9911796707
TMI Blog1992 (10) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... . These shareholders are part of the Saboo group having 40 per cent. of the total equity. 2. The admitted facts about this case are as follows : Shri R.K. Saboo, father of the petitioner had obtained an industrial licence from the Government of India for the manufacture of hosiery needles in the year 1959. For implementation of the said project, a financial and technical collaboration agreement was finalised with Theodor Groz and Sohne and Ernst Beckert Nadelfabrik Commandet-Gesslschaft (hereinafter called G. B. ), a partnership firm in Germany. The terms of collaboration were approved by the Government of India, vide their letter dated November 21, 1959. The G. B. group and Shri R.K. Sabpo entered into an agreement on April 1, 1960, to form and promote in India a private limited company and in pursuance of the said agreement the company was incorporated on October 15, 1960. Later the company became a deemed public limited company under Section 45A of the Companies Act, 1956. As per the agreement, Shri R.K. Saboo was to transfer the industrial licence to the newly formed company and the G. B. group to provide technical know-how. The total project cost was ₹ 15 lakhs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term of five years, he was appointed as managing director in 1989; On the retirement of Shri R.K. Saboo, the petitioner was appointed on November 10, 1991, as managing director from the Saboo group. 5. The German firm consisted basically of two families, one Groz family and the other Beckert family. Prior to 1987; one Mr. Martin Gass belonging to Groz family was, the chairman of the board of the company. In 1987, there was restructuring in the affairs of GB whereby Dr. Thomas Lindner from the Beckert family became the chairman of the board of directory of the company. 6. It is the contention of the petitioner that the collaboration agreement dated April 1, 1960, and the articles of association provide for shared management between the two groups and equal representation of both the groups on the board of directors, despite unequal shareholding. This was further confirmed by an agreement dated February 7, 1989. The business of the company was to be carried on as joint Venture and on, the basis of mutual trust and confidence to be reposed by the two groups on each other. It is the contention of the petitioner that for all purposes, it was a partnership enterprise between the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge profit margins, non-compliance with requirements of Section 297 of the Companies Act, the exclusion of the Saboo group from the day to day management of the company by withholding important information regarding operations of the company and unilateral take over of certain departments previously looked after by the petitioner, non-declaration of dividend, sale of needles at loss, non-co-operation of the GB group to take effective steps to indigenise raw material supplies and transfer of technology to the company. 8. In the context of issues like maintainability, application of the principles of partnership to a limited company, what constitutes oppression, the nature of the powers of the Bench under Section 397/398 and the type of the reliefs that can be given, both the petitioner and the respondents have referred to the decisions in various court cases. The petitioner relied on the decisions in the following cases : 1. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal). 2. Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. [1983] 53 Comp Cas 883 (Cal). 5. Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom). 4. Cosmosteels Put L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 16. Chandler Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi). 17. Mohta Bros. Pvt. Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40:Comp Cas 119 (Cal). 18. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal). : 10. There is another factual aspect of this case which may be conveniently noted at this stage. While the Saboo group holds 40 per cent. of equity capital, the present petition has been supported by only 25 per cent. of the equity holders. When the petition first came up for hearing on January 30, 1992, counsel appearing on behalf of the petitioner and the respondents prayed that orders for interim relief be passed to the effect that the meeting of the board of directors of the company scheduled to be held on February 7, 1992, be held to consider only items Nos. 1, 6 and 7 of the agenda and the other items be postponed and considered in the meeting of the board of directors to be held on or after March 21, 1992, and we ordered accordingly. At the hearing held on April 8 and 9, 1992, counsel for the respondents brought up the issues relating to holding of board meetings. He prayed that the order dated Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for ex parte stay. As such the defendants are restrained not to consider the items regarding the extension of contract of the persons who have already superannuated or due for superannuation and shall also not take any decision which may amount to reducing the amount of the space available to the directors so the second group to which the plaintiff belongs in the board meetings. 11. It was submitted on behalf of the G. B. group that the order of the Sub-Judge was obtained without disclosing to the court that on the same subject a petition was pending before the Company Law Board and that the Company Law Board had permitted the board of directors to consider this matter and the ex parte stay order obtained by Shri S.P. Mandelia, director, belonging to the Saboo group was with the intention of circumventing the orders passed by the Company Law Board. It was further pointed out that in view of the court order the board was unable to take any decision regarding continuation of Shri Sehgal's services which was essential from the point of view of the company and, therefore, orders may be issued that the services of Shri Sehgal shall not be treated as superannuated till a fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of these facts, though only 25 per cent. shareholders belonging to the Saboo group are parties to the petition, it is obvious that the petition has been filed to protect the interests of all the shareholders belonging to the Saboo group. 