Holding

If the facts do not establish just and equitable grounds for winding up under Section 397, no relief can be granted, and the petition must be dismissed.

Summary

A petition under Sections 397 and 398 of the Companies Act, 1956 was filed by several shareholders alleging oppression and mismanagement, including the illegal removal of a director and unfair share valuation. The Company Judge found the grievance legitimate, ordered the petitioners to sell their shares at a valuation, and held the director’s removal illegal. On appeal, the Calcutta High Court Division Bench held that relief under Section 397 is contingent on the petitioners proving that winding up the company would unfairly prejudice them; absent such proof, no winding‑up or related relief can be granted. The Supreme Court, hearing a special leave petition, affirmed the Division Bench’s interpretation and dismissed the petition, finding no merit in the petitioners’ claim for relief. Consequently, the order directing share sale and the dismissal of the petition stand.

Issues considered

The requirement under Section 397(2) that petitioners must demonstrate that winding up would unfairly prejudice them in order to obtain relief.
Whether a petition for oppression and mismanagement can be granted relief such as forced share purchase when the facts do not establish just and equitable grounds for winding up.
Whether the illegal termination of a director’s office can, by itself, constitute a ground for winding up under Section 397.

Legislation cited

Companies Act, 1956s. 283(1)(g), s. 397, s. 398

Subjects

oppressionmismanagementwinding upjust and equitableshare valuationdirector removalCompanies Act 1956

Judgment

HANUMAN PRASAD BAGRI AND ORS. A
v.
BAGRESS CEREALS PVT. LTD. AND ORS.

MARCH27,200!

[S. RAJENDRA BABU AND K.G. BALAKRISHNAN, JJ.] B

Company Law :

Companies Act, 1956-Sections 397, 398-Petition on grounds of op-
pression and mismanagement-Finding by Company Judge regarding misman-
agement-No finding ofjust and equitable grounds for winding up and other- c
wise it will cause hardship to petitioners-Appeal allowed by Division Bench-
Held, interpretation given by Division Bench is just and proper.
. On a petition filed by the Appellant-Petitioners under Sections 397
& 398 of the Companies Act, 1956, the Company Judge held that the D
petitioners' grievance in regard to ouster from the management of the
company is legitimate and justified; that respondent No. 3 had maneuvered
the matters in such a manner it resulted in the ouster of petitioner No. 1
from the management of the Company and directed Petitioner No. 1 and
his group members to sell their shares to respondents at a value to be .
determined by a Valuer as on the date of the petition and also held that the E
Petitioner No. 1 had been illegally removed as ~n Executive Director of the
Company. An appeal was filed by the Company and by respondent No. 2.
The Petitioners also claimed in that appeal that the Company Judge should
have given guidelines for valuation of the shares on the market value and
should have also provided for payment of interest on the amount receiv· F
able by them both on account of share value and remuneration. A Division
Bench of the High Court allowed the appeal filed by Respondents holding
that one of the conditions precedent for granting relief under Section 397
of the Act is that the Petitioners should prove that winding up of the
company would unfairly prejudice the Petitioners who are claiming of G
oppression, that otherwise the facts will justify the making of a winding up
on just and equitable grounds.

). In appeal to this Conrt, the appellant contended that even if a case of
oppression is not made out by the Petitioners, the Court is not powerless
under Section 397 of the Act to do substantial justice between the parties H
811
812 SUPREME COURT REPORTS [2001] 2 S.C.R.

