TMI Blog1999 (7) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... p principles in the conduct of the affairs of the company, for directions to the respondents to purchase the shares held by the petitioners or in the alternative, directing the respondents to sell the shares held by them to the petitioners. 2. It is appropriate to narrate, in brief, the contents of the petition. This company was incorporated in June, 1995, by four groups consisting of the petitioner and the second to fourth respondents along with their associates, with 25 per cent. shares to each group, with the object of taking over the business of ECL Agrotech (ECL), a unit of one Electro Steel Castings Limited. ECL was engaged in the business of high breed seeds. This unit was being headed by one P. Bhotika. One of the main customers of this unit was Heinz, an American company. This unit was taken over by the company along with its assets, liabilities and businesses for a total consideration of ₹ 75 lakhs. Shri Bhotika, being an expert in high breed seeds also joined the company. All the four groups were represented by one director each and the petitioner became the chairman and managing director of the company. In May, 1996, the chairman and Shri Bhotika undertook a fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the company and as a matter of fact, the petitioner and Shri Rungta were active members of Aggarwal Samaj, Bangalore, and as such knew each other well. Their association continued when a partnership firm in the name of Bangalore Deve lopers was formed with the petitioner and respondents Nos. 2, 3 and 4 as partners. When ECL was to be taken over, a sum of ₹ 10 lakhs was paid through this firm. The company was the outcome of the personal relationship between the petitioner and respondents Nos. 2, 3 and 4, That is why, he pointed out that, when the company was incorporated, it was ensured that all the four groups were allotted 25 per cent. shares each and each group was represented in the Board with one representative. This itself, according to learned counsel, would indicate that the company is in the guise of a quasi-partnership wherein equal shareholding and equal participation in the management has been ensured. Therefore, according to him, the company having been incorporated on the basis of mutual trust and confidence among the shareholders, it has all characteristics of a partnership and is governed by the discipline of relationship amongst the partners in a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhotika that M/s. Heinz were having dealings for a long time and when they learnt that he had joined the new company they started dealing with the new company. Referring to annexure A22, he pointed out that it was the company which informed Heinz, through a fax on August 23, 1996, that Shri Bhotika had left the company and again by a fax dated August 28, 1996 (annexure A23), the company informed M/s. Heinz that the petitioner would also be leaving the company. He referred to annexure A24 in which the company had informed M/s. Heinz on September 11, 1996, that new start-up companies would find it difficult to provide the same level of technical expertise and the comfort of dealing with a proven person. These documents have been conveniently concealed by the respondents in their reply. Because of these faxes and since M/s. Heinz were keen on dealing only with Shri Bhotika, through a fax dated September 13, 1996 (annexure 9), M/s. Heinz asked the company to deliver all stock seeds to Shri Bhotika. Thus, it is clear that the petitioner did not take away Heinz from the company. However, the respondents, with a mala fide intent, fabricated the minutes of an allegedly held board meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne envelopes which had not been opened by the shareholders with the request that the Bench should open the envelopes and see whether these envelopes contained the notices for the extraordinary general meeting. According him, his removal without notice is bad in law, besides being an act of oppression. 6. Summing up his arguments, Shri Raghavan submitted, notwithstanding the allegations against the respondents, that the petitioner is prepared to walk out of the company along with his group provided the respondents comply with the agreement already reached, by paying a sum of ₹ 17.5 lakhs together with 18 per cent. interest. Otherwise, he submitted that the valuation of the shares should be made as on the date when the disputes between the parties arose, i.e., August, 1996. According to him, even though the normal rule is that the date of valuation is the date of filing of the petition, yet, the same need not be applied in all cases. It would depend on the facts of each case and the date has to be based on fairness. According to him, the company earned enormous profit during 1995-96, and no dividend was declared. In 1996-97, the company suffered losses, Therefore, if the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 397 petition, one of the essential ingredients is that the petitioner should establish that there are grounds to wind up the company on just and equitable grounds which the petitioner has not been also to establish especially when this company cannot be wound up as it is a profitable company having a large number of shareholders. He also pointed out that the petitioner is not interested in the welfare of the company as is evident from the fact that before coming to the Company Law Board, he had filed a winding up petition before the Karnataka High Court. 