TMI Blog2003 (12) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to as the Respondent ) are equal shareholders, each entity holding fifty per cent of the Company s equity. 2. The Petitioner has submitted that in actuality the Company was a 50-50 quasi partnership between the Petitioner and the Respondent, both of whom had equal representation on the Company s Board. In order to ensure equal status and power to the Petitioner as well as the Respondent, the Chairman was not vested with a casting vote and Board Meetings could be convened only with the consent of one Director of each of the parties. The other salient feature of this quasi partnership is that in the event of a deadlock, as defined in Article 7.2( b ) of the Joint Venture Agreement (JVA), the arrangement would become terminable under Article 6.1( e ) of the JVA. Article 7.2 of the JVA reads thus: "7.2 Deadlocks; Options upon Deadlock; Arbitration : ( a ) Co-operation - The parties will act (and will cause directors designated by them to act) reasonably and in good faith to avoid deadlocks at either the Board of Directors or shareholder level. The parties agree to act in a manner consistent with the JV s Memorandum of Association and Articles of Association. ( b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partner. You are requested to submit the particulars of the Industrial licence holder and the industrial licence with full particulars so that the joint venture can be provided the licensed capacity. ( c )The proposal envisages import of vatted malt spirit for the bottling of the local scotch and for blending with local whisky. For this purpose, the company would have to obtain an import licence as per the prescribed policy and procedure under the EXIM policy. The duties will be payable at the applicable rate. The approval is subject to the condition that value of imports shall be offset by committed exports of the products of the joint venture company. ( d )Liquor would be produced from non-molasses based alcohol only. ( e )You shall export sufficient quantities of products to maintain foreign exchange neutrality over a period of 5 years." 4. The Petitioner s contention is that from the very beginning the Company was plagued with financial stringencies This issue was repeatedly raised in the Board Meetings but the Respondent failed to invest its total share of funds in consonance with its commitment. Reminders and requests made to the Respondent in this regard are avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being stillborn was the Respondent s failure to transfer the licensed capacity to the Company. It is contended that requests and reminders were made, inter alia, by letters dated 1-12-1997, 11-12-1997 and 27-1-1998, but all of them failed to elicit the required response. It has next been contended that it was the Respondent s responsibility for distribution of the products of the Company, but despite the appropriation of compensation for such services this duty was not diligently discharged by the Respondent. Furthermore, although original advertisement and promotional costs were to be shared equally between the Petitioner and the Respondent, the letter insisted on the JVA being amended in August, 1997 with the objective of shifting these burdens and outflows wholly onto the Petitioner. It is alleged that the Petitioner had already invested over US$ 3 million to promote the JV brands. The Petitioner has also complained that the marketing plan and depletion of goals were rejected by the Respondent without the letter forwarding any alternative depletion proposal. It is explained that it was in these circumstances that the Petitioner was constrained to issue the Deadlock Notice o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh expressed his concern over Mr. Girotra not coming back on depletion goals for the financial year 1999-2000. He referred to the discussions held in the previous meting in which it was decided that Mr. Girotra will come back within 3 weeks with what should be, the depletion goals of the Company as JIL did not agree on the depletion goals as included in the business plan provided by Brown Forman in the month of May 99. Mr. Singh stated that in spite of the fact that the JV had no approved budgets and 3 months of the year had already gone by, no counter proposals were received from Mr. Girotra by 20th July. Mr. Anil Girotra informed that after due discussions he had with Mr. M.N. Tripathi, Sr. General Manager, Sales of JIL, he wanted certain information, before JIL takes the responsibility of sale of JV brands. He further informed that a letter dated 22nd July, 1999 initiated by Mr. M.N. Tripathi was forwarded to him for collection of data from sales force. Further, he himself also wrote a separate letter on 28th July, 1999 to all the branch heads of the Company but till date nothing is provided to him. Mr. Singh pointed that the JV is as much JIL s as it is Brown Forman s and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue the Termination Notice dated 13-12-1999, which reads as follows : "Re: Deadlock under the Joint Venture Agreement dated April 24, 