TaxTMI 
TaxTMI 
2006 (3) TMI 337
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....Companies by name Samrat Shipping Company Ltd. (for short "SSCO") and Samrat Shipping & Transport Systems Ltd. (for short "SSTS"). Both these companies are private companies. The appeals arise out of the allegations of oppression and mismanagement by the Sippy Group against the Puri Group and the proceedings under the Companies Act on account of the diversion of the Contship agency from SSTS to a company floated by the Puri Group. 2. This SSTS was having principally two types of businesses; one was agency business and the other was charter business. The agency business included the business with and for Contship. The agency business was all throughout being looked after by Puris whereas the charter business was being looked after by Sippys. The major profit of the company was through the agency business. It is the grievance of the Sippy Group that Puri Group diverted the agency business with Contship to another company floated by them and named as Samrat Shipping & Logistics Ltd. (for short "Samrat Logistics") whose name was later on changed to Seaworld Shipping & Logistics Pvt. Ltd. (for short "Seaworld"). It was alleged by the Sippy Group that this diverting of business by Pur....
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....er business. Sometimes in 1977-78 Vaishnav Puri joined SSCO leading to Sippy Group, Jaisingh Group and Puri Group each having 33 per cent shareholding in SSCO. 4. (i) Subsequently, Vaishnav Puri secured the agency of Contship for SSCO. An agreement between the two was entered into on 1-2-1991. This business developed over the years. (ii) Sometimes around 1994, disputes arose between Jaisingh Group and Sippy Group inter se resulting into litigation. One of the causes of the dispute was stated to be with respect to the use of the word "Samrat". In view of this dispute, Contship terminated the agency of SSCO by end of June 1996. 5. On 28-8-1996, SSTS was incorporated only by Puris and Sippys with equal shareholding. Contship appointed SSTS as its agent with effect from 1-10-1996. Jaisingh Group separated thereafter in March 1997. As a part of the settlement, the Jaisingh Group were not to use the word "Samrat" any longer. 6. (i) As stated earlier, Puri Group looked after the liner agency business all throughout, whereas the Sippy Group looked after its charter business. By the end of March 2001, the income from agency business went up from Rs. 13 millions to Rs. 23 million....
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....o Puris calling upon a meeting of the Board of Directors to consider action against Samrat Logistics, but Vaishnav Puri disputed that Kundan Puri should preside over the meeting as Chairman. He suggested that the meeting should be called after an independent Chairman is appointed. Correspondence went on between the parties on these technicalities. Ultimately, the Sippy Group filed another suit bearing No. 876 of 2002 in the High Court as a derivative action in their individual names as shareholders of SSTS against Puri Group and Samrat Logistics. They sought relief by way of injunction restraining the use of the word "Samrat" and restraining the passing off on that basis. The Puri Group produced in the court the records relating to incorporation of Samrat Logistics and ultimately agreed in April 2002 to change the name of Samrat Logistics to Seaworld Shipping & Logistics. In view thereof, this suit was subsequently withdrawn in September 2002 after filing the present company petitions. 9. (i) In June 2002, the Sippy Group filed Company Petition No. 41 of 2002 before the CLB invoking sections 397 and 398 of the Act. It was filed against SSTS, Vaishnav Puri, Vishal Puri, Seaworld ....
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.... the CLB by its order dated 11-11-2002. It is material to note that in the application, which was filed by Contship for this purpose, Contship specifically stated that it was aware that there were other shareholders in both SSCO and SSTS, but it had dealt with only Puris and "it had continued to have confidence in the professionalism of and faith/trust in Mr. Puri to look after the interest of Contship in India." According to Puris, it is relevant to note that from 7-12-2001 onwards (when Sippys came to know about the business with Contship having been diverted), Sippys made no efforts to request Contship to reconsider their decision. The affidavit of Contship further stated that its commercial interest in India had been looked after by Mr. Puri all throughout and that it had never dealt with Sippys. It further stated that it had terminated the agency of SSTS as it was concerned with safeguarding its own commercial and financial interest. (ii) Contship pointed out in this application that earlier SSCO was appointed as an agent from 1-2-1991 and this agency continued until 30-9-1996. SSTS was appointed as the agent from 1-10-1996. Clause 7.01 of the Agreement dated 1-10-1996 had ....
