9911796707
TMI Blog1984 (6) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petition. The company is a private limited company in which the shareholders are all descendants of one Amar Nath Bhaskar. The family tree will be helpful in understanding the composition of the four groups of family members who are involved in this litigation : Amar Nath Bhaskar B. N. Bhaskar BNB T. N. Bhaskar TNB Rajendra Nath Bhaskar RNB Ravindra Nath Bhaskar RB Vivek Vidur Vashishta Bharat Vinay Rajeev Sanjay Sanjeev The company is the successor in business of a partnership known as M/s Amar Nath Bhaskar and Sons (ANB and Sons). ANB and Sons commenced business on January 1, 1957, and a deed of partnership was drawn up on December 26, 1959. The partners in this firm were RNB, RB, Vivek, Vidur and Bharat of whom Bharat was a minor. The shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a going concern. Thus, with effect from April 1, 1973, the company became the sole owner of the business and the shares were held by the four groups of members of the families. The shareholding of the company, as on October 11, 1972, was as follows: Shares Amount (Rs.) % age "Shri B. N. Bhaskar 124 12,400 Shri Vivek N. Bhaskar 125 12,500 (S/o Shri B. N. Bhaskar) 40 Shri Vidhur Bhaskar 125 12,500 Shri Vashishta Bhaskar 125 12,500 Shri T. N. Bhaskar 149 14,900 20 Shri Bharat Bhaskar 100 10,000 (S/o Shri T. N. Bhaskar) Shri Rajendra N. Bhaskar 150 15,000 20 Shri Rajeev Bhaskar 100 10,000 (S/o Shri Rajendra N. Bhaskar) Shri Ravindra N. Bhaskar 250 25,000 20 The board of directors of the company as on October 11, 1972, were BNB, TNB, RNB, RB, Vivek and Vidur. It will thus be seen that the shareholding of the company among the various groups retained the same proportion as before and all the four groups were also represented on the manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. The allegations of the petitioner in this regard will be referred to a little later. But at this stage, it is sufficient to refer to one development. The ninth annual general meeting of the company was called for December 29, 1981. The agenda for the meeting included two items : (1) to reappoint Vivek who was shortly retiring by rotation as the director and managing director of the company ; and (2) to reappoint Mr. I. P. Kohal and Smt. Aruna Bhaskar, the brother-in-law and mother of Vivek, who had been co-opted as directors on the death of BNB for a further term. On receipt of this letter, RNB wrote a strong letter to Vivek on December 28, 1981. Apart from questioning the alidity of the annual general meeting, RNB in this letter catalogued a number of grievances. His complaint was that, when the partnership of ANB and Sons was converted into a limited company, the parties did not intend that any family should be excluded from the management of the company or that there should be any change in the partnership concept under which they had previously operated. According to him, both RB and himself had often had reservations regarding the manner in which BNB had operated the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of a company known as Ishwar Industries Ltd. in which the BNB group held substantial shares. Almost simultaneously, on May 24, 1982, RNB and Rajiv filed this petition under sections 397, 398 and 433 of the Companies Act. The last paragraph of this petition which contains the prayer clause is in the following terms : "35(a) In the circumstances, it is respectfully submitted that the facts and circumstances of the case would justify the making of winding-up order on the ground that it is just and equitable that the company be wound up and that the affairs of the company are being conducted in a manner oppressive to the members of the company, other than the BNB family, and in a manner prejudicial to the interests of the company, and in a manner prejudicial to the public interest, and that a material change has taken place in the management and control of the company and in the ownership of the company';s shares by reason of which the affairs of the company are being and will continue to be conducted in a manner oppressive and prejudicial to the shareholders of the company, other than the members of B. N. Bhaskar family, and in a manner prejudicial to the public interest and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections of the court. The two company petitions, the present one and the one seeking the winding up of Ishwar Industries Ltd., were heard together for the purposes of admission. When these proceedings were pending, considerable efforts were also made to bring out some reconciliation between the family members who constitute the various groups. Perhaps a suggestion was thrown out that the affairs of the two companies could be so arranged that the major shareholding in each of the companies remains with one group instead of being spread over among all the three groups. In the course of these negotiations, Vivek entered into an arrangement with the TNB group under which he purchased the entire shareholding of the TNB group in the present company in exchange, it was stated that the shares of the BNB group in Ishwar Industries Ltd. had been passed on to the TNB group. As a result of this exchange, the shareholding of the BNB group in the present company has gone up to 80% and this has further worsened the position and accentuated the grievances of the petitioners in the present petition. Thus, attempts at reconciliation have not only proved unsuccessful; they have to some extent resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' further allegation is that the BNB family has conducted the affairs of the company in a manner grossly oppressive of the shareholders of the company including the petitioners and grossly prejudicial to the interest of the company. It is alleged that, after the company took over the partnership business, the profits have decreased as compared to that of the business when it was carried on in partnership. Apart from these allegations based on the history of the company's activities and the shareholdings, certain allegations regarding diversion of funds were made in paragraph 25 of the petition which have apparently weighed considerably with