MANAGEMENT AND CORPORATE GOVERNANCE

Fiduciary Duty/Role of Directors

1. Percival v. Wright
In this case the directors bought some shares from a shareholder, but did not tell him that the
company was negotiating an expansion. The shareholder was aggrieved because he would not
have sold his shares had he known about the expansion, as the share prices would have likely
gone up.
Directors have a fiduciary duty towards the company and not the shareholders individually.
Negotiations with third parties does not give rise to fiduciary duty to the shareholders, and the
directors were not required to disclose negotiations taking place to the plaintiff.
2. Ferguson v. Wilson
In this case one of the directors had advanced money to the company, and had the right to be
paid back either in cash or shares. He was paid in cash, but later said that he wanted to be
paid in shares.
Between whom was the contract?
The above contract was between the plaintiff and the company, where the company was
acting through its directors. It was not a contract b/w the plaintiff and the directors. Directors
are agents of the company. If the directors act then the company is made liable because of
principal agent relationship.
A shareholder may sustain a bill against directors personally, where he charges them as
trustees, and seeks redress against them for a breach of duty to the company of which he is a
member.
3. Peskin v. Anderson
The Royal Automobile club sold one of its businesses. Some former members of the club
sued RAC as they were not able to enjoy the proceeds of the sale owing to them having left
the company.
Directors owe a fiduciary duty to the company, and there is no general duty towards the
shareholders. However, in appropriate and specific circumstances, a director can be under a
fiduciary duty to a shareholder. Thus, they were not bound to inform the members of the
plans to sell the company before they resigned.
Duty towards Shareholders
4. Reliance Natural Resources v. Reliance Industries
RIL basically entered into a production sharing agreement for supply of gas with the NTPC.
During this period, there was a dispute between Mukesh and Anil Ambani and a MoU was
entered into between the two brothers dividing RIL concerns between the two brothers. The
MoU gave RNRL a specified entitlement of gas at the price at which RIL had agreed to
supply to NTPC. The Ministry of Petroleum declined to approve RIL’s request to supply gas
to RNRL at the NTPC price.
What was the legal nature of the MoU?
It is not binding between RIL and RNRL. The MoU is between 2 persons and the company is
a separate legal entity. The doctrine of identification is applicable only in respect of small
companies but in the present case, the companies have millions of shareholders and one
cannot make the companies’ personality the same as that of the persons involved.
Doctrine of identification.
5. Globe Motorrs v. Mehta Teja Singh
Some agreements were entered into b/w appellants and respondent, but 6/13 of the directors
were direct beneficiaries of these agreements. During winding up the liquidator said that the
agreements should be rescinded as they were vitiated by fraud and were against the interests
of the company.
Directors are the trustees of the company and they need to act with utmost good faith. The
agreement was made in a manner so as to simply benefit the Directors. Even though they
were well aware of the same they did not disclose this to the Company. Moreover, there was
not even a single redeeming feature in the agreement for the Company. The Directors failed
to put their personal greed aside and disclose this conflict of interest to the Company.
The test to be applied in the present case is-had the company been a going concern and had
some payments in pursuance of this very agreement been made to the respondents could the
company have asked for recession of the contract or in case any payments had been made to
the respondent Harnam Singh (the distributor who was also a director in the company) and
others, for the return of the same to the company
6. Dale & Carrington v. Prathapan
The petitioner was a majority shareholder in a company in which the respondent was the MD.
The petitioner issued further shares and allotted the same to himself without a proper meeting
of the board. This resulted in the petitioner becoming a minority shareholder.
Firstly, the directors gave a fiduciary duty to ensure that the issue was made for a proper
purpose. Secondly, as per Section 179, the issue of shares can only happen via a board
resolution. In this case, no board meeting happened.
Duty towards Stakeholders
7. Tristar Consultants v. Customer Services India
Contract between plaintiff and respondent. Contract was cancelled and the plaintiff claimed
the director of the respondent company to be personally liable.
Directors have no fiduciary or contractual duty or duty of care towards third parties who deal
with the company. Liability arises if they gain a personal benefit out of a transaction while
acting on behalf of a company.
