TaxTMI 
TaxTMI 
2014 (12) TMI 1297
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....e pleadings for couple of decades. The Plaintiff has filed many legal proceedings against Defendant Nos. 2 and 3 including proceedings in Company Law Board under Sections 397 and 398 of the Companies Act, 1956 with regard to Defendant No. 1. The present suit is one such proceeding filed by the Plaintiff. 2. The grievance of the Plaintiff briefly put is that Defendant No. 2 has obtained and/or applied for several patents in his own name whereas the patents ought to have been obtained and/or applied for in the name of Defendant No. 1. The Plaintiff, in this derivative action, is seeking to make a claim on behalf of Defendant No. 1. The supporting layer put-forth is the suit cannot be filed in the name of the Company Defendant No. 1 and Defendant No. 1 is not in a position to make such claim in its own name because the Plaintiff does not hold majority shares and the management of the Company is in the control of Defendant No. 2/Defendant No. 3. The Plaintiff also states that Defendant No. 2 was in a fiduciary relationship as the promoter, director, majority shareholder and the Research Head of Defendant No. 1 and by registering the patents in his individual name and not in the n....
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.... say directors of the Company or majority of the shareholders who are unlikely to take any action for the wrong done to the company....... " (iii) In Nirad Amilal Mehta vs. Genelec Ltd. [2008 (6) Bom.CR 499] in paragraph 7, it was observed as follows: "7. .............. The suit should therefore normally be filed by the Company for setting aside the alienation. The Plaintiff who is only a shareholder of the Company would not normally have a right to file a suit on behalf of the Company as the person aggrieved is the Company and not a shareholder. More than one and a half century ago, in (Foss vs. Harbottle), (1843) 2 Hare 461, the Court laid down the rule that normally an individual shareholder would not be entitled to bring an action for a wrong allegedly done to the company. It is the Company who alone can bring an action for a wrong done to it. The rule however has been subjected to more than one exception. In (B.B.M. (UK) Limited vs. Janardan Mohandas Rajan Pillai), 1993 (3) Bom.C.R. 228, this Court while upholding the rule that it is the Company who is entitled to maintain an action for wrong allegedly done to it and a shareholder has no locus standi to maint....
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.... notice of motion, that itself is a final relief that the Plaintiff is seeking regarding the patents, i.e., prayer clauses-(a), (b), (c), (d), (f) and (g). Prayer clause-(e) was not argued. 7. Before we proceed further, it is necessary to give an analepsis on the case. The Defendant No. 1 was registered and it took over an erstwhile partnership business by the name M/s. Gharda Chemicals Industries. In this partnership firm, the Defendant No. 2 was to receive 40% of the profits while the remaining 60% was to be divided amongst the others, viz. the Plaintiff's father who was to get 30% and the remaining 30% to be shared between the mother of Defendant No. 2 who was also the Plaintiff's grandmother and the Plaintiff's maternal aunt. The Defendant No. 2 was to receive 40% from the profits though he had invested only 20% of the total contribution to the firm because of the expertise and ability that the Defendant No. 2 possessed. He was the person on whom the firm relied upon. 8. Defendant No. 1 is in the business of manufacture and sale of organic, inorganic chemicals, its byproducts, perfumery chemicals, cement and other materials. Therefore, the Defendant No. 2 w....
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....ed that under Section 88 of the Indian Trust Act, 1882, where a Director of a Company bound in a fiduciary character to protect the interest of the Company gains himself any pecuniary advantage adverse to those of the Company, he must hold for the benefit of the Company the advantage so gained. The Plaintiff's in support of this contention relied upon (i) Ultraframe UK Ltd. vs. Fielding (2004) RPC 24, (ii) Hop Extract Co. Ltd. vs. Horst [36] (supp) RPC 177], (iii) Fine Industrial Commodities Ltd. vs. Powling [71] RPC 253], (iv) Patchett vs. Sterling Engineering Coy Ltd. (72 RPC 50), (v) Triplex Safety Glass Co. Ltd. vs. Scorah (15 RPC 21), (vi) Narayandas Shreeram Somani vs. Sangli Bank Ltd. (AIR 1966 SC 170) and (vii) Dale Carrington Invt. (P) Ltd. vs. P.K. Prathapan (2005) 1 SCC 212]. 12. The Plaintiff alleged that during the period of 2001 to 2010, Defendant No. 1 has spent an amount of about Rs. 186 crores on research and development and Defendant No. 2 cannot take advantage of that and registered the patent in his own name. The Plaintiff also alleged that Defendant No. 2 has also benefited by the efforts of the employees of Defendant No. 1. It is the Plaintiff's cas....
