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TMI Blog2021 (6) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... gement of the Gujarat Division is not getting the required funds and hence, they have to go for high cost external borrowings and that has consistently contributed to the business losses. Already the division has not been doing well and the high cost of borrowing aggravated the situation. It is evident that the Board has asked for revival plan of the Gujarat Division. Apparently, the plans submitted by the Gujarat Division (meaning Kamdars) did not find favour with the Board. Nothing prevented the Board to formulate a revival plan for the Gujarat Division and give directions to the Gujarat Management to put things in order. The problem which we perceive is that the divisions were treated as companies within a company and while the Board took credit for profitable units, it blamed the local management for losses, without initiating proper remedial measures though empowered to do so. Whether the company is a quasi-partnership or not, cannot be decided at the interim stage. The prayers made in CA No. 1008 of 2020 are based on facts relating to the averments made in the Company Petition alleging oppression and mismanagement. Therefore, at this interim stage entire gamut of the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares and is also one of the Executive Directors. R6 to R17 are holding 40.64% of the share capital. R18 to R22 are the shareholders collectively holding 1.94% of the share capital. d) The Petitioners are called as the 'Kamdar Group'. R2 to R17 (wrongly mentioned as R21 in the Petition) are called the 'Sanghvi Group'. Kamdar Group are deemed to include R18 to R22 who form part of Kamdar Group. As a result, the Kamdar Group collectively holds 17.49% of the share capital of R1. The Sanghvi Group holds 64.95% of the share capital of R1. e) R2 is the son of P2's sister (wife of late Manubhai P Sanghvi). Thus, P1 is R2's mama's son. R1 company is a quasi-partnership with three units respectively running in Gujarat, Maharashtra and Andhra Pradesh Telangana. R1 was incorporated on the basis and premise that it shall be collectively managed and administered by Kamdar and Sanghvi groups as a quasi partnership. f) Separate account books were maintained in respect of each of the above business units. g) The P2 has been continuing as Joint Managing Director (leading the Kamdar Group) and R2 is continuing as Managing Director for the last 40 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be to conduct and supervise the business activities of the Gujarat Division and he would be responsible to the Managing Director for carrying out his functions in accordance with the policy laid down by the Board from time to time. The Petitioner No. 2 being the Joint Managing Director of R1 Company stationed in the Gujarat Division was responsible to the Managing Director of R1 Company for carrying out his functions. In this context, a reference was made to Executive Director's Agreement executed between the P1 and R1 Company, which clearly demonstrates that the Petitioner No. 1 shall be acting under supervision of the Board. The relevant extract of the Executive Director's Agreement is reproduced hereunder: ...The Executive Director's headquarters will be at Ahmedabad in the State of Gujarat. The Executive Director shall be subject to the superintendence, control and directions of the Board of Directors of the Company and will be responsible for the general conduct and management of the business and affairs of the company... 4. On 12.03.2018, a notice was issued for convening the 567th Board meeting on 21st March 2018 to transact, inter alia, the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e evident that the stock available at Gujarat Division did not match up with the short term limit availed from the Bank. P1, on 09.07.2020 wrote an email and sought intervention and advise of the Board in relation to the request made by ICICI Bank. e. Again the Petitioners addressed an email to the Board on 13.08.2020, enclosing a message from ICICI Bank demanding funds and therefore, reiterated their request to the Board to intervene and take corrective measures. f. Due to the Petitioners' mishandling of the Gujarat Division, the situation had deteriorated to such an extent that Gujarat Division had no money for making payment of statutory dues, i.e. goods and service tax of Rs . 3.5 crores, though the same has been collected by them from the customers. For this also, the Petitioners requested R1 to make arrangement for payment. In view of this, A3 addressed an email dated 20.06.2020 to P1 and P2 requesting them to provide a plan. The Petitioners' abysmal handling of Gujarat Division is evident from the fact that Ashok Leyland (AL) which is one of the most significant business partners of R1 was constrained to address an email on 19.06.2020 to P1 requesting their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners as a counter blast to this Application, have filed an Application making allegations against the Applicants and R5 and have inter alia sought the appointment of an Administrator for the R1 company. k. In the past, R1 company had, on several occasions, including emails dated 21.06.2018 and 26.04.2020 of the Applicants and Org. Company Respondent No. 5, asked the Petitioners to furnish a business turnaround plan