Other than where directors have made themselves personally liable i.e. by way of guarantee,
indemnity etc. liabilities of directors of a company, under common law, are confined to cases
of – (1) malfeasance, i.e., intentional conduct that is wrongful or unlawful, and (2)
misfeasance, i.e. an act that is legal but performed improperly – for example, where the
directors have been guilty of tort towards those to whom they owe a duty of care.
Proper Purpose Rule
8. Howard Smith v. Ampol Petroleum
Ampol acquired a company called RWM, but the board of RWM did not want this to happen
as the appellant had offered continue the employment of the directors as per the terms of his
takeover offer. The board issued shares to dilute the shareholding of Ampol, and the reason
given was the purchase of some machinery.
If BOD has made a decision bona fide, then Court has no jurisdiction to inquire into it.
However, where self-interest is involved, they cannot asser bona fides.
Court held that the issue of shares should have a proper purpose. The purpose here was
clearly to flip the voting powers.
9. Eclairs Group v. JKX Oil
The appellants owned enough shares to block special resolutions in the respondent company,
and were using this power to block some upcoming projects. The board of JKX used its
powers under the AoA to restrain the appellants from voting in the general meetings.
The BoD must use its power for a proper purpose and not for an underlying improper
purpose.
Here, trying to influence the outcome of SH resolutions is clearly outside proper purpose as
conferred by the AOA – the relevant clause had 3 purposes –
1. to induce a shareholder to comply with a disclosure notice;
2. to protect the company and its shareholders against having to make decisions about
their respective interests in ignorance of relevant information; and
3. as a punitive sanction for a failure to comply with a disclosure notice
It was irrelevant whether Eclairs and Glengary could have averted the imposition of
restrictions on their rights as shareholders by giving different answers to the questions. The
proper purpose rule is the principal means by which equity enforces directors' proper
conduct, and is fundamental to the constitutional distinction between board and shareholder.
What if there are multiple purposes?
Save perhaps in cases where the decision was influenced by dishonest considerations or by
the personal interest of the decision-maker, the directors' decision will be set aside only if the
primary or dominant purpose for which it was made was improper. [MINORITY VIEW-
DOMINANT PURPOSE TEST]
Need to look at whether the decision would have been made if there was no improper
purpose. If the answer is that without the improper purpose(s) the decision impugned would
never have been made, then it would be irrational to allow it to stand simply because the
directors had other, proper considerations in mind as well, to which perhaps they attached
greater importance. [MAJOROTY VIEW- BUT FOR TEST]
Correspondingly, if there were proper reasons for exercising the power and it would still have
been exercised for those reasons even in the absence of improper ones, it is difficult to see
why justice should require the decision to be set aside.
Diversion of Corporate Opportunity [USE 166(4) OF ACT]
10. Regal v. Gulliver
A cinema was leased by Regal through a subsidiary that it incorporated. The subsidiary had
5k share capital, out of which 2k was subscribed by Regal and the rest by the directors of
Regal. Later the 3k shares held by the directors were sold for a profit. After Regal came
under new management, it sued the directors for breach of their fiduciary duties.
Directors are liable to account for activities outside the company if (i) what the directors did
was so related to the affairs of the company that it can properly be said to have been done in
the course of their management and in utilisation of their opportunities and special
knowledge as directors and (ii) what they did resulted in profit for themselves and/or a
conflict with the interest of the company. Director is in breach of his duties if he takes
advantage of an opportunity that the corporation would otherwise be interested in but was
unable to take advantage. The liability arises from the mere fact of a profit having, in the
stated circumstances, been made- does not matter whether fraud or mala fide intention.
If the property is acquired by a director in the course of exercise of office of director by
reason of the fact that he is a director and in the course of directorship then the profit made on
the resale of such property shall belong to the company.
11. Vaishnav Shorilal Puri v. Kishore Kundan Sippy
There was the Puri group and the Sippy group, which held equal amount of shares and
directorships in a shipping company. This shipping company had an agency business with a
company called Contship and a charter business. The former was looked after by the Puri
group whereas the latter by the Sippy group. The Sippy group said that the Puri group
diverted the agency business to another company floated by them called Seaworld Shipping.
