TMI Blog1999 (11) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... NB are on the other side--the former being the petitioners and the latter being the respondents. On the demise of HNB and MNB, their groups are headed by Shri Dilip Bhargava, son of HNB and Mrs. Veena Bhargava, the wife of MNB. Now the HNB group is referred as the DB group. KNB is the first petitioner and BNB is the second petitioner. DB is the second respondent and Smt. Veena Bhargava is the third respondent. At the time of the incorporation of the company, HNB was the chairman and the MD of the company and after his demise in 1979, KNB and BNB became the chairman and managing director and joint managing director respectively. This company had about 46 per cent, shares in another company known as EMA India Limited. From 1983 onwards the DB group had been controlling the affairs of EMA while KNB, BNB and MNB controlled the company. The company has four divisions, namely, track components division, forge division, track re-building division, all located in Kanpur and the plastic division in Mumbai. On the date of the petition, the petitioners' group held 27.29 per cent, shares and the respondents' group 51.87 per cent., the financial institutions about 9 per cent, and the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolving an investment of ₹ 14.93 crores with a projected annual turnover of about ₹ 20 crores. With a view to maintain the family harmony, the board approved the proposal and left the plastic division completely under the sole control of the respondent. The board also appointed him as the deputy managing director and vice-chairman with effect from October 1, 1996. Even though originally the respondent assured the board that no assistance to set up and run the plastic division would be needed from Kanpur, yet, over a sum of ₹ 8 crores was transferred from the Kanpur division to the plastic division. However, the performance of the plastic division had been dismal right from the beginning and the accumulated loss stood at about ₹ 8.3 crores as on December 31, 1997. The net worth of this division was completely eroded because of the losses incurred by the plastic division due to the mismanagement of this division by the respondent. The respondent also indulged in siphoning off funds of this, division and with a view to hide this, refused to furnish the accounting details of the division resulting in non-finalisation of the accounts of the company for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring it on par with that of the respondents as per the family agreement, for freezing of voting rights of the respondents, etc. 4. Respondents Nos. 2 and 4 have filed their counters to the petition. The reply of the second respondent, in a nutshell, is as follows : the first petitioner is the managing director and another a joint managing director and as such they have no locus standi to file this petition alleging oppression and mismanagement in the affairs of the company. This petition has been filed with an oblique motive of retaining the control of the company even though the petitioners are in minority. Since the entire petition is founded on the family agreement which itself provides for arbitration in case of disputes, the petitioners cannot file this petition for execution of the family agreement especially when the company is a listed company. Further, the petitioners have already filed two civil suits on the same issues that have been raised in this petition. The respondent is the son of the founder of the company, namely, H. N. Bhargava, elder brother of the petitioner. After the death of H. N. Bhargava, the petitioner, being the eldest in the family was appointed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial institutions urged the company to go for a rights issue of ₹ 8 crores and at the initiative of the respondent, VSL Finance Limited agreed to sponsor the rights issue. However, the petitioner was not interested in the rights issue being made and as such this rights issue did not materialise even though the respondent and his family members had contributed ₹ 1.5 crores towards the rights issue. Even though the plastic division was not doing well, yet, the petitioner wanted remittances from this division to Kanpur. Instead of assisting the plastic division, the petitioner, with a view to oust the respondent from the company, suggested closing of this division, sale of the division or in the alternative advised forming of a separate entity for this division, even though the petitioner was fully aware that the financial institutions would not support this move. In spite of the financial difficulties experienced by the plastic division, the petitioner issued instructions to the bank to transfer the sale proceeds of the plastic division to Kanpur resulting in non-payment of salary to the workers consequent to which the workers went on a flash strike in May, 1998, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d petitioner as the joint managing director with effect from December 30, 1998 ; that the respondent had forcibly taken over the Kanpur division of the company, on December 28, 1998 ; that the petitioners were not allowed entry into the factory premises. The allegations of the respondents were that without notice to his group of shareholders, the petitioner allegedly held the annual general meeting for 1997-98 on December 28, 1998, whereat far reaching decisions were taken ; that the registered office of the company was shifted to the residence of the petitioner ; that all the records of the company had been removed from the registered office ; that clandestinely; and without the approval of a duly constituted share transfer committee, a number of shares held by the respondents which were in pledge with VLS Finance Limited had been transferred to VLS Finance resulting in the respondent being reduced to a minority. 