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....ted to meridian. There is no specific rejoinder to this allegation. It was averred in para 5.1 that V.S. Puri had initially refused to sign/approve Meridian's account in 2000. He had finally agreed to do so only on Sippys assurance that they would agree for release of the personal guarantee of V.S. Puri and corporate guarantee of SSCO towards Meridian Trading Pvt. Ltd. Mr. Puri had also stated that Sippys had assured that parties would work towards separation of the joint businesses and assets whereunder Meridian's losses would be taken over by Sippys. There was no rejoinder to this statement. It was further stated in para 5.2 of the reply that Sippys failed to arrange for release of the personal guarantee of V.S. Puri. There is no denial to that in the rejoinder filed by Sippys. It is also seen from the record that list of assets and businesses and their valuation had been prepared by the auditors for the purposes of division/separation, but it did not ultimately conclude satisfactorily. It was further contended by Puris in para 5.3 of their affidavit that by 2001, good amount of SSTS fund was locked up in SSCO/Meridian. It was affecting the cash flow of SSTS and its ability to du....
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....ency with Seaworld on 1-12-2001 and the Seaworld issued its service schedule from 14-12-2001. The agreement could not have been signed on 1-12-2001 without prior consultation with Contship. The inference was, therefore, drawn that Vaishnav Puri had used his knowledge derived in his capacity as Managing Director of SSTS to his own advantage in termination of the agency with SSTS. The prior incorporation of another company Seaworld and thereafter Contship entering into this company immediately after terminating the agreement with SSTS indicated the breach of fiduciary duties on the part of Puris. 17. The CLB held that the statement by the Puri Group that Contship was not willing to deal with SSTS in view of the disputes between Sippy Group and Puri Group had not been substantiated. Letters of Contship dated 1-9-2001 and 26-4-2002 did not say anything of the kind, though Contship had very much reposed confidence in Puris and desired to deal with them. The CLB, therefore, observed that the directors of Puri Group had breached their fiduciary duties and were liable to account for the benefit and so also was Seaworld liable for the business and profit derived by it. This is on the foo....
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....rld whichever would be earlier. Company Appeal No. 2 of 2004 arising out of Company Petition No. 40 of 2002 : 20. As stated earlier, we will be dealing with Company Petition No. 40 of 2002 later. It is necessary to note, however, at this stage, that this petition filed by Sippys concerning the alleged oppression and mismanagement in SSCO was also allowed by the CLB while deciding Company Petition No. 41 of 2002. The CLB rendered a common judgment on both these petitions on 29-10-2003. In Company Petition No. 40 of 2002, the CLB gave direction to Puris to pay interest on account of alleged delay on their part in repayment of the amount of Rs. 49 lakhs lent to Puris by SSCO. According to Sippys, this amount was not returned by Puris within the period of four years provided for returning it. The CLB directed the Puris to pay interest at 12 per cent for the period beyond four years until the amount was returned. CLB directed exchange of shares of SSCO also. This decision on Company Petition No. 40 of 2002 gave rise to Company Appeal No. 2 of 2004 by Puri Group. The learned Single Judge decided this Company Appeal No. 2 of 2004 along with earlier mentioned three appeals bearing No....
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.... Court that if in the facts of that case there had been a specific stipulation that the partnership business was to continue even after the expiry of 17 years (which was the term of partnership therein), different considerations may have arisen. The learned Judge noted the observation of the Apex Court, that there was no absolute rule of law or equity that a renewal of lease by one partner must necessarily enure for the benefit of the other partners. The Judge also noted that the observations in later part of para 14 of that judgment were emphasized by the counsel on the part of Puris where the Apex Court observed that the partners in that matter were not on cordial terms and that there was hardly any room for importing the idea that they were occupying a fiduciary position apart from the fact that they were partners. The learned Judge, however, observed that those observations were in the facts of that case and that the renewal of lease was not obtained clandestinely in that matter. He then observed that whether the presumption of fiduciary relationship applied will have to be decided on the facts of this case. 23. The judgment in the case of Deva Sharma v. Laxmi Narain Gaddodi....
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....he fact that an agreement was entered into between Seaworld and Contship on 1-12-2001 and the service schedule was prepared on 14-12-2001. This para 20 also referred to the fact that one Virat Bharucha had applied to the Registrar of Companies in Goa for incorporating a company in the name of Samrat Shipping & Logistics earlier. It was stated to be a company belonging to the group of SSTS and that promoters were Vaishnav Puri and Vishal Vaishnav Puri. ROC had approved the name on 11-1-2001 for a period of 6 months. Mr. Bharucha sought an extension by another 6 months. On 18-10-2001, he informed the ROC that he had no objection to the company being incorporated by other promoters and a form was filed appointing Vaishnav Puri and Vishal Puri as directors. The CLB has observed that the incorporation of the company proximate to the date of expiry of the agency agreement with SSTS also raises strong presumption that while acting as directors of SSTS and while the agency was subsisting with SSTS, Puris were planning to take away the Contship agency to Seaworld, which was in breach of the fiduciary duty to SSTS. 25. In para 33 of his judgment, the learned Single Judge accepted the argu....
