Company Law Board
S. Bhuvaneswari, P. Sujatha And S. Jagan ... vs Aci (Agro Chemical Industries) ... on 10 October, 2002
Equivalent citations: [2002]112COMPCAS658(CLB)
ORDER K.K. Balu, J.
1. The petitioners holding 19.5 per cent of the paid-up capital in M/s ACI (Agro Chemicals Industries) Limited ("the Company") have filed this petition under Section 397/398 of the Companies Act, 1956 ("the Act") alleging various acts of oppression and mismanagement in the affairs of the Company.
2. The main acts of oppression and mismanagement in the affairs of the Company, agitated in the petition relate to the following:-
(a) exclusion of the petitioner's nominee from the day-to-day affairs and management of the Company;
(b) mismanagement of the respondents 2 to 5, directors of the Company leading to fall in the turn over, reduction of profits and ultimate losses suffered by the Company; and
(c) diversion of the business from the Company by the sixth respondent.
3. Shri C.Harikrishnan, Senior Advocate for the petitioners, while initiating arguments submitted that the Company was originally a proprietory concern, carrying on business in pesticides by one Mr. P.M. Gangadharan. The proprietory concern was later converted into a partnership in the name and style of Agrochemical Industries in January, 1981, wherein, the petitioners were inducted as partners. The sixth respondent entered into a marketing and consignment Agency Agreement with the said firm by an agreement dated 2.1.1989 (Annexure A-4) for sale of the products manufactured by the firm. Thereafter, the petitioners and M/s Dalhousie Chemicals Limited, a subsidiary of the sixth respondent entered into a Memorandum of Understanding dated 11.10.85 (Annexure A-5), thereby, the Company was incorporated in February, 1986, in order to take over the business of the firm. Shri S.Parthasarathy became the Chairman of the Company. Later, the partnership firm had entered into an agreement on 29.12.88 (Annexure A-7) with the Company, in terms of which the firm would cease to carry on the business of the manufacture and marketing of formulation of pesticides and the Company would carry on the said business. The Company took over the assets and liabilities including the license, privileges and other franchise belonging to the firm. The agreement prohibited the petitioners from carrying on business of formulation of pesticides. As on the date of the petition, the shareholding pattern of the parties in the Company is as follows:
Name of the Shareholder Date of Acqui- sition No. of shares SP Group KRC Group MRC Group Smt. S.Bhuvaneswari Feb'89 8017
-
Smt, R. Sujatlia Feb'89 1503
-
-
Shri S.Jagan Mphan Rao May'92 9980
-
-
M/s Trackstar Investments Mar'91
-
10000 M/5 Standard disli. &Breweries (P) Ltd.
Mar'91
-
10000
-
M/s Biofoods (P) Ltd.
Mar'91
-
10000
-
M/s Malleswara Finance and Investments Ltd.
Oct'94
-
-
10500 M/s Lalquilla Investments Co. 1'vt. Ltd.
May'92
-
-
15000 M/s Nishmuk Investments Co. Pvt. Ltd.
May'92
-
-
15000 M/s Vibhavari Finance & Investments (P) Ltd.
May'92
-
-
10000 19500 30000 50500 19.5 30.0 50.5 The petitioners hold 19.5. per cent of the share capital and the remaining 80.5 per cent of the shares is held by the corporate bodies, which are the subsidiaries of the sixth respondent. In terms of the agreement dated 29.12.88, the Company took the factory sheds on lease from the firm and the plant and machinery belonging to the firm on lease. The lease of the factory shed and plant and machinery with the firm was extended from time to time. The sixth respondent has been the consignment sales agent of the Company with effect from 01.01.89. Shri S. Parathasarathy, husband of the first petitioner and father of the second petitioner continued to be a whole-time director of the Company. The persons having controlling interest in the Company at the relevant point of time have been observing the principles of partnership at all times. However, respondents 2 to 5, executives and nominees of the sixth respondent and directors of the Company started ignoring the interest of the Company and acted as per the wishes of the promoters of the sixth respondent. On account of the mismanagement of the respondents 2 to 5, the turn over of the Company for the year 1999-2000 touched the lowest, namely, Rs. 670.49 lakhs and consequently the Company incurred a loss of Rs. 47.36 lakhs for the first time. The fall in turn over, reduction of profit and the ultimate losses sustained by the Company are contributed to the following factors:-
(i) Failure of the sixth respondent to procedure the potential products from the Company.