15. One more factual aspect also could be noted at this stage before we take up in detail the various controversies between the two groups. The Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the FERA ), came into operation on January 1, 1974. Section 29 of the FERA, inter alia, provides that a company, in which the non-resident holding is more than 40 per cent. would require permission of the Reserve Bank of India (RBI) to carry on business in India. Under Section 29(4), the Reserve Bank of India has power to give directions for disinvestment of foreign equity holding or impose conditions while granting licence to carry on business in India. In 1973-74, the Government required G. B. to reduce their equity ownership in. the company but considering the nature of the technology, the Reserve Bank of India permitted them to retain 60 per cent. of equity and in this matter the Saboo group supported the case of the G. B. gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction of the business of the directors shall be two directors, one of whom shall be from the Groz-Beckert group and the other from the Saboo group. However, with the consent of the Groz-Beckert group in the case of non-presence of any of the directors on their behalf the quorum will be any two directors. Article 105-- Subject as herein mentioned and except as delegated to a managing director local board committee agency or attorney effectively appointed or established under these articles every decision of the directors shall be made by a simple majority of those present and voting at a meeting of the directors. However, the following decisions and matters shall not be effected unless made in the presence of director/directors or both groups and unanimously by all the directors present : (a) Making of appropriations out of the profits : Provided that in case it proves impossible to reach unanimity the dividends will be paid in accordance with Section 23A of the Indian Income-tax Act or any statutory modification or re-enactment thereof for the time being in force. (b) Carrying on of any business activity other than that of manufacturing and selling hosiery needles. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to : (i) make calls on shareholders in respect of moneys unpaid on the shares in the capital of the company ; (ii) issue debentures ; and (iii) except as may be delegated by the board under Section 292 of the Act invest the moneys of the company and make loans or borrow moneys. Article 107 -- The company shall always have as the chairman of the board of directors one out of the four nominees of the Groz-Beckert group on the board of directors of the company. Similarly the company shall have as its vice-chairman of the board of directors one of the nominees of the Saboo group on the board of directors of the company. 17. As noted in para 3 above, there are a large number of areas indicated by the petitioner in the petition about which there are acrimonious controversies, most of which spring out of the proposed expansion programme. These controversies mainly relate to the period after the signing of the settlement arrived at between the two parties on February 7, 1989, regarding their understanding about future management of the affairs of the company. In 1988, GB proposed an expansion programme for 20 million needles based on total export as there was good scope fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with this visit stipulated that the company would arrange to obtain firm commitment from GB in form and substance satisfactory to the Exim Bank to the effect that GB will buy back up to 20 million needles per annum from the company at a minimum average price of DM 165 per 1,000 needles excluding agency commission payable, if any, and the price will be increased corresponding to the increase in the price of the raw material. On May 4, 1990, a board meeting was held which confirmed the minutes of the February 8, 1990, meeting, in which the detailed time schedule of the expansion programme was considered. On August 16, 1990, while approving the expansion programme of the company, the Government of India imposed export obligation in respect of the proposed expanded capacity of 20 million needles, in addition to the existing exports of 17 million needles. On September 3, 1990, Shri S.P. Mandelia, a director belonging to the Saboo group, wrote to Dr. Linder, respondent No. 2, calling for a board meeting as early as possible to clarify the economic viability of the expansion programme before any further steps were taken in connection with the same. In the letter, it is mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to accept itself as an affiliate subsidiary company of GB rather than an independent unit. Another point of dispute in respect of the minutes of the board meeting held on December 4, 1990, relates to the issue regarding the Saboo group insisting on reconsideration of the project, while, according to the GB group, the project was reapproved and confirmed by the use of the casting vote of the chairman. The meetings were held in February-March, 1991, between the Saboo group and GB in Germany to resolve the dispute. It is stated by the petitioner that at these meetings GB declared that whereas the Saboo group perceived the company to be an independent Indian company, GB wanted the Indian company to be a part of its global marketing strategy and a subsidiary and GB reiterated the proposal made in 1988 that the Saboo group should sell its shares and let GB assume total control over the affairs of the company. In the reply filed by the respondents, the respondents have denied the averments made by the petitioner but confirmed that there was a difference in the business philosophy and objectives of the two groups in relation to the working of the company and they had suggested that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce was made to a number of points the Saboo group had raised at the board meeting which the GB group refused to discuss and got postponed. While none of the parties has filed the entire disputed minutes before us in support of their contentions, extracts of some of the disputed items have been filed by both the parties. The issues that were considered at the board meeting included issues relating to the expansion project, the dividend policy, compliance with the provisions of Section 297, continuation of the lease of the transit house at Delhi and the respective authority of the two managing directors over the executives for the smooth functioning and management of the company, At the next board meeting held on November 18, 1991, again all the items relating to various controversies were considered but there are no agreed minutes of that meeting and it has been alleged by the petitioner that the GB group tried to defeat the various resolutions suggested by the Saboo group by the casting vote. It is the contention of the petitioner that even for approval of the directors' report and proposals