether any formal disclosure of his concern or interest was or was not made by Chandrakant Bakubhai at the meeting of the board of directors. Thirdly, even if there was contravention of section 299, such contravention did not have any invalidating consequence so far as the resolution dated 8th December, 1957, was concerned. At the worst Chandrakant Bakubhai incurred, if at all, the penalty provided by the section, but the validity of the resolution dated 8th December, 1957, was not affected in any manner. Mr. S.B. Vakil also relied on section 300 which provides that no director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement. The argument of Mr. S.B. Vakil was that Chandrakant Bakubhai had participated in the discussion on the resolution dated 8th December, 1957, and had also voted on it. This allegation was denied by Chandrakant Bakubhai in his affidavit dated 3rd April, 1963. The minutes of the meeting of the board of directors dated 8th December, 1957, also show that Chandrakant Bakubhai did not vote on the resolution and equally he did not take any part in the discussion on the resolution. There was, therefore, no contravention of the provisions of section 300. But I may point out that even if there were any such contravention, that would not invalidate the resolution dated 8th December, 1957. The attack against the validity of the resolution dated 8th December, 1957, must, therefore, fail.

55. The next ground of attack on behalf of the petitioners was against the making of the agreement dated 10th January, 1958, between the company and Messrs. Prahladji Sevakram and Company Limited by which minimum remuneration of Rs. 25,000 per year was agreed to be paid by the company to Messrs. Prahladji Sevakram and Company Limited. On this part of the case the argument of Mr. S.B. Vakil was that though the mill was closed down on 25th April, 1957, and advertisements were given for sale of the movable and immovable properties of the company, the directors and controlling shareholders got the company to enter into the agreement dated 19th January, 1958, with Messrs. Prahladji Sevakram and Company Limited so that notwithstanding the closure of the business and the bad financial position f the company, Messrs. Prahladji Sevakram and Company Limited could extract annual sums of Rs. 25,000 from the company. But this argument was patently misconceived. It completely overlooked the circumstances in which the agreement dated 10th January, 1958, was made between the company and Messrs. Prahladji Sevakram and Company Limited. The Companies Act, 1956, came into force from 1st April, 1956, and as a result of the provisions contained in that Act, the managing agency agreement which subsisted between the company and Messrs. Prahladji Sevakram and Company Limited required to be modified in order to bring it in line with those provisions. The company, therefore, took steps to bring the managing agency agreement in line with the provisions of the companies Act, 1956, and after obtaining the consent of the Central Government entered into the agreement dated 10th January, 1958, with Messrs. Prahladji Sevakram and Company Limited. The agreement was entered into with effect from 1st January, 1957. The mill of the company was working up to 25th April, 1957, and thereafter also the company continued to exist and it was, therefore, necessary that the managing agency agreement should be in accordance with the provisions of the Companies Act, 1956, and it was only with a view to achieving this purpose that the agreement dated 10th January, 1958, was entered into by the company with Messrs. Prahladji Sevakram and Company Limited. Of course the agreement dated 10th January, 1958, provided for payment of minimum remuneration of Rs. 25,000 per year but I may point out once again that no part of this minimum remuneration was at any time received by Messrs. Prahladji Sevakram and Company Limited from the company. The fact that messrs. Prahladji Sevakram and Company Limited gave up the minimum/managing agency commission of Rs. 25,000 per year from 1957 onwards knocks the bottom out of the allegation of the petitioners that the agreement dated 10th January, 1958, was made with a view to enabling Messrs. Prahladji Sevakram and Company Limited to squeeze the company of the sum of Rs. 25,000 every year.