(ii) Diversion of the orders by the sixth respondent from the Company to its Hyderabad Unit.
(iii) Increase of price by the sixth respondent for the raw materials supplied to the Company and
(iv) Non-procurement of products by the sixth respondent from the Company and procurement of the same from its Hyderabad unit.
4. The sixth respondent started procuring the products from a different unit ignoring the Company which resulted in steep decline in the turn over of the Company and ultimately the Company was constrained to incur losses during the period 1999-2000. The sixth respondent started supplying raw-materials to the Company at a higher rate than the rate prevailing in the market. The Company was having large turn over varying from 1,637 lakhs to 4,145 lakhs during the period between 1988-89 and 1998-99 resulting in profits ranging from Rs. 5.28 lakhs to Rs. 35.91 lakhs. It is only on account of the sixth respondent diverting the business from the Company to different organizations and supplying raw-materials at higher rates, there was a decline in the business resulting in low turnover and consequent losses suffered by the Company. The Company incurred losses of Rs. 47.36 lakhs during the year 1999-2000 and during the current year the loss exceeded Rs. 200 lakhs. Though the sixth respondent had agreed to compensate the loss sustained on account of its diversion of business to Hyderabad unit, the sixth respondent ailed to fulfill the commitment. The sixth respondent is the sole buyer of the products of the Company, but failed to pay the Company regularly. The sixth respondent either delays payment to the creditors or excludes the creditors of the Company who are associated with the petitioners. The sixth respondent used to make direct payments to the creditors of the Company without concurrence of the whole-time director. The dues to Andhra Bank secured by the properties of the first petitioner and the whole-time director have not been settled. The respondents 2 to 6 owed a duty to the Company and shareholders. They hold fiduciary duties to the Company. But these respondents are guilty of breach of trust in relation to the Company as they have diverted the orders through some other Company and failed to compensate the loss sustained by the Company. The whole-time director is the nominee of the petitioners and their interest in the Company is represented by the whole-time director and any act of the respondents to oust him illegally would constitute an act of oppression. The respondents 2 to 5 paralised the Company and the failure in business is contributable to the sixth respondent and its nominees being respondents 2 to 5 on the Board of the Company. The whole-time director has been marginalized by the respondents 2 to 5, by excluding him from the day-to-day affairs of the Company and taking away the cheque signing power from the whole time director. Moreover, the respondents have nominated a factory manager to take care of the day-to-day affairs, who will report directly to the board of directors. The respondents used to hurriedly convene the board meeting in such a way that their whole time director would not be available in station to attend the board meeting. The respondents have violated the interim order dated 23.02.2001 of the CLB and removed the entire machinery. The intention of the respondents is to make the Company a defunct-company. Shri Harikrishnan pointed out that in terms of the MOU dated 29.12.1988, the partners of the firm had surrendered everything to the Company, i.e., machinery (Annexure A-9), shed under Annexure A-10 and the machinery in the second shed under Annexure A-12. The petitioners are deprived of carrying on any business in the pesticide. At present, the Company is closed. At this juncture, the sixth respondent had offered to sell the entire shares held by them to the petitioners at par value. This shows that the Company intends to take undue advantage of the situation after causing huge loss to the Company. In the present circumstances, the remedies sought by the petitioners have become meaningless except the remedy of awarding of damages of Rs. 380.39 lakhs towards compensation for the losses caused to the Company on account of the misfeasance by the respondents. The respondents hold 80.50 per cent of the shares and they owe fiduciary duty to the Company on account of the controlling interest in the affairs of the Company and also the contactual obligation by virtue of Annexure A-27. In the circumstances, the sixth respondent should provide business to the Company and should not divert orders to a different unit. Though the CLB can award remedies including directing the sale of shares of the petitioners or to wind up the Company or to investigate into the affairs of the Company, the petitioners seek the remedy of compensation to the Company. Shri Harikrishnan in support of his legal contentions relied upon the following decisions:-
a. Regal (Hasting), Ltd. v. Gulliver and Ors. - [1942] 1 All ER annotate Page.379) - to show the liability of the directors to the company on account of the fiduciary relationship of the directors.
b. Ebrahimi v. Westbourne Galleries Ltd and Ors. - [1972] 2 All ER Page 492 and c. Scottish Co-operative Wholesale Society, Ltd. v Meyer and Anr.