for reviving the business of Gujarat Division, so that the Board could take an informed decision on arranging funds. Despite repeated reminders, till filing of this Application, the Petitioners had failed to furnish such a plan, to arrest these losses and improve the profitability of the Division. l. The business turnaround plan submitted by the Petitioners to the Board on 29th October 2020, much after the filing of this Application, contained several discrepancies and significant shortcomings, which were highlighted by the other board members during the 589th Board Meeting held on 19th December 2020 and the Board had requested the Petitioners to provide a concrete business turnaround plan. However, till date, the Petitioners have not taken any corrective measu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears from 2008 to 2020. These calculations are taken out from audited financial data and books of accounts of R1 which were approved by the Petitioners in previous board meetings/AGM. r. The Gujarat Division does not qualify for the performance linked incentives. This has been the cause of lower margins resulting into heavy losses suffered by it. s. Since decades the profits of the respective divisions have been ploughed back into that same division for expansion of business activities based on the opportunities created in the best interest of the Company as a whole and shortfall is bridged by way of borrowings viz. Term Loans from the banks/financial institutions. t. The Gujarat Division has only made marginal profits till the year 2000. In past, the funds were sent by Gujarat Division to the head office to contribute partly for common expenses. The other two divisions also did the same. A large part of these common expenses however was met out of the cash flows from the Maharashtra Division. u. The Maharashtra Division for decades has paid for the Gratuity Trust Fund for the employees of the Gujarat Division and for R1's contribution and employee contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... request for funds which was nothing but seeking release of funds already agreed under the MOD. May be you were not having enough faith in the MOD and the modality of the settlement scheme you as a majority had decided... aa. Based on the MOD, which is a solemnly signed agreement between the Petitioners, Applicants and R5, a sum of Rs . 56 Cores was paid on 1st September 2020 by the Maharashtra and Andhra Pradesh Divisions towards the bank liabilities of Gujarat Division. bb. In view of the Petitioners' breach of the terms of the MOD, inter alia, by trying to persuade this Tribunal to pass orders directing a buy out and sell out, on the fair valuation of the shares and other assets of the company, and that too at the interim stage, on 25th January 2021, the Applicants and R5 have approached the Hon'ble Bombay High Court to seek specific performance of the said MOD by filing a civil suit against the Petitioners, being Suit (L) No. 2448 of 2021. The suit is sub judice. cc. Reference in CA No. 1008 of 2020 to the Petitioners' dragging their feet and delaying implementation of the MOD, are sought to be misread and misconstrued by the Petitioners to suggest th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the case of the Petitioners as a quasi-partnership and held that the Respondents are trying to alter the existing position continuing for the last 40 years. c. This Bench in the order dated 06.04.2018 observed that: This Bench prima facie having noticed this company has been running for the last several years as three separate units, one at Gujarat, one at Maharashtra and another at Telangana exclusively managed by respective groups, R1 company is not expected to make any structural changes to the existing arrangement at least until this company petition is disposed off. d. The Applicants essentially want change of the order and to support their Application, they relied on the same facts and circumstances pleaded in the Petition as such there is no change in the circumstances for this Application. e. The intention of the Applicants is to either buy out the Petitioners cheaply or to force the demerger of the Gujarat Division at a depressed value and by deliberately suggesting a scheme setting out a squeaked allocation of the company resources. f. The Applicants' desire is to eject the Petitioners from exclusively managing the Gujarat Divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Sanghvi and Kamdar families and the manner in which the business was managed, as well as how they conducted themselves vis- -vis each other. b) Explanatory Statement to Notice dated 25th May 1999, with respect to Petitioner No. 2, stated that: His function will be to conduct and supervise the business activities of the Company in Gujarat State . For Petitioner No. 1, it is stated that: He will control, supervise and coordinate the business activities of the Company in Gujarat State. He will be in charge of the day-to-day activities of all the branches in the Gujarat State. c) Letter dated 3rd July 2008 sent by Mr. Bharat Sanghvi to the Petitioners informing them of his and Mr. Mahesh Sanghvi's decision to step down as the Managing Director and the Joint Managing Director respectively and to continue as Non Executive Directors; for the purpose of appointing Rajiv and Sachin Sanghvi as the Joint Managing Directors and to bring in Aditya Sanghvi (his