DR. BAIS SURGICAL AND MEDICAL INSTITUTE PVT. LTD. & ORS. v. DHANANJAY PANDE

What happened

Appellant no. 1 is a company incorporated on 14 November 1994 to run a hospital built by appellant no. 2 and his wife. Facing financial constraints, it was approached by respondent no. 1, who offered to infuse funds if he was made Managing Director and the hospital was converted into a cardiac facility; he was appointed with effect from 1 January 1998 and the hospital became a heart institute. He said that on 15 July 1999 the Board allotted him 14,75,998 shares against his share application money, which the appellants disputed. After a dispute and conciliation between 27 and 29 May 2000, he instituted a first company petition in January 2001 under sections 397 and 398 on the failure to issue share certificates, and the company objected under section 399 that he was not a member. The Company Law Board by order of 2 December 2004 treated him as a member and directed allotment of shares or refund with interest. On 25 December 2004, the Board allotted him the 14,75,998 shares and also allotted 60,00,000 shares to appellant no. 2 for transfer of the hospital land and building, as a pre-condition for a Management Agreement with Wockhardt Hospitals Ltd., executed on 2 March 2005. The respondent's second petition alleged dilution of his holding from 49% to 15%, and by order of 14 March 2008 the Board held the allotment oppressive. Both orders were affirmed by the High Court. On 2 August 2010, this Court directed the appellants to deposit ₹2,59,18,525 including interest.

Questions before the court

• Can a person whose name is not entered in the register of members be treated as a 'member' entitled to petition for oppression and mismanagement under sections 397 and 398?

Why the court ruled this way

The appellants confined their argument to the meaning of 'member' and relied on section 41 and decisions such as Balkrishan Gupta v. Swadeshi Polytex (paragraph 12). Section 2(27) is widely worded, while section 41 sets out the modes by which membership arises, and the requirement of agreement 'in writing' was meant to ensure reliable proof of consent and prevent fraudulent inclusion of names, not to make entry in the register the sole mode (paragraphs 21 and 22). Jurisdiction under sections 397 and 398 is equitable and aimed at relief for minority shareholders, and the enquiry on maintainability should focus on section 399, so 'member' should not be read in an unduly technical sense, as in Shri Balaji Textile Mills, Gulabrai Kalidas Naik, World Wide Agencies and Umesh Kumar Baveja (paragraphs 22 to 28). On the facts, the High Court rightly relied on a letter describing the respondent as 'co-owner', the conciliation minutes and the conciliator's letter acknowledging his entitlement to shares, his appointment as Managing Director, the renaming of the hospital after his concern, and the company's use of his investment to expand capital and profits, which together showed he was treated as a stakeholder and not a creditor (paragraphs 29 and 30). There was no reason to differ from the factual conclusion (paragraph 31).

Controlling point

The respondent was entitled to be treated as a member to maintain proceedings under sections 397 and 398.

Order and next steps

The appeals were dismissed. The amount deposited in the Court with accrued interest was released to the respondent, Dhananjay Pande, pending applications were disposed of, and there was no order as to costs.

Practical implications

A company that accepts investor funds as share application money and treats the investor as an owner cannot later rely on the lack of an entry in the register of members to defeat an oppression petition.

Limits of this ruling

• The ruling concerns the Companies Act, 1956 and turned on the cumulative conduct of the company; the Court did not hold that an unrecorded investor is always a member, and it confined its enquiry to the meaning of 'member'.