C. v. PARDHANANI VS M. B. PARDHANANI — 1990 DIGILAW 150 (KAR)

SHIVASHANKAR BHAT, J. ( 1 ) THIS petition purports to be under Sec 398 of the Companies Act ('the Act', for short) seeks the following reliefs against the respondent:" (1) to declare that respondent is guilty of acts of mismanagement and misappropriation and is receipient' of illegal gratification while in management of Mac Charles (India) Ltd; (2) direct respondent to restore to mac. Charles (India) Ltd. , the sum of Rs. 44,78,000/- or such other sum as may be found due to the company in respect of such acts of mismanagement, misappropriation and illegal gratification indulged in while in management of the company; (3) punish respondent under Sections 539,540, 541, 542 and 543 of the Companies Act, 1956 (read with Schedule XI) and award such imprisonment as this Hon'ble court deems just and appropriate; (4) remove respondent from the office of the Director of the company; (5) pass temporary injunction restraining him from attending board Meeting of the company; (6) disqualify respondent for holding any office of Director in the company; (7) for costs of these proceedings and for interest on sums which respondent is directed to restore to the company; and (8) grant such other and further reliefs as this Hon'ble Court deems fit to grant in the facts and circumstances of the case". ( 2 ) ACCORDING to the petitioners, the respondent who was the Managing director of the 3rd petitioner company, resigned fro'm the office of Managing Director in May 1987 and (hereafter did not attend any of the Board's meetings. Subsequently an extraordinary General Body Meeting, was convened to remove him from the office of Director; meeting was scheduled to be held on 21-12-1987, but was not held in view of a Civil Court's order. The share holding of the respondent is only 1. 28 percent which he holds in trust and for the benefit of the 2nd petitioner. The application for temporary injunction was subsequently withdrawn in the Civil Suit and in the adjourned meeting held on 18-1 -1988, respondent was removed from the office of the Director. The present petition was filed on 27-8-1988. The 1st petitioner is the Director and Chairman of the Company. The Company was impleaded as the 3rd petitioner, subsequently; originally it was not impleaded as a party. The present petition was filed on 27-8-1988. The 1st petitioner is the Director and Chairman of the Company. The Company was impleaded as the 3rd petitioner, subsequently; originally it was not impleaded as a party. The petition proceeds on the clear assumption that petitioners 1 and 2 hold the controlling interest in the company and the respondent ceased to be in charge of the company's management and its affairs. Several acts of commission and omission are alleged against the respondent while he was allegedly in control of the affairs of the company and was its Managing director. In view of these misfeasance committed by the respondent, the company is alleged to have suffered huge loss. ( 3 ) IT is not necessary to refer to the details given in the petition. The respondent, however, has denied the allegations made against him; on the other hand, he attributes several acts of omissions to the 1st petitioner, resulting in loss to the com pany; he further asserts, that the 1st petitioner has been guilty of enriching himself at the costs of the company. ( 4 ) THERE are a few more litigations between the parties. Being brothers, the 1st petitioner and the respondent may be expected of proceeding with a bitter fight against each other. ( 5 ) PETITION is not yet admitted. The respondent has raised a preliminary objection as to the maintainability of the petitioner under Sec. 398 of the Act. According to the respondent, the relief is sought against a person who is not in the management of the company and admittedly is not controlling its affairs. Petitioners 1 and 2 are in the present management. Question of any oppression by the respondent, of the other share holders does not arise here. The reliefs sought are in the nature of compensation for the past alleged tortious acts and seeks punishment to be imposed on the respondent. The reliefs sought in no way reflects the reliefs contemplated by Sec. 398 of the Act. Question of any oppression by the respondent, of the other share holders does not arise here. The reliefs sought are in the nature of compensation for the past alleged tortious acts and seeks punishment to be imposed on the respondent. The reliefs sought in no way reflects the reliefs contemplated by Sec. 398 of the Act. ( 6 ) SOME of the acts and omission sattributed to the respondent are: (a) respondent was the Managing Director at the relevant time and was responsible for the delay in execution of the Hotel project; (b) respondent abused his authority as the managing Director by placing orders for materials without disclosing the same to the other Directors; (c) respondent, as the managing Director, made certain fraudulent appointments, who were his favourites, on exorbitant remunerations; and (d) respondent was guilty of embezzlements and misappropriations. All these are alleged to have resulted in loss to the company and are