CASE -1

M.S.D.C. Radharamanan Vs. M.S.D. Chandrasekara Raja and another [2008] INSC 471 (14 March
2008)

2. M/s. Shree Bhaarathi Cotton Mills Private Limited is a company registered and incorporated under
the Companies Act, 1956 (For short, 'the Act'). Out of the 2,84,000 equity shares in the company of
Rs.10/- each, 2,83,999 shares are held by the first respondent and his son (appellant herein). The
remaining one share is held by M/s. Visva Bharathi Textiles Private Limited, shares in which again is
held equally by the first respondent and the appellant. Thus, for all intent and purport, all shares of the
company are held by the appellant and the first respondent.

3. Whereas the first respondent is the Managing Director of the Company, the appellant is the Director
thereof. Indisputably the parties are not on good terms.

4. Respondent No.1 filed an application purported to be under Sections 397 and 398 of the Act alleging
several acts of oppression on the part of appellant herein before the Company Law Board, Additional
Principal Bench, Chennai. The said application was registered as C.P. No. 2 of 2004.

By reason of an order dated 16th August, 2004, the Company Law Board while opining holding there
was no act of mala fide or oppression on the part of the appellant, opined that there exists a deadlock
in the affairs of the company. It directed the appellant to purchase 2,84,000 shares held by the first
respondent at a value to be determined by a chartered valuer.

5. An appeal was filed thereagainst by the appellant before the High Court of Judicature at Madras
under of Section 10F of the Act which was registered as C.M.A. No. 174 of 2004.

By reason of the impugned judgment dated 11th October, 2006 a Division Bench of the High Court
dismissed the same opining that the Company Law Board could very well look into the justifiability of
the situation and was, thus, right in arriving at its conclusion that there existed a deadlock situation. It
was opined that in such a situation it would be impossible for both of them to pull on together as there
was incompatibility between them. The High Court noticed that the appellant herein even intended to
file a criminal complaint against his father, the first respondent for alleged mis-appropriation of a sum
of Rs.8,15,000/-. A suit for partition, it was furthermore noticed, was pending. It was directed:

"77. .. However, if there is any dispute regarding the method of valuation of the shares and the ultimate
valuation arrived at by the valuer, it is open for either parties to approach the Company Law Board for
getting the valuation finalised. Thereupon, at the first instance, the second respondent shall purchase
the shares of the petitioners, within six months from the date of finalisation of such valuation and on his
failure to do so, the petitioner in C.P., shall purchase the shares of the second respondent, within six
months thereafter. In the event of both the alternatives failing, the purchase of shares of either the
petitioner or the second respondent could be transferred to third parties depending upon the exigency.
The Company Law Board is at liberty to pass such further orders under Section 402 of the Companies
Act, in commensurate with the views expressed by this court, for the smooth running of the company.

78. In view of the reasons given for deciding the aforesaid point this civil miscellaneous appeal is partly
allowed by modifying the order passed by the Company Law Board. The submission made by learned
Counsel for the petitioner is recorded as aforesaid."

6. Mr. C.A. Sundaram, learned Senior counsel appearing on behalf of the appellant, in support of the
appeal, submitted :

1. The Company Law Board was not justified in issuing the impugned direction in purported exercise of
its jurisdiction under Section 402 of the Act directing him to purchase the shares of the respondent
despite arriving at a finding of fact that no act of oppression has been committed by the appellant.
2. The condition precedent for exercise of such power being oppression on the part of a Director of a
company being not satisfied, the impugned judgment is wholly unsustainable.

3. The High Court committed a manifest error in passing the impugned judgment in reversing the
findings of fact arrived at by the Company Law Board; although no appeal therefrom had been preferred
by the first respondent so as to hold that the acts of omission and commission on the part of the
appellant constituted such an oppression.

4. Both the High Court as also the Company Law Board committed a serious error in granting the relief
in favour of the first respondent without taking into consideration that the grant of relief shall not only be
in the interest of the company but also must have a direct nexus with the affairs of the company and
conduct of its business.

5. In any view of the matter, having regard to the prayers made by the first respondent in his application
before the Company Law Board, appointment of an Additional Director would have served the purpose.

6. As the appellant does not have the necessary fund to purchase the shares of the first respondent,
he could not be forced to sell his shares.

7. Mr. K. Parasaran, learned Senior counsel, appearing for the respondents, on the other hand, would
contend :-

1. Appellant did not raise any ground in the special leave petition that he is not in a position to purchase
the shares of the Respondent No.1.

2. The company being a private limited company, which is in the nature of a quasi partnership concern,
the Court should take a holistic view of the matter and so viewed the judgments of the Company Law
Board as also the High Court are unassailable.

3. Appellant having not acceded to the proposal of respondent No.1 in regard to the appointment of the
Additional Director, it does not lie in the month to say that appointment of the Additional Director would
serve the purpose.

4. The Company Law Board, in exercise of its jurisdiction under Sections 397 and 398 read with Section
402 of the Companies Act has the requisite jurisdiction to direct a share holder to sell his shares to the
other, although no case for winding up of the company has been made out or no actual oppression on
the part of the Director has been proved.

8. A shareholder of a company or a Director has several remedies under the Act. Section 433 of the
Act envisages filing of an application for winding up thereof, inter alia, in a case where the Company
Law Board may form an opinion that it is just and equitable that the company should be wound up.

9. Section 443 of the Act provides for the powers of Company Law Board in a winding up proceeding.
Sub-section (2) thereof provides that a company may be directed to be wound up when a petition is
presented for winding up on the ground that it is just and equitable.

The Company Law Board may refuse to do so, if in its opinion some other remedy is available to the
petitioners and that they are acting unreasonably.

The applicant, thus, in a given case, when it would not be in the interest of the company to be wound
up, may take recourse to other remedies available in law. Making out a case of oppression is one of
them.

10. An application under Section 397 of the Act may be filed in the following circumstances :- 1) Where
the affairs of the company are being conducted in the manner prejudicial to public interest; or 2) In a
manner oppressive to any member or members.

11. Sub-section (2) of Section 397 of the Act, however, provides that in the event the Court is of the
opinion that the company's affairs are being conducted in a manner oppressive to any member or
members or furthermore held that directing winding up the company would unfairly prejudice such
member or members, but the same otherwise justifies the making of a winding up order on the ground
that it is just and equitable that the company should be wound up. It may make such other or further
order as may think fit and proper with a view to bringing to an end to the matters complained of.

Interpretation of Section 397(2) of the Act came up for consideration before a Division Bench of this
court in Hanuman Prasad Bagri & Ors. vs.

Bagress Cereals Pvt. Ltd. & Ors. [ [2001] 2 SCR 811]. This court while examining the conditions laid
down in the section, opined that:

" No case appears to have been made out that the company's affairs are being conducted in a manner
prejudicial to public interest or in a manner oppressive of any member or members. Therefore, we have
to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the
members of the company who have the grievance and are the applicants before the court and that
otherwise the facts would justify the making of a winding up order on the ground that it was just and
equitable that the company should be wound up. In order to be successful on this ground, the Petitioners
have to make out a case for winding up of the company on just and equitable grounds. If the facts fall
short of the case set out for winding up on just and equitable grounds no relief can be granted to the
Petitioners. On the other hand the party resisting the winding up can demonstrate that there are neither
just nor equitable grounds for winding up and an order for winding up would be unjust and unfair to
them."

After reviewing the decision of the High Court on the above test, this Court held that no reasons
prevailed for interference with the order and thus dismissed the appeal.

12. Section 398 of the Act provides for filing of an application for the reliefs in cases of mismanagement.

Section 402 provides for the powers of the Company Law Board on an application made under Section
397 or 398 of the Act which includes the power to pass any order providing for the purchase of the
shares or interests of any member of the company by other member (s) thereof or by the company.

13. Ordinarily, therefore, in a case where a case of oppression has been made a ground for the purpose
of invoking the jurisdiction of the Board in terms of Sections 397 and 398 of the Act, a finding of fact to
that effect would be necessary to be arrived out. But, the jurisdiction of the Company Law Board to pass
any other or further order in the interest of the company, if it is of the opinion, that the same would
protect the interest of the company, it would not be powerless. The jurisdiction of the Company Law
Board in that regard must be held to be existing having regard to the aforementioned provisions.

14. The deadlock in regard to the conduct of the business of the company has been noticed by the
Company Law Board as also the High Court.

Keeping in view the fact that there are only two shareholders and two Directors and bitterness having
crept in their personal relationship, the same, in our opinion, will have a direct impact in the matter of
conduct of the affairs of the company.

15. When there are two Directors, non-cooperation by one of them would result in a stalemate and in
that view of the mater the Company Law Board and the High Court have rightly exercised their
jurisdiction.

16 Before us, learned counsel for the parties, have referred to a large number of decisions operating in
the field.

We may notice the legal principle emerging from some of them.

17 In S.P. Jain vs. Kalinga Tubes Ltd.: (1965) 2 SCR 720 this Court compared the provisions of Section
397 with Section 210 of the English Act to hold:- "The law always provided for winding up, in case it
was just and equitable to wind up a company. However, it was being felt for some time that though it
might be just and equitable in view of the manner in which the affairs of a company were conducted to
wind it up, it was not fair that the company should always be wound up for that reason, particularly when
it was otherwise solvent. That is why Section 210 was introduced in the English Act to provide an
alternative remedy where it was felt that, though a case had been made out on the ground of just and
equitable cause to wind up a company, it was not in the interest of the shareholders that the company
should be wound up and that it would be better if the company was allowed to continue under such
directions as the court may consider proper to give."

The Court analysed the decision in Re. H.R. Harmer Limited : [1958] 3 All. E.R. 689 in the following
terms :- "19. In Harmer's case, it was held that " the word ' oppressive ' meant burdensome, harsh and
wrongful". It was also held that " the section does not purport to apply to every case in which the facts
would justify the making of a winding up order under the ' just and equitable' rule, but only to those
cases of that character which have in them the requisite element of oppression." It was also held that "
the result of applications under Section 210 in different cases must depend on the particular facts of
each case, the circumstances in which oppression may arise being so infinitely various that it is
impossible to define them with precision." The circumstances must be such as to warrant the inference
that " there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity
with which the company's affairs are being conducted, as distinguished from mere resentment on the
part of a minority at being outvoted on some issue of domestic policy". The phrase "oppressive to some
part of the members" suggests that the conduct complained of " should at the lowest involve a visible
departure from the standards of fair dealing, and a violation of the conditions of fair play on which every
share holder who entrusts his money to a company is entitled to rely . . . But, apart from this, the question
of absence of mutual confidence per se between partners, or between two sets of shareholders,
however relevant to a winding up, seems to me to have no direct relevance to the remedy granted by
Section 210. It is oppression of some part of the shareholders by the manner in which the affairs of the
company are being conducted that must be averred and proved. Mere loss of confidence or pure
deadlock does not . . . come within Section 210. It is not lack of confidence between share holders per
se that brings Section 210 into play, but lack of confidence springing from oppression of a minority by
a majority in the management of the company's affairs and oppression involves ... at least an element
of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder."

It is true that observations in Harmer's case was held to be applicable in a case falling within the purview
of Section 397 of the Act but the statement of law that it was not enough that only a just and equitable
case for winding up of the company should be made out but it must also be found that conduct of the
majority shareholders was oppressive to the minority members, cannot be said to be exhaustive.

18 The question came up for consideration yet again before a three judge Bench of this Court in Needle
Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd., : (1981) 3 SCC 333 wherein
Chandrachud, C.J.

upon considering a large number of decisions of this Court as also the English Courts including S.P.
Jain and Harmer Ltd. (supra) categorically held :- "172. Even though the company petition fails and the
appeals succeed on the finding that the Holding Company has failed to make out a case of oppression,
the court is not powerless to do substantial justice between the parties and place them, as nearly as it
may, in the same position in which they would have been, if the meeting of May 2 were held in
accordance with law."

