TaxTMI 
TaxTMI 
2021 (6) TMI 659
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....n and mismanagement in R1 Company at the hands of the Respondents, on the following grounds among others. a) The Petitioners collectively hold 15.55% of the share capital in R1. P1 is a shareholder and Executive Director of R1 from 1984. P2 is a shareholder and Joint Managing Director of R1. P3 to P5 are the shareholders in R1. b) R1 is a closely held private limited company incorporated on 01.12.1948 under the Companies Act, 1913, by late Manubhai P Sanghvi, late Pranubhai P Sanghavi, late Mirubhai Jaffer Patel and Ratilal D. Kamdar (P2). Late Manubhai Sanghvi and late Pranubhai Sanghvi are brothers. Mr. Mirubhai Jaffer Patel was their family friend. R1 is engaged in the business of dealing in automobiles. c) R2 is a shareholder holding 5.33% shares of R1 and is its Managing Director. R3 and R4 are shareholders, each having 9.99% shares and are Executive Directors. R5 is holding 8.99% shares and is also one of the Executive Directors. R6 to R17 are holding 40.64% of the share capital. R18 to R22 are the shareholders collectively holding 1.94% of the share capital. d) The Petitioners are called as the 'Kamdar Group'. R2 to R17 (wrongly me....
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....Gujarat or their rights or in any way infringed by the Respondents." CA No. 1008 of 2020: 3. This Application is filed by Mr. Bharat (A1) Mr. Sachin (A2) and Mr. Aditya (A3) who respectively are R2, R3 and R4 in the Company Petition. The Petitioner Group (Kamdar Group) who holds 19.31% of shareholding in R1 enjoys and have been enjoying for the past 36 years two positions on the Board. The Applicants (late Manubhai P Sanghvi Branch), with 37.70% of shareholding occupied three positions on the Board. R5 and R14 (late Pranubhai P Sanghavi Branch) with 32.33% of the shareholding occupied just one position on the Board. R1 Company is a Board managed company. The Directors have to conduct business under the supervision of the Board. This is reiterated in the explanatory note to the Notice of the Extraordinary General Meeting of R1 Company held on 17th June 1999, wherein it was recorded that the function of P2 (as a Joint Managing Director) would be to conduct and supervise the business activities of the Gujarat Division and he would be responsible to the Managing Director for carrying out his functions in accordance with the policy laid down by the Board from time to time. The Pet....
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....iven an impression that prior permission of this Tribunal would be imperative before the Board could intervene in the operations of the Gujarat Division even in order to stave off or prevent the existential threat to R1. c. The Gujarat Division has overdrawn its limit with Canara Bank. Despite availing facilities from Canara Bank the Petitioners were unable to entertain Canara Bank's request for furnishing stock statement for the month of March, 2020. As upon furnishing of the stock statement to the Canara Bank, it would have been evident that the Gujarat Division had overdrawn its limits as compared to the existing stock. On 17.06.2020, P1 by an email, sought the intervention and advise of the Board in relation to the request made by Canara Bank. d. Likewise, the Petitioners were reluctant to share the stock statement with ICICI Bank as they knew that if ICICI Bank conducts stock audit based on the information furnished by the Petitioners, it would become evident that the stock available at Gujarat Division did not match up with the short term limit availed from the Bank. P1, on 09.07.2020 wrote an email and sought intervention and advise of the Board in rela....
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....edged operations under AMPL Gujarat." h. AL yet again sent an email on 19.01.2021, stating, "With regard to "any issues and differences amongst the promoters of AMPL" is concerned, hope the same is resolved at your end quickly, however "this issue" has severely affected Ashok Leyland operations in Gujarat, as is evident from AMPL Gujarat's business revenue and figures for the year 20-21 as of now. We need someone from AML management to respond to Ashok Leyland, about the way forward immediately, otherwise we will proceed with alternate options at our end." i. The Applicants submit that the above are the instances of Petitioners' mishandling of the affairs of the Gujarat Division and resorting to advice and intervention of the Board to resolve the financial mess created solely by the Petitioners. j. These emails eloquently speak of the gross incompetence of the Petitioners and their responsibility in mismanaging the affairs of the Gujarat Division. However, the Petitioners as a counter blast to this Application, have filed an Application making allegations against the Applicants and R5 and have inter alia sought the appointment of....
