Company Law Board
Shri Kishore Kundan Sippy And Shri ... vs Samrat Shipping And Transport Systems ... on 29 October, 2003
Equivalent citations: [2004]118COMPCAS472(CLB), [2004]50SCL493(CLB)
ORDER
S. Balasubramanian, Chairman
1. Since the main parties as well as the background in both the petitions are common, both the petitions were heard together and as such are being disposed of by this single order.
2. The petitioners known as Sippy Groups and one Jai Singh Group incorporated a company known as Samrat Shipping Company Private Limited (SSCO) in November, 1975 with equal shareholding and equal number of directors on the Board. CP 40 of 2002 relates to this company (second petition). The main object of that company is to carry on business as shipping agents, management of shipping services etc. Sometime in 1977, the 2nd respondent known as Puri Group joined the company and the shareholding of all 3 groups came to be 1/3rd each. 7 other companies with the name Samrat were incorporated by the said 3 groups. One M/s Meridian Trading Co Pvt. Ltd was also incorporated as a subsidiary of SSCO. In that company SSCO holds 90% shares and the 1st petitioner has been the MD and the second respondent-the Chairman. In 1994, certain disputes arose among the three groups and in 1997, Jai Singh Group left the entire Samrat Group including SSCO. Thereafter, in SSCO, Sippy and Puri Groups became equal shareholders with 50% shares each. The 2nd petitioner became the Chairman of the company and the 2nd respondent, the Managing Director. SSCO held an agency agreement with one Contship Containerliners (Contship) under an agreement dated 1st February, 1991 for a period of 5 years which came to an end on 30th September, 1996. Samrat Shipping & Transport Systems Private Ltd. (SSTS) was incorporated in August, 1996 in which both the groups hold 50% shares each and the 2nd petitioner has been the Chairman and the 2nd respondent-the managing director of this company. CP 41 of 2002 relates to this company (first petition). The Puri Group incorporated a company in the name of Samrat Shipping & Logistics Private Limited in October 2001. Contship terminated the agency agreement with the SSTS effective on 30.11.2001 on expiry of the period of the agency and entered into a fresh agency agreement with Samrat Shipping & Logistics Private Ltd. (the 4th respondent) for a period of 5 years effective from 1.12.2001.
3. The main dispute between the parties in the first petition relates to the 4th respondent and it's getting the agency business of Contship. The Sippy Group filed a suit against Puri Group for having used the name "Samrat" for their new company and seeking for an injunction restraining the use of the word/name "Samrat" on the ground that the word/name belong to Sippy Group. On that company changing its name to Seaworld Shipping & Logistics Private ltd, the Sippy group withdrew the suit. In the present petition, the complaint of the Sippy group is that the Puri group, more particularly the 2nd respondent, being a director of SSTS, has breached his fiduciary duties to SSTS by diverting the Contship agency to the 4th respondent which is under his control. Contship had also been impleaded as the 5th respondent. On an application filed by Contship seeking for deleting its name from the array of respondents, this Bench, by an order dated 11.11.2002 deleted it as a party in these proceedings reserving the right of this Bench to implead it in case of any necessity.
4. With reference to the 1st petition Shri Sarkar, Sr. Advocate appearing for the Sippy group submitted: SSCO was incorporated in 1975 by the Sippy group and one Jai Singh Group. At that time, no other company in shipping business had the word "Samrat" as a part of its name. The business of the company flourished and the word "Samrat" became well known in the shipping circle. Puri Group joined the company in 1977 with 1/3rd shares in the company. The other original promoters held 1/3rd shares each. Many other companies were incorporated by the three groups collectively using the word "Samrat" as a part of the names of these companies. It was universally recognized that any company with the word "Samrat" as a part of its name was a group company of SSCO. However, Puri group incorporated a company by themselves in the name of Samrat Shipping & Logistics Private Limited without the knowledge of approval of Sippy group or SSCO in October 2001. The main complaint in the petition is that the Puri Group has taken away the main business of the company i.e. the Agency Contract of Contship. This agency business contributed to 95% of the business of SSTS. By taking away the main business of the company, the 2nd respondent has breached his fiduciary duties to the company as a director. Further, by incorporating a separate company, namely, the 4th respondent, the Puri Group is carrying on a competing business with the company and as a matter of fact all the resource of the company like its infrastructure, employees etc. are being for the benefit of the 4th respondent. The manner and mode by which the 4th respondent was incorporated with the name Samrat Shipping & Logistics Private Limited is also questionable. The 2nd and 3rd respondents, without the approval of the Board or the Sippy Group holding 50% shares in the company, gave no objection to the Registrar of Companies for incorporation of the 4th respondent with the name "Samrat". This itself is an abuse of their powers as directors. That company was incorporated only with a view to take away the agency agreement with M/S Contship. the letter of termination of the agreement with the company from Contship dated 1st September, 2001 to the 2nd respondent was never disclosed to the company or to the Board or to the Sippy Group. As a matter of fact, this letter itself was addressed to the 2nd respondent instead of to the company. Even assuming that Contship had the right to terminate the agreement in terms of the deed of agreement, yet, the obligations of Puri Group towards the Sippy group and SSTS cannot be undermined. Nothing prevented the Puri Group to persuade Contship to continue the agreement with the SSTS. There is nothing on record to show that Contship was dis-satisfied with the performance of SSTS. The only stand taken by Puri Group is that because the 2nd respondent is an expert in Shipping business, Contship desired to have dealings only with him. The admitted position is that the 2nd respondent has always been managing the affairs SSTS as MD and Sippys never interfered with the working of the company. In other words, continuing the agreement with the company, Contship would continue to have dealings only with Puri Group. Therefore, by taking over Canship agreement to the new company, Puri Group has diverted the business of the company in breach of their fiduciary duties to SSTS. It has been held in Cook v. G.S. Deeks (AIR 1916 PC 161); that the directors of a limited company who assume the complete control of a company's business are not at liberty to sacrifice the interest which they are bound to protect and while ostensibly acting for the company divert in their own favour business which should properly belong to the company they represent. In Scottish Cooperate Society Ltd. v. Meyer (1958 3 AER 66) it has been held that Even though a director of a company could become a director of rival company also, provisions of Section 210 could be invoked if he subordinates the interest of one company to those of the other. In the present case, the Puri group have subordinated their interest in SSTS to that of the 4th respondent. In Boulting and