son) to the Board. It is pertinent to note that the next generation of the Sanghvis were brought on the Board, as opposed to any professionals. As such, Board positions were being treated as a mandatory office a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tside shareholder groups were not given any opportunity to express their wishes and the scheme of buyback of their shares was discussed by the Board in their absence. The factum of these negotiations (which remained inconclusive), where the manner in which R1 is to be treated was discussed, itself is a strong indication that these groups treat R1 as a quasi-partnership. This is because, for all intents and purposes, the 'outsider' shareholding was irrelevant and the only parties required in a settlement discussion as to the future of R1 were the two Sanghvi families and the Kamdar family. vii. Even historically, the Directors appointed from outside the said families held no executive role or control over the management of the affairs of R1. The contesting Respondents have been unable to show anything to suggest that they had any executive powers. The contesting Respondents falsely claim that outside directors had such executive powers, but no proof has been provided in this regard. Even in the case of contribution of money by the respective divisions either towards external donations (pertinently to family trusts among others) or towards dividends is concerned, the San ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have deliberately, and as a stratagem, engineered the present state of the Gujarat Division, by financially strangulating it and treating it grossly disparately, and in a discriminatory and prejudicial manner, when compared to the Andhra Pradesh (including Telangana) and Maharashtra Divisions under the control of the Sanghvis. l. Despite being forced to contribute huge sums of money to the coffers of R1 over the years, R1 by virtue of being under the Sanghvis' dominance has itself not extended any reasonable assistance to the Gujarat Division, when the same was needed by it. The Petitioners' repeated request for funding of the Gujarat Division were rejected by the Board. m. The contesting Respondents have compelled the Gujarat Division to take outside lending at higher interest rates, when R1 had ample available reserves. No right thinking and prudent management would adopt such a course of action. Obviously this has been done over the years to put the Gujarat Division in a position of financial hardship and distress. n. The disparate and prejudicial treatment of the divisions is also ex facie apparent from the following: i. Working Capital: Maharashtra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Andhra Divisions had contributed. o. One of the reasons which has been oft-cited by the contesting Respondents to justify their refusal to grant funds to the Gujarat Division was the Petitioners alleged failure to provide a business plan. This is simply not true, as the Petitioners have repeatedly provided business plans to the Board with respect to the Gujarat Division. In fact, by an email dated 21st August 2019, the Petitioners provided a detailed and thorough explanation of the financial position of the Gujarat Division and the funds needed by them to put the business back on track. Another business plan was submitted as recently as 29th October 2020, which was summarily and arbitrarily rejected by the Sanghvi majority on the Board, solely on account of the pendency of the Applications before this Tribunal. This clearly demonstrates that the Sanghvi majority has no interest in the revival of the Gujarat Division and their idle agenda is to place the Gujarat Division and the Petitioners in a position of financial hardship, prejudice and economic coercion, so as to pressurize the Petitioners to leave the company. p. Importantly, the contesting Respondents have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondents) and the contesting Respondents' failure to clarify certain misunderstandings with Maruti. When the Petitioners raised these proposals in Board meetings, the proposals were either simply recorded as having been 'noted' (without any decision on them) or pushed back on the ground that further studies needed to be done. Clearly, the Sanghvis have systematically and after a period of time both shifted funding; compelled the Gujarat Division to borrow; and shelled any opportunity to grow. This was and is oppressive conduct and constitutes mismanagement. s. On the other hand, the Board was overly eager when it came to proposals mooted by the Maharashtra and Andhra Divisions, to the extent that it was forced to subsequently admit that investments were made without internal discussions and deliberations and that We also did not deliberate on return on the investments before committing or making them in Respondent No. 2's letter dated 29th January 2015. An example of the duplicitous conduct can also be seen at the 577th Board Meeting held on 25th July 2019, wherein the Petitioners proposed a plan for a dealership business for 2 and 3 wheeler vehicles but we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operationally profitable in 13 of the last 16 years. A business cannot be operationally profitable with incompetent management. In fact, the renewal of the Petitioner No. 1's executive directorship for a period of 5 years (as late as in 2017) and him