Cosmosteels Pvt. Ltd. v. Jairam Das Gupta

The court in this case talks about oppression of shareholders, self-sale of company's share and requirement of notice. The case has differentiated between the two sects of provision i.e. Section 100-104 and Section-402, so as to prevent the majority from again, intervening an appeal brought against the same majority.
Estimated Reading Time: 10 minutes

Introduction

Normally, a company is prevented from buying its own shares so as to prevent any misuse and to protect the interest and investment of the shareholders. However, there are exceptions to this rule. For example, in case of oppression of shareholders, a company can be directed to buy its own shares. Refusing reasonable transfer of shares,[1] refusal to provide proper benefits, etc. can be some examples of oppression of shareholders. While companies are directed to buy their own shares in cases of oppression of shareholders, using their own share-capital, a pertinent question remains unanswered: won’t it hamper the interest of other shareholders/creditors? Share capital is the sum of money an organization receives by selling shares. The same sum of money is used again in the business to gain profit, which thus increases the share value.[2]

Procedural History

The above-mentioned case[3] was presented in the Supreme Court of India before a three-judge bench consisting of Justice P.N. Bhagwati, Justice D.A. Desai, and the then Chief Justice of India, JusticeMirza H. Beg,.The case was decided on December 16th, 1977. The case dealt with the reduction of share capital in the process of the company buying its own shares and whether notice was to be provided to creditors regarding such order of the court. The court dealt with provisions of Companies Act, 1956, which provided for reduction of share capital (Section-100 to 104), company buying its own shares (Section-402), and oppressed shareholders (Section-397 and 398).

Facts

Gupta Group, a group of shareholders had filed a company-petition in the High Court of Calcutta seeking relief under Section-397 (3) and 398 of the Companies Act.[4] They claimed to have been oppressed as shareholders by the majority. The claim was brought against the Jain Groups (having three individuals) and the Company. An order was passed by the company judge on April 21st, 1977, by which the board of directors of the company was superseded and an advocate, chartered accountant, and auditor and an engineer were appointed to look into the assets and liabilities of the company and finally determine a break-up value. The company was to buy the shares which belonged to Gupta Group, within three months, in the failure of which, the administrator would have the power to do the same on the behalf of the Company and the capital shares of the company would be reduced pro tanto.

Again, certain interim orders were sought by the company and the Jain Group (defendants). This resulted in the requirement of payment of 7 Lakhs to certain parties, being stayed while the process for valuation of shares did not stay. Further, an injunction was provided to the company form creating encumbrance on, dealing with, or disposing of, their assets during the evaluation.

Again, the interim order was modified on April 25th, 1977, and the company was ordered to carry out the payment of 7 lakhs to the persons like in the first order, within 14 days. The process of investigation and evaluation has stayed.

The order of April 25th, 1977, was challenged under a Special Leave Petition (SLP). The said defendants became appellants. The Supreme Court, stayed the order of April 25th, 1977 passed by the division bench of the High Court. Injunction as provided before was maintained by the Supreme Court. Prayer for a stay of the order of the high court dated April 21st, 1997 was also granted. Here the court exercised its power under Section-402 directing the company to buy from the shareholders rather than exercising Section-100.

An order was passed by the Supreme Court on May 31, 1997, disposing of the appeal in consent terms. The company (appellants in the Supreme Court) was to buy 1300 shares from Gupta Group (respondents in the Supreme Court). The share price was to be determined by chartered accountants by proper analysis of assets, liabilities, loans, etc. of the company. Both the parties were heard and the decision of the chartered accountants was to be final and binding.

The interveners filed the present miscellaneous petition on August 22, 1977, claiming for postponement of the purchase of shares by the company. Further, they claimed the right to intervene. They further claimed for proceedings for such purchase of shares, by following proper procedures laid down in Section 100 to 104.[5] An additional prayer was for a modification of the order of May 31st, 1977.