That since the agency agreement with SSTS had been terminated by Contship, no business
opportunity was any longer available to SSTS. Therefore, the diversion of Contship agency
from SSTS to Seaworld cannot amount to breach of fiduciary duty on the part of Puris.
Thus, it must be judged, based on the facts of each case, as to whether or not the director has
acted contrary to its duty towards the company.
 12. Bhullar v. Bhullar
It was a company run by two brothers and their sons on the board of directors. The company
owned a supermarket and a bowling alley. One of the brothers and his son said that they did
not want the company to acquire any more investment properties. However, one of the other
sons on the bard noticed that a car park next door to the bowling alley was for sale, and set up
another company to acquire it but did not tell the company. The other board members found
out and filed an unfair prejudice claim.
Whether the Company could or would have taken that opportunity, had it been made aware of
it, is not to the point: the existence of the opportunity was information which it was relevant
for the Company to know, and it follows that the appellants were under a duty to
communicate it to the Company. Reasonable men looking at the facts would think there was a
real sensible possibility of conflict.
If the opportunity falls within the company’s existing business activities, not simply where
the company is actively pursuing a particular opportunity, then an opportunity the director
comes across is a corporate one, even if no property or information of the company was
deployed by the director to obtain the opportunity.
13. Foster Bryant Surveying v. Bryant, Savernake Property Consultants
Foster and Bryant were two professional surveyors employed by two different firms. Alliance
was a client of Foster’s firm. Foster later started his own firm and took Alliance as his client.
Foster had asked Bryant to join but he had declined. Later, Alliance signed an exclusive
arrangement with Foster’s firm. Bryant eventually joined Foster and a SHA was executed,
and later on Bryant’s wife also joined. However, the relationship b/w the parties got strained
and Foster dismissed Bryant’s wife after which Bryant also resigned. However, Alliance
wanted Bryant to keep working for them, and he did so under a retainer agreement. After this
agreement, Bryant set up a new company that worked with Alliance.
When is Resigning Director Liable: Director who has resigned his directorship may be liable
under where after his resignation he exploits property of former company.;
Property of former company may be either: business opportunity or information/trade
secrets of former company; Business opportunity may constitute either:;
existing work carried out by company; i.e. where D solicits customers of former company;
this is an ‘intangible asset’ of former company.
There should be some relevant connection or link between the resignation and the obtaining
of the business. There is a need to demonstrate both lack of good faith with which the future
exploitation was planned while still a director, and the need to show that the resignation was
an integral part of the dishonest plan.
14. Industrial Development Consultants v. Cooley
Cooley was the MD of the plaintiff company and also an architect. He was approached by a
another company who said that they did not want to contract with a firm, but with Cooley
directly. Cooley resigned from the board by giving some excuse and undertook the other
work. The company found out and sued Cooley for breach of his duty of loyalty.
Even though there was no chance of IDC getting the contract, if they had been told they
would not have released him. So, he was held accountable for the benefits he received. He
rejected the argument that because he made it clear in his discussions with the Gas Board that
he was speaking in a private capacity, Mr. Cooley was under no fiduciary duty. He had ‘one
capacity and one capacity only in which he was carrying on business at that time. That
capacity was as managing director of the plaintiffs.’ All information which came to him
should have been passed on.
No agent can be allowed to make any profit without the knowledge and consent of his
principal in the course of his agency.
Business Judgment
15. Cede & Co. v. Technicolor
Plaintiff filed a suit against the defendant company and its directors for breach of fiduciary
duty and unfair dealing.
There is a presumption in favour of the board in the form of the business judgment rule.
However, to rebut this presumption, the plaintiff need not show actual injury, but merely that
the BoD breached its duty of care.
Board Meetings
16. Maharashtra Power Development Corp. v. Dabhol Power
Dabhol had Enron as a majority shareholder which was undergoing bankruptcy proceedings,
though Dabhol was excluded from this. Dabhol was unable to pay its dues. Dabhol and
MSEB also had some disputes regarding a Power Purchase Agreement. Various directors of
Dabhol resigned. Consequently, it was considered appropriate that firstly, the quorum of the
board of directors be completed by appointing a third director and thereafter, consider and
pass the necessary resolutions to protect the interest of the Company. It was in these
circumstances that in the Board Meeting on June 4, 2002 Mr. Peter Freeman (Respondent No.