like indigenisation, travel by economy class instead of business class as an economy me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent No. 4 was sent to the Government for regularisation of the contravention of the provisions of the Import Control Act. This matter came up for discussion at two/ three board meetings and, finally, on November 18, 1991, in connection with the resolution moved by the Saboo group before the board for immediate re-export of spares worth ₹ 40 lakhs supplied by GB and refund of purchase price paid by the company to GB. This resolution was defeated by using the casting vote. It is also submitted by the petitioner that while the company auditors, A. F. Ferguson, earlier circulated a note to the managing director of the company pointing out the contravention of law, this note was later on withdrawn and replaced by a note which did not mention about the contravention of law. It was also submitted by the petitioner that out of imported spare parts of ₹ 38 lakhs, respondent No. 4 was attempting to write off the spare parts worth ₹ 32 lakhs imported for the expansion project but could not do so when the Saboo group objected to such write off on the ground that the matter was not discussed with them. 23. In reply, it has been submitted by the respondents that the expan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enisation of raw material supply and even the proposal of the Saboo group that more Indian manufacturers of raw material should be contacted was defeated by the use of the casting vote. This is because, according to the petitioner, all the supplies of imported raw material are channelised through the GB group which has a vital interest in ensuring that the company remains totally dependent on imported supplies and this continued import of raw material has resulted in a greater outflow of foreign exchange from the country. 25. In reply, the respondents have stated that GB is making only a reasonable profit between 5 to 10 per cent. on the raw materials supplied to the company by procuring the same from manufacturers who have developed the raw material as a result of technical know-how from GB. Even on an earlier occasion, when the customs authorities questioned the valuation of the raw material, on production of the chartered accountant's certificate by the GB group, the valuation was accepted by the customs authorities. This, according to the respondents, would indicate that there is no unreasonable profit margin on the raw materials supplied. Attempts by the company to deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Shri Chagla then elaborated the efforts made by the company to develop local raw material sources over the last so many years and how in the past by use of local raw material, the quality of production had suffered. He challenged the petitioner's contention that the source of raw materials is hot disclosed by GB and stated that on each and every package of raw material imported, the name and address of the supplier and composition of the raw material are given. 28. He also mentioned that the prices for imported raw materials were fixed once in three years, GB was absorbing any increase in the procurement prices. He pointed out that raw material supplied is not manufactured by GB and GB is only procuring it because of GB's contacts with the raw material suppliers which have been developed over the years by giving benefit to them of GB's research and development in this respect. He also mentioned that when the company was under the control of the Saboo group, nothing prevented the company from exploring alternative sources, both indigenous as well as foreign. The present allegation is nothing but another issue essentially arising out of differences between the two g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue to use the trade mark in India. In March, 1988, on the basis of the instructions given by the company, the company's trade mark lawyers wrote to the Registrar of Trade Marks, withdrawing Application No. 414563 made by the company. Shri R. K, Saboo, in his letter-dated April 1, 1988, to Dr. W. Bannmueller of GB confirmed the withdrawal of application for registration of its trade mark. It is mentioned in the letter that in order to facilitate the registration of your application by the Trade Mark Registrar of India, we have withdrawn our Application No. 414563-in class 26. In this regard, a copy of the letter written by our trade mark attorneys, the Acme Company, to the Registrar of Trade Marks, withdrawing the application is enclosed herewith. On October 17, 1989, the trade mark attorneys of the company filed Form TM 35 for self-cancellation of the registration of trade mark. On December 24, 1991, the petitioner, Mr. Y. Saboo, wrote to respondent No. 4 as follows : Dear Mr, Ivanovski, Certain trade mark/logo had been registered in the name of our company under registration number 414563. I am given to understand that sometime back, an application has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner, is not in the interest of the company and all these acts were done under the dictates of GB after it was brought under respondent No. 4. It is mentioned in the petition that after the failure of negotiations held in February-March, 1991, in Germany between the two groups, Mr. Ivanovski, respondent No. 4, was called to Germany by GB and after his return he unilaterally took over the sales and public relations department of the company, under his control despite the objections of the petitioner who was looking after these, departments, as all along these departments were looked after and, managed by the managing director nominated by the Saboo group. It is further alleged that not only these departments were taken over by respondent No. 4 but the petitioner was also kept out of the meetings held by respondent No. 4 with the vice-presidents of the concerned departments. According to the petitioner, this was contrary to the agreement reached between the two groups on February 7, 1989, that both the groups would have equal say in the management and affairs of the company and, vide his letter dated April 12, 1991, he had brought his dissatisfaction to the notice of responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained that only direct cost should be considered for estimating loss and on that basis the loss would be only ₹ 3 to, 4 lakhs. It is the contention of the petitioner that this statement of respondent No. 4 was misleading as even if direct costs are considered, the loss will be over ₹ 56 lakhs and for this purpose the petitioner had filed a duly signed statement of the company's cost accountant. 