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SHANTI PRASAD JAIN V. KALINGA TUBES LTD., AIR 1965 SC 1535

SHANTI PRASAD JAIN V. KALINGA TUBES LTD., AIR 1965 SC 1535                             

                       

FACTS

  • In this case, the shareholders of the company originally consisted of two groups.
  • Fourteen appeals were made on certificates granted by the High Court of Orissa, which raised common questions of law and fact. These appeals were a result of a fight between two groups of business magnates for the control of Messrs Kalinga Tubes Limited (hereinafter referred to as “the Company”).
  • There were some financial difficulties for the company, and the petitioner agreed to supply finance on the terms that he would be allotted shares equal to those held by the two groups after sharing the capital.
  • The company was not party to the agreement, so it converted into a public limited company to obtain advances from Industrial Finance Corporation.
  • The majority of shareholders, who were respondents, issued fresh shares after conversion to outsiders also, whereas the petitioner suggested in the meeting of the Board of Directors that fresh shares should be allotted to the existing shareholders according to Section 80 of the Companies Act, 1956.
  • The petitioner applied under Section 397 of the Companies Act, 1956 (corresponding to Section 241(1)(a)), on the grounds of oppression.
  • The Single Judge Bench declared that it was oppressive and mismanagement due to continuing oppression of minority shareholders.
  • The Division Bench held that the agreement of 1954 did not have any binding effect on the company irrespective of its nature in 1957 when it was converted into a public company from a private company.
  • Then the appeal was filed before the Supreme Court.

 

ISSUE

  • Whether the allotment of new shares was made in a manner oppressive to the minority shareholders?
  • Whether there was just and equitable cause for winding-up the Company?
  • Whether there was a case of mismanagement under Section 398 of the Act?

 

HELD
The Court, while dismissing the appeal, ultimately determined that the allotment of shares to outsiders by the majority shareholders would not constitute oppression against the minority appellant group.

  • This action was taken to prevent the scenario where the appellant could gain complete control of the company, especially considering that, at the time, the other two shareholders, Patnaik and Loganath, lacked funds.
  • Further, the allotment of shares even at par did not seriously affect the proprietary rights of the appellant as a shareholder. The haste with which the shares were allotted on July 30, 1958 cannot be said to be a part of a design to oppress the minority.
  • The case of oppression based on the agreement of July 1954 as the sheet-anchor of the appellant's case must fail. The slight delay in the payment of the full value of the shares cannot be said to be so prejudicial to the interests of the Company as to call for any action under Section 398 of the Act.
  • The change in management was not likely to result in the affairs of the Company being conducted in a manner prejudicial to its interests. No case has been made out even prima facie for action under this part of Section 398 of the Act.
  • Regarding the lack of confidence and differences among shareholders in early 1958, it was emphasised that mere distrust does not constitute oppression unless it demonstrates unfair treatment of minority rights.

 

COMMENTARY
“The meaning of the term "oppression", as explained by Lord Cooper in the Scottish case of Elder v Elder & Watson Ltd, was cited with approval by Wanchoo J (afterwards CJ) of the Supreme Court of India in Shanti Prasad Jain v Kalinga Tubes Ltd. The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely." The complaining shareholder must be under a burden which is unjust or harsh or tyrannical. A persistent and persisting course of unjust conduct must be shown. In the above-mentioned Scottish case the allegations were that the petitioners, who were two shareholders in a small family company, were removed by the majority from directorship and also from their employment as secretary and factory manager. The petition failed because they had not suffered as shareholders but in different capacities. 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.
Inadequate information.—That the members of the company have not been given all the information with respect to its affairs which they might reasonably expect including information as to commission payable to the managing director or manager. The concepts emphasised by the provision are nothing new to company law. The phrase "intent to defraud creditors'' has already been judicially construed under Section 542 [now S. 339] which imposes liability for fraudulent conduct of business. The word "oppressive" has been construed in a number of cases under Section 397 [now S. 241] including the decision of the Supreme Court in Shanti Prasad Jain v Kalinga Tubes Ltd.”