Case Law: Ashok Kumar Oswal v. Panchsheel Textiles Mfg

Introduction

The basic principle governing the management of a corporation’s affairs is that “the courts will not, in general, intervene at the request of shareholders in matters of internal administration; and will not interfere with the management of a corporation by its directors so long as they are acting within the powers conferred on them by the articles of Association.”

The majority rule, on the other hand, does not always prevail. The rule’s application extends to situations in which companies have the authority to validate managerial errors. However, there are some actions that no majority of shareholders could approve. In such instances, each shareholder, acting as a representative of the company, may file a lawsuit to enforce the company’s responsibilities.

One such exception to the majority rule is the prevention of oppression or mismanagement. An application to the Company Law Tribunal under Section 241 of the Companies Act, 2013 can be made whenever “the affairs of a company are being administered in a way oppressive to any member or members or adverse to public interest.”

Section 244 specifies the minimum number of members who must sign the application. If the company has a share capital, the application must be signed by at least 100 members or one-tenth of the total number of members, whichever is lower, or any member or members owning one-tenth of the company’s issued share capital. If the company is without share capital, the application has to be signed by one-fifth of the total number of its members. However, the Tribunal may, on application, allow any member or members to sue “if in its opinion circumstances exist which make it just and equitable to do so.”

Meaning of Oppression 

“The essence of the matter appears to be that the conduct complained of should at the very least 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” the Supreme Court of India said in Shanti Prasad Jain v Kalinga Tubes Ltd.

In the Re: Hindustan Cooperative Insurance Society Ltd case, the court observed that it is oppression when the majority exercised their authority wrongfully, in a manner burdensome, harsh and wrongful or they attempted to force the minority shareholders to invest their money in a different kind of business against their will.

Similarly, an attempt to deprive a member of his ordinary membership rights is an “oppression” as held in the case of Mohan Lai Chandumall v Punjab Co Ltd.

Minor acts of mismanagement, however, are not to be regarded as oppression. As far as possible shareholders should try to resolve their differences by mutual readjustment. Moreover, the courts will not allow these special remedies to become a vexatious source of litigation as observed in Lalita Rajya Lakshmi v. Indian Motor Co.

The company Law Board, in the case of Ashok Kumar Oswal v. Panchsheel Textiles Mfg., propounded upon the legal principle of oppression i.e., a single action of allotment of shares can amount to oppression.

Facts of the Case 

1. The petitioner and the respondent were the sons of R.C. Oswal and during the division in the family. Petitioner became the Managing Director of Vardhman group while the respondent took control of the other manufacturing companies.
2. The company in the case was initially managed by only the petitioner and his wife but later the respondent and his daughter were also appointed as the additional directors. In lieu of the same appointment on a separate board meeting the equity was enhanced from 10,000 shares of Rs. 10 each to 50,000 shares of Rs. 10 each, while the preference was reduced from 48,000 shares of Rs. 100 each to 44,000 shares of Rs. 100 each. The total authorized capital remained as Rs. 49 lakhs.
3. 10,000 equity shares were allotted of which the third respondent subscribed to 1,000 shares and the second respondent to 9,000 shares. According to the petitioner, his group held 68 percent of the 7995 issued shares in the company prior to the allotment of 10,000 shares, and thus was in the majority; however, with the allotment of these shares to the respondents, they gained majority control of the company, converting the petitioner’s group from a majority to a minority, and as a result, the respondents have acted in an manner oppressive to the petitioner.

Arguments of the Parties

1. The petitioner contended that they have reposed complete faith on the respondent while appointing them as the additional directors of the company. The affairs of the company were being conducted on mutual trust and confidence and it was the will of the respondent which prevailed not only in this company but also in all the companies in the group. The petitioner trusted his brother and, therefore, was in the habit of signing documents/papers presented to him by his brother. The petitioner used to abide by the decision of his brother. Thus, they argued that the normal rules of the company management/corporate governance cannot be applied in facts of this case and, therefore, the participation of the petitioner in the decision making cannot be held against him as an estoppel.
2. The petitioner also asserted that he was unaware of any board meeting in which the 10,000 equity shares were allotted. The petitioner never had the opportunity of knowing that the share capital had been increased since he did not sign any annual report after 1998. Even though the petitioner signed the annual report in september 1998, he had not signed any of the enclosures to the same. They also contested that petitioner was under the impression that the affairs of the company were running smoothly until respondent proposed for his appointment as the Managing Director of the Vardhman Group.
3. They further argued that the issue and allotment of 10,000 shares was done with the intention of reducing the petitioner’s majority to a minority, as evidenced by the fact that the money raised by the issuing of these additional shares is just Rs. 1 lakh, which is small in this company’s eyes. The respondents have gained control of two companies by transforming themselves into a majority in this one. They also added that independent shareholders were not offered additional shares at the time of allotment of these shares.
4. It was also alleged that the petitioner had not signed any document including the balance sheet. Even though, the respondents contend, on the basis of copies of attendance sheets, wherein the signatures of the petitioner are found that he had attended all the impugned Board meetings, the petitioner did not attend any meeting and the respondents have used the signatures of the petitioner taken on blank sheets.
5. They further added that allotment of 10,000 shares is not only oppressive to the petitioner but also in violation of the provisions of SEBI Take Over Code. By this allotment, the respondent has taken control over the company which holds 26.2 per cent shares in a listed company. In terms of Regulations, for the respondent to acquire voting rights beyond 15 percent they must have made an open offer thus, any acquisition in violation of Regulation is void and invalid.
6. The petitioner alleged that there are no minutes before this Bench which could be considered to be valid in law and as such should be ignored in addition to all being fabricated.
7. The respondent contended that they were inducted into the Board with the full consent and knowledge of the petitioner Simultaneously, the respondents were also appointed as additional directors in five other companies also which hold shares in Vardhman, with the view that the first respondent should have the control over the shares held by these companies in Vardhman. Therefore, the petitioner cannot now seek removal of these respondents as directors.
8. They further added that the allotment of 10,000 shares could not have been done without amending the memorandum of the company and it has been admitted by the petitioner himself, the memorandum was altered in an Extraordinary General Meeting however, no allotment was done in the same.
9. It was also argued that the petitioner himself held Board meetings of the companies under his control and that a meeting was held exclusively for the purpose of allotting the shares to the respondent group and this meeting was also attended by the petitioner and his wife thus, the doctrine of estoppel is applicable to them.
10. They added that the allegation of the petitioner that he was not aware of the allotment of shares are false as the annual return made as on september 1998 was signed by him and his claim that the Annexures to the annual report were fabricated can also not be accepted as these figures are in the main body of the annual report and not in the Annexures and before signing the annual report, the petitioner should have seen the same.
11. Respondent also argued that the claim that petitioner’s group was in the majority of the company was not correct and the allotment of 10,000 shares cannot be examined in isolation as the facts prevailing before 1998 should also be taken into consideration.
12. They also denied the allegation of signatures being taken on the blank sheets.

