Citation Codes

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Case Number

Company Appeal No. 19 of 2005 in Company Petition No. 2 of 2002

Judges

Mohta Anoop V., J.

Acts

SECTION 10 F COMPANIES ACT 1956
provisions of Sections 397 and 398 of the Companies Act.
Sections 397 and 398 of the Companies Act, 1956
Section 397/398 of the Companies Act,
section 398 read with section 402
section 10-F

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Smart Summary

Structured Summary of the Opinion (Mohta Anoop V., J.)

Factual and Procedural Background

This appeal arises from the appellants' challenge under Section 10-F of the Companies Act, 1956 to an order dated 17 January 2005 passed by the Company Law Board (Principal Bench, New Delhi) ("CLB"). In 2001 the respondent raised disputes with the appellants and in December 2001 filed Petition No. 2 of 2002 under Sections 397 and 398 of the Companies Act before the CLB, alleging oppression of a minority shareholder and mismanagement.

The CLB concluded that although some wrongful actions by the company were apparent, no case of oppression was made out; nevertheless it directed that the respondent/petitioner be permitted to sell her shares and, if she wished to exit, the company (respondents before the CLB) should buy the shares at a fair price to be determined by a valuer appointed by the Board (valuation to be based on balance sheet as on 31/03/2001). The appellants challenged those operative directions as contrary to Sections 397 and 398 and an abuse of process, seeking quashing of the CLB order.

Relevant background facts found in the opinion: the respondent held 28% of the shares; the company was incorporated in 1992 and had raised paid-up capital and taken term loans from the Maharashtra State Financial Corporation secured by personal guarantees from directors and the respondent's husband; the respondent's husband, a chartered accountant, was actively aware of and participated in the company's financial matters until about May 2001. The CLB considered complaints including breach of collateral security, alleged misappropriation of DEPB sale proceeds, diversion of business to another company, and unsecured loans/advances.

Legal Issues Presented

Whether the CLB was justified in directing the company to purchase the respondent's shares as a remedy where the CLB itself had found that no case of oppression was made out under Sections 397/398 of the Companies Act.
Whether the respondent, who (and whose husband) were aware of and participated in the company's transactions, could invoke equitable jurisdiction to obtain a buy-out remedy notwithstanding the absence of proven oppression or mismanagement.
Whether the CLB's operative directions constituted an abuse of process and were contrary to the provisions of Sections 397 and 398 of the Companies Act.
Whether, on appeal under Section 10-F (limited to questions of law), the High Court could interfere with findings of fact made by the CLB on the ground that such findings are perverse or based on no evidence.

Arguments of the Parties

Appellants' Arguments

The CLB's operative direction compelling the company to purchase the respondent's shares was contrary to Sections 397 and 398 of the Companies Act and amounted to an abuse of the CLB's process.
Where facts fall short of just and equitable grounds for winding up (or a case of oppression), no relief such as ordering a buy-out can be granted; reliance was placed on Hanuman Prasad Bagri v. Bagree Cereals Pvt. Ltd. and Jaladhar Chakraborty v. Power Tools and Appliances Co. Ltd. to support this position.
The CLB's findings that no oppression was made out, and that the respondent and her husband were aware of the company's transactions, meant that the respondent could not claim equitable relief now.
It was submitted that the appellants were entitled to interference with the CLB directions and quashing of the operative order as being perverse and unsustainable; the appellants relied on Needle Industries and other authorities as supporting principles concerning oppression/mismanagement.

