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TMI Blog2001 (12) TMI 888X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribers to the memorandum were the late Tirath Ram Ahuja and the late S.K. Bagai, yet, immediately after incorporation, the late Chawla was also inducted as a director and he continued to be so till his demise in 1996. The late Tirath Ram Ahuja was a permanent director and chairman of the company as per the articles of association of the company. All the three were electors right from incorporation of the company on February 28, 1950, and the affairs of the company were being managed in line with partnership principles among the heads of the three families. When Tirath Ram expired in 1985, the late J.S. Chawla became the chairman of the company and he continued to function as such till he expired in 1996. In 1985, the second respondent who is the son of the late Tirath Ram Ahuja became the managing director and Sri P.S. Chawla, a son of late J.S. Chawla became the joint managing director, a post created for the first time. When Sri Bagai expired, his son Sri R.R. Bagai joined the company as an employee and he continues to be so even now. In 1997, Sri P.S. Chawla died in an accident. Since the petitioners belonged to Chawla's family, in spite of repeated requests made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the board of the company. But the respondents have refused to do so and instead Sri Arun Ahuja was made a director in June, 1998. Thus, the petitioners have been denied their legitimate expectation of participation in the management of the company. Presently, the entire management of the company is in the hands of only Ahuja's family even though the company was incorporated on the principles of quasi-partnership with participation in the management by all the three groups with remuneration. Chawla's group, even though holds only 12 per cent. shares in the company, had otherwise invested substantial amount of funds in the business of the company as is evident from the statement presented before the Bench. Such investment was made only because the company was in the nature of a partnership. Even though, it is contended by the respondents that the late J.S. Chawla was not one of the promoters since he had not subscribed to the memorandum, he had always been considered to be one of the founders of the company as is evident from the explanatory statement in connection with the special resolution proposed in the 30th annual general meeting of the company convened on June 25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcing the veil, it is found that in reality it is a partnership and if there was an understanding that persons investing in the shares of the company would be appropriately remunerated by way of salary and perquisites with the right to participate in the management, in lieu of or in addition to the dividends, the interest created by such an understanding has to be held as a component of a proprietary right of sets of shareholders while applying equitable consideration. In the case of a small private limited company having very limited number of shareholders, an understanding as to management of the company and remuneration payable in lieu of or in addition to the participation in the profits of the company, could be taken note of by the court in exercise of its jurisdiction under Section 397/398/402 of the Act and grant an appropriate relief. Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp Cas 91 ; AIR 1976 SC 565 : In a given case, the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. Vijay Krishan Jaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give representation to Bagais since they knew that no one could claim directorship as a matter of right. 8. He further submitted : The claim of the petitioners that they should be taken on the board has no basis. There is no right of inheritance recognized in law for appointment to the board. Just because, a person is appointed as a director in recognition of his expertise, it does not necessarily follow that his legal heir would also prove to be a good director. In the absence of any written shareholders agreement providing for perpetual participation in the management by the shareholders, or a provision to that effect in the articles, no one can, relying on customary practice, even assuming it was so, claim representation on the board as a matter of right. Further in the present case, the petitioners are carrying on a competing business and are participating in tenders participated by the company. Therefore, to induct a representative from the petitioners' side on the board of the company would be detrimental to the interests of the company. 9. As far as the financial management alleged by the petitioners is concerned, no particulars have been furnished. Mere suspic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hunjhunwala [1976] 46 Comp Cas 91 ; AIR 1976 SC 565 : When more than one family or several friends or relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is complete deadlock in the company on account of lack of probity in the management of the company and there is no possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on just and equitable ground. Jaladhar Chakraborty v. Power Tools and Appliances Co. Ltd. [1994] 79 Comp Cas 505 (Cal) : Under Section 397/398 of the Act, the court should be satisfied that the affairs of the company are being carried on in a manner oppressive to the members and that the complaining members should establish that the company is liable to be wound up on just and equitable grounds. Asoka Betelnut Co. Pvt. Ltd. v. M.K. Chandrakanth [1997] 88 Comp Cas 274 (Mad) ; [1997] 40 SCL 33 : In the absence of proof that the petitioners had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner for a representation on the board arises out of an implied agreement between the original promoters for participation of all the families in the management of the company as is evident from the long association of over 45 years by the Chawla family in the management of the company. Further, it is also evident that it is only the Chawlas' contribution that resulted in the company accumulating over ₹ 3.75 crores reserve as on March 31, 1998. The present value of the assets is over ₹ 30 crores which was also due to the efforts of the Chawlas. The contention of the respondents that the business of a proprietorship of the late Tirath Ram Ahuja was taken over by the company is not correct and what was taken over by the company was a part of the uncompleted project by the late Ahuja. This is a fit case wherein the principles applied in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL) could be applied and the company be treated as a quasi-partnership for considering the grant of the prayers of the petitioners. 