M/S. KILPEST PVT. LTD.versusSHEKHAR MEHRA

                         MIS. KILPEST PVT. LTD.                                    A
                                   v.
                            SHEKHAR MEHRA

                             OCTOBER 8, 1996

            [S.P. BHARUCHA AND S.B. MAJMUDAR, JJ.]                                 B

       Companies Act 1956, Ss.397 398, 402 and 433(f)--Minority share
  holder M's petition for oppression and mismanagement tried as a petition
for winding up under just and equitable claus~High Court finding no ground
for winding up but directing reinstatement of Mas director; requiring inspection   c
 of company's records by the Registrar and directing other director D to return
 moneys wrongly appropriated-Held: there was no ground for winding up the
 company; having regard to the wide powers under s.402 very rarely would it
 be necessary to wind up any company in a petition filed under Ss.397 and
 398.
                                                                                   D
      M and D promoted K, a private limited company and were its first
directors. The two fell out and M did not attend the Board or other
meetings of the company after September 1, 1981. In December, 1981 the
M group held 1500 shares and the D group held 1625 shares. Thereafter
the D group increased its shareholding to 4500 shares. At a Board meeting          E
held on April 9, 1983 it was resolved that M ceased to be a director. M
then filed a petition for oppression and mismanagement under ss.397 and
398 of the Companies Act, 1956 ('Act') in the Bombay High Court. A Single
Judge thought it fit to try the petition as one for winding up, which was
concurred with by this Court.
                                                                                   F
      The Single Judge dismissed the petition. M appealed to the Division
Bench which held that the company could not be treated as a partnership
concern and there was no ground for winding it up under the just and
equitable clause. In exercise of its powers under S. 402 of the Act it directed
that M be appointed a director; that D should pay back to the company              G
the sum of Rs. 52, 875 wrongly appropriated by him; that the Registrar of
Companies should inspect the records of the company and if the purchases
of raw materials and payments made are found to be to fictitious persons,
D should pay back the amount thereof.

      M and D appealed to this Court. During the pendency of the appeals, H
                                  239
     240                    SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A the operation of the High Court's order was stayed but the inspection was
     allowed to be carried on; the company prospered during the pendency of
     the appeals.

             Dismissing the appeals, this Court

B           HELD : 1.1. The appeal by M would have to be rejected as there was
      no case for winding up the company. There was no substance in D's appeal
      either. The High Court found D had appropriated to himself moneys
      belonging to the company. M's presence on the Board would prevent a          ,_
    - recurrence, thus protecting M's interest and that of the company.
C                                                                (246-G; 247-A]
            1.2. The general interest of the shareholders should not be readily
     sacrificed at the alter of squabbles of directors for power to manage the
     company. The promoters of a company, whether or not they were thitherto
     partners, elect to avail of the advantages of forming a limited company.
D    They voluntarily and knowingly bind themselves by the provisions of the
     Companies Act. The submission that a limited company should be treated
     as a quasi-partnership should therefore, not be easily accepted. Having
     regard to the wide powers under Section 402, very rarely would it be
     necessary to wind up any company in a petition filed under Section 397
     and 398. [244-E; 246-D-E]
E
             Ebrahimi v. Westboume Galleries Ltd. and Ors., (1972) 2 All ER 492,
     referred to.

      Hind Overseas Private Limited v. Raf!!iunath Prasad Jhunjhunwalla
F andAnr., [1976] 3 SCC 259, affirmed.
             CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1974 of
     1986.

             From the Judgment and Order dated 16.4.86 of the Madhya Pradesh
G High Court in Company Appeal No. 4 of 1985.

           H.K. Puri for the Appellants in C.A. No. 1974/86 and C.P. No.
     352/96.

             A.N. Pareekh, Sushi! Kr. Jain, Pradeev Agarwal and AP. Dhamija
H for the Respondent in C.A. No. 1974/86 and 1975/86.
        KILPEST PVT. LTD. v. SHEKHAR MEHRA [BHARUCHA, J.)              241

      The Judgment of the Court was delivered by                              A

      BHARUCHA, J. These are cross appeals. against the judgment and
order of a Division Bench of the High Court of Madhya Pradesh.