Respondent's Arguments

The respondent sought relief under Sections 397/398 alleging oppression and mismanagement and requested that, to end the dispute, she be permitted to exit the company by selling her shares and, if she chose, that the company buy her shares at a fair price determined by a valuer appointed by the CLB.
The respondent relied on several precedents (including Hindustan Construction Co. Ltd. v. G.K. Patankar; Caparo India Ltd. v. Caparo Maruti Ltd.; Delstar; Sangramsinh Gaekwad) to support the availability of relief — including equitable relief — even where, in certain circumstances, a court/tribunal may grant orders to do substantial justice between parties or where equitable jurisdiction requires a permanent solution to intractable disputes between shareholders.
It was (implicitly) argued that the High Court should not disturb the CLB order on appeal under Section 10-F limited to questions of law; the opinion records and rejects this contention by reference to authority explaining that perverse findings of fact based on no evidence can become questions of law on appeal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Hanuman Prasad Bagri v. Bagree Cereals Pvt. Ltd. (2001)	Principle that if facts fall short of just and equitable grounds for winding up, no relief (such as under ss.397/398) can be granted.	The court held that this authority squarely covered the appellant's submission and supported quashing the CLB directions because the facts did not justify the relief ordered.
Jaladhar Chakraborty v. Power Tools and Appliances Co. Ltd. (1994)	Support for the proposition that having held no ground of oppression or mismanagement, a court cannot order a buy-out under ss.397/398; substratum for such orders is absent where no oppression/mismanagement is found.	The court relied on the observation in this case to conclude that, since no oppression/mismanagement was proved, the CLB should not have ordered purchase of shares.
Hindustan Construction Co. Ltd. v. G.K. Patankar (1976)	Authority cited by respondent as supporting some aspects of the case-law on remedies; the opinion records the respondent's reliance.	The court found this authority distinguishable on facts and of no assistance to the respondent in the present case.
Caparo India Ltd. v. Caparo Maruti Ltd. (2006)	Sets out propositions: before granting relief under s.397 petitioner must prove acts of oppression (of a nature akin to winding up); court should distinguish between s.397 (oppression) and s.398 (mismanagement); where appropriate, s.398 read with s.402 may be invoked; and equitable relief may be granted in certain intractable shareholder disputes.	The court quoted these propositions and applied them to conclude that equitable jurisdiction could not be used here because the facts did not justify such relief; the present case did not involve prolonged intractable litigation or lack of probity warranting a buy-out.
Delstar Commercial and Financial Ltd. v. Sarvottam Vinijaya Ltd. (2003)	Precedent relied upon by respondent (referenced among authorities on oppression/mismanagement).	The opinion records reliance but does not derive a distinct rule from it beyond noting that authorities relied upon by respondent were distinguishable on facts.
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. (1981)	Principles concerning oppression and mismanagement surrounding ss.397, 398 and 402.	The court noted the principle was not in dispute and observed that it did not assist the respondent; instead it supported the appellant because no case of oppression or mismanagement was established.
Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005)	Authority for the proposition that even if no case of oppression is made out, in some cases a court may grant relief to do substantial justice between the parties.	The court considered the Sangramsinh submission but held it inapplicable: the present facts did not warrant exercising equitable jurisdiction to grant the buy-out remedy.
Jyotsna Nalinikant Kilachand v. Nandlal Kilachand Investment Pvt. Ltd. (1993)	Authority cited by respondent (recorded among relied-upon cases).	The court recorded reliance but did not treat it as determinative; the opinion focuses on distinguishing the respondent's authorities on facts.
Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan (2004/2005)	Clarifies that Section 10-F refers to appeals on questions of law but a finding of fact that is perverse or based on no evidence can be set aside in such an appeal because perversity itself becomes a question of law.	The court applied this principle to hold that it could set aside the CLB's operative direction on the ground of perversity (the operative part being contrary to law and unsustainable), despite the appeal being under s.10-F.

Court's Reasoning and Analysis

The court's analysis proceeded as follows:

The court accepted the CLB's factual findings in part — notably that some wrongful acts by the company appeared on the record (breach of collateral security, temporary transfer of funds, diversion of business, sale of flat subject to security, unsecured advances) — but that these instances, considered on their own, did not make out a case of oppression or mismanagement under Sections 397/398.
The court emphasized the undisputed and material fact that until May 2001 the respondent and her husband (a chartered accountant who advised and participated in the company's financial matters) were fully aware of and involved in the company's transactions and decisions. That participation and knowledge weighed against allowing equitable relief now.
The CLB had concluded the petitioner engaged in "forum shopping" and that she was a party to the company decisions until the dispute arose; the court accepted that these conclusions supported the finding that the petition did not establish oppression sufficient to attract relief under ss.397/398.
Despite concluding no oppression was proved, the CLB directed a buy-out to end the dispute. The High Court analyzed this operative direction and concluded it was contrary to the legal scheme of Sections 397 and 398 and amounted to an abuse of the CLB's process in the circumstances.
The court considered authorities relied upon by both sides. It held that precedents establishing that equitable relief may be granted in some cases (for instance where shareholders cannot do business together and litigation is protracted) were distinguishable because the present facts did not show prolonged, intractable litigation or lack of probity requiring such a remedial solution.
The court addressed the procedural argument about Section 10-F appeals being limited to questions of law. It applied Dale & Carrington to explain that a finding of fact that is perverse or based on no evidence can be reviewed on an appeal limited to questions of law because the perversity itself becomes a question of law.
On that footing the court concluded that the operative direction of the CLB compelling purchase of shares was perverse and unsustainable in law given the absence of proven oppression or mismanagement and the respondent's prior knowledge/participation. Accordingly, interference was warranted and the impugned order was quashed.