56. Mr. S.B. Vakil then turned his attack on the execution of the memorandum of equitable mortgage and the memoranda of pledge by the company in favour of Shah Manilal Mulchand and the other creditors on 29th March, 1958. He contended that this transaction was effected by the directors and the controlling shareholders with a view to giving preference to the directors and their relatives over the other creditors and that it was, therefore, oppressive to the minority shareholders and prejudicial to the interests of the company. There is in my opinion no substance in this contention. The conduct of the affairs of the company in order to come within the ambit of section 397 must be a conduct which is oppressive to the shareholders in their capacity as shareholders and not in any other capacity such as the capacity of creditors. Now if by executing the memorandum of equitable mortgage and the memoranda of pledge dated 29th March, 1958, the company gave a preference to the directors and their relatives over the other creditors, such transaction may be liable to be avoided at the instance of the other creditors, if any, but surely it cannot be said to be a transaction oppressive to the shareholders in their capacity as shareholders. By this transaction no right of theirs as shareholders was infringed nor was their interest in the assets of the company in any way prejudiced. It was not disputed the company did owe to Shah Manilal Mulchand and the other creditors the amounts for which the memorandum of equitable mortgage and the memoranda of pledge were executed, but the only grievance was that securities were given for those amounts. Now if for an admitted debt due and owing by a company, the company gives security to the creditor, though it may not be necessary, the action cannot be said to be oppressive to the minority shareholders in their capacity as shareholders. But on the facts I do not think that the giving of securities was a entirely gratuitous act on the part of the company. The resolutions of the board of directors dated 29th March, 1958, show that demands for the amounts respectively due and payable to them were made by Shah Manilal Mulchand and the other creditors and they were pressing for the said amounts and it was because the company agreed to give securities to them that they agreed to wait for payment of the said amounts for a period of one year. Of course, the partners of Shah Manilal Mulchand and the other creditors were either the directors of the company or were the relatives of the directors, but that surely did not prevent them from taking action against the company and if such action was taken and th movable and immovable properties by the company were sold in execution of decrees which might be obtained by them against the company, such sale being a distress sale would have fetched a price very much lower than the market price and the interests of the company and the shareholders would have been prejudiced if in fact the market price was higher. Moreover, at that date there were no other unsecured creditors in any large amounts and the present grievance is not made by any of them. But apart altogether from this, there is another circumstance which requires to be noticed and it is this, namely, that in any event the sale of the movable and immovable properties of the company was no occasioned by reason of the education of the memorandum of equitable mortgage and the memoranda of pledge by the company in favour of Shah Manilal Mulchand and the other creditors nor were there any creditors of the company whose claims were in fact defeated or delayed by the execution of the said memorandum of equitable mortgage and the said memoranda of Pledge. At the date when the sale of the movable and immovable properties of the company was effected, there were no other creditors of the company whose claims were outstanding and even if the equitable mortgage and the pledges had not been executed by the company in favour of Shah Manilal Mulchand and the other creditors, the sale proceeds would have in any event gone to discharge the respective debts claimed by them against the company. Shah Manilal Mulchand and the other creditors did not, therefore, secure any advantage by reason of the execution of the equitable mortgage and pledges in their favour by the company which they would not have otherwise got. The execution of the equitable mortgage and the pledges by the company in favour of Shah Manilal Mulchand and the other creditors did not, therefore, operate to cause any oppression to the minority shareholders or to prejudice the interests of the company and no reliance can be placed on the execution of the said equitable mortgage and pledges for the purpose of supporting the allegations in the petition.

57. As in the case of the resolution dated 8th December, 1957, so also in the case of the equitable mortgage and pledges executed by the company in favour of Shah Manilal Mulchand and the other creditors on 29th March, 1958, Mr. S.B. Vakil, on behalf of the petitioners, raised a contention of invalidity. There were two grounds on which this contention was founded. The first ground was that the consent of the company in general meeting was not obtained under section 293 of the Companies Act, 1956, before the execution of the said equitable mortgage and pledges. The short answer to this contention is that section 293 did not apply since what was being done by the execution of the said equitable mortgage and pledges was not disposition of the whole or substantially the whole of the undertaking of the company within the meaning of that section. The second ground urged by Mr. S.B. Vakil was that the directors did not disclose their interest in the transaction at the meeting of the board of directors and that the execution of the equitable mortgage and pledges was, therefore, bad. This ground is also without any substance. It is clear from the minutes of the meeting of the board of directors held on 29th March, 1958, that the directors interested in each of the three transactions, namely, the equitable mortgage and the two pledges, disclosed the nature of their interest at the said meeting. The names of the directors to whom moneys were due from the company and in whose favour the said equitable mortgage and pledges were proposed to be executed by the company to secure payment of those dues were set out in the resolutions and all the directors present at the meeting, therefore, knew the nature of the concern or interest of the said directors. There was, therefore, no contravention of the provisions of section 299 of the Companies Act, 1956. Moreover, as I have already said above, while discussing the validity of the resolution dated 8th December, 1957, even if there was any contravention of the provisions of section 299, such contravention did not have the effect of nullifying the resolutions for execution of the said equitable mortgage and pledges and the said resolutions were, therefore, valid resolutions and the said equitable mortgage and pledges executed pursuant to the said resolutions were valid transactions.

