TaxTMI 
TaxTMI 
1992 (10) TMI 263
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.... fully paid up which constitute approximately 25 per cent. of the total shareholding of the company. These shareholders are part of the Saboo group having 40 per cent. of the total equity. 2. The admitted facts about this case are as follows : Shri R.K. Saboo, father of the petitioner had obtained an industrial licence from the Government of India for the manufacture of hosiery needles in the year 1959. For implementation of the said project, a financial and technical collaboration agreement was finalised with Theodor Groz and Sohne and Ernst Beckert Nadelfabrik Commandet-Gesslschaft (hereinafter called "G. B."), a partnership firm in Germany. The terms of collaboration were approved by the Government of India, vide their letter dated November 21, 1959. The G. B. group and Shri R.K. Sabpo entered into an agreement on April 1, 1960, to form and promote in India a private limited company and in pursuance of the said agreement the company was incorporated on October 15, 1960. Later the company became a deemed public limited company under Section 45A of the Companies Act, 1956. As per the agreement, Shri R.K. Saboo was to transfer the industrial licence to the newly formed ....
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.... Ivanovski of the G. B. group was appointed as technical director for a period of five years and even before the expiry of this term of five years, he was appointed as managing director in 1989; On the retirement of Shri R.K. Saboo, the petitioner was appointed on November 10, 1991, as managing director from the Saboo group. 5. The German firm consisted basically of two families, one Groz family and the other Beckert family. Prior to 1987; one Mr. Martin Gass belonging to Groz family was, the chairman of the board of the company. In 1987, there was restructuring in the affairs of GB whereby Dr. Thomas Lindner from the Beckert family became the chairman of the board of directory of the company. 6. It is the contention of the petitioner that the collaboration agreement dated April 1, 1960, and the articles of association provide for shared management between the two groups and equal representation of both the groups on the board of directors, despite unequal shareholding. This was further confirmed by an agreement dated February 7, 1989. The business of the company was to be carried on as joint Venture and on, the basis of mutual trust and confidence to be reposed by the two gr....
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....ark, denial by the GB group for lawful use of the GB trade marks by the company, supply of machines and equipment by GB at huge profit margins, non-compliance with requirements of Section 297 of the Companies Act, the exclusion of the Saboo group from the day to day management of the company by withholding important information regarding operations of the company and unilateral take over of certain departments previously looked after by the petitioner, non-declaration of dividend, sale of needles at loss, non-co-operation of the GB group to take effective steps to indigenise raw material supplies and transfer of technology to the company. 8. In the context of issues like maintainability, application of the principles of partnership to a limited company, what constitutes oppression, the nature of the powers of the Bench under Section 397/398 and the type of the reliefs that can be given, both the petitioner and the respondents have referred to the decisions in various court cases. The petitioner relied on the decisions in the following cases : 1. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal). 2. Sishu Ranjan Dutta v. Bhola Nath Paper House....
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.... 13. Scottish Co-operative Wfioksale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL). 14. Shanti Prasad Jain v..Kalinga Tubes Ltd, [1965] 35 Comp Cas 351 (SC). 15. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd, [1981] 51 Comp Cas 743 (SC). 16. Chandler Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi). 17. Mohta Bros. Pvt. Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40:Comp Cas 119 (Cal). 18. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal). : 10. There is another factual aspect of this case which may be conveniently noted at this stage. While the Saboo group holds 40 per cent. of equity capital, the present petition has been supported by only 25 per cent. of the equity holders. When the petition first came up for hearing on January 30, 1992, counsel appearing on behalf of the petitioner and the respondents prayed that orders for interim relief be passed to the effect that the meeting of the board of directors of the company scheduled to be held on February 7, 1992, be held to consider only items Nos. 1, 6 and 7 of the agenda and the o....
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.... requirement and extension of services of employees superannuated or due for superannuation. In the said suit, the Sub-Judge 1st Class, Delhi, passed the following ex parte orders ; "Whereas, in the above noted case, the plaintiff has moved an application under Order 39, rules 1 and 2 of the Civil Procedure Code for ex parte stay. As such the defendants are restrained not to consider the items regarding the extension of contract of the persons who have already superannuated or due for superannuation and shall also not take any decision which may amount to reducing the amount of the space available to the directors so the second group to which the plaintiff belongs in the board meetings." 11. It was submitted on behalf of the G. B. group that the order of the Sub-Judge was obtained without disclosing to the court that on the same subject a petition was pending before the Company Law Board and that the Company Law Board had permitted the board of directors to consider this matter and the ex parte stay order obtained by Shri S.P. Mandelia, director, belonging to the Saboo group was with the intention of circumventing the orders passed by the Company Law Board. It was furth....
