Synchron Machine Tools P. Ltd. and Others Vs. U.M. Suresh Rao - Court Judgment

K.A. Swami, J.

1. This petition is filed under sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), for the following reliefs :

'1. declare that the transfer of 25 equity shares held by Sri B. K. P. Rao (fourth respondent) in favour of his wife, Smt. B. K. Anupama Rao (third respondent), is invalid and illegal and direct that out of the said 25 shares originally held by Sri B. K. P. Rao, 12 shares be transferred to the petitioner;

2. quash the proceedings of the extraordinary general meeting of the members of the company held on November 12, 1987, and annual the resolution passed at the extraordinary general meeting of the company on November 12, 1987, declining to appoint the petitioner as director and direct that the petitioner shall continue as a wholetime director of the company with all such powers as originally conferred upon him and that he is entitled to draw remuneration as such;

3. direct amendment of the articles of association of the company by providing that the petitioner shall be a director of the company for life and that he shall not be removed from his office without the permission of this hon'ble court;

4. give necessary directions to ensure that in the management of the affairs, business and funds of the company, the petitioner shall have equal participation to the same extent as respondent No. 2;

5. enquire into and determine the loss caused to the company as a result of the wrong decision of the second respondent to retrench eleven workers of the company in the year 1984 and direct recovery of the said amount from the second respondent personally;

6. enquire into and determine the amounts paid by the company as return on capital brought in by Sri B. K. P. Rao (fourth respondent) in the guise of consultancy fee to him and his son, Sri Ananthakrishna Rao, and direct recovery of the said amounts from the fourth respondent with interest at the prevailing bank rate;

7. restrain the second respondent by a permanent injunction from making any representation or holding out to the public, employees of the company, bankers, etc., that the petitioner is not entitled to represent the company;

8. if the acts of oppression and mismanagement of respondent No. 2 cannot be effectively redressed then to order that the company be wound up under section 433(f) of the Companies Act.'

2. The petitioner is a member of the first respondent-company, Synchron Machine Tools Pvt. Ltd. (hereinafter referred to as 'the company'). The registered office of the company is situated at 48/D, 'N' Block, Third Stage, Rajajinagar, Bangalore-10. The company was incorporated under the Act on March 17, 1975. The nominal capital of the company is Rs. 5,00,000 divided into 500 equity shares of Rs. 1,000 each. The paid-up capital of the company is rupees one lakh. The petitioner holds 38 equity shares of Rs. 1,000 each fully paid. Thus, the shareholding of the petitioner exceeds 10 per cent. of the paid-up share capital of the company which as already pointed out is rupees one lakh. Consequently, it may be pointed out at the outset that, the petitioner satisfies the requirement of section 399(1)(a) of the Act to maintain the petition under sections 397 and 398 of the Act.

3. The objects of the company, as stated in the memorandum of association, are manifold and they are as follows :

1. To carry on the business of manufacturers of various types of small tools, cutting tools, hand tools, precision tools, pneumatic tools, thread gauges, ring gauges, plug gauges, snap gauges, special gauges, engineers steel scale, surface plates, angle plates, straight edges, swivel base, special reamers, cutters, ground taps and dies, gear-hobs, drill bits, and boring bits, and different types of accessories such as face plates, lathe chucks, milling vice, rotary tables, dividing heads, collects, drill chucks, measuring instruments and other precision equipment, devices for mechanical, electrical and hydraulic operations, finished and semi-finished machine parts, accessories and components for engineering and other allied industries.

2. To carry on the business of manufacturers of various types of tools required for engineering and allied industries such as press-tools, punching dies, blanking dies, compound dies, progressive dies, plastic moulding dies for compression moulds, injection moulds, transfer moulds, moulding dies for gravity and pressure die-castings, forging dies, sintering dies, jigs and fixtures for machining, assembly, erection and installation operations.

3. To carry on the business of manufacturers of pressed parts, deep draw parts, formed parts, coined parts, stampings and laminations, strips and bands using both ferrous and non-ferrous sheets.

4. To carry on the business of manufacturers of plastic moulded parts using compression moulding, injection moulding, transfer moulding, blow moulding, film-blowing, and other techniques.

5. To carry on the business of manufacturers of machines, machined parts, machine elements, components, machine tools, hardware, fastenings, clutches and couplings, clamps, bearings, gears, springs, beltings, agricultural and other implements, rolling stocks, foundry equipment.'

4. In addition to these main objects, the memorandum of association also specifies several objects incidental or ancillary to the attainment of the main objects and it also specifies several other objects which are not included in the main objects as incidental or ancillary. For our purpose, it is not necessary to refer to the same.

5. At this stage certain facts which are undisputed may also be referred to. At the time of incorporation of the company, there were only three shareholders, namely, S. M. Khanapure; Adam Hajee Ebrahim; and N. V. Rao - second respondent. They subscribed to one share each. These three were also the first directors of the company.

6. Before I state the grounds on which the aforesaid reliefs are sought, it is also relevant to notice that on the date the petition was filed there were only three shareholders of the company. The petitioner holds 38 equity paid-up shares. The second respondent holds 37 equity paid-up shares. The third respondent, Smt. B. K. Anupama Rao, holds 25 equity paid-up shares. It is also an admitted fact that respondent No. 3 is the wife of respondent No. 4; that respondent No. 2 is the son-in-law of respondents Nos. 3 and 4; that respondent No. 2 is the son of the petitioner's mother's brother, as such, respondent No. 2 is the first cousin of the petitioner.

7. The grounds for seeking the aforesaid reliefs are as follows :

Even though the company was incorporated on March 7, 1975, with the aforesaid three directors for more than one year, it did not commence any business, therefore, Sri Khanapure and Sri Adam Hajee Ebrahim resigned on January 27, 1976. Consequently, the second respondent alone was left as director of the company. At that time, the petitioner was looking out for a good project and had undertaken a market survey for locating a suitable engineering project to set up a small scale industry. For this purpose, he had also collected sufficient data. However, when he came to know of the fact that the second respondent was interested in setting up a small scale industry, the petitioner joined the second respondent. After Sri Khanapure and Adam Hajee Ebrahim tendered their resignations, the petitioner was co-opted as director of the company on January 27, 1976. The specific case of the petitioner is that from then onwards it was agreed and understood that the petitioner and the second respondent would be equal partners in the venture.

8. The project report which was prepared by the petitioner was revised and the Canara Bank was approached for grant of financial assistance to set up the unit, and the loan was obtained from the bank on concessional terms on the basis that the petitioner and the second respondent were unemployed engineers. They also filed a joint affidavit on February 11, 1976, to the effect that they were unemployed engineers and secured seed money assistance from the Government of Karnataka in a sum of Rs. 75,000; that the petitioner and the second respondent also by mutual agreement inducted one Sri B. S. N. Rao, who was earlier working as the chief executive in a reputed engineering company at Bangalore, as a director and shareholder; that at the instance of the second respondent, his father-in-law, respondent No. 4, was also inducted into the company in order to raise capital in the year 1976; that it was decided to issue in all 100 shares - 25 shares to each of the four individuals.

9. The work of the company also was divided between the petitioner and the second respondent; that in the annual returns filed up to September 15, 1976, and November 16, 1977, it is shown that 25 shares held by respondent No. 4 have been transferred to his wife, Smt. B. K. Anupama Rao, respondent No. 3; that this transfer was not made in accordance with the procedure prescribed for transfer of shares to non-members; that, according to article 20 of the articles of association of the company, a member proposing to transfer his shares is required to give a notice to the board of directors of the company and upon receipt of such notice the board is required to offer the said shares to existing members of the company in proportion to their shareholding in the company; that this procedure was not followed for transfer of the shares held by respondent No. 4 to respondent No. 3; that the petitioner in this regard alleges that the transfer of shares in this manner was a calculated move on the part of the second respondent to acquire a larger voting power; that Sri B. S. N. Rao in the year 1978, undertook a project consultancy work at Delhi, therefore, he resigned from the board; that the shares held by him, in accordance with the understanding between the petitioner and the second respondent, ought to have been transferred to the petitioner to maintain parity in the shareholding of the company; that at that time the relationship between the petitioner and the second respondent was cordial, therefore, on the suggestion of the second respondent the shares held by Sri B. S. N. Rao were distributed between the petitioner and the second respondent and the petitioner was allotted thirteen shares and the second respondent, twelve shares. In this regard, it is alleged in the petition by the petitioner that this was also the calculated move of the second respondent with a particular design in mind; that after the resignation of Sri B. S. N. Rao on May 24, 1978, there were only two directors of the company, namely, the petitioner and the second respondent from May 24, 1978, till November 12, 1987; that though initially there were hurdles in the progress of the company, in the later years the company started earning profits; that as per the balance-sheet and profit and loss account for the year 1985-86 the company had made profits. The petitioner and the second respondent by the resolution dated September 30, 1978, were made whole-time directors with effect from April 1, 1977, with a salary of Rs. 2,500 per month each and other perquisites. This was also intimated to the Registrar of Companies by filing form No. 23.

10. In the year 1984, the company thought of revamping its production system by installing sophisticated machines with a view to reorganise its unit to improve its profitability; that the petitioner worked out the details and found that some of the existing machines were required to be sold and new machines were required to be acquired; that in this process eleven workers were retrenched. However, the second respondent refused to agree to sell two machines which had become obsolete; that as a result of it, new machines could not be acquired; that at the same time the company lost the services of eleven skilled workers who were retrenched; that these retrenched workers have raised disputes and the same are pending and this has resulted in exposing the company to substantial claims on account of back-wages, etc.

11. The petitioner and the second respondent also started two partnership firms one called 'ACE Industries' in which the petitioner's wife and the wife of the second respondent were equal partners and another partnership firm called 'Electro Fab'; that in Electro Fab the petitioner and the second respondent were partners each holding 50 per cent. interest and the profits and losses were to be shared equally; that the office of these two firms were located in the premises of the first respondent-company; that these two firms purchased some of the items of machinery required for the business operation of the first respondent-company and they were used by the company to execute the work orders; that due to differences between the petitioner and the second respondent these two firms stand dissolved; and the arbitrators have been appointed to work out the mutual rights of the partners. A significant part of the machinery required by the company for its business is owned by these firms; that, therefore, it is impossible for the company to carry on its business without the use of those machines; that the second respondent started acting unreasonably in the matter of the company's business and, therefore, serious differences arose between the petitioner and the second respondent from the year 1984; that towards the end of the year 1984, the differences between the petitioner and the second respondent escalated and reached the pith.

12. There were attempts made by the parties and their well-wishers to bring about a settlement and to resolve the difference; that Sri K. P. Rao and Sri Sadashiva Rao, partners of K. P. Rao and Co., chartered accountants of the first respondent-company, held several discussions with the parties; that in the light of these discussions Sri B. K. P. Rao, by his letter dated January 11, 1985, addressed to Sri K. P. Rao offered to sell twelve shares out of the 25 shares held by his wife to the petitioner; that this was done to maintain parity in the shareholding between the petitioner and the second respondent; that he demanded Rs. 7,000 per share which was wholly exaggerated; therefore, the petitioner wrote to Sri K. P. Rao that though the offer of shares was in the right spirit, the price indicated per share was extremely high, therefore, requested him to assess the fair value of share for the purpose of enabling the transfer of shares. Sri B. K. P. Rao sent a note dated February 11, 1985, to the auditors of the first respondent-company as to the method of valuation; that before any action could be taken by Sri K. P. Rao, Sri B. K. P. Rao by his letter dated February 27, 1985, withdrew his offer; that this withdrawal of offer was not in conformity with the provisions of the articles of association of the company.

13. That Sri B. K. P. Rao was not in the management of the company. Therefore, he was not eligible to be paid any salary or remuneration from the company; that the company agreed to give return on his investment of Rs. 25,000 in the company at the prevailing bank rate of interest in the form of consultation fee to be paid in the name of his son, Sri A. Ananthakrishna Rao, during the period when Sri B. K. P. Rao was in the service of Binny Ltd. that Ananthakrishna Rao was a young man with no experience and was in fact working as a trainee in Kirloskar Electric Co. Ltd.; that he did not render any assistance to the company; that this arrangement of paying the amount in the form of consultation fee was continued and paid to Sri B. K. P. Rao even after his retirement from the company; that it was pointed out by the petitioner that the company could not afford to continue this arrangement and that it was a serious drain on the company's resources; as such it should be discontinued; that at this stage differences between the petitioner and the second respondent escalated further and resulted in a deadlock in the management of the company; that the second respondent held out a threat to the petitioner that he and his relative, respondent No. 3, held majority of shares, as such they could throw the petitioner out from the company at any time; that the second respondent also falsely spread words in the social and business circles that the petitioner was only an employee of the company and was never a director.

14. That the second respondent made attempts to prevent payment of remuneration to the petitioner, that all cheques on behalf of the company were being signed by both the petitioner and the second respondent; that the second respondent declined to sign the cheques when it came to payment of remuneration to the petitioner; that this attitude of the second respondent resulted in stalemate and the second respondent completely stopped signing cheques on behalf of the company; that there was exchange of letters between the petitioner and the second respondent in this regard containing allegations and counter-allegations; that differences between the petitioner and the second respondent still worsened when the second respondent all of a sudden by his letter dated August 24, 1987, sent a requisition to the company under section 169 of the Act to convene an extraordinary general meeting of the company to comply with article 29(e) of the articles of association of the company in order to appoint the petitioner, the second respondent and one outsider by name Dr. Ghatge as director of the company; that the petitioner replied to the letter dated August 24, 1987, and pointed out that there was no violation of article 29(e) of the articles of association of the company and that there was no need to appoint any outsider as director of the first respondent-company; that the petitioner learnt that the second respondent on misrepresenting the facts to Dr. Ghatge had requested him to become a director of the first respondent-company; that the requisition letter dated August 24, 1987, of the second respondent was followed by the notice dated October 9, 1987, convening the extraordinary general meeting (EGM) on November 12, 1987; that the petitioner, apprehending that an attempt was being made oust him from the company, convened a board meeting by his notice dated October 28, 1987, on November 7, 1987, proposing to co-opt two directors; that the second respondent informed the petitioner that convening of the board meeting was illegal and as such he should not attempt to do the same; that, therefore, the petitioner had no option but to requisition a meeting under section 169 of the Act on November 10, 1987; that the second respondent by his reply dated November 7, 1987, informed that the board was not competent to meet and discuss when the extraordinary general meeting of the company convened by the second respondent was to be held on November 12, 1987; that in the extraordinary general meeting of the company held on November 12, 1987, the petitioner was present; that two other persons by name Sri Keshavan, claiming to be an advocate and Sri Vijaya Krishna, claiming to be a chartered accountant, were kept present in the said meeting which was not permissible; that the second respondent did not put the resolution proposing to elect the petitioner as a director to vote by show of hands; that he straightaway directed vote by poll; that the polling slips were distributed and votes were cast by three members, i.e., the petitioner and respondents Nos. 2 and 3; that at that time Sri Keshavan and Vijayakrishna both attempted to participate in the meeting and tried to interfere with the petitioner's right to vote; that the request of the petitioner to direct these two persons to withdraw from the meeting was overruled by the second respondent; that respondents Nos. 2 and 3 voted against the resolution to appoint the petitioner as director; that the other two resolutions proposing to appoint the second respondent and Dr. Ghatge as directors were declared as passed whereas that of the petitioner was declared as lost as respondents Nos. 2 and 3 voted against the petitioner; that after the meeting the petitioner learnt that the second respondent requested Dr. Ghatge to meet him at the Golf Club for a board meeting of the company; that after Dr. Ghatge met the second respondent at the Golf Club and the second respondent informed him that he wanted to co-opt Sri B. K. P. Rao, father-in-law of the second respondent as a director of the company; that Dr. Ghatge on coming to know the evil intention of the second respondent tendered his resignation as director of the company which was also brought to the notice of the Registrar of Companies.

