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PUNJAB & HARYANA HIGH COURT
Harbans Singh and Bal Raj Tuli JJ.
Suresh Chandra Marwaha
Versus
Lauls Private Ltd.And Ors.
Letter Patent Appeal No. 189 of 1972,
Decided On : AUGUST 7, 1972
COMPANIES ACT - SECTIONS 397, 398 - OPPRESSION AND MISMANAGEMENT - VALIDITY OF SHARE TRANSFERS - JURISDICTION - INTERNAL MANAGEMENT - REMOVAL OF DIRECTOR - INDIVIDUAL AND CORPORATE RIGHTS OF SHAREHOLDERS - RIGHT TO APPOINT DIRECTORS - MAJORITY SHAREHOLDER - WINDING UP OF COMPANY - INTERESTS OF CREDITORS - CHANGE IN MANAGEMENT. 1. A petition under Sections 397 and 398 of the Companies Act can only be maintained if the petitioner is able to establish that he has been oppressed as a member of the company and not in any other capacity. 2. The validity of share transfers is a matter to be determined in a petition under Section 155 of the Companies Act and not in a petition under Sections 397 and 398 of the Act. 3. The court will not interfere in the internal management of a company unless it is shown that the affairs of the company are being conducted in a manner oppressive to the minority shareholders. 4. The removal of a director by a resolution of the company in accordance with the provisions of the Act does not constitute oppression of the director as a shareholder. 5. A shareholder has two kinds of rights, namely, individual rights and corporate rights. Every shareholder can enforce his individual rights singly but corporate rights have to be enforced by the majority. 6. The right to appoint a director is a very valuable right of a shareholder and when this right is infringed, his right qua shareholders is also affected. The shareholder in such a case is entitled to apply under Section 397 of the Act. 7. A change in the management of a company brought about by and in the interests of a creditor of the company does not afford a cause of action to any member under Section 398 of the Companies Act.
Fact of the Case:
The appellant, a shareholder of M/s. Lauls Private Ltd., Faridabad, filed a petition under Sections 397 and 398 of the Companies Act against the respondents, alleging oppression and mismanagement of the company's affairs. The petition was dismissed by the learned single judge, and the appellant filed an appeal under Clause 10 of the Letters Patent.
Finding of the Court:
The court held that the appellant had not made any specific allegations of oppression of any member or members of the company and that the vague allegations made with regard to the management of the affairs of the company by the present management as being prejudicial to the interest of the company were not sufficient to establish a case of oppression under Sections 397 and 398 of the Companies Act.
Issues: 1. Whether the petition should be stayed on the ground that two suits relating to the same subject-matter filed by the petitioner in the Court of the Subordinate Judge, Ballabgarh, are pending? 2. Is the petition bad for misjoinder of parties? 3. Whether the consent of Shrimati Shiv Chandrika Marwaha in upport of the petition constitutes a valid consent as contemplated by the Act and the Rules framed thereunder? 4. Is the petition not maintainable on the principle of internal management as alleged in paragraph 7 of the reply? 5. Has the petitioner given sufficient particulars of his allegations of activities oppressive to the petitioner and prejudicial to the interest of the company? 6. Was the change in management brought about in May, 1969, in the interest of the creditors of the company and in the interest of the company? 7. If issues Nos. 4, 5 and 6 are decided against the petitioner, is the petition maintainable under Sections 397 and 398 of the Act?
Ratio Decidendi: The court held that the petition under Sections 397 and 398 of the Companies Act was not maintainable because the appellant had not made any specific allegations of oppression of any member or members of the company and that the vague allegations made with regard to the management of the affairs of the company by the present management as being prejudicial to the interest of the company were not sufficient to establish a case of oppression under Sections 397 and 398 of the Companies Act.
Final Decision: The appeal was dismissed with costs.
1. The appellant, Suresh Chandra Marwaha, filed a petition under Sections 397 and 398 of the Companies Act against the respondents which was dismissed by the learned single judge on March 17, 1972, and this appeal under Clause 10 of the Letters Patent has been directed against that order.
2. The appellant is a shareholder of M/s. Lauls Private Ltd., Faridabad (hereinafter called " the company "), holding 5 shares of Rs. 100 each. His mother, Shrimati Shiv Chandrika Marwaha, holds 754 shares and the petition has been filed with her support. Thus, the appellant and his mother hold more than 10 per cent. shares of the company and were entitled to file a petition under Sections 397 and 398 of the Companies Act.
3. The company was incorporated as a private company limited by shares in 1933 and its principal promoter was Shri S. R. Laul, advocate. Articles 6 and 8 of the company provided as under :
"6. That no shares of this company shall be held by any person other than the descendants of Mr. S. R. Laul except such shares as have been or are transferred with the previous consent of the board of directors as laid down in Article 6 or are allotted to any outsider hereafter by the board I Provided that this article shall not affect holding of shares by Shrimati Ishwara Devi Laul herself personally.
7. That all shares presently held by the shareholders on the death of Shrimati Ishwara Devi Laul or of any of the descendants of Mr. S. R. Laul without any direct issue of such descendant and on the extinction of the line, shall revert to Mr. S. R. Laul or in case of his earlier death to his direct descendants and shall be divisible amongst them according to Hindu law of inheritance subject always to the provisions of Article 6 above : Provided that the provisions of this article shall not apply to bona fide outsider transferees or allottees or their representatives as are contemplated in Article 6 above but shall apply to all shares re-transferred to the original holder out of his holding, the holder shall include his or her descendants.
8. The provisions of Articles 6 and 7 shall also be applicable to all shares hereinafter allotted to any person by way of gift from or in consideration of money paid by Mr. S. R. Laul."
4. Article 9 makes a provision for the transfer of shares by the board of directors who have been given the right to decide to transfer shares without assigning any reason, etc.
5. From time to time many relations of Shri S. R. Laul, other than his descendants, were allotted shares, as is clear from annexure III, wherein two sons-in-law, two daughters-in-law, one grand-daughter (daughter of a daughter) and one niece (brothers daughter) are mentioned. The appellant is the son of Shrimati Shiv Chandrika Marwaha, a daughter of Shri S. R. Laul.
6. M/s. India Iron Traders Corporation, Motia Khan, Delhi, was a creditor of the company to the tune of about Rs. 4 lakhs. Failing to recover the amount from the company, the said firm filed a petition for the winding up of the company in this court on May 2, 1969. It appears from the averments in the petition and the annexures annexed thereto that a compromise was arrived at between some of the directors of the company and the partners of M/s. India Iron Traders Corporation under which the members of the Laul family owning 2,869 shares agreed to transfer their shares to Chander Sagar Gupta, a partner of M/s. India Iron Traders Corporation and his associates, for a consideration of Rs. 50 per share. A meeting of the board of directors was held on May 27, 1969, to give effect to the said transfers and to make Chander Sagar Gupta and Gyan Sagar Gupta, directors of the company, in place of Navin Deepak Laul and Arvind Laul. It may be noted here that on May 27, 1969, the board of directors consisted of Navin Deepak Laul, Arvind Laul and Shrimati Shiv Chandrika Marwaha. At the meeting held on that date, Shrimati Shiv Chandrika Marwaha was absent and Chander Sagar Gupta and Gyan Sagar
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