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TMI Blog2014 (12) TMI 1297X X X X Extracts X X X X X X X X Extracts X X X X ..... aintiff has filed many legal proceedings against Defendant Nos. 2 and 3 including proceedings in Company Law Board under Sections 397 and 398 of the Companies Act, 1956 with regard to Defendant No. 1. The present suit is one such proceeding filed by the Plaintiff. 2. The grievance of the Plaintiff briefly put is that Defendant No. 2 has obtained and/or applied for several patents in his own name whereas the patents ought to have been obtained and/or applied for in the name of Defendant No. 1. The Plaintiff, in this derivative action, is seeking to make a claim on behalf of Defendant No. 1. The supporting layer put-forth is the suit cannot be filed in the name of the Company Defendant No. 1 and Defendant No. 1 is not in a position to make such claim in its own name because the Plaintiff does not hold majority shares and the management of the Company is in the control of Defendant No. 2/Defendant No. 3. The Plaintiff also states that Defendant No. 2 was in a fiduciary relationship as the promoter, director, majority shareholder and the Research Head of Defendant No. 1 and by registering the patents in his individual name and not in the name of Defendant No. 1, Defendant No. 2 was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kely to take any action for the wrong done to the company....... " (iii) In Nirad Amilal Mehta vs. Genelec Ltd. [2008 (6) Bom.CR 499] in paragraph 7, it was observed as follows: "7. .............. The suit should therefore normally be filed by the Company for setting aside the alienation. The Plaintiff who is only a shareholder of the Company would not normally have a right to file a suit on behalf of the Company as the person aggrieved is the Company and not a shareholder. More than one and a half century ago, in (Foss vs. Harbottle), (1843) 2 Hare 461, the Court laid down the rule that normally an individual shareholder would not be entitled to bring an action for a wrong allegedly done to the company. It is the Company who alone can bring an action for a wrong done to it. The rule however has been subjected to more than one exception. In (B.B.M. (UK) Limited vs. Janardan Mohandas Rajan Pillai), 1993 (3) Bom.C.R. 228, this Court while upholding the rule that it is the Company who is entitled to maintain an action for wrong allegedly done to it and a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer clauses-(a), (b), (c), (d), (f) and (g). Prayer clause-(e) was not argued. 7. Before we proceed further, it is necessary to give an analepsis on the case. The Defendant No. 1 was registered and it took over an erstwhile partnership business by the name M/s. Gharda Chemicals Industries. In this partnership firm, the Defendant No. 2 was to receive 40% of the profits while the remaining 60% was to be divided amongst the others, viz. the Plaintiff's father who was to get 30% and the remaining 30% to be shared between the mother of Defendant No. 2 who was also the Plaintiff's grandmother and the Plaintiff's maternal aunt. The Defendant No. 2 was to receive 40% from the profits though he had invested only 20% of the total contribution to the firm because of the expertise and ability that the Defendant No. 2 possessed. He was the person on whom the firm relied upon. 8. Defendant No. 1 is in the business of manufacture and sale of organic, inorganic chemicals, its byproducts, perfumery chemicals, cement and other materials. Therefore, the Defendant No. 2 was entrusted with the charge of the partnership firm and later of the Defendant No. 1 Company. 9. The shareholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company gains himself any pecuniary advantage adverse to those of the Company, he must hold for the benefit of the Company the advantage so gained. The Plaintiff's in support of this contention relied upon (i) Ultraframe UK Ltd. vs. Fielding (2004) RPC 24, (ii) Hop Extract Co. Ltd. vs. Horst [36] (supp) RPC 177], (iii) Fine Industrial Commodities Ltd. vs. Powling [71] RPC 253], (iv) Patchett vs. Sterling Engineering Coy Ltd. (72 RPC 50), (v) Triplex Safety Glass Co. Ltd. vs. Scorah (15 RPC 21), (vi) Narayandas Shreeram Somani vs. Sangli Bank Ltd. (AIR 1966 SC 170) and (vii) Dale Carrington Invt. (P) Ltd. vs. P.K. Prathapan (2005) 1 SCC 212]. 12. The Plaintiff alleged that during the period of 2001 to 2010, Defendant No. 1 has spent an amount of about Rs. 186 crores on research and development and Defendant No. 2 cannot take advantage of that and registered the patent in his own name. The Plaintiff also alleged that Defendant No. 2 has also benefited by the efforts of the employees of Defendant No. 1. It is the Plaintiff's case that Defendant No. 2 never did any work or never made any efforts in his personal capacity but always acted on behalf of Defendant No. 1 in colla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itle or interest therein and Defendant No. 2 shall be entitled to apply for patents and obtain patents in his own name for his inventions. 