SHANTI PRASAD JAIN Vs. KALINGA TUBES LTD

JUDGEMENT

(1.) SRI Shanti Prasad Jain, an industrialist and financier,--who until lately was chairman of the Board of Directors of Kalinga Tubes Ltd. (hereinafter referred to as the Company), is the petitioner in the complaint herein under Sections 397, 398, 402 and 403 of the Indian Companies Act, 1956 on the ground of alleged continuing and continuous process of oppression to some part of the members of the Company (including the petitioner) and mis-management in a manner prejudicial to the interests of the Company, arising out of group factions in the directorate of the Company, where the petitioner's rival groups are alleged to have acted with the ulterior motive of gaining voting power to obtain control of the company for the said rival groups and their nominees to the exclusion of the petitioner, his group and his nominees, in the circumstances hereinafter stated.

(2.) THE petitioner represents what is known as the Jain Group in the Company respondent No. 1 is the Company; respondent No. 2 Sri B. Patnaik,--who has since, after the last Elections in Orissa, become the Chief Minister of the State, and thereupon ceased to be a director in the Company,--represents what is known as the Patnaik Group including, among others, his wife respondent No. 3 Mrs. Gyan patnaik and respondents Nos. 5 to 12 herein; respondent No. 4 Sri G. S. Loganathan, represents what is known as the Madras Group; besides these respondents, the Government of Orissa is represented by respondent No. 13 who is Secretary, Industries Department, Government of Orissa; respondents Nos. 14, 15 and 16 have subsequently been made parties herein as transferees of shares as hereinafter stated.

(3.) THE course of events,--which led to the presentation of the petition, stated in a broad outline,--is as follows: on December 1, 1950 the Company was incorporates as a private limited company with its registered office in Orissa with an authorised capital of Rs. 25 Lakhs; there were seven signatories including respondent No. 2 Sri B. Patnaik and respondent No. 4 C. S. Loganathan; the Company started and acquired lands; the Company, however, did not go into production until several years after its incorporation; in fact, prior to 1954 the Company was involved in large debts and was in actual financial difficulty; at that time the Company was exclusively controlled by Sri Patnaik and Sri Loganathan; they held the majority of shares of the company, the shareholders being Sri Patnaik, Sri Loganathan, Sri tarapore, Sri Narayan Swami and Kalinga Industrial Development corporation Ltd. , by then there were two distinct groups, namely, the madras Group represented by Sri Loganathan as aforesaid and the orissa or the Patnaik Group represented by Sri B. Patnaik. During this period when the company was passing through actual financial crisis, the petitioner Sri S. P. Jain was nowhere in the picture. In the middle of June, 1954, the Company which was then badly in need of capital, came to be introduced to the petitioner Sri S. P. Jain, through one Dr. H. B. Mohanty, Secretary, Industries and Development department, Government of Orissa, who made several visits to Calcutta, contacted Sri S. P. Jain and had several discussions with him about the affairs of the Company and its financial difficulties. Dr. Mohanty introduced Sri Patnaik to Sri S. P. Jain; thereafter Sri S. P. Jain had discussion with Sri Patnaik about the affairs of the company and Sri S. P. Jain eventually visited the factory of the Company at Chouduar (Cuttack ). Then there were numerous discussions between Sri S. P. Jain and Sri Patnaik about the affairs of the company, its finances, management and future prospects. During this period in June, 1954, there was certain correspondence between Sri Patnaik and Sri S. P. Jain, from which it appears that they had their points of discussion clarified including the proportion in which the shares were to be allotted arid regarding the constitution of the Board of Directors--all in the proportion of one-third for each of the three groups, namely, Madras Group one-third, Orissa or Patnaik Group one-third and Jain Group one-third; as regards the loss which the Company had already incurred oh the sale of pipes amounting to Rs. 7 lakhs it was distinctly understood that the same will be taken up by the Madras and the Orissa (Patnaik) Groups. All those discussions and correspondence were with a view to arrive at a basic working understanding among the three groups. A letter dated June 22, 1954 from Sri S. P. Jain to Sri Patnaik recorded the lines on which they all agreed to work jointly, namely, that Sri S. P. Jain undertook to supply further capital of the Company to the extent of