2019 (6) TMI 573 - AT - Companies Law

Oppression and Mismanagement - termination of the Franchise Agreement - non-competing agreements - Appellant stated that the 2nd and 3rd respondent have attempted to ride on the goodwill and reputation of the Appellants by representing themselves as Ex-Director TIME and 2nd and 3rd respondent issued various advertisement for promotion of 4th respondent. HELD THAT - Once it has been accepted by the appellant and the respondent that when this franchise agreement is terminated it will be unreasonable restriction on the part that one party will be restrained not to do anything which is similar to the appellant company, especially when no consideration has flown from appellant company and the respondent nor even there has been any agreement to either purchase or sell shares in the 1st respondent by both group of shareholders. We have also noted non-competing Clause at Para 43 Page 98, that the appellant has reserves its rights to directly or indirectly engage, invest or participate in or provide assistance to any person or entity which competes with the company in India or abroad. After the termination of the franchisees agreement, 1st respondent company being reduced to virtually defunct company, restrictions on 2nd and 3rd respondent would not be justifiable. At the time of these advertisements it has been noted already termination of the franchise agreement has taken place and it has also been accepted w.e.f. 25.4.2012 by the appellant company. After this position has been accepted, the right of the persons to use the word Ex-Director cannot be denied as it would represent their experience as well. Therefore, we do not see that there is enough ground to object to use of the word Ex-Director . We see no irregularity in this matter. In any case, it can not be matter for consideration for consideration of question of oppression. In the absence of any supporting documents for a huge amount of ₹ 10 crores, the demand of the appellant is illogical. It could only be a wild guess for a loss. Having noted that few of the courses were withdrawn by the appellant and also having a right directly or indirectly engage, invest or participate in or provide assistance to any person or entity which competes with the company in India or abroad which does not restrict that the appellant to organise his own business especially as it has been contended that the TIME is a great name in the market. There would hardly be any hindrance in its organising its operation even when this franchisees agreement has been terminated. A well established name had come through being successful in the competition. It would not be desirable that others are denied the same opportunity. After the agreement has been terminated there is no basis for this demand. Appeal dismissed.

Issues Involved:

1. Termination of Franchise Agreement and its implications.
2. Alleged violation of non-compete clause by the respondents.
3. Allegations of diversion of business and mismanagement.
4. Claims for compensation and damages.
5. Use of the title "Ex-Director" by the respondents.

Detailed Analysis:

1. Termination of Franchise Agreement and its implications:

The appellants were aggrieved by the termination of the Franchise Agreement by the respondents. The agreement was initially for three years and renewed periodically, with the last renewal effective from April 1, 2011, to March 31, 2014. The appellants argued that the respondents used the cancellation of certain courses as an excuse to terminate the Franchise Agreement. The Tribunal found that after the termination of the agreement, it would be unreasonable to restrict the respondents from engaging in similar business activities, especially since the 1st respondent company had become virtually defunct. The Tribunal noted that the non-compete clause was one-sided and lost its force once the 1st respondent ceased operations.

2. Alleged violation of non-compete clause by the respondents:

The appellants claimed that the respondents violated the non-compete clause in the Shareholders Agreement by incorporating a competing business (4th respondent) while still being shareholders of the 1st respondent. The Tribunal observed that the non-compete clause was unilateral and not enforceable once the 1st respondent stopped its business activities. The Tribunal also noted that the 1st respondent was not a signatory to the Shareholders Agreement, and thus, the clause could not be imposed on it.

3. Allegations of diversion of business and mismanagement:

The appellants alleged that the respondents diverted business from the 1st respondent to the 4th respondent and mismanaged the 1st respondent. The Tribunal found no evidence to support the claims of business diversion or mismanagement. The Tribunal noted that the 1st respondent had become dormant and was not conducting any operational activities. The respondents argued that the 1st appellant had unilaterally cancelled certain courses and started its own venture in Kolkata, competing directly with the 1st respondent. The Tribunal found no merit in the allegations of oppression and mismanagement.

4. Claims for compensation and damages:

The appellants sought compensation of ?10 crores for the alleged loss suffered by the 1st respondent due to the diversion of business to the 4th respondent. The Tribunal found that the appellants failed to provide any supporting documents or evidence to substantiate the claim for ?10 crores. The Tribunal deemed the demand illogical and a wild guess, noting that the appellants had the right to engage in their own business activities even after the termination of the Franchise Agreement.

5. Use of the title "Ex-Director" by the respondents:

The appellants objected to the respondents referring to themselves as "Ex-Director, TIME" in advertisements, arguing that it was misleading. The Tribunal found that the respondents' use of the title "Ex-Director" was factual, as they had been directors of the franchise units of TIME. The Tribunal saw no irregularity in the use of the title and noted that it represented the respondents' past experience. The Tribunal concluded that this issue did not constitute grounds for oppression.

Conclusion:

The Tribunal dismissed the appeal, finding no merit in the appellants' claims. The Tribunal upheld the impugned order, stating that the appellants failed to provide sufficient evidence to support their allegations. The Tribunal emphasized that the restrictions imposed by the non-compete clause were unreasonable after the termination of the Franchise Agreement and the cessation of the 1st respondent's business activities. The demand for compensation was also rejected due to the lack of supporting documents. The use of the title "Ex-Director" by the respondents was deemed appropriate and not misleading. The appeal was rejected with no order as to costs.

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