Anr v. Association of Cinematograph Television 1963 1 AER 716) the Court has held that the rule of equity demands that a person having fiduciary duties will not be allowed to enter into engagements in which he can have an interest conflicting with his fiduciary duties. There are number of judicial decisions to the effect that in case of profit arising from diversion of business by a fiduciary, he is liable to account for any benefit derived from diversion of business in breach of his fiduciary duties and application of those decisions in the present case would clearly establish that the 2nd and third respondents, being directors of SSTS have breached their fiduciary duties and therefore are liable to account for the profits made by the 4th respondent in the agreement with Contship on account of diversion of the business. In Industrial Development Consultants Limited v. Cooley (1972 2 AER 162) the Court observed that a director holds fiduciary position towards the company and if he makes any profit when he is acting for the company, he must account the company. It makes no difference that the profit is one which the company itself could not have obtained, the question being not whether the company could have acquired it but whether the director acquired it while acting for the company nor that the interest of the director is as a trustee for a third party. Likewise in Regal (Hastings) Limited v. Gulliver (1942 1 AER 378) it is held that the rule of equity which insists on, who by use of fiduciary position make a profit, being liable to account for that profit, will no way depends upon fraud, or absence of bona fide. The liability arises from the mere fact of a profit having been made. The profiteer, however, honest and well intentioned cannot escape the risk of being called upon to account. Further, in terms of Section 88 of the Indian Trusts Act also, any advantage gained by a fiduciary should be held in trust for the beneficiary. Further, this company is in the nature of ta quasi partnership between the Sippy and Puri groups and in terms of principles of partnership also, one partner cannot take away a business of the partnership without the consent of the other partners. Since the principle of trusteeship would govern their relationship, the provisions of Trust Act would have to be applied and if done so, the Puri Group has to account for the profits they made in their contract with Contship to the Company.
5. Summing up his argument, Shri Sarkar submitted: There is complete deadlock in SSTS as is evident from the fact no Board meetings of the company has been possible after the disputes arose and the action of the 2nd respondent in taking away the main business of the company is not only oppressive to the Sippy Group holding 50% shares in the company in terms of Section 397 but also prejudicial to the interest of the company in terms of Section 398. Therefore, the only way by which the acts complained of could be put to an end is to direct the Puri group/4th respondent to account for the profits derived from the agency agreement with Contship and divide the assets of the company equally between the two groups thereafter as both the groups cannot not continue together. The division of assets would also be in line with the proposal made by the 2nd respondent himself in para 16 of his letter dated 27th Feb. 2002 (Annexure A-10).
6. Shri Devitre appearing for the Puri group submitted: The 2nd respondent is an expert in the shipping business and his expertise has been recognized world over. Even before joining SSCO in 1977, he was dealing with Contship. Contship entered into the agency agreement with SSCO only because of the association of the 2nd respondent with that company and this has been confirmed by Contship also in its letter dated 26.4.2002. In terms of the agency agreement with Contship, Contship had the right to terminate the agreement with a three months' notice and the agreement also provided that no compensation was payable on such termination. It is on record that the earlier agreement with SSCO was terminated when the period of the agreement expired. Thereafter, Contship entered into a fresh agreement with SSTS. SSCO never complained that its business had been diverted to SSTS. In the present case, Contship did nor renew the agency agreement with SSTS when the term of the agreement expired. Neither the company nor any of the parties could have forced Contship to renew the agreement with SSTS as it is the prerogative of Contship to choose its agent. Even at the time when Contship terminated its agreement in 1996, the termination notice was sent in the name of the 2nd respondent and therefore the petitioners cannot attribute any motive when Contship addressed the termination notice in 2001 to the 2nd respondent. The disputes between the Sippy Group and Puri Group started in 2001 in relation to the functioning of Meridian. Meridian has been in complete control of Sippy Group right from the beginning and enormous funds of SSCO were being diverted to that company which was opposed by Puri Group. Contship was aware of the dispute between the two groups and was apprehensive that renewing the agency agreement with SSTS wherein both the groups have equal shareholding would not be in its interest. Since Contship had complete confidence in the 2nd respondent, it took the commercial decision of entering into the fresh agreement with the 4th respondent which was in complete control of Puri Group. The allegation of the petitioners that by using the name Samrat in the name of the 4th respondent, Puri Group had obtained the agency is not correct as Contship itself in its letter dated 26.4.2002 (Exhibit 'C') clarified that they have entered into the agreement with the 4th respondent only because of their confidence in the 2nd respondent and not because of the name 'Samrat'. Therefore, the question of diversion of any business of the company by Puri Group does not arise as the existing agreement with SSTS had expired. Once a contract is terminated or has expired, a director can take the same and it would not amount to breach of his fiduciary duties. The 2nd respondent has not obtained the contract for the 4th respondent in his capacity as the MD of SSTS but he got it only on the basis of his personal expertise and the confidence that Contship had in him. Further, the Sippy Group has not initiated any proceeding against Contship regarding the termination of the agreement nor they have made any complaint to Contship in his regard. If at all, SSTS had any cause of action, it could be only in the event of Contship terminating the agreement prematurely, which is not the case. Further, even in the suit filed by Sippy Group, there was no complaint regarding diversion of business. In the first suit, the Sippy Group had only complained about use of the name "Samrat" and claiming damages. In the second suit also, they had claimed Rs. 10 crores for using the name Samrat. While the first suit was withdrawn with liberty to file a fresh suit, the second suit was withdrawn unconditionally. Therefore, in the present proceedings, Sippy Group cannot claim any damages on the ground of diversion of business. The present proceeding has been initiated with a view to extract money from Puri Group alleging that the contract with Contship has been diverted. Any damages could be only against loss of profit which is also not possible in the present case since the period of contract had expired and therefore the question of future profit from a non existing business does not arise. Therefore, this petition is malafide and should be dismissed.