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....ld that sections 397 and 398 cannot be given restricted meaning and wherever required the appropriate directions can be given, and in para 51, he held that no fault can be found with the CLB for issuing such directions. 28. The learned Judge, therefore, dismissed Appeal No. 1 of 2004 filed by Puri Group as also Appeal No. 4 of 2004 filed by Seaworld, and allowed Appeal No. 5 of 2004 filed by Sippy Group by a common judgment and order dated 23-2-2004. The direction by the CLB to account for the benefits for a limited period was set aside in Appeal No. 5 of 2004, but was substituted by a direction to account for the benefits until Puris purchased the shares of Sippy Group in SSTS or till the agency of Seaworld with Contship is terminated. 29. (i) The order on Company Appeal Nos. 1 and 4 of 2004 has led to the Puris and Seaworld filing present Appeal Nos. 389 and 468 of 2004 under the Letter Patent. The order on Company Appeal No. 5 of 2004 has led to Puris and Seaworld filing present Appeal Nos. 369 and 469 of 2004 under the Letter Patent. We will deal with the submissions of the counsel for the parties on all these appeals together since all of them arise out of Company Petiti....
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.... has not been complied with due to the disputes between Puris and Sippys. Mr. Vaishnav Puri has filed a reply and referred to the Minutes of understanding arrived at between the applicant on one hand and the Puris and Sippys on the other on 23rd July, 2004 wherein it was agreed to sell the properties of SSCO and Meridian and to return the amount of Rs. Four crores to the applicant. It is stated that Puris are agreeable to maintain this understanding but Sippys are not. Sippys have not filed any reply. This Motion is also pending without any order. 35. All these Motions are being heard and decided along with these Appeals. 36. Mr. Chenoy, learned counsel appearing for the appellants, submitted that the conduct of Puris in setting up another company, which has now come up to be known as Seaworld, has been the main factor which has weighed on the CLB and on the learned Single Judge. The learned Single Judge has time and again referred to para 20 of the Judgment of the CLB, wherein it is noted that the notice of termination of the agency by Contship dated 1-9-2001 was not brought to the notice of Sippys by Puris. From 22-12-2000 and all throughout the year 2001 steps were taken t....
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....ey made any correspondence or efforts to persuade Contship. The submission of Mr. Chenoy was that the agency business had been terminated by Contship. Once that was so terminated, there was no question of any obligation on Puris that they should not engage into independent relation-ship with Contship. Mr. Chenoy submitted that the relationship of Puris with Contship was of their own and not because of Vaishnav Puri being a director of SSTS. He pointed out that Contship had terminated its agency with SSCO in the past also. Besides, for alleging any collusion between Contship and Puris and establishing such collusion, Contship ought to have been retained as a party Respondent, but it had been permitted to be deleted from the proceedings. No finding could, therefore, be arrived at to the prejudice of Puris on such a background. Mr. Chenoy submitted that SSTS had no longer any corporate opportunity and the learned Judge erred in applying the test of Benett v. Gaslight & Coke Co. of London [1882] 48 LT 156. He substantiated his arguments with a number of judgments which we will separately deal with. 38. The submissions of Mr. Chenoy have been countered by Dr. Tulzapurkar, learned cou....
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....it led to mis-management of SSTS and SSCO within the meaning of section 398 of the Companies Act? (iii)whether any such findings and directions based thereon given by the CLB and as sustained and/or modified by the learned Single Judge were warranted? The relevant sections 41. When we deal with the first point and the rival submissions thereon, it will be appropriate to refer to section 88 of the Indian Trusts Act which lays down that the advantage made in fiduciary capacity has to be made good. This section reads as under :- "88. Advantage gained by fiduciary.-Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained." The relevant sections of Companies Act are sections 397, 398 and 402. They read ....
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....foresaid, the Tribunal may, with a view to bringing to end or preventing the matters complained of or apprehended, make such order as it thinks fit- 402. Powers of the Tribunal on application under section397 or 398.-Without prejudice to the generality of the powers of the Tribunal under section 397 or 398, any order under either section may provide for- (a )the regulation of the conduct of the company's affairs in future; (b)the purchase of the shares or interests of any members of the company by other members thereof or by the company; (c )in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital; (d)the termination, setting aside or modification of any agreement, howsoever, arrived at, between the company on the one hand, and any of the following persons, on the other, namely- (i )the managing director, (ii)any other director, (iii) and (iv) (v)the manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in all the circumstances of the case. (e )the termination, setting aside or modification of any agreement between the company and any person not....
