SP JAIN V. KALINGA TUBES

FACTS

• There were two groups of shareholders led by P and L in the company.
• In an agreement between a person S, P and L, S was allotted shares equal to those held by P and L, and the 3 groups were to have equal measure in the capital and control of the company.
• The company was not a party to this agreement and no change was ever made in the articles thereof to confirm to the agreement, although the company was converted into a public company with the consent of the 3 groups.
• Later, the P and L groups outvoted S in a general meeting in passing a resolution that 39,000 new shares be allotted not to existing shareholders but to outsiders.
• A notice of a general meeting was issued for raising the capital and issuing additional equity shares to outsiders only.
• S filed an application alleging oppression at the hands of the P and L groups who wanted to exclude S and his minority group completely from all control in the company by acquiring 75% voting control therein in breach of the said agreement.

ISSUES

1. Whether the act done by P&L groups leads to oppression?
2. Whether the resolution passed in general meeting valid?

ARGUMENTS FROM PLAINTIFF SIDE

1. The Plaintiff pleads that issue of new share not to existing but to outsider leads to oppression in the hands of majority groups P& L who wanted to exclude minority group from all control in the company by acquiring 75% voting control it was designed for the purpose of completely excluding the appellant from the affairs of the company. That was why the new shares were being offered to outsiders and not to the existing shareholders.

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2. Plaintiff further alleged that Resolution passed in general meeting for allotting shares to outsiders is in contravention with the section 81 and this resolution as well as the hasty allotment were in abuse of the power of the P and L group and oppressive of the minority.

ARGUMENTS FROM DEFENDANT SIDE

1. Defendant said that Oppression must be a continuous process. The mere fact that it was decided at the meeting to offer the new shares to outsiders and not the existing shareholders did not necessarily amount to an oppression of the minority shareholders. The majority shareholders were not bound to accept a proposal of the minority shareholders that the new shares should be allotted only to the existing shareholders.

2. The general meeting having decided that new shares should not be issued to the existing shareholders but to others, there was no contravention of S 81. The company was in need of money for expansion and its ability to obtain a loan from the Finance Corporation depended upon the increase of its subscribed share capital.

JUDGEMENT

It came to the conclusion that no such oppression had been established under S 397 and S 398 as to mismanagement of the Act. The seven persons to whom the new shares were offered were independent person, even though they might be friends of the majority group of shareholders. But there was nothing to show that they were under the control of the majority group and therefore it could not be said that 75 per centum of the voting strength was concentrated in the hands of P& L groups except where these new allottees chose to vote with these groups and the fact that the P and L groups might be able to get the support of the holders of the new shares did not necessarily mean oppression of the appellant, for the new shareholders may support the P and L groups on the ground that such support would be for the benefit of the Company.

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Passing of resolution in the general meeting is not in contravention of S 81 of the Act. The agreement on which the case of oppression was based was not binding even on the private company and much less so on the public company when it came into existence in 1957. It was really an agreement between a non-member and two members of the company and although for some time the agreement was in the main carried out, clearly some of its terms could not be put in the articles of association of the public company as the company was not bound by the agreement.

Judicial precedents

In Re. H. R. Harmer Limited, (1958), it was held that “the word ‘oppressive’ meant burdensome, harsh and wrongful”. S.210 was introduced in the English Act to provide an alternative remedy where it was felt that though a case had been made out on the ground of just and equitable cause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the company was allowed to continue under such directions as the court may consider proper to give.
Scottish Cooperative Wholesale Society v. Mayer (1959), the society created a subsidiary company to enable it to enter in the rayon industry. Subsequently when the need for the subsidiary ceased to exit, the society adopted a policy 0f running down its business which depressed the value of its share. The two petitioners who were managing directors and minority shareholders in the company successfully “oppression”. The court ordered the society to purchase the minority share at the value at which this stood before the oppressive policy started (this decision has been also followed in H.R. Harmer ltd case.

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Elder v. Elder & Western Ltd, (1952), the term Oppression as explained by Lord Cooper “The Essence of the matter seems to be that the conduct complained of should at the lowest, involves visible departure from the standards of fair dealing, on which every shareholder who entrust his money to the company is entitled to rely.

Author: Anjali Thakur,
Gitarattan international business school ip university

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