7. Reacting to the various cases cited by Shri Sarkar, Shri Devitre submitted that none of the decisions in these English case can be applied by Indian Courts. All the decisions relate to the period before 1948 and therefore after India has become independent, English decisions are not binding on Indian Courts. The decisions of Indian Courts on the fiduciary responsibilities of a director or a partner are entirely different. Indian Courts have not applied strict fiduciary doctrine on the part of directors as in England. In Deva Sharma v. Lakshmi Naralu Gadeodia (AIR 1956 Punjab 49) while considering the application of Section 88 of the Indian Trusts Act, the court held that in applying fiduciary responsibilities of a partner in a partnership firm, it must be established that he has acquired financial benefits for himself by representing that he was acting for the partnership and the party dealing with him should also have been under the belief that the partner was dealing on behalf of the partnership. In the present case, the 2nd respondent did not obtain the Contship agency for the 4th respondent in his capacity as the MD of SSTS nor Contship dealt with him as such. Therefore, the question of complaining that the 2nd respondent has acted in breach of his fiduciary duties and he should account for the benefit accrued to the 4th respondent to the company does not arise. The learned counsel also relied on the decision of this Bench in Pye Lend Lease Private Ltd. v. Jewel Private Limited (1998 1 CLJ 363) wherein this Bench had observed, in a complaint that a director, in breach of his fiduciary duties had diverted the business of a company to his own company, that the company had not lost the business opportunity but the business opportunity was itself not available to the company. Relying on this observation, the learned counsel contended that in the present case since the agency agreement with SSCO had been terminated by Contship, the question of breach of fiduciary duties on the basis of diversion of a non existing agency, does not arise. In Desein Private Limited v. Elektrim Indian Limited (2001 43 CLJ 141) this Board has held that to substantiate an allegation of diversion of business it should be established that the company had lost a business opportunity to the newly incorporated company. Since in that case, the particular respondent against whom the complaint had been made had already gone out of business and without the assistance of that respondent the company itself could not carry on the business, the Board held that there was no breach of fiduciary duties. Similarly, in the present case, without the assistance of the 2nd respondent, the company could not have carried on business with Contship. In Chennuru Gavaraju Chetty v. Chennuru Sitaramamurthy Chetty (AIR 1959 SC 190) the issue before the court was whether the renewal of a lease granted by the Government in favour of a partnership, by a partner in his own name after the partnership was dissolved, could be treated as an asset of the dissolved partnership. The court held that in deciding this issue, the circumstances prevailed at the time of renewal should be taken into account and the facts of that case indicated that the renewal of the lease was not intended to be for the benefit of the partners. The learned Counsel submitted that even though the facts of this case are not directly applicable to the present case, yet, the principles could be applied. In the present case also, there were ongoing disputes between the Puri and Sippy Groups and the agency agreement with the 4th respondent was entered into after the expiry of the term of the agreement with SSTS.
8. Summing up his arguments, Shri Devitre submitted that the petitioners are not clear as to how they are alleging that there was diversion of the business of the company. Initially there complaint was that by using the word 'Samrat' with the name of the 4th respondent, Puri Group obtained the agency agreement from Contship. When this was rebutted by Contship, the petitioners' complaint is that the 2nd respondent had instigated Contship to terminate its agreement with SSCO and influenced the Contship to enter into an agreement with the 4th respondent. However, there is no such averment in the petition to this effect and the same is only advanced during the arguments. No evidence has been produced to substantiate these charges. Considering the fact that the 2nd respondent has not utilized his position as MD of SSTS nor the funds nor the resources of SSTS were utilized in obtaining the agency agreement for the 4th respondent, the question of either the 2nd respondent or the 4th respondent being accountable to SSTS or Sippy group for the benefits derived from the agency agreement with Contship by the 4th respondent does not arise. Further, since the 4th respondent is not a shareholder of SSTS, no order can be made against the 4th respondent in these proceedings. Since the petition is motivated only to claim damages and not for any relief for any alleged oppression or mismanagement, this petition should be dismissed. The question of division of the assets of the company between the two groups, as prayed for by Shri Sarkar, in any way does not arise since no case of oppression or mismanagement has been established. If the prayer were to be granted, it would only amount to winding up of the company and this Board has no jurisdiction to do so. Further, dead lock alone cannot be a ground for seeking relief under Sections 397/98 as held by Calcutta High Court in Re Modern Furnishers (Interior Designers) Private Ltd (58 CC 858). Accordingly, he sought for dismissal of this petition.