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....ch are used by the Company are and shall be pursuant to a permission/license granted by Defendant No. 2 and Defendant No. 1 shall not have any right, title or interest therein and Defendant No. 2 shall be entitled to apply for patents and obtain patents in his own name for his inventions. 15. This, according to the Plaintiff, amounts to distribution of assets by the Company to the detriment of all the shareholders and Defendant No. 1 does not have the permission of 100% shareholders to enter into this kind of agreement with Defendant No. 2. The Plaintiff's case is that Defendant No. 2 is in control of Defendant No. 1 and Defendant No. 2 having misused his position as Chairman and Managing Director of Defendant No. 1 will not allow Defendant No. 1 to initiate any action against Defendant No. 2 for the protection and recovery of valuable assets. Moreover, Defendant No. 2 owned and/or otherwise controlled the majority of the equity shares in Defendant No. 1 and all the Directors on the Board of Directors of Defendant No. 1 having been appointed by Defendant No. 2, any resolution moved by the Plaintiff with Defendant No. 1 to initiate action against Defendant No. 2 will obviousl....
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.... reads as follows: 9.2. The 2nd Respondent is required to be restrained from in any manner selling, transferring, alienating, encumbering, or otherwise dealing with the other assets and properties of the 1st Respondent. The 1st Respondent has developed considerable process/technical knowhow with regard to (i) making of rock phosphate (ii) extraction of iron ore (iii) manufacture of temperature resistant polymers and (iv) the development of high grade cement from the ash of coking coal furnaces. These processes/technical knowhow are hereinafter referred to as "the Specific Process Knowhow". The Specific Process Knowhow is developed by the 1st Respondent by the funds of using the labs of, using the resources of and research staff of the 1st Respondent. The Specific Process Knowhow is owned by the 1st Respondent and would constitute a valuable asset of the 1st Respondent. The 2nd Respondent had publicly evinced his desire to take away the Specific Process Knowhow and to encash the same for his own exclusive benefit, thereby depriving the 1st Respondent and its minority shareholders including the Petitioners from the benefit of the Specific Process Knowhow. The 2nd Respondent,....
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....Company was kept a secret arrangement till it became known for the first time to the respondent in February 2005. It is common ground that even the present petitioners are signatories to the said MOU. In fact, even the present petitioners have sold 27 and 66 shares respectively to Godrej Soaps Ltd., without following the regime of Article 57. On the one hand, the petitioners were questioning the intention of the 2nd respondent but at the same time, the petitioners were themselves indulging in act which was not only illegal but against the interests of the company. According to the respondents, the petitioners group was bent upon selling their shares to a person who happens to be the competitor of respondent company. Besides, it is the petitioners group who on the one hand were opposed to increase of authorised share capital resulting in respondent No. 1 not being able to declare bonus shares; and on the other hand were acting against the interests of the Company by committing themselves to sell their shares to person who happens to be the competitor of respondent company. According to the respondents the present petition is a speculative petition for which reason also the grievance....
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....round that the Company has now become a public limited company. Even on account of this change, it has become redundant to entertain the grievance of the present petitioners in relation to the issues concerning extra ordinary general meeting dated 15th February 1990. More so, when the stand taken by the present petitioners at the time of arguments plainly suggests that they are interested in walking out of the Company and sell their shares at a fair price.' 129] ..... 130] The argument is that the appellants were not parties to this judgment and, therefore, it does not bind them. However, it is pertinent to note that the appellants were original petitioners. They withdrew from Company Petition No. 77 of 1990. There is nothing on record to indicate that they withdrew with liberty to raise the pleas raised by them again. Once the learned Judge has found that the conduct of the remaining petitioners was entirely blameworthy and they could not substantiate the charge and/or allegation leveled of being oppressed as minority shareholders, then, I do not see how the present appellants can on the same material succeed in proving the said allegation. Apart from finding....
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....ion with ulterior motives or has a competing interest with that of the Company or has an alternate remedy, he is not entitled to file a derivative action or atleast he is not entitled to any interim relief in the suit filed in the garb of a derivative action. If the Plaintiff does not satisfy even one of the above conditions, a derivative action by him is not maintainable or atleast he is not entitled to any interlocutory reliefs in such an action at this stage. The Defendants whilst alluding to some of the above conditions submitted that the rules which govern the circumstances in which a derivative action will be available to a shareholder remain strict. 21. The Defendants also submitted that Defendant No. 2 has no fiduciary duty to invent in the facts and circumstances of the case. It is the Defendants' case that just because Defendant No. 2 is the Managing Director of Defendant No. 1, it does not follow that the patent devised by Defendant No. 2 in his individual capacity should belong to Defendant No. 1 or that Defendant No. 2 should hold them in trust for Defendant No. 1. It is the case of the Defendants that Defendant No. 2 is the inventor and as an inventor, he is en....