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....ing 40 per cent. equity shareholder Saboo group", and that the enterprise was started as a joint venture and both groups having an equal say in the management of the company. In the documents filed to support various averments made in the petition, documents supplied by Shri S.P. Mandelia have been included and relied on. In view of these facts, though only 25 per cent. shareholders belonging to the Saboo group are parties to the petition, it is obvious that the petition has been filed to protect the interests of all the shareholders belonging to the Saboo group. 15. One more factual aspect also could be noted at this stage before we take up in detail the various controversies between the two groups. The Foreign Exchange Regulation Act, 1973 (hereinafter referred to as "the FERA"), came into operation on January 1, 1974. Section 29 of the FERA, inter alia, provides that a company, in which the non-resident holding is more than 40 per cent. would require permission of the Reserve Bank of India (RBI) to carry on business in India. Under Section 29(4), the Reserve Bank of India has power to give directions for disinvestment of foreign equity holding or impose conditions while grant....
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....jority of votes. In case of an equality of votes the chairman shall have a second or casting vote. A director may, and the secretary on the requisition of a director shall, at any time summon a meeting of the directors. It shall not be necessary to give notice of a meeting of directors to any, director for the time being absent from India. Article 99.--The quorum necessary for the transaction of the business of the directors shall be two directors, one of whom shall be from the Groz-Beckert group and the other from the Saboo group. However, with the consent of the Groz-Beckert group in the case of non-presence of any of the directors on their behalf the quorum will be any two directors. Article 105-- Subject as herein mentioned and except as delegated to a managing director local board committee agency or attorney effectively appointed or established under these articles every decision of the directors shall be made by a simple majority of those present and voting at a meeting of the directors. However, the following decisions and matters shall not be effected unless made in the presence of director/directors or both groups and unanimously by all the directors pre....
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....ither collaterally with or to the exclusion of all or any of the powers of the directors in that behalf and may, from time to time, revoke, withdraw, alter or vary all or any of such powers. Unless and until otherwise determined the managing directors will jointly exercise all the powers exercisable by the directors save such powers as by the Act or by these articles shall be exercisable by the directors themselves. (c) The managing directors shall not exercise the powers to : (i) make calls on shareholders in respect of moneys unpaid on the shares in the capital of the company ; (ii) issue debentures ; and (iii) except as may be delegated by the board under Section 292 of the Act invest the moneys of the company and make loans or borrow moneys. Article 107 -- The company shall always have as the chairman of the board of directors one out of the four nominees of the Groz-Beckert group on the board of directors of the company. Similarly the company shall have as its vice-chairman of the board of directors one of the nominees of the Saboo group on the board of directors of the company." 17. As noted in para 3 above, there are a large nu....
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....une, 1990. In January, 1990, the company made an application to the Central Government for an import licence for the machinery required in connection with the expansion programme. At the board meeting held on February 8, 1990, detailed time schedule and status report in respect of the expansion programme were submitted to the board by respondent No. 4. In the month of March, 1990, an officer of the Exim Bank visited the company for appraisal of the project. The aide memoire prepared by the officer of the Exim Bank in connection with this visit stipulated that the company would arrange to obtain firm commitment from GB in form and substance satisfactory to the Exim Bank to the effect that GB will buy back up to 20 million needles per annum from the company at a minimum average price of DM 165 per 1,000 needles excluding agency commission payable, if any, and the price will be increased corresponding to the increase in the price of the raw material. On May 4, 1990, a board meeting was held which confirmed the minutes of the February 8, 1990, meeting, in which the detailed time schedule of the expansion programme was considered. On August 16, 1990, while approving the expansion progra....
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....hould consider and take and GB could not provide guarantee for profits. According to the Saboo group, GB refused to give minimum price of DM 165 for 1,000 needles and offered a much lower price of DM 120 per 1,000 needles. It is further contended that GB was prepared to give a buy-back guarantee for 20 million needles at DM 165 per 1,000 needles for one year and DM 120 per 1,000 needles for the next four years and the price of DM 165 per 1,000 needles for five years could be considered if the company was prepared to accept itself as an affiliate subsidiary company of GB rather than an independent unit. Another point of dispute in respect of the minutes of the board meeting held on December 4, 1990, relates to the issue regarding the Saboo group insisting on reconsideration of the project, while, according to the GB group, the project was reapproved and confirmed by the use of the casting vote of the chairman. The meetings were held in February-March, 1991, between the Saboo group and GB in Germany to resolve the dispute. It is stated by the petitioner that at these meetings GB declared that whereas the Saboo group perceived the company to be an independent Indian company, GB wanted....
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....nts that the demands made by the Saboo group show that the primary concern of the Saboo group is not the alleged oppression by the majority or the denial of the legitimate right of the minority shareholders but perpetuation of their exclusive power and control over the company and ensuring for themselves the benefits and perquisites over and above those to which they are entitled to in the ordinary course. In the rejoinder filed by the petitioner this has been denied and disputed by the Saboo group and reference was made to a number of points the Saboo group had raised at the board meeting which the GB group refused to discuss and got postponed. While none of the parties has filed the entire disputed minutes before us in support of their contentions, extracts of some of the disputed items have been filed by both the parties. The issues that were considered at the board meeting included issues relating to the expansion project, the dividend policy, compliance with the provisions of Section 297, continuation of the lease of the transit house at Delhi and the respective authority of the two managing directors over the executives for the smooth functioning and management of the company....