19. The provisions of the Act vis-`-vis the jurisdiction of the Company Law Board must be considered
having regard to the complex situation(s) which may arise in the cases before it. No hard and fast rule
can be laid down. There cannot be any doubt whatsoever that the acts of omission and commission on
the part of a member of a company should be qua the management of the company, but it is difficult to
accept the proposition that the just and equitable test, which should be held to be applicable in a case
for winding up of a company, is totally outside the purview of Section 397 of the Act. The function of a
Company Law Board in such matters is first to see as to how the interest of the company vis-a-vis its
shareholders can be safeguarded. The Company Law Board must also make an endeavour to find out
as to whether an order of winding up will serve the interest of the company or subvert the same. Further,
if an application is filed under Section 433 of the Act or Section 397 and/or 398 thereof, an order of
winding up may be passed, but as noticed hereinbefore, the Company Law Board in a winding up
application may refuse to do so, if any other remedy is available. The Company Law Board may not
shut its doors only on sheer technicality even if it is found as of fact that unless the jurisdiction under
Section 402 of the Act is exercised, there will be a complete mismanagement in regard to the affairs of
the company.

20. Sections 397 and 398 of the Act empower the Company Law Board to remove oppression and
mismanagement. If the consequences of refusal to exercise jurisdiction would lead to a total chaos or
mismanagement of the company, would still the Company Law Board be powerless to pass appropriate
orders is the question.

If a literal interpretation to the provisions of Section 397 or 398 is taken recourse to, may be that would
be the consequence. But jurisdiction of the Company Law Board having been couched in wide terms
and as diverse reliefs can be granted by it to keep the company functioning; is it not desirable to pass
an order which for all intent and purport would be beneficial to the company itself and the majority of
the members? A court of law can hardly satisfy all the litigants before it. This, however, by itself would
not mean that the Company Law Board would refuse to exercise its jurisdiction, although the statute
confers such a power on it.

21. It is now a well settled principle of law that the Courts should lean in favour of such construction of
statute whereby its jurisdiction is retained enabling it to mould the relief, subject of course, to the
applicability of law in the fact situation obtaining in each case.

Hall India (P) Ltd. and Ors. [134 (2006) DLT 450], as regards the jurisdiction of the Company Law Board
and the High Court under Sections 397/398 and 402, a learned single judge of the Delhi High Court
held:

"Jurisdiction of the CLB (and ultimately of this Court in appeal) under Sections 397/398 and 402 is much
wider and direction can be given even contrary to the provisions of the Articles of Association. It has
even right to terminate, set aside or modify the contractual arrangement between the company and any
person [see Section 402(d) and (e)].

Section 397 specifically provides that once the oppressiois established, the Court may, with a view to
bringing to an end the matters complained of, make an order as it thinks fit. Thus, the Court has ample
power to pass such orders as it thinks fit to render justice and such an order has to be reasonable. It is
also an accepted principle that "just and equitable" provision in Section 402(g) is an equitable
supplement to the common law of the company to be found in its Memorandum and Articles of
Association."

22. In a case of this nature, where there are two shareholders and two Directors, any animosity between
them not only would have come in the way of proper functioning of the company but it would also affect
the smooth management of the affairs of the company. The parties admittedly are at logger heads. A
suit is pending regarding title of the shares of the Company. A contention had been raised by the
appellant before the Company Law Board that the 1st respondent having filed a wealth-tax return as
Karta of Hindu Undivided Family, he not only has 50 % shares in the Company but also 50% shares in
the H.U.F.; whereas the contention of the 1st respondent in that behalf is that the appellant had already
taken his half share in the joint family property and the H.U.F. mentioned in the Wealth Tax Return
pertains to the smaller H.U.F. which consists of himself and his daughters.

1st respondent is about 80 years old. Because of his old age, he is not in a position to look after the
affairs of the company. Even in the grounds of appeal before us, a contention has been raised that it
was the 1st respondent, who is the oppressor. We have noticed hereinbefore that, rightly or wrongly,
appellant also intended to file a criminal case against the 1st respondent alleging that he had
misappropriated a huge amount as a Director of the company.

23. Before the Company Law Board, several grounds to establish a case of oppression had been made
out :- 1) Non co-opting of a third Director on the Board ;

2) Non clearance of accumulated stocks ;

3) Surrender of the surplus power in favour of TNEB ;

4) Non issue of duplicate share certificates ;

5) Non redemption of preference shares ;

6) Non sanctioning of increment to the staff members ;

7) Dead lock in the affairs of the company.

24. In regard to the first ground, admittedly, A. Jayakumar, son-in-law of the 1st respondent being the
brother-in-law of the appellant was nominated as a Director of the company. Appellant indisputably did
not agree in that behalf. However, the first respondent left it to the discretion of the Company Law Board
to appoint a third Director, but we are informed at the bar that even the same was objected to by the
appellant.

25. It is in the aforementioned situation the Company Law Board has opined that such an impasse could
have been removed by resorting to appointment of an additional Director. What the Board failed to
notice was that when the appellant himself intended to become the Managing Director, he would like to
have his own man in the Board which was not acceded to by the 1st respondent.

26. Surrender of surplus power in favour of TNEB may be a business decision but such a decision will
have a direct impact on the conduct of the business. It at least shows that the parties were at logger
heads. It is in the aforementioned situation, the High Court opined :- "The Company Law Board should
have categorically held that such surrender was beneficial to the company and the second respondent
unjustifiably objected to it.

Admittedly, the second respondent was not in favour of such surrender on the ground that it was
required for future expansion of the factory activities. Such a plea of the second respondent is based
on mere conjectures and surmises and not borne out by any proposed project for future expansion. As
such the Company Law Board very well could have held that the second respondent was oppressive."

27. In relation to the non-issue of duplicate share certificates the Company Law Board opined :- "That
is why the petitioner took up the very same issue again at the Board meeting convened on 20.03.2004,
after filing of the company petition. It is on record that the second respondent did not attend the Board
meeting on 20.03.2004 on the ground that the subject matter is sub-judice before the CLB. Thus, there
is no ultimate denial of the issue of duplicate share certificates by the second respondent in favour of
the petitioner."

28. The High Court, however, in this regard opined "recording this, the Company Law Board could have
very well held that the second respondent was not justified in causing obstruction to the issuance of
such share certificates."

29. A ground has also been taken in the memo of appeal contending :

"The Division Bench entirely failed to appreciate that the Petitioner being a whole time director and also
being a 50% shareholder the Petitioner has a right to refuse to give his consent to certain transactions
if the Petitioner is of the opinion that the same is not good for the business of the Respondent No.2
company or that the same is against the interests of the company. The Petitioner has merely exercised
his right as a whole time director in not agreeing to certain resolutions and that by itself neither amounts
to a dead lock of oppression."

We have referred to the views taken by the Company Law Board as also the High Court, not being
oblivious of the objection of Mr. Sundaram, that in relation to those findings, the 1st respondent did not
prefer any appeal.

30. Without going into the legal issue, however, we are of the opinion that the same is only evidence of
the instances as to how a dead lock in the affairs of the company was viewed. Both the Company Law
Board as well as the High Court have arrived at a concurrent finding that as there was no mutual trust
and confidence between the parties and, thus, it would be impossible for the company to run the same
smoothly.

We are not again oblivious of the observations made by this Court in S.P. Jain case that the same by
itself would not be a ground of winding up;

but the ground of lack of mutual trust and confidence cannot be taken into consideration in isolation.
The same has to be considered having regard to large number of other factors, the cumulative effect
thereof would be extremely significant to arrive at one or the other conclusion.

31. We may take notice of the fact that the appellant had made the following allegations against the 1st
respondent in the list of dates :- "It is respectfully submitted that the Respondent No.1 did not maintain
proper books of minutes of meetings or attendance registers, did not allow the Petitioner herein to use
the company guest house in Chennai, the Respondent No.1 attempted to bring in a third director to
marginalize the role of the Petitioner, the Respondent No.1 siphoned off Rs.8,15,000/- of the company
money, the Respondent No.1 attempted to transfer by way of gifts properties given as collateral security
to financial institutions and so on. When the Petitioner herein either asserted his rights or attempted to
thwart the wrongful acts of the Respondent No.1, the Respondent No.1 became abusive."

32. We may also notice that in his reply statement before the Company Law Board it was stated by the
appellant :- "5.10 The Petitioner-Managing Director has become quite old. In fact under the Companies
Act, in case of Public Companies there exist sufficient safeguards to restrict appointment of Managing
Directors over the age of 70 without prior permission of the Central Government. Such provisions have
been thoughtfully provided considering the inherent weaknesses that will emerge out of old age. In
order to continue the smooth functioning of the enterprise, it would be very much conducive if the
Managing Director gracefully retires from the post and lets a much younger and still experienced person
to take over the mantle of the company. And further more, so, considering that the younger person is
the only son of the present Managing Director, it is quite natural that the take-over of the mantle that
should be mooted."

It was further averred :- "6. There has been no oppression or mismanagement as averred by the
Petitioner. It is a fact that the Petitioner, who is the Managing Director of the Company is in a more
convenient position to oppress the 2nd Respondent but on the other hand, the Petitioner has been
alleging the opposite, without any basis. The mere fact that one of the two directors/shareholders
decides to exercise his proprietary right as a shareholder/director to vote for or against any resolution
does not amount to deadlock in management or oppression."

33. In a case of this nature, it is necessary to take a holistic approach of the matter. What might not be
permissible for the affairs of a public limited company or even a private company having large number
of shareholders and Directors, may be permissible in a case of this nature where a company for all
intent and purport a quasi partnership concern. The Parliament, while enacting a statute, cannot think
of all situations which may emerge in giving effect to the statutory provision.

The situation obtaining in the present case in that sense is a pathetic one. Both the Company Law
Board as also the High Court has no doubt that the acrimony between the parties is resulting in
mismanagement of the conduct of affairs of the company. Therefore, a conclusion as regards the dead
lock in the affairs of the company cannot be faulted with.

34. In Hind Overseas (P) Ltd. vs. Raghunath Prasad Jhunjhunwalla and another [(1976) 3 SCC 259]
this Court upon noticing a large number of decisions opined :- "37. Section 433 (f) under which this
application has been made has to be read with Section 443(2) of the Act.

Under the latter provision where the petition is presented on the ground that it is just and equitable that
the Company should be wound up, the court may refuse to make an order of winding-up if it is of opinion
that some other remedy is available to the petitioners and that they are acting unreasonably in seeking
to have the Company wound up instead of pursuing that other remedy.

38. Again under Sections 397 and 398 of the Act there are preventive provisions in the Act as a
safeguard against oppression in management. These provisions also indicate that relief under Section
433 (f) based on the just and equitable clause is in the nature of a last resort when other remedies are
not efficacious enough to protect the general interests of the Company."

35. This Court noticed that although the Indian Companies Act is modelled on the English Companies
Act, the Indian Law is developing on its own lines. It was opined that the principle of 'just and equitable
clause' is essentially equitable consideration and may, in a given case, be superimposed on law.

The Court in arriving at the said conclusion considered the decision of House of Lords in Re : Ebrahimi
and Westbourne Galleries Ltd. : 1973 AC 360 whereupon strong reliance has been placed by Mr.
Sundaram as also in Re: Yenidje Tobacco Co. Ltd. : (1916) 2 Ch. 412 amongst others.

What is important is not the interest of the applicant but the interest of the shareholders of the company
as a whole. If such a principle is applied in a case of winding up of a company, we do not see any
reason not to invoke the said principle in a case under Section 397 of the Act, subject of course to the
applicability of the well known judicial safeguards.
A similar question came up for consideration in Sangramsinh P.

Gaekwad vs. Shantadevi P. Gaekwad 2005 (11) SCC 314 wherein this Court upon noticing a large
number of decisions including Needle Industries (India) Ltd. (supra) observed :- "191. In Shanti Prasad
Jain referring to Elder case it was categorically held that the conduct complained of must relate to the
manner of management of the affairs of the company and must be such so as to oppress a minority of
the members including the petitioners qua shareholders. The Court, however, pointed out that that law,
however, has not defined what oppression is for the purpose of the said section and it is left to the court
to decide on the facts of each case whether there is such oppression."

