Cosmosteels Private Ltd. v. Jairam Das Gupta & Ors.

In the present case, the readers will learn how the Apex Court held that there was no ambit for apprehension on behalf of the Petitioners that the reduction of share capital to be affected under the Court’s direction, without reference or notice to the creditors, would adversely affect the interest of the Company.
CITATION1978 AIR 375
COURTSupreme Court of India
JUDGES/CORAMJustice D.A. Desi
DATE OF JUDGEMENT16.12.1977

Introduction

Section 77 of the Companies Act, 1956, envisages that on the purchase by a company of its own shares, reduction of its share capital may be effected and sanctioned in either of two different modes:

  1. According to the procedure prescribed under sections 100-104; or
  2. Under section 402, depending upon the circumstances in which reduction becomes necessary.

Section 77 of the Act also prohibits the company from buying its own shares unless the consequent reduction of capital is effected in pursuance of sections 100-104 or Section 402. Section 397-398 of the erstwhile Companies Act, 1956, talks about when any shareholder feels that they are oppressed or that there is mismanagement by the company, such shareholders can institute a case under the sections abovementioned to the Companies Law Tribunal. Section 100-104 of the Companies Act, 1956, talks about when a company can pass a special resolution for the reduction of share capital. Where the reduction of share capital is necessitated by directions given by the Court under sections 397 and 398, the procedure prescribed in Sections 100-104 is not required to be followed.

Facts

The facts of the case are as follows: The case was instituted by Jairam Das Gupta in the Calcutta High Court in 1975 under Section 397 & 398 of the Companies Act, 1956, stating that there was oppression by the majority on the minority shareholders and praying for various reliefs. The Court appointed a Chartered Accountant and an Engineer for investigating into the accounts of the company and valuation of assets of the Company and to determine the break-up value of the shares as on the date of the petition respectively.

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An appeal was sought by both the parties and the payment of Rs. 7 Lakh to certain parties stayed but the order for the valuation of the shares did not stay and the proceeding for the same continued. Vide order dated 25.04.1997 the company was directed to carry out the payment of Rs. 7 Lakh within a fortnight from the date of the order failing which an Administrator would be appointed by the Judge to take over the possession for the purpose of making the said payment.

An SLP was moved by the Petitioners and the court stayed the order of the Division bench dated 25.04.1997 for the payment of Rs. 7 Lakhs. The petitioners filed the present miscellaneous petition on 22.08.1977 requesting the Court to permit them to intervene in the proceedings pending in and to postpone the purchase of shares by the Company until such time as the Company adopts proceedings in a competent Court by following the procedure laid down by the Companies Act, 1956, and particularly sections 100 to 104 for reduction of the share capital. In the alternative, there was a prayer for safeguarding the claims of interveners by modifying the order dated 31st May 1977. The petitioners claimed to be the creditors of the Company to the tune of Rs. 40 Lakhs.

Issues

The main issue in the case was: When a case is filed under sections 397-398 of the Companies Act, 1956, on account of oppression of the minorities by the majority and the mismanagement by the company, is it obligatory for the Company in question to serve a notice upon all the creditors of the Company.

Summary of court decision and judgment

In the instant case, it was held that there was no ambit for apprehension on behalf of the Petitioners that the reduction of share capital to be effected under the Court’s direction, without reference or notice to the creditors, would adversely affect the interest of the Company because:

  1. As per the orders dated 31.05.1977, as valuation was done under the petition filed under Section 397 and 398 the Chartered Accountants would have to take into account the assets of the company as also the existing contingent and anticipated debts, liabilities, claims, and demands which was revealed in the accounts of the company for the last five years.
  2. The order of the Court did no fix any minimum price at which shares shall be purchased by the company.
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Analysis

The right to notice is a part of the Natural Justice, but a party must establish the existence upon of proof of an interest which is bound to be not injured by not hearing the parties claiming to be entitled to notice and to be heard before the order is passed. So under section 400 of the Companies Act, it does not envisage a fresh notice to be issued to the Central Government at the appellate stage even though when a petition is filed under the sections 397 and 398 it is an obligatory function of the Court to give notice under section 400 to the Central Government and allow them to make a representation and if any representation is made then the Court would have to take that into consideration before passing the final order in the proceeding.

Section 100-104 talks about when and how a company can reduce its share capital and the procedure laid down states that a special majority is enough to go ahead with the reduction of share capital. The courts, however, under their powers vested under section 397 and 398 states that whenever a case is filed under the said provisions of the Companies Act, 1956, then the Company is not required to be followed in order to make the direction effective. Section 77 of the Companies Act, 1956, restricts the company from buying its own shares and securities unless the reduction of capital is effected in pursuance of Sections 100-104 and Section 402.

Conclusion

The court’s decision was correct in as much as it helped to keep the rights of the oppressed minority shareholders and deal with the mismanagement done in the company. This case gives a brief idea over the understanding of the powers of the Court and how it can exercise its given power in all cases to serve justice for people.

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