58. That takes me to the question whether the sale of the movable and immovable properties of the company to Bharat kala Bhandar Limited was oppressive to the minority shareholders or was prejudicial to the interests of the company. Here again the attack was a two-fold one. The first attack was directed against what I may call the merits of the sale while the other attack was directed against he validity of the sale on the ground of non- compliance with the requirements of section 172 of the Companies Act, 1956. I will first examine the case of the petitioners in so far as it impeached the merits of the sale by alleging that the sale was oppressive to the minority shareholders and prejudicial to the interests of the company. There were two grounds on which the sale was impeached. The first ground was that the sale was at an undervalue. Now so far as this ground is concerned, it is entirely without any substance. It was alleged by the petitioners in paragraph 19 of the petition that the market value of the movable and immovable properties of the company was not less than Rs. 20,00,000, but that the said movable and immovable properties had been arbitrarily and capriciously sold for the price of only Rs. 11,40,000. Though this allegation was made in the petition, no evidence was produced in support of this allegation. The only piece of evidence on which Mr. S.B. Vakil relied was a affidavit dated 14th September, 1959, made by Induprasad Prahladji Raval in the winding up petition filed against the company in the High Court of Bombay. It is undoubtedly true that in that affidavit it was stated by Induprasad Prahladji Raval that the total value of the machinery of the company was Rs. 12,02,180, but his statement made on 14th September, 1959, merely gave the opinion of Induprasad Prahladji Raval as regards the value of the machinery. This statement was obviously not based on any valuation made by the company. Induprasad Prahladji Raval in his affidavit filed in reply to the present petition pointed out the circumstances in which this statement came to be made by him and he stated that the valuation given in this statement was based on an offer given by one machinery merchant on the footing that he would be entitled to remove the individual items of machinery from Sidhpur with the permission of the Government of India, but such permission was not obtainable from the Government of India and it was, therefore, not possible to avail of the said offer. The offer did not materialise into a contract and the valuation given by Induprasad prahladji Raval on the basis of such an offer can have no significance. Moreover the offer was on the basis that the individual items of machinery would be possible to be removed from Sidhpur and it is elementary that the sale of individual items of machinery would always fetch a better price than the sale of an entire block. Apart from this valuation given by Induprasad Prahladji Raval in the affidavit made by him on 14th September, 1959, no other evidence of the value of the movable and immovable properties of the company was placed before the court on behalf of the petitioners. On the other hand the evidence produced on behalf of the company and its directors clearly showed that the price of Rs. 11,40,000 realised by the company as a result of the sale from Bharat Kala Bhandar Limited was a proper price. The first piece of evidence to which reference must be made in this connection is again the report of the committee appointed by the Government of Gujarat. The committee consisted of three experts in the textile line, namely, the General Manager of Arvind Mills Limited, the General Manager of Calico Mills Limited and the Directors of Industries, Ahmedabad. The committee consisting of these three experts opined that the existing machinery in the spinning, winding and warping departments would fetch about Rs. 2,00,000 to Rs. 3,000,000 while the looms in the weaving department would fetch about Rs. 1.5 to Rs. 2 lakhs provided permission for sale was obtained from the Textile Commissioner. The total value of the machinery was thus estimated by the committee at Rs. 4 to 5 lakhs. The immovable properties of the company were admittedly not of a value exceeding Rs. 2 to 3 lakhs. The total value of the movable and immovable properties, according to the committee, thus did not exceed Rs. 9 to 10 lakhs and the price of Rs. 11,40,000 realised by the company could not, therefore, be regarded as a low price. Apart from this evidence, the directors made considerable efforts to sell the movable and immovable properties of the company. Three advertisements were given in the issue of the Times of India dated 17th, 20th and 22nd June, 1957. But the only offer received was that from Messrs. India Textile Traders which was only for a sum of Rs. 6,07,500 for the machinery of the company. This offer was, however, considered to be a low offer and the directors did not, therefore, accepted the same. Thereafter, no offer worth the name was received until about September, 1958, when an offer of Rs. 9,75,000 for the movable and immovable properties was received from Mehsana Jilla Sahakari Audyogik Sangha Limited. This transaction, however, did not go through since the company could not settle the claim of the workmen for retrenchment compensation. The company thereafter continued to make efforts to sell the movable and immovable properties of the company and it was only on 12th July, 1961, that a firm offer to purchase the movable and immovable properties of the company for Rs. 11,40,000 was received from Bharat kala Bhandar Limited. These facts clearly show that the maximum offer received by the company after the mill was closed down on 25th April, 1957, was the offer of Bharat Kala Bhandar Limited for Rs. 11,40,000 and if the directors and the majority shareholders thought that it was worth-while accepting this offer, it cannot be said that they did something which was oppressive to the minority shareholders or prejudicial to the interests of the company. It is significant to note that neither the petitioners nor any of the shareholders supporting them raised any objection at the extraordinary general meeting of the company held on 6th September, 1961, that the price at which the movable and immovable properties of the company were proposed to be sold was not a fair price. It is also noteworthy that neither the petitioners not any of the shareholders supporting them has been able to bring forward any definite offer of a large amount or even to produce any evidence which would show that the price of Rs. 11,40,000 was not a fair price. It is easy to make allegations of under-valuation but in the absence of evidence they cannot be accepted. The evidence is on the contrary the other way round and it clearly establishes that the price of Rs. 11,40,000 realised by the company was a fair price. This view also receives support from the fact that a observed by the committee appointed by the Government of Gujarat the machinery of the company was old and the unit was small and uneconomic unit and it was not possible to run it as an efficient profit making unit without carrying out large rehabilitation programme and spending a sum of at least Rs. 33,00,000 on such rehabilitation programme.

