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Judgment
Ahmadi, J.—Messrs. Laxmi Film Laboratory and Studios P. Ltd., came to be incorporated under the Companies Act, 1956 on August 12,
1956, with the authorised capital of Rs. 15,000 divided into 10,000 equity shares of Rs. 100 each and 5,000 cumulative preference share of Rs.
100 each. It issued subscried and paid up capital is Rs. 7,50,000 divided into 5,000 equity share of Rs. 100 each and 2,500 cumulative
preference shares of Rs. 100 each. The company claims to be the pioneer of the film industry in the State of Gujarat and is credited to have
established the first film in this sutido in this state. The main objects of the company as enumerated in its memorandum of association are,inter alia,
to erect, construct, purchased by contract or otherwise, acquire, from Alkapuri Studios or others completes right and title in respect of no
objections a certificate or any certificate relating to licence or licences for studio- laboratories, etc., to let out and maintain and conduct the
necessary laboratory or laboratories studios theaters and picture-house and to establish, conduct and carry of the business of processing,
developing and printing picture negatives, sound negative pictures and sound positives and picture-cum-sound positives films and prepare prints of
the motion pictures or films., to buy take, on hire or otherwise acquires all necessary machineryt, cameras, instruments, apparatus, chemicals and
other necessary materials for processing, developing and printing of the motion pictures, materials and wherewithals for setting dressing an
decoration, ornaments, furniture and other particles and things in connection therewith; to purchase, take on lease and otherwise acquire the land
required for such business and to undertake or carry out all or any of functions, operations services or work sin connections there with; to establish
counteract purchaser acquire conduct, manage, control and supervise either solely or jointly with others, film corporation, laboratories, studios,
cinema, theatres, well--equipped, editing rooms and other places of amusement or entertainment in any part of the world, etc.
The present shareholders of the company are divided into two groups namely, Bham group and the patel group. The Bham group holds 5-
1/3per cent of the shares while the Patel group holds 94-2/3 per cent. of the shares of the company. IT will be clear from the split up given in
paragraph 7 of the petition that Bham Group holds 400 equity shares of whereas the patel groups holds 4,600 equity shares and 2,500 preference
shares of the company., The petitioners belong to the patel group and they claim that their group has financed the working capital of the company
by way of deposit to the extent of Rs. 15,.00,000.,
Respondent No.2, Navnit Shivalal Bham, was appoinnted a permanennt managing director of the company by article 38 of the articles of
association of the company. However, the said article was deleted from the articles of association of the company by a special resolution passed at
the extraordinary general meeting of the members of the company held on December 7, 1973. Thereupon, it is the case of the petitioners that
respondent no.2 ceased to be the managing director of the company although be continued as an ordinary director. AFter its incorporation the
company took on monthly lease premises belonging to the son of respondent No.10 for the residence or respondent No.10 for the residence of
respondent No.2 as the managing director of the company. Admittedly, respondent No.2 was in occupation of the said residential premise, there
whereof was paid by the company. It is the case of the petitioners that even though respondent No.2 on ceasing to the the managing director of the
company after the resolution of December 7, 1973, was not entitled to rent- free residential accommodation, he continued to remain in occupation
of the said premises at the expense of the company as a director thereof. THe first general meeting of the company was held on September 24,
1974. At the said general meeting no resolution was passed as contemplated by s. 314(1) of the Companies Act (hereinafter called ""the said Act"").
Consequently, the petitioner contended that by virtue of clause (a) of sub-s. (2) of s. 314 of the said Act, respondent No.2 must be deemed to
have vacated his office as director of the company. However, according to the petitioners, this position of the second respondent having vacated
officer as director of the company because of the fiction of law was realised for the first time in 1978. In the mean-time, admittedly, respondent
No.2 continued to function as the director of the company and participate in the deliberations as such.
It is the case of the petitioners that respondent No.2 had absented himself from three consecutive meetings of the Board of directors of the
Company held between October, 1976, and January, 1977, without obtaining leave of absence from the board even though notice of the mattings
were sent to him under certificate of positing. According to the petitioners, the second respondents, therefore, case to be a director of the
company with effect from January 22, 1977. in view of s. 283(1)(g) of the Act. The change was also reported by the company to the Registrar of
companies under s. 303 of the Act in the perscibed from on January 25, 1977. The receipt of the said letter was acknowledged by the Registrar of
Companies by his letter, dated February 3, 1977. Accordingly, the petitioners contended that the second respondent had ceased to be a director
of the company with effect from January 25, 1977.
On the aforesaid tow grounds the petitioners contended that the second respondent had ceased to be the director of the company and he is not
entitled to function as such or represent to be the director of the company. By an amendment of the petitioner the petitioners have claimed a relief
for a declaration that the second respondents has ceased to be a director of the company and for a consequential injunction to restrain him from
acting and representing as such.
The petitioners further contend that the second respondents claims to be the pioneer of the film industry in Gujarat and has inflated notices about
his ability and achievement in the said filed. They contended that he had acted against the interest of the company while he was the managing
director and director of the company and as a shareholders. According to them, the conduct of the second respondent in particular and the Bham
group of shareholders in general is oppressive and harsh and is calculated to prevent the company and its directors from amongst the Patel group
of shareholders from exercising their legitimate rights. The particulars of misconduct of the second respondent and the Bham group of shareholders
have been enumerated in cls. (a) to (h) of para, 12 of the company petition. According to the petitioners after the second respondent was removed
as the managing director of the company, he waged a war of vendetta against the company and its present directors with the co-operation of
respondents Nos. 3 to 7. They allege that the second respondent instigates the workers of the company to resort to agitations by raising
unwarranted charter of demands and thereby truncating the smooth working of the company. False charges such as wrongful disposal of imported
machinery, etc., are being leveled against the present directors of the company with a view to transaction their image. The second respondents also
refused to co-operate and tried to throw obstacles in the smooth working of the company with the result that the company is deprived of its
legitimate rights. For example, the second respondent was required to any to obtain and furnish and Income Tax clearance certificate to enable the
company to obtain an import licence. Respondents Nos. 8, 9 and 10 submitted their respective Income Tax verification verification certificate but
the second respondent failed to do so even though he was reminded about the same time and again. the second respondent deliberately failed to
submit the Income Tax verification certificate with a view to depriving the company of the benefit of import licences to which it was legitimately
entitled. Such behavior on the part of the second respondent is clearly calculated to cause prejudice to the company, its shareholders and even so
far as public interest is concerned.
Several legal proceedings have also cropped up as a result of the intrasigent attitude of the second respondent and the Bham group of
shareholders. The second respondent filed a suit in the Court of Civil Judge, (Junior division) at Baroda, being Suit No. 427 of 1977, on April,
1977, for a declaration that he continued to be the director of the company and for an injunction that no meeting of the board of directors should
be called without giving notice thereof to him. The petitioners contended that the and ad interim injunction was obtained in the said proceedings by
the second respondent restraining the company from operating its bank accounts with a view to paralysing the working of the company. However,
the said order was vacated on May 7, 1977, whereupon the second respondent preferred an Appeal No. 77 of 1977, on June 15, 1977, in the
District Court at Baroda. THE order of the learned trial judge was set aside in appeal on August 31, 1977, whereupon the company was
constrained to file a revision application in the High Court Which was summarily rejected. The second respondent filed by yet another suit No.