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....show that the Maharashtra and Andhra Pradesh/Telangana Divisions also function on borrowed funds. Yet they have been making profits for years, after servicing the debt. The contention of P2 that the Gujarat Division has suffered losses due to payment of high interest cost is not true. The total interest cost of the Gujarat Division is INR 65.83 crores for the years from 2008 to 2020 and the interest cost of the Maharashtra and Andhra Pradesh/Telangana Divisions are INR 196.33 crores and INR 101.93 crores, respectively, for the said period. q. The Gujarat Division has suffered a total loss of INR 73.5 Crores, for the years from 2008 to 2020 and the Maharashtra and Andhra Pradesh/Telangana Divisions have made a profit before tax of INR 115.54 Crores and INR 373.42 Crores respectively, for the years from 2008 to 2020. The EBITDA of Gujarat Division is INR 2.94 Crores, for the years from 2008 to 2020, and the EBITDA of Maharashtra and Andhra Pradesh/Telangana Divisions are INR 400.32 Crores and INR 622.71 Crores respectively, for the years from 2008 to 2020. These calculations are taken out from audited financial data and books of accounts of R1 which were approved by the Peti....
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.... complain any oppression or mismanagement. The Petitioners by conduct are estopped from making any complaint. y. After filing of the Company Petition, the Applicants and Respondent No. 5 held discussions and negotiations to amicably resolve their differences in the matter, viz. concerning the affairs of R1. A binding agreement in the form of 'Minutes of Discussion' (MOD) dated 14.06.2019, was arrived at between the parties. Under the MOD, the parties agreed on the terms of separation and in particular, demerger of three Divisions from R1. The said Agreement is valid, binding and subsisting between the parties. z. This can also be evidenced by email dated 24th June 2020, addressed by the Petitioner No. 1 to the Applicants, wherein the Petitioner No. 1 has admitted the validity and subsistence of the MOD, by acting in furtherance of the MOD. In the said email P1 has stated: "... Despite highlighting this aspect clearly, the response from your side was only maligning our operations and running style of business, instead of logically looking at the request for funds which was nothing but seeking release of funds already agreed under the MOD. May be yo....
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....Division. Immediate restructuring of Gujarat Division is required to mitigate losses incurred by the Gujarat Division, including but not limited to save the AL dealership in Gujarat Division. The order dated 06.04.2018 prevents the Board from legitimately interfering in the affairs of Gujarat Division, without the permission of this Tribunal. Hence, the Applicants seek modification of the Order dated 6th April 2018. 7. The Applicants have not impleaded any of the other parties to the Company Petition in this Application. However, the original Respondent Nos. 5 & 14 have supported the Application and have taken part in the hearing of the Application. The original Petitioners have filed their reply contesting the Application. 8. Response of the Petitioners to CA No. 1008 of 2020. a. There is no change in circumstances to consider this Application. The prima facie opinion formed by this Bench in the order dated 06.04.2018 does not warrant any intervention. The Applicants essentially want to take over the management of the Gujarat Division. b. This Tribunal by order dated 06.04.2018 considered the case of the Petitioners as a quasi-partnership and held that the ....
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....t R1 by buying out their shares, since no outsider group at any point in time or now, hold more than 10% of the share capital. This important provision ensured that only Sanghvis and Kamdars would have the permanent right to remain shareholders of R1 and dominate its affairs. iii. Article 24 of AoA contains restrictions on transfer of members' shares in terms of right of preemption to existing members. The Hon'ble Supreme Court says that a preemptive right is one of the ingredients of "those private companies which are essentially incorporated partnerships". iv. The following correspondence between the parties completely and unequivocally shows that it was the admitted position all along that R1 is a quasi-partnership, in which all partners participated in the management of R1. a) Letter dated 21st July 1975 from Mr. Bharat Sanghvi to British Leyland stating that Petitioner No. 2, posted in Ahmedabad, was a 'nephew' who "looks after our activities in Gujarat state". He also recommended Petitioner No. 1 for training with British Leyland. This is evidence of the close ties and the parity maintained between the Sanghvi and Kamdar families and....
