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In Re: Modern Furnishers (interior Designers) (P.) Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberCompany Petition No. 577 of 1983
Judge
Reported in[1985]58CompCas858(Cal)
ActsCompanies Act, 1956 - Sections 397 and 398
AppellantIn Re: Modern Furnishers (interior Designers) (P.) Ltd. and ors.
Cases ReferredNeedle Industries (India) Ltd. v. Needle Industries Newey
Excerpt:
- .....as a school teacher and at the request of petitioner no. 1, he left his job and joined the partnership business on february 1, 1964.38. at the hearing, learned counsel for the petitioners reiterated in his submissions the contentions of the petitioners in their pleadings and further submitted that, in the facts and circumstances, a case of oppression and mismanagement has been made out against respondent no. 2. he urged that there has been a total ouster of one group of shareholders by another group of equal strength from the management of the company and its business and the court should exercise its powers under sections 397 and 398 of the companies act, 1956, to restore the previous position. he submitted that respondent no. 2, who joined the business as a mere employee, has.....
Judgment:

Dipak Kumar Sen, J.

1. The material facts, not in dispute, resulting in the present proceedings under Sections 397 and 398 of the Companies Act, 1956, are as follows:

2. One Dhirendra Nath Mallick had been carrying on business since 1920 under the name and style of ' Modern Furnishers' as the sole proprietor thereof. R. N. Banerji, respondent No. 2 herein, was an employee of Dhirendra in the said business.

3. Some time in 1940, Dhirendra became a tenant in a portion of premises No. 38, Park Mansions, Park Street, Calcutta, which was used as a showroom and office of the said business.

4. On February 8, 1963, Dhirendra and respondent No. 2 constituted a partnership under the existing name ' Modern Furnishers'. The said partnership was registered. Respondent No. 2 was allotted 2 annas share in the said partnership while Dhirendra retained the balance 14 annas share. The tenancy in the said premises at Park Street, Calcutta, was transferred in favour of the partnership.

5. Dhirendra died intestate on May 6, 1963, leaving Tarulata, his widow and petitioner No. 1 in this application, as his sole heiress and legal representative.

6. By a deed executed thereafter on January 15, 1964, petitioner No. 1 and respondent No. 2 constituted a new partnership in the same name 'Modern Furnishers', which took over the business of the previous partnership. The two partners had equal shares in the partnership except as to the goodwill of the business in which petitioner No. 1 retained 2/3rds share and respondent No. 2 was given the balance 1/3rd.

7. The said partnership was converted into a limited company named Modern Furnishers (Interior Designers) P. Ltd. (hereinafter referred to as 'the company ') on or about November 1, 1975. One of the objects of the company was to acquire and take over the business of the said partnership. Respondent No. 2 was appointed the permanent managing director of the company under its articles and he has continued as the managing director ever since.

8. The said partnership was, however, not dissolved. The tenancy in the said premises at Park Street was retained by the said partnership which occupied and still occupies a portion therein. The company was allowed to carry on business in the remaining portion of the said premises under tenancy as a licensee under the partnership.

9. Rajat Kamal Basu, petitioner No. 2, is a nephew (sister's son) of petitioner No. 1. He was employed by the said partnership as the works manager of the business in 1964. His employment was continued under the company. On or about June 10, 1976, petitioner No. 2 was allotted 10 shares in the company and in 1980 he was authorised by the company to operate its banking accounts along with respondent No. 2.

10. It appears that disputes commenced between the parties some time in April, 1983, when respondent No. 2, as the managing director of the company, withdrew the authority of petitioner No. 2 to operate the bank accounts of the company. On June 20, 1983, the services of one K. A. Karmally, a supervisor working in the factory of the company, was terminated by respondent No. 2 and on July 15, 1983, a notice was served by respondent No. 2 upon petitioner No. 2 terminating his service as the works manager of the company with immediate effect.

11. By a letter dated August 31, 1983, petitioner No. 1 called upon respondent No. 2 to give reasons for the termination of the services of petitioner No. 2. She also authorised her representative to inspect the accounts of the company on her behalf. Respondent No. 2 did not furnish any reason for the termination of the services of petitioner No. 2 and informed petitioner No. 1 that, while she could herself inspect the books and records of the company, such inspection would not be giyen to her representative.

12. On September 16, 1983, a notice was issued on behalf of the company stating that a meeting of the board of directors would be held on September 24, 1983, inter alia, to discuss the accounts of the company for the year ended on March 31, 1983. Petitioner No. 1 did not attend the meeting. A fresh notice was issued for holding another meeting of the board on October 1, 1983. Before the said meeting could be held, the present application was moved on September 29, 1983, and an interim order was obtained.