Holding and Implications

Holding:

APPEAL ALLOWED. The impugned order dated 17 January 2005 of the Company Law Board is quashed and set aside. No costs were awarded.

Implications:

The direct effect is that the CLB's direction compelling the company to purchase the respondent's shares is removed; the respondent does not obtain the ordered buy-out remedy pursuant to the impugned order.
The court concluded the CLB's operative directions were contrary to the provisions of Sections 397 and 398 and amounted to an abuse of process in the particular facts of this case (notably the respondent's and her husband's participation and knowledge of company affairs).
The opinion does not announce or rely on any novel legal principle beyond applying existing authorities; it resolves the appeal on the facts and established authorities, so no new precedent is recorded by the court in this opinion beyond the application of settled principles (including the doctrine that perverse findings of fact may be set aside on appeals limited to questions of law under Section 10-F).

This summary is confined to and derived exclusively from the content of the provided opinion.

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Vardhaman Dye Stuff Industries Pvt. Ltd. & Ors. v. M.R Shah .

Mohta Anoop V., J.:— The appellants, (Original respondent) being dissatisfied by the impugned order dated 17th January, 2005 passed by the Company Law Board, Principal Bench, New Delhi (for short, “CLB”), have preferred present appeal under section 10(f) of the Companies Act 1956 (for short,” Companies Act”).

2. In the year 2000-2001 the respondent raises certain disputes with the appellants. In the month of December, 2001, the respondent files a petition No. 2 of 2002 under Sections 397 and 398 of the Companies Act, 1956 before the Company Law Board, New Delhi against the appellants. On 27/01/2005, by the impugned order the CLB though holds that no case of oppression has been made out by the respondent, yet directed the appellants to purchase the shares of the respondent. Hence the appeal.

3. The relevant conclusion as arrived at by the CLB is as under:—

“36. I find that the petitioner has been indulging in forum shopping and she was aware of everything happening in the company till the dispute arose after March, 2000. Now when the relationship in the two groups have soured, the petitioner has raised various issues of action/inaction on the part of respondents alleging that the affairs of the respondent company are being conducted in a manner oppressive to the petitioner. The petitioner was a party to all these decisions and operating through her husband. She cannot turn back at a later stage to invoke equitable jurisdiction on the basis of certain decisions taken by the respondent company. Although some of these decision like transferring of Rs. 20 lakhs to the personal account of a particular director for two days, diversion of companies export business through another company of the respondent directors for saving sales tax etc. as well as selling the flat which had not been released out of the collateral security, are some of the actions which are apparently wrong on the part of the respondent company. The concerned authorities like Registrar of Companies would take note of these omissions and not adhering to the provisions of the companies act and take suitable action against the company. However, no case of oppression to the petitioner is made out by merely some wrongful actions taken by respondent company as mentioned above.

37. In view of the above discussions, the petition is disposed of with the following directions that in order to end the dispute, the petitioner should be given liberty to sell his shares and go out of the company on return of his investment in shares, as she feels oppressed by the majority share holders. In case the petitioner is willing to part with her shares, the shares will be bought by the respondent at the fair price to be fixed by a valuer to be appointed by this Board. The valuation will be based on the balance sheet of the respondent company as on 31/03/2001. In case the petitioner desires to go out of the company, then on an application made by her, a suitable valuer will be appointed by this Board in consultation with both the parties.”

4. The learned Counsel appearing for the appellant has relied on the following cases:—

1. (Hanuman Prasad Bagri v. Bagree Cereals Pvt. Ltd.)1, 2001 DGLS 536 : (2001) 4 SCC 420 : A.I.R 2001 S.C 1416 : J.T 2001 (4) S.C 424 : 2001 (3) SCALE 86 : 2001 (3) Supreme 80 : 2001 (2) Comp. L.J 392 (SC).

2. (Jaladhar Chakraborty v. Power Tools and Appliances Co. Ltd.)2, 1994 Company Cases, (Vol. 79), (Cal.) 505.

5. The learned Counsel appearing for the respondent has relied on the following cases:—

1. (The Hindustan Construction Co. Ltd. v. G.K Patankar)3, 1976 DGLS 24 : (1976) 1 SCC 810 : A.I.R 1976 S.C 907.

