Karnataka High Court
M.L. Thukral And Another vs Krone Communication Ltd. And Others on 17 February, 1995
Equivalent citations: [1996]86COMPCAS648(KAR), ILR1995KAR1142, 1995(2)KARLJ107
JUDGMENT M.F. Saldanha, J.
1. An unusual dimension of the law in relation to sections 397 and 398 of the Companies Act, 1956, has arisen in this case. Chapter VI of the Act basically deals with cleansing action or, more correctly defined, with the supervisory powers of the Company Law Board directed towards maintenance of purity of administration and functioning of a company which is why, the Chapter has rightly been titled PREVENTION OF OPPRESSION AND MISMANAGEMENT. A member of the company is entitled to apply for relief in cases of oppression and similarly, in cases of mismanagement. What is important is that the sections deal with the concept of preventive action essentially in order to forestall the damaging effects of such wrongful activity. In this regard, therefore, it is essential that the legislative intent, namely, that the relief should be prophylactic rather than curative requires to be emphasised. While considering pleas of this type, the Company Law Board and the court will have to be extremely circumspect because allegations are often false, exaggerated, misconceived, contrived or mischievous and in those of the cases where this appears to be the position such complaints will have to be shot down as often time, the genesis of such complaints is motivated. Similarly, the forum before which such a complaint is made must be on guard and just as in appropriate cases, it is necessary to pierce the veil of the company, while dealing with this category of cases, it is equally essential to sift out the chaff from the grain and ascertain the true nature and genuineness of the complaint and more importantly, whether it qualifies for a relief or action under section 397 or 398. In this regard, the real issue posed is as to whether, in a case where a shareholder or for that matter a director seeks a relief in relation to a dispute and a grievance that is totally and completely extraneous to the fair exercise of his rights under sections 397 and 398 of the Companies Act, 1956, whether at all the Company Law Board would have jurisdiction to entertain such a complaint, howsoever adroitly it may be presented or interlinked and intertwined with other issue that may come within the ambit of Chapter VI. The answer is undisputedly no.
2. This appeal assails the correctness of an interim order dated February 1, 1995, passed by the Company Law Board, Principal Bench, New Delhi. The dispute basically is one between Krone Communication Ltd. and Mr. M. L. Thukral who is a director of a company by the name of Sterling Transtel Limited. The latter company is the main distributor of the telecommunication products manufactured by Krone Ltd. The present appellant claims to be a promoter director of the company and it is his case that the entire venture was started as a joint venture between the Germans and him. Pursuant to the setting up of the company, Sterling has been marketing its products under a distributorship agreement which was valid initially for a period of three years but which has been extended. Under the terms of the agreement, Krone is required to give six months' notice if the agreement is to be terminated. The appellant has, as will be indicated below, filed a petition under sections 397 and 398 of the Companies Act, 1956, before the Company Law board wherein he has made serious allegations in respect of the manner in which the company is being managed inter alia to the effect that abnormally large amounts of money have been unjustifiably repatriated outside the country and according to the appellant, because of this action, a decision is imminent whereby the distributorship agreement will be terminated. He had applied for interim reliefs to the Company Law Board and the same have been rejected on the ground that the nature of the dispute is outside the scope of sections 397 and 398 of the Companies Act, 1956, and it is against this order that the present appeal has been filed.
