BEFORE THE COMPANY LAW BOARD
ADDITIONAL PRINCIPAL BENCH
CHENNAI
C.P. No.57/1998
Present: 1.
Shri S. Balasubramanian, Vice-Chairman
2. Shri K.K.Balu, Member.
IN THE MATTER OF
COMPANIES ACT, 1956 (1 OF 1956)
SECTION 397/398
AND
IN THE MATTER OF M/S
ULTRAFILTER (INDIA) PRIVATE LIMITED
PETITIONERS:
RESPONDENT:
ULTRAFILTER GMBH
PRESENT ON BEHALF OF PARTIES:
1. Shri
K.G.Raghavan, Advocate ...
for Petitioners.
2. Shri S.S.
Naganand, Advocate ... for Respondent.
O R D E R
(DATE OF HEARING:
08.06.2001)
S.
BALASUBRAMANIAN:
1. The
second petitioner holding 51.82 per cent shares in M/s Ultrafilter (India)
Private Limited (“the Company”) has filed this petition alleging acts of
oppression and mismanagement against the respondent holding 26 per cent shares
in the Company. The facts of this case
are that this Company was incorporated by the first petitioner in December,
1985 for manufacture of filter equipment.
The Company and the respondent entered into a ‘Technical Collaboration
Agreement’ on 17th February, 1986 by which the respondent was to
provide technical know how and assistance for manufacture of industrial filters
by the Company. Thereafter a
‘Shareholders Partnership Agreement’ was entered into between the respondent
and the second petitioner by which the respondent was to subscribe to 26 per
cent shares in the Company for a sum of Rs.7.8 lakhs. This agreement also provided that the Company would enter into a
‘Name Protection Agreement’ a ‘Distributor Agreement’, a ‘Trade Mark Registered
User Agreement’ It also provided for
amendment to the Articles of the Company.
Pursuant to this agreement, Articles were amended providing for
requirement of special resolution on certain matters, appointment of one-third
of the directors by the respondent, requirement of affirmative votes by the
nominees of the respondent in the board meeting on certain matters, providing
for quorum only in the presence of at least one nominee of the respondent in
the Board meeting. The respondent
acquired 26 per cent of the shares in the Company. While ‘Distributors Agreement’ was entered into, the other two
agreements, namely, ‘Name Protection Agreement’ and ‘Trade Mark Registered User
Agreement’ were not entered into. The
‘Technical Collaboration Agreement’ provided for expiry of the agreement by
16.02.1991 with a provision for premature termination by either of the parties. The Company started manufacturing
ultrafilters in the name and style of “Ultrafilter” which is a trade mark of
the respondent. Since the concept of
using ultrafilters developed gradually into the use of filters along with
dryers, the Company started manufacturing Dessicant type dryers to be sold
along with the filters manufactured by it.
As far as the other type - Fridge Dryers are concerned, they were being
imported. For the purposes of selecting
a suitable fridge dryer, the Company consulted the respondent and on its
recommendation, the Company started importing Fruilair dryers of Italy for
being sold along with the filters manufactured by the Company. A competitive dryer manufactured by Sabroe
was being marketed by one M/s Pace Equipment, Bombay. Thus there was a competition between the Company using its own
filter with Fruilair dryers and Pace Equipment marketing other filters along
with Sabroe dryers. In the meanwhile,
the respondent acquired M/s Sabroe. The
respondent also evinced interest in acquiring controlling interest in the
Company and certain negotiations had been taking place between the parties, but
without any fruitful result. By a
letter dated 20th October, 1997 (Annexure-17) the respondent advised
the Company that the ‘Technical Collaboration Agreement’ had come to an end on
16th February, 1991 and as such Company should not use the word
“Ultrafilter” in any of the products manufactured by the Company under the
‘Technical Collaboration Agreement’.
Through this letter, the respondent also issued a notice of termination
of ‘Trade Mark Registered User Agreement’ as on 1st December,
1998. Thereafter, certain negotiations
had been going on between the parties without any fruitful results and hence
this petition has been filed by the petitioner seeking to restrain the
respondent from interfering with the affairs of the Company, restraining the
respondent from any act which would be in competition directly or indirectly
with the business of the Company, restraining the respondents from claiming any
right or do any business in India under the name and style of “Ultrafilter”
either as a trade mark as a part of corporate name in India and also for
deletion of the Articles which were inserted by virtue of the Shareholders
Agreement.
2.