6. In the hearing held on July 22, 1998, C. A. No. 133 of 1998 was moved wherein the petitioners had sought for restraining the requisitionists from convening the extraordinary general meeting as per the requisition dated June 15, 1998. On that day, without passing any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in the hearing held on May 28, 1999, the parties agreed that the disputes could be resolved by division of the assets of the company by which the Forge division would vest in the petitioners and the other two divisions in the respondents. Accordingly, an order was passed on May 31, 1999, giving certain directions for conducting the affairs of the company in the interim period till the modalities of the divisions of the assets of the company were worked out. In the same order, in view of the settlement between the parties, the interim board was dissolved. However, neither of the parties complied with the interim directions given in the order dated May 31, 1999, and later the respondents withdrew their offer of amicable settlement by division of the assets of the company, even though the petitioners were prepared for the same. Accordingly, the petition-was heard on the merits. After the hearing was concluded, the State Bank of India, Kanpur and ICICI, who had given financial assistance to the company, filed applications praying for protecting their interests in the order to be made by the Company Law Board on the petition. 8. Even though, various counsel appeared for both the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate company, he did not take any action. In addition, the respondent is also guilty of attempting to remove the petitioner directors from their managerial positions through a special resolution on December 50, 1998. Further, without taking into consideration the interests of the company, his action also resulted in stoppage of the operation of the bank accounts and with a view to increase his majority on the board, he also tried to induct four more directors from his group. He also pointed out that the respondent illegally took, control of the track component division on December 28, 1998, even though the petitioners were managing that division for over 20 years. Thus, he submitted that the respondent, in view of his majority shareholding, has tried to oppress the petitioners by ousting them from the management of the company. In regard to transfer of shares to VLS Finance, learned counsel pointed out that when VLS Finance to which the shares had been pledged, lodged the transfer instruments seeking registration, the company was legally bound to transfer the shares and the same was not with a view to reduce the majority shareholding of the respondents. 9. He further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot absolve themselves of their responsibilities in this regard. The main reason for inadequate finance for the plastic division was that the projected public issue could not materialise due to adverse capital market conditions and due to the reluctance of the petitioner to agree to rights issue of shares. Just because the plastic division suffered losses under the alleged management of the respondent, it cannot give rise to a cause of action for the petitioners to file this petition. The board was fully aware of the status of this division as is evident from the approval of the accounts by the board for the year 1996-97 and also the unaudited accounts up to September 30, 1997. As a matter of fact it is the petitioner with minority shareholding who has been trying to take over the company as is evident from the fact that without the consent of all the directors, Shri Bhalla was inducted into the board on May 28, 1998, and they have also taken a stand that two more directors were appointed in a board meeting held on July 8, 1998. In addition, without proper notices, they allegedly held the annual general meeting for 1997-98 on December 28, 1998. There are various circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roving the transfer by which the majority of the respondents had been reduced to minority, the petitioners have acted in a manner oppressive to the respondents and as such this transfer should be set aside as held in Clemens v. Clemens Bros. [1976] 2 All ER 268 (Ch. D.) and Dipak G. Mehta v. Anupar Chemicals (India) Pvt. Ltd. [1999] 98 Comp Cas 575 (CLB). He further pointed out that with a view to prevent the respondent to have access to the statutory records of the company and with a view to carry out the manipulation, the petitioners shifted the registered office to the residence of the petitioner without any authority of the board and as such the registered office should be shifted back to its original location. 12. Countering the arguments of Shri Subramanian that the company is a family company and in the nature of quasi-partnership, Shri Sarkar pointed out that this company is a listed company with over 20 per cent, of the shares held by outsiders. Further, even the family settlement relied on by the petitioner that there would be equalisation of the shares between the KN group and the DB group can no longer stand inasmuch as the MNB group holding about 9 per cent, shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y signed and executed. As per the agreement, all accruals to the shares by way of bonus, dividend, rights, etc., would be deemed to be pledged with VLS Finance. However, even though bonus shares were issued and dividends declared, nothing came to VLS Finance. There was consistent and regular failure on the part of the company to pay back the principal as well as interest in spite of repeated reminders except that a small amount of ₹ 44 