JUDGMENT
Lakshmanan, J.
1. Company Application No. 266 of 1991 was filed by one L. RM. K. Narayanan to substitute him as the petitioner in Company Petition No. 21 of 1990 in the place of respondents Nos. 8 to 15 (company petitioners.)
2. Company Application No. 392 of 1991 was filed by respondents Nos. 8 to 15 in Company Application No. 266 of 1991 to grant leave to them to withdraw the main company petition from the file of this court for the reasons stated in the affidavit filed in support of the said company application.
3. Company Petition No. 21 of 1990 was filed by respondents Nos. 8 to 15 in Company Application No. 266 of 1991 against Puthuthottam Estates (1943) Ltd., under sections 397, 398, 402 and 403 of the Companies Act to regulate the conduct of the affairs of the company and for various other reliefs. The petitioner in Company Application No. 266 of 1991 is the son of the first petitioner in Company Petition No. 21 of 1990 and other petitioners are his mother, brothers and sisters and brother-in-law. The petitioners have filed the company petition against the company and its board of directors seeking for relief to regulate the conduct of the company’s affairs and for appointment of an administrator to take charge of the company. Very serious allegations of malpractice have been alleged against the company and its directors.
4. It is relevant at this stage to notice certain averments made by the petitioners in the main company petition. Relevant passages are reproduced hereunder :
“The petitioners together hold substantial interest in the first respondent company and they hold together 18.37 per cent. of the paid-up capital of the first respondent company. The break-up figures of shares held by the petitioners respectively are as follows :
Names Shares
1. L. Ramakrishnan 2,730
2. L. RMK. Valliammai Achi 3,890
3. L. RMK. Valliappan 930
4. RM. Kannammai 2,878
5. L. Meyammai 2,976
6. SP. Nachammai 3,182
7. V. Vasantha 2,630
8. ST. Annamalai 70
-------
19,286
-------
As such, the petitioners are qualified to file this petition under section 399(1) of the Companies Act.
The petitioners state that the affairs of the company are conducted in a manner detrimental to the interest of the company and oppressive to the minority shareholders and the respondents who are in management of the first respondent-company are in the management only to carry out their illegal and unlawful acts to appropriate assets of the company for their personal purposes. Respondents Nos. 2 to 6 have been acting in a manner oppressive to the majority shareholders and prejudicial to the interest of the company and its shareholders. Respondents Nos. 2 to 6 who are in management and in control of the company affairs did not disclose the real facts to the members of the company and their acts amount to mismanagement, misappropriation, misconduct and oppression on the minority shareholders and it affects the interest of the company as a whole.”
5. The board of directors who hold majority shares in the respondent-company, realising that the petitioners along with one L. RM. K. Narayanan, son of the first petitioner, hold 23.26% of the equity capital and are an obstacle for carrying out their unlawful acts which are beneficial and advantageous to them, are now contemplating to increase their shareholding in the respondent company by violating the provisions of the Companies Act. To remove the obstacle in passing any special resolution, the board of directors have now decided to issue right shares. As on date, the petitioners and the said L. RM. K. Narayanan, son of the first petitioner, hold more than 23% of the equity capital, while the persons in management hold 55 per cent. of the equity capital and, therefore, the present management is unable to pass any special resolutions without the concurrence of the petitioners and the said L. RM. K. Narayanan. The petitioners can vote against any special resolution if it is detrimental and prejudicial to the interest of the company and its shareholders.”
6. Thus, it is seen from the averments extracted above that the petitioners, while filing the company petition, have taken into account the shareholdings of L. RM. K. Narayanan also to maintain the company petition, which suited them at the time of filing the company petition. In fact, they said in paragraph 23 that the board of directors who hold majority shares in the company, realising that the petitioners along with one L. RM. K. Narayanan, son of the first petitioner hold 23.26 per cent. (18.37 per cent. by the petitioners and the rest by L. RM. K. Narayanan) of equity capital and are an obstacle for carrying out their unlawful acts which are beneficial and advantageous to them, are now contemplating to increase their shareholding in the company by violating the provisions of the Companies Act. It is further averred that the persons in management hold 55 per cent. of the equity capital and hence are unable to pass any special resolutions without the concurrence of the petitioners and the said L. RM. K. Narayanan.