the learned judge. The contents of this para may be set out here as much of the arguments before us have turned on its contents; "25. It is submitted that these poor results of the company have been caused and achieved by the diversion of funds from the coffers of the company to support and promote various concerns, companies and activities of B. N. Bhaskar family at the cost and detriment of the company and for their own benefit by, inter alia, the following means: (i)The B. N. Bhaskar family has the following family concerns/ companies know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to General Refractories Pvt. Ltd., which is believed to be a paper concern of the B. N. Bhaskar family. (vi)It is reasonably believed and apprehended that there are other firms and concerns whom the company deals with, in which members of the B. N. Bhaskar family have substantial undisclosed interest, and from or through whom purchases are made or through whom sales are made on considerations other than the prevailing market prices, to the prejudice of the company. The petitioners crave leave to refer to and rely upon the company's records when produced. (vii)In addition, the petitioners reasonably believe that respondents Nos. 2 and 3 have diverted monies from the coffers of the company for other means, for which the petitioners will crave inspection of the company's records." When the petition was filed, notice was given to the respondents, i.e ., the B.N.B. group. An affidavit in reply was filed by Vidur Bhaskar dated April 12, 1982. Subsequently, another affidavit and certain annexures were filed by Vivek Bhaskar on May 14, 1982. Affidavits in rejoinder to these two affidavits were also filed on behalf of the petitioners. Counsel for the parties were then heard and ultimatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of a firm with an inherent right to a defined ratio in shareholdings among all the groups of members or participation by all the groups in the management, counsel says, is totally unfounded and untenable in law. He points out that, right from the beginning, even when the business was being carried on by a firm, the part played by the family of BNB in the firm was predominant. Also, when the company was formed, its shareholding was more, it was represented by more members on the board of directors and, admittedly, even according to the petitioners, the affairs of the company were being completely managed all along by the BNB group. According to learned counsel, the transaction of purchase of shares from the RB group in 1977 was in accordance with the articles. It was voluntarily made by the RB group and had been effected after the RB group had offered its shares to the other groups including the petitioners. Anyhow, the mere fact that one group of shareholders has purchased the shares of another group cannot bring the case within section 433, 397 or 398. This was no case of ouster from the management of any group. It is pointed out that neither the RNB group nor the RB group had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apart, it is really the proposal of the appellants, availing themselves of the scope offered by RNB's resignation to take over all the directorial position, that precipitated the current spate of litigation. Moreover, the acts alleged in para 25 continue till today and though they may have started quite some years ago, the petitioners cannot be estopped from voicing their objections thereto, merely because they have been silent earlier. We, therefore, reject these contentions. Turning to the merits, the first question that arises is whether a prima facie case has been made out that the just and equitable clause in section 433 is attracted in the present case. The petitioner's case was that the company is in reality and in substance nothing more than a partnership based on certain mutual understandings among the partners and that any conduct of any group of members which will abuse the trust and confidence reposed or the understanding which forms the basic structure of the company would justify the affected group seeking the winding up of the company. This contention is largely based on the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction on the transfer of the members'; interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere." Sri Saharya contends that, though broadly endorsing the above decision, the Supreme Court has been more guarded in its approach. He pointed out that the partnership analogy was not only not accepted in Hind Overseas'; case [1976] 46 Comp. Cas. 91 (SC), but that the court also severely limited the scope of the above clause in the following passage (at page 104): "When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership analogy failed on the facts. The position here is much more complicated. We have set out earlier the history of the constitution of the present company. The details of the shares held by the various groups in the partnership as well as the shareholdings of the company commencing from 1963 till the death of RB in 1976 clearly show that the company was in the nature of a partnership between the four groups of family members. It is true that right from the beginning, the family of BNB had an upper hand both in regard to the shares as well as in regard to the management. But while this is a relevant fact, it cannot be conclusive that the agreement was not in the nature of a partnership even when the company replaced the firm. The applicability of the analogy of a partnership depends not on the number of shares held by various persons but on whether there was a personal relationship, mutual trust and confidence, an unwritten but clear and distinct, if implied, understanding between the parties as to the manner in which the firm and then the company were to carry on their affairs. The details given earlier clearly show that a proportionate parity was maintained between the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding. It is difficult, therefore, to say that a prima facie case has not been made out for the applicability of Ebrahimi's [1972] 2 All ER 492 (HL) principle here. Mr. Saharya tried to show to us that the purchase by the BNB group of the