TMI Blog1995 (12) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1944, between Lady Parson Kaur, widow of the late Sir Sundar Singh Majithia and her sons, namely, Surendra Singh Majithia, Sardar Surjeet Singh Majithia and the sons of a deceased son, Kirpal Singh, namely, Gur Nihal Singh Majithia and Dilip Singh Majithia. In the year 1956, the partnership business was converted into a private limited company and, subsequently, in the year 1974, it was made a public limited company. The said company after its incorporation in the year 1956 took over as a going concern the other businesses being carried on by the members of the family in partnership including the business of Saraya Distillery, Saraya Oil Works and the business of Fairweathers. Apart from the same, the family was also carrying on in partnership, the business of Saraya Engineering Works (P.) Ltd. In the year 1971, pursuant to a decision of all the family members, it was mutually agreed to divide and partition the family business and properties amongst the various members of the family. The parties, therefore, by an agreement dated March 21, 1972, appointed one Sardar R.S. Bindra as the sole arbitrator. As per the said award which was made a rule of the court on January 3, 1974, va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners Nos. 1 and 2 of the second part and petitioner No. 3 of the third part. As a result of the MoU, Company Petition No. 6 of 1985 was got dismissed as withdrawn and further petitioner No. 3 was nominated as a director on the board of directors and respondent No. 2 along with his father, Surjeet Singh Majithia, and brother resigned from the board. Respondent No. 3 was appointed chairman of the company for a period of five years and respondent No. 5, Gurjeet Singh Majithia, was appointed managing director of the company for the same period. Further, according to petitioner No. 3, he was appointed as director-in-charge of the company for a period of five years with effect from June 8, 1986. However, this was not liked by respondent No. 2 who in connivance with respondent No. 5 and to discredit petitioner No. 3 got a false and fraudulent complaint filed against petitioner No. 3 and exerted pressure on petitioner No. 3 to resign and succeeded in getting his resignation as the director-in-charge of the company, though he continued to remain a working director during this period. In the place of petitioner No. 3, respondent No. 2 was appointed as a director contrary to the MoU dated Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondents Nos. 2 and 5. It has been further pleaded that petitioner No. 3 who was in charge of the affairs of the company between the period 1986 and 1992 completely mismanaged the affairs of the respondent-company and the company suffered loss of 1.90 crores in the year ending March 31, 1992. A criminal complaint was filed against petitioner No. 3 and others and the management of the respondent-company by the cane-growers, and petitioner No. 3 had voluntarily resigned from his position as the managing director of the respondent-company and, thereafter, respondent No. 2 who was associated with the management and affairs of the respondent-company during the period 1979 to 1986 and as during this period, the respondent-company had progressed well and in the year ending October 31, 1986, had made a cash profit of 1.43 crores, he was called upon to join the board and to retrieve the deteriorating condition of the company. Since respondent No. 2 took over as director-in-charge of the affairs of the company in September, 1992, the position of the company has changed, all the liabilities have been paid up and, during the year ending March 31, 1994, the company had made a profit of Rs. 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been stated, inter alia , that complete inspection of all the relevant records was not given to the said respondent. As he wanted specially to see the relevant records regarding the disposal of the company's land respondent No. 3, therefore, had visited Sardar Nagar to find out the details as in a meeting of the board of directors held on December 4, 1992, when respondent No. 2 was appointed as the managing director, one of the items on the agenda pertained to disposal of surplus land of the company lying at different places. On his arrival at Sardar Nagar on September 11, 1995, along with his advocate, he got first hand information from the persons who had purchased the company land against cash payment that they have not received any document of title to confirm the sale though they have paid money for the said purpose. Respondent No. 3 was also handed over three registers by the sugar godown in-charge a perusal of which showed that the registers contained details of datewise delivery of molasses off the record to Saraya Distillery managed by respondent No. 3. The record further showed that there had been large-scale illegal diversion of molasses from the sugar mill to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been filed to the counter-affidavit of respondents Nos. 1 and 2 by the petitioners in which mainly the allegations made in the petition have been reiterated. It has been emphasised that respondent No. 2 in collusion with