being in charge of the Gujarat Division, falsifies the contesting Respondents' charge. w. In this case, it is only the interest burden caused due to huge and repeated external borrowings that has crippled the Gujarat Division's financial position. Even with respect to the three years in which the Gujarat Division was operationally loss-making, FY 2008-09 was in the aftermath of the great recession, and FY 2013-14 was a year in which the whole company was operationally loss making, due to an industry wide downturn in the automotive sector. In fact, the industry as a whole has been going through difficult times, and this has been admitted as much in correspondence addressed by Respondent No. 2 dated 29th January 2015 and 11th February 2015. In this correspondence, the contesting Respondents admit the general downturn in the industry, and indicate that the bright spots were only in the passenger vehicles business (which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also their case that the business of R1 is managed in a professional manner in line with good corporate governance. If that be so, Petitioner No. 1 was re-appointed as a Director for 5 years on 01.04.2017, which belies their contention that P1 is incompetent to manage the Gujarat Division. bb. The business with Ashok Leyland dealership, which the Applicant's/Original Respondents are making a hue and cry with regard to Gujarat, it is to be noted that the very same dealership in Maharashtra was also loss making in 8 years and profitable only in 4 years when the last 12 years data was compared. Even during the 4 years of profitable period in Maharashtra, the profit margin was very thin. Further, an analysis of the branch-wise financials of the Maharashtra Division dealing in Ashok Leyland would show that in both FY 2017-18 and 2018-19, of the 13 branches operating an Ashok Leyland dealership, 11 were loss-making and only 2 were profit-making. This is despite the Maharashtra Division having the benefit of hybrid finance, that is, interest-free funds from R1 as well as external borrowing. In fact, for the Maharashtra Division, the losses of the Ashok Leyland dealership were s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record irrelevant facts relating to the Petitioners' independent venture, M/s. Kamdar Carz Private Limited (KCPL) to be ignored since the losses in KCPL does not have bearing on the merits of the Applications before this Tribunal. gg. It is submitted that the Petitioners and the contesting Respondents (being quasi partners) are evidently at loggerheads. It is equally evident that the Petitioners have not been treated fairly. This state of affairs is severely prejudicing the interests of R1, and particularly, the Gujarat Division, which is being starved of funds, despite R1 having hundreds of crores of liquid assets in terms of listed shares available at its disposal. hh. The reliefs sought by the Petitioners are framed in the most equitable manner, and are designed to achieve parity, fairness and transparency in the business of R1 and in the light of this situation CA No. 1064 of 2020 has been filed praying for various reliefs. The Applicants/original Respondents' contention that the MOD entered into by the parties is a concluded contract is false. The MOD was merely a document that set out the terms of a possible settlement that was being explored by the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to ensure that almost all decisions concerning R1 are taken as per their own desires and dictum. This dominant position has been repeatedly abused by the majority Sanghvi Groups at the Board level and shareholder level, to prejudice the Gujarat Division. While comparing the Gujarat Division with other divisions, the other divisions are having multiple dealerships and sources of revenue whereas Gujarat Division has sole source of income from Ashok Leyland dealership only. The fact that the Gujarat Division does not have any business other than the Ashok Leyland dealership is not on account of any lack of initiative of the Kamdar Group. Over the years, the Kamdar Group has proposed to the Board of R1, at least 7 different business ventures, which could have brought additional revenue and profits into the Gujarat Division. These proposals included dealerships of Kia, Maruti, Hyundai, and Morris Garages. However, all these proposals were systematically thwarted by the Sanghvi Group, so as to diminish the Gujarat Division's business prospects. d. Further, the Respondents complained that the Petitioners lack initiative to present business plans. The Mahindra Mahindra deale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made a profit, or at least incurred significantly lower losses. Nothing was done by the Board in this regard, despite multiple requests for intervention by the Petitioners. R1 rejected the business proposals of the Kamdar Group, while simultaneously allowing the Maharashtra and Andhra Divisions to grow their respective businesses, which clearly reveal the disparity in treatment of R1's three divisions. g. R1 had investments in the shares of blue chip companies to the extent of Rs . 295.04 crores and reserves and surplus of Rs . 