It was furthermore held "196. The court in an application under Sections 397 and 398 may also look to
the conduct of the parties. While enunciating the doctrine of prejudice and unfairness borne in Section
459 of the English Companies Act, the Court stressed the existence of prejudice to the minority which
is unfair and not just prejudice per se.

197. The court may also refuse to grant relief where the petitioner does not come to court with clean
hands which may lead to a conclusion that the harm inflicted upon him was not unfair and that the relief
granted should be restricted. (See London School of Electronics, Re.) 198. Furthermore, when the
petitioners have consented to and even benefited from the company being run in a way which would
normally be regarded as unfairly prejudicial to their interests or they might have shown no interest in
pursuing their legitimate interest in being involved in the company. [See RA Noble & Sons (Clothing)
Ltd., Re.] 199. In a given case the court despite holding that no case of oppression has been made out
may grant such relief so 201. In Shanti Prasad Jain v. Union of India it was held that the power of the
Company Court is very wide and not restricted by any limitation contained in Section 402 thereof or
otherwise. "

36. It was opined that the burden to prove oppression or mismanagement is upon the applicant. The
Court, however, will have to consider the entire materials on record and may not insist upon the
applicant to prove each act of oppression. It was furthermore observed that an action in contravention
of law may not per se be oppressive, whereas the conduct involving illegality and contravention of the
Act may be suffice to warrant grant of any remedy.

37. Reliance has been placed by Mr. Sundaram on Kilpest (P) Ltd. vs.

Shekhar Mehra : (1996) 10 SCC 696, which has also been noticed in Sangramsinh P. Gaekwad (supra)
opining :

"The real character of the company, as noticed hereinbefore, for the purpose of judging the dealings
between the parties and the transactions which are impugned may assume significance and in such an
event, the principles of quasi-partnership in a given case may be invoked.

231. The ratio of the said decision, with respect, cannot be held to be correct as a bare proposition of
law, as was urged by Mr. Desai, being contrary to larger Bench judgments of this Court and in particular
Needle Industries. It is, however, one thing to say that for the purpose of dealing with an application
under Section 397 of the Companies Act, the court would not easily accept the plea of quasi-partnership
but as has been held in Needle Industries the true character of the company and other relevant factors
shall be considered for the purpose of grant of relief having regard to the concept of quasi- partnership."

38. Submission of Mr. Sundaram that the appointment of an additional Director could be a sufficient
relief which the court may grant cannot be accepted. Appellant rejected such an offer. At this stage
bitterness and acrimonious between the parties have ensued.

In a recent decision of J.K. Paliwal and Others vs. Paliwal Steels Ltd.

and others [(2007) 5 Comp LJ 279 (CLB)], on the role of the directors in terms of Section 397 and 398
, the Company Law Board held that the role of the directors was well settled and they were the trustees
of the company. It was thus opined that the directors were required to act on behalf of the company in
a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company.

39. In Girdhar Gopal Dalima and others vs. Bateli Tea Co. Ltd. and others : (2007) 1 Comp.LJ 450
(CLB) the Company Law Board held that once the Company Law Board gives a finding that acts of
oppression have been established, winding up of the company on just and equitable grounds becomes
automatic.

40. We, in the facts and circumstances of this case, are of the opinion that it is not a fit case where we
should interfere with impugned judgment in exercise of our discretionary jurisdiction under Article 136
of the Constitution of India. The appeal fails and dismissed with costs. Counsel's fees assessed at Rs.
50,000/-.

CASE -2

CBI, Hyderabad Vs Subramani Gopalakrishnan & ANR.

JUDGMENT

P. Sathasivam, J.

1. Leave granted. These appeals, at the instance of the Central Bureau of Investigation (in short
"the CBI"), Hyderabad are directed against the order dated 25.06.2010 passed by the High
Court of Andhra Pradesh at Hyderabad in Criminal Petition Nos. 4972 and 4913 of 2010, in and
by which, the High Court enlarged the respondents herein, namely, S. Gopalakrishnan (A4)
and V.S. Prabhakara Gupta (A10) on bail by imposing certain conditions.
2. Since the CBI has challenged the order of the High Court granting bail in respect of the two
accused, namely, A4 and A10, we are constrained to refer only the facts which are necessary
for the disposal of these appeals.
3. Brief Facts:
a. On 07.01.2009, B. Ramalinga Raju (A1), the then Chairman of M/s Satyam Computer
Services Limited (in short "M/s SCSL") addressed a confessional letter to the Board of
Directors revealing certain financial irregularities in M/s SCSL. As per this letter, the
balance-sheet as on 30.09.2008 showed inflated (non-existent) cash and bank balances of
Rs. 5,040/- crores, an accrued interest of Rs. 376/- crores which is non-existent and an
understated liability of Rs.1,230/- crores on account of funds arranged by him and an
overstated debtors position of Rs. 490/- crores (as against Rs. 2,651/- crores reflected in
the books). He also revealed several other factual details which resulted an increase in
artificial cash and bank balances.

b. He also revealed several frauds and cooking books of accounts ever happened in India's
corporate history. Due to the fraud on the part of the persons in Management including the
Financial Advisors, Auditors, etc., many investors suffered loss and on the complaint of one
of such investors, a First Information Report (in short "FIR") was registered on 09.01.2009
by the Andhra Pradesh State Crime Investigation Department against the then Chairman,
Directors and Auditors of M/s SCSL and others under Section 120-B read with Sections
409, 420, 467, 468, 471 and 477A of the Indian Penal Code (in short `IPC'). Considering
the magnitude of the offence, investigation was entrusted to the CBI and a regular case
being RC.No.4(S)/2009 was registered by the CBI, Anti-Corruption Branch, Hyderabad, on
20.02.2009.

c. Due to fudging of the company accounts and manipulation of records by showing incorrect
and inflated figures in the balance-sheets by the Chairman, M.D. and other Directors of the
Company which were certified by the Auditors, the value of the shares of the Company
suddenly dropped causing huge financial loss to the shareholders. The drop in the value of
the shares was due to dishonest and fraudulent acts committed by the aforesaid
functionaries, who were managing the affairs of the Company and were associated with its
functioning and day-to-day affairs.

4. With the above brief facts, let us consider the allegations leveled against the Respondents
herein (A4 and A10) and the role played by them. The role of S. Gopalakrishnan (A4), Partner
and In-charge of M/s Price Waterhouse in CC 1/2010:
 a. He affixed his signature on the financial statements as partner of M/s Price Waterhouse,
the Statutory Auditors for M/s SCSL from the financial year 2001 till 2007.

b. He was a partner in the firm `M/s Price Waterhouse, Bangalore and not in `M/s Price
Waterhouse'.

c. In the agreement entered into between M/s SCSL and M/s Price Waterhouse, instead of
affixing his signature, he signed as `M/s Price Waterhouse' which is contrary to the
established practice and procedure.

d. By virtue of his status as a Statutory Auditor, it is incumbent on his part to verify the bank
balances and FDRs claimed to be held by M/s SCSL besides other investments, liabilities
and sales of the Company before certifying the statutory Audit Report which forms the basis
of Annual Financial Statement of the Company

e. The presentations made by him to the Audit Committee about the health of the Company
were misleading.

f. As a consideration for his acts in accommodating the accused persons, he received an

exorbitant audit fee from M/s SCSL over and above the market rate which reflects a quid
pro quo arrangement.

g. Letters generated on the letter-heads of M/s Price Waterhouse were recovered from the
computer systems of M/s SCSL. These letters were supposed to be written by the Auditors
addressed to the banks seeking confirmations about the balances.

h. Though deficiencies were found in Information Technology General Check, no substantial

and elaborate examination of the financial accounts was conducted by him.

i. Control deficiencies identified in the integrated audit were not brought to the notice of the
Audit committee.

j. The above overt acts of A4 reveal the offences punishable under Section 120-B read with
Sections 420, 419, 467, 471 and 477A of IPC.

5. The role of Sri S. Gopalakrishnan (A4), in CC 3/2010:

(a) He failed to comply with the Audit & Assurance Standards while conducting Statutory Audit in case
of M/s SCSL. (b) He failed to point out the existence of forged and fabricated invoices in the Invoice
Samples.(c) As a quid pro quo for his role he received very high remuneration. (d) The above overt acts
of A4 reveal the offences punishable under Section 120-B r/w 420, 471 & 477A IPC.The role of Sri V.S.
Prabhakara Gupta (A10), Head Internal Audit, M/s SCSL in the Supplementary Charge-sheet:

a. He was the Associate In-charge - Internal Audit and was the Global Head of Internal Audit
of M/s SCSL during the relevant period of time.

b. He had intentionally not included auditing of Oracle Financials (OF) in the Internal Audit
Plan of M/s SCSL till 2007 even though the system was operational since 2002.

c. He intentionally submitted a prioritization plan to the Audit Committee for postponing the
audit of many items including Oracle Financials citing several irrelevant reasons.

d. With regard to anomalies pertaining to the invoices no correctional measures or follow up

action was taken.

e. He did not properly follow up for the restoration of the access to the offshore books of
accounts for the Internal Audit team.

f. He intentionally flouted the laid down procedures mentioned in the Internal Audit Manual.

g. The above overt acts of A10 reveal the offences punishable under Section 120-B r/w
Section 420 IPC.
6. Apart from the above details, Mr. P.P. Malhotra, learned ASG has also brought to our notice
that prior to the grant of bail by the High Court A4 had filed seven bail applications and the High
Court passed the impugned order only in the eighth bail application. He also pointed out that in
the same way, A10 had filed six bail applications and the High Court passed the impugned
order enlarging him on bail only in the sixth bail application.
7. By pointing out all these details, learned ASG submitted that at this stage, release of the
accused-respondents from judicial custody will jeopardize the trial, particularly, when these two
respondents, A4 and A10 who were the external and internal auditors of the Company, will
influence the witnesses and it would be difficult for the employees to come and depose against
them. He also submitted that considering the seriousness of the offence, impact on the society
as a whole and magnitude of the offence, the respondents are not entitled for bail and the High
Court has committed an error in granting the bail to them. He also submitted that the reliance
on the orders of this Court insofar as Talluri Srinivas (A5) is not comparable because after the
order of this Court granting him bail on 04.02.2010 in Criminal Appeal No. 257 of 2010, the
entire scenario in the trial has changed, hence the said order cannot be cited as a precedent.
He also submitted that though A4 and A5 were Auditors of M/s SCSL, A5 was there only for a
limited period of one year whereas A4 worked for a period of seven years i.e. from 2000-07.
He also relied on the order of this Court in Criminal Appeal No. 2068-2072 of 2010 dated
26.10.2010 wherein this Court cancelled the bail granted by the High Court insofar as A1, A2,
A3, A7, A8 and A9 are concerned.
8. On the other hand, Mr. Mukul Rohatgi, learned senior counsel appearing for A4 highlighted the
alleged role between those accused, i.e. A1, A2, A3, A7, A8 and A9 whose bail has been
cancelled by this Court and that of A4. According to him, the order of this Court dated
26.10.2010 in Criminal Appeal No. 2068-2072 of 2010 is not applicable. A4 had been in custody
for one year and five months before he was enlarged on bail. He also demonstrated that even
according to the prosecution the role assigned to A4 and A5 is identical and when A5 was
ordered to be released by this Court even as early as on 04.02.2010, the High Court rightly
applied parity between them and granted bail. He also contended that A4 was not an employee
of M/s SCSL but was partner in M/s Price Waterhouse and has nothing to do with the alleged
claim in M/s SCSL.
9. Shri D. Rama Krishna Reddy, learned counsel appearing for A10 submitted that though he was
an internal auditor of M/s SCSL, no statutory function was assigned to him. He also pointed out
that only in the second charge-sheet, his name was included as an accused. He further pointed
out that before granting bail by the High Court, he was put in jail for 222 days.
10. We have perused the impugned order of the High Court, various details furnished by both the
sides and considered the rival contentions.
11. As per the complaint and investigation, A4 and A10 along with the other accused are involved
in one of the greatest corporate scams of the commercial world. It has caused a financial storm
not only throughout the country but also worldwide and by their action and conduct, lakhs of
shareholders and others have been duped and the corporate credibility of the nation has
received a serious setback. It is not in dispute that nobody can underestimate the sufferings of
the shareholders and others due to the scam in question.
12. Though it was argued that the Management of M/s SCSL has been shifted to other corporate
entity, it is demonstrated before us that the employees who were working in the erstwhile M/s
SCSL are now working under the present management. In view of the same, at least persons
working in the accounts section/financial management will not come forward to depose against
the Respondents herein (A4 and A10) who were the external and internal auditors of the
Company and who had influence in the Company.
13. The High Court, while ordering bail for A4 and A10, heavily relied on the order of this Court
dated 04.02.2010 made in Criminal Appeal No. 257 of 2010. The said appeal relates to one -
Talluri Srinivas (A5), who is a Chartered Accountant, registered with the Institute of Chartered
Accountants of India (ICAI). He was working as a partner with M/s Price Waterhouse, Bangalore
registered with the ICAI. M/s Price Waterhouse is the statutory authorized auditors of M/s SCSL
and allegation against A5 is that while submitting the audit report for the year 2007-08, some
inflated figures were incorporated in the said report and thereby he committed serious breach
of faith as a Member of the professional body of auditors/accountants. After noting several
 details and hearing the learned counsel on either side, this Court noted the following
circumstances for releasing A5 on bail: "
i. the charge-sheet is running into several thousand pages;