1054 of 1977 on September 28, 1977, to restrain the company and its directors, that is, the present respondents Nos. 8,9, and 10 from holding
the annual general meeting to be convened on September 30, 1977, for passing the accounts for the year ended March 31, 1977, and from
holding the meeting of the Board of directors on September 30, 1977. An ad interim injunction was obtained in that behalf also. That injunction
continued for a year and a half. Thereupon, petitioner No.1 and others members of the Patel Group of shareholders filed company Petition No.37
of 1978 in this court. Thsi court, by its orders, Dated July, 18, 1978, and July 25, 1978, directed the parties to apply to other trial court for
modification of the injunction and pursuant thereto the injunction was modified by the trial court which enabled the company to hold the meetings
and appoint its auditors. Eventually, Suit No. 1054 of 1977 was disposed of on january 19, 1979, on the ground that the trial court had no
jurisdiction to entertain and try the same. Against that order the second respondents preferred an appeal to the District Court at Baroda, being
Appeal No.26 of 1979, which is pending. On the other hand, respondents Nos. 8, 9, and 10 as the directors of the company filed Suit No. 233 of
1977 on october 18, 1977, in the Court of the learned Civil judge (Senior Division), Nadiad, for a declaration that the second respondent had
ceased to be a director of the company and for a consequential injunction to retrain him from acting as such. The application seeking interim
injunction in the said terms, was, howere, rejected by the learned trial judge on February 22, 1978, against which an appeal from Order No. 255
of 1978 was preferred to this court on May 21, 1978, which was admitted to hearing and an interim relief restraining the present second
respondent from representing himself as the director of the company and/or form exercising powers of director except with the prior permission of
the trial court with liberty to him to attend all the meeting of the board and participate therein without the right to vote was initially granted but the
said order was modified on July, 18, 1978, conceding the right to vote.
The Patel group of shareholders made a representation to the Company law board, Government of India, on December 17, 1977, about the
injunction obtained by the Bham Group which resulted in the company being unable to have the accounts passed and company with the provision s
of the act. The company law board by its letter dated December 21, 1978. regretted its inability to intervene in the matter dut to pending litigation
the petitioners further contend that as a result of a series of representations made by the second respondent, the State of Gujarat had reduced the
subsidiary from Rs. 3,00,000 to Rs. 2,00,000 out of which Rs. 1,60,000 was withheld in view of the allegations made by the second respondent
and, as such the conduct of the second respondent had caused monetary loss to the company. According to the petitioners., the Bham group of
shareholders have adopted his negative attitude with a view to taking over the control and management of the company even though i9t is in a tiny
minority since it has very little to lose even if their conduct is likely to cause prejudice to the company. They, therefore, contained that such conduct
on the part of Bham group of shareholders can only be described as oppressive to the majority group of shareholders. The petitioner contend that
there is a lack of confidence by reason of the wrongful conduct of the Bham group of shareholders involving and element of lack of probity and fair
dealing in the matter of their respective proprietary right as shareholders. As a result of this attitude adopted by the Bham group of shareholders the
image of the company has suffered considerably, besides it having faced financial set-backs. In fact, the company faced financial difficulties
between 1972 and 1976 and it is the claim of the petitioner that but for the financial assistance brought by the Patel group of shareholders by way
of deposits of Rs. 15,00,000, the company would not have survived. Due to the attitude adopted by the Bham group of shareholders, in spite of
the huge investment made by the Patel Group, they do not secure adequate fair, and reasonable return on their investment as the bham group car
afford to play a negative role with a view to ultimately taking over the control and management of the company as its financial investment is only of
the tune of Rs, 40,000 (400 equity shares of Rs. 100) as against the huge investment made by ten page group of shareholder should be given
direction pecluding them from iunsitutin legal and other proceedings against the company without the express permission of the high Court, they
should be prevented form making false and baseless allegations/representations to various State and central Govt. authorities. without the express
permissions of the High Court and appropriate orders directing them to sell the 400 equity shares held by them to the patel group of shareholder at
a value to be determine by an independent values appointed by the High Court be passed and finally the pending litigations, namely, suit No. 427
of 1977, pending in the control of in the Court of Civil Judge (Junior Division), Baroda, suit no. 233 of 1977, pending in the Court of civil judge
(senior Division), Nadiad, and Civil Appeal No 26 of 1979, pending in the District Court at Baroda be transferred for trial an disposal to the High
Court, So far as the Appeal from Order is concerned, it arises out of the order passed in Civil Suit No. 23 of 1977 by learned Civil Judge (Senior
Division0 NAdiad, rejecting the application for grant of interim injuction to restrain the present second respondent form representing to be a
director of the company and from exercising his rights as such.
The second respondent, who is the main contesting party, in his affidavit-in-reply, contends that the petition is not maintainable inasmuch as : (i)
on the allegation made in the petition itself no case for winding up of the company on just the quitable grounds is made out; and (ii) an earlier
petition No. 37 of 1978, brought on similar allegations was not admitted by P.D.Desai J. He concedes that art. 38 of the articles of association of
the company was delected whereupon he ceased to but the managing director of the company. Even after he ceased to be the managing director
of the company, it is an admittedly fact that he continued to reside in the premises which were allotted to him for residence ""rent-free"" in his
capacity as the managing director of the company but on his ceasing to be the managing director he offered to pay the rent in respect of the
premises used of residence and, therefore, he contends that s. 314(2) of the Act has no application. It is his stay that the petitioners and other
members of the patel group were awarded of this position in law and that is why they never reside such a a dispute till 1978 even though litigations
in that behalf and commenced longs black. According to him the reference to s. 314(2)(a) of the Act at a belated stage is only an after-though with
a view to easing him out from the management of the company. With regard to the allegation that between October, 1976, and January, 1977, he
absented himself without leave of absence from the board for three consecutive meetings of the board of directors of the company and thereby
ceased to be the director of the company, his say is that he never receive the notice of the meetings alleged to have been sent under certificate of
positing and that a Civil Suit No. 427 of 1977 in that behalf is pending in the court of the Civil Judge (Senior Division), Baroda, and the matter is
sub-judice. With reference to the allegatisn of the miconduct west out in cls. (a) to (h) of para. 12 of the petition, it is sufficient to state at this stage
that the has denied/explained all those allegations in paras. 15 of 22 of his affidavit-in-reply to which I will advert at the appropriate stage. Suffice it
to say that it is his contention that the petitioners and respondents Nos. 8,9 and 10 have entered into a conspiracy to throw him out of the company
so that they may have a free hand in conducting the affairs of the company according to their sweet will. He, therefore, contends that the petition
deserves to dismissed.