7. This company petition, though signed by the petitioners, was presented on February 26, 1990, in this court.
8. Mr. L. RM. K. Narayanan has also filed a separate affidavit supporting the cause of the petitioners in the main company petition. He is holding 5,140 equity shares of Rs. 10 each in the capital of the company and his shareholding in the company is nearly 4.88 per cent. Paragraph 3 of his affidavit is worth noticing :
He says :
“I am entitled as a member to support the case of the petitioners and I am also joining with them in seeking the relief prayed for in the company petition.”
9. In fact, Mr. Narayanan gave more details in regard to the mismanagement of the company by the directors. He has furnished details about various criminal proceedings wherein the company and its officers have pleaded guilty and paid fine in the cases. It is stated that the directors have pleaded guilty and paid fines for violations apparently with a view to prevent an enquiry into the extent of the offences committed by them. The facts and particulars given by Mr. Narayanan, if enquired into, may bring out startling and astonishing facts in regard to the management of the affairs of the company by its directors.
10. However, this court is not at this stage concerned about the merits of the company petition. This court now is on a very short point as to whether the company petition filed by respondents Nos. 8 to 15 in Company Application No. 266 of 1991 can be allowed to be withdrawn from the file of this court to the detriment of Mr. L. RM. K. Narayanan, who supported the cause of the company petitioners earlier at the time of filing the main petition and whether the substitution petition filed by L. RM. K. Narayanan is to be ordered as prayed for.
11. It appears from the affidavit filed by Mr. L. RM. K. Valliappan, brother of Mr. Narayanan and son of the first petitioner, Ramakrishnan Chettiar that they have sold all their share in the company to the sixth respondent on January 18, 1991, and hence they have no interest in the affairs of the company. They have no right or interest to proceed further in the company petition and hence they pray for leave of this court to withdraw the company petition from the file of this court. They filed Company Application No. 392 of 1991 under rule 88(2) of the Companies (Court) Rules, 1959. Even before the filing of this application, Mr. Narayanan filed Company Application No. 266 of 1991 on February 1, 1991, under rules 6 and 9 of the Companies (Court) Rules and section 402 of the Act. Mr. Narayanan, in his affidavit, has expressed his apprehension that the company petitioners are likely to withdraw the company petition since respondents Nos. 2 to 7 in the company petition have agreed to purchase their shareholdings. He has stated that since the proceedings under sections 397, 398 of the Act are representative actions and that he is vitally interested in prosecuting the petition and if the petition is allowed to be withdrawn, he and other shareholders are likely to be prejudiced very much. He has also stated that he had already filed an affidavit in this court setting out in detail how the affairs of the company are being conducted in a manner prejudicial to the company and its shareholders and hence he is entitled to be substituted in the place of the petitioners in the company petition. This petition was opposed by the managing director of the company through Mr. G. Subramaniam, learned counsel appearing for Mr. K. Govindarajan, advocate, supported by Mr. M. S. Krishnan, learned counsel for the petitioners in the company petition.
12. Mr. G. Subramaniam, learned senior counsel, has urged that the applicant in Company Application No. 266 of 1991 cannot be brought on record or substituted in the place of petitioners in the company petition on the following points :
(a) The petitioner in Company Application No. 266 of 1991 is not holding 10 per cent. of the shares to maintain the petition;
(b) Counsel relied upon in the main company petition cannot be taken advantage of by the present applicant;
(c) When the applicant is not entitled to file an independent company petition, he cannot indirectly become the petitioner and prosecute the company petition;
(d) The petitioner in Company Application No. 266 of 1991 us not in any way prejudiced, if the company petition is allowed to be withdrawn. If at all, he can take steps to file a company petition separately if he is eligible;
(e) Mere filing of an affidavit by Narayanan will not give a right to him to maintain the company petition independently;
(f) The applicant is neither a necessary party nor a proper party to the proceedings to invoke the provisions of the Code of Civil Procedure for substitution. He has no right to come on record as a petitioner in the company petition.
