TMI Blog2003 (1) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... and Gurmit Singh are alive they shall be the nominees of Fritz and that Sunil Puri and one other members of its group would also be directors as long as they are alive. The company was to have two Managing Directors - Shri Sunil Puri and Shri Gurmit Singh. It also provided that both the groups shall exercise their voting rights to ensure that the directors nominated by both the groups continue in service. Another provision is that the shares held by Fritz can be transferred to the family or direct dependence of Harjan Singh and Gurmit Singh and likewise shares held by Sunil Puri Group could be transferred to the family members and that the first option to purchase the shares of one group shall be with the other group. The first petitioner, after purchasing the shares held by Shri Harjan Singh in Fritz, sold his entire shareholding in Fritz to one Manmohan Singh for a consideration of ₹ 2.5 lakhs in October, 1978. This consideration was to be set off by an amount of ₹ 1.5 lakhs being the value of 29,500 shares held by Fritz in the company which were to be transferred to the first petitioner. Since the shares were not transferred to the first petitioner and full consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh as MD. In Jagjit Singh Chawla v. Tirath Ram Ahuja Ltd. CP No. 57 of 1999-dated 5-12-2001 this Board has held that denial of legitimate expectation in a company in the nature of their quasi-partnership could be a just and equitable ground for winding up of the company. The learned Counsel further submitted : Till the year 1991 the company was jointly managed by the first petitioner and the second respondent thereafter their children join the company. In 1991, a subsidiary in the name of Global Drilling Fluids Chemical Ltd. (Global) was incorporated and while the first petitioner was in full control of company the second respondent took control of the subsidiary. Unfortunately because of mismanagement by Shri Sunil Puri the subsidiary started to loose heavily and presently it has an accumulated loss of over ₹ 190 lakhs which has acted as a drain on the resources of the company. Since the first petitioner was not happy with the situation prevailing in the company he proposed a separation within the promoters with either of the groups buying out the other and accordingly the Board Meetings held on 1-4-2002 a proposal for separation was placed. However, without reacting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and baseless. The services of the third petitioner in the company have been suspended while the sons of Sunil Puri have been employed profitably in the company. None of the family members of the first petitioner who had been associated with the company for over 25 years are in service of the company today. By these acts the Sunil Puri Group is financially squeezing the petitioners. At the same time the second respondent who is the other MD has not been keeping good health right from 1999 but the company is paying a huge amount towards his salaries and perks. However, in the reply the respondents have asserted that the second respondent is in good health even though in para 13 of the suit in Delhi HC, they have stated that the second respondent had fallen seriously ill and as such could not make any contribution in the management of the company. This would indicate that the respondents are guilty of filing false affidavits. The learned counsel further submitted that the respondents are guilty of mismanaging the funds of the company. Sunil Puri engineered to divert a sum of US $ 23,000 which was due from export earnings in favour of his son studying in Canada as is evident from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the assets of the company between the petitioners group and respondents group since it came to the conclusion that the company was in the nature of a quasi-partnership. In Cosmosteels (P.) Ltd. v. Jairam Das Gupta [1978] 48 Comp. Cas. 312 , the Supreme Court has held that the when the court orders purchase of its own shares by accompany in terms of section 402, there is no need to follow the procedure pres-cribed for reduction of share capital in sections 100 to 104 of the Act. Shri Tripathi, Senior Advocate appearing for the respondent submitted : The foundation of the petition is that the company is in the nature of a quasi-partnership. This foundation has no basis. The company is a listed company with over 450 members while the petitioners group holds 11 per cent shares, Puri s group holds only 30 per cent. The reliance on the MOU of 1974 cannot be any way help the petitioners. Even though the MOU provided that the petitioners group and the Puri s group would hold equal shares, at no time this equality was maintained. Further the said MOU was with Fritz and not with the petitioner. The petitioner was a nominee of Fritz and once Fritz had been sold out, the locus-stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llectual property of the company in the form of various Engineering drawings/design, manuals etc. by taking photo copies and have started using these in the new company. Therefore, in an emergency Board Meeting held on 13-5-2002 the conduct of the first petitioner in accepting the resignations was discussed in detail and the Board decided to terminate his services as an MD since he could not give any justification for accepting the resignations of the employees. Since he had acted against the interest of the company, the decision of the Board to remove him as MD, cannot be in any way questioned and cannot be considered to be an act of oppression. Further in a petition under section 397 only the right as a shareholder can be agitated and there is no scope for entertaining directorial complaints as held in V.M. Rao v. Rajeswari Ramakrishnan [1987] 61 Comp. Cases 20 (Mad.). Since