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....f imports of spare parts which were in contravention of the provisions of the Import Control Act. 22. It is the contention of the petitioner that import of these spare parts was made in undue haste and under the direction of GB. It has been further contended that the spare parts which included second-hand parts as well, were imported without any examination as to the possibilities of indigenous manufacture and at very exorbitant prices. No consultations were held with the Saboo group before the letter of respondent No. 4 was sent to the Government for regularisation of the contravention of the provisions of the Import Control Act. This matter came up for discussion at two/ three board meetings and, finally, on November 18, 1991, in connection with the resolution moved by the Saboo group before the board for immediate re-export of spares worth Rs. 40 lakhs supplied by GB and refund of purchase price paid by the company to GB. This resolution was defeated by using the casting vote. It is also submitted by the petitioner that while the company auditors, A. F. Ferguson, earlier circulated a note to the managing director of the company pointing out the contravention of law, this note....
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....s no quantification of this profit and the respondents had consistently avoided discussion on this topic.,It is also further alleged that the imported raw material which was about 85 per cent. of the total raw material requirement in 1986 during the period when Shri R.K. Saboo was managing director, has gone up to nearly 100 per cent. now after respondent No. 4 has taken over as managing director. According to the petitioner, the GB group has ensured that no effective steps were taken for indigenisation of raw material supply and even the proposal of the Saboo group that more Indian manufacturers of raw material should be contacted was defeated by the use of the casting vote. This is because, according to the petitioner, all the supplies of imported raw material are channelised through the GB group which has a vital interest in ensuring that the company remains totally dependent on imported supplies and this continued import of raw material has resulted in a greater outflow of foreign exchange from the country. 25. In reply, the respondents have stated that GB is making only a reasonable profit between 5 to 10 per cent. on the raw materials supplied to the company by procuring t....
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....price at which GB was procuring these machines. Referring to the allegation that the Indian company is a dumping ground for all the discarded machines of GB, Shri Chagla pointed out that as per the collaboration agreement, GB has to supply all the new machinery manufactured by GB. There is no obligation on GB to supply machinery not manufactured by it but all along the company has been requesting GB to use their good offices for buying other machinery which was not manufactured by GB. Shri Chagla then elaborated the efforts made by the company to develop local raw material sources over the last so many years and how in the past by use of local raw material, the quality of production had suffered. He challenged the petitioner's contention that the source of raw materials is hot disclosed by GB and stated that on each and every package of raw material imported, the name and address of the supplier and composition of the raw material are given. 28. He also mentioned that the prices for imported raw materials were fixed once in three years, GB was absorbing any increase in the procurement prices. He pointed out that raw material supplied is not manufactured by GB and GB is only ....
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....s falling in class 26 and this trade mark was mainly used in domestic sales. According to GB the application for registration of this trade mark was made without prior consultation with GB and as GB objected to the attempts of the Saboo group to register the trade marks owned by GB, it was mutually agreed between GB and Mr. R.K. Saboo that the company would withdraw its application on the condition that GB would register the trade mark in its own name and the company would be permitted to continue to use the trade mark in India. In March, 1988, on the basis of the instructions given by the company, the company's trade mark lawyers wrote to the Registrar of Trade Marks, withdrawing Application No. 414563 made by the company. Shri R. K, Saboo, in his letter-dated April 1, 1988, to Dr. W. Bannmueller of GB confirmed the withdrawal of application for registration of its trade mark. It is mentioned in the letter that "in order to facilitate the registration of your application by the Trade Mark Registrar of India, we have withdrawn our Application No. 414563-in class 26. In this regard, a copy of the letter written by our trade mark attorneys, the Acme Company, to the Registrar of T....
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....never parted with the ownership of the trade mark, and the conduct of the Saboo group in registering the trade mark without the consent of GB agreeing and confirming self-cancellation of trade mark and again getting the trade mark renewed up to December, 1997, without informing GB is tantamount to theft of the trade mark and shows lack of probity. (iv) Complaints regarding working of the sales department : 32. In the petition several instances have been pointed out about the working of the sales department which, according to the petitioner, is not in the interest of the company and all these acts were done under the dictates of GB after it was brought under respondent No. 4. It is mentioned in the petition that after the failure of negotiations held in February-March, 1991, in Germany between the two groups, Mr. Ivanovski, respondent No. 4, was called to Germany by GB and after his return he unilaterally took over the sales and public relations department of the company, under his control despite the objections of the petitioner who was looking after these, departments, as all along these departments were looked after and, managed by the managing director nominated by ....