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....SSCO and then to SSTS because of Puris. It was the business of Puris Contship which was being run through SSTS. In the letter dated 26-4-2002 Contship described Puris as Contship men in India. Even CLB in para-4 of its judgment accepted this position when it observed as follows:- "...The admitted position is that the second respondent (i.e., V.S. Puri) has always been managing the affairs of SSTS as a M.D. and Sippys never interfered with the working of the company." Even when Contship applied for being deleted from the proceedings it clearly stated in paragraph (vii) of its application that the applicant (Contship) company never had dealings with any other person in any matter. It had always dealt with Mr. V.S. Puri. It also stated that the proceeding was more to harass the applicant-company and as a pressure tactics against Mr. V.S. Puri. This contradicts the statement of Sippys in paragraph 46 of their rejoinder dated 9-9-2002 wherein they have stated as follows:- "I deny that Contship is today aware of the personality of the companies with whom it is doing business or the question of Contship being misled in any manner cannot or does not arise." (iii) Mr. Chinoy the....
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.... and even to secure the benefit for himself. 44. Mr. Chinoy submitted that the principle of opportunity being made available to the partnership would apply at an initial stage or during the continuation of a contract. However, once the contract is terminated or it expires, the business opportunity comes to an end. Contship could not be restrained from taking any such decision and Puris could not dictate to Contship what it should do. He pointed out that the decision relied upon by the CLB viz. the judgment of Messachusets Court of Appeal in Energy Res. Corpn. v. Porter 438 NE 2d 391 was the case of initial offer and opportunity. 45. Mr. Chinoy pointed out the English judgment in the case of Keech v. Sanford SC2 Wh & TLC 693 relied upon by the CLB and Sippys laid down the principle of absolute confidence which applied in the case of express trust. That was a case where the lease of a market was devised towards the trustee for the benefit of an infant. Before expiry of the lease the lessor refused to renew it in favour of the infant and the trustee took it for himself. It was held that the trustee was obliged to convey it to the infant and account for the profits. Mr. Chinoy co....
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....l benefit are immune from the liability." The Court also held that burden of proof rested upon the party attacking the acquisition. (v)Similar view is taken in Robert Broz and RFB. Cellular Inc. v. Cellular Information Systems, Inc. decided by the Supreme Court of Delaware on 22-3-1996 and reported in (1996) DEL Lexis 105. In this judgment the Court held that the defendant-Broz was under no obligation to formally present the corporate opportunity to the CIS Board of Directors. Though presentation of such an opportunity may serve as a shield to a liability but there is no per se rule requiring such presentation, and then the Court observed as follows:- "Of course presenting the opportunity to the Board creates a kind of safe harbour for the director. .....It is not the law of Delaware that presentation to the Board is a necessary pre-requisite to a finding that the corporate opportunity has not been usurped." 47. In the facts of the present case, Mr. Chinoy submitted that Sippys came to know about the termination of the agency of SSTS on 7-12-2001. They have not written a single letter to the Contship asking it to continue its agency with SSTS. They have not been able to....
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....r against Sippys with respect to SSTS, no order could be passed against Seaworld to make good the profit earned by it allegedly at the expense of Sippys. He criticized the learned Single Judge for having gone to the extent of saying that there cannot be any limitation for the relief to be granted under section 402 of the Companies Act. He relied upon a judgment of the Division Bench of this Court in Shanti Prasad Jain v. Union of India 75 BLR 778 at 811 to point out that a scope of proceedings under section 397 is essentially concerning the Company in dispute and not other Companies. He adopted the submissions of Mr. Chinoy but stated that even if the Appeal of Mr. Chinoy fails, the order could not be maintained against Seaworld. 49. Appeal No. 358 of 2004 (arising out of the decision in Company Appeal No. 2 of 2004 and Company Petition No. 40 of 2002) and submissions of Mr. Chagla, learned counsel for Puris: (i)Mr. Chagla pointed out that Company Petition No. 40 of 2002 was filed by Sippys on 1-7-2002 and the sole act of oppression and/or mis-management alleged therein was with respect to the NOL transaction which had taken place some ten years earlier in 1992. In the reply ....
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.... this part of the order. (iv)Once a finding is given that the party concerned had not come with clean hands, the petition ought to have been dismissed. The learned Single Judge, however, maintained the second direction and observed in para 49 of his judgment that in his understanding CLB had found that there was oppression of Sippy group and mismanagement in the affairs of the Companies and, therefore, that direction had been given. Reliance was placed by Mr. Chagla on a judgment of Single Judge of Karnataka High Court in Srikanta Datta NarasimharajaWadiyar v. Sri Venkateshwara Real Estate (P.) Ltd. [1991] Comp. Cas. 211 to the effect that the question of good faith has to be tested by the conduct of the petitioner not only in the particular proceedings but also in parallel proceedings in civil courts. Mr. Chagla, therefore, submitted that both the petitions ought to have been dismissed. Yet apparently on the basis of the allegations in Company Petition No. 41 of 2002 concerning SSTS, the direction for exchange of shares has been maintained in Company Petition No. 40 of 2002 which is erroneous, since apart from the NOL controversy there was no separate allegation of oppression o....
