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T:

Yash

Vardhman
Pradyumna
Pranjal

Before
THE HONBLE COMPANY LAW BOARD
In the Matter of

MR. D & ORS.-

PETITIONERS

RESPONDENTS

v.
ABC & SONS PVT. LTD. & ORS.

MEMORANDUM FOR THE PETITIONERS

-Table of Contents-

-Petitioners-

TABLE OF CONTENTS
TABLE OF CONTENTS -

LIST OF ABBREVIATIONS

II

INDEX OF AUTHORITIES

III

STATEMENT OF JURISDICTION

VIII

STATEMENT OF FACTS

IX

STATEMENT OF ISSUES

SUMMARY OF PLEADINGS

XI

PLEADINGS

I. THE PETITION UNDER 397 AND 398 OF THE COMPANIES ACT, 1956 IS MAINTAINABLE.
(A). There is dilution of shareholding of the petitioner. -

(B). Even a single act which causes perpetual damage would be considered
as oppression -

(C). Where number of members are less than 10 -

(D).Complicated questions of law and fact are involved. -

(E). No law of limitation applies to proceedings before the Company Law Board.

II. THE ACTS OF THE RESPONDENTS AMOUNTED TO OPPRESSION ON THE PETITIONER. 3


(A). Issue of rights shares is an act of oppression.

(B). Refusal to buy shares of the Petitioners amounts to oppression.

(C). The condition of a winding up order is being fulfilled.

III. THAT THE ACTS OF RESPONDENTS CONSTITUTE MISMANAGEMENT AS FALLING


UNDER 398 OF THE COMPANIES ACT, 1956

PRAYER

10

XII

MEMORANDUM FOR THE PETITIONERSI

-List of Abbreviations-

-Petitioners-

LIST OF ABBREVIATIONS

Abbreviations

Full Forms

&

And

AIR

All India Reporter

AoA

Articles of Association

BoD

Board of Directors

Co.

Company

Com Cases

Company Cases

CompLJ

Company Law Journal

Ed.

Edition

Honble

Honourable

Ltd.

Limited

Ors.

Others

Pvt.

Private

Section

S.C.

Supreme Court

SCC

Supreme Court Cases

u/s

Under Section

v.

Versus

viz.

Namely

Vol.

Volume

-MEMORANDUM FOR THE PETITIONERSII

Index of Authorities-

-PetitionersINDEX OF AUTHORITIES

CASES CITED
CASE NAME

PAGE NO.

Albert David Ltd, In Re (1964) 68 CWN 163.

All India Shaw Wallace Employees v. Shaw Wallace and Co., (2000) 102

Comp Cases 466 (CLB).


Arati Dutta Gupta v. Unit Construction Co. Ltd. [2004] 52 SCL 679 (CLB).

Ashim Kumar Dutta v. Natobar Dutta Properties Pvt. Ltd., (1995) Tax LR

1355 (Cal).
Bhaskar Stoneware Pipes Pvt. Ltd. v. Ranjindernath Bhaskar [1988] 63

11

Comp. Cas. 184.


Binod Kumar Kasera V. Nandlall and Sons Tea Industries, (2010) 153 Comp

11

Cas 184 (CLB).


Chand Mall Pincha v. Hathi Mall Pincha, (1999) 2 Comp LJ 90 (Gau).

Chander Kishan Gupta v Pannalal Girdhari Lal Pvt. Ltd., 1984 55 CompCas

12

702 Delhi.
Col. Kuldip Singh Dhillon v. Paragaon Utility Financiers Pvt. Ltd., (1988)

64 Com Cases 19 (P&H).


D Ramakrishna Rao v. LRR Hatcheries Ltd., (1999) 4 Comp LJ353 (CLB).

Dale and Carrington Investment (P.) Ltd. v. P K Prathapan, (2004) 4 Comp

LJ 1 (SC).
Dr. Mrs. Usha Chopra v. Chopra Hospital Pvt. Ltd., [2005] 63 SCL 625.

Ebrahimi v. Westbourne Galleries Ltd., (1973) AC 360.

Farhat Sheik v. Esemen Metalo Chemicals P. Ltd., (1995) 1 Comp LJ 159

-MEMORANDUM FOR THE PETITIONERSIII

Index of Authorities-

-Petitioners-

(CLB).
Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd., (2001) 33 SCL 78 (SC).

Hind Overseas (P.) Ltd. v. Raghunat Prasad Jhunjhunwala, AIR 1976 SC

565.
In re, Malayalam Plantations (India) Ltd. (1991) 5 Corpt LA 361 (Ker).

12

Jer Rutton Kavasmaneck v. Gharda Chemicals Ltd., (2001) 3 Comp LJ 28.

K. Muthusamy v. S. Balasubramanian, (2011) 167 Comp Cas 167 (Mad).

11

K.P. Chackochan v. Fedral Bank, [1989] 66 Comp. Cas. 953 (Ker.).

Kishan Khariwal v. Ganganagar Industries Ltd., [2004] 50 SCL567.