A and, therefore, on the facts available in the case the order made by the
Company Judge should have been maintained and that it is not possible
for the Petitioners and respondents to carry on business of the company
together and the only solution is that one group shareholders should pur-
chase· the shares of the other group and that the Petitioners have no
objection in selling shares of their group at a proper value.
B
Dismissing the Appeal, the Court

HELD : 1. The conclusion of the Division Bench that the company
petition is liable to be rejected on the ground that there is no finding by the
Company Judge that the winding up will unjustly prejudice the company
c is upheld. [815-C]

2. The interpretation of the Division Bench that if the facts fall short
of a case upon which the company court feels that the company should be
wound up on just and equitable grounds and in that event no relief can be
D granted under See. 397 of the Act, is also upheld. [817-DJ

Needle Industries (India) Pvt. l.Jd. v. Needle Industries New (India)
Holding l.Jd., AIR (1981) SC 1298, referred to.

CIVIL APPELLATE JURISDICTION : Special Leave Petition (C) No.
E 17137 of 2000.

From the Judgment and Order dated 25.8.2000 of the Calcutta High
Court in A. No. 255 of 1993.

Jaideep Gupta and Praveen Kumar for the Petitioners.
F A.K. Ganguli, Somnath Mukherjee, Dhruv Agrawal and Goodwill
Indeevar for the Respondents.

The Judgment of the Court was delivered by

RAJENDRA BABU, J. A petition under Sections 397 & 398 of the
G Companies Act, 1956 [hereinafter referred to as 'the Act'] was filed before
the Calcutta High Court on grounds of oppression and mismanagement. The
learned Company Judge held that the Petitioners' grievance in regard to
ouster from the management of the company is legitimate and justified; that
respondent No.3 had manoeuvred the matters in such a manner to result in
H the ouster of the Petitioner No. I from tlie management of the Company. The
llANUMAN PRASAD BAGRI v. BAGRESS CEREALS PVT. LID. [RAJENDRA BABU, J.] 813
learned Company Judge further directed the Petitioner No. I and his group A
members to sell their shares to respondents at a value to be determined by
a Valuer as on 16.5.1988, that is, the date of the petition and also held
that the Petitioner No. I had been illegally removed as an Executive Director
of the Company. Appeal was preferred on behalf of the Company by
respondent No.2 and also on his own behalf. The Petitioners-alsQ claimed in
B
that appeal that the learned Company Judge should have given guidelines for
valuation of the shares on the marlcet value and should have also provided
for payment of interest on the amount receivable by them both on account
of share value and remuneration. The Division Bench of the Calcutta High
Court allowed the appeal by the order made on 25.8.2000 holding that
one of the conditions precedent for granting relief under Section 397 of c
the Act is that the Petitioners should prove that winding up of the company
would unfairly prejudice the Petitioners who are claiming of oppression,
that otherwise the facts will justify the making of a winding up on just
and equitable grounds. Contesting the correctness of this view, this special
leave petition is filed.
D
Relying upon the decision in Needle Industries (India) Pvt. /.Jd. v.
Needle Industries New (India) Holding Ltd., AIR (1981) SC 1298, it is
claimed that even if a case of oppression is not made out by the Petitioners,
the Court is not powerless under Section 397 of the Act to do substantial
justice between the parties and, therefore, on the facts available in the case E
the order made by the learned Company Judge should have been maintained.
It is pleaded that it is not possible for the Petitioners and respondents to
carry on business of the company together and the only solution is that one
group shareholders should purchase the shares of the other group and that
the Petitioners have no objection in selling shares of their group at a proper F
value.

Section 397(2) of the Act provides that an order could be made on an
application made under sub-section (I) if the court is of the opinion - (I) that
the company's affairs are being conducted in a manner prejudicial to public
interest or in a mauner oppressive of any member or members; and (2) that G
the facts would justify the making of a winding up order on the ground that
it was just and equitable that the company should be wound up, and (3) that
). the winding up order would unfairly prejudice the applicants. No case appears
to have been made out that the company's affairs are being conducted in a
manrier prejudicial to ptiblic interest or in a mauner oppressive of any member H
814 SUPREME COURT REPORTS [2001) 2 S.C.R.

