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Mohta Bros. (P.) Ltd. and ors. Vs. Calcutta Landing and Shipping Co. Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberAppeal from Original Order No. 86 of 1966
Judge
Reported in[1970]40CompCas119(Cal),73CWN425
ActsCompanies Act, 1956 - Sections 397 and 398
AppellantMohta Bros. (P.) Ltd. and ors.
RespondentCalcutta Landing and Shipping Co. Ltd. and ors.
Appellant AdvocateS.C. Sen and ;R.N. Nag, Advs.
Respondent AdvocateRanadeb Chaudhuri and ;Sankar Ghosh, Advs.
DispositionAppeal dismissed
Cases ReferredVine v. National Dock Labour Board.
Excerpt:
- .....was also appointed chairman of the board of directors with a casting vote. on the basis of the shares held by the parties, the two sons had the major beneficial interest, but were in- a minority in voting rights. the father as the chairman assumed power which he did not possess, and exercised them against the wishes of the shareholders, namely, the two sons, who had the major beneficial interest in the company. on these facts the sons applied for an order under section 210 of the companies act, 1948, alleging that the affairs of the company were being conducted by the father in a manner oppressive to some part of the members, including themselves. it was held that the affairs of the company had been conducted in a manner oppressive to the sons as members of the company, and that,.....
Judgment:

B.C. Mitra, J.

1. The appellants made an application under Sections 397, 398 and 402 of the Companies Act, 1956 (hereinafter referred to as 'the Act '). The company, in regard to whose affairs this application was made is Calcutta Landing and Shipping Company Ltd. (respondent No. 1). The main business of the company was shipping, landing and carrying of cargo. The four appellants hold among them more than 1/10th of the issued share capital of the respondent No. 1. Gladstone Lyall and Company Ltd. were appointed managing agent of respondent No. 1 on or about August 16, 1960, and held 19,705 shares in the capital of the company. Various charges of mismanagement, manipulation of dividend, misfeasance and oppression were laid in the petition. The application was dismissed by a judgement and order dated September 21, 1962, and hence this appeal.

2. In the court below various allegations against management of respondent No. 1 and also various charges laid in the petition were canvassed, but in this appeal Mr. S. Sen, learned counsel for the appellants, pressed some of the charges only, though he did not abandon or give up the points arising out of the other charges.

3. The first contention urged before us was that the dividend declared on the equity share capital of the company was manipulated in order to depress the market value of the shares to enable the directors of the company to acquire shares at an under-value. It was contended that the assets of the company were secreted and a profit, smaller than what was actually made, was shown in order to reduce the dividend. A chart was handed over to us, in which figures under various heads were collected, and it was argued that, although in the years 1957, 1958 and 1959, the gross boat hire varied within very small limits, there was a large fluctuation in the dividend declared, inasmuch as in 1957 the dividend was 15 per cent., but in 1958 it was reduced to 7 1/2 per cent. and in 1959 to 3 per cent. Although this point was canvassed before us, there is nothing in the petition with regard to fluctuation in the dividend declared in the years 1957, 1958 and 1959 nor was this point urged in the court below. The only point relating to fluctuation in the dividend declared which was argued in the court below is to be found in paragraph 26 of the petition in which it is said that for the year ending October 31, 1962, the company increased its dividend from 7 1/2 per cent. to 22 per cent. This being the only contention relating to dividend, the first contention regarding fluctuation in the dividend declared in the years 1957, 1958 and 1959 cannot be entertained by us. I shall now proceed to deal with the second contention relating to dividend, namely, increase from 7 1/2 per cent. to 22 per cent.