KRS Mani v. Anugraha Jewellers Ltd., [1999] 19 SCL 145.

10

Laguna Holdings Pvt. Ltd & Ors. v. Eden Park Hotels Pvt. & Ors., [2013]

176 Comp Cas 118 (Del).


Laxmi Narayan Rawat v. RT Udyog P. Ltd., (2005) Comp LJ 342.

M Moorthy v Driver and Conductors Bus services Pvt. Ltd., (1991) 71 Com

12

Cases 136, (Mad-DB).


M/s Mewar v. Lake Palace Hotels and Motels Ltd., [1997] 4 CLJ 440

(Delhi).
Mohinder Singh v. Hoshiarpur Express Tpt. Co. Ltd., [2008] 86 SCL 155

(CLB).
Narain Das (K.) v. Bristol Grill (P.) Ltd., (1997) 90 Com Cases 79 (CLB-

10

N.Delhi).
Narain Das K. v Bristol Grill Pvt. Ltd., (1997) 90 Com cases 79.

12

Piercy v. Mills & Co., (1920) 1 Ch 77.

PIK Securities Pvt. Ltd v. United Western Bank Pvt. Ltd., (2001) 4 Comp LJ

-MEMORANDUM FOR THE PETITIONERSIV

Index of Authorities-

-Petitioners-

81.
Rai Saheb Vishwamitra v. Amar Nath Mehrotra, (1986) 59 Com Cases 854

(All).
Rajamuhndry Electric corporation v A Nageshwara Rao, AIR 1956 SC 213.

13

Rajeev Bhingarde v. Kaizen Wheels (P.) Ltd., C.P. No. 90 of 2010 Decided

10

on 16.04.2014.
Ramashankar Prasad And Ors. vs Sindri Iron Foundry (P) Ltd., AIR 1966

Cal 512.
Ramshankar Prasad v. Sindri Iron Foundry Pvt. Ltd., (1966) 1 Comp LJ 310.

Rashmi Seth v. Chemon (India) P. Ltd., (1993) 3 Comp LJ 89 (CLB).

Re A Company, (1987) BCLC 82 (Ch D).

Re Five Minutes Car Wash Services Ltd., (1966) 1 All ER 242.

Re R. A. Noble & Sons (Cothing) Ltd., (1983) BCLC 273.

Re, Cooper (Cuthbert) & Sons Ltd., (1937) 2 All ER 466.

Re, Davis & Collen Ltd., (1935) Ch 693.

Re, London School of Electronics, (1985) Ch 211.

13

Richardson & Cruddas Ltd. v. Haridas Mundra, AIR 1959 Cal 695.

11

Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314.

Sarabjeet Singh Mokha v. Marble City Hospital and Research Centre Pvt.

Ltd., (2008) 84 CLA 378.


Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 Com Cases 351.

Shree Daulat Makanmmal Luthra v. Keshav Naik, [1992] 9 CLA 72.

Shri Vipul Dilkhushbhai Rathod v. M/s Ram Agri-Infra India Pvt. Ltd. &

11

Ors., Company Law Board, Mumbai C.P. No. 17 of 2013.

-MEMORANDUM FOR THE PETITIONERSV

Index of Authorities-

-Petitioners-

Smith (Howard) Ltd. v. Ampol Petroleum Ltd., (1974) AC 821.

Sorab Dinshaji Dastur v. D.P.R Cassad, (1963) 33 Com Cases 306.

Subhas Ch. Agarwal v. Associated Limestone Ltd., [1998] 16 SCL 212.

Suresh Kumar Sanghi v. Supreme Motors Ltd., 1983 54 CompCas 235

Delhi.
Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd., [2001] 31 SCL

120 (CLB).
Tea Brokers Pvt. Ltd. v. Hemandra Prosad Barooah, (1998) 5 Comp LJ 463

(Cal.).
V. Natarjan v. Nilesh Industrial Products Pvt. Ltd., [2003] 41 SCL 237.

11

(CLB).
Vijay Sobhagyachand Vipani v. Jai Jalaram Fabricators P. Ltd., (2000) 4

Comp LJ 167(CLB).
Woodbriar Estate Ltd. v. V.N.A.S Chandran, [2007] 78 SCL 393.

Worldwide Agencies Pvt. Ltd. v. Mrs. Margaret T. Desor, [1990] 67 Comp.

Cas. 607.

STATUTES AND RULES CITED


No.

BIBLIOGRAPHICAL INFORMATION

1.

The Companies Act, 1956.

2.

The Contract Act, 1872.

3.

The Specific Relief Act, 1963.