13. It is a matter of record that the present shareholding of the company in respect of its total issued share capital is as follows:

(a) Petitioner No. 1 holds 767 shares;

(b) Respondent No. 2 also holds 767 shares;

(c) Uma Banerji, the wife of respondent No. 2, and respondent No. 4 herein, holds 10 shares; and

(d) Petitioner No. 2 holds 10 shares.

14. It is alleged in the petition that at the time of the incorporation of the company it was agreed or understood between petitioner No. 1 and respondent No. 2 that both of them would have the right to participate in the management of the company equally. It was further agreed that as petitioner No. 1 was a pardanashin lady not capable of participating actively in the management of the company, petitioner No. 2. would look after her interests in the company and also take an active part in the manager ment of the company as her representative.

15. It is alleged that taking advantage of the position of petitioner No. 1, respondent No. 2 has been treating the company as his personal property without any reference to petitioner No. 1. The services of the said K. A. Karmally, it is alleged, was terminated wrongfully and illegally without any resolution of the board of directors of the company or the consent of the petitioners. K. A. Karmally, it is alleged, was an old employee in the business from the time of Dhirendra. It is alleged that the motive behind the termination of the services of the said K. A. Karmally was to oust petitioner No. 1 and her group from management.

16. It is alleged that, similarly, the employment of petitioner No. 2 was terminated by respondent No. 2 with an oblique motive of ousting the group of petitioner No. 1 from management. Such termination was also effected without any resolution of the board of directors of the company and without the consent of petitioner No. 1. Respondent No. 2 refused to the representative of petitioner No. 1 inspection of the books and records of the company also with the same motive.

17. It is alleged that respondent No. 2 is presently seeking to surrender the tenancy of the partnership in the said premises at Park Street to cause loss and injurjy to the company which is only a licensee therein. It is also the object of respondent No. 2 to make secret profits by surrender or transfer of the said tenancy.

18. It is alleged that respondent No. 2 has been selling the products of the company, viz., furniture, without proper records and documents and without charging sales tax. Such conduct has resulted in the company becoming liable to penal proceedings under the Sales Tax Act.

19. It is alleged that respondent No. 2 as the managing director of the company failed and neglected to hold the meetings of the board of directors as required in law. By reason of the mismanagement by or inefficiency of respondent No. 2, the company, it is alleged, has suffered financial loss from year to year. By reason of the conduct of respondent No. 2 as aforesaid, the normal functioning of the company, it is alleged, has also been disrupted an'd there has been loss of mutual faith and confidence between the shareholders and the directors.

20. It is further alleged that respondent No. 2 is refusing to allow petitioner No. 2, a shareholder of the company, to enter its registered office. Further, petitioner No. 1 wrongfully and without any resolution of the board has unilaterally increased the wages of the workmen of the company by Rs. 50 per month with retrospective effect from July, 1983. This increase was given effect to only after petitioner No. 2 was removed from the company.

21. It is alleged that the aforesaid constitute mismanagement by and oppression on the part of respondent No. 2.

22. The following orders have been prayed for in this application:

(a) Appointment of a special officer or administrator or receiver over the books of account, statutory books including shareholders' minute books, directors' minute books, other properties and assets of the company situated at No. 1 Gorachand Lane, Calcutta, and at its showroom at 38, Park Mansion, Calcutta;

(b) Appointment of a special officer or administrator or receiver to take charge and to carry on the management and business of the company;

(c) A declaration to the effect that respondent No. 2 be deemed to have vacated and has ceased to be a director of the company;

(d) An injunction restraining respondent No. 2 from acting as the managing director of the company and from exercising any of the powers and authorities of managing directors and an officer of the company usurping the functions of the directors or officers of the company or from drawing any remuneration and from interfering with the affairs of the company;

(e) Supersession of the board of directors of the company and directions for fresh election of the board;

(f) An injunction restraining respondent No. 2 from holding any meeting of the board of directors of the company;

(g) An injunction restraining respondents Nos. 2 and 4 from surrendering the tenancy of the said showroom of the company at Park Street, Calcutta, or dealing with the tenancy in any manner including taking any step relating to surrender of the said right of tenancy in favour of the landlord of the said premises.

(h) An injunction restraining respondents Nos. 1 and 2 from giving effect to the purported letter of termination dated July 15, 1983.

