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PETITIONER: M/S KILPEST PVT. LTD. & ORS.

       Vs.

RESPONDENT: SHEKHAR MEHRA

DATE OF JUDGMENT:       08/10/1996

BENCH: S.P. BHARUCHA, S.B. MAJMUDAR

ACT:

HEADNOTE:

JUDGMENT:                             WITH               (C.A. 1975/86, Con. Pet. 352/96)                       J U D G M E N T BHARUCHA, J. These are  cross appeals against the judgment and order of a Division Bench of the High Court of Madhya Pradesh. The appellant  in Civil  Appeal  No.1975/86,  Shekhar  Mehra (Mehra),  and   the  second   appellant  in   Civil   Appeal No.1974/86, R.K.Dubey  (Dubey) promoted  Kilpest  Pvt.  Ltd. (the company)  and were  its first  Directors. Dubey was the Managing Director and Mehra was the Joint Managing Director. The two  fell out  and Mehra  did not  attend Board of other meetings of  the  company  after  1st  September,  1981.  In December 1981  Mehra, his  relations and  friends (the Mehra group) held  1500 shares  of the company of Rs100/- each and Dubey, his relations and friends (the Dubey group) held 1625 shares.   Thereafter   the   Dubey   group   increased   its shareholding so  that when  the present  petition was  filed they held  4500 shares.  At a  Board meeting  of the company held on  2nd January,  1982, K.P.Mishra, the third appellant in Civil Appeal No.1974/86, was appointed to the Board as an Additional Director.  In the  Extraordinary  General  Meting held on  15th January,  1983, Articles 84 to 86,91 and 93 of the Articles  of Association  of the company, which provided for the  management of  its business  by Dubey and Mehra for life with  equal remuneration, were altered  and the post of Joint Managing  Director was  abolished. At  a Board meeting held on   9th  April, 1983,  it was  resolved that Mehra had ceased to  be a Director. He then filed a a civil suit, with which we  are not  directly concerned,  and then the present petition for  oppression and  mis-management under  Sections 397 and 398 of the Companies Act, 1956. It was  the case  of Mehra in the petition that the meetings subsequent to December, 1981, had been called without notice to him  so as  surreptitiously to allot additional shares to the Dubey  group and  remove Mehra  from the  post of  Joint Managing Director.  the allotment  of additional  shares and the alternation  of the  aforesaid Articles  had altered the basic structure of the company. While this might be a ground for winding it up, Mehra sought relief under Section 397 and

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398 of  the Act.  The petition  also set out various alleged acts of mis-management by Dubey. The petition was contested. The learned  single judge  found it  appropriate to  try the petition as a winding-up petition. The company appealed. The Division Bench  allowed the  appeal, set  aside the order of the single  judge and  dismissed the  petition.  Mehra  then filed an  appeal to  this court,  which was  allowed and the matter was remanded. Upon remand  the parties  went to  trial  on  the  basis  of affidavits.  The   single  judge   dismissed  the  petition, whereupon Mehra  filed the appeal upon which the order under challenge  was  passed.  The  division  Bench  came  to  the conclusion that  there was  no merit in Mehra’s case that he had not been given notice of the meetings. It found that the company could  not be  treated as  a partnership concern and there was  no ground  for winding  it up  under the just and equitable clause.  Dubey was  found to have committed an act of breach  of faith  by appropriating  to himself the sum of Rs.52,875/- belonging  to the  company. Having regard to its powers under  Section 402 of the Companies Act, the Division Bench directed  that Mehra  be appointed  a Director  of the company enjoying  all the  powers and  privileges enjoyed by the other  Director, K  P Mishra; that Dubey should pay back to the  company  the  sum  of  Rs.  52,875/-  and  that  the registrar of  Companies should  inspect the  records of  the company for  the period  1981 till  the date of the judgment regarding  purchase   of  raw  materials  from  the  parties mentioned therein  and if it was found that no such purchase of raw  materials from  the parties mentioned therein and if it was  found that  no such  purchases  had  been  made  and payments were  to fictitious  parties, Dubey should pay back the amount thereof. At the  stage when  leave to appeal was given by this court, the operation  of the  order under  challenge was stayed. IT was directed  that the  company would function in the manner it was  functioning during the pendency of the appeal before the high  court and  that there  stay would  not prevent the Registrar of  Companies carrying out the inspection required by the order under appeal. While there  appeals have  been awaiting  final disposal the company has prospered. Learned counsel  for Mehra  sought to challenge the findings of the  fact reached  by the Division Bench in the judgement under appeal.  We find  that the Division Bench assessed the evidence before  it and  came to  a conclusion  thereon. The conclusion has not been challenged as being perverse or such as could  not reasonably  have been reached upon the record, as, indeed,  it could  not have been, We, therefore, proceed upon the  basis of  the findings  of fact  recorded  by  the Division Bench. The principal argument on behalf of Mehra was based upon the judgement of  the House  of Lords in Ebrahimi vs. Westbourne Galleries Ltd.  and Ors.,  (1972)  2  All  ER  492.  It  was submitted that  inasmuch as  there were  only  two  promoter Directors, who held, along with their friends and relations, 1500 and  1650 shares  respectively, and  since they were to remain Joint  Managing Directors  for life,  the  principles applicable to a partnership were relevant. There having been an exclusion  of Mehra  from the  business of  the  company, Mehra was entitled to an order winding up the company. Ebrahimi’s  case  was  considered  by  this  court  in  Hind Overseas Private  Limited vs.  Raghunath Prasad Junjhunwalla and Anr..  1976(3) S.C.C.  259. The  facts of  Ibrahimi case were set out therein thus:      In  Ebrahims’s   case  (supra)  the