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....by Dr. Tulzapurkar appearing for Sippys 50. (i) Dr. Tulzapurkar, learned counsel appearing for Sippys, submitted that one has to look to the entire controversy from the point of view of a bystander. He, for that purpose, referred to a passage from Palmer's Company Law 24th Edition Vol. 1 page 993. The learned author holds that the general text for unfair prejudice has to be an objective one and not a subjective one namely as to what a reasonable bystander observed the consequences of the conduct would regard it. In his submission, if a third party is to be set up a company with the name Samrat, Sippys and Puris would have surely filed a joint action. In the present case, Puris sent their employee one Mr. Bharucha to Goa to float a company in the name of Samrat Logistics on the Registrar of Companies pointing out that the name Samrat was registered and a no objection was required. Puris gave the no objection on behalf of SSTS on 10-1-2001. This was not disclosed to Sippys. This very Mr. Bharucha later on withdrew from this proposed company and allowed Puris to become the main directors of Samrat Logistics. In his submission, the Jaisingh family had walked out of his business and ....
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....ailed of their position as directors of SSTS to grow in the business and now they were trying to walk out with a cream thereof." 51. Dr. Tulzapurkar relied upon the judgment in Scottish Co-operative Wholesale Society's case (supra) and Keech v. Sanford 25 ER 223 in support. He submitted that in a quasi-partnership the relationship had to be looked at as that of trustees. In a conflict between duty and interest it is duty which had to be given preference. An analysis of 3 leading Indian cases 52. Two Indian cases were emphasised by both the counsel for interpreting section 88 and its application to the present case viz. (1) Chennuru GavararajuChetty's case (supra) and (2) Deva Sharma's case (supra). We will have to discuss them in details. 53. (i) In Chennuru Gavararaju Chetty's case (supra), the provisions of section 88 of the Trusts Act, 1882 came to be considered by the Apex Court. Section 88 provides amongst others that where a director of a company bound in a fiduciary character to protect the interest of another person gains for himself any pecuniary advantage by availing himself of his character or where he enters into any dealings under circumstances in which his....
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....e lease and that they had obtained it instead for themselves by availing themselves of that charac-ter. The Court noted that according to the Madras Government, the personal conduct of the lessees was the determining factor in the grant of the fresh lease. The contesting defendants had managed the factory well and to the satisfaction of the revenue, therefore, they were able to obtain the fresh lease. In para 13 of the judgment, the Apex Court held that, therefore, it cannot be said that they had availed themselves of their character as partners in obtaining the renewal. (iv) In para 14 of the judgment, the Court examined as to whether the plaintiffs had made out a case in terms of the second part of section 88. The Court noted that for that purpose it had to be shown that the contesting defendants while obtaining renewal of the lease had placed themselves in such a position as to render their interest adverse to those of the other partners and had thereby obtained the pecuniary advantage. The Court held that if the plaintiffs had established that any funds or goodwill of the alleged firm name had been utilised for obtaining the renewal of the lease, the case could have come dir....
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.... a lease by one partner, must necessarily ensure for the benefit of all the partners. There is a presumption of fact, as distinguished from a presumption of law, that there is an equity in favour of the renewal of the lease ensuring for the benefit of all the partners. But such a presumption being one of facts, is rebuttable, and must, therefore, depend upon the facts and circumstances of each case." Thereafter the Court held that the facts and circumstances amply rebut any presumption of fact that the lease should ensure to the benefit of all the parties. 54. (i) In Deva Sharma's case (supra) a question came up before the Division Bench of Justice Khosla and Justice Kapur of the Punjab High Court as to whether section 88 applied to the facts of that case. On a difference of opinion between the two Hon'ble Judges, the matter was referred to a third Judge Falshaw J., whose judgment is reported in the above report. British India Corporation Ltd. was the owner of a number of enterprises including the Kanpur Cotton Mills Co. By an agreement dated 20th March, 1937, it appointed M/s. L.N. Gadodia & Co. as the selling agents for the sale of all yarn and cloth produced by the mills u....
