Varghese Kalliath,J.
1. Both these appeals are against the judgment of the company judge in proceedings under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act'). The appeal, M.F.A. No. 65 of 1993, is by respondents Nos. 1 to 3 and 5 in the petition, C.P. No. 27 of 1988. The appeal, M.F.A. No. 64 of 1993 is by the fourth respondent in C.P. No. 27 of 1988, Respondents Nos. 1 to 4 in both the appeals are the same. Respondent No. 5 in M.F.A. No. 65 of 1993 is the appellant in M.F.A. No. 64 of 1993, and respondent No. 6 is the Union of India, represented by the Secretary, Company Law Administration, New Delhi. In M.F.A. No. 64 of 1993, respondent No. 5 is the company--the Palghat Exports Pvt. Ltd., 132/147, Shanmugha Road, Palghat. Respondent No. 6 is K. Santhosh Hebbar, managing director of the company. Respondent No. 7 is the chairman of the company and respondent No. 8 is the company director, L. Viswanathan. Respondent No. 9 is the Union of India, represented by the Secretary, Company Law Administration, New Delhi. Respondents Nos. 1 to 4 are the petitioners in C.P. No. 27 of 1988. Respondent No. 1 was the first petitioner in C.P. No. 27 of 1988 who is the father of respondents Nos. 2, 3 and 4.
2. As a unit, respondents Nos. 1 to 4 in both the appeals held 7 out of the total 28 equity shares issued by the company. The appellants in M.F.A. No. 65 of 1992 are the company, managing director, chairman and director. As stated earlier, appellant in M.F.A. No. 64 of 1993 is another director who was the fourth respondent in C.P. No. 27 of 1988.
3. The case of respondents Nos. 1 to 4 as against appellants Nos. 2 to 4 in M.F.A. No. 65 of 1992 and the appellant in M.F.A. No. 64 of 1993 is that they are entitled to get reliefs under Sections 397 and 398 of the Act on account of the fact that the affairs of the company are being conducted in a manner prejudicial to public interest and in a manner oppressive to respondents Nos. 1 to 4. It is argued that respondents Nos. 1 to 4 in the appeals have given all the particulars of instances of the oppressive and prejudicial acts of the appellants in both the appeals to attract the jurisdiction of the company court for relief under Sections 397 and 398 of the Act. The company court has given in its judgment an analysis of the various instances and acts for the purpose of getting a clear picture of the case of respondents Nos. 1 to 4. The company court also has given in its judgment an analysis of the answers given by the appellants herein to the allegations made by respondents Nos. 1 to 4 in C.P. No. 27 of 1988. After considering the various aspects of the matter and the law on the subject, the company court has given a verdict giving substantial reliefs to respondents Nos. 1 to 4.
4. The reliefs granted by the company court in the judgment under appeal are these :
'(i) Respondents Nos. 2, 3, 4 and 5 shall deposit a sum of Rs. 35,000 in this court towards the approximate recorded value of the movables of the company sold by them as shown in the minutes of the meetings of the board of directors.
(ii) The respondents shall deposit a sum of Rs. 35,000 which represents the value of the shares purchased by the petitioners.
(iii) Respondents Nos. 2 to 5 shall on behalf of the company purchase the shares from the petitioners and refund the amount paid by them.
(iv) The respondents shall furnish all the accounts of the money they received from the different shareholders, the income from the business that the company carried on, the expenses incurred by them and all other details relating to the finances of the company.
(v) The respondents shall call a general body meeting at which the petitioners shall be invited. Respondents Nos. 2 to 5 shall endeavour to secure personal presence of every member of the company. The respondents shall place the aforesaid accounts before the general body meeting.
(vi) Parties have liberty to seek further direction in this application.
(vii) The orders at (i) and (ii) shall be complied with within three months from today.'
(These are the reliefs granted by the company judge).
5. The appellants in both the appeals are very much aggrieved by the judgment and they have filed the appeals contending that the company court's findings are not legal and valid both on facts and law. Now, to dispose of these appeals, we feel that it requires a short resume of the statement of facts which are given in detail, is necessary. Now, we turn to the facts.
6. The company in question is the Palghat Exports Pvt. Ltd. It was incorporated on 22nd June, 1984. The petitioners before the company court who are respondents herein are admittedly shareholders. They have got legitimacy to file a petition under Sections 397 and 398 of the Act, since they held 7 out of the total 28 equity shares issued by the company.