4. The charge relating to payment of increased dividend is that the dividend was raised to satisfy one of the previous directors of the company who invested large amounts of money in acquiring shares in the company in 1962. The director referred to is G. Jatia. The names of shareholders as on October 31, 1962, have been set out in annexure ' A ' to the affidavit affirmed by D. F. Grantham on June 25, 1965, and is to be found at page 257 of the paper book. It appears from this annexure that at the material time G. Jatia held 700 shares and Mrs. Pushpa Jatia held 300 shares. But on that date Mohta Brothers Private Ltd. held 16,993 shares, Sm. Gouri Devi Mohta held 1,600 shares, Om Prakash Mohta held 300 shares, Sri Prakash Mohta held 300 shares and Hari Prakash Mohta held 300 shares. It is plain to us that if anybody has benefited by the increase in the dividend declared it is the appellants' group of shareholders and not the Jatias, The appellants were manifestly holding a much larger block of shares than the Jatias and correspondingly the dividend received by their group was many times more than what was received by the Jatia group of shareholders. This alone would have been enough to dispose of the appellants' contention that dividend was increased to satisfy a previous director of the company. But that is not all. It appears from the minutes of the annual general meeting of the company held on April 26, 1963, which has been set out at pages 150-151 of the paper book that the proposal for payment of dividend at Rs. 2'20 was seconded by Om Prakash Mohta, and this proposal was carried unanimously at the meeting. Among the shareholders who participated in the meeting were, besides Om Prakash Mohta, Sri Prakash Mohta. The increase in dividend for the accounting year ending with October 31, 1962, received the fullest support of the appellant's group of shareholders. Yet, they now turn round and say that the increase in dividend was improper and was intended to benefit the Jatias. Then again it appears from the materials before us that the total holding of shares by Mohta Brothers Private Ltd. and Gladstone Lyall and Company Ltd. came to 36,995 shares out of a total of 62,500 shares. Thus, two shareholders held more than 51 per cent. of the shares in the capital of the company and by reason of Sections 104, 108 and 109 of the Income-tax Act, 1961, dividend had to be declared at 90 per cent. of the profit to avoid imposition of penal tax. This position was made clear to the appellants by the letter dated 27th April, 1964, addressed to Om Prakash Mohta by respondent No. 1. On these facts the charge regarding increase in dividend for the year ending October 31, 1962, is without any substance and is altogether frivolous.

5. In paragraph 26 of the petition there is also another charge that the company has hidden assets and the directors of the company and/or the managing agents are manipulating the profits and dividend to acquire outside shares at an under-value by concealing assets and showing decreased profits. All that I need say with regard to this charge is that it is easy for a person holding shares in a joint stock company to make charges of this nature, but vague, uncertain and indefinite charges of hidden assets and secret profits by themselves, and in the absence of proof, do not entitle the petitioner to relief under Sections 397 and 398 of the Act. So far as this charge is concerned it must be held that there is a singular lack of particulars, much less of proof, and no heed should be paid to such sweeping charges. Before passing, I should mention that the appellants and their group became shareholders for the first time in 1961 and, therefore, the contentions by the learned counsel for the appellants with regard to declaration of dividend for the earlier years cannot be entertained, on that ground alone, quite apart from the fact that there are no allegations in the petition with regard to fluctuation or manipulation of dividend for the years 1957, 1958, 1959 and 1960.

6. The next contention of Mr. Sen was that the shares of the company were acquired by the Jatia group with the object of obtaining control of the management of the company. It was suggested that in purchasing the shares the Jatias had taken advantage of inside information, and dividend was manipulated so as to depress the market value of the shares to enable the Jatia group to acquire them. This, it was suggested, was contrary to commercial morality and therefore, it was submitted, must be condemned. In support of this contention, Mr. Sen read a few passages from a text book on Take over and Amalgamation by Weinder. We cannot accept this contention of the learned counsel for the appellants. In the first place, there is no evidence at all that the Jatia group was acquiring shares of the company with a view to obtain control of the management. In the second place, there is nothing illegal, and not even improper, for a person to acquire the shares of a joint stock company in the market, unless the transaction in shares are proved to have been effected by unfair manipulation of the share prices. We must at once observe that there is no proof of manipulation of share prices and there is nothing to show that shares were being acquired by the Jatia group with a view to obtain control of the management of the company. The acquisition of the shares by the appellants' group was by no means negligible and they certainly went in the market for acquiring large block of shares in the company, and upon these facts, the charge that a bid was made to gain control of the management of the company can as well be made against the appellants. Then again, acquisition of shares by one or a group of persons in a joint stock company is not one of the matters for which relief can be granted under Sections 397 and 398 of the Act to a minority group of shareholders, unless, it is proved, that it is oppressive to the minority group, and so far as Section 397 is concerned, it is further shown that such acquisition would justify an order for winding up of the company. We are not satisfied that the mere fact that Jatias had acquired some shares of the company is a ground for winding up of the company nor that the acquisition of shares by the Jatias group has resulted in any oppression to the appellants.

7. The next contention of the learned counsel for the appellants was directed against the ratio which the expenses incurred by the company bore to the income earned. This contention was based on the allegations in paragraph 12 of the petition in which it is alleged that in the year ending October 31, 1962, the company incurred expenses in the sum of Rs. 7,77,623 for stores, rent, rates, taxes, for salaries, wages and bonus ; and in that year the boat hire .earned was Rs. 15,44,065, but in 1963 the expenses went up to Rs. 8,31,135 although the boat hire stood reduced at Rs. 11,32,094. These charges had been answered in paragraph 12 of the affidavit-in-opposition affirmed by H.F. Whitehouse on August 5, 1964, and is to be found at page 165 of the paper book. It is said in that affidavit that the increase in expenses was due to the payment of one month's extra basic salary paid to all employees as a centenary allowance, cost of centenary celebration, additional cost in respect of dock permits, motor car expenses, use of costly ropes, increase in cost of tarpaulins and increase in office rent.