Shri
Raghavan, Advocate appearing for the petitioners submitted that the relationship
between the second petitioner and the respondent is in the nature of a
partnership and it is not a relationship between a shareholder and a
shareholder. Since the Company is in
the nature of a partnership, each partner owes a higher degree of duty not only
to the other partner but also to the Company.
Only by piercing the corporate veil, the real relationship between the
parties would emerge and it will show that the association between the
petitioner and the respondent is nothing but a pure partnership. This being the case, neither in law nor in
equity, a partner can commence or carry on competing business with the
Company. Even the title of the
Agreement between the parties at Annexure A-4 is styled as ‘Shareholders
Partnership Agreement’. A reference to
Annexure R-13 would indicate that even while considering amendment to the
Articles, the stand taken by the respondent was that its interest should be
protected as a partner in the joint venture company. All these facts would squarely indicate that the principles of
partnership be applied in deciding the disputes between the parties in the
present petition. He further argued
that having successfully implemented the project and finding that the Company
was doing well, the respondent decided to gain control of the Company by
seeking to increase its shares to 51 per cent as is evident from Annexure R-1,
wherein a threat had been given to the second petitioner that in case the
respondent is not allowed to increase its share to 51 per cent, it would be constrained
to form a new company to manufacture the products presently manufactured by the
Company. Since the second petitioner
was not inclined to agree for increasing the shareholding percentage of the
respondent, it has started putting
spokes in the functioning of the Company.
One way of doing was to force the Company to sell Sabroe dryers along
with the filters manufactured by the Company.
This is notwithstanding the
fact that M/s Pace Equipment who are competitors to the Company is having
collaboration with M/s Sabroe.
Unfortunately, since the respondent has acquired M/s Sabroe, it has
started supporting Pace not only in spirit, but also in deed as conveyed in its
letter at Annexure A-13. The respondent
being a partner should be more interested in the better performance of the
Company than supporting M/s Pace Equipment with which the respondent does not
have any capital commitment. This will
be in complete violation of the fiduciary duties that the respondent owes to
the Company and the shareholders. As a
matter of fact, the respondent even cautioned the second petitioner not to
compete with Pace Equipment in taking part in tenders as is evident from
Annexure A-15. The second petitioner
vide his letter dated 23rd October, 1997 (Annexure A-18) brought to
the notice of the respondent that the Company started marketing Friulair dryers
only on the recommendation of the respondent and that since Sabroe dryer was
very expensive it would not be in a position to market the dryer. However, with a view to put an end to the
stalemate, the second petitioner wrote a letter to the respondent on 20th
November, 1997 (Annexure A-21) suggesting that while the Company would market
filters along with Sabroe dryers, the Pace Equipment should also market only
the filter manufactured by the Company along with Sabroe dryers. This suggestion was not acceptable to the
respondent. Instead the respondent
informed the second petitioner by its letter dated 19th May, 1998
(Annexure A-22) that it would establish, in India, a strong “Ultrafilter made in Germany” by 1st January,
1999, whatever effort and cost it may take.
Thus, it is very clear that the respondent is more interested in
furthering its own interest rather than the interest of the Company. Under these circumstances, the second
petitioner wrote a letter to the respondent bringing out the various acts of
dereliction of fiduciary duties by the respondents and suggested that to put an
end to the disputes the petitioner would be willing to purchase the shares held
by the respondent on a value to be determined in terms of Article 10(g) of the
Articles of Association of the Company.
However, the respondent was not agreeable to this suggestion.
3.
Though
the parties have resolved to end the controversy at the Board meeting held on
12.10.98, the respondent started to enter into competition with the Company.
The respondent by its letter dated 20.10.98 (Annexure A-25) has clearly
expressed its intention to establish its own subsidiary in India so as to
market its products including filters made in Germany. This act of the respondent, according to
Shri Raghavan is contrary to its obligations of good faith and fair dealings
and not justified by a partner. He
pointed out that the dispute in relation to trade mark issue is the subject
matter of a civil suit at Bangalore. In
spite of the interim order passed by the CLB, the respondent caused
advertisements inviting distributors in India for its products. Shri Raghavan emphasised that the conduct of
the respondent in having business dealings with a competitor of the Company,
insisting the Company to promote the business of the competitor and persuading
the customers of the Company not to have business dealings with the Company are
harsh, wrongful and burdensome acts of oppression by the respondent and
attracting the provisions of 397/398.
