9911796707
TMI Blog2012 (12) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... ere in constant touch with each other. The two family groups had entered into two different business ventures. Petitioners (hereafter referred to as the DKG Group) were doing the business of real estate and exports; whereas the Gupta family (hereinafter referred to as the SKG Group) had ventured into the hotel business. Business of both the family groups flourished over time. The SKG Group knowing the financial viability and credibility of the DKG Group invited them to jointly set up a chain of hotels. At that time respondent no.3 was a partner in a hotel property in Delhi. 2. On 20.3.2001 the petitioner no.2 and respondent no.3 agreed to start a business in equal partnership with an equal shareholding and accordingly they incorporated a new company under the name and style of 'M/s Luxor Hotels and Resorts Private Ltd.' (which later came to be known as Eden Park Hotels Pvt. Ltd. vide order dated 27.11.2002) The company was on the lookout for the properties to start a hotel business. An application was submitted to the government in the name of a Consortium (comprising of the DKG group, the SKG group as also the respondent company). Bids were submitted for the acquisition of three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 19.3.2002 a Board meeting was held between the SKG Group and DKG Group pursuant to which the AOA of the company were amended on 20.3.2012. Clause 6.2.1 which relates to the allotment of 5000 shares by each group in favour of Mr. V. Lakshmi Kumaran has been given a complete goby; it has been ignored; it was never the intention of both the participating groups to resort to this clause; that is why it does not find mention in the amended AOA (dated 20.3.2002). Further submission being that both parties had equal rights to participate in the operation and the management of the company; although admittedly the Chairman and the Managing Director of the Company had to be appointed by the SKG Group yet the Vice-President and the Executive Director were to be nominated from the DKG Group. Attention has been drawn to the definition of "Business Plan" as contained in Article 2(n); submission being that the "Business Plan" has not been adhered to by the SKG Group. Article 43A specifically postulates that an affirmative vote of at least one 'A' Director (SKG group) and one 'B' Director (DKG group) is essential for the matters enumerated therein including the "approval of the accounts" of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DKG group has been excluded totally from all participation; the statutory auditor who was initially appointed for one year at the time of the incorporation of the company (on 20.3.2001) has ceased to exist as his terms has not been renewed; the statutory record which includes the balance sheets and annul returns have not been filed before the Registrar of Companies (ROC) since the year after 2002 for which prosecution has been launched by the ROC; the deadlock in the company is complete. Attention has been drawn to the definition of "just and equitable" as contained in Section 433(f). Submission being that the powers of this Court under this sub clause are not to be circumscribed on any count. Attention has also been drawn to Section 443 (1)(d); submission being that the powers of this Court to deal with a winding up petition are contained therein and the words appearing "or any other order that it thinks fit" are not to be read ejusdem generis to the preceding words and this has been held by a Division Bench of the Bombay High Court in Nilesh Lalit Parekh v. Pratibha Inderjit Kapur 2002 (1) BCR 357. Reliance has also been placed upon Shakuntala Rajpal v. Mckenzie Philip (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in the joint venture have fallen out and Group B had ousted Group A it does amount to a deadlock. Reliance has also been placed upon Eastern Linkers (P.) Ltd. v. Dina Nath Sodhi [1984] 55 Comp. Cas. 462 (Delhi); submission being that where the shareholding is more or less equal and there is a complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of a smooth and efficient continuance of the company as a commercial concern it is a fit ground to invoke jurisdiction under the "just and equitable" ground; submission being reiterated that even if the company is making a profit this fact is not relevant; if otherwise it is a fit case to wind up the company. It is pointed out that the provisions of Sections 397 and 398 operate in separate and distinct parameters; this is not an alternate remedy available to the petitioner as there is no hope left that the company can be re-structured; this is a fit case the winding petition must be admitted and only then the court can take a final call as to whether the petition is to proceed on its merits or is liable to be dismissed; at this preliminary stage only a prima fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the internal auditors are not being allowed to function; further in terms of the letter of Sandeep Gupta dated 29.7.2003 their powers have been curtailed which is against the spirit and intent of the AOA. No business plan has been submitted to the Board or approved which is in derogation of the Article 48(B) of the AOA of the Company and in fact there is no