IN THE HIGH COURT OF ANDHRA PRADESH 

S. RAVI, Advocate, for the appellant. 

VEDULA SRINIVAS, Advocate, for the respondent. 

JUDGMENT 

P. VENKATARAMA REDDI, J. - OSA No. 40 of 1999 is filed by the respondents in Company Petition No. 27 of 1988 and OSA No. 5 of 1996 is filed by the petitioner in the company petition. The respondents in the company petition (appellants in OSA No. 40 of 1999) are aggrieved by the findings of the learned Judge that there was oppressive conduct on the part of the 2nd respondent and his group of shareholders. 

2. The petitioner in the company petition (appellant in OSA No. 5 of 1996) hereinafter referred to as 'petitioner', is aggrieved by the quantum of relief granted by the learned Single Judge while allowing the company petition. It is the contention of the appellant in OSA No. 5 of 1996 that the value of the shares which the respondents were called upon to pay to the appellant was very much on the low side, and that option should have been given to the petitioner-appellant to buy shares. 

3. CP No. 27 of 1988 was filed seeking directions under section 397 and section 398 of the Companies Act to provide relief to the petitioner against the alleged acts of oppression. The petitioner sought an order to invalidate the issuance of additional shares to respondents 2 to 6 on 24.3.1988, to remove the 2nd respondent and respondents 4 to 6 from the posts of managing director and directors, respectively, to direct amendment of articles of association so as to have proportionate representation for the petitioner on the one hand and respondents 2 and 3 on the other hand and lastly, to allow the petitioner to purchase the shares of respondents 3 to 6 to the value fixed by this court. Respondents 3 to 6 are the wife and children of the 2nd respondent. 

4. The 1st respondent in the company petition is the company by name Hillock Hotels (P) Limited, having its registered office at Vishakapatnam. The main object of the company is to carry on the business of hotel, restaurant, lodging, house keepers and to provide places of amusement, recreation, entertainment, etc. 

5. The 1st respondent company was incorporated initially on 13.5.1980 with authorised share capital of Rs. 10 lakhs divided into 1,000 equity shares of Rs. 1,000 each. The subscribed and paid up share capital upto 1988 was Rs. 1,10,000 divided into 110 equity shares of Rs. 1,000 each. Respondents 2 and 3 (husband and wife) who had each subscribed for five shares were the subscribers to the memorandum and articles of association and they became the directors in terms of the articles. The 2nd respondent was nominated as managing director in terms of article 19. The petitioner was inducted as a director in the first meeting of the company held on 7.6.1980, i.e., one month after formation of the company and five shares were allotted to him initially. On 9.3.1981, the petitioner was allotted 45 shares thereby making up the total of 50 shares of the face value of Rs. 50,000. At about the same time, respondents 2 and 3 were also allotted additional shares and they held 25 shares each. Thus, the share-holding of the petitioner and respondents 2 and 3 together were in equal proportion. Two other persons were also allotted shares of five each. On 2.2.1987, 150 additional shares were issued and those shares were allotted to respondents 4 to 6. Thus, respondents 2 to 6 acquired substantial number of shares thereby disturbing the parity in the shareholdings which the petitioner and the respondents 2 and 3 initially had. In 1992, i.e., during the pendency of the company petition, 250 additional shares were allotted to respondents 2 to 6 at 50 each. 

6. Respondent company purchased a plot of land of 1,300 sq. yds., in Vishakapatnam Urban area for the value of Rs. 81,660 on 29.7.1980. At the meeting of the Board of directors held on 6.6.1987, attended by R-2 and R-3 only, it was resolved to issue further shares for raising necessary funds for construction of residential complex. On 3.9.1987, the managing director was requested to take necessary steps to receive the applications for shares in order to proceed with construction activity. Thus, admittedly, the additional share capital was raised for the purpose of constructing a multi-storied residential complex which, it is not in dispute, is not covered by the objects of the company. When the construction was about to be started, the present company petition was filed. 