15. This, according to the Plaintiff, amounts to distribution of assets by the Company to the detriment of all the shareholders and Defendant No. 1 does not have the permission of 100% shareholders to enter into this kind of agreement with Defendant No. 2. The Plaintiff's case is that Defendant No. 2 is in control of Defendant No. 1 and Defendant No. 2 having misused his position as Chairman and Managing Director of Defendant No. 1 will not allow Defendant No. 1 to initiate any action against Defendant No. 2 for the protection and recovery of valuable assets. Moreover, Defendant No. 2 owned and/or otherwise controlled the majority of the equity shares in Defendant No. 1 and all the Directors on the Board of Directors of Defendant No. 1 having been appointed by Defendant No. 2, any resolution moved by the Plaintiff with Defendant No. 1 to initiate action against Defendant No. 2 will obviously be defeated. 16. The Defendants' case is that the Plaintiff has no locus. According to the Defendants the issues raised by the Plaintiff have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her assets and properties of the 1st Respondent. The 1st Respondent has developed considerable process/technical knowhow with regard to (i) making of rock phosphate (ii) extraction of iron ore (iii) manufacture of temperature resistant polymers and (iv) the development of high grade cement from the ash of coking coal furnaces. These processes/technical knowhow are hereinafter referred to as "the Specific Process Knowhow". The Specific Process Knowhow is developed by the 1st Respondent by the funds of using the labs of, using the resources of and research staff of the 1st Respondent. The Specific Process Knowhow is owned by the 1st Respondent and would constitute a valuable asset of the 1st Respondent. The 2nd Respondent had publicly evinced his desire to take away the Specific Process Knowhow and to encash the same for his own exclusive benefit, thereby depriving the 1st Respondent and its minority shareholders including the Petitioners from the benefit of the Specific Process Knowhow. The 2nd Respondent, who has access to and possession of the Specific Process Knowhow is required to be restrained by this Hon'ble Bench from in any manner selling, transferring, alienating, encum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the present petitioners have sold 27 and 66 shares respectively to Godrej Soaps Ltd., without following the regime of Article 57. On the one hand, the petitioners were questioning the intention of the 2nd respondent but at the same time, the petitioners were themselves indulging in act which was not only illegal but against the interests of the company. According to the respondents, the petitioners group was bent upon selling their shares to a person who happens to be the competitor of respondent company. Besides, it is the petitioners group who on the one hand were opposed to increase of authorised share capital resulting in respondent No. 1 not being able to declare bonus shares; and on the other hand were acting against the interests of the Company by committing themselves to sell their shares to person who happens to be the competitor of respondent company. According to the respondents the present petition is a speculative petition for which reason also the grievance made at the instance of petitioners with regard to meeting dated 15th February 1990 cannot be countenanced.' '50. The fact that even the present petitioners were party to MOU and have committed themsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dinary general meeting dated 15th February 1990. More so, when the stand taken by the present petitioners at the time of arguments plainly suggests that they are interested in walking out of the Company and sell their shares at a fair price.' 129] ..... 130] The argument is that the appellants were not parties to this judgment and, therefore, it does not bind them. However, it is pertinent to note that the appellants were original petitioners. They withdrew from Company Petition No. 77 of 1990. There is nothing on record to indicate that they withdrew with liberty to raise the pleas raised by them again. Once the learned Judge has found that the conduct of the remaining petitioners was entirely blameworthy and they could not substantiate the charge and/or allegation leveled of being oppressed as minority shareholders, then, I do not see how the present appellants can on the same material succeed in proving the said allegation. Apart from finding that they are raising the same issues based on the same allegations and identical arguments, I am of the opinion that the observations of the learned Single Judge would be applicable to the present appellants too. Any wider controve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a derivative action. If the Plaintiff does not satisfy even one of the above conditions, a derivative action by him is not maintainable or atleast he is not entitled to any interlocutory reliefs in such an action at this stage. The Defendants whilst alluding to some of the above conditions submitted that the rules which govern the circumstances in which a derivative action will be available to a shareholder remain strict. 21. The Defendants also submitted that Defendant No. 2 has no fiduciary duty to invent in the facts and circumstances of the case. It is the Defendants' case that just because Defendant No. 2 is the Managing Director of Defendant No. 1, it does not follow that the patent devised by Defendant No. 2 in his individual capacity should belong to Defendant No. 1 or that Defendant No. 2 should hold them in trust for Defendant No. 1. It is the case of the Defendants that Defendant No. 2 is the inventor and as an inventor, he is entitled to apply for the patents as per Section 6(1)(a) of the Patents Act and there is no provision in law which provides that the employee generated patent should belong to the employer. It is also submitted that under the contract whereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hearing, do not relate to the business of the Company at all and no R & D expenditure has been incurred in respect of these. 