8. The allegations of the appellants that the ratio of expenses to income increased in 1963 although the income fell in that year owing to mismanagement, in our view, appear to have no substance at all. Excepting a bare and vague allegation that the expenses rose in 1963, while the income fell in that year, there is nothing to show that this was due to mismanagement on the part of the directors of the company or the managing agent. Further, in our view, the respondents have sufficiently explained the increase in the expenses. The next contention of the learned counsel for the appellants was that 20 old barges belonging to the company had been sold in 1960, thereby reducing the company's fleet to 87 steel barges and three steel launches. It was argued that the expenses of maintenance of the fleet up to October 31, 1961, was Rs. 1,06,140 whereas in 1962 and 1963 the expenses went up to Rs. 2,03,870 and Rs. 1,97,571, respectively. It was further alleged that in 1963 the company paid more for hire charges of boats than in previous years and therefore there was sufficient scope for expansion of the boat hiring business. The contention was that, while the company disposed of a part of its fleet, the expenses of maintenance of the fleet went up.

9. These allegations by the appellants have been met by the respondents who contended that the increased maintenance charges were due, firstly, to the closure of the company's workshop which necessitated repairs to be done by outside agencies. Secondly, the strict regulation of the boat licensing authority in renewing licence of boats made thorough overhaul and repairs of boats and launches necessary. Thirdly, it was contended that the company's fleet was very old and therefore thorough repairs were executed in 1962-63. To our mind, these answers of the respondents sufficiently explained the increase in the expenses for the maintenance of the fleet, and at any rate the charges made by the appellants on this head do not, in our view, constitute acts of mismanagement under the Act. The next contention of Mr. Sen was relating to a boat No. 183, which sank. It was contended that the boat was not insured and a loss of Rs. 300 was written off in the profit and loss account for the year ending October 31, 1962, but the compensation of Rs. 22,168 was shown in the year ending 1961. The suggestion of the learned counsel for the appellants was that the assets of the company were under-valued as the market value of the boat was more than Rs. 22,000 whereas the book value was only Rs. 300. In our view, there is no substance in this contention. The book value of assets is arrived at after deducting the depreciation, and there is nothing wrong in the book value of a particular item of the assets of a company being less than the market value. The book value of a particular item of asset is not, and indeed is not intended to be, the market value of the asset. Then again it appears from the answer given by the respondents that the allegation of the appellants with regard to the realisation of compensation was incorrect. According to the respondents, the compensation of Rs. 22,168 was realised with regard to a different boat altogether, namely, boat No. CLS 84-, and not from boat No. 183, which was totally destroyed by fire, and, therefore, the depreciated value of Rs. 300 had to be written off. Upon these facts, in our view, there is no force in the contention of the learned counsel for the appellants on this ground.

10. In support of his contentions that relief ought to be granted to the appellants in the facts canvassed before us, learned counsel for the appellants relied upon several decisions to which I shall now refer. The first case relied upon by him was Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324; [1958] 3 All E.R. 56 ; 29 Comp. Cas. 1 . In our view, that decision is of no assistance to the appellants in this case. In that case the appellants were the owners of a weaving mill and they, in collaboration with the respondents, started the manufacture of rayon cloth. A private company which was the subsidiary of the appellants' company was formed for purchase of yarn and the manufacture of rayon cloth. In this company the parent company held 4,000 shares and 3,900 shares were held by the respondents. The respondents were two of the five directors of the subsidiary company and the remaining three were the nominees of the parent company. The subsidiary company was successful and the parent company desired to acquire further shares in the subsidiary company. The respondent proposed issue of shares to the appellant at a valuation but this was not accepted and hostility started. In the board of the subsidiary company the parent company formed a department that carried on a business of purchasing materials and dyeing, finishing and processing of the same. The parent company after the removal of control started starving the subsidiary company of supplies of rayon cloth from its mill. This was followed by an offer by the respondents to sell their shares in the subsidiary company at a certain price. The nominee directors of the parent company adopted a policy of passive support to the parent company and allowed the subsidiary company's trading activities to vanish. On these facts a petition was filed under Section 210 of the Companies Act, 1948, on the ground that the affairs of the company were being conducted in a manner oppressive to some parts of the members and the appellants were directed to purchase the share of the respondents at a price. It is to be noticed also that in that case it was common ground that it was just and equitable that the company should be wound up. This case,_ in our view, has not the remotest application to the facts with which we are concerned in this appeal, nor does the principles discussed therein in any way uphold the contention of the learned counsel for the appellants.