He further emphasised that the respondent should not pursue its business
in competition with the Company, unless it ceases to be a member of the
Company. Shri Raghavan, has, therefore,
sought for the relief sought in the petition. Shri Raghavan, in support of his
above contentions, relied on the following decisions:-
(i)
In Re: London School of Electronics Limited – (1985) BCLC
273 – “While granting the remedy in favour of
the petitioners against oppression of minority shareholders, the Court ordered
purchase of shares by the petitioner for the value as of the date of the
presentation of the petition.”
(ii)
Boyle & Birds’ Company Law III Edition – “There is a school of thought
that the Courts should regard their jurisdiction under Section 459
(corresponding to Section 397 of the Indian law) in the widest possible way,
but that they should preserve a unfettered discretion in deciding, in
particular cases, whether the interests of a petitioning member have in fact
being unfairly prejudiced. In a
quasi-partnership type company, the Court may take account of legitimate
expectations of members.”
(iii)
Scottish Co-operative
Wholesale Society Ltd. Vs. Meyer and Another – (1959) XXIX CC 1 - “The Court will grant appropriate
remedies when the affairs of the Company are conducted in a manner oppressive
to the members, if the Court is of the opinion – (a) that the company’s affairs
are being conducted as aforesaid; and (b) that to wind up the company would
unfairly prejudice that part of the members, but otherwise the facts would
justify the making of a winding-up order on the ground that is was just and
reasonable that the company should be wound up, the court may, with a view to
bringing to an end the matters complained of, make such order as it things fit,
whether for regulating the conduct of the company’s affairs in future, or for
the purchase of the shares of any members of the company by other members of
the company, or by the company, and, in the case of a purchase by the company,
for the reduction accordingly of the company’s capital, or otherwise.”
(iv)
Jaldu Anantha Raghurama Arya Vs. East Coast Transport and
Shipping Co. (Private) Ltd. – (1958) XXVIII CC 20 - “The Court came to the conclusion that it was just and equitable
to wind up the Company in view of the fact that one of the shareholders was
actively engaged in promoting interests of a firm which was conducting a
similar rival business.”
(v)
Lindley on Partnership (14th Edition) – “The utmost good faith is due from every member of a partnership
towards every other member; and if any dispute arises between partners touching
any transaction by which one seeks to benefit himself at the expense of the
firm, he will be required to show, not only that he has the law on his side,
but that his conduct will bear to be tried by the highest standard of honour.”
(vi)
Needle Industries (India) Ltd. Vs. Needle Industries Newey
(India) Holdings Ltd.
(vii)
In Re Elgindata Ltd.: [1991] BCLC 959 – “In general members of a
company have no legitimate expectations going beyond the legal rights conferred
on them by the constitution of the Company, i.e., to say its memorandum and
Articles of Association. Nonetheless
legitimate expectations super imposed on a member’s legal rights may arise from
agreements or understandings between the members.
(viii)
Re a company (No 005685 of 1988), ex parte Schwarcz (No 2)
and Re a company (No 002015 of 1996) – “The Court will grant
appropriate reliefs where an abuse of the rules was established on the facts
and the court would exercise its discretion to make what order it thought was
fair and just in all the circumstances of the case.”
(ix)
Chander Kishan Gupta Vs. Mannalal Giridhar Lal (1984 55 CC
702) – It has been held that the affairs of
the Company must be carried on in a manner which would help the Company
prosper. The infighting among the
directors would adversely affect the company’s business. This would attract Section 398.
(x)
Atmaram Modi Vs. ECL Agrotech (1999 98 CC 463) it is held that a partner should not carry on any business in
competition with the firm. In the
course of business of a partnership, a partner is entitled to have certain
legitimate exceptions as has been held in Elgindata Ltd (1991 BCLC 959) and
Re a Company (1997 2 BCLC 1).
(xi)
The Partnership
Act, 1932
provides that a partner has a duty to carry on the business of a firm to its
common advantage and if a partner carries on the same nature of business shall
account for the profits made by him in such business.
(xii)
Yendije’s case, 1916 2 Ch 426 - “If a private Company could be fairly
called a partnership in the guise of a private Company then the things which
might be a ground for dissolution of a partnership will apply also in the case
of a private Company and that in this connection deadlock will not be material.”
4.
Shri S.S.Naganand,
Advocate appearing for the respondent submitted: Even though the complaints of
the petitioner relate to trade mark, attempt of the respondent to gain control
of the Company, allegation of carrying on competing business in India and
termination of the ‘Technical Collaboration Agreement’ etc. the real issue is
regarding use of the trade name and mark “Ultrafilter” by the Company. In regard to this the respondent has already
initiated civil suit in OS 54 of 1999 in Bangalore. Therefore, no effective decision in this controversial issue
could be given by the CLB.