24. According to the Defendants, if it is to be held that Defendant No. 2 is not entitled to the patents and Defendant No. 1 is entitled to, the patents may itself get revoked or canceled. According to the Defendants, under Section 64 (1)(b) of the Patents Act, any person may apply for revocation of the patent if "the patent was granted on the application of a person not entitled under the provisions of the Patents Act to apply therefor". In such a situation, if it is held that the patent was wrongfully obtained by Defendant No. 2 rather than in the name of Defendant No. 1, then any person including the competitors of Defendant No. 1 may apply for revocation/cancellation of the patent and this can never be in the interest of company. 25. According to the Defendants, the Plaintiff's conduct is also tainted and he has not come with clean hands because the Plaintiff has engaged the Defendants in constant litigations which demonstrates that the Plaintiff has never been and is not a well-wisher of the Company. The Plaintiff has always been on the look-out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also submitted by the Defendants that the Plaintiff has suppressed in the plaint the fact that the Plaintiff had agreed to sell his shares in Defendant No. 1 to Godrej, who is a competitor and has agreed to exercise all his voting rights in respect of his shares in Defendant No. 1 as per the directions of Godrej. This MOU was brought on record by Defendant No. 2 in his affidavit of 12th December, 2011. Therefore, the Plaintiff having suppressed this MOU is disentitled to any interim reliefs. The Plaintiffs tried to argue saying that it was only a pledge. This read with the two decisions of this Court dated 14th November, 2008 dismissing the Company Petition No. 77 of 1990 and 14th June, 2011 dismissing the Company Appeal No. 24 of 2008 gives reasons to believe that the Plaintiff is only espousing the cause of Godrej, a competitor. Such an action is not bona-fide or in the best interest of the Company and hence on this ground alone, the Plaintiff is not entitled to maintain this derivative action. 28. The Defendants also submitted that the Plaintiff had even filed a criminal complaint-filed by the original Plaintiff no. 2 (mother of the Plaintiff) against her daughter Maharukh, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship rights-the forum being the patent office, the Court will leave it to the forum to decide rather than endeavoring to make a decision itself. The Defendants also submitted that there are express provisions in the Patents Act, like section 71 read with section 117(C)&(D) and section 64(1)(C) read with sections 52 and 117(C)&(D) where jurisdiction of the Court appears to be barred. In view thereof, even if the Court has jurisdiction, it will refrain from exercising that jurisdiction, where the specialized forum (patent office) is more equipped to deal with complex issues of ownership rights in patents which is a highly technical subject. The Defendants also submitted that ownership rights is also linked with the concept of 'inventive content' which requires specialized knowledge for correct determination of the ownership rights and hence all the more reason why such issues should be left to a specialized forum like the patent office and the Court should not grant an interlocutory injunction where the Plaintiff has not sought any reliefs before the specialized forum. 30. It was also submitted that Article 160 (a) of the Articles of Association of Defendant No. 1 empowers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Plaintiff has to cross two hurdles to be entitled to any relief and if the Plaintiff fails even in one of them he will not entitled to any relief. The Plaintiff has to prove atleast prima-facie that (a) he is entitled to maintain this action and (b) he satisfies that (i) he has a prima-facie case for grant of injunction; (ii) if injunction is not granted, irreparable loss/injury will be caused which cannot be compensated in damages; and (iii) the balance of convenience is in his favour. 34. With this background, let us proceed further: In Palmer's Company Law, derivative action is explained as an action where the Plaintiff is seeking to enforce not his own right of action but a right of action vested in or derived from the Company. Thus, the Plaintiff may seek to enforce the Company's rights by suing in a representative form on behalf of himself and all other shareholders in the Company (except the wrongdoers) against the wrongdoers. Therefore, as derivative action has to be filed in a representative form, let us see whether the Plaintiff crosses that first hurdle. The Plaintiff is the only shareholder of Defendant No. 1 who has filed this action. The Plaintiff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Edition, at pages 8238 and 8239, while analyzing the English Companies Act of 2006, the relevant factor in a derivative action to be kept in mind is discussed as under: The six other matters the statute required the Court to take into account are: (i) Whether the member is acting in good faith in seeking to continue the claim. (iv) Finally, there is a factor which is given special prominence by being out in a sub-section of its own. The court must have "particular regard" to the views about the litigation of the members of the Company who have no personal interest, direct or indirect, in the matter. This indicates a preference for collective, rather than individual, decision-making over the litigation, even if the body of shareholders in question is a minority. 