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2003 (10) TMI 670

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..... t were incorporated by the said 3 groups. One M/s. Meridian Trading Co. Pvt. Ltd. was also incorporated as a subsidiary of SSCO. In that company SSCO holds 90 per cent shares and the 1st petitioner has been the MD and the second respondent-the Chairman. In 1994, certain disputes arose among the three groups and in 1997, Jai Singh Group left the entire Samrat Group including SSCO. Thereafter, in SSCO, Sippy and Puri Groups became equal shareholders with 50% shares each. The 2nd petitioner became the Chairman of the company and the 2nd respondent, the Managing Director. SSCO held an agency agreement with one Contship Containerliners (Contship) under an agreement dated 1st February, 1991 for a period of 5 years which came to an end on 30th September, 1996. Samrat Shipping Transport Systems Private Ltd. (SSTS) was incorporated in August, 1996 in which both the groups hold 50 per cent shares each and the 2nd petitioner has been the Chairman and the 2nd respondent-the Managing Director of this company. CP 41 of 2002 relates to this company (first petition). The Puri Group incorporated a company in the name of Samrat Shipping Logistics Private Limited in October, 2001. Contship termin .....

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..... the company i.e., the Agency Contract of Contship. This agency business contributed to 95 per cent of the business of SSTS. By taking away the main business of the company, the 2nd respondent has breached his fiduciary duties to the company as a director. Further, by incorporating a separate company, namely, the 4th respondent, the Puri Group is carrying on a competing business with the company and as a matter of fact all the resources of the company like its infrastructure, employees etc. are being used for the benefit of the 4th respondent. The manner and mode by which the 4th respondent was incorporated with the name Samrat Shipping Logistics Private Limited is also questionable. The 2nd and 3rd respondents, without the approval of the Board or the Sippy Group holding 50 per cent shares in the company, gave no objection to the Registrar of Companies for incorporation of the 4th respondent with the name Samrat . This itself is an abuse of their powers as directors. That company was incorporated only with a view to take away the agency agreement with M/s. Contship. The letter of termination of the agreement with the company from Contship dated 1st September, 2001 to the 2nd res .....

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..... of business in breach of his fiduciary duties and application of those decisions in the present case would clearly establish that the 2nd and third respondents, being directors of SSTS have breached their fiduciary duties and therefore are liable to account for the profits made by the 4th respondent in the agreement with Contship on account of diversion of the business. In Industrial Development Consultants Ltd. v. Cooley [1972] 2 AER 162 the Court observed that a director holds fiduciary position towards the company and if he makes any profit when he is acting for the company, he must account the company. It makes no difference that the profit is one which the company itself could not have obtained, the question being not whether the company could have acquired it but whether the director acquired it while acting for the company nor that the interest of the director is as a trustee for a third party. Likewise in Regal (Hastings) Ltd. v. Gulliver [1942] 1 AER 378 it is held that the rule of equity which insists on, who by use of fiduciary position make a profit, being liable to account for that profit, will no way depends upon fraud or absence of bona fide. The liability arises fro .....

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..... earlier agreement with SSCO was terminated when the period of the agreement expired. Thereafter, Contship entered into a fresh agreement with SSTS. SSCO never complained that its business had been diverted to SSTS. In the present case, Contship did not renew the agency agreement with SSTS when the term of the agreement expired. Neither the company nor any of the parties could have forced Contship to renew the agreement with SSTS as it is the prerogative of Contship to choose its agent. Even at the time when Contship terminated its agreement in 1996, the termination notice was sent in the name of the 2nd respondent and therefore, the petitioners cannot attribute any motive when Contship addressed the termination notice in 2001 to the 2nd respondent. The disputes between the Sippy Group and Puri Group started in 2001 in relation to the functioning of Meridian. Meridian has been in complete control of Sippy Group right from the beginning and enourmous funds of SSCO were being diverted to that company which was opposed by Puri Group. Contship was aware of the disputes between the two groups and was apprehensive that renewing the agency agreement with SSTS wherein both the groups have .....