Apart from petitioner No.1 and respondent No.2 respondents Nos.4 and 5 have also field affidavits placing on record their respective
viewpoints in regard to the controversy between the two group of shareholders Respondent No.4 in his affidavit, states that the petition has been
filed by the petitioners in collusion with respondent s Nos., 8, 9 and 10 with a view to harassing the minority shareholders with the ulterior motive
of usurping their shares. He denies that the conduct of the minority shareholders is oppressive as alleged and that such a petition under ss. 397 and
398 of the Act is not maintainable as it is not the case of the petitioners that a situation has arisen which would necessitate the winding up of the
company on just and equitable grounds if no relief is granted under the aforesaid provisions of the Act. he has endorsed and supported the stand
taken by the second respondent in his affidavit-in-reply to the main petition. On the contrary, according to him, it is the majority group, that is, the
patel group, which has throughout acted against the interest of the company by refusing to offer further shares to the minority shareholders and by
attempting to ease out the second respondent from the management of the company. As regards the premises occupied by the second respondent,
he contends, that the said premises were taken on rent in 1969-70 by the company for its office and was ultimately given to the managing director
for his residence. The company vacated the premises by the end of 1973 and, thereafter, the second respondent continued to occupy the premises
in his individual capacity to the knowledge of respondents Nos. 8, 9 and 10 as well as the second petitioner. According to him, art. 38 of the
memorandum and article of association was delected with the ulterior motive of throwing out the second respondent as the permanent managing
director of the company. He states that he had objected to the resolution for the deletion of art. 38 but his objections was overruled by the
majority vote held by the patel group of shareholders. He states that the second respondent along with others was appointed a permanent director
of the company and he could not be removed from directorship of the company and he could not be removed from directorship of the company
except in accordance with the articles of association. Yet in the annual report of 1976-77 the names of the permanent director of the company are
not printed with a view to creating an impression that the second respondent was no more a director of the company. He, lastly, submits that
respondent Nos. 8, 9 and 10 have joined in chorus with the petitioner as they were behind the sale of imported film laboratory equipments and had
derived monetary benefit therefrom. HE, therefore, contends that the petition was been filed in conspiracy by the petitioners and respondents Nos.
8, 9, and 10 to ease out the second respondent of the Bham group of shareholders as they have raised certain disputes in regard to the manner in
which the affairs of the company are conducted by the majority.
Respondent No.5, who is one of the permanent director of the company also states that he has not received notices of the board meetings for
the last many years and the last notice which he received was some time in 1976. He could not attend that meeting but he had agreed with the
agenda and endorse the lain proposal of G.I.I.C., to expand the laboratory division. He was, however, no invited to sign the loan agreement. He
states that in the year 1973 he and voted against the second respondent in good faith when the resolution for delection of art. 38 was moved as he
believed that, with the delection of the article, the affairs of the company could be better administered by eh board of directors jointly. However, to
his dismay, he found that respondents Nos. 8,9 and 10 stated to act in the an aribiraty manner and handled the affairs of the company improperly.
He also makes a grievacne that even though he is a permanent director of the company, his name is not shown as the director in the annual reports
of the last two years. According to him, the company is now in a position to make huge profits, and therefore, the majority shareholder, who are
behind the petition, want to depriva the minority shareholders of their legitimate profits by purchasing their share at a low price. He had denied the
allegation that consequent to the removal of the second respondent as the managing director of the company a war of vendetta was started against
the company and its present directors with the co- operations of respondents Nos.3 to 7. He, therefore, contends that this petition which is field
under s. 397 of the Act is not maintainable as the ulterior object of the petitioners and respondents Nos. 8,9 and 10 is to oust the minority
shareholders by purchasing their shares at a low price.
Respondent No.2 has filed his affidavit stating that the notice of the meetings of the board of directors convened on October 21, 1976,
November 30, 1976, December 18,m 1976, and January 22, 1977, were dispatched under certificate of posting on October 13, 1976.
November 22, 1976, December 9, 1976,a nd January 10, 1976, to him to the same address to which, in the past, notices were sent and received
by him. HE has produced the certificates of posting along with his affidavit as well as a postal acknowledgment bearing the signature of the second
respondent of November 7, 1973, to show that notices were received at the said address in the past by him. It his case that even that after the
receipt of the notice, the second respondent idnt attend three consecutive meetings of the board of directors and, therefore the was disqualified
from acting as the director of the company. Of course, as stated earlier, the second respondents, has stated that the did not receive the notice and,
therefore, the question of remaining present at the meetings did not arise.
In view of these contentions raised in the affidavits filed on record, the following question arise for my determination :
(1) Whether the petition is maintainable in law ?
(2) Whether the conduct of respondents Nos. 2 to 7 is harsh oppressive and lacks probity in relation to the affairs of respondent No.1 l- company
?
(3) Whether the petition is filed in collusion with and at the instance of respondents Nos., 8, 9, and 10 with a view to outsting the second
respondent ?
(4) Whether the second respondent has ceased to be a director of respondent No.1 company ?
(5) What relief or relief''s, if, any, are the petitioners entitled to ?
My findings on the aforesaid points arising for determination are as under :
(1) All the ingredients of s. 397 are not satisfied.
(2) In the negative.
(3) The petitioners and respondents Nos. 8, 9 and 10 have made it a common cause top oust the second respondent from management .
(4) Not answered as the question is sub-judice in proceedings pending in the lower courts.
(5) The petitioner to be dismissed.
From the averments which have been set out in extenso and having regard to the reliefs claimed in the petition, in the substance, two questions
rise for determinination. They are: (i) Whether second respondents has either by virtue of s. 314(2)(a) or by his omission to attend three
consecutive meetings of the board of directors without leave of absence ceased to be a director of the company; and (ii) whether the conduct of
the minority, particularly the second respondent, in so far as the affairs of the company are concerned, is oppressive have in regard to the various
acts of commission and omission tantamounting to misconduct set out in paragraphs 12(a) to (h) of the main petition so as to invoke the application
of s. 397 of the Act ? I will deal with these tow aspect separately in the order in which I have set them out.
Article 38 of the articles association of the company, as it stood before its delection provided that -
Shri Navnit Shivla Bham shall be be the permanent meaning director of the company and shall be entitled to hold the office till the expiration of his
term.
This articles was admittedly deleted by a special resolution passed at the extraordinary general meeting, held on December 7, 1973.
Thereupon, the second respondent ceased to be the managing director of the company., This fact is also admitted by respondent No.2 in his
affidavit-in-reply. In para. 13 of the affidavit-in-reply, the second respondents states as under :
I say that the company, by its special resolution, dated December 7, 1973, deleted article 38 of the articles of association of the company and,
thereafter, I ceased to be a managing director of the company.
It is, therefore, obvious from the above averments that there is no controversy between the parties that, after the deletion of art. 38, of the articles
of association of the company and, thereafter, I ceased to be a managing director of the company.
After the second respondent ceased to be a the managing director of the company, he continued to be one of the directors of the company by
virtue of art. 33 of the articles of association of the company. The names of the directors of the company were set out in art. 33(b) and the name of
the second respondent figured at S No. 5 before his name was truck out subsently. That articles provided that the aforesaid directors shall be
permanent directors unless they resign or be disqualified under art. 36. Articles, 36, in turn, provided as under :
No director shall be disqualified from his office from contracting with the company nor shall any such contract entered into by or on behalf of
company in which any director shall be in any way interested be avoided nor shall any director, by so contracting or being so interested be liable to
account to the company for any profit realised by any such contract by reasons of such decorator, holding that office or of the fiduciary relation
hereby established but it is declared that the nature of his interest must be disclosed by him at the meeting of the directors, of which the contract is
determined on his interest then existing or in any other case at the first meeting of the directors, after the acquisition of his interest.
