2013 (10) TMI 31 - HC - Companies Law

Nature of Company - Whether R1 was a family Company to which Principles of quasi partnership applied - Held that - it was difficult to find out that a right was impliedly reserved for family members to be on the Board as of right - CLB found that the appointment of Directors was done in accordance with the Articles of Association and therefore, it had taken the view that the principles of dissolution of partnership cannot be invoked in the case on hand - merely because the Company owns several cars and one was being used by the second respondent, the same cannot be said to be mismanagement of the affairs of the Company by the second respondent. Oppression and Mismanagement - Whether the second respondent had mismanaged the company Held that - The appellants have not made out a case under Section 397 of the Act and that they have not proved oppression - For the court to grant relief under section 397, the respondents must fail to show that just and equitable winding up would unfairly prejudice them and the petitioners must succeed in showing that just and equitable winding up would, even if granted, unfairly prejudice the petitioners - Sometimes, in minority petitions, asking the question whether the company petitioner will be unjustly prejudiced on winding up, becomes an obviously unnecessary and empty exercise. Such is the case where two groups of nearly equal shareholding fight with each other for the control of the company. If one were to wait during a battle of this type, and ask, if the company petitioners have made out the case that winding up of the company will unfairly prejudice them, the simple and straightforward answer would be that nobody wants a winding up, the two sets are fighting for the company not its winding up. The principle of just and equitable clause - Scope of section 433 (f) - Section 433 provides for the circumstances in which a company may be wound up by the court - There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it was just and equitable that the company should be wound up - Section 222 (f) of the English Companies Act, 1948 was in terms identical with the Indian counter-part, Section 433(f). It is now well established that, the sixth clause, namely, just and equitable is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, just and equitable . Since, however, the matter cannot be left so uncertain and indefinite, the courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also born out of recognition of equitable considerations generally. This is particularly so as section 35(6) of the English Partnership Act, 1890 also contains, inter alia, an analogous provision for the dissolution of partnership by the court. Section 44(g) of the Indian Partnership Act also contains the words just and equitable - Decided against Appellant.

Issues Involved:

1. Whether R.1 is a family company to which principles of quasi-partnership apply.
2. Whether the petitioners have established oppression and mismanagement by the second respondent and his associates.
3. Whether the second respondent has mismanaged the company.
4. Whether the petitioners are entitled to an order directing the company and the second respondent to purchase their shares or to spin off any of the three units to them.

Issue-wise Detailed Analysis:

Issue 1: Whether R.1 is a family company to which principles of quasi-partnership apply.

The Company Law Board (CLB) found that the principles of partnership cannot be invoked. The company was incorporated in 1956, and the shares were primarily held by family members of G.T.Krishnaswamy Naidu, with 500 shares held by a non-family member, P.Asher. The CLB noted that there was no implied right for family members to be on the Board as of right, nor was there any material to show a basic understanding for equal participation in management. The appointment of Directors was done in accordance with the Articles of Association, and thus, the principles of dissolution of partnership could not be applied.

Issue 2: Whether the petitioners have established oppression and mismanagement by the second respondent and his associates.

The CLB found that the petitioners failed to prove the alleged mismanagement and oppression. The allegations included misuse of company cars, unauthorized residence in a company bungalow, sale of old machinery at undervalued prices, detrimental inter-company transactions, non-disclosure of actual income, and obtaining loans under various heads. The CLB determined that these allegations were unsubstantiated. For instance, the company owning several cars and the second respondent using one did not constitute mismanagement. The company did not own any bungalow, and the old machinery was sold at market value. The accounts were regularly audited with no adverse remarks, and the company's financial practices were found to be in order.

Issue 3: Whether the second respondent has mismanaged the company.

The CLB concluded that the petitioners did not establish any mismanagement by the second respondent. The allegations of mismanagement, such as the sale of old machinery at book value and non-disclosure of actual income, were not supported by evidence. The company's financial statements and audit reports did not reflect any irregularities. The decision to disinvest shares in subsidiaries occurred decades ago and was made by the appellants' father. Thus, the allegations of mismanagement were without merit.

Issue 4: Whether the petitioners are entitled to an order directing the company and the second respondent to purchase their shares or to spin off any of the three units to them.

The CLB declined to pass an order for the purchase of shares or spinning off any units. The petitioners did not plead for an exit from the company in their petition. The CLB suggested that the petitioners could invoke the provisions under the Articles of Association to transfer their shares if they desired an exit. The suggestion was made for the company or respondents to purchase the shares at a fair price to avoid prolonged litigation and maintain cordial relations.

Conclusion:

The CLB dismissed the company petition filed by the appellants, finding no merit in the allegations of oppression and mismanagement. The appellants were advised to seek an exit by invoking the provisions of the Articles of Association for transferring their shares. The judgment emphasized that the appellants failed to substantiate their claims with evidence and that the company's management practices were in compliance with legal and financial standards. The appeal was dismissed, upholding the CLB's findings.

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