13. We have considered the pleadings and the arguments of counsel. With the view to put an end to the disputes, in view of the suggesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was named as a first director etc. Normally, when two or more persons form a company, the presumption is that they have decided to work within the framework of the articles and subject themselves to the discipline applicable to an incorporated company. Viewing in this manner, the respondents would be right in contending that in the absence of the provisions in the article for joint management, a shareholder cannot demand a position on the board. In this connection it is worthwhile referring to the Jaidka Motor case [1997] 1 Comp LJ 268 (CLB) wherein, after discussing various decided cases, practically all the objections as in this case were examined by this board and it concluded that to treat a company as a partnership it was not necessary to have equal shareholdings, no need for deadlock, no need for pre-existing partnership, etc. It also observed that an analysis of various decisions showed that courts have been looking for some basic understanding written or unwritten between parties. Therefore, if the facts reveal some basic understanding between parties that the company would be managed on partnership principles, then the same could be applied in a Section 397/398 petition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 98 Comp Cas 463 this Board has held that in the course of business of a partnership, a partner is entitled to have certain legitimate expectations. Now in the present case the admitted position is that there is no agreement relating to joint management and the articles also do not provide for the same. Therefore, as held by this Board in Anupar Chemicals (India) Pvt. Ltd.'s case [1999] 98 Comp Cas 575, we have to examine whether the facts reflect the existence of any understanding of joint management justifying the claim of legitimate expectation of being on the board by the petitioners. 17. At the time of incorporation of the company, Sri J.S. Chawla was not a subscriber to the memorandum which according to the respondents would indicate that he was not a promoter of the company. This stand, we are of the view, cannot be sustained for the simple reason that on the day of incorporation itself, he was appointed as a director and his group acquired 800 shares in the company within four days thereafter. Further, in the explanatory statement for Sri J.S. Chawla's appointment as whole-time director and chairman with effect from September 15, 1993, it was specifically mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the three families. In Smt. Nupur Mitra v. Basubani (P.) Ltd. [2001] 41 CLA 306 (CLB) ; [2002] 108 Comp Cas 359 a family consisted of six brothers. Four of the brothers were the signatories to the memorandum and they were also the first directors of the company incorporated in 1948. The total share capital consisted of 500 shares of ₹ 100 each. While one brother had subscribed to 100 shares, the other three had subscribed to 25 shares each at the time of incorporation. In 1950, the balance 325 shares were issued by which shares were issued to all the 6 brothers. The issue and allotment of shares were challenged on the ground that in terms of Section 105C of the 1913 Indian Companies Act, before issue and allotment of shares to outsiders, the then four shareholders who were the signatories to the memorandum alone should have been offered shares and since there was no record to show that it was done and in the absence of any written agreement between the brothers for joint holding and management, the allotment should be declared as null and void. This challenge was made in the year 1998 after the death of all the six brothers. It was contended by the other side that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company is in the nature of partnership between the three families with the understanding of sharing the fruits of the company and as such the petitioners have justifiable claim of legitimate expectation of being on the board of the company. It was contended by the respondents that when the Bagai family sought for a representation on the board, the Chawlas, who were on the board did not consider the request which would indicate that there was no understanding of joint management. We do not have any material to show that Bagais' raised the issue of understanding and that the same was rejected. Any way, if one group does not enforce its rights, it does not bar the other to raise this issue. Therefore, we do not consider that the absence of a member of the Bagai group on the board would disentitle the petitioners to seek a representation on the board. 20. The respondents have pointed out that besides the members of the three families, there are outside shareholders and therefore, the principles of partnership cannot be applied. We have seen the shareholding pattern. From 500 shares in 1950, the total paid up capital increased to 14,800 shares in 1970 by issue of shares on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that judgment would show that the court, after observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (page 495) : therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise 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. In order to be successful on this ground the petitioners have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners . It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit and this would not justify winding up on just and equitable grounds. However, the present case, the claim of the petitioners arises out of their claim of quasi-partnership and we have already held that by denying the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order, but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be open to the minority shareholders with a view to bring to an end the oppressive conduct on the minority . 23. Thus, in the present case, the petitioners have established oppression and since the principles of partnership are applied in this case, denial of legitimate expectation could be a just and equitable ground for dissolution of a partnership and therefore, the company could be wound up on just and equitable grounds and since the company is financially sound it would not be in the interest of the company or the shareholders to wind up the company. Therefore, the prayer of the petitioners for a representation for the Chawlas on the board deserves to be granted. The respondents contend that the petitioners are having a separate comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jas' group within 15 days from the date of this order by communicating their decision to the petitioners in writing. In case the respondents exercise the option to induct a representative of the petitioners, then the petitioners should indicate the name of their representative, who should be inducted into the board within 15 days from the date of receipt of the communication from the petitioners. As long as the Chawlas hold 12 per cent. shares in the company, they will have the right to appoint a nominee on the board of the company with remuneration as a whole-time director. In case the respondents choose the second option of purchasing the shares held by the petitioners, this Bench will appoint an independent valuer to determine the fair value of the shares and give consequential directions. 25. The petition is disposed of in the above terms with the liberty to the parties to apply for appointment of an independent valuer in case the respondents choose the option of purchasing the shares held by the Chawlas. The purchase could be either by the Ahujas or by the company. In the latter case, the company would be permitted to reduce the share capital to the extent of the face v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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