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....were operating various divisions of R1 within themselves and recognized themselves inter se as joint owners, controllers and in management of R1. No recourse to the miniscule minority was either taken or required. In light of the above, it is submitted that the Respondents' case that R1 was a "professionally run organization adhering to the highest standards of corporate governance" is nothing but an act of desperation on the part of the contesting Respondents, all intended to vainly deny the fact that and the manner in which R1 has been run over the last more than 70 years, based purely on the principles of partnership, and is contrary to their own conduct and repeated acknowledgment of what R1 was and is really a quasi-partnership. In no "professionally run organization" would the Directors discuss the handing over the reins to their children. vi. The three family groups, being the two Sanghvi families and the Kamdar family, are closely related as can be seen from the family tree. The contesting Respondents referring to the 'without prejudice' negotiations for settlement and MOD, were not able to answer as to why in the negotiations as well as the MOD the out....
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....as Directors were answerable to the Board, while in the same breath seeking to foist the entire liability for the Gujarat Division on the Petitioners' shoulders since they allegedly 'ran the business into the ground'. The contesting Respondents must elect whether it was the Board or the Petitioners who allegedly ran the business. If it is the latter, as the correspondence and Petitioners suggest, the most essential characteristic and/or feature of a quasi-partnership stands established. j. The record bears out the undisputed position that the three divisions (Maharashtra, Andhra Pradesh and Telangana, and Gujarat) have been under the autonomous control of the two Sanghvi Groups and the Kamdar Group respectively, in accordance with the understanding between the parties, and this position has prevailed for 60 years. The same is not liable to be disturbed. That being so, the Petitioners have a vested right in the management of the affairs of R1 (more particularly, the autonomous functioning of the Gujarat Division under them) and the prayers sought in the contesting Respondents' Company Application No. 1008 of 2020 ought not to be granted. k. The cont....
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.... 100% of this amount was used for the benefit of the Maharashtra and Andhra Divisions. None of the proceeds were used on the Gujarat Division. These investments have been acquired from the funds received by the head office of R1, from the various divisions, including the Gujarat Division over the years. It is therefore completely unfair and unjustifiable as to why the Gujarat Division, which contributed to the purchase of these investments, should not be able to benefit from the proceeds realized from their sale. If the total listed investments held by R1 were taken into account (as on February, 2021, carrying market value of Rs . 402 crores), more than 75% of these investments were purchased much before 2010-i.e. before the Gujarat Division started making losses (even as per the contesting Respondents). That being the case, there can be no legal, equitable or reasonable ground as to why the Petitioners would not be entitled to share the benefit of these investments and/or the realization thereof. Apart from the ipse dixit of the contesting Respondents' advocates, there is no material or computation brought on record to show that the sale of investments were only those investme....
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....owards the Petitioners and the Gujarat Division. r. One further ground which proves the disparate treatment meted out to the Gujarat Division can be seen from the manner in which the contesting Respondents have thwarted its expansion plans. Apart from this, even some existing business such as the Bajaj Auto dealership had to be given up by the Petitioners on account of the restraints employed by the contesting Respondents. It is apparent that the Sanghvis had a business spat with Bajaj Auto-Mr. Rahul Bajaj himself has blamed the lack of "good management" in Andhra Division. The Gujarat Division too had to eventually exit the Bajaj Auto dealerships due to its failure in being able to expand on account of the restrictions placed by the Sanghvi-controlled Board. Not just this, in order to diversify and expand its business, the Gujarat Division had from time to time proposed to take on dealerships of KIA, Hyundai, Maruti and Morris Garages-each of which was systematically rejected by the contesting Respondents. In fact, despite Maharashtra having a Maruti dealership, the Gujarat Division was unable to get this dealership on account of the huge financial outlay required for the....