the appointment of a Managing Director is on a contractual basis, these contractual rights cannot be enforced in a 397 petition as has been decided by this Board in ML Thukral v. Krone Communications Ltd. [1996] 86 Comp. Cas. 643 (CLB). The learned counsel further submitted : Article 154 of the Articles of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss incurred by that company cannot be attributed to the second respondent. The learned counsel further submitted that : The allegation that the second respondent is unwell or that due to his mental condition he is unable to discharge his responsibilities as a Managing Director is malicious and without any basis. It is true that at times the second respondent was indisposed and could not attend his functions for short periods. The second respondent continues to manage the affairs of the company offering his valuable guidance and inputs for the growth and prosperity of the company and as such payment of emoluments and perquisites to him cannot be considered to be an act of mismanagement. As a matter of fact it is the petitioners, who without holding any position in the company now, are continuing to illegally and unauthorizedly retaining their perquisites like car etc. In so far as the alleged diversion of US Dollar 23,000 by Sunil Puri in favour of his Son Dhiuv Puri is concerned, the same is false and baseless. No such diversion took place and the entire nature of the transactions had been explained in Para 6.8 of the reply from which it could be seen that whatever amount th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, when section 77A prescribes certain conditions for a company to buy back its own shares, the Company Law Board has no powers to direct the company to purchase its own shares without complying with the statutory provisions. Presently the market price of the shares of the company is about ₹ 18 per share and the petitioners are free to sell the shares in the market since the shares of the company are listed. There is absolutely no justification nor is legally permissible for the company to value its shares and purchase the shares of the petitioners at that value. Shri Arun Kathpalia, appearing for the petitioners submitted in rejoinder : The first petitioner did not act in any way against the interest of the company. He accepted the resignation of only three employees of the Engineering Division. In the past also resignation of employees had been accepted by Managing Directors without reference to the Board as no employee who does not want to continue in the company can be forced to continue. Further, neither first petitioner nor other petitioners have anything to do with the new company. They cannot prevent their relations from carrying on any business that they wish to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a legal bar in terms of section 77A of the Act in directing purchase of shares of the petitioners by the company, the learned counsel submitted that the powers under section 402 of the Act are so wide that it is not circumscribed by any limitations. In Bennet Coleman Co. v. Union of India [1977] 47 Comp. Cas. 92 Bombay High Court has held that Chapter VI of Part VI of the Companies Act is a complete code by itself and that the exercise of power under section 402 is not limited by any other provisions of Act. Such an observation has also be made by the Supreme Court in Cosmosteel (P.) Ltd. s case (supra). The Legislature has enacted section 77A with a view to put some checks and balances when a company voluntarily desires to purchase its own shares and the provisions of this section are not applicable in a case where the CLB in terms of specific provisions of section 402(b) directs a company to purchase the shares held by a member. The observation of the Apex Court in Supreme Court Bar Association s case (supra) cannot be applied in the present case in as much a section 402 specifically confers the power to order purchase of shares of a member by a company while in that case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner as an MD is an act of oppression. Normally, as a principle, directorial complaints cannot be agitated in a 397/98 petition as the complaints in such a petition should be relating to the rights qua a member. The learned counsel for the respondents cited the case of VM. Rao (supra) in this regard. However, this Board has been taking a view that this principle cannot be strictly applied in family companies, companies with a few identifiable groups of shareholders or companies in the nature of partnership, wherein there has been active management par- ticipation by all the groups of shareholders. In the present case, the petitioners have invoked the principles of partnership and have sought for continuation of the 1st petitioner as an MD of the company on the basis of his active his participation in the management from the incorporation of the company, and also on the basis of the MOU. There is no readymade yardstick to determine as to when an incorporated company could be considered to be a quasi partnership for the purposes of a petition under section 397/398. It would depend on the facts of a particular case. Equality in the shareholding and there is deadlock in the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioners have invoked the principles of quasi partnership on the basis of the terms of the MOU dated 18th October 1974 between Fritz and Shri Sunil Puri. Some of the clauses of the MOU relied on by the petitioners are as follows : a. Clause 1 : Fritz and Singh Private Limited are leading manufacturers of filters in India and have acquired a special name and reputation in the trade circle and in this special business............. b. Clause 4.2 : The paid up capital of the company from time to time shall be such as may be necessary to meet the requirements of the project. The immediate