15. It is the further case of the petitioner that the company had been managed by the petitioner and the second respondent right from the inception; that the affairs of the company had been carried on by them as partners; that the petitioner and the second respondent all along considered themselves as equal partners; that the business of the company had been carried on by them jointly in every respect; that all the decisions were taken by mutual consent till differences arose between them; that the petitioner and the second respondent carried on the affairs of the company as partners was also further strengthened by the fact that the two partnership firms were formed by them with equal shares; that the company was a small private company and its shares were closely held. Therefore, it is the case of the petitioner that the principles of partnership law would apply to the first respondent-company; that the conduct of the second respondent justified lack of confidence in the conduct and management of the company's affairs; that the rift was solely due to the desire of the second respondent to take over the control of the company and oust the petitioner; that the manner in which the company was incorporated and run for such a long period of time by the petitioner and the second respondent made it clear that both of them were equal partners; that the calculated moves spread over several years of the second respondent were an attempt to increase his percentage of shares by adopting illegal means and by failing to comply with the provisions of the articles of association; that even though the company has been in existence for more than one decade, it has not maintained the minutes of the board of directors meeting; that the share certificates have not been printed and the members' register and other statutory registers have not been maintained; that there is a deadlock in the company and as such in the facts and circumstances of the case, it is just and equitable to wind up the company as the affairs of the company are being conducted in a manner oppressive to the petitioner who is a member of the company. But, in the facts and circumstances of the case, the winding up of the company would unfairly prejudice the petitioner and as such it is necessary to bring to an end the oppression carried out by the second respondent.

16. That at the extraordinary general meeting held on November 12, 1987, respondents Nos. 2 and 3 have exercised their voting rights in a manner prejudicial to the interest of the company and its members; that the decision to vote against the petitioner was motivated by their desire to oust the petitioner from the management and control of the company; that the manner of exercise of voting power by respondents Nos. 2 and 3 left no room for doubt that their intention was to bring about a material change in the management and control of the company by alteration in its board of directors; that by reason of the change in the board of directors, it is likely that the affairs of the company would be conducted in a manner prejudicial to public interest and in a manner prejudicial to the interest of the company and its members; that after being in management from the time company's factory was set up in the year 1976, the petitioner finds himself out of office as director and this is only due to his differences with the second respondent which is all the making of the second respondent and his desire to aggrandize unto himself the power of full control over the affairs and funds of the company to the exclusion of the petitioner. Thus, the petitioner has sought for the reliefs extracted above on the grounds that he and the second respondent are equal partners of the company; that an attempt is made to oust him from the management of the company; that this is against the interest of the company and the petitioner who is shown as a minority shareholder and as such he is entitled to be protected from such oppression; that the transfer of the shares from the fourth respondent to the third respondent was illegal and unsustainable; that the company is a small private company governed by the principles of partnership; that the attempt to oust the petitioner from the management has the result of materially changing the management and control of the company; that the removal of the petitioner as a director is detrimental to the interest of the company and the petitioner; that this is as a result of the second and the third respondent exercising their voting right to oppress the petitioner and that the petitioner has also been deprived of the remuneration and the perquisite he was entitled to draw as a wholetime director.

17. The respondent have filed a common statement of objections, inter alia, contending that there was no understanding between the petitioner and the second respondent; that the petitioner was entitled to 50 equity shares in accordance with the understanding with the company; that the petitioner and the second respondent would be equal partners in the venture is denied; that the first respondent being a body corporate incorporated under the Act; that the business of the first respondent did not arise out of any previous partnership; that there was no understanding of equal partnership in the venture between the petitioner and the second respondent; that respondents Nos. 2 and 4 were solely responsible for conceiving the business venture; that the petitioner had no role at all to play when the business venture was conceived; that it is not true that Hajee and Khanapure resigned because the company did not commence any business; that Khanapure resigned as a result of differences of opinion on the salary to be paid to him; that the allegation that the second respondent had no entrepreneurial experience or technical knowledge is grossly incorrect apart from being unjustifiably malicious; that at no point of time there was any understanding between the petitioner and the second respondent that they would be equal partners in the first respondent-company; that there was no justification, need or reason for such an understanding to be arrived at; that the petitioner held one share and respondent No. 2 held two shares; that the difference in the shareholding commenced from the date the petitioner was co-opted; that the transfer of one share held by Khanapure to the petitioner and one share held by Hajee Ibrahim to the second respondent was approved and carried out at the meeting of the board of directors held on January 27, 1976, wherein the petitioner was also present and he neither objected to the transfer of an additional share to the second respondent nor demanded equality of shareholdings; that on the contrary he acquiesced and consented to the shareholding of the second respondent being two and his being one. As such for the first time in the petition he has claimed a right to own shares equally with the second respondent.

18. That the first respondent-company was opened even before the petitioner became a member of the company; that it is true that the petitioner and the second respondent furnished affidavits to the Department of Industries and Commerce but it is not factually correct that in that affidavit, the petitioner and the second respondent had stated that they were setting up a small scale industry with shares in equal proportion; that prior to co-opting the petitioner, he had represented to the second respondent that he had varied experience on the shop floor and that he would be capable of managing the entire production department of the first respondent-company and that he would effectively replace Mr. Khanapure by virtue of his experience in the shop floor; that on these representations, the second respondent agreed to co-opt the petitioner to the board; and one share held by Khanapure was transferred to the petitioner; but later on it transpired that the petitioner did not in fact have any experience whatsoever in the production department or on the shop floor. Therefore, in the interest of the company, on the suggestion of the second respondent Sri B. S. N. Rao was included as a member of the board of directors of the company as he was qualified and had wide experience on the shop floor. Therefore, it is false to allege that Sri B. S. N. Rao was co-opted at the instance of the petitioner. Of course, the petitioner was a consenting party to the inclusion of Sri B. S. N. Rao; that at the stage when B. S. N. Rao was co-opted, the petitioner insisted for allotment of shares. Therefore, 25 shares were allotted to Mrs. Anupama Rao, wife of Sri B. K. P. Rao as Sri B. K. P. Rao had been involved in the first respondent-company from its inception and was practically responsible for the venture itself; that the petitioner did not object to the allotment of shares to Mrs. B. K. Anupama Rao; that in the meeting of the board of directors held on August 14, 1976, wherein the petitioner was present, it was resolved to allot 25 shares to Mrs. B. K. Anupama Rao without her being co-opted as a director of the board; that the petitioner's claim of expertise and technical skill was per se false; that the entire process of selection of plant and machinery, placing orders therefor, inspection and installation, etc., were supervised by B. S. N. Rao and not by the petitioner.

19. That in the board meeting held on October 1, 1976, there was allocation of responsibilities amongst the petitioner, the second respondent and B. S. N. Rao. The petitioner was to look after the marketing, appointment of personnel, their promotions, disciplinary proceedings against them and their removal, liaison with banks, and placing of orders for machinery. That the allegation that B. K. P. Rao transferred 25 shares to his wife Smt. B. K. Anupama Rao is not factually correct; that in the board meeting held on August 14, 1986, the initial allotment of 25 shares itself was to Mrs. Anupama Rao. Therefore, there was no question of transfer of shares from B. K. P. Rao to Mrs. B. K. Anupama Rao; that even otherwise, if any such transfer had taken place, the petitioner was also a consenting party to the transfer as he had signed the annual reports up to September 15, 1976, and November 16, 1976, in his capacity as a director. As such he is precluded and estopped from challenging the legality or validity of such transfer; that the transfer of shares was contrary to the procedure prescribed in the articles of association is also untenable; that apart from the fact that there was no such transfer and even if such transfer had taken place, the petitioner being a consenting party is precluded from challenging the same at the belated stage; that there was no motive for transfer of shares as alleged by the petitioner even assuming that there was transfer; that at any rate, it does not constitute oppression of minority shareholders or mismanagement; that it is true that B. S. N. Rao resigned on May 24, 1978, that there was no understanding at any stage to transfer the shares held by B. S. N. Rao to the petitioner; the petitioner agreed to the transfer of shares held by B. S. N. Rao - 12 shares to the second respondent and 13 shares to him. As such he is precluded from challenging the transfer of shares or attribute motives to the second respondent; that the petitioner, in law, was not entitled to the transfer of all the 25 shares held by B. S. N. Rao; that it is true that on the resignation of B. S. N. Rao on April 28, 1978, there were only two directors - the petitioner and respondent No. 2; that even then, there was no understanding either express or implied that the petitioner and respondent No. 2 would be equal partners in the company; that apart from the petitioner and respondent No. 2, the only other member of the company was Smt. B. K. Anupama Rao; that on the resignation of B. S. N. Rao, the total shareholding was 100 shares which were divided and held as follows :

1. Petitioner .... 38 shares2. Respondent No. 2 .... 37 shares3. Respondent No. 3 .... 25 shares

20. It is true that the petitioner and respondent No. 2 signed all the documents and furnished personal guarantees to the banks but this did not enable the petitioner or create any right in him to claim 50 per cent. shareholding in the first respondent-company as there was no such understanding that they would be equal partners; that the allegations that the petitioner was completely all along in charge of the production activities of the company is not correct. From October 1, 1976, duties of each of the directors were specified. The responsibility of production was of B. S. N. Rao and not of the petitioner. The petitioner had no knowledge or experience either of the shop floor or of production. Therefore, the petitioner being solely in charge of the production is not only untenable but factually incorrect. There was a concept of reorganisation but it is not true that the petitioner worked out details of reorganisation as alleged in the petition.

21. Eleven workers were retrenched because they were found to be surplus and the petitioner was a consenting party to it. It is true that respondent No. 2 unreasonably refused to participate in the economic reorganisation of the company or that he objected to the sale of two machines or that the said machines had become obsolete; that the second respondent was agreeable for sale of such machines but the offers received for the machines were not satisfactory. Therefore, the petitioner and the second respondent jointly decided not to sell the machines; that all the machines are being used; that industrial disputes are pending and there is nothing special about it; it is a normal feature of every industrial venture. From this it cannot be inferred that there is mismanagement.

22. It is true that two partnership firms known as Ace Industries and Electro fab were formed by the petitioner and the second respondent; that in Ace Industries the wife of the petitioner and the wife of the second respondent were the partners and in Electro fab, the petitioner and respondent No. 2 were partners. In both the firms, the parties had 50 per cent. interest but the business carried on by the firms was not intimately connected with that of the first respondent. The fact that the petitioner and respondent No. 2 were equal partners in the partnership firm did not in any manner establish the right of the petitioner to be equal shares in the first respondent-company; that it is not true that the second respondent started acting unreasonably in the matter of the company's business from 1984. In fact the petitioner is involved in the establishment of another industry of which the petitioner and his wife are directors. The petitioner established another industry by name Supangita Engineers P. Ltd. in about the month of June, 1985, while he was a director of the first respondent-company. Therefore, he became irregular in the discharge of his duties as a director of the respondent-company. Hence, differences between the petitioner and the second respondent developed; that establishment of another factory during the tenure as a director of the first respondent-company showed lack of bona fides on the part of the petitioner; that change of board of directors was made at the instance of the petitioner; the former auditors of the first respondent-company were Aru and Dev; K. P. Rao and Co. were appointed at the instance of the petitioner, as auditors of the company in place of Aru and Dev., K. P. Rao and Co. were responsible for the petitioner being released from the partnership business of manufacture of fasteners; that the second respondent had all along believed that the intention of the petitioner in appointing K. P. Rao and Co. as chartered accountants of the company was bona fide. It was because of this that K. P. Rao and Co. were also involved in attempts to sort out differences of opinion between the petitioner and the second respondent; that out of 25 shares held by Smt. B. K. Anupama Rao, 12 shares were offered to the petitioner and 13 shares were offered to the second respondent by Sri B. K. P. Rao; that the petitioner has deliberately withheld the latter portion of the letter of B. K. P. Rao, which states that he was willing to sell 13 shares held by his wife to the second respondent; that the offer was made to K. P. Rao and not to the petitioner directly; that failure of negotiation regarding the sale and purchase of shares was due to the unreasonable attitude adopted by the petitioner; that the petitioner valued the shares at Rs. 896.98 per share whereas the third respondent valued them at Rs. 7,000 per share.