Admittedly the second respondent has not been disulfide under art. 36 quoted above. According to the petitioners, the second respondent
ceased to be a director of the company for two reasons, namely, : (i) he vacated office as director of the company on September 25, 1974,
pursuant to s. 314(2)(a) of the act; and (ii) he ceased to be a director of the company on his failure to attend three consecutive meetings of the
board of the director without absence of leave between October, 1976, and January 1977. Section 314(1) provides the except with the consent
of the company. Section 314(2)(a). on which reliance is placed, lays done that if any office or place of profit is held in contravention of the
provisions of sub-s. (1), the director shall be deemed to have vacated his office as such on and from the date next following the date of the general
meeting of the company referred to in the first proviso or, as the case maybe the date of the expire of the period of three months referred to in the
second proviso to the at sub-section and, shall also be liable to refund to the company any remuneration received or the poetry equivalent of any
perquisite or advantage enjoyed by him for the period immediately persuading the date aforesaid in respect of such office or polae of profit.
According to the company, at the extraodianry general meeting, held on December 7, 1973, the first general meeting of the company was held on
September 24, 1974, and at the said meeting no special resolution as contemplated by s. 314(1) was passed consenting to the second respondent
occupying free of rent the premises taken on lease by the company and, consequently, with effect from September 25, 1974, the second
respondent by virtue of s. 314(2)(a) vacated the office as the director of the company. It, is however and admitted fact that ever after september
25, 1974, the second respondent was allowed to function as the director of the company without any objection from any quarter whatsoever. That
is why the petitioners in para 10. of the petition contended that the legal effects of s. 314(2)(a) of the Act was realised for the first time in 1978.
Now, as against this contention, the a contentions of the second respondent is that after the deletion of art. 38 and on his ceasing to be the
managing director of the company, he continued to reside in the premises in his individual capacity as the tent of the landlord and undertook the
liability to pay the rent as such. he states, that, even before the resolution of December 7, 1973, was passed the company had passed a resolution
some time, in October, 1973, to evacuate the premises and deliver possession thereof to the landlord. It was, thereafter, that he had entered into
an arrangement whereby he became the direct tenant of the landlord and offered to pay the rent in respect of the premises to the latter. In the
circumstances, he contends that there was no scope for invading s. 31(2)(a) of the act and this fact was well within knowledges of the petitioners
and, therefore, right up to 1978, even though legal proceedings had commenced earlier, they did not contend that he and vacated the office as
director of the company with effect from September 25, 1974. According to him, the attempts on the part of the petitioners own to contend that
they became aware of the legal position only in 1978 is merely and after though to get rid of the second respondent as the director of the company.
Admittedly, on january 15, 1977, the second respondent filed a Miscellaneous Application No. 12 of 1977, for fixation of standard rent inrespet
of the said residential premises in the small cause court at baroda. Civil suit No. 233 of 1977 has also been field in court of the civil Judge (senior
Division), Nadiad, against the second respondent for a declaration that he must b deemed to have vacated the office as director of the company by
virtue of s. 314(2)(a) of the Act and for a payment of Rs. 12,000 by way of rent which the company became liable to pay to the landlord in
respect of the demised premises as being the monetary equivalent of the perquisite enjoyed by the second respondent. The landlord has also filed
suit No. 356 of 1977, in the Small Causes Court, Baroda, against the second respondent and the company for eviction of the former from the
premises in question. It will thus appear from the aforesaid proceedings pending in the subordinate courts that the question whether the second
respondent has ceased to be the director of the company, by virtue of s. 314(2)(a) of the aCt, is sub-judice. It will be a question to be determined
on evidence whether, after the deletion of art. 38 of the articles of association at the extraodianry general meeting held on December 7, 1973, the
second respondent by arrangement with the landlord became the directenat of the latter and was liable to pay the rent in respect of the demised
premises. The second respondent has throughout in his affidavit-in-reply stated that he was always ready and willing to pay the rent to the landlord
as a direct tenant and this question will also have to be examined by the Small Causes Court, Baroda, while dealing the with the proceedings,
namely, the standard rent application as well as the suit pending before it. The question will directly come up for consideration in Suit No. 233 of
1977, pending in the court of the Civil Judge (Senior Division), Nadiad, as it is founded on the ground that by virtue of s. 314(2)(a) of the Act, the
second respondent must be taken to have vacated the office with effect from September 25, 1974. In the said suit field by respondents Nos. 8, 9,
and 10, an ad interim relief was sought to ration the second respondent from acting or representing to be the director of the company but the
learned Civil Judge (senior Division), by his order, dated February 22, 1978, rejected that application and against that order the original plaintiffs,
that is, respondents Nos. 8, 9 and 10, have preferred Appeal from Order No. 225 of 1978, which is being disposed of by this judgment. In the
said proceedings the company is a party, and, therefore, the present petitioners can ventilate their grievance through the directors of the company
who have initiated the proceedings pending in the subordinate courts, I do not think if would be proper in the present proceedings to adjudicate
upon the question whether the second respondent has vacated the office as director of the company with effect from September 25, 1974, by
virtue of s. 314(2)(a) of the Act since disputed question of fact arise, and they can be satisfactorily resolved after the parties have led evidence in
the proceedings pending before the subordinate courts.
It is next contended by the petitioners that the second respondents ceased to the director of the company as he had failed to attend three
consecutive meetings of the board of directors without leave of absence between October, 1976, and January, 1977. The affidavit of the chairman
and directors of the company, respondent No.8 herein, shows that notices of the meetings were sent under certificate of positing to the second
respondent addressed ""C/o. Shivabhaiu f. Patel, Kashiba Bhuvan, Anushtu Tekra, Opposite Kothi, Baroda."" Now, this Shivabhaiu PAtel is
respondents No. 10 who, according to the second respondent, is hand-in-glove with the petitioners and who is admittedly one of the plaintiffs in
Suit No. 233 of 1977, filed in the court of the learned Civil Judge (Senior Division), Nadiad, for a declaration that the second respondent has
ceased to be the director of the company with effect from September 25, 1974, by virtue of s. 314(2)(a) of the act. The case of the second
respondent is that he did not receive and of the notices send under certificates of positing at the above address presumably because they were
received by Shivabhaiu F. Patel, respondent No. 10 herein, and assign the latter was hostile to them he did not bother to deliver those notices to
him and hence it cannot be said that he wilfully remained absent form the meeting of the board of directors without leave of absence consecutively
on three occasions. It was pointed out on behalf of the petitioners, that along with the affidavit of respondent No. 10 postal acknowledgment
bearing the signature of the second respondent, dated November 7, 1973, is produced which shows that communication addressed in the same
fashion had earlier reached the second respondent and, therefore, the notices sent to the same address must be presumed to have been received
by the second respondent. It is, however, necessary to bear in mind that the postal acknowledgment is of November, 1973, while the resolution
deleting art. 38 from the articles of association was passed on December 7, 1973, that is, almost a month thereafter. It was, thereafter, that the
relations between the second respondent and the directors of patel group of shareholders became strains and it is in that context that the question
whether these notices were in fact received by the second respondent requires to be considered. The second respondent had filed suit No. 427 of
1977, in the court of the Civil Judge (Senior Division), Baroda, for a declaration that he continues to be the director of the company, In the said
suit, the second respondent as plaintiff obtained ex parte interim orders but the same came to be vacated on May 7, 1977. In appeal No.77 of
1977, however, the District Court, Baroda, set aside the order the order of the trial court had the defendants were directed to inform the plaintiff
(the second respondent) about the meetings to be held in future and they were also restrained from making any change in the articles of association
till the disposal of the suit. From the above discussion, it becomes clear that the question whether the second respondent has ceased to be the
director of company for failure to attend three consecutive meetings of the board of directors without level of absence is directly in issued in Suit
No. 427 of 1977, pending in the court of the learned Civil Judge (Senior Division), Baroda. IT was, thereafter, that, company petitioner No. 37 of
1978 was filed by petitioner No. 1 and others on May 21, 1978, which was disposed of by P.D.Desai J. on July, 18, 1978. In the circumstance it
is obvious that even the question whether the second respondents has ceased to be the director of the company for failure to attend three
consecutive meetings is sub-judice in the court of the learned Civil Judge (senior Division), Baroda. THE question can rightly be decided on the
evidence led by the parties, because the principal question for consideration will be whether the second respondent had in fact received the notices
sent under certificate of posting form time to time at the address stated earlier. If on the evidence placed on record the court comes to the
conclusion that the notices were not served on the second respondents as contended by him the question of his ceasing to be the director of the
company will not survive. I am, therefore, of the opinion that the question raised in this petition as such can be satisfactory disposed of after the
parties have had an opportunity of leading oral evidence in the suit which is pending in the subordinate court. I, therefore, do not, think, it proper to
decided the question on affidavit particularly when the suit is pending in the subordinate court and the question as such can be satisfaction trolley
resolved only on evidence properly adduced by the parties. I, therefore, answer point No. (4) raised for determination accordingly.
