KALINGA TUBES LTD Vs. SHANTI PRASAD JAIN

JUDGEMENT

(1.) THIS appeal arises out of an application by Sri Shanti Prasad Jain under Sections 397, 398, 402 and 403 of the Companies Act, 1956 (hereinafter called the Act). As there are large number of appeals and the descriptions of the parties as appellants and respondents may lead to confusion, the parties would be described in this judgment as petitioner and respondents in terms of the petition dated 14th September, 1960. The petitioner's case is as follows : (A) Kalinga Tubes Limited (hereinafter to be referred to as the Company) is a Company incorporated under the Indian Companies Act having its registered office at Chodwar in Cuttack district. The petitioner is a holder of 3000 shares of the value of Rs. 100.0.0 each. Those shares are fully paid up and all calls due have been duly paid. The petitioner obtained consent in writing under Section 399 of the Act of the shareholders holding 13,083 shares. The holdings of the petitioner and of the consenting share-holders constitute more than one-tenth of the issued share capital of the Company. The application is made for the petitioner on behalf of and for the benefit of the consenting shareholders and the petitioner. The authorised capital of the Company is Rs. 1 Crore consisting of shares of Rs. 100.0.0 each. All the shares are Equity shares. The subscribed capital is 61,000 shares of Rs. 100.0.0 each fully called. Prior to 1954, the Company was exclusively controlled and managed by Sri B. Patnaik (respondent-2) and Sri C. S. Loganathan (respondent-4) who between themselves held the majority shares. Sometime in 1954, Dr. H.B. Mohanty, the then Seretary of the industries Department, Government of Orissa, informed the petitioner that the Company was in financial and administrative difficulties and requested him to help the Company by providing finance, arranging loan from Banks and other sources and further by providing necessary administrative guidance. The petitioner agreed to the proposal. The shares in the Company were held originally by Sri Narayan Swami, respondents 2 and 4, Sri J. S. Taraporewala and a Company called the Kalinga Industrial Development Corporation Ltd., which was controlled by respondents 2 and 4. Subsequently an Agreement was entered into amongst the petitioner, respondents 2 and 4, Sri Narayan Swami and Sri Taraporewala, the terms whereof were recorded in writing on 27th July 1954. In terms of the agreement, shares were being held in equal proportion amongst the petitioner and respondents 2 and 4, and the agreement was duly acted upon in all respects. The 250 shares held by Sri Narsing Rath were purchased from him and were equally distributed amongst them. The one excess share was registered in joint names of the three parties. The petitioner was appointed as the Chairman and one of his nominees was appointed as the Director of the Company. Sri Narayan Swami agreed to act as the Managing Director of the Company on condition that he would obtain prior concurrence and approval of the Chairman in all matters of administrative policy. As a result of misunderstanding between Sri Narayanswami and respondents 2 and 4, the former resigned and therefore respondent 2 was appointed as the Managing Director on the same understanding that he would act in consultation with the petitioner in all matters of administrative and business policy and obtain the petitioner's prior concurrence and approval. Through the efforts of the petitioner and primarily upon his guarantee, the Chartered Bank agreed to grant over-draft facilities to the Company to the extent of Rs. 60 lacs and the Indian Bank agreed to grant similar facilities to the extent of another Rs. 50 lacs, and limits for Letters of Credit to the extent of Rs. 1.15 crores from the Chartered Bank and Rs. 1 Crore from the Indian Bank were also obtained and the Company was able to meet its need for working capital and for capital expenditure. The Company started functioning smoothly and efficiently and profits were earned by the Company. An application for sanction of issue of 39,000 Ordinary shares of Rs. 100.0.0 each was made on 17th September 1956 by the Company to the Government of India under the Capital issues (Control) Act, 1947 mentioning that the additional shares would be issued to the existing Directors, shareholders and their nominees. The Company was converted into a public company on 11th January 1957. The shareholders of the private Company continued to be the shareholders of the public company. While the company was a private company, it had made an application to the Government of Orissa for a loan of Rs. 65 lacs and the Orissa Government advised the Company to apply through Industrial Finance Corporation for such loan. As the Industrial Finance Corporation gave loans only to public limited Companies, it was decided to convert the Company into a public Company to enable it to apply for and obtain loan from the said Corporation. After the Company was converted into a public Company, the Controller of Capital issues on behalf of the Government of India sanctioned issue of 39,000 Ordinary shares on 18th December, 1957. One of the terms of the said sanction was :