7. The objects of the company set out in the memorandum and articles of association include as the main objects, export and import. Of course, there are ancillary objects also. The memorandum contains a head of objects--other objects. This includes the conduct of restaurants and hotels.
8. Petitioner No. 1 before the company court paid Rs. 35,000 on May 22, 1985, for the purchase of 7 shares. It is the case of the petitioners that one of the directors, P. Ramkumar, represented that the object of the company was to carry on the business of import and export of commodities. Even before the allotment of shares and even before the payment of the price of 7 shares of Rs. 35,000, the company started restaurant Oasis and departmental store Denni on May 19, 1985. The company was engaged in no other business. The petitioners before the company court alleged that the starting of the restaurant and departmental store was contrary to the objects of the company.
9. Admittedly, the business was closed down on September 1, 1985, and the board resolved on January 14, 1986, to close down the two units. From the evidence, it is seen that the company carried on no business after 1986. It is alleged that the movables for the conduct of the business of Oasis and Denni were disposed of by the directors. It is pointed out that the movables of the units were sold privately.
10. In this backdrop of events, the petitioners want to bring out the case of oppression thus : (1) The company through its directors was carryingon the business of running restaurant and departmental stores contrary to the objects of the company. (2) Although the company never made profits the premises belonging to the wife of one of the directors, Ramkumar, were hired for a high rent of Rs. 1,500 per month. (3) The managing director, K. Santhosh Hebbar was paid remuneration of Rs. 2,000 per month. (4) The business was closed down within a short time, say 5 months and after closing down the business the movables used for the purpose of the business were sold privately and the directors who were in control of the business received the sale proceeds and misappropriated them. (5) The registered office of the company became defunct from December 1, 1985, and books of account and records were not maintained. (6) There is manipulation in the minute books, balance-sheet and annual accounts. (7) The petitioners were never served with notice of meetings and they were excluded.
11. The appellants herein in their counter-affidavit controverted the allegations and submitted that on the facts, the petition under Sections 397 and 398 of the Act is not maintainable and that, at any rate, even if the petition is found maintainable applying the correct law and drawing the correct inferences, the application has to be dismissed. What the appellants said can be summarised thus : The company was incorporated on June 22, 1984. Initially, the second and fourth appellants in M.F.A. No. 64 of 1993 were the subscribers. In the meeting of the board of directors held on March 30, 1985, the board resolved to start a restaurant and departmental store. The building was taken on rent on April 1, 1985. On May 7, 1985, the third appellant and the fourth appellant were appointed as additional directors and the second appellant was made the managing director. The business commenced on May 19, 1985. On May 7, 1985, it was resolved to have 26 shares more and out of 26, the board resolved to issue 7 shares to the petitioners before the company court. The business was a failure and on January 14, 1986, the board passed a resolution to wind up the business and to dispose of the movable assets.
12. The company petition was filed seeking the relief only in July, 1988. The first respondent in the appeal is the father of respondents Nos. 2, 3 and 4 (petitioners before the company court). The first respondent had filed C.P. No. 6 of 1987 invoking the remedy under Section 237A of the Act for inspection of the affairs of the company. The same was dismissed on March 9, 1988. The appellants herein submitted before the company courts that the petition deserves to be dismissed.
13. The company court framed necessary issues and took both oral and documentary evidence. The first respondent was examined as PW-1 and the auditor of the company was examined as PW-2. Respondents Nos. 1 to 4 (petitioners before the company court) produced exhibits A-1 to A-28. On the appellants' side, exhibit R-1 certified copy of the order in C.P. No. 6 of 1987 and two other exhibits produced, viz., letter dated August 21, 1986, sent by the first petitioner before the company court to the Registrar of Companies and copy of memorandum of association of the company.
14. The appellants challenge the company court's judgment on different points : (1) Counsel for the appellants submitted that the facts established do not attract the invocation of Sections 397 and 398 of the Act. (2) The company court has travelled beyond the pleadings. The company court ought to have confined its examination to the pleadings. The over-stepping to areas which are not demarcated in the pleadings vitiated the judgment impugned in these appeals. (3) Since no separate petition under Section 543 of the Act was filed, the reliefs granted by the company court are unsustainable. (4) It was very strongly argued that the purpose of the petition was to recover the money invested by the first petitioner, a purpose even at a long shot not a purpose encompassed in Sections 397 and 398 of the Act.
