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TMI Blog2012 (10) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... for Poovayya and Co. for the Respondent JUDGMENT Ravi Malimath, J 1. Aggrieved by the order dated December 12, 2001, passed by the Company Law Board, Chennai in Company Petition No. 57 of 1998 (Ultrafilter (India) P. Ltd. v. Ultrafilter GmbH [2002] 112 Comp Cas 93), directing the petitioner-company therein to purchase the shares held by the respondent therein, among consequential reliefs, the respondent has filed the present appeal. The first respondent is a private limited company. It was incorporated in December 1985, for the manufacture of filter equipment. The second respondent holds 51.82 per cent, of the shares. The appellant holds 26 per cent, of the shares. Respondent No. 1 and the appellant, initially entered into a technical collaboration agreement on February 17, 1986, by which the appellant was to provide technical know-how and assistance for the manufacture of industrial filters by the company. Thereafter a shareholders partnership agreement dated October 16, 1986, was entered into between the appellant and the second respondent by which the appellant was to subscribe to 26 per cent, shares in the company for a sum of Rs. 7.8 lakhs. This agreement also provided tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company, to restrain the appellant from claiming any right or to do any business in India under the name and style of ultra-filters either as a trade mark or as a part of a corporate name in India and to amend the articles of association or in the alternate, to direct the appellant to sell its 26 per cent, of the shares held in the company and other consequential reliefs. The appellant entered appearance and contested the petition. The Company Law Board by the impugned order, granted relief to the respondent by directing the respondent/company to purchase the shares held by the appellant on a fair market value to be determined by the statutory auditors of the company on the basis of the balance-sheet as on March 31, 1999 and on such determination, the respondent was directed to pay the consideration within six months thereafter. Aggrieved by this order, the respondent before the Company Law Board, is in appeal. Sri Naganand, learned senior counsel appearing for the appellant's counsel, contends that the Company Law Board failed to follow the well settled principles of law governing the exercise of jurisdiction under section 397/398 of the Companies Act. That the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jority shareholder to seek relief under the said provisions of law. He contends that section 399 provides the right to apply under sections 397 and 398 of the Companies Act and entitles the respondent to maintain a petition. Hence, the contention of the appellant that a majority shareholder cannot file a petition under section 397/398 of the Act is erroneous and cannot be sustained. That various communications have been placed on record in order to establish the failed relationship between the parties as well as acts of oppression and mismanagement by the appellant. It is therefore evident that the interests of the respondent has been adversely affected due to the acts of omission and commission by the appellant. Even otherwise, the appellant through its competitors has commenced business of the very same products being dealt with by the company. That the, appellant rather than performing its duty, is engaged in encouraging the competitors against the interest of the company. Hence a case for winding up of the company on just and equitable grounds has been established. Under the facts and circumstances of the case, rather than winding up the company, the impugned order has been pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comp Cas 743 ; AIR 1981 SC 1298, there is no finding recorded by the Supreme Court that a petition under section 397 could only be filed by a minority and not by a majority shareholder. The fact that the petition was ultimately dismissed on merits is immaterial, since what is of relevance is that the petition was not dismissed on the ground that the petition has been filed by the minority. On considering the various decisions relied upon, with regard to the scope of section 397/398, it would emerge that there is no prohibition for a majority shareholder to maintain such a petition. Any member of a company can complain of oppression and if the court were to opine, that there is an oppression to any member, rather than the winding up of the company, could pass such orders as it thinks fit and considers just and equitable. Therefore, section 397 does not postulate a difference between the majority and a minority shareholder. Any member of a company could complain under section 397. Under section 398 also, any member could complain with regard to the mismanagement and the court could deal with it as in section 397. However, in terms of section 399, only those members holding not less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ools P. Ltd. v. U. M. Suresh Rao reported in [1994] 79 Comp Cas 868, the Karnataka High Court held as follows (page 892) : "A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in ... In the case of domestic or family companies, the courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. Lack of probity has to result in prejudice to the company's business, affecting rights of complaining parties as shareholders and not as directors. If a deadlock can be resolved by the articles there is no deadlock to bring in winding up and if there are alternative remedies the company should not be wound up. The learned company judge also held that he was unable to hold that the substratum of the company had gone; However, in the appeal, it was reversed and winding up was ordered. The matter was taken to the Supreme Court. After referring to Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 All ER 492 (HL) ; [197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is placed on the judgment of Shanti Prasad Jain v. Kalinga Tubes Ltd. reported in [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535, wherein the Supreme Court held at paragraphs 18, 19 and 26 as under (page 365) : "In H. R. Harmer Ltd., In re [1958] 3 All ER 689; [1959] 29 Comp Cas 305 (CA), it was held that 'the word "oppressive" meant burdensome, harsh and wrongful'. It was also held that 'the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the "just and equitable" rule, but only to those cases of that character which have in them the requisite element of oppression'. It was also held that 'the result of applications under section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision'. The circumstances must be such as to warrant the inference that 'there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to section 397 ... It is true that by the beginning of 1958 there were differences between the appellant and the Patnaik and Loganathan groups and there was loss of confidence between them. But mere loss of confidence between these groups of shareholders would not come within section 397 unless it be shown that this lack of confidence sprang from a desire to oppress the minority in the management of the company's affairs and that there was at least an element of lack of probity and fair dealing to a member in the matter of his proprietary right as a shareholder." Reliance is placed on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. reported in [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298, wherein it was held as follows (page 781) : "In England, after the decision of the House of Lords in