prejudicial to the interest of the public and of the company and its members. ( 7 ) THE question to be considered at the outset, therefore, is whether, this petition is maintainable under Sec. 398 of the Act. ( 8 ) SEC. All these are alleged to have resulted in loss to the company and are prejudicial to the interest of the public and of the company and its members. ( 7 ) THE question to be considered at the outset, therefore, is whether, this petition is maintainable under Sec. 398 of the Act. ( 8 ) SEC. 398 reads:"398: Application to court for relief in cases of mismanagement: (1) Any members of a company who complain - (a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or (b) Whoever issues a circular referred to in sub-clause (iii) of clause (a), in the interests of, any creditors, including debenture holders, or any clause of share-holders, of the company has taken place in the management or control of the company, whether by an lateration in its Board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Court for an order under this section, provided such members have a right so to apply in virtue of Section 399. (2) If, on any application under subsection (1), the Court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. " ( 9 ) MR. " ( 9 ) MR. Udaya Holla, contended that the purpose of Sec. 398 is to bring to an end or prevent the matters complained of or apprehended, and its object is not to rake up the past and to compensate any alleged loss caused to the company in the past; mera surcharge proceeding is not contemplated by it. Like Sec. 397, this provision also is attracted only as a preventive measure. Mr. Naganand, he learned counsel for the petitioner, however contended that Sec. 398 has to be read with Sec. 406 of the Act and consequently schedule XI to the Act gets attracted; by virtue of Schedule XI, any officer or member of a company in respect of which an application has been made under Sec. 397 or 398 is liable to be punished or penalised; such a person could be fastened with liability for fraudulent conduct of business and also the court may assess damages against such a person; for these purposes, Schedule X1 is incorporated with suitably modified provisions of Sections 539 and 544 of the Act. A person who has been guilty of misfeasance, or defrauded the company while in office, cannot escape these liabilities by just resigning from the office. According to mr. Naganand, the present management of a company can invoke Sec. 398 and schedule XI to the Act, against any past officer of the company and to effectuate the provisions contained in Schedule XI, it is necessary to interpret Sec. 398 so as to uphold the maintainability of an application by the present management. ( 10 ) MR. Naganand's contention incorporates the provisions of Schedule XI into Sec. 398, and makes them part of the letter's substantive elements. Sec. 539 says that, it is attracted, on an application made under Sec. 398. Similarly, Sec. 543 says that, "if in the course of the proceedings on an application made to tha court under Sections 397 and 398, it appears that any person. . . . . etc. " In other words, these provisions of Schedule XI get attracted only in the course of a main application under Sec. 397 (or Sec. 398 ). Similarly, Sec. 543 says that, "if in the course of the proceedings on an application made to tha court under Sections 397 and 398, it appears that any person. . . . . etc. " In other words, these provisions of Schedule XI get attracted only in the course of a main application under Sec. 397 (or Sec. 398 ). The proceedings under the provisions of several sections stated in Schedule XI, are to be subsequent to the lodging of the main application under Sec. 398; they are only incidental or ancillary to the main proceedings; they are actually comparable to the proceedings envisaged by Sectins 539 to 544 as found in the body and the act (i. e. , those sections as found immediately after Sec. 538 in the Act;) those proceedings contemplated by the main sections 539 and 543 are the off-shoots of winding up proceedings; i. e. , subsequent to the stage of Sec. 433 and other provisions governing the filing and hearing of a petition for winding up. If the fraudulent conduct of the past Directof by itself cannot be a ground for the winding up of a company under Sec. 433, by the same analogy, it has to be held that, the past conduct of an ex-officer of the company who is not presently controlling tha affairs of the company, cannot by itself constitute a cause of action for filing an application under Sec. 398, by the present management. ( 11 ) THIS interpretation, according to Mr. Naganand, would defeat the purpose of the Act and enable delinquent officers of the company to get away with their misdeeds. ( 12 ) THAT is not so. Any fraudulentor tortious act on the part of 'officer' of the company resulting in loss to the company, would give rise to a cause of action to sue him for an appropriate relief. Similarly, if the fraud or misconduct alleged is of such a nature, in appropriate cases, criminal law can be put in motion against him. Neither the law, nor the company is helpless to vindicate itself in these matters. The