1977 Supreme(SC) 367

SUPREME COURT OF INDIA
M.A. BEG, C.J.I., P.N. BHAGWATI AND D.A. DESAI, JJ.
Cosmosteels Private Limited and others, Appellants
Versus
Jairam Das Gupta and others, Respondents.
Civil App. Crl. No. 1347 (N) of 1977
Decided on 16-12-1977.
Civil Misc. Petition No. 7962 of 1977, (Application for intervention) in the matter of
Advocates appeared
Mr. Shankar Das Ghose, Sr. Advocate (M/s. J. B. Dadachanji, Mr. K. J. John and Shri Narain, Advocates with him), for the Appellants in the Appeal and Opp. Party in CMP; Mr. A. K. Sen and Mr. R. P. Bhatt, Sr. Advocate (M/s. E. C. Agrawala, S. S. Khanduja and S. Sahni, Advocates with them), for Respondents Nos. 1-6; Mr. Niren De, Sr. Advocate (S. V. Tambvekar, Advocate with him), for Applicant/Interveners (Bharat Refineries).

Headnote:REDUCTION OF SHARE CAPITAL—OPPRESSION OF MINORITY SHARE HOLDERS—PETITION UNDER SECTIONS 397 AND 398—SAFEGUARD TO CREDITORS - NOTICE TO CENTRAL GOVERNMENT—WHETHER REQUIRED AT APPELLATE STAGE ALSO - REDUCTION OF SHARE CAPITAL—SAFEGUARD TO CREDITORS - FRESH NOTICE TO CENTRAL GOVERNMENT—WHETHER REQUIRED AT APPELLATE STAGE ALSO - POWERS OF COMPANY LAW BOARD—SAFEGUARD TO CREDITORS

       

       -the scheme of Sections 397 and 406 constitutes a Code by itself for granting relief to oppressed minority share holders and for granting appropriate relief, a power of widest amplitude, inter alia, lifting the veil on Company purchasing its shares under Court’s direction, is conferred on the Court. When the Court exercises this power by directing a purchase of its shares by the company, it would necessarily involve reduction of the capital of the Company. No canon of construction would permit an interpretation in which the statutory power of the court for its exercise depends upon the veto of the members of the company. This would inevitably be the situation if reduction of share capital can only be brought by resorting to the procedure prescribed in Sections 100 to 104. Additionally it would cause inordinate delay and the very purpose of granting relief against oppression would stand self defeated. Viewed from a slightly different angle, it would be impossible to carry out the directions under section 402 for reduction of share capital if the proceeding under Sections 100 to 104 is required to be followed. Under Sections 100 to 104 the Company has to first adopt a special resolution for reduction of share capital if its articles so permit. After such a resolution is adopted which is necessarily must be passed by majority, and it being a special resolution, by a statutory majority, it will be submitted for confirmation by the court. Now, when minority shareholders complain of oppression by majority and seek relief against oppression from the court under sections 397 and 398 and the Court in a petition of this nature considers it fair and just to direct the company to purchase the shares of the minority shareholders to relieve oppression, if the procedure prescribed by Sections 100 to 104 is required to be followed, the resolution will have to be first adopted by the members of the Company but that would be well nigh impossible because the very majority against whom relief is sought will be able to veto it at the threshold and the power conferred on the court would be frustrated. That could never have been the intention of the legislature. Therefore, it is not conceivable that when a direction for purpose of shares is given by the Court under Section 402 and consequent reduction in share capital is to be effected, the procedure prescribed for reduction of share capital in Sections 100 to 104 should be required to be followed in order to make the direction effective,

       -undoubtedly, when a petition is made to the Court under Sections 397 and 398 it is obligatory upon the court to give notice of the petition to the Central Government and it would be open to the Central Government to make a representation and if any such representation is made, the Court would have to take it into consideration before passing the final order in the proceeding. But section 400 does not envisage a fresh notice to be issued at the appellate stage,

       -As held in the case of Cosmosteels Private Limited v. Jairam Das Gupta, AIR 1978 SC 375 = (1978) I SCJ 423 = (1978) I SCC 215 = 48 Com. Cas. 312 = (1978) I SCWR 416 where the court, while disposing of a petition under Sections 397 and 398, gives a direction to the company to purchase shares of its own members, a consequent reduction of the share capital is bound to ensue, but before granting such a direction, it is not necessary to give notice of the consequent reduction of the share capital to the creditors of the company. No such requirement is laid down by the Act. Two procedures ultimately bringing about reduction of the share capital are distinct and separate and stand apart from each other and one or the other may be resorted to according to the situation. This is the clearest effect of the disjunctive “or” in Section 77.

       Further Held that, it may be noticed that until the company submits its resolution for reduction of share capital to the court, the creditors have no say in the matter and therefore the court is empowered to ascertain the wishes of the creditors by following the procedure prescribed in Sections 101 to 104. To object behind prescribing the procedure in Sections 101 to 104 requiring, save in special circumstances as contemplated in Section 101(3), the court to give notice to the creditors is that the members of the Company may not unilaterally act to the detriment of the creditors behind their back. If such a procedure were not prescribed the court might, unaware of all the facts, be persuaded by the members to confirm the resolution and that might cause prejudice to the creditors. But such a situation would not be likely to arise in a petition under Sections 397 and 398. In such a petition the court would better be in a position to have all the relevant facts and circumstances before it and it would be the court which would decide whether to direct purchase of shares of the members by the company. Before giving such a direction, the court would certainly keep in view all the relevant facts and circumstances, including the interest of the creditors. Even if the petition is being disposed of on a compromise between the parties, yet the court, before sanctioning the compromise, would certainly satisfy itself that the direction proposed to be given by it pursuant to the consent terms, would not adversely affect or jeopardise the interest of the creditors. Therefore, it cannot be said that merely because Section 402 does not envisage consent of the creditors before the court gives direction for reduction of share capital consequent upon purchase of shares of some of the members by the Company, there is no safeguard for the creditors.

       -undoubtedly, when a petition is made to the Court under Sections 397 and 398 it is obligatory upon the Court to give notice of the petition to the Central Government and it would be open to the Central Government to make a representation and if any such representation is made, the Court would have to take it into consideration before passing the final order in the proceeding. But Section 400 does not envisage a fresh notice to be issued to the appellate stage.