ii. The CBI proposes to examine 470 witnesses;

iii. a very large volume of records have been produced in this case;

iv. therefore, it can be easily assumed that the trial of this case will take a long time even to
start." Considering these factual details without expressing any opinion on the merits of the
case regarding the nature of offence or gravity thereof allegedly committed by A5 and
having regard to the fact that he had been in custody for more than a year released him on
bail on 04.02.2010 by imposing certain conditions.

14. Now the question is whether the same reasonings are applicable to the respondents herein, i.e.
A4 and A10?
15. We have already pointed out that in view of the appeal filed by Talluri Srinivas (A5) against the
dismissal of his bail application by the High Court, this Court considering the facts stated in the
earlier paragraph passed an order on 04.02.2010 releasing A5 on bail subject to certain
conditions. First of all, there is no similarity in respect of the role assigned to A4 and A5. Mr.
Mukul Rohtagi, learned senior counsel, after taking us through several materials, submitted that
even as per the prosecution, the role assigned to A4 and A5 is identical. After going through
the same, prima facie, we are satisfied that the said assumption is incorrect. It is pointed out
that though both A4 and A5 were Auditors of M/s SCSL at the relevant time, admittedly, A5 had
worked only for a period of one year whereas A4 was in-charge of auditing the accounts of M/s
SCSL for a period of seven years, i.e., from 2000 to 2007. In addition to the same, we have
also verified three charge-sheets and the imputations made against both these accused
persons. In these factual details available, prima facie, we are satisfied that A4 and A5 cannot
be put on the same footing in respect of erroneous auditing resulting in inflated cash and bank
balances of M/s SCSL.
16. It is relevant to point out the recent order of this Court dated 26.10.2010 in Criminal Appeal No.
2068-2072 of 2010 wherein this Court cancelled the bail granted by the High Court in respect
of A1, A2, A3, A7, A8 and A9. After passing such order, this Court after recording the fact that
the charges have been framed on 25.10.2010 and trial is scheduled to commence w.e.f.
02.11.2010 issued several directions, namely,
i. the trial Court to take up the case on day-to-day basis and conclude the trial as expeditiously
as possible in any event on or before 31.07.2011;

ii. the trial Court would avoid granting undue adjournments, unless it becomes absolutely
imperative;

iii. the parties are directed to examine only material and most essential witnesses and fully
cooperate with the trial Court;

iv. the accused shall be produced before the trial Court on time, on every date of hearing, unless
exempted by orders of the Court;

v. the trial Court is free to decide the case without being influenced by any of the observations
made by the High Court or by this Court;

vi. for any reason, trial is not concluded before 31.07.2011, the accused would be at liberty to
approach the trial Court for grant of bail.

17. The recent order dated 26.10.2010 of this Court referred to above makes it clear that this Court
cancelled the bail in respect of prime accused, namely, A1, A2, A3, A7, A8 and A9. It is also
brought to our notice that in view of the specific directions of this Court in the said order, the
trial has started and according to the learned ASG, it is likely to be concluded by the cut off
date, i.e. 31.07.2011. It is also brought to our notice that out of 697 witnesses, the prosecution
has dropped 470 witnesses and only 227 witnesses are to be examined. Out of this, 193
 witnesses have already been examined and some of them are to be cross-examined. According
to the him, only 30 more witnesses have to be produced and examined.
18. In view of the directions of this Court in the subsequent order dated 26.10.2010, the trial is
proceeding on day-to-day basis and likely to be concluded by 31.07.2011. We are satisfied that
the reasons stated while granting bail for Talluri Srinivas (A5) by this Court on 04.02.2010 are
not applicable to the respondents herein. Accordingly reliance on the basis of the bail order
granted in favour of A5 cannot be applied to these respondents.
19. Mr. Mukul Rohatgi, learned senior counsel, appearing for A4 and Mr. D. Rama Krishna Reddy,
learned counsel appearing for A10 strongly commented the conduct of the CBI in not
challenging the order of the High Court granting bail to these persons and failure on their part
to place these matters before the Court at the appropriate time. It is not in dispute that the High
Court granted bail to these respondents on 25.06.2010 and the CBI challenging the said order
filed two special leave petitions before this Court on 06.10.2010. No doubt, the matter was listed
before the Court only on 01.04.2011 on which date, this Court issued notice to the respondents
and on the same day the notice was accepted by the respective counsel for the respondents
and they were permitted to file their reply. After filing reply, when the matter again came up for
hearing on 04.04.2011 at the request of both sides, the matter was posted for final hearing on
15.04.2011 and was argued at length on the same day. Though the appellant-CBI was not so
diligent to bring the special leave petitions for orders immediately after filing of the same due to
various reasons and compliance of the office report had taken some time, however, on this
ground their challenge with regard to the order of the High Court granting bail cannot be rejected
without going into the merits.
20. Though Mr. D. Rama Krishna Reddy, learned counsel for A-10, submitted that he being the
internal auditor, employee of M/s SCSL, there is no statutory function and his name does not
find place in the first charge-sheet and he was named only in the second charge-sheet,
considering the materials available, it is not desirable to go into the correctness or otherwise at
this juncture and at the same time in view of the magnitude of the scam and without the
assistance and connivance of persons in-charge of auditing, we are unable to accept the stand
of the learned counsel and hold that the High Court is not justified in granting bail for him.
21. It is also relevant to note that there is difference between yardsticks for cancellation of bail and
appeal against the order granting bail. Very cogent and overwhelming circumstances are
necessary for an order directing the cancellation of bail already granted. Generally speaking,
the grounds for cancellation of bail are, interference or attempt to interfere with the due course
of administration of justice or evasion or attempt to evade the due course of justice or abuse of
the concessions granted to the accused in any manner. These are all only few illustrative
materials. The satisfaction of the Court on the basis of the materials placed on record of the
possibility of the accused absconding is another reason justifying the cancellation of bail. In
other words, bail once granted should not be cancelled in a mechanical manner without
considering whether any supervening circumstances have rendered it no longer conducive to
a fair trial to allow the accused to retain his freedom by enjoying the concession of bail during
the trial. We have already pointed out that the issue before us is not for cancellation of bail
granted earlier, the question is whether in the facts and circumstances of the magnitude of the
scam, the bail granted in favour of all the main accused have been cancelled and the
Respondent Nos. A4 and A10 being external and internal auditors respectively, their role being
paramount in inflating processing assets and bank balances of M/s SCSL, we are of the view
that the High Court is not justified in granting bail.
22. In view of the specific allegation by the prosecution that A4 and A10 were party to the criminal
conspiracy showing inflated (non-existent) cash and bank balances reflected in the books,
inflated proceeds over a period of last several years frauds and cooking books of accounts, we
are satisfied that the High Court ought not to have granted bail to these respondents.
Considering the subsequent order of this Court dated 26.10.2010 cancelling the bail in respect
of other accused and issuing directions based on which the trial has to be concluded within the
schedule time, viz. 31.07.2011, we hold that the High Court committed an error in granting bail
to these respondents A4 and A10.
23. In the light of the above discussion, the impugned order of the High Court dated 25.06.2010 in
Crl. Petition Nos. 4913 and 4972 of 2010 granting bail in favour of the respondents i.e., A4 and
A10 is set aside. They are directed to surrender on or before 30.04.2011 otherwise the
appellant shall take appropriate steps in accordance with law. All the observations and
 directions, as stated in the earlier order dated 26.10.2010, are also applicable to the
respondents (A4 and A10). We also make it clear that the above said conclusion is for
considering the grant of bail by the High Court and the trial Court is free to decide the case
without being influenced by any of the observations made by the High court and by this Court
in this order.

CASE -3

S. P. Jain Vs. Kalinga Tubes Ltd. [1965] INSC 6 (14 January 1965)

14/01/1965 WANCHOO, K.N.

WANCHOO, K.N.

GAJENDRAGADKAR, P.B. (CJ) SIKRI, S.M.

CITATION: 1965 AIR 1535 1965 SCR (2) 720

CITATOR INFO:

RF 1976 SC 565 (29) RF 1981 SC1298 (59,51) R 1990 SC 737 (27) R 1992 SC 453 (7)

ACT:

Companies Act (Act 1 of 1956), ss. 397 and 398-Scope of.

HEADNOTE:

In July 1954, two groups of shareholders led by P and 1, who, together held an equal number of shares
of the value of Rs. 21 lakhs out of a total share capital of Rs. 25 lakhs in the respondent company (then
a private ate company), entered into a private agreement with the Appellant, whereby, (i) the share
capital of the company was to be increased by Rs.

10 1/2 lakhs and shares of this value allotted to the appellant so that the total shares held by him would
be equal to the holding of each of the other two groups; (ii) each of these three groups of shareholders
would have an equal number of representatives on the Board of Directors;

(iii) the appellant undertook to arrange certain credit facilities for the company; and (iv) the appellant
was to be the Chairman of the Board. In accordance with this agreement, the appellant was made the
Chairman and though various resolutions were passed by the company to implement the agreement,
these resolutions did not in terms refer to the agreement. and no change was made in the Articles of
Association of the company so as to embody the terms of the agreement. Sometime later, the
subscribed capital of the company was increased to Rs. 61 lakhs and the new shares were so allotted
as to maintain the parity in the share holdings of the three groups. When one of the two minority
shareholders sold 250 shares, these were equally divided between the three groups and one odd share
was held by P, L and the Appellant jointly.

In 1956-57, the company desired to raise a loan from the Industrial Finance Corporation and as this
Corporation made advances only to public limited companies, in January 1957 the company was
converted into a public company.
Appropriate amendments were made in its Articles of Association, but even on this occasion, no attempt
was made to incorporate into the Articles the terms of the Agreement of July 1954. After sanction had
been obtained of the Controller of Capital Issues for the issue of additional share capital, the appellant
suggested at a meeting of the board of directors in March 1958 that the new shares should be issued
proportionately to the existing shareholders in accordance with the provisions of Section 81 of the
Companies Act, 1956. On the other hand those representing the P and L groups proposed that the new
shares should be offered privately in the best interests of the company at the sole discretion of the
directors; this proposal was made because these two groups did not have money to subscribe for the
new capital and they feared that if shares were offered in the first instance to existing shareholders, the
appellant could get all of them and thus acquire control of the company. In view of the majority of the P
and L groups in the Board, their proposal was adopted and subsequently a resolution to that effect was
also accepted at a General Meeting of the shareholders held in March 29, 1958. The appellant
thereafter instituted a suit to have the resolution declared illegal and void and obtained an ex parte
injunction against the company from allotting shares pursuant to this resolution. On July 13, 1958, the
appellant's suit was dismissed by the Subordinate Judge and the injunction vacated by him 721 at 11
A.M. The Board of Directors at a meeting held on that date, immediately on receiving the news that the
injunction had been vacated, allotted the new shares to seven persons who had previously applied for
them. On the same day, the appellant filed an appeal and applied for and obtained an order staying the
operation of the order of the Subordinate Judge. Eventually these appeals were also dismissed and the
stay vacated.