23. That Sri B. K. P. Rao had invested Rs. 25,000 in the shares of the company and no dividend was declared; that he was also advising the company; further he had advanced a loan of Rs. 50,000 to meet its immediate requirement; that B. K. P. Rao was paid Rs. 300 from October 12, 1978, up to August 17, 1984, by cheques; that the petitioner is a consenting party as the cheques were signed by him; that the payment of Rs. 300 per month cannot be held to constitute oppression or mismanagement. The allegation that the second respondent prevented payment of remuneration to the petitioner is denied; that it is the petitioner who is responsible for such a situation; that the petitioner himself signed the cheques; that the petitioner signed the cheques in relation to the payments to be made to the suppliers only after those cheques were sent by registered post for signature of the petitioner; that it is denied that the second respondent made attempts to oust the petitioner from the management; that under article 29(e) of the articles of association, one-third of the directors shall retire each year; that this provision was not given effect to by inadvertence; therefore, an attempt was made to regularise the directorship of both. Therefore, a notice dated April 28, 1987, was issued to call for an extraordinary general meeting to consider and pass resolutions appointing the petitioner, the second respondent and one Dr. V. M. Ghatge as directors of the first respondent-company; that the extraordinary general meeting held on November 12, 1987, was not with a view to oust the petitioner; that Dr. Ghatge had experience in similar industry, therefore, he was suggested by the second respondent to be a director of the first respondent-company; that there was no design or mala fide intention on the part of the second respondent in proposing the name of Dr. Ghatge; that there was no misrepresentation of facts to Dr. Ghatge made by the second respondent as alleged by the petitioner; that before the extraordinary general meeting to be held on November 12, 1987, the petitioner issued a letter calling for a board meeting on November 7, 1987, to co-opt Mr. Sridhar and Mr. Raghuraj as directors; that convening of the board meeting was illegal, therefore, the petitioner was informed accordingly by the letter dated November 3, 1987; that there was nothing illegal in the extraordinary general meeting held on November 12, 1987; that the petitioner in spite of having convened a board meeting on November 10, 1987, and in spite of having issued a letter separately convening the extraordinary general meeting, in fact, attended the extraordinary general meeting on November 12, 1987; that it is not false that the second respondent unilaterally assumed chair and conducted the meeting as alleged; the second respondent had been appointed as chairman of the board. Therefore, the question of the second respondent unilaterally assuming the chair did not arise; that the petitioner did not at any time object to the convening of the meeting as alleged by him; that on the contrary, he was a consenting party to the entire proceedings; that no objection of any nature was raised by the petitioner during the proceedings of the meetings; that the presence of Sri Keshavan was not illegal; he was duly appointed as legal adviser of the first respondent-company at the board meeting held on May 4, 1987; the allegation that the voting by poll was straightaway resorted to without in the first instance taking a vote by show of hands is grossly incorrect and denied as false. The voting on the resolution nominating the petitioner as director was in the first instance held by show of hands. However, before the results of such poll were declared, one of the shareholders, viz., Smt. Anupama Rao, demanded a poll in pursuance of which a poll was conducted; that it is grossly incorrect to aver that the petitioner took objection to the need to appoint a third director, viz., Dr. Ghatge; that at no time Dr. Ghatge had indicated his disinclination to be a member of the board; that the averment that Dr. Ghatge had indicated to the petitioner that he was not agreeable to act as a director of the first respondent-company is wholly untenable as the petitioner could not have had any knowledge of the same; that Dr. Ghatge resigned only because the petitioner had made a false representation to him that it would involve litigation; that the petition is the direct result of the failure of the petitioner to get elected as a director in the extraordinary general meeting held on November 12, 1987; that it is filed with a mala fide intention as no right is vested in the petitioner to remain as a board director of the first respondent-company after the resolution so nominating him was lost; that all the averments made in the petition are afterthoughts and are motivated because of the failure of the petitioner to get elected as a director; that the petitioner was instrumental in making Dr. Ghatge resign; that after the resignation of Dr. Ghatge, the board of directors comprised only the second respondent. Therefore, by virtue of the right vested in the second respondent under regulation 75, he appointed Mr. Sunil Kothari as a second director. As such the board of directors of the first respondent-company now comprises the second respondent and Mr. Sunil Kothari; that the averments made in para 27 of the petition are denied as grossly incorrect and false; that in any event, the petitioner was involved during the period of seven years in the administration and running of the first respondent-company and in view of the fact that all the decisions and actions were taken by the petitioner and the second respondent jointly, the petitioner is not entitled to challenge the acts of the company for the past seven years; that the petitioner is guilty of delay and laches; that all the allegations of oppression and mismanagement are made for the first time. There are no bona fides in the petition; that the minutes of the meeting of the board of directors of the company have been maintained and would be produced separately; that in any event, the mere non-maintenance of minutes of the board meeting would not constitute oppression. The share certificates have not only been printed but have also been delivered to the shareholders. The register of members as required by the Act has been maintained. The relevant extracts therefrom will be produced separately.

24. That it is factually incorrect to say that the affairs of the company are being conducted in a manner oppressive to the petitioner. The petitioner himself refused to sign the cheques; that the alleged rift between the petitioner and the second respondent is not due to the desire of the second respondent to take control of the company and to oust the petitioner; that on the contrary, the conduct of the petitioner in using the company's time, contacts, infrastructural facilities and experience to set up an independent private limited company with the petitioner and his wife as directors would only support the contention of the second respondent that the petitioner sacrificed the interest of the first respondent-company in preference to his own private limited company. Therefore, if there were any calculated motives, it was attributable entirely to the petitioner himself who had engaged in setting up another parallel company in competition with the first respondent-company; that the petition has been filed only to harass the second respondent and to impede the functioning of the first respondent-company in view of the fact that the petitioner has lost the election as a member of the board of directors of the first respondent-company; that the contents of para 29 of the petition are grossly incorrect; that the petitioner having participated in the extraordinary general meeting held on November 12, 1987, and having contested the election for the directorship of the first respondent-company and lost it, has no right to challenge the manner in which the members of the company exercised their right of voting; that the fact that the members of the company placed confidence in the second respondent and expressed lack of confidence in the petitioner would itself establish that the affairs of the company are not being conducted in any way prejudicial to the interest of the first respondent. The respondents have also denied the averment made in para 29 of the petition and the grounds raised in paragraphs 30(a) to (d). Consequently, it is the case of the respondents that the petitioner is not entitled to any of the reliefs sought for in the petition.

25. It is the further case of the respondents that the petition does not disclose any grounds justifying an order of winding up of the first respondent-company under section 433(f) of the Act nor granting any of the reliefs prayed for in the petition; that the petition is not maintainable as the petitioner has failed to show that he was compelled to submit to conduct which lacked probity or conduct that was unfair; that it is the inherent right of the shareholders to elect their directors. Therefore, the rejection of the petitioner's claim to be elected as a director of the first respondent company cannot constitute oppression as defined under the Act. That similarly mere dissatisfaction of the petitioner also cannot constitute oppression as defined under section 397 of the Act; that the petitioner has failed to establish that the first respondent-company or the second respondent has been guilty of illegal or unlawful acts continuously so as to warrant the presumption of mismanagement; that mere isolated acts of alleged mismanagement, if any, would not constitute oppression as defined in section 397 of the Act. Thus, the respondents have sought for dismissal of the petition. Therefore, it is the case of the respondents that the petitioner is not entitled to any reliefs and the petition is liable to be dismissed.

26. In support of his case, the petitioner has given evidence as PW-1 and has also examined Sri Sadashiva Rao, partner of K. P. Rao and Co., chartered accountants of the first respondent-company as PW-2 and has produced 49 documents which are marked as exhibits P-1 to P-49. In support of their case, the respondents have examined respondent No. 2 as RW-1 and got marked 37 documents as exhibits R-1 to R-37. In addition to these the respondents have produced 13 other documents, the genuineness of which is challenged by the petitioner. Therefore, those documents are marked for identification purpose as exhibits 1 to 13.

27. Having regard to the pleadings of the parties, evidence adduced by them and the arguments advanced on both sides, the following points arise for consideration :

1. Whether this is a case to which the principles of partnership are attracted

2. Whether the petitioner proves that the affairs of the first respondent-company are being conducted in a manner oppressive to him, and prejudicial to the interests of the first respondent

3. Whether the petitioner proves that the transfer of 25 equity shares held by Sri B. K. P. Rao (respondent No. 4) in favour of his wife, Smt. B. K. Anupama Rao (respondent No. 3), is invalid

4. Whether the proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, and the resolutions passed at the said extraordinary general meeting of the first respondent-company are liable to be declared as illegal and invalid and quashed

5. Whether the petitioner is entitled to continue as a wholetime director of the first respondent-company with all such powers as originally conferred upon him and is entitled to draw remuneration

6. Whether it is necessary to declare and issue directions that in the management of the affairs, business and funds of the first respondent-company, the petitioner shall have equal participation to the same extent as respondent No. 2

7. Whether it is necessary to enquire into the determine the amounts paid by the first respondent-company to the fourth respondent and his son in the guise of consultancy fee and direct recovery of the said sum from the fourth respondent with interest at the prevailing bank rate

8. Whether it is necessary to restrain the second respondent by permanent injunction from making any representation or holding out to the public, employees of the company, bankers, etc., that the petitioner is not entitled to represent the first respondent-company

9. Whether the articles of association of the first respondent-company require to be amended

10. Whether it is just and necessary to direct that out of the 25 shares originally held by B. K. P. Rao (respondent No. 4) now standing in the name of his wife, Smt. B. K. Anupama Rao (respondent No. 3), 12 shares be transferred to the petitioner ?

11. Whether it is a case in which the first respondent-company has to be wound up under section 433(f) of the Act

12. What order

28. Before I take up point No. 1 for consideration, I consider it just and necessary to discuss the law on the point.

29. Law on the point :

In the light of the contentions urged on both sides, I will now consider the law on the point. It is contention of Sri Sunderswamy, learned senior counsel for the petitioner, that the facts and circumstances of the case attract the principles laid down in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, whereas it is contended by Sri Santosh Hegde, learned senior counsel appearing for the respondents, that the first respondent is a company incorporated under the Act and as such the principles enunciated in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360, are not attracted. Further, the facts and circumstances of the case do not warrant the application of the principles of partnership; that the first respondent-company has not come into existence or formed out of an existing partnership. The specific case of the petitioner is that there has been an understanding between the second respondent and the petitioner, when he joined the first respondent that he and the second respondent would be equal partners in the venture of the first respondent. Of course, if the case of the petitioner as to such an understanding between him and the second respondent is found established as a matter of course the principles of partnership are required to be applied. If, on the contrary, no such agreement or understanding is found as existing between the petitioner and the second respondent, it will have to be seen whether the facts proved warrant application of the principles enunciated in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360.

30. In Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360, 379 as noticed by the Supreme Court in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla : [1976]2SCR226 , it was held as follows (at pages 499, 500 of [1972] 2 All ER) :

'The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own : that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act, 1948, and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The super-imposition of equitable considerations requires sometime more, which typically may include one, or probably more, of the following elements :

(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;

(ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business;

(iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere ...

A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.'

31. In Hind Overseas' case [1976] 46 Comp Cas 96 (SC) there was a petition filed for winding up under section 433(f) of the Act. The learned company judge dismissed the petition holding that the principle of dissolution of partnership applied to companies either on the ground of complete deadlock or on the ground of being domestic or family companies. A complete deadlock would be created where the board has two real members or the ratio of shareholding is equal. In the case of domestic or family companies, the courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. Lack of probity has to result in prejudice to the company's business, affecting rights of complaining parties as shareholders and not as directors. If a deadlock can be resolved by the articles there is no deadlock to bring in winding-up and if there are alternative remedies the company should not be wound up. The learned company judge also held that he was unable to hold that the substratum of the company had gone. However, in the appeal, it was reversed and winding-up was ordered. The matter was taken to the Supreme Court. After referring to Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 and also Yenidje Tobacco Co. Ltd.'s case [1916] 2 Ch 426 (CA) and other cases, the Supreme Court held as follows (at page 104 of 46 Comp Cas) :

'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 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 ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not 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.

The principle of 'just and equitable' clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula.

In an application of this type allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition.

The question that is raised in this appeal is as to what is the scope of section 433(f) of the Act. Section 433 provides for the circumstances in which a company may be wound up by the court. There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Section 222(f) of the English Companies Act, 1948, is in terms identical with the Indian counterpart, section 433(f). It is now well established that, the sixth clause, namely, 'just and equitable' is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, 'just and equitable'. Since, however, the matter cannot be left so uncertain and indefinite, the courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also born out of recognition of equitable considerations generally. This is particularly so as section 35(6) of the English Partnership Act, 1890, also contains, inter alia, an analogous provision for the dissolution of partnership by the court. Section 44(g) of the Indian Partnership Act also contains the words 'just and equitable'.

Section 433(f) under which this application has been made has to be read with section 443(2) of the Act. Under the latter provision where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

Again under sections 397 and 398 of the Act, there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interest of the company.'

32. The Supreme Court also went into the evidence and reversed the reasoning of the Division Bench as may be noticed from paragraphs 46, 47 and 48 of the judgment (see Hind Overseas' case [1976] 46 Comp Cas 91 at pp. 108, 109) and allowed the appeal and dismissed the petition for winding-up. Thus, in Hind Overseas' case [1976] 46 Comp Cas 91 though the Supreme Court enunciated the principles in paragraphs 32 to 37 (see [1976] 46 Comp Cas 104-106), as extracted above, the appeal was ultimately allowed on the basis of the findings of fact recorded, as may be noticed from paragraphs 46 to 48 (see [1976] 46 Comp Cas 109) of the judgment.

33. Sri Santosh Hegde, learned senior counsel for the respondents, placed reliance on another decision of the Supreme Court in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) . In that case, according to the assessee, the dividend income received by her in respect of the shares held by her in the tea company was to the extent of 60 per cent. agricultural income in her hands and, therefore, pro tanto exempt from tax. While the Revenue contended that dividend income was not agricultural income and, therefore, the whole of the income was liable to tax. The Income-tax Appellate Tribunal held that the dividend income could not be treated as agricultural income in the hands of the shareholder and decided in favour of the Revenue. However, it agreed that its order gave rise to a question of law, and formulated the following question and referred it to the High Court (at page 3) :

'Whether 60 per cent. of the dividend amounting to Rs. 2,750 received by the assessee from the two tea companies is agricultural income and as such exempt under section 4(3)(viii) of the Act.'

34. The High Court upheld the order of the Tribunal, but granted leave to appeal to the Supreme Court. It was held by the Supreme Court that the words 'revenue derived from land' occurring in the definition of the expression 'agricultural income' as contained in section 2(1) of the Indian Income-tax Act, 1922, could not be interpreted beyond their legitimate limits. It was further held that the expression 'agricultural income' as defined in the Act was obviously intended to refer to the revenue received by direct association with the land which was used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changed hands either by way of distribution of dividends or otherwise. In fact and truth, dividend would be derived from the investment made in the shares of the company and the foundation of it would rest on the contractual relations between the company and the shareholder. Dividend was not derived by a shareholder by his direct relationship with the land. Accordingly, it dismissed the appeal.