7. The broad contention of the petitioner has been that the company promoted by the 2nd respondent in association of the petitioner was more or less like a partnership venture with the fundamental postulate that there should be equal participation. But when the land value had gone up, the 2nd respondent managed to allot additional shares for himself and his family members to gain control over the company to the detriment of the petitioner. The 2nd respondent, therefore, betrayed the mutual confidence expected to be maintained. It is also contended that the 2nd respondent without starting the hotel project, took steps to embark upon a totally different venture without the knowledge of the petitioner. These acts according to the petitioner, constituted oppression and, therefore, various reliefs as mentioned supra sought for. 

8. The stand of the 2nd respondent is that the decision taken by the Board of directors to take up construction of residential complex was bona fide and was in the general interest of the company. The petitioner was not taking any interest in the management of the company and was not even attending the meetings inspite of intimation. As finances were required for taking up the construction work, it was decided to raise additional share capital. The allegations of oppression or lack of probity and betrayal of confidence are denied. The 2nd respondent also expressed his willingness to agree for allotment of additional shares now if the petitioner so desires. 

9. The petitioner got examined as PW-1 and the manager of the 1st respondent company was examined on behalf of the respondents as RW-1. 

10. The learned Single Judge framed five issues which are as follows : 

"1. Whether the respondents-company is in the nature of a joint venture partnership between the petitioner and the third respondent ? 

2. Whether the issue of additional share capital in March, 1988, suffers from any illegality and has been done by respondents for their exclusive benefit and is an act of oppression ? 

3. Whether the company has undertaken construction of residential flats and, if so, is it within the scope and authority conferred by the memorandum of association ? 

4. Whether the affairs of the company are being conducted in a manner oppressive to the interests of the petitioner for the reasons mentioned in the petition 

5. What relief to be granted in this petition ? 

11. In a way, the issues 2 to 4 are overlapping. Issues 1 to 4 are held in favour of the petitioner. As regards the 5th issue, the learned Judge calculated the value of 50 shares held by the petitioner and directed the respondents 2 to 6 to pay Rs. two lakhs and acquire his fifty shares and, in default, the petitioner was permitted to move the court for appropriate directions for the purchase of shares of R-2 to R-6 by him. 

12. We have our serious reservations in endorsing the findings reached by the learned Judge vis-a-viz is the first issue that the company in substance was a partnership. Except the fact that the shareholdings were equal at the initial stages of the company, there were only a few outsiders with insignificant share value and the intimate friendship may be an impelling motive to the petitioner to collaborate with the 2nd respondent, prima facie, we are not inclined to think that various criteria adverted to by the learned judge at page 11 of the judgment, are satisfied in the instant case. 

There is no evidence to the effect that the company was formed or continued on the basis of personal relationship involving mutual confidence, nor was there any evidence or pleading that there was an agreement express or implied that the petitioner should actively and in equal measure participate in the business affairs of the company. However, we need not dwell on this aspect at length as we are inclined to concur with the learned Single Judge as regards the finding of oppression. 

13. The learned counsel for the appellants in OSA No. 40 of 1999 (respondents in the CP) assailed the observations and finding of the learned Judge that there was no need to issue additional share capital for any purpose connected with the objects of the company and such a move on the part of the appellant and his group amounted to oppression. It is submitted by the learned counsel for the appellants in OSA No. 40 of 1999 that from the mere fact that the activity of building a residential complex did not fall within the scope of the enumerated objects of the company, the decision taken cannot by itself be construed as an act of oppression as it would ultimately benefit the general body of shareholders. It is pointed out that the memorandum of association could always be altered to take care of the legal requirement. It is further submitted that the petitioner took little or no interest till he nurtured the idea of gaining control over the company after its only assets, i.e., plot of land, considerably appreciated in value. The learned counsel while contending that in any case there were no continuous acts of oppression, called in aid the principle that an isolated act of oppression or lack of fairness is not a sufficient ground to grant relief under section 397. 