1995, as amended ( Agreement ) in relation to Jagatjit Brown-Forman (India) (P.) Ltd. ( Joint Venture ), and termination notice under section 6.1( e ) and 7.2( b ) of the Agreement. Dear Sir : For nearly a year the Joint Venture shareholders and Board of Directors have been trying unsuccessfully to resolve a number of important issues concerning the Joint Venture s continued operation. In this time we have been unable to agree on the Joint Venture s depletion goals and marketing plan (including the level of advertising and promotional spend, and the transition of the sales force to Jagatjit Industries Ltd. ( JIL ). As you know, the parties identified these issues as critical to the Joint Venture s function, and provided in the Agreement that failure to agree on these issues would constitute a deadlock. As a result of the continuing disagreement on these issues, Brown-Forman Mauritius Ltd. ( BFML ) issued a notice of deadlock to JIL on August 10, 1999 pursuant to section 7.2( a ) of the Agreement. Under section 6.1( e ) of the Agreement, fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "26. Proceedings at Meetings. ( a )Questions arising at meetings shall be decided by a majority of votes, provided however that no resolution will be passed in respect of the following matters, unless passed with the unanimous consent of the nominee Directors of BFM and JIL present at such meeting. (1)Alternation in the Memorandum and Articles of Association of the Company. (2)Increase in the existing liabilities of the Company except in the normal course of business. (3)Mortgage, charge, encumbrance or creating a lien on or selling or agreeing to sell or otherwise dealing with any of the fixed and current assets of the Company. (4)Issue of any further shares or debentures. (5)Entering into any financial commitments including borrowings, repayments of which exceeds three years (long term). (6)Embarking on any new project or incurring of any capital expenditure, other than as per the budgets presented by JIL to the Company under the operating agreement. (7)Investment in any other company or concern. (8)Promotion of any new company or concern. (9)Merger or amalgamation of any other company with the Company. (10)Winding up/liquidation of the Company. (11)P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng him of requiring the earmarked 500 KL distillation capacity for manufacturing various products of the Company and also assuring him that this utilisation will not affect the Respondent s supply to Punjab licensees. It was, therefore, requested that a No Objection Certificate be issued, which was so done by the Commissioner s letter dated 13-2-1998. In paragraph 16 of its Reply the Respondent has, inter alia, blamed the Petitioner for not establishing a reliable and strong network in India capable of sourcing consumer durable for its retail operations in the United States of America. It has been averred that the production of alcoholic beverages at the peak of the second year of its operations never exceeded 19,000 cases which is less than 4 per cent of the sales for which FIPB permission had been obtained. The Respondent invested a total sum of Rs. 1.52 crores on 31-3-1997 towards capital contribution; and in addition indirectly invested Rs. 1.90 crores over a period of time towards bottling and distribution charges of the Company which has till date not been repaid to the Respondent. Furthermore, it is alleged that a sum of Rs. 1.40 crores has been paid by the Respondent to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary. ( d ) Book Value Determination - After all inventory and raw materials have been returned as described in section 6.4( a ), and after all tax and other assessment issues related to the winding up of JV have been resolved, JV s then current Net Book Value shall be determined as set out in Schedule 6.5( d ). ( e ) Options on Termination - Upon termination: (1)the parties may agree jointly to dissolve the JV and split its remaining assets so that the Net Book Value of such assets matches equitably the parties then current equity interests in the JV; or (2)if the parties cannot agree on a division of assets, then any party may make an offer to buy out the other party s entire equity interest for a certain price - but the offering party must be willing to sell its own equity interests at the same price (proportionate to its equity interest, with no extra value being ascribed to a majority interest). The parties receiving an offer to sell their equity interest to the other party will have 20 business days (after receipt of government approval, if necessary) in which to decide whether to sell their interests to the offering party or buy the offering party s interest at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. In exercise of such equitable discretion, the Court is guided by the same principles as in discharge of its equity jurisdiction. One of the principles of equity that apply is the conduct of the Petitioner prior to filing of the petition. Secondly, the overall effect of such an order on the company, its shareholders, workers, creditors, and