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....xercise of the casting vote of the chairman. It is further alleged that at the annual general meeting held on December 30, 1991, the members were misled by respondent No. 4 by stating that no needle-wise costing was available before the year 1991 despite the fact that the sales department was maintaining the needle-wise costing for several years. At the same annual general meeting, while the Saboo group stated that estimated loss on account of sale of needles below cost was around Rs. 100 lakhs in the year 1991-92, respondent No, 4 maintained that only direct cost should be considered for estimating loss and on that basis the loss would be only Rs. 3 to, 4 lakhs. It is the contention of the petitioner that this statement of respondent No. 4 was misleading as even if direct costs are considered, the loss will be over Rs. 56 lakhs and for this purpose the petitioner had filed a duly signed statement of the company's cost accountant. 35. The petitioner further alleges that, apart from using the sales department to further its own plans and interests, GB arid its nominee managing director, Mr. Ivanovski, are encouraging indiscipline and insubordination towards the Saboo group ma....
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.... brushing aside this issue. It is further pointed out that the price at which needles were sold by the company is higher than the price charged by competitors and there is no truth in the allegation that needles have been sold at a loss to eliminate competition. 37. In the counter-reply, the petitioner has pointed out that the provisions of Article 105(e) are very clear and are applicable. It is further pointed out that for the purpose of income-tax returns the method adopted for valuation of the finished stocks has always been on aggregate basis and this has nothing to do with the product costing which is done needle-wise as is essential for marketing purposes. It is pointed out that while the company was selling needles below eost earlier, it was expected to be a short-term phenomenon and the magnitude of the loss was insignificant. However, it is alleged that, presently such sales are made on a very large scale and the estimated loss on account of this during 1991 as per the company's own records, is expected to be Rs. 56 lakhs. In order to curtail the loss, the proposal made by the Saboo group for indigenisation of raw material, has been opposed by the GB group mainly wi....
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....espondent No. 4 pointed out that such high payment of dividend was not justified considering the liquidity problems of the company especially when the company had to obtain loans to pay its taxes. In view of this, the GB group had proposed a dividend of 10 per cent., i.e., Re. 1 per share but all the directors of the Saboo group voted against the resolution. It is the contention of the respondents that by not agreeing to the proposal of the GB group for payment of 10 per cent. dividend, the Saboo group Mocked the company from declaring any dividend and, therefore, there is no truth that the GB group was not willing to declare any dividend. The respondents have relied on the minutes of the board meeting held on November 18, 1991, however, the minutes of the board meeting are disputed. 40. In the rejoinder, it has been pointed out by the petitioners that the payout ratio of dividend to net profit of the company consistently averaged about 50 per cent. up to 1986-87. Thereafter, it has steadily dropped to about 15 per cent. and to "nil" in 1991-92. It is also pointed out that although in the past, the dividend had remained more or less in the region of 15 per cent., this was accomp....
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....ore arrival of the main machinery. After the receipt of the import licence on October 23, 1990, respondent No. 4 made a representation on November 9, 1991, to the Chief Controller of Import and Exports seeking regularisation of the import of spare parts. (iv) The project envisaged import of second-hand reconditioned machinery proposed to be imported from the GB group and the valuation was to be on the basis of replacement cost plus overhauling charges with a reasonable margin of profit to the GB group. The valuation was to be certified by an approved surveyor in West Germany and by an approved Indian chartered engineer, if required. (v) Since inception of the company, contracts for import of raw material, spare parts, reconditioned second-hand machinery, export of needles except export to USSR and certain neighbouring countries, were made by the company with GB and no disputes were raised about the same so long as the Saboo group was in control of the management of the company. On the contrary, objections raised by the auditors about applicability of Article 105 and disclosure under Section 297 of the Companies Act were taken up by the board of directors and they ....
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....n on which the viability of the project was based. In this connection, he drew our attention to the minutes of the board meeting to point out that the expansion programme was conceived not only for increasing the capacity of the unit but also for updating the technology and producing quality needles which would also reduce the cost of its products as well as reduce a country's dependence on import of sophisticated needles. Refuting the allegations that GB has a vested interest in exports through GB at prices lower than DM 165 per 1,000 needles, Shri Chagla pointed out that GB on its own even got the export obligation deleted. He stated that while the GB group was ready to give a commitment for one year at DM 165 for 1,000 needles and a minimum price of DM 120 for 1,000 needles for another four years, it was not appropriate on the part of the Saboo group to expect a long-term commitment from GB as the company has to shoulder the risk inherent in any business. In reply, Shri Mookherjee pointed out that while the Saboo group was not against the expansion programme, its only request was to reassess the project in view of the increase in the cost of the project as well as the non-av....