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..... dismissed. 7. Reacting to the various cases cited by Shri Sarkar, Shri Devitre submitted that none of the decisions in these English cases can be applied by Indian Courts. All the decisions relate to the period before 1948 and therefore after India has become independent, English decisions are not binding on Indian Courts. The decisions of Indian Courts on the fiduciary responsibilities of a director or a partner are entirely different. Indian Courts have not applied strict fiduciary doctrine on the part of directors as in England. In Deva Sharma v. Laxmai Narain Gaddodia AIR 1956 Punjab 49 while considering the application of section 88 of the Indian Trusts Act, the Court held that in applying fiduciary responsibilities of a partner in a partnership firm, it must be established that he has acquired financial benefits for himself by representing that he was acting for the partnership and the party dealing with him should also have been under the belief that the partner was dealing on behalf of the partnership. In the present case, the 2nd respondent did not obtain the Contship agency for the 4th respondent in his capacity as the MD of SSTS nor Contship dealt with him as such. Th .....

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..... th the 4th respondent was entered into after the expiry of the term of the agreement with SSTS. 8. Summing up his arguments, Shri Devitre submitted that the petitioners are not clear as to how they are alleging that there was diversion of the business of the company. Initially their complaint was that by using the word Samrat with the name of the 4th respondent, Puri Group obtained the agency agreement from Contship. When this was rebutted by Contship, the petitioners complaint is that the 2nd respondent had instigated Contship to terminate its agreement with SSCO and influenced the Contship to enter into an agreement with the 4th respondent. However, there is no such averment in the petition to this effect and the same is only advanced during the arguments. No evidence has been produced to substantiate these charges. Considering the fact that the 2nd respondent has not utilized his position as MD of SSTS nor the funds nor the resources of SSTS were utilized in obtaining the agency agreement for the 4th respondent, the question of either the 2nd respondent or the 4th respondent being accountable to SSTS or Sippy Group for the benefits derived from the agency agreement with Co .....

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..... he petitioners had no further cause of action in that suit. Therefore, that suit cannot be compared with the present petition which has been filed complaining of oppression and mismanagement against the respondents. Only when the petitioners came to know that most of the assets cars and employees of the company were being used for the benefit of the 4th respondent, they decided to file this petition. In his capacity as MD, it was the 2nd respondent s bounden duty to have ensured that Contship agreement was given to SSTS in which case all the profits would have come to SSTS instead of to the 4th respondent especially when there is no record to show that Contship did not want to deal with SSTS. None of the cases relied on by the learned counsel for the respondents would have any application in the present case. In Deva Sharma s case (supra), the partnership firm had a selling agency business and the partnership agreement contained a clause that on termination of that agency neither partner would take the agency. The partnership itself was coterminus with that of the agency. When the agency was terminated, the partnership also came to an end. When one of the partners took the agency t .....

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..... ed to be a constructive trustee of SSTS for the profit accrued to the 4th respondent with the agency business of Contship as held in Selangor United Rubber Estates (P.) Ltd. v. Cradock [1968] 2 AER 1073. 10. As far as the 2nd petition is concerned Shri Sarkar submitted : The main complaints of the petitioners in this petition are that there is complete deadlock in the affairs SSCO and that the 2nd respondent is guilty of personally profiting himself at the cost of the company. Both the groups hold 50% each and have equal number of directors on the Board. There is no running business except rental income as the company has a large number of properties. The company had invested ₹ 49 lacs in the shares of a company known as NOL (India) Private Limited in 1992 and these shares have been shown as an investment in the books of the company and is shown as such in the Balance Sheets also right from the beginning. However, on the basis of some fabricated Board Resolution, the 2nd respondent claims that the company had lent him ₹ 49 lakhs to purchase these shares and therefore these shares belonged to him. Claiming as such, he has sold these shares for ₹ 2.7 crores and r .....