35. In that case, a contention was urged that an investor in the shares of a company would also buy the right to participate in any profits which the company may make. This contention was negatived and it was held that 'there is nothing in the Indian law to warrant the assumption that a shareholder who buys shares, buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders'. The Supreme Court also negatived the contention that the position of shareholders in a company was analogous to that of partners inter se. It held that such analogy was wholly inaccurate. The Supreme Court also further observed thus (at page 6) :

'Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders.'

36. It is not possible to hold that this decision is of any help to consider the question involved in the case on hand. It is not the case of the petitioner that the first respondent is a partnership. The first respondent is undoubtedly a private company. In the case of a small domestic company confined to a few individual shareholders it would be open to them to agree to carry on the business and affairs of the company on the principles of partnership. It would also be open to the court to pierce the corporate veil and find out as to whether the apparent structure of the company is not the real structure and that in reality it is a partnership. Therefore, it is not possible to hold that the decision in Bacha F. Guzdar's case [1955] 25 Comp Cas 1 (SC) is of any assistance to decide the point under consideration.

In Bird Precision Bellows Ltd., In re [1984] 1 Ch 419, Nourse J. held thus :

'The classical definition of partnership which subsists between persons carrying on a business in common with a view of profit. It seems to me that that is exactly what Mr. Armstrong, Mr. Bird, Mr. Nin, Mr. Rowden and Pipe-Chem were doing. More particularly, and with reference to the typical and important elements previously referred to, I find the following facts in relation to the company and the roles which Mr. Armstrong and Mr. Nin were intended and expected to play, and did play, in its affairs. First, the company represented an association which was formed on the basis of a personal relationship involving mutual confidence. Mr. Bird accepted in his evidence in chief that there was trust between himself and Mr. Armstrong and Mr. Nin, although he said that it was no more than in any other business connection. That is quite enough. The personal relationship involving mutual confidence does not have to be one which extends beyond the confines of business, for example into social life. Secondly, there was an agreement or understanding that Mr. Armstrong and Mr. Nin should participate in the conduct of the business. In my judgment that element is found where there is an agreement or understanding that a shareholder shall participate in all major decisions relating to the company's affairs, for example by acting as a director, even if not in the day-to-day conduct of the business. Thirdly, there were restrictions on share transfers. Fourthly, both Mr. Armstrong and Mr. Nin did provide capital for the company in substantial amounts.

In the circumstances, it seems to me to be clear that the company was a quasi-partnership within Lord Wilberforce's criteria or, indeed within any other criteria which might be material. Mr. Jacob sought to argue that there was a partnership only in relation to the company's premises, but there was nothing in that point. The proposition implicit in his submission that there can only be a quasi-partnership in a case where all the shareholders make similar contributions to the company is supportable neither on authority nor in principle. Further, to compare the roles of Mr. Armstrong and Mr. Nin with that of consultants to a partnership is most unrealistic. Each of them was intended and expected to play a central and regular part in the affairs of the company, and that is exactly what they both did.'

37. From the aforesaid decisions, we can deduce the following propositions :

1. It is open to the court to pierce the veil and determine the real structure of the company. If the apparent structure of the company is not the real structure and it is in reality a partnership, the principles of dissolution of the partnership may be applied in adjudicating the petition for winding up.

2. In order to determine whether in reality the company is a partnership, the following norms are to be satisfied :

(i) shareholdings should be more or less equal;

(ii) the company must have been formed or continued on the basis of a personal relationship involving mutual confidence;

(iii) an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business;

(iv) restriction on the transfer of shares so as to ensure the continuation of the element of mutual confidence between the shareholders.

3. In the case of winding up of a company in the nature of quasi-partnership, it is only when complete deadlock in the company is created on account of lack of probity in the management of a company and there is no hope and possibility of smooth and efficient continuation of the company as a commercial concern, winding up may be ordered on the just and equitable ground.

4. Winding up may be refused if in the opinion of the court, some other remedy is available and the petitioner is acting unreasonably.

5. In the case of a small company which is in reality a partnership and the complaining petitioner is excluded from the management, it would be an act of oppression and would be prejudicial to the interest of the company. In such a case there would not be much difference between the interest of a company and the interest of a shareholder and, as such, the interest of a member who had ventured his capital in the business of a small private company might include the legitimate expectation that he would continue to be employed as director and therefore unfair prejudice would be caused to his interest as a member.

38. Keeping in view the aforesaid principles of law, I will now proceed to consider point No. 1.

39. Point No. 1. - The first respondent-company (hereinafter referred to as 'the company') is a domestic company. At no point of time, the membership of the company exceeded four. The company was incorporated on March 17, 1975, with three members. Those members were :

1. Mr. Khanapure2. Mr. Haji Ibrahim Issack3. Mr. N. V. Rao (respondent No. 2)

40. Each member held one share. All the three members were the directors of the company. The company was incorporated on March 17, 1975, with the aforesaid three members. They were not related to each other. The company did not make any progress until the petitioner joined the company as a member and as a director. Mr. Khanapure and Haji Ibrahim Issack retired from the company on January 27, 1976. The petitioner became a member of the company and also a director of the company from January 27, 1976, as per exhibit P-34. One share held by M. S. Khanapure was transferred to the petitioner and one share held by Haji Ibrahim was transferred to respondent No. 2. Subsequently with a view to increase the share capital, 97 shares were allotted in the following manner :

1. 23 shares to the second respondent;2. 24 shares to the petitioner;3. 25 shares to Sri B. S. N. Rao; and4. 25 shares to Sri B. K. P. Rao (respondent No. 4)

as per the entries made in exhibit P-34. Thus as per exhibit P-34, the petitioner held 25 shares, respondents Nos. 2 and 4 each held 25 shares and Sri B. S. N. Rao held 25 shares. Sri B. S. N. Rao was also made a director of the company from July 10, 1976. However, we find from the annual return of the company prepared up to November 15, 1977, as per exhibit P-36 that 25 shares held by B. K. P. Rao were shown as transferred to Mrs. B. K. P. Rao (respondent No. 3). Thereafter, in the annual return for the subsequent years, Mrs. B. K. P. Rao is shown as holder of 25 shares. Sri B. S. N. Rao ceased to be a member and director of the company with effect from May 24, 1978. He transferred 12 shares out of 25 shares held by him to the second respondent and the remaining 13 shares to the petitioner on May 24, 1978. This is also evidenced by exhibit P-37, annual return of the company made up to September 30, 1978. It is proved and it is not disputed that exhibits P-34, 36 and 37 are signed by the petitioner and respondent No. 2. The petitioner and the second respondent became the whole-time directors of the company from February 1, 1976. The petitioner continued to be the wholetime director till November 12, 1987. It is also relevant to notice that from February 1, 1976, there were only two wholetime directors till November 12, 1987, viz., the petitioner and the second respondent. After the retirement of B. S. N. Rao on May 24, 1978, the affairs of the company were being managed, and the administration was being carried on, by the petitioner and the second respondent only.

41. The specific case of the petitioner is that though the company was incorporated on March 17, 1975, no progress whatsoever was made. It was only after the petitioner joined the company, that the seed money was raised from the Government of Karnataka on the ground that the petitioner and the second respondent were unemployed graduates and that they had started the new venture for seeking self-employment. The term loan which was sanctioned earlier by the Canara Bank, Ulsoor branch, Bangalore, for the first respondent-factory was got released on satisfying the conditions; that the petitioner joined the company with a specific understanding that the petitioner and the second respondent would be equal partners in the company; that it was in pursuance of this understanding and with the mutual consent of the petitioner and the second respondent in order to have the services of a Tooling Engineer, Sri B. S. N. Rao, was taken as a director on the suggestion of the petitioner and the father-in-law of the second respondent, viz., Sri B. K. P. Rao, was inducted into the company with 25 shares each. It is also the further case of the petitioner that pursuant to the aforesaid understanding only, when Sri B. S. N. Rao retired, all his shares were required to be transferred to the petitioner but the same were transferred to the petitioner and the second respondent in the proportion of 13 : 12 respectively on the understanding that the shares standing in the name of respondent No. 3 would also be transferred to the petitioner in conformity with the agreement that the petitioner and the second respondent would be equal partners in the venture; that, therefore, in conformity with the said understanding, the shares standing in the name of the third respondent-mother-in-law of the second respondent were also required to be transferred to the petitioner and the second respondent in the proportion of 12 : 13, i.e., 12 shares, to the petitioner and 13 shares to the second respondent which the second respondent failed to secure.

42. On the contrary, it is the case of respondents Nos. 2 to 4 that there was no understanding between the petitioner and the second respondent that they would be equal partners in the venture; that the shares were allotted to Smt. B. K. Anupama Rao (respondent No. 3) and not to Sri B. K. P. Rao; that the first respondent is a private limited company; that the principles of partnership are not attracted because it did not come into existence either out of a partnership or it was started with an understanding that the company will be run on the basis of the principles of partnership. Therefore, it is now required to be seen whether the evidence on record supports the case of the petitioner.

43. The petitioner and the second respondent are not strangers. They are close relations. The second respondent is the cousin of the petitioner inasmuch as he is the son of the petitioner's mother's brother. Respondents Nos. 3 and 4 are the mother-in-law and the father-in-law of the second respondent. The company is a small company confined to close relations. Though initially two strangers, viz., Khanapure and Haji Ibrahim Issack, were associated with the company, it was only for a very short period, of about ten months from March 17, 1975, to January 27, 1976. During this period, except incorporating the company, nothing more appears to have been done. The sale deed relating to the land for locating the factory came to be registered on January 27, 1976. In pursuance thereof, a certificate was obtained on January 30, 1976. Land tax was paid on February 19, 1976. A joint affidavit of the petitioner and the second respondent as per exhibit P-2 was sworn to on February 11, 1976, for the purpose of securing the seed money from the Government of Karnataka. In the affidavit it was stated that the petitioner and the second respondent were shareholders and directors of the first respondent-company; that they were graduates in engineering and were unemployed; that they wanted to start a new venture for seeking self-employment. On the basis of this, the petitioner and the second respondent obtained the seed money for the company. The term loan was drawn after the petitioner became a director of the company. The correspondence as evidenced by exhibits R-5 to R-11 established beyond doubt that all the requirements of the term loan sanctioned by the Canara Bank, Ulsoor branch, under the letter bearing No. CSI. 384 TPS, dated January 7, 1976, were complied with and the loan was obtained only after the petitioner became a member and director of the company. If there was no understanding between the petitioner and the second respondent that they would be equal partners in the venture and the petitioner were to remain only as a shareholder, there was no reason whatsoever for him to take all the interest and devote his full time for the company as he was not the whole-time director of the company at that time. It was only on September 30, 1978; resolutions were passed as per exhibit P-3 appointing the petitioner and the second respondent as whole-time directors of the company with effect from April 1, 1977, with a salary of Rs. 2,500 per month and several other perks.

44. In the evidence, the petitioner has specifically stated that there was 50 : 50 partnership understanding between the petitioner and the second respondent. The fact that 25 shares held by B. S. N. Rao were transferred to the petitioner and the second respondent in the proportion of 13 and 12, respectively, would also go to corroborate or confirm the case of the petitioner that there was an understanding between him and the second respondent that they would be equal partners in the venture. If there was no such understanding, there was no reason why the shares of B. S. N. Rao were transferred to the petitioner and the second respondent in the aforesaid proportion. In fact, as per the case of the petitioner, all the shares held by B. S. N. Rao were required to be transferred to him because B. S. N. Rao was inducted into the company at the instance of the petitioner. Further, in order to maintain equality of shares between the petitioner and the second respondent, all the shares held by B. S. N. Rao were required to be transferred to the petitioner. However, they were transferred in the aforesaid proportion on an understanding that the shares standing in the name of respondent No. 3 would also be transferred in the proportion so as to maintain equality of shares between the petitioner and the second respondent.

45. The case of the petitioner that 25 shares standing in the name of Smt. B. K. Anupama Rao (respondent No. 3), mother-in-law of the second respondent, were also required to be transferred in the proportion of 12 to the petitioner and 13 to the second respondent in order to maintain parity between the petitioner and the second respondent is also corroborated by the fact that there were negotiations in this regard between the petitioner, the second respondent and the fourth respondent in the presence of Mr. Sadashiva Rao, partner of K. P. Rao and Co., the auditors of the company. The second respondent also admits in his evidence that there were such negotiations. In para 8 of his deposition, the second respondent has stated thus :

'The decisions relating to the affairs of the company used to be taken jointly by me and the petitioner. In March, 1985, the company received a notice from the Central Excise for clubbing the turnovers of the first respondent-company and Electro Fab. There were discussions between me, the petitioner and Sri Sadashivarao regarding the transfer of shares held by respondent No. 3. This discussion took place at the end of 1984.'

46. Again, in para 25 of his deposition, he had admitted that in that discussion he convinced the fourth respondent to sell the shares of his wife to him and the petitioner. Of course, the second respondent has further stated that the petitioner did not make any demand before 1985 that the shares held by the second respondent and the petitioner should be equal.

47. PW-2, Sadashiva Rao, has also stated that after the shares held by B. S. N. Rao were transferred in the proportion stated by him, the shares held by the petitioner were 38 and those held by the second and the third respondents were 62. He has further stated in his evidence thus :

'I came to know about the discussion regarding equalization of shares between the petitioner on the one hand and the second respondent on the other in 1984. This matter came up for consideration in connection with the problem that had arisen regarding payment of excise duty by the sister concerns of the petitioner and the second respondent. ... There was a continuous dialogue between the petitioner and the second respondent through me. Ultimately Mr. B. K. P. Rao, the fourth respondent, gave a letter as per exhibit P-5 addressed to senior partner of K. P. Rao and Co., Mr. K. P. Rao asked me to hand over exhibit P-5 to the petitioner and to know his comments on it regarding valuation of shares. ... In the year 1985, we tried to bring about harmony between the petitioner and the second respondent. To my knowledge, there was no agreement or understanding arrived at between the petitioner and the second respondent regarding equalization of shares. I say this because there were only discussions and negotiations. As there was only a negotiation regarding transfer of shares held by the wife of Sri B. K. P. Rao, no value regarding transfer of the shares was determined.'