3. In support of the appeal, Mr. Ganesan, on behalf of the appellant, took me through certain relevant parts of the record. He sought to demonstrate that effectively, the business being carried on by the company was initially conceived of as a joint venture in so far as the appellant possesses not only certain expertise in relation to the telecommunication products in question but is also well acquainted with equipment for distribution of these products in the Indian market. With this background, Mr. Ganesh submitted that the appellant is a 11 per cent. shareholder and that he was, right from the very inception not only a director of the company but was instrumental in achieving impressive results as far as the sales are concerned through his company Sterling Transtel Ltd. (hereinafter referred to as "Sterling") which was the main distributor for the products in question. Mr. Ganesh, thereafter, pointed out to me on the basis of figures that the sales through Sterling had increased from 1990 when the figure showed approximately Rs. 9 million to Rs. 9.3 millions in 1994. He also relied on certain extracts from the records of the respondent-company, Krone to indicate that the performance of the appellant and Sterling had been very much appreciated by the board of directors. According to Mr. Ganesh, in the month of June, 1994, he was required to file a composite petition before the Company Law Board asking for certain reliefs. Principally, the appellant had contended that several decisions and acts on the part of the board of directors of the company, and the managing director individually were not in the interest of the company and that they could be construed as indication of gross mismanagement. The appellant had also contended that the board of directors of the company is not correctly constituted and that consequently, he as a minority director was virtually being sidelined. Another charge was that several of the decisions were being taken without these matters having been formally referred to the board and even in those instances when such a reference was made for decision, the result was a foregone conclusion because of the lopsided nature of the board. Even though the appellant was still a director of the company, relevant information and documents on crucial issues were either not supplied to him or worse, he was kept in the dark in respect of other important developments. The appellant had basically made out a case of mismanagement and he, therefore, sought for appropriate reliefs from the Company Law Board. It is material to mention here that in the original petition filed before the Company Law Board, one of the reliefs asked for is that the non-exclusive distributorship agreement between the appellant's company, Sterling and Krone should not be terminated. I need to record in passing that this agreement was for a period of three years which have elapsed in the year 1994, and that according to Mr. Ganesh, the record will demonstrate that it was to be renewed and that it was only because of his complaint to the Company Law Board that it is very clear that the same will be terminated. Even though the agreement in question was not formally renewed, it is still in operation and is being acted upon by the parties as the same has been extended and for that matter not formally terminated. In sum and substance, among other things, the company will be required to give the appellant a clear six months notice under the terms of that agreement which will be effective on and from the date on which the decision is taken to terminate the agreement.
4. Mr. Ganesh submitted that he is entitled to invoke the provisions of sections 397 and 398 of the Companies Act, 1956, in so far as the facts of this case will indicate that the company and its directors and in particular, the managing director have never hit back at the appellant who has approached the legally constituted authority for corrective action, and that they have virtually decided to use an arm twisting approach by terminating the distributorship agreement. According to Mr. Ganesh, Sterling is the best known and the most important distributor for these products and such a step would be disastrous to the interest of the company. Despite this according to him the action in question is being contemplated and he alleges serious mala fides on the part of the respondents because he submits that in the background of the impressive record of Sterling, it is more than crystal clear that the interests of the company are being sacrificed in order to take revenge against the appellant. A strong plea was made that any such action must be stayed as otherwise, nobody would be able to apply for legal redress.
5. It is unnecessary for this court to go into the areas of dispute because the petition is pending before the Company Law Board and was scheduled to be heard in the month of May, 1995. The appellant made an urgent application to the Company Law Board for interim orders whereupon, after hearing the parties the Company Law Board passed an order dated February 1, 1995, rejecting the prayer of the applicant that the board of directors should be restrained from taking a decision in relation to the distributorship agreement between the company and Sterling. The Company Law Board, however, granted the application for inspection, etc., and advanced the hearing of the main petition to March 27, 1995. In sum and substance, the Company Law Board upheld the position that the dispute in relation to the distributorship agreement was outside the ambit and scope of sections 397 and 398 of the Companies Act, 1956, and, therefore, refused to exercise the jurisdiction in respect thereof. However, since the decision is to be taken by the board of directors and the appellant had questioned the validity of the constitution of the board, it was directed that whatever decision is taken would be subject to final orders that the Company Law Board would pass in the main case. It is against this order that the present appeal has been filed.
6. An urgent application was made to this court by Mr. Ganesh that it is virtually a matter of life and death, as far as his client is concerned, which sentiment unfortunately I do not share and very grave urgency was pleaded that the court must take up this matter on a top priority basis and hear it regardless of all other work. Accordingly, the meeting of the board of directors which was to be held on February 6, 1995, was directed to be postponed and the petition was listed for urgent hearing.