proposals for issue of share capital are as follows : Fritz and Singh Private Limited - ₹ 3.5 lacs, Sunil Puri Group - ₹ 3.5 lacs, Foreign Collaborators - ₹ 1 lac. In addition, shares of ₹ 14 lacs will be issued for subscription by public financial institutions and underwriters. c. Clause 4.4 : The voting stock of the company shall always be issued, subscribed, allotted to and paid for in such manner to maintain the proportion of 50 : 50 of voting power as between the Fritz and Singh Private Limited and Sunil Puri Group. d. Clause 5.2 : Out of the directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, the assets and liabilities of Fritz and Singh Private Limited were taken over by the company. Some of the clauses of this agreement are : a. Clause I : The seller company are leading manufacturers of filters in India and have acquired a special name and reputation in this field amongst the trade and in the special business . b. Clause III : The seller company embarked upon the establishment of a new undertaking for the manufacture of filter paper in India and to this and strived and succeeded in obtaining collaboration with the internationally known firm M/s. Carl Schleicher and Schull of West Germany upon most favourable terms. c. Clause IV : The seller company has also obtained the requisite approval of the Government of India to the aforesaid collaboration. d. Clause V : The seller company has imported capital goods after obtaining permission, licenses, clearance etc. from the various authorities. e. Clause VI : In the interest of the Project, the Seller company has agreed that the project be implemented by the buyer company and has also agreed to transfer to it its rights, privileges, permissions, licenses and authorities etc. on the terms a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps. From 28.57 per cent holdings each in 1974, Puris shareholding went upto 42.26 per cent in 1988. However, the petitioners group shareholding came down to .05 per cent in 1980 and came to 7.39 per cent in 1998 but the 1st petitioner continued as an MD. This itself would clearly establish that even Puris had never questioned the right of the 1st petitioner from continuing as an MD in terms of the MOU notwithstanding the sale of M/s. Fritz to an outsider and that there was no equal shareholding. The very fact that the first agreement stipulates, by name, that Shri Gurmit Singh and Shri Harjan Singh would be a directors for life along with Shri Sunil Puri with another of his nominee would indicate that both the groups should have joint management of the company notwithstanding the fact that the agreement itself provides for public subscription later-as a matter of fact, with the proposed public subscription for ₹ 14 lakhs, both the groups put together would be holding only 30 per cent shares in the company. Further, I also find that there is equality in the remuneration drawn by Shri Gurmit Singh and Shri Sunil Puri as is evident from the explanatory statement in the notice f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re business of Fritz had been taken over by the company where after, Fritz itself had been sold out on appointment of Shri Gurmit Singh as an MD in the company and he has served in that capacity for over 25 years drawing remuneration. With the entire business of Fritz having been taken over, the only source of livelihood for Shri Gurmit Singh was from the employment of the company. Therefore, even assuming that the MOU with Fritz cannot be relied upon by the petitioners after its sale to an outsider, yet, the sequence of the events would indicate that there had been a tacit agreement that Shri Gurmit Singh would continue as an MD with remuneration. As held by this Board in Tirath Ram Ahuja Ltd. s case (supra), when certain groups of shareholders who have formed a company and have been participating in the affairs of a company for a long time with remuneration, then there an be a presumption of legitimate expectation and exclusion of one from the management could be an act of oppression. In the present case, in view of my findings that the agreement Shri Sunil Puri and Fritz is nothing but an between Shri Sunil Puri and Shri Gurmit Singh and that the long continuation of Shri Gurmit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used of removal of the intellectual properties of the company. In regard to the 1st petitioner engaging himself in a compet-ing business, no materials have been placed before me that either he is a shareholder or a director in the other company except that the registered office of that company is in his house. Whether a director could be accused of breach of his fiduciary duties if his near relations engage themselves in a competing business is a matter on which no authorities have been cited by the respondents and as a matter of fact this issue need not be examined in the present case, as it is on record that the sons of the 1st petitioner and the 2nd respondent had formed a partnership in the name of Filtration Sceiences (Annexure P-4) to carry on a similar business as that of the company and as such, the respondents cannot complain that the relatives of the petitioners have engaged themselves in a competing business. There is nothing on record to evidence that the business of the company had been diverted except some evidence has been produced that the new company has dealings with a supplier to the company of some materials. Sourcing supply of raw materials from a common supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. Further, this Board Meeting was attended only by the directors belonging to these two groups and that the directors belonging to Sunil Puri group approved the removal. It is also to be noted that all the allegations against the petitioners were narrated by the 6th respondent who was thereafter appointed as an additional director. Further, it