shares of the RB group in 1977 was not in violation of, but rather in accordance with, the terms of articles 4 and 5. We have gone through these articles, the language of which is quite cumbersome and involved and would like to express no conclusion one way or the other at this stage. But we would only like to point out once again that under section 433(f), the issue is not one of legality or otherwise of a step taken so that, even if this were quite a lawful transaction, its effect vis-a-vis section 433(f) would still need examination. That apart, the allotment of shares to BNBS Cements Products P. Ltd. has not been satisfactorily explained. It was suggested that this was done only in order to retain the company as a private limited company in view of the provisions contained in section 43A of the Companies Act. But, assuming that a private limited company was required to be made a shareholder in order to prevent the company from becoming a publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to section 397" Reference may also be made to paragraph 18 of the judgment where the observations in Harmer's case [1958] 3 All ER 689; [1959] 29 Comp. Cas. 305 (CA) have been extracted. In that decision, it was pointed out that the circumstances to warrant interference under section 210 of the English Act corresponding to section 397 of the Indian Act must be such as to warrant the inference that there had been (at pages 321 and 322 of 29 Comp. Cas.): "...at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy...the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fairplay on which every sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the orders will not get justice at his hands." After referring to Kalinga Tubes' case [1965] 35 Comp. Cas. 351 (SC), the court observed (at page 782): "It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot 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." It seems to us that the facts of the present case, judged in the light of these observations, justify the admission of the petition under section 397. We have already discussed the applicability of the just and equitable clause to the present case which is also a requirement of section 397. The other part of the requirement, viz., oppression or mismanagement (to put it broadly) is also made out prima facie on the materials before us. This petition does not seem to be the outcome of a mere resentment at being outvoted or some conduct which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in a manner prejudicial to the interests of the company or that a material change has taken place in the management or control of the company and in the ownership of the company's shares by reason of which it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. Here again, we shall leave out of consideration the words "prejudicial to public interest". While the transfer of shares and the disturbance of the shareholding ratio cannot be said to be prejudicial to the interests of the company as a whole, we agree with the learned single judge that the allegations contained in paragraph 25 of the petition make out a prima facie case to show this. Mr. Saharya contends that the allegations contained in the above paragraph are vague and general and that they have been adequately answered by the reply affidavits filed by the appellants in the company petition. We have been taken by counsel for both sides through the contents of this paragraph, the affidavits filed by the two parties and the documents and material on record and we are unable to agree with Shri Saharya either that the allegations are vague and general or tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e electricity charges were met by the said company. He submits that this is a crucial fact. He refers to an electricity bill issued by the electricity department to BNBS Cements and Products P. Ltd., in which the electric consumption is shown as 777 units per week or 3,100 units per month. The electricity consumption of the firm and the other company are said to be equally substantial. Mr. Kaura points out that on the above consumption, the electricity charges borne by the company in respect of the running of the other concerns would far exceed the rent allegedly received from them by the company and the position would be that a substantial part of the electric bills of the other firm and companies is being met out of the funds of the present company. There is a similar allegation regarding the office premises at Ishwar Nagar. It is not possible to decide the merits of all these allegations at this stage but it does prima facie appear that no satisfactory explanation has been given in respect of the allegations made by the petitioners. The second main allegation is that the company carries on its pay-roll most of the staff of other companies of the BNB group, bears their water, el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er companies free. It is also necessary to enquire whether all their expenses debited to the company's account pertain to their services to the petitioner company alone or pertain also to their services to the other concerns. As we have said repeatedly earlier, this is not the stage to completely go into details of various allegations and find out how far they are proved or not proved. What is important is only to find out whether a prima facie case has been made out. In our opinion, the answer is in the affirmative. The petitioners have given in para 25 tangible materials to indicate prima facie that the funds of the company are being diverted to other concerns. Being out of management, they cannot, at this stage, give more definite or detailed particulars which they may or may not be able to adduce at the stage of hearing of the petitions. Though given adequate opportunity, the respondents in the petition have not been able to completely explain the position so as to persuade the court that there is even no prima facie case. The diversion of funds alleged by the petitioner, if correct, has resulted from the conduct of the affairs by the BNB group. The nature of these transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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