In September 1960 another General meeting of the company was called to approve a proposal to
increase the share capital of the company from Rs. 1 crore to Rs. 3 crores. It was also intended that
these new shares should be offered to outsiders with a view to making the company more broadbased.

At that stage the appellant filed a petition in the High Court under Section 397 and 398 of the Companies
Act, 1956, complaining inter alia, that the issue of new shares was in furtherance of a continuing
oppression of the apperant's minority group; that by allotting such shares to benamidars of P and L in
disregard of the agreement of July 1954, it was intended to exclude the appellant from all control of the
affairs of the company; that the resolutions passed in March 1958 as to the manner of allotment of new
shares contravened s. 81 of the Companies Act, 1 956 and this resolution as well as the hasty allotment
on July 30, 1958 were in abuse of the power of the P and L groups and oppressive of the minority. The
petition was allowed by the single Judge but this decision was reversed in appeal by a Division Bench
of the High Court. On appeal to the Supreme Court.

HELD : (i) On the facts no case had been made out, of oppression within the meaning of section 397.

For a petition under section 397 to succeed, it is not enough to show that there is just and equitable
cause for winding up the company, though that must be shown as preliminary to the application of
section 397. It must further be shown that the conduct of the majority shareholders was oppressive to
the minority as members and this require.,, that events have to be considered not in isolation but as a
part of a consecutive story. There must be continuous acts on the part of the majority shareholders,
continuing up to the date of the petition, showing that the affairs of the company were being conducted
in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and
wrongful and mere lack of confidence between the majority shareholders and the minority shareholders
would not be enough unless lack of confidence springs from oppression of the minority by a majority in
the management of the company's affairs, and such oppression must involve at least an element of lack
of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. [937 C-F]
Elder v. Watson, (1952) S.C. 49; George Meyer v. Scottish Cooperative Wholesale Society Ltd. (1954)
S.C. 381; Scottish Co-operative Wholesale Society Lid. v. Meyer and another, [1958] 3 All. E.R. 66. Re.
H. R. Harmer Ltd., [19581 3 All E.R. 689; discussed and applied.

(ii) The agreement of July 1954 on which the case of oppression was based was not binding even on
the private company and much less so on the public company when it came into existence in 1957. It
was really an agreement between a non-member and two members of the company and although for
some time the agreement was in the main carried out, clearly some of its terms could not be put in the
articles of association of the public company. As the company was not bound by the 722 agreement,
the mere fact that it was decided at the meeting in March 1958 to offer the new shares to outsiders and
not the existing shareholders did not necessarily amount to an oppression of the minority shareholders.
The majority shareholders were not bound to accept a proposal of the minority shareholders that the
new shares should be allotted only to the existing shareholders. Furthermore the general meeting
having decided that new shares should not be issued to the existing shareholders but to others, there
was no contravention of s. 81 of the Companies Act 1956 and the resolution of March 28, 1958 was in
accordance with law as it stood at the time. [739 B-C; 740 G-H; 741 C-E; 745 D-F] (iii) it could not be
said that the allottees of new shares were benamidars or stooges of the P or L group and that by
allotment of shares to them, the majority shareholders were oppressing the minority. These allottees
were independent persons and the fact that the P and L groups might be able to get the support of the
holders of the new shares did not necessarily mean oppression of the appellant, for the new
shareholders may support the P and L groups on the ground that such support would be for the benefit
of the Company. [744 C-E] (iv) The haste in issuing now shares upon the vacation of the injunction of
July 30, 1958 could not be held to be a part of the design to oppress the minority. The company was in
need of money for expansion and its ability to obtain a loan from the Finance Corporation depended
upon the increase of its subscribed share capital. The haste became necessary because the injunction
was vacated on that day and it was felt that if immediate action was not taken and the new shares
allotted, there might be a further injunction and consequent delay. The haste in the allotment of shares
arose out of circumstances brought about by the appellant's conduct. [743 A-E] Held also, that no case
had been made out for action under section 398 on the ground that the affairs of the company were
being conducted in a manner prejudicial to its interests. [749 C]

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 734-747 of 1964.

Appeals from the judgment and order dated April 18, 1963 of the Orissa High Court in A.H.O. No. 13 of
1961 and A.H.O.

Nos. 2 to 14 of 1962.

N. C. Chatterjee, S. Roy Chowdhury, M. L. Jhunjhunwala, S. Murty and B. P. Maheshwari, for the

appellant (in all the appeals).

M. C. Setalvad, A. V. Viswanatha Sastri, Ranadeb Chaudhri, M. K. Banerjee, J. B. Dadachanji, O. C.

Mathur and Ravinder Narain for respondent No. 1.

Ranadeb Chaudhurl and J. B. Dadachanji, for respondent No.

2. G. S. Pathak, B. Dutta and J. B. Dadachanji, for respondent No. 3.

A.V. Viswanatha Sastri and J. B. Dadachanji, for respondent No. 4.

723 Sachin Chowdhury, S. N. Andley, Rameshwar Nath and P.

L.Vohra,for the respondent Nos. 9, 10, and 12.

C.K. Daphtary, Attorney-General, J. B. Dadachanji, O. C.

Mathur and Ravinder Narain, for respondent No. 13.

Sachin Chowdhury, B. Sen, Dipak Dutta Chowdhury, for respondent No. 14.

Niren De, Additional Solicitor-General and Rajinder Narain & Co. for respondent No. 15.

S. V. Gupte, Solicitor-General and Rajinder Narain, & Co.

for respondent No. 16.

The Judgment of the Court was delivered by Wanchoo, J. These fourteen appeals on certificates
granted by the High Court of Orissa raise common questions of law and fact and will be dealt with
together. They are a consequence of a fight between two groups of business magnates for the control
of Messrs Kalinga Tubes Limited (hereinafter referred to as the Company). They arise out of an
application under ss. 397, 398, 402 and 403 of the Indian Companies Act, No. 1 of 1956, (hereinafter
referred to as the Act) made by the appellant in the High Court. Most of the facts are not seriously in
dispute and it is necessary to set them out in detail in order to decide the main point raised on behalf of
the appellant, namely, that the affairs of the Company were being conducted in a manner oppressive
to him and his group of members.

The Company was floated as a private limited company on December 1, 1950 with an authorised capital
of Rs. 25 lacs.

Originally, the shares were held by two groups of shareholders equally, except a few shares. These
groups of shareholders may for our purposes be taken to be represented by Patnaik and Loganathan.
The Company raised a sum of Rs.

36 lacs by the issue of two series of debentures which were guaranteed by the Government of Orissa
between 1952 to 1954.

In 1954, the appellant was approached by Dr. Mohanty, then Secretary to Government of Orissa
(Industries Department) which was naturally interested in the Company having guaranteed debentures
to the tune of Rs. 36 lacs, for helping the Company which was in financial and administrative difficulties.
The appellant was requested to help the Company by providing finance and by arranging loans from
banks and other sources and further by providing the necessary administrative guidance. The appellant
agreed to do so and consequently on July 27, 1954, an agreement was entered into 724 between the
appellant, and Patnaik and Loganathan To this agreement, the Company was not a party. We shall
refer in detail to the various terms of the agreement later. In brief, however, the agreement provided
that the appellant would be allotted shares in the Company equal to those held by Patnaik and
Loganathan after increasing the share capital of the CompanyThus the Company would have three
groups of shareholders represented by the appellant, Patnaik and Loganathan holding equal number
of shares, besides a French company and one Rath, who between themselves held shares worth Rs.
4 lacs. These shareholders however were not party to the agreement. It was also provided that these
three groups of shareholders would have equal number of representatives on the Board of Directors of
the Company, namely, two each for the time being. The appellant also undertook to arrange for cash
credit facilities to the limit of Rs. 50 lacs on the security of raw materials and finished goods of the
Company. And finally, the appellant jain was to be the chairman of the Company. This agreement was
followed by certain resolutions passed by the Company on August 16, 1954 by which some of the terms
of the agreement were substantially carried out, the authorised capital was increased to rupees one
crore (though it was issued later in instalments), and the appellant was made the chairman of the
Company. It may however be noted that the resolutions did not refer to the agreement in terms and no
change was made in the Articles of Association of the Company to bring them in conformity with all the
terms of the agreement. In January 1955, Narayanswami who had been appointed Managing Director
resigned and Patnaik was appointed the Managing Director. In April 1955, the Company started
production.

Sometime thereafter the share capital was further subscribed up to Rs. 61 lacs and the three groups,
namely, the appellant Jain, Patnaik and Loganathan held one-third of the shares leaving out shares
held by the French company. Mr.

Rath had sold his shares numbering 250 and these shares were equally divided between the three
groups and the one odd share was held by all the three namely Jain, Patnaik and Loganathan, jointly.
In September 1956, a resolution was passed by the Board of Directors referring the question of
conversion of the Company to a public limited company to a sub-committee consisting of the appellant,
Loganathan and Patnaik. About the same time, an application was made to the Controller of Capital
Issues for the sanction of the issue of further shares to the extent of Rs. 39 lacs out of the authorised
capital of rupees one crore and for the 725 issue of debentures to the extent of Rs. 64 lacs. In this
application it was stated that the shares were intended to be issued privately to the existing
shareholders and/or their nominees. In december 1956 a resolution was passed by the Board of
Directors for converting the Company into a public limited company and for amending the Articles of
Association in consequence at the next annual general meeting. This was necessary as the Company
wanted to borrow from the Industrial Finance Corporation which however made advances only to public
limited companies. On January 11, 1957, the Company was converted into a public company and the
Articles of Association were amended. Even so, no attempt was made to incorporate the terms of the
agreement dated July 27, 1954 in the Articles of Association so amended.

Trouble however seems to have arisen between the appellant and the other two groups as early as
September 1955 in consequence of an advertisement issued by the appellant in newspapers
suggesting that his group was engaged in the manufacture of black and galvanised steel tubes and in
this advertisement the emblem of the Company was also printed, as if the Company was part of the
appellant's group. This led to strong protests by Patnaik and Loganathan and eventually the appellant
withdrew the advertisement. However, the appellant continued to be the chairman of the Company in
spite of growing differences between him and Patnaik and Loganathan. Articles of Association were
further amended in November 1957. At that time also nothing was put therein on the basis of the
agreement dated July 27, 1964. In December 1957, the Controller of Capital Issues sanctioned the
issue of shares of the face value of Rs. 39 lacs and debenutres of the face value of Rs. 64 lacs subject
to the provisions of s. 81 of the Act. Real trouble started after this sanction for the issue of fresh shares.
We shall have occasion to refer to s. 81 of the Act later; it is enough to say here that that sanction
provides that the new shares would be offered in the first instance to the existing shareholders in
proportion, as nearly as the circumstances admit, to the capital paid up on the existing shares at that
date "subject to any direction to the contrary which may be given by the Company in general meeting".
So unless the Company decided otherwise at a general meeting, the new issue of shares to the tune
of Rs. 39 lacs would have had to be offered under s. 81 of the Act to the existing shareholders in
proportion to their existing shares. At that time as already indicated, the appellant group held one-third
share 726 and Loganathan and Patnaik groups held two-thirds share except for certain shares held by
the French company and therefore in the absence of a direction to the contrary at a general meeting,
the new shares would also have gone in equal shares to the three groups subject to the shares which
would go to the French Company.

