TMI Blog2006 (11) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... the company and there is complete deadlock between them. It is stated that the substratum of the company has been lost in view of the irreconcilable differences between the two groups. It is further stated that the business of the company has come to a standstill and there is complete failure to comply with the statutory requirements. It is submitted that there is mutual loss of confidence and lack of probity between the two groups with civil and criminal litigations and defaults in compliance with statutory provisions of the Act. Including appointment of statutory auditor, annual audit, filing of balance sheet etc. A number of other submissions have been made, which have been noticed in the latter portion of this order. 3. The respondents, on the other hand, have stated that present petition is nothing but a ploy by the petitioner to wriggle out of its obligation under the joint venture agreement and to set up a competing business in India. Allegations have been made about the conduct of the petitioner with the objective to show that the petitioner s conduct was inequitable and unjust. It is stated that the petitioner has misconducted itself and is not entitled to take shelte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was of complete deadlock that by itself was not made sole basis for winding up the company. The Supreme Court also noticed that the House of Lords did not approve of undue emphasis on the contractual rights over the equitable principles derived from partnership law. 7. In Ebrabhimi v. Westbourne Galleries Ltd. s case ( supra ) Lord Wilberforce had observed (at pages 499 and 500 of [1972] 2 All ER) : "...in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words just and equitable and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act, 1948, and by the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments, it was held were not an authority for the proposition that for no purpose whatsoever should the principles of quasi-partnership be applied to an incorporated company. The real character of the company for the purpose of judging the dealings between the parties and the transactions impugned, assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked. 9. This Court in International Caterers (P.) Ltd. v. Manor Hotels (P.) Ltd. 122 [2005] DLT 20 has examined section 433( f ) of the Act and principles of quasi-partnership, deadlock and loss of substratum. The following observations/paragraphs are relevant for the present case : "29. Even just and equitable ground contained in section 433( f ) of the Act on which second petition is filed appears to have been established. Admittedly, in this case the two groups are having equal say in the management and equal shares having voting rights. If they are not able to along well, situation of deadlock is inevitable, Black s Law Dictionary defines deadlock as under : Deadlock 1. A state of inaction resulting from opposition or lack of compromise. 2. Corporations. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to make out a case of substantial injustice which can be set right by the Court invoking the principles laid down in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 : AIR 1981 SC 1298. 39. In the case of O.P. Basra s/o Guari Shanker v. Kaithal Cotton and General Mills Co. Ltd. AIR 1962 Punjab 151, the Court laid down the tests to find out whether the substratum of the company had been lost. These tests can be found in para 6 of the judgment which reads as under: The usual tests for determining whether the substratum of the company has disappeared are when ( a ) the subject-matter of the company is gone, or ( b ) the object for which it was incorporated has substantially failed, or ( c ) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or ( d ) the existing and probable assets are insufficient to meet the existing liabilities, vide In re, Cine Industries and Recording Co. Ltd. AIR 1942 Bom. 231. Failure of any one of these tests is deemed a good ground for winding up of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares between two factions". 13. The following passage from Pennington s Company Law (Fifth Edition) is extremely elucidatory: "Deadlock if it becomes impossible to manage a company s affairs because the voting power at board and general meetings is divided between two dissenting groups, the Court will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointment of statutory auditor, company secretary etc. ( e )In the present case even the contractual rights arising from the Articles require equal participation between the petitioner and the respondent group. The articles themselves provide for joint partici-pation of both groups in the conduct and business of the company. There was/is also a joint venture agreement between the parties which ultimately resulted in formation of the company. The Joint venture agreement supports the view that the company is in fact an "equal partnership". The shareholding is equally divided. In view of Article 143( b ), the present case, is on a better footing than Hind Overseas, where the finding was that "quasi-partnership" did not exist. Moreover there is complete deadlock and the entire functioning in terms of Articles and the Act has become un-workable. ( f )The company is a body corporate for the purpose of doing business. It is a collection of individuals united to form one body and an artificial person, which is required to function and do business as per the wishes and desires of the shareholders in a democratic manner. The Board of Directors is the executive organ of the company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phase which is likely to get resolved in near or distant future. The animosity and the differences have resulted in even a criminal case being filed and the litigations which have remained pending in this Court and other forums for the last three to four years. Efforts made from time to time including this Court to have settlement have failed. The reports of the court appointed chairpersons have confirmed the complete deadlock. There does not seem to be any possibility of the two groups resolving their disputes and reaching any settlement. ( k )The respondent group has itself filed a petition under sections 397 and 398 of the Act alleging oppression and mismanagement on the part of the petitioner. In this petition filed before the Company Law Board the respondent group has admitted complete deadlock in the management and affairs of the company. In this regard it may be relevant to refer to the averments made by the respondent group itself in its petition filed before the Company Law Board under sections 397 and 398 of the Act, which are reproduced below: "42. The respondent No. 2 has systematically destroyed the Respondent No. 1 company since it failed to supply medical equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent No. 1 company. However, wind up the company would unfairly prejudice the petitioner." 15. It is equally well-settled that judicial admissions by themselves can be made the foundations of the rights of the parties ( Sangramsinh P. Gaekwad s case ( supra ) and Uttam Singh Duggal Co. Ltd. v. United Bank of India [2000] 7 SCC 120). 