TaxTMI 
TaxTMI 
TaxTMI 
2021 (6) TMI 659
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....nds 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 mentioned as R21 in the Petition) are called the 'Sanghvi Group'.....
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....y 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 Petitioner No. 2 being the Joint Managing Director of R1 Company stationed in the Gujarat Division was responsible to the Managin....
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....e 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 relation to the request made by ICICI Bank. e. Again the Petitioners addressed an email to the Board on 13.08.2020, enclosing a message from ICICI Bank demanding funds and therefore, reitera....
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...., 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 an Administrator for the R1 company. k. In the past, R1 company had, on several occasions, including emails dated 21.06.2018 and 26.04.2020 of the Applicants and Org. Company Respondent No. 5, asked the Petitioners to furnish a business turnaround plan for reviv....
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....st 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 Petitioners in previous board meetings/AGM. r. The Gujarat Division does not qualify for the performance linked incentives. This has been the cause of lower margins resulting into heavy losses suffered by it. s. Since decades the profits of the respective divisions have been ploughed back into that same division ....
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....iscussion' (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 you were not having enough faith in the MOD and the modality of the settlement scheme you as a majority had decided..." aa. Based on the MOD, which is a solemnly signed agreement between the Petitioners, Applicants and R5, a sum of Rs . 56 Cores was paid on 1st September 2020 by the Maharashtra and Andhra Pradesh Divisions towards the bank liabilities of Gujarat Division. bb. In ....
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....l 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 Respondents are trying to alter the existing position continuing for the last 40 years. c. This Bench in the order dated 06.04.2018 observed that: "This Bench prima facie having noticed this company has been running for the last several years as three separate units, one at Gujarat, one at Maharashtra and another at Telangana exclusively managed by respective groups, R1 company is not expected to make any structural change....
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....ngredients 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 the manner in which the business was managed, as well as how they conducted themselves vis-à-vis each other. b) Explanatory Statement to Notice dated 25th May 1999, with respect to Petitioner No. 2, stated that: "His function will be to conduct and supervise the business activities of the Company in Gujarat State". For Petitioner No. 1, it is stated that: "He will control, supervise and coordinate the business activities of the Company in Gujarat State. He will be in charge of the day-to-da....
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....un 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 outside shareholder groups were not given any opportunity to express their wishes and the scheme of buyback of their shares was discussed by the Board in their absence. The factum of these negotiations (which remained inconclusive), where the manner in which R1 is to be treated was discussed, itself is a strong indication that these groups treat R1 as a quasi-partnership. This is because, for all intents and purposes, the 'outsider' shareholding was irrelevant and the only parties required in a settlement discussion as to the future of R1 were t....
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....s (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 contesting Respondents have deliberately, and as a stratagem, engineered the present state of the Gujarat Division, by financially strangulating it and treating it grossly disparately, and in a discriminatory and prejudicial manner, when compared to the Andhra Pradesh (including Telangana) and Maharashtra Divisions under the control of the Sanghvis. l. Despite being forced to contribute huge sums of money to the coffers of R1 over the years, R1 by virtue of being under the Sanghvis' dominance has itself not extended any reasonable assistance to the Gujarat Division, when the same wa....
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....02 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 investments, for the purchase of which, the Maharashtra and Andhra Divisions had contributed. o. One of the reasons which has been oft-cited by the contesting Respondents to justify their refusal to grant funds to the Gujarat Division was the Petitioners alleged failure to provide a business plan. This is simply not true, as the Petitioners have repeatedly provided business plans to the Board with respect to the Gujarat Division. In fact, by an email dated 21st August 2019, the Petitioners provided a detailed and thorough explanation of the financial position of the Gujarat Division and the funds needed by them to put the business back on....
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.... 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 same (for which no assistance was forthcoming from the contesting Respondents) and the contesting Respondents' failure to clarify certain misunderstandings with Maruti. When the Petitioners raised these proposals in Board meetings, the proposals were either simply recorded as having been 'noted' (without any decision on them) or pushed back on the ground that further studies needed to be done. Clearly, the Sanghvis have systematically and after a period of time both shifted funding; compelled the Gujarat Division to borrow; and shelled any opportunity to grow. This was and is oppressive conduct and constitutes mismanagement. s. On the other hand....
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....d 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 Division is inherently flawed. It fails to recognize that the Gujarat Division has been operationally profitable in 13 of the last 16 years. A business cannot be operationally profitable with incompetent management. In fact, the renewal of the Petitioner No. 1's executive directorship for a period of 5 years (as late as in 2017) and him being in charge of the Gujarat Division, falsifies the contesting Respondents' charge. w. In this case, it is only the interest burden caused due to huge and repeated external borrowings that has crippled the Gujarat Division's financial position. Even with respect to the three years in which the Gujarat Division was operationally loss-making....
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....vision 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 No. 1 is incompetent to manage the Gujarat Division and has always been disinterested in the business. It is also their case that the business of R1 is managed in a professional manner in line with good corporate governance. If that be so, Petitioner No. 1 was re-appointed as a Director for 5 years on 01.04.2017, which belies their contention that P1 is incompetent to manage the Gujarat Division. bb. The business with Ashok Leyland dealership, which the Applicant's/Original Respondents are making a hue and cry with regard to Gujarat, it is to be noted that the very same dealership in Maharashtra was also loss making in 8 years and profitable only in 4 years when the last 12 years data was compared. Even during the 4 ....