15. Now, we feel that the correctness of the judgment should be examined at the outset by understanding the width and scope of Sections 397 and 398 of the Act. Sections 397 and 398 of the Act read thus :
'397. Application to Company Law Board for relief in cases of oppression.--(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under Sub-section (1), the CompanyLaw Board is of opinion-
(a) that the company's affairs are being conducted in a mannerprejudicial to public interest or in a manner oppressive to any memberor members ; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the makingof a winding-up order on the ground that it was just and equitable that the company should be wound up,
the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
398. Application to Company Law Board for relief in cases of mismanagement.--(1) Any members of company who complain-
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company ; or
(b) that a material change (not being a change brought about by, or in the interests of any creditors including debenture-holders, or any class of shareholders, of the company) has taken place in the management or control of the company whether by an alteration in its board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company,
may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of Section 399,
(2) If, on an application under Sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.'
16. The aforesaid sections are in Chapter VI of the Act which deals with prevention of oppression and mismanagement. Considering the nature of relief pressed for before the company court and the arguments advanced before us by the petitioners before the company court, we think that it is sufficient for us to confine our enquiry to Section 397 of the Act. Chapter VI of the Act is obviously intended for the purpose of giving protection to shareholders from oppression and mismanagement of the controlling shareholders. Though by the Amendment Act, 1988, the power to grant relief under Section 397 of the Act is given to the Company Law Board with effect from May 31, 1991, before the amendment, the power was vested with the court under the Companies Act, 1956. The parallel provision ih the English Companies Act, 1948, since repealed is Section 210. For the first time in the Indian Companies Act, 1913, protection to shareholders was made in Section 153C by the Companies Amendment Act, 1951. This is a protection to avoid winding up in the case of mismanagement or oppression. Certainly, winding up is a drastic procedure. In many cases, it may not help the prejudiced and oppressed members who could seek for it, on account of mismanagement and oppression and so the courts were always circumspect and reluctant to grant the relief of winding up. If we trace the legislative history which resulted in a less drastic provision of giving wide powers to the court to pass appropriate orders in case of oppression and mismanagement, necessarily we have to refer to the Cohen Committee Report which recommended that 'the court should have the power to impose upon the parties to the dispute whatever settlement the court considers just and equitable.' On the report of the Cohen Committee Section 210 was incorporated in the English Companies Act, 1948, and we followed in India by introducing Section 153C in the Indian Companies Act, 1913. The recommendation of the Babha Committee in 1952 widened the scope and area still further. The remedy was extended by not confining it to cases of minority oppression, but also the cases of mismanagement of company affairs in a manner prejudicial to the interests of the company. In 1963, the provision of the Companies Act, 1956, was amended extending the scope of the provision to include where the affairs of the company were being conducted in a manner prejudicial to the public interest.
17. At the foreground, when we examine the factual situation emerging in the case, we have to caution ourselves that the oppression is the core element to be proved and the nature of oppression to be tested in the context of 'cause for winding up'. But it has to be remembered that the provision is intended to avoid winding up and to mitigate and alleviate oppression. The relief under Section 397 of the Act is geared to help the members who were oppressed. The relief under Section 398 of the Act is geared to save the company and it is in the interest of the company alone and not to any particular member/members.
18. The right of members to apply under Section 397 of the Act is hedged in with certain restrictive conditions. This is to avoid frivolous applications from dissatisfied members approaching the court or the Company Law Board, as the case may be. The provision regarding member/members having one-tenth share capital of the company alone can file applications under Sections 397 and 398 of the Act is intended to avoid frivolous petitions. Of course, under Section 399(4), it is provided that the Central Government may authorise any member or members of the company to apply to the Company Law Board for relief, if in its opinion circumstances exist which make it just and equitable to do so.
19. The expressions 'oppression' and 'mismanagement' which are the core concepts in the section are left by the Legislature without defining them. When once it is left without definition, the task of the court is difficult and more responsible. Naturally, the court will always incline to wade through precedents to find out and to assign the correct meaning of these two words 'oppression' and 'mismanagement' in the context in which they are used. Certainly, the courts have to decide on the facts of each case as to whether there is a real cause of action under Section 397 and 398 of the Act.