11. The next case relied upon by the learned counsel for the appellants was In re H. R. Harmer Ltd. In that case a company was formed to acquire a business. Two of the sons of the founder went into the business and the shares in the company were held by the founder, his wife and the two sons. Under the articles of the company the father was the governing director and each of the two sons became life directors. The father was also appointed chairman of the board of directors with a casting vote. On the basis of the shares held by the parties, the two sons had the major beneficial interest, but were in- a minority in voting rights. The father as the chairman assumed power which he did not possess, and exercised them against the wishes of the shareholders, namely, the two sons, who had the major beneficial interest in the company. On these facts the sons applied for an order under Section 210 of the Companies Act, 1948, alleging that the affairs of the company were being conducted by the father in a manner oppressive to some part of the members, including themselves. It was held that the affairs of the company had been conducted in a manner oppressive to the sons as members of the company, and that, even if the father's acts might have been done lawfully with the sanction of a general meeting, the sons were entitled to require that the proper procedure should be followed by the father. This decision, to my mind, has no application to the facts of this case. The few acts of alleged mismanagement, which have been canvassed before us, appeared to us to have been sufficiently explained by the company. Regarding the oppression arising out of share-holding and declaration of dividend, it is clear that the appellants have benefited by the declaration of a higher dividend to a larger extent than the rival group and further that the increase in the dividend from 7 1/2 per cent. to 22 per cent. in the year ending October 31, 1962, was to avoid imposition of income-tax at penal rate(1) [1959] 1 W.L.R. 62 ; [1958] 3 All K.R, 689 ; 29 Comp. Cas. 305.in circumstances to which I have already referred. The few specific acts on which learned counsel for the appellants relied, as acts of oppression and mismanagement, cannot, in our view, be held to be such. Negligence and inefficiency, even assuming such are proved, do not amount to mismanagement or oppression as contemplated by the Act.

12. The next case relied upon by Mr. Sen was a decision of the Supreme Court, Shanti Prasad Jain v. Kalinga Tubes Ltd., : [1965]2SCR720 . In that case it was held that whether the conduct of the majority was oppressive to the minority must depend upon facts proved, and also that for the purpose of proving oppression it must be shown that events happened not in isolation but as part of a policy and that there were continuous acts on the part of the majority showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. It was further held that such oppression must involve an element of lack of probity or fair dealing and that mere loss of confidence between grpups of shareholders was not enough. The principles laid down in that case do not support the contentions raised on behalf of the appellants in this case.

13. Mr. Sankar Ghosh, learned counsel for the respondents, contended that in an application under Sections 397 and 398 of the Act, the court dealing with the application should confine itself to the allegations in the petition itself and not embark upon a rambling enquiry into indefinite charges of mismanagement and oppression. He argued that, in considering the question if relief ought to be granted to a petitioner, the court should look into the facts alleged and proved, and must confine itself to events that have happened up to date of the petition and should not take into consideration facts that have happened subsequently. In support of this contention reliance was placed on a decision of this court in Bengal Luxmi Cotton Mills Ltd., In re[1965] 35 Comp. Cas. 187 ; 69 C.W.N. 137 and similar observations in an English decision in Lundie Brothers Ltd., In re. [1965] 1 W.L.R. 1051 ; [1965] 2 All E.R. 692 ; 35 Comp. Cas. 827 Reliance was also placed on a Bench decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti Prasad Jain. A.I..R. 1963 Orissa 189 In our view, this question is well settled, namely, that, in a petition under Sections 397 and 398 of the Act, the court must confine itself to the case as made out in the petition and to the allegations in the petition itself and supporting affidavits, if any, and not look at other evidence with regard to events that might have happened subsequent to the petition. The next contention of Mr. Ghosh was that sweeping allegations of mismanagement, secret profits and other improper acts have been made by the appellants without giving any particulars and without any attempt to prove the same. Such allegations, it was argued, should not even be looked into by the court in considering the question of relief to the petitioner. In support of this contention, reliance was placed by Mr. Ghosh on In re Clive Mills Co. Ltd., [1964] 34 Comp. Cas. 731 ; 68 C.W.N. 884.Five Minute Car Wash Service Ltd., In re, [1966] 1 W.L.R. 745 ; [1966] 1 All E.R. 242 ; 36 Comp. Cas. 566.and Gunga Narain Gupta v. Tiluckram Chowdhry. [1888] L.R. 15 LA. 119 ; I.L.R. 15 Cal. 533 In our view, this contention on behalf of the respondent is well founded. Full particulars must be given by a petitioner in an application under Sections 397 and 398 of the Act of acts of mismanagement and oppression. Vague and uncertain allegations of mismanagement and oppression, although they may constitute grounds for suspicion, do not entitle a petitioner to ask the court to embark upon an investigation into the affairs of the company, in the hope that in consequence of such investigation, something will turn up which will enable the court to grant relief to the petitioner. It is true that it may not always be possible for one or a group of shareholders to furnish particulars of acts of mismanagement, fraud, oppression, misappropriation or other improper acts, but such inability on the part of shareholders, who have no access to the books of the company, is by no means a ground for directing an investigation into the affairs of the company or for giving any other relief to a petitioner. The petitioner must set out the facts which constitute acts of mismanagement, misappropriation, fraud or oppression and prove, prima facie, at any rate, that on those facts an investigation is called for. If a petitioner fails to set out the facts and produce satisfactory proof in support of those facts no order for investigation into the affairs of the company can be made, nor can any relief be granted to the petitioner. A shareholder has no right of access to the books of the company, but denial of access to such books is not an act of oppression as has been held by this court in a Bench decision, Rajya Lakshmi (Lalita) v. Indian Motor Co. Ltd. : AIR1962Cal127 If a petitioner cannot make out a case of mismanagement and oppression, because he was unable to collect materials for the purpose, it is not for the court to direct the directors of the company to offer inspection of the company's books and accounts to enable a petitioner to collect materials for the petition under Sections 397 and 398 of the Act, or to direct investigation into the company's affairs and accounts by an independent person to bring out materials for further orders against the company, its directors or shareholders.