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....bsidiary. 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 ousting the Petitioners from R1 at a depressed valuation. ff. The contesting Respondents have also attempted to bring on record irrelevant facts relating to the Petitioners' independent venture, M/s. Kamdar Carz Private Limited (KCPL) to be ignored since the losses in KCPL does not have bearing on the merits of the Applications before this Tribunal. gg. It is submitted that the Petitioners and the contesting Respondents (being quasi partners) are evidently at loggerheads. It is equally evident that the Petitioners have not been treated fairly. This state of affairs is severely prejudicing the interests of R1, and particularly, the Gujarat Division, which is being starved of funds, despite R1 having hundreds of crores of liquid assets in terms o....
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....e 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 with four directors while the Kamdar group has only two. Thus, the Sanghvi Group has an absolute majority on the Board of R1, and therefore, is in a position to ensure that almost all decisions concerning R1 are taken as per their own desires and dictum. This dominant position has been repeatedly abused by the majority Sanghvi Groups at the Board level and shareholder level, to prejudice the Gujarat Division. While comparing the Gujarat Division with other divisions, the other divisions are having multiple dealerships and sources of revenue whereas Gujarat Division has sole source of income from Ashok Leyland dealership only. The fact that the Gujarat Division does not have any business other than the Ashok Leyland dealership is not on account of any lack of initiative of the Kamdar Group. Over ....
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.... 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 India, the Board would not ensure that the commission paid by AL across the three divisions is uniform. This would have certainly ensured that the Gujarat Division made a profit, or at least incurred significantly lower losses. Nothing was done by the Board in this regard, despite multiple requests for intervention by the Petitioners. R1 rejected the business proposals of the Kamdar Group, while simultaneously allowing the Maharashtra and Andhra Divisions to grow their respective businesses, which clearly reveal the disparity in treatment of R1's three divisions. g. R1 had investments in the shares of blue chip companies to the extent of Rs . 295.04 crores and reserves and surplus of Rs . 628.85 crores. R1 is capable of funding the entire working capital requirement of all its divisions on its own. Despite t....
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....o 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 the Board meetings. k. However, Gujarat Division was denied even working capital requirements. In May, 2018, the Petitioners sought funding from R1 and requested for Rs . 65 crores to repay the ad-hoc limits, and utilize balance funds for purchase of chassis and repayment of overdrawn limits. Further the Petitioners by letter dated 16.06.2018 apprised R1 of its ad-hoc trade advance of Rs . 10 crores from IBL which was due for repayment in June, 2018; as well as the dissatisfaction expressed by Ashok Leyland, due to low uptake by the Gujarat Division of chassis from Ashok Leyland. In the same letter, the Petitioners requested R1 to transfer Rs . 25 crore, for purchase of chassis and repayment of trade advances. Subsequently, R1 replied on 21.06.2018 and called for Board meeting to discuss the matter, and directed the Petitioners to submit a ti....
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.... 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 Gujarat Division independently for more than 60 years. p. Gujarat Division is entitled to get funds from R1 for the purpose of running the business. There is absolutely no reason for forcing the Gujarat Division to depend exclusively on third party high cost funding when R1 has sufficient reserves and funds. The Petitioners are entitled to be treated fairly and equitably. q. In the above circumstances, the Petitioners/Applicants are seeking the following reliefs: a) Pending the hearing and final disposal of the petition, this Tribunal be pleased to supersede the Board of Directors of Respondent No. 1 and appoint a fit and proper person as administrator of Respondent No. 1 to take charge of its records, assets, properties, accounts and/or all movables, immovable and tangible and intangible properties of Respondent No. 1 and with directions, including for: (i) governing a....
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....he 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 and/or parting with possession of Respondent No. 1's assets and properties and/or otherwise taking any lending and/or financial obligations or encumbering the assets and properties of Respondent No. 1, other than in the ordinary course of business and for the purpose of funding the immediate fund requirement of the Gujarat Division; (ii) prejudicing, obstructing and/or interfering with Petitioner No. 1 and 2's control of Respondent No. 1's Gujarat Division and its business and operations and/or to in any manner do anything which will prejudice Respondent No. 1's Ashok Leyland dealership for the Gujarat Division or to make any communication or correspondence with Ashok Leyland concerning the Gujarat Division save and except with the prior written consent of the Petitioner. (iii) indulge in any communication, propaganda and/or correspondence, including, before Respondent No. 1's principal Ashok Leyland and/or its employees and/or agents which is ....
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....ention 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 directions to the Gujarat Management to put things in order. The problem which we perceive is that the divisions were treated as companies within a company and while the Board took credit for profitable units, it blamed the local management for losses, without initiating proper remedial measures though empowered to do so. iii. Whether the company is a quasi-partnership or not, cannot be decided at the interim stage. The prayers made in CA No. 1008 of 2020 are based on facts relating to the averments made in the Company Petition alleging oppression and mismanagement. Therefore, at this interim stage entire gamut of the allegations and counter-allegations cannot be gone into nor would it be prudent to do so. It is settled that reliefs which can be granted in the main Petition/Suit cannot be granted at the interim stage. This can be decided only after the final hearing of the Company Petition as observed by this Bench vide order dated 06.04.2018. The Applicants in CA No. 1008 of 2020/original Respondents....