9911796707
TMI Blog2003 (12) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent') 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) Deadlock Events - The parties deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 available in terms of the letters dated 18-3-1997 and 4-4-1997 and the draft Minutes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. 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 of 60 days. This Notice is dated 10-8-1999, which was also endorsed by the holding Company of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 in order to provide counter proposals, they should have obtained whatever information they required. Mr. A.K. Singh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril 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, failure to resolve the issues in 60 days constitutes a deadlock event giving either party a right to terminate the Agreement. We are well past ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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)Payment of remuneration to any Director of the Company. (12)Any long term agreements/contracts for periods exceeding three years. (b)If any of the aforesaid matters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Hongkong and Shanghai Banking Corporation Ltd. towards repayment of the loan payable by the Company. It is averred that it will be evident that the Respondent has contributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 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 the same (proportional) price. (f) Duty to continue Business - Until all of the above post-termination steps are completed (or for 180 days, if shorter), all parties agree that they will continue doing business wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 facts of this case disappearance of substratum has not actually arisen. If business is not being carried on it is on account of Petitioner's conduct in, inter alia, (i) creating a deadlock situation and issuing an entirely unlawful termination no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 funds and even otherwise arbitration was the proper remedy. When considering winding up on just and equitable grounds the absence of attempts at reconciling differences through consensus would be a vital and relevant factor. The Petitioner's submission on no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 aforesaid decisions is that winding up of a domestic or family company on just and equitable rule is permissible if there is a justifiable lack of confidence in the conduct and management of the company's affairs, grounded on the conduct of directors in regard to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to me that the following point may be added to the foregoing considerations. (vii)Generally speaking, an admission of debt should be available and/or the defence that has been adopted should appear to the Court not to be dishonest and/or a moonshine, for proceedings to continue. If there is insufficient material in favour of the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ona 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 between the parties would also prevent the Company Judge from bringing about the end of the juristic life of a Company which is otherwise existing and breathing on artificial legal support systems. 15. In Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp. Cas. 91, 106 (SC), Their Lordships have observed that - "Section 433(f) under w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers 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 indices of the erosion of the substratum of a company were enumerated which are, firstly, that the subject-matter has vanished; secondly that the object for its incorporation has substantially failed; thirdly, business cannot be continued without losses; and fourthly that the existing and probable assets are insufficient to meet existing liabilities. Similarly, in Brunton & Co. Engineers Ltd., I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tings, 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 business; the reason for the other director's absence was his fear that the petitioner would insist on a general meeting being called at which, by the terms of the articles, the petitioner could require the other shareholders to purchase his shares, or if they were unwilling to purchase them, to join with the petitioner in passing a resolution to wind up the company voluntarily; the result of the other director's absence from boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 difficult to find a proper solution under sections 397 and 398 of the Act. This is not a case where a patch-work arrangement can satisfactorily resolve a cleavage which to all intents and purposes is fundamental, absolute and complete. It, therefore, appears that the only possibility which may be left to the petitioners is a winding-up order, provided, of course, they are entitled to the same on any grounds made out by them, which would re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parties are at logger-heads. So we agree with the learned Single Judge that this was a case in which the petition had to be admitted and citation issued. We would accordingly dismiss the appeal, leaving the parties to bear their own costs." (p. 861) 21. On the aspect concerning the disappearance of the substratum of the Company reliance has been placed by Mr. Sundaram on the decision of the Division Bench rendered in Malabar Industrial Co. Ltd. v. A. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 & Co. Ltd., In re [1946] 1 All ER 435, and observed thus (at page 980 of 32 Comp. Cas.) : 'It is, therefore, clear that in order to bring the case within the principle underlying substratum cases, it is not enough to show that the main or dominant object for which the company is incorporated has been abandoned or that there is no intention on the part of the company to carry out such object but it must be proved that such object has become impossible of fulfilment either by reason of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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, and the Court will not make an order at the instance of a party which is guilty of mala fides. We have not permitted Mr. Mathalone to go into the merits of these allegations about the mala fides of the petitioners because in our opinion these allegations are entirely irrelevant. If the petitioners have made out a case for the winding up of the company, if they have placed materials before the Court which satisfy the Court that the company is insolvent, if they have placed materials before the Court which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 is all too evident and has resulted in the closure of its operations. It is the Respondent's case that the company has been suffering losses year after year and as much as Rs. 250 lakhs in 1998-99. It can scarcely be disputed that the Company's employees have left the Company in droves, proverbially much like rates fleeing a sinking ship. The Sales of the Company are commercially insignificant and cannot sustain it in the future even if the most optimistic prognosis is adopted. 24. Since the shareholding is equally di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 the contract between the parties the breach of which is not the subject-matter of this winding up petition; the parties are equipped with legal rights and remedies in that regard. Fourthly, it is argued that this petition has been filed only because almost unbridled and untrammeled latitude has been granted to foreign investors and hence the Petitioner does not need to collaborate with the Respondent to transact business in India. Counsel for the Petitioner has answered that even in the new regime 'No Objection' from the Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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