       The appellant in Civil Appeal No. 1975/86, Shekhar Mehra (Mehra),      B
and the second appellant in Civil Appeal No. 1974/86, R.K. Dubey (Dubey)
promoted Kilpest Pvt. Ltd. (the company) and were its first Directors.
Dubey was the Managing Director and Mehra was the Joint Managing
Director. The two fell out and Mehra did not attend Board or other
meetings of the company after 1st September, 1981. In December 1981
Mehra, his relations and friends (the Mehra group) held 1500 shares of the    C
company of Rs.100 each and Dubey, his relations and friends (the Dubey
group) held 1625 shares. Thereafter the Dubey group increased its
shareholding so that when the present petition was filed they held 4500
shares. At a Board meeting of the company held on 2nd January, 1982,
K.P. Mishra, the third appellant in Civil Appeal No. 1974/86, was appointed   D
to the Board as an Additional Director. In the Extraordinary General
Meeting held on 15th January, 1983, Articles 84 to 86, 91 and 93 of the
Articles of Association of the company, which provided for the manage-
ment of its business by Dubey and Mehra for life with equal remuneration,
were altered and the post of Joint Managing Director was abolished. At a
Board meeting held on 9th April, 1983, it was resolved that Mehra had         E
ceased to be a Director. He then filed a civil suit, with which we are not
directly concerned, and then the present petition for oppression· and
mis-management under Sections 397 and 398 of the Companies Act, 1956.

       It was the case of Mehra in the petition that the meetings subsequent F
to December, 1981, had been called without notice to him so as surrep-
titiously to allot additional shares to the Dubey group and remove Mehra
from the post of Joint Managing Director. The allotment of additional
shares and the alteration of the aforesaid Articles had altered the basic
structure of the company. While this might be a ground for winding it up,
Mehra sought relief under Sections 397 and 398 of the Act. The petitinn G
also set out various alleged acts of mis-management by Dubey. The petition
was contested. The learned single Judge found it appropriate to try the
petition as a winding-up petition. The company appealed. The Division
Bench allowed the appeal, set aside the order of the single Judge and
dismissed the petition. Mehra then filed an appeal to this Court, which was H
    242                  SUPREME COURT REPORTS (1996) SUPP. 7 S.C.R.

A allowed and the matter was remanded.
           Upon remand the parties went to trial on the basis of affidavits. The
   single Judge dismissed the petition, whereupon Mehra filed the appeal
   upon which the order under challenge was passed. The Division Bench
   came to the conclusion that there was no merit in Mehra's case that he had
B not been given notice of the meetings. It found that the company could not
   be treated as a partnership concern and there was no ground for winding
  ,it up under the just and equitable clause. Dubey was found to have
    committed an act of breach of faith by appropriating to himself the sum of
  . Rs. 52,875 belonging to the company. Having regard to its powers under
C Section 402 of the Companies Act, the Division Bench directed that Mehra
    be appointed a Director of the company enjoying all the powers and
    privileges enjoyed by the other Director, K.P. Mishra; that Dubey should
    pay back to the company the sum of Rs. 52,875; and that the registrar of
    Companies should inspect the records of the company for the period 1981
    till date of the judgment regarding purchases of raw materials from the
D parties mentioned· therein and if it was found that no such purchases had
    been made and payments were to fictitious parties, Dubey should pay back
  . the amount thereof.

          At the stage when leave to appeal was given by this Court, the
E operation of the order under challenge was stayed. It was directed that the
    company would function in the manner it was functioning during the
    pe_ndency of the appeal before the High Court and that the stay would not
    prevent the Registrar of Companies carrying out the inspection required
    by the order under appeal.

F          While these appeals have been awaiting final disposal the company
     has prospered.

           Learned counsel for Mehra Sought to challenge the findings of fact
     reached by the Division Bench in the judgment under appeal. We find that
G    the Division Bench assessed the evidence before it and came to a con-
     dusion thereon. The conclusion has not been challenged as being perverse
     or such as could not reasonably have been reached upon the record, as,
     indeed, it could not have been. We, therefore, proceed upon the basis of
     the findings of fact recorded by the Division Bench.

