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TMI Blog2001 (12) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... a 'Distributor Agreement', a 'Trade Mark Registered User Agreement' It also provided for amendment to the Articles of the Company. Pursuant to this agreement, Articles were amended providing for requirement of special resolution on certain matters, appointment of one-third of the directors by the respondent, requirement of affirmative votes by the nominees of the respondent in the board meeting on certain matters, providing for quorum only in the presence of at least one nominee of the respondent in the Board meeting. The respondent acquired 26 per cent of the shares in the Company. While 'Distributors Agreement' was entered into, the other two agreements, namely, 'Name Protection Agreement' and 'Trade Mark Registered User Agreement' were not entered into. The 'Technical Collaboration Agreement' provided for expiry of the agreement by 16.02.1991 with a provision for premature termination by either of the parties. The Company started manufacturing ultrafilter int he name and style of Ultrafilter which is a trade mark of the respondent. Since the concept of using ultrafilter developed gradually into the use of filters along with drye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. Only by piercing the corporate veil, the real relationship between the parties would emerge and it will show that the association between the petitioner and the respondent is nothing but a pure partnership. this being the case, neither in law nor in equity, a partner can commence or carry on competing business with the Company. Even the title of the Agreement between the parties at Annexure A-4 is styled as 'Shareholders Partnership Agreement'. A reference to Annexure R-13 would indicate that even while considering amendment to the Articles, the stand taken by the respondent was that its interest should be protected as a partner in the joint venture company. All these facts would squarely indicate that the principles of partnership be applied in deciding the disputes between the parties in the present petition. He further argued that having successfully implemented the project and finding that the Company was doing well, the respondent decided to gain control of the Company by seeking to increase its shares to 51 per cent as is evident from Annexure R-1, wherein a threat had been given to the second petitioner that in case the respondent is not allowed to increase i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious acts of dereliction of fiduciary duties by the respondents and suggested that to put an end to the disputes the petitioner would be willing to purchase the shares held by the respondent on a value to be determined in terms of Article 10(g) of the Articles of Association of the Company. However, the respondent was not agreeable to this suggestion. 3. Though the parties have resolved to end the controversy at the Board meeting held on 12.10.98, the respondent started to enter into competition with the Company. The respondent by its letter dated 20.10.98 (Annexure A-25) has clearly expressed its intention to establish its own subsidiary in India so as to market its products including filters made in Germany. This act of the respondent, according to Shri Raghavan is contrary to its obligations of good faith and fair dealings and not justified by a partner. He pointed out that the dispute in relation to trade mark issue is the subject matter of a civil suit at Bangalore. In spite of the interim order passed by the CLB, the respondent caused advertisements inviting distributors in India for its products. Shri Raghavan emphasised that the conduct of the respondent in having busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital, or otherwise. (iv) Jaldu Anantha Raghurama Arya v. East Coast Transport and Shipping Co. (Private) Ltd. - (1958) XXVII CC 20 -- The Court came to the conclusion that it was just and equitable to wind up the Company in view of the fact that one of the shareholders was actively engaged in promoting interests of a firm which was conducting a similar rival business. (v) Lindley on Partnership (14th Edition) -- The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arises between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour. (vi) Needle Industries (Indian) Ltd. v. Needle Industries Newey (India) holdings Ltd. (vii) In Re Elgindata Ltd.: [1991] BCLC 595 -- In general members of a company have no legitimate expectations going beyond the legal rights conferred on them by the constitution of the Company, i.e., to say its memorandum and Articles of Association. Nonetheless legitimate expectations super imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, it is to be noted that the increase in the shareholding was being discussed between the parties right from 1992. As a matter of fact a telex sent by the second petitioner to the respondent on 1.3.92 reads: I am pleased to inform you that we are agreeable to give you 51 per cent shareholding in Ultrafilter (India) Private Limited generally in accordance with the terms agreed to on 21.02.92. Later he informed the respondent that due to difference of opinion among his family members he could not take further action in increasing the share capital of the respondent. Therefore, it is wrong to suggest that the respondent, on its own, tried to force the petitioner to offer 51 per cent shares in the Company. A reference to the letter of the respondent dated 20.04.1993 (Annexure R-41) would indicate that the intention of the respondent even after getting 51 per cent shares in the Company was to continue as a partner with the second petitioner with a common objective rather than being a competitor. The letter at Annexure A-17 is not a threat given to the second petitioner, but with a view to promote the Company with a higher shareholding. Therefore, the allegation that in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another company to manufacture filters which are presently manufactured by the Company and as such it is the second petitioner who has acted in breach of his fiduciary duties to the Company. Presently, after the dispute started, the respondent has started manufacturing filters but not those which are being manufactured by the Company. 