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    company which  was first  formed by      the   two    erstwhile    partners,      Ebrahimi and  Nazar, was  joined by      Nazar’s son,  George Nazar,  as the      third director  and each of the two      original  shareholders  transferred      to him  100 shares  so that  at all      material times  Ebrahimi  held  400      shares, Nazar 400 shares and George      Nazar  200   shares.  the   Nazars,      father and son, thus had a majority      of the  votes in  general  meeting.      Until the  dispute  all  the  three      remained  directors.  Later  on  as      ordinary resolution  was passed  by      the company  in general  meeting by      the votes of Nazar and George Nazar      removing Ebrahimi  form the  office      of  director.   That  led   to  the      petition for  winding-up before the      court." This Court  noted that the following features had been found in Ebrahimi’s case:      "(1) There  was a prior partnership      between the  only two  members  who      later on formed the company.      (2)  Both   the  shareholders  were      directors   sharing   the   profits      equally  as   remuneration  and  no      dividends were declared.      (3) One  of the  shareholder’s  son      acquired shares from his father and      from   the    second   shareholder,      Ebrahimi, and joined the company as      the third  shareholder  -  director      with  two   hundred   shares   (one      hundred from each).      (4)  After   that,  there   was   a      complete ouster  of  Ebrahimi  from      the management  by the votes of the      other  two  directors,  father  and      son.      (5)   Although   Ebrahimi   was   a      partner,   Nazar    had   made   it      perfectly clear  that  he  did  not      regard Ebrahimi  as a  partner  but      regarded  him  as  an  employee  in      reputation of  Ebrahimi’s status as      well as of the relationship.      (6) Ebrahimi  through ceasing to be      a director  lost his right to share      in the  profits through  directors’      remuneration  retaining   only  the      chance of  receiving dividends as a      minority shareholder.      Bearing in  mind the above features      in the  case, the  House  of  Lords      allowed the petition for winding-up      by reversing  the judgment  of  the      court of  appeal and  restoring the      order of Plowman, J." This court  observed that  although the  Companies  Act  was modelled  on   the  English  statute,  the  Indian  law  was developing on its own lines and making significant progress. Where the words used in both the Indian and English statutes