628.85 crores. R1 is capable of funding the entire working capital requirement of all its divisions on its own. Despite this, the Gujarat Division's repeated pleas for self-funding by R1 have been stymied and frustrated and the Gujarat Division has to depend on external borrowings for working capital. However, in respect of other two divisions their working capital requirements are satisfied by a healthy mix of funding, which includes funds from R1, for which no cost is incurred and the balance requirement being met out of external funding from banks and financial institutions. The annual accounts of R1 for the years 2017-18 and 2018-19 clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to repay the ad-hoc limits, and utilize balance funds for purchase of chassis and repayment of overdrawn limits. Further the Petitioners by letter dated 16.06.2018 apprised R1 of its ad-hoc trade advance of Rs . 10 crores from IBL which was due for repayment in June, 2018; as well as the dissatisfaction expressed by Ashok Leyland, due to low uptake by the Gujarat Division of chassis from Ashok Leyland. In the same letter, the Petitioners requested R1 to transfer Rs . 25 crore, for purchase of chassis and repayment of trade advances. Subsequently, R1 replied on 21.06.2018 and called for Board meeting to discuss the matter, and directed the Petitioners to submit a time bound action plan. l. After the filing of the Company Petition, the funding support from R1 completely stopped. The Petitioners closed down several branches that were not doing good business in the past. The Petitioners now only conduct business in 6 cities and towns within the State of Gujarat. Due to lack of funding, the Gujarat Division is unable to purchase adequate number of chassis from AL. AL is requiring the Petitioners to purchase more stock from them and requesting them to clear the outstanding paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jarat Division to depend exclusively on third party high cost funding when R1 has sufficient reserves and funds. The Petitioners are entitled to be treated fairly and equitably. q. In the above circumstances, the Petitioners/Applicants are seeking the following reliefs: a) Pending the hearing and final disposal of the petition, this Tribunal be pleased to supersede the Board of Directors of Respondent No. 1 and appoint a fit and proper person as administrator of Respondent No. 1 to take charge of its records, assets, properties, accounts and/or all movables, immovable and tangible and intangible properties of Respondent No. 1 and with directions, including for: (i) governing and administration of Respondent No. 1, which includes its Maharashtra, Andhra and Gujarat Divisions; (ii) supervise the functioning of the nominee directors of the Sanghvi Group and the Kamdar Group, in their capacity as managers of the respective Maharashtra, Andhra and Gujarat Divisions of Respondent No. 1; (iii) provide adequate financial and/or funding support to the said respective Maharashtra, Andhra and Gujarat Divisions and to take regular account of the business and operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for the purpose of funding the immediate fund requirement of the Gujarat Division; (ii) prejudicing, obstructing and/or interfering with Petitioner No. 1 and 2's control of Respondent No. 1's Gujarat Division and its business and operations and/or to in any manner do anything which will prejudice Respondent No. 1's Ashok Leyland dealership for the Gujarat Division or to make any communication or correspondence with Ashok Leyland concerning the Gujarat Division save and except with the prior written consent of the Petitioner. (iii) indulge in any communication, propaganda and/or correspondence, including, before Respondent No. 1's principal Ashok Leyland and/or its employees and/or agents which is in any manner defamatory and/or prejudicial to Respondent No. 1's Ashok Leyland dealership for the Gujarat Division or the Petitioners. 10. We have heard the learned counsels appearing for the parties at length and have carefully gone through the pleadings and the relevant documents. The following are the observations of this Bench: i. The Company is managed by the Board of Directors and overall there is representation for all the groups for a qui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roper remedial measures though empowered to do so. iii. Whether the company is a quasi-partnership or not, cannot be decided at the interim stage. The prayers made in CA No. 1008 of 2020 are based on facts relating to the averments made in the Company Petition alleging oppression and mismanagement. Therefore, at this interim stage entire gamut of the allegations and counter-allegations cannot be gone into nor would it be prudent to do so. It is settled that reliefs which can be granted in the main Petition/Suit cannot be granted at the interim stage. This can be decided only after the final hearing of the Company Petition as observed by this Bench vide order dated 06.04.2018. The Applicants in CA No. 1008 of 2020/original Respondents Nos. 2 to 4 are practically seeking review of the order passed by this Bench on 06.04.2018 which is not permissible. It is to be noted that it is very difficult to get finance for a loss making division. iv. The contention of the Applicants in CA No. 1008 of 2020 that Order dt. 06.04.2018 gives an impression that prior permission of this Tribunal is necessary before the Board of Directors of R1 Company could intervene in the operations of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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