2012 (10) TMI 627 - HC - Companies Law

Winding up Oppression and mismanagement Held that - Company is nothing but a glorified partnership between the petitioner and the respondent - appellant having veto powers in major decisions of the company cannot compete with the business of the company. That there are allegations by both the parties against each other. It would mean that both of them have breached the doctrine of utmost good faith towards each other thus putting the interest of the company in jeopardy. Hence it is a case where the majority alleges oppression by the minority and this minority has protective provisions in the articles. That the relationship 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

Issues Involved:
1. Maintainability of a petition under Sections 397/398 of the Companies Act by a majority shareholder.
2. Application of partnership principles to the case.
3. Allegations of oppression and mismanagement.
4. Justification for the Company Law Board's order directing the purchase of shares.

Detailed Analysis:

1. Maintainability of Petition under Sections 397/398 by a Majority Shareholder:

The appellant contended that the petition filed by the majority shareholder under Sections 397/398 of the Companies Act was not maintainable. The argument was based on the premise that such petitions should be filed by minority shareholders against majority shareholders. However, the court held that there is no prohibition in law for a majority shareholder to maintain such a petition. Section 399 of the Companies Act allows any member holding not less than one-tenth of the issued share capital to file a petition under Sections 397/398. Therefore, the respondent, despite being a majority shareholder, had the statutory right to file the petition.

2. Application of Partnership Principles:

The appellant argued that the Company Law Board erred in applying the principles of partnership to the case. The respondent countered that the nature of the documentation and the manner in which the business was conducted indicated a partnership-like relationship. The court referred to the judgment in *Synchron Machine Tools P. Ltd. v. U. M. Suresh Rao* and held that the principles of partnership were applicable. The relationship between the parties started with a technical collaboration agreement and later included a shareholders partnership agreement, indicating a partnership-like understanding. Thus, the company was deemed a glorified partnership, justifying the application of partnership principles.

3. Allegations of Oppression and Mismanagement:

The appellant contended that there was no material to show oppression or mismanagement. The respondent provided various communications to demonstrate acts of oppression and mismanagement by the appellant. The court referred to several judgments, including *Shanti Prasad Jain v. Kalinga Tubes Ltd.* and *Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.*, to establish the criteria for oppression. The court found that the appellant's actions, such as engaging in competitive business and pressuring the respondent to support a competitor, were harsh, burdensome, and wrongful. These actions constituted oppression and mismanagement, justifying the relief sought by the respondent.

4. Justification for the Company Law Board's Order:

The Company Law Board directed the respondent to purchase the appellant's shares at a fair market value determined by the statutory auditors. The court upheld this order, finding that the relationship between the parties had deteriorated to the extent that the company could not be run effectively. The appellant's competitive actions and the resulting deadlock in the company's management justified the winding up of the company on just and equitable grounds. However, to avoid prejudicing the company, the court found it just and necessary to direct the appellant to sell its shares to the respondent.

Conclusion:

The court dismissed the appeal, upholding the Company Law Board's order. The findings were based on material evidence and were deemed just and reasonable. The court found no error or perversity in the Company Law Board's conclusions, affirming the decision to direct the purchase of the appellant's shares by the respondent.

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