2. (Caparo India Ltd. (U.K) v. Caparo Maruti Ltd.)4, 2006 (72) CLA 99 Del.)

3. (Delstar Commercial and Financial Ltd. v. Sarvottam Vinijaya Ltd.)5, 2003 (113) Company Cases 642.

4. (Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.)6, 1981 DGLS 302 : (1981) 3 SCC 333 : A.I.R 1981 S.C 1298 : 1981 (2) SCALE 959.

5. (Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (D) through LRs.)7, 2005 DGLS 63 : (2005) 11 SCC 314 : A.I.R 2005 S.C 809 : J.T 2005 (1) S.C 581 : 2005 (1) SCALE 493 : 2005 (3) Comp. L.J 385 (SC).

6. (Jyotsna Nalinikant Kilachand v. Nandlal Kilachand Investment Pvt. Ltd.)8, 1993 (3) Bom. C.R, 512.

6. The undisputed position is that, respondent (original petitioner) is holding 28% shares in appellant company (original respondent No. 1). Respondent (original petitioner) has filed petition under Section 397/398 of the Companies Act, complaining oppression on minority share holder and mismanagement of appellant company, perpetrated by the Managing Director and Directors of the appellant company.

7. The company was incorporated in the year 1992. The company has its factory at M.I.D.C, Tarapur, Maharashtra. In 1997 the paid up share capital of the company was raised to Rs. 34.0 lacs. Appellant company has availed 3 term loans of about Rs. 90 lacs in total in 1994, 1996 and 1997 from the Maharashtra State Financial Corporation (for short, “M.S.F.C”) against the factory plant and machinery. The respondent's (original petitioner's) husband Mr. Rajesh Shah had qualified Chartered Accountant often advise in basic financial matters to the appellant company. All directors of the company and Mr. Rajesh Shah, the husband of the respondent, had given their personal guarantee for repayment of the loans. The respondent however, moved the petition on allegation of siphoning and misusing funds by the appellant company after March, 2000.

8. After considering the material placed on record and written submissions filed by the parties, the CLB has dealt with all the aspects which culminated by answering four major issues, viz.; “breach of collateral security given to M.S.F.C”, “alleged misappropriation of Sale price of DEPB licenses”, “diversion of company business to Vardhaman Impex Pvt. Ltd.”, and “allegation of unsecured loans and advances”.

9. The undisputed position on record as rightly observed by the CLB that till May 2001 the respondent and her husband were fully aware of the affairs of the company. The respondent's husband in his capacity as a Chartered Accountant at the relevant time was fully aware all the financial aspects of the Company. He represented in various group of companies on tax and financial matters including Income Tax authorities. The respondent, therefore, based on the allegation of siphoning of fund and or mismanagement, moved this application inspite of the facts that the respondent and her husband were aware of all the basic financial transaction including of breach of collateral security, alleged misappropriation of sale price, and/or diversion of company business to Vardhaman Impex Pvt. Ltd. and even of unsecured loan and advances. The CLB after considering the material placed on record, apart from above facts come to a clear conclusion that some instances here or there that cannot be the reason to pass or grant any relief as prayed in such application.

10. The paragraphs quoted above further reflects that all the conclusions arrived at by the CLB by observing specifically that no case of oppression to the respondent was made out by merely some wrongful actions taken by the appellant company as mentioned above.

11. In the present facts and circumstance of the case, therefore, having once come to the conclusion that there is no case made out by the respondent of oppression and even otherwise as the respondent as well as her husband who was acting at the relevant time, as a Chartered Accountant, were fully aware of all the transactions and in fact participated in all such transactions, cannot agitate the same foundation for the relief as prayed in the petition. The operative part therefore, in view of the above facts and reasoning is contrary to the provisions of Sections 397 and 398 of the Companies Act. The appellant, therefore, has made out her case to interfere in view of the directions as given by the CLB.

12. The directions compelling the company to purchase the shares of the respondent/petitioner, in the facts and circumstances of the case, is abuse of the process of the CLB. Such directions is, therefore, contrary to the law and impermissible.

13. The submission based upon Sangramsinh (supra) that, “in a given case, the Court despite holding that no case of oppression has been made out may grant such relief so as to do a substantial justice between the parties.” As noted above, in the present case, there is no case made out to grant such relief in favour of the respondent. There is no case of oppression or mismanagement, made out in the facts and circumstances of the case and even otherwise insufficient justification to pass such impugned order/directions and therefore being perverse, unsustainable.

