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TMI Blog2005 (9) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... tent, has gone in their favor on the question of oppression. Having had the benefit other stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify the unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we ae now adopting is intended primarily to set right the course of justice, in so far as we may. Even when it was found that there was a justification in issuing rights share, the Court, in order to do substantial justice, restored the earlier balance in given fact situation. In the facts of this case even one such act would be sufficient to constitute oppression and mismanagement as it disturbs the equity stakes decisively by bringing down the equity share of petitioners from 32% to 18% (which would have relevance in taking many managerial decisions where majority of 75% or more is required). However, it ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian company is driven out of the company but the company continues to adopt its name and wants to continue to ride on its goodwill without being assocated with it. Such unprecedented situation would call for unprecedented solution and in my opinion the second alternative suggested by the petitioner that in case the petitioner has to go out from the company it is willing to do so provided the words Prentice Hall are also dropped from its name, is not something which is unreasonable. In such a situation, the argument of the learned counsel for the respondent that the company is a separate entity and the appellant's attempt is to identify it selfith the company, may also be of no relevance. No doubt, the company has separate legal entity. But we are here concerned with the proceedings under Section 397/398 of the Act and in the process the issue being discussed is as to whether direction can be issued u/s 402 of the Act for change of the name of the company. Such a direction would be permissible in the facts of this case where the petitioner brought this corporate vehicle to India and gave its name is now asked to pull apart and breaoff and would be no longer associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner shall pay a sum of ₹ 20 crores to the second respondent and his group. If according to the second respondent, the shares held by him have higher value, in that eventuality he may approach the CLB for appointment of an expert for the valuation of the shares;(C) In case second alternative is accepted by the petitioner, the petitioner shall transfer all its shares in favor of the second respondent without any consideration (as per its own offer) and the second respondent in that eventuality take steps for change of the name in the Indian company by dropping the words Prentice Hall . (D) 2nd respondent is given 30 days time to exercise his option. If the option is not exercised within 30 days, it would be open to the petitioner to exercise its option either to accept the first alternative or the second alternative. There shall be no orders as to costs - HON'BLE A.K. SIKRI, J. For the Appellant : Arjun Jaitley and Sudipto Sarkar, Sr. Advs., Sanjiv Banerjee, Shiraz Patodiaand and Gopal Jain, Advs For the Respondent : C. Aryama Sundaram, Sr. Adv., Atul Sharma, Dinesh Pardasani and Neel Mason, Advs. JUDGMENT A.K. Sikri, J. 1. Prentice Hall Inc. (now merged with Pea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utually agreed upon, subject to restriction, if any, imposed by the Government of India. 2. On June 6, 1963 itself, a Collaboration Agreement was also entered into between Prentice Hall Inc. and the company under which Prentice Hall Inc. granted license to the company, inter alia, to re-print and sell the books included in the schedule to such agreement of which Prentice Hall Inc. was the owner of the copyright and in respect of such other books as would be mutually agreed between Prentice Hall Inc. and the company. Life of this agreement was 10 years, subject to the right of Prentice Hall Inc. to terminate the same. This collaboration agreement also provided that in the event the appellant terminated the agreement, the company would omit the words Prentice and Hall from its name. Prentice Hall Inc. also permitted the company to use its mark i.e. Prentice Hall . 3. Mr. B.D. Laroia continued to hold the majority shares in the company and after his death the said shareholding was transferred in the name of his wife. Mr. Ashok K. Ghosh joined the company as an employee and some time in the year 1972 he was appointed as the Managing Director. In the year 1973 Mr. Ghosh purchased the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed against each other, which are pending in this court. Pearson filed another suit relating to copyright in the year 2003 in this Court, which is also pending. Soon thereafter, Pearson also filed a petition being CP No. 73/2003 before the CLB under Sections 397/398, 402, 406 and 408 of the Companies Act (in short the 'Act') alleging certain acts of oppression and mismanagement. This petition has been disposed of vide impugned order dated 6th July 2004 Aggrieved against certain findings in the judgment, Pearson has filed appeal being Co. A. (SB) No. 20/2004 Aggrieved against other part of the judgment Mr. Ashok K. Ghosh and other respondents have filed Co. A. (SB) No. 21/2004 It is these appeals with which we are concerned here. Since there are two cross appeal, for the sake of convenience Pearson is described as the petitioner hereinafter whereas Mr. Ashok K. Ghosh and other respondents are described as the second respondent (the nomeclature adopted by the Company Law Board in its judgment). 