5.
On merits of the
case, he submitted: As far as the complaint of the second petitioner regarding
attempt of the respondent to gain control of the Company is concerned, it is to
be noted that the increase in the shareholding was being discussed between the
parties right from 1992. As a matter of
fact a telex sent by the second petitioner to the respondent on 1.3.92 reads: “I
am pleased to inform you that we are agreeable to give you 51 per cent
shareholding in Ultrafilter (India) Private Limited generally in accordance
with the terms agreed to on 21.02.92.
Later he informed the respondent that due to difference of opinion among
his family members he could not take further action in increasing the share
capital of the respondent. Therefore,
it is wrong to suggest that the respondent, on its own, tried to force the
petitioner to offer 51 per cent shares in the Company. A reference to the letter of the respondent
dated 20.04.1993 (Annexure R-41) would indicate that the intention of the
respondent even after getting 51 per cent shares in the Company was to continue
as a partner with the second petitioner with a common objective rather than
being a competitor. The letter at Annexure
A-17 is not a threat given to the second petitioner, but with a view to promote
the Company with a higher shareholding.
Therefore, the allegation that in view of the second petitioner refusing
to allow the respondent to acquire 51 per cent shares has caused the
termination of the agreement, s not correct.
6.
In regard to the allegation that the respondent has started competing
with the business of the Company is concerned, a perusal of the sequence of
events would show that the second petitioner has been adamant, without any
justification in not selling Sabroe dryers with the filters manufactured by the
Company. Since even though the
respondent suggested Friulair dryers earlier, since it had acquired Sabroe, it advised the second petitioner to market
these dryers along with the filters manufactured by the Company. The second petitioner had not adduced any
reason as to why this proposal could not be accepted. Further, seeking the Company to market a product could never be
considered to be competing business of the Company since the respondent has not
sought the Company to market filters produced in Germany, in which case, the
second petitioner could have a grievance.
Further, the second petitioner never brought this issue before the
Board, as it is for the Board to decide, taking into consideration the
available source for dryers and take a commercial decision on the basis of the
viability. Instead, without bringing the matter before the Board, the second petitioner has been acting on his
own to decide as to which dryers should be used with the filters manufactured
by the Company. Therefore, there is no
basis for this allegation that the respondent is competing with the business of
the Company and thus acted in breach of its fiduciary duties.
7.
As far as
termination of the agreement is concerned, Shri Naganand submitted: The
‘Technical Collaboration Agreement’ entered into on 17th February,
1986 had a currency of only five years.
Further the agreement also provides for termination of the agreement by
giving 90 days notice. Therefore, the
currency of the terms of this agreement came to an end in 1991. The petitioner never questioned the terms of
agreement till this petition was filed.
As a matter of fact, when the ‘Name Protection Agreement’ was terminated
by the letter dated 20th October, 1997, the second petitioner never
questioned this in his letter dated 23rd October 1997 (Annexure
A-18). This has been challenged only in
the petition. Further, the second
petitioner himself has started another company to manufacture filters which are
presently manufactured by the Company and as such it is the second petitioner
who has acted in breach of his fiduciary duties to the Company. Presently, after the dispute started, the
respondent has started manufacturing filters but not those which are being
manufactured by the Company.
8.
In regard to the
claim of the petitioners that the Company is in the nature of a quasi
partnership, Shri Naganand submitted that this principle is to be applied only
in case of dissolution of a partnership and not to a Company. In the present case, just to get out of
contractual obligation, the petitioner has filed this petition invoking the
principles of partnership when the respondent had acted in terms of the
contract, such exercise can never be oppressive to a shareholder. Even though, the petitioner has contended
that the respondent has veto powers in terms of Articles, yet so far the
respondent has not used the veto power.
None of the cases cited by the learned counsel for the petitioner in
relation to application of partnership principles could apply in the present
case since the respondent being in minority could never oppress a majority
shareholder who is actually in control of the Company. In Kilpest Private Limited Vs. Shekhar
Mehra (1996 87 CC 615), the Supreme Court has held that the
principles of partnership can be invoked only in rare cases and the Delhi High
Court in Smt. Abnash Kaur Vs. Lord Krishna Sugar Mills Limited (1974 44
CC 391) has held that the principles of partnership could be
applied only in cases of deadlock. The
Gujarat High court also in Re: Atul Drug House Limited (1971 41 CC 352) has held
likewise. In the present case, the
petitioner has not either averred or established that there had been deadlock
in the management of the Company.