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....s to benefit from inventive abilities of Defendant No. 2 as it may use these inventions royalty free. It was also submitted that many of the patents listed in the revised Exhibit 'J' as tendered by the Plaintiff during the course of the hearing, do not relate to the business of the Company at all and no R & D expenditure has been incurred in respect of these. 24. According to the Defendants, if it is to be held that Defendant No. 2 is not entitled to the patents and Defendant No. 1 is entitled to, the patents may itself get revoked or canceled. According to the Defendants, under Section 64 (1)(b) of the Patents Act, any person may apply for revocation of the patent if "the patent was granted on the application of a person not entitled under the provisions of the Patents Act to apply therefor". In such a situation, if it is held that the patent was wrongfully obtained by Defendant No. 2 rather than in the name of Defendant No. 1, then any person including the competitors of Defendant No. 1 may apply for revocation/cancellation of the patent and this can never be in the interest of company. 25. According to the Defendants, the Plaintiff's conduct is also tainted and....
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....to jeopardize not only the business of Defendant No. 1 but the patents themselves. Therefore, as this conduct is contrary to the interest of Defendant No. 1, a derivative action at the instance of such a party ought not to be encouraged. 27. It is also submitted by the Defendants that the Plaintiff has suppressed in the plaint the fact that the Plaintiff had agreed to sell his shares in Defendant No. 1 to Godrej, who is a competitor and has agreed to exercise all his voting rights in respect of his shares in Defendant No. 1 as per the directions of Godrej. This MOU was brought on record by Defendant No. 2 in his affidavit of 12th December, 2011. Therefore, the Plaintiff having suppressed this MOU is disentitled to any interim reliefs. The Plaintiffs tried to argue saying that it was only a pledge. This read with the two decisions of this Court dated 14th November, 2008 dismissing the Company Petition No. 77 of 1990 and 14th June, 2011 dismissing the Company Appeal No. 24 of 2008 gives reasons to believe that the Plaintiff is only espousing the cause of Godrej, a competitor. Such an action is not bona-fide or in the best interest of the Company and hence on this ground alone, the....
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.... and d) by having the name of the rightful patentee substituted for the person who has wrongfully obtained the patent in revocation proceedings (for which no time limit is prescribed). Where there is a specialized forum constituted to determine patent ownership rights-the forum being the patent office, the Court will leave it to the forum to decide rather than endeavoring to make a decision itself. The Defendants also submitted that there are express provisions in the Patents Act, like section 71 read with section 117(C)&(D) and section 64(1)(C) read with sections 52 and 117(C)&(D) where jurisdiction of the Court appears to be barred. In view thereof, even if the Court has jurisdiction, it will refrain from exercising that jurisdiction, where the specialized forum (patent office) is more equipped to deal with complex issues of ownership rights in patents which is a highly technical subject. The Defendants also submitted that ownership rights is also linked with the concept of 'inventive content' which requires specialized knowledge for correct determination of the ownership rights and hence all the more reason why such issues should be left to a specialized forum like the p....
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....f the Company the alleged wrongdoers because the wrongdoers are themselves in control of the Company. The requirements to be complied with to permit an individual shareholder to sue on behalf of the Company is very strict. In the present notice of motion, therefore, the Plaintiff has to cross two hurdles to be entitled to any relief and if the Plaintiff fails even in one of them he will not entitled to any relief. The Plaintiff has to prove atleast prima-facie that (a) he is entitled to maintain this action and (b) he satisfies that (i) he has a prima-facie case for grant of injunction; (ii) if injunction is not granted, irreparable loss/injury will be caused which cannot be compensated in damages; and (iii) the balance of convenience is in his favour. 34. With this background, let us proceed further: In Palmer's Company Law, derivative action is explained as an action where the Plaintiff is seeking to enforce not his own right of action but a right of action vested in or derived from the Company. Thus, the Plaintiff may seek to enforce the Company's rights by suing in a representative form on behalf of himself and all other shareholders in the Company (except t....