It would be convenient at this stage to dispose of appeal from order No. 225 of 1978, which arises out of a suit instituted by respondents Nos.
8, 9 and 10 against the second respondent for a declaration that the vacated office as a director of the company by virtue of the application of s.
314(2)(a) of the Act. That suit is again based on the allegation that , after the second respondent ceased to be te managing director of the company
on the delection of art. 38 of the articles of association he was not entitled to rent-free residential quarters since it amounted to a perquisite and as
he contained to occupy the quarters for which the company was required to pay rent to the landlord, he must be deemed to have vacated the
office by virtue of s. 314(2)(a) of the Act. now, as stated earlier, before this suit No. 233 of 1977 was instituted, the second respondent had
already field a Standard Rent Application No. 12 of 1977 on January 15, 1977. Subsequently, a suit was filed by the londlord against the second
respondent and the company for eviction of te demised premises. However, admittedly, before the resolution was passed deleting art. 38, the
board of directors of te company had resolved to vacate and surredoer possession of the demised premises to the landlord. Thereupon, the
second respondent had written a letter on October 16, 1973, that the should be allowed to continue in the occupation of the demised premises
and, sub-sequntly, by a letter of January 15, 1974, he had offered to vacate the premises at te end of April 30, 1974, and had also offered to pay
the rent in respect of the premises from February 1, 1974. Thereafter, he continued in occupation of the premises and it is his case that that was
because he was accepted as as direct tentate by the landlord. However, because the land lord did not accept the rent from him, he seems to have
field the Standard Rent Application No. 12 of 1977, and the landlord countered by field suit No. 256 of 1977 for eviction. Therefore, the question
is as to how be continued in occupation of the premises in question after December, 1973. for a long period of almost three years. Now, in the suit
by an interim injuction the relief which was sought was to restrain in the second respondent from acting or representing in any manner whatsoever
to be the director of the company. That was on the basis that he had ceased to be a director of the company. That was on the basis that the had
ceased to be a director of the company under s. question free of rent meaning thereby that he continued to receive the perquisite which he was not
entitled to enjoy after the deletion of art. 38 from te articles of association. In view of the pending litigation and the nature of dispute raised therein,
the learned trial judge was disinclined to grant any such interim, injunction nd, in my in opinion, rightly, It is prima facie not easy to accept te
statement made in para 10 of the main company petitioner that the effect of s. 314(2)(a) of the Act was realised or discovered for the first time in
1978. That statement is obviously inaccurate because the suit in question was filed in 1977. According to the averments made in the main petition
the second respondent caused to be the director of the company by viture of s. 314(2)(a) of the Act with effect from September 25, 1974. Yet the
suit in question was filed in 1977 after a lapse of almost three years. Having regard to the fact that the standard rent application and an eviction suit
were pending wherein one of the questions at issue was whether the second respondent is the direct tenant of the landlord, te learned trial judge
was disinclined to grant the intermre lief sought in suit No. 233 of 1977 for the reasons set out in his order of bury 22, 1978. I think, in the
circumstances, the rejection of that application was proper and no interference in appeal is required. I would, therefore, dismiss the appeal from
Order No. 225 of 1978 heard along with the company petition.
That takes me to the second part of the company petition bearing on the question, whether the reliefs sought in cls. (a), (b) and (c) para. 31,
namely, giving of directions of the Bham group of shareholders not to institute any legal proceedings or make false and baseless
allegations/representations to various State and Central Government authorities without the permissions of the High Court or to direct the Bham
group of shareholders to sell their 400 equity shares to te Patel group of shareholders, should be granted in the facts and circumstances of te case.
That attracts the application of the provisions of ss. 397, 398 of the Act. Section 397 reads as under :
(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest
or in a manner 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.
(2) If, on any application under sub-section (1), the Court is of opinion -
(a) that te company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members;
and
(b) that to wind up the company would unfairly prejudice such members 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 thinks fit.
Sub-s. (1)(a) of s. 398, which is relevant for our purpose, reads as under :
(1) Any members of a company who complain -
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the
company ; or ............
may apply to the court for an order under this section, provided such members have a high so to apply in virtue of section 399.
Section 399 next provides that an application under ss. 397 and 398 can be made in the case of a company having a share capital by not less
than one hundred members of the company or not less than one- tenth of the total number of its members, whichever is less, or any member or
member shielding not less than one-tenth of the issued share capital of the file company, provided that te application or applicants have puffed all
calls and other sums due on their shares. In the instant case. the petitioners have in para. 6 of the petition, averred that they cumulatively hold more
than 10 per cent. of the shares of the company, an averments which has not been challenged or controvert. It is, therefore, obvious that the petition
answers te requirements of s., 399 of the act, At this stage, it may be advantage our to refer to s 402 which spells out the powers of te court under
ss. 397 and 398. of te act. It lays done that a companies court the dealing with an application under ss. 397/398 of the Act, 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 by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its 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 court, 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), after notice
to the concerned party;
(f) the setting aside of any transfer, delivery, of goods, payment, execution or other act relating to property made or done by or against the
company within three months before the date of the application u/s 397/398, 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 court it is just and equitable that provision should be made.