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....t both the groups were fighting on a non-issue and the matter could have been resolved to mutual satisfaction by getting intervention of a third party like financial institutions which were also involved right from the beginning of the appraisal of the project and which had made commitments regarding financing it. 44. Regarding the allegations about import of spare parts in contravention of the Import Control Act, the matter is already before the competent authority and we, therefore, refrain from expressing our views on the subject. We have also noted Shri Chagla's arguments that the project report gives all the details regarding old machines, new machines and reconditioned machines that will be supplied and the import licence also gives all the details and, therefore, the allegation that there was fraud or misrepresentation is totally unsustainable. We have considered the facts relating to import of spares ahead of arrival of the machinery on OGL and we do not find any mala fides in this matter ; at the most it only shows that the lead time assumed for getting the import licence was not realistic. 45. Regarding the allegations relating to supply of raw materials and mac....
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....avoidance of giving information to the managing director belonging to the Saboo group and insubordination by the senior officers are complaints which manifest the deteriorating personal relations between the petitioner and respondent No. 4. Most of these matters related to day-to-day matters and no policy issues are involved in it. It is also clear from the various letters exchanged between Dr. Lindner and Shri R.K. Saboo that there was no specific division of work between the two managing directors. The only other allegation in regard to the sales department is regarding the sale of the needles at a loss. As per Article 105 of the articles of association unanimous approval is required for selling needles at loss. We find that detailed data is available about the costing of the needles. The fact that needles have been sold at a loss is accepted by both the parties. The sale of the needles at a loss started in the year 1987. The controversy is only related to the quantum of loss and the requirement of unanimous resolution. We have not been impressed by the arguments advanced by the respondents in defending this allegation. This matter could have been discussed at the board meeting i....
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....triment of the Indian economy and the Saboo group of shareholders. It is the contention of the petitioner that the resources of the Indian company are thus being utilised against the interest of the company and its minority shareholders. The petitioner had also attempted to obtain relevant information from GB about GB's ultimate sale prices but the same was not disclosed. On behalf of the petitioner, a resolution was proposed at the board meeting held on November 18, 1951, that an independent market survey be commissioned to explore the export possibility and ascertain the international prices for the company's products so as to get the best available terms for exports. However, this resolution was defeated by the GB directors by exercise of the casting vote. In view of this, it has been submitted by the petitioner that the GB group has effectively prevented the company from making any further effort to promote direct exports and also even from obtaining independent information regarding the international market. 49. It is the contention of the respondents that the sale prices of needles purchased by GB from the company are not dictated by GB and these transactions are b....
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....0-81 and 1987-88 and in the remaining years the exports ranged between 9 million and 16 million needles. The chart indicating direct exports and exports through GB shows that while in 1987-88 the sales through GB accounted for 68.52 per cent. and in 1990-91 they were only 44 per cent., statistical data relating to sale to GB in relation to total sales of the company indicate that in 1990-91, the share of sales through GB in quantity was 9.86 per cent. of the total sales and in value, it was 7.78 per cent. It was also noted that in 1987-88 when the Saboo group was in total control of the management, in terms of quantity the sales through GB was 24,24 per cent. of total sales and in value, it was 19.11 per cent. A chart has been given covering all 75 items covering all export contracts direct and through GB for the year 1991 and comparative prices realised in the export market as well as in the domestic market. There are only a few items where comparative data regarding the prices of direct exports and exports through GB are available. On the basis of this data, it is very difficult to arrive at a definite conclusion. In certain cases, the prices realised by exports through GB were h....
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....y or otherwise of Section 297 in order to protect the company and its directors from any likely proceedings, was defeated by the GB group by exercise of a casting vote by the chairman. According to the respondent, the provisions of Section 297 are not applicable to a foreign firm such as GB and, therefore, there is" no necessity to take permission from the Central Government. The respondent also pointed out that the present auditors of the company had raised the issue of applicability of Section 297 to the transactions of sales to and purchases from GB in the first year of audit at the board meeting held on August 29, 1989. It was then explained by the board to the auditor that the provisions of Section 297 were not applicable to such transactions and that such a view was also accepted in the past by the previous auditors of the company. It is further stated that at the conclusion of the board meeting a note signed by the then sole managing director Mr. R.K. Saboo, and the then technical director of the company (respondent No. 4) was given to the auditors indicating that the section is not applicable and the company would arrange to obtain a written legal opinion. The company obtai....
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....rm would not be covered by it. The word firm which appears along with the word private company in that provision should normally draw its colour from the word private company which has to be registered in India. If GB has been a company incorporated under the German law even then the provisions of Section 297 would not have been applicable as those provisions apply only to such companies as are registered under the Indian Act. " 53. In the opinion given by the Attorney-General of India, it has been observed "the section has to be interpreted to further the object of the section and not to defeat its object. From this point of view, it does not matter whether one of the contracting parties is a foreign firm or a foreign company. Vice versa, the possible contention that the company as defined in the Act only means an Indian company and it does not include foreign firm is untenable, firstly, because the definition itself is only to be understood in the light of the provisions of the Companies Act, clearly specifying that the word would mean what it says only when the context does not require otherwise. In the context of Section 297, the word "company" would include a foreign compan....