36. Having regard to the aforesaid, the Plaintiff though holding 12% of the shares of the Company, is all alone in this action particularly when the other minority shareholders, who collectively own about 13% of the shares of Defendant No. 1, are against the action and do not consider it in best interest of Defendant No. 1. Therefore, in my view, such a Plaintiff should not be entitled to maintain this derivat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the name 'Western Industrial Chemical Company Private Limited" (WCIPL) and manufactures a chemical by the name PV-23. The Defendants submitted that Defendant No. 1 also manufactures the same product but the product was devised by Defendant No. 2 and is being used royalty free by Defendant No. 1 and the same is superior to that of WCIPL. In fact, the Plaintiff in his affidavit in rejoinder dated 22nd December 2011 has stated that "I verily believe that the Defendant No. 1 forayed into PV-23 only with a view to adversely impact my business". Therefore, it gives a strong feeling that this action coupled with the past history between the parties which will be explained later is an attempt by the Plaintiff only to finish this competition by jeopardizing the business of Defendant No. 1. The statement of the Plaintiff in his affidavit in rejoinder explains the fact that the Plaintiff's interests are in conflict with that of Defendant No. 1 and also the malice that the Plaintiff has against Defendant No. 1. 41. In an unreported judgment of this Court in the matter of Anil Madhavdas Ahuja Vs. Marvel Fragrances Private Limited and Ors. NMS No. 767/2011 in Suit No. 566/2011, dt. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the MOU, I cannot accept that it was merely a pledge particularly because the Plaintiff had agreed to sell his shares to Godrej and exercise all his voting rights in such a manner as may be directed by Godrej. The MOU further provides that "the Plaintiff shall be bound to sell and/or transfer or dispose of any rights in respect of any shares in Defendant No. 1, whether purchased with the finance made available by Godrej or not, only to Godrej". The Court of Chancery in the matter of Forrest vs. The Manchester, Sheffield and Lincolnshire Railways Company, 45 ER 1131 at page 3 has held as under:- "It has been a very wholesome doctrine of this Court that one shareholder having in view the legitimate purposes of the Company may be permitted in this Court to maintain a suit on behalf of himself and the other shareholders of the company, but the principle upon which that constructive representation of the shareholders is permitted indisputably requires that the suit shall be a bona fide one, faithfully, truthfully, sincerely directed to the benefit and the interests of those shareholders whom the Plaintiff claims a right to represent. But can I permit a man who is the puppet o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed to sue on behalf of the Company if he is bringing the action bona fide for the benefit of the Company for wrongs to the Company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed. First on the necessity for the absence of an ulterior purpose, the words of Lawton LJ in Nurcombe v. Nurcombe [1984] BCLC 557 at 562, [1985] I WLR 370 at 376 are apposite: 'It is pertinent to remember, however, that a minority shareholder's action in form is nothing more than a procedural device for enabling the court to do justice to a Company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the Company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so'." Further at page 256 it was held: "I can well understand that Mrs. Barrett is upset at what has occurred bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Plaintiff is also evidence of family disputes/disputes of a personal nature now being again sought to be litigated in the garb of a derivative action. Therefore on this ground also, the Plaintiff will not be entitled to any relief as sought. 48. It is also quite obvious that the Plaintiff having not succeeded in his earlier actions against Maharukh Murad Oomrigar, his sister and the Defendant No. 2, he is re-agitating the same points in the garb of a derivative suit. 49. In Company Petition No. 77 of 1990, the petitioners therein had made similar allegations of mismanagement, oppression and misappropriation of shares of Defendant No. 1 by Defendant No. 2 and others. The Plaintiff, who was also one of the petitioners, later withdrew from the petition. The said petition was, however, dismissed by this Court by an order dated 14th November 2008, inter-alia, holding that no ground of any oppression or mismanagement and misappropriation was made out. While dismissing the petition, the Court made an observation on the withdrawal by the petitioner from the petition by stating that the effect of unconditional withdrawal from the proceedings by the petitioners is that they have giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the court to do justice to a Company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the Company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Gower's Principles of Modern Company Law (4th edn, 1979) p. 652 the law is stated, in my opinion correctly, in these terms: 'The right to bring a derivative action is afforded (to) the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as Plaintiff on the company's behalf...'" Further at page 7 of the above decision it was held as follows: "My understanding of these judgments is that the court is entitled to look at the conduct of a Plaintiff in a minority shareholder's action in order to satisfy itself that he is a proper person to bring the action on behalf of the Company and that the Company itself will benefit. A particular Plaintiff may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense to Defendant No. 1 to use any patent as may be devised by him which may required in the course of business. The Defendant No. 1 continues to benefit from the inventive policies of Defendant No. 2 as these inventions are royalty free. If the Plaintiff's prayers are to be allowed, that would also amount to a fetter in the inventive ability or in the passion of Defendant No. 2 to invent and give royalty free license and who in his advance age of being in the 80's, still continues to invent. If the relief sought is granted, Defendant No. 1 will not be able to use any of the patents and that would mean loss to the Company. Moreover, none of the judgments relied upon by the Plaintiff to buttress the second point that because Defendant No. 2 is working as a Managing Director, he has a fiduciary duty to register the patents in the name of Defendant No. 1 are applicable. I deal below with these judgments. (a) In Triplex Safety Glass Co. Ltd. v. Scorah (Vol. LV RPC Page 21), the chemist who took out a patent in his own name was employed in the laboratories of the Plaintiff-Company. He had been directed by the Company to discover a method for producing Acrylic Acid and hence he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of FIC, was engaged in conceiving or devising the patent in the course of his employment duties and during work hours. Accordingly, whilst conceiving the invention, the Defendant was acting in his capacity as Managing Director of FIC, i.e., he was acting in the course of his duties towards the Company in conceiving the invention whereas Defendant No. 2 whilst conceiving the inventions was acting in his individual capacity and did not conceive the inventions as part of his duties towards the Company or in his capacity as Managing Director. He was not required to under his contract as Managing Director with Defendant No. 1. (c) In the case of Patchett v. Sterling Engineering Co. Ltd. (Vol. LXXII, RPC, Page 50), the employee was employed in the department of design and development of domestic electrical appliances of his employer company. The Court observed "It was not disputed that in this capacity it was his duty to put his inventive faculty and skill at the service of the company". During the course of his employment he created the inventions for which patents were obtained. It was in these circumstances that the court held "that where the employee in the course of his employme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much after the suit inventions were conceived) which, inter-alia, contains a clause to the effect that the Company acknowledges that the patents devised by Defendant No. 2 are and continues to be his own and do not belong to the Company amounts to an attempt to ratifying an act which cannot be ratified without the consent of all the shareholders or amounts to unauthorized distribution of assets of the company. This point of view of the Plaintiff cannot be accepted. The said resolution containing the above term does not amount to ratification at all. Also it cannot amount to unauthorized distribution of assets of the Company as the assets being the inventions in question are patented in the name of Defendant No. 2 and not Defendant No. 1. Hence, it is not a case whereby the assets belonging to the Company have been sought to be unauthorizedly distributed or misappropriated. It looks more like clarificatory. Moreover the said resolution has become final upon its passage by the requisite majority of the shareholders. The said resolution, I am told, has not been challenged by the Plaintiff in any legal proceedings and the validity thereof is not the subject matter of these proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any relief. 61. Therefore, the Plaintiff fails in crossing both the hurdles. The Plaintiff does not make out any case that (a) he is entitled to maintain this derivative action and (b) consequently the question of making out a prima-facie case or any irreparable loss being caused or balance of convenience being in his favour, did not arise. In any event the Plaintiff did not make out a prima-facie case for injunction nor is able to prove that any irreparable loss will be caused to the Plaintiff or the balance of convenience is in his favour. 62. In the circumstances, the notice of motion is dismissed with costs. 63. The Courts should be alert in dealing with such speculative suits and shoot down such bogus litigation at an early stage. This action of the Plaintiff, it is quite obvious is inspired by vexatious motives. I observe with regret the infliction of the ordeal upon the Courts by parties like the Plaintiff by presenting a case which was disingenuous or worse. It may be a valuable contribution to the cause of justice if such speculative and frivolous litigations are dealt with a tough hand. Substantial judicial time will be saved if such parties are saddled with substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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