TaxTMI 
TaxTMI 
2005 (12) TMI 286
X X X X Extracts X X X X
X X X X Extracts X X X X
....o group is having its registered office in London and holds 75 lakhs equity shares of Rs. 10 each, thus, constituting 60 per cent of total paid up equity share capital. Jindal group has investment in this company through two companies, namely, Machino Plastics Limited (Machino group) and Machino Finance Private Limited. Machino group is a joint venture of Maruti Udyog Limited (MUL), Sujuki Motor Corporation and Jindal group. M/s. Machino Finance Private Limited is also controlled by Jindal group. These two companies together are holding 20 per cent of paid up share capital of the company. Remaining 20 per cent is held by MUL. Thus Caparo group is the holding company of Caparo Maruti Limited with 60 per cent share capital and Jindal groups are having 20 per cent equity stakes. It may also be noted at this stage that Caparo group is controlled and managed by Lord Swaraj Paul and family members of Jindal group. Mr. M. D. Jindal is the head of Jindal group. Mr. Jindal is the husband of Lord Swaraj Paul's sister. These two groups are closely related to each other. It is a different matter that today, unfortunately, the two groups are at loggerheads and there are number of litigations be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Ltd. which was appointed as a dealer of Maruti vehicles in Kolkata in 1985 and at that time this company was the only dealer of Maruti vehicles in Kolkata. He boasts that because of his close contact with the MUL, the joint venture in the form of the company was envisioned and given shape due to his efforts with the objective to manufacture and supply heavy sheet metal parts for the Maruti range of vehicles. All efforts for incorporation of this company, namely, acquiring land, appointing contractors arranging loans from IDBI Bank and operating bank accounts etc. were made by Mr. Jindal and his family members. In fact, the Caparo group came into picture a year after the incorporation of the company when the company had already passed through the take off stage. Mr. Jindal became Chairman of the company. Persons from Caparo group were also appointed as directors. As the chairman, Mr. Jindal had been managing the affairs of the company. The turnover of the company rose from Rs. 19.57 crores in the year 1997-98 to Rs. 56.62 crores in the year 2001-02. Mr. Jindal claims that this quantum jump was because of his efforts and good reputation in the market which he enjoys. However, Mr. J....
X X X X Extracts X X X X
X X X X Extracts X X X X
....companies owned by NRIs. He came to know about the sanction of the loan only from the minutes of the Board meetings which were received subsequently. When he started asking for details of the loans granted along with details of investments and demanded that it be placed in the Board meeting on 14-12-2002, plans to remove him as the chairman were started by the Caparo group and in the meeting held on 31-12-2002 he was even given this threat and was asked to resign. As he refused to resign, the NRI directors called another Board meeting again without consulting the chairman. Notice for this meeting was issued on 4-2-2003 to be held on 7-2-2003 and he was removed as chairman of the company. In the petition the Jindal group also raised allegation about holding of other board meetings in illegal manner without consulting the chairman and without giving sufficient notice. There were some other allegations of incurring certain expenditure. However, these were the allegations of trivial nature and were not pressed at the time of arguments and, therefore, not taken note of. (iii) The Caparo group has incorporated a company in the name of Caparo Engg. India P. Ltd. at Pitampur, Madhya Prade....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... loanees with interest which was given at the rate of 14 per cent per annum as against suggestion of Mr. Jindal that interest rate should be between 13 per cent to 13.5 per cent. The Board observed that as interest from the companies was 14 per cent per annum whereas borrowing rate charged by ICICI Bank from the company was 12.6 per cent it was commercially wise and prudent decision and mere keeping of monies in other companies in term deposit cannot be stated to be a bad business practice. Allegation of diversification of business/conduct of parallel business by Caparo group has also been brushed aside by the Board on the ground that there is no competing business by M/s. Caparo Udyog Engg. Co. Pvt. Ltd. which supplies parts in respect of light commercial vehicles and other heavy commercial vehicles where the technology employed is different from the one employed by the company and further that the specification of components manufactured by both the parties are completely distinct and cater to different categories of customers. The Board did not find any substance in the allegation against Mr. Asthana for being a director of M/s. Caparo Udyog Engg. Co. Pvt. Ltd. on the ground tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o state that the Board's decision on this aspect is free from any flaw. 9. Other allegation of the Jindal Group was that the Caparo group had caused the company losses by making advances to sister concerns which were under the control of the Caparo group and, thereafter, in turn, utilized by another company under the control of Caparo group which had identical objects clause as that of the company and these allegations have hot been examined by the Board at all though it was the specific case of the Jindal group that such loans made by the company were used solely for the benefit of the Caparo group. In this respect, it was the submission of