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Raghunath Swarup Mathur And Ors. vs Har Swarup Mathur And Ors. on 18 November, 1969

Allahabad High Court

Raghunath Swarup Mathur And Ors. vs Har Swarup Mathur And Ors. on 18 November, 1969

Equivalent citations: 1970 40 CompCas 282 All

Author: M Beg

Bench: M Beg


1. Raghunath Swarup Mathur and his four sons are the petitioners before this court under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as the Act). The petitioners fulfil the requirements of Section 399 of the Act for filing a petition under Sections 397/398 of the Act as they hold more than one-tenth of the paid up capital of the Co-operative Co. Ltd., Nawabganj, Saharanpur, which is the company involved here. The petitioners allege that the first three opposite parties, Har Swarup Mathur and Kishan Swarup Mathur and Jagroop Swarup Mathur, the real brothers of petitioner No. 1, control the affairs of the co-operative company and that the three opposite parties Nos. 4 to 6--Hari Mohan Mathur and R.P. Mathur and K.K. Bhartari--are mere puppets in their hands. M/s. Shyam K. Gupta Company, Auditors, opposite party No. 7, have been impleaded by the petitioners on the allegation that they have been colluding in concealing irregularities and frauds of opposite parties Nos. 1 to 3. The Central Government, opposite party No. 9, is probably impleaded only because Section 400 of the Act requires a notice of such a petition to be sent to the Central Government. The real targets of the attack of the petitioners are the three opposite parties, who according to the petitioners, have functioned in various capacities contrary to the provisions of the Act and realised salaries illegally from the company. The petitioners also allege that the three opposite parties are defrauding the company, misappropriating funds, and embezzling money.

2. So far as H.S. Mathur, opposite party No. 1, the former managing director, is concerned, it is in evidence that a suit was filed by the company for the recovery of Rs. 15,621 from him on the ground that he had illegally drawn Rs. 825 as salary as a managing director from April 1, 1961, to October 27, 1962, without obtaining either the sanction of the Central Government as required by Section 269(2) of the Act, or the sanction of the company under Section 317 of the Act. Another ground on which the amount was alleged to have been illegally paid to him is that the company made no profits from March, 1961, to March, 1962, so that the opposite party was said to be bound to refund the amount under Section 309(5) of the Act because his appointment did not have the approval of the Central Government under Section 198(4) of the Act. This claim, however, having formed the subject-matter of a suit by the company which was dismissed by the Civil Judge, Saharanpur, the case of the contesting opposite parties is that the suit was rightly dismissed as the salary was paid to the opposite party No. 1 after obtaining the required sanction under the law and that no appeal was filed as the decision of the civil judge was correct. The petitioners alleged that the suit was dismissed owing to collusion between the contesting opposite parties. In other words, the petitioners want to reopen the case by means of this petition on vague allegations of fraud and collusion of which particulars are wanting to sustain the plea.

3. Another ground of attack against the opposite party No. 1 is that the accounts were not kept properly during his term of office as managing director and that the audit reports from 1959 to 1962 and a letter written by the Registrar of Companies, U.P., dated March 16, 1963 (annexure " D ") show that " there were embezzlements and corruption on a large scale." No audit report supports a charge of this character. Indeed, the petitioners have themselves alleged that the auditors are colluding with the contesting opposite parties to whitewash and conceal the contesting opposite parties' illegal acts. A perusal of a copy of the above-mentioned letter, filed by the petitioners themselves, shows that the Registrar had asked for information and accounts on the ground that accounts had not been properly maintained, as required by Section 209 of the Act. This information was required to be furnished within ten days of the receipt of the letter. There is no mention there of any embezzlement, corruption or fraud. The letter also indicates that the appointments of K.S. Mathur, opposite party No. 2, either as general manager or as secretary, being irregular for contravening the provisions of Sections 310 and 314, the company was required to give information about the steps taken to obtain refund of excess payments. Information was also required to be given, within ten days, whether steps had been taken to regularise increase of the sitting fees of directors from Rs. 25 to Rs. 100 per meeting by obtaining the approval of the Central Government under Section 310 of the Act or to show that the excess amount paid had been refunded.