rs. 10,50,000 (Rupees ten lakhs fifty thousand) which is equal to the capital subscribed by each, namely, Sri Patnaik and Sri Loganathan, that the loss of Rs. 7 lakhs will be borne by Sri B. Patnaik and Sri Lognathan; that the responsibility of the future finances of the Company will be shared equally by Sri S. P. Jain, Sri Patnaik and Sri Lognathan; that Sri s. P. Jain will be the Chairman, Sri Patnaik will be the Managing Director and Sri Shithal Prasad (relation of Sri S. P. Jain) will be the joint managing, Director; these terms on which the parties agreed to work jointly, were confirmed by Sri Patnaik in his letter to Sri S. P. Jain dated june 29, 1954 in which it was expressly mentioned that Sri Patnaik and sri Lognathan will immediately allot to Sri S. P. Jain or his nominees Rs. 3 lakhs worth of shares and will hold the balance of Rs. 51/2 lakhs as loan to the Company on a clear agreement that as soon as they get capital issues sanctioned for the said amount from the Controller of capital Issues, the same will be allotted to Sri S. P. Jain or his nominees; that the said loss on the import of pipes will be borne by Sri Loganathan and Sri B. Patnaik; that in that connection they were taking steps to dissolve the managing agency firm namely the Kalinga industrial development Corporation Ltd. so that Sri S. P. Jain, as their new partner, is not encumbered with their past transactions; that as the working capital of about Rs. 10 lakhs would be required at the initial stages, this amount of Rs. 10 lakhs was to be provided as clean advance to the company, Rs. 5 lakhs by Sri S. P. Jain and Rs. 5 lakhs by Loganathan; it was further confirmed in the letter that Sri S. P. Jain had agreed to provide banking facilities up to Rs. 50 lakhs for the import of raw materials; it was clearly understood as recorded in the letter that any capital required will be found in equal proportion by the three principal share-holders, namely Sri S. P. Jain, Sri Loganathan and Sri Patnaik. Then on July 27, 1954 there was a Memorandum of Oral Agreement between Sri S. P. Jain as the first part, Sri Patnaik of the second part and sri Loganathan, Sri Tarapore and Sri Narayanswami; all of Madras--of the third part in regard to the Company, signed by all these parties; it recorded the terms of the agreement between the parties as partners of the Company which then was a private limited company. The main controversy in this case centres round this agreement which is the bone of contention between the parties; the petitioner's case being that it is binding on the Company; while the case of the rival groups is that it is a mere scrap of paper not binding on the Company; indeed this document carried with it, as will be seen, the seeds of dissention between the three groups which ultimately led to this unfortunate litigation. The effect and legal implications of the document, upon construction thereof, which is a question of law, will be dealt with hereinafter. The petitioner's case is that it was in terms of this agreement that the constitution of the Board was changed and the managing agency resigned and that there are such other telling circumstances, purporting to show that the Agreement was acted upon; while the case of the rival groups is that these changes were brought about in ordinary course of business without reference to the agreement. During all this time Sri s. P. Jain acted as Chairman of the Company and gave all guidance and advice in the matter of management of the Company, and his influence, as a seasoned businessman, was also made use of in the interest of the company; the instances of such guidance, advice and his administration of the Company are evident from the correspondence and other documents produced in this case. There can be no doubt as to this position that it was through the influence of Sri S. P. Jain that the bank facilities were obtained from the Chartered Bank of India which because of the personal guarantee given by Sri S. P. Jain, had advanced loans of several lakhs of rupees to the Company. Except for these credit facilities, which the Company received through the influence of Sri S. P. Jain, the company could not have raised itself to its present status as a prosperous growing concern. Incidentally, it may also be noted here that obtaining of these credit facilities for the Company was also one of the terms of the said Agreement of July 27, 1954. Indeed, as records show, the Chartered Bank gave overdraft facilities to the Company, only because of Sri S. P. Jain was connected with the Company as its chairman. It was early in 1956, that, while the Company was still a private limited company, the said three representatives of the three groups, describing themselves as