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.... Charan Law and Others V. Rameshwar Prasad Bajoria & Ors. AIR (37) 1950 Federal Court 133 alone the Court also recognized the concept of collective decision making in bringing a derivative action rather than the decision of a single shareholder. In Palmer's Company Law, 25th Edition, at pages 8238 and 8239, while analyzing the English Companies Act of 2006, the relevant factor in a derivative action to be kept in mind is discussed as under: The six other matters the statute required the Court to take into account are: (i) Whether the member is acting in good faith in seeking to continue the claim. (iv) Finally, there is a factor which is given special prominence by being out in a sub-section of its own. The court must have "particular regard" to the views about the litigation of the members of the Company who have no personal interest, direct or indirect, in the matter. This indicates a preference for collective, rather than individual, decision-making over the litigation, even if the body of shareholders in question is a minority. 36. Having regard to the aforesaid, the Plaintiff though holding 12% of the shares of the Company, is all alone ....
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....ompany-Defendant No. 1. Therefore, this action can never be considered to be in the interest of Defendant No. 1 40. The next point which goes against the Plaintiff is that the Plaintiff has himself admitted that the Plaintiff is a competitor of Defendant No. 1. The Plaintiff admittedly is a majority shareholder and controls a Company by the name 'Western Industrial Chemical Company Private Limited" (WCIPL) and manufactures a chemical by the name PV-23. The Defendants submitted that Defendant No. 1 also manufactures the same product but the product was devised by Defendant No. 2 and is being used royalty free by Defendant No. 1 and the same is superior to that of WCIPL. In fact, the Plaintiff in his affidavit in rejoinder dated 22nd December 2011 has stated that "I verily believe that the Defendant No. 1 forayed into PV-23 only with a view to adversely impact my business". Therefore, it gives a strong feeling that this action coupled with the past history between the parties which will be explained later is an attempt by the Plaintiff only to finish this competition by jeopardizing the business of Defendant No. 1. The statement of the Plaintiff in his affidavit in rejoinder e....
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....ed to exercise all the voting rights in respect of his shares in Defendant No. 1 as per the directions of Godrej. The Plaintiff did not disclose about this MOU and the same was brought on record by Defendant No. 2 in his affidavit dated 12th December 2011. 44. The Plaintiff tried to brush aside this MOU by saying that it was only a pledge. However, reading a copy of the MOU, I cannot accept that it was merely a pledge particularly because the Plaintiff had agreed to sell his shares to Godrej and exercise all his voting rights in such a manner as may be directed by Godrej. The MOU further provides that "the Plaintiff shall be bound to sell and/or transfer or dispose of any rights in respect of any shares in Defendant No. 1, whether purchased with the finance made available by Godrej or not, only to Godrej". The Court of Chancery in the matter of Forrest vs. The Manchester, Sheffield and Lincolnshire Railways Company, 45 ER 1131 at page 3 has held as under:- "It has been a very wholesome doctrine of this Court that one shareholder having in view the legitimate purposes of the Company may be permitted in this Court to maintain a suit on behalf of himself and the other shar....
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....if the Plaintiff has an ulterior motive in bringing the action as then it cannot be regarded as bona-fide in the interest of the company. This is the principle followed in common law as is evident from the decision of the Court of Appeal in England in Barrett Vs. Duckett and Others [1995] 1 BCLC 243 where at page 250, paragraph 6 it was held: "6. The shareholder will be allowed to sue on behalf of the Company if he is bringing the action bona fide for the benefit of the Company for wrongs to the Company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed. First on the necessity for the absence of an ulterior purpose, the words of Lawton LJ in Nurcombe v. Nurcombe [1984] BCLC 557 at 562, [1985] I WLR 370 at 376 are apposite: 'It is pertinent to remember, however, that a minority shareholder's action in form is nothing more than a procedural device for enabling the court to do justice to a Company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice....
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....aintiff had against Defendant No. 2. In fact the Plaintiff/his mother had also filed a criminal complaint against Defendant No. 2 and the police whilst closing the case observed that having regard to her age and physical and mental state, the criminal complaint has not been filed by her (the mother) but at the instance of the Plaintiff and there appears to be a family dispute. Even previous litigations initiated by the Plaintiff is also evidence of family disputes/disputes of a personal nature now being again sought to be litigated in the garb of a derivative action. Therefore on this ground also, the Plaintiff will not be entitled to any relief as sought. 48. It is also quite obvious that the Plaintiff having not succeeded in his earlier actions against Maharukh Murad Oomrigar, his sister and the Defendant No. 2, he is re-agitating the same points in the garb of a derivative suit. 49. In Company Petition No. 77 of 1990, the petitioners therein had made similar allegations of mismanagement, oppression and misappropriation of shares of Defendant No. 1 by Defendant No. 2 and others. The Plaintiff, who was also one of the petitioners, later withdrew from the petition. The sai....