35. The petitioner further alleges that, apart from using the sales department to further its own plans and interests, GB arid its nominee managing director, Mr. Ivanovski, are encouraging indiscipline and insubordination towards the Saboo group managing director as seen by the behaviour of the vice-president (sales). Correspondence has been exchanged between the petitioner and respondent No. 4 on the matter regarding insubordination and denial of information by the sales department and was also discussed in the several board meetings. This dispute regarding who should control the sales department ultimately became a major issue in relation to extension of the services of the vice-president (sales), after superannuation, culminating in bringing a stay order even for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been on aggregate basis and this has nothing to do with the product costing which is done needle-wise as is essential for marketing purposes. It is pointed out that while the company was selling needles below eost earlier, it was expected to be a short-term phenomenon and the magnitude of the loss was insignificant. However, it is alleged that, presently such sales are made on a very large scale and the estimated loss on account of this during 1991 as per the company's own records, is expected to be ₹ 56 lakhs. In order to curtail the loss, the proposal made by the Saboo group for indigenisation of raw material, has been opposed by the GB group mainly with a view to enable the GB to make their separate profits on the supply of expensive raw material. Dividend policy : 38. It has been alleged in the petition that in order to compel the Saboo group to dispose of their shareholding, the GB group is using the dividend policy in such a way to make the investment of the Saboo group in the company unremunerative and effectively reduce the return on investment to shareholders. In this context, the petitioner has referred to the papers presented to the board of directors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany from declaring any dividend and, therefore, there is no truth that the GB group was not willing to declare any dividend. The respondents have relied on the minutes of the board meeting held on November 18, 1991, however, the minutes of the board meeting are disputed. 40. In the rejoinder, it has been pointed out by the petitioners that the payout ratio of dividend to net profit of the company consistently averaged about 50 per cent. up to 1986-87. Thereafter, it has steadily dropped to about 15 per cent. and to nil in 1991-92. It is also pointed out that although in the past, the dividend had remained more or less in the region of 15 per cent., this was accompanied by liberal issues of bonus shares from time to time which effectively increased the total quantum of return. No bonus shares have been issued by the company for the last 10 years. It is also contended that the proposal by the Saboo group to pay 40 per cent. dividend would have resulted in payment of only 28 per cent. of the net profits which is not only well below the company's average for the last 25 years but also below the industry-wise average of the last three years. It is also pointed out that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied by an approved surveyor in West Germany and by an approved Indian chartered engineer, if required. (v) Since inception of the company, contracts for import of raw material, spare parts, reconditioned second-hand machinery, export of needles except export to USSR and certain neighbouring countries, were made by the company with GB and no disputes were raised about the same so long as the Saboo group was in control of the management of the company. On the contrary, objections raised by the auditors about applicability of Article 105 and disclosure under Section 297 of the Companies Act were taken up by the board of directors and they persuaded the auditors to drop them as in the opinion of the directors, they were not applicable. (vi) The dispute regarding economic viability of the expansion programme started in September, 1990, after a lapse of about one year since the unanimous, approval of the board in August, 1989, and the dispute centred around the issue regarding the price at which the needles were to be exported through GB. (vii) The company had registered its own trade mark under registration No. 414563 and this trade mark is mainly used in the domestic sales. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that GB on its own even got the export obligation deleted. He stated that while the GB group was ready to give a commitment for one year at DM 165 for 1,000 needles and a minimum price of DM 120 for 1,000 needles for another four years, it was not appropriate on the part of the Saboo group to expect a long-term commitment from GB as the company has to shoulder the risk inherent in any business. In reply, Shri Mookherjee pointed out that while the Saboo group was not against the expansion programme, its only request was to reassess the project in view of the increase in the cost of the project as well as the non-availability of the buy-back arrangement at DM 165 per 1,000 needles. Even this simple request for reassessment was vetoed by GB. Referring to the arguments of Shri Mookherjee regarding reappraisal of the project, Shri Chagla argued that the intention of the Saboo group in raising this controversy, after a lapse of one year since approval of the project and after taking steps to implement the project and making substantial financial commitments, clearly indicates that the Saboo group wanted to delay the implementation of the project and delay honouring the commitment give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s arguments that the project report gives all the details regarding old machines, new machines and reconditioned machines that will be supplied and the import licence also gives all the details and, therefore, the allegation that there was fraud or misrepresentation is totally unsustainable. We have considered the facts relating to import of spares ahead of arrival of the machinery on OGL and we do not find any mala fides in this matter ; at the most it only shows that the lead time assumed for getting the import licence was not realistic. 