A or members. Therefore, we have to pay our attention only to the aspect that
the winding up of the company would unfairly prejudice the members of the
company who have the grievance and are the applicants before the court and
that otherwise the facts would justify the making of a winding up order on
the ground that it was just and equitable that the company should be wound
up. In order to be successful on this ground, the Petitioners have to make
B
out a case for winding up of the company on just and equitable grounds. 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. On the other hand the
party resisting the winding up can demonstrate that there are neither just nor
equitable grounds for winding up and an order for winding up would be
c unjust and unfair to them.

On these tests, the Division Bench examined the matter before it.

It was noticed that the shareholding of the Petitioners is well under 20%
while that of those opposing the winding up is more than 80%. Therefore,
D the adversary group has sufficient majority shareholding even to pass a
special resolution.

The grievances made by the Petitioners before the Division Bench of
the High Court are as fol\ows:

E I. That the registered office of the company was shifted from the
congested Posta area to the multi-storeyed building called Chatterjee Polk on
Jawaharlal Nehru Road, and then again shifted back from there.

2. That a certain amount of wheat quota for which above Rs.l 7 lakbs
was deposited by the company was allowed, contrary to control orders to be
F lifted by a sister concern.

3. That a certain loan payable to the Petitioner No. I a little under Rs.6
lakbs was sought to be paid back by the company by seeking to make a book
adjustment, trying to show a payment to another company Sumati in extin-
guishment of the liability of the Petitioner No. I to Sumati on the oral
G
instruction of Petitioner No. I that the debt to him be paid instead to Sumati.

4. That certain roller boxes, about 14 in number were sold off at an
aggregate price of Rs. 96,000, although those had been acquired in 1980 at
a cost of Rs. 75,000. The complaint was that the boxes were still usable and
H unnecessarily sold.
HANUMAN PRASAD BAGRJ v. BAGRESS CEREALS PVT. LTD. [RAIENDRA BABU, !.] 815
5. That a large amount of commission, of the order of Rs.20 lakhs or A
so, although receivable by respondent No.3 and/or his son, was got paid by
Mitsubishi to the company so as to avoid tax incidence to respondent No.3
himself, who utilised the losses of the company for setting off of the profit,
treating the company as the respondent No.3's own company.

6. That the continuing directorship of Petitioner No. I was sought to be
B
terminated without giving him appropriate notices of the Board meetings; the
terminations were alleged to be of no effect and the stoppage of remuneration
and of directorial benefits, improper and illegal.

The Division Bench was neither impressed with the merits of the case c
nor with the legal position and reached a conclusion that the company petition
is liable to be rejected on the ground that there is no finding by the learned
Company Judge that the winding up will unjustly prejudice the company,
therefore, the order of the nature appealed had been passed and also con-
cluded that it is impossible for them to arrive at a finding in favour of the
D
Petitioners. So far as shifting of the registered office from Posta area to
Chatterjee Polk and back to Posta, the Division Bench was of the view that
shifting of the registered office by itself may not be a reason or a ground
to be raised in a petition under Section 397 or 398 of the Act as long as the
company did not suffer much loss on account of the shifting and shifting back
and no case was made out to show that such exercise was undertakeD to put E
an oppressive pressure and pain upon the Petitioners. It is not clear that such
a course was adopted by way of a wasteful expenditure so as to amount to
mismanagement and on that rejected the first contention.

