SHANTI PRASAD JAIN Vs. KALINGA TUBES LTD

JUDGEMENT

(1.) These fourteen appeals on certificates granted by the High Court of Orissa raise common questions of law and fact and will be dealt with together. They are a consequence of a fight between two groups of business magnates for the control of M/s. Kalinga Tubes Limited (hereinafter referred to as the Company). They arise out of an application under Sections 397, 398, 402 and 403 of the Indian Companies Act, No. 1 of 1956 (hereinafter referred to as the Act) made by the appellant in the High Court. Most of the facts are not seriously in dispute and it is necessary to set them out in detail in order to decide the main point raised on behalf of the appellant, namely, that the affairs of the Company were being conducted in a manner oppressive to him and his group of members.

(2.) The Company was floated as a private limited company on December 1, 1950 with an authorised capital of Rs. 25 lacs. Originally, the shares were held by two groups of share-holders equally, except a few shares. These groups of share-holders may for our purposes be taken to be represented by Patnaik and Loganathan. The Company raised a sum of Rs. 36 lacs by the issue of two series of debentures which were guaranteed by the Government of Orissa between 1952 to 1954. In 1954, the appellant was approached by Dr. Mohanty, then Secretary to Government of Orissa (Industries Department) which was naturally interested in the Company having guaranteed debentures to the tune of Rs. 36 lacs, for helping the Company which was in financial and administrative difficulties. The appellant was requested to help the Company by providing finance and by arranging loans from banks and other sources and further by providing the necessary administrative guidance. The appellant agreed to do so and consequently on July 27, 1954, an agreement was entered into between the appellant, and Patnaik and Loganathan. To this agreement, the Company was not a party. We shall refer in detail to the various terms of the agreement later. In brief, however, the agreement provided that the appellant would be allotted shares in the Company equal to those held by Patnaik and Loganathan after increasing the share capital of the Company. Thus the Company would have three groups of share-holders represented by the appellant, Patnaik and Loganathan holding equal number of shares, besides a French company and one Rath, who between themselves held shares worth Rs. 4 lacs. These share-holders, however, were not party to the agreement. It was also provided that these three groups of share-holders would have equal number of representatives on the Board of Directors of the Company, namely, two each for the time being. The appellant also undertook to arrange for cash credit facilities to the limit of Rs. 50 locs on the security of raw materials and finished goods of the Company. And finally, the appellant Jain was to be the chairman of the Company. This agreement was followed by certain resolutions passed by the Company on August 16, 1954 by which some of the terms of the agreement were substantially carried out, the authorised capital was increased to rupees one crore (though it was issued later in instalments), and the appellant was made the chairman of the Company. It may, however, be noted that the resolutions did not refer to the agreement in terms and no change was made in the Articles of Association of the Company to bring them in conformity, with all the terms of the agreement. In January 1955, Narayanswami who had been appointed Managing Director resigned and Patnaik was appointed the Managing Director. In April 1955, the Company started production. Sometime thereafter the share capital was further subscribed up to Rs. 61 lacs and the three groups, namely, the appellant Jain, Patnaik and Loganathan held one-third of the shares leaving out shares held by the French company. Mr. Rath had sold his shares numbering 250 and these shares were equally divided between the three groups and the one odd share was held by all the three namely Jain, Patnaik and Loganathan, jointly. In September 1956, a resolution was passed by the Board of Directors referring the question of conversion of the Company to a public limited company to a sub-committee consisting of the appellant, Loganathan and Patnaik. About the same time, an application was made to the Controller of Capital Issues for the sanction of the issue of further shares to the extent of Rs. 39 lacs out of the authorised capital of rupees one crore and for the issue of debentures to the extent of Rs. 64 lacs. In this application it was stated that the shares were intended to be issued privately to the existing share-holders and/or their nominees. In December 1956 a resolution was passed by the Board of Directors for converting the Company into a public limited company and for amending the Articles of Association in consequence at the next annual general meeting. This was necessary as the Company wanted to borrow from the Industrial Finance Corporation which however made advances only to public limited companies. On January 11, 1957,the Company was converted into a public company and the Articles of Association were amended. Even so, no attempt was made to incorporate the terms of the agreement dated July 27, 1954 in the Articles of Association so amended.

(3.) Trouble, however, seems to have arisen between the appellant and the other two groups as early as September 1955 in consequence of an advertisement issued by the appellant in newspapers suggesting that his group was engaged in the manufacture of black and galvanised steel tubes and in this advertisement the emblem of the Company was also printed, as if the Company was part of the appellant's group. This led to strong protests by Patnaik and Loganathan and eventually the appellant withdrew the advertisement. However,the appellant continued to be the chairman of the Company in spite of growing differences between him and Patnaik and Loganathan. Articles of Association were further amended in November 1957. At that time also nothing was put therein on the basis of the agreement dated July 27, 1954. In December 1957, the Controller of Capital Issues sanctioned the issue of shares of the face value of Rs.39 lacs and debentures of the face value of Rs.64 lacs subject to the provisions of S. 81 of the Act. Real trouble started after this sanction for the issue of fresh shares. We shall have occasion to refer to S. 81 of the Act later; it is enough to say here that that Section provides that the new shares would be offered in the first instance to the existing share-holders in proportion, as nearly as the circumstances admit, to the capital paid up on the existing shares at that date "subject to any direction to the contrary which may be given by the Company in general meeting". So unless the Company decided otherwise at a general meeting, the new issue of shares to the tune of Rs. 39 lacs would have had to be offered under S. 81 of the Act to the existing share-holders in proportion to their existing shares. At that time as already indicated, the appellant group held one-third share and Loganathan and Patnaik groups held two-thirds share except for certain shares held by the French company and, therefore, in the absence of a direction to the contrary at a general meeting the new shares would also have gone in equal shares to the three groups subject to the shares which would go to the French company.