2017 (7) TMI 460 - HC - Companies Law

Dispute between the controlling group and the Natarajan block - directions to the effect that 18.98% of shares owned by the Natarajan block should be purchased either by the controlling group or, by SVG itself - Held that - First, Natarajan was part of the promoter group and not a mere adviser, which is exemplified by the fact that throughout, that is, since 1987, he has been retained as a Director till the conclusion of the AGM of 26.09.2014, irrespective of the form or structure Binny Limited morphed into from time to time. Second, the principle of quasi-partnership or in substance a partnership would apply to the relationship, which subsisted in the first instance, amongst Late Ramasamy, Ethiraj, M.Nandagopal and Natarajan, and after, the death of Ramasamy amongst his son Venkatachalam and the other three gentlemen. Third, Natarajan, admittedly, did not receive any professional fee. He clearly discharged functions as Director entrusted to him, first on behalf of Binny Limited and, thereafter, on behalf of SVG as well. Over the years, it appears from the record, an understanding was reached between the persons referred to above, that they would have a representative each on the BOD of the concerned company/companies, as the case may be. Fourth, though there was clearly no written agreement in place an understanding built on trust had been forged, which required each side to ensure the appointment of the nominee of the other side on the Board of the concerned company. This facet comes through upon examining a long corporate history of nearly 27 years, spanning between 1987 and 2014. The understanding and trust, which had remained steadfast for nearly three decades was breached, when, Natararajan was not renominated to the Board of SVG. Fifth, the nature of the relationship between Natarajan and the controlling group cannot be given a short shrift by labelling it as Directorial complaint . While, in isolation, one cannot, but agree, that corporate democracy and shareholders will must prevail these principles need to be tested in the context of facts and circumstances obtaining in each case. Bereft of context, a grievance regarding failure to obtain renomination to the BOD may seem like a Directorial Complaint. Sixth, the appellants, cannot use the Directorial Complaint argument or even the argument that it is a limited company having public shareholders to deny the Natarajan block its right to sit on the high table, that is, the BOD. When these arguments are put to scrutiny, what does come through, starkly, is that the public shareholders, which approximately, number 9014 are dispersed and, the company, i.e., SVG is run, in substance, like a closely held company by the Controlling group, who hold 55% of the equity stake. It is because of this reason that the Board of SVG could take a decision to allow for use of the Boat Club Property, which is even by a conservative measure, a property worth ₹ 300 Crores, for personal use of Shanmugam, its Managing Director, despite poor financials, or that, a ballot resolution dated 02.05.2015 could be passed giving powers to the Board of SVG to, inter alia, make investments or grant loans to the extent of ₹ 500 Crores, with the potentiality of these facilities being extended to associate entities/companies. As has already been alluded to herein above, while, extension of financial facilities to associate entities/companies, at this stage, can only be construed as an apprehension, it cannot be completely wished away and, therefore, the co-existence of Natarajan with the appellants can only be construed as oppressive, that is, harsh and burdensome and since, appellants are in majority, the oppression could only be on the minority, which includes the Natarajan-block. The failure to reappoint Natarajan on the Board of Directors of SVG is only the beginning of the oppression. Seventh, even if, one were to assume, for the sake of argument, that findings of oppression are not called for, in the instant case, would I, then, reverse the direction issued by the CLB on that score, which, in its own wisdom, has tried to do substantial justice between the contesting parties, by compelling the controlling group to purchase the shares of the Natarajan block. This power, as held hereinabove by me, was rightly exercised by the CLB, save and except to the extent it directed SVG to purchase the shares, upon failure of the controlling group to do so. To my mind, this power was available to the CLB, contrary to what has been argued by the counsels. Therefore, the CLB s endeavour to unlock the asset of the Natarajan block, which has stayed the course along with other co-venturers for nearly three decades, in the given facts and circumstances, does not call for interference, as it is both fair and equitable. Eighth, the deadlock, as indicated above, need not necessarily be an ingredient of 397 and 398 action. It is only one of the circumstances in which, such an action can be brought to Court. Besides, the concept of deadlock need not to be looked at in absolute terms. In my view, any issue, which creates an impediment or a possibility of a logjam in the smooth functioning of the company in the foreseeable future, is an aspect, which ought to be factored in, while examining the tenability of an action instituted under Section 397 and 398 of the 1956 Act. The majority shareholders will always allude to the argument that, since, they have the requisite numbers, whether in terms of shares or members on the Board that they can run the company without a hitch; an argument, if, accepted, would actually mean, that the Court would then give legal credence to the submission that they could run rough shod over the minority. Running of the company requires inclusiveness, which is intrinsic part of any democratic process and cannot, to my mind, be any different, where corporate jurisprudence or governance is involved. Therefore, in substance, find no difficulty in CLB coming to the conclusion that there would be impediments in running the affairs of SVG, as indicated above, and therefore, perhaps, as against the use of the expression practical deadlock , some other expression, which would describe the situation more accurately could have been used. Perhaps, gridlock would better describe such like situations. Based on the foregoing discussion, the appeals are partly allowed, in as much as, the direction issued by CLB vide the impugned judgment dated 10.03.2016 is set aside to the extent, it directs purchase of equity stake of respondent Nos.1 to 6 by SVG. The other direction of the CLB, which requires the controlling group to purchase the shares of respondent Nos.1 to 6 is sustained. Since, CLB had called upon the parties to appoint an independent valuer, pending the disposition of the aforementioned matter, valuation was got done, albeit, without prejudice to the rights and contentions of the parties via Brahmayya & Co., Chartered Accountants. The valuation report was received and opened. It appears that the contesting parties did not have an opportunity to comment on the valuation report. Therefore, for this purpose, I intend to remand the matter to the National Company Law Tribunal, Chennai Branch (in short, NCLT) (in view of the changed statutory position). The parties would appear before the NCLT on 14.07.2017. The NCLT would call upon the parties to submit their objections and, thereafter, come to a conclusion, one way or the other, as to the price, at which the controlling group should be called upon to purchase the shares of respondent Nos.1 to 6. To ensure that there is a compliance, the Controlling group and/or its constituents are injuncted from selling, transferring or creating third party interest, qua their shareholding in SVG, till further orders of the NCLT, and in case, a charge or interest has already created by the controlling group, vis-a-vis their equity stake in SVG, the protem charge so created by this direction will stand subordinated to any such prior charge or interest. SVG is also injuncted from registering or recording any request for transfer of shares which are owned or controlled by Ethiraj and Shanmugam and/or its constituents except with the prior permission of NCLT. Furthermore, pending the completion of the aforesaid exercise, SVG will not transfer and/or create third party interest in its immovable assets.The NCLT would be free to modify and/or vary the protem order and also to seek other forms of solvent security, if, offered by the controlling group, till such time, the equity interest of respondent Nos.1 to 6 is bought over by them, i.e., the controlling group and/or their nominees.

