Company Law Board
Mr. M.K. Dhir, Mrs. Madhu Dhir, Mr. Harsh ... vs Givo Limited, Mr. Kartar Singh Thakral, ... on 11 February, 2003
Equivalent citations: [2003]117COMPCAS193(CLB), (2005)5COMPLJ121(CLB), [2006]66SCL388(CLB)
ORDER
S. Balasubramanian, Vice Chairman
1. The 1st respondent company which was incorporated in 1992-93 in the name of KB & T changed its name to GIVO Limited in October, 1997. The authorized capital of the company is Rs. 74 crores comprising of 6 crores equity shares of Rs. 10/- each and 14 lakhs of 10% cumulative preference shares of Rs. 100/- each. The present subscribed capital is of the order of Rs. 52.43 crores. The main business of the company is to carry on manufacture, purchase, sale, import, export etc. of readymade garments and fashion apparel. The petitioners 1 and 2 were promoters of the company and also subscribers to the Memorandum. Presently, the petitioners' group hold 16.5% equity shares in the company. All the petitioners have given personal guarantees for the loans taken by the company from IDBI and IFCI. The amount due to the financial institutions is of the order of about Rs. 29 crores as on 31.3.2001 and the accumulated loss on that day was to the tune of Rs. 43.8 crores. Now the company is before the BIFR and DRT. The main grievance of the petitioners is that the 2nd respondent and his group known as Thakral Group have taken over the management of the company is exclusion of the petitioners and have been mismanaging the affairs of the company leading to heavy losses and at the same time have not taken any action to replace the personal guarantees given by the petitioners.
2. Shri Chaudhary appearing for the petitioners submitted: Even though the company was promoted by the petitioners, later on a Memorandum of Agreement was entered into between the company and Thakaral Group by which the Thakral Group had agreed to market up to 70% of the production of the company for a period of 5 years on a commission of 3% on the sale value of the products (Annexure A-4). Similarly, another agreement was entered into between the company and one Manufacture Lane Gaetano Marzotto and Fieli S. p. A, Italy (GMF) by which the later was to market 20% of the production of the company. In November, 1993, a shareholders' agreement was entered into between the petitioners' group, Thakral Group and GMF by which the parties had undertaken to subscribe to the shares of the company in a proportion to be decided. Later on, they had decided that Thakral Group would hold 45% shares, petitioners' group 45% shares and GMF the balance 10% shares. Accordingly, they had invested in the shares. Later on, when the company needed further funds, since the petitioners did not have sufficient funds, the Thakral Group subscribed to further shares by which the petitioners' holding got reduced to 16.5%. The Thakral Group and GMF which is also controlled by Thakral Group did not fulfill their obligation of marketing 90% of the products of the company due to which the company suffered resulting in losses year after year. Right from 1997, the Thakral Group had majority on the Board and has been controlling the affairs of the company. Due to their mismanagement, the losses are mounting and with interest liability, the due to the financial institutions has gone over Rs. 30 crores. The financial institutions have initiated proceedings before DRT and the personal properties of the petitioners have been attached since they had given personal guarantees. Since the assets of Thakral Group are in Singapore, no attachment order has been made against their assets. If the management under Thakral Group does not clear the loans, there is every threat of the properties of the petitioners being sold. Even tough the respondents claim that the petitioners had mismanaged the company from 1993 to 1997, yet, they had approved all the accounts during that period clearly establishing that their allegations against the petitioners are an after thought. From 1997, Thakral Group assumed the entire control and management of the company and because of their mismanagement during the last 5 years, the net worth of the company has become negative and the company has become a BIFR company. In view of their mismanagement due to which the loans taken from the financial institutions could not be paid by the company, the survival of the petitioners is at stake. Since the petitioners are in minority, it is unfair and unjust that they should be compelled to continue their personal guarantees. In Vinod Kumar Mittal v. Kaveri Lime Industries Ltd. (100 CC 66), the Board had directed the majority shareholders who were in control of the company, to release the personal guarantees given by the minority shareholder. The same ratio should be applied in this case also. In case, their personal guarantees have to continue, then, the control and management of the company should also be given to the petitioners who are prepared to purchase all the shares held by Thakral Group for Rs. 1/- or else the petitioners are prepared to sell their shares to Thakral Group for Rs. 1/- provided the petitioners are released of their personal guarantees.