learned senior counsel that those submissions are noted in paras 3 to 7 of the impugned judgment they are not dealt with at all. However, while giving its finding rejecting this contention, the Board has merely lifted the arguments advanced by the Caparo group and noted in earlier part of the judgment. I am unable to agree with this submission of the learned senior counsel. For this, let me first reproduce para 22 of the impugned judgment where aspect is dealt with : The second allegation is regarding siphoning off company funds by granting l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nication Ltd. [1996] 86 Comp. Cas. 648 (Kar.). It is settled law that in the case of allegation of fraud, siphoning off funds etc., full details should be furnished and mere suspicion cannot substitute proof as relied in the case of Karedla Suryanarayan v. Ramadas Motor Transport Ltd. [1999] 98 Comp. Cas. 518 1 (CLB-New Delhi). The only point of contention in the whole issue is that the Board Meeting dated 18-1-2002 was held without complying with the provisions of Articles 146 and 149 of the Articles of Association and no clear notice of three days was given and the meeting was called without the knowledge of Mr. M.D. Jindal, Managing Director. The respondents have submitted that this Board Meeting dated 18-1-2002 in which the loan was sanctioned was held in full compliance of the provisions of the article 146 of the Articles of Association by the company by giving three days notice which does not execlude the date of issuance or receipt of notice in reckoning three days period as relied on the case of Smt. Shantidevi Pratapsinh Gaekwad v. Sangram Sinh P. Gaekwad [1996] 1 Comp. LJ 72 (Guj.). It is true that no clear three days notice was given but there was no question of any prej....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uggestions that interest rate should be kept at 13 to 13.5 per cent. This suggestion was clearly accepted and the interest rate kept was even still higher i.e., 14 per cent. Mr. Jindal in his reply had never complained about the short notice or postponing of the meeting. On the contrary, suggestion of Mr. Jindal that interest should be between 13 to 13.5 per cent would indicate that he had no objection to the grant of loans but was only concerned with the proper returns on the loans which were to be granted. (e) The Board also referred to the judgment of Power Tools and Appliances Co. Ltd.'s case (supra), in support of the proposition that mere keeping of monies of the company in a term deposit cannot be stated to be a bad business practice. 11. It is clear that the Board accepted the plea that the decision to grant loan at 14 per cent which was even higher than the borrowing rate was a prudent decision and taken in the best interest of the company. Therefore, I do not find any fault with the finding of the Board on this count. 12. Mr. Jindal, who was Chairman of the company, presided over the meeting held on 28-10-2000 in which decision was taken to grant the loans to sister co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....grievance of the appellant on that count is found to be baseless and without merit." 13. Be as it may, the Board has also found that the two companies to whom the loan was granted were not doing any competing business. It may be noted in this respect that main business of Caparo Maruti Limited is 'to manufacture and supply sheet metal parts and components to Maruti Udyog Limited which is manufacturer of passenger cars and light passenger commercial vehicle'. On the other hand, Caparo India Engg. Pvt. Ltd. (CIEPL) manufactures and supplies parts in respect of light commercial and other heavy commercial vehicles where the technology employed is different from the one employed by the company. Learned senior counsel for the Jindal group could not deny that the specification of the components manufactured by CEIPL and CML are completely distinct and they cater to different category of customers. Whereas CML manufacturers for light motor vehicles of MUL alone, CEIPL manufactures for heavy commercial vehicles to Eicher. Therefore, there is no competition involved at all. In addition, following aspects which have come on record also need to be specifically highlighted : (i) In terms of A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Therefore, in these circumstances, I am satisfied that the petitioners should be relieved from the consequence of default as there is no longer any default which had been made good as soon as the same was brought to the notice of the petitioners." 14. When the facts are filtered in the manner indicated above, argument of the learned senior counsel for the Jindal group that judgment of the Calcutta High Court in the case of Power Tools & Appliances Co. (P.) Ltd. (supra) was misapplied would not hold good. Following principles are laid down by the Calcutta High Court in the said case : (a) It cannot be stated that the mere keeping of monies of the company in a Term Deposit is bad business practice or in any event such management as would warrant interference of section 397 of the Act. (b) In deciding an application under sections 397 and 398 of the Companies Act the Court has to bear in mind the principle of particularities and proof. (c) Acts of oppression must be a continuous one. (d) There must be evidence that on the facts stated the company was otherwise liable to be wound up. 15. It is stated at the cost of repetition that the board of the company had taken a normal busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders, having a dominant power in a company, either (1) exercise that power to procure that something is done or not done in the conduct of the company's