8. Dealing with the merits of the case, Shri Naganand submitted as follows : The petitioner is responsible for the breach of faith between himself and respondents Nos. 2 to 4. The petitioner abandoned the services of the company, incorporated a new rival company in the name of M/s. Oriental Bio-tech Limited and started carrying on the seeds business. The petitioner diverted the business of the company including the export order from M/s. Heinz, to his newly formed company and took away with him a few of the employees of the company including P, Bhotika who is the main architect of the company. The petition has been filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extraordinary general meeting, the shareholders and their proxies in all comprising 74.62 per cent. of the paid up share capital of the company unanimously passed a resolution removing the petitioner from the office of director of the company. Though there was an attempt to settle the disputes between the petitioner and respondents Nos. 2 to 4 through intervention of third parties, no settlement could either be reached or implemented on account of non-co-operation on the part of the petitioner. He further submitted that, the respondents are not willing for any compromise as the petitioner had acted against the interest of the company. He also prayed that the petition should be dismissed. 9. We have considered the pleadings and arguments of counsel. Before dealing with the same, it is essential to note that, in the hearing held on October 27, 1998, we had advised the parties that they should try to settle the disputes amicably by the respondents purchasing the shares of the petitioners' group at ₹ 17.5 lakhs that was agreed earlier together with the payment of interest at 18 per cent. from September, 1996. In the hear ing held on November 16, 1998, it was informed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mehta v. Shree Anupar Chemicals India Pvt. Ltd. [1999] 98 Comp Cas 575 (CLB) ; [1999] 33 CLA 393 (CLB), we held, in the facts of that case in which it was established that the company was in the guise of a partnership, removal of the petitioner as a director was an act of oppression. In the same way in Naresh Trehan v. Hymatic Agro Equipments P. Ltd. [1999] 97 Comp Cas 561 (CLB) in view of the company being a family company, wherein an implied agreement relating to participation of all the shareholders in the management was established, we held that ouster of one of them as a director was an act of oppression warranting winding up of the company on just and equitable grounds. However, in Karedla Suryanarayana v. Ramadas Motor Transport Ltd. [1999] 98 Comp Cas 518 (CLB) we declined to entertain the complaint of removal as a director, since the company was neither a family company nor a company in the guise of a partnership. Even in the cases cited by Shri Naganand, viz., Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhnnwala [1976] 46 Comp Cas 91 (SC) and Mpest Pvt. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615, the Supreme Court has not held that partnership principles should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken on the board as a director. Thus, we find that both equal shareholding and joint management have been ensured. These facts combined with the long personal association between the petitioner and the respondents would prima facie establish that the company has been incorporated with mutual trust and confidence among the shareholders with a view to run it in the form of a quasi-partnership and, therefore, the petitioner is at liberty to challenge his ouster from the management in this petition under Section 397. Learned counsel for the petitioner relied on Synchron Machine Tools P. Ltd. v. V. M. Suresh Rao [1994] 79 Comp Cas 868 (Kar), to advance his stand that the principles enunciated in that case to treat a company as a quasi-partnership are fully satisfied in this case. We do not propose to deal with this case inasmuch as, on appeal, the Division Bench of the said court has held otherwise. 13. The grievance of the petitioner relating to his removal is two fold. One is about the contention of the company that he had ceased to be a director in terms of Section 283(l)(i) read with Section 299 and another is his removal by the general body on December 23, 1996. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice for this meeting. According to the respondents, notices for the extraordinary general meeting and the annual general meeting which was also convened on the same date, were sent to all the shareholders, including the petitioner, in a single envelope to each. The petitioner does not deny receiving this envelope and according to him it contained only the notice for the annual general meeting and no notice for the extraordinary general meeting was found in the envelope. Counsel for the petitioner produced nine unopened envelopes addressed to his group of shareholders with a request that we ourselves should open these covers and see whether the notice for the extraordinary general meeting was enclosed therewith. The said covers were opened and we found that they did not contain the notice for the extraordinary general meeting. According to the respondents, these envelopes had already been opened and had been closed with adhesive tape by the petitioner and that the company never closed the envelopes with adhesive tapes. However, counsel for the petitioner asserted that the envelopes were never opened and had been produced intact. However, he did not elaborate as to why the nine sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, whether the removal of the petitioner as a director is wrong, burdensome and harsh and whether there is an element of lack of probity, have to be examined. 