resolution of the Company approving any business plan; attention has been drawn to the minutes of the meetings of the company drawn up on 06.9.2002. Attention has also been drawn to the minutes of the Board meetings for the financial year 2004-05, 2005-06; submission being that in the minutes of the Board meeting recorded on 27.4.2004 there is no mention of approval of any business plan. Mr. D.K. Jain in his letter dated 23.9.2004 has reiterated his protest that no business plan has been submitted by him in the year 2004-05 which has again been reaffirmed in his subsequent letter dated 15.2.2005 as also on 27.9.2005; the minutes of the Board meeting held on 29.9.2005 show that the agenda with respect to the business plan was deferred and thereafter the consideration of the approval of the business plan has not been reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lored the domestic forum; Article 6.2.1 of the SHA enables the parties to resolve their alleged deadlock by resorting to the domestic forum which on one pretext or the other, the petitioner is not allowing to be given a go-ahead. The so called dead lock alleged by the petitioner is not justifiable; it is at the behest of the petitioner himself. Even otherwise, it is clearly resolvable. The second alternate remedy under Sections 397 & 398 of the Companies Act which is a jurisdiction vested exclusively in Company Law Board (after the amendment of 1988) has also not been explored; if any interference is warranted in the internal management of the company, it would only lie within the domain of the CLB. The allegations made in the petition only relate to misunderstandings and squabbles generated by the petitioner himself for which the Court ought not to resort to the winding up procedure which is only a last resort after all possibility of a resolution of disputes through other mediums comes to a dead end. Even otherwise, admittedly the company is a healthy company; it is profiteering; this is a fit case where the petition should be dismissed at the threshold itself. Maintainability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is thus clear that the admission of the petition itself and the public advertisement which has to be effected being a necessary corollary of its admission would cause an irreparable harm to the company if the petition ultimately fails. This is especially so if it is a solvent company. This argument of the learned counsel for the petitioner that unless the petition is admitted, arguments of the parties cannot be considered is thus an argument bereft of force and is accordingly rejected. Section 433 (f) of the Companies Act. 11. The moot question that arises for consideration is whether a case under Section 433 (f) of the Companies Act is attracted. Section 433 (f) reads as under:- "[433. Circumstances in which company may be wound up by Court - A company may be wound up by the Court - (a), (b), (c), (d) and (e) ** ** ** (f) if the Court is of the opinion that it is just and equitable that the company should be wound up;" 12. In this context the observations made by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich arises for decision is whether if an alternate remedy is available to the petitioner, can he press for the winding up of the company on the 'just and equitable' ground. 16. This provision stipulates that the Court may refuse to make an order for winding up where the 'just and equitable' ground is being pressed if there is an alternate remedy available to the petitioner and the Court prima-facie holds that the petition seeking winding up of the company on this 'just and equitable' clause is an unreasonable demand made by the petitioner. 17. In Hind Overseas (P.) Ltd. (Supra), the Apex Court after culling out the principles and the law laid down by the English Courts as also the Indian Courts and after making reference to the judgments Cuthbert Cooper & Sons Ltd., [1938] 8 Comp. Cas. 131 (CD) Yenidja Tobacco Co. Ltd., In re [1916] 2 Ch. 426, Ebrahimi v. Westbourne Galleries Ltd. [1973] 379 AC 360 (HL) in D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. [1936] 6 Comp Cas 227 (PC) and Rajahmundry Electric Supply Corpn Ltd. v. A. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC), had inter-alia noted as follows:- "Section 433(f) under which this application has been made has to be rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the Agreement shall prevail and have an overriding effect in so far as the contractual relationship between the Parties is concerned in respect of the subject matter contained herein. Further the Agreement shall prevail as between the Parties in case of any ambiguity or inconsistency between the Agreement and the Memorandum of Association and Articles of Association of D.S.O. Investments Ltd. and/or Laguna Holdigns Private Ltd. And /or the Company, and it is agreed that any such ambiguity and/or inconsistency will be removed (and the Parties will so endeavour and support any resolution) to the extent permissible under applicable law, by carrying out necessary modifications and/or amendments. " 20. This Article postulates that the parties shall be governed by the terms and conditions of the SHA. The SHA will prevail and have an overriding effect in case of any inconsistency between the SHA and the AOA. 21. Clause 6.2.1 of the SHA is relevant. It reads as under:- "Out of the shares as are to be allotted to each of the respective groups, 5000 shares (herein called 'Trustee Shares') out of each Group, which shall be paid for by the respective groups, shall be allotted in the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act recognizes this power. 