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PETITIONER: S. P. JAIN

       Vs.

RESPONDENT: KALINGA TUBES LTD.

DATE OF JUDGMENT: 14/01/1965

BENCH: WANCHOO, K.N. BENCH: 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.   Some time 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

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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  broad- based. 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  share- holders  was oppressive to the minority as members and  this require.,,  that  events  have  to  be  considered  not   in

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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

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interests. [749 C]

JUDGMENT: 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  res- pondent 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

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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 Company- Thus 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

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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

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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 share- 7 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  there- after  apply on the condition that atleast 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  two- thirds  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

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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

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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

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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 transfering 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

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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  com- pletely  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

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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 sometime 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,

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(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

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fact that up./65- 736 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 confi- (1)[1958] 3 All.  E.R. 689. 737 dence 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

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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 num- ber  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  for ever.  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

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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

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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  allot- ment 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

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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

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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 appel- 743 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

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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 broad- based  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  well- founded  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

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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 sometime 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

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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

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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 Com- pany  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 one- third 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  one- third 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

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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. The  appeals  therefore fail and are hereby  dismissed  with costs, one set of hearing fee. Appeals dismissed 751