9. In rejoinder, Shri Sarkar submitted: He had relied on para 16 of letter of the 2nd respondent at Annexure A-10 for division of assets of the company between the two groups only with a view to put to an end to the disputes as suggested by the 2nd respondent himself in that letter. In the letter, there is no mention that Contship business was a separate business. Therefore the profits attributable to the Contship agreement now diverted to the 4th respondent should also be taken into account at the time of division of the assets of the company. Sippy group complaint is not only about the breach of fiduciary duties of the 2nd respondent but also being oppressive to a 50% shareholder. Breach of fiduciary duties is also an element of oppression. The very fact that respondents 2 and 3 in their capacity as directors of SSTS gave no objection for incorporation of the 4th respondent with the word "Samrat" as part of its name without the knowledge and approval of the Board would indicate that they have incorporated that company with an ulterior motive. Again, they never brought before the Board the letter of termination of the agreement from Contship. The suit filed in Bombay related to the illegal use of the word "Samrat" and claim for damages against usage of that name. In that suit, there was no complaint of oppression and the petitioners had reserved the right to seek other remedies. Once the 4th respondent changed its name omitting the word "Samrat" the petitioners had no further cause of action in that suit. Therefore, that suit cannot be compared with the present petition which has been filed complaining of oppression and mismanagement against the respondents. Only when the petitioners came to know that most of the assets cars and employees of the company were being used for the benefit of the 4th respondents, they decided to file this petition. In his capacity as MD, it was the 2nd respondent's bounden duty to have ensured that Contship agreement was given to SSTS in which case all the profits would have come to SSTS instead of to the 4th respondent especially when there is no record to show that Contship did not want to deal with SSTS. None of the cases relied on by the leaned counsel for the respondents would have any application in the present case. In Deva Sharma case (Punjab), the partner ship firm had an selling agency business and the partnership agreement contained a clause that on termination of hat agency neither partner would take the agency. The partnership itself was co terminus with that of the agency. When the agency was terminated, the partnership also came to an end. When one of the partners took the agency there after, the same was challenged and the other partner claimed share of profits from the agency taken by the first partner on the ground that the first partner had breached his fiduciary duties in terms of Section 88 of the Indian Trust Act. The court held that since, the partnership itself had come to an end, the question of breach of fiduciary duties did not arise. But in the present case, the 2nd respondent still continues as the MD of SSTS and is associated with it as a 50% shareholder. Likewise, in the Supreme Court case (AIR 1959 SC 190) also the question that arose was whether a partner, after dissolution of the partnership, can take a lease that was with the firm. The court held that since the firm was no longer existing and that both the partners were trying to get the lease independent of the other and that there were preexisting disputes between them, obtaining the lease by one of the partners would not amount to breach of fiduciary duties. The other two decisions of Company Law Board relied on by Shri Devitre are different in facts and as such are not applicable to the present case. Therefore, none of the case cited by the learned counsel for the respondents is applicable to the fats of the present case. The contention of the learned counsel for the respondents that the decisions of English Courts are not applicable is not correct. There are a number of judgments by various courts including the Supreme Court rendered after 1950 when the Constitution of India came into being that all Privy Council decisions are binding unless modified by the Supreme Court or by Parliament. This decision is found in Director of Rationing & Distribution v. The Corporation of Calcutta (AIR 1960 SC 1355), Shrimati Raja Rani Das v. Sicis Kumar (AIR 1953 Cal. 524). In Saurashtra Cement & Chemicals v. Essma Industries Private Ltd. (1996 1 CLJ 211 Gujrat), the court has followed the decision in various cases decided by Court of Appeal and Privy Council. Even in Needle Industries case (AIR 1981 SC 1293), the Supreme Court has referred to various decisions of Privy Council. Therefore, the English cases cited on behalf of the petitioners can definitely be applied in the present case. Since the 2nd respondent has diverted the business of the company to the 4th respondent, the 4th respondent has to be considered to be a constructive trustees of SSTS for the profit accrued to the 4th respondent with the agency business of Contship as held in Selangor United Rubber Estates Pvt. Ltd. v. Cradock (1968 2 AER 1073).
10. As far the 2nd petition is concerned Shri Sarkar submitted. The main complaints of the petitioners in this petition are that there is complete deadlock in the affairs SSCO and that the 2nd respondent is guilty of personally profiting himself at the cost of the company. Both the groups hold 50% each and have equal number of directors on the Board. There is no running business except rental income as the company has a large number of properties. The company had invested Rs. 49 lacs in the shares of a company known as NOL (India) Private Limited in 1992 and these shares have been shown as an investment in the books of the company and is shown as such in the Balance Sheets also right from the beginning. However, on the basis of some fabricated Board Resolution, the 2nd respondent claims that the company had lent him Rs. 49 lacs to purchase these shares and therefore these shares belonged to him. Claiming as such, he has sold these shares for Rs. 2.7 crores and refunded only Rs. 49 lacs to the company. Even though, these shares were held in his name, they were so held for the benefit of the company and therefore he should be directed to make good the balance amount to the company. Even assuming that the Board had authorized him to hold these shares in his name, he cannot enjoy the profit at the cost of the company. Therefore, after he makes good this excess amount to the company and since the company is not doing any business and there is deadlock and has a large number of properties, all the properties of the company should be valued and on the basis of the valuation, apportioned between the parties. They may be given the option to retain whatever property they want to the extent of their entitlement and the properties not chosen by anyone may be sold and the liabilities of the company be discharged. The option to retain the company may also be given to either of the parties. In case the 2nd respondent takes the company, he should change the name of the company without using the word "Samrat". This is the only way by which the deadlock situation in the company could be resolved. Further, the petitioners have carried out an inspection of the accounts of various group companies as permitted by this Bench. During the inspection, as elaborated in the affidavit dated 20th August, 2002, the Puri group is found to have diverted substantial funds from both SSCO and SSTS to various companies of the Puri group. Therefore, an investigation into the affairs of both these companies should be ordered and the amount diverted should be accounted for and then only the division of assets of the company should be ordered. Till such time the investigation is completed, the funds generated by the 4th respondent should be kept in a separate account.
11. In regard to the second petition, Shri Devitre submitted: This petition does not disclose any cause of action for invoking the provisions of Sections 397 or 398 and as such this petition should be dismissed. The only allegation is about the investment in the shares of NOL India Private Limited. Even in respect of this complaint, the petitioners have not come with clean hands. Neptune Orient Lime Limited of Singapore proposed a joint venture for its operations in India. In view of the expertise of the 2nd respondent, the Singapore company insisted to have a joint venture company with his participation only and without the participation of SSCO. Even though, SSCO was not to participation in the joint venture, in view of the joint venture company having agreed to take 100 employees of SSCO without any severance pay, in a Board Meeting held on 15th October, 1992, it was decided to lend a sum of Rs. 49 lacs to the 2nd respondent for investment in the shares of the joint venture company. This Board Resolution was signed by the 2nd petitioner himself. Accordingly, a shareholders' agreement was entered into between the 2nd respondent and the Singapore company. The amount of Rs. 49 lacs lent by the company was credited into the bank account of the 2nd respondent and paid by him from that account to NOL for allotment of shares in his own name. Even though the shares were held in the name of the 2nd respondent, Rs. 49 lacs was shown as investment of SSCO in the books of account keeping in view the Tax Laws and other statutory compliance. In 2000, NOL decided to end the joint venture and purchased all the shares held by the 2nd respondent. This matter was placed before the Board of SSCO and in the Board Meeting held on 8th May, 2000 (Exhibit - 3), the Board resolved that the 2nd respondent would return the interest free loan of Rs. 49 lacs to SSCO and the investment shown in the books of accounts be reversed. The agreement of sale and purchase of these shares dated 20th September, 2000 was signed by the 2nd petitioner as a witness. Even the transfer instruments indicating the consideration received was signed by the 2nd petitioner as a witness (Exhibit-5). Immediately on sale of these shares, the 2nd petitioner also resigned as a director of NOL. In the Balance Sheet as on 31.3.2001, the entry relating to investment in NOL was reversed and this Balance Sheet was signed by the 2nd petitioner. In the present proceedings, it is the 1st petitioner who has denied all these facts while the 2nd petitioner has been in the knowledge of all these transactions and had consented to the arrangement. Therefore, the petitioners have not come with clean hands meriting dismissal of the petition summarily. Having known these facts and suppressing the same, the petitioner cannot claim any relief by instituting the present proceedings. Mere deadlock cannot give cause of action to file a petition under Sections 397 or 398. Further, the prayer of the petitioner for sale of properties and discharge of liabilities amount to winding up of the company and this Board has no jurisdiction to do so.