13. Per contra, Mr. A. K. Mylsamy, learned counsel appearing for Mr. Narayanan, is meeting the points raised by Mr. G. Subramaniam cited the following decisions in support of his case for substitution in the place of the original petitioners :
They are :
1. Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao ;
2. V. K. Mathur v. K. C. Sharma [1987] 61 Comp Cas 143, 148 (Delhi);
3. Jalpaiguri Cinema Co. Ltd. v. Promotha Nath Mukherjee [1978] 48 Comp Cas 131 (Cal); and
4. Rai Mathura Prasad v. Hanuman Prasad Bhagat [1984] 56 Comp Cas 467 (Pat).
14. Before adverting to the above judgments, it has to be considered whether a shareholder whose consent was obtained for filing petition under section 397 of the Act, etc., can ask for substituting himself as a petitioning creditor even though his shareholding is less than 10 per cent. as provided in section 399(1)(a). In this connection, the principal contention of Mr. G. Subramaniam is that such a person cannot ask for substitution and his only remedy is to file a separate petition. No direct authority has been brought to my notice on this aspect of the matter. In my considered opinion, when once a petition is validly presented, it is well open to a shareholder to ask for substitution and prosecute the proceedings even though such a shareholder by himself could not have presented a petition under section 397 for want of required share qualification. The court has to only consider whether the petition was a valid petition at the time of its presentation. If a valid has been presented, any shareholder can ask for substituting himself as the petitioning creditor. In this connection, the ratio laid down by the highest court in Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91, is of great importance. In very clear terms, it has been laid down that the validity of a petition must be judged on the facts as they were at the time of its presentation. When once there is a valid petition, the shareholder who seeks to substitute himself wants to merely continue such a valid petition and such a shareholder need not hold ten per cent. of the share capital. The requirement as to the share qualification is relevant and material only at the time of institution of the proceedings. Therefore, I am unable to countenance the argument of Mr. G. Subramaniam, learned senior counsel appearing for the respondents in both the company applications.
15. Further, it is not incumbent upon the court to dismiss a petition because a proceeding under section 397 or 398 of the Act is a representative proceeding. Even if the original petitioner does not want to continue the proceedings, the court cannot be compelled to dismiss the action. Even then, it is open to the court to consider the merits of the case without dismissing the petition.
16. I now propose to deal with the judgments referred to above :
Rajahmundry Electrical Supply Corporation Ltd.’s case [1956] 26 Comp Cas 91 (SC) was filed under the old Act (VII of 1913) under sections 153C, 162(vi). The Supreme Court held thus (at page 95) :
“Held, that the validity of a petition must be judged on the facts as they were at the time of its presentation, and a petition which was valid when presented cannot, in the absence of a provision to that effect in the statute, cease to be maintainable by reason of events subsequent to its presentation. The withdrawal of consent by thirteen of the members, even if true, could not affect either the right of the applicant to proceed with the application or the jurisdiction of the court to dispose of it on its own merits.”
17. It is thus seen from the judgment of the apex court that the validity of a petition must be judged on the facts as they were at the time of presentation. It is not the case of the respondents that the company petition was not validly presented. If that is so, when a petition is validly presented, in the absence of a provision to that effect in the statute, it does not cease to be maintainable by reason of events subsequent to its presentation.
18. At this juncture, the subsequent affidavit, dated March 28, 1991, filed by Mr. L. RM. K. Valliappan is worth to be noticed. An entirely different story has been given in paragraph 2 different from the one given in the main company petition. Mr. Valliappan says as follows :
“As regards the allegations contained in paragraphs 3 and 4 of the affidavit under reply, I state that out of apprehension regarding sale of some assets of the company and further issue of capital, we filed the above company petition under sections 397 and 398 of the Companies Act, 1956, to regulate the affairs of the company. Respondents Nos. 1 to 7 filed their counter in Company Applications Nos. 242 and 243 of 1990 stating that the affairs of the company are properly conducted and our apprehension was unwarranted. As regards the allegations contained in paragraph 4 of the affidavit under reply I state that the allegations made by the applicant in his affidavit are not true to our knowledge. As regards the allegations contained in para 5 of the affidavit under reply I state that we respondents Nos. 8 to 15 have sold all our shares in the first respondent company to the sixth respondent on January 18, 1991, and thereafter we have no interest in the affairs of the company. It is true that we are withdrawing our company petition on the account that we have sold all our shares in the respondent company to the sixth respondent on January 18, 1991.”