59. But quite apart from the evidence showing that the price of Rs. 11,40,000 realised by the company was a reasonable price, I do not see any reason why the directors and controlling shareholders should have sold the movable and immovable properties of the company at an under-valuation. As a matter of fact the price of Rs. 11,40,000 realised for the movable and immovable properties of the company was not even sufficient to meet the claims of the directors and their relatives who were creditors of the company. Then they should the directors and controlling shareholders have sold the movable and immovable properties of the company for the price of Rs. 11,40,000 if it was possible to realise a higher price for the same By selling the movable and immovable properties of the company at an under-valuation, the directors and controlling shareholders not only prejudiced their interest as shareholders but also injured their interests as creditors, for a part of their claims remained unpaid by the company. It is impossible t accept the contention of the petitioners that the directors and controlling shareholders were so unmindful of their own interests that they sold the movable and immovable properties of the company at a price which was not even sufficient to meet their claims as creditors, unless, of course, the price actually realised was the maximum possible price which could be fetched for the same. The contention that the sale was at an under-valuation must, therefore, be rejected.

60. The second ground on which mr. S.B. Vakil relied was that the sale of the movable and immovable properties of the company was not at all necessary. The argument was that the movable and immovable properties need not have been sold at all ant this again was put on two counts. Firstly, it was contended that the mill could have been run at a profit for the benefit of the shareholders and, secondly, that nothing would be received by the shareholders from the sale and on these two counts it was urged that the sale of the movable and immovable properties of the company was against the interests of the company and the minority shareholders. The argument on both the counts is in my opinion unsustainable. So far as the first count is concerned, the answer is clear, namely, that it was impossible to run the mill at a profit for the benefit of the shareholders. I have already dealt with this aspect of the matter and I need not say anything more beyond observing that there were continued losses from 1949 to 1957 and as pointed out by the committee appointed by the Government of Gujarat, the machinery of the company was old and the unit was a small and uneconomic unit and without scrapping the weaving unit and running the spinning unit after carrying out a large rehabilitation programme it was not possible to work the mill as an efficient profit making unit. Since it was not possible to carry out this large rehabilitation programme for the purpose of renovating the spinning unit of the mill, the only course available was the sale of the mill. It is no doubt true that, as pointed out by Mr. S.B. Vakil under the second count, the result of the sale was that nothing was received by the shareholders, but that cannot be helped. If the intrinsic value of the assets of the company was not sufficient to meet even the claims of the creditors, no surplus would naturally remain for the shareholders, but that does not mean that the company should not on that account sell off its assets. Either the company continues to run the mill or allows the mill to remain idle. If the company continues to run the mill, the company would go on incurring further losses which would deteriorate the financial position of the company more and more without in any way benefiting the shareholders. If on the other hand the mill of the company is allowed to remain idle, the machinery would deteriorate and unnecessary expenses would be continued to be incurred and interest on loans payable to creditors would go on mounting. Either course would be prejudicial to the interests of the company and would be an imprudent course to adopt. The only solution in such a case would be to sell the assets of the company and that is exactly what the directors and the controlling shareholder did. Merely because the result of the sale was that nothing was received by the shareholders, it cannot be said that the sale should not have been effected at all. As a matter of fact if the sale had not been effected, the creditors could have got their moneys by obtaining decrees against the company and selling the assets of the company in execution of such decrees which would have been more ruinous to the shareholders. The attack on the merits of the transaction of sale must, therefore fail and it must be held that the sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited was neither oppressive to the minority shareholders nor prejudicial to the interests of the minority shareholders nor prejudicial to the interests of the company.

61. Turning now to the attack against the validity of the sale, the main grounds on which the sale was challenged was that it was effected without obtaining the consent of the company in general meeting as required by section 293 of the Companies Act, 1956. Now a resolution giving the consent of the company was certainly passed at the extraordinary general meeting of the company held on 5th September, 1961, but the validity of this resolution was challenged on the ground that the meeting of the company at which the resolution was passed was convened without complying with the requirements of section 172 of the Companies Act, 1956. The contention of Mr. S.B. Vakil was that under section 172 an explanatory statement was required to be sent to the shareholders along with the notice of the meeting and that such explanatory statement was required to set out all material facts concerning the item of business to be transacted at the meeting including in particular the nature of the concern or interest, if any, therein, of every director and managing agent, if any, and this particular requirement of the section was not satisfied in the present case. He contended that the explanatory statement sent along with the notice did not set out the material facts concerning the proposed sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited as also the nature of the concern or or interest of the directors and that there was, therefore, non-compliance with the requirements of section 172. He also urged that the agreement of sale made between the company and Bharat Kala Bhandar Limited was not made available for inspection to the shareholders and the time and place where the said agreement could be inspected was not specified in the explanatory statement and this also constituted a contravention of the provisions of section 172. He was, therefore, illegal and invalid and the resolution according sanction to the proposed sale was also, therefore, illegal and void.