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

The appellant did not attend the meeting of March 29, 1958 though he was present by proxy. Patnaik
presided at that meeting. Two resolutions were put forward at that meeting, one on behalf of the
appellant s group and the other on behalf of Patnaik and Loganathan groups. The appellant's resolution
proposed that the new shares should be offered to the existing shareholders of the Company in the
proportion of their share7 27 holdings and the offer should remain open for a period of fifteen days with
the right to accept or renounce the whole or part of the offer in their names or in the names of their
nominee or nominees and if a shareholder did not accept within that period the offer should be deemed
to have been declined. The second resolution on behalf of the Patnaik Loganathan groups proposed
that the new shares should not be offered or allotted to the existing shareholders or to the public and
that they should be allotted privately in the best interest of the Company at the sole discretion of the
directors to such persons as might have applied or thereafter apply on the condition that at least 5 per
centum of the face value of shares applied for was paid as application money and 10 per centum of the
face value was paid on allotment and the balance paid as and when called upon in accordance with the
Articles of Association of the Company.

As was to be expected, the resolution put forward on behalf of the appellant was lost and the resolutions
put forward on behalf of Patnaik and Loganathan groups as to the allotment of new shares were passed.
Thus in that meeting there was a complete breach between the three groups.

This was followed on April 18, 1958, by a suit by the appellant and some other shareholders of his
group for a declaration that the resolutions dated March 29, 1958 were ultra vires, illegal, void and not
binding on the appellant, the Company and its shareholders with a prayer for permanent injunction
restraining the defendnats in the suit (namely, the other two groups) and their servants and agents from
giving effect to or acting in any way in pursuance of the said resolutions and further restraining each of
the defendants, their servants and agents from issuing and alloting the new shares in terms of the
impugned resolutions. That suit was filed in the court of the Subordinate Judge, Cuttack. It is
unnecessary here to refer to the details of that suit. It is enough to say that an ex parts interim injunction
was obtained on the same day restraining the Company and other defendants from issuing and allotting
the new shares to persons other than the existing shareholders and giving effect to the resolutions in
that regard passed at the meeting held on March 29, 1958.

The Company then made an application for setting aside the ex parte interim injunction. This matter
came up before the court on May 15, 1958. At that time an offer was made on behalf of the Company
that in view of the urgent necessity for funds, the Company might be permitted to issue twothirds of the
shares, keeping back one-third which would have gone to the appellant if the shares had been offered
to the existing shareholders; but this was not accepted on behalf of 728 the appellant. The hearing of
the injunction matter was postponed on several dates and it appears that the Patnaik and Loganathan
groups continued to call meetings of the Board of Directors on the dates fixed in the suit, and the agenda
always provided for the allotment of the new shares.

Eventually on July 30, 1958 the Sub-ordinate Judge delivered judgment and vacated the injunction at
about 11 a.m. A meeting of the Board of Directors was being held on the same day from 10-30 a.m.
and as soon as a message was received that the injunction had been vacated the new shares were
allotted to seven persons who had applied for the same along with the application money. This
happened about midday and the return as required by the Act was duly filed with the Registrar of
Companies at 12-40 p.m. The same day, an application was made at 12-40 p.m. on behalf of the
appellant before the Subordinate Judge praying that the order vacating the injunction be stayed till the
appellant obtained orders from the High Court where he wished to appeal. The Company's lawyer
however intimated to the court that the shares had already been allotted. Even so, the court passed an
order staying the operation of its judgment delivered earlier for two days. The matter was then taken in
appeal to the High Court by the appellant. The appeal was dismissed in September 1958. There was a
Letters Patent appeal following the dismissal but that was not pressed and was eventually dismissed in
November 1960.

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

To continue the narrative, it appears that an extraordinary general meeting of the Company was called
on September 21, 1960 to consider increasing the share capital from rupees one crore on which it stood
after the increase in 1958 to rupees three crores by issue of additional equity shares numbering one
lac of the value of rupees one crore and the issue of another one lac cumulative 7 29 redeemable
income-tax free preference shares of the value of rupees one crore subject to such rights and privileges
attaching to such preference shares as might be specified in the new Article to be inserted in the Articles
of Association. It was also intended that these new shares should be offered to outsiders (i.e. other than
the existing shareholders) with a view to making the Company more broad based. This meeting was
called by a notice issued on August 25, 1960.

It was the calling of this meeting which led to the application under s. 397 etc. on September 14, 1960
by the appellant. It was urged in the application that this issue of new shares was in furtherance of the
continuing and continuous process of oppression of the appellant and his group being the minority
shareholders and was designed for the purpose of completely excluding the appellant and his group
from all control in the affairs of the Company and to deprive the financial advantage to be gained by
them by the issue of new shares at par and to retain such advantage exclusively to-the Patnaik and
Loganathan groups so that the appellant and his group might be forced to sell their holdings to the
Patnaik and Loganathan groups at a nominal value. That was why the new shares were being offered
to outsiders and not to the existing shareholders, the object being to offer the shares to nominees and/or
benamidars of the Patniak and Loganathan groups and to such persons who would be within their
control. The result of this would be that Loganathan and Patnaik groups would acquire more than 75
per centum of the voting strength of the Company and would be in complete control of it and so gain
enormous financial advantage for themselves. This would cause irreparable loss and prejudice to the
rights of the appellant and his group of minority shareholders. It was alleged that this was being done
by the Patnaik and Loganathan groups who were in control of the majority of shares. Finally it was
urged that the affairs of the Company were conducted in a manner prejudicial to the interest of the
Company by Loganathan and Patnaik groups and there was mismanagement in conducting such
affairs. It was further alleged that the conduct of Loganathan and Patnaik groups towards the minority
shareholders was oppressive, burdensome, harsh and wrongful and the entire manoeuvre was that
these groups should be able to control over 75 per centum of the voting strength in the Company.
Further it was alleged that the conduct of these groups involved a visible departure from the standard
of fair dealing and violation of the conditions of fair play to which the appellant and his group as minority
shareholders were entitled. In particular 730 the denial to the existing share holders to subscribe,. to
the new :shares in proportion to their respective holdings and the issue of such shares to benamidars
of the Patnaik and Loganathan groups was oppressive to the appellant and his group of minority
shareholders and also amounted to mismanagement of the affairs of the ,Company. This was also in
breach and violation of the agreement dated July 27, 1954 to which the Patnaik and Loganathan groups
were parties.

Further it was said that although in form the Company was a public company in reality it was a
partnership consisting of the three groups namely, the appellant's group, and of Loganathan and
Patnaik groups. The last two groups had combined together against the appellant group which had
resulted in justifiable lack of confidence on the part of the appellant and his group in the conduct of the
affairs of the Company by the other two groups. Such lack of confidence had been caused by lack of
probity in the conduct of the affairs of the Company by these two groups, which were acting to benefit
themselves personally and were not concerned with the welfare of the Company. The appellant and his
group would not get any relief by calling a general meeting of the Company, and the facts and
circumstances aforesaid would justify the making of a winding-up order on the ground that it was just
and equitable that the Company should be wound up. Therefore the appellant prayed for directions
under s. 397 of the Act, as the winding-up of the Company which was in a prosperous condition would
unfairly prejudice the appellant and other members of the minority group and redress against such
oppression could be given by the High Court by making suitable directions in that behalf.

The affairs of the Company were being conducted in a manner prejudicial to the interest of the Company
for reasons already stated and there had been a material change in the management or control of the
Company by alteration in its Board of Directors and by fraudulent changes introduced in the ownership
of the Company's shares and by reason of the wrongful act and conduct of the Patnaik and Loganathan
groups. The appellant therefore prayed for the removal ,of the present Board of Directors, for re-
constitution of the Board of Directors with at least two permanent representatives from his group and
for ensuring equal representation in the Board of the three groups of shareholders, and for alterations
in the Articles of Association to incorporate therein the provisions of the agreement dated July 29, 1954.
The appellant also sought a declaration that the resolutions passed by the Board of Directors on March
1, 1958 and at the general meeting dated March 29, 1958, 731 were null and void and were passed in
abuse of the power of Patnaik and Loganathan groups and in oppression of the minority Shareholders
and prayed that the said resolutions be set aside in so far as they related to the issue and allotment of
39,000 new shares. The allotment made on July 30 should be declared illegal and null and void as it
was made in abuse of the powers of the Patnaik and Loganathan groups and in oppression of the
minority shareholders and was not binding upon the Company, the appellant and his group. It was
prayed that directions be given to sell the said 39,000 shares by the allottees to the Company upon
payment of the amounts actually paid thereon so far and the Company be permitted to offer the same
to the shareholders as on July 29, 1958 in proportion to their respective shareholdings. An injunction
was also prayed for restraining the Company from holding the meeting on September 21, 1960. Finally
it was prayed that orders be passed for investigation into the conduct of the affairs of the Company by
the Loganathan and Patnaik groups and suitable directions be made with a view to regulating the affairs
of the Company in future and if necessary in administrator of the Company be appointed for carrying
out such directions as the High Court might be pleased to make for purposes of removing the oppression
and the acts of misconduct and mismanagement and for regulating the conduct of the affairs of the
Company. The seven persons to whom the new shares were allotted in July 1958 were also made
parties and injunction was prayed for restraining them from transferring those shares.

The application was opposed on behalf of the Company, and its main contention was that the Company
was not a party to the agreement dated July 27, 1954 and was not bound by it.

It was further contended that there was no mismanagement and the Company and its affairs were not
being conducted in a manner prejudicial to it. It was also contended that there was no oppression on
the undisputed facts in the present case. The application was also opposed on behalf of Loganathan
and Patnaik groups and their case was that they had not acted in any manner which could be said to
be oppressive of the rights of the minority shareholders represented by the appellant. They also
contended that the affairs of the Company were not being mismanaged nor were they being conducted
prejudicially to the interest of the Company Further the seven persons to whom the, shares had been
allotted on July 30, 1958 contended that they were not benamidars of the Patnaik and Loganathan
groups. Their case was that they were independent persons of substance and had applied for the 7 32
new sham themselves and not as benamidars of Loganathan and Patnaik groups. They denied that
there was any oppression of the minority shareholders as alleged or that there was any mismanagement
of the affairs of the Company or any conduct which was prejudicial to the interest of the Company. They
contended that the resolutions of March 1, 1958, March 29, 1958 and July 30, 1958 were perfectly legal
and proper and they were entitled to the shares which had been allotted to them.

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

This was followed by fourteen appeals to a Division Bench by the Company and the various
shareholders. These appeals were consolidated and heard together. The Division Bench came to the
conclusion that the agreement of July 27, 1954 was not binding on the public company which came into
existence after July 11, 1957, whatever might have been the position under the agreement when it was
a private company.

It also came to the conclusion that the seven persons to whom the new shares were offered were not
benamidars of Loganathan and Patnaik groups but were independent persons of substance, even
though they might be friends of the majority group of shareholders. But there was nothing to show that
they were under the control of the majority group and therefore it could not be said that 75 per centum
of the voting strength was concentrated in the hands of Loganathan and Patnaik groups except where
these new allottees chose to vote with these groups. On a careful consideration of 733 the facts, the
Division Bench came to the conclusion that no such oppression had been established as would justify
an order under s. 397 of the Act. As to mismanagement under s.

398, the Division Bench came to the conclusion that no case had been made out under that section.
On this view of the matter, the appeals were allowed and the application of the appellant was dismissed
and the parties were ordered to bear their own costs. Thereupon the appellant applied for and obtained
certificates to appeal to this Court and that is how the matter has come up before us.

We shall first take up the case under s. 397 of the Act and proceed on the assumption that a case has
been made out to wind-up the Company on just and equitable grounds. This is a new provision which
came for the first time in the Indian Companies Act, 1913 as s. 153-C. That section was based on s.
210 of the English Companies Act, 1948, which was introduced therein for the first time. The purpose
of introducing s. 210 in the English Companies Act was to give an alternative remedy to winding up in
case of mismanagement or oppression. The law always provided for winding up, in case it was just and
equitable to wind up a company.

