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 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
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 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;
(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 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.