62. Two answers were given to this contention by Mr. C.C. Gandhi on Behalf of the company and the learned Advocate-General on behalf of the directors. The first answer was that the provisions of section 172 were not mandatory but were directory and that even if there was non-compliance with the requirements set out in those provisions, such non-compliance did not have the effect of invalidating the meeting or the resolution passed at the meeting. This raised the question whether the provisions of section 172 are mandatory or directory. Now the question as to whether a statute is mandatory or directory. Now the question as to whether a statute is mandatory or directory is a question which has to be adjudged in the light of the intention of the legislature as disclosed by the object, purpose and scope of the statute. If the statute is mandatory, the thing done not in the manner or form prescribed can have no effect or validity ; if it is directory, penalty may be incurred for non-compliance, but the act or thing done is regarded as good. As observed by Maxwell on the Interpretation of Statutes, tenth edition, page 376 :

' It has been said that no rule can be laid down for determining whether the command is to be considered as a mere direction or instruction involving no invalidating consequence in its disregard, or as imperative, with an implied nullification for disobedience, beyond the fundamental one that it depends on the scope and objects of the enactment. It may, perhaps, be found generally correct to say that nullification is the natural and usual consequence of disobedience, but the question is in the main governed by considerations of convenience and justice, and, when that result would involve general inconvenience or justice to innocent persons, or advantage to those guilty of the neglect, without promoting the real aim and object of the enactment, such an intention is not to be attributed to the legislature. The whole scope and purpose of the statute under consideration must be regarded.'

63. Lord Campbell in Liverpool Borough Bank v. Turner (1) (1860) 30 L.J. Ch. 379 observed :

'No universal rule can be laid down as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience. It is the duty of courts of justice to try to get at the real intention of the legislature by carefully attending to the whole scope of the statute to be construed.'

64. It is, therefore, clear that regard must be had to the whole scope and purpose of the statute for the purpose of determining whether the statute is mandatory or directory. Judged by that test, the conclusion is irresistible that section 172 enacts a provision which is mandatory and not directory. The object of enacting section 172 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgments are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interest of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 172, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 172, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid.

65. Mr. C.C. Gandhi and the learned Advocate-General, therefore, contended that there was no non-compliance with the requirements of section 172. Non- compliance with the requirements of section 172 was alleged on behalf of the petitioners in three respects. It was first alleged that the agreement of sale between the company and Bharat Kala Bhandar Limited was not available for inspection to the shareholders and the time and place where the said agreement could be inspected was not specified in the explanatory statement. This contention was based on sub-section (3) of section 172. BUt that sub-section applies only where the item of business consists of according of approval to any document by the meeting. In the present case the item of before the meeting of the company held on 5th September, 1961, was not according to approval by the meeting to the agreement of sale between the company and Bharat Kala Bhandar Limited. The item of business was whether the undertaking of the company should be sold to Bharat Kala Bhandar Limited for the price of Rs. 11,40,000 on certain terms and conditions. Whether there was already an agreement between the company and Bharat Kala Bhandar Limited was immaterial. It was equally immaterial whether the agreement was oral or in writing. All that the meeting was concerned with was whether to accord consent to the sale of the undertaking by the company to Bharat Kala Bhandar Limited was not required to be placed for the approval of the meeting. Sub-section (3) of section 172 had, therefore, no application and there was accordingly no non-compliance with the requirements of that sun-section.

66. The second matter on which according to the petitioners there was non- compliance with the requirements of section 172 was in regard to sub- section (2) of that section in as much as the explanatory statement did not set out the natured of the concern or interest of the directors and the managing agents in the proposed sale of the movable and immovable properties of the company. There is no substance in this contention. If one looks at the explanatory statement it is clear that it has been set out there that out of the directors of the company, four directors, namely, Induprasad Prahladji Raval, Chandrakant Bakubhai, Ramesh Bakubhai and Rameshchandra Induprasad, were interested in the proposed sale, in as much as they were secured of the company and their debts to be paid off out of the sale proceeds. These mere the only directors who had an interest in the proposed sale and the nature of their interest was clearly set out in the explanatory statements. Of course it was not set out as to what were the amounts of the debts due and owing to them by the amendment by the Companies (Amendment) Act, 1960, all that was required to be set out in the explanatory statement was the nature of the concern or interest and not the extent of the concern or interest.