affairs or (2) procure by an express of implicit threat of an exercise of that power that something is not done in the conduct of the company's affairs; and when such conduct is unfair or, to use the expression adopted by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd. v. Mayar, 1958 (3) All ER 66 'burdensome, harsh and wrongful' to the other members of the company or some of them, and lacks that decree of probity which they are entitled to expect in the conduct of the company's affairs: see Scottish Co-operative Wholesale Society Ltd. v. Mayor and Re. H. R. Harmer Ltd. 1958 (3) All ER 689." Although this case related to acts of oppression, the observations are equally applicable to cases under section 398. Para 22 : The second consideration which has to be borne in mind is the principle of particularity and proof. As held in Maharani Lalita Rajya Lakshmi M.P. v. Indian Motor Co. (Hazaribagh) Ltd. AIR 1962 Cal. 127. "The main defect of this application is that the facts alleged are not proved. It is essential to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ti Limited is doing the excellent business and no quarrel is even raised by Jindal group another case relied upon by learned senior counsel for the Jindal group was Ebrahimi v. West Bourne Galleries Ltd. 1972 (2) All ER 492. This English case came up for discussion before our Supreme Court in the case of Kilpest (P.) Ltd. v. Shekhar Mehra [1999] 2 Comp. LJ 261 and principles of Ebrahimi's case (supra) were distinguished in the following manner : "The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398." 18. Likewise as the allegations of lack of probity on the part of the directors of the company have not been established, judgment in the case of Re Print, Loch v. John Blackwood Ltd. 1942 All ER 200 would have no application. 19. I am, therefo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earing for Caparo group in support of this appeal is that this direction is not only without jurisdiction but uncalled for in the facts of this case when the Board itself had concluded that there was no act of oppression or mismanagement on the part of the Caparo Group. In such petition when the Board comes to the conclusion that there were certain acts of oppression or mismanagement, in order to resolve the disputes once for all, many times directions of the nature given by the Board are passed allowing one group to buy out the other group to give quietus to such disputes for all times to come and put an end to continuous bickering between the two warring groups. Such a course is, however, admissible only when some acts of oppression or mismanagement are found to have been established. However, where petition is found to be meritless and the petitioner has failed to establish any allegation of oppression or mismanagement, in such a situation the Board is not competent to issue such directions as, otherwise it would amount to giving freedom to such parties by filing frivolous petitions and getting such orders even the petitions are found to be meritless. 24. Referring to the provi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to an end any matter complained of either under section 397 or 398. The substratum for passing any order under section 397 or 398 is not available. As observed by Buckley LJ In re. Jermyn Street Turkish Baths Ltd., reported in 1971 All ER 184 at 199" : "If this could be regarded as an act of oppression, which in our opinion it cannot, it would not, we think, justify and order that one side should buy the shares of the other. So drastic a remedy would go far beyond what is necessary to put an end to this particular form of oppression." Again as observed in Maharani Lalita Rajya Lakshmi MP's case (supra ) : ". . .It is also proper to emphasise that the power of the Court to make such order, as it thinks fit, under section 397(2) of the Act is expressly stamped with the purpose of 'bringing to an end the matters complained of'. Therefore, wide as the power of the Court is following from the words of the expression 'such order as it thinks fit' it is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed 'to bringing to end the matters complained of'. The marginal note of section 397 of the Companies Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4 learned counsel for the appellant herein fairly submits that it is not necessary to now pursue the present appeal as the main petition itself has been decided in favour of the appellant herein and the appellant, therefore, seeks to withdraw the present appeal. Without prejudice to appellant's rights and contentions to the observations made in the impugned order the present appeal is accordingly dismissed as withdrawn. It is clarified that this order is passed in view of the subsequent event namely disposal of the company petition itself by the Company Law Board and no observations are made on the merits." It was argued that it can be inferred from this order that while withdrawing the appeal, the Caparo group made a categorical statement that it was satisfied with the impugned judgment dated 19-8-2004 and, therefore, it was not open to the Caparo group to now challenge directions contained in para 24 of that judgment. 