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....providing any funds of R1; and thwarting their expansion plans. Therefore, the conduct of the contesting Respondents is not only oppressive, but also constitutes gross mismanagement of the affairs of R1 whereby they are allowing one of the historically profitable divisions to wither and die in their attempt to wrest control from the Kamdar family and make the Kamdars a voiceless minority. u. The cornerstone of the contesting Respondents' case is that the Gujarat Division is making huge losses on account of the incompetent management of the Petitioners. This is a bald and false assertion, as these losses have been engineered by the contesting Respondents themselves, and have accumulated due to the oppressive conduct and mismanagement on their part. There are no allegations of wrongdoing against the Petitioners. Also, the contesting Respondents have not provided any alternate business plan, or particularized the manner in which they believe the Petitioners have mismanaged the affairs. Levelling the Respondents' allegations of mismanagement against the Petitioners are false and misleading. v. In any event, their case regarding losses incurred by the Gujarat D....
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.... be misconstrued or treated as an inability or disinclination on the part of the Petitioners to continue to run the Gujarat Division. z. There is no single complaint of mismanagement of Gujarat Division until 2018. This charge of incompetent management has been concocted and trotted out only after 19th March 2018, when the Petitioners filed the present Company Petition. Prior to that there has been no issue regarding the management of the Gujarat Division. The present disputes arose when, in response to the Petitioners' correspondence of 9th March 2018 (suggesting a professional enterprise valuation for the purpose of demerger), the contesting Respondents made clear their attempt to grab the Gujarat Division on 14th March 2018, which was further resisted by the Petitioners on 19th March 2018. As such, what the contesting Respondents were trying to do is what they seek to do now-oust the Petitioners from their longstanding and autonomous control of the Gujarat Division, whilst maintaining exclusive control of their own divisions and render the Petitioners/the Kamdar Group, as a voiceless and passive minority. aa. The case of the Respondents is that Petitioner N....
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....supplied the relevant information regarding the profitability of the different ventures of the Maharashtra and Andhra Divisions. ee. Furthermore, a subsidiary of R1, M/s. Olympus Motors Pvt. Ltd., which is independently managed by Respondent No. 5, was admittedly showing continuous losses, and since corporate guarantees had been given by R1, these losses resulted in a bad credit rating for R1. It is, therefore, clear that allegations of bad/incompetent management and/or loss making are not the exclusive purview of any one of the branches of R1. Moreover, despite these losses, R1 not only gave the subsidiary access to interest free, non-returnable funds from the coffers of R1, to turnaround its business, but also funded the losses of this subsidiary. The Gujarat Division, on the other hand, which is an integral part of the business of R1, was not given similar treatment, and was instead relegated to incurring higher debt to operate its business. Although Olympus is not a party to the present proceedings, it is pertinent to note this duplicitous attitude of the Board, which all but lays bare the contesting Respondents' ulterior, mala fide objectives of oppressing and ous....
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....id the agreed value for its present shareholding in R1 and also to give them immediate autonomy and control over and ownership of the Gujarat Division (having the Ashok Leyland dealership). b. The parties have even executed non-binding terms to work out an amicable settlement. Since these documents/correspondences are marked 'without prejudice', they are not being produced here. Even though the settlement talks have continued for two years, the parties are still not ad idem on every aspect/term of this settlement. It only reached an impasse due to the contesting Respondents' dilatory tactics and the ever increasing harsh, burdensome and oppressive conduct with which the contesting Respondents act vis-à-vis the Petitioners and the Gujarat Division of R1. Despite arriving at an in-principle understanding on the price to be paid to the Kamdar Group, and that the Gujarat Division (having the Ashok Leyland dealership) ought to be 100% controlled by the Kamdar Group and must be legally separated from R1, further implementation of the settlement has been systematically defeated by the contesting Respondents. c. The Board is dominated by Sanghvi group w....
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....ral Maruti Driving school projects, the Nexa project and the large expenditure on voluntary retirement schemes for several employees working in these ventures of the 2 Divisions (and not Gujarat). These expenses were written off when orally discussed with the Gujarat Division at meetings or telephonically, but never formally tabled at meetings, or otherwise documented in any manner. For the above, the expenses were taken from the common pool of R1 and not the funds of the individual divisions. e. R1 always asked the Gujarat Division to provide detailed proposals even on small capital expenditure of values lesser than Rs . 1 crore, in contrast, with the 2 other Divisions, for whom the Sanghvi majority on the Board would approve new dealerships, showroom etc. as a matter of routine procedure. f. The Ashok Leyland dealership, per se is a low margin business. In addition to this, the margin provided by AL to these two divisions are not uniform and the Gujarat Division is getting very low amount for the vehicles sold while it is higher than the other divisions. R1 has been a premier dealer for Ashok Leyland since 1948, having the maximum number of dealer outlets across....