14. We are unable to agree with the contentions of the learned counsel for respondents in company petition though plausible they are. It cannot be gainsaid that the move to raise additional share capital that too with a view to embark upon a venture not contemplated by the objects for which the company was incorporated, is a very significant and crucial move. The definite case of the petitioner has been that he was not made aware of such move and had no knowledge that the meeting of Board of directors held in June and September, 1987, was being convened for that purpose. The petitioner stated in his evidence that he was not invited for the Board's meeting where decision to issue additional shares was taken. The witness for the respondents RW-1 admitted that at the time of increase of the capital in the year 1987, no shares were offered to the petitioner. Even for the shares allotted during the pendency of the company petition, there is nothing to show that any offer was made to the petitioner. True, as pointed out by the learned counsel for the petitioner, the learned Single Judge found that there was an admission of the petitioner that he was receiving the intimations of meetings by telephone. On the basis of this so-called admission, the learned Single Judge skipped the discussion on the issue by observing that the question whether the petitioner was given notices cannot be decided as there was no adequate material one way or the other. But we are of the view that the admission referred to supra cannot be stretched too far. It does not mean that the petitioner was having notice of crucial meetings held on 6.6.1987 and 3.9.1987. It is not the case of the respondents that written intimation of the meeting and the agenda was sent to the petitioner in advance or at least the details of agenda were notified to the petitioner even orally. There is no good reason nor explanation for by-passing the prescribed procedure of sending the notices of meeting in advance, that too when an important aspect having a great bearing on the future affairs of the company, was going to be discussed. The irresistible inference that needs to be drawn is that 2nd respondent deliberately kept the petitioner in dark about the proposed raising of share capital, that too, to finance a new line of business. The fact that the 2nd respondent followed up the decision taken on 3.9.1987 by allotting the additional shares to his kith and kin without even apprising the petitioner of the decision, is a further pointer of his design to gain control over the company to the exclusion of the petitioner. The court has to take into account the overall picture emerging from the undisputed facts and the evidence on record. The least that can be said is that the petitioner who was having equal stake in the company and was associated with the company from the beginning was given a raw deal when it came to the question of allotting the additional share capital. He was not put on due notice of the proposed allotment of additional shares, nor about the change of business activity. The arbitrary and unfair acts of the 2nd respondent would undoubtedly tantamount to acts of oppression within the meaning of section 397. The effect of such act is to be felt not just on one day or for some days, but it had continuing repercussions. In other words, the potential of oppression casts a shadow over the affairs of the company all the time to come. 

15. We cannot but conclude that by issuing shares in favour of the family members of the 2nd respondent without the knowledge of the petitioner, respondents 2 and 3 have forsaken the fiduciary position as directors and exercised their power for extraneous purposes with the predominant object of gaining control over the affairs of the company and for benefiting themselves and their children. It is true, as pointed by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC): AIR 1981 SC 1298, the mere fact that by the issue of shares, the directors incidentally acquire control over the company, does not amount to abuse of their fiduciary power. But that is not the case here. The power has been exercised for extraneous reasons for the self-aggrandisement of respondent 2 and his family and such exercise of power is a taboo, as observed in that very decision. 

16. We, therefore, agree with the finding of the learned Single Judge on issue No. 4 read with issues 2 and 3, though for somewhat different reasons. We, therefore, dismiss O.S.A. No. 40 of 1999 filed by respondents in the company petition. 