partners, discussed the desirability of expanding the business and making it a public company, to obtain loan from industrial corporation because, under the terms of Section 23 (1) (e) read with section 2 (c) of the Indian Finance Corporation Act, loan is advanced only to a public limited Company, and ultimately the Company was converted into a public Company on or about January 11, 1957; the shareholders of the Company, when it was private, however continued to be the shareholders of the Public Company at all material times. Sri S. P. Jain himself, along with his other colleagues, encouraged the conversion of the Company into public Company. Before the Company was made public company there were informal meetings among the members of the three groups and it was all through understood that the shares issued or to be issued were to be offered at par to the existing shareholders and that the shareholders would be at liberty to apply for the shares in their own names or in the names of their nominees and indeed throughout the period from the date of the agreement of July. 27, 1954 until the dispute arose the allotment of shares was confined to the three groups in equal proportion. The next chapter in this story opens in the month of March 1958 which relates to the allotment of 39,000 ordinary shares, the issue of which the controller of Capital issues, had, by his letter of authority dated december 18, 1957, sanctioned: Under the said authority, all the said new shares were to be issued privately for cash at par: Condition No. 6 of the said sanction was that subject to the provisions of Section 81 of the Companies Act, 1956, the new shares should, in the first instance, be offered to the existing shareholders with the right of remuneration attached. In this context it may be mentioned that this sanction was made by the controller of Capital Issues on an application made by the Company for the issue of 39,000 ordinary shares of Rs. 100/- each for total face value of Rs. 30 lakhs made on September 17, 1956, when the Company was still a private company; in Clause 7 of the said application it was stated that the cash issue will be private and that it would be issued to the existing directors, shareholders and/or their nominees: it was on the basis of this application that the Controller of Capital Issues had sanctioned the increase of share capital by his letter dated December 18, 1957 as aforesaid: in the meantime, the company had become a public company since January 1957. Now it was the allotment of these 39,000 new shares which became the proximate cause of trouble among the rival groups. The petitioner's case is that under the Agreement dated July 27, 1954, these 39,000 new shares were to be allotted to the three groups in equal proportion as existing shareholders or to their nominees. On March 1, 1958, a notice was issued for an extraordinary general meeting to be held on March 29, 1958 for the purpose of considering, inter alia, the "manner and proportion in which such snares are to be issued as stated in the Agenda: in the Explanatory Statement it was stated that it was necessary in the interest of the Company to increase the share capital and the moneys were urgently needed by the Company for the purpose of expansion of its business. At the extra-ordinary general meeting on march 29, 1958 Shri. S. P. Jain was not personally present: at this meeting curiously enough a resolution was moved by the respondent No. 3 Mrs. Gyan Patnaik that the said 39,000 shares shall not be offered or allotted to the existing shareholders of the equity shares in the Company or to the public, to which an amendment was moved by two members of the Jain Group but the amendment, when put to vote, was declared lost, and Mrs. Gyan Patnaik's resolution was passed. An exception had been taken, on behalf of the Jain Group, that--as what actually took place at the meeting showed,--the notice dated March 1, 1958 was misleading as hereinafter fully discussed. Thereafter, on April 18, 1958 the Jain Group filed a suit in the Court of the Subordinate Judge, Cuttack being, Title Suit No. 21 of 1958 for declaration that the resolutions passed at the extraordinary general meeting of the Company on March 29, 1958 are ultra vires, illegal, void and not binding on the. Jain Group and/or its share-holders, permanent injunction against the defendants in the suit, including the Company and the rival groups, restraining them from giving any effect or acting in any way in pursuance of the said resolution, passed at the extraordinary general meeting of the Company on March 29, 1958, and further restraining the defendants from issuing or allotting any shares in terms of the impugned resolutions; on the same date an