-MEMORANDUM FOR THE PETITIONERSVI

Index of Authorities-

-Petitioners-

BOOKS REFERRED

RAMAIYA, Guide To The Companies ACT (17TH ED., 2010)

RAMAIYA, Guide To The Companies Act (18TH ED., 2015)

POLLOCK & MULLA, Indian Contract And Specific Relief Acts (13TH ED., 2006)

TAXMANN, Company Law, (3RD ED., 2014)

DATABASES REFERRED

http://www.manupatra.com

https://www.scconline.in/default.aspx

http://www.claonline.in/

-MEMORANDUM FOR THE PETITIONERSVII

-Statement of Jurisdiction-

-Petitioners-

STATEMENT OF JURISDICTION
The counsels on behalf of the Petitioners have endorsed their pleading under the aegis of
Sections 398 and 397 of the Companies Act, 1956. The Petitioners would humbly contest
the grounds that have been invoked under the aegis of Sections 398 and 397 of the
Companies Act, 1956.

-MEMORANDUM FOR THE PETITIONERSVIII

-Statement of Facts-

-Petitioners-

STATEMENT OF FACTS
A.

The facts of the case are that ABC and Sons Pvt. Ltd. was previously a partnership firm
converted under the Companies Act, 1913. It is in the business of preparing food products
with restriction on transfer of its shares only to male descendants of the family who were
Mr. A, B C D and E.

B.

After death of Mr. A., Mr. B, C, D and E became the directors of the company.

C.

In 1985-86 difference started arising between Petitioner and Respondents. The Petitioner
offered his 25% stake to respondents and resignation from directorship which was accepted
by the latter. As promised petitioner stepped down from management however, the
respondents did not purchase his stake. There were negotiations afterwards also but no
conclusion reached.

D.

Further the company issued rights shares to all members which diluted the share of
Petitioner from 25% to 7.5 % losing any say in management as well as affairs of the
company.

E.

In the meantime the performance of company was deteriorated and was in financial
distress. The management comprising of the respondents did not have the skills to manage
the affairs. They were selling the assets of the company and raising huge loans.

F.

The money so raised was siphoning off to their own companies and used for huge
drawings. They also outsourced core business opportunity of the company to their own
companies set in ancillary business.

G.

The Petitioners have filed the present petition seeking relief under section 397and 398 of
the Companies Act, 1956.

-MEMORANDUM FOR THE PETITIONERSIX

-Statement of Issues-

-Petitioners-

STATEMENT OF ISSUES
The following issues are presented before the Honble Company Law Board:Q1. WHETHER THE PETITION FILED UNDER 397 AND 398 OF THE COMPANIES ACT, 1956 IS
MAINTAINABLE?

Q2. WHETHER

THE ACTS OF THE

RESPONDENTS

ARE PREJUDICIAL TO INTEREST OF

PETITIONERS AND AMOUNTED TO OPPRESSION ON THE PETITIONERS?


Q3. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE ACTS OF THE RESPONDENTS
AMOUNTED TO MISMANAGEMENT OF THE COMPANY?

-MEMORANDUM FOR THE PETITIONERS-X

-Summary of Pleadings-

-Petitioners-

SUMMARY OF PLEADINGS
I.

It is most respectfully submitted before this Honble Board that the present composite
petition is maintainable under 397 and 398 of the Companies Act, 1956. Firstly, the
Petitioner contends that there has been a dilution in the shareholding due to issue of
rights shares which has resulted in perpetual damage to the Petitioner. Secondly,
complicated questions of law and facts are involved in this matter.

II.

It is most respectfully submitted before this Honble Board that acts of the Respondents
have infringed the rights of the Petitioners which in turn resulted in oppression on the
Petitioners. It is firstly submitted that the issuance of rights shares by the Respondents
directors was motivated on the sole malafide intention to reduce the voting power of the
Petitioners in the Respondent Company and prejudiced the interest of the Petitioners in
the company. Further, it is also been contended that there was malafide breach of the
contract that was entered into by the Petitioners with the Respondents to not to allow
the Petitioners to exit the company which again resulted in oppression.

III. It is most humbly submitted before this Honble Board that the acts of Respondents in
the present case fall under section 398 of the Companies Act, 1956 amounting to
mismanagement. That the respondents have after usurping power in the company acted
in a way which is prejudicial to the interest of the company. It is further submitted that
the acts which comprise of mismanagement are sale of assets, siphoning off funds, huge
drawing s and diversion of business opportunities. That these acts are prejudicial to the
interest of the company thus constitutes mismanagement.

-MEMORANDUM FOR THE PETITIONERS-XI

-Pleadings-

- Petitioners-

PLEADINGS
I.

THE PETITION UNDER 397 AND 398 OF THE COMPANIES ACT, 1956 IS MAINTAINABLE.

1.

The Petitioner most humbly submits before this Honble Board that the present composite
petition under both 397 and 398 of the Companies Act, 19561 is maintainable and can be
filed provided the reliefs claimed are not conflicting.2
(A). There is dilution of shareholding of the petitioner.

2.

The Company Law Board in Kishan Khariwal v. Ganganagar Industries Ltd.3 held that if
persons shareholding which was 10% or more gets below 10% by issue of further shares, such a
person can maintain the petition provided he has challenged further issue in his petition. The
petitioner had a shareholding of 25% in the company4 which got reduced to 7.5% when the
further issue of shares took place5. The petitioner has challenged the further issue of shares in
this petition on the ground of being oppressive. Therefore it is submitted that even in the present
situation where petitioner has a shareholding of less than 10%, the petition is still maintainable.