is also seen that in the AGM held on 30-9-2000, the approval of the shareholders was taken for appointment of the 1st petitioner as MD. This being the case, it is doubtful as to whether an MD appointed by the shareholders could be removed by the Board without approval of the general body. Anyway the issue becomes irrelevant in view of the final order that I propose to pass. In regard to the allegation relating to payment of remuneration to Shri Sunil Puri in spite of his being unwell, the same MOU under which the 1st petitioner claims continuation as MD with remuneration is applicable to Shri Sunil Puri also. Therefore, even assuming that Shri Sunil Puri was not well, payment of remuneration to him cannot be questioned by the petitioners especially when the 1st petitioner was aware of such payments earlier and never protested. In regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplained of, taking into consideration the interest of the company and the shareholders. It is an admitted position that the petitioner s group holds 25 per cent shares in the company, with which they would be in a position to block any special resolution. The petitioner has always expressed his desire to part with his shares and certain efforts were also made towards this end without any success. Therefore, we consider it appropriate, in the interest of the company and the shareholders, that the respondents should purchase the shares of the petitioner s group . In the present case, the petitioners hold about 11 per cent shares and according to the respondents, as averred in the sur rejoinder, the petitioners are indulging in various acts interfering with the affairs of the company even now, which prejudicially affect the company. Further, when we apply the principle of legitimate expectation, in case such expectation does not, for whatever reason materialize, then the affected shareholder should have the right to exist from the company by selling his shares. The respondents have taken a stand that the petitioners could sell their shares in the open market. Similar suggestion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is a listed company. The market price of shares do not reflect the fair value of shares. I find from the balance sheets of the company that it has a huge reserves and surplus and the petitioners are legitimately entitled to a portion of the same in proportion to the shares held by them. For that purpose, it is necessary to value the shares of the company by an independent valuer and the shares should be brought by the company or the Sunil Puri group. This decision is in line with the decisions of this Board in some of the cases like Tirath Ram Ahuja Ltd. s (supra), Atmaram Modi s (supra) etc. cases wherein in exercise of its powers under section 402 of the Act, this Board had ordered the purchase of shares of one group by the other or by the company on a valuation made by an independent valuer. For a direction to the company to purchase the shares held by the petitioners in the company, the respondents have relied on section 77A of the Act to contend that in view of the non obstante provision in that section, this Board cannot order purchase of the shares by the company in terms of section 402 of the Act without complying with the provisions of section 77A. For the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 77A and which are still in statute book. In this connection, section 100(1)(c) provides that by passing a special resolution, a company could pay off any paid up capital meaning thereby purchase of its own shares and the only requirement is that in terms of section 101, it should get the Court s approval in terms of section 102. Likewise, in terms of section 391, a scheme of arrangement may result in purchase of its own shares by a company. There are a number of decided cases in which it has been held that the Court can sanction a scheme even if involves doing acts for which procedure is prescribed in other sections of the Act. Asian Investments Ltd., In re [1992] 73 Comp. Cas. 517 (Mad.); Hindusthan Commercial Bank Ltd. v. Hindusthan General Electrical Corpn. [1960] 30 Comp. Cas. 367 (Cal.). If the contention of the learned counsel for the respondents that no court can bypass the provisions of section 77A, it would only mean that the provisions of those sections empowering the Court to pass an order to a company to purchase its own shares would be a nugatory. When the Legislature has intended that this Board should have the powers to order purchase of its own shares by a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceivable that when a direction for purchase of shares is given by the court under section 402 and consequent reduction in share capital is to be effected, the procedure prescribed for reduction of share capital in sections 100 to 104 should be required to be followed in order to make the direction effective . In regard to the contention of the learned counsel for the respondents that the observations of Bombay High Court no longer holds good in view of the insertion of section 77A subsequently, I do not find much merit in that contention, Bombay High Court has examined the scope and application of section 402 read with sections 397 and 398 of the Act and these sections still remain in the statute book. Further, as pointed out by the learned counsel for the petitioners, the object of section 77A is to put some checks and balances when a company, on its own, desires to buy back its own shares and as such this section has no application in a case where this Board exercises its powers under section 402 of the Act. Thus I have no hesitation to hold that the powers of this Board to pass an order directing a company to purchase its own shares in terms of section 402 are not curtail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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