5) was appointed as the third director to hold office till the next annual general meeting. The
Board Meeting continued thereafter with Mr. Freeman present there. The appointment of the
board member was challenged by MPDC as a shareholder.
Court held-
- Shareholder is not entitled to receive a notice of a board meeting. Not sending one is
not an act of oppression.
- Convening a board meeting without a quorum was not illegal as it was for the purpose
of appointing a new director.
- If no director raised an objection wrt a lack of agenda, then the shareholder cannot
raise that issue.
17. TM Paul v. City Hospital
A board meeting was convened in which certain matters which were not included in the
agenda were discussed. The plaintiff did not attend the meeting and claimed that he did not
receive a notice for the same. A suit was filed to declare the board meeting as illegal and
void.
Passing resolutions that are not in the agenda by itself will not amount to fraud. But, if the
second defendant had convened the meeting with the object of getting the resolutions passed,
but deliberately omitted to include them in the agenda, it will amount to active concealment
of a fact by one having knowledge or belief of the fact and will amount to fraud – the
endeavor to alter other persons' rights and to one's own advantage by deception which
constitutes fraud is apparent in the conduct of the second defendant.
Accordingly, the meeting and passing the resolutions were held to be invalid for want of
notice to the second plaintiff and also as adoption of these resolutions, without including
them in the agenda in the background and circumstances of the case, amounted to fraud.
In this case, there was no necessity for the co-option except for gaining a majority for the
managing director in the subsequent meetings, so the co-option cannot be said to be bona
fide. The co-option must fail for want of bona fides and also for the reason that the convening
of the meeting and the resolutions passed on August 18, 1992, were invalid for the reasons
already noticed.

INSIDER TRADING
18. VK Kaul v. SEBI
Appellant was an independent director of Ranbaxy, which was the parent company of Solrex.
Solrex made some huge investments, and the appellant provided this info to his wife who
bought shares of Solrex and later sold them at a higher price.
Appellant held guilty of insider trading, as the decision to buy the shares of Solrex would
only be known to the insiders. There is a high preponderance of probability required, such as-
- Access to info;
- Relation b/w tipper and tippee
- Timing of trade;
- Pattern of trade and any attempt to conceal the same
19. Mrs. Chandrakala v. SEBI
The appellant in this case was held guilty of insider trading as she was deemed to be a
connected person. However, she said that her husband ceased to be a promoter of the
company and was merely a shareholder who did not have information about the day to day
working of the company.
Since the husband ceased to be promoter of the Company in 2005, he was only a shareholder
of the Company and had no information about the day to day working of the Company.
Therefore, his wife, the Appellant before us, cannot be said to be a person deemed to be a
connected person.
In this case, the SC considered the fact that the UPSI in question was positive in nature but
the appellant actually sold shares during this period. It said that trades should be motivated by
the UPSI. While there is a presumption against the appellant, the appellant in the present case
had shown that she did not trade on the basis of the UPSI by establishing that her trades were
bona fide and that she both bought and sold shares.
A person who is in possession of unpublished price sensitive information which, on
becoming public is likely to cause a positive impact on the price of the scrip, would only buy
shares and would not sell the shares before the unpublished price sensitive information
becomes public and would immediately offload the shares post the information becoming
public.
20. Rakesh Agarwal v. SEBI
Rakesh Agarwal was the MD of ABS which signed a deal with Bayer to sell 51% of its
shares. Rakesh sold a significant portion of his shares to Bayer through his brother-in-law
making huge profit before the acquisition, after which SEBI held him to be guilty of insider
trading.
However, SAT considered the fact that Bayer was not willing to acquire ABS unless it could
obtain 51% shareholding, which necessitated the sale of shares by Rakesh. Thus, his actions
were in the best interests of the company and there was no intention to make profit. For
insider trading, it must be proven that the insider benefited unfairly from the trade. While
mens rea is not specifically provided for, it does not mean that motive can be ignored.