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....fit of either parts of the section. (iii) Falshaw J. noted in his judgment that it was clear that Deva Sharma was a favoured person and in fact the protegee of the British India Corporation. He then noted in para 21 that the first question to be decided was whether clause 3 of the Partnership Agreement was enforceable. Khosla J. had held that the agreement was enforceable whereas Kapur J. had held that it was not. Falshaw J. then referred to section 27 of the Contract Act which provides that an agreement in restraint of trade is void. He, however, noted that exception (1) thereof provided for saving of an agreement not to carry on business of which goodwill was sold. (iv) The learned Judge thereafter noted that the first part of section 27 laid down the basic principle that every contract in restraint of trade or business was void, but an exception was made in the case of sale of goodwill of a business. The learned Judge further noted that a modification of the general principle is provided in section 54 at the Partnership Act which provides that partners may agree not to carry similar business for a specified period within a specified area in the event of dissolution. After ....
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....basis on which the question of applicability of second part of section 88 must be decided is simply that Deva Sharma negotiated for and secured the selling agency business in December 1945 at the time when all interested parties were aware that the selling agency agreement in favour of Gadodia & Co. was due to expire on 31-12-1945. The case was, therefore, not covered under the second part also. (vii) Four cases were cited before the learned Judge. One of them has been emphasised before us and which was referred by the learned Single Judge in favour of the Sippys. That was in the case of Benett (supra). That was a case where a trustee had clearly acted behind the back of co-trustees. Therein there was a irrefutable presumption of personal incapacity to retain the benefit. Therefore, it had been held in that matter that by reason of his trusteeship, the person concerned had disqualified from obtaining the agency for himself. That was a case of an express trust. In fact Falshaw J. noted that the work done by Gadodia and Deva Sharma in partnership had hardly anything to do with the giving of the selling agency to Deva Sharma who was all throughout a protegee of the British India Co....
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.... of section 81 of the Companies Act. This section provided that the new shares would be offered in the first instance to the existing shareholders in proportion, as nearly as the circumstances admit, to the capital paid-up on the existing shares at that date, subject to any direction to the contrary, which may be given by the Company in general meeting. Therefore, unless the Company decided otherwise at a general meeting, the new shares of Rs. 39 lakhs had to be offered to the existing shareholders in proportion of their existing shares. (iii) In the meeting of the Board of Directors on 1-3-1958, S.P. Jain proposed that the new shares should be issued to the existing shareholders as per section 81, whereas Patnaik proposed that a general meeting be called for that purpose. The groups of Patnaik and Loganathan did not have sufficient money to subscribe to the new shares if offered in the first instance to the existing sharesholders. In that case those shares would have been taken by S.P. Jain. Thus, if Jain got all the new shares, his group would become the majority shareholder and would get control of the company. Patnaik, therefore, put a resolution which provided for calling o....
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....l. (vi) Later on, an extraordinary general meeting was called on 21-9-1960 to increase the share capital from Rs. 1 crore to Rs. 3 crores. The shares were to be offered to outsiders i.e., other than the existing shareholders. Calling of this meeting led to the application under section 397 of the Act by Jain. It was submitted that issuance of new shares was in furtherance and continuation of the process of oppression and with a view to completely exclude him and his group from control of the company. The new shares would lead Loganathan and Patnaik to acquire more than 75 per cent of the voting strength. Their conduct showed a visible departure from the standard of fair dealing and fair play. It was alleged that affairs of the Company were being conducted causing prejudice to the interest of the Company amounting to mismanagement under section 398 of the Act. A Single Judge of the Orissa High Court entertained the petition. It was held that the conduct of Patnaik and Loganathan was oppressive of the minority. This judgment led to the appeals to the Division Bench. The Division Bench held that no such oppression had been established. The application of S.P. Jain was, therefore, d....
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....cretion vested in the Court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding up order." (ix) In para 13 of the judgment, the Court noted that section 397 was a successor to earlier section 153C of the Indian Companies Act, 1913 which was based on section 210 of the English Companies Act, 1948. In para 18, the Court noted that in Harmer's case it was held that word "oppressive" meant burdensome, harsh and wrongful. It further noted that phrase "oppressive to some part of the members" suggests that the conduct complained of "should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play". But, apart from this, the question of absence of mutual confidence per se between the partners or between two sets of shareholders, however, relevant to a winding up seems to have no direct relevance to the remedy granted by section 210. It, however, held that oppression of some part of the shareholders by the manner in which the affairs of the company are being conducted must be averred and proved. Mere loss of confidence or pure deadlock does not come within section 210. ....