45. Regarding the allegations relating to supply of raw materials and machines/equipment at inflated prices, clauses 6 and 7 of the foreign collaboration agreement specifically provide for GB to supply all equipment required by the company, at cost. There is no clause in the foreign collaboration agreement relating to supply of raw material by GB. However, right from the beginning, the company has been importing raw material through GB and even during the long period when Shri R.K. Saboo was the sole managing director of the company, more than 86 per cent. of the raw material was being purchased through GB. The complaint of the petitioner is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the sale of the needles at a loss. As per Article 105 of the articles of association unanimous approval is required for selling needles at loss. We find that detailed data is available about the costing of the needles. The fact that needles have been sold at a loss is accepted by both the parties. The sale of the needles at a loss started in the year 1987. The controversy is only related to the quantum of loss and the requirement of unanimous resolution. We have not been impressed by the arguments advanced by the respondents in defending this allegation. This matter could have been discussed at the board meeting instead of defeating it by exercise of casting vote. The only defence that the respondents have placed before us is that in the past, during the regime of Shri R.K. Saboo such sales were undertaken without passing any unanimous resolution and in the past the board itself had explained to the auditors that such sales can be made on the basis of business/commercial decisions. While we appreciate the logic behind this contention that in a business involving a large mix of products, sometimes some items may have to be sold below the cost of production as a business-decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain the international prices for the company's products so as to get the best available terms for exports. However, this resolution was defeated by the GB directors by exercise of the casting vote. In view of this, it has been submitted by the petitioner that the GB group has effectively prevented the company from making any further effort to promote direct exports and also even from obtaining independent information regarding the international market. 49. It is the contention of the respondents that the sale prices of needles purchased by GB from the company are not dictated by GB and these transactions are being made for the last so many years and no such allegation regarding export prices was made by the Saboo group in the past. The respondents have challenged the documents relied upon by the petitioner on the ground that they were neither from manufacturers or dealers or with respect to GB products and they are essentially the prices of retailers of certain other products which have no bearing on price at which GB had sold the needles. It is also submitted by the respondents that the percentage of sales through GB has come down substantially and GB has been taking up the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al control of the management, in terms of quantity the sales through GB was 24,24 per cent. of total sales and in value, it was 19.11 per cent. A chart has been given covering all 75 items covering all export contracts direct and through GB for the year 1991 and comparative prices realised in the export market as well as in the domestic market. There are only a few items where comparative data regarding the prices of direct exports and exports through GB are available. On the basis of this data, it is very difficult to arrive at a definite conclusion. In certain cases, the prices realised by exports through GB were higher than the domestic price while in some cases the price realised from direct export was less than the domestic price. There are also a few cases where the prices realised by exporting through GB were less than the domestic prices and vice versa. On the whole, considering the trend of reduction in reliance on exports especially through GB, efforts made by the company to get the export obligation deleted and the inability of the petitioner to substantiate the allegations by proper documents or evidence about the huge margins alleged to have been made by the GB group, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year of audit at the board meeting held on August 29, 1989. It was then explained by the board to the auditor that the provisions of Section 297 were not applicable to such transactions and that such a view was also accepted in the past by the previous auditors of the company. It is further stated that at the conclusion of the board meeting a note signed by the then sole managing director Mr. R.K. Saboo, and the then technical director of the company (respondent No. 4) was given to the auditors indicating that the section is not applicable and the company would arrange to obtain a written legal opinion. The company obtained a legal opinion from Justice A. N. Grover, a retired judge of the Supreme Court of India confirming that Section 297 was not applicable to such transactions. It is the contention of the respondents that the controversy regarding alleged violation of Section 297 is baseless and raising this issue in a Section 397/398 petition is not bona fide. It is further submitted that the attempt of the Saboo group to convey the impression that it is more concerned with the observance of laws and rules must fail since all the matters complained of were also in existence at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section and not to defeat its object. From this point of view, it does not matter whether one of the contracting parties is a foreign firm or a foreign company. Vice versa, the possible contention that the company as defined in the Act only means an Indian company and it does not include foreign firm is untenable, firstly, because the definition itself is only to be understood in the light of the provisions of the Companies Act, clearly specifying that the word would mean what it says only when the context does not require otherwise. In the context of Section 297, the word company would include a foreign company. Moreover, under the Indian law, the English law and the German law a firm is not a legal entity but a collection of individuals, and there is no difference between the position of an Indian firm or an English firm or a German firm and the word firm is not defined under the Companies Act. Therefore, in any event, for the purpose of this case, since we are concerned with a foreign firm, even the little doubt about the nature of the company will not arise in regard to a firm and Section 297 will apply to a firm whether the firm is an Indian firm or a foreign firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, we have to examine not the formal aspect of compliance with the statutory provision but we have to deal with the basic question as to the conduct of the directors and their fulfilling the test of fiduciary obligation. In this context, we have noted that when such a