4. The only specific item mentioned by the petitioners of alleged embezzlement is that an annual expenditure of fuel was shown as ranging from Rs. 7,000 to about Rs. 14,000 in different years whereas it was said to be always less than Rs. 100 every year. It was, however, stated in the petition that, in the balance sheet, the expenditure for fuel had been shown as amalgamated in subsequent years with expenditure for "steam coal ". The counter-affidavit of the contesting opposite parties shows that they furnished details of all expenditure to the Registrar, but, as the Registrar was not satisfied, the company was prosecuted under Sections 216 and 218 of the Act for failure to furnish information from 1958 to 1961 and that the managing director was convicted. As regards the alleged expenditure on the specific item of fuel, the contesting opposite parties ascertained that it was always correctly shown and that large variations in the amount shown were due to substitution of coal in place of other fuel in subsequent years. Apparently, only the other fuel was shown separately as " fuel " in some years and the petitioners have picked upon this item due to the resulting confusion. Another ground taken is that petitioner No. 1 filed a complaint against opposite parties Nos. 1 and 2 under Sections 465/477A, Indian Penal Code, for falsification of the attendance register, but the petitioners themselves state that this case was compromised on 15th March, 1963.

5. Similar allegations are made against K.S. Mathur and J.S. Mathur, opposite parties Nos. 2 and 3. The allegations are either, unsupported by particulars or relate to some irregularity which had already been the subject-matter of attention of the Registrar of Companies or the Company Law Board so that the irregularity was either cured or condoned. And, once, the managing director was actually convicted, as already mentioned, for infringement of Sections 216/218 of the Act. The allegation against K.S. Mathur, opposite party No. 2, in particular, was that expenses on office and administration by him and on repairs and maintenance were excessive. This allegation is also controverted by the contesting opposite parties. The correctness of the allegation that the balance-sheet ending March, 1964, did not show the purchase of any machinery or plant, whereas the addition of Rs. 8,055.37 is shown in purchases, is also denied by the contesting opposite parties. The allegations relating to particular heads of expenditure as unjustified or incorrect are vague and general. No specific instances or details of falsification of accounts with regard to particular transactions could be furnished. Every allegation, whether in relation to any particular head of expenditure or of a more general and sweeping character, is met by a counter assertion so that it is not possible to determine which version is true without an elaborate and detailed examination of the accounts and taking of evidence including oral evidence.

6. The allegation that the auditors have been colluding or conspiring with the contesting opposite parties has not been substantiated. It is significant that, among the charges levelled by the petitioners against the contesting opposite parties, is that writ petitions were filed in this court by them as well as in the Supreme Court against the reinstatement of petitioner No. 1 as ordered by the Labour Court, Meerut, and these were ultimately dismissed. The contesting opposite parties alleged that petitioner No. 1, who had also been employed by the company, was dismissed for insubordination and want of efficiency as an engineer employed by the company. The contesting opposite parties also alleged that the petitioners were disappointed at the results of the election of directors at a general meeting of the company held on 30th of September, 1965. Among the grounds of the petition, taken in paragraph 18, is that elections of opposite party No. 1 as director and opposite party No. 2 as managing director were illegal and that the minutes of the meeting had been fabricated.