interim injunction was issued restraining the defendants, from giving effect to the resolutions passed on March 29, 1958. As hereinafter discussed, the said injunction order was not obeyed by the Company in that notwithstanding the said injunction, the Company and its management,--by way of giving effect to the said resolutions passed at the extraordinary general meeting on March 29, 1958,--had received applications for allotment of these 39,000 shares at a point of time when the injunction order was still in force. In the mean time there was an application for modification of the injunction order on May 15, 1958 but it was adjourned till June 30, 1958. The Company, however, in pursuance of their decision to take steps for allotment of these shares issued a notice on June 21, 1958 for Board meeting to be held on June 30, 1958. The injunction application not having been disposed of, there was a subsequent notice of meeting issued by the Company on July 23, 1958 for a Board meeting to be held on July 30, 1958 including in the agenda an item for consideration of allotment of these 39,000 shares subject to any order of the Court. Then ultimately on duly 30, 1958 the injunction order was "vacated by the learned Subordinate Judge, whereupon the learned Advocate for the Jain Group applied for stay of operation of the said order vacating the injunction so that they might move the High Court; it is said that at that time the learned Advocate for the Company was present in Court and he also received a copy of the application for stay of operation of the order vacating the injunction, but, as fully discussed hereinafter, the allotment appears to have been rushed through with indecent haste and scramble, and allotment is stated to have been made within 40 minutes from the passing of the order vacating the injunction and everything was done as fait accompli-later on, however, on the same day the Subordinate Judge made, an order staying the operation of order vacating the injunction; but it was too late. What exactly happened on July 30, 1958 deserves justifiable comments, made on behalf of the Jain Group, that the Company had allotted these 39,000 shares hastily with an ulterior motive. The next episode in the history of this litigation was that the rival groups, in pursuance of their persistent policy to oust the Jain Group, made a further attempt to raise the capital of the Company from Rs. 1 crore to Rs. 3 crores in a certain specified manner and issued a notice of an extraordinary general meeting to be held on September 21, 1960; in the Explanatory statement, attached to the notice, it was said that the shares in the Company should be offered to outsiders, that is, persons other than the existing shareholders and as such capital as possible should be raised from such outsiders; that this would ensure that the structure of the Company would be further broad-based and the shares would be held by various independent persons, that is, not the existing shareholders. On September 14, 1960 Sri S. P. Jain filed the present complaint under sections 397, 398, 402 and 403 Indian Companies Act, on the ground of continuing and continuous oppression to the minority group of shareholders including himself, and mismanagement of the affairs of the company as stated in the petition. The main grounds, on which the petition was filed, were that the rival groups were pursuing their policy of continuing and continuous process of oppression of the petitioner and his group being the minority shareholders, with a view to completely exclude the petitioner and his group from all control in the affairs of the company; further that the affairs of the Company were being conducted in a manner prejudicial to the interests of the company by the rival groups, particulars whereof are fully stated in the petition; that the whole object of the rival groups is said to be to obtain realignment of the shareholding, in a manner so that they can control over 75 per cent of the voting power; that in view of the wrongful acts of the rival groups who had combined together, there has arisen a justifiable lack of confidence on the part of the petitioner and his group in the conduct and management of the affairs of the company. On this petition, an interim order was passed by this Court, inter alia, restraining the rival groups from placing before the said extra-ordinary general meeting which was to be held on, September 21, 1960 or considering any resolution or resolutions with regard to the increase of the share capital of the Company by creation of additional 1 lakh equity shares of Rs. 100/- each. The defence taken on behalf of the rival groups, is, in substance, a simple denial of all the allegations made in the petition.