H          The principal argument on behalf of Mehra was based upon the
        KILPESTPVf.LTD.v.SHEKHARMEHRA[BHARUCHA,J.]                       243

judgment of the House of Lords in Ebrahimi v. Westboume Galleries Ltd.          A
and Ors., (1972) 2 All ER 492. It was submitted that inasmuch as there
were only two promotor Directors, who held, along with their friends and
~elations, 1500 and 1650 shares respectively, and since they were to remain
Joint Managing Director for life, the principles applicable to a partnership
were relevant. There having been an exclusion of Mehra from the business
                                                                                B
of the company, Mehra was entitled to an order winding up the company.

      Ebrahimi's case was considered by this Court in Hind Overseas
Private Limited v. Raghunath Prasad Jhunjhunwalla and Anr., (1976] 3
S.C.C. 259. The facts of Ibrahimi case were set out therein thus:

        "In Ebrahimi's case (supra) the Company which was first formed
                                                                                c
        by the two erstwhile partners, lbrahimi and Nazar, was joined by
        Nazar's son, George Nazar, as the third director and each of the
        two original shareholders transferred to him 100 shares so that at
        all material times Ebrahimi held 400 shares, Nazar 400 shares and
        George Nazar 200 shares. The Nazars, father and son, thus had a D
        majority of the votes in general meeting. Until the dispute all the
        three remained directors. Later on as ordinary resolution was
        passed by the company in general meeting by the votes of Nazar
        and George Nazar removing Ebrahimi from the office of director.
        That led to the petition for winding-up before the court."
                                                                                E
      This Court noted that the following features had been found in
Ebrahimi's case :

        "(1) There was a prior partnership between the only-two members
        who later on formed the company.                                        p

        (2) Both the shareholders were directors sharin'g the profits equally
        as remuneration and no dividends were declared.

        (3) One of the shareholders' son acquired shares from his father
        and from the second shareholder, Ebrahimi, and joined the com-          G
        pany as the third shareholder : director with two hundred shares
        (one hundred from each) ..

        (4) After that, there was a complete ouster of Ebrahimi from the
        management by the votes of the other two directors, father and
        son.                                                             H
    244                   SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A           (5) Although Ebrahimi was a partner, Nazar had made it perfectly
            clear that he did not regard Ebrahimi as a partner but regarded
            him as an employee in repudiation of Ebrahimi's status as well as
            of the relationship.

             (6) Ebrahimi through ceasing to be a director lost his right to share
B            in the profits through director's remuneration retaining only the
             chance of receiving dividends as a minority shareholder.

             Bearing in mind the above features in the case, the House of Lords
             allowed the petition for winding-up by reversing the judgment of
c            the court of appeal and restoring the order of Plowman, J."

    This Court observed that although the Companies Act was modelled on
    the English statute, the Indian law was developing on its own lines and
    making significant progress. Where the words used in both the Indian and
    English statutes were identical, English decisions might throw light and
D their reasons might be persuasive, but the proper course was to examine
    the language of the statute and ascertain its true meaning. It was apposite,
  · having regard to the background, conditions and circumstances of present
    Indian society and the needs and requirements of the country that a
    somewhat different treatment be adopted. The courts would have to adjust
E and adapt, limit or extend principles derived from English decisions,
    entitled as they were to great respect, suiting the conditions of Indian
    society and the country in general, always, however, with one primary
    consideration in view that the general interests of the shareholders should
    not be readily sacrified at the alter of squabbles of directors for power to
    manage the company. This Court said :
F
             "When more than one family or several friends and relations
             together form a company and there is no right as such agreed upon
             for active participation of members who are sought to be excluded
             from management, the principles of dissolution of partnership
             cannot be liberally invoked. Besides, it is only when shareholding
G
             is more. or less equal and there is a case of complete deadlock in
             the company on account of lack of probity in the management of
             the company and there is no hope or possibility of smooth and
             efficient continuance of the company as a commercial concern,
             there may arise a case for winding-up on the just and equitable
H            ground. In a given case the principles of dissolution of partnership
        KILPESTPVf.LTD.v.SHEKHARMEHRA[BHARUCHA,J.J                       245

        may apply squarely if the apparent structure of the company is not A
        the real structure and on piercing the veil it is found that in reality
        it is a partnership. On the allegations and submissions in the
        present case, we are not prepared to extend these principles to the
        present company."