7. On the above-mentioned allegations, the petitioners have prayed for the removal of opposite party No. 2 from the office of the managing director and of the other contesting opposite parties from directorship of the company. They pray that petitioner No. 1 may be appointed the managing director and that the other directors may be chosen by this court from amongst the petitioners or other shareholders " as this hon'ble court may deem fit and proper ". They ask for orders directing opposite party No. 1 to refund a sum Rs. 15,021 paid to him from April 1, 1961, to February 27, 1962, and the alleged excess of managerial remuneration paid to opposite parties Nos. 2 and 3 from April 1, 1961, up to the date of the petition on the ground that these payments violated Sections 198 and 309 of the Companies Act. They also pray that opposite parties Nos. 1 to 3 " be forbidden to hold any office of profit in the company along with respondents Nos. 4, 5 and 6 ". Furthermore, petitioner No. 1 has claimed compensation for loss of pay due to illegal termination of his service and the award of gratuity to him " when due for his 25 years or more of service " and also that he be reinstated in his post. The petitioners have also applied, presumably as one of the alternative modes of relief, for the appointment of an investigating officer to examine the affairs of the company with regard to the alleged mismanagement and " bungling" of accounts and embezzlement and to assess the loss to the company from the activities of the opposite parties Nos. 1 to 6, and, it is prayed, that such of the opposite parties as are " found responsible " be ordered to be prosecuted in a court of law.

8. It is evident from the allegations of the two sides, and, particularly from the reliefs claimed, that the petitioners' whole object is that this court should interfere with the internal management of the company and set right the alleged mismanagement by appointing petitioners and others of their liking to manage the company in place of the contesting opposite parties, who should, according to the petitioners, be punished for their alleged misdeeds. The case of the contesting opposite parties, on the other hand, is that the petition is a mala fide attempt by disgruntled and outvoted individuals to injure the company for fanciful wrongs alleged to have been done to them. They allege that the petitioners' sole object is that the management of the company should be handed over to an outvoted minority of shareholders led by the first petitioner, a former employee of the company and the father of the other petitioners. The circumstances in which the petition is made, some of the allegations made in it, and the reliefs claimed in it certainly indicate that the motives of the petitioners may be questionable. It may be that the dominant object of the petitioners is to secure control of the company and to punish the contesting opposite parties for actions which are not liked by the petitioners whose personal interests are injured. Nevertheless, if a case for any order under either Section 397 or Section 398 of the Act is made out, the petitioners' motives or objects will not matter.

9. Section 397 of the Act undoubtedly empowers this court to make such orders " as it thinks fit" but only " with a view to bringing to an end the matters complained of". The matters complained of must be proved to establish : " (a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up." It is, therefore, an essential prerequisite for a petitioner under Section 397 of the Act to prove that, apart from any prejudice to the interests of members, a winding up order would be justified in equity. Although, grounds of justice and equity elude categorisation and must necessarily be left to be decided on the particular facts of each case, yet, well recognised tests have to be applied in deciding what they are, and the language used in Section 397 indicates that just and equitable grounds for a winding up must not only exist, but they must be sufficiently compelling so as to " justify" a winding up order.
10. Section 443(2) of the Act makes it clear that the court may refuse to exercise its discretionary power to order a winding up on the ground that it is  just  and  equitable  to  do  so  if more  suitable  alternative remedy for obtaining relief is there.   

It enacts : " Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy." 

11. Indeed, the principle that the existence of a more efficacious alternative mode of relief, which could be adopted, justifies refusal to exercise the discretionary power invoked is of more general application. It applies to other kinds of discretionary powers. It will be observed that powers contained in both Sections 397 and 398 of the Act are discretionary. 
12. Section 398 of the Act does not contain the express restriction, found in Section 397 of the Act, that facts proved must justify a winding up order. It is, therefore, difficult to see the object of putting cases of existing injury to public interest in Section 397 as well as in Section 398. It was enough to put such cases in Section 398, the range of which is not confined to cases in which winding up orders would be justified. In cases falling under Section 398(1)(b), action can be taken to prevent even likelihood of injury in future either to the interests of a company or to public interest. But, in so far as powers under Section 397 as well as Section 398 are discretionary, the principle is equally applicable to both that the exercise of such power should be refused where a more suitable or efficacious means of redress is open to a complainant. Another rule, flowing from the very nature of powers under Sections 397 and 398 of the Act, is that interference with internal management of companies should take place only on good and compelling grounds.