However, it was being felt for some time that though it might be just and equitable in view of the manner
in which the affairs of a company were conducted to wind it up, it was not fair that the company should
always be wound up for that reason, particularly when it was otherwise solvent. That is why s. 210 was
introduced in the English Act to provide an alternative remedy where it was felt that though a case had
been made out on the ground of just and equitable cause to wind up a company, it was not in the
interest of the shareholders that the company should be wound up and that it would be better if the
company was allowed to continue under such directions as the court may consider proper to give.

That is the genesis of the introduction of s. 153-C in the 1913-Act and s. 397 in the Act.

Section 397 reads thus :"Application to Court for relief in cases of oppression(1) Any members of a
company who complain that the affairs of the company are being conducted in a mariner oppressive to
any member or members (including any one or more of themselves) may apply to the Court for an order
under this section, provided such members have a right so to apply in virtue of section 399.

up./65-13 734 (2) If, on any application under sub-section (1), the Court is of opinion(a) that the company
affairs are being conducted in a manner oppressive to any member or members; and (b)that to wind up
the company would unfairly prejudice such member or members, but that otherwise the facts would
justify the making of a winding up order on the ground that it was just and equitable that the company
should be wound up;

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

as calls for action under this section.

We may in this connection refer to four cases where the new s. 210 of the English Act came up for
consideration, namely, (1) Elder v. Elder and Watson,(1), (2) George Meyer v.

Scottish Cooperative Wholesale Society Ltd.(2), (3) Scottish Co-operative Wholesale Society Ltd. v.
Meyer and another(3), which was an appeal from Meyer's case(2), and (4) Re. H. R.
Harmer Limited(4). Among the important considerations which have to be kept in view in determining
the scope of s. 210, the following matters were stressed in Elder's case(1) as summarised at p. 394 in
Meyer's case(2) :"(1) The oppression of which a petitioner complains must relate to the manner in which
the affairs of the (1) [1952] S. C. 49:

(3) [1958] 3 All. E.R. 66:

(2)[1954] S. C. 181:

(4)[1958] 3 All. E.R. 689.

735 company concerned are being conducted; and the conduct complained of must be such as to
oppress a minority of the members (including the petitioners) qua shareholders.

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

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

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

(5) The power conferred on the Court to grant a remedy in an appropriate case appears to envisage a
reasonably wide discretion vested in the Court in relation to be order sought by a complainer as the
appropriate equitable alternative to a winding-up order." Meyer's case was between a parent company
and a subsidiary company and it was held that "(1) when a subsidiary company is formed with an
independent minority of shareholders, the parent company must, if engaged in the same class of
business, conduct the affairs of the subsidiary, even though these are in a sense its own, in such a way
as to deal fairly with the subsidiary; (2) that, if the parent company deliberately pursues a course
calculated to destroy its subsidiary, with resulting loss to the minority shareholders, this may amount to
oppression within the meaning of sec. 210; (3) that the conduct of a majority shareholder may amount
to oppression notwithstanding the fact that up./65736 his own shares depreciate in value pro rata with
those of the minority; and (4) that, even if the majority shareholder has virtually destroyed the
substratum of the company by his oppressive conduct and it is conceded by all parties to be just and
equitable that the company be wound up, the oppressed minority may nevertheless be entitled to a
remedy under sec. 210." These observations were approved by the House of Lords in appeal and it
was held that "whenever a subsidiary is formed as in this case with an independent minority of
shareholders, the parent company must, if it is engaged in the same class of business, accept as a
result of having formed such a subsidiary an obligation so to conduct what are in a sense it-, own affairs
as to deal fairly with the subsidiary." In Harmer's case(1), it was held that "the word 'oppressive' meant
burdensome, harsh and wrongful". It was also held that "the section does not purport to apply to every
case in which the facts would justify the making of a winding up order under the 'just and equitable' rule,
but only to those cases of that character which have in them the requisite element of oppression". It
was also held that "the result of applications under s. 210 in different cases must depend on the
particular facts of each case, the circumstances in which oppression may arise being so infinitely
various that it is impossible to define them with precision". The circumstances must be such as to
warrant the inference that "there had been, at least, an unfair abuse of powers and an impairment of
confidence in the _probity with which the company's affairs are being conducted, as distinguished from
mere resentment on the part of a minority at being outvoted on some issue of domestic policy". The
phrase "oppressive to some part of the members" suggests that the conduct complained of "should at
the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions
of fair play on which every shareholder who entrusts his money to a company is entitled to rely. ... But,
apart from this, the question of absence of mutual confidence per se between partners or between two
sets of shareholders, however relevant to a winding up seems to have no direct relevance to the remedy
granted by S. 210.

It is oppression of some part of the shareholders by the manner in which the affairs of the company are
being conducted that must be averred and proved. Mere loss of confidence or pure deadlock does not
come within s. 210. It is not lack of confidence between shareholders per se that brings s. 210 into play,
but lack of confidence (1)[1958] 3 All. E.R. 689.

737 springing from oppression of a minority by a majority in the management of the company's affairs,
and oppression involves at least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder." These observations from the four cases referred to above
apply to s. 397 also which is almost in the same words as s.

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

The main plank of the appellant's case to prove oppression is the agreement of July 27, 1954 between
himself and Patnaik and Loganathan. At that time he was not a member of the Company. It is not
disputed that the Company was not a party to that agreement and is thus strictly speaking not bound
by its terms. But even apart from this strict legal aspect of the matter, let us see what exactly the
agreement provides. At that time Patnaik and Loganathan groups held shares of the value of Rs. 21
lacs in the Company, and the main provision of the agreement is that the share capital would be
increased and the appellant would be given shares of the face value of Rs. 10,50,000 so that his,
holding should be equal to the holdings of the other two groups. It also provides that the three groups
would have an equal number of representatives on the Board of Directors and the appellant would be
its Chairman Other provisions of the agreement refer 738 to matters of detail to which it is unnecessary
to refer.

It will be seen, however, that there is no provision in the agreement as to what would happen if and
when the share capital was actually increased beyond the increase envisaged at the time of the
agreement. There is also no provision in the agreement to the effect that the Articles of Association of
the private company as it then was would be amended suitably to bring the provisions of the -agreement
with respect to shareholding and the Board of Directors into line with the agreement. Thus there is
nothing in the agreement about the future in the matter of allotment of shares in case capital was actually
increased thereafter. In this connection our attention is drawn to the fifth term of the agreement which
is in these terms -."Ordinary shares of the face value of Rs. 4 lacs held by the French company (Rs.
3,75,000) and Mr. Rath (Rs. 25,000) will continue to be held by them as heretofore, and none of the
parties hereto will have any interest therein so that the shareholding in the Company of all the three
parties hereto will remain equal and in the same proportion." It is urged that this term shows that the
intention was that the shareholding of the three groups would remain equal forever. We are not prepared
to read this implication in this term. It was easy to provide in the agreement that whenever capital was
actually increased, it would be divided equally between the three parties thereto. In the absence of such
a provision we do not think that the fifth term is capable of the interpretation which is put on it on behalf
of the appellant. It only deals with the shares worth Rs. 4 lacs held by the other two persons and
provides that besides those shareholdings capital shares would be held equally by the three parties.
Therefore as we read the agreement we cannot come to the conclusion that it provides that if in future
there was an actual increase in capital that will necessarily be shared equally by the three parties.

However, it is said that the conduct of the three parties later on shows that when there was actual
increase of capital to Rs. 61 lacs sometime after July 1954, this increase was shared equally by the
three parties and further when Mr. Rath sold his holdings in the Company they were purchased equally
by the three parties so much so one odd share out of 250 shares was held by the three parties jointly.
This is undoubtedly so, and does give some colour to the argument that the three parties concerned in
the 739 agreement intended that their shareholdings should remain equal even later. But this intention
cannot be said to bind the Company, muchless so when the Company was not bound strictly speaking
even by the express terms of the agreement. So far as the Company is concerned, it was free to dispose
of shares as the directors or the shareholders in general meeting considered proper without regard to
this agreement.

Another element came into the picture in January 1957 when the Company was converted into a public
limited company. It is obvious that a public limited company was even much less bound by the
agreement of July 1954 as compared to the private company. We have already pointed out that even
when the Company was private its Articles of Association were not amended to bring them into line with
the agreement and that shows that the agreement was only between two groups of shareholders and
Jain with respect to the state of affairs as it was at the time of the agreement. When the Company
became a public limited company and it was decided to issue new shares of the value of Rs. 39 lacs
the question of allotment of these shares arose. By then some differences had developed between the
three groups. The appellant wanted the shares to be allotted to the existing shareholders while the
Patnaik and Loganathan groups wanted the matter to be decided by a general meeting as evidenced
by what happened in the meeting of the Board of Directors dated March 1, 1958. It appears that the
decision to issue new shares was taken sometime in 1956 when the Company was a private company.
At that time the authorised capital was rupees one crore though only Rs. 61 lacs had been issued.

The fresh issue of Rs. 39 lacs worth of shares was thus intended to bring the subscribed capital up to
the limit of the authorised capital. The application to the Controller of Capital Issues was made for that
purpose on September 17, 1956. At that time the intention was that the issue would be private and
would be made to the existing shareholders, directors and/or their nominees. This was bound to be so
as the Company was then private. As, however, the Company wanted a loan from the Industrial Finance
Corporation and as that Corporation would only grant loans to a public company, the Company was
converted into a public company, as already indicated, in January 1957.

The contention of the appellant, however, is that when the share capital was decided to be increased
by fresh issue within the limit of rupees one crore, regulation 42 of the First Schedule to the 1913 Act
was in force and that regulation required that direction to the contrary as to allotment of shares should
be given 740 by the resolution sanctioning increase of share capital.

This was however not done at the time when the authorised share capital was decided to be increased
in 1954 and consequently the new shares had to be allotted to the existing shareholders under
regulation, 42. At that time, however, the Company was private and the shares had to be issued to the
existing shareholders and no question of any direction to the contrary arose if the Company was to
retain its private character. The sanction of the Controller of Capital Issues came in December 1957
when the Company had become a public limited company, and the question of allotment arose
thereafter. By that time the Act (i.e. the 1956 Act) had been passed and regulation 42 of the First
Schedule to the 1913 Act was no longer in force. Instead it bad been replaced by s. 81 of the Act, which
provides that "where at any time subsequent to the first allotment of shares in a company, it is proposed
to increase the subscribed capital of the company, by the issue of new shares, then, subject to any
direction to the contrary which may be given by the company in general meeting and subject only to
those directions, such new shares shall be offered to the persons who at the time of the offer are holders
of equity shares of the company, in proportion as nearly as circumstances admit, to the capital paid up
on those shares at that time".

Further sub-s. (3) of s. 81 provides that the section shall not apply to a private company. Thus S. 81
specifically applies to public companies only and comes into play when subscribed capital (as distinct
from authorised capital) has to be increased. Therefore when the question of actually issuing new
shares arose after the sanction of the Controller, regulation 42 was no longer in force as it had been
repealed, and action had to be taken in accordance with s. 81 of the Act. Section 81 does not require
that direction to the contrary must be given by the resolution sanctioning the increase of share capital
as under regulation 42 of the First Schedule to the 1913 Act.

Consequently it was open to the public company in 1958 when it proposed to increase the subscribed
capital after the sanction of the Controller to act under s. 81 and this was what was done by the
resolution of March 28, 1958 at the general meeting. The general meeting decided that new shares
should not be issued to the existing shareholders but should be issued to others privately. The resolution
of March 29, 1958 was in accordance with the law as it stood when it was passed and cannot 'be said
to be vitiated in any way.

It is however urged that the notice for the general meeting of the 29th March, 1958 was not in
accordance with s. 173, and so 741 the proceedings of the meeting must be held to be bad. This
objection was however not taken in the petition and we have therefore not permitted the appellant to
raise it before us, as it is a mixed question of fact and law. We may add that, though the objection was
not taken in the petition, it seems to have been urged before the appeal court. Das J. has dealt with it
at length and we would have agreed with him if we had permitted the question to be raised. This attack
on the validity of what happened on March 29, 1958 must thus fail.