procedure of those civil and criminal cases, may be more cumbersome or elaborate ; that by itself is not a reason to read, the statutory provision like Sec. 398 differently from what it conveys, ( 13 ) SEC. 398 is already extracted above. Neither the law, nor the company is helpless to vindicate itself in these matters. The procedure of those civil and criminal cases, may be more cumbersome or elaborate ; that by itself is not a reason to read, the statutory provision like Sec. 398 differently from what it conveys, ( 13 ) SEC. 398 is already extracted above. The application under it is for relief "in cases of mismanagement". Any member of the company may complain to the court. The subject of complaint is to be that the affairs of the company are being conducted in a manner prejudicial to public interest etc. It is in present tense. At the time of the application the affairs of the company are to be conducted in a manner prejudicial to the public interest etc. It does not say, "the affairs of the company are or were being conducted. . . . . . . . . . . . ". ( 14 ) SECTION 398 is the twin provision to Sec. 397; the object is to provide a further remedy to a member of the company, in respect of matters not covered by sec. 397. Though most of the provisions of our Companies Act bear similarity to the English Companies Act, there is no similar provisions in the English Act to sec. 398. Sub-clause (b) of Sec. 398 (1) throws much light on sub-clause (a ). Sub- clause (b) is attracted, when a material change takes place in the management or control of the company and by that change it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest etc. While Sec. 398 (1) (a) provides a remedy against the present management, sub-clause (b) provides for a remedy consequent upon change in the management or control of the company. The purpose is to stop or prevent the prejudice or the likely prejudice to the public interest or interests of the company. This is made clear by sub-section (2) itself. The order of the Court is to bring to an end or preventing the matters, complained of. To bring to an end a thing or matter, that thing or matter should be in existence, atleast on the date of the application for such a belief. ( 15 ) SCHEDULE XI to the Act is attracted only when, in the proceedings under sec. To bring to an end a thing or matter, that thing or matter should be in existence, atleast on the date of the application for such a belief. ( 15 ) SCHEDULE XI to the Act is attracted only when, in the proceedings under sec. 398, certain misfeasance, breach of trust or fraud comes to light. The several provisions contained in Schedule XI contemplate further independent proceedings against the person found to have been guilty of misfesance etc, in the course of the main proceedings under Sec. 398. Sec. 398, nowhere, states that a member of the company may apply under sec. 398, to take action against the past management or officer of the company so as to reimburse the company for any loss caused to it. ( 16 ) SEC. 402 also is relevant here. It enunciates the power of the court on an application under Sec. 397 or 398. None of the clauses (a) to (g) specifically empower the court to take penal or civil action against the past management or officer of the company, on an application under Sec. 398. ( 17 ) THE powers vested in the court under Sec. 398 are not only discretionary; they are designed to remove an existing oppressive or prejudicial course of conduct of the affairs of the company and is not concerned with the past management, except, where the past projects itself os continuing wrong and pervades the present conduct of company's affairs. ( 18 ) A few decisions cited by the learned counsel for both sides, require to be considered. ( 19 ) IN re Jermyn Street Turkish Baths Ltd. (41 C,c. 999) is a decision of the Court of Appeal (England ). It is concerned with the concept of oppression in relation to the Director's remuneration; i. e. , when an excessive remuneration drawn by or paid to, a Director amounts to oppression of the minority. ( 20 ) DR. V. Sebastian and others v City Hospital P. Ltd. and others (57 C. C. 453) is a decision of Kerala High Court. It is said there, that, even a majority of members of a company may complain of oppression by the minority share-holders. and seek relief from the court. ( 21 ) SHANTI Prasad Jain v Kalinga Tubes Ltd. etc. ( AIR 1965 SC 1535 ) was cited by Mr. Udaya Holla to contend that, ss. It is said there, that, even a majority of members of a company may complain of oppression by the minority share-holders. and seek relief from the court. ( 21 ) SHANTI Prasad Jain v Kalinga Tubes Ltd. etc. ( AIR 1965 SC 1535 ) was cited by Mr. Udaya Holla to contend that, ss. 397 and 398 cannot be invoked by the majority share holders as the object behind these provisions is to protect the minority against the oppressive conduct of the majority. Concept of oppression has been elucidated in the said decision, thereafter at page 1543 (para-19); the Supreme court held:". . . . . . . . . . . . AND the question in each case is whether the conduct of the affairs of a company by the majority share-holders was oppressive to the majority share holders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of S. 397. It must further be shown that the conduct of the majority share holders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority share holders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the membeis. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority share holders and the minority share holders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a share-holder. It is in the lights of these principles that we have to consider the facts in this case with reference to S. 397. " some of the observations no doubt indicate that the provisions of Sec. 397 can be invoked only by the minority share holders. It is in the lights of these principles that we have to consider the facts in this case with reference to S. 397. " some of the observations no doubt indicate that the provisions of Sec. 397 can be invoked only by the minority share holders. But it is possible to take the view that these observations were made in the context of the facts of the said case. It is unnecessary in the instant case, for me to consider this proposition, having regard to the conclusion arrived at by me, as to the scope of Sec. 398. One sentence in the above observation of the Supreme court is very relevant when it says that, "there must be continuous acts on the part of the majority shareholders, continuing up to the date of petition. showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. " (underlining is done here) the crucial words in the opening sentences of Sections 397 and 398 are substantially similarly, i. e. , any member of a company who complain that the affairs of the company "are being conducted". . etc. and it is this structure of the sentence that gave rise to the above observation of the supreme Court. ( 22 ) SOME of the observations inco/aba Land and Mill Co. Ltd. v Vasant investment Corporation Ltd, 8 others (AIR 1964 Gujarat 107) may aid the proposition advanced by Mr. Naganand. Though the learned Judge observes, there, that a proceeding under Sec. 543 emanates from a proceeding under Sections 397 and 398, and that prima facie, the enquiry under Sees. 397 and 398 has no connection with the enquiry under Sec. 543 (Schedule XI), proceeding initiated under sec. 543 was retained for further consideration, even after the relevant prayer concerning Sees. 397 and 398 were not pressed. An important aspect of the said case was, the proceeding under Sections 397 and 398 had substantially taken place and evidence has been recorded even in respect of allegations falling under Sec. 543. The persons against whom complaints were made were in the management and control of the affairs of the company, when the main petition under Sections 397 and 398 was filed. The persons against whom complaints were made were in the management and control of the affairs of the company, when the main petition under Sections 397 and 398 was filed. Therefore, as on the date of the application, the allegation was that the affairs of the company "are being conducted" in a manner prejudicial to public interest, or to the interest of the company etc. Therefore, the petition, as such, was maintainable at a time when it was filed and entertained. In this background the observations found at page 112, are to be held as obitter or as irrelevant to the facts of the instant case before me. Said observations are :"therefore, all that an applicant under section 543 (Schedule XI) has to satisfy, when presenting an application under section 543 (Schedule Xi) is that a case for misfeasance has come to light in the course of a petition under section 397 or section 398. Therefore, from one point of view, the moment the present petition was filed and allegations came to be made against respondents Nos. 2 to 4 that they were guilty of misfeasance, a right to present an application under section 543 (Schedule XI) accrued to a creditor or member of the respondent company and therefore it is necessary that the present petition must be retained on the file, in order to enable either the petitioner company or any other creditor or member of the respondent company to make that application. "subsequent discussion also supports my view in this regard. At page 113, the court said, "i have no doubt whatsoever that a proceeding under section 397 or section 398 of the Act cannot be said to have started unless the petition under that section has come to be filed, numbered, and at least, some order of the court is obtained thereon. Till that stage, it cannot be said that a proceed' ing under section 397 or section 398 of the Act has started. In this view of the matter, it appears to me lo be crystal clear that petitions under sections 397 or 398 and 543 (Schedule XI) cannot be combined together or simultaneously made, but that the petition under the latter section must follow after a prima facie case has come into light i;i the course of the proceedings under the former sections. " ( 23 ) IN other words, until an application under Sec 398 is entertained and some order is obtained thereon, there cannot be a proceeding at all under Sec. 398. Here, in the instant case the respondent has raised the