6. The case of the petitioner before the Company Law Board (in short the 'CLB') was that when transformation of Prentice Hall Inc. and change of guard was taking place, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also made to the extent that the second respondent did not account for various publications printed and sold by the company in the account books of the company and thus, pocketed sale proceeds thereof. The respondent contested te petition on various grounds, including preliminary objection to the maintainability of the petition. 7. After hearing the parties the CLB passed the impugned order returning the following findings: i) Contention of the respondents that the petition was filed with oblique motives was not found to be justified as the civil suit filed by the parties against each other and pending in Delhi High Court related to the contract between the company and the petitioner, while in the company petition filed before the CLB, the petitioner was alleging oppression and mismanagement which reliefs could be granted only in these proceedings and not in the civil suits; ii) the preliminary objections of the respondents that Pearson had no locus standi to file the petition and that Sh. Ravi Oberoi was not authorised to file the petition on behalf of Pearson were rejected holding that with the change of the name from Prentice Hall Inc. to Pearson, the entity would remain the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8. After giving the aforesaid findings the CLB thereafter deliberated upon the nature of relief which could be granted in the facts of this case. It noted that it was a closely held company run on quasi partnership basis. However, due to differences in relations it was not possible for both the petitioner and the respondent No. 2 to continue together and parting ways was the only plausible solution to put an end to the dispute. The petitioner suggested two alternatives: (i) the petitioner could purchase the shares held by the second respondent and his group; and (ii) petitioner was willing to go out of the company and sell its shareholding to the second respondent only if the second respondent omitted the words Prentice Hall from the name of the company. The CLB did not find favor with the fist alternative. In so far as second option is concerned, dropping of the words Prentice Hall from the name of the company was found to be inequitable by the CLB and, therefore, the CLB left it to the option of the petitioner the choice of either continuing with the company as a shareholder or going out of the company on receipt of aforesaid consideration for its share. In case the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that one alleged act of issuing share capital would not constitute oppression or mis-management and the petition under Section 397/398 of the Act was not maintainable. Reliance was placed on the judgment of the Supreme Court in the case of Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. where the Supreme Court, agreeing with the Division Bench of the High Court observed that the termination of Directorship would not entitle such person to ask for winding up on 'just and equitable' ground inasmuch as there is an appropriate remedy by way of company unit which can give him full relief if such action had been taken by the company on inadequate ground. A Director, even if illegally terminated, cannot bring his grievance as to termination for that single and isolated act, even if it was doing good business and even if the Director could obtain each and every adequate relief in a suit in a court. 12. It may be mentioned at the outset that the respondents have not at all given any justification for issuing further share capital. The CLB recorded categorical findings to the effect that this move of the respondents lacked bona fide, more so when 75% of the money collected by is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he equilibrium further. The respondents are wrong in their submission that the CLB did not deal with the aspect of delay. After taking note of boom doggle move of the respondents in issuing these shares the CLB proceeds to observe as under: The respondents have claimed that by keeping quiet for over two years, that too, after coming to know of the issue, the petitioner cannot now complain and they have relied on the case of Bengal Luxmi Cotton Mills. It is true that delay and acquiescece are relevant factors to be considered, but in the present case, the delay of two years cannot be considered to be such that the petitioners cannot make a complaint of oppression. The respondents have also relied on Palghat Exports case, to contend that a single act cannot give rise to a petition under Sections 397/398. This Board has held in a number of cases, that in the matter of issue of shares, even it is a single act, since its effect is a continuing one, the same could be a subject matter of a petition under Section 397. Further, the petitioners have also made other allegations. 