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

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

It is however urged that the haste with which the new shares were issued on July 30, 1958 shows a
design to harm the appel743 lant as a minority shareholder. It is no doubt true that the shares were
issued in haste. But as we have already indicated, the Company was in need of money for expansion
and its getting the loan from the Industrial Finance Corporation also depended upon the increase of
subscribed share capital. Therefore, the haste with which the shares were allotted on July 30, 1958
cannot really be said to be a part of a design to oppress the minority. The haste became necessary
because the interim injunction was vacated on that day and it was felt that if immediate action was not
taken and the new shares allotted, there might be further injunction which would further delay the issue
of shares and getting the loan from the Industrial Finance Corporation.

The haste therefore appears to have occurred because of the action taken by the appellant in bringing
a suit and getting a temporary injunction. It was feared that even after the vacation of the temporary
injunction the appellant would go in appeal and get another injunction from the appeal court.

This fear was justified because the Subordinate Judge's court two hours later withheld the operation of
its order vacating the temporary injunction. The haste in the particular circumstances of the case in
allotment of shares cannot therefore lead to any inference of oppression but arose out of circumstances
brought about by the appellant's conduct.

But it is urged that even though the Company was in urgent need of money it accepted only 5 per
centum with the application and 10 per centum on allotment and that the remainder of the money did
not come for a long time. Again it is true that the remainder of the money did not come for sometimes
It also appears that out of the seven persons who had applied to take shares six had to take loans from
the Central Bank of India Limited to pay up the remainder of the money and that a part of the new capital
(i.e. Rs. 7,65,000) was not received even till the time when the application under S. 397 was made. But
that again in our opinion does not necessarily lead to the inference that there was oppression by the
majority shareholders of the appellant, once it is held that the seven persons to whom the new shares
were allotted were not stooges or benamidars of the Patnaik and Loganathan groups. There might be
reasons why those persons were not in a position to pay the entire money at once and therefore
borrowed money from the Bank to make up the full amount of the shares taken by them. Further it
appears that there was a fight between the appellant group on the one side and the Patnaik and
Loganathan groups on the other for the control of the Company. If the fear of Patnaik was correct that
the 7 44 appellant would have purchased all the shares worth Rs. 39 lacs for want of money on the part
of Patnaik and Loganathan groups and would thus have obtained a dominating position in the Company,
the action of the majority shareholders in preventing such domination by one group only and taking
action for that purpose cannot in the circumstances be said to be oppressive of the minority
shareholders. It is well to remember that if the appellant had got the entire new issue of Rs. 39 lacs
because of the inability of the Patnaik and Loganathan groups to take up their two-thirds shares, the
majority control would have vested in one group. But the action of the majority shareholders in issuing
new shares to others and not to the existing shareholders has brought about a position where, after the
issue of new shares even the Patnaik and Loganathan groups have no longer a majority and they have
to carry the holders of the new shares with them in order to carry on the work of the Company. The new
holders are not the stooges and benamidars of the Patnaik and loganathan groups and therefore after
the action taken in March and July 1958 the Company cannot be said to be dominated by any group
but has become more broadbased as a public company should really be The fact that the Patnaik and
Loganathan groups may be able to get the support of the holders of new shares does not necessarily
mean oppression of the appellant, for the new shareholders may support the Loganathan and Patnaik
groups on the ground that such support would be for the benefit of the Company.
Finally it is urged that the whole object of the Patnaik and Loganathan groups was to get control over
75 per centum of shares of the Company, for a voting strength of 75 per centum is required to pass a
special resolution without which complete control of a company is impossible.

Therefore it is said that Loganathan and Patnaik groups so manoeuvred the affairs that they should be
able to get over 75 per centum of the voting strength. It is urged that if the new shares had been divided
equally between the three groups the Patnaik and Loganathan groups would not have been able to
control over 75 per centum shares. This argument again would have some force if the new shares had
been allotted to stooges and benamidars of the Patnaik and Loganathan groups. But as the
shareholdings stand, after the action of March and July 1958, the position is that roughly Patnaik and
Loganathan groups between themselves have got shares worth Rs. 38 lacs, the appellant has got
shares worth Rs. 19 lacs and shares worth Rs. 39 lacs are held by the new 745 allottees and shares
worth about Rs. 4 lacs by the French company. So unless the Patnaik and Loganathan groups are able
to persuade the new allottees always to vote with them they would not be in control of over 75 per
centum of shares. The argument that all this was done to give the Patnaik and Loganathan groups
control over 75 per centum of shares in the Company does not therefore appear to be wellfounded
when we remember that the new allottees are not stooges or benamidars of these two groups. The fact
that the shares were issued presumably to the friends of Patnaik and Loganathan groups is hardly of
any significance in the matter of oppression, for if shares are issued privately they are bound to go to
friends of the directors.

The case of oppression therefore based on the agreement of july 1954 as the sheet-anchor of the
appellant's case must fail. In the first place that agreement was strictly speaking not binding even on
the private company-it was muchless binding on the public company when it came into existence in
1957. The agreement did not contain any specific provision as to future issue of capital. Further at the
time when the agreement took place the appellant was not even a member of the private company and
it was really an agreement between a non-member and two members of the Company, which would go
to show that the agreement could in no circumstances bind the Company. It is true that for some time
the agreement was in the main carried out when the capital was actually increased up to Rs. 61 lacs,
the appellant getting one-third of it barring the French company's shares When, however, the Company
was made into a public company some of the terms of the agreement could not be put even in the
Articles of Association of the public company. But it is said that if the Patnaik and Loganathan groups
had behaved like honourable men, the agreement could still have been carried out after the Company
became a public company and that these two groups did not behave honourably when they gave the
go-by to the agreement completely. There is some force in the contention that Loganathan and Patnaik
groups, when they were -in need of the appellant, took his help; it also does appear that when the
Company had turned the corner and it was felt that the appellant's help was not absolutely necessary,
these two groups thought it unnecessary to carry out the spirit of the agreement (though not the terms
for the terms had nothing to do with the future increase of capital and its distribution). But can it be said
that the conduct of the affairs of the Company was carried on oppressively merely because these two
groups which in March and July 1958 were in 746 majority did not carry out the spirit of the agreement
? We have given anxious consideration to this aspect of the matter and we feel that, though the Patnaik
and Loganathan groups did take advantage of the help given by the appellant when the Company was
in a difficult situation the fact that when new issue was made on behalf of the public company, they
decided to make it more broad based and issue the shares to others and not to the existing
shareholders, cannot be said to be oppressive of the then minority shareholders, namely, the appellant's
group. We have already pointed out that it cannot be said to have been proved in this case that the
appellant suffered in his proprietary rights as a shareholder and in these circumstances it cannot be
said that the action taken in March and July 1958 in the allotment of the new shares amounted to such
oppression of the appellant as would justify an order under S. 397.

Reference then may be made to the proposed increase of shares for which a meeting was called on
September 21, 1960 and which gave further cause to the appellant to move the application which he
did on September 14, 1960. In that meeting it was proposed to increase the share capital by rupees
two crores, one crore of which was to be in equity shares and the other crore in preference shares. It is
said that this was part of the design to further reduce the shareholdings of the appellant in the Company
so that he may be driven out of it, for after the issue of the new proposed capital the appellant's holding
of equity shares would be hardly 10 per centum of the entire equity capital. In the first place, as the
meeting of September 21, 1960 was never held because of the injunction obtained by the appellant, we
cannot say how the new shares would have been issued and whether they would have been offered to
the public for subscription to make the Company even more broad-based than it was then If that was
the intention that could hardly be called oppression of the appellant. Apart from that we fail to see why
the appellant should be driven out of the Company and should be compelled to sell his shares simply
because his proportion of equity capital is only 10 per centum of the entire equity capital, for it is not in
dispute that the Company is doing well and the appellant will get his dividends as any other shareholder.
But if the appellant means that it is not worth his while to invest his money in a company in which he is
unable to have an important-if not a controlling-voice, this shows that the real basis for the application
in the present case was not the oppression of the appellant as a minority shareholder but the feeling
that the appellant who hoped to get control 747 of the Company had been thwarted by what took place
in March and July 1958. If that is the real position, then it cannot be said that the Loganathan and
Patnaik groups acted with lack of probity or fair dealing in thwarting the desire of the appellant to get
control of the Company; nor can such conduct be said to be oppressive of a minority shareholder.

The case of the appellant based on the agreement of July 27, 1954 therefore must fail and it must be
held that even if that agreement was not carried out by the Company, which was not bound by it, there
can be no case of oppression of the appellant.

We now come to the case under s. 398. It provides that any members of a company who have rights to
apply in virtue of S. 399 may complain (i) that the affairs of the company are being conducted in a
manner prejudicial to the interests of the company, or (ii) that a material change has taken place in the
management or control of the company and that by reason of such change, it is likely that the affairs of
the company will be conducted in a manner prejudicial to the interests of the company. On such
application being made, if the court is of opinion that the affairs of the company are being conducted as
aforesaid or that by reason of any material change as aforesaid in the matter of management or control
of a company, it is likely that the affairs of the company will be conducted as aforesaid, the court may,
with a view to bringing to an end or preventing the matters complained of or apprehended, make such
order as it thinks fit. This section only comes into play as the marginal note shows, when there is actual
mismanagement or apprehension of mismanagement of the affairs of the company. It may be
contrasted with s. 397 which deals with oppression to the minority shareholders, whether there is
prejudice to the company or not In the present case, the appellant relies on the following three
circumstances to show that the affairs of the Company were being conducted in a manner prejudicial
to its interests, namely(i) that when the new shares worth Rs. 39 lacs were issued in July 1958 only a
small part of the sharemoney was received in the beginning;

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

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

It is true that when new shares of the value of Rs. 39 lacs were issued, the Company received only 15
per centum of the share 748 money to begin with, namely, 5 per centum with the application and 10 per
centum on allotment. But the evidence shows that though there was some delay in the receipt of 85 per
centum of share money, shares worth Rs. 30 lacs were fully paid up in the financial year 1959-60, and
the only amount outstanding in that year was Rs. 7,65,000 (i.e. 85 per centum of shares worth Rs. 9
lacs). The slight delay in the payment of the full value of the shares cannot therefore in the
circumstances be said to be so prejudicial to the interests of the Company as to call for any action under
S. 398 of the Act.

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

The last point that has been urged in this connection is that the Company lost the support of the
appellant in view of the action taken by the Patnaik and Loganathan groups in March and July 1958.
Here again it is true that the appellant was dissatisfied with what had happened in March ;and July 1958
with regard to the allotment of shares worth Rs. 39 lacs and withdrew his support from the Company. If
the Company was able to 749 carry on without this support as it apparently was in 1958, it cannot be
said that the action which resulted in the loss of the appellant's support to the Company was necessarily
prejudicial to it, it may be that the appellant was sore inasmuch as he must have felt that his assistance
was taken when the Company was in need of such assistance; but later the Patnaik and Loganathan
groups acted in the manner in which they did when they felt that the appellant's support was no longer
necessary to the Company. But if the appellant's support was no longer necessary to the Company by
1958 the action of the Patnaik and Loganathan groups which resulted in the loss of such support cannot
be said to be prejudicial to the interests of the Company. We therefore agree with the High Court that
no case has been made out for action under s. 398 on the ground that the affairs of the Company were
being conducted in a manner prejudicial to its interests.

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

Lastly it was stated in the application that accounts had not been shown to the appellant and his group
and in consequence of this the appellant was not able to give full particulars of the several acts of fraud,
misfeasance and other irregularities committed by the new management. But as the High Court has
pointed out, the appellant asked for production of certain documents in April 1961 and those documents
were made available for inspection by the appellant and were produced in court. It was 750 for the
appellant to take inspection of those documents if he so desired and the appeal court was right in
pointing out that the learned Single Judge was not correct in drawing an adverse inference against the
Company that it had disobeyed the orders of the court and had not produced the documents called for
and had given no opportunity to the appellant for their inspection. It seems to us that the appeal court
was right in this view and no case has been made out even prima facie for action under this part of S.
398 of the Act.