13. Learned counsel for the contesting opposite parties relied on Smt. Soma Vati Devi Chand v. Krishna Sugar Mills Ltd., A.I.R. 1966 Punj. 44 to contend that the jurisdiction of the court, under Sections 397 and 398 of the Act, described as " summary " by the learned counsel, does not extend to determination of contested questions of fact requiring " investigation ". The case cited deals with the jurisdiction of the court under Section 155 of the Act relating to rectification of register of members. The principle contained there is not applicable to the wide equitable jurisdiction conferred by Sections 397 and 398 of the Act. If courts have refused to enter into contested questions of fact in proceedings under Sections 397 and 398, it is not because there is a limitation upon the jurisdiction of the court confining it to uncontested questions of fact. Indeed, such a restriction upon the powers of the court would defeat the very object of a remedial power which can rarely be exercised without contest on facts. But, inasmuch as the jurisdiction of the court under the Act is, as a matter of practice and generally applied rules, exercised on the basis of evidence tendered through affidavits, it is possible to refuse the exercise of discretionary power on the ground that more detailed and necessary oral and documentary evidence can be conveniently produced in another type of proceeding which may be available on the facts of a particular case. Exceptional cases can, however, arise in which detailed adduction of oral and documentary evidence, in proceedings under Sections 397 and 398 of the Act, maybe the only way of administering justice efficaciously.

14. In In re Bengal Luxmi Cotton Mills Ltd., [1965] 35 Comp. Cas. 187, 213 the Calcutta High Court refused to exercise its jurisdiction on the ground that suits already filed, in which detailed evidence could be led on contested questions of fact, were more suitable, in the circumstances of the particular case, than " summary " proceedings under Sections 397 and 398 of the Act, in which evidence by affidavits is given, for trial of questions raised. It, however, indicated that if suits had not been already filed, the position may have been different. It did not deny itself the jurisdiction to try contested questions of fact by adduction of detailed evidence if the suits had not been filed. In other words, it applied a rule applicable to exercise of discretionary power, but, as the jurisdiction to embark on an elaborate inquiry, if justified by the circumstances of the case, was there, I doubt, with great respect, whether the jurisdiction can be correctly described as a "summary " jurisdiction.

15. In K.R.S. Narayana Iyengar v. T.A. Mani, A.I.R. 1960 Mad. 338 Ramaswami J. pointed out, by a reference to legislative history, that the object of Sections 397 and 398 of the Act, was to arm courts with power to prevent winding up orders by imposing solutions upon the company in cases where, in the absence of such provisions, there could be no alternative to winding up. In Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., [1964] 34 Comp. Cas. 777 ; A.I.R. 1965 Guj. 96 Bhagwati J. interpreted Sections 397 and 398 of the Act as meant primarily for preventive action against continuing wrongs under which past or concluded transactions could be set aside only in exceptional cases where past transactions formed the basis of or were inseparably linked up with a continuing wrong. In Bengal Luxmi Cotton Mills case B.C. Mitra J. went so far as to hold that : " ......to make an order under Section 397 or Section 398 on the ground that a criminal complaint has been made against the directors or even on the ground that the directors had been convicted of a criminal offence, would be introducing into the law relating to companies, matters which are entirely foreign to company law and administration, and beyond the ambit of the jurisdiction which this court exercises."

16. What the learned judge really meant seemed to be that powers of the court under Sections 397 and 398 of the Act were neither intended to operate as substitutes for punitive criminal proceedings nor could be invoked solely because the directors of a company had made themselves criminally liable to be prosecuted.

17. In Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 35 Comp. Cas. 351 ; A.I.R. 1965 S.C. 1535 the Supreme Court had occasion to consider the scope of Sections 397 and 398 of the Act before the amendments of both these sections in 1963. As regards Section 397 of the Act, it quoted with approval the views expressed by English courts, on the corresponding Section 210 of the English Companies Act of 1948, which were held to be applicable here. The cases cited were : Elder v. Elder and Watson [1952] S.C. 49., George Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954] S.C. 381., Scottish Co-operative Wholesale Society Ltd. v. Meyer(4) [1959] A.C. 324; [1958] 3 All E.R. 404; [1959] 29 Comp. Cas. 1 (H.L.). (Meyer's case in appeal in the House of Lords) and In re H.R. Harmer Ltd., [1959] I W.L.R. 62 ; [1959] 29 Comp. Cas. 305 (C.A.). Their Lordships of our Supreme Court pointed out, inter alia (page 364) : " The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted ; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders."