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..... th his participation only and without the participation of SSCO. Even though, SSCO was not to participate in the joint venture, in view of the joint venture company having agreed to take 100 employees of SSCO without any severance pay, in a Board Meeting held on 15th October, 1992, it was decided to lend a sum of ₹ 49 lakhs to the 2nd respondent for investment in the shares of the joint venture company. This Board Resolution was signed by the 2nd petitioner himself. Accordingly, a shareholders agreement was entered into between the 2nd respondent and the Singapore company. The amount of ₹ 49 lakhs lent by the company was credited into the bank account of the 2nd respondent and paid by him from that account to NOL for allotment of shares in his own name. Even though the shares were held in the name of the 2nd respondent, ₹ 49 lakhs was shown as investment of SSCO in the books of account keeping in view the Tax Laws and other statutory compliance. In 2000, NOL decided to end the joint venture and purchased all the shares held by the 2nd respondent. This matter was placed before the Board of SSCO and in the Board Meeting held on 8th May, 2000 (Exhibit-3), the Board .....

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..... trol and management has been with the 1st petitioner. Substantial funds of SSCO have been pumped into Meridian which has been incurring losses right from the beginning for over 14 years. The accounts of Meridian are not being properly maintained and therefore the 2nd respondent was reluctant to sign the Annual Accounts as on 31-3-2000. However, on an assurance that the personal guarantees given by him in favour of Meridian would be replaced, he signed the Accounts for that year. However, in regard to the accounts for the year 2000-01, the auditors could not complete the audit of the accounts as the 1st petitioner could not furnish various informations/clarifications/documents required by the auditors. Therefore, if any investigation is to be ordered, then, such investigation should cover the affairs of Meridian also. For doing so, Meridian should be made a party to the proceedings for which the respondents have already filed an application. Even otherwise, as held by Madras High Court in Shankar Sundaram v. Amalgamations Ltd. [2002] 38 SCL 777 , the affairs of the holding company would also include subsidiaries and since Meridian is a subsidiary of SSCO, ordering of investigation i .....

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..... e word Samrat as a part of the name of the 4th respondent and no allegations regarding either deadlock in the affairs of the company or breach of fiduciary duties on the part Puri Group in getting the Contship contract to the 4th respondent has been agitated in those suits. There is also no similarity in the reliefs sought and as such this petition cannot be dismissed on the ground that the civil suits have been withdrawn unconditionally. 17. Insofar as the prayer of Shri Sarkar for investigation into the affairs of these two companies as also other companies on the basis of various findings in the inspection carried out as per the consent order and the counter-prayer of Shri Devitre that investigation into the affairs of M/s. Meridian should also be ordered, are concerned, I do not consider that the parties have made out a case for directing an investigation. In the companies involved in the present procee-dings, both the groups are not only shareholders holding 50 per cent shares each but also they have equal representation on the Board. As per inspection carried out by the petitioners, the alleged diversion/deficiencies in the accounts mostly pertain to the period 1999-2000 .....

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..... 0 per cent of the business of SSTS which had two groups of shareholders and now the entire business has gone to the 4th respondent which is controlled only by Puri Group. I am in full agreement with the submission of Shri Devitre that Contship can never be compelled to chose any particular agent and it has full freedom to decide on its agent. What has to be examined is whether Puri Group the 2nd respondent being the MD and the 3rd respondent being a director of SSTS - has breached their fiduciary duties to SSTS in getting the Contship agency to the 4th respondent which under their sole control. Both the sides have cited certain cases in regard to the fiduciary responsibilities. Two of the cases Deva Sharma (supra) and Chennuru Govararaju Chetty (supra) cited by Shri Devitre relate to partnerships and the fiduciary responsibilities of partners to the firms after the partnerships had come to an end. In the present case, the examination relates to the fiduciary responsibilities of a director of a company in which he still continues as a director as a matter of fact as the MD. In Jewel (P.) Ltd. s case (supra), the third party did not want to give the business because the company was a .....