not just the Petitioner. Thirdly, the Court s jurisdiction would not be used to achieve a purpose that the Petitioner cannot otherwise achieve owing to his contractual or other obligations. The Petitioner cannot through his own conduct create a situation and thereafter plead such a situation as a ground for the Court to exercise its equity jurisdiction. No petition for winding up on the ground of deadlock can be entertained where the deadlock is caused by the conduct of the Petitioner, who uses the effect of his conduct as ground for winding up. Fourthly, even if the grounds are made out under section 433( a ) to ( f ) of the Act, still it would remain a discretionary relief. Such discretion would be sparingly used in exercise of jurisdiction under section 433( f ) of the Act. It is further argued on behalf of Respondent No. 2 that in the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to an end when the Petitioner approached this Hon ble Court. Mr. Sundaram has further contended that none of the alleged subsequent events are relevant or can be taken into account to condone the conduct of the Petitioner. There are no pleadings or evidence in support of the alleged subsequent events apart from the oral submissions of the Petitioner in the Rejoinder arguments which in any event are wholly irrelevant; and that the circumstances prevailing prior to and at the time of the filing of the petition should only be considered. The Petitioner s application for FIPB approval contemplates investment up to US $ 2 million in the first year to be stepped up to US $ 7 million in five years based on projection of 5 lakh cases in one year. This projection of 5 lakh cases was never proposed by the Petitioner in any of the marketing plans for any year. FIPB approval dated 12-2-1996 does not prescribe any time limit for the investment of US $ 2 million. No letter from FIPB was ever issued complaining that the condition of investment of US $ 2 million had not been complied with. No attempt to resolve differences was undertaken by the Petitioner on any grievance regarding infusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances to the said case and the company was wound up. These principals in main have continued to hold the field throughout. It is, therefore, safe to conclude that the powers of the court under the just and equitable clause are not limited; and the court will be guided by the rules of equity and will do what justice demands, keeping in view the facts and circumstances of each case. All the same, the principles on which a partnership is dissolved may be applied to the case of a company, which consists of two members only or where the shareholding is equal or where it is a family or domestic company with the shareholding equally divided between two rival groups, which has resulted in a deadlock. Extending this doctrine a little, the Articles of Association of the company assume great importance; and if the Articles can help to resolve the deadlock the winding up has to be ruled out. The Articles have to be taken as the terms of the contract between the members, showing their intention as to how they agreed to transact the business of the company; and which must, therefore, govern the relationship amongst them inter se . Another important principle that has emerged from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts on which the defence depends, the petition should be rejected. ( iv ) The Court may consider the wishes of creditors so long as these appear to be justified. ( v )The machinery of winding-up should not be allowed to be utilised merely as a means of realising its debts. [For the above propositions see Pradeshiya Industrial Investment Corporation of Uttar Pradesh v. North India Petrochemical Ltd. [1994] 2 Comp. LJ. 50 (SC), in which the observation in Amalgamated Commercial Traders (P.) Ltd. v. Krishnaswami [1965] 35 Comp. Cas. 456 (SC) and Madhusudan Gordhandas Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125 (SC) have been paraphrased]. ( vi )If the stance of the adversaries hangs in balance it is always open to the Company Court to order the Respondent Company to deposit the disputed amount. This amount may be retained by the Court and be held to the credit of the suit, if any is pending, or likely to be filed in the immediate future. [ see Civil Appeal No. 720 of 1999 arising out of SLP (C) No. 14096 of 1998 - Nishal Enterprises v. Apte Amalgamations Ltd., decided by the Hon ble Supreme Court on February 5, 1999]. It appears t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r party to enforce winding up. This is for the reason that if there is an admission of debt, or if a moonshine and mala fide defence to the petition has been presented, an Award would be a foregone conclusion and procrastinating and deferring the inevitable and to the dispute would be contrary to and in negation of the expectation of law. Where a bona fide defence to the winding up petition has been disclosed the petition ought to be dismissed in any case by the Company Court. It cannot enter upon disputed questions, which would either have to be adjudicated upon by