20. The leading English cases under Section 210 of the English Companies Act are Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL) and H.R. Harmer Ltd., In re [1959] 29 Comp Cas 305 (CA). Considering the above two cases and other English cases, the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC) observed thus (at pages 366 and 367) :
'... 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 ... 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.'
21. It is pertinent to note that in farmer Ltd's case [1959] 29 Comp Cas 305 (CA), it was held that 'the word 'oppressive' meant burdensome, harsh and wrongful'. Further, it was held that 'the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the 'just and equitable' rule, but only to those cases of that character which have in them the requisite element of oppression'. It was also held that 'the result of applications under Section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision.' The facts of the case should disclose and unfold to invite an inference that 'there had been at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy.'
22. It is important to note that in every case under Section 397 of the Act, it is obligatory on the part of the complainant to establish 'persistent and persisting course of unjust conduct' (See Elder v. Elder and Watson [1952] SC 49 and Scottish Co-operative Wholesale 'Society Ltd, v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL)), A survey of judicial decisions though not exhaustive would indicate the following acts of the controlling shareholders to be oppressive to minority shareholders : (1) The power exercised by the controlling shareholders is directed to destroy the company's business--Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL), (2) Usurping the power and obtaining the entire power and exercising it against the wishes of the shareholders who are in minority with regard to voting power--Harmer Ltd.'s case [1959] 29 Comp Cas 305 (CA), (3) Denying voting rights to the shareholders-Mohan Lal Chandumall v. Punjab Co. Ltd. [1962] 32 Comp Cas 937 (Punj), (4) If the directors refuse to distribute compensation money obtained on nationalisation of the company--Hindusthan Co-operative Insurance Society Ltd., In re [1961] 31 Comp Cas 193 (Cal), (5) The company undertaking businesses other than those mentioned in the objects clause without calling a general meeting or passing a resolution-- Hindusthan Co-operative Insurance Society Ltd., In re [1961] 31 Comp Cas 193 (Cal), (6) Exercising the power by majority to expel members--B.R. Kundra v. Motion Pictures Association [1978] 48 Comp Cas 536 (Delhi), (7) Deadlock created in carrying out the affairs of the company due to lack of faithbetween two factions of the family-Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. [1983] 55 Comp Cas 883 (Cal), (8) The directors and managing directors consistently not functioning in their office--Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. [1983) 53 Comp Cas 883 (Cal), (9) The directors not taking interest in the affairs of the company and always quarrelling so as to cause loss to the company--Chander Krishan Gupta v. Pannalol Girdhari Lal Pvt. Ltd, [1984] 55 Comp Cas 702 (Delhi), (10) In a company where there are only two shareholders and who are directors and one director who has got majority shares refuses to cooperate with the affairs of the company and exhibiting mutual lack of confidence not to be settled otherwise than by taking it to court, by mutual domestic policy-Combust Technic Pvt. Ltd., In re [1986] 60 Comp Cas 872 (Cal), (11) If the directors refuse to register shares in the name of the complaining petitioners with an object to retain control over the affairs of the company-Kumar Exporters P. Ltd. v. Naini Oxygen and Acetylene Gas Ltd. [1986] 60 Comp Cas 984 (All).
23. We have cited the aforesaid instances as illustrations, Certainly they are not exhaustive. There are instances where the court refused to accept certain acts not amounting to oppression for the purpose of invoking Section 397 of the Act. In Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh Ltd.), AIR 1962 Cal 127, the court held that denial of access to, or inspection of, the books of account of the company to the petitioner may not amount to an act of oppression. In N. Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP), it was held that an attempt to get a majority by lawful means is not an act of oppression within the meaning of Section 397 of the Act. Similarly, in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, the Supreme Court found that issuing of shares by the majority shareholders to their friends or outsiders would hot amount to an act of oppression. In the same case, it was held that mere loss of confidence amongst different groups of shareholders due to non-distribution of new shares to the existing shareholders would not amount to an act of oppression. In S.R. Subramanian v. Drivers and Conductors Bus Service Private Ltd. [1978] 48 Comp Cas 672 (Mad), it was held that failure to forward the statutory report in the case of a private limited company is not an act which can be considered as an act of oppression to invite an action under Section 397 of the Act. In South India Viscose Ltd. v. Union of India [1982] 52 Comp Cas 247 (Delhi), it was held that mere contravention of some provisions of law by the board and actions being unwise or not prudent may not amount to an act of oppression.