(2.) THE cases of all the respondents are almost identical. It would be sufficient to refer in detail to the affidavit of Sri B. Patnaik (respondent 2). THE petitioner's allegations making out a case under Sections 397 and 398 are denied. Respondent 2's case is that Sri Jain (the petitioner) wanted to take an absolute control of the company, and the Company succeeded after strenuous efforts in protecting itself from passing to the absolute control of the petitioner. Having got the Company into somewhat better position than what it was initially, the petitioner tried to stop the flow of capital to the Company and threatened to withdraw his guarantee for Cash and Credit facilities with Company's Bankers and tried to stop raising of the capital from the shareholders and wrongfully instituted Title Suit No. 21 of 1958 and obtained ex parte interim injunction by suppression of all material facts. THE Company went into production in April 1955 and made rapid progress in its expansion. THE profits made by the Company increased from year to year and the Company paid dividends to the shareholders at the rate of three per cent till 31st March 1958 and at six per cent thereafter. THE reserve of the Company also progressively increased, and the Company was on a very sound position and there was scope for further development. THE petitioner, who is very rich as compared with the other share-holders, has all along insisted that the shares be issued to the existing shareholders only knowing it very well that it may not be possible for the other share-holders to acquire those shares with the result that he might be able to acquire absolute majority in the Company and gain absolute control thereof. THE oral agreement is ultra vires the memorandum of Articles of Association of the Company and is illegal and opposed to public policy. It was never acted upon. Sri Jain and Sri Sabharwala retired by rotation at the Annual General Meetings. THE petitioner did very little to procure finances for the Company besides introducing the Company to the Chartered Bank. THE draft notice with the agenda was approved by the petitioner in the meeting of the Board of Directors held on 1st March 1958. By the resolution of 29th March 1958 it was intended to exclude the existing shareholders from participating in the new shares in the best interest of the Company. THE resolution was not in breach of the conditions on which the sanction was given by the Controller of Capital Issues. THE value of the existing shares in the Company would never go down by the issue of such shares to outsiders. Under the terms of the sanction of the Controller of Capital issues, the issue had to be made privately and not publicly by issue of prospectus or through advertisement. THE Board accepted the applications for shares which had already been made. THE petitioner and his group never made any such application. THE issue of shares was not made with indecent haste. THE question of allotment of shares was before the Board on several occasions previously and could not be taken up in view of the pending injunction. THE persons to whom shares were issued on 30th July 1958 are all respectable and independent persons of substantial means and they are not under the control of respondents 2 and 4. THE allottees paid 5 per cent along with their application and subsequently made further payments of the allotment money and other money. A total sum of Rs. 35,000/- was received from the said allottees in respect of the shares, and in most cases these payments were made by cheques. But for the allotments the Company would have been deprived of this sum which was urgently needed. After the allotment of 30th July 1958, the present shareholdings of the petitioner and his group are less than 20% (twenty per cent) and the Company can pass a special resolution without the concurrence of the petitioner and his group. THE petitioner retired at the Annual General Meeting of the Company held on 17th October 1958. He offered himself for re-selection but was not re-elected by the shareholders. THE suit had already been filed against the Company by the date of the re-election and he had caused immense injury to the Company by preventing it from raising capital for several months. In the circumstances, the share-holders were justified in their lack of confidence in the petitioner. Sri Sabharwala continued to be a Director of the Company and attended the Board meeting until he retired at the Annual General meeting held on 30th December 1959. He was not re-elected for similar reasons. On 13th October 1955 the Board of Directors of the Company sanctioned the transfer of Rs. 3,40,000/- to respondents 2 and 4 at the request of Kalinga Industrial Development Corporation Limited. THE Board resolutions were confirmed by another Board meeting presided over by the petitioner on 12th January 1956. On 31st March 1956 respondents 2 and 4 utilised the said sum of Rs. 3,40,000/-each for obtaining an allotment of new shares issued by the Company. THE inspection of accounts was never sought for prior to the filing of the application.

(3.) PRIOR to the execution of the Agreement, the largest shareholders of the Company were respondents 2 and 4 who held 21,000 shares out of 25,000 shares, that is 84% the French Company held 3750 shares (15%) and Mr. Narsingh Rath 250 shares (1%). Admittedly the French Company takes no interest in the management of the affairs of the Company. The shares were allotted to the French Company towards remuneration for its collaboration. Respondents 2 and 4 constituted the 'brain' of the company and their will was the will of the Company. Even though by no resolution of the Board the Agreement was made binding on the Company, respondents 2 and 4 entered into the agreement with full understanding that the affairs of the Company would be managed in accordance with the Agreement and the inter se obligation and duties amongst the 3 partners would be determined in accordance with the Agreement. The Agreement cannot be said to be binding on the Company in the- sense that it was executed on behalf of the Company; on the theory the Company was essentially a partnership in between respondents 2 and 4 prior to the agreement, the subsequent conduct of the affairs of the Company should be tested by the touchstone of the terms of the agreement, quoted below :