means of an ordinary and regular civil suit, or by making a Reference where the parties have contracted with each other to resolve their differences through arbitration. Therefore, in actuality, the Company Judge will in no circumstances substitute himself for or assume the role of the arbitrator. The relevance of the observations pertaining to the Arbitration Conciliation Act, 1996, to my mind, is that if the existence of an arbitration clause in neither a deterrent nor an obstacle for the passing of winding up orders, then the procedural and attending requirements of the termination clause in the agreements be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich shows that no substance was, ultimately, found therein. We agree with the Division Bench that this was no case for winding up the company and must dismiss the appeal filed by Mehra." (p. 622) 17. The principal prong on which this Petition is pitched is simply that the substratum of the company has eroded and hence it should be wound up. Although in Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC) Their Lordships found that this state of affairs did not exist, the following discussion is instructive: ". . . Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In the present case the object for which the company was incorporated has not substantially failed, and it cannot be said that the company could not carry on its business except at a loss, nor that its assets were insufficient to meet its liabilities....." (p. 557) 18. In O.P. Basra v. Kaithal Cotton General Mills Co. Ltd. AIR 1962 Punj. 151, four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d who hold an equal number of voting shares; if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general meeting, and management decisions will cease to be made. In this situation the court will make a winding up order, even though there is a provision in the company s articles that one director shall have a casting vote at board meetings, or that disputes shall be settled by arbitration. Nevertheless, the petitioner must show that there is no likelihood of the deadlock being resolved in fact, and for this purpose he should set out in his petition or in his supporting affidavit the relevant provisions of the company s articles (if any) and details of the attempts he has made to resolve the deadlock. There may also be a deadlock even though the voting power is not equally divided between the dissenting groups. Thus, where there were three shareholders with equal shareholdings, and two of them were the company s directors, one of the director-shareholders was held entitled to a winding up order when the other persistently refused to attend board meetings and make up a quorum to transact busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible to run the company on certain principles. It may be that the Court may even come to the conclusion that the one or the other party should buy the other out. In practice, the resolution of internal disputes under sections 397 and 398 of the Act is based on hope. That hope must come from the possibility of co-operation between the parties. It is manifest that the disagreements relate not only to the company under consideration but to other firms also and there are other factors such as the running of a rival firm by Bansal and Goel which makes it difficult in the present case to hold that any order under sections 397and 398 of the Act will enable the company to run, except on the total ouster of one or other party. What then is the relief that the petitioners can get in such a petition? There is a question of a flat in Bombay, which is on the point of being sold or transferred outright for Rs. 1,55,000 to the mother of R.P. Bhandari. If this transaction goes through, the question of the petitioners getting their due share will be lost and even if the Court is able to cancel that transaction, what is to prevent the directors selling it again to somebody else? In short, it is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous aspects of this case, it appears that the partnership principle is attracted, and the relations between the parties are not confined only to being shareholders of the same company. They are also partners in other partnerships which are correlated to the company. This view is expressed on a prima facie basis, as far as it is necessary at the stage of considering the question whether the petition should be admitted. The abovementioned two judgments referred to by the learned counsel for the appellant, in the case of Atul Drug House Ltd., In re [1971] 41 Comp. Cas. 352 , decided by the Gujarat High Court, and Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhuwalla [1976] 46 Comp. Cas. 91, decided by the Supreme Court, are cases in which the Court thought that an alternative remedy did exist. It was also found that the petitions were motivated by some other considerations. The Court has power to stay a winding-up petition if it finds that resort to winding-up is for ulterior purposes. It is not necessary to go into the facts of the two cases which are far complex in the present case. We