Issues involved in the case

The following issue was involved in the case:

1. whether the complaint on allotment of 10,000 shares is time-barred and whether such a single act could be considered as oppression?

Judgment of the case

The Court was of the opinion that because the petitioner claims that the allotment of 10,000 shares has turned his group from a majority to a minority, although being a single act, it will have a continuous and perpetual effect. Even a single act of allotment of shares could be regarded as an act of oppression, based on various precedents.

The court further said that the shares were held by the trust, and since both the petitioner and the respondent were trustees, one of the trustees could not claim over the shares for percentage share computation on the basis of a contingent right to vote arising out of a contingent event of disagreement between the trustees. Any disturbance in the shareholding percentage in a family company, irrespective of the percentage of the shares, could be considered an act of oppression.

The court also stated that the petitioner as a director of the company must have been aware of the finances at the bank account and thus, they must have been aware that the money came from the respondent. When he knew that the money had come from the respondents, he would have also been aware of the purpose of the remittance.

Therefore, the knowledge of the petitioner regarding the allotment cannot be ruled out. The court agreed with the respondent’s claim that the figures are in the main body of the annual report and not in the Annexures and before signing the annual report, the petitioner should have seen the same. Even though a single can amount to the claim of oppression, the court held that upon the analysis of the facts of the instant case, the petitioner must have known about these allotment of shares way before they claimed to have found. Therefore, the petitioner has failed to establish that the allotment of 10,000 shares was without his knowledge and concurrence.

The court however, rejected the contention of the petitioner that the requirements under SEBI TakeOver Code were not complied with as the change in control of the shares within the promoters group is not hit by the provisions of the TakeOver Code.

The court also added that the shareholding of the respondents’ group in that company would go up considerably and in such a situation, the distribution of the shares would be prejudicial to the interest of the petitioner. Therefore, the control of the company would be versed upon the petitioner along with all assets and liabilities of the company.

Analysis of the Judgment in the light of Justice and equity 

The Judgment has reasoned and established the stance of vesting the control of the company on the petitioners along with the assets and liabilities. The court had acted in the light of justice and equity as each and every fact was weighed on the paradigm of the law of the land and the conclusions were averred based upon the fair play and equitable grounds. The judgment cannot be said to have set the precedent however, the legal propositions are still being followed by the various courts.

In Piercy v. S. Mills and Co Ltd the Court said to the effect that “if shares were issued to the public with the immediate object of controlling the greater number of shares in the company and of obtaining the necessary statutory majority for passing a special resolution, then it will not be a valid bona fide exercise of the powers.”

Recently, the case of Ishita Ghosh v. JDS Technologies (P) Ltd, involved allotment of shares resulting in reduction of percentage of shareholding of the petitioner. The Minority shareholder had to exit the company and the Majority shareholders were directed to buy shares at a fair value.

Further in the case of Jayesh Koshambi v. Vighneshwar Air Conditioning (P) Ltd, the company law board held that allotment of shares made with knowledge and consent of the petitioner who signed relevant forms, not to be set aside.

Shareholders’ resolutions cannot be the subject of judicial review, but their timings and the conduct of the majority in passing them can be taken into account for deciding whether the conduct of affairs is in an oppressive manner as held in Pushpa Katoch v. Manu Maharani HotelsLtd.

Conclusion 

The case not only established that a single action can constitute oppression but also observed that as opposed to mere animosity on the side of a minority at being outvoted on an internal policy issue, there must be an unfair abuse of power and a loss of faith in the integrity with which the company’s affairs are managed. It does not include mere domestic disputes between directors and members or lack of confidence between one section of members and another section in the matter of policy or administration.

It is also highlighted that every claim of oppression must be judged based upon the facts and circumstances of individual cases. In certain cases the question arises sometimes which is not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders, in these cases the situation must be decided based upon the equitable grounds.