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were identical,  English decisions  might  throw  light  and their reasons might be persuasive, but the proper course was to examine  the language  of the   statute and ascertain its true  meaning.   It  was  apposite,  having  regard  to  the background, conditions  and circumstances  of present Indian society and the needs and requirements of the country that a somewhat different  treatment be  adopted. The  courts would have to adjust and adapt, limit or extend principles derived from English  decisions, entitled  as  they  were  to  great respect, suiting  the conditions  of Indian  society and the country  in  general,  always,  however,  with  one  primary consideration in  view that  the general  interests  of  the shareholders should  not be  readily sacrificed at the altar of squabbles  of directors  for power to manage the company. This Court said:      "When  more   than  one  family  or      several   friends   and   relations      together form  a company  and there      is no right as such agreed upon for      active participation of members who      are  sought  to  be  excluded  from      management,   the   principles   of      dissolution of  partnership  cannot      be liberally  invoked. Besides,  it      is only  when shareholding  is more      or less  equal and  there is a case      of complete deadlock in the company      on account  of lack  if probity  in      the management  of the  company and      there is  no hope or possibility of      smooth and efficient continuance of      the   company   as   a   commercial      concern, there may arise a case for      winding-up on the just and quitable      ground.  In   a  given   case   the      principles   of    dissolution   of      partnership may  apply squarely  if      the  apparent   structure  of   the      company is  not the  real structure      and on  piercing  the  view  it  is      found  that  in  reality  it  is  a      partnership. On the allegations and      submissions in the present case, we      are not  prepared to  extend  these      principles to the present company." We respectfully  agree with  the observations on the case of Hind Overseas Pvt. Ltd. and would add this. Sections 397 and 398 of  the Companies  Act provide  relief  to  shareholders against oppression and mismanagement. The powers exercisable in such  petitions, at  the relevant  time by the courts and now by  the Company Law Board, have been set out in Sections 402. Sections 402 reads thus :      "S.402. Powers of Company Law Board      on application under section 397 or      398  -  Without  prejudice  to  the      generality of  the  powers  of  the      Company Law  Board  under  sections      397 or  398, any order under either      section may provide for -      (a) the  regulation of  the conduct      of the company’s affairs in future;      (b) the  purchase of  the shares or      interests of  any  members  of  the      company by other members thereof or      any the company;

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    (c) in  the case  of a  purchase of      its  shares   by  the   company  as      aforesaid,      the      consequent      reductiont fits share capital;      (d) the  termination, setting aside      or modification   of any agreement,      howsoever arrived  at, between  the      company on the one hand, and any of      the  following   persons,  on   the      other, namely :-      (i) the managing director,      (ii) any other director,      (iii) the managing agent,      (iv)the secretaries and treasurers,      and      (v) the manager,      upon such  terms and  conditions as      may, in  the opinion of the Company      Law Board, be just and equitable in      all the circumstances of the case;      (e) the  termination, setting aside      or modification  of  any  agreement      between the  company and any person      not  referred  to  in  clause  (d),      provided  that  no  such  agreement      shall be  terminated, set  aside or      modified except after sue notice to      the party  concerned  and  provided      further that  no such obtaining the      consent of the party concerned;      (f)  the   setting  aside   of  any      transfer,   delivery    of   goods,      payment,  execution  or  other  act      relating to  property mode  or done      by or  against the  company  within      three months before the date of the      application under  section  397  or      398, which  would, if  made or done      by or  against  an  individual,  be      deemed in  his insolvency  to be  a      fraudulent preference;      (g) any  other matter  for which in      the  opinion  of  the  Company  Law      Board it  is just and equitable the      provision should be made. The promoters of a company, whether or not they were thither to partners,  elect to  avail of the advantages of forming a limited  company.   They  voluntarily   and  knowingly   bid themselves by  the provisions  of  the  Companies  Act.  The submission that  a limited  company should  be treated  as a quasi-partnership should, therefore, not be easily accepted. Having regard  to the  wide powers  under Section  402, very rarely would  it be  necessary to  wind up  any company in a petition filed under Sections 397 and 398. The present  was a  petition under Sections 397 and 398. The Division Bench  exercised power under Section 402 to appoint Mehra as  a director  to protect  his  interests  and  guard against mismanagement.  It required  Dubey to  return to the company  the   sum  of   Rs.52,875  which   he  had  wrongly appropriated  to  himself.  It  directed  the  Registrar  of Companies of enquire into other allegations of misconduct in which it  found, prima  facie, substance;  and  we  may  say immediately that  we have  perused the  report filed  by the Registrar of  Companies which  shows that  no substance was, ultimately, found  therein. We agree with the Division Bench

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that this  was no  case for  winding up the company and must dismiss the appeal filed by Mehra. Insofar as  Dubey’s appeal  is concerned,  it was  submitted that the division Being ought not to have ordered that Mehra be appointed  a Director  of the company. The Division Bench found  that   Dubey  had   appropriated  to  himself  moneys belonging to  the company.  Mehra’s presence  on  the  Board would prevent a recurrence, thus protecting Mehra’s interest and that of the company. We, therefore, find no substance in Dubey’s appeal. Dubey had filed a contempt petition against Mehra for having made complaints  to certain  authorities while these appeals were pending.  There is  no breach  of  any  order  nor  any contempt and the contempt petitions must be dismissed. The  appeals   are  dismissed.   The  contempt  petition  is dismissed. There shall be no order as to costs.