They also said (page 366) :

" The circumstances must be such as to warrant the inference that 'there has 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'. "

18. Mere lack of confidence and differences between two groups were insufficient for action under Section 397. After considering the scope of Section 398, their Lordships held (page 375) :

" On such application being made, if the court 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 matter of management or control of a company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. This section only comes into play, as the marginal note shows, when there is actual mismanagement or apprehension of mismanagement of the affairs of the company. It may be contrasted with Section 397 which deals with oppression to the minority shareholders, whether there is prejudice to the company or not. "

19. As already observed by me, after the amendments of Sections 397 and 398 in 1963, prejudice to public interest can form a ground of action either under Section 397 or under Section 398 of the Act. The scope of remedial action under either of the two sections could be said to have become more extended as a result. Nevertheless, the powers vested in the court continue to be discretionary and are designed for removal of an existing and not past oppressive or prejudicial course of conduct of the affairs of the company. They are, in my opinion, primarily intended for preventive purposes. The object of the exercise of these powers is either to prevent a winding up or to remove the continuation of harm or reasonable probability of injury to the interests of the company or to the wider public interests. Past acts and transactions may either afford evidence of what may be reasonably apprehended in future or may have to be undone only to prevent or remove what had wrongfully originated in the past but continues to exist and provides a sustainable cause of action at the time when the petition is filed. Purely punitive action, as distinct from preventive remedial action, does not fall directly within the purview of these provisions although certain forms of punitive action, such as those mentioned in Schedule XI, which is applied by Section 406 of the Act to proceedings under Sections 397 and 398 of the Act, may indirectly result from them. Although the amplitude of the remedial powers of the court, under Sections 397 and 398, should not be curtailed in such way as to hamper the jurisdiction to suppress the mischiefs aimed at, yet, the court has to be careful and astute enough to prevent a misuse of the provisions of Sections 397 and 398 by a party, lest a remedy proposed and adopted to overcome an alleged mischief becomes a source of greater oppression and harm than the one sought to be removed or prevented.

20. The petition before me may now be examined in the light of the foregoing discussion of the law applicable to such petitions. It would not be unfair to describe the petition, in substance, as little more than a catalogue of charges for past alleged misdeeds of the first three opposite parties. The charges against opposite party No. 1, the former managing director, relate to the period in which he served the company in that capacity and begin with : " That Shri H.S. Mathur, respondent No. 1, is unfit to act as a director on the following grounds." The subject-matter of these charges has already been mentiond above. Similarly, charges against opposite parties Nos. 2 and 3 set out their past acts as grounds of their unfitness to act as the managing director and director respectively. Sections 397 and 398 of the Act are not meant for such purely punitive action.

21. As regards the claims of petitioner No. 1, as a former employee of the company, the petitioners only disclosed, in the petition, that the company had filed writ petitions against the orders of a labour court reinstating the petitioner, which were dismissed. But, other facts, that petitioner No. 1 had to subsequently retire, having attained the age of superannuation, that there was an arbitration award on the dispute arising between the parties on this question and on the claim for gratuity, and: that a writ petition directed against that award was dismissed by this court, were revealed by the opposite parties. The claims of petitioner No. 1, made in his capacity as a former employee only, who had worked as an engineer of the company, for an order of reinstatement and payment of gratuity to him, are not only shown to be concluded by previous orders in other proceedings but are utterly misplaced in proceedings under Sections 397 and 398 of the Act which are only open to a member as a shareholder of the company. Such claims have nothing to do with claims for relief against any unfair or unjustifiable agreements which may have to be set aside or modified, under Section 402(d) and (e) of the Act, as necessary consequences of orders under Sections 397 and 398 of the Act.