3.

When a shareholders shareholding falls below 10% because of further issue of shares, which is
the subject matter of petition under 397 of the Companies Act, 1956 by that shareholder, he
retains his right to make petition under 399 of the Companies Act, 1956.6

4.

The Honble Board in PIK Securities Pvt. Ltd v. United Western Bank Pvt. Ltd.7 held that
increasing capital by making a further issue is a decision of managerial nature and therefore it
1

Hereinafter referred to as Act.

Sorab Dinshaji Dastur v. D.P.R Cassad, (1963) 33 Com Cases 306 See also, Worldwide Agencies Pvt. Ltd. v.
Mrs. Margaret T. Desor, [1990] 67 Comp. Cas. 607.

[2004] 50 SCL567.

Moot Proposition, 3.

Id, 4.

Woodbriar Estate Ltd. v. V.N.A.S Chandran, [2007] 78 SCL 393; See also Mohinder Singh v. Hoshiarpur
Express Tpt. Co. Ltd. [2008] 86 SCL 155 (CLB).
7
(2001) 4 Comp LJ 81.

-MEMORANDUM FOR THE PETITIONERS-1

-Pleadings-

- Petitioners-

belongs to the domain of directors. Use of this power for consolidating their own position by
those in control and for creating a new majority is improper and in such a case, the petition for
prevention of oppression and mismanagement would be maintainable.
(B). Even a single act which causes perpetual damage would be considered as oppression.
5.

The acts of oppression and mismanagement have been committed against the Petitioner
continuously from the 1985-1986. In the case of an oppressive act, though it may itself not be
continuous, if the circumstances indicate that the effect is continuous the court will interfere.8
Where single act was capable of causing perpetual damage to the member, it would be
considered as oppression of member.9
(C). Where number of members are less than 10.

6.

It is submitted before this Honble Board that in a case where there are less than 10 members in a
company, then even if the Petitioner who is only one in number has the right to file a petition
under 397 and 398 read with 399 of the Companies Act, 1956.10 In the present matter the
number of member filing this petition are 311 out of the total 7 members of the company.12
(D).Complicated questions of law and fact are involved.

7.

It has been held in Jer Rutton Kavasmaneck v. Gharda Chemicals Ltd.13 that a petition under
397 and 398 of the Companies Act, 1956 cannot be struck out at the preliminary stage where
complicated questions of law and fact were involved.

Ramshankar Prasad v. Sindri Iron Foundry Pvt. Ltd., (1966) 1 Comp LJ 310; See also Ashim Kumar Dutta v.
Natobar Dutta Properties Pvt. Ltd., (1995) Tax LR 1355 (Cal).

Tea Brokers Pvt. Ltd. v. Hemandra Prosad Barooah, (1998) 5 Comp LJ 463 (Cal.).

10

A.K Majumdar and Dr. G.K Kapoor, Company Law and Practice, Taxmann, 17th Ed. 2012, Pg. 945.

11

Supra Note 4 at 8.

12

Id, 7.

13

(2001) 3 Comp LJ 28.

-MEMORANDUM FOR THE PETITIONERS-2

-Pleadings-

- Petitioners-

(E). No law of limitation applies to proceedings before the Company Law Board.
8.

It has been held in M/s Mewar v. Lake Palace Hotels and Motels Ltd.14 that no law of limitation
applies to the proceedings before the Honble Company Law Board. Therefore it is humbly
submitted before this Honble Board that no limitation applies to this petition before the Honble
Board.

9.

Therefore it is most humbly submitted before this Honble Board that the petition, in the light of
399 of the Companies Act, 1956 and the precedents cited, is maintainable.

II.

THE ACTS OF THE RESPONDENTS AMOUNTED TO OPPRESSION ON THE PETITIONER.

10.

It is humbly submitted before this Honble Board that the Respondents herein have acted in an
oppressive manner. The counsels would base its assertion on two grounds, firstly, issue of rights
shares of the company amounted to oppression on the Petitioners, secondly, that refusal to buy
the shares of the Petitioner is an act of oppression.
(A). Issue of rights shares is an act of oppression.

11.

It is most respectfully submitted before this Honble Board that the rights issued of the company
was malafide and was for the sole purpose of diluting the voting rights held by the Petitioners.
The Respondents were well aware of the fact that the Petitioners wanted to exit the company
and, thus, for oppressing the minority, i.e. the Petitioners, continuously issued the rights shares,
which herein explains the malafide intention of the Respondents.

12.

It is relevant to mention here that the Respondent company was formed by the conversion of a
partnership to a company by the father of the Petitioner No. 1 in 1948,15 and since then, the
company was run on mutual trust between the shareholders. Thus, it can safely be said that the
company is in the form of the quasi-partnership.16 Although, the Board of Directors of
14

[1997] 4 CLJ 440 (Delhi).