Section 433(f) of the Act, which deals with the winding up of a company; provides that a company may be wound up by the court if the court
is of the opinion that it is just and equitable so to do. Now, on a plain reading of s. 397 of the Act which is analogs to s. 210 of the English Act, the
court must be satisfied that the affairs of the company8 are being conducted in a manner prejudicial to public interest or in a manner oppressive to
any member or members and that the fact facts would justify the making of a winding up order on the ground that it was just and equitable so to do
under s. 433(f) but, if such an order is likely to unfairly prejudice any members the court may exceries this power under s. 402 with a vie two
bringing to an end the matters complained of. It is, therefore, a viw to bringing to an end the matters complained of. It is, therefore, an essential
condition for the maintenance of a petition under s. 397, of the Act that facts and circumstances which would justify the making of a winding up
order on just and quitable grounds should exist as required by s. 433(f) of the Act. Under s. 398(1)(A) of the act, a petition an be field by any
member of a company on the ground that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner
prejudicial to the interest of the company. Now, in the instant case, admittedly the Patel Group of shareholders are in a majority. They are in
charge of the affairs of the company. So far as the second respondent is concerned , as seen earlier , he was eased out as the managing director of
the company by the delection of art. 38 of the articles of association of the company. Thereafter, he continued as an ordinary director of the
company but it is the case of the Patel Group of shareholders that he has ceased to be even an ordinary director of the company by virtue of s.
314(2)(a) of the Act and he having failed to attend three consecutive meetings of the board of directors of the company without leave of absence.
Since then he was not informed about the meetings of the board of directors of the company and, therefore, it can safely be said that he did not
participate in the conduct of the affairs of the company. Therefore, s. 398(1)(a) of the Act, in my opinion, has no direct application. That is why
Mr. G.N.Shah, the learned counsel for the petitioners, rightly emphasised throughout the hearing of this company petition that the intervention of
court has become necessary under s, 397 read with s. 402 of the Act as the conduct of the second respondent is oppressive to the majority, this
is, the Patel Group of shareholders. IT was., on the other had, argued by Mr. Thakkar, the learned counsel fro the second respondent, that
nowhere in the petition has it been alleged that the facts would justify the making of winding up order on the ground that it is just and equitable to
do so but that as such anorder would unfairly prejudice the interest of the petitioning members, it is not advisable to wind up he company. Mr.
Thakkar emphasised that in order to bring the case within the purview of s. 397 of the Act, the petitioning creditors must make out a case that but
for the power granted to the court under s. 397/402 of the Act, a stage had reached for winding up the company on just and equitable grounds,
that is, under s. 433(f) of the Act.
The petitioners in order to succeed in this petition must establish facts which would justify the making of a winding-up order on just and
equitable grounds under s. 433(f) of the Act. The court will entertain an application under this provision only when it is of the opinion that an order
for winding up will unfairly prejudice the interest of the the petitioner or members on whose behalf the petition is field. in other words, the formed
remedy would be move for having the company wound up but if the court comes to the conclusion that it is not in the interest of the members to
wind up the company since the substruck of the company is intact, the oppression, if any, may be removed by granting appropriate direction to
those causing the oppression. Normally, petitioners complain of oppression by the majority but in this petition the allegation is that it is the minority,
particulars the second respondent, who is oppressing the majority. ONe of the conditions which must be satisfied is that the affairs of the company
are being conducted in a manner oppressive to the petitions members on whose behalf they have filed the petition. Now, if the affairs of the
company are in the hand of respondents Nos. 8 9 and 10 who represent the majority members, that is, the patel Group of shareholders, it is
difficult to held that the affairs of the company and being conducted in manner oppressive to them when they the selves are in a majority on the
board of directors of the company. The second condition which must be satisfied is that the facts establish that ordinarily the court would have
directed the company to be wound up on the just and equitable ground but that to do so would unfairly prejudice the majority members of the
company. The second *essential ingredient for the exercise of power under s. 397 of the Act which the petitioners must establish, is whether, on
the facts and in the circumstances of the case, the court would have been prepared to wind up the company under s. 433(f) of the Act, had it not
been of the opinion that a winding-up order would unfairly prejudice the interest of the majority shareholders. Mr. G.N.Shah, the learned advocate
for the petitioners, therefore, contended that this being aprivate limited company, the principles governing the winding-up of a partnership under s.
44(g) of the Partnerships Act, on Just and equitable grounds, should govern this court in reaching the conclusion whether ordinarily it would have
directed the company to be wound up under s. 433(1) of the Act, on the facts and in the circumstances placed on record. In support of this
contention, strong reliance was was placed by Mr. Shah on the decision of the House of Lords in Ebrahimi v. West borne Galleries Ltd. [1973]
AC 360. That was a petition brought by one Ebrahimi who for many year had been an equal partner with Nazar in a business dealing Persian
carpetrs. In 1958, they decided to incorporate the business and the two were appointed the first directors, each holding 500 shares. Shortly
thereafter, Nazar''s son entered the business and he to was made a director of the company . Ebrahimi and Nazar each transferred to him 100 of
their shares. Thus, the majority of votes tilted in favour of Nazars. For some years the company did flourishing business and made good profits all
of which were distributed amongst the directors as remuneration. A few years later, the relations between Ebrahimi and Nazar began to deteriorate
and it was alleged that Nazar, who did most of the purchasing on behalf of the company in Persia, was diverting sub- stantial profits to himself
leaving little or nothing for the company. The Nazars had also started an antique business in the premises occupied by the company. The
company''s profits were considerably reduced and protests from Ebrahimi fell on deaf ears. Finally, at an extraordinary general meeting of the
company, the father and son, who held the majority shares removed Ebrahimi from his office as director. Thereupon Ebrahimi ceased to participate
in the management of the company''s affairs and since no dividends were paid, the profits being distributed amongst the directors as their
remuneration, he received nothing whatsoever. Thereupon, Ebrahimi presented a petition under s. 210 read with s. 22(f) to the (English)
companies Act, 1948. IN that case the House of Lords came to the conclusion that when Ebrahimi and Nazar turned their partnership into a
company, it was on the basis that the character of the association would, as a matter of personal relation and good faith, remain the same and
therefore, when the question of winding up of such a company arises it is right to apply the principles of partnership in ordering the company to be
wound up. Mr. Thakkar, the learned advocate for the second respondents, however. invited my attention to the decision of the Supreme Court in
Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91, to point out that the observations in Ebrahimi''s case [1973]
AC 360, have no application so far as this case is concerned because the origin of the company cannot be traced to a partnership business
between two groups of shareholders. The Supreme Court, in the aforesaid case, reviewed the entire case-law on the subject and observe as under
(p. 104) :
When more than one family or several friends and relations together form a company and there is to no right as such agreed upon for active
participation of members who are sought to the excluded from management the principles of dissolution of partnership cannot be liberally invoked.
Besides, it is only when the shareholders, is more or less equal and there is a case of complete deadlock in the company on account of lack or
probility 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 equitable 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 thje veil it is found that in reality it is a partnership.
In Shanit Prasad Jain v. Kalinga Taubes Ltd. [1965] 35 Comp Cas 351, their Lordships observed that the mere loss of confidence between
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 or fair dealing as a shareholders.
In In re Davis & Collett Ltd. [1935] 5 Comp Cas 467 (Ch D) Also\, it was said that it may be ""just and equitable"" that a private company, the
share capital of which is so held that it is substantially a partnership should be wound up when a director had employed irregularities to purport to
put, himself, in complete control of the affairs of the company excluding the other director or directors from its management.