16. It is on record that the petitioner is one of the principal promoters of the company and that he played an important role in taking over the business of ECL Agrotech Division. It is on record that he is one of the promoters of Oriental which is carrying on the same business as that of the company. It is also on record that the business with Heinz has now been taken over by Oriental and that two of the officials of the company along with Shri Bhotika have also joined the new company. While the petitioner has justified incorporating the new company on the ground that there were settlement talks by which the shares of the petitioner would be purchased by the respondents, he has also averred that Shri Bhotika joined the new company of his own volition and that Heinz also started having business transaction with the new company because of the association of Shri Bhotika with the new company. According to the respondents, the entire exercise of incorporating the new company was with a view to take away Heinz. It woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inz. The petitioner had dual responsibilities one to the company as a director and the second, as a partner to the other partners. At the time when he incorporated the new company, he continued as a shareholder as well as a director and as claimed by the petitioner, as the chairman and managing director of the company. While, in law, there is no prohibition, subject to certain conditions, for a person to be a director in two rival companies as held in London and Mashonaland Exploration Co. Ltd. v. New Mashonaland Exploration Co. Ltd. [1891] WN 165, the law is also clear that he cannot breach the fiduciary responsibilities that he owes as a director to any of these two companies. In Scottish Co-operative Wholesale Society Ltd. v Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL) it was held a director cannot subordinate the interest of the first company to those of the second company . In this connection, the observation of the Queen's Bench Division in Island Export Finance Ltd. v. Um Unna [1986] BCLC 460, is relevant, wherein it observed a director's fiduciary duty did not necessarily come to an end when he ceased to be a director. A director was precluded from divert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is prejudicial acts forced the shareholders to remove him as a director and as such we do not find that there is any act of oppression against him or that there is any lack of probity on the part of the majority shareholders. Thus, there is no scope to declare his removal as invalid on the ground that it was an act of oppression. Even though, the petitioner even questioned the factum of holding the extraordinary general meeting and alleged that no extraordinary general meeting was held on December 23, 1996, yet, we are not in a position to hold so, since the respondents have produced all the necessary documents to prove that this meeting was in fact held. If there had been any illegality in his removal for want of notice to him for the extraordinary general meeting, he cannot agitate the same in a Section 397 petition. Therefore this petition deserves to be dismissed. 19. However, we do not propose to do so. In a Section 397/398 petition, even if the petitioner fails to establish the allegations of oppression and mismanagement, as we observed in Ramadas Motor Transport Ltd. 's case (C. P. No. 15 of 1994), relying on Needle Industries (India) Ltd.'s case [1981] 51 Comp Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase is concerned, we do not find any justification to deviate from the general principle for the reasons stated hereinafter. During the year 1995-96, one of the main customers was Heinz. By August, 1997, the petitioner had taken away Heinz which resulted in a substantial reduction in the business of the company. The prayer of the petitioner to take August, 1996, as the valuation date is only to get the benefits of the profits earned during 1995-96. The counsel stressed upon the principle of just and fair when he sought for August, 1996, as the Valuation date. We feel that the petitioner cannot rely on this principle when he himself has not acted in a just and fair manner. If the company had incurred losses on account of the action of the petitioner in taking away Heinz, then he should also share the losses of the company (which would have been in any way made up in his new company). Therefore, adopting August, 1996, as the valuation date would only mean that the petitioner is being rewarded with something that he does not deserve due to his prejudicial acts against the interest of the company. Therefore, we do riot find any justification to deviate from the normal principle of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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