- [1958] 3 ALL E.R. Page 66 - to show that any act of the parent company, if it is oppressive to its subsidiary, the courts will interfere and grant remedy to the minority shareholders of the subsidiary company.
d. Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel (P) and Ors. (1953) 3 Comp LJ 418 (Raj) - "to state that the delinquent directors mismanaging the affairs of the Company are liable to compensate the company and shall repay with interest amounts misspent and misutilised.
5. Shri Krishna Srinivasan, appearing for respondents 1 to 5 at the outset making a reference to Annexure A-17 in regard to the shareholding pattern in the Company, has pointed out that the Company cannot be a subsidiary of the sixth respondent. He further pointed out that Shri S. Parthasarathy, husband of the first petitioner, father of the second petitioner and brother of third petitioner was the whole-time director till July, 2000 and in-charge of the day-to-day affairs of the Company. The whole-time director is solely responsible for the management of the Company. The allegations of mismanagement of affairs of the Company solely rest on the whole-time director as one of the respondents in the petition. He further contended that the claim of Rs. 380.39 lakhs towards compensation for the loss said to have been caused to the Company based on the consignment Agency Agreement dated 2.1.1989 (Annexure A-4) entered between the Company and the sixth respondent is not sustainable. The said consignment Agency Agreement cannot create any right in favour of the petitioners for compensation. The agreement is terminable by giving six months notice by either of the parties. This does not empower the petitioners to claim any compensation and no claim for the loss can be made under Annexure A-4. Moreover, there cannot be any order so as to continue the consignment agency. According to Shri Krishna Srinivasan, the petitioners has filed the present petition with oblique motives and for collateral purpose to gain profits, in which case, the petition is liable to be dismissed. He further pointed out that the whole-time director acted against the interest of the Company for which he referred to the letter dated 17.1.2001 (Annexure A-50) written by the whole-time director to the creditors of the Company advising them that the sixth respondent had assumed the responsibility of the bank operations nominating their executives as authorised signatory for signing cheques and advising them to contact the nominees of the sixth respondent in regard to the matters relating to the company. According to Shri Krishna Srinivasan, though the petitioners have made allegations of oppression and mismanagement in the petition, they did not whisper any such allegations at the time of the annual general meeting for the year ended 31.03.2000 held on 25.09.2000. The allegations of oppression and mismanagement are after-thought. He further pointed out that as per the MOU dated 3.11.1988 (Annexure A-6) entered between Agrochemicals Industries, the partnership firm and Mallesware Investments, the firm should have been dissolved but however the firm is still in existence. Though the sixth respondent was placing orders with the Company, he submitted that the sixth respondent suspended its operations in pesticides in Chennai on account of which the sixth respondent could not continue to provide business to the Company. He further pointed out that all decisions were taken in the meetings of the Board of Directors of the Company and that the whole-time director never raised any objection to the manner in which the Company was carrying on its business or to any of the decisions taken in these meetings. The petitioners having not participated through their nominee being the whole-time director are estopped from challenging the decisions taken at the meetings of the Board of Directors of the Company. In support of his legal contentions, Shri Krishna Srinivasan relied upon the following decisions:-
(i) M.L. Thukral and Ors. v. Krone Communications Limited and Ors.
- (1996) 86 CC 643 - to state that members cannot claim any relief in respect of distributorship agreement between a company and the concern controlled by them.
(ii) Re Bellador Silk, Ltd. - [1965] 1 ALL E.R. 667
- to show that the petition seeking relief for oppression and mismanagement will not be entertained if the petition is filed for a collateral purpose and such petition is an abuse of process of court.