contract is approved by the board, an application for the approval of the Central Government is to be made in Form No. 24A prescribed under the Companies (Central Government) General Rules and Forms, 1956, with required documents. A perusal of the form indicates that the Central Government requires (i) the proposal for which approval is required, (ii) particulars of the contract to be entered into, (iii) whether the terms of the contract confirm to prevailing market rates, (iv) if the company has entered into any contract with any other person in respect of sale of the same kind of goods, whether the terms of such contract are similar to the terms of the proposed contract and (v) if there is any variation in rates, the reasons for the same. The particulars to be submitted for approval of the Government do not require the purchaser to reveal information at what price he is reselling the goods or at what price he had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management and a case is made out that it is just and equitable to wind up the company. Referring to the memorandum of understanding, articles of association and the terms of agreement dated February 7, 1989, it was pointed out that though the company is a Section 43A company, in reality it is nothing but a partnership between the German group having 60 per cent. equity and the Saboo group having 40 per cent. equity. Despite the unequal equity holding, both the groups have equal representation in the management. It was pointed out that the partnership was formed in good faith and confidence and now there is no faith and confidence and there is a deadlock in the management. The GB group is not functioning or exercising the casting vote in the interest of the company and even for taking decisions in the day-to-day affairs, the GB group is taking recourse to the casting vote. Shri Mookherjee argued that all the allegations made in the petition are sufficient to make out a prima facie case to seek winding up of the company. Shri Mookherjee then referred to decision in Ebrahimi's case [1973] AC 360 (HL) and Hind Overseas' case [1976] 46 Comp Gas 91 ; AIR 1976 SC 565, to substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved by the board of directors of the company during Shri R.K. Sabop's tenure. 58. Challenging the arguments advanced by counsel for the respondents, Shri Mookherjee pointed out that though the articles provide for exercise of a casting vote by the chairman, the provisions of Article 105 of the articles of association provide for a unanimous decision by all the directors present at the meeting on certain matters and in respect of these matters, the casting vote has no relevance. He also pointed out to the provisions of Article 99 which stipulates that the quorum for a board meeting is two directors, one from each group and if one group is not present, then no board meeting can be held. He further pointed out that there are number of instances relating to issues covered under Article 105 wherein unanimous decision has not been possible. Thus, according to Shri Mookherjee, a deadlock already exists and the articles do not provide for resolving all such deadlocks. Shri Mookhenee further argued that even in a case where the articles provide for exercise of a casting vote, natural justice demands that such use of the casting vote should be to decide the matter in the interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il through the correspondence between the parties and also taken us through the several court decisions wherein, particularly, the point regarding application of the principles of dissolution of partnerships to companies was decided. We find that in a domestic or family company, courts have applied the partnership principle when shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. In the case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Gas 390 (Delhi), the Division Bench of the Delhi High Court considered decisions in several cases decided by the English courts and Indian courts on this issue. After examining the decisions in Furrier's Alliance Ltd., In re [1907] 51 Sol Jo 172, Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 (CA), Davis and Collett Ltd., In re [1935] 5 Comp Gas 467 (Ch D), Lundie Brothers Ltd., In re [1965] 35 Comp Gas 827 (Ch D), it was concluded that the trend of the English cases has been to apply the principle of partnership to deadlock cases. If the deadlock is found to be resolvable by resort to the articles of association, then the applicability of the said principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he three most important indices of partnership, viz., equal status of the partners (though not necessarily equal interest), equal participation in management and mutual confidence, are the basis of association. A private limited company which is an association of persons in a joint stock company, who have agreed to keep the membership amongst themselves and who have divided the participation more or less equally should, therefore, be ordinarily treated as analogous to a partnership. The Division Bench of the Delhi High Court did not agree with these views expressed by the appellate court. It was observed (at page 436 of 44 Comp Cas) : For a company, after all, on incorporation, becomes an entity different from a partnership. And the rules for dissolving a partnership on just and equitable grounds cannot easily be imported in a case for dissolving a company on similar grounds. There may be cases where the partnership principles may be applicable, such as deadlock cases ; but, apart from other things, the provision in the articles, whereby the deadlock, if any, can be resolved the availability of the alternative remedies cannot be ignored. 