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..... by Shri Devitre. The fiduciary responsibility of a director enjoins that he should not take away the running business of a company nor he could use the resources of the company for his own personal benefit. The claim of the 2nd respondent is that since the agency with SSTS has come to an end, even if he continues as a director of SSTS, he could take the agency to his own company. His further stand is that as it was he who brought the agency of Contship to Samrat Group, he is free to take it. His third contention is that Contship did not want to have the agency with the company and the fourth is that Contship desired to have the agency with him because of his expertise. The stand that since he had brought the agency to the company, he can take away the same has to be rejected straightway. It is not uncommon that a business is secured by a company because of the expertise of a particular person in that company. But once the business is taken over by the company, no fiduciary can have a right or claim over that particular business as it belongs to the company. No business can thrive unless otherwise the resources of the company are employed in that business and no individual, by himse .....

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..... orate Opportunity to his company. Under ALI test s general rule, a director may not take advantage of a corporate opportunity unless the director first offers the corporate opportunity to the company and makes disclosure concerning the conflict of interest with the corporate opportunity and the corporate opportunity is rejected by the company. As a matter of fact even for rejection, ALI test requires that the rejection must be fair to the company, the rejection must be by disinterested directors and should be ratified by disinterested shareholders. From this it is clear that a director cannot treat a corporate opportunity lightly and take the same for his own benefit. The recognized defenses in case of complaint of taking away a corporate opportunity are: the company has permitted him to take the opportunity; the company is not financially capable of taking the opportunity for itself; the company is either legally or technically not in a position to pursue that opportunity; the third party refuses to deal with the company; and the opportunity was offered to the director in his personal capacity. 19. Applying the above principles, I shall first examine whether, Contship agency is .....

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..... the plaintiffs the defendant embarked on negotiations with the Eastern Gas Board in an effort to discharge his duty to the plaintiffs. In 1968 the Eastern Gas Board were contemplating building four depots and had not decided whether to farm out the work to other architects or do it themselves. The plaintiffs were interested in this work and with the aid of the defendant they attempted to get at least one of the depots. That attempt failed. It became evident that the Eastern Gas Board disliked the set up of the plaintiffs organization and were not prepared to deal with the plaintiffs in any capacity. In May 1969 the Eastern Gas Board finally decided on the location of their four depots. In addition they decided to build a central store to support the four depots. At that time a new deputy chairman of the Eastern Gas Board was appointed and during discussions with his colleagues at the board about the projects the defendant s name was mentioned. The deputy chairman was of the opinion that the defendant was the right man for the job and so he telephoned him at his home and arranged a meeting. At the meeting the defendant soon realized that he had a good chance of getting the work fr .....

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..... the sequence of events, it appears that the whole exercise of getting the agency to the 4th respondent had been preplanned even while the agency was subsisting with SSTS. The 2nd respondent did not disclose the notice of termination dated 1-9-2001, which was received in his name, to the Board of the company. Had he disclosed, the Board could have made efforts to persuade Contship to renew the agency with SSTS. As a matter of fact, as a director, the 2nd respondent himself was obliged to persuade Contship to renew the agency with SSTS. Instead, it appears that he had been interacting with Contship to get the agency for the 4th respondent even prior to the expiry of the agreement with SSTS as is evident from the fact that Contship entered into a deed of agreement with the 4th respondent on 1-12-2001 and the 4th respondent commenced the agency assignments immediately as is evident from the Service Schedule issued by the 4th respondent dated 14-12-2001. The agreement could not have been signed on 1-12-2001 without prior consultant with Contship. Therefore, it is obvious that he used the knowledge derived in his official capacity that Contship was terminating the agency with SSTS effec .....

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..... ct, in its affidavit dated 19-8-2002, Contship has averred The applicant company has never been concerned with and is not concerned with any internal matters between the shareholders of respondent No. 1 nor co directors of respondent No. 2 and have nothing to do with them at any time. [para 1 (viii)]. The unwillingness of a third party to deal with a company cannot be permitted as a defense to a corporate opportunity claim, absent disclosure. This defense, especially after the opportunity has been taken away, has to be normally rejected mainly because it presents significant evidentiary problems. For example, if a fiduciary and the third party (who presented the opportunity to the fiduciary) are successful in their independent collaboration, it would not be in either parties interest to admit later that the third party also was interested in working with the company at the outset. Such an admission could establish, as a matter of law, the existence of a corporate opportunity, and, in turn, lead to the imposition of a constructive trust on the fiduciary s interest in the diverted opportunity in favour of the company. Therefore, if the third party shows an unwillingness to deal wit .....