(iii) Palghat Exports Private Ltd. v. T.V. Chandran and Ors. - (1994) 79 CC 213 - to show that in Section 397/398 petition, personal grievance of members cannot be maintained...
(iv) (1995) 3 CLJ 418
- to show that the petitioner is not entitled to challenge the decisions taken in the meetings of the board of directors and meetings of the Company on account of acquiescence.
6. Shri S.Sai Prasad appearing for the sixth respondent has contended that his client cannot be held responsible for the losses sustained by the Company. The sixth respondent was constrained to divert the orders from the Company to a different unit on account of the commercial decision taken by them which cannot be questioned by the Company. He made a reference to the speech of the whole-time director on the occasion of annual general meeting for the year 1999-2000 held on 25.9.2000 to show that the Company could not function for more than 200 working days due to non-availability of raw-materials. He referred to the statement produced by the petitioners to show that the Company was solely responsible for shortage of supply of its products. He further contended that the Company failed to supply the products on account of its own financial difficulties. In the circumstances, the sixth respondent cannot be blamed for diverting its orders to a different unit at Hyderabad, which is at the sole discretion of the sixth respondent. In the circumstances, Shri Sai Prasad sought for dismissal of the petition.
7. Shri Harikrishnan, in his reply made a reference to Annual Report of the sixth respondents for the year 2000-2001 to show that the Company is a subsidiary of the sixth respondent. He further pointed that the Company was formed at the instance of the sixth respondent and therefore the sixth respondent owes fiduciary duty to the petitioners. He pointed out that there was no allegation of oppression or mismanagement against the whole-time director in which case he need not be a party to the proceedings. He placed reliance on the decision of the Apex Court in Needle Industries to show that even if the petitioner is liable to be dismissed, the CLB has the discretion to grant compensation to the Company. He further pointed out that the decisions cited by Counsel for the respondents are not applicable to the facts and circumstances of the present case, especially when the compensation is not sought for the petitioners, but compensation shall be awarded to the Company. There has been no malafide intention on the part of the petitioners. He, therefore, sought for award of compensation against the Company.
8. We have considered the pleading and submissions made on behalf of the petitioners as well as respondents.
9. Before considering the contentions of either of the parties, we shall observe that taking into consideration the long standing relationship between the petitioners' nominee, Shri S. Parthasarathy, the whole-time Director and the sixth respondent, we though it fit to settle the disputes amicably among the parties. Towards this end, we have suggested that the petitioners may go out of the Company on payment of a lump-sum of Rs. 10,00,000/- by the sixth respondent, which approximately represents 50 per cent of the investment made by the petitioners in the Company. The sixth respondent was not agreeable for this suggestion and on the other hand offered to sell the shares numbering 50,500 shares, held by it and its group to the petitioners at par, for which the petitioners were not willing. However, even after the hearing was concluded attempts were made to settle the disputes amicably but the same failed and as such this order is being released.