67. The petitioners also contended that there was non-compliance with the requirements of sub-section (2) of section 172 in as much as the explanatory statement did not set out all material facts concerning the proposed sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited. According to the petitioners the conditions of the proposed sale contained in clauses 3, 4, 10, 13 and 14 of the letter of offer dated 12th July, 1961, addressed by the attorneys of Bharat Kala Bhandar Limited to the attorneys of the company (to which I shall for convenience refer as the agreement of sale dated 12th July, 1961, since this letter of offer was accepted on the same day by a letter addressed by the attorneys of the company to the attorney of Bharat Kala Bhandar Limited) were not set out in the explanatory statement. Clause 3 of the agreement of sale provided that the title should be marketable, free from all claims, charges and incumbrances. This was the provision for making out marketable title which is implicit in all agreements of sale. Even apart from the express provision in the agreement of sale, this would be implied as a matter of law and it could not, therefore, be said to be a material fact concerning the proposed sale which should have been set out in the explanatory statement. As a matter of fact it would not affect the judgment of the shareholders one way or the other. Clause 4 provided a period of two months from the date of acceptance of the offer for completion of the transaction. Now in a sale of immovable property time is not of the essence of the contract and even if a period of two months was provided for completion of the transaction the transaction could be completed at any time even after the expiration of the period of two months, provided it was completed within the time fixed by either party making such time as the essence of the contract. Of course the sale was a composite sale of both movable and immovable properties, but it was essentially a mercantile transaction for sale of the entire block of the company and time was, therefore, not of the essence of the contract and the period of two months specified in the agreement was, therefore, not a material fact concerning the proposed sale. In any event I think that the time of completion of the purchase could not be said to be a material fact concerning the transaction of sale which would influence the judgment of the shareholders in deciding whether to give consent or not. Clause 10 provided for delivery of vacant possession of the bungalows and staff quarters, if possible. That was an usual clause consequential upon sale and was not a material fact which would affect the judgment of the shareholders on the advisability or otherwise of the transaction. Clause 14 embodied a provision which is an usual provision in all agreements of sale, namely, that the stamp duty and registration charges on the conveyance shall be borne and paid by the vendor and the purchaser in equal shares. That provision also could not be regarded as a material fact which would influence the judgment of the shareholders one way or the other in the matter of the proposed transaction.

68. That leaves only clause 13 of the agreement of sale on which considerable stress was laid by Mr. S.B. Vakil on behalf of the petitioners. Mr. S.B. Vakil contended that the condition mentioned in this clause was not set out in the explanatory statement and that the omission to do so constituted a contravention of sub-section (2) of section 172. The argument of Mr. S.B. Vakil was that the condition mentioned in this clause provided that Bharat Kala Bhandar Limited would be entitled to give the benefit of the agreement of sale to any nominee or nominees and that, if it did so, the company would have to complete the sale in favour of such nominee or nominees and this condition was a material fact concerning the transaction of