Issues

The issues before the court were:

  1. Was the notification of purchase of shares by the company required to be provided to the interveners (i.e. the creditors) or not.
  2. The court was also required to decide if the principle of natural justice had been violated by the decision.
  3. Ultimately the court was required to decide if the interveners had the right to object. (The court didn’t deal with whether the interveners were in fact, creditors. It simply assumed that they were, and dealt with the case.)

Contentions

In the present case, the contention by the interveners was discussed, rather than discussing the contentions of the appellant and the respondents. The interveners claimed that they were creditors to the company and claimed for payment of Rs. 40 Lakhs before the company bought the shares from the Gupta Group. They stated that “Cosmos Pioneer” was an oil tanker that belonged to the company. The vessel, which contained petroleum had been chartered for transport from Bombay Port to Kandla Port on June 15th, 1973. The vessel was stranded and abandoned on June 18th, 1973. This was the base for the claim. They claimed that they were creditors to the company and were entitled to notice of reduction in the share capital of the company since they had a monetary interest in the company.

Decision

  1. Section-402 was independent of Section 100-104 as prescribed by Section 77.
  2. The notification was not required when it came to Section-402 as notification requirement would have violated its object.
  3. Interests of the intervening creditors were well-considered under Section-402.
  4. In an appeal under Section 397 and 398, the situation under section 100-104 would not likely arise.
  5. Principles of natural justice were adhered to.
  6. Section-400 has been adhered to by the Supreme Court.[6]

Analysis

Section-77 of the Companies Act prevented companies from buying their own shares. Section 101-104 and Section-402 were exceptions to the said section. But again, Section 101-104 and Section 402 could have only been followed in cases such as oppression of shareholders and an appeal being brought against it under Section-397 and 398.

Under Section-100, reduction of capitals could have been done by (i) extinction or reduction of liabilities with respect to sharing capitals not paid up (ii) cancellation of paid-up shares which is lost or unrepresented by shares (iii) paying off any paid-off shares. Companies, under Section-101 also had to adopt a special resolution for such activities and had to seek an order from the court confirming the reduction. A list was to be made of creditors who could object to the reduction and who could not. This requirement of Section-101, which essentially notified the creditors of activities being taken under Section-100, was not essential if the court had taken up its power under Section-100 (3), which provided that the said procedure of notification can be dispensed with if the court thinks it’s proper to do so.

Section-397 and 406[7] provided for granting appropriate relief and power to lift the ban on a company to buys its own shares.Section-397 and 398[8] provided that the oppressed shareholders can approach the court and the court can under Section-402,[9] exercise its power to order the company or its members to buy shares from the oppressed shareholders. In case the company had to buy from the oppressed shareholders, the share capital would reduce.

The court decided that both the processes mentioned in Section-402 and Section 100-104 were unique and distinct. It was therefore not reasonable to say that procedure under Section 100-104 must be followed in every case of a reduction of capital of a company. Further, Section-77 prescribed that the two sets of provisions are independent – a conclusion drawn from the use of “or” in the said section.

Rule of notice to the creditors as provided under Section-101 under which a company has to call for special resolution whereas no such notification is required under Section-402. It was further decided that the statutory power of a court can’t be made dependent on the vote of members of a company. Further, Section-402 had the object to prevent delay by not resorting to special resolutions being passed. Therefore, notification to the creditors defeats the very purpose of the said section. This essentially means that the right to object or interfere didn’t exist. Such rights could have only existed if the company was directed to work under Section 100-104. Here as well, under special circumstances under Section-101 (3), the company is not required to notify the creditors/shareholders, as the procedure for special resolution is dispensed with. Section 100-104 was discussed in the case but it was also said that such a situation would not arise from a petition under Section-397 and 398. In the case of a petition under Section-397 and 398, provisions of the Act are to be applied according to the discretion of the court.[10]