24. It is significant for the purpose of the case at hand that courts have held that past acts which have come to an end would not be taken for the purpose of invoking the court's jurisdiction under Section 397 of the Act--see Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi) ; Motion Pictures Association, In re [1984] 55 Comp Cas 375 (Delhi); In Chander Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi), the court held that stray illegal acts may not amount to acts which would constitute a ground for an action under Section 397 of the Act. It is settled by the Supreme Court decisions that isolated acts of the controlling shareholders cannot be used as a ground for taking action under Section 397 of the Act. The case-law would indicate that one of the conditions essential for seeking relief under Section 397 of the Act is that there should be continued oppression over a period of time. We say so, because it is settled law that isolated acts of oppression or stray illegal acts would not amount to oppression or mismanagement unless the stray illegal acts may have continuing or lasting consequences and in such cases the power may be invoked. The case law on the subject as to what would amount to oppression and mismanagement is rather in a nebulous state. But the Supreme Court has given very substantial guidelines for determining whether an act would amount to oppression within the meaning of Section 397 of the Act.
25. We may close this discussion referring to the quotation from Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 wherein the Supreme Court observed, after reviewing the English as well as Indian authorities, thus (at page 782) :
'It is clear from these various decisions that on a true construction of Section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. 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.'
26. We may also in this context refer to a decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 ; 803 ; AIR 1965 Guj 96, 98, wherein Bhagwati J., as he then was, observed that '... being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy ...'
27. The learned company judge considered the principal distinction in the meanings of the words 'business' and 'affairs' and observed that 'affairs' in the context of the life of a company means things to be done or business to be conducted. The Companies Act requires certain acts to be done even by a company which has no business or commercial activity to run. These include filing of annual returns, holding annual general meetings, filing reports, preparation and filing of balance-sheet and profit and loss account, appointment of auditors and so on. These are part of the things to be done or business to be conducted by the company, notwithstanding the fact that it has no assets and its business is closed down. The learned company judge adverted to this distinction in the context that the company in question ceased to run the restaurant and departmental store. The company court observed that even though the company ceased to run the business it continued as a legal entity and as such it has to function as a company. The learned company judge also referred to the meaning that has to be given to the word 'business' and observed: 'It takes in everything required to carry on the commercial activity' and ultimately said that 'affairs' is a word of wider import taking in its sweep everything and every business to be done by a company. We agree with the company judge that a company which ceased to have any business cannot be exempted from the sweep of Section 397 of the Act.
28. The observation of Lord Denning quoted by the learned company judge is worth repeating. These are the words of Lord Denning : 'But it would be wrong to infer therefrom that the remedy is limited to cases where the company is still in active business. The object of the remedy is to bring 'to an end the matters complained of that is, oppression, and this can be done even though the business of the company has been brought to a standstill.' (Scottish Co-operative Wiwlesole Society Ltd. V. Meyer [1958] 3 All ER 66, 89 ; [1959] 29 Comp Cas 1, 33 (HL)).
29. Before discussing the facts of the case, we feel that it is necessary to bear in mind that in Section 397 of the Act the court has been given power which is discretionary in character because the words used are 'the court may make an order as it thinks fit with a view to bringing to an end the matters complained of' as distinct from the power granted under Section 398 of the Act wherein it is stated 'the court may pass an order with a view to bringing to an end or preventing the matters complained of or apprehended . . .' Now, we think that it is time for us to discuss the various points raised by counsel for the appellants on the factual situation emerging in the case.
30. Counsel for the appellants in M.F.A. No. 65 of 1993 submitted that the facts disclosed in the petition would not attract the exercise of power under Sections 397 and 398 of the Act. This contention was raised mainly on the ground that at the time when the petition was filed, the business of the company was closed. It was emphasised that the business was closed in 1986 and as such the company which was not doing any business cannot form the subject-matter of action under Sections 397 and 398 of the Act. The learned company judge has considered this question in detail and relied on Hindusthan Co-operative Society Ltd., In re, [1961] 31 Comp Gas 193 ; AIR 1961 Cal 443, and also the observation of Lord Denning in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) ; [1958] 3 All ER 66 and held that the contention raised by the appellants in M.F.A. No. 65 of 1993, who were the respondents before the company court are unsustainable. We think that the company court has rightly held so.