Sco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts . . . with reference to section 397." Reliance is placed on Hanuman Prasad Bagri v. Bagress Cereals P. Ltd. reported in [2001] 105 Comp Cas 493 ; AIR 2001 SC 1416, wherein it has been held as under (page 495) : "Section 397(2) of the Act provides that an order could be made on an application made under sub-section (1) if the court is of the opinion-(1) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members ; (2) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up ; and (3) that the winding up order would unfairly prejudice the applicants. No case appears to have been made out that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members. Therefore, we have to pay our attention only to the aspect that the winding u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under sections 397 and 398. (e) Once conduct is found to be oppressive under sections 397 and 398, the discretionary power given to the Company Law Board under section 402 to set right, remedy or put an end to such oppression is very wide. (f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact." Reliance is placed on M. S. D. C. Radharamanan v. M. S. D. Chandmsekara Raja reported in [2008] 143 Comp Cas 97 ; AIR 2008 SC 1738, wherein the hon'ble Supreme Court held as follows (page 104) : "Section 398 of the Act provides for filing of an application for relief in cases of mismanagement. Section 402 provides for the powers of the Company Law Board on an applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt in the market place to face the customers. In addition, Friulair is also asking us what will happen now. They want immediate answer from us and also all our customers and I do not blame them. This is not only impacting our image and credibility but also our business. That is why I had to set the deadline. We also have the pressure dies ready and the housings made for export. Earlier all this is resolved better for all of us. With regards, Yours sincerely, Kris Kini." By a letter dated March 19, 1997, vide annexure A13, the appellant wrote a letter to the respondent, which in part is extracted as follows : "March 19, 1997 Dear Mr. Kini I hereby request that Ultrafilter India and their nationwide sales and service staff be instructed to support the effort of Pace rather than enter into competition on fridge dryers ... Kind personal regards, Ultrafilter GmbH, Dirk G. Kronsbein, Group Chairman." By a letter dated March 20, 1997, vide annexure All, the appellant wrote a letter which in part is extracted as follows: "March 20, 1997 Dear Mr. Kini To conclude, our existing relation is only that of a minority shareholder. Nothing else. Therefore, if no agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby we strongly feel that you have forfeited the right under the agreement, both in terms and spirit to continue as a shareholder of the company you had the option of either being a competitor or a shareholder. You choose to be a shareholder and therefore promised not to be a competitor. Now you have taken the route of being a competitor and therefore have no right to be a shareholder. In this situation, we are left with no alternative but to call upon you to sell the shares to us, which we are willing to purchase at a value to be determined under article 10 (g) of the articles of association. Immediately upon hearing from you, we shall request our auditors, M/s. Amarnath Kamath and Co., to determine the face value of the shares so that the formalities can be completed. : Yours sincerely, For Ultrafilter (India) P. Ltd., K. K. Kini, Chairman and Managing Director." The appellant in reply to the respondent wrote a letter dated October 9, 3 1998, vide annexure R4, which is extracted as follows : "October 9, 1998 Dear Mr. Kini We have received your letter dated September 26, and would like to point out the following essential points : 1. Ultrafilter GmbH has not said or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant, the sum and substance of the same would be as follows : (a) That the respondent should support the business of Pace Equipment rather than enter into a competition with it; (b) That an agreement has to be reached to increase the appellant's share capital to 51 per cent.; (c) That the company Pace Equipment is the sole and exclusive importing distributor for Sabroe dryers and not the respondent-company; (d) That the respondent should stop competing against Pace ; (e) That the respondent-company should establish a new identity ; (f) That even though the business relationship is severed, the appellant would continue to exercise its rights in the directors board meeting; (g) That the appellant will re-establish the ultrafilter presence in India at whatever effort and cost it may take and that they will establish a strong ultrafilter made in Germany-position in India; (h) That there are no restrictions in any document or agreement restraining the right of the appellant to carry on its normal business including sales of its goods to its customers in India; (i) That the appellant is legally entitled to compete with the company; (j) That the appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent pressure being made by the appellant is therefore hard and burdensome. Hence, the action of the appellant is a clear case of oppression. (n) All these facts and circumstances lead to the conclusion that all is not well with the company and its two shareholders. In view of the present situation the company cannot be run effectively. That a case of oppression has been made out by the respondent. The appellant even though being a minority shareholder, is conferred with a veto power in all the board meetings. Admittedly the appellant has commenced rival competitive business directly and indirectly against the company by manufacturing and marketing the very same products. The appellant has openly threatened that it would start manufacturing 'ultrafilter made in Germany' products in India at what-ever effort and cost it may take". There is no possibility of the company being run normally, effectively or profitably under the given circumstances. The respondent alleges that the appellant is carrying on a rival business on its own and has even applied for tenders where the company has also applied for the same. The appellant admits to such a course of action and emphasises that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent. Hence it is a fit case that establishes oppression by the appellant. Such actions of the appellant is oppressive and is a continuing oppression. The conduct of the appellant is burdensome, harsh and wrongful, reflecting the lack of confidence between the two shareholders. The appellant by admittedly engaging himself with a competitive company has acted in breach of good faith and trust. He was expected to act only in the interest of the company and not against it. The appellant admits and justifies his actions by stating that the competitive businesses that it has undertaken, is not prohibited by law, since the agreements between them have been terminated. Thus the appellant seeks to justify his competitive businesses. He does not deny it. Under these circumstances and in view of the material on record, we have no hesitation to hold that sufficient grounds are made out by the respondent, for winding up of the company on just and equitable grounds. Consequently, it is necessary that the appellant being a minority be directed to sell its shares to the respondent. (q) The Company Law Board considered all the materials placed before it while passing the impugned order. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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