respondent No. 5 has given a total goby to the MoU dated April 29, 1986, and has even gone to the extent of saying that the name is not binding. It has been further emphasised that there is total mistrust between the majority shareholders represented by respondents Nos. 2 and 5 and other shareholders including the petitioners on account of which there is complete deadlock and the company cannot run under its present management. Though presently a public limited company, all the shareholders of the company belong to the Majithia family and there are no outsiders and it is actually in the form of a partnership though in the garb of a company, the partners of which in the real sense of the term are the members of the three branches of the Majithia family. In view of the same the provisions of section 433( f ) of the Act are attracted and this court can exercise its powers for the winding up of the company as the petitioners do not have any alternative remedy except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company has been sold in plots to different parties without informing the board of directors or accounting for the same in the books by respondent No. 2; ( ii )that the molasses of the company has been diverted to the distillery belonging to respondent No. 2; ( iii )the employees of the distillery of respondent No. 2 have been employed in the respondent-company and the employees of the distillery have been brought on the board of directors of the respondent-company; ( iv )the accounts maintained by respondent No. 2 do not depict the correct statement of affairs and despite the discrepancies being pointed out, no effort has been made to rectify the same, and ( v )the affairs of the respondent-company are being so run as if it were the private business of respondent No. 2 and his group. On these allegations, it has been stated that the mutual trust and confidence between the majority shareholders and the petitioners is completely lost and the animosity and discord created has resulted in a deadlock. Therefore, it will not be in the interest of the minority shareholders to let the company carry on its business. As the company is really in the nature of a partnership, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tern Linkers (P.) Ltd. v. Dina Nath Sodhi [1984] 55 Comp Cas 462. In this case, following the decision of the Supreme Court in the case of Hind Overseas (P.) Ltd.'s case [1976] 46 Comp Cas 91 and other decided cases, the court had, in the facts of the said case, invoked the partnership principles and had upheld the order of the learned single judge winding up the company under the provisions of section 433( f ) of the Act. Apart from the said cases, learned counsel has also placed reliance upon two other decisions of the Delhi High Court in the case of Bhaskar Stoneware Pipes (P.) Ltd. v. Rajinder Nath Bhaskar [1988] 63 Comp Cas 184 and in the case of Moti Films (P.) Ltd. v. Harish Bansal [1983] 54 Comp Cas 856 , wherein also the partnership principles were applied and orders were passed under the provisions of section 433( f ) of the Act. Shri S.N. Verma, learned senior counsel appearing for respondent No. 3, has adopted the main submissions made by learned counsel for the petitioners and has contended that, though the respondent-company is now a public limited company, it is wholly a family concern wherein the members of the Majithia family are the shareholders. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the same. Besides, they have not come with clean hands and their conduct disentitles them to any equitable remedy. So far as the allegations of lack of probity, mismanagement, misappropriation are concerned, it has been submitted that they are mischievous, motivated and unsubstantiated. Lastly, it has been contended that in any event, this is not a case in which this court should exercise its discretion under section 443 of the Act. From the submissions made by learned counsel for the parties, what arises for consideration at the very threshold, is, firstly, whether the partnership principle can be invoked in the facts of the present case for winding up of the respondent company, secondly, whether in view of the allegations of gross mismanagement, lack of probity and oppression by the majority shareholders, the petitioners have an alternative remedy in terms of section 443(2) of the Act by invoking sections 397 and 398 of the Act, and thirdly, whether this court should admit this petition at this stage on the basis of the averments made in the affidavit filed by the petitioners and decide this case after looking into the evidence at the final hearing stage. Before procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oppressed, that to wind up the company would unfairly prejudice the member or members though otherwise, the acts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, the Board with a view to bringing to an end the matters complained of may make such order as it thinks fit. Similar powers can be exercised by the Board under section 398 if satisfied that the affairs of the company are being mismanaged. While considering the first point mentioned above, what has to be seen is whether after the incorporation of the private limited company it can