do not find any ulterior purpose in the present case. It is quite obvious that the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice that as per the explanatory statement extracted earlier in paragraph (2), the company itself was of the view that it was incorporated in the year 1918 as a public limited company with the main object of carrying on plantation business. The learned Judge noted the explanatory statement in support of his conclusion that a prima facie case was made out based on the main object theory. According to us, even the explanatory statement cannot be understood to mean that the main object of the company was to carry on plantation in rubber but was only to carry on plantation business. We will now consider the above decision to see whether the learned Judge was justified in relying upon it to pass the order under appeal. In Mohanlal Dhanjibhai Mehta v. Chunilal B. Mehta [1962] 32 Comp. Cas. 970 (Guj.), Bhagwati J., as he then was, considering the last ground that the substratum of the company has gone, noted the observation of Lord Cairns in Suburban Hotel Co., In re [1867] 2 Ch. App. 737, German Date Coffee Co., In re [1882] 20 Ch. D. 169, Eastern Telegraph Co. Ltd., In re [1947] 2 All ER 104 (Ch. D), Red Rock Gold Mining Co. Ltd., In re [1889] 61 LT 785 and Kitson ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a whose debts amount to Rs. 50,00,000 also supports the petitioners, and the particular class for whom we must have the greatest sympathy, the class of poor labourers whose debts amount to Rs. 36,00,000, strongly support the petitioners and want us to pass a winding up order. Mr. Nathwani appears for some creditors to the value of Rs. 12,000 and he says that these petty creditors actually have supplied goods to the Mills, bills have been submitted, registered notices have been sent, and they have not been paid. It is true and this must be said in fairness to the learned Judge below that most of the parties who are now appearing before us with special leave did not appear in the Court below and it may be that that was one of the factors that weighed with the learned Judge in declining to make an order of winding up. But as we read the judgment of the learned Judge, the main reason which has weighed with him is that the petitioners have not come to this Court with clean hands, and Mr. Mathalone wanted to satisfy us that the motive of the petitioners in closing down the Mills was selfish, that they were largely responsible for bringing about an impase in the affairs of the Mills, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est in contradistinction to those of either the shareholders or the creditors comes to the forefront. The jural role transforms into that of a doctor performing euthanasia. Inter se claims and disputes between shareholders, or debts owing to the company s creditors are not extinguished, but merely shifted to a different arena. It is on this understanding that the present case should be resolved, as has been done in the plethora of precedents presented before me by the learned counsel for the parties. Firstly, it must be seen whether the substratum, or the vital purpose for which the artificial entity was constituted, has been deracinated. In the present case the future of the Company is determined and regulated by the Joint Venture Agreement which has been terminated by the Petitioner. It has ceased to exist, but for it being sustained by statutory life lines. In this case the Board has stopped meeting; the capital required for its functioning is inadequate and the Respondent have declined to infuse and invest any more on the specious and evasive ground that it was need based . Even if the investment commitment was only need-based, the financial stringency faced by the Company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omply with statutory obligations such as holding Annual General Meetings, filing Annual Returns, etc. Secondly, if the party praying for the winding up of the Company is itself guilty of approaching the Court with unclean hands it indubitably would not be entitled to equitable relief. However, I cannot view any action of the Petitioner as symptomatic of unfair, inequitable or illegal conduct. The termination of the JVA, wrongly or otherwise, the non-fulfilment of post termination obligations are bilateral liabilities and are beyond the scope of this petition unless it is palpably and manifestly mala fide. This equally applies to the filing of petition within the ninety days period post termination of the JVA. Again I shall refrain from discussing this issue threadbare as it is bound to bear on the disputes between the Petitioner and the Respondent, with which I am not concerned in this petition. Thirdly, the contention that it would not be fair and proper to allow the petition till such time as the post termination obligations have been completed by the Petitioner or even to entertain it in these circumstances does not appear to me to be sustainable. These obligations arise from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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