14. The another Judgment which has been strongly relied by the learned Counsel appearing for the respondent is Caparo India Ltd. (supra), where in para 36, the Delhi High Court has observed as under:—

“(a) Before any direction can be given or relief can be granted under section 397 of the Act, the petitioner has to prove the acts of oppression and that too of a nature which would normally make out a case of winding up of the company under just and equitable clause. However, winding up is not resorted to as it would prejudicially affect the interest of the petitioner and therefore, recourse to section 397 of the Act. If case of this nature is not made out then directions under section 397 cannot be issued.

(b) Normally, the petitions are filed invoking provisions of the sections 397/398 of the Act and in such petitions duty of the Court is to see the distinction between the two provisions and examine the position, i.e, to see as to whether a particular allegation is oppression under section 397 or of the mismanagement under section 398.

(c) Even if case under section 397 is not made out and the allegations are such as which would bring the case under section 398, appropriate directions under section 398 read with section 402 can be issued.

(d) Even if a case of oppression is not made out, in exercise of its equitable jurisdiction, the Court can grant relief and pass the necessary orders. This would normally be in those cases where two sets of shareholders cannot do business together and have been fighting litigation for years and there is lack of probity amongst the parties and the Court is of the opinion that a permanent solution has to be found.”

15. As noted above, I am of the opinion that, there is no case made out by the respondent to exercise any equitable jurisdiction to grant such relief. This is not the case where the parties were fighting litigation for the years. On the contrary, in this case at the relevant time, the petitioner who was fully aware all the transactions and affairs of the company, as her husband was a Chartered Accountant of the company, who in fact dealt with all alleged basic financial matters of the company cannot claim the equity or such reliefs. There is no case of oppression and mismanagement or winding up of the company on any unjust or equitable ground to bring the case under any of Section 397 or 398 and or even 402 of the Companies Act. The above cases as relied by the learned Counsel appearing for the respondent are distinct and distinguishable on facts itself. In view of the above reasoning, the Hindustan Constructions Co. Ltd. (supra) as relied by the learned Counsel appearing for the respondent is also of no assistance.

16. The Supreme Court Judgment which has been relied by both the parties in Needle Industries (India) Ltd. (supra) referring to the principle of oppression and mismanagement of surrounding Section 397, 398 and 402 is not in dispute, in no way assist the respondent and on the contrary it supports the appellant in all respects and as there is no case of oppression or mismanagement and or winding up order.

17. The Apex Court judgment relied by the learned Counsel appearing for the appellant in Hanuman Prasad (supra) squarely covers the submissions as raised that “if the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners”. Further Jaldhar Chakraborty (supra) also supports the case of the appellant specially the observation in the following para:—

“The last question to be decided in this matter is whether the Court can compel the company or the respondents to purchase the shares of the petitioner. As noted above the petitioners are willing to sell their shares in the company at market value. The offer is not acceptable to the company or the respondents. In my view having held that there was no ground of oppression or mismanagement, there is no question of the Court passing any order for bringing to an end any matter complained of either under section 397 or 398. The substratum for passing any order under section 397 or 398 is not available. As observed by Buckley L.J, in (Jermyn Street Turkish Baths Ltd., In re)9, (1971)4) Comp. Cas 999, 12025 (1971) 3 All. E.R 184 (at page 201).”

18. In view of the above, the submission that the High Court may not disturb the impugned order passed by the Company Law Board as section 10-F refers to an appeal only on a question of law, is not correct. The Apex Court in (Dale & Carrington Invt. (P) Ltd. v. P.K Prathapan)10, 2004 DGLS 599 : (2005) 1 SCC 212 : A.I.R 2005 S.C 1624 : J.T 2004 (7) 434 : 2004 (7) SCALE 584 : 2004 (7) Supreme 209, has observed as under:—

“section 10-F refers to an appeal being filed on a question of law. The learned Counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and, therefore, the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned Counsel for the appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law.”

19. Therefore, in view of the above reasoning, in the facts and circumstances of the case and as already observed the impugned order and specially the operative part is perverse and unsustainable. Resultantly, the appeal is allowed. The impugned order dated 17th January, 2005 is quashed and set aside.

20. No costs.

21. Appeal allowed.

Vardhaman Dye Stuff Industries Pvt. Ltd. & Ors. v. M.R Shah .

Structured Summary of the Opinion (Mohta Anoop V., J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellants' Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Vardhaman Dye Stuff Industries Pvt. Ltd. & Ors. v. M.R Shah .

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