16. Learned counsel for the respondent while not denying complete deadlock between the two groups, has submitted that this by itself cannot be a good ground to wind up the respondent company under the just and equitable clause. He had argued that the petitioner had acted in an unjust and unreasonable manner and, therefore, should be denied equitable relief under section 433( f ) of the Act. It was further submitted that there was/is no lack of probity or mismanagement in the affairs of the company, which was/is sine qua non for any company to be wound up by applying principles of partnership or deadlock under the just and equitable clause. The respondents submitted that winding up petition has been filed as a ploy by the petitioner to escape liability and obligations under the joint venture agreement including the non-compete clause. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nominee as CEO. This resolution was passed with the consent of the director belonging to the respondent group voting in favour for the same. Moreover in spite of the e-mail dated 14-6-2002, nothing in furtherance thereof was done for period of 1 years and the business of the company had continued as normal. It is not the case of the respondent group that the petitioner had withdrawn itself and was not cooperating or abiding by the terms of the joint venture agreement and/or deliberately withholding any new business plan within the said period. The company continued to function and do business as before for a long time thereafter. 20. The open conflict between the petitioner and the respondent group arose in September, 2003. Perhaps the problems can be traced back to June, 2003 when Drager Medical AG Co. KgaA wrote letter dated 18-6-2003 to the respondent company stating that payments/remittances had not been made as per the distribution agreement and the respondent company had failed to make payment of the first instalment as was agreed. It was also stated that there were frequent problems causing severe impact on the general business activities due to raid of CBI on the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard had decided in its previous meeting to review the matter of conflict between CEO and COO in its next meeting and that there was an urgent necessity to resolve the issue. The letter of suspension issued by Mr. Claus Grabowsky to Mr. Sandeep Sinha was placed on table and discussed. Mr. Sandeep Sinha was asked to explain the charges. After hearing him the board discussed the matter and felt that the charges levelled by the CEO were baseless. Thereafter, Mr. Sandeep Sinha levelled the charges against Mr. Claus Grabowsky, CEO. The board discussed the same and decided that Mr. Claus Grabowsky, the CEO should be placed on suspension with immediate effect." 22. Mr. Claus Grabowsky, CEO was representative of the petitioner group. This conduct of the respondent group, when there were already signs of stress and strain, finally broke the relationship. Confidence snapped. The conduct of the respondent does not stand the test of "reasonable businessman". Lack of probity on the part of the respondent group is apparent. 23. Various other resolutions were also passed including appointment of Mr. Vijay K. Kaul as Additional Director and change of authorised signatories entitled to ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al director belonging to the respondent group upon affirmative vote of the petitioner and appointment of new bank signatories. An alternative proposal was also given that the agenda for the board meeting on 22-12-2003 should be put up for re-consideration. More importantly it was stated that the petitioner had full intention to carry on the joint venture and it was clarified that intention of the petitioner was to amicably resolve the matter. This proposal was rejected by the respondent group by again raising up the issue of distributorship agreement. 27. In these circumstances I do not think it can be said that the petitioners have conducted themselves in a manner which would disentitle them to approach this Court under section 433( f ) and invoke jurisdiction of this Court under the just and equitable clause. It is quite apparent that respondent group is substantially to be blamed for the impasse and deadlock. The respondent group has acted contrary to the articles. The relationship between the petitioner and the respondent group was/is purely business and commercial relationship. While protecting one s monetary interest, aspirations and desires, both groups were required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the subject-matter of the winding-up petition. The winding-up petition is based upon statutory rights and provisions, which cannot be contracted away. At the same time while applying just and equitable clause, contractual obligations cannot be ignored. The respondent-company has already filed Suit No. CS(OS) No. 519/2004 and CS(OS) No.1216/2005 before this Court in respect of its purported rights under the joint venture agreement, a joint venture agreement is a contract and violation or breach of contract by a party entitles the sufferer to claim damages from the delinquent. Reference in this regard can also be made to the order passed by this Court on interim application in CS(OS) No. 519/2004 and the appeal filed thereafter. Moreover I may mention that the respondent company is not a party to the joint venture agreement that was signed prior to incorporation. Lastly but most importantly, the joint venture agreement itself does not specifically bar transfer and sale of shares by both the petitioner and the Usha Group to third parties. Clause 12 of the joint venture agreement dated 9-5-1987 specifically provides that the Drager Group (petitioner) can sell in total or in part, its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration. Supreme Court in the case of Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 5 SCC 688 1 , has held : "4. Sub-section (1) of section 8 provides that the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. 5. The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the Company. That could obviously not be referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld by the Supreme Court in Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 wherein it has been held as under : ". . . 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...". 36. In the present case, respondent No. l was incorporated as a joint venture between the petitioner and the respondent-group. To this extent the object and purpose has failed. However, it cannot be said that as per the Articles, sale of shares by one group is prohibited or never anticipated. Even the joint venture does not prohibit sale of shares by one group to third parties, subject to pre-emptive right of the other group. 37. On the question of losses the respondent-group has taken a contradictory stand before this Court and the Company Law Board. Before the Company Law Board the respondent-group has stated that the operations have come to a standstill and there was no running business and the business operations had been completely p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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