10. The facts not in dispute are that the Company was incorporated pursuant to Memorandum of Understanding dated 11.10.85 (Annexure A-5) entered between the petitioners 1 & 2, as partners of Agro Chemical Industries, a partnership firm ("the firm") and Dalhousie Chemicals Limited, a subsidiary company of the sixth respondent. Thereafter the petitioners 1 & 2 entered into yet another Memorandum of Understanding dated 11.10.85 (Annexure A-5) with Mallesware Finance and Investments Company Limited, also a subsidiary of the sixth respondent for equity participation in the Company to the extent of 80.5 per cent in terms of the MOU dated 3.11.88 (Annexure A-6). Shri S. Parthasarathy, husband of the first petitioner, father of the second petitioner and brother of the third petitioner was appointed as the whole-time director of the Company. As on date, the petitioners held 19.5 per cent of the shares and the rest of the shares are held by the sixth respondent as well as its group companies. The Company is a subsidiary of the sixth respondent, as borne out from the Annual Report for the year ended 31.3.2000. As per the MOU dated 3.11.98, the plant and machinery and the sheds belonging to the firm were leased out to the Company and the Company was paying the hire and rental charges to the firm. The licence quotas and other rights, benefits and privileges available to the firm were transferred to the Company. The firm shall be dissolved from 1st December, 1998 or such date as may be agreed between the petitioners 1 & 2 and Mallesware Investments. By virtue of the Consignment Agency Agreement dated 2.1.89 (Annexure A-4), the Company appointed the sixth respondent as its consignment agents for the sale of the products manufactured by the Company, upon which the sixth respondent has been acting as the consignment agent of the Company providing business to the Company. The consignment agency is terminable by six months notice in writing by either of the parties. The consignment agency has been terminated by the sixth respondent by virtue of its letter dated 19.2.2001. The Company had voluminous turn-over between 1988-89 and 1998-99 involving a huge amount ranging from Rs. 1,625 lakhs to Rs. 4,145 lakhs earning huge profits ranging from 5.28 lakhs to Rs. 35.91 lakhs. There was a reduction in the turn over and as well as the profit since the year 1996-97 to 1999-2000. During 1999-2000, the Company declared a loss of Rs. 47.36 lakhs. The loss is attributed to, inter-alia, non-availability of raw-materials, financial difficulties faced by the Company and diversion of the orders by the sixth respondent from the Company to a different unit in Hyderabad. The Company owes monies to various creditors. The petitioners 1 & 2 and the whole-time director have guaranteed the loan amount availed by the Company from Andhra Bank. Andhra Bank has charge over the assets of the petitioners and the whole-time director. The sixth respondent has given a counter-guarantee in favour of the whole-time director for Rs. 225 lakhs agreeing to indemnify the whole-time director against any claim, loss or damage which the whole-time director may sustain on account of providing his personal guarantee to Andhra Bank. The dues due to Andhra Bank and other creditors remain outstanding. The minutes of the Board meeting of the Company held on 31.3.1997 (Annexure A-27) which is not disputed shows that the sixth respondent had agreed that in the event of non-purchasing, the minimum quantity of raw-materials, the sixth respondent shall compensate the overhead expenses and the profit percentage for the actual quantity short lifted against the agreed minimum quantity. It is also not disputed that the sixth respondent has diverted the orders to a different unit at Hyderabad for its own commercial reasons. It is clear that the business, the plant and machinery and shed and together with all its benefits belonging to the firm were made available for the use of the Company, which is the subsidiary of the sixth respondent. The Company though had earned profits since 1988-89 to 1998-99, suffered losses during the year 1999-2000 and 2000-2001. Now the Company is closed. The factory is not manufacturing any products.
11. It is on record that the petitioners had completely given up their partnership business in favour of the Company by surrendering its license, privileges etc. to the Company with the view to derive some benefits from the Company, But presently the factory of the Company has been closed depriving the petitioners whatever they were getting from the Company in lieu of from their partnership firm. Therefore, as suggested by us during the hearing the respondents/the Company should purchase the shares held by the petitioners. Eventhough the investment of the petitioners is in the order of about Rs. 19.5 lakhs in the share capital of the Company, considering the present status of the Company, we consider that the fair value of the shares held by the petitioners could be assessed at 50 per cent of face value, which comes to Rs. 9.25 lakhs. The shares could be purchased either by the Company or the sixth respondent. In case the Company purchasers the shares, it is authorized to reduce the capital of the Company to the extent of the face value of the shares. In addition, the Company will also pay a consolidated sum of Rs. 5 lakhs towards the lease rental for the factory premises, which has not been paid for a long time and also towards the unpaid salary of Shri Parthasarathy. The Company will also hand over the factory premises and plant & machinery given by the petitioners/their firm to the Company on lease. The Company will get release of the immovable properties offered by the first petitioner and Mr. Parthasarathy as securities for the dues of the Company. However, the petitioner will assist and cooperative with the respondent in the negotiation with the Bank. The payment stipulated as above and the release of factory premises and machinery taken on lease by the Company shall be completed latest by 30.11.2002. On receipt of consideration for the shares, the petitioners will hand over blank transfer forms along with the original share script to the sixth respondent/Company as the case may be.
With the above directions, the petition is disposed of.