13. In Howard Smith Ltd. v. Ampol Petroleum Ltd. and Ors., 1974 All.E.R. 1126 while holding that if there is no pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an best done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls. 'The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is in the case of a trustee exercising a special power of appointment.' The main stream of authority in their Lordship's opinion, support this approach. 15. We may also usefully refer to the following observations of the Supreme Court in the case of N.I.I. Ltd. v. N.I.N.I.H. Ltd., :- 118. It is necessary to clear a misunderstanding in regard to the power of Directors to issue shares. It is not the law that the power to issue shares can be used on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals succeed on the finding that the Holding Company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them, as nearly a sit may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. The notice of the meeting was received by Sanders in U.K. On the 2nd May when everything was over, bar the post/meeting recrimination which eventually led to this expensive litigation. If the notice of the meeting had reached the Holding Company in time, it is reasonable to suppose that they would have attended the meeting, since one of the items on the Agenda was Policy-(a) Indiaisation, (b) allotment of shares . Devagnanam and his group were always ready and willing to buy the excess shares of the Holding Company at a fair price as is clear from the correspondence to which our attention has been drawn. In the affidavit date May 25, 1977, Devagnanam sated categorically that the Indian shareholders were always ready and willing to purchase one-third of the shareholding of the non-resident shareholders, at a price to be fixed in accordance with the Articles of Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became majority holders, thus reducing the non-resident a minority holder. The Court held as under:- 29. In the present case we are concerned with the propriety of issue of additional share capital by the Managing Director in his own favor. The facts of the case do not pose any difficulty particularly for the reason that the Managing Director has neither placed on record anything to justify issue of further share capital nor has it been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither was the allotment of additional shares in favor of Ramanujam bona fide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam has to be set aside. 17. In the facts of this case even one such act would be sufficient to constitute oppression and mismanagement as it disturbs the equity stakes decisively by bringing down the equity share of petitioners from 32% to 18% (which would have relevance in taking many manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may also be noted at this stage that the foreign partner reduced its share in equity as and when there was change in legal position in India; first from 49% to 38% and thereafter from 38% to 32%. 19. When the prohibition/restriction on the equity share to be held by a foreign company in an Indian company was eased by the Indian Government, the petitioner wanted to raise its stakes in the Indian company, which, according to the petitioner, was its legitimate aspiration. However, what is of relevance to us is that disputes arose between the two groups and number of legal battles ensued, stock whereof has already been taken above. Apart from two cross suits for injunction and declaration filed by both the parties in this High Court, the petitioner also filed a suit for injunction alleging infringement of its copyright and trade mark. Thereafter proceedings were filed by the petitioner before the CLB culminating into passing of the impugned order. Simultaneously, with the eruption of disputes between the parties, the petitioner has collaborated with other company in India and has started doing competing business. The respondents have also started publishing other titles. 20. The posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrighted books of the petitioner but some other books and at the same time retain the nomenclature given by and associated with the petitioner. If the second respondent has, during this period, started publishing other books, not belonging to the petitioner, it can very well start another venture and incorporate other company for doing that business. It may be noted that during arguments Mr. Sarkar, learned senior counsel for the petitioner, has offered to pay the second respondent a sum of ₹ 20 crores if he willing to go out. On the other hand, if only other alternative given by the petitioner was acceptable to the second respondent and the second respondent was agreeable to drop the name Prentice Hall , the petitioner had offered to transfer all its share in favour of the second respondent without any consideration. 22. Cases are in abundance where directions are given of sale of shares by the majority shareholders to the minority shareholders under Section 402 of the Act (See (i) N.I.I.L. v. N.I.N.I.H.L., and (ii) Re. A company (No 00709 of 1992) O'Neill and Anr. v. Phillips and Ors., 1999 (2) All.E.R. 961). 