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....ny, should not have been so entered into". It was further observed : "Disclosure of interest and not voting on the resolution by the interested director are only formal aspects of the compliance with the statutory provision. The basic question is as to the conduct of the directors and whether it satisfies the test considering their fiduciary relationship to the company". In the context of the allegation of the petitioner that the GB group is not obtaining the approval of the Central Government as per Section 297 as the GB group does not want to disclose certain information, we have to examine not the formal aspect of compliance with the statutory provision but we have to deal with the basic question as to the conduct of the directors and their fulfilling the test of fiduciary obligation. In this context, we have noted that when such a contract is approved by the board, an application for the approval of the Central Government is to be made in Form No. 24A prescribed under the Companies (Central Government) General Rules and Forms, 1956, with required documents. A perusal of the form indicates that the Central Government requires (i) the proposal for which approval is required, (ii)....
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....ontract between the company and GB were unfair or that they were heavily weighted in favour of GB. 56. At this stage, it will be appropriate to deal with the issue of maintainability of the petition raised by the respondent. Shri P. C. Sen and Shri Mookerjee, counsel appearing on behalf of the petitioner pointed out that the petitioners hold requisite percentage of shares in the company and have the right to apply under Section 397/398 of the Companies Act and the petition is maintainable as long as the complaints in the petition indicate instances of oppress ion/mismanagement and a case is made out that it is just and equitable to wind up the company. Referring to the memorandum of understanding, articles of association and the terms of agreement dated February 7, 1989, it was pointed out that though the company is a Section 43A company, in reality it is nothing but a partnership between the German group having 60 per cent. equity and the Saboo group having 40 per cent. equity. Despite the unequal equity holding, both the groups have equal representation in the management. It was pointed out that the partnership was formed in good faith and confidence and now there is no faith ....
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....ock by providing for a casting vote to be exercised by the chairman. He referred to the decision in Smt. Abnash Kaur v. Lord Krishna Sugar Mills Limited [1974] 44 Comp Cas 390 (Delhi) and pointed out that it is an accepted principle that where the articles provide for a solution for resolving a deadlock, the court will not interfere. Sim Chagla also pointed out that Shri R.K. Saboo was the sole managing director for over a period of 15 years and most of the instances which have been alleged as mismanagement are not new as similar transactions have been considered and approved by the board of directors of the company during Shri R.K. Sabop's tenure. 58. Challenging the arguments advanced by counsel for the respondents, Shri Mookherjee pointed out that though the articles provide for exercise of a casting vote by the chairman, the provisions of Article 105 of the articles of association provide for a unanimous decision by all the directors present at the meeting on certain matters and in respect of these matters, the casting vote has no relevance. He also pointed out to the provisions of Article 99 which stipulates that the quorum for a board meeting is two directors, one from....
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..... In order to make out a case for invoking the provisions of Section 397, the petitioner has to make out that the affairs of the company are being conducted in a manner oppressive to them and, further, that the facts justify the making of a winding up order on the ground that it is just and equitable that it should be wound up though in the circumstances it would unfairly prejudice them if the company were ordered to be wound up. Only if these two conditions are satisfied, an order under Section 397 could be passed. Counsel on both sides have drawn our attention in detail through the correspondence between the parties and also taken us through the several court decisions wherein, particularly, the point regarding application of the principles of dissolution of partnerships to companies was decided. We find that in a domestic or family company, courts have applied the partnership principle when shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. In the case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Gas 390 (Delhi), the Division Bench of the Delhi High Court considered decisions in several cas....
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....where the shareholdings were more or less equal and there was ousting not only from management, but also from benefits as shareholders. This case went up in appeal before the Division Bench of the Calcutta High Court [1971] 41 Comp Cas 308, which set aside the judgment of the learned single judge. The appellate Bench held that the company had to be wound up applying the principles of partnership on the ground that the company at its inception and for a number of years afterwards was found to be really in substance a partnership. It was held by the appellate court that the three most important indices of partnership, viz., equal status of the partners (though not necessarily equal interest), equal participation in management and mutual confidence, are the basis of association. A private limited company which is an association of persons in a joint stock company, who have agreed to keep the membership amongst themselves and who have divided the participation more or less equally should, therefore, be ordinarily treated as analogous to a partnership. The Division Bench of the Delhi High Court did not agree with these views expressed by the appellate court. It was observed (at page 436....