9.
Shri
Naganand has also submitted that in deciding a Section 397 petition, the
conduct of the parties has also to be taken into account. It was the petitioner who agreed for 51 per
cent shares for the respondent, yet when the respondent sought for increasing
the shareholding, the petitioner has sought to make a complaint of the same in
the petition. Since the relief under
Section 397 is equitable in nature, the conduct of the parties are also to be
taken into account as held in Srikanta Dutta Narasimharaja Wadiyar Vs.
Sri Venkateswara Real Estate Enterprise (Pvt.) Ltd. (1991 71 CC 211 Karnataka). On the same proposition he also relied
on Jagannath Gupta & Company Private Limited Vs. Mulchand Gupta (39
CC 262).
10. He
pointed out that the second petitioner holds majority shares in the Company and
therefore he should have settled the dispute in the domestic forum rather than
coming before the CLB. In regard to
Trade Mark, he referred to the decision of Delhi High Court Baker Hughes
Limited Vs. Hiroo Khushalani (1998 PTC (18) Delhi). In that case, as per the agreement, the Trade
Mark could be used only as long as the petitioner held 40 per cent shares in
the Company. When the petitioner had
reduced its shareholding below 40 per cent and when the Company continued to
use the trade mark, the Delhi High Court granted injunction against using the
trade mark by the Company. In the
present case, since the agreement stands terminated and has come to an end, the
petitioner cannot use the trade mark “Ultrafilter” in any of its product.
11.
Summing
up his arguments, Shri Naganand submitted that the petitioners have not made
out any ground which would justify the winding up of the Company on just and
equitable grounds, which is a mandatory in the light of the decision of Apex
Court in Anuman Prasad Bagri case – 2001 (105) CC
493. The
petitioners being majority shareholders cannot invoke any remedy under Section
397/398, especially when the remedies are available only to the minority
shareholders. In this connection, he referred to the decision of Delhi High
Court in Suresh Kumar Sanghi Vs. Supreme Motors Ltd. – (1983) 54 CC
235. He further referred to various decisions where right of majority
to apply under Section 397/398 has been recognised, which according to him are
not applicable to the facts of the present petition. He further submitted that the petition is bad for non-joinder of
necessary parties, namely M/s Pace Equipment and Sabroe. The respondent called
upon the petitioners by its letter dated 20.10.97 not to use the name “ultra
filter” whereas the petition has been filed in October, 1998. The petition has been filed after a delay of
one year of notice of termination issued by the respondent. He further pointed that the petitioners
deliberately fudged the Articles of Association omitting recitals having
bearing on the petition, which disentitles the petitioners who claim equitable
remedy before the Company Law Board. Shri Naganand pointed out that the petitioners
have not proved any act of oppression by the respondent. According to him, no
act of oppression has either be alleged or proved. The only controversy is in regard to the use of trade name “ultra
filter” in respect of which a civil suit is already pending. He further pointed
out that there is no mismanagement alleged against the respondent. Moreover, the second petitioner and his
group holding majority of shares are in the management of the Company. The action of respondent in having
terminated the “Name Protection Agreement” cannot be construed as an act of
oppression or mismanagement. The
respondent exercised his right envisaged in the “Name Protection
Agreement”. Merely because the Name
Protection Agreement has not been signed, it cannot be construed that there has
been no concluded contract as has been held in AIR 1968 SC 1028 – Kallipora
Sriramulu Vs. Aiswatha Narayan. Further, there is no prohibition on the part of a director to
compete with the business of the Company for which he placed reliance on the
decision of the Court of Chancery in England in London and
Mashoraland Exploration Co. Ltd. reported in (1891) WN 165. He further referred to Article
4.1 of the Shareholder Partnership Agreement which only regulates the transfer
of shares held by the respective shareholders.
Articles do not restrain the shareholders from carrying on competing
business in India. Even otherwise such
an agreement cannot be enforced by virtue of Section 27 of the Indian Contract
Act. He, therefore, sought for dismissal
of the petition.
