Introduction

• This case deals with the issue of new shares not to the existing shareholders but to others privately and does not mean oppression of the majority shareholders.

Facts

• In this case, the shareholders of the company originally consisted of two groups.
• There were some financial difficulties for the company, and the petitioner agreed to supply finance on the terms that he would be allotted shares equal to those held by the two groups after sharing the capital.
• The company was not party to the agreement, so it converted into a public limited company to obtain advances from Industrial Finance Corporation.
• The majority of shareholders, who were respondents, issued fresh shares after conversion to outsiders also, whereas the petitioner suggested in the meeting of the Board of Directors that fresh shares should be allotted to the existing shareholders according to Section 80 of the Companies Act, 1956.
• The petitioner applied under Section 397 of the Companies Act, 1956 (corresponding to Section 241(1)(a)), on the grounds of oppression.
• The Single Judge Bench declared that it was oppressive and mismanagement due to continuing oppression of minority shareholders.
• The Division Bench held that the agreement of 1954 did not have any binding effect on the company irrespective of its nature in 1957 when it was converted into a public company from a private company.
• Then the appeal was filed before the Supreme Court.

Issues Involved

• Whether the majority power was exercised in good faith would be oppression of mismanagement?

Observation

• The SC's ruling highlighted that the public company formed in 1957 was not obligated by the 1954 agreement and could allocate shares as decided in general meetings under Section 81 of the Companies Act, 1956.
• Merely opting to offer shares to others instead of existing shareholders, as decided in the 29th March 1958 meeting, didn't inherently oppress minority shareholders. Majority shareholders weren't obliged to adhere to the minority shareholders' stance on share allotment.
• The Court noted the apprehension of the Patnaik group during the issuance of new shares that the appellant group might seize majority control.
• Consequently, shares were designated to others in the general meeting to prevent this.
  • If new shares were not allotted to existing shareholders due to this concern, it could not be deemed oppressive to the minority.
• Regarding the lack of confidence and differences among shareholders in early 1958, it was emphasized that mere distrust does not constitute oppression unless it demonstrates unfair treatment of minority rights.

Conclusion

• The Court, while dismissing the appeal, ultimately determined that the allotment of shares to outsiders by the majority shareholders would not constitute oppression against the minority appellant group.
• This action was taken to prevent the scenario where the appellant could gain complete control of the company, especially considering that, at the time, the other two shareholders, Patnaik and Loganath, lacked funds.