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....he doctrine of clean hands. As an equitable invention, the derivative action cannot be used to do injustice." The Defendants also relied upon the judgment of the English Appeal Court in the matter of Nurcombe vs. Nurcombe (1985) 1 All ER 65, where at page 6 and 7 it is held as under:- "It is pertinent to remember, however, that a minority shareholder's action is in form nothing more than a procedural device for enabling the court to do justice to a Company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the Company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Gower's Principles of Modern Company Law (4th edn, 1979) p. 652 the law is stated, in my opinion correctly, in these terms: 'The right to bring a derivative action is afforded (to) the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him fr....
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....ctor Contract dated 6th May 2008, that Defendant No. 1 entered with Defendant No. 2 during the subsistence of which the concerned patent applications have been made shows Defendant No. 2 is only entrusted with powers of management. There is not even an iota of indication either expressly or by implication that he was also required to devise inventions. 55. It must also be noted that the in-disputed position is that Defendant No. 2 has given royalty free license to Defendant No. 1 to use any patent as may be devised by him which may required in the course of business. The Defendant No. 1 continues to benefit from the inventive policies of Defendant No. 2 as these inventions are royalty free. If the Plaintiff's prayers are to be allowed, that would also amount to a fetter in the inventive ability or in the passion of Defendant No. 2 to invent and give royalty free license and who in his advance age of being in the 80's, still continues to invent. If the relief sought is granted, Defendant No. 1 will not be able to use any of the patents and that would mean loss to the Company. Moreover, none of the judgments relied upon by the Plaintiff to buttress the second point that....
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....ially different and hence it cannot be said that Defendant No. 2 holds the inventions in trust for Defendant No. 1. (b) Even Fine Industrial Commodities Ltd. v. Prowling (Vol. LXXI, RPC Page 253), the facts were different from the present case. In that judgment, there is a finding that Byrne sought to collaborate with the Defendant because the Defendant was the Managing Director of FIC. The whole tenor of the judgment suggests that the Defendant being the Managing Director of FIC, was engaged in conceiving or devising the patent in the course of his employment duties and during work hours. Accordingly, whilst conceiving the invention, the Defendant was acting in his capacity as Managing Director of FIC, i.e., he was acting in the course of his duties towards the Company in conceiving the invention whereas Defendant No. 2 whilst conceiving the inventions was acting in his individual capacity and did not conceive the inventions as part of his duties towards the Company or in his capacity as Managing Director. He was not required to under his contract as Managing Director with Defendant No. 1. (c) In the case of Patchett v. Sterling Engineering Co. Ltd. (Vol. LXXII, RPC, Page 50....
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....frame UK Ltd. v. Fielding (2004) RPC 24), also relied upon by the Plaintiff again, principles set therein are distinguishable from the present case in that the inventions were not devised by Defendant No. 2 in his position as Managing Director of the Company. Relying on this judgment the Plaintiff sought to contend that the resolution pertaining to appointment of Managing Director passed in the shareholders meeting held on September 21, 2013 (i.e. much after the date of the suit and much after the suit inventions were conceived) which, inter-alia, contains a clause to the effect that the Company acknowledges that the patents devised by Defendant No. 2 are and continues to be his own and do not belong to the Company amounts to an attempt to ratifying an act which cannot be ratified without the consent of all the shareholders or amounts to unauthorized distribution of assets of the company. This point of view of the Plaintiff cannot be accepted. The said resolution containing the above term does not amount to ratification at all. Also it cannot amount to unauthorized distribution of assets of the Company as the assets being the inventions in question are patented in the name of De....
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....Section 64(1)(b) of the Patent's Act, the patents itself will be at risk. Moreover, the life of a patent is only for a period of 20 years from the date of application and the patents start from as far back as 2008. Even some of the patents admittedly, do not relate to the business of the Company. In addition to this, Defendant No. 1 is able to exploit the patent without payment of any royalty. By keeping in mind the interest of Defendant No. 1, in my view, the Plaintiff should not be granted any relief. 61. Therefore, the Plaintiff fails in crossing both the hurdles. The Plaintiff does not make out any case that (a) he is entitled to maintain this derivative action and (b) consequently the question of making out a prima-facie case or any irreparable loss being caused or balance of convenience being in his favour, did not arise. In any event the Plaintiff did not make out a prima-facie case for injunction nor is able to prove that any irreparable loss will be caused to the Plaintiff or the balance of convenience is in his favour. 62. In the circumstances, the notice of motion is dismissed with costs. 63. The Courts should be alert in dealing with such speculative suits ....