Section-402 provided the court with the power to lift the ban on the company to buy from its own shares as it didn’t require any consent from the creditors/shareholders as required by Section-101. This was said to be completely justified. Further, it was noted[11] that just because the consent of the interveners was not taken, didn’t mean that their rights had been violated. It was said that the court could use its discretion after careful analysis of the relevant facts and the circumstances. This requirement was required to be fulfilled even in cases where the compromise had been met between the parties in dispute. Additionally, it was noted that the court had ordered the chartered accountants to determine the break-up value of the shares based on the assets, liabilities, debts, etc., present and contingent. Therefore, in the process of determination of break-up value, the interests of the interveners were also included. Moreover, the court had not even set a minimum value for the shares to be bought by the company. If the value was set by the court such that the value would be more than the original value of the shares, the company had to use its funds to buy the more expensive shares. The order had clearly stated that if the break-up value was more than Rs. 65 per share, the company had to pay for the balance while if the valuation was done at less than Rs. 65, Gupta Group had to pay for the balance. Here, the sole power is provided to the chartered accountants. Finally, since, the interveners had failed to show how the decision had affected their interest due to the lack of notification. Therefore, the principles of natural justice had not been violated.

The court had also taken notice of Section-400 which provided that every application under Section-397 and 398 must be given notice to the central government. The government may make representation with respect to such an application, which a court had the duty to take into consideration. Since the notice was provided by the High Court of Calcutta to the Central Government, and since no representation was made, there was no fault on the part of the Supreme Court to not notify the Central Government.

Conclusion

There are provisions that provide for the protection of small shareholders from oppression. They can file an appeal and the court can suggest as per their discretion. Generally, the court chose to follow Section-402. A certain number of people alleging to have been oppressed is a must to bring an appeal.[12]Nevertheless, the required number can be subject to change, based on the discretion of the central government. This shows how such relief provisions like Section-402 are not limited.

If Section-101 is followed along with Section-402, the dominant people involves in the shares would vote against the special resolution and rule out the decision of the court. Therefore, the argument requiring notice would defeat the basic principle of law that no one is above the law, which is clearly not the intent of the legislature. Further, a 3/4th majority is required for the special resolution to be passed. Such a majority can’t be obtained by the oppressed minority. Here, for an appeal against the majority rule, the court can’t again provide power to the same majority who oppressed the minority.

Section-402 can be used for over-riding other provisions of the Companies Act but it cannot be used to nullify other Acts. This shows the importance and power of the said section within the Companies Act. Many other cases have debated and defended Section-402 along with Section-397 and 398,[13] and some cases have specifically referred to the present case.[14] The case has differentiated between the two sects of provision i.e. Section 100-104 and Section-402, so as to prevent the majority from again, intervening an appeal brought against the same majority. Therefore, the court’s interpretation and decision, in the present case, are very clear and have served the purpose of the provisions.

Also read Types of Companies under the Indian Company Law


[1] Jalpaiguri Cinema Co. Ltd. v. PromothaNath Mukherjee, (1978) 48 Comp Cas 131(Cal.) (India).

[2] Bucha F. Guzdar v. Commissioner of Income TaxAIR 1955 SC 74 ⁋ 9 (India).

[3] Cosmosteels Pvt. Ltd. v. Jairam Das Gupta, (1978) 48 Comp Case 312 (India).

[4] Companies Act Section 397-398 (1956).

[5]Companies Act Section 100-104 (1956).

[6] Cosmosteels Pvt. Ltd. v. Jairam Das Gupta, (1978) 48 Comp Case 312 ⁋14 (India).

[7] Companies Act, Section 397 & 406 (1956).

[8] Companies Act Section 397-398 (1956).

[9] Companies Act §402 (1956).

[10] Companies (Court) RuleRule 90 (1959).

[11]Supra note 6.

[12] Companies Act §399 (1956).

[13] Debi Jhora Tea Co. Ltd. v.Barendra Krishna Bhowmick and Others (1980) 50 CompCas 771 ⁋ 25 (India).

[14] Bpl Communication Limited v. Shri TPG Nambiar (2006) 132 CompCas 13 CLB⁋ 3 (India).

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