7. It is necessary to confine this decision to a limited aspect of the case namely the short question as to whether the Company Law Board was justified in having refused to exercise the jurisdiction in respect of the distributorship agreement and more importantly, if the refusal was unjustified, whether this court should stop the board of directors from taking a decision in this regard. As far as this last aspect of the matter is concerned, I need to observe that the appellant's charges are still in the realm of allegations and have yet to be established. The appellant goes to the extent of alleging bias on the part of the directors and he contends that having regard to the charges made by him it is a foregone conclusion that they will decide in favour of terminating the agreement. The appellant is not only the minority director but a party interested and he, therefore, submits that there is virtually nothing he can do with regard to the distributorship matter in these circumstances except approaching a legal forum, for reliefs. Mr. Ganesh also submitted that quite apart from the excellent track record of Sterling, it would be a loss running into virtually cores of rupees because the entire infrastructure and the jobs of 300 employees of his client's company are at stake. He also advanced a strong plea that this court should direct that the decision should be deferred until the Company Law Board hears the petition next month on March 27, 1995. In this regard, he submitted that, in any event, the six months notice period has yet to run but if the decision were to be taken, the moment it comes to be known in the market, it would have ruinous consequences to the appellants. Mr. Ganesh places reliance on an earlier Division Bench decision of the court in the case of Synchron Machine Tools P. Ltd. v. U. M. Suresh Rao, [1994] 79 Comp Cas 868 (Kar). The principles enunciated in that case were to the effect that in the face of allegations of oppression and mismanagement and a petition filed for reliefs, the court had sufficiently wide powers to grant just and equitable reliefs, which require to be moulded to suit the circumstances of the case. On an analogy, Mr. Ganesh submitted that this was a most deserving case in which a director who has complained about gross mismanagement should be protected from oppressive consequences that are sought to be visited on him. He contended that it was wrong on the part of the Company Law Board to have refused an interim order and that this court, therefore, ought to intervene. He also relied on certain passages from Ramaiya's Commentary on the Companies Act, at pages 2229 and 2230, in support of his contention that excluding a joint venture from participating in all major decisions affecting the company's affairs has been recorded as unfairly prejudicial. In this regard, he relied on the well known decision in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 (HL), where the court amplified the aspect of equitable considerations. Basically, what learned counsel has submitted is that in a situation of a joint venture business, a total and unfair exclusion of one of the parties is a sufficient cause of action calling for corrective steps. In totality, therefor, he submitted that judicial intervention at this point of time is fully justified.
8. Opposing the grant of any reliefs, Mr. Ashok Desai, on behalf of the respondents, submitted that the principles laid down in Synchron Machine Tools P. Ltd. v. U. M. Suresh Rao [1994] 79 Comp Cas 868 (Kar) will have no application whatsoever as far as the present proceedings is concerned, because the present dispute relates to only one aspect of the proceeding pending before the Company Law Board, namely, the termination of the distributorship agreement which is an issue completely extraneous to the main dispute. Mr. Desai submitted that the allegations of oppression and exclusion which have been levelled against the respondents have been denied, that even as of today, the appellant is very much a director of the company and that no vindictive actions have been taken against him. That issue, however, is within the ambit of the proceedings before the company Law Board and the principles enunciated by the courts in the decisions referred to above are totally extraneous to the issue that falls for determination before me. Mr. Desai has also submitted, and with considerable justification, that a civil court would be precluded from adjudicating upon the wisdom or otherwise to terminate a distributorship agreement and, in this regard, he placed reliance on a decision of the Supreme Court in Indian Oil Corporation Ltd. v. Amritsar Gas Service , wherein, the Supreme Court disapproved of a civil court having interfered with an arbitration award in the matter of a distributorship agreement. Mr. Desai submitted that it is for the board of directors to decide as to who should distribute the products of the company and the terms and conditions thereof and he drew my attention to the reply filed by the company wherein it is pointed out that the company was contemplating termination of the agreement principally because it would be far more beneficial to the financial interest of the company and would effect a saving of as much as Rs. 1.5 crores. This position has been disputed by Mr. Ganesh, but I need to record that the board of directors of a limited company in particular are required to act in the best interests of a company, and it is presumed that they are doing so until the contrary is established. This court is not even required to adjudicate on that question because the step has so far not been taken, and also because the entire dispute is yet to be heard by the Company Law Board. This court is, however, required to decide as to whether it is required to exercise jurisdiction in a matter of the present type and whether it would be right in doing so. The principles laid down in Indian Oil Corporation Ltd. v. Amritsar Gas Service very clearly mandate that it would not be appropriate for a court to sit in judgment over a decision of this type because there are several aspects of the matter that are involved and which are relevant including the fact as rightly pointed out by Mr. Desai that where parties are at loggerheads, the inadvisability of one of them distributing the products is an issue of consequence. I am in agreement with the submissions canvassed by learned counsel, therefore, that this court ought not and should not come in the way of the board of directors exercising their discretion in this matter. Even if the decision is erroneous, since the composite dispute is pending before the Company Law Board, it is open to that forum, if it so desires, to direct corrective action.