12. As far as the prayer for investigation is concerned, the learned counsel submitted that on the basis of the verification of accounts, the petitioners cannot demand the same. All the allegations in respect of the accounts relate to the period before 31st March, 2001. The 2nd petitioner has approved the Annual Report containing the Balance Sheet and Profit & Loss Account and he has also signed all the returns including the Return of Income Tax. They have received dividends on the basis (SIC) without any reservation or protest. Therefore, even in seeking investigation, the petitioners are acting dishonestly. The petitioners have suppressed the fact that they themselves had incorporated two companies having registered office in the same premises as that of the SSCO.
13. He further submitted: The disputes between the parties arose on account of mismanagement of Meridian in which SSCO holds 90% shares. The 1st petitioner has been the Managing Director of this company and the 2nd respondent is the Chairman. Complete control and management has been with the 1st petitioner. Substantial funds of SSCO have been pumped into Meridian which has been incurring losses right from the beginning for over 14 years. The accounts of Meridian are not being properly maintained and therefore the 2nd respondent was reluctant to sign the Annual Accounts as on 31.3.2000. However, on an assurance that the personal guarantees given by him in favour of Meridian would be replaced, he signed the Accounts for that year. However, in regard to the accounts for the year 2000-01, the auditors could not complete the audit of the accounts as the 1st petitioner could not furnish various information/clarification/documents required by the auditors. Therefore, if any investigation is to be ordered, then, such investigation should cover the affairs of Meridian also. For doing so, Meridian should be made a party to the proceedings for which the respondents have already filed an application. Even otherwise, as held by Madras High Court in Shankar Sundram v. Amalgamations Ltd. (2002 38 SCL 777), the affairs of the holding company would also include subsidiaries and since Meridian is a subsidiary of SSCO, ordering of investigation in to the affairs of SSCO would cover Meridian also.
14. In rejoinder, Shri Sarkar submitted: The decision of Calcutta High Court in Modern Furnishers itself states that provisions of Section 397/98 can be invoked if one group is guilty of misfeasance or malfeasance by one group to the prejudice of the other. Further, in the present case, the petitioner, with the view to ensure the survival of the companies has applied under Sections 397/98. In Hind Overseas case, it has been held that no company can be would up if an order could provide for survival of the company. Therefore, mere division of assets of a company, especially a company in which two groups of shareholders have equal shareholding and there is deadlock, would not amount to seeking winding up of the company.
15. I have considered the pleadings and arguments of the counsel. When the matter came up for hearing, on the application of Contship for being deleted as a party to the proceedings, this Board, by a reasoned order dated 11.11.2002, granted the prayer of Contship. Thereafter, a consent order was passed to maintain the statues quo in respect of the properties and shareholdings of not only these two companies but also other group companies and both the sides were granted the liberty to conduct inspection of the accounts of all companies. On my suggestion that the parties should also try to resolve their disputes amicably, attempts were made by the parties and to enable the parties to resolve the disputes amicably, the hearing of the petitions was also deferred from time to time. Finally when the parties intimated failure, the petitions were heard on merits.
16. As far as the first petition is concerned, the petition contains various allegations in regard to the usage of the word "Samrat" as a part of the name of the 4th respondent. Since, the matter was agitated in the Civil Suit and as the 4th respondent has already changed its name omitting the word "Samrat", I do not propose to deal with the allegations in this regard. Shri Devitre contended that since the petitioners have withdrawn the civil suit unconditionally, the first petition being more or less on the same allegations as that of the suit, should not be entertained. I have seen the plaint in both the suits. In both the suits, the complaint of the petitioners related to the use of the word "Samrat" as a part of the name of the 4th respondent and no allegations regarding either deadlock in the affairs of the company or breach of fiduciary duties on the part. Puri Group in getting the Contship contract to the 4th respondent has been agitated in those suits. There is also no similarity in the reliefs sought and as such this petition cannot be dismissed on the ground that the civil suits have been withdrawn unconditionally.
17. In so far as the prayer of Shri Sarkar for investigation into the affairs of these two companies as also other companies on the basis of various findings in the inspection carried out as per the consent order and the counter prayer of Shri Devitre that investigation into the affairs of M/S Meridian should also be ordered, are concerned, I do not consider that the parties have made out a case for directing an investigation. In the companies involved in the present proceedings, both the groups are not only shareholders holding 50% shares each but also they have equal representation on the Board. As per inspection carried out by the petitioners, the alleged diversion/deficiencies in the accounts mostly pertain to the period 1999-2000/2001. It is on record that the accounts of both SSTS and SSCO have been audited up to 31st March, 2001 and approved by the Board of Directors. Likewise, the accounts of Meridian have also been approved up to 31st March, 2000. Evening assuming that there have been some deficiencies/diversions, the same could not have happened without the knowledge and consent of both the groups of directors. Perhaps, as long as the relationship between the two groups continued to be cordial, the action of one group was either condoned or approved by the other group. Investigation is generally ordered only when public interest is involved or things which are detrimental to the interest of the shareholders happened surreptitiously so that the things are brought to light. Just because two groups of shareholders have fallen out with each other, the process of investigation into affairs carried on together by them together by them with out any complaint earlier, cannot be demanded by one to score against the other. Therefore, I reject the prayer for investigation more so in view of the final relief that I propose to grant.