23. Respondent No. 2 has affirmed an affidavit on November 29, 1983, which has been filed in opposition to an interlocutory application made by the petitioners in the main application under Sections 397 and 398 of the Companies Act, 1956. Inasmuch as the said affidavit has dealt exhaustively with the main petition, the same was relied on as an affidavit-in-opposition to the main petition at the hearing.

24. It is admitted in this affidavit that respondent No. 2 was originally an employee in the said business of Dhirendra but thereafter, it is alleged, he was enagaged as the manager of the business and was in charge of the showroom at Park Street.

25. It is alleged that Direndra had full faith and confidence in and appreciated the efficiency of respondent No. 2 as a reason whereof respondent No. 2 was taken in as a partner in the business. It is alleged that when the partnership was reconstituted, after the death of Dhirendra, the relations of petitioner No. 1, particularly her sisters' sons, wanted to interfere and raised objections to respondent No. 2 being taken in as a partner. In spite thereof, petitioner No. 1, who had confidence in respondent No. 2, accepted respondent No. 2 as an equal partner.

26. Petitioner No. 1, thereafter, came to reside with her nephews. At the request of petitioner No. 1, petitioner No. 2, who was unemployed at the time, was given employment in the partnership to provide him with a livelihood though he was untrained, had no experience in any business and had not been employed in the partnership during the lifetime of Dhirendra. He was asked to maintain the attendance register, cash books and issue-registers at the office of the business. It was understood that petitioner No. 1 would not participate in the day-to-day business; nor was it felt necessary that any representative of petitioner No. 1 would look after her interest in the business.

27. Petitioner No. 2, it is alleged, was found totally unfit for the work and his attendance was irregular.

28. It is alleged that the said Karmally, who had been acting as the supervisor in the factory of the company, was not discharging his duties faithfully. He misbehaved with other workmen. It was also found that, with the assistance of petitioner No. 2, Karmally had established a rival business, where he was accepting orders from, the customers of the company, and was supplying furniture to them direct. In spite of warnings, neither petitioner No, 2 nor the said Karmally took any step to desist from such wrongful activities. The services of Karmally were accordingly terminated.

29. Even after the termination of the services of Karmally, it was found that petitioner N6. 2 in spite of verbal warnings continued to have business dealings and transactions through Karmally which directly affected the business of the company. Petitioner No. 2 also started instigating the workmen of the company against the management. He was using the facilities of telephone and transport of the company for carrying on his personal dealings through Karmally as aforesaid. The aforesaid wrongful activities of petitioner No. 2 were brought to the notice of petitioner No. 1; who said that she was helpless in the matter and was unable to control petitioner No. 2. In the circumstances, the employment of petitioner No. 2 in the company had to be terminated.

30. It is alleged that the decision to terminate the services of Karmally and petitioner No. 2 had been communicated by respondent No. 2 to petitioner No. 1.

31. It is alleged that respondent No. 2 had always been looking after the interest of petitioner No. 1 and it is only the relations of petitioner No. 1, including petitioner No. 2, who are trying to interfere with the business of the company with the object to wind up the same so that the tenancy right in the said premises at Park Street which is a valuable asset could be dealt with by them.

32. It is alleged that though petitioner No. 1 has nothing to do with the day-to-day management of the company, the financial benefits of management are being shared by respondent No. 2 and petitioner No. 1 equally.

33. It is alleged that the books and records of the company are maintained regularly and there is no question of any sale without proper records. It is contended that no particulars of the alleged wrongful dealings of respondent No. 2 have been given in the petition.

34. It is alleged that respondent No. 2 fell ill some time in 1980 and at that time petitioner No. 2 had been given authority to sign cheques on behalf of the company. The power and authority of petitioner No. 2 to operate the bank accounts of the company were withdrawn thereafter when his wrongful activities as aforesaid came to the knowledge of respondent No. 2. It is alleged that, in any event, such authority was given to petitioner No. 2 for a limited period.

35. The wages of the workmen of the company, it is alleged, had to be enhanced from time to time in the usual course. Negotiations were held with the workers and a memorandum of settlement was executed on April 1, 1980.

36. Petitioner No. 2 has affirmed an affidavit on December 16, 1983, which has been filed in reply to the aforesaid affidavit of respondent No. 2. A supplementary affidavit affirmed by petitioner No. 1 on January 17, 1984, has also been filed.

