Case: S. P. Jain Vs. Kalinga Tubes Ltd

only amount outstanding in that year was 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. 33. As to the removal of Rs. 7 lacs from the coffers of the Company by the Longanathan 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 the 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 circumstance 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. 34. 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 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 appellants 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 appellants support was no longer necessary to the Company. But if the appellants support was no longer necessary to the Company by 1958 the action of the Patnaik and Loganathan groups which resulted in the loss of such support cannot be said to be prejudicial to the interests of the Company. We, therefore, agree with the High Court that no case has been made out for action under S. 398 on the ground that the affairs of the Company were being conducted in a manner prejudicial to its interests. 35. 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 interets. 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 in September 14, 1960. These matters however cannot be taken into account for the application as 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. 36. 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 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 the view and no case has been made out even prima facie for action under this part of S. 398 of the Act.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]31. 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 share-holdings 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 appellants holding of equity shares-would be hardly 10 per centum of the entire equity capital. In the first place, as the meeting of September 21, 1960 was never held because of the injunction obtained by the appellant, we cannot say how the new shares would have been issued and whether they would have been offered to the public for subscription to make the Company even more broad-based than it was then. If that was the intention that could hardly be called oppression of the appellant. Apart from that, we fail to see why the appellant should be driven out of the Company and should be compelled to sell his shares simply because his proportion of equity capital is only 10 per centum of the entire equity capital, for it is not in dispute that the Company is doing well and the appellant will get his dividends as any other share-holder. 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 share- holder but the feeling that the appellant who hoped to get control 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 share-holder. The case of the appellant based on the agreement of July 27, 1954 therefore, must fall 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 appellant32. 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 interest 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 on 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 management or apprehension of mismanagement of the affairs of the company. It may be contrasted with S. 397 which deals with oppression in the minority share-holders, 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 share-money 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 appellantIt is true that when new shares of the value of Rs. 30 lacs were issued, the Company received only 15 per centum of the share 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. 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 Act33. As to the removal of Rs. 7 lacs from the coffers of the Company by the Longanathan 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 the 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 circumstance 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 agent34. 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 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 appellants 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 appellants support was no longer necessary to the Company. But if the appellants support was no longer necessary to the Company by 1958 the action of the Patnaik and Loganathan groups which resulted in the loss of such support cannot be said to be prejudicial to the interests of the Company. We, therefore, agree with the High Court that no case has been made out for action under S. 398 on the ground that the affairs of the Company were being conducted in a manner prejudicial to its interests35. 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 interets. 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 in September 14, 1960. These matters however cannot be taken into account for the application as 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 affairs36. 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 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 the view and no case has been made out even prima facie for action under this part of S. 398 of the Act.