15

Supra Note 4 at 1.

16

Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314.

-MEMORANDUM FOR THE PETITIONERS-3

-Pleadings-

- Petitioners-

Respondent Company are authorised to issue rights, this power should only be exercised by bona
fide in the interest of the company,17 as there exists a fiduciary relationship between the
company and its shareholders18. This fiduciary power should not be exercised for an improper
purpose such as creating new majority.19 The Honble Board has also held that the manipulative
issue of shares by the respondents, on whom the petitioner reposed great faith, as an act of
oppression.20
13.

There was a breakdown in the mutual trust and confidence between the shareholders of this
quasi-partnership company after the disputes arose between the factions of shareholders.21 The
acts of Respondents were oppressive in the conduct from the very moment they started to disturb
the shareholding of the Petitioners in the Respondent company. It was held in the case of Laxmi
Narayan Rawat v. RT Udyog P. Ltd.22 that where the company is in the nature of a quasipartnership any disturbance of shareholding is likely to be an act of oppression.

14.

Further, at the time of issuing of capital, there was no urgent requirement of funds to the
company and the same was only called for the sole purpose of disturbing the quantum of say of
the Petitioners in the company. As, here the real motive for the issue of shares was to alter the
balance of voting power in the company, that would be an improper exercise of the power which
lead to infringement of members contractual rights under the articles.23 Though, the Petitioners
were the minority before such rights issue, the act of the Respondent directors to further dilute

17

Piercy v. Mills & Co., (1920) 1 Ch 77.

18

Daleant Carrington Investment (P.) Ltd. v. PK Prathapan, (2004) 4 Comp LJ 1 (SC).

19

Smith (Howard) Ltd. v. Ampol Petroleum Ltd., (1974) AC 821.

20

Dr. Mrs. Usha Chopra v. Chopra Hospital Pvt. Ltd., [2005] 63 SCL 625.

21

Supra Note 4 at 3.

22

(2005) Comp LJ 342.

23

Re A Company (1987) BCLC 82 (Ch D).

-MEMORANDUM FOR THE PETITIONERS-4

-Pleadings-

- Petitioners-

the shareholding still qualifies to be an act of oppression.24 Further it was also held that if in a
closely held company, shares have been issued for extraneous reasons which resulted in
reduction in shareholding of a member, it would amount to oppression. 25 This ratio has also been
decided in numerous cases.26
15.

The Honble Board also in the case of All India Shaw Wallace Employees v. Shaw Wallace and
Co.27 had classified that the financial crisis in the company which was result of the acts of the
management is an act of oppression against the shareholders. In the instant case, the new
management of the company formed by the Respondents have deteriorated the position of the
Respondent company, resulting into low dividends to the Petitioner over the period and thus,
would amount to oppression.
(B). Refusal to buy shares of the Petitioners amounts to oppression.

16.

It is humbly submitted before this Honble Board that the Respondents have oppressed the
Petitioners also when they breached the contract of purchasing the shares of Petitioners. The
Respondents here had at the very first moment promised to buy the shares of the Petitioners, and
after the AGM of the Respondent company, where the Petitioner had not filed for reappointment,
had conveniently declined to buy the same28 resulting in no exit option to the Petitioners herein.

17.

In Laguna Holdings Pvt. Ltd & Ors. v. Eden Park Hotels Pvt. & Ors.29 the Honble High Court
of Delhi had observed that:-

24

Chand Mall Pincha v. Hathi Mall Pincha, (1999) 2 Comp LJ 90 (Gau).

25

Sarabjeet Singh Mokha v. Marble City Hospital and Research Centre Pvt. Ltd., (2008) 84 CLA 378.

26

Farhat Sheik v. Esemen Metalo Chemicals P. Ltd. (1995) 1 Comp LJ 159 (CLB); Rashmi Seth v. Chemon
(India) P. Ltd. (1993) 3 Comp LJ 89 (CLB); Vijay Sobhagyachand Vipani v. Jai Jalaram Fabricators P. Ltd.
(2000) 4 Comp LJ 167(CLB); D Ramakrishna Rao v. LRR Hatcheries Ltd. (1999) 4 Comp LJ353 (CLB).

27

(2000) 102 Comp Cases 466 (CLB).

28

Supra Note 4 at 3.

29

[2013] 176 Comp Cas 118 (Del).

-MEMORANDUM FOR THE PETITIONERS-5

-Pleadings-

- PetitionersIn Ebrahimis case there was a prior partnership between the two
members who had later on formed the company. The company had
first been formed by the two partners namely Ebrahimi and Nazar and
later on joined by Nazars son George Nazar as the third director.
Each of the original two shareholders transferred to him 100 shares
so that at all material times Ebrahimi held 400 shares, Nazar 400
shares and George Nazar 200 shares. The Nazars, father and son thus
had a majority of votes in a general meeting. Until the disputes arose,
all the three remained directors. Later on an ordinary resolution was
passed by the company in a general meeting by the votes of Nazar and
George Nazar removing Ebrahimi from the office of a director. This
had led to the petition for winding up. The Court had noted that
Ebrahimi had no choice left; he had no exit out; AOA of the company
did not permit him to sell his shares to a third party; on all counts, he
was caged; these factors had weighed in the mind of the Court to
admit the winding up petition.