26. Thus the 10,000 trustee shares to be allotted to Laxmi Kumaran would enable the shareholders at their meeting to appoint Laxmi Kumaran as a director and he belonging to neither of the two groups i.e. group 'A' or group 'B' would be then in a position to resolve all disputes which would include the matters enumerated in Article 43-A. The rule of commonsense and logic which can be deduced from the ratio laid down in Barron v. Potter (supra) thus shows that where the Board has become non-functional even in matters where a veto vote of each group is required (including the approval of accounts), the shareholders in a meeting can unlock this impasse. 27. Under Section 215 of the Companies Act the profit and loss account of the Company shall be signed by the Board in its meeting. However, if the Board has become non-functional as is so in the instant case, to prevent criminal prosecution which is a necessary consequence of a company not getting its accounts approved yearly (Section 217 (5) of the Companies Act), the logical conclusion would be that in such a scenario, the shareholders would be competent to approve the accounts of the company. Alternative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that in all these meetings there was an agenda for the allotment of shares to the trustee. The letters exchanged between the parties (dated 15.02.2005, 01.07.2005 and 30.08.2006) also evidence that time and again it had been brought to the notice of the DKJ group that the refusal to allot nominee shares to Laxmi Kumaran in terms of the SHA was only because of the non-cooperation of the DKJ group. It is thus clear that even after the amended AOA, the parties were at all times contemplating the implementation of clause 6.2.1 of the SHA. 32. Clause 6.2.1 which was an essential part of the SHA was thus never abandoned. In fact this objection about the abandonment of Clause 6.2.1 was taken up for the first time by the petitioner only when he had filed his reply to C.A. No. 385/2011. To put the record straight, C.A. No. 385/2011 was an application filed by the respondent seeking the implementation of Clause 6.2.1 of the SHA. Reply was filed on 18.10.2011. It was never the case of the petitioner that the SHA was not a governing factor between the parties; it was only on 18.10.2011 that for the first time this defence was set up by the petitioner that Clause 6.2.1 stood abandoned. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which a partnership is dissolved, may be applied to the case of a company, which consists of two members only or where the shareholding is equal or where it is a family or domestic company with the shareholding equally divided between two rival groups, which has resulted in a deadlock. Extending this doctrine a little, the Articles of Association of the company assume great importance; and if the Articles can help to resolve the deadlock the winding up has to be ruled out. The Articles have to be taken as the terms of the contract between the members, showing their intention as to how they agreed to transact the business of the company; and which must, Therefore, govern the relationship amongst them inter se. Another important principle that has emerged from the aforesaid decisions is that winding up of a domestic or family company on just and equitable rule is permissible if there is a justifiable lack of confidence in the conduct and management of the company's affairs, grounded on the conduct of directors in regard to company's business." 36. The guidelines contained in AOA would be the governing factor between the parties to draw a conclusion as to whether an alternate rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irector lost his right to share in the profits through director's remuneration retaining only the chance of receiving dividends as a minority shareholder. Bearing in mind the above features in the case, the House of Lords allowed the petition for winding-up by reversing the judgment of the court of appeal and restoring the order of Plowman, J." 41. These features are absent in the facts of the instant case. In the present case, the parties knew each other socially only; they did not share any business arrangement earlier; they had no common business prior to the incorporation of the present company. The parties had specifically consented to form a company upon which the principles of partnership would not apply (Article 14.1). In fact the averments in the petition decipher this intent of the parties. Para 3.26 and para 3.33 state that on 18.03.2002, the respondent had betrayed the confidence and trust reposed upon it by the petitioner by writing a letter to Lazard wherein he had sought to surreptitiously and fraudulently acquired a 60% shareholding of the Edenpark Hotels Private Limited in his own name; noting thereby that the relationship of the so call trust and faith between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian society and the needs and requirements of the country that a somewhat different treatment be adopted. The courts would have to adjust and adapt, limit or extend principles derived from English decisions, entitled as they were to great respect, suiting the conditions of Indian society and the country in general, always, however, with one primary consideration in view that the general interests of the shareholders should not be readily scarified at the alter of squabbles of directors for power to manage the company." 