sale, since there was a provision in clause 9 of the agreement of sale that the mill should be started within the eleven months of the company settling the claim of the workmen for retrenchment compensation and that if the working of the mill was not started within the said period, the purchaser should pay to the company such sum as and by way of additional compensation or damages as might be determined by Mr. Tricumdas as sole arbitrator. If Bharat Kala Bhandar Limited transferred the benefit of the agreement of sale to a party which was financially unsound and the working of the mill was not started within the period prescribed by clause 9 of the agreement of sale, additional compensation or damages as may be determined by Mr. Tricumdas as sole arbitrator would be payable by such party, but if such party was financially unsound, the company might not be able to recover the amount of compensation or damages from such party. The condition entitling Bharat Kala Bhandar Limited to transfer the benefit of the agreement of sale to any nominee or nominees was, therefore, a material condition which should have been disclosed in the explanatory statement. Now this contention was strenuously pressed by Mr. S.B. Vakil, but I am afraid there is no substance in it and it must be rejected. In the first place the resolution which was submitted to the general meeting to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited for the price of Rs. 11,40,000 and so far as that resolution was concerned, it was entirely immaterial to state in the explanatory statement that under the agreement of sale Bharat Kala Bhandar Limited was entitled to transfer the benefit of the agreement of sale to any nominee or nominees and that the company was bound to complete the sale in favour of such nominee or nominees. The consent sought from the general meeting being a consent to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited and not to any nominee or nominees of theirs, it was not a matter of any consequence to be set out in the explanatory statement that there was a provision in the agreement of sale that the benefit of the agreement of sale could be transferred by Bharat Kala Bhandar Limited to any nominee or nominees and that if this was done, the company was bound to complete the sale in favour of such nominee or nominees. The resolution embodied the consent of the general meeting to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited and pursuant to such consent, the sale was in fact executed by the company in favour of Bharat Kala Bhandar Limited. But apart from this answer, there is also another answer which can be given to the contention of Mr. S.B. Vakil. The obligation under clause 9 of the agreement of sale to pay compensation or damages for failure to start the mill within the period provided in that clause was the obligation of Bharat Kala Bhandar Limited and even if Bharat Kala Bhandar Limited transferred the benefit of the agreement of sale to any nominee or nominees, Bharat Kala Bhandar Limited could always be called upon to pay compensation or damages if the working of the mill was not started within the said period. The burden of the agreement of sale could not be transferred by Bharat Kala Bhandar Limited to the nominee or nominees to whom the benefit of the agreement of sale might be transferred and even if the conveyance was executed by the company in favour of any nominee or nominees of Bharat Kala Bhandar Limited, the obligation to pay compensation or damages for failure to start the working of the mill within the prescribed period would remain that of Bharat Kala Bhandar Limited and the condition set out in clause 13 of the agreement of sale, was, therefore, not a material fact concerning the transaction of sale which should have been disclosed in the explanatory statement on pain of contravention of sub-section (2) of section 172.