12. In his reply, Shri Raghavan submitted that
Article 43 of the Articles of Association refers only to the “Shareholder
Agreement” which was entered into on 16th October, 1986 and not to
the “Name Protection Agreement” entered into on 17th February,
1986. Therefore, as long as the
‘Shareholders Agreement’ is not terminated, the Company can continue to use the
trade mark “Ultrafilter”. He also
pointed out that as per the recent Government Guidelines, no foreign
collaborator can start a competing business against the joint-venture company
without government approval and that too without the consent of the Indian
partner. Therefore, as long as the
‘Shareholders Agreement’ continues, the respondent cannot start any competing
business in India. In regard to the
contention that partnership principles can be applied only in case of a
deadlock, Shri Raghavan pointed out that in Needle Industries case,
the Court has held that a partnership can be dissolved once it is established
that there is a breach of utmost good faith by a partner. Therefore, when a company is established
based on mutual trust and confidence, which is breached, then the principles of
partnership could be applied. In regard
to the decision of the Supreme Court in Bagress Cereals Private Limited case
cited by the Counsel for the respondent, Shri Raghavan submitted that in Needle
Industries case (AIR 1981 SC 1298) which was decided by a three-judge Bench, at
paragraph 171, it was held that even if acts of oppression are not established
such technicality cannot be permitted to defeat the exercise of equitable
jurisdiction conferred by Section 397.
Therefore, the decision in Bagress Cereals by a division bench cannot over rule a
decision of a three-judge bench and therefore the principle of stare
decesis would be applicable.
Further, in the present case, the petitioner has clearly established
acts of oppression and therefore, the Company Law Board can, in exercise of its
equitable jurisdiction, pass appropriate orders to put an end to the acts of
oppression complained of.
13. We have considered the pleadings and arguments of
the Counsel. This is a peculiar case
wherein the Company itself has been arrayed as a petitioner. In terms of Sections 397/398, it is only the
members fulfilling the requirements of Section 399 have the right to allege
oppression and mismanagement and the Company can never file a petition in terms
of these Sections. As a matter of fact,
we also find that there is no board resolution authorizing the Company to file
this petition. Therefore, we are
considering this petition as one filed by the second petitioner alone.
14. The petitioner has invoked the principles of
partnership to advance his case of oppression and mismanagement in the affairs
of the Company. There is no readymade
yardstick to determine as to when a company could be considered to be in the
nature of a partnership. Normally, when
two or more persons join together to form a company, the presumption is that
they have agreed to abide by the discipline applicable to a company in terms of
the provisions of the Act and the Articles and very rarely the principles of
partnership could be applied as has been held by the Apex Court in Kilpest
case (supra). The learned
Counsel for the respondent submitted that deadlock is one of the important
criteria to consider a company as that of a partnership. In Vijay Kishan Jaitka Vs. Jaitka
Motor Company Limited (1997) 1 CLJ 268, this Board, after examining
various cases, came to the conclusion that to treat a company as that of a
partnership, there is no need for equality in shareholding, deadlock etc. These aspects were also considered by this
Board in Deepak Mehta Vs. Shree Anupar Chemicals Private Limited case
and it was held that if the facts and circumstances would show, on piercing the
corporate veil, that the real structure of a company is that of a partnership,
then the principles applicable to dissolution of partnership could be applied
in case of a company also. This Board
has been taking a view that in closely held family companies or companies where
there are a few identical groups of shareholders with a right to participate in
the management, the principles of partnership could be applied. In the present case, admittedly there are
only two groups of shareholders and both have joint management in terms of the
Articles. As a matter of fact, even
though the respondent holding only 26% shares is in the minority, it has veto
powers in the board meetings. Further,
as rightly pointed out by Shri Raghavan, even the shareholder agreement has
been termed as “Shareholder Partnership Agreement”, evidencing the fact that
the intention of the parties had been to carry on the business of the Company
as that of a partnership. Therefore, we
have no hesitation to hold that the Company is nothing but a glorified
partnership between the petitioner and the respondent.
15. Once we have held that the company is in the
nature of partnership, we have to examine, on the basis of the allegations, as
to whether the respondent has breached its duty of utmost good faith towards
the other partner and whether its conduct is of the highest standards expected
of a partner.
16. The complaints of the petitioner relate to the
attempt of the respondent to gain majority shares in the Company, forcing the
Company to deal with Sabroe dryers and their putting fretters in the free
commercial functions of the Company, termination of the “Name Protection
Agreement” and entering into competing business with the Company.