31. Counsel for the appellants further submitted that the company court can take action under Sections 397 and 398 of the Act only on the pleadings of the petitioners. Obviously, in the pleadings the complaints highlighted are of the year 1985-86. The learned company judge has also noted this submission in paragraph 7 of the judgment. When the complaints are of the period 1985-86 and the petition is of the year 1988, counsel for the appellants submitted that considering the words used 'affairs are being conducted' Sections 397 and 398 of the Act are not attracted. Further, the object of the sections, it was contended, is to stop the oppressive acts and to prevent the continuation of the oppressive and prejudicial acts by the controlling shareholders. When once an act even if it is an oppressive one has been done, it becomes a fait accompli and thereafter remains to be a past act and in such cases the operation of Section 597 of the Act is not recommended.
32. When P.W.-1 was examined, he has said clearly that the complaints made in C.P. No. 27 of 1988, relate to the years 1985 and 1986, and he has also admitted that when he filed C.P. No. 27 of 1988, the company had no activity or business to be carried on--see page 13 of P.W.-1's deposition. The object of Section 397 of the Act on a plain reading of the section indicates that it is to terminate or prevent an existing, present, state of prejudicial, oppressive, harsh, unfair conduct and so obviously past conduct or closed affairs are not encompassed in the section. If the affairs which are complained of are not being conducted in praesenti as at the time of filing the petition, they are matters of the past. They have no present existence and so there are no complaints to bring to an end by an order of the court. Naturally, in such a state of affairs, there are no affairs which are present or future to be prevented.
33. This position has been clearly stated in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mitts Co. Ltd. [1964] 34 Comp Cas 777 (Guj). This case has been referred to by the learned company judge. It has to be noted that the Gujarat High Court held that (i) Sections 397 and 398 apply to present continuous wrongs ; (ii) the remedy is essentially preventive ; (in) there must exist on the date of the petition a continuous course of oppressive, or prejudicial conduct of the affairs of the company; (iv) there is no power in the court to set aside or interfere with past and concluded transactions between a company and third party. We do not want to emphasise the fact that the remedy envisaged in Section 397 of the Act is not intended to set at naught what has already been done by the controlling shareholders in the management of the affairs of the company.
34. In Thakur Hotel (Simla) Company (Private) Ltd., In re [1963] 33 Comp Cas 1029, Tek Chand J. of the Punjab High Court in plain language observed thus (headnote) : 'Mismanagement or misconduct of directors during earlier years is no ground for winding up a company under the 'just and equitable' clause or for making an order under Section 397 if the mismanagement had ceased at the time of the application. The object of Section 397 is not 'to rake up the past but to redeem the future'. The quote in the above observation of Tek Chand J. is from H.R. Harmer Ltd., In re [1959] 29 Comp Cas 305 (CA), wherein Roxburgh J. said, 'The purpose of this section (Section 210) is not so much to rake up the past as to redeem the future.'
35. In Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao, [1956] 26 Comp Cas 91, 97 ; AIR 1956 SC 213, 217, the Supreme Court observed : 'Where nothing more is established than that the directors have misappropriated the funds of the company an order for winding up would not be just or equitable, because, if it is a sound concern, such an order must operate harshly on the rights of the shareholders'. Considering the case, Thakur Hotel (Simla) Company Private Ltd., In re [1963] 33 Comp Cas 1029 (Punj), the court said that merely on the conduct of the directors in misappropriating the funds of the company, an order for winding up would not be just and equitable ; it requires a further clause that in addition to such misconduct, circumstances exist which render it desirable in the interest of the shareholders that the company should be wound up. In this case, the petitioners have made it clear that an order winding up the company is not warranted and that it is not desirable inthe interest of the shareholders to wind up the company, the circumstances unfolded in the petition even if all of them are established, we are of the opinion that an order for winding up would not be just and equitable.
36. In Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, the Supreme Court has made it clear that the oppressive acts must be continuous on the part of the majority shareholders and those acts should continue 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. We may also refer to a passage from Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) (at page 782) :
'It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitutioh of the word 'oppression' in Section 210 of the English Act by the words 'unfairly prejudicial' in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gowe'r's Company Law, Fourth edition, page 668). But that recommendation was not accepted and the English law remains the same as in Meyer [1959] 29 Comp Cas 1 ; [1959] AC 324 and H.R. Warmer Ltd., In re [1959] 29 Comp Cas 305 (CA) as modified in Jermyn Street Turkish Baths Ltd., In re [1971] 41 Comp Cas 999 (CA), We have now adopted that modification in India.'