However, in the case of Rajahmundry Electric Supply Corporation Ltd. Vs. A. Nageswara Rao and Others, , it was clarified that where
nothing more is established than the directors have misappropriated the funds of the company, an order for winding up would not be just or
equitable, because if it is a sound concern, such an order must operate harshly on the rights of the shareholders. But it, in addition to such
misconduct, circumstances exist which would render it desirable in the interest of the shareholders that the company should be wound up there is
nothing in law which bars the jurisdiction of the court to make such an order.
From the above case-law it becomes clear that the principles of dissolution of a partnership would be applicable only if the company is a
domestic concern. It must also be shown that an irresolvable deadlock in the administration of the company has resulted because of group is
amongst the shareholders and directors of the company and it has rendered it impossible for the company to transact business and the only
alternation is to wind up the company. In the instant, case, so far as the second respondent is concern he holds 50 equity shares while his wife,
Madhuben, holds an equal number of equity shares. The Naiks, who are alleged to being the bham group, hold 250 equity shares and R.B.Gupta,
also stated to be a member of the Bham group, holds 50 shares. Thus, amongst themselves, they hold 400 shares whereas the patel group of
shareholders hold 4,600 equity shares, apart from the entire block of preference shares, held by them. If we turn to the memorandum and articles
of association we find that initially there were five directors, three from the Patel group and two from the bham group including the second
respondent. As stated, earlier, the second respondent was appointed a permanent managing director of the company having regard to his
experience in the field by virtue of art. 38 of the articles of association, which came to be deleted at the extraordinary general meeting held on
December 7, 1973. From that date onwards admittedly the second respondent ceased to be the managing director of the company. It is also an
admitted fact that at the said meeting for the delection of art. 38, Shri Gunvant L. Naik, the fifth respondent, voted in favour of the deletion of that
article. In para. 12 of his affidavit he states as under :
I say that I had voted against Navnit shivlal Bham in the year 1973 in a good faith when a a resolution was brought to delecte article 38 of
respondent No. 1
It is, therefore, difficult to say that the fifth respondent is a member of the Bham group as alleged by the petitioners. He too has been removed
from the board of directors of the company on the ground that he had failed to attend three consecutive meetings of the board without leave of
absence and had, failed to attend three consecutive meetings of the board without leave of absence and had, therefore, vacated the office of
director of the company under s. 283 of the Act. As has been discussed earlier, even the name of the second respondent was removed from the
memorandum and articles of association of the company as a director of the company on the ground that he had vacated office under s. 214(2)(a)
and/or s. 283 of the Act. The result is that at present the management of the affairs of the company is in the hands of Pate group of shareholders,
namely, respondent Nos. 8, 9, and 10. It cannot, therefore, be urged on behalf of the company that these directors are conducting the business of
the company in a manner prejudicial to other interest of the members including the petitioners. They are in a majority and are, therefore, in a
position to overrule the second respondent even if he is allowed to participate in the management of the business of the company. He is not in a
position to oppress the majority directors by his single vote as admittedly the other three directors, that is respondents Nos. 8, 9 and 10, belong to
other patel group of shareholders; it is also not the case of the petitioners that the company has lost financial stability or that its substratum is wiped
out. On the contrary, in the affidavits it has been stated that the company is financially sound and it making profits. It is not the case of the patel
group of shareholders who are in a vast majority that the conduct of the second respondent is such that they would have majority that the conduct
of the second respondent is such that they would have been constrained to move for the winding up of the company but for the provision of s. 397
of the Act. This is not a company which came into existence out of the partnership business conducted in the past. The shareholdings of the two
group are such that no deadlock is possible. The directors representing the majority of the shareholders belonging to the Patel group are in a
position to cover rule the second respondent even if the his is allowed to participate in the affairs of the company. What the majority has done is to
first ease out the second respondent as the managing director of the company by deleting art. 38 and, thereafter, to deny him participation in the
business and affairs of the company by virtue of s. 314(2)(a) and/or s. 283 of the Act. IT is in fact a situation where the second respondent can
make a grievance that he is being eased out from the management of the company by the majority directors belonging to the patel group. In such a
situations where the company is not a domestics company and where not deadlock is likely to occur and where the smooth functioning of the
company is not threatened, it cannot be said that on the principle applicable for the dissolution of a partnership on just and equitable grounds the
company is liable to be dissolved. To may mind, therefore, the principle on which Mr. Shah relied cannot be invoked in the facts and circumstance
of that case. That is why, as pointed out by Mr. Thakkar, there is no allegation in the petition that unless the court exercise power under s. 397 of
the Act a situation has arise for the dissolution of the company which would not be in interest of majority of shareholders belonging to the patel
group.
The next question is whether the conduct of the second respondent can be said to be ""oppressive"" for the exercise of power under s. 397 of
the Act. In Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; 29 Comp CAs 1 (HL), Lord Simonds defined ""oppressive
as meaning ""burdensome, harsh had wrongful"", It was clarified that what was required was an oppressive course of conduct and not an insulated
act or transaction for the exercise of power. In re Jermyn Street Turkish Baths Ltd. [1971] 1 WLR 1042, Court of Appeal observed (pp. 1059
and 1060):
... oppression occurs when shareholders, having a dominant power in a company, either (1) exercise that power to procure that something is done
or not done in the conduct of the company''s affairs or (2) procure by an express or implicit threats of an exercise of that power that some thing is
not done in the conduct of the company''s affairs; and when such conduct in unfair of to use the expression adopted by Viscount simonds in
Scottish Co-operative Wholesale society Ltd. v. Meyer [1959] AC 324; 29 Comp Cas 18 (HL), `burdensome, harsh and wrongful'' to the other
members of the company or some of them, and lack that degree of probity which they are entitled to expect in the conduct of the company''s
affairs. ........Oppression must, we think, import that the oppressed are being constrained to submit to somethings which is unfair to them as the
result of same overbearing act or attitude on part of the oppressor.,
In a recent decision, Needle Industrial (India) Ltd., v Needle Industries Newey (Inida) Holding Ltd., civil appeal Nos. 2139, 3438 and 2484
of 1978 [1981] 51 Comp Cas 743 (SC), the Supreme Court revised the English as well as Indian authorities on the subject and observed as
under (P. 782) :
It is clear from these various decisions that on a true construction of s. 397, an unwise, inefficient or careless conduct of a director in the
performance of his duties cannot give rise to a claim fie relief under that section. The person complaining of oppression must show that he has been
constrained to submitted to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of
his legal and proprietary rights as a shareholder.
Having examined the legal position a to the scope and ambit of s. 397 of the Act, it is necessary to consider whether the conduct of they
second respondents can be said to be oppressive to the majority of the shareholders belonging to the Patel Group. Now, as pointed out earlier, the
petitioners, in the order to succeed, must prove that the company''s affairs are being conducted in a manner oppressive to any member or members
so that the court may with a view to bringing to an end the matters complained to make such order as it considers fit. Now, so far as the second
respondent is concerned, he is not allowed to participate in the affairs of the company and is, therefore, in no way concerned with the conduct of
the affairs of the company so as to cause prejudiced to the majority shareholders. He has ceased but as the permaned managing director of the
company and even as an ordinary director of the company he is not allowed to paritipate on the ground that he has vacated the office . The matter
in so far as latter contention is concerned being sub-judice, I have refrained from examining the validity of that contention. One thing is, however,
clearer that the second respondents is not allowed to participate in the affairs of the company but even if he were to participate, he could easily be
overruled because respondents Nos. 8, 9 and 10 who form a block are in majority. It is, however, contended in the body of the petition that the
second respondent has been guilty of acts of misconduct enumerated in Cas. (a) to (h) of para. 12 of the petition. There allegations are -
(a) he had issued a false certificate, dated May 18, 1973, to M/s. Ishwar Arts International of rambling them to procure entertainment tax
exemption for their picture `Pyasi Nadi'' ;
(b) he had collected a cheque of Rs. 12, 000 on August 2, 1973, from M/s. Ishwar Arts International out of which he credited, a sum of Rs.