preliminary objection at the threshold. The petition has not yet been formally admitted. The Central government also has not been notified as required by Sec. 400. Therefore, even if those observations of Gujarat High Court (at page 112) is to be applied, read with the further observations extracted above, it cannot be said that the petitioners herein can invoke the provisions contained in schedule XI for the purposes of an applica tion under Sec. 398. ( 24 ) MOHANLAL Ganpatram and Another VShri Saysji Jubilee Cotton and jute Mills Co. Ltd, and Others (AIR 1965 gujarat 96) does not give the entire facts; nor the complete judgment. It was rendered by Justice P. M. Bhagwati, (as his lordship, then was ). The question posed was :"does the power of the Court extend to the making of an order, setting aside or interfering with past and concluded transactions between a company and a third party which are no longer continuing wrongs or is the power of the court confined to the making of an r. 39 order preventing future oppression or mismanagement? Mr. S. B. Vakil, learned advocate appearing on behalf of the petitioners, pleaded for former construction on the ground that such construction would enlarge the power of the court rather than limit it and in support of this plea he relied on the well known rule of interpretation that in the case of provisions of a remedial nature, which sections 397 and 393 undoubtedly wore, the const ruction to be made should be such as will suppress the mischief and advance the remedy and add force and life to the cure and remedy according to the true intent of the makers of the Act, pro bona publico. Now Mr. S. B. Vakil is certainly right in his submission that sections 397 and 398 being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. S. B. Vakil is certainly right in his submission that sections 397 and 398 being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. "again at page 100, it was observed :"the language of sections 397 and 398 leave no doubt as to the true intendment of the Legislature and it is transparent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the Legislature, which as I will presently show it could never have been, the language of sections 397 and 398 would have been different and the legislature would not have confined trie power of the court by limiting the purpose for which it can be exercised under the sections. "however, Mr. Naganand referred to para-35, wherein it was held that,"the court can therefore, in cases covered by section 543, as set forth in schedule XI award, on an application under section 397 or 398 at the instance of the aggrieved share holders, compensation to the company and through the company to the aggrieved shareholders, in respect of past and concluded transactions which are not containing wrongs. Just as clause (i) of section 402 enables the court to set at naught transactions amounting to fraudulent preference effected within three months before the date of the application under section 397 or 398, even though they are no longer continuing wrongs, so also, section 406 enables the court to award compensation in respect of past and concluded transactions falling within section 543 as set forth in Schedule xi, even though they are no longer continuing wrongs. These are the only two cases in which on an application under section 397 or 398, the court is empowered to give relief in respect of past and concluded transactions which are no longer continuing wrongs and they are really in the nature of exceptions to the general principle manifest from the language of sections 397 and 398 that the power of the court under both the sections is confined only to making an order for the purpose of putting an end to oppressive or prejudicial conduct and the court cannot make an order setting aside or interfering with past and concluded transactions which are no longer continuing wrongs or giving compensation to the company or the aggrieved share holders in respect of such transactions. "this observation was made under a different context altogether. Court was not concerned there with the maintainability of the petition under Sec. 398, wherein, the substantial prayer was to take actfon against the person who was in the control of the company's affairs in the past the relief sought, there, was against the existing management. The court was considering, broadly, the amplitude of the court's powers in a proceeding under Sec. 398. ( 25 ) STANDARD Private Ltd. and others v Kshetra Mohan Saha and others ( AIR 1968 Cal. 572 } says that misappropriation of money in the past is not continuing wrong and therefore cannot be a cause for proceedings under Sections 397 and 398. ( 26 ) THE prayers made in the instant case, while invoking Sec. 398, are outside the scope of the said provision, when admittedly, the reliefs are sought against the respondent, who is not in management or control of the company; they may fall under Schedule XI to the Act, but, that by itself would not make the application under Sec. 398 maintainable. ( 27 ) IN the result, for the reasonsstated above, this petition is rejected in limine. No order as to costs. Petition rejected. --- *** --- .