3. Shri Alok Dhir, Advocate for the respondents submitted: This petition is malafide, filed for the single oblique motive of getting the personal guarantees of the petitioners released. It was the first petitioner who induced Thakrals to invest huge funds in the company and he was controlling the entire management right from 1993 to Feb. 1997 as the Managing Director. Since Thakrals are based in Singapore, they completely relied on the first petitioner and gave him a free hand to manage the affairs of the company. Even though the original project cost was to the order of about Rs. 49 crores, ultimately the project cost went up to about Rs. 62 crores due to the mismanagement on the part of the first petitioner. When Thakrals realized the mismanagement on the part of the first petitioner in Feb. 1997, he resigned from the post of Managing Director. By that time the company had accumulated substantial losses. Without understanding the implications, the first petitioner had taken substantial financial assistance from Institutions and he never took any step to repay the loan nor the interest accrued thereon. Even when it was agreed that the petitioners would invest Rs. 3 crores and the Thakrals Rs. 11 crores for additional shares, the petitioners invested only Rs. 85 lakhs while Thakrals invested the entire Rs. 11 crores. Thus the petitioners got their percentage holding reduced voluntarily. Since the quality of the products of the company was not upto the mark, Thakrals could not lift 70% of the production as per the agreement with the company. As far as M/s. GMF is concerned, who are not in any way connected with Thakrals, and which has not been made a party to the proceedings, it did also not lift the products due to quality deficiencies. After the first petitioner resigned as the Managing Director, the company is being managed by professionals who have been able to improve the performance of the company. Till Feb. 2000 the company has paid all the interest due on loans and the losses of the company have been progressively reduced. In the year 1996-97 when the petitioner was in charge, the loss was Rs. 19.47 crores which was reduced to Rs. 6.8 crores in the year 1997-98. This is inspite of the fact that the company's funds were blocked and non/slow moving inventories accumulated by the first petitioner had to be disposed of at heavy discount. There have been various instances of diversion of funds by him as is evident from disallowance of various items of expenses by the income tax department. Further, proceedings have been initiated by Enforcement Directorate for non compliance of relevant provisions and violation of licences granted by Apparel Export Promotion Counsel, by the 1st petitioner. The petitioners are guilty of diversion of the business of the company to their own company by name Dhir Global Industrial Pvt. Ltd. They have not only used the know how of the company in setting up their own company, they also induced the technical and non technical employees of the company to join their own company. Most of these employees were trained in Italy at heavy cost by the company. They are also using phonetically similar brand name "GIOVANI" and are passing on the same as that of the respondent company by undertaking the price. In DRT proceedings they are actively supporting the cause of the Banks and Financial Institution against the company.
4. The learned counsel further submitted: So far, Thankrals have invested over Rs. 40 crores in the company both in the form of share capital and also in the form of ECB loans etc. This would show that while the petitioners have given only personal guarantees Thakrals have actually brought in substantial funds into the company. Presently proceedings are pending before DRT and BIFR and in terms of the recent Securitisation Act, notices have been issued to the company as well as to the petitioners.
5. Summing up his arguments the learned counsel submitted: No act of oppression or mismanagement has been established against the respondents. Presently, the company is being managed by professionals. The loans against which the petitioners have given personal guarantees were taken while the first petitioner was in full control of the company and after having mismanaged the affairs of company for over five years and having voluntarily resigned as the Managing Director, now the petitioners cannot seek to get them released of their personal guarantees especially when two of their nominees are still on the Board of the Company. Further, since they are already parties before the DRT, they cannot over reach the same by approaching the CLB and seek for the release from the personal guarantees. Even though the first petitioner resigned as MD as early as in 1997, yet, the petitioners have moved this petition only after other proceedings have been initiated. As far as the case of Kaveri Lime Stone Limited cited by Shri Chaudhary, wherein this Board had directed the release of personal guarantees by the petitioner is concerned, in that case the allegation of oppression against the petitioner had been established and there were no other pending proceedings. In the present case, not only no case of oppression or mismanagement has been established but proceedings before DRT and BIFR are pending. Since this petition has been filed with an oblique motive, the same should be dismissed.
6. Shri Chaudhary submitted a rejoinder: GMF is a part of Thakral group and the same has not been denied in the reply. The losses incurred by the company during the period when the first petitioner was the Managing Director was a result of the failure of Thakrals and GMF to lift the agreed quantum of products of the company. There is nothing on record to show that the their failure to lift the products was on account of quality failure. KBHS had been exporting garments right from 1975 and therefore to allege that the petitioners are competing with the business of the company is not correct. The other company was established only in 1998 after the first petitioner was ousted from the company and it started the production only in 2001. It was Thakrals who had induced the petitioners to put up a world class factory with the assurance of lifting 90% of the production. The mismanagement on the part of Thakrals in the last 5 years is evident from the fact that the accumulated loss has gone up from Rs. 25 crores in Mar. 1997 to about Rs. 85 crores now. It is the common knowledge that during initial stages of any project no company can earn profits and as such the initial loss can never be attributed as reflection of mismanagement. Now the net worth of the company has become negative which can definitely be attributed to mismanagement by the so called professional directors who are all nominees of Thakrals. Practically the entire project was implemented through institutional finance and today Thakrals have a world class project worth Rs. 50 crores while the petitioners have nothing. Since Thakrals own Transnational Companies they can easily release the petitioners of personal guarantees which they are not willing to do only with a view to cause harm to the personal interest of the petitioners. Therefore, in all fairness and in equity when the petitioners not being in control of the company and are holding only a negligible 16% shares, cannot be burden with their personal guarantees given for the benefit of the company. Since this company was incorporated in the guise of a quasi partnership between the petitioners and Thakrals and when one partner acts against the interest of the other one, the only remedy available is through invoking the provisions of Section 397. Therefore, one of the alternative prayers already made should be granted to the petitioners.