18. The main allegation in the first petition relates to the Contship agreement with the 4th respondent. The issue for determination is whether the Puri Group has breached its fiduciary duties to SSTS in getting the contract to the 4th respondent and whether Puri Group/4th respondent is accountable to SSTS for the benefits that the 4th respondent has derived from the contract with Contship. The admitted position is that Contship had the right to terminate the agreement with SSTS by giving 3 months' notice in terms of the Agency Agreement and as a matter of fact in the present case, the agreement itself was coming to an end on 30.11.2001. It is not the first time that Contship changed its agents. In 1996, it changed the agency with SSCO to that of SSTS. When Contship had the agency with SSCO, there were 3 groups of shareholders and when it changed its agency to SSTS, SSTS had only two groups of shareholders. At that time, whether the 3rd group complained of diversion of business is not on record. Whether, when the agency is not subsisting with SSTS, it can complain that in breach of fiduciary duties to the company, the 2nd respondent has diverted the agency to the 4th respondent, requires determination. The admitted position is that the agency with Contship contributed nearly 90% of the business of SSTS which had two groups of shareholders and now the entire business has gone to the 4th respondent which is controlled only by Puri Group. I am in full agreement with the submission of Shri Devitre that Contship can never be compelled to chose any particular agent and it has full freedom to decide on its agent. What has to be examined is whether Puri Group - the 2nd respondent being the MD and the 3rd respondent being a director of SSTS - has breached their fiduciary duties to SSTS in getting the Contship agency to the 4th respondent which is under their sole control. Both the sides have cited certain cases in regard to the fiduciary responsibilities. Two of the cases - Deva Sharma (Punjab) and Chennuru Govaraju (Supreme Court) - cited by Shri Devitre relate to partnership and the fiduciary responsibilities of partners to the firms after the partnerships had come to an end. In the present case, the examination relates to the fiduciary responsibilities of a director of a company in which he still continues as a director - as a matter of fact as the MD. In Jewel Brushes case (CLB), the third party did not want to give the business because the company was already dealing with a competitor. In Electrim's case (CLB), the principal itself had given the particular business. Therefore none of these cases are applicable to the present case. Shri Sarkar has cited some English cases on the fiduciary responsibilities of a director and also their liability to account for breach of their fiduciary responsibilities. Shri Devitre contended that decisions of English are not binding on Indian Courts, while according to Shri Sarkar they are binding. I do not propose to decide as to whether decisions of English cases are binding on this Board or not other than noting that as long as a principle of law enunciated by a complete court/authority anywhere, as long as there is no contradictory decision in by an Indian Court, could always be taken into consideration, not as a binding one but as a guiding one. Two of the cases cited by Sarkar, even though directly refer to the fiduciary duties of a director, yet, do not refer to a case similar to the one presently before me. But these cases do lay down the proposition of the strict construction of the duties/responsibilities of a director. In Cook's case, the defendants holding 3/4th of the share capital of the company, appropriated to themselves - through a newly incorporated company - a contract which was tendered in the name of the company and the petitioner director holding 1/4th share capital complained of breach of fiduciary responsibilities on the part of the defendants and the court held it in the affirmative. Scottish Cooperative Society case does not deal with diversion of business but with the action of the holding company, which had its nominees on the Board of the subsidiary, in denying supply of raw material to the subsidiary which depended on the holding company for raw materials. The Court held that the holding company had acted in an oppressive manner to the minority shareholders of the subsidiary. I shall be referring to Industrial Development Consultants case later as it is more or less similar to the one present case before me. While it is universally recognized that a director of a company stands in a fiduciary capacity with the company, the extent of his fiduciary duties is not codified by any statute and is decided on facts of each case. The nature of fiduciary duties has to be strictly construed and not liberally as suggested by Shri Devitre. The fiduciary responsibility of a director enjoins that he should not take away the running business of a company nor he could use the resources of the company for his won personal benefit. The claim of the 2nd respondent is that since the agency with SSTS has come to an end, even if he continues as a director of SSTS, he could take the agency to his own company. His further stand is that as it was he who brought the agency of Contship to Samrat Group, he is free to take it. His third contention is that Contship did not want to have the agency with the company and the fourth is that Contship desired to have the agency with him because of his expertise. The stand that since he had brought the agency to the company, he can take away the same has to be rejected straightaway. It is not uncommon that a business is secured by a company because of the expertise of a particular person in that company. But once the business is taken over by the company, no fiduciary can have a right or claim over that particular business as it belongs to the company. No business can thrive unless otherwise the resources of the company are employed in that business and no individual, by himself, without the aid of the resources of the company, can develop the business. If SSTS has done well as far as the agency with Contship is concerned, it cannot be attributed to only to the 2nd respondent but also to all the resources of the company at his command. The very fact that Contship continued the agency with SSPL for 5 years till the expiry of the period of agency, notwithstanding is right to terminate with a 3 months notice, would indicate that it was happy with SSTS. Under this circumstance, we have to examine the conduct of the 2nd respondent. One of the main elements of fiduciary duties of a director is loyalty to the company. The fiduciary relationship with and loyalty to the company in cases of allegations of diversion of a business by a director are examined in USA by applying the doctrine of Corporate Opportunities. The guiding case on corporate opportunity in USA is the opinion of Delaware Supreme Court in Guth v. Loch decided in 1939 (5A-2d 503). The basic principles decided in that case is widely applied in complaints of diversion of business by a person in fiduciary relationship with a company. Regarding the concept of Corporate Opportunity, the Court opined that "Where a corporation is engaged in a certain business and an opportunity is presented to it embracing an activity as to which it has fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, adaptable to its business..... and is one that is consonant with its reasonable needs and aspirations for expansion, it may properly said that the opportunity is in the line of the corporation's business". The Court further observed "If there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy and by embracing the opportunity, the self interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself". The American Law Institute (ALI) has also adopted the opinion in Guth case in its approach to Corporate Opportunity promulgated in 1994. The principal feature of the ALI test is its strict requirement that the fiduciary disclose a potential corporate opportunity to his company. Under ALI test's general rule, a director may not take advantage of a corporate opportunity unless the director first offers the corporate opportunity to the company and makes disclosure concerning the conflict of interest and the corporate opportunity and the corporate opportunity is rejected by the company. As a matter of fact even for rejection, ALI test requires that the rejection must be fair to the company, the rejection must be by disinterested directors and should be ratified by disinterested shareholders. From this it is clear that a director cannot treat a corporate opportunity lightly and take the same for his own benefit. The recognized defenses in case of complaint of taking away a corporate opportunity are: the company has permitted him to take the opportunity; the company is not financially capable of taking the opportunity for itself: the company is either legally or technically not in a position to pursue that opportunity; the third party refuses to deal with the company; and the opportunity was offered to the director in his personal capacity.