21. SEBI v. Abhijit Rajan
Rajan was the MD of GIPL. GIPL had an SHA with SIL which was later terminated by
GIPL. Before this information was disclosed, Rajan sold his shares in GIPL. He said that the
trade was a part of corporate debt restructuring to prevent the company from going into
bankruptcy.
The information regarding the termination of the two shareholders’ agreements can be
characterized as price sensitive information, in that it was likely to place the existing
shareholders in an advantageous position, once the information came into the public domain.
In such circumstances, on issue no. 2, the SC held that the sale by the Respondent would not
fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made
before the information could have a positive impact on the price of the shares. He had no
intention to make undeserved gain. In fact, the termination of the contract was beneficial to
GIPL but Rajan sold the shares, showing that he did not have a profit seeking motive.
Furthermore, the sale of shares was necessary to stave off bankruptcy of the parent company
of GIPL.

CORPORATE RESTRUCTURING
22. Miheer H. Mafatlal v. Mafatlal Industries
MFL- transferor and MIL- transferee to be amalgamated. The scheme of amalgamation was
finalized by resolutions of the BoD of both companies. However, the appellant was a director
of the transferor company and a shareholder of the transferee company and he objected to the
amalgamation. The transferor company had its office in Bombay whereas transferee had it in
Ahmedabad. When the transferor moved an application at the Bom HC the appellant did not
object but when the transferee company moved the application at Ahmedabad he objected.
The single judge convened a meeting of the equity shareholders who approved the scheme,
and the objections of the appellant were overruled.
There was a dispute b/w a director of MIL and the appellant, whether this should have
been disclosed as a material interest under 230(3)?
3 pronged approach-
- Director’s interest should have been different from other voting members
- The merger should have an effect on the material interest.
- The effect of merger on director should be different from the effect on the interests of
other voting members.
A private dispute b/w the two parties did not have a substantial connection w the merger nor
did it have an effect on the interest of the director.
Whether there was an absence of majority/suppression of minority interest?
Appellant said that the shareholders had acted as a class and not as individual members while
casting their votes. The class of equity shareholders had acted in concert and the actual intent
was to suppress minority shareholders.
While sanctioning a scheme of merger, the Court has to look into the bonafide actions of the
majority acting as a class and not as individual members. Just because the appellant was part
of a different class of shareholdings, it cannot be deemed that the majority had acted unfairly
against him. In order to prove suppression of a minority, it has to be proved that the majority
has acted in a manner that is prejudicial to the interests of the minority. But in this case, the
interests of the majority and the minority were aligned because the resultant entity was going
to generate more profits than the individual companies and thus, there was no question of
differing interests or suppression of the interests of the minority.
Whether Appellant was a special class of shareholder?
Appellant said that he was a different class of shareholder by virtue of some family
arrangement. However, AOA recognized only 2 classes. Further, under 230(1), meeting of
relevant class of members has to be convened. In this case, the class of members involved
were equity shareholders and there was no provision in law recognizing the right to hold a
special meeting for a different sub-class.
Whether the Court has jurisdiction like an appellate authority to minutely scrutinize
the scheme and to arrive at an independent conclusion whether the scheme should be
permitted to go through or not when the majority of the creditors or members or their
respective classes have approved the scheme as required by Section 391 Sub-section (2)?
 - Sanctioning court has to see whether the statutory procedure has been complied with
and the requisite meetings have been held.
- The scheme is backed up by the requisite votes.
- The meetings had the relevant materials to enable them to arrive at an informed
decision.
- All necessary material is placed before the voters
- All requisite material is placed before the court by the applicant seeking sanction of
such a scheme
- Scheme is not violative of any law or contrary to public policy.
- Members were acting bona fide and were not coercing the minority.
- Scheme was fair just and reasonable from the POV of prudent man of business taking
a commercial decision beneficial to class represented by them for whom the scheme is
meant.
Court cannot sit in appeal over the commercial wisdom of the majority of the class of
persons. The court cannot refuse to sanction a scheme even if in its opinion there could have
been a better scheme for the company/members/creditors. The court will also not question the
exchange ratio arrived at by an expert based on reliable procedures.
23. Hindustan Lever Employee’s Union v. Hindustan Lever
Merger of TOMCO and HLL was challenged in the High Court by shareholders of TOMCO
on grounds of inter alia under valuation of shares, violation of public interest for selling to a
foreign company etc.