48. Here it is relevant to notice that unless there was an understanding between the petitioner and the second respondent that they will be equal partners in the venture, there was no reason whatsoever for the discussion to take place regarding the transfer of shares standing in the name of Smt. B. K. Anupama Rao. If the petitioner had become a member of the company as any other person purchasing the shares without any special understanding, there was no reason for him to swear to an affidavit along with the second respondent to raise the seed money as unemployed graduates for starting a new venture for self-employment. There was also no reason for him to work without any remuneration at the initial stage. The petitioner in this regard has specifically stated thus :

'I have received no benefit from the membership of the company except receiving remuneration as whole-time director of the company. I have contributed for the development of the company financially and technically. My contribution financially was much more than that of the second respondent as I had advanced money to the company at the initial stage without taking interest.'

49. In the cross-examination, it has been elicited by the respondents that the petitioner got from Industrial Accessories Corporation a sum of Rs. 60,000 in lump sum; that he had a ready cash of Rs. 1 lakh; that he had a short-term fixed deposit in the Canara Bank, Ulsoor branch, of a sum of Rs. 1 lakh; that he was working in the first respondent-company and looking after the project and was responsible for securing the sale deed pursuant to the agreement of sale.

50. It was because of the discussion as to transfer of shares standing in the name of Smt. B. K. Anupama Rao, her husband, respondent No. 4, addressed a letter, exhibit P-5, dated January 11, 1985, offering 12 shares to the petitioner and 13 shares to the second respondent at the rate of Rs. 7,000 per share and also claimed a sum of Rs. 24,000 for not transferring one-third of the shares held by B. S. N. Rao which were transferred to the petitioner and the second respondent in the proportion of 13 and 12, respectively. Exhibit P-5 starts with reference to the discussion which took place for transfer of shares standing in the name of Smt. B. K. Anupama Rao. The petitioner sent a reply as per exhibit P-6. In exhibit P-6, the petitioner has specifically stated that the petitioner and the second respondent secured the benefit of seed money capital of Rs. 75,000 from the Government of Karnataka and also refund of Rs. 65,000 approximately paid earlier towards sales tax and obtained massive loan from the Canara Bank, Ulsoor branch, in the year 1976, at a concessional rate of interest of 15 per cent. margin money. He also further stated that all these benefits were obtained by them under a Government scheme known as Unemployed Graduate Engineers seeking self-employment. He also further stated that his friend, B. S. N. Rao, was appointed to the board with 25 shares and in order to maintain the balance Mr. B. K. P. Rao was also given 25 shares, thus forming two blocks each having 50 per cent. shareholding in the company. He further stated that Mr. B. K. P. Rao transferred his 25 shares to his wife without first offering the same to the existing shareholders, viz., the petitioner and the second respondent. He further stated that B. S. N. Rao retired from the company in the year 1977. Instead of transferring his entire 25 shares to the petitioner for maintaining the necessary balance, only 13 shares were allotted to him by mistake. He also pointed out that the company was paying 16 per cent. interest for all loans from shareholders and others equally. He further stated in exhibit P-6 that the sum of Rs. 25,000 paid by Mrs. B. K. P. Rao towards 25 shares was also treated as loan and interest at the rate of 16 per cent. was being paid from the year 1977. Of course, subsequently Sri B. K. P. Rao withdrew his offer by the letter dated February 27, 1985, marked as exhibit P-8.

51. After Sri B. S. N. Rao retired from the company on May 24, 1978, there were only three members in the company, viz., the petitioner, the second respondent and Smt. B. K. Anupama Rao (respondent No. 3). The said position continued till the date of filing of the petition and also till the last date of hearing of this petition. Out of these three members, the petitioner and the second respondent only continued as wholetime directors of the company till November 12, 1987. Smt. B. K. Anupama Rao did not attend the annual general meetings at any time. For the first time, she attended the extraordinary general meeting of the members of the company held on November 12, 1987. It is also relevant to notice that the petitioner and the second respondent took decisions jointly and carried on the affairs of the company.

52. In addition to this, there is also another circumstance which also supports the case of the petitioner that the company was run by the petitioner and the second respondent on an understanding that they would be equal partners in the venture. The petitioner and the second respondent started two partnership firms known as Ace Industries and Electro Fab. The wife of the petitioner and the wife of the second respondent were the partners in Ace Industries. The petitioner and the second respondent were the partners in Electro Fab. Each of the partners had 50 per cent. interest. The offices of both these firms were located in the premises of the first respondent-company. The business of these two firms was carried on by the petitioner and the second respondent. The business carried on by the two firms was intimately connected with the business of the company. If there was no understanding between the petitioner and the second respondent that the first respondent-company will be run on the basis of 50 : 50 partnership, the petitioner and the second respondent would not have started two partnerships in the premises of the first respondent with 50 per cent. share each. Of course, after the differences that arose in the company between the petitioner and the second respondent, these two partnerships also have been wound up.

53. No dividends have so far been declared. The investments in the capital equipment of the company was in the order of Rs. 12 to 13 lakhs in the year 1976. Out of this Rs. 1 to 2 lakhs were by way of contribution by the promoters and the seed money obtained from the Government of Karnataka. The rest of the money was raised by loan. The petitioner and the second respondents have together executed documents on behalf of the company in favour of the bank for raising loans. It may also be pointed out here that as the partners of Electro Fab were no other than the petitioner and the second respondent, there was an objection raised for clubbing the income of Electro Fab with the turnover of the company. Therefore, the petitioner and the second respondent decided to change the constitution of the board of directors and to bring in two more directors, B. K. P. Rao, father-in-law of the second respondent and Smt. Kamalini Rao, mother-in-law of the petitioner. In order to maintain parity of shares between the petitioner and the second respondent, the petitioner suggested that 12 shares be allotted to his mother-in-law, Kamalini Rao. The second respondent initially agreed to allot 12 shares to Smt. Kamalini Rao but subsequently refused to allot 12 shares to Smt. Kamalini Rao.

54. Though there is denial on the part of the respondents that there was no such understanding between the petitioner and the second respondent that the first respondent-company will be run by the petitioner and the second respondent on equal partnership basis, the evidence on record referred to above probabilises the fact that it was because of such an understanding that the petitioner chose to join the first respondent-company and worked without any remuneration and put in his heart and soul and contributed physically and financially, for the development of the company. It may be pointed out here that by the end of March, 1984, as disclosed by the evidence on record, most of the liability regarding term-loan was discharged by the first respondent-company. The second respondent in his evidence has specifically stated that at present the company has no liability except the working capital liability and the term-loan liability not exceeding Rs. 50,000. Thus when the company came to stand on its own legs, the second respondent appears to have changed his mind and appears to have thought of taking full control over the company, if necessary, by ousting the petitioner from the management. It is because of this that differences arose between the petitioner and the second respondent which led to the ousting of the petitioner from the wholetime directorship of the company and reducing him to a minority shareholder. This aspect will be dealt with while considering point No. 2.

55. It was contended by Sri N. Santosh Hegde, learned senior counsel appearing for the respondent that no definite case was made out by the petitioner that there was an understanding between him and the second respondent that they would be equal partners in the venture. In para 8 of the petition, the petitioner has stated that he was co-opted as director of the company on January 27, 1976, and from then onwards, it was agreed and understood that the petitioner and the second respondent would be equal partners in the venture. Again, in para 13 of the petition, he averred that in accordance with the understanding between him and the second respondent, the shares held by Sri B. S. N. Rao ought to have been transferred to him to maintain parity in the shareholding of the company. But in fact only 13 shares were transferred to the petitioner and 12 to the second respondent. Again, in para 19 of the petition, he as averred that Sri K. P. Rao and Sadashivarao, partners of K. P. Rao and Co., chartered accountants who were also the auditors of the company, held several discussions with the parties and in the light of the discussions Sri B. K. P. Rao by his letter dated January 11, 1985, addressed to Sri K. P. Rao, offered to sell 12 shares held by his wife to the petitioner. Whereas in the evidence he has stated that in the year 1984, the company received a notice from the Superintendent of Central Excise, regarding the liability of the company to pay the excise duty and pursuant to such notice, himself and the second respondent thought of reconstituting the company by bringing in the fourth respondent as a director of the company. In this regard it is also relevant to notice that the petitioner also has stated that he also suggested to the second respondent to bring in his mother-in-law as one of the directors of the company. It was further contended that in between 1976 and 1978, there was another understanding among four shareholders each one having 25 shares; that at no point of time there was parity of shares between the petitioner and the second respondent. Therefore, it was contended that the case of the petitioner that he joined the company with an understanding that he and the second respondent would be equal partners in the venture was far from the truth. The evidence on record, it was contended, did not establish any such case.

56. It is not possible to agree with the contentions of Sri Santhosh Hegde, learned senior counsel for the respondents. It is not the manner in which the evidence has to be appreciated. The total effect of the evidence adduced by the parties in the background of the pleadings of the parties has to be appreciated. The second respondent admits the discussion that took place regarding the transfer of shares standing in the name of the third respondent in the proportion of 12 and 13 to the petitioner and the second respondent respectively. He even admits that the decisions relating to the affairs of the company used to be taken jointly by him and the petitioner. He also further admits that during the discussions held in the latter part of 1984 to bring about equality of shareholding between the petitioner and himself in the company, he convinced the fourth respondent to sell the shares of his wife to himself and the petitioner. The discussion also related to the price of shares of the third respondent. There cannot be smoke without fire. The discussion could not have gone to such an extent if there was no understanding between the petitioner and the second respondent that they would be equal partners in the venture. They would not have even started the two partnership firms in the premises of the company with 50 per cent. shares each. The affairs of the company would not have been carried on by the petitioner and the second respondent together as wholetime directors from 1976 to 1987. The staff of the partnership firms was not different. It was common to the company and the partnerships.

57. It is true that the company was not started out of the partnership existing between the petitioner and the second respondent. In that event, much of the task of the petitioner to prove that he had joined the company on the understanding with respondent No. 2 that it would be run on the principles of partnership, would have been reduced. The fact that the company did not spring up out of the existing partnership between the petitioner and the second respondent and the petitioner joined the company only after it was incorporated did not in any way prevent the petitioner to plead and prove that in reality the first respondent is being run on the principle of partnership. It also did not come in the way of the court to determine the real nature of the company. In the case of a small and domestic company not formed out of appeal to the public to purchase shares, it is always open to the court to pierce the veil and find out whether the structure of the company is what it appears to be or whether in reality it is based on the principles of partnership. As held in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL) an element of personal relationship involving mutual confidence will often be found where a pre-existing partnership is converted into a limited company. But it does not mean that even if the company is formed by different persons not being relations, subsequently they cannot agree or come to an understanding that the company would be run on the element of personal relationship involving mutual confidence. This is what has happened in the instant case. Though the company was started with three persons not related to each other, it did not make any mark. Within a short period of 10 months, out of the three directors, two directors retired. It was at that stage that the petitioner, who is closely related to the second respondent, joined the company as a member and director, with an understanding that the petitioner and the second respondent would be equal partners in the venture. Both of them participated in the conduct of the business of the company. Of course, the third respondent remained as a sleeping member. That did not in any way militate against the understanding of the petitioner and the second respondent to run the company on the principles of partnership. The third respondent is none other than the mother-in-law of the second respondent. The articles of association of the company also placed restriction upon the transfer of the members' interest in the company to ensure that the element of mutual confidence is not lost. The petitioner and the second respondent continued to be the directors of the company and shared the profits equally in the form of remuneration as no dividends were declared. In Hind Overseas' case [1976] 46 Comp Cas 91 (SC) the principles laid down in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL) were approved. On the application of the principles deduced from the various decisions considered in the earlier portion of this order, it is established in this case that the petitioner joined the company with an understanding between him and the second respondent that the company would be run by them on equal partnership basis. Accordingly, the business of the company and its affairs were carried on jointly by the petitioner and the second respondent on the basis that they were equal partners in the venture. Therefore, the principles of partnership are attracted to the case on hand. Accordingly point No. 1 is answered in the affirmative.

58. Point No. 2. - The evidence on record discloses that from the time the petitioner joined the company, i.e., from January 27, 1976, he and the second respondent jointly carried on the business and affairs of the company. All the decisions were taken jointly by the petitioner and the second respondent. During the course of the cross-examination, it has been elicited from the second respondent that joint decisions were taken by the petitioner and the second respondent on 33 subjects which included authorising the petitioner to import machines, furnishing affidavits for seed money, authorising the petitioner and the second respondent to sign forms, guarantees, etc., for raising loans from the Canara Bank, filing Form No. 32, enhancement of credit with the Canara Bank, appointment of technical director, Mr. B. S. N. Rao, approval of accounts up to March 21, 1976, decisions as to commercial production, execution of lease deed, selling of a band saw, purchase of air-conditioners, shifting of registered office, receipt of jig boring machine, acquisition of a height master, sale of excess land of the company, placing of orders - Jackbson precision surface grinding machine from Denmark, furnishing of bank guarantee and approval of accounts for the years 1976 to 1986. No dividend was declared. The petitioner and the second respondent only continued as wholetime directors of the company drawing remuneration and perks from the beginning till November 12, 1987. Thus, the petitioner and the second respondent completely identified themselves with the company.

59. It has also been pointed out while considering point No. 1 that there was an understanding between the petitioner and the second respondent that the company would be run on the basis of 50 : 50 partnership. The petitioner was made a director of the company on the date he joined the company and was also made full time director. He continued to be the full time director till November 12, 1987, the date on which he was voted out as director by respondents Nos. 2 and 3.

60. The evidence also discloses that respondent Nos. 2 and 3 formed one group being the son-in-law and the mother-in-law and, therefore, the second respondent tried to take undue advantage of the fact that shares held by him and the third respondent together formed majority. The second respondent has admitted in his evidence that he was entertaining the idea when he issued the notice in October, 1987, calling for extraordinary general meeting of the members of the first respondent-company on November 12, 1987. The exchange of letters between the petitioner and the second respondent, marked as exhibits P-9 to P-16, indicated that the petitioner was not treated properly by the second respondent. It is not in dispute that the massive financial liability of the company was discharged before differences arose between the petitioner and the second respondent and seed money had also been paid back. The second respondent has also admitted in his evidence that at present the company has no liability except the working capital liability and the term-loan liability not exceeding Rs. 50,000.

61. This is a case, as already pointed out, though the first respondent is a company incorporated under the Act, but in reality it was being run on the understanding between the petitioner and the second respondent that they would be equal partners in the company. The third respondent is none other than the mother-in-law of the second respondent. She became the holder of 25 shares of the company pursuant to the transfer of shares made by respondent No. 4 in her favour. Respondent No. 4 is none other than the husband of the third respondent and the father-in-law of the second respondent.