19. Applying the above principles, I shall first examine whether, Contship agency is a corporate opportunity for SSTS. It is an admitted position that SSTS was carrying on the same agency for 5 years prior to the expiry of the period of agency and the agency business is in the line of business of SSTS. It has expertise and experience in that business. Nothing has been said that SSTS was financially incapable of taking the agency further. Therefore, when the earlier agency came to an end on 30.11.2001, unless Contship had abandoned its business in India, any further agency contract envisaged by Contship in India, was a corporate opportunity for SSTS. Therefore, when the 4th respondent, which is a company of Puris took the agency from 1.12.2001, SSTS, undoubtedly lost this corporate opportunity. The defense of the 2nd respondent is that since the agency with SSTS had come to an end and that Contship did not want to deal with SSTS, that in view of this SSTS had lost its opportunity and that the opportunity was offered to him in his personal capacity because of his expertise, there was no breach of his fiduciary duties to SSTS. In Industrial Development Consultants case (supra), similar defense was raised. In a nut shell that case was: (as is indicated in the head note of that case) The plaintiffs were one of a group of companies which offered to large industrial enterprises, both in the public and private sector, comprehensive construction services which included the services of architects, engineers, project managers, construction analysts and others involved in such work. The defendant was an architect of considerable distinction and attainment in his own sphere; he had worked in the gas industry for some 17 years, and prior to his appointment as managing director of the plaintiffs, had been the chief architect for the West Midlands Gas Board. The success which the plaintiffs had attained was largely in the private sector and they were anxious to enter the public sector. Because of the defendant's connections and contacts in the gas industry, the chairman of the group offered the defendant the post of managing director of the plaintiffs. The defendant accepted and the appointment took effect from 5th February, 1968. No service agreement was signed however with the result that whilst the defendant was with the plaintiffs there was no express provision as to notice and no covenants of any kind restrictive or otherwise. Within days of joining the plaintiffs the defendant embarked on negotiations with the Eastern Gas Board in an effort to discharge his duty to the plaintiffs. In 1968 the Eastern Gas Board were contemplating building four depots and had not decided whether to farm out the work to other architects or do it themselves. The plaintiffs were interested in this work and with the aid of the defendant they attempted to get at least one of the depots. That attempt failed. It became evident that the Eastern Gas Board disliked the set up of the plaintiffs' organization and were not prepared to deal with the plaintiffs in any capacity. In May 1969 the Eastern Gas Board finally decided on the location of their favour depots. In addition they decided to build a central store to support the four depots. At that time a new deputy chairman of the Eastern Gas Board was appointed and during discussions with his colleagues at the board about the projects the defendant's name was mentioned. The deputy chairman was of the opinion that the defendant was the right man for the job and so he telephoned him at his home and arranged a meeting. At the meeting the defendant soon realized that he had a good chance of getting the work from the Eastern Gas Board for himself. The board made it clear that they were only interesting in employing the defendant privately and that they did not want any trouble with his employers. They were also in a hurry to proceed with the projects. The defendant realized that if he was to get this work he had to free himself from the plaintiffs as soon as possible. He therefore made an appointment to see the group chairman and at the interview told him that he wanted to resign on account of his health. Because of the defendant's representations as to the state of his health the group chairman got the impression that the defendant was on the verge of a breakdown and so agreed to release him quickly. The representations made by the defendant about his health were to his knowledge untrue. The defendant ceased to be managing director of the plaintiffs from 1st August. On 6th August the Eastern Gas Board wrote to the defendant offering him employment as project manager for four projects, the defendant to be totally responsible for the design and supervision of the four projects. This work was in substance the same work which the plaintiffs had unsuccessfully attempted to obtain in 1968. In an action by the plaintiffs for an account for breach of fiduciary duty, the defendant denied that there was any fiduciary duty or any breach of such duty, contending that the contract was offered to him in his personal capacity because of his expertise and even otherwise the plaintiffs had suffered no damage since they would not have obtained the work for themselves in any case. This defense was rejected by the Court on the ground that while the defendant was managing director of the plaintiff, a fiduciary relationship existed between him and the plaintiff. Accordingly, information which came to him while he was managing director and was of concern to the plaintiffs, it was his duty to disclose this information to the plaintiffs and therefore, such non disclosure was a breach of his fiduciary duties. It further held that because of his breach of duty, the defendant was liable to account to the plaintiffs for all the benefits he had received or would receive under the contract with Gas Board. The question whether the benefits of the contract would have been obtained for the plaintiffs but for the defendants breach of fiduciary duties was irrelevant.