17. In regard to the alleged demand of the respondent
that its shareholding should be increased to 51 per cent and beyond, we find
that the negotiations in this regard had been going on from 1992 onwards and it
appears that even the petitioner was willing to give 51 per cent shares in the
Company to the respondent which offer it appears had been withdrawn later. We find from Annexure R-41 which is a letter
dated 20.4.93, that the respondent had expressed its disappointment over the
refusal of the petitioner to increase the respondents’ holding to 51 per cent
and in the same letter we also find that the respondent had cautioned the
petitioner that in view of this the respondent might have to establish a new
company. However, in the last paragraph
of the letter, the respondent has also indicated that reconsideration of the
proposal by the petitioner would bring out a strong bond between them. For about five years, it appears, that
neither of the parties had raised the issue again. By a letter dated 20th March, 1997 (Annexure A-11) the
respondent had indicated that if no agreement was reached for the respondent to
increase the share capital to 51 per cent, new agreement should be proposed,
discussed, agreed and signed. Then,
again by a letter dated 29th October, 1997 (Annexure A-19), the respondent
suggested that it could acquire 76 per cent shares in the Company. By the time the disputes relating to
marketing of Sabroe dryers had started.
From the sequence of events, even though the respondent had cautioned
that it would start a separate company as early as in 1993, yet its initiation
of proposal of majority control in 1997 appears as a fall-out of disputes
relating to marketing of Sabroe dryers.
In other words, we do not find support to the allegation of the
petitioners that the termination of the agreement is a fall-out of the
petitioner’s refusal to allow the respondent to acquire majority in the
Company. Any way as things stand today,
there have been no change in the shareholding in the Company and mere
expression of desire to gain control of the Company cannot be considered to be
an act of oppression, especially when the sequence of events show that an issue
which was dormant for five years gained momentum only after other disputes had
started between the parties.
18. In so far as the allegation of the petitioner
that the respondent, unmindful of the commercial interest of the Company,
insisted on marketing Sabroe dryers is concerned, we find from letter dated 14th
March, 1996 (Annexure A-8) that the respondent, while informing the petitioner
that since M/s Sabroe of Germany had established production facilities in India
for manufacture of dryers, the Company may not be in a position to compete with
them for dryers and as such had given a list of alternate resources and the
Company has chosen to market the dryers manufactured Fruilair of Italy. Between
this period and February, 1997, the respondent is stated to have acquired M/s
Sabroe of Germany. From the letter of
the petitioner dated 18th February, 1997 at Annexure A-10, we find
that the petitioner had expressed his apprehension that the acquisition of
Sabroe which has a collaboration with Pace Equipment which is competing with
the Company would give an advantage to M/s Pace Equipment. Again, by another letter 22nd
March, 1997 (Annexure A-12), the petitioner has advised the respondent not to
enter into any other business association with Pace Equipment, which if done
so, would be detrimental to both the petitioner and the respondent. In its letter dated 19th March,
1997 (Annexure A-13), the respondent had stated that it would honour the
agreement between Sabroe and Pace not only in spirit but also in deed and it
had also suggested that the Company should instruct its staff to support the
efforts of Pace rather than enter into competition on fridge dryers. Again, by a letter dated 9th
April, 1999 (Annexure A-15), the respondent had expressed its commitment to M/s
Pace Equipment and has also advised the petitioner not to compete against Pace
with fridge dryers.
19. While, after having acquired Sabroe, the respondent who was
reluctant earlier to promote Sabroe dryers could not be faulted for insisting
the Company to market Sabroe dryers, yet we feel, by doing so, the respondent
has given certain advantage to M/s Pace which was marketing some other filter
along with Sabroe dryers. Even though,
the Company is not manufacturing dryers and as such asking the Company to
market Sabroe dryers cannot be considered to be against the interest of the
Company, in all fairness, respondent should have also ensured that the filters
manufactured by the Company are also marketed by M/s Pace. By this, not only the respondent would have
been benefited as it had acquired Sabroe, the Company also could have benefited
by the marketing of the filters manufactured by the Company by M/s Pace. The respondent has not adduced any
justification as to why it could not have requested Pace to market the filters
manufactured by the Company along with Sabroe dryers. As a matter of fact, we find from the letter of the Petitioner at
Annexure A-21 dated 20.11.97 that he himself had suggested that while the
Company would market Sabroe dryers along with the filters manufactured by the
Company, the respondents should also ensure that Pace also marketed Sabroe
along with the filters manufactured by the Company. Even though, it may appear that there will two competitors for
the same product yet such a competition for the same product is not something
unknown. While it is a fact that the
Company has not been in any way affected by the insistence of the respondent to
market Sabroe dryers, the reluctance on the part of the respondent to ensure
that Pace also marketed the filters manufactured by the Company has deprived
the Company of part of the benefit.