23. The CLB did not find favor with the first alternative s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prentice Hall would mislead the public and thus, would be against the public interest. I was informed during arguments that most of the books published by the petitioner are educational books. The company is also publishing same kind of books. Giving an impression to the public at large-academicians and students-that the books published by the company are that of the petitioner. Prentice Hall would be perplexing and obfuscating. Furthermore, if the second alternative suggested by the petitioner is not acceptable to the second respondent group who wants to retain the name of the company as well and is agreeable to purchase the shares of the petitioner, which is not acceptable to the petitioner, the effect would be that the stalemate would continue. Consequently, the unfortunate and bitter litigation which has started between the parties would also continue. It may not be in the interest of the company as well to continue with these litigations. Therefore, if the second alternative has to be examined purely on equitable grounds, the petitioner has better case in equity to press for deletion of the words Prentice Hall from the respondent company's name. 25. Next question is, wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the CLB is not right in observing that it is not clear as to whether the consent to use the words Prentice Hall was because of the shareholders' holding in the company and association with the management or because the company was to publish the titles of the petitioner. It has already been observed that as far as the shareholding is concerned, its pattern changed from time to time to comply with the Government regulations. Moreover, even the agreement to publish the titles of the petitioner has since been terminated. 27. Second and third reason given by the CLB is also not valid. Maybe, what is provided in clause 10 of the Agreement dated 6th June 1963 is not contained in the Articles of Association. Had there been such a provision in the Articles of Association to the effect that if the petitioner ceases to be a shareholder the petitioner would omit the words Prentice Hall from its name, the petitioner would have enforced the same as a matter of right. Even the CLB admits so. However, the question is as together a direction of this nature is warranted in the given case, de-hors the Article of Association? Jurisdiction of the CLB (and ultimately of this Court in appeal) u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequate and exhaustively laid down in the articles. The super-imposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued the basis of a personal relationship involving mutual confidence-this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeing' members), of the shareholders shall participate in the conduct of the business; (iii) restriction on the transfer of the members' interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. 28. This judgment was followed by the House of Lords in Re. A company (No 00709 of 1992) O'Neill and Anr. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is driven out of the company but the company continues to adopt its name and wants to continue to ride on its goodwill without being associated with it. Such unprecedented situation would call for unprecedented solution and in my opinion the second alternative suggested by the petitioner that in case the petitioner has to go out from the company it is willing to do so provided the words Prentice Hall are also dropped from its name, is not something which is unreasonable. In such a situation, the argument of the learned counsel for the respondent that the company is a separate entity and the appellant's attempt is to identify itself the company, may also be of no relevance. No doubt, the company has separate legal entity. But we are here concerned with the proceedings under Section 397/398 of the Act and in the process the issue being discussed is as to whether direction can be issued under Section 402 of the Act for change of the name of the company. Such a direction would be permissible in the facts of this case where the petitioner brought this corporate vehicle to India and gave its name is now asked to pull apart and break off and would be no longer associated with it. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent cannot raise the plea that such a course would not be in the interest of the company. I do not agree with the contention of the respondents that present petition is filed for collateral purpose and oblique motives and, therefore, the same was not maintainable and should have been dismissed by the CLB. Reliance on In Re. Bellador Slk Ltd., [1965] 1 All. ER 667 by the respondent in the present case would, therefore, be of no avail. 31. In view of the aforesaid discussion, the nature of relief, as granted by the CLB, is hereby set aside. The appeal filed by the petitioner is allowed in the following terms:- A) An opportunity is granted to the second respondent and his group to exercise his option to accept one of the two alternatives suggested by the petitioner, namely, either to come out of the company and sell the shareholding to the petitioner or to by the shares held by the petitioner in the company;(B) In case first option is exercised, the petitioner shall pay a sum of ₹ 20 crores to the second respondent and his group. If according to the second respondent, the shares held by him have higher value, in that eventuality he may approach the CLB for appointment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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