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....ng of friends and relatives which holds 40 per cent. shares. In spite of inequality in the shareholding, there is equal participation in day-to-day management. Both the groups are entitled to nominate three directors each and the general administration and management of the company is in the hands of two managing directors having equal powers, one each to be appointed by both the groups. The chairman of the board of directors shall always be one out of three nominees of the GB group and the vice-chairman of the board of directors will be one of the nominee directors of the Saboo group and the chairman of the company shall have a casting vote. As per Article 99, the quorum necessary for transaction of the business of the company shall be two directors one from each group. In addition, while most of the decisions of the directors shall be taken by simple majority, in respect of ten matters mentioned in Article 105 unanimous resolution of the board of directors would be required. All the above arrangements have been incorporated in the articles of association and the relevant articles have been mentioned in para 7 of this order. While it is clear that the groups do not have equal shar....
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....er. In view of this, we have no hesitation in coming to the conclusion that in the light of the deadlock arising in the conduct of the affairs of the company, a case for winding up on the "just and equitable ground" has been made out. 63. As the preliminary issue regarding making out a case to wind up the company on just and equitable grounds has been settled in favour of the petitioner, we may now proceed to examine the second issue whether the petitioner has been able to establish that the various acts alleged on the part of the respondents have resulted in oppression of the petitioner as members of the company. The various allegations and facts relating to them have been dealt with extensively in paras 8, 9, 10 and 11 of this order. Both Shri Mookherjee and Chagla referred to a number of court cases and well known propositions established in respect of what constitutes oppression. Shri Mookherjee elaborately referred to the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Gas 1 (HL) and pointed out close resemblances and similarities in that case and the facts of this case. He pointed out that so long as there was no confli....
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.... give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. 65. Shri Mookherjee then argued that considering these well-established principles and applying them to the various acts alleged to have been committed by the majority shareholders in exercise of their rights as shareholders, a clear case of oppression has been established. He pointed out that the various acts complained of lack in probity and are unfair to the minority. He pointed out that frequent use of the casting vote by the chairman belonging to the GB group left no choice to the minority shareholders but to submit to such conduct. 66. Shri Chagla referred to important considerations which have to be kept in view in determining the issue of oppression and which were summarised in the decision of the Supreme Court in S.P. Jain v. Kalinga Tubes Ltd. [196.5] 35 Comp Cas 351. In that case, the Supreme Court had referred to the decisions of the English courts in Elder v....
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....least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder ; (vii) events have to be considered not in isolation but as a part of consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members, 67. Shri Chagla pointed out that applying these principles, no case has been made out that circumstances are such which could infer an unfair abuse of powers by the majority shareholders. While admitting that there is a deadlock and loss of confidence, Shri Chagla pointed out that it is not enough to establish a case of oppression. He pointed out that the GB group had never shirked from discussing any issue in the meeting of the board of directors and all the necessary information was made available to the Saboo group so as to enable them to discuss the various matters adequately in the board. He, therefore, concluded that the charge of lack of probity or unfair dealing cannot be established against his clients. Shri Chagla argued that the moti....
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.... objection in respect of similar acts about which they are now complaining as oppressive. The relation between the two groups took an adverse turn soon after the appointment of the technical director. Just as there were different phases of management in the Indian company, similarly new personalities came on the scene as in the GB group Dr. Lindner representing the Beckert family has come in power in place of the representative of the Groz family. As GB group started asserting its rights of participation in the management, first with the appointment of a technical director and then a managing director, conflicts started. A temporary truce was signed on February 7, 1989, but it did not douse the fire completely. It remained smouldering. Efforts made in February-March, 1991. at the meetings held in Germany failed to improve the situation. The controversies have resulted more in mud splattering than bringing out any real problems. Allegations made by both groups have created more bitterness without resolving the crisis already existing. When the crisis developed, instead of evolving a strategy for solving the problem and conveying a message about the areas of grievance "honestly and t....
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....f oppression, when exercise of such vote is contemplated by the articles of association. It only indicates that the relations of both the, parties have reached a stage where reconciliation is not possible. 70. Before dealing with the scope of Section 397/398 and the types of reliefs that can be given under these sections, Shri Mookherjee referred to a decision of the Supreme Court in Needle Industries' case [1981] 51 Comp Cas 743 to indicate that even if the petitioner fails to make out a case of oppression, the court is not powerless to do substantial justice between the parties. He then referred to the decision in Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom) in which a detailed analysis of various sections contained in Chapter VI of the Act was made and it was pointed out that these provisions are not subject to other provisions contained in sections dealing with usual corporate management of a company in the normal circumstances. It was held that the subjects dealt with by Sections 397 and 398 are such that it becomes impossible to read any such restriction or limitation on the powers of the court acting under Section 402. It was observed "an exami....
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....80] 50 Comp Cas 771 (Cal) in which it was held that there can be no limitation on the court's power while acting under Section 397/398 and 402 of the Companies Act, 1956. Instead of winding up a company, the court has been vested with ample power to continue the corporate existence of a company by passing such orders as it thinks fit in order to achieve the objective by removing any member or members of a company or to prevent the company's affairs from being conducted in a manner prejudicial to the public interest. The court under Section 398 read with Section 402 of the Act has the power to supplant the entire corporate management. It was also held that the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act and there can be no doubt that the intention of the Legislature was to confer wide and ample powers upon the court for regulation of the conduct of the company's affairs and to provide for any other manner which the court thinks just and equitable to provide for, in the interests of the corporate body and the general public. Referring to the decision of the Supreme Court i....