8. In regard to the claim of the petitioners that the Company is in the nature of a quasi partnership, Shri Naganand submitted that this principle is to be applied only in case of dissolution of a partnership and not to a Company. In the present case, just to get out of contractual obligation, the petitioner had filed this petition involving the principles of partnership when the respondent had acted in terms of the contract, such exercise can never be oppressive to a shareholder. Even though, the petitioner has contended that the respondent has veto powers in terms of Articles, yet so far the respondent has not used the veto power. None of the cases cited by the learned counsel for the petitioner in relation to application of partnership principles could apply in the present case since the respondent being in minority could never oppress a majorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the decision of Apex Court in Anuman Prasad Bagri case -- 2001 (105) CC 493. The petitioner being majority shareholder cannot invoke any remedy under Section 397/398, especially when the remedies are available only to the minority shareholders. In this connection, he referred to the decision of Delhi High Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. -- (1983) 54 CC 235. He further referred to various decisions where right of majority to apply under Section 397/398 has been recognised, which according to him are not applicable to the facts of the present petition. He further submitted that the petition is bad for non-joinder of necessary parties, namely M/s Pace Equipment and Sabroe. The respondent called upon the petitioners by its letter dated 20.10.97 not use the name ultra filter whereas the petition has been filed in October, 1998. The petition has been filed after a delay of one year of notice of termination issued by the respondent. He further pointed that the petitioners deliberately fudged the Articles of Association omitting recitals having bearing on the petition, which disentitles the petitioners who claim equitable remedy before the Company Law Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership principles can be applied only in case of a deadlock, Shri Raghavan pointed out that in Needle Industries case, the Court has held that a partnership can be dissolved once it is established that there is a breach of utmost good faith by a partner. Therefore, when a company is established based on mutual trust and confidence, which is breached, then the principles of partnership could be applied. In regard to the decision of the Supreme Court in Bagress Cereals Private Limited case cited by the Counsel for the respondents, Shri Raghavan submitted that in Needle Industries case (AIR 1981 SC 1298) which was decided by a three-judge Bench, at paragraph 171, it was held that even if acts of oppression are not established such technicality cannot be permitted to defeat the exercise of equitable jurisdiction conferred by Section 397. Therefore, the decision in Bagress Cereals by a division bench cannot over rule a decision of a three-judge bench and therefore the principle of share decision would be applicable. Further, in the present case, the petitioner has clearly established acts of oppression and therefore, the Company Law Board can, in exercise of its equitable jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a matter of fact, even though the respondent holding only 26% shares is in the minority, it has veto powers in the board meetings. Further, as rightly pointed out by Shri Raghavan, even the shareholder agreement has been termed as Shareholder Partnership Agreement , evidencing the fact that the intention of the parties had been to carry on the business of the Company as that of a partnership. Therefore, we have no hesitation to hold that the Company is nothing but a glorified partnership between the petitioner and the respondent. 15. Once we have held that the company is in the nature of partnership, we have to examine, on the basis of the allegations, as to whether the respondent has breached its duty of utmost good faith towards the other partner and whether its conduct is of the highest standards expected of a partner. 16. The complainants of the petitioner relate to the attempt of the respondent to gain majority shares in the Company, forcing the Company to deal with Sabroe dryers and their putting fretters in the free commercial functions of the Company, termination of the Name Protection Agreement and entering into competing business with the Company. 17. In regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial interest of the Company, insisted on marketing Sabroe dryers is concerned, we find from letter dated 14th March, 1996 (Annexure A-8) that the respondent, while informing the petitioner that since M/s Sabroe of Germany had established production facilities in India for manufacture of dryers, the Company may not be in a position to compete with them for dryers and as such had given a list of alternate resources and the Company has chosen to market the dryers manufactured Fruilair of Italy. Between this period and February, 1997, the respondent is stated to have acquired M/s Sabroe of Germany. From the letter of the petitioner dated 18th February, 1997 at Annexure A-10, we find that the petitioner had expressed his apprehension that the acquisition of Sabroe which has a collaboration with Pace Equipment which is competing with the Company would give an advantage to M/s Pace Equipment. Again, by another letter 22nd March, 1997 (Annexure A-12), the petitioner has advised the respondent not to enter into any other business association with Pace Equipment, which if done so, would be detrimental to both the petitioner and the respondent. In its letter dated 19th March, 1997 (Annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted in a manner which is beneficial to the interest of the Company. However, we also note that the contention of the Counsel for the respondent that the petitioner should have placed this matter before the Board of Directors for taking a commercial decision on this issue. However, considering the relationship between the parties and their attitude in this regard, we do not consider this lapse as a material. Reliance of the learned Counsel for the petitioner on Lindley on Partnership (14th Edition) that a partner cannot seek benefit at the instance of the firm cannot be straight away applied in this case, in as much as the petitioner has not given any details as to how the respondent sought to derive benefit at the cost of the Company in seeking marketing of Sabroe dryers of the Company. 20. Even though there was no allegation in the petition that the respondent had started a business in competition with the Company, yet when CA 253/98 was filed with certain documents indicating that the respondent was intending to start competing business with the Company, this Bench passed an order on 27.10.98 restraining the respondent from doing any act which would be in competition with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent heavily relied on Bagress Cereals case to contend that to seek any relief, the petitioner should be in a position to show that the Company is liable to be wound up on just and equitable grounds and that such winding up would be prejudicial to his interest. It is to noted that in that case, the Supreme Court finding that no act of oppression had been established also held that for a relief under Section 397, the petitioner should satisfy the Court that the Company is liable to be wound up on just and equitable ground and such a winding up would not be in its interest. In that case, the issue relating to quasi partnership was not before the Court. The ground for dissolution of partnership on just and equitable grounds are wider than those for winding up of a company on just and equitable grounds. This aspect has been examined in detail in Anupar Chemicals case. In the present case, we have already held that the principles of partnership could be applied. The relations 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 equitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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