60. The Supreme Court in Hind Over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saboo group and the chairman of the company shall have a casting vote. As per Article 99, the quorum necessary for transaction of the business of the company shall be two directors one from each group. In addition, while most of the decisions of the directors shall be taken by simple majority, in respect of ten matters mentioned in Article 105 unanimous resolution of the board of directors would be required. All the above arrangements have been incorporated in the articles of association and the relevant articles have been mentioned in para 7 of this order. While it is clear that the groups do not have equal shareholding, unless both the groups are ready to co-operate and co-exist, no meetings of the board of directors can be held because of the provisions of Article 99 nor can matters relating to the ten items which require unanimous resolution as per Article 105 be decided upon unilaterally. In respect of day-to-day matters, since the chairman has the casting vote, it might be argued that it is possible that the deadlock can be resolved by exercise of this casting vote. However, the deadlock in respect of board meetings, as well as the items which require unanimous resolution can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioner as members of the company. The various allegations and facts relating to them have been dealt with extensively in paras 8, 9, 10 and 11 of this order. Both Shri Mookherjee and Chagla referred to a number of court cases and well known propositions established in respect of what constitutes oppression. Shri Mookherjee elaborately referred to the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Gas 1 (HL) and pointed out close resemblances and similarities in that case and the facts of this case. He pointed out that so long as there was no conflict of interests, nominee directors had no difficulty in doing their duty as directors of the company. But once the interests were in conflict, the nominee directors failed to protect the interest of the company because of inaction. Shri Mookherjee pointed out that all the Saboo group's efforts to make the Indian company independent in respect of raw materials purchases, direct export, etc., have been opposed by the GB group through the nominee directors as there was conflict of interest. Thus, the majority acting through nominee directors subordinated the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the various acts complained of lack in probity and are unfair to the minority. He pointed out that frequent use of the casting vote by the chairman belonging to the GB group left no choice to the minority shareholders but to submit to such conduct. 66. Shri Chagla referred to important considerations which have to be kept in view in determining the issue of oppression and which were summarised in the decision of the Supreme Court in S.P. Jain v. Kalinga Tubes Ltd. [196.5] 35 Comp Cas 351. In that case, the Supreme Court had referred to the decisions of the English courts in Elder v_ Elder and Watson [1952] SC 49, George Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954] SC 381, Scottish Co-operative Wholesale Society Limited v. Meyer [1959] 29 Comp Cas 1 which was an appeal from Meyer's case [1959] 29 Comp Cas 1 and H. R. Harmer Limited., In re [1959] 29 Comp Cas 305 and summarised the following conclusions : (i) Although the word oppressive is not defined, it is possible by way of illustration, to figure out a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is a deadlock and loss of confidence, Shri Chagla pointed out that it is not enough to establish a case of oppression. He pointed out that the GB group had never shirked from discussing any issue in the meeting of the board of directors and all the necessary information was made available to the Saboo group so as to enable them to discuss the various matters adequately in the board. He, therefore, concluded that the charge of lack of probity or unfair dealing cannot be established against his clients. Shri Chagla argued that the motive of the petitioner in raising all these controversies is not for protecting the interests of any shareholder or the company or the public interest. He pointed out that just before the crucial board meeting in August, 1991, the Saboo group submitted 17 demands which mainly related to protecting their own benefits and which they were claiming as a matter of right in the company. In addition, they also claimed that they should get, somehow, a share in the profit arising out of the transactions of the company with the GB group. Shri Chagla pointed out that this was totally not acceptable to the GB group and hence the disagreement between the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, but it did not douse the fire completely. It remained smouldering. Efforts made in February-March, 1991. at the meetings held in Germany failed to improve the situation. The controversies have resulted more in mud splattering than bringing out any real problems. Allegations made by both groups have created more bitterness without resolving the crisis already existing. When the crisis developed, instead of evolving a strategy for solving the problem and conveying a message about the areas of grievance honestly and transparently both the groups found more convenient to indulge in shadow boxing and accusing each other of intrigue. Matters which could have been solved by better communication and sharing of information, were made worse by clamming up which only created further antagonism. The allegations relating to exclusion of the Saboo group from day-to-day management, withholding of important information regarding the operation of the company, unilateral take over of certain departments by the GB group, non-co-operation by the staff of the sales department, allotment of space to the directors representing the Saboo group and extension of service of certain senior executives of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7] 47 Comp Cas 92 (Bom) in which a detailed analysis of various sections contained in Chapter VI of the Act was made and it was pointed out that these provisions are not subject to other provisions contained in sections dealing with usual corporate management of a company in the normal circumstances. It was held that the subjects dealt with by Sections 397 and 398 are such that it becomes impossible to read any such restriction or limitation on the powers of the court acting under Section 402. It was observed an examination of the aforesaid sections brings out two aspects; first, the very wide nature of the power conferred on the court, and, secondly, the object that is sought to be achieved by the exercise of such power, with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by those sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court's power. Further, sections 397 and 398 are intended to avoid winding up of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act and there can be no doubt that the intention of the Legislature was to confer wide and ample powers upon the court for regulation of the conduct of the company's affairs and to provide for any other manner which the court thinks just and equitable to provide for, in the interests of the corporate body and the general public. Referring to the decision of the Supreme Court in Cosmosteels Pvt. Ltd. [1978] 48 Comp Cas 312 (SC), Shri Mookherjee pointed out that if the court gives a direction under Section 402 to the company to purchase the shares of some of its own members, consequent reduction of share capital can be done and it