Scheme cannot be against public interest merely because it involves sale to a foreign
company. In fact, FERA was specifically amended to increase foreign participation. Public
interest also would not include a mere future possibility of merger resulting in a situation
where the interest of the consumer might be adversely affected. Suitable corrective steps in
this regard can be taken after the merger if there arises an issue.
Jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with
mathematical accuracy if the determination satisfied the arithmetical test. A company
court does not exercise an appellate jurisdiction. What is imperative is that such
determination should not have been contrary to law and that it was not unfair for the
shareholders of the company which was being merged. The Court's obligation is to be
satisfied that valuation was in accordance with law and it was carried out by an independent
body. Although the CA who did the valuation was a director of TOMCO, he performed as
duties as a member of a renowned firm of CAs, and his conclusions were checked by two
other independent bodies. The fact that his connection wasn’t disclosed as a ‘material
interest’ of a director under 230(3) is not a sound argument.
Also, transfer of assets at a lower price could not be upheld as violative of public interest.
What requires, however, a thoughtful consideration is whether the company court has applied
its mind to the public interest involved in the merger.
OPPRESSION AND MISMANAGEMENT
24. Foss v. Harbottle
The petitioners were two minority shareholders and the defendants were the 5 directors of a
company that was set up to purchase some land. The directors used company money to
purchase their own lands to make personal profit.
Proper plaintiff rule- Only the company was competent to sue or safeguard its rights, and
not individual shareholders. The shareholders should bring their complaint before a general
meeting of the company instead. However, this rule is not absolute.
Majority rule- Company cannot function effectively unless the will of the majority prevails.
If a wrong is done to a company or there is irregularity in its internal management which is
capable of confirmation by a simple majority of members an action will not lie at the suit of a
minority of members. The company alone may sue. The shareholders, in this case, had all the
powers to intervene and ratify or reject the relevant contracts. When the power to ratify or
reject the decisions lies with the shareholders collectively, individual shareholders cannot be
allowed to file a case. They surrender to the will of the majority shareholders. The court will
not make a decision which can later be overturned by the majority shareholders.
25. TCS v. Cyrus Investments (revisit)
Cyrus Mistry was MD of Tata and his Co. Sharpoonji Pal Group was a minority SH in Tata
Sons. Ratan Tata convened a board meeting and got Cyrus removed from the board.
Unless the removal of a person as a chairman of a company is oppressive or mismanaged or
done in a prejudicial manner damaging the interests of the company, its members or the
public at large, the Company Law Tribunal cannot interfere with the removal of a person as a
Chairman of a Company in a petition under Section 241 of the Companies Act, 2013.
The court held that mere removal of a person as Chairman of the Company is not a subject
matter under Section 241 unless it is shown to be “oppressive or prejudicial”. The court held
that Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of
reinstatement. This cannot trigger the just and equitable clause for winding up or grant of
relief under these sections.
26. Menier v. Hooper’s Telegraph Works
The shareholding was as follows-
- Hooper Telegraph- 3k shares
- Meiner- 2k shares
- 13 persons with 325 shares, 10 of whom were directors.
The object of the company was to create a telegraph line under licenses granted to the
company. One of these licenses was granted to the chairman of the company, and this license
was claimed by the company. However, the chairman got greedy and incorporated another
company and used his licenses through the new company. He did not give benefit to the
original company. The chairman was sued and it was claimed that he did not hold those
licenses in his personal capacity. The chairman reached out to Hooper Telegraph for
assistance. Thereafter, a EGM of the company was held where a resolution for voluntary
winding up was passed. This was proposed by a director of Hooper Telegraph. The
arrangement b/w Hooper and the chairman was concealed from the other shareholders.
A minority shareholder’s action was properly brought in this case. The proper plaintiff and
majority rule was relaxed. This was because-
- The majority shareholders made an arrangement which dealt with matters affecting
the whole company, in which the minority was also interested.
- The defendant obtained advantages for itself by dealing with something which was
the property of the whole company.
- The majority has divided the assets of the Company, more or less, between
themselves, to the exclusion of the minority. I think it would be a shocking thing if
that could be done, because if so the majority might divide the whole assets of the
company, and pass a resolution that everything must be given to them, and that the
minority should have nothing to do with it.
