Company Law Board
M.L. Thukral And Ors. vs Krone Communications Limited And Ors. on 1 February, 1995
Equivalent citations: [1996]86COMPCAS643(CLB)
ORDER
1. This application, being Company Application No. 8 of 1995 in Company Petition No. 21 of 1994 was filed on January 18, 1995, seeking various interim orders and reliefs by way of injunctions and directions with a request for urgent hearing on the plea that a board meeting has been scheduled for January 27, 1995, in which certain proposals having adverse effect on the petitioner are likely to be discussed. The application was heard on January 24, 1995, with notice to the respondents whose advocates were present. Even though the application contains many prayers, Sri S. Ganesh, counsel on behalf of the petitioners, pressed for only two reliefs, i.e., to restrain the board of directors from considering any matter relating to the distributorship agreement with Sterling Transtel Ltd. (hereinafter called as "Sterling") and to direct the company to give inspection of records/accounts of the company.
2. Sri Ganesh stated that the respondent-company came into existence as a consequence of promoters and the joint venture agreements between petitioner No. 1 and respondent No. 2 in 1988 and 1989, respectively. The relationship between petitioner No. 1 and respondent No. 2 has itself arisen out of successful introduction of the products of respondent No. 2 in India by the efforts of the petitioner. In view of the marketing expertise of petitioner No. 1, it was agreed that he would remain responsible for marketing the products of the company as executive director (marketing). A non-exclusive distributorship was given to Sterling which is owned and controlled by the petitioner and his family to distribute the products of the company in the year 1990. Over a period, Sterling has performed commendably in distribution of the products and as such, even though the agreement expired in December, 1993, the terms of agreement still continue with mutual understanding between the parties. This is in spite of a fresh agreement that was negotiated and initialed in December, 1993, and approved by the board of directors which was not given effect to. He further submitted that the board of directors of the company have proposed to discuss the agreement in its meeting to be held on January 27, 1995, and in all probability in view of the strained relationship between the petitioner and the board of directors belonging to respondent No. 2 group the agreement might be terminated. Since the issue of validity or the constitution of the board of directors of the company is to be decided by the Company Law Board, it would not be proper for the board of directors to take any decision especially relating to distributorship agreement and, therefore, he sought for either restraining the company from taking any decision or to direct the company to defer discussion of this item till the petition is disposed of. He further stated that the distributorship agreement is a part of the original understanding between the parties and as such termination of the agreement would in effect be completely against the spirit in which the joint venture agreement was entered into between petitioner No. 1 and respondent No. 2. He further stated that the very fact that petitioner No. 1 is drawing only a rupee as his salary for being a wholetime director (marketing) would indicate that the agreement with Sterling which is controlled by him, is a part and parcel of the original understanding. According to him, since Sterling has invested a substantial amount of money in Delhi and Bombay, as per the terms of the distributorship agreement, any termination of the agreement at this Stage would greatly jeopardise the petitioner's interest. He expressed his apprehension that respondent No. 2 with his nominees in the board has decided to terminate the agreement with an ulterior motive to penalise the petitioner for having filed the instant petition. Even if the company terminates the agreement, such termination will come into effect only after six months of notice of termination and, therefore, the board of directors should be restrained from taking any decision on the distributorship till the main petition is disposed of.
3. He further stated that for the purpose of filing his rejoinder, he needs to inspect various documents and other records of the company and directions to that effect should be given by the Company Law Board.