7. I have considered the pleadings and the arguments of the counsel. The fact that the company is in dire financial difficulties is not disputed by both the parties but each one is accusing the other for the present status of the company. While the petitioners accuse the Thakral Group of mismanagement after they took over the control of the company, Thakral's group is accusing the 1st petitioner for having increased the cost of the project and also for the loss that the company had incurred when he was in control of the company. The respondents have also alleged that the petitioners are guilty of diversion of funds, starting a competing business and taking away the employees of the company. I find that when the petitioner was in control of the management, the respondents had representation on the Board including that of the Chairmanship. It is also on record that during that period they had brought in huge funds to the company, which they would have not done without examining the affairs of the company and without satisfying themselves about the proper functioning of the company. Therefore, to accuse the petitioner for escalation in the cost of the project, there is no justification. In regard to the losses incurred by the company during the tenure of the petitioner in the management, it is to be noted that the project commenced commercial production only from January 1996 and for the year ended on 31.3.1996 the loss was Rs. 3.4 crores which included financing charge of Rs. 2 crores. Likewise for the year ended 31.3.1997 the loss was about 19.4 crores with financing charges of Rs. 8 crores and depreciation of about Rs. 3 crores. Any new project, in the initial years, especially when implemented out of external financing bearing interest, will incur losses. Therefore, to allege that the losses were due to the financial mismanagement of the first petitioner is not justified. It appears that the company has not been able to reach its optimum capacity, whatever may be the reason, which has put the company in financial difficulties. This conclusion is inevitable from the act that even after nearly six years of commencement of commercial production, the company is still incurring losses (even though the quantum of losses is coming down year after year), not withstanding the fact that volume of production is going up. Therefore, the allegations of financial mismanagement made against each other, without full particulars, cannot be adjudicated.
8. It is on record that the petitioners voluntarily reduced their percentage shareholding by not subscribing to the right offer made to them and the 1st petitioner voluntarily resigned from the post of MD initially and thereafter also resigned as Vice Chairman. In other words the petitioners had voluntarily handed over the management of the company to Thakrals. Under these circumstances, the only issue for consideration is whether a person who was in management with considerable percentage of shares and who had given personal guarantees should continue with the personal guarantees when his shareholding has been reduced considerably and is in no longer in management. Normally, personal guarantees are given by the promoters of a company or those who have high states in the company. In the present case, the petitioners, being promoters and having management control of the company had given personal guarantees when the project was under implementation. Now that, their stake in the company has come down and that they are no longer in control of the management, in equity, they should not be burdened with their personal guarantees and Thakarals who have high stakes and who are in control of the company are obligated to replace the same. It is the ratio that was applied by this Board in Kaveri Lime Stone Pvt. Case (supra) wherein this Board upheld the decision of the company to remove the petitioner as a director but at the same time directed the respondents to release the petitioner from the personal guarantees given by him in favour of the company as he ceased to be a part of the management. Shri Chaudhary made two alternative proposals- one is that, if they personal guarantees of the petitioners are released, they would transfer their shares for Re 1 to Thakarals and the other is that in case the petitioners are not relieved of their personal guarantees, Thakarals should transfer their shares to the petitioners for Re 1 so that the petitioners could take care of all the liabilities of the company. While I find the first proposal to be fair and justifiable in facts of this case, the second proposal of asking Thakrals, who have invested huge funds into the company to sell their shares is not justified. Therefore, with the view to put an end to the disputes between the parties, I direct thakral group to take all steps to release the petitioners from their personal guarantees for loans taken in favour of the company within a period of 3 months from the date of this order. However, I make it abundantly clear, that this direction is without prejudice to the pending proceedings before DRT and BIFR and also subject to the concurrence of the Financial institutions holding the personal guarantees of the petitioners. As and when their personal guarantees are released, the petitioners shall transfer their shares to Thakarals for a consolidated consideration of Re 1.
9. The petition is disposed of in the above terms without any order as to cost.