9. The real issue as indicated by me earlier centres around the narrow question as to whether the Company Law Board was justified in having refused to exercise discretion. In this regard, Mr. Desai relied on a decision of the Chancery Division in J. E. Cade and Sons Ltd., In re [1992] BCLC 213, wherein under somewhat similar circumstances, the court was concerned with the company or the majority shareholder refusing to purchase the minority shareholders' freehold in a firm and the court had down the principle that it was not permissible to consider the petition, because the interests that were being sought to be protected were entirely different from the petitioner's interests as a member of the company. Mr. Desai also relied on another decision of the Chancery Division reported in Butterworth's Company Law cases reported in Jaber v. Science and Information Technology Ltd. [1992] BCLC 766, wherein the interesting question had arisen in relation to a member of the company seeking to protect other interests and the court in that case declined to grant the reliefs prayed for. Basically, what is submitted by learned counsel is that the termination of the agreement between the company and Sterling has nothing to do with the rights of the appellants in his capacity as a shareholder and director of the company and that, therefore, the Company Law Board was fully justified in having refused to grant the reliefs.
10. This is a case in which, admittedly, the appellant who is a shareholder and director of the company also has other business interests. This is perfectly legitimate and is also permissible. The real issue is as to whether in the event of the distributorship agreement being terminated, it may be said that any rights of the appellant in his capacity as shareholder and director are being infringed. Conversely, it is necessary to examine as to whether the appellant, who undoubtedly has a dual status - one as a shareholder of Krone and, on the other hand, as a director of Sterling and, as far as the present appeal is concerned, who is desperately interested in protecting the interest of Sterling, as he contends, can invoke the special powers of the Company Law Board under sections 397 and 398 of the Companies Act for this purpose. Since the matter has been fully argued before me, it is incumbent that this court records a finding on the issue that has been canvassed and I need to observe that even if one were to accept that the appellant has the interest of Krone equally at heart, the fact remains that the relief asked for by him relates exclusively to the anticipated loss, prejudice or damage that may occur to Sterling. On the pleadings before me, on behalf of Krone it is contended that the termination of the agreement would benefit the company and its shareholders both businesswise and financially. It may be that the appellant does not agree with this appraisal but it is also clear as was more than evident in the course of Mr. Ganesh's submissions, that the appellant is desperately concerned about his business interests in Sterling. That cannot be the subject-matter of an application under section 397 or 398, because these sections are circumscribed to situations where the interests in relation to that very company are concerned. To may mind, therefore, the Company Law Board was more than fully justified in having refused to exercise jurisdiction in respect of the distributorship agreement because it is totally and completely extraneous to the main dispute. I do concede that this aspect of the case has been very cleverly interwoven into the main dispute in order to give it the complexion of being an integral part thereof. It is, however, distinctly separable and to my mind, has been rightly excluded.
11. Having regard to this position, no interference is called for through the present appeal which accordingly fails and stands dismissed. In the circumstances of the case, there shall be no order as to costs.