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....t necessary to go into the question of mismanagement by one group as there are mutual allegations. In this case, both the parties suggested an equitable division of the business and assets of the company in an appropriate manner so that both the groups can carry on business independently of each other and the long standing reputation and goodwill of the flourishing business of the company should be fairly divided between the two groups along with assets in an equitable, just and proper manner so that the matter complained of is brought to an end. Shri Mookherjee pointed out that this was a company which Shri R.K. Saboo started and he has spent 30 years in this business and has no other-business except this. In this context, he also pointed out that the business of the Indian company is a small fraction of the worldwide activity of the GB group and, therefore, they should have no objection if the Bench comes to a conclusion to divide the property and business of the company in the proportion of their shareholding. In this connection, he also referred to Article 131 of the articles of association of the company and pointed out that it would be applicable only if the company goes into....
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.... Real Estate Enterprises P. Ltd. [1991] 72 Comp Gas 211 (Kar) he pointed out that it is well settled that the relief under sections 397 and 398 of the Companies Act is an equitable relief which is entirely left to the discretion of the company court. He pointed out that since the petitioner has not come with clean hands he does not deserve any relief. He, however, conceded that the situation in the company has come to such a stage that the petitioner and the respondents cannot live together and cannot work together. In such a situation, there is no other alternative but to sever the relationship. He pointed out that the petitioners are using the provisions of articles 99 and 105 in order to stall the expansion project which was unanimously approved by the board when Shri R.K. Saboo was the sole managing director of the company. He pointed out that all the acts complained of have been discussed in great detail at the meetings of the board of directors and whatever information was required by the Saboo group has been made available at the board meetings. Referring to the plea of Shri Mookher-jee that the Saboo group should be allowed to buy the majority's shares, Shri Chagla poin....
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....ection 398 of the Act. In such a situation a permanent solution has to be found which would enable the company thereafter to function smoothly. The solution could only be found in one of the groups purchasing the shares of the other and in such a case the first option to purchase the shares had to be given to the majority shareholders against whom the charge of oppression is made. He referred to the case of Bholanath Paper House Ltd. [1983] 53 Comp Cas 883 (Cal) referred to by Shri Mookherjee and pointed out that the division of assets was ordered on the ground that both the parties were having equal shares and it was at the suggestion of the parties. He also brought to our notice that it was a family company doing trading business in which case sharing of goodwill assumes a substantial importance. There is no such case in the present situation. Shri Chagla concluded his arguments stating that in the light of the foreign collaboration agreement, provisions of the articles of association and well established principles in various court cases, whenever a situation of deadlock as in the existing case arises and the functioning of the company is affected because of the serious disputes....
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....postpone the date of severing of the relationship. An order in a dispute of this nature should be such that it will put an end to the dispute. We do not think that the other alternative suggested by Shri Mookherjee regarding bifurcating the assets is a viable solution as neither is the nature of the business of the company such as to make it a feasible solution nor is it possible in the light of the terms and conditions of the foreign collaboration agreement, the legal issues relating to the trade mark and the provisions of the articles of association. The facts of the case Cited in support of such an alternative by Shri Mookherjee are quite different from the facts of the present case and there is absence of any agreement between the parties on bifurcating the assets. Therefore, the only solution that can put to an end this dispute is severing of the relationship by sale of shares by one party to the other. While the petitioner has made it clear during the hearing that he is not interested in selling his shares, he is willing to buy shares of the respondents and has prayed for such a relief. In this context, Shri Chagla has pointed out the decisions in large number of court cases ....
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....tioner and forward copies thereof to Khaitan and Company, Advocates, 9, Old Post Office Street, Calcutta-700 001, the advocates for the petitioners, to J. B. Dadachanji and Co., Advocates, Jeevan Vihar, (1st floor), 3, Parliament Street, New Delhi, the advocates of the respondents and to Groz-Beckert Saboo Limited, having its registered office at New Asiatic Building, 2nd Floor, H-Block, Connaught Circus, New Delhi. Such valuation should state the value per share. The company will pay Rs. 30,000 as remuneration to Shri Malegam in addition to incidental expenses towards travel, etc. (2) Within one month from the receipt of the copy of the valuation report from the valuer, respondents Nos. 2 and 4 would deposit with the company the value per share for 2,86,661 shares held by the petitioner and 12 shareholders who have supported the petition. The company would immediately deposit this money in interest bearing fixed deposit for not less than 90 days. The company would also inform the petitioner about the fact that the GB group has deposited the amount. (3) The petitioner and the 12 shareholders supporting the petition will deposit all the 2,86,661 shares along with d....