The judgment followed in this case is a leading judgment on the aspect of oppression and
mismanagement.30
18.

In the instant case too, there is no exit option available with the Petitioners as the AoA provides
for very harsh restrictions as to transferability of shares only to private company and thus, the
only option that was available with the Petitioners was to sell these shares to Respondents.
(C). The condition of a winding up order is being fulfilled.

19.

In the present case the condition of making a winding up order for the company is getting
fulfilled as per the facts and circumstances of the case. From, the dissecting view there is a just
and equitable ground for making of such an order and also if such an order is made it would
unfairly prejudice such member or members of the company who are subject to acts of
oppression.
(i). There is a just and equitable ground for making of winding up order.

20.

As, per 397(2)(b)31 the precondition for satisfying that an act is falling within its ambit there
should be a just and equitable ground32 for making of a winding up order. In the case of Subhas
30

Ebrahimi v. Westbourne Galleries Ltd. (1973) AC 360.

31

The Companies Act, 1956, No. 1 of 1956.

32

Id.

-MEMORANDUM FOR THE PETITIONERS-6

-Pleadings-

- Petitioners-

Ch. Agarwal v. Associated Limestone Ltd.33 it was held that that justification of winding up is a
precondition for admission of a petition under 397 (2) (b), for relief against oppression.
21.

In the present case ABC & Sons34 was formed as a partnership and later on converted into a
private limited company. Subsequently, there was lack of confidence35 amongst two sects of the
shareholding of the company where the oppression act is being committed by the respondents
over the petitioner. Similar facts were there in the case of Re, Davis & Collen Ltd.36 where it was
held that:
Where a private company consisting of one or more families or a
group of friends or relations is inwardly in the nature of
partnership business and circumstances justifying the dissolution
of a partnership under the Partnership Act such as exclusion of
one or more partners leading to loss of mutual confidence, a state
of irreconcilable animosity precluding all reasonable hopes of
reconciliation will constitute just and equitable ground for
winding up the company, though they may not constitute sufficient
grounds for winding up under the Companies Act.

22.

When a company formed among family members or friends with more or less equal
shareholding it is only when there is a complete deadlock in the management on account of lack
of probity in the management of the company as a commercial concern, there may arise a case
for winding up on the just and equitable ground.37

33

[1998] 16 SCL 212 See also Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd., (2001) 33 SCL 78 (SC).

34

Supra Note 4 at 1.

35

Id at 3.

36

(1935) Ch 693 See also Re, Cooper (Cuthbert) & Sons Ltd., (1937) 2 All ER 466.

37

Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwala, AIR 1976 SC 565.

-MEMORANDUM FOR THE PETITIONERS-7

-Pleadings23.

- Petitioners-

The respondents through their various acts have oppressed the petitioner thus, establishing a just
and equitable ground for winding up order. As, it is held by the Honble Apex court in the case
of Shanti Prasad Jain v. Kalinga Tubes Ltd.38 that:
It is not enough that there is just and equitable cause for winding
up the company though that must be shown as a preliminary to the
application of section 397. It must further be shown that the conduct
of the majority shareholders was oppressive to the minority as
members and this requires that events have to be considered not in
isolation but as part of a consecutive story.

24.

The petitioner has now become a minority shareholder as right issue was being done which
caused his shareholding to diminish in the company bringing it to 7.5%39 of the issued and paid
up capital of the company. Thus, he brings himself under the ambit of this as the Respondents
who have the de facto control of the company being unfair40 as he is the member concerned.

25.

Even, if the oppression is not for a long duration but it was of such a nature that its effect would
have persisted indefinitely and kept the petitioners under the complete mercy of the respondents.
Not only was the case a fit one for winding up under the 'just and equitable' clause, the facts
discovered amply demonstrate that there was such a lack of probity in the conduct of the affairs
of the company by the respondents that the petitioners could no longer have confidence in them
and rightly ask the Court to intercede on their behalf.41
(ii). The order of winding up will prejudice the petitioners interest.

26.

In order that the court that the court may make an order under 397 of the Act, the court must be
satisfied, firstly that the companys affair are being conducted in a manner oppressive to any
member of the members, secondly that the facts would justify the making of a winding up order,
38

(1965) 35 Com Cases 351 See also, Rai Saheb Vishwamitra v. Amar Nath Mehrotra, (1986) 59 Com Cases
854 (All); Col. Kuldip Singh Dhillon v. Paragaon Utility Financiers Pvt. Ltd., (1988) 64 Com Cases 19
(P&H).

39

Supra note 4 at 7.

40

Re R. A. Noble & Sons (Cothing) Ltd., (1983) BCLC 273.