20. In the present case, from the sequence of events, it appears that the whole exercise of getting the agency to the 4th respondent had been preplanned even while the agency was subsisting with SSTS. The 2nd respondent did not disclose the notice of termination dated 1.9.2001, which was received in his name, to the Board of the company. Had he disclosed, the Board could have made efforts to persuade Contship to renew the agency with SSTS. As a matter of fact, as a director, the 2nd respondent himself was obliged to persuade Contship to renew the agency with SSTS. Instead, it appears that he had been interacting with Contship to get the agency for the 4th respondent even prior to the expiry of the agreement with SSTS as is evident from the fact that Contship entered into a deed of agreement with the 4th respondent on 1.12.2001 and the 4th respondent commenced the agency assignments immediately as is evident from the Service Schedule issued by the 4th respondent dated 14.12.2001. The agreement could not have been signed on 1.12.2001 without prior consultation with Contship. therefore, it is obvious that he used the knowledge derived in his official capacity that Contship was terminating the agency with SSTS effective from 1.12.2001 to his own advantage. In other words, even when the agency was subsisting with SSTS, he was planning to take the same subsequently without disclosure to the Board of SSTS. Sippys have alleged that the 4th respondent was incorporated only with a view to take over the agency business. It appears to me that the sequence of events would support this allegation. One Shri Virah M. Bharucha applied to ROC Goa for incorporating a company in the name of "Samrat Shipping & Logictics Private Ltd." on 22.12.2000. In the application it is stated that the proposed company would be a group company of SSTS and the proposed promoters/directors were the 2nd and 3 respondents. These two respondents, in their capacity as directors of SSTS, gave no objection to ROC by letters dated 10.1.2001 for allotting the proposed name to the proposed company. ROC approved the name by a letter dated 11.1.2001 valid for a period of 6 months. Shri Barucha sought extension of the time by an application dated 13.7.2001 and ROC granted another six months time by a letter dated 23.7.2001. By a letter dated 18.10.2001, Shri Barucha informed the ROC that since he was unable to participate as a subscriber/director of the proposed company, he had no objection in the company being incorporated by the other promoters. On 18.10.2001, Form No. 32 indicating that the 2nd and 3rd respondents had been appointed as directors w.e.f. incorporation of the company in terms of the Articles was filed with the ROC. Thus the incorporation of the company proximate to the date of expiry of the agency agreement with SSTS also raised a strong presumption that while acting as directors of SSTS and while the agency was subsisting with SSTS, the 2nd and 3rd respondents were been planning to take away the Contship agency to the 4th respondent, which is definitely a breach of their fiduciary duties to SSTS.
21. The stand of the 2nd respondent that Contship was not willing to deal with SSTS in view of disputes between Sippys and Puris, has not been substantiated. Neither in its letter dated 1.9.2001 nor in its letter dated 26.4.2002, Contship has mentioned anything about such disputes. The first letter only mentions about the termination on expiry of the period of agency and the second letter only talks of Contship's desire to deal with Puris reposing confidence in the 2nd respondent. As a matter of fact, in its affidavit dated 19.8.2002, Contship has averred "the applicant company has never been concerned with and is not concerned with any internal matters between the shareholders of respondent No. 1 nor co directors of respondent No. 2 and have nothing to do with them at any time." (para 1 (viii)). The unwillingness of a third party to deal with a company cannot be permitted as a defense to a corporate opportunity claim, absent disclosure. This defense, especially after the opportunity has been taken away, has to be normally rejected mainly because it presents significant evidentiary problems. For example, if a fiduciary and the third party (who presented the opportunity to the fiduciary) are successful in their independent collaboration, it would not be in either parties interest to admit later that the third party also was interested in working with the company at the outset. Such an admission could establish, as a matter of law, the existence of a corporate opportunity, and, in turn, lead to the imposition of a constructive trust on the fiduciary's interest in the diverted opportunity in favour of the company. Therefore, if the third party shows an unwillingness to deal with a company, the director should disclose this fact and attempt to cure the problem. In Industrial Development Consultant case, on a similar plea of third party refusal, the court observed: "There was always the possibility of the plaintiffs persuading the Eastern Gas Board to change their minds; and ironically enough, it would have been the defendants duty to try and persuade them to change their minds. It is a curious position under which he whose duty it would have been to seek to persuade them to change their minds should now say that the plaintiffs suffered no loss because he would never have succeeded in persuading them to change their mind". On a similar plea of refusal by a third party to deal with the company, the Appeal Court of Massachuttes observed in Energy Res. Corporation v. Porter (438 NE 2d 391) "The unalterability of a third party's resolve can by no means be certain so long as a fiduciary, by keeping the third party's position and his reasons for it a secret, never offered his company a chance to test it. If the refusal to deal is shrouded in secrecy, it is too likely that the tempted officer will find himself in a position of Fielding's "fair creature" of whom he wrote, 'he would have ravished her, if she had not, by a timely compliance, prevented him". Therefore, if the 2nd respondent was aware that Contship did not want to deal with SSTS, as a fiduciary, the 2nd respondent should have unambiguously disclosed the refusal to the company together with a fair statement of the reasons for the refusal. In the present case, the 2nd respondent did not even disclose the letter of termination, thus depriving SSTS, a chance to persuade Contship to renew the agency with SSTS. The failure to disclose the letter of termination and also the unwillingness of Contship to deal with SSTS is definitely a breach of his fiduciary duties on the part of the 2nd respondent. Another stand of the 2nd respondent is that the agency was offered to him in his personal capacity because of his expertise. The same grounds on which the claim of third party refusal are rejected are applicable to the claim of individual capacity. Further, it is always difficult to enquire as to whether the opportunity was presented to a director in his individual capacity or otherwise because the only parities privy to that type of information would be the director and the third party who approaches him with that opportunity. Not surprisingly, both the parties, if successful, would claim that the third party presented the opportunity to the director because of their friendly relationship or the expertise of the director. Therefore, since a director is always under constant duty of loyalty to the company, even if an opportunity is presented to him in his individual capacity, he should disclose the fact to the company first. In this connection I ma refer to the case of investment in NOL which is agitated in the second petition. In that case, the 2nd respondent disclosed to the Board the unwillingness of the Singapore company to deal with the company and its interest to deal with the 2nd respondent in his personal capacity. Full disclosure was made by the 2nd respondent which was also recorded in the minutes. The company not only permitted him to deal in his personal capacity but also lent him Rs. 49 lakhs to invest in NOL (the allegation of Sippy group in this regard to dealt with later). In the present case, the facts reveal that the 2nd respondent never disclosed to the company, the fact of the agency being offered to him in his individual capacity. Thus on an over all assessment of the case, it is clear that by taking the agency business to the 4th respondent without disclosure, the two directors of Puri group on the Board of SSTS, had breached their fiduciary duties to SSTS.
22. Having concluded that by his failure to disclose the letter of termination of the agency by Contship, alleged the stand of Contship that it was unwilling to deal with SSTS subsequent to the termination of the agency and also the fact that the agency was offered to him in his personal capacity, the 2nd respondent has breached his fiduciary duties to SSTS, the next issue for consideration is whether the Puri group is liable to account for the benefit that the 4th respondent derived from the agency business