10,000 and refused to account for the remaining Rs. 2,000;
(c) he, as managing director of the company; influenced a prospective producer of `Okha Haran'' to shoot the picture at Bombay and thus acted
against the interest of the company ;
(d) he refused to vacated the premises of the company and refused to surrender possession thereof to the company after he vacated office at
managing director of the company;
(e) in order to usurp that said premises, he falsely claimed tenancy rights in his own name to the detriment of the company;
(f) he field proceedings for fixation of standard rent in respect of the said premises with the result that the son of the tenth respondent was
constrained to file an eviction suit against him and the company;
(g) in 1971 the company obtained financial assistance of Rs. 7,50,000 from the Gujarat Industrial Investment Corporations Ltd. (GIIC) and
imported as actual user, a machinery, namely, bell & Howell Additive Printer, which was hyothecated to GIIC as part of security for repayment of
the loan but when it was realised that further investment to the extent of Rs. 30,00,000 wa required to complete the laboratory, the company
decided to sell the machinery and even though he had participated in the negotiations he leveled false charges against the company and its directors
and wrote letters, collectively produced at annex, ""B"" with a view to defendant the company; and
(h) he , after ceasing to be the managing director of the company made representations to the Central and State Govts, as a director of the
company making wild and baseless allegations against the company and respondents Nos. 8, 9 and 10 and shareholders beloning to the Patel
Group.
Out of these allegations made against the second respondent it is obvious that allegations (d), (e) and (F) concerned the residential premises in
the occupation of the second respondent with which I have dealt with in the earlier part of this judgment., So far as allegations at (A) is concerned,
is pertains to something done on May 18, 1973, before his removal as the managing director of the company. Allegation (b) contains a charge of
having misappropriated a sum of Rs. 2,000 out of the amount of Rs. 12,000 received by him on August 2, 1973, which as observed Rajahmundry
Electric Supply Corporation Ltd. Vs. A. Nageswara Rao and Others, , is not by itself a good ground for the exercise of jurisdiction under s. 397
of the Act. In para. 17 of the affidavit-in-reply filed by the second respondent he admits to have retained a sum of Rs, 2,000 with him but has not
accounted for the same. He contends that as managing director of the company he and full power and authority to disburse payments for and on
behalf of the company. No one denies that power but he was certainly liable to account. However, a suit is field in the Anand court by the
company against the second respondent for recovering the amount in the hands of the second respondent out of the unaccounted amount of Rs.
2,000 and since that suit is pending. I do not consider it proper to make any further observations in regard to the said charge. Suffice it to say that
merely on a charge of the misapporaition of funds sit cannot be said that a proper case for exercise of power under s. 397 of the Act is made out.
Besides, these are events which had taken place before the removal of the second respondent as the managing director of the company. So also
allegations (c) refers to his conduct as managing director of the company and has nothing to do with his conduct as director or shareholders of the
company. The second respondent has answered this charge in para. 17 of his affidavit by stating that the producer of the picture was ready and
willing to shoot it in the studio of the company but since the studio was not acceptable, he refused to shoot it in the studio of the company. now,
this is a matter which cannot be decided on affidavits because the evidence of the produced of this said film and the circumstances in which he
refused to shoot the film in the sauted of the company would be necessary. However, even this allegations pertains to a period prior to his removal
as managing director of the company. Allegations in cls. (d), (e) and (f) pertain to matter concerning his eviction from the premises in his
occupation which were initially leased out to the company. As these allegations have already been dealt with, I need not delve into them., The
allegations (g) pertains to the purchase and sale of machinery imported on actual user''s license by the company some time in 1971. The company
then entered into an agreement in August/ September, 1973, with Famous Cine Laboratory for the sale of the machinery. However, the sale could
not not be completed because, acordign to the petitioners, the purchasers beaked out. GIIC had also consented to the sale of the machinery, It
appears that the second respondent was not happy about the disposal of the machinery which was ultimately sold to the ale of the machinery. It
appears that the seconds respondent was not happy about the disposal of the machinery which was ultimately sold to Messrs. Quality Labs and
wrote letter making a grievance about the same to differed authorities, produced collectively at annex. ""B"" to the petition. Allegation (h) also
pertains to his having written letters making allegation against respondents nos. 8, 9 and 10 in regard tot the conduct of the company''s affairs by
them. He seems to have written letters to different authorities between july 1, 1977, and April 16, 1979, as enumerated in the said sub-paragraph
of the company petition. These allegiance have been answered by the second respondent in paras. 21-22 of his affidavit-in-reply. He firmly
believed that it was not in the interest of the company to sell the imported machinery as in his opinion, the price fetched was inadequate., He has
started in para 21 of his affidavit-in-reply that ""the present market value is in the region of the Rs. 10,00,000 or more"". In his reply to Company
Petition No. 37 of 1978, dated July 18, 1978, he had valued the machinery at Rs. 5,00,000 . It was therefore, argued by Mr. Shah that the
second respondent was in the habit of making wild and unfound allegations Assuming for the sake of argument that it is so, can it be said that his
conduct causes oppression to the majority in so far as the conduct of other affairs of the company is concerned ? If the second respondent strongly
delivered that it was not in the interest of the company to sell the machinery and if he was no able to put forth his point of view at the meeting of the
board of directors of the company since he was not allowed to participate he gave vent to his feeling by writing letter to various authorities with a
view to restarting the company form selling the machinery. Merely because he made allegations against respondents Nos. 8, 9 and 10 who have
kept him out of management it is not possible to hold that a case is made out under s, 397 of the Act. Thereafter if we examine the allegations in
paras. 12(a) to (h) of the petition, it becomes clear that they can be divided into two parts, namely, his conductor prior to his having been removed
as the managing director of the company in December, 1973, and the allegations that the made in regard to thereafter. So far as the allegations
regarding his conduct prior to his removal as managing director of the company are concerned, they are stray allegations which do not show that
he had any desire to oppress the majority. so far as the allegations contained in para. 12(G) and (h) are concerned, since he was not allowed to
participate in the conduct of the affairs of the company on the allegation that the had vacated the office as director of the company, he had no
option but to give vent to his feelings by writing letter to various authorities with a view to preventing the said director from acting in a manner
which he considered to be prejudicial to the interest of the company. It is not possible in the circumstances to say that he did not act in good faith
and that his intention was to oppress the majority. I am, therefore, of the opinion that even on the basis of these allegations it is not possible to
conclude that a case for the exercise of jurisdiction under s. 397 of the Act is made out.
In the result, therefore, I dismiss the company petition as well as the appeal from order but in the facts and circumstance of the case make no
order as to costs in both the proceedings.