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....ven on the private company and that it did not contain any specific provision as to the future issue of capital. In para 27, it even held that the haste with which the shares were allotted on 30-7-1958 cannot really be said to be a part of a design to oppress. "The haste became necessary because the interim injunction was vacated on that day and it felt that if immediate action was not taken and the new shares allotted, there might be further injunction which would further delay the issue of shares and getting the loan from the Industrial Finance Corporation." In para 28, it held that if the fear of Patnaik was correct that the appellant would have purchased all the shares worth Rs. 39 lakhs for want of money on the part of Patnaik and Loganathan, their action in preventing such domination cannot be said to be oppressive. Thus, the pre-emptive action was held to be a permissive conduct. (xii) The court refused to accept that the new allottees were nominees of Patnaik and Loganathan. In para 28 of the judgment, the Court noted that though the company was in urgent need of finance, it accepted only 5 per cent with the application and 10 per cent on allotment and the remainder did ....
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....e individual partner is free to look after his own interest and to secure the benefit for himself. (iii)As held in Deva Sharma's case (supra) to attract the first part of section 88 the pecuniary advantage to be gained by the partner in a fiduciary capacity must be in dealing with same third party as a partner acting on behalf of the partnership. Falshaw J. held that such a situation did not arise since British India Corporation itself had terminated the agency and, therefore, the occasion to represent on behalf of the erstwhile firm to gain any benefit did not arise. In Chennuru Gavararaju Chetty's case (supra) also the plaintiff had failed to establish that the defendants had used either the funds or the goodwill of the firm for obtaining the renewal. Therefore, at the end of para 13 the Apex Court held that the first part of section 88 clearly did not apply. (iv)To attract the second part of section 88, it will be necessary to have the third party in the proceedings to establish the collusion between the third party and the defendant. In Deva Sharma's case (supra) British India Corporation had been deleted as a defendant. In the present case also Contship has been deleted ....
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....iling of the benefit of the character as a partner in the earlier partnership. 57. The narration of the facts as above shows that in Company Petition No. 41 of 2002 Sippys were principally relying upon the diversion of the Contship agency as the act amounting to breach of fiduciary obligations and which according to them amounted to their oppression in SSTS. As far as Company Petition No. 40 of 2002 is concerned, it is their case that they have additionally relied upon non-return of the loan given to Puris by SSCO within the time stipulated therefor. As against that in Petition No. 41 of 2002, the defence of Puris is that there was hardly any confidence left between the parties and that there were already financial problems between the two. Besides, the termination of Contship agency is a conscious decision by third party and on that happening there was no business opportunity left for SSTS. As far as Petition No. 40 of 2002 is concerned, their defence has been accepted by the learned Single Judge, namely, that the allegation of unjustified and unexplained delay in returning the loan has not been established. Sippys were fully aware about the delay or the causes thereof and they....
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....oyer. It is however material to note that to apply these principles the element of confidence must be subsisting when the allegation is made. In the present case, can it be said that Sippys were innocent sufferers when it is clearly placed on record that Meridian which was subsidiary to SSCO and which was under the control of Sippys, had consistently suffered losses and substantial amounts were diverted from SSCO to Meridian going into crores. The subsidiaries of Meridian however were in profit. There has been sufficient correspondence prior to the filing of the company petitions in June/July 2002. Can it, therefore, be said a mere afterthought? The inescapable conclusions are that there was hardly any confidence left between the parties. That was also the factor noted in Chennuru Gavararaju Chetty's case (supra) as also in Deva Sharma's case (supra), the two leading Indian cases which we have discussed earlier. It is, therefore, not possible to accept that any case is made out under first part of section 88 of the Trusts Act. 61. When we consider the application of second part of section 88, we have to look to the question of availability of business opportunity and the conduct....
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....ifically observed that when an opportunity is not available to the partnership, there is nothing wrong for a partner to avail of it himself. Whereas Chennuru Gavararaju Chetty's case (supra) is one where the lease had expired and it was to be renewed, in Deva Sharma's case (supra) the earlier agreement was coming to an end and it was terminated at that time. In the present case, we are concerned with the situation wherein Contship had the right to terminate the agreement and it has terminated and justified it. In Deva Sharma's case (supra), British India Corporation was deleted as a defendant and, therefore, Falshaw, J. held that it was difficult to establish collusion in the absence of a vital party. In the present case, Contship got itself deleted. But in any case, as noted above, it specifically stated that it was supporting Puris and that it had all throughout dealt with Puris only. In Chennuru Gavararaju Chetty's case (supra) the party obtaining the lease had shown the professionalism which was recognized by the then Madras Government. In Deva Sharma's case (supra) he was the man on spot and was a protege of the British India Corporation. In the present case, Contship had in t....