62. It was contended by Sri Sunderswamy, learned senior counsel for the petitioner that in the case of a small company continued on mutual interest and confidence and in substance a partnership, the court shall have to bear in mind wider equitable consideration which might include the legitimate expectation that the petitioner would continue to be employed as a director and that his non-continuation would be unfairly prejudicial to his interest as a member and thus it would be oppressive to him. On the contrary, it was contended by Shri Hegde, learned senior counsel for the respondents, that it is a normal rule in a company registered under the Act that a majority shareholder will have control over the company. The fact that minority shareholder is not continued as a director cannot at all be considered sufficient to hold that the affairs of the company are being conducted in a manner oppressive to the petitioner and prejudicial to the interest of the first respondent; that by non-continuation of the petitioner as director, his right as shareholder is not in any way affected nor the value of the shares of the petitioner is affected, therefore, the petitioner is not entitled to any relief. It was also contended on behalf of the petitioner that the exercise of power by the majority shareholders, namely, respondents Nos. 2 and 3, not to elect the petitioner as director in the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, suffered from lack of probity, malice and arbitrariness inasmuch as the voting power was exercised only with a view to exclude the petitioner from participating in the affairs of the company.

63. Learned counsel also placed reliance on a decision in Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D). In that case, the plaintiff held 45 per cent. and her aunt 55 per cent. of the issued share capital of the family company. The aunt was a director of the company but the plaintiff was not. There were four other directors. The total emoluments of the directors exceeded the company's net profits before taxation in each of the years 1971 to 1974. The directors proposed to increase the company's share capital from Pounds 2,000 to Pounds 3,650 by the creation of a further 1,650 ordinary shares all of which were to carry voting rights. The directors other than the aunt were to receive 200 shares each and the balance of 850 shares were to be placed in trust for long service employees of the company. The secretary wrote to the plaintiff on November 1, 1974, setting out the proposals and enclosing notice of an extraordinary general meeting to be held on November 27, 1974, to approve the setting up of a trust for the company's employees, to increase the company's capital and to provide for the proposed allotments. On November 22, 1974, the plaintiff's solicitor wrote a letter to the aunt pointing out that the scheme would reduce the plaintiff's shareholding to under 25 per cent. and stating that the plaintiff was opposed to it. The aunt replied that she was fully aware of the implications of the changes in the company's structure but intended to support the scheme. The plaintiff's solicitor attended the meeting on November 27, 1974, as her proxy and proposed an adjournment. The aunt voted against the adjournment and three resolutions were then passed. The plaintiff brought an action against the company and the aunt seeking a declaration that the resolutions were oppressive of the plaintiff and an order setting them aside. The defendant contended that if two shareholders both honestly held differing opinions, the view of the majority should prevail and that shareholders in general meeting were entitled to consider their own interests and to vote in any way they honestly believed proper in the interest of the company. From these facts, it was held that the aunt was not entitled as of right to exercise her majority votes as an ordinary shareholder in any way she pleased; her right was subject to equitable considerations which might make it unjust to exercise it in a particular way. Although it could not disputed that she would like to see the other directors have shares in the company and a trust set up for long service employees, the inference was irresistible that the resolutions had been framed in order to put complete control of the company into the hands of the aunt and her fellow directors to deprive the plaintiff of her existing rights as a shareholder with more than 25 per cent. of the votes and to ensure that she would never get control of the company. It was further held that those considerations were sufficient in equity to prevent the aunt using her votes as she had and the resolutions were accordingly set aside.

64. In the instant case also, it may be relevant to notice that before November 12, 1987, the third respondent never participated in any of the general meetings of the members of the first respondent-company and never exercised her voting right. For the first time on November 12, 1987, she attended. The evidence on record discloses that respondents Nos. 2 and 3 together contrived to exclude the petitioner from participation in the affairs of the company by not electing him as a director. The second respondent, as already pointed out, admitted that he had thought of removing the petitioner when he called for the extraordinary general meeting. Therefore, this is a case which attracts the rule laid down in Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D).

65. In addition to this, it is already pointed out that the company was being run on the understanding that the petitioner and the second respondent would be equal partners. The very fact of entertaining an idea of removing the petitioner from participating in the affairs of the company by the second respondent and exclusion of the petitioner from the management of the affairs of the company by not continuing him as a director is an act which attracts the equitable considerations and also goes to prove that the ulterior motive of respondents Nos. 2 and 3 was to cause prejudice to the interest of the petitioner and deprive him from the legitimate expectation of continuing as a whole time director, and to reduce him to a mere shareholder.

66. In a company like that of the first respondent which was being run on mutual confidence and on equal participation in the management of the company, the act of discontinuation or exclusion of the petitioner from the management of the company would be nothing but unfairly prejudicial to the interest of the petitioner because the legitimate expectation of the petitioner that he would continue to be employed as director is frustrated by the contrived act of respondents Nos. 2 and 3. As pointed out in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL), in a company like the first respondent shareholder's participation in the management of the company forms part of the interest of a member of the company as the company would be based on personal relationship involving mutual confidence. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., : [1981]3SCR698 , while considering the scope of 397 of the Act, it has been observed thus (at page 782 of 51 Comp Cas) :

'The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder.'

67. In the instant case also, the act and conduct of respondents Nos. 2 and 3 in ousting the petitioner from the management of the affairs of the company lacks in probity and is unfair to the petitioner, because participation of the petitioner in the management of the company having regard to the understanding between the petitioner and the second respondent that the company would be run on equal partnership basis formed part of the interest as a member of the company. The statement of law made in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL) that it is through the just and equitable clause that obligations common to partnership relations may come in, has also been referred to in the aforesaid decision. The other principles laid down in Ebrahimi's case [1972] 2 All ER 492; [1973] AC 360 (HL) have also been referred to in the aforesaid case.

68. In Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., : AIR1966Cal512 , it has been observed in para 54 (at p. 529) thus :

'The respondents' group purported to obtain supremacy in the board and at general meetings by a trick, i.e., by the suppression of notices of the board meetings on January 22, 1963, and February 21, 1963, if in fact such meetings were ever held. They followed this by purporting to issue additional shares to third parties when there appeared no occasion for the same, by appointing new directors and taking complete control of the board and delegating all its powers to one of them (Kedarnath Bhagat) thereby completely ousting the petitioners. All this did not affect the petitioners merely in their capacity as directors but also as shareholders in that the latter lost all right to participate in the management of the company. There was oppression in that there was negation of the shareholders' rights to have the affairs of the company conducted in the way laid down in the Companies Act, in utter disregard of the functions of the board by committing all its powers to one member of the respondents' group. The overthrow of the petitioners may not have been caused by the show of arms as alleged in the petition but there can be little doubt that it was achieved by subterfuge in disregard of company procedure. The conduct of the respondents on and after January 22, 1963, had no vestige of probity or rectitude.'

69. It is also further observed that while it is true that the oppression was not of long duration having at best commenced only a few weeks before the matter was brought into court, but there can be no doubt that its effect was continuous and would have persisted but for the intervention of the court. It is further observed that it is not necessary that the petitioner who comes to court for redressal under section 397 should have submitted himself to oppression over a period before he can invoke the powers of the court. If the oppression is of short duration but is of such a lasting character that redress is impossible by calling board meetings or general meetings of the company, a case for intervention under section 397 is made out. This answers the contention of Sri Santosh Hegde, learned senior counsel for the respondents that the act of oppression should be continuous and should be a long drawn process and it should not be single or isolated act in order to enable the petitioner to seek a relief of the nature sought for by him. The effect of ousting of the petitioner from the management is of lasting character inasmuch as it excludes him from the management of the affairs of the company.

70. It is also one of the contentions of the second respondent that the petitioner was not taking interest in the affairs of the company and most of the time he was attending to the work of his company started recently known as Supangitha Engineers (P.) Ltd., Bangalore and thereby the work of the first respondent-company suffered. Therefore, he removed him from the management. In support of this contention, certain correspondence made by the petitioner relating to Supangitha Engineers (P.) Ltd., are produced as exhibits R-14 to R-16 and R-18 to R-23 ranging for the period from November, 1985, to October, 1986. These documents are produced to show that the petitioner was attending to the work relating to Supangitha Engineers (P.) Ltd., at the office of the first respondent-company. It may be relevant to notice that the Supangitha Engineers (P.) Ltd. was situated in Bommasandra Industrial Area, 20 kms. away from the first respondent-company. It was incorporated on March 30, 1985. It was a family company in which the petitioner and his wife were the directors. The petitioner has deposed that one Suresh Lal who was formerly working in the first respondent-company and later joined Supangitha Engineers (P.) Ltd. was his purchase agent, and the petitioner was in overall charge of that company as managing director. The board meetings were held in his house and he was visiting Supangitha Engineers (P.) Ltd. four times a week and took half an hour to reach Supangitha Engineers (P.) Ltd. and spent about two hours there. He has denied the suggestions that he neglected his duty towards the first respondent-company after he started Supangitha Engineers (P.) Ltd.; that the differences between him and the second respondent arose because of that factor that he started Supangitha Engineers (P.) Ltd.; that Supangitha Engineers (P.) Ltd. was competing with the first respondent-company. He has also further deposed that he discussed the matter with the second respondent before he started Supangitha Engineers (P.) Ltd.; that the second respondent wanted to join Supangitha Engineers (P.) Ltd. along with their common friend, Sri B. T. Bhandari; that the petitioner agreed to the suggestion; that pursuant to it, Form No. 1A mentioning the names of three promoters, the petitioner, the second respondent and Sri B. T. Bhandari, was filed on February 20, 1985. The fact that exhibits R-14 to R-16 and R-18 to R-23 relating to Supangitha Engineers (P.) Ltd. were received by the petitioner at the address of the first respondent-company did not in any way go to prove that the first respondent neglected the duties as wholetime director of the first respondent-company. This fact also did not go to prove that the interests of the first respondent-company suffered in any manner. No doubt, as admitted by the petitioner, for some time, the registered office of Supangitha Engineers (P.) Ltd. was located in the premises of the first respondent-company before it was shifted to Bommasandra Industrial Area in the middle of 1987. He has also further deposed that he was not doing work for Supangitha Engineers (P.) Ltd. in the premises of the first respondent-company; that he had his office at his residence and his wife was his secretary as she knows typing; that all the correspondence and the applications were prepared by him and typed by her. However, the registered office of Supangitha Engineers (P.) Ltd. until it was shifted to Bommasandra in the middle of 1987 was in the factory premises of the first respondent-company. But, at no point of time any objection was raised by the second respondent. Therefore, it was indicative of the fact that the petitioner did not allow the interest of the first respondent-company to suffer because he had started Supangitha Engineers (P.) Ltd.

71. Even if the motive of respondents Nos. 2 and 3 was to safeguard the interest, the first respondent-company and, therefore, they contrived to remove the petitioner from the management of the company because the petitioner had started another company by name Supangitha Engineers (P.) Ltd., the effect of the action and conduct of respondents Nos. 2 and 3 was to oust him from the management of the company and thereby causing injury to him even as a shareholder of the company. In these matters, it is the result rather than motive which is the material thing. In H. R. Harmer Ltd., In re [1958] 3 All ER 689, 703; [1959] 29 Comp Cas 305 (HL), it is observed thus (at page 327 of 29 Comp Cas) :

'Then counsel's third submission was that what was done by the father was not oppressive of the rights of the sons as members, but merely oppressive of their rights as directors. I cannot accept this. It appears to me that the sons as members, and not merely as directors, were oppressed by the singular conduct of the father. The oppression must, no doubt, be oppression of members as such, but it does not follow that the fact that the oppressed members are also directors is a disqualifying circumstance when the question of relief under section 210 arises. I think that there may well be oppression from the point of view of member-directors where a majority shareholder (that is to say, a shareholder with a preponderance of voting power) proceeds, on the strength of his control to act contrary to the decisions of, or without the authority of the duly constituted board of directors of the company. Fourthly, counsel for the father said that the acts complained of might have been restrained by injunction in so ar as they were acts done without the authority of the board. As to this, I do not think that a wrongdoer in this field can well complain that the person wronged might have chosen another remedy. Then fifthly, counsel said that the acts complained of were not in their result oppressive, because it cannot be demonstrated that the company suffered any loss from any of them. I cannot agree. The acts complained of were, I should say for the most part, calculated to damage the company in one way or the other. Sixthly, counsel said that the acts complained of might have been lawfully done by calling a general meeting and passing the requisite resolutions, ordinary or special. As to this, I think that the sons were at least entitled to require that the proper procedure should be applied. Then seventhly, counsel said that this is not a case of discrimination between different shareholders or classes of shareholders. I agree, but see no reason for holding that section 210 is necessarily confined to cases of discrimination, though it is to be expected that cases calling for its application would most usually take that form. Finally, counsel submitted that the father got no pecuniary benefit out of what he did. That is not literally true, but even if it were, I do not think that it is essential to a case of oppression that the alleged oppressor is oppressing in order to obtain pecuniary benefit. If there is oppression, it remains oppression even though the oppression is due simply to the controlling shareholders' overweening desire for power and control and not with a view to his own pecuniary advantage. The result rather than the motive is the material thing.'

72. As already pointed out, the resultant effect of the act and conduct of respondents Nos. 2 and 3 is that it has caused unfair prejudice not only to the interests of the petitioner as shareholder, but also to the interest of the first respondent-company.

73. Sri Santosh Hegde, learned senior counsel for the respondents, placed reliance on several decisions in support of his contention that this is not a case in which it could be said that the affairs of the first respondent-company were being conducted in a manner oppressive to the petitioner and prejudicial to the interests of the first respondent. I will now take up for consideration all those decisions. Reliance was placed on paras 14, 15 and 19 of the decision in Shanti Prasad Jain v. Kalinga Tubes Ltd., : [1965]2SCR720 . The Supreme Court, regarding the scope of section 397 of the Act, observed in paragraph 19 thus (at 1543 AIR 1965 SC) :

'These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders 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 section 397. It must further be shown that the conduct of the majority shareholders 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 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. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders 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 shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to section 397.'