19. The real fact is that they were made to file an affidavit like the above one because they have sold their shares in the company to the sixth respondent on January 18, 1991, and hence they have no interest in the affairs of the company. It is thus seen beyond any doubt that the petitioners in the main company petition have filed the company petition only with a view to achieve their personal gain and filed the company petition as a coercive process to make the directors of the company and others in the management come to terms and, on achieving their object of selling their shares, they have decided to withdraw their serious allegations made earlier. It is to be noticed that they needed the support of the petitioner in Company Application No. 266 of 1991, at the time of filing and maintaining the company petition and simply ignored or forgot the help of Narayanan when they achieved their object; there is no purpose in blaming the petitioners for their conduct in settling their claim with the people in the management. The people who made very drastic and serious allegations against the company and its directors have now completely withdrawn their allegations made earlier and say that the allegations made earlier are not correct and that the affairs of the company are properly conducted and that their apprehension was unwarranted.
20. V. K. Mathur’s case, [1987] 61 Comp Cas 143 (Delhi) is a judgment rendered by the Hon’ble Mr. Justice S. Ranganathan of the Delhi High Court as he then was. The headnote of the case reads as follows :
“Once there is a valid petition before the court, there are ample powers in the court to permit other persons to join the petition as co-petitioners. In a proper case, the court can even permit such persons to take over the prosecution of the petition from the original petitioner and substitute themselves for him in case it is found that he desires to withdraw from the petition for oblique reasons but the court is satisfied that the allegations in the petition need to be gone into. This is clear, as pointed out by Mr. Mehra, from Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC) and rule 88(2) of the Companies (Court) Rules. These are provisions and powers designed to enable the court to render justice and to ensure that the real grievances of groups of members properly ventilated are remedied by the court, and not allowed to be circumvented by interested persons buying up or otherwise silencing the original petitioner.”
21. In Jalpaiguri Cinema Co.’s case [1978] 48 Comp Cas 131, the Calcutta High Court held thus (p. 140) :
“Even in cases where the plaintiff does not want to proceed with his action it is not incumbent upon the court to dismiss the action. The court may if it so desires deal with the action on merit without dismissing the same. Reference in this connection may be made to Dasarath Mandal v. Emperor [1907] ILR 34 Cal 325 and Pazhaniandi v. Naku, AIR 1927 Mad 109. A petitioner likewise in an application filed under section 397 or 398 of the Act cannot insist on dismissal of the application on the ground that he does not want to press the same. Notwithstanding the unwillingness of the petitioner to press an application under section 397 or 398 of the Act, the court may deal with the application on merits.
Rule 88(2) of the Rules ensures that no petitioner of an application filed under section 397 of the Act may withdraw the application without the leave of the court. We do not think that a petitioner of such an application may bypass the provisions of this rule by not wanting to withdraw the application but insisting on the dismissal of the application on the ground that he does not desire to press the same. He cannot, in our opinion, do indirectly what he cannot do directly by virtue of rule 88(2) of the said Rules.”
22. Rai Mathura Prasad’s case [1984] 56 Comp Cas 467, is a judgment rendered by a Division Bench of the Patna High Court, consisting of Sandhawalia C.J. and Lalit Mohan Sharma J.