4. Shri D. Dave, advocate, arguing and replying on behalf of respondent No. 1-company stated that the main petition is already fixed for hearing on May 8 and 9, 1995, and the case is ripe for hearing. The reliefs claimed in the application are to some extent similar to the reliefs prayed for, but not granted by the Company Law Board on June 3, 1994, and as such the application is not maintainable. Moreover, the respondents were served a copy of the application only in the evening of January 18, 1995, and as such it was not possible to file a detailed reply. As regards the distributorship agreement, Sri Dave contended that the promoters' agreement or the joint venture agreement did not provide for appointment of Sterling as the distributor of the company. He further contended that clause 32 of the joint venture agreement expressly provided that, unless provided specifically, nothing would be inferred to govern the relation between the parties. The distributorship is a contract in the nature of personal services and the company cannot be fastened with a distributor whom it may not find useful and desirable. Sterling is neither a member of the company nor a party to the present proceedings and the distributorship agreement had come to an end in December, 1993. Since the company has now acquired a capability and is in a position to directly market and distribute its product and thereby making a net saving to the tune of approximately Rs. 1.05 crores, the board of directors is considering this matter in its meeting fixed on January 27, 1995. The attempt of the petitioners is to pre-empt any such consideration by the board of directors. Further, as per the agreement, the company has a right to appoint any other distributor in the same territory. Sri Dave further submitted that it is now well settled that the Company Law Board would have jurisdiction only to protect the interests of any person in his capacity as a member of the company, and it cannot extend to the interest of such person in some other capacity. In this connection, he cited H.R. Harmer Ltd., In re [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA) and Lundie Bros. Ltd., In re [1965] 2 All ER 692 ; [1965] 35 Comp Cas 827 (Ch D). He also cited the decision of the Supreme Court in Indian Oil Corporation Ltd. v. Amritsar Gas Service [1991] 1 SCC 533 to state that disputes arising out of inter se agreements between parties fall within the realm of private law rights with reference to the provisions of the Specific Relief Act and they cannot be agitated in a general representation dispute. Therefore, Sri Dave argued that this matter is beyond the scope of the provisions of section 397/398 and as such, Shri Dave contended that the prayer regarding restraining the board of directors from considering the distributorship agreement should not be granted. However, as regards the other prayer regarding inspection of documents, he had no objection to giving the inspection of such documents as are permissible under law on receipt of details from the petitioner.
5. On hearing both counsel, we suggested to counsel for the respondent that as it would take some time for us to pass an order on this application, the company should defer taking up the item relating to the distributorship agreement, and accordingly, it was agreed that the board meeting scheduled for January 27, 1995, would be postponed to February 6, 1995, or thereafter.
6. In regard to the prayer relating to the distributorship agreement, we are generally in agreement with submissions made by Sri Dave. A perusal of the promoters' agreement, joint venture agreement and articles of the company shows that there is no mention regarding the distributorship agreement with Sterling. As a matter of fact, the impugned agreement was entered into after incorporation of the company. We also find that Sterling is neither a party to the proceedings nor a member of the company. In a petition under Section 397/398, it is the right of a member that could be agitated. In the instant case, even though the petitioner by himself is a member, what is being sought to be agitated is a commercial agreement between the company and a third party, even though petitioner No. 1 has controlling interest in the third party. Entering into and termination of commercial agreement are purely within the purview of the board of directors and, in their commercial wisdom, they may do whatever they consider appropriate. We cannot intervene in these matters unless otherwise they fall within the parameters of the provisions of Section 397/398. Accordingly, we are of the opinion that there is no scope for us to intervene in the matter of the distributorship agreement between Sterling and the company. However, as the petitioner has questioned the validity of the composition of board of directors, which we are yet to examine, any decision of the board in this regard will be subject to our findings on the composition of the board.
7. As far as the prayer regarding inspection of documents is concerned, petitioner No. 1 will furnish before February 15, 1995, a list of documents he desires to inspect and the company shall give inspection of these documents before February 22, 1995. The respondents will file their replies on the application by February 21, 1995, and the petitioners will file their rejoinders on the main petition as well as the application by March 15, 1995. In view of the urgency expressed by the petitioners, with the consent of the parties, the hearing originally fixed for May 8 and 9, 1995, is now advanced to March 27, 28 and 29, 1995, for 10.30 a.m. for final disposal of the application as well as the petition.