45. In Ebrahimi's case there was a prior partnership between the two members who had later on formed the company. The company had first been formed by the two partners namely Ebrahimi and Nazar and later on joined by Nazar's son George Nazar as the third director. Each of the original two shareholders transferred to him 100 shares so that at all material times Ebrahimi held 400 shares, Nazar 400 shares and George Nazar 200 shares. The Nazars, father and son thus had a majority of votes in a general meeting. Until the disputes arose, all the three remained directors. Later on an ordinary resolution was passed by the company in a general meeting by the votes of Nazar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluding the principles of partnership. Section 91 & 92 of the Evidence Act also postulate that when a written document has been executed, no oral submission contrary to the written terms contained therein can be looked into. 50. The settled legal position thus emanating that the partnership principle would be applicable only in those cases where the deadlock is complete and irresoluble under its constitution which is clearly not so in this case. The domestic forum has not been resorted to; alternate remedy under Section 397 has also not been explored. The question of alternate remedy in fact assumes a great importance. Party cannot take advantage of his own wrong 51. Reliance by the learned counsel for the petitioner on the judgment of Draeger Werk (supra) in this context is misplaced. In this case there were two partners having equal participative rights and equal shareholding of 50% each. The rest of the facts are distinct. This was a case where the respondent himself had filed a petition under Sections 397 & 398 of the Companies Act alleging oppression and mis-management on the part of the petitioner; the respondent group had admitted that there is a complete deadlock in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved; there was a falsification of the record of the company which included the minutes of the Annual General Meetings and the Board meetings. 55. Under the AOA of the company, the day to day management of the company vested with the SKG group. In terms of Articles 48-A, 48-B and 49-B of the AOA, the Chairman and the Managing Director of the company were from the SKG group. The Chairman had the casting vote and except for matters enumerated in Article 43 A where a veto vote of one A and one B director was required; in all other matters the Managing Director was looking after the day to day functioning of the company. Article 6.2.1 of the SHA coupled with the principle of Barron's case (supra) enabled Laxmi Kumaran to resolve any kind of an impasse including the one contemplated in Article 43 A. In this background, the desire of Priya Jain (Executive Director) to obtain an equal footing with the Managing Director Sushil Gupta would be contrary to the SHA and AOA. The insistence of the petitioner on retaining K.S. Kalra and thereafter DKG's communications dated 27.09.2005 & 15.07.2006 insisting that the internal auditor K.S. Kalra should join hands with the statutory auditor which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any be wound up". Powers of the Court under Sections 397 & 398 vis-à-vis Section 443 (1) of the Companies Act. 58. Once the partnership principle is rejected, the petitioner has to prove almost the same grounds even for succeeding in the present petition and therefore Sections 397/398 must be treated as another alternative and effective remedy. 59. The Indian Companies Act, 1913 did not have any provision equivalent to Sections 397 & 398 of the Companies Act; it was only by way of an amendment in 1951 that this provision was incorporated in the Act and Sections 153-C and 154-C were inserted; provision of Section 153-C was borrowed from the English Companies Act, 1945. In the Indian Companies Act, 1956, Sections 153-C and 153-D were incorporated as Sections 397 & 398. Relevant would it be also to point that in the Indian Companies Act, 1913, the provision for winding up was contained in Section 162 which is equivalent to Section 433 of the Indian Companies Act, 1956. Under Section 170 of the Companies Act, 1913, there were powers available with the Court to pass interim orders in the course of winding up. There was no provision in the nature of Section 443 which was incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act was to give an alternative remedy to winding up in case of mismanagement or oppression. The law always provided for winding up, in case it was just and equitable to wind up a company. However, it was being felt for some time that though it might be just and equitable in view of the manner in which the affairs of a company were conducted to wind it up, it was not fair that the company should always be wound up for that reason, particularly when it was otherwise solvent. That is why Section 210 was introduced in the English Act to provide an alternative remedy where it was felt that, though a case had been made out on the ground of just and equitable cause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the company was allowed to continue under such directions as the court may consider proper to give. That is the genesis of the introduction of Section 153C in the 1913 Act and Section 397 in the Act". 