41

Ramashankar Prosad And Ors. vs Sindri Iron Foundry (P) Ltd., AIR 1966 Cal 512.

-MEMORANDUM FOR THE PETITIONERS-8

-Pleadings-

- Petitioners-

on the ground that it was just and equitable that the company should be wound up and thirdly,
that a winding up order would unfairly prejudice the applicant or applicants.42
27.

As, the petitioner is having an interest in the company and has also expressed a desire earlier to
be relieved from his interest in the company he also didnt filed for his re-appointment as the
companys director43 but he was on the other hand made a victim of the oppressive acts of the
respondents. Hence, to wind up the company would unfairly prejudice the oppressed members.44

28.

Therefore, a winding up order should not be made though the precondition of having a just and
equitable ground for such an order has been justified but it will also prejudice the interest of the
oppressed member as there is his shareholding and due to misconduct of the respondents the
petitioner will suffer loss as there are large borrowings 45 taken by the respondents and a winding
up order will also bring liability on the oppressed shareholder.

29.

On an application under S. 397 and S. 398, Company Law Board can direct the majority
shareholder to purchase the shares of the aggrieved shareholder at a specified price.46 In Suresh
Kumar Sanghi v. Supreme Motors Ltd.47 the Delhi High Court granted the group in actual control
the opportunity to purchase the shares of the other group at a price to be fixed by a judge. Having
regard to the ceaseless conflict between the groups, it was held to be in the interest of the
Respondents to purchase Petitioners shares at a fair price to be determined by the statutory
auditors.48

42

Albert David Ltd, In Re (1964) 68 CWN 163 See also, Re Five Minutes Car Wash Services Ltd., (1966) 1 All
ER 242.

43

Supra note 4 at 4.

44

K.P. Chackochan v. Fedral Bank, [1989] 66 Comp. Cas. 953 (Ker.).

45

Supra note 4 at 6.

46

Shree Daulat Makanmmal Luthra v. Keshav Naik, [1992] 9 CLA 72.

47

1983 54 CompCas 235 Delhi.

48

Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd., [2001] 31 SCL 120 (CLB); See also, Arati Dutta
Gupta v. Unit Construction Co. Ltd. [2004] 52 SCL 679 (CLB).

-MEMORANDUM FOR THE PETITIONERS-9

-PleadingsIII.

- Petitioners-

THAT THE ACTS OF RESPONDENTS CONSTITUTE MISMANAGEMENT AS FALLING UNDER 398 OF


THE COMPANIES ACT, 1956.

30.

398 of the Act states that mismanagement is said to be constituted if the affairs of the company
are conducted in a manner prejudicial to the interest of the company or in a manner prejudicial to
public interest.49

31.

The very section comes into play when there is actual mismanagement or apprehension of such
mismanagement and takes into account the positive acts of the parties which prejudices the
interest of the company.50 It is humbly submitted that in the present petition the acts which
comprise of mismanagement are (I) Diversion of Funds (II) Sale of assets of the company
(III) Diversion of business opportunity.

32.

Funds of the company has been siphoned off by the respondents. They are siphoning off the
funds through their own companies in order to gain personal benefits as their companies are into
ancillary business51 with respect to ABC Private Ltd. This is also evident that through this act
and other related acts the companys performance is getting deteriorated to a large extent.52

33.

In the case of Narain Das (K.) v. Bristol Grill (P.) Ltd.53 having similar facts as the present case
it was held thatWhere a company of four brothers was provided with the funds by
a bank for its business and three of the four brothers started using
the money in breach of the agreement between them for the use of
that money, it was held that the fourth brother had a legitimate
ground for making a complaint of oppression and financial
management under Section 397 and 398.
Hence, the petitioner is having a legitimate ground to come before the Honble Board.
49

Richardson & Cruddas Ltd. v. Haridas Mundra, AIR 1959 Cal 695

50

Chander Kishan Gupta v Pannalal Girdhari Lal Pvt. Ltd., 1984 55 Comp Cases 702 (Del).

51

Supra Note 4 at 6.

52

Id.

53

(1997) 90 Com Cases 79 (CLB-N.Delhi).

-MEMORANDUM FOR THE PETITIONERS-10

-Pleadings34.

- Petitioners-

In the case of Rajeev Bhingarde v. Kaizen Wheels (P.) Ltd.54 inflated capital was being shown
which was due to huge borrowings taken from financial institutions. Proving that financial
irregularities in the conduct of the affairs of the company which leads to only conclusion that the
respondents were siphoning off the funds of the company. This was being done to attain personal
benefits on the cost of the company. A special audit was ordered with compensation to be given
by the respondents.

35.

Petitioner was the in charge55 of financial matters of the company and such siphoning of funds
was being undertaken to other companies for unknown/unwanted purposes and he being the
expert was kept out of such a matter.56

36.

Such a diversion of funds of the company for the benefit of the majority group which directly
affects the gross financial state of the company is an act of mismanagement.57 Also, in a family
company which previously was a partnership such an act of siphoning of funds is held to be
amounting to oppression58.