22. A glance at the representations filed on behalf of the Central Government, under Section 400 of the Act, shows that the claims for refund of salaries paid to opposite parties alleged to have been irregularly appointed without sanction of the Central Government, are also not well founded as the company either obtained the required approval or the excess payments were refunded. No question of setting aside a decree of a civil court, dismissing any such claim, could arise on the allegations of any fraud or collusion in such a case. The Central Government also seemed satisfied with the auditors' reports on the company's balance-sheets which, according to its representations dated November 28, 1967, were not adverse or qualified reports for the two preceding years.

23. Several issues, including those on the alleged unfitness of each of the three opposite parties to act as directors, were framed in this case. The petitioners were given full opportunity, under the orders of this court, to examine the records of the company, under the supervision of a commissioner, so as to provide particulars of alleged " embezzlements and corruption " and mismanagement. They could do nothing more than to cite four audit reports, for the years 1960-61, 1961-62, 1962-63 and 1963-64, of which copies were filed, revealing certain irregularities and defects, which were certainly brought out, in accounts kept and expenses shown as incurred, during the term of office of the opposite party No. 1, as managing director, which lasted until 1965. Therefore, after hearing arguments of both sides at some length, the first and preliminary issue in the case was reframed as follows : " On allegations made by both sides and the material on record is this a fit case for any order either under Section 397 or Section 398 of the Companies Act ?"

24. The preliminary issue was reframed so as to embrace matters covered by other issues also. It did not seem necessary to decide any other issue before deciding this issue. Mr. P.C. Srivastava, learned counsel for the petitioners, who obtained time for further preparation of arguments of this issue, put in considerable industry and argued the case for his clients with commendable fairness and ability. He was, however, unable to convince me that any order, either under Section 397 or Section 398 of the Act, could be passed by this court in this case.

25. Those complaints of the petitioners against the conduct of the affairs of the company by the contesting opposite parties which could be supported by some particulars relate to a period before September 30, 1965, when a new managing director was elected. The petition in this court was filed on August 23, 1967. Delay, if considerable and unexplained, is enough to defeat equities and to justify a refusal to exercise discretionary powers. In this case, delay is both considerable and unexplained so far as any question of giving relief against the alleged mismanagement before September 30, 1965, is concerned. Moreover, alleged mismanagement up to 1965 could not, as already indicated, be said to be even relevant unless reasonably correlated to a prospect of mismanagement in and after 1967.

26. The only past transaction or event which could be said to affect the present and future management of the company was the election at the general meeting of the company held on September 30, 1965. The petitioners allege that only fourteen members were present at it. A copy of the minutes (annexure "M " to the counter-affidavit) shows that fifteen out of twenty-five members were present. The petitioners allege that proxies were not allowed to be utilised at the meeting. The minutes disclose that ten members voted through proxies. The election of opposite party No. 1 as director was challenged on the ground that his proposer, Hari Mohan Mathur, opposite party No. 4, who is admitted to be a shareholder, had no right to propose a name for the office of a director. This objection appears to be utterly baseless. At least nothing was shown to substantiate the objection. It was also alleged that opposite party No. 2 received only two votes in his favour when he stood for directorship and that two votes were cast against him. This is clearly contradicted by the minutes of the meeting. It is also inconsistent with the petitioners' allegation about the contesting opposite parties' control over a number of members which certainly exceeds two. The copy of the minutes of the meeting also discloses that petitioner No. 1 was present and stood for election to the office of a director but failed and left the meeting without signing the minutes. The petitioners allege that entries in the minutes book are false. But, they have not filed affidavits of any other members present at the meeting. And, they waited for nearly two years, during which another general meeting and fresh elections of directors had taken place, before applying to this court. They could not, therefore, be held to have made out a case for believing that the contesting opposite parties are not legally authorised to conduct the affairs of the company.