74. From the aforesaid observation made in Shanti Prasad Jain's case : [1965]2SCR720 , it is clear that if the conduct of the majority shareholders is harsh and wrongful and involves at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder, it can be held that the affairs of the company are being conducted in a manner oppressive to some part of the members. In the instant case, it has already been pointed out that the company is a small domestic company which was being run on the basis of an agreement of equal partnership. Therefore, the petitioner was all through continued as a director and a wholetime director with salary and perks. Such a benefit was as a result of understanding of equal participation. Therefore, it formed part of the proprietary rights as a shareholder. As a consequence of non-continuation of the petitioner as a wholetime director by respondents Nos. 2 and 3 in the extraordinary annual general meeting of the company held on November 12, 1987, the proprietary rights of the petitioner as a shareholder were affected. The conduct of respondents Nos. 2 and 3 in ousting the petitioner from the management was not only harsh but it was wrongful. Therefore, the principles laid down in Shanti Prasad Jain's case : [1965]2SCR720 , support the case of the petitioner.

75. Dr. V. Sebastian v. City Hospital P. Ltd. [1985] 57 Comp Cas 453 (Ker). In this case, it has been held that sections 397 and 398 of the Act, are intended primarily to protect the minority interests, as the majority will be able to protect itself by controlling the directors at general body meetings. It has also been further held that even the majority also can claim protection under section 397 and 398 of the Act, if they are prevented from exercising their right to demand poll. It has also been further held that the powers conferred are wide and section 404 of the Act also recognises the power of the court to amend the articles of association in proceedings under Chapter VI. However, on facts it is held that the allegations of oppression and mismanagement by the majority are not proved.

76. This decision is relied upon by learned counsel for the respondents in support of the plea that the affairs of the company should ordinarily be allowed to be carried on in accordance with the wishes of its members; that the members in the general meeting are the supreme governing body of the company; that courts must be reluctant to interfere with their decisions, because the interests of the company are ordinarily best known to the members of the company.

77. It is true that the affairs of the company should ordinarily be allowed to be carried on in accordance with the wishes of the majority of its members. But wishes of the majority of the members should be such that it does not interfere with or affect the proprietary rights of shareholders and does not undermine the understanding of the shareholders on the basis of which the company is run. Therefore, it is not possible to hold that this decision is of any assistance to the respondents.

78. Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi). In this case, a petition under sections 397, 398, 402 and 403 was filed by one group of shareholders called the S group against another group called the A group. Both the groups had equal shares in the company. The S group contended that it had been completely excluded; that there was lack of probity on the part of the management; that there were a number of persistent contraventions of the provisions of the company law by the respondents; that the meeting held in March, 1980, wherein respondent No. 2 was reappointed as managing director was illegal. The court found that the instances of violation of the provisions of the Act referred to by the petitioners could not be complained about in the proceedings under section 397 or 398 of the Act; that the resolution passed at the meeting in March, 1980, continued the existing state of the management; that even if the meeting was illegal, it did not result in any oppressive act committed on the petitioner and it was not proved or shown that there had been any continuous acts of oppression by the majority on the minority shareholders; that the petitioner failed to prove that he was ousted from the management of the company; that the provisions of section 397 could not have been invoked because the petitioner and the members of his group were not minority shareholders.

79. It is not possible to agree with the statement of law made in the aforesaid decision, that the provisions of section 397 cannot be invoked if the petitioner group is not a minority shareholder. As already pointed out the provisions of section 397 or 398 of the Act can be invoked by the members of the company, if they satisfy the requirements laid down in section 399 of the Act. Ultimately, in that case, it was found that the only business of the company was dealership of Telco and this business was under notice of termination and the Telco did not like to have business dealings with the petitioner group, but were willing to have business dealings with the respondent group. Therefore, the respondent group was given the first option to purchase the shares of the petitioner group. Such a situation does not arise in the instant case. Therefore, it is not possible to hold that this decision is of any application to the facts and circumstances of the case on hand.

80. V. J. Thomas Vettom v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp Cas 284 (Ker). In this case it was held that non-declaration of dividend which did not affect the value of the shares could not be characterised as mismanagement or oppression on the minority shareholders; that the court must have strong grounds before it orders winding up. The fact that the complaining parties were themselves participants in the alleged activities, will be one of the factors to dissuade the court to exercise its powers under section 397 or 398 of the Act. The powers of the court under section 402 of the Act are wide, but courts should always exercise restraint in interfering with the affairs of the company; that the interest of the public good should always be kept in view; that stray cases of mismanagement or few cases of mismanagement without sufficient proof should not lead the court to entrust the powers of the management of the company to strangers appointed by the court. In the light of the facts and circumstances of the case on hand discussed earlier, it is not possible to apply the ratio of this case. Further, in this case, the petitioner has sought for winding up of the company in the event it is not otherwise possible to remedy the grievances.

81. Shantilal Manibhai Patel v. Laxmi Film Laboratory and Studios P. Ltd. [1984] 56 Comp Cas 110 (Guj). In this decision, after referring to Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC) and Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 (SC) it has been held that the principles of dissolution of the partnership would be applicable only if the company is a domestic concern, that it must also be shown that an irresolvable deadlock in the administration of the company has resulted because of the group is amongst the shareholders and the directors of the company; and that it has rendered it impossible for the company to transact; that the only alternative is to wind up the company. In the instant case, as already pointed out, the petitioner has sought for winding up alternatively only as a last sort. It is also not necessary to order for winding up if it is possible to provide an alternative solution to overcome the situation existing in the company. Regarding oppression, the decision in Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 (SC) has been followed and the observations made therein, that the person complaining of oppression must show that he has been constrained to submit to conduct which lacks in probity, conduct which is unfair to him and which has caused prejudice to him in exercise of his legal and proprietary right as a shareholder are reproduced. Therefore, it cannot be held that this decision supports the case of the respondents.

82. Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP). In this case, a few shareholders filed a company petition under sections 433 and 439 of the Companies Act in the High Court for winding up of the company on various grounds. Two other shareholders filed a petition under sections 397 and 398 of the Act contending that in view of the various acts of impropriety on the part of the board of directors of the Andhra Bank Ltd. and the conducting of the affairs in a manner oppressive to the interests of the members of company and mismanagement in the functioning of the company, the company should be regulated by constituting a new board of directors or in the alternative to direct payment of compensation to the dissenting shareholders. The company judge dismissed both the petitions. On appeal, it was held that the main object of the company was only to carry on the banking business and it was no longer entitled to carry on that business in view of the embargo placed by the Banking Companies Acquisition Act, 1980, the substratum of the company must be said to have been lost and hence the company should be wound up. It was also further held that in a petition under sections 397 and 398 alleging oppression and mismanagement there should be material evidence of acts of oppression with reference to the affairs of the company; that a mere apprehension that the minority shareholders could be oppressed in the conduct of the company, that was to be formed in the future, could not be a sufficient ground for invoking section 397 of the Act. Even the mere fact that the minority shareholders were being outvoted or there was an attempt to acquire control of the company's affairs by purchasing large blocks of shares would not constitute acts of oppression; that any resolution passed at a meeting was illegal because of non-compliance with the provisions of the Act would not also be sufficient to establish the oppression. In the instant case, the acts and conduct of respondents Nos. 2 and 3 did result in oppression of the petitioner as affected the right of the petitioner as a member of the company. Therefore, the respondents cannot derive any sustenance from this decision.

83. Raghunath Swarup Mathur v. Har Swarup Mathur [1970] 40 Comp Cas 282 (All). In that case, a petition under sections 397 and 398 of the Act was filed for removal of opposite part No. 2 from the office of the managing director and of the other contesting opposite parties from directorship of the company. The petitioners also further prayed for appointing petitioner No. 1 as managing director and other directors to be chosen by the court from amongst the petitioners or other shareholders. The petitioners also further prayed for a direction to opposite party No. 1 to refund a sum of Rs. 15,021 paid to him from April 1, 1961, to February 27, 1962, on the allegation that it was an excess payment of managerial remuneration paid to opposite parties Nos. 2 and 3 from April 1, 1961, up to the date of the petition. They also further prayed for directing opposite parties Nos. 1 to 3 to forbid them to hold any office in the company along with respondents Nos. 4, 5 and 6. A preliminary issue was raised in the following terms : 'On the allegations made by both sides and the material on record is it a fit case for any order either under section 397 or section 398 of the Companies Act ?'. It was held that neither an oppression of a minority nor circumstances justifying a winding up were established; that the charges of mismanagement in the past even if proved were not enough to establish an existing injury to the interest of the company or to public interest or the likelihood of such injury in the future, therefore, no action would be taken under section 398 of the Act. It was also further held that whatever might have been the position in the past, the company was carrying on a profitable business and even if some bungling had taken place in the keeping of accounts in the past it would not justify a winding-up order where the company was a sound profit making concern. It was held that in a petition under section 397 of the Act, it must be proved that the company's affairs were being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members; that the facts should justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; that the winding up order should be refused where a more suitable or efficacious means of redress is open to a complainant. Thus, it is not possible to hold that this decision lays down any proposition which would go against the petitioner in proving his case that the conduct and actions of respondents Nos. 2 and 3 were oppressive.

84. V. M. Rao v. Rajeswari Ramakrishnan [1987] 61 Comp Cas 20 (Mad). In this case, it was held that for maintaining a petition under sections 397 and 398 of the Act (a) it must be established that the oppression complained of affected a person in his capacity or character as a member of the company as harsh and unfair treatment in any other capacity such as a director or a creditor was outside the purview of the section; (b) there must be continuous acts constituting oppression up to the date of the petition; (c) the events have to be considered not in isolation but as part of a continuous story; (d) that it must be shown as a preliminary to the application of section 397 that there were just and equitable grounds for winding up the company; (e) that the conduct complained of could be said to be oppression only if it can be said that it is burdensome, harsh and wrongful and the oppression involves at least an element of lack of probity and fair dealing to a member in matters of proprietary right as a shareholder. On the facts, it was held against the petitioner.

85. Regarding the proposition laid down in this decision that there must be a continuous act constituting oppression up to the date of the petition, it has already been pointed out that what is material is the result of the act. In a given case if the act or conduct of the majority shareholders affects the proprietary right of the minority shareholders, it may be found sufficient for granting relief in a petition under sections 397 and 398 of the Act.

86. Thus, I am of the view that the aforesaid decisions relied upon by learned counsel for the respondents are not in any way helpful to the respondents to support their contention that the facts and circumstances established in the case cannot be held to be sufficient to prove that the affairs of the first respondent-company are being conducted in a manner oppressive to the petitioner and prejudicial to the interests of the company.

87. It is also contended that the conduct of the petitioner in persuading Sri Ghatge to resign from the directorship was not bona fide. Therefore, he is not entitled to the reliefs sought for in the petition. If we view this conduct of the petitioner in the background that there was an understanding between him and the second respondent to run the first respondent-company on an equal partnership basis, it would not be possible to hold that the petitioner was not justified in persuading Sri Ghatge not to accept the directorship of the first respondent-company. What the petitioner did was to protect his own interest as a shareholder of the company and also the interest of the company because an outsider not being a member of the company could not have taken as much interest as the petitioner in the affairs of the company and in safeguarding the interests of the company.

88. The evidence discloses that after the petitioner became a director of the company it had made steady progress. In fact, as admitted by the second respondent the liability of the company had been wiped out and the company had no liability except the working capital liability and the term loan liability not exceeding Rs. 50,000. This achievement of the first respondent-company must be said to be to the credit of both the petitioner and the second respondent. In such a situation if an outsider is brought as a director of the company by ousting the petitioner it would not only cause oppression to the petitioner but also cause prejudice to the interests of the first respondent-company. Accordingly, point No. 2 is answered in the affirmative.

89. Point No. 3 : Exhibit P-34(c) is the annual return of the first respondent-company made up to September 15, 1976. A portion of this document is marked as exhibit P-34(c). Exhibit P-34(c) contains a list of persons holding shares or stock in the company on the date of the annual general meeting held on September 15, 1976. According to exhibit P-34(c), Sri B. K. P. Rao, respondent No. 4, held 25 shares of the first respondent-company. Exhibit P-34 is signed by the petitioner and the second respondent. Exhibit P-36 is the annual return of the first respondent-company made up to November 16, 1977. This is also signed by the petitioner and the second respondent. Exhibit P-36 contains the list of persons holding shares or stock in the company as on November 16, 1977. According to exhibit P-36, 25 shares held by Sri B. K. P. Rao were transferred to his wife, Smt. B. K. Anupama Rao, respondent No. 3. The evidence also discloses that in the subsequent years, Smt. B. K. Anupama Rao has been shown as holding 25 shares of the first respondent-company. There was also a proposal to transfer 12 shares out of the 25 shares held by Smt. B. K. Anupama Rao to the petitioner and 13 to the second respondent. However, it did not fructify. This aspect has already been noticed in the previous portion of this order.

90. The contention of the petitioner is that the transfer of 25 shares held by Sri B. K. P. Rao to his wife, Smt. B. K. Anupama Rao, was opposed to articles 19 and 20 of the articles of association of the first respondent-company because the procedure prescribed therein was not followed, as such the transfer of those shares by respondent No. 4 in favour of respondent No. 3 was invalid. On the contrary, it was the case of the respondents that Sri B. K. P. Rao did not hold the shares at any time. It was Smt. B. K. Anupama Rao, to whom the shares were allotted, who was holding the shares. Exhibit-1 is the minutes of the meeting of the board of directors of the first respondent-company covering the period from March 28, 1975, to September 14, 1978. As recorded in exhibit-1, on August 14, 1976, it was resolved to allot 25 shares to the third respondent and 25 shares to Sri B. S. N. Rao. The correctness of exhibit-1 has been disputed and it is marked only for the purpose of identification. If really 25 shares were allotted to Smt. B. K. Anupama Rao (respondent No. 3) on August 14, 1976, in exhibit P-34 which is signed by the petitioner and the second respondent, Sri B. K. P. Rao (respondent No. 4), the husband of respondent No. 3 could not have been shown as holding 25 shares of the first respondent-company. Similarly, in exhibit P-36 it could not have been shown that 25 shares held by respondent No. 4 were transferred to the third respondent. Exhibits P-34 and P-36 being the annual returns of the company for the years 1976 and 1977, filed before the Registrar of Companies shall have to be accepted as representing true facts. Therefore, it is not possible to accept the case of the respondents that Sri B. K. P. Rao was not allotted any shares and it was only Smt. B. K. Anupama Rao who was allotted 25 shares and there was no transfer of 25 shares held by Sri B. K. P. Rao to his wife, Smt. B. K. Anupama Rao. However, this conclusion cannot be held to be sufficient to answer point No. 3 in favour of the petitioner. The transfer of shares by Sri B. K. P. Rao to his wife, Smt. B. K. Anupama Rao, had taken place as long back as in the year 1977. The petitioner had also accepted this transfer and signed the annual returns of the first respondent-company made up to November 16, 1977, as per exhibit P-36. In the subsequent years Smt. B. K. Anupama Rao has been shown as holder of 25 shares. Therefore, the petitioner having acquiesced in the transfer of 25 shares by Sri B. K. P. Rao to his wife Smt. B. K. Anupama Rao for over ten years, he cannot now be permitted to turn back and challenge the validity of the transfer of 25 shares made by Sri B. K. P. Rao in favour of his wife Smt. B. K. Anupama Rao. The petitioner by his own conduct is estopped to challenge the same. Accordingly, point No. 3 is answered in the negative.