27. Without prejudice to this plea, Mr. Mukherjee submitted that the Board was competent to give such directions even when charge of oppression was rejected as it had necessary powers to do substantial justice. His submission was that in the facts of this case whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le winding up of a company. It is also to be established that although the facts are such if just and equitable winding up of the company is called for, order for winding up would unfairly prejudice the petitioner and, therefore, instead of having recourse to the winding up of the company under section 433(f) of the Act, remedy under section 397 is resorted to, to seek appropriate directions to remedy the situation created by the respondents/adversary group. Normally, if such a case is not made out, the Court would not give relief under section 397 of the Act. This is the position of law stated in the case of Bagree Cereals (P.) Ltd. v. Hanuman Prasad Bagri [2001] 105 Comp. Cas. 465 which decision is upheld by the Supreme Court in the case of Hanuman Prasad Bagri (supra). However, reading of the case of Needle Industries (India) (P.) Ltd. (supra) would give an impression that even if section 398 of the Act which entitles affected persons to file a petition on the ground of mismanagement by adversary group, does not contain such a stringent requirement to be proved i.e. it is not necessary to form an opinion, in these proceedings, about the appropriateness of just and equitable wind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....discussion in the judgment would show that primarily the allegations were to be found in the realm of section 397 and there was no finding as to why winding up will be unjust to the complainants. This was the main reason for upsetting the judgment which approach is affirmed by the Supreme Court in appeal. 33. On the other hand, in Needle Industries (India) Ltd.'s case (supra), the Supreme Court held that even if the allegations of oppression and mismanagement are not established, the Court can in appropriate cases exercise its discretion in giving the direction that stakes of minority group be purchased by other group to avoid any further bickering between the two groups. This is clear from the following discussion in Needle Industries (India) Ltd.'s case (supra) : "Even though the company petition fails and the appeals succeed on the finding that the Holding Company has failed to make out a case of oppression, the Court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. . . . ****** There is no reason way we should not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this test laid down in Needle Industries (India) Ltd.'s case (supra), the Court concluded that the petitioner had failed to make a case under section 397 of the Act. Thereafter, the learned Judge proceeded to examine the matter in the light of provisions of section 398 of the Act, namely, whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company or a material change has taken place in the management and control of the company and it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company and observing that if such a case is made out then the Court would be entitled to pass an order which would bring to an end the matters complained of, the Court found following justification in that case for giving appropriate directions : "In the present case the company had been functioning like a rudderless ship. It is not denied that for quite some time the company had been incurring losses. The directors of the company are carrying on their other personal business. The disputes amongst the directors of the company have resulted in the records of the company not being available at th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cise of its equitable jurisdiction the Supreme Court nevertheless did grant relief. Similar is the case here. I cannot lose sight of the fact, and this is an admitted case of the parties, that the two sets of shareholders, namely, respondent Nos. 3 and 5 on the one side and the others on the other, cannot do business together. They have been fighting litigation for years. There is a complete lack of probity amongst the parties. The dismissal of the petition will not solve the problems and, therefore, as far as possible, a permanent solution has to be found which would enable the company, thereafter, to function smoothly." 36. The harmonious reading of the two sets of cases Bagree Cereals (P.) Ltd.'s case (supra) by Calcutta High Court as upheld by the Supreme Court on the one hand and Needle Industries (India) Ltd.'s case (supra) as interpreted by this Court in Chander Krishan Gupta's case (supra) and Krishan Lal Ahuja's case (supra) would suggest the following legal position: (a) Before any direction can be given or relief can be granted under section 397 of the Act, the petitioner has to prove the acts of oppression and that too of a nature which would normally make out a case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t his group was in close contact with Maruti Udyog Ltd., with efforts of Mr. Jindal, Caparo Maruti Ltd. was incorporated as a joint venture wherein Maruti Udyog Ltd. also associated and agreed to give the business to this company for manufacture and supply of heavy sheet metal parts for the Maruti range of vehicles. Mr. M.D. Jindal is the husband of sister of Lord Swaraj Paul, controlling Caparo group. Mr. Jindal was made Chairman of the Company because of close family relations between the two groups. 39. As already noted above, over a period of time some differences arose between the two groups and Mr. Jindal was removed as the Managing Director. The relationship has worsened over a period of time. There are even criminal cases filed against each other. In these circumstances, petition was filed before the CLB challenging the removal of Mr. Jindal as Chairman and also alleging certain other acts of oppression as well as mismanagement. No doubt the CLB did not find any substance in these allegations and those findings are affirmed by me in the discussion recorded above. Allegations also relate to mismanagement, namely, giving of loans by the company to the sister concerns of Capa....