TaxTMI 
TaxTMI 
2012 (10) TMI 627
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....lant was to provide technical know-how and assistance for the manufacture of industrial filters by the company. Thereafter a shareholders partnership agreement dated October 16, 1986, was entered into between the appellant and the second respondent by which the appellant was to subscribe to 26 per cent, shares in the company for a sum of Rs. 7.8 lakhs. This agreement also provided that the company and the appellant would enter into a name protection agreement, a distributor agreement, a trade mark registered user agreement along with an amendment to the articles of the company. Accordingly, the appellant acquired 26 per cent, of the shares of the company. The company started manufacturing filters in the name and style of ultrafilter. The use of filters developed into the requirement and use of filters along with the dryers. Hence the company started manufacturing its own desiccant type of dryers to be sold along with the filters manufactured by it. As far as the other type, viz., fridge dryers are concerned, the same were being imported and sold along with the filters. The company consulted the appellant and on the recommendation of the appellant, the company started importing friu....
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....ideration within six months thereafter. Aggrieved by this order, the respondent before the Company Law Board, is in appeal. Sri Naganand, learned senior counsel appearing for the appellant's counsel, contends that the Company Law Board failed to follow the well settled principles of law governing the exercise of jurisdiction under section 397/398 of the Companies Act. That the petition having been filed by the majority shareholders, is liable to be dismissed on this ground alone. It was contended that until and unless all the ingredients of section 397 are satisfied, no relief could be granted to the respondent. It is therefore for the respondent to prove, that the company is liable to be wound up on just and equitable grounds. Until this condition is satisfied, no relief could be granted. That there is no deadlock in the affairs of the company, since the company is run by the majority shareholders, viz., the respondent. That the relief claimed under section 397, is an alternate to the winding up of the company and since no grounds have been made out for winding up, no relief could be granted. That the main basis for the grant of relief by the Company Law Board appears to be a f....
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....llant through its competitors has commenced business of the very same products being dealt with by the company. That the, appellant rather than performing its duty, is engaged in encouraging the competitors against the interest of the company. Hence a case for winding up of the company on just and equitable grounds has been established. Under the facts and circumstances of the case, rather than winding up the company, the impugned order has been passed by the Company Law Board, which is just and equitable. For all these reasons, the order passed by the Company Law Board is just, fair and reasonable and does not call for any interference. Accordingly, he pleads that the appeal be dismissed. In support of his case, he relies on the following judgments : (1) V. S. Krishnan v. Westfort Hi-Tech Hospital Ltd. reported in . [2008] 142 Comp Cas 235 (SC) ; (2) M. S. D. C. Radharamanan v. M. S. D. Chandrasekara Raja reported in [2008] 143 Comp Cas 97 ; AIR 2008 SC 1738 ; and (3) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. reported in [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298. Heard counsel....
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....at there is an oppression to any member, rather than the winding up of the company, could pass such orders as it thinks fit and considers just and equitable. Therefore, section 397 does not postulate a difference between the majority and a minority shareholder. Any member of a company could complain under section 397. Under section 398 also, any member could complain with regard to the mismanagement and the court could deal with it as in section 397. However, in terms of section 399, only those members holding not less than one-tenth of the issued share capital of the company and in the case of a company not having a share capital, not less than one-fifth of the total number of its members alone have a right to apply under section 397/398. Therefore the only restriction to maintain a petition under section 397/398 is as contained in section 399. If the conditions of section 399 are fulfilled, not only could such a member maintain a petition under section 397/398 but has a statutory right to do so. It is not in dispute, that the respondent possessed the required qualification to maintain a petition under section 397. When a majority complains of oppression, the majority therefore, b....
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....he company's business, affecting rights of complaining parties as shareholders and not as directors. If a deadlock can be resolved by the articles there is no deadlock to bring in winding up and if there are alternative remedies the company should not be wound up. The learned company judge also held that he was unable to hold that the substratum of the company had gone; However, in the appeal, it was reversed and winding up was ordered. The matter was taken to the Supreme Court. After referring to Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 All ER 492 (HL) ; [1973] AC 360 and also Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch. D 426 (CA) and other cases, the Supreme Court held as follows (at page 104 of 46 Comp Cas) ... 'In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership'." In the light of the aforesaid judgment and in the facts of this case, it can therefore be held that the principles of partnership stand attracted to the case on hand. That sufficient material has been placed to establis....
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....haracter which have in them the requisite element of oppression'. It was also held that 'the result of applications under section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision'. The circumstances must be such as to warrant the inference that 'there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy'. The 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 fairplay on which every shareholder who entrusts his money to a company is entitled to rely . . . 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 me to have no direct relevance to the remed....
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....dence between them. But mere loss of confidence between these groups of shareholders would not come within section 397 unless it be shown that this lack of confidence sprang from a desire to oppress the minority in the management of the company's affairs and that there was at least an element of lack of probity and fair dealing to a member in the matter of his proprietary right as a shareholder." Reliance is placed on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. reported in [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298, wherein it was held as follows (page 781) : "In England, after the decision of the House of Lords in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1, a restricted interpretation has been given to section 210 by the Court of Appeal in Jermyn Street Turkish Baths Ltd., In re [1971] 41 Comp Cas 999; [1971] 3 All ER 184, which has been adversely criticised by writers on company law (see Palmer's Company Law, 22nd edition, page 613, paragraphs 57-06, 57-07. Gore-Browne on Companies, 43rd edition, paragraph 28-12). In India, this restrictive development has no place, for, in Shanti Prasad Ja....