will not be necessary to give a notice of this reduction of share capital to the creditors of the company nor is it required to follow the prescribed procedure in sections 108 to 111 of the Companies Act. Shri Mookherjee then pointed out that the petitioner is seeking the reliefs in order that the corporate structure should continue and the interest of his client should be protected. He pointed out that the reliefs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and has no other-business except this. In this context, he also pointed out that the business of the Indian company is a small fraction of the worldwide activity of the GB group and, therefore, they should have no objection if the Bench comes to a conclusion to divide the property and business of the company in the proportion of their shareholding. In this connection, he also referred to Article 131 of the articles of association of the company and pointed out that it would be applicable only if the company goes into liquidation. He also pointed out that Article 131 is ultra vires the Companies Act. Shri Mookherjee then referred to the third alternative relief that can be considered by this Bench in deciding the petitioner's case. He pointed out that since the petitioner is vitally interested in the business of the company and is willing to buy the shares of the foreign collaborators, there is a case for directing the majority to sell the shares to the minority. He made it clear that they are willing to purchase the shares but are not willing to sell the_shares as this is the only business which the Saboos have. In this connection, he also pointed out that the Reserve Bank of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 and 105 in order to stall the expansion project which was unanimously approved by the board when Shri R.K. Saboo was the sole managing director of the company. He pointed out that all the acts complained of have been discussed in great detail at the meetings of the board of directors and whatever information was required by the Saboo group has been made available at the board meetings. Referring to the plea of Shri Mookher-jee that the Saboo group should be allowed to buy the majority's shares, Shri Chagla pointed out that the Saboos have only a financial stake in the company while the GB group has a much greater stake in the company. He pointed out that the company was started on the basis of German technology and the technology is an intellectual property of the GB group. Nobody can use the trade mark owned by the GB group and the Indian company cannot use independently the trade mark which is the property of the GB group without their permission. He also pointed out that upgrada-tion of the technology will meet the future domestic demand of Indian consumer only if GB continues in the company. Shri Chagla pointed out that it is a well established principle that it is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to our notice that it was a family company doing trading business in which case sharing of goodwill assumes a substantial importance. There is no such case in the present situation. Shri Chagla concluded his arguments stating that in the light of the foreign collaboration agreement, provisions of the articles of association and well established principles in various court cases, whenever a situation of deadlock as in the existing case arises and the functioning of the company is affected because of the serious disputes between the two parties which cannot be reconciled, there is no other option but to ask the minority shareholders to sell their shares to majority. He pointed out that any independent auditor could be appointed to decide the valuation of the shares and the shares can be purchased either by the GB group or by another Indian party or by a non-resident Indian subject to the approval of the concerned authorities both in respect of the level of foreign participation as well as the industrial licence requirements. 73. We have carefully considered the arguments in relation to the type of the relief that could be granted by this Bench. No doubt, we have come to the conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present case and there is absence of any agreement between the parties on bifurcating the assets. Therefore, the only solution that can put to an end this dispute is severing of the relationship by sale of shares by one party to the other. While the petitioner has made it clear during the hearing that he is not interested in selling his shares, he is willing to buy shares of the respondents and has prayed for such a relief. In this context, Shri Chagla has pointed out the decisions in large number of court cases establishing the principle that it is the majority which has the right to purchase the share of the minority shareholders and it is the oppressor who has to pay the price for the shares of the oppressed. It is settled law that the majority should never be forced to sell its shares to a minority and the relief that can be given in such a case to a minority shareholder is to ensure a fair price for the shares he is required to sell. Accordingly in this case the GB group which is holding 60 per cent. of the shares should buy the shares of the Saboo group. In order to buy shares of the Saboo group, they will have to obtain permission from the Reserve Bank of India and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uer, respondents Nos. 2 and 4 would deposit with the company the value per share for 2,86,661 shares held by the petitioner and 12 shareholders who have supported the petition. The company would immediately deposit this money in interest bearing fixed deposit for not less than 90 days. The company would also inform the petitioner about the fact that the GB group has deposited the amount. (3) The petitioner and the 12 shareholders supporting the petition will deposit all the 2,86,661 shares along with duly executed transfer forms with the company within 45 days from the date on which this order is served on the petitioner. (4) The other shareholders belonging to the Saboo group who are not before us, may also avail if they so desire, of this option of selling their shares to the majority shareholders at the price as determined by the valuer appointed under this order. The company will write within 15 days of the receipt of this order to all such shareholders about the option available and within one month from the receipt of the letter from the company they will file their consent, if they want to sell their shares with the company along with share certificates and duly execut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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