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....rat Division. i. The order dated 06.04.2018 passed by this Tribunal ensured that the contesting Respondents did not take any precipitative steps in furtherance of their objective to take over the management of the Gujarat Division, the Board tried to indirectly achieve this objective by stifling the business of the Gujarat Division, depriving it of much needed funds, forcing the Gujarat Division to rely solely on high cost external borrowings, so that the Petitioners would get frustrated and allow the Sanghvi Group to take over the Gujarat Division and dominate the Petitioners. j. Subsequent to the filing of Company Petition, the funding support from R1 has completely stopped. Right from 2011, the Petitioners are informing the Respondents of the severe cash crunch as a result of transferring funds from the Gujarat Division to R1, based on the requests of the Board. The Petitioners' request for infusion of funds at various board meetings were met with unreasoned rejections from the Board which used to grant its approval to the Maharashtra and Andhra Divisions to effect substantial capital investments and expansions without any formal proposal being tabled at th....
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....here is no justifiable reason to withhold these funds from the Gujarat Division. o. Sanghvi Group is trying to take advantage of the present financial situation of the Gujarat Division by filing CA No. 1008 of 2020 to seek modification of the order dated 06.04.2018 and oust the Petitioners from the management of the Gujarat Division. The Sanghvi Group is abusing its dominant shareholding strength and Board position and power to repudiate the original and long standing understanding of joint administration and management of the affairs of R1. The nominee directors of the Maharashtra and Andhra Divisions (viz. members of the Sanghvi Group) act collectively and take decisions beneficial for Maharashtra Division & Andhra Division. Decisions which benefit the Maharashtra Division or the Andhra Division are taken by the wrongdoing majority directors. However, the request of the Petitioners for funds are summarily rejected. The Sanghvi Group is deliberately disrupting the business of the Gujarat Division, in order to force the Kamdar Group into agreeing to a depressed valuation for their shareholding in R1 in the ongoing settlement discussions. The Petitioners were managing the G....
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....reconciliation, if any, with the bank) crores (as per the Statement annexed at Exhibit GG hereto), being the amount required by the Gujarat Division of Respondent No. 1 so as to pay off and discharge its financial creditors and lenders and trade creditors and as necessary for its working capital requirements; (ii) order and direct the Board of Directors of Respondent No. 1 (more particularly, the Sanghvi directors, viz. Respondent Nos. 2 to 5 to forthwith disclose on oath the amounts invested and/or made available by Respondent No. 1 to its Andhra and Maharashtra Divisions for the purposes of working capital, capital expenditure and/or towards acquisition of assets (movable and/or immovable) and additional dealerships and also the number of new businesses and/or outlets which were opened and/or closed by Respondent No. 1 in areas outside the State of Gujarat from the year 2015 onwards till date; c) Pending the hearing and final disposal of the petition, this Hon'ble Tribunal be pleased to restrain and prohibit Respondent Nos. 2 to 17, their servants and/or agents from in any manner (directly or indirectly): (i) dealing with, alienating, encumbering an....
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....well and the high cost of borrowing aggravated the situation. It is evident that the Board has asked for revival plan of the Gujarat Division. Apparently, the plans submitted by the Gujarat Division (meaning Kamdars) did not find favour with the Board. The Board was conscious that the division was in financial straits and was badly in need of revival. Downward spiral of one limb of the company is bound to affect the health of the company as a whole. The other limbs thus could not escape the effect. Therefore, it was incumbent upon the company to find ways and means to manage the downslide. Whether or not the company did take remedial measures or otherwise contributed to the dismal financial position of the Gujarat Division or that it resulted from the mishandling of the micro-management, can only be gone into after a thorough enquiry while hearing the Company Petition taking into consideration the rival pleadings of the parties. It is prima facie probable that the Board did not give adequate attention to the revival of the resuscitation of the Gujarat Division. We are of the view that nothing prevented the Board to formulate a revival plan for the Gujarat Division and give directio....