37. The Madras High Court had an occasion to consider the question in great detail in V.M. Rao v. V.L Dutt [1987] 61 Comp Cas 20 (Mad). The court formulated the following conditions for maintaining a petition, under Sections 397 and 398 of the Companies Act, 1956, (at page 66) (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 ; (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) it must be shown as a preliminary to the application of Section 397 that there are just and equitable grounds for winding up the company ; (e) the conduct complained of can 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 unfair dealing to a member in matters of proprietary rights as a shareholder.
38. In Surinder Singh Bindra v. Hindustan Fasteners (P.) Ltd. [1990] 69 Comp Cas 718 (Delhi), the court was adverting to the question whether an oppressive act of a character which has got a continuing effect can be considered as one which will come under Section 397 of the Act. In that context, the court said that there have to be continuous acts complained of continuing up to the date of the petition showing that the affairs of the company are being conducted in a manner oppressive to some part of the members or in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. After stating thus, the court said that it cannot be said that the events which occurred three years prior to the date of filing of the petition cannot be looked into if those events form continuous acts complained of continuing up to the date of petition. These can be looked into if they form part of a continuous process continuing up to the date of petition showing that the affairs of a company are being conducted in a manner stipulated in Sections 397 and 398 of the Act.
39. Certainly the company court has taken into consideration acts or affairs even after the filing of the application. From the judgment, it is clear that the learned company judge has discussed certain affairs of the company which would amount to misconduct up to the date of August 11, 1990.
40. Counsel for the appellants strongly contended that the examination of the complaints should be confined to complaints narrated or pleaded in the petition. The company court has no jurisdiction under Sections 397 and 398 of the Act to travel beyond the pleadings. It is well settled that no evidence can be looked into in regard to facts which are not pleaded.
41. We may refer to certain decisions also on this aspect of the matter. In Fildes Bros. Ltd., In re [1970] 40 Comp Gas 998 (Ch D), Megarry J. observed thus (at page 1004) : 'Second, the petitioner is confined to the heads of complaint set forth in his petition. His evidence may no doubt amplify and explain these complaints, but I do not think that he can rely upon any new head not fairly covered by his petition. For this proposition counsel for appellants cited Cuthbert Cooper and Sons Ltd., In re [1938] 8 Comp Cas 131 (Ch D), which I have already mentioned, where Simmonds J. said : ' For the purpose of determining whether the petition should be granted or not, it is necessary for me to look at the allegations in the petition, and I do not propose to travel beyond them.' We may also refer to Lundie Brothers Ltd., In re [1965] 35 Comp Cas 827 (Ch D), wherein Plowman J. observed thus : 'It was suggested in the course of argument that it was really the evidence and not the allegations in the petition which was of importance in this matter. I entirely dissent from that proposition. It seems to me that it would be wrong for the court to travel outside the allegations in the petition, particularly in a case of this sort where the petition is based on the proposition that the respondents to it have been guilty of some oppression or some lack of probity'.
42. In C.P. Gnanasambandam v. Tamil Nadu Transports (Coimbatore) Private Ltd. [1971] 41 Comp Cas 26 (Mad), the Madras High Court observed that (headnote) : 'Events that happened subsequent to the institution of a winding np petition cannot be taken advantage of by the petitioner in support of the prayer for winding up'.
43. From the judgment, it is seen that the company judge adverted to events that happened after the filing of the petition. We find no justification in looking at those events for supporting the petition. Further, we are of the opinion that the main allegation being allegations referable to the years 1985 and 1986 as admitted by the applicants the two-year gap cannot be surmounted by saying that there is continuity in regard to the allegation made in the petition. In this view, we are of the opinion that the appellants are right in their contention that the condition regarding the fact that the oppressive acts should continue or should be present at the time when the petition was filed has not been complied with in this case. We are of the opinion that when the learned company judge has considered the issues referring to events which took place after the filing of the petition, his Lordship has overstepped the bounds of Section 397 of the Act.
44. In this view, we feel that the petition ought to have been dismissed on this ground.
45. But we may also advert to certain other aspects : (1) that the petition does not reflect a representative action and that it is intended only for the purpose of recovering the money spent by the petitioners before the company court which is not an object contemplated even at a long shot in Section 397 of the Act. P.W.-1 when examined plainly and perhaps very frankly said that : 'It is true that the object of my petition is to recover the money lost by me in the business of the company'. When once the petitioners before the company court have said that the object of the petition is not what is contemplated under Section 397, it is very difficult to allow the petition.