27. Rajahmundry Electric Supply v. Nageshwara Rao
Respondent filed winding up application against appellant on grounds of mismanagement,
misappropriation of funds, and riding rough over the rights of the shareholders. The chairman
of the company said that the person responsible for mismanagement was fired by the
company and now no application for winding up was maintainable.
Whether mismanagement can be a ground for winding up depends on the facts of the case.
However, if it is in the interest of the shareholders that the company be wound up then the
court can do so.
Also, courts will not generally intervene at the instance of shareholders in matters of internal
administration, and will not interfere with the directors so long as they are acting intra vires
the articles. As long as the directors are supported by the majority shareholders the minority
cannot do anything about it.
Also, for the purposes of 244 (who may present application), if some members have
withdrawn their consent subsequent to the presentation of the application, it would not affect
the right to proceed with the same. The validity of the application is judged on the facts as
they were at the time of its presentation, and not subsequent events.

28. Shanti Prasad Jain v. Kalinga Tubes

Kalinga Tubes was floated as a pvt company with 2 groups of shareholders. They entered into
a private agreement w SP Jain (appellant) wrt to shareholding and appointment of directors.
The appellant became chairman of the board. No change was made in AOA to incorporate the
agreement. The relationship b/w the 3 shareholder groups got strained. Company wanted to
issue more shares. Appellant said that they should do a rights issue but the other 2
shareholder groups (which were the majority of the BoD) said that private placement should
be done at the discretion of the board, and a resolution was passed to this effect. New shares
were further issued to the benamidars of the 2 major shareholders. Appellant said this was
oppressive.
The conduct of the majority shareholders was oppressive to the minority members and this
requires that events have to be considered not in isolation but as a part of a consecutive
story – continuous acts on the part of the majority shareholders, continuing up to the date of
the petition, showing that the affairs of the company were being conducted in a manner
oppressive to some part of the member.
The persons to whom the new shares were issued were not benamidars but were independent
even though they might have been their friends, but this does not mean that they were under
the control of the majority.
The conduct must be ‘burdensome, harsh and wrongful’ and the mere lack of confidence
between the majority shareholders and those in minority would not be enough, unless
such lack of confidence springs from oppression of a minority by a majority in the
management of the company’s affairs.
The mere fact that the internal affairs were managed by keeping an equal proportion of shares
among the 3 shareholders cannot create a right in favour of the plaintiff. To compel the
majority to offer shares only to existing shareholders, would not only NOT be oppression, but
also deprive them of their right to direct free issue of shares under S. 62.
29. Needle Industries v. Needle Industries Newey Holding

The leader of the Indian 40% was the chief executive and MD of the company. At this time
FERA came into effect due to which RBI directed Needle India to bring down its foreign
shareholding to 40%. There was friction b/w English and Indian shareholders. For
Indianization of Needle India, English wanted the 20% reduction of their holding to be
allotted to an Indian co. in which they had a substantial interest. On the contrary, a rights
issue was approved for the existing shareholders at a board meeting, and it was resolved that
if the offer was not accepted 16 days from the date on which it was made, it would be deemed
to be declined. The letter offering its proportion to the Holding co was sent only 4 days
before the last date and it was received after the date of exercising the option had expired.
Similarly, the notice of the meeting was also sent quite late and was received in England the
day the meeting was to be held. This meant that the English were neither able to exercise
their right to buy the issue nor was it able to attend an important board meeting. The Holding
co. complained of oppression.
The person complaining of oppression must show that he has been constrained to submit to a
conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to
him in the exercise of his legal and proprietary rights as shareholder. An unwise, inefficient,
or careless conduct of a director would not in itself constitute oppression.
The fact remains that-
- The Holding co. in any case had to reduce 20% of its shareholding; and
- It did not have the right to renounce shares to anyone else.
Therefore, although proper notice was not given, the Holding co. in any case would not have
been able to participate in the rights issue.
However, in this case, the rights issue was made at nominal value whereas the market value
of the shares was much higher. Court said that this was unjust enrichment, and that the Indian
allottees of the shares must compensate the holding co. to the extent to which the mkt. value
exceeds nominal value.