lakhs towards principal and an amount of ₹ 38.18 lakhs towards interest was received by VLS Finance. As of date, a sum of ₹ 325 lakhs was outstanding towards the principal and interest. Even though VLS Finance insisted on 40 per cent, of the shares to be pledged at the time of sanctioning the loan, yet, in view of non-handing over of the bonus shares, the holding by VLS Finance has come down to around 15 per cent. Since, there was a threat of the company being wound up, with a view to protect the interest of VLS Finance, it had lodged the shares for registering the same in its own name. VLS Finance had already approached the SEBI for seeking exemption from application of the take over code and the application is pending with the SEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt materials to show that this company is a family company in the guise of a partnership, notwithstanding the fact that it is a listed company. The first is that the company took over the partnership firm, initial allotment of shares was in the same proportion to the shares in the partnership, it is the family members who decide about the composition of the board as is evident from the family settlement in 1991, it is the family shareholders who pledged their shares for raising finance for the company, etc. 17. It is evident from the pleadings that the genesis of the present disputes between the parties is in relation to the affairs of the plastic division. It is an admitted fact that the performance of the plastic division has resulted in dire financial difficulties for the company as a whole. While it is the contention of the petitioners that the respondent is responsible for the poor performance of this division, it is the contention of the respondent that it is due to non-availability of sufficient funds. It is on record that this division was established with the approval of the board and as such whether it was a sensible proposal or was at the instance of the respondent is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned shareholders have to initiate separate proceedings and we do not consider it proper, to adjudicate on this issue in the present proceedings especially in view of the stand of VLS Finance that they would not exercise any voting rights in respect of these shares. 18. It is very unfortunate that the family shareholders who had carried on the business of the company for nearly 30 years successfully have brought the affairs of the company to the present stage wherein its existence itself is in state of flux. In the recent past, both the groups have tried to outwit each other by adopting various measures unmindful of whether they fall within the four corners of law. That is why, without entering into the controversies, we advised the parties to amicably settle the matter and with a view to assist them in their efforts, we also appointed a former judge of the Supreme Court as the chairman of the board. A perusal of the deliberations in the board shows that both the groups cannot carry on together and realising the same they themselves agreed before us that the assets of the company could be divided. However, later the respondents withdrew from compromise, while the petitioners we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n mind while moulding appropriate relief. It is on record that bath the groups agreed for the division of assets and as a matter of fact, there has been a de facto division by which the petitioners are managing the forge division and the respondents other two divisions for nearly a year. It is at the last minute that the respondent resiled from this stand. According to us, the most appropriate direction that we could give, with a view to put an end to the disputes between the parties is that there should be division of assets of the company by which the petitioners will continue to control and manage the forge division and the respondents the other two divisions. This would be in line with our decision in Jaidka Motor's case [1997] 1 Comp LJ 268 (CLB) wherein also, even though the company was a public company, in view of the family nature of the company, we directed the division of the assets. Shri Sarkar pointed out that in the present case, the divisions are interdependent as such division of the company is not possible. We find that the forge division supplies certain raw materials to the track components division but such supplies are not large and constitute only a small p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 104 of the Act in a proceeding under Section 397/398. The ICICI will nominate a suitable person as the chairman of the company latest by December 15, 1999, who will ensure that the final division of the assets is completed by June 30, 2000. The function of this board will be restricted to working out the modalities of carrying out the above directions. Expenses connected with these tasks will be borne by the company. During this period the company's bank accounts which stand frozen now, will be operated only as per the directions/authority of the chairman. However, the petitioners and the respondents are at liberty to open and operate new accounts in the names of the forge division and track components divisions respectively. If there are any outstandings from any customers on the supplies made prior to January 1, 1999, then realisation of the same will be credited to the accounts standing in the name of the company. Till the partition is effected, no general body meetings of the company will be convened or held either by the company or by any shareholder. This would safeguard the apprehensions of the respondents arising out of the transfer of shares to VLS Finance. 21. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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