Under these circumstances, we are of the view that the petitioner is
justified in complaining that the respondent has not acted in a manner which is
beneficial to the interest of the Company.
However, we also note that the contention of the Counsel for the
respondent that the petitioner should have placed this matter before the Board
of Directors for taking a commercial decision on this issue. However, considering the relationship
between the parties and their attitude in this regard, we do not consider this
lapse as a material. Reliance of the
learned Counsel for the petitioner on Lindley
on Partnership (14th Edition)
that a partner cannot
seek benefit at the instance of the firm cannot be straight away applied in
this case, in as much as the petitioner has not given any details as to how the
respondent sought to derive benefit at the cost of the Company in seeking
marketing of Sabroe dryers of the Company.
20. Even though there was no allegation in the
petition that the respondent had started a business in competition with the
Company, yet when CA 253/98 was filed with certain documents indicating that
the respondent was intending to start competing business with the Company, this
Bench passed an order on 27.10.98 restraining the respondent from doing any act
which would be in competition with the business of the Company either in filter
business or in dryer business, either singly or through any other agency. Even now this order continues. While the learned Counsel for the petitioner
produced certain documents to show that the respondent is directly
participating in tenders for products manufactured by the Company, the stand of the respondent is that since
the term of the “Shareholders Agreement” has come to and end, the respondent is
not bound by the terms of the agreement, but even otherwise, the respondent is
not engaged in the business of any of the products manufactured by the
Company. The reliance of the Counsel
for the respondents on London and
Mashoraland Exploration Co. Ltd. case does not assist the respondent in
as much as in the present case we are examining the conduct of the respondent
as a partner. The respondent having
veto powers in major decisions of the Company cannot compete with the business
of the Company. However, we also note
the allegation of the respondent that the petitioner himself has started
another company to manufacture products similar to that of the Company. If the allegations of both the parties
against each other is correct, it would mean that both of them have breached
the doctrine of utmost good faith towards each other, thus, ultimately putting
the interest of the Company in jeopardy.
21. Now that we have held that insistence of the
respondent that the Company should market Sabroe dryers is against the interest
of the Company and that by starting competing business with the Company by both
the sides, the interest of the Company has been affected, the relief to be
granted should protect the interest of the Company. In case of a partnership, all the partners should exhibit utmost
good faith not only to each other, but also in case of a quasi-partnership
company to the Company also. The
proceedings before us have brought out very clearly that in view of the
strained relationship between the parties, as is evident from the fact that in
spite of having given sufficient time to the parties to resolve the disputes
amicably, they have not been able to arrive at a settlement that they cannot
see eye to eye on any issue concerning the affairs of the Company. This is a case wherein a majority alleges
oppression against the minority and this minority has protective provisions in
the Articles. The learned Counsel for
the respondent heavily relied on Bagress
Cereals case to contend that to seek any relief, the petitioner should
be in a position to show that the Company is liable to be wound up on just and
equitable grounds and that such winding up would be prejudicial to his
interest. It is to be noted that in
that case, the Supreme Court finding that no act of oppression had been
established also held that for a relief under Section 397, the petitioner
should satisfy the Court that the Company is liable to be wound up on just and
equitable ground and such a winding up would not be in its interest. In that case, the issue relating to quasi
partnership was not before the Court.
The ground for dissolution of partnership on just and equitable grounds
are wider than those for winding up of a company on just and equitable
grounds. This aspect has been examined
in detail in Anupar Chemicals case. In the present case, we have already held
that the principles of partnership could be applied. The relations between the two parties has become so sour that
they cannot carry on the business of the Company together and if so that itself would be a very valid ground for
winding up of the Company on just and equitable ground. Therefore one of the parties has to go out
of the Company. In the present case, as
has been held in number of cases, it is the minority shareholder, being the
respondent, who should go out of the Company on receipt of fair consideration
for its shares. Accordingly, in terms
of Section 402 of the Act, we direct the petitioner/Company to purchase the
shares held by the respondent on a fair value to be determined by the statutory
auditors of the Company on the basis of the Balance Sheet as on 31.3.1999 being
the proximate date of the petition. The
statutory auditor will compute the fair value of the shares within a period of
three months from the date of this order and the value so computed shall be
binding on both the parties. On
determination of the value, in case the second petitioner/his group is willing
to purchase the shares held by the respondent, they should pay the consideration within six weeks
thereafter. Otherwise, the Company
will purchase the shares and reduce the
share capital of the Company to the extent of the face value of the shares.
22. With the above directions, this
petition is disposed of with no order as to cost.