be said that the partnership continued in principle. For the said purpose, learned counsel for the parties have referred to the articles of association a copy of which has been annexed to the petition. I have considered the various articles as pointed out by learned counsel and I am of the view that there are certain articles which go to show that the same are contrary to the tenets of the principles of partnership and, therefore, it cannot be said conclusively that the partnership continued even behind the veil of the private limited company. Reference in this conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partnership business under the garb of a public limited company wherein all the shareholders of the family have been accommodated. The submission, therefore, is that it was not contemplated that the business of the respondent-company would be given to any particular group, but it should continue in the same manner as it was run during the partnership. I am unable to agree with this submission. The said award reveals that even the shareholding in the Saraya Sugar Mills (respondent No. 1) had been so divided as to give controlling interest to Shri Surendra Singh Majithia who was having 52.5 per cent. shares whereas the group of petitioner No. 3 and that of respondent No. 3 were given 16.8 per cent. shares each. It is noteworthy that the said award was accepted by all the groups and was also acted upon. This was not possible had it been a partnership as contended by the petitioners. As a matter of fact, this award indicates that the real intention was to give effect to the separation of the family and its businesses. It is further noteworthy that in May, 1978, Sardar Surendra Singh gifted 70,000 shareholding to different groups the maximum going to the group of respondents Nos. 2 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in this case, therefore, were on the facts of the said case. In the case of Moti Films (P.) Ltd. [1983] 54 Comp Cas 856, the Delhi High Court had held that the partnership principle would be prima facie attracted in the facts of the said case. Consequently, the observations made in that case would also not apply in the facts of the present case wherein it has been held that the partnership did not continue after incorporation of the company and, in any case, after the award in the year 1972. Assuming anything remained of the partnership that too came to an end. Learned counsel for the petitioners has also relied upon the decision of House of Lords in the case of Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 and certain observations made therein. In this case also though there was a prior partnership between two members, who later on formed the company, both the shareholder directors were sharing the profits equally as remuneration. Subsequently, the son of one of the directors was made a shareholder director. The father and the son combined and ousted the other director who not only ceased to be a director, but lost his right to share in the profit through the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dissolution of partnership principle has been applied to companies either on the ground of complete deadlock or on the ground of domestic or family companies. The complete deadlock is where the board has two real members or the ratio of shareholding is equal. The Yenidje Tobacco Co. Ltd. [1916] 2 Ch 426 (CA) and Loch v. John Blackwood Ltd. [1924] AC 783 (PC) illustrate these types. In the domestic and family companies courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from the management, but from the benefits as shareholders. Lack of probity has to result in prejudice to company business affecting the rights of complaining parties as shareholders and not as directors. Applying the principle laid down above in the facts of the present case, it would be noticed that here the shareholding has never been equal. Initially, Surender Singh Majithia was having the major shareholding. Subsequently also by means of the award of the year 1972, Surendra Singh Majithia was given dominant control over the affairs of the company and was holding the maximum shares. Subsequently, by means of gift and by bequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1986, but they have also repudiated the same by stating it to be a waste paper. The question, therefore, is whether the petitioners could on those allegations file a petition under sections 397 and 398 of the Act before the Company Law Board, and if the same could be filed, in that case, should the petition be dismissed under the provisions of section 443(2) of the Act. As already noticed above, learned counsel for the petitioners has vehemently urged that the provisions of sections 397 and 398 of the Act could not be applied by them as the minority shareholders in the present case are not saying that to wind up the company would prejudice them. On the contrary, they are praying that the company be wound up. I am, however, unable to agree with the submissions made by learned counsel for the petitioners and respondent No. 3 that in the facts of the present case, the provisions of sections 397 and 398 of the Act cannot be invoked by them as an alternative. It has been held by the Gujarat High