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....resentative in India. Floating another company by using the name "Samrat", not informing about the letter from Contship terminating the agency of SSTS, and not coming to the negotiating table and contesting the passing off action could not be said to be a good conduct on the part of Puris. That, however, cannot lead to a conclusion that if Puris were to disclose the termination of agency by Contship, Sippys would have been able to persuade Contship to continue its agency with SSTS. Sippys have not made any such effort after coming to know about the termination and Contship has also specifically placed it on affidavit that it has consciously terminated the agency with SSTS. Hence as far as the aspect concerning the business opportunity being available is concerned, it cannot be decided in favour of Sippys and SSTS. 65. In the circumstances, as far as the second part of section 88 of the Trusts Act is concerned, it will have to be held that the business opportunity was no longer available to SSTS and, therefore, if the opportunity is availed of by Puris, it cannot be said to be in breach of their fiduciary obligation. 66. When we come to the second point for determination, Dr. ....
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....10 of the English Act by the phrase "unfairly preju-dicial". It had not been accepted when the judgments in the cases of Meyer and Harmer Ltd. ( supra) were rendered. It has however been subsequently accepted and the test in the new section 439 of the English Companies Act thereafter is whether the conduct was unfairly prejudicial and not merely illegal. Dr. Tulzapurkar had relied upon Palmer's Company Law on the general test for unfair prejudicial conduct, namely that it should be that of a reasonable bystander and then on Pennington's Company law for what is an oppressive conduct. These authorities on the English Law would not be of assistance for the construction of section 397 of the Indian Companies Act since we have not adopted any such modification in India. In fact, if we see the discussion under the caption "unfair prejudice" in Chapter 66 of Palmer's Company Law (24th Edition), the learned author has noted that there are dicta from the courts that the phrase "unfair prejudice" must be given a broader meaning than the word "oppression", and referred to the relevant cases. 68. We have discussed the judgment in the case of Shanti Prasad Jain (supra) in detail. The conduct....
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.... determination is concerned, we hold that on account of termination of agency of SSTS by Contship, SSTS had no longer had any business opportunity. Therefore, the diversion of Contship agency from SSTS to Seaworld thereafter cannot amount to breach of fiduciary duty on the part of Puris as its directors as referable to section 88 of the Indian Trusts Act. 71. As far as the second point for determination is concerned, we hold that floating of another company with the name Seaworld by Puris rightly invited a passing off action by Sippys. Their conduct in that behalf as also not disclosing the receipt of the termination letter, not coming to the negotiating table and defending the passing off action some way or the other could not be said to be a straight conduct. At the same time, it will not amount to oppression of Sippys within the meaning of section 397 of the Companies Act or that it led to mismanagement of SSTS under section 398 thereof. 72. As far as Company Petition No. 40 of 2002 is concerned, in our view, the submission of Mr. Chagla is well taken. That petition has to be decided on its own merits as held by the Apex Court in the case of Sangramsinh Gaekwad (supra). In....
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....Once the opportunity was not available to SSTS, it could not be held to be a breach of fiduciary obligation if Puris took it. The findings of CLB on the second part are influenced by its finding with respect to the first part concerning conduct of Puris. In our view, all those findings are erroneous and will have to be held as unsustainable. Consequently, the judgment and order of the learned Single Judge accepting this approach and upholding those findings is also unsustainable. 74. Since Puris succeed in Company Petition No. 41 of 2002 concerning SSTS, the subsequent directions for valuation of the shares and exchanging them will have to be set aside. Similarly there will not be any occasion for Seaworld to make the alleged loss good. The directions given by the CLB and the learned Single Judge are sought to be defended as necessary directions under section 402 of the Companies Act. Once the first two points for determination are decided as above, there is no occasion to give any such direction. The direction as given by the CLB and the learned Single Judge is on the lines of the English Law as in Industrial Development Consultants v. Cooley (1972) 2 All ER 162, wherein it was....
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....uch as the relations between the parties are strained, the directions for valuation and purchase of shares of each other could have been sustained independently. However, what we find is that even during the pendency of these appeals, the parties were negotiating amongst themselves for an appropriate way of separation from time to time. In the circumstances, we are of the view that since we have held that the Company Petitions were not tenable, it would not be proper to maintain even that direction and the parties should be left to resort to their remedies either by negotiations or by appropriate actions. Dr. Tulzapurkar appearing for Sippys submitted that in a winding up action Sippys will not get anything once the Contship agency is allowed to be retained by Seaworld. However, having held that there was no breach of fiduciary duties or oppression involved in the Contship agency shifting to Seaworld, no such equitable remedy could be provided to Sippys. Seaworld cannot be forced to account for the alleged loss of SSTO or Sippys on any such ground. 76. Mr. Doctor has submitted that even if Company Petition No. 41 of 2002 succeeds, any such direction of making the loss good canno....