23. The Bench was of the view that the entire scheme of the Act clearly indicates that the court’s power in this regard is to be used to protect the interest of the public or a group of shareholders. The Bench held thus (p. 471) :
“The entire scheme clearly indicates that the court’s power in this regard is to be used to protect the interest of the public or a group of shareholders. Sub-section (3) of section 399 permits an individual member to make an application ‘on behalf and for the benefit of all’ members of a company entitled to move the court. Such a person clearly acts in a representative capacity and in the present case, Banarsi Lal Bhagat was also representing the interest of a group of shareholders including the petitioners. With respect to the representative nature of the proceeding, the provision is similar to those of Order 1, rule 8 which states that where there are numerous persons having the same interest in one suit, one or more of such persons with the permission of the court, may sue or be sued or may defend in such suit on behalf or for the benefit of all persons so interested. It is firmly established that a suit filed under Order 1, rule 8 does not abate on the death of the plaintiff because (i) the persons represented are not ‘legal representatives’ of the deceased within the meaning of the Code, and Order 22, rules 33 and 34, do not apply to such a case, and (ii) the persons represented are already parties to the suit constructively though the conduct of the suit is in the hands of a particular person to whom leave has been given. Any one of the persons represented, therefore, can continue the suit after the plaintiff’s death. Any such person in entitled to apply to the court to be made a party under sub-rule (1) of Order 1, rule 8 (if not named as a party either as the plaintiff or defendant) and a person arrayed as a defendant (as in the case before us) may apply to be transposed under Order 1, rule 10. In view of rule 6 of the Companies (Court) Rules, 1959, there does not appear any reason not to apply these provisions in the present case.
Even assuming that the provisions of Order 1, rule 10 of the Civil Procedure Code are not applicable, rule 9 of the Companies (Court) Rules declaring inherent powers of the court gives the court authority to transpose the opposite party as applicants in the interest of justice.
For the reasons mentioned above, I am of the view that the transposed petitioners, although named as opposite parties in the case, were represented by Banarsi Lal Bhagat and by their transposition the court has merely permitted them to proceed with the case as their representative is dead.”
24. Section 397 gives power to the court to save a company from winding up by making a suitable order. Section 399 gives the right to apply under sections 397 and 398. It is useful to refer to sections 399(1)(a) and section 399(3). Section 399(3) says that where any members of a company are entitled to make an application by virtue of sub-section (1) any one or more of them having obtained the consent in writing of the rest may make the application on behalf and for the benefit of all of them.
25. In Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao :
“Where an application has been made by or on behalf of two or more members, the members may jointly make an application or they may authorise one of them to make an application on behalf of and for the benefit of all of them …
After the application is made, if such consent is revoked by some of the members, it does not affect the maintainability of the application.”
26. It is well-settled that the court has inherent powers to make such order as is necessary to do justice on the facts of the case. Likewise, the court has discretion to substitute any creditor who does not want to proceed. Rule 9 of the Companies (Court) Rules, 1959, deals with inherent powers of the court. Nothing in the said rule be deemed to limit or otherwise affect the inherent powers of the court to give such directions or orders as may be necessary for the ends of justice or to prevent abuse of the process of the court.
27. Thus, none of the points raised by Mr. G. Subramaniam merits acceptance. As laid down by the Supreme Court, the validity of a petition must be judged on the facts as they were at the time of its presentation. It is not disputed by Mr. G. Subramaniam that the company petition was validly presented and duly supported by the petitioner in Company Application No. 266 of 1991 by his affidavit. Hence, it cannot cease to be maintainable by reason of events subsequent to its presentation. Section 399(3) permits an individual member to make an application “on behalf and for the benefit of all” members of a company entitled to move the court. He acts clearly in a representative capacity. In the present case, Mr. L. RM. K. Narayanan was also representing the interest of shareholders including the petitioners. Rule 9 of the Companies (Court) Rules declaring inherent powers of the court gives the court authority to transpose the other party as applicant in the interest of justice.
28. For the foregoing reasons, I order Company Application No. 266 of 1991 and substitute L. RM. K. Narayanan in the place of the petitioners in the main Company Petition No. 21 of 1990. Time for carrying out amendment two weeks. He is allowed to proceed further as the petitioner in the place of petitioners in the main company petition.
29. In view of the order above, Company Application No. 392 of 1991 is dismissed. Permission to withdraw the company petition from the file of this court is rejected.