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..... o approaches him with that opportunity. Not surprisingly, both the parties, if successful, would claim that the third party presented the opportunity to the director because of their friendly relationship of the expertise of the director. Therefore, since a director is always under constant duty of loyalty to the company, even if an opportunity is presented to him in his individual capacity, he should disclose the fact to the company first. In this connection I may refer to the case of investment in NOL which is agitated in the second petition. In that case, the 2nd respondent disclosed to the Board the unwillingness of the Singapore company to deal with the company and its interest to deal with the 2nd respondent in his personal capacity. Full disclosure was made by the 2nd respondent which was also recorded in the minutes. The company not only permitted him to deal in his personal capacity but also lent him ₹ 49 lakhs to invest in NOL (the allegation of Sippy Group in this regard is dealt with later). In the present case, the facts reveal that the 2nd respondent never disclosed to the company, the fact of the agency being offered to him in his individual capacity. Thus on a .....

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..... erminate the agency by a 3 months notice. Therefore, it would not be proper to direct the 4th respondent to be accountable to SSTS for the benefits that it would derive from the Contship agency during the entire period of 5 years. The Contship agency with the 4th respondent commenced on 1-12-2001. The present petition was filed on 9-7-2002. The hearing was concluded on 21-7-2003. I am of the view that it would be just and proper if I direct the 4th respondent to account for all the benefits/profits that it derived from agency contract with Contship for a reasonable period between 1-12-2002 and 21-7-2003. I feel that it would be reasonable that the 4th respondent accounts to SSTS for all profits that the 4th respondent derived from Contship agency for the period from 1-12-2001 to 31-3-2003. Accordingly, I direct that whatever profit the 4th respondent derived from the Contship agency during this period should be paid to SSTS. This direction is on the ground that breach of fiduciary duties is not only an act of oppression in terms of section 397 but also prejudicial to the interest of the company and an act of mismanagement in terms of section 398. 24. As far as the second petitio .....

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..... agreed to between the two groups of shareholders even assuming may not be within the provisions of statute cannot be challenged only on the ground that disputes have arisen between the parties. However, in terms of the resolution dated 15th October, 1992, the 2nd respondent was to repay the amount of ₹ 49 lakhs within a period of 4 years. Since he has not paid the amount within 4 years, purely on equitable consideration, I am of the view that the 2nd respondent should pay reasonable interest on this amount for the period beyond 4 years till he refunded the amount. Accordingly, the 2nd respondent is liable to pay to the company a simple interest of 12 per cent for the intervening period and accordingly I direct so. This interest amount should be paid within a period of one month from the date of this order. 25. Now that I have given my findings on the main allegations on both the petitions, the question of relief arises. The admitted position is that there is complete deadlock in the affairs of both the companies. In the present case, because of the deadlock and loss of confidence between the two groups, it is the consent order dated 18-7-2002 which is operating between the .....

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..... iness of that company related to the agency with Contship which according to the 2nd respondent himself was at this initiative. Further, in regard to SSTS, the Sippy Group has made allegations of diversion of funds and use of resources of this company by Puri Group. Therefore, it would be just and proper that SSTS is taken over by Puri Group by purchasing the shares held by Sippy Group in this company. Accordingly, I order so. 26. Since purchase of shares as directed above cannot be done without proper valuation, it is necessary to appoint an independent valuer to value the shares of both these companies. The independent valuer so appointed will also compute the amount of profit that the 4th respondent has derived from the agency with Contship from 1-12-2001 to 31-3-2003. The parties will appear before me on 1st December, 2003 at 2.30 PM to suggest the name of the mutually acceptable valuer to carry out the assignment. In case the parties could not agree on a valuer, the Bench (sic) will appoint one. Till the process of valuation is completed the terms of the consent order dated 18-7-2002 will continue to operate as an order of this Bench more particularly the terms at Paragraph .....

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