62. Thus wherever an alternate remedy is available to a party, the just and equitable clause could not be resorted to casually. It is not the interest of the petitioner alone which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; (g) any other matter for which in the opinion of the 1[Tribunal] it is just and equitable that provision should be made. 65. These powers are exercisable by the CLB alone. 66. The Division Bench of Madras High Court in Geetanjali Press (P.) Ltd. v. Thangaswami [1962] 32 Comp. Cas. 108 (Mad.) had noted that a Court whose jurisdiction has not been invoked under Sections 397 & 398 of the Companies Act would not be competent to pass any order which would amount to intervening in the management of the company in a petition for winding up; in such a petition either winding up can be made or if such a petition is not sustainable it shall be dismissed. The Single Bench in this case had appointed an Administrator hoping to salvage the company; it had found that the winding petition could not be sustained but had passed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasoning that Section 443 (1)(d) permits the Court to pass all such orders which are unrelated to the winding up is in conflict with the clear and explicit language contained in this statutory provision. 70. The judgments of Abnash Kaur (supra) and Shakuntala Rajpal (supra), in this context have impliedly been overruled by the judgment of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 57 SCL 476 (SC). In Abnash Kaur, the Court was dealing with a composite petition under Section 433/397/398 of the Companies Act. At this point of time, the jurisdiction under Sections 397 & 398 of the Companies Act and Section 433 of the Companies Act both vested the High Court. The Division Bench upholding the reasoning of the Single Judge had allowed the purchase of shares interse between the parties. In Shakuntala Rajpal (supra) (delivered on 05.12.1985), the Court had noted that since the petitioner being a minor shareholder did not have the requisite number of shares to apply (in terms of Section 399 of the Companies Act) under Sections 397 & 398 of the Companies Act, the alternative remedy availed by him under Section 433 (f) of the Companies Act was maintainable. At this point of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact confer very valuable right on a group of shareholders to seek the aid of the Court in getting their grievances redressed. The irregular and dishonest deeds complained of by the petitioner group can well be answered by the CLB under the wide powers that it has. Section 402 (g) in fact contains the residuary powers available with the CLB which can encompass almost any kind of an order which may be passed by the CLB on the acts of the nature complained of by the petitioner. After the amendment of the Companies Act, 1956 and by the incorporation of Sections 397 & 398 into this Act, the intent of the legislature has become clear. A winding up has to be resorted only as a last measure; a winding up order may be passed only if there is o other alternate efficacious remedy available to the aggrieved party. The forum of Sections 397 & 398 is a special forum which has been created by the Statute to be dealt with by an expert body in relation to the problems in the working of the company. The scheme of the Companies Act shows that all efforts should be made to keep the company alive; the winding up process may be resorted to only if there are extreme accentuating circumstances. 75. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no hope or possibility of a smooth and proper functioning of the company as a commercial concern. In International Caterers the company had been formed for the purpose of running a hotel; the management of the hotel had been handed over to a third party; there was no domestic form available to the parties; in this eventuality the total loss of substratum and the irresolvable deadlock between the parties had led to the winding up. 79. The judgments of the Calcutta High Court in Modern Furnishers (Interior Designers) (P). Ltd., In re [1985] 58 Comp. Cas. 858, Smt. P. Sridevi v. Cherishma Housing (P.) Ltd [2009] 147 Comp. Cas. 130 (AP) and the judgment of this Court reported as Brown Forman Mauritius Ltd. v. Jagjit Brown-Forman India Ltd. [2004] 51 SCL 214 (Delhi) relied upon by the counsel for the petitioner are also all distinguishable. Modern Furnishers Interior Designer (supra) was a petition under Section 397/398 of the Companies Act; the court while dismissing the petition had noted that the relief under the aforenoted provision cannot be granted as the disputes between the parties related not only to the company but were also prevailing in the partnership firm of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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