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....e Act provides that an order could be made on an application made under sub-section (1) if the court is of the opinion-(1) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members ; (2) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up ; and (3) that the winding up order would unfairly prejudice the applicants. No case appears to have been made out that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members. Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case for winding up. of the company on just and equitable grounds. If the facts fall s....
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....sed on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under sections 397 and 398. (e) Once conduct is found to be oppressive under sections 397 and 398, the discretionary power given to the Company Law Board under section 402 to set right, remedy or put an end to such oppression is very wide. (f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact." Reliance is placed on M. S. D. C. Radharamanan v. M. S. D. Chandmsekara Raja reported in [2008] 143 Comp Cas 97 ; AIR 2008 SC 1738, wherein the hon'ble Supreme Court held as follows (page 104) : "Section 398 of the Act provides for filing of an application for relief in cases of mismanagement. Section 402 provides for the powers of the Company Law Board on an application made under section 397 or section 398 of....
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.... play, the small businesses in India fall a prey to the predators. It is becoming extremely difficult in the market place to face the customers. In addition, Friulair is also asking us what will happen now. They want immediate answer from us and also all our customers and I do not blame them. This is not only impacting our image and credibility but also our business. That is why I had to set the deadline. We also have the pressure dies ready and the housings made for export. Earlier all this is resolved better for all of us. With regards, Yours sincerely, Kris Kini." By a letter dated March 19, 1997, vide annexure A13, the appellant wrote a letter to the respondent, which in part is extracted as follows : "March 19, 1997 Dear Mr. Kini I hereby request that Ultrafilter India and their nationwide sales and service staff be instructed to support the effort of Pace rather than enter into competition on fridge dryers ... Kind personal regards, Ultrafilter GmbH, Dirk G. Kronsbein, ....
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...., 1998, vide annexure A22, the appellant wrote to the respondent, which in part is extracted as follows: "May 19, 1998 Dear Mr. Kini Having said this, you can be sure that I will reestablish the ultra-filter presence in India as of January 1, 1999, whatever effort and cost it may take. We will establish a strong ultrafilter made in Germany-position in India. Yours sincerely, Ultrafilter GmbH, Dirk G. Kronsbein." The respondent wrote a letter on September 26, 1998, vide annexure R3, which in part is extracted as follows: "September 26, 1998 Dear Mr. Kronsbein, Thereby we strongly feel that you have forfeited the right under the agreement, both in terms and spirit to continue as a shareholder of the company you had the option of either being a competitor or a shareholder. You choose to be a shareholder and therefore promised not to be a competitor. Now you have taken the route of being a competitor and therefore have no right to be a shareholder. In this situation, we are left with no a....
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.... of the present case. 9. Ultrafilter GmbH have every right to use the trade name 'Ultra-filter' in any part of the world including India. The company's limited permission to use the mark 'Ultrafilter' as part of its corporate name and as a trademark has been terminated and such termination will have effect as of December 1, 1998. Looking forward to meet you and all the board members on October 28, 1998, 14.00 at Ultrafilter (India) P. Ltd. Sd/- Dirk G. Kronsbein, Group Chairman." A reading of the above communications would clearly disclose the manner in which the parties are dealing with one another. By virtue of the letters written by the respondent, it emerges as follows: (a) That the appellant has become a competitor and therefore has no right to be a shareholder; (b) That the appellant was asked to sell their shares to the respondent; (c) In view of the competition with Pace Equipment the respondent is unable to answer the queries of the customers and hence, the company is losing its credibility. In the letters written by the appellant, the s....
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.... that affects the company. What is of crucial importance is not a healthy competition, but a competition against a company, which is fully supported by the appellant himself. The appellant being a shareholder of the company cannot therefore indulge in deliberate acts or omission or commission against the company itself. The appellant therefore has failed in its duties towards the company. There has been an active, deliberate and negligent act by the appellant towards the company. The interest of the appellant should be only towards the company and none else. By being a shareholder of the company, the appellant cannot act against its interest. (m) The communications also reveal that the appellant was pressurising the respondent to support the effort of the competitor, which competitor, was taken over by the appellant. It is therefore evident that even though the appellant was a shareholder in the company, in view of the fact that it had taken over Sabroe, its interest were only towards Sabroe whose products were being sold by Pace Equipment. The object of the appellant is to ensure its own success through Pace Equipment rather than that of the company. Hence, o....
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.... cancellations of the agreements. The appellant is manufacturing and selling the same products that are being manufactured and sold by the company which is therefore adverse to the interests of the respondent. Admittedly there are only two major shareholders and both have joint management in terms of the articles. Even though the appellant holds 26 per cent, of the shares, it has been conferred with a veto power in the board meetings. A veto power would therefore mean, that until and unless the appellant agrees, no decision could be taken by the respondent even though he is a majority. The appellant has a veto power in the board meeting enabling it to scuttle the probables of the respondent. The material placed would show that there are a series of incidents attri-butable to the appellant. The acts complained of are not in isolation but continuous and are linked to one another. The appellant proposed to gain absolute control over the company by demanding additional shares. On the refusal to grant them, the respondent has been threatened. The threat is "at whatever effort and cost it may take". Competitive businesses have been embarked upon, by the appellant which is adverse to the ....