17. The next contentious issue is about the relief granted by the learned judge. As already noted, the appeal - OSA No. 5 of 1996 filed by the petitioner in the company petition is directed against this part of the order. The learned Judge having held that the affairs of the company were being conducted by the majority shareholders in a manner oppressive to the petitioner and that there were sufficient grounds to wind up the company came to the conclusion that winding up order will unfairly prejudice the petitioner and, therefore, thought it fit to grant relief under section 402 (b) of the Companies Act, which enables the court to make an order for the purchase of the shares of any member of the company by other members thereof or by the company. As it is nobody's case that the company should be wound up, the learned judge rightly concentrated on the question on what terms the order should be passed under section 402 (b). The learned judge following the dicta of Lord Denning speaking for the House of Lords in Scottish Cooperative Wholesale Society Ltd. v. Meyer (1959) 29 Comp Cas 1 (HL), and the guiding principle laid down in the case of Bird Precision Bellows Ltd., Re, (1985) 3 Comp LJ 429 (Ch D) : 1985) 3 All ER 523 (Ch D) took the view that the oppressor should be directed to buy the shares at a fair price and the value of such shares on the date of the petition should be the determining criterion. 

18. The learned Judge commented that the normal rule is that the oppressor has to buy the shares of the oppressed shareholders though in exceptional circumstances such as those obtaining CP No. 8 of 1981 (decided by Jeevan Reddy, J., on 10.6.1988), the oppressed shareholders could be directed to buy the shares of the oppressor. The view of House of Lords in Scottish Cooperative Society, supra, was followed by a Division Bench of Calcutta High Court in, Ramashankar Prasad v. Sindhri Iron Foundry, (P) Ltd. (1966) 1 Comp LJ 31b (Cal) : AIR 1966 Cal 512. In that case, an auditor was appointed to find out the value of shares at the date of the petition and it was further directed that the respondents who were found to be oppressors should buy the shares of the petitioners. The said decision of the Calcutta High Court was cited with approval recently by a Division Bench of this court consisting of U. C. Banerji, C.J. (as he then was) and Bilai Nazki, J., in R. Khemka v. Deccan Enterprises (P) Ltd. (1999) 1 Comp LJ 206 (AP) : (1999) 1 ALT 628. The view taken by the learned Single Judge in the impugned judgment cannot, therefore, be said to be erroneous. True, as pointed out by the learned counsel for the petitioner (appellant in OSA No. 5/96), what was laid down by Lord Denning in Scottish Cooperative Society case is not a hard and fast rule. Apart from the decision of Jeevan Reddy, J., referred to by the learned Single Judge, our attention has been drawn to the observations of A. N. Sen, J., in Tea Brokers (P) Ltd. v. Hemendra Prasad Barooah (Appeal No. 186 of 1971) (1998) 5 Comp LJ 463 (Cal). It was observed therein that the decision of House of Lords in Scottish Cooperative Society case is not an authority for the proposition that whichever party comes to the court complaining acts of oppression by the opposite party, applicant party must always be directed to sell the shares to the party who commits the acts of oppression. We are also of the view that no such inflexible proposition can be laid down. Even then, we do not think that this is an exceptional case which calls for departure from the normal rule enunciated in Scottish Cooperative Society case. The deposition of PW-1 referred to by the learned Judge in the concluding part of the judgment makes it clear that petitioner expressed his willingness at one point of time to withdraw the company petition if the respondents paid half of the land value. The second point to be taken note of is that the petitioner ought to blame himself partly for the situation in which he landed himself. He should have taken more interest in the affairs of the company and should have been more vigilant. This conduct of the petitioner disentitles him to the relief which he sought for, viz., that he should be allowed to purchase the shares of respondents 2 and 3. 

19. The next aspect pertains to the mode of valuation. As already seen, the value of share that would be fetched at the date of the petition was the criterion applied in Scottish Cooperative Wholesale Society's case and reiterated in Ramashanker Prasad's case (1966) 1 Comp LJ 310 (Cal), supra, which in turn was referred to with approval by the Division Bench of this court in Khemka's case (1999) 1 Comp LJ 206 (AP), supra. The learned Judge however took the relevant date as the date on which the additional share capital was issued. The relevant date was, therefore, taken as 1.12.1987 for the purpose of estimation of share value. Whether the date 1.12.1987 is taken as the relevant date or the date of filing of the petition, i.e., 18.4.1988, is taken as the relevant date, it does not make much of difference. The time gap is only five months. In fact, the learned Judge actually estimated the share value obtaining during the year 1987-1988. 