As regards the second contention that a cenain amount of wheat quota F
for which above Rs.17 lakhs was deposited by the company was allowed,
contrary to control orders to be lifted by a sister concern, it was found as
a fact that there is neither disclosure of oppression or mismanagement. The
company in question during the relevant time was under lock out and,
therefore, wheat quota wonh Rs.17 lakhs was allowed to be lifted by a sister
concern. It is alleged that such an act amounted to violation of control order G
and that as the wheat quota was lifted by the sister concern, the company
in question was shown to be having an asset by way of debt as again~t that
sister concern and it is not clear how the company suffered a loss by taking
a debt and giving the wheat quota to sister concern. On this basis the second
contention was also rejected. H
816 SUPREME COURT REPORTS [2001] 2 S.C.R.
A On the third point about certain loan payable in extinguishment of the
liability of the Petitioner No. I the case put forth was that the company owed
money to Sumati and upon instruction of Petitioner No.I, money was paid
by the company to Sumati so that Petitioner No. I does not have to pay to
Sumati and the company does not have to pay Petitioner No. I. During the
course of the proceedings in this matter, Petitioner No. I filed separate
B
company petition for winding up against another sister concern, Bagri Synthetics
Ltd. However, a suit was ordered to be filed and a sum of Rs.5,74,662 was
directed to be deposited. Thereafter, the suit was decreed by a judgment which
was upheld by the appellate court and, therefore, it was held that if a debt
remained owing to Petitioner No. I from the company it would be unreason-
C able for the Petitioner No. I to ask for a just and equitable winding up of the
company on the other hand filing a suit would be proper as it had done in
the other case and, therefore, did not enter into further details of the facts
of the case in that part of matter.

The fourth contention is in regard to certain roller boxes about 14 m
D number were sold off at an aggregate price of Rs.96,000, although those had
been acquired in 1980 at a cost of Rs.75,000 . The complaint was that the
boxes were still usable and mmecessarily sold. On this point also the
Division Bench did not find any ground of oppression or mismanagement as
provided under Section 397 or 398 of the Act.
E
The Division Bench found that Mitsubishi commission of Rs.23 lakhs
could hardly be a matter of mismanagement of the company to bring into
its till-money which is not even its due. No loss is shown to accrue to the
company because of the bringing in of this commission and, therefore, it was
found that the mismanagement was not established.
F
The last and the most important point urged is in regard to continuation
of directorship of the first petitioner. The first Petitioner joined the company
in or about 1971 and he is a Director. It was noticed that the last Board
meeting which he appears to have attended was held on 19.8.1985 but
apparently he did not'thereafter attend the meeting of 16.11.1985. Thereafter
G there was no material to show that he went to the corp<" ·•te office or attended
any board meeting. The petitioner No. I pleaded that the respondents could
not have treated him as ceased to be a Director in terms of Section 283(l)(g)
of the Act. Form 32 had been filed by the company with the Registrar of
Companies on 15.1.1988 showing that the Petitioner No.I had ceased to be
H a Director with effect from 21.12.1987 and since then it is maintained
HANUMAN PRASAD BAGRI v. BAGRESS CEREALS PVT. LTD. [RA!ENDRA BABU, J.) 817
throughout that Petitioner No. 1 ceased to be in the office of the Director of A
the Company. The Division Bench noticed that the position that Petitioner
No. 1 ceased to be a Director is seriously disputed and the Division Bench
ultimately concluded that the termination of directorship would not entitle
such person to ask for winding up on just and equitable grounds inasmuch
as there is au appropriate remedy by way of company suit which can give
B
him full relief if such action had been taken by the company on inadequate
ground. The Division Bench found that if a Director even if illegally
terminated cannot bring his grievance as to termination to winding up the
company for that single and isolated act, even if it was doing good business
and even if the Director could obtain each and every adequate relief in a suit
in a court. c
In this background, the appeal having been allowed, we do not find any
good reason to interfere with such an order. However, Sri Dipankar Gupta,
learned Senior Advocate for the Petitioners, sought to urge the legal question
as to the interpretation placed by the Division Bench that if the facts fall short
of a case upon which the company court feels that the company should be D
wound up on just and equitable grounds in that event no relief can be granted
to the Petitioners in regard to Section 397 of the Act. We find adequate
support to the view taken by the Division Bench and we cannot read the
provisions of Section 397 of the Act in any other manner than what has been
done by the Division Bench. Therefore we find no merit in this petition. The E
same shall stand dismissed. No costs.

V.M. Petition dismissed.