Court in a well considered judgment in the case of Atul Drug House Limited, In re [1971] 41 Comp Cas 352 (Guj) as follows (at page 367): "The question of alternative remedy even when the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortance as such cases would clearly be covered by reason of the oppressive conduct or mismanagement under section 397 or section 398." Respectfully agreeing with the aforesaid observations, I am of the view that as the partnership principle was not applicable in the facts of the present case, as already found above, it has now to be considered whether the petitioners can invoke the provisions of sections 397 and 398 before the appropriate forum and seek their remedy, if any. It is noteworthy that in the petition itself, the petitioners have only regularly stated in paragraph 51 thereof that they have no other alternative remedy available except to seek the winding up of the company on just and equitable grounds. They have not clearly stated as to why the remedy under sections 397 and 398 cannot be taken to be an efficacious alternative remedy especially in view of the allegations of mismanagement and misappropriation, lack of probity on the part of the majority shareholders. In the arguments also, learned counsel for the petitioner and respondent No. 3 has contended that sections 397 and 398 of the Act are not alternative remedy within the meaning of section 443(2) as the minorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate forum. Though learned counsel for the parties have advanced lengthy arguments on the basis of the allegations and counter allegations made against each other in various affidavits filed before this court, I refrain myself from giving any finding with regard to the same as I am of the view that as the petitioners have alternative remedy, it shall be open to them to raise all those questions before the appropriate forum and, therefore, it would not be proper for this court to give any finding with regard to the same. Learned counsel for the petitioners has, however, contended that at this stage, the court has only to see whether a prima facie case has been made out by the petitioners and, thereafter, admit the petition and the evidence can be led by the parties at the time of final hearing and, therefore, the court should not decide this case finally at this stage. I am unable to agree with the said submission. There is nothing in section 443 of the Act to indicate that the court cannot refuse to make an order of winding up at any stage prior to the hearing of the company petition. On the contrary, under sub-section (1), the court can on hearing the winding up petition dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allegations, therefore, that are being made in the petition were not put before the domestic forum or discussed. At all the relevant time, since 1986, respondent No. 3 has been the chairman of the company. The decisions have been taken by the board. Allegations have been made about respondent No. 2 having sold land of the company soon after he became the managing director in the month of October, 1992. Allegations have also been made that petitioner No. 3 was forced to resign as the managing director on September 10, 1992, and also ceased to be a director since September 30, 1992. Respondent No. 3, who is the father of petitioners Nos. 1 and 2 and supporting the present petitioners, did not raise any grievance with regard to the same. Petitioner No. 3 also took no action since 1992 till the filing of this petition in June, 1995, for redressal of grievance. According to the petitioners, respondent No. 2 was removed from the board on account of certain action taken by him by means of the memorandum of understanding of the year 1986. No explanation has been given as to why respondent No. 2 was called back in the year 1992, and petitioner No. 3 removed without there being any object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court is not going into the said allegations at this stage as this matter can also be gone into if and when the petitioners choose to approach the appropriate forum for redressal of their grievances under sections 397 and 398 of the Act or if the matter is raised before the domestic forum or any other appropriate authority under the Act. However, it has to be kept in mind that the respondent company is engaged in the manufacture and sale of sugar which is classified as an industry in the high priority sector. It has been stated (that) the respondent company directly employs 1,400 persons and also provides indirect employment to substantial number of persons such as farmers and farm workers who are engaged in the activity of growing sugarcane. The respondent-company must naturally be contributing to the State exchequer by way of excise duty, sales tax and other levies which is alleged to be over rupees five crores per annum. This is also admitted that from the time respondent No. 2 has taken over as managing director of the company, the company made a profit of Rs. 1.84 crores whereas in 1991-92 when the petitioner No. 3 was in-charge the company suffered a loss of Rs. 1.90 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X
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