Summary

Issues Involved:
1. Determination of whether Natarajan was merely an adviser or a promoter.
2. Applicability of quasi-partnership principles to SVG, a public listed company.
3. Existence of a deadlock in the management of SVG.
4. Validity of paper ballots cast at the AGM held on 26.09.2014.
5. Legitimacy of the decision to allow the Managing Director to use the Boat Club Property as his residence.
6. Validity of the special resolution passed under Section 372A of the Companies Act, 1956.
7. Determination of oppression and mismanagement.
8. Appropriateness of the CLB's direction to purchase shares of respondent Nos.1 to 6.

Detailed Analysis:

Issue 1: Determination of whether Natarajan was merely an adviser or a promoter
The court concluded that Natarajan was not merely an adviser but a promoter. This was evidenced by his long-standing involvement with the company since 1987 and his continuous role as a director. The court stated, "Natarajan was part of the promoter group and not a mere adviser, which is exemplified by the fact that throughout, that is, since 1987, he has been retained as a Director till the conclusion of the AGM of 26.09.2014."

Issue 2: Applicability of quasi-partnership principles to SVG, a public listed company
The court found that the principle of quasi-partnership could apply to SVG despite it being a public listed company. The court noted, "SVG itself had taken a stand that it was a 'closely held company'." The court emphasized that the relationship among the parties was akin to a quasi-partnership due to the mutual trust and understanding that existed.

Issue 3: Existence of a deadlock in the management of SVG
The court recognized the potential for a deadlock in the management of SVG, stating, "There could arise situations where impediments may emerge, which may ultimately impact the smooth functioning of SVG." The court acknowledged that the relationship between the controlling group and Natarajan had deteriorated, leading to a "practical deadlock."

Issue 4: Validity of paper ballots cast at the AGM held on 26.09.2014
The court held that the casting of paper ballots by the controlling group at the AGM was improper. The court stated, "The controlling group was, clearly, in the wrong in casting their vote in the manner, which was contrary to the procedure prescribed by SVG qua one and all." The court emphasized that the shareholders were informed that voting would be conducted via electronic means.

Issue 5: Legitimacy of the decision to allow the Managing Director to use the Boat Club Property as his residence
The court found that the decision to allow the Managing Director to use the Boat Club Property lacked transparency and proper disclosure. The court stated, "The BOD, at the meeting held on 01.09.2012, failed to make a complete disclosure as to the property, which SVG, intended to give for use to its Managing Director." The court directed SVG to seek ratification from the shareholders regarding this decision.

Issue 6: Validity of the special resolution passed under Section 372A of the Companies Act, 1956
The court acknowledged the apprehension regarding the potential misuse of funds but noted that mere apprehension could not form the basis of an act of mismanagement. The court stated, "The decision to have a postal ballot was taken at the BOD Meeting dated 28.03.2014 and the resolution via postal ballot was passed on 02.05.2014."

Issue 7: Determination of oppression and mismanagement
The court concluded that the failure to reappoint Natarajan to the Board of SVG constituted an act of oppression. The court stated, "The fact that respondent Nos.1 to 6 are not represented on the Board of SVG, on account of the appellants voting against Natarajan's reappointment, would be, in the given circumstances, prejudicial to their interest, and hence, constitute an act of oppression."

Issue 8: Appropriateness of the CLB's direction to purchase shares of respondent Nos.1 to 6
The court upheld the CLB's direction for the controlling group to purchase the shares of respondent Nos.1 to 6 but set aside the direction for SVG to purchase the shares. The court stated, "The direction should have been restricted to the controlling group, and that, it ought not to have extended it to SVG."

Conclusion:
The appeals were partly allowed, modifying the CLB's direction by setting aside the requirement for SVG to purchase the shares of respondent Nos.1 to 6. The matter was remanded to the National Company Law Tribunal (NCLT) for determining the price at which the controlling group should purchase the shares. The controlling group was injuncted from transferring their shares in SVG until further orders from the NCLT.