SHETH MOHANLAL GANPATRAM Vs. SAYAJI JUBILEE COTTON AND JUTE MILLS COMPANY LIMITED

JUDGEMENT

(1.) Before I examine the various arguments which were advanced before me on the merits of the petition I must refer to two objections of a preliminary nature which were urged by Mr. I. M. Nanavati learned advocate appearing on behalf of Bharat Kala Bhandar Limited in answer to the petition in so far as the petition was directed against Bharat Kala Bhandar Limited. Mr. C. C. Gandhi learned advocate appearing on behalf of the Company and the learned Advocate General appearing on behalf of the Directors also supported Mr. I. M. Nanavati in these preliminary objections. The first preliminary objection was that in a petition under sec. 397 or 398 of the Companies Act 1956 the Court has no jurisdiction to set aside a transfer effected by a Company in favour of a third party except in a case falling under sec. 402(f). The argument briefly was that sections 397 and 398 of the Companies Act 1956 were on a true construction aimed at putting an end to a continuing state of affairs and not at compensating the minority shareholders for a wrong which was no longer a continuing wrong and that the remedy given by those sections being a preventive remedy no order could be made by the Court setting aside a transfer already past and concluded between a Company and a third party unless such order was expressly authorized as in a case covered by sec. 402 The petitioners were therefore not entitled so ran the argument to have the sale of the movable and immovable properties of the Company effected in favour of Bharat Kala Bhandar Limited set aside even if the allegations made by them in the petition were well-founded and they were in a position to show that such sale was a link in the chain of conduct which could be said to be oppressive to the petitioners and other minority shareholders or prejudicial to the interests of the Company. The second preliminary objection which was urged in the alternative was that even if the power of the Court under sections 397 and 398 of the Companies Act 1956 extended to making an order setting aside a transfer already made by a Company in favour of a third party such power could not be exercised in the present case since Bharat Kala Bhandar Limited was on the facts and circumstances of the case protected by the doctrine of indoor management. The validity of these preliminary objections turned on the true interpretation to be put on the provisions of sections 397 and 398 of the Companies Act 1956 I shall therefore immediately proceed to examine the scope and ambit of these sections.

(2.) Sections 397 and 398 are part of a fasciculus of sections commencing from sec. 397 and ending with sec. 407 and this fasciculus of sections occurs in Section A dealing with Powers of Court under Chapter VI headed Prevention of Oppression and Mismanagement. Under sec. 397 any members of a Company who complain that the affairs of the Company are being conducted in a manner oppressive to any member or members including any one or more of themselves may petition the Court which if satisfied that the Companys affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding up order on the ground that it is just and equitable to do so but that this would unfairly prejudice such member or members may make such order as it thinks fit with a view to bringing to an end the matters complained of. This section corresponds to sec. 210 of the English Companies Act 1948 Sec. 398 considerably enlarges the scope of the remedy by providing that any members of a Company who complain that the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company or that a material change has taken place in the management or control of the Company and that by reason of such change it is likely that the affairs of the Company will be conducted in a manner prejudicial to the interests of the Company may apply to the Court and the Court may if it is of the 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 make such order as it thinks fit with a view to bringing to an end or preventing the matters complained of or apprehended. It is obvious that this remedy provided by sec. 398 is of a much wider nature than the remedy under sec. 397 since unlike the remedy under sec. 397 it is not limited by the requirement that the facts must be such as justify the making of the winding up order against the Company on the ground that it is just and equitable to do so. The question of construction which arises for determination on these provisions is as to what is the extent of the power of the Court under sec. 397 or 398. 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 order preventing future oppression or mismanagement ? Mr. S. B. Vakil learned advocate appearing on behalf of the petitioners pleaded for the 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 398 undoubtedly were the construction 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 bono 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. The reasons are as follows:

(3.) Prior to the enactment of the Companies Act 1956 the statute relating to Companies was the Indian Companies Act 1913 There was in the Indian Companies Act 1913 section 153-C which corresponded to sections 397 and 398 of the Companies Act 1956 This section was introduced in the Indian Companies Act 1913 by Act LII of 1951 following the enactment of section 210 in the English Companies Act 1948 The genesis of the provisions contained in sections 397 and 398 of the Companies Act 1956 is therefore to be found in section 210 of the English Companies Act 1948 Now the position which obtained prior to the enactment of section 210 of the English Companies Act 1948 was that even if the affairs of a Company were being conducted in a manner oppressive to some part of the shareholders or in a manner prejudicial to the interests of the Company the aggrieved shareholders had no effective remedy to put an end to such conduct for unless the case fell within any of the three recognized exceptions to the rule in Foss v. Harbottle (1843) 2 Hare 461 the Court had no jurisdiction to interfere with the internal management of the Company and even in a case falling within any of the three recognized exceptions to the rule in Foss v. Harbottle all that the aggrieved shareholders could do was to challenge an act already done by the controlling shareholders as part of such conduct and they could not take any effective steps to prevent the continuance of such conduct. The only remedy which the aggrieved shareholders had was to apply for winding up the Company on the ground that it was just and equitable to do so. That remedy was however totally inadequate for it meant killing the Company for the purpose of putting an end to the oppression and mismanagement. But killing the Company would be a singularly clumsy method of ending oppression and mismanagement and such a course might well turn out to be against the interests of the minority shareholders. The liquidation of the Company may result in the sale of its assets at break-up value which may be small and the minority who urged by the oppression of the majority petitions for a winding up order may in effect play its opponents game for the only available purchaser of the assets of the Company may be the very majority whose oppression has driven the minority to seek redress. Hence the Cohen Committee recommended an alternative and less drastic expedient for bringing to an end oppressive conduct on the part of those in control of the Company and this expedient is now embodied in section 210 of the English Companies Act 1948 Following the enactment of this section the legislature introduced section 153-C in the Indian Companies Act 1913 providing an alternative remedy for putting an end to oppression or mismanagement on the part of the controlling shareholders. The remedy given by section 153-C was a more effective and less drastic remedy than the remedy of winding up for if there was oppression or mismanagement the aggrieved shareholders could instead of applying for winding up the Company in order to put an end to such oppression or mismanagement apply for relief under the section and the Court could make such order as it thought necessary with a view to putting an end to such oppression or mismanagement and preventing its recurrence. When the Companies Act 1956 was enacted what was originally section 153 was split up into sections 397 and 398 and the scope of the remedy was expanded by removing in cases covered by section 398 the requirement that the aggrieved shareholders must make out a case for winding up under the just and equitable clause before they can apply for relief under that section. The object and purpose of the remedy however remained the same namely to cure the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. It is in the light of this background that the principles of interpretation relied on by Mr. S. B. Vakil must be applied and applying that principle of interpretation the widest power may be inferred for the Court to interfere in the internal management of a Company with a view to putting an end to oppression or mismanagement on the part of controlling shareholders so as to advance the remedy and suppress the mischief. But no power I am afraid can be inferred by the application of that principle of interpretation to set aside or interfere with past and concluded transactions between a Company and third parties which. are no longer continuing wrongs unless the sections by use of clear and unambiguous language confer such power on the Court.