     We respectfully agree with.the observations in the case of Hind            B
Overseas Pvt. Ltd. and would add this. Sections 397 and 398 of the Com-
panies Act provide relief to shareholders against oppression and mis-
management. The powers exercisable in sue~ petitions, at the relevant time
by the courts and now by the Company Law Board, have been set out in
Section 402. Section 402 reads thus :
                                                                                c
        "S.402. Powers of Company Law Board on application under section
        397 or 398 - Without prejudice to the generality of the powers of
        the Company Law Board under section 397 or 398, any order under
        either section may provide for -
                                                                                D
        (a) the regulation of the conduct of the company's affairs in future;

        (b) the purchase of the shares or interests of any members of the
        company by other members thereof or by the company;

        (c) in the case of a purchase of its shares by the company as
        aforesaid, the consequent reduction of its share capital;               E

        ( d) the termination, setting aside or modification of any agreement,
        howsoever arrived at, between the company on the one hand, and
        any of the following persons, on the other, namely :

        (i) the managing director,                                              F

        (ii) any other director,~

        (iii) the managing agent,

        (iv) the secretaries and treasures, and                                 G
        (v) the manager,

        upon such terms and conditions as may, in the opinion of the
        Company Law Board, be just and equitable in all the circumstances
        of the case;                                                      H
    246                  SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A           (e) the termination, setting aside or modification of any agreement
            between the company and any person not referred to in clause (d),
            provided that no such agreement shall be terminated, set aside or
            modified except after due notice to the party. concerned and
            provided further that no such agreement shall be modified except
            after obtaining the consent of the party concerned;
B
            (t) the setting aside of any transfer, delivery of goods, payment,
            execution or other act relating to property made or done by or
            against the company within three months before the date of the
            application under section 397 or 398, which would, if made or done
c           by or against an individual, be deemed in his insolvency to be a
            fraudulent preference :

            (g) any other matter for which in the opinion of the Company Law
            Board it is just and equitable that provision should be made.

D         The promoters of a company, whether or not they were thitherto
    partners, elect to avail of the advantages of forming a limited company.
    They voluntarily and knowingly bind themselves by the provisions of the
    Companies Act. The submission that a limited company should be treated
    as a quasi-partnership should, therefore, not be easily accepted. Having
E   regard to the wide powers under Section 402, very rarely would it be
    necessary to wind up any company in a petition filed under Sections 397
    and 398.

        The present was a petition under Sections 397 and 398. The Division
  Bench exercised power under Section 402 to appoint Mehra as a Director
F to protect his interests and guard against mis-management. It required
  Dubey to return to the company the sum of Rs. 52,875 which he had
  wrongly appropriated to himself. It directed the Registrar of Companies to
  enquire into other allegations of misconduct in which it found, prima facie,
  substance; and we may say immediately that we have perused the report
G filed by the Registrar of Companies which shows that no substance was,
  ultimately, found thereon. We agree with the Division Bench that this was
  no case for winding up the company and must dismiss the appeal filed by
  Mehr a.

          Insofar as Dubey's appeal is concerned, it was submitted that the
H Division bench ought not to have ordered that Mehra be appointed a
                               •

        KILPESTPVf.LTD.v.SHEKHARMEHRA(BHARUCHA,J.)                   247

Director of the company. The Division Bench found that Dubey had A
appropriated to himself moneys belonging to the company. Mehra's
presence on the board would prevent recurrence, thus protecting Mehra's
interest and that of the company. We, therefore, find no substance in
Dubey's appeal.

       Dubey has filed a contempt petition against Mehra for having made    B
complaints to certain authorities while these appeals were pending. There
is no breach of any order nor any contempt and the contempt petition must
be dismissed.                  '

     The appeals are dismissed. The contempt petition is dismissed.
There shall be no order as to costs.                                · C

S.M.                                                  Appeals dismissed.