37.

It is humbly submitted that, based on the factual circumstances, it is essential that an


investigation and forensic audit be conducted in the affairs of the Company in order to bring out
the correct and complete picture of its affairs. An investigation and forensic audit is the only
manner in

which the extent of loss

caused to

the Company and the

extent

of siphoning off funds of the Company can be established. Further, such an investigation would

54

In The Company Law Board, C.P. No. 90 of 2010 Decided on 16.04.2014.

55

Supra Note 4 at 2.

56

KRS Mani v. Anugraha Jewellers Ltd., [1999] 19 SCL 145.

57

Bhaskar Stoneware Pipes Pvt. Ltd. v. Ranjindernath Bhaskar [1988] 63 Comp. Cas. 184, See also Id.

58

V. Natarjan v. Nilesh Industrial Products Pvt. Ltd., [2003] 41 SCL 237 (CLB).

-MEMORANDUM FOR THE PETITIONERS-11

-Pleadings-

- Petitioners-

bring out the true position of the financials of the Company and the various transactions
undertaken by it59.
38.

Also, in the case of Shri Vipul Dilkhushbhai Rathod v. M/s Ram Agri-Infra India Pvt. Ltd. &
Ors.60, there was a huge siphoning off funds as transfers were being done in the family members
accounts, secondly huge cheques were written for work which was not done at all, it was held by
the Honble board that it is an act of gross mismanagement.

39.

Hence, it is humbly submitted before the Honble board that such an act of siphoning off funds
done by the respondents from the companys account to their own companies is an act of gross
misconduct on the respondents part so as to get personal benefit on the cost of the company.

40.

Thus in light of the aforementioned case-laws it is humbly submitted that the act of Respondents
of selling the property which the founder purchased for company61 and using the money to pay
oneself salary was prejudicial to the interest of the company.

41.

In the case of M Moorthy v. Driver and Conductors Bus services Pvt. Ltd.,62 wherein the
respondents sold 2 buses being the only assets of the company was in the gross neglect of the
interest of the company and that was management was indifferent to the affairs of the company it
was held that relief under 397 and 398 were proper.63

42.

It is well settled that where the board of directors sold the estate at low price and without
compliance to the provisions of the Act, further also failed to account the income, it constituted
mismanagement.64
59

Binod Kumar Kasera V. Nandlall and Sons Tea Industries, (2010) 153 Comp Cas 184 (CLB), See also K.
Muthusamy v. S. Balasubramanian (2011) 167 Comp Cas 167 (Mad).

60

Company Law Board, Mumbai C.P. No. 17 of 2013.

61

Supra Note 4 at 6.

62

(1991) 71 Com Cases 136, (Mad-DB).

63

Id.

64

In re, Malayalam Plantations (India) Ltd., (1991) 5 CLA 361 (Ker).

-MEMORANDUM FOR THE PETITIONERS-12

-Pleadings43.

- Petitioners-

Where a company of four brothers was provided with funds by a bank for its business and three
of the four brother started using the money in breach of the agreement between them for the use
of money it was held that the fourth brother had a legitimate ground for making complaint for
financial mismanagement under 398 of the Act.65

44.

In a case where court found out that Vice chairman had grossly mismanaged the affairs of the
company and had drawn considerable purpose for his use, it was held to be mismanagement. 66 In
the present case the respondents have in a similar manner used the funds to make huge drawings
at a time of financial distress thereby grossly neglecting the interest of the company.

45.

It is humbly submitted that the respondents act of outsourcing the core and principal business
work of the company such as manufacturing, packaging, purchasing of raw material and
marketing of food to their own companies67 amounted to diversion of business opportunity
thereby prejudicing the interests of the company.

46.

In Re, London School of Electronics wherein the respondent director removed the petitioner
director and deprived him of the 25% of the profits attributable to that opportunity the act was
held to be oppressive and prejudicial to the companys interest.68

65

Narain Das K. v Bristol Grill Pvt. Ltd., (1997) 90 Com cases 79.

66

Rajamuhndry Electric Corporation v. A Nageshwara Rao, AIR 1956 SC 213.

67

Supra Note 4 at 6.

68

(1985) Ch 211.

-MEMORANDUM FOR THE PETITIONERS-13

-Prayer-

-Petitioners-

PRAYER
Wherefore, in the light of facts presented, issues raised, arguments advanced and authorities
cited, counsels on behalf of the Petitioners humbly submit that the Honble Board to kindly
declare and adjudge that:

I.

The acts of the Respondents amounted to oppression on the Petitioners and


mismanagement of the Respondent Company, and;

II.

The Respondents shall purchase the shares of the Petitioners at the price specified
by this Honble Board including adequate compensation;

And pass any other order which this Honble Board may deem it fit in the light of justice, equity
and good conscience.
And for this act of kindness of your lordship the Board shall as duty bound ever pray.

On behalf of
TC -

Sd/Counsels for the Petitioners

-MEMORANDUM FOR THE PETITIONERSXII