91. Point No. 4 : The evidence on record discloses that after the petitioner and the second respondent were appointed as wholetime directors with effect from February 1, 1976, they were continued and there was no election to elect a director at any time till November 12, 1987. The evidence also further discloses that the second respondent thought of ousting the petitioner only after the differences between them arose. The continuation of the petitioner and the second respondent as wholetime directors of the first respondent-company from February 1, 1976, for over a period of 11 years was also indicative of the fact that there was an understanding between the petitioner and the second respondent, that they would be equal participants in the company and it was because of such an understanding, no election whatsoever was held to elect a director of the company. The petitioner and the second respondent were continued uninterruptedly as wholetime directors from February 1, 1976.

92. The background in which the extraordinary general meeting of the members of the first respondent-company was held on November 12, 1987, would go to show that it lacked bona fides and it was wholly intended to oust the petitioner from participating in the affairs of the company. The second respondent has admitted that when he demanded for calling the extraordinary general meeting of the members of the company on November 12, 1987, he had thought of removing the petitioner from the management. Thus, the extraordinary general meeting was called not to subserve the interest of the first respondent-company, but to cause prejudice and harm to the petitioner and to deprive him of his right to participate in the affairs of the company with the second respondent. Long before October, 1987, the first respondent-company had discharged its liabilities. The only liability that was subsisting was that of working capital liability and term loan liability which did not exceed Rs. 50,000 as admitted by the second respondent. He has also admitted that he had entertained the idea that the petitioner should not be re-elected when he issued notice in October, 1987, calling for the extraordinary general meeting of the members of the company. The petitioner has stated in his evidence the reasons for removing him from the management. He has stated that :

(1) he stopped payment of interest on the share capital held by respondent No. 3 from 1985;

(2) massive financial liability of the company had been discharged;

(3) send money had been paid;

(4) the petitioner was a minority shareholder;

(5) respondent No. 2 wanted to have full control over the company; and

(6) the petitioner had not received any benefit from the respondent-company except remuneration as director, even though, he contributed for the development of the company, financially and technically.

93. It may also be pointed out, as per the evidence on record, the second respondent had even discussed the matter with the third respondent about the ousting of the petitioner from the management of the company. While considering point No. 2, it has already been discussed as to how and in what manner the acts and conduct of the respondents Nos. 2 and 3 had caused injury to the petitioner and were oppressive to him. I do not think it necessary to repeat the same once again.

94. Respondent No. 3, for the first time, participated in the extraordinary general meeting held on November 12, 1987. The evidence also disclosed that the proceedings of the extraordinary general meeting were also not conducted in a fair and proper manner. It is true, in a case where the principles of partnership are not attracted, in other words, there is no difference between the apparent and real structure of the company, it is normal for a majority shareholders to have control over the company. But in a case where the real structure of the company is different from the apparent structure and it is run on an understanding between the shareholders that they would be equal partners in the company and the company is a small and domestic company and it is formed without appealing to the public for purchasing the shares, it is not at all either normal or proper and fair to oust one of the directors of the company. Because in such a case, there will not be much difference between the interest of a shareholder and the company and participation in the affairs of the company becomes part of the proprietary rights of a shareholder. This was the situation obtaining in the first respondent-company. This aspect has been discussed under points Nos. 1 and 2. Therefore, the proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, in so far as it resulted in ousting the petitioner from the wholetime directorship of the company and appointing one Dr. Ghatge as a director in place of the petitioner, affected the proprietary rights of the petitioner as a shareholder and, therefore, were illegal. The proceedings were also vitiated because of lack of bona fides on the part of respondents Nos. 2 and 3 as they contrived to oust the petitioner from the management of the company. Dr. Ghatge, after he came to know the affairs of the company from the petitioner, tendered his resignation as a director of the first respondent-company and the same was accepted. Thus, the proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, and the annual general resolution passed at the said meeting were vitiated and were invalid. Accordingly, point No. 4 is answered in the affirmative.

95. Point No. 5. - In the light of the findings recorded on points Nos. 1, 2 and 4, the petitioner is entitled to continue as a wholetime director of first respondent-company with all the benefits he enjoyed and such powers as originally conferred upon him and is entitled to draw the remuneration and all the perquisites. Accordingly, point No. 5 is answered in the affirmative.

96. Point No. 6. - In the light of the findings recorded on points Nos. 1, 2, 4 and 5, it is necessary to declare and issue a direction that in the management of the affairs, business and funds of the first respondent-company, the petitioner shall have equal participation to the same extent as respondent No. 2. Accordingly, point No. 6 is answered in the affirmative.

97. Point No. 7. - This contention has been raised by the petitioner only after the differences arose between him and the second respondent. As the petitioner was a party to the payments made of consultancy fee to the fourth respondent and his son, it is not now open to him to contend to the contrary and claim that the same should be recovered from the fourth respondent with interest at the prevailing bank rate. Therefore, I am of the view that it is not necessary to enquire into and determine the amounts paid by the first respondent-company to the fourth respondent and his son as consultancy fee. Accordingly, point No. 7 is answered in the negative.

98. Point No. 8. - In the light of the findings recorded on points Nos. 1, 2 and 4 to 6, it is not at all open to the second respondent to make any representation or to hold out to the public, employees of the company and the bankers that the petitioner is not entitled to represent the first respondent-company. However, it is not necessary to issue any permanent injunction to the second respondent to this effect. A declaration made pursuant to the findings recorded on points Nos. 1, 2 and 4 to 6 would be sufficient to safeguard the interest of the petitioner as equal partner in the company. Point No. 8 is answered accordingly.

99. Point No. 9. - As the present differences between the petitioner and the second respondent are due to the fact that there is no appropriate provision in the articles of association of the first respondent-company to the effect that the petitioner and the second respondent are equal participants, even though, in reality, they have been equal participants in the company, to avoid any such situation arising in future and to safeguard the interest of the petitioner and the second respondent and also of the first respondent-company and to ensure smooth working of the company, it is necessary to amend the articles of association of the first respondent-company to the effect that the petitioner and the second respondent are equal participants in the company. It has also been pointed out that the plenitude of power conferred by sections 398 and 402 read with section 404 of the Act, it is open to the court to amend, or direct amendment, of the articles of association of the company to reflect that the petitioner and second respondent are equal participants and equal partners in the company (See Dr. V. Sebastian v. City Hospital P. Ltd. [1985] 57 Comp Cas 453 (Ker) and also Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom)). It follows that the shareholding of the petitioner and the second respondent either individually or along with the members of the group of each of them shall be equal. Point No. 9 is answered accordingly in the affirmative.

100. Point No. 10. - While dealing with point No. 3 it has been pointed out that 25 equity shares were allotted to Sri B. K. P. Rao who in turn transferred them to his wife, Smt. B. K. Anupama Rao. The grievance of the petitioner has been that the shares should not have been transferred to Smt. B. K. Anupama Rao. The same should have been transferred to the petitioner and the second respondent in the proportion which would make them equal shareholders of the first respondent-company. There were also negotiations for transfer of 12 shares out of 25 shares standing in the name of Smt. B. K. Anupama Rao to the petitioner and 13 to the second respondent. This is evident from the correspondence marked as exhibits P-5 to P-8. The proposal was ultimately withdrawn by respondent No. 4 as per exhibit P-8. It is because of the fact that 25 shares continued to be held by Smt. B. K. Anupama Rao, the disproportionality continued to exist, in the shares held by the petitioner and the second respondent. Smt. B. K. Anupama Rao, respondent No. 3, being the mother-in-law of the second respondent is a member of the group of the second respondent. It was at the instance of the second respondent she attended the extraordinary general meeting of the members of the first respondent-company held on November 12, 1989, and exercised her vote against the petitioner with a view to oust the petitioner from the management of the first respondent-company and not with a view to subserve the interest of the first respondent-company.

101. No doubt exhibit P-5 dated January 11, 1985, was sent to Mr. K. P. Rao, chartered accountant for the first respondent-company, proposing to sell 12 shares out of 25 shares held by respondent No. 3 to the petitioner and the remaining 13 to the second respondent. This proposal though was sent to Mr. K. P. Rao, was in substance and in effect sent to the company itself because Mr. K. P. Rao was none other than the chartered accountant of the first respondent-company. Exhibit P-5 was sent by respondent No. 4 on behalf of his wife, respondent No. 3, in whose name the shares stood. As per article 19 of the articles of association of the first respondent-company the selling member shall have to give notice in writing to the company of his or her intention to sell the whole or part of his or her shares in the company. Exhibit P-5 was brought to the notice of the petitioner by Mr. K. P. Rao. Pursuant to exhibit P-5, the petitioner sent his reply, exhibit P-6, through Mr. K. P. Rao to respondent No. 4. In continuation of exhibit P-5 dated January 11, 1985, respondent No. 4 sent another letter dated February 11, 1985, exhibit P-7 to Mr. K. P. Rao along with exhibit P-7(a) giving the details as to how he arrived at the value of each share at Rs. 7,000. However, by the letter dated February 27, 1985, exhibit P-8, addressed to Mr. K. P. Rao, respondent No. 4 withdrew his offer to sell the shares and stated that the matter should be treated as closed. As per article 19 of the articles of association of the company, it was not at all open to respondents. Nos. 3 and 4 to withdraw the sale notice. After the receipt of the sale notice, the company was required to find a purchasing member within four calendar months and in the event of difference between the selling member and the purchasing member as to the value, the fair value of the share shall have to be certified by the auditor as an expert and not as an arbitrator. The further procedure to be followed in this regard, has been laid down in articles 22 to 25 if the articles of association. Therefore, the withdrawal of the sale notice was not at all permissible. When the notice was withdrawn four calendar months after service of sale notice had not expired.

102. In the light of the findings recorded on points Nos. 1, 2, 4, 5, 6, 8 and 9, it becomes necessary that either the shares held by Smt. B. K. Anupama Rao should be directed to be transferred to the petitioner and the second respondent in the proportion 12 : 13 so as to equalise to shareholdings of the petitioner and the second respondent or to allot 24 equity shares to the petitioner. In that event the shares held by the petitioner would be equal to the shares held by respondents Nos. 2 and 3 together. Respondent No. 3, as already pointed out, is a member of the group of the second respondent. However, to allow respondent No. 3 to continue to hold 25 shares and to allot 24 fresh shares to the petitioner to make him equal shareholder would not be a correct and proper solution because though the third respondent is the mother-in-law of the petitioner one cannot assure that the mother-in-law will always support her son-in-law. It may be possible that she may change sides. In fact the trouble is created because of her presence in the company as member. Therefore, in order to safeguard the interest of the petitioner and the second respondent and also to ensure healthy relationship between them, and further to ensure proper and smooth functioning of the first respondent-company, I am of the view that 25 shares held by respondent No. 3 shall be transferred to the petitioner and the second respondent in the proportion of 12 and 13 respectively.

103. The next question for consideration is as to the fair value of 25 shares held by respondent No. 3. According to article 21 of the articles of association 'The fair value of the share shall be such a sum of money, as the auditor for the time being of the company shall certify in writing, which valued in his opinion is the fair value thereof, and so that in so certifying, the said auditor shall be deemed to be acting as an expert and not as an auditor'. It is also permissible for the court to appoint any other person for the purpose of determination of the fair value of the shares held by respondent No. 3. As the parties were not able to arrive at an agreement with regard to the fair value of the shares when they negotiated through the chartered accountant of the company, I am of the view that it is just and necessary to appoint another person to value the shares held by the third respondent for the purpose of effecting transfer of the same to the petitioner and the second respondent in the proportion of 12 and 13 respectively. On the question as to who should be appointed to value the shares, it is necessary to hear the parties. Accordingly, point No. 10 is answered in the affirmative. However, the question as to who should be appointed to determine the fair value of the shares will be determined after hearing both sides in this regard.

104. Point No. 11. - It follows from the several findings recorded above that the grievances of the petitioner are redressed and there will not be any difficulty in the smooth working of the company. The petitioner and the second respondent are also close relations. The company has been getting on well and most of its liabilities have been discharged. Therefore, I do not consider it just and appropriate to direct winding up of the first respondent-company. Point No. 11 is accordingly answered in the negative.

For the reasons stated above, this petition is allowed in part, as follows :

(i) The petitioner and the second respondent shall be equal partners in the first respondent-company.

(ii) The shareholding of the petitioner and the second respondent either individually or along with the members of the group of each of them shall be equal.

(iii) The proceedings of the extraordinary general meeting of the members of the first respondent-company held on November 12, 1987, and the resolutions passed at that meeting defeating the move to elect and appoint the petitioner as wholetime director and appointing Dr. Ghatge as a director, are declared illegal, invalid and the same are quashed. The petitioner shall be deemed to have continued as a wholetime director of the first respondent-company with such powers as originally conferred upon him and is entitled to draw the remuneration. It is further declared that in the management of the affairs, business and funds of the first respondent-company, the petitioner shall have equal participation to the same extent as respondent No. 2. Any other person co-opted as a director wholetime director shall cease to be such and cease to function from today.

(iv) the articles of association of the first respondent-company shall be amended within six months from today in conformity with the directions and declarations contained in this order.

(v) The prayer of the petitioner to declare the transfer of 25 equity shares of respondent No. 4 to respondent No. 3 as invalid, is rejected. The prayer of the petitioner to enquire into and determine the amount paid by the first respondent-company to respondent No. 4 and his son as consultancy fee and to direct recovery of the same, is rejected.

(vi) The third respondent is directed to transfer 25 shares held by her to the petitioner and second respondent in the proportion of 12 and 13 respectively. The fair value of the shares shall be determined by a person to be appointed by the court.

Call this petition on June 5, 1992, at 2.30 p.m. to hear the parties for appointment of a person to determine the fair value of the shares.

(vii) As it is held that the petitioner and the second respondent would be equal partners in the first respondent-company, it is just and appropriate to direct each party to bear his or her or its costs.

It is ordered accordingly.