14. From the allegations in the petition it seems to us that the petition was the result of rivalry between two groups of shareholders in the matter of administration of the company's affairs. The appellants have sought to focus the attention of the court on alleged isolated acts of mismanagement, but they failed to substantiate that there was any mismanagement at all. Relief under Sections 397 and 398 cannot be granted to a group of shareholders merely because it has been out-voted in the matter of the business policy or management of the company's affairs. That proposition is now well settled.

15. The appellants have failed to satisfy us that there is any lack of probity or fair dealing on the part of the directors of the company which entitle them to relief under Sections 397 and 398 of the Act. On the question of the appellant's right to relief in a case such as this, I reiterate the views I expressed in In re Clive Mills Co. Ltd. :

' In my view in exercising its powers to make an order for investigation under Sections 397 and 398 of the Act the court should proceed cautiously, before any order for investigation is made on such charges. The management of the company is vested in its board of directors. There may be many and good reasons for the failure of the company to earn profits. Similarly there may be valid and good reasons for increase in the costs of manufacture and administration of the company. But arc such allegations enough to induce this court to make an order for investigation under Sections 397 and 398 of the Act? I do not think so. It is no part of the duty of this court to lay down business and trading policy of the company or to regulate, control and check its day to day administration. '

16. Before concluding I should deal with one other contention of Mr. Sen, namely, that the appellants ought not to be deprived of relief merely because of defects in the pleadings. It was submitted that, although the appellants might have failed to make out a case of mismanagement and oppression in the petition, an investigation at any rate ought to be directed on the materials such as they are. In support of this contention Mr. Sen relied upon some of the observations of Lord Denning in his review of a book, namely, The Law of Restitution by Robert Goff, in volume 83 (1967) of The Law Quarterly Review. The passage relied on by Mr. Sen is that ' no person should be allowed unjustly to enrich himself at the expense of another '. Reliance was also placed on the observations of Jenkins L.J. in Vine v. National Dock Labour Board. [1956] 1 All E.R. 1 Such observations, to our mind, are of no assistance to the appellants in this appeal. They are no authority for the proposition that, even though a petitioner fails to make out a case for a-statutory relief by setting out material facts in the pleading, yet the court should grant relief to the petitioner by directing an investigation, in the hope that the report of the investigation might disclose materials for further orders against the company, and in favour of the petitioner. In our view, to hold that an investigation should be directed or relief ought to be granted to a petitioner, even though facts relating to mismanagement, oppression, misappropriation and improper conduct have not been pleaded and proved, would open the door to grave injustice. It would enable a group of shareholders, having the requisite shareholding, to obtain an order for investigation into the affairs of the company, or other orders, on allegations which may subsequently turn out to be entirely unfounded. This, in our view, cannot and ought not to be done.

17. In our opinion, the court below was right in coming to the conclusion that the appellants were not entitled to any relief. The appeal is accordingly dismissed with costs.


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