20. The next question is about the valuation of shares. It is not in dispute that having regard to the fact that the only asset of this non-functioning company is that land and there are practically no liabilities, the share value could be related to the land value. The learned Judge rightly observed that notwithstanding the book value of the land being Rs. 91,193 as per the latest balance sheet, it is legitimate to take into account the market value of the land. To avoid further delay in this old matter, the learned Judge did not deem it expedient to have the shares valued by a chartered accountant. The learned Judge is quite right in saying so. The value of the land of 1,361 sq. yds. was fixed at Rs.8,02,990. On that basis, the value of 50 shares was computed at Rs. 3,64,950. Having arrived at that figure, the learned Judge scaled it down to Rs. 2 lakhs and it is this amount of Rs. two lakhs that was directed to be paid by respondents 2 to 6. In scaling down the amount, the only reason given by the learned Judge was that as per the deposition of PW-1, R-2 sent a word that he was willing to pay Rs. two lakhs, if he withdrew the company petition. But PW-1 insisted on half the value of the land to be paid. The learned Judge then remarked that the actual value of the land as on 1.12.1987 was not mentioned in the deposition. The learned Judge, without any further discussion, accepted the suggestion of the learned counsel for respondents that Rs. two lakhs can be taken as the reasonable amount. With respect, we do not find sufficient basis for reducing the value of Rs. 3.65 lakhs to Rs. 2 lakhs. The unfructified offer given by the 2nd respondent cannot form the basis for valuing the land and the shares. 

21. The learned Judge took note of the fact that as per the version of RW-1 himself, the company purchased another plot of land of an extent of 1,016 sq. yds., close to the land in question in March, 1992, at the rate of Rs. 787 per sq. yd. In order to arrive at the value in 1987-88, the learned judge made a proportionate reduction by applying the cost of inflation index notified by the Central Government for the purpose of computation of capital gains. Resultantly, the value of 1,361 sq. yds., at the date of filing the petition was fixed at Rs. 8,02,990. On that basis, the value of 50 shares was computed at Rs. 3,64,950. We find no good reason to depart from this value adopted by the learned Judge. 

22. However, as already observed, we disapprove the unwarranted reduction in the estimated share value. We are also of the view that the petitioner-appellant should legitimately get something more than this amount. The order of the learned Single Judge was passed in January, 1996. Having regard to the time lag and costs that would have been incurred by the petitioner in pursuing this protracted litigation, we consider it just and proper to fix the amount to be paid to the petitioner by respondents 2 to 6 at Rs. 4 lakhs instead of Rs. 2 lakhs. We may mention that in the course of arguments, the learned counsel for the respondents stated that the respondents in order to avoid further litigation will be willing to pay Rs. 4 lakhs to the petitioner in full settlement. However, as there was no compromise on that basis, the case was again heard oil merits. 

23. We, therefore, modify the order of the learned Single Judge by directing payment of Rs. 4 lakhs instead of Rs. 2 lakhs. The 2nd respondent may deposit the amount in a bank with instructions to the banker to pay the amount to the petitioner (appellant in OSA No. 5 of 1996) on the petitioner producing before the officer of the bank the share transfer forms and other documents necessary to effectuate the transfer of shares. The respondents shall deposit the same within a period of one month and send an intimation to the petitioner as well as the petitioner's counsel by registered post. In case neither party fulfils the obligations following this order, it is open to the aggrieved party to seek further directions from the court. 

24. In the result, OSA No. 40 of 1999 is dismissed and OSA No. 5 of 1996 is allowed to the extent indicated above. We make no order as to costs.