WINDING UP
30. Madhusudan Gordhandasa v. Madhu Woollen Industries
Appellants filed a petition for winding up of the company on the grounds of inter alia the
company incurring huge losses and being unable to pay their debts.
If a creditor has filed a petition for winding up and there is a bona fide dispute about a debt
and the defence is a substantial one, the court will not order winding up.
Where however there is no doubt that the company owes the creditor a debt entitling him to a
winding up order, but the exact amount of the debt is disputed the court will make a winding
up order without requiring the creditor to quantity the debt precisely. The principles on which
the court acts are first that the defence of the company is in good faith and one of substance,
secondly, the defence is likely to succeed in point of law and thirdly the company adduces
prima facie proof of the facts on which the defence depends. Winding up order will not be
made on a creditor's petition if it would not benefit him or the company's creditors
generally.
The mere fact that it had suffered trading losses will not destroy its substratum unless there is
no reasonable prospect of it ever making a profit in the future. A court would not draw such
an inference normally. One of its largest creditors, who opposed the winding up petition
would help it in the export business. The company had not abandoned the objects of its
business.
Therefore, on the facts and circumstances of the present case it could not be held that the
substratum of the company had gone.
31. Innoventive Industries Ltd. v. ICICI Bank
ICICI initiated CIRP against Innoventive. Innoventive said that no debt was due since the
liabilities were temporarily suspended pursuant to a government notification. NCLT held that
due to the non obstantate clause in S. 238 IBC, IBC would prevail over a state statute.
SC held that the Maharashtra Act does not matter as non-payment of even disputed financial
debt constitutes a default under IBC. As long as a debt is due, it does not matter if it is
disputed. This is diff from the situation of an OC, where he can get out of the clutched of the
code the moment there is the existence of a dispute. For an FC, the AA will just look at
evidence produced by FC to see if a default has occurred.
There is repugnancy b/w Maharashtra Act and the IBC and the non-obstantate clause of the
IBC would prevail over the state law.
32. Mobilox Innovations v. Kirusa Software
Section 8 notice was sent to Mobilox for non-payment of dues. Mobilox said that there is a
dispute b/w the parties including breach of an NDA.
Kirusa then filed an application under S. 9 of IBC initiating CIRP which was rejected by
NCLT on the ground that Mobilox had served a notice of a dispute.
Supreme court agreed giving a wide ambit to the meaning of dispute, holding that disputes
are not merely limited to pending arbitration or litigation proceedings and the word “and”
occurring in S. 8(2) must be read as “or”.
Plausible contention test- It is clear that such notice must bring to the notice of the
operational creditor the ‘existence’ of a dispute or the fact that a suit or arbitration proceeding
relating to a dispute is pending between the parties. Therefore, all that the adjudicating
authority is to see at this stage is whether there is a plausible contention which requires
further investigation and that the ‘dispute’ is not a patently feeble legal argument or an
assertion of fact unsupported by evidence. It is important to separate the grain from the chaff
and to reject a spurious defence which is mere bluster. However, in doing so, the Court does
not need to be satisfied that the defence is likely to succeed. The Court does not at this stage
examine the merits of the dispute except to the extent indicated above. So long as a dispute
truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has
to reject the application.
33. CoC Essar Steel v. Satish Kumar Gupta
Essar Steel was in CIRP and the CoC had accepted the resolution plan of ArcelorMittal,
making it the resolution applicant. The RP was challenged by some creditors.
SC held tat the CoC is in the driver’s seat for directing the CIRP. This is bec CoC being
financial creditors have great financial wisdom. The ultimate decision of what to pay and
how much to apay to each class of creditors lies with the CoC. The AA cannot interfere on
merits with the commercial wisdom of the CoC, only limited judicial review is available to
see whether the CoC has taken into account that interests of all stakeholders have been taken
care of and the value of the CDs assets has been maximized.
SC rejected the equality principle, the idea that OC’s, FC’s, secured and unsecured creditors
have to be treated as an equal class of creditors. The CoC can approve differential payments
to different class of creditors provided that the provisions of IBC have been complied with.
.