46. In Killick Nixon Limited v. Bank of India [1985] 57 Comp Cas 831, a Division Bench of the Bombay High Court observed that under Sections 397 and 398 of the Act any personal grievance of a member himself isnot contemplated. The cause of action under Section 397 is the conduct of the affairs of a company in a manner prejudicial to public interest or in a manner oppressive to any member or members of the company.
47. The decision in Bellador Silk Ltd., In re [1965] 1 All ER 667, 671 (Ch D) sheds clear light on what the court should do when a shareholder filing a petition under Section 397 of the Act comes forward before the company court as a witness and deposes before the court that he has filed the petition for the purpose of obtaining the money he has invested in shares or for recovery of money from the company. The court said that the ulterior purpose of the petitioner makes the petition not bona fide and if the petition is not bona fide, the court is bound to reject it. We think, we have to quote what Plowman J. has said on this aspect of the matter. He has said that if the object of a petition under Section 397 of the Act is to recover money from the controlling shareholders, it is an abuse of the process of the court and on that ground the petition should be dismissed. Now, we quote : '... in my judgment, this case must fail for different reasons. First and foremost is the reason that I do not regard this petition as a bona fide attempt to obtain relief under Section 210 at all. It became obvious during Moss Simmons cross-examination that he did not really want the relief for which he was asking in the petition and that its real object was to achieve a collateral purpose, namely, to get some satisfaction in regard to the repayment to Bellador Ltd. or to the Simmons group of companies, of the outstanding loan. Indeed, he made no bones about this in the witness-box. For example, he was asked if he wanted a receiver appointed and he said that of course he did not, and, although he stated that there were some irregularities of which he disapproved, he time and again emphasised that his real concern was to force an agreement with his co-directors for the repayment of the loans to the Simmons group. The urgency of this became apparent when he explained that the money was needed for the purpose of honouring an agreement made with the Inland Revenue in regard to the payment of arrears of tax. If the loan was not repaid, he was, he said, faced with ruin. A petition which is launched not with the genuine object of obtaining the relief claimed, but with the object of exerting pressure in order to achieve a collateral purpose is, in my judgment, an abuse of the process of the court and it is primarily on that ground that I would dismiss this petition', . Buckley on the Companies Acts, Fourteenth edition of 1981, under the head 'Abuse of process under Section 210' cites the decision in Beliador Silk Ltd., In re [1965] 1 All ER 667.
48. We have already referred to what P.W.-l has said as regards the real object of the petition. This real object which is tacitly reflected in the prayers made by the petitioners has been expressly stated in the deposition of P.W.-l. The first prayer is to pass appropriate orders for the purchase of the shares held by the petitioners. We feel that in view of the clear and unambiguous statement by P.W.l, it is difficult for us to discern a different object which will satisfy Section 397 of the Act other than an outside object of Section 397 of recovering the amount invested for purchasing the shares. Of course, counsel for the respondents wanted to say that the object of the petition was to take action under Section 397 of the Act and the relief the petitioners wanted was recovery of the money they have invested. This explanation, we feel, is not commendable and so we cannot accept it, we feel that we have to follow the dictum laid down in Bellador Silk Ltd., In re [1965] 1 All ER 667 (Ch D). We hold that the petition is liable to be dismissed on this sole ground.
49. Since we have found that the application is to be dismissed for the reasons we have already adverted to, we feel that it is not necessary for us to consider the other points raised by counsel for the appellants including the points raised on the question of separate application for granting of relief.
50. Counsel for the respondents wanted to support the judgment and submitted that the petition cannot be dismissed on the ground that the court has overstepped the pleadings or on the ground that the complaints raised in the petition do not have the character of live complaints which require action by the court to prevent them and lack of bona fides as revealed from the deposition of P.W.-1. He also submitted that the lack of pleadings cannot stand as a ground for rejecting the petition. We find it difficult to accept the submission made by counsel for the respondents.
51. We feel that for the reasons we have discussed, the petition is liable to be dismissed and so the appeals have to be allowed. We set aside the judgment of the company court and allow the appeal and dismiss the application, C.P. No. 27 of 1988. No order as to costs.