27. The minutes of the general meeting of September 30, 1965, show that a dividend of 20% was declared for the year ending March 31, 1965. The counter-affidavit filed on behalf of the petitioners, together with the replies in the rejoinder-affidavit, show that, whatever may have been the position in the past, the company is carrying on a profitable business now. Even if some "bungling ", as the petitioners call it, had taken place in the keeping of accounts in the past, this would not justify a winding up order. As the Supreme Court pointed out in Rajahmundry Electric Supply Corporation Ltd. v. Nageswara Rao, [1956] 26 Comp. Cas. 91; A.I.R. 1956 S.C. 213 proof of some mismanagement, even if it extends to misappropriation of funds by directors, may not justify a winding up order where the company is a sound profit earning concern. The reason for this is clear. The proper remedy in such cases lies in suitable proceedings against delinquent directors and not by a winding up order which is directed against the company. In the instant case, neither an " oppression" of a minority nor circumstances justifying a winding up could be established. Therefore, Section 397 of the Act would not apply. And, as the contested charges of some mismanagement in the past, even if proved, are not enough to establish an existing injury to the interests of the company or to public interest, or, the likelihood of such injury in future, no action under Section 398 of the Act can be taken.

28. Before concluding, I may indicate a procedure which could, in appropriate cases, be held to be a necessary prelude to proceedings under Sections 397 and 398. Sections 235 to 237 of the Act empower the Central Government to appoint one or more inspectors to investigate the affairs of a company and to submit a report, which is made legally admissible evidence, by Section 246 of the Act, in proceedings before a court of law. Such a report could provide the basis of action by the Central Government against a company under either Section 397 or Section 398 of the Act, as laid down by Section 243 of the Act, or, for recovery of damages in respect of any fraud, misfeasance, or other misconduct in the management of the company's affairs, where this is necessary in public interest, as provided by Section 244 of the Act. It could, therefore, be urged, in cases where a detailed inquiry into the conduct of the affairs of a company is called for, that a petition under either Section 397 or Section 398 of the Act, without applying for such an inquiry, under Section 236 of the Act, is premature.

29. Learned counsel for the petitioners contended that this is a fit case in which at least a declaration by order of this court, under Section 237(a)(ii) of the Act, that an investigation by an inspector is needed, is called for. After having considered this submission seriously, I have reached the conclusion that, although such a declaration may be made in a case under either Section 397 or Section 398 of the Act which cannot be properly proceeded with or satisfactorily decided without an investigation by an inspector or by inspectors, it should not be given where, after considering the merits of a case, proceedings under either Section 397 or Section 398 do not appear to be sustainable. As I am of opinion, for the reasons given above, that neither a case of " oppression" in the sense understood in law, falling within Section 397 of the Act, nor one of mismanagement, such as that contemplated by Section 398 of the Act, calling for any action now under Section 398 against the company or against any of its directors or shareholders, is maintainable on facts and circumstances disclosed here, no declaration by an order, under Section 237(a)(ii) of the Act, which obliges the Central Government to investigate, should be given here. As the declaration sought amounts to a direction to the Central Government, it should only be granted either where a party, having applied to the Central Government for an investigation, has failed despite sufficient grounds shown for it, or, when the court finds that a proceeding before it, under either Section 397 or Section 398 of the Act, cannot satisfactorily terminate without such an investigation. The petitioners may, if so advised, themselves either apply under Section 236 of the Act to the Central Government or take any other proceeding, which may be available to them under the law, for the protection of any right or enforcement of any liability. It is clarified that the dismissal of this petition will not stand in the way of their doing so as no issue, except the preliminary one, whether this is a fit case for an order under Section 397 or Section 398 of the Act upon the material brought to the notice of this court, is being decided here.

30. The result is that I decide the preliminary issue against the petitioners and hold that no order can be made in this case under either Section 397 or Section 398 of the Act. Accordingly, I dismiss this petition with costs.



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