69. Mr.S.B.Vakil lastly contended that in any event there was contravention of section 172 inasmuch as it was not stated in the explanatory statement that the sale proceeds were going to be utilised for payment of the secured creditors and that after payment to the secured creditors nothing would re,aim with the company for distribution to the shareholders. This fact was, in the submission of Mr.S.B.Vakil, a material fact required disclosed so that the shareholders would b4 able to decide that though nothing was going to remain with the company after payment to the secured creditors, they should yet vote for the transaction of sale. This contention is also in my opinion now well-founded. It is clear from the balance-sheets of the company for the years 1958,1959 and 1960, which were passed by the annual general meetings of the company held respectively on 25th December, 1959, 24th September, 1960, and 28th June, 1961, that there were secured creditors of the company in the aggregate amount of over Rs. 12,00,000 which exceeded the amount of the sale proceeds. the share-holders, therefore, knew that there were secured creditors of the company who would have to be paid off out of the sale proceeds and that after payment to the, nothing would remain for the shareholders. Apart from that, the fact that there were secured creditors and that they had consented to the sale was set out in the explanatory statement and from that it should have been obvious to the shareholders that the secures creditors would have to be paid off from the sale proceeds and that after such payment, nothing would remain with the company after payment to them could not be said to be a material fact concerning the transaction of sale. This fact related to the effect of the sale. It dealt with the question as to what would happen to the sale proceeds which might be realised from the sale. It was not a material fact concerning the sale and was, therefore in any event not necessary to be set out in the explanatory statement under section 172. There was, therefore, in my opinion, no contravention of the provisions of section 172 even on this ground.

70. For these reasons I am of the opinion that there was in fact no contravention of the provisions of section 173 which would invalidate the general meeting held on 5th September, 1961, and the resolution passed at the said meeting. The resolution was, therefore, a valid resolution and even if the question of validity of the resolution could be raised by the petitioners in this petition under sections 397 and 398-which as I have already held cannot be done-the attack against the validity of the resolution must fail.

71. These were the only contentions urged before me in support of the allegations of oppression and mismanagement and since I find that there is no substance in them, it is obvious that the petition must fail. The petition is, therefore, dismissed. In view of the special facts and circumstances of the case, I think the fair order of costs would be that each party should bear and pay its own costs of the petition.


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