37. It is stated in the said supplementary affidavit, inter alia, that petitioner No. 2 is the constituted attorney of petitioner No. 1 and has affirmed the main petition on her behalf. It is stated that petitioner No. 2 was requested by petitioner No. 1 to join the business in order to protect the interest of petitioner No. 1. It is alleged that, petitioner No. 1 is an illiterate and not in good health and it is, therefore, necessary that one of her relations should act as her representative in the said business. It is alleged that petitioner No. 2, before he joined the business, was employed as a school teacher and at the request of petitioner No. 1, he left his job and joined the partnership business on February 1, 1964.

38. At the hearing, learned counsel for the petitioners reiterated in his submissions the contentions of the petitioners in their pleadings and further submitted that, in the facts and circumstances, a case of oppression and mismanagement has been made out against respondent No. 2. He urged that there has been a total ouster of one group of shareholders by another group of equal strength from the management of the company and its business and the court should exercise its powers under Sections 397 and 398 of the Companies Act, 1956, to restore the previous position. He submitted that respondent No. 2, who joined the business as a mere employee, has by manoeuvring taken control of the entire company.

39. Learned counsel for the respondents submitted, on the other hand, that no case of either mismanagement or oppression has been made out by the petitioner. He also submitted that the only possible complaint of the petitioners could be that respondent No. 2, who is in charge of the management of the company as the managing director, had terminated the services of two of the employees of the company in exercise of his power of management. Such terminations, in law, do not amount to oppression within the meaning of Sections 397 and 398 of the Companies Act. If such terminations have been wrongful, the remedy lay elsewhere and not under the jurisdiction of this court.

40. Learned counsel submitted further that there was no allegation of any financial irregularity or misappropriation of the assets, properties or funds of the company against respondent No. 2.

41. Petitioner No. 2, who holds only 10 shares in the company, cannot as of right insist on taking part in the management of the company either as a shareholder or as a representative of petitioner No. 1. There has been no obstruction or ouster of petitioner No. 1, who is free to take part in the management of the company.

42. In support of the respective contentions, several decisions were cited at the Bar as noted hereafter:

(a) Richardson and Cruddas Ltd., In re : AIR1959Cal695 . This decision was cited on behalf of the petitioners for the proposition that, under Section 402 of the Companies Act, it was open to the court, in proper cases, to provide for independent management by constituting an advisory board.

(b) Inland Steam Navigation Workers Union v. Rivers Steam Navigation Co, Ltd. [1968] 38 Comp Cas 99. This decision of a Division Bench of this court was cited by the' petitioner for the proposition that when an occasion demanded, the court could pierce the veil of a company to find out what was its actual constitution.

(c) Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962f32 Comp Cas 207 ; AIR 1961 Cal 127. This decision was cited on behalf of the respondents for the proposition that under Section 397 of the Companies Act, the court had to be satisfied that the affairs of the company were being conducted in a manner oppressive to any member or members. The acts of oppression not only had to be alleged with sufficient particulars but had to be proved to the satisfaction of the court before the court could be called upon to act upon the same.

(d) Debi Johra Tea Co. Ltd. v. Barendra Krishna Bhowmick [1980] 50 Comp Cas 771. This decision of a Division of this court was cited by the petitioner for the following observations (at p. 782):

' It should be borne in mind that when a court passes an order under Sections 397 , 398 and 402 as has been done in the instant case, there could be no limitation on the court's power while acting under the sections. Instead of the winding-up of a company, the court under the abovementioned sections has been vested with ample power to continue the corporate existence of a company by passing such orders as it thinks fit in order to achieve the objective by removing any member or members of a company or to prevent the company's affairs from being conducted in a manner prejudicial to the public interest. The court under s. 398 read with Section 402 of the Act has the power to supplant the entire corporate management. Under the aforesaid sections, the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act. ' (e) Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66; [1058] 3 WLR 404; [1959] 29 Comp Cas 1 (HL). This decision of the House of Lords was cited for the judgment of Lord Denning. The propositions laid down by Lord Denning are, inter alia, that if the directors of a company did nothing to defend the interests of the company when they ought to dp something, their inaction can amount to an act of oppression. Lord Denning also observed that one of the most useful orders in Section 210 of the English Companies Act was the power of the court to order the oppressor to buy the shares of the members, that is, the injured shareholders at a fair price.

(f) Five Minute Car Wash Service Ltd., In re [1966] 1 All ER 1242 ; [1966] 36 Comp Cas 566 (Ch D). This decision was cited on behalf of the respondents for the proposition that allegations of lack of wisdom, inefficiency and carelessness on the part of the directors of a company may not amount to oppressive conduct within the meaning of Section 210 of the English Act.

(g) Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 ; [1972] 2 WLR 1289 ; [1973] AC 360 (HL). This decision deals with a case whereon account of difference of opinion between two major shareholders, it wasdirected that the company should be wound up on just and equitablegrounds.

(h) Needle Industries (India) Ltd. v. Needle Industries Newey (India)Holding Ltd' : [1981]3SCR698 . This decisionof the Supreme Court was cited for the proposition that even where a petition under Sections 397 and 398 of the Companies Act failed because no case of oppression was made out, the court would not be powerless to do substantial justice between the parties as required in the facts and circumstances of the case.

43. At the conclusion of his submissions, learned counsel for the petitioners suggested that respondent No. 2 should be directed to sell his shares in the company as also those held by his wife, respondent No. 4, to the petitioners. The same could be done on valuation or the parties could be left to bid against each other and the group making the higher bid should be permitted to buy off the other. Learned counsel for the respondents stated on instructions that these suggestions were not acceptable to the respondent.

44. From the facts and circumstances which have been brought out in this proceedings, it appears that upto now there has been no dispute in the existing partnership where petitioner No. 1 and respondent No. 2 are partners with equal shares. If the parties had strong differences in opinion, disputes would not have remained confined to the affairs of the company only and would have extended to the running of the partnership.

45. I also note that the tenancy in the said premises in Park Street, which appears to be the target of the contesting parties and in respect of which mutual allegations and counter-allegations have been made, belong to the partnership and not to the company which is only a licensee under the partnership. The company may not be able to carry on its business effectively in future if such licence is withdrawn.

46. The contention cf the respondents that there has been no allegation of financial irregularity or misappropriation against the management has to be taken note of and it is also to be noted that respondent No. 2 remains the permanent managing director of the company under its articles. The articles constitute an agreement between the shareholders. Petitioner No. 1 must have had full confidence in respondent No. 2 when she subscribed to the said article.

47. The termination of the services of petitioner No. 2 by the company, in my opinion, does not amount to an act of oppression. Respondent No. 2 is only a shareholder and as the works manager of the company, he cannot claim to have been taking part in the management of the company. As a shareholder, he has a limited right to participate in the annual general meeting of the company and to enter the registered office of the company for the purpose of inspection of the statutory books and records as permitted by the Companies Act. Petitioner No. 2 cannot have any further right. A shareholder may cast his vote by proxy but a director cannot manage the company by proxy and whatever be the understanding between the parties which is not on record in writing, it is not open to petitioner No. 1 to take part in the management of the company through her representative.

48. I am aware that petitioner No. 1 is an illiterate Hindu lady, who is not expected to take an active part in the management of the company. But this position was known to the parties from the very inception and with full knowledge of such facts the company was incorporated and was managed satisfactorily till recently. There is no reason to assume and no facts have been brought out to show that the interests of petitioner No. 1 will be jeopardised in future.

49. If there is a genuine and irreconciliable difference of opinion between petitioner No. 1 and petitioner No. 2 on the one hand and respondents Nos. 2 and 4 on the other, over the management of the company, then the classic position of a deadlock in management has arisen as the shareholding of the two groups are equal. Proceedings under Sections 397 and 398 of the Companies Act cannot be resorted to for solving a genuine deadlock in the absence of any established misfeasance or malfeasance by one group to the prejudice of the other. If the parties have lost all confidence amongst them and it is not possible for them to carry on business jointly or provide for an acceptable management, the only way out seems to be to wind up the company and if necessary in the instant case to dissolve the existing partnership. The assets, if any left, will be available to the parties for distribution.

50. On the facts of this case, the dispute in the management of the company cannot be solved in the domestic forum inasmuch as the two opposing groups hold equal shares. The court also cannot through its officers continue to manage the company for all times to come. The petitioners have also not been able to make out a case of substantial injustice which can be set right by the court invoking the principles laid down in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. : [1981]3SCR698 .

51. For the reasons stated above, I am not inclined to and do not pass any order on this application except that I record that learned counsel for the respondents stated on instructions that the respondents and the company will not stand in the way of petitioner No. 2 to exercise his rights as a shareholder in the company in accordance with law.

52. All interim orders are vacated and the special officers will stand discharged. The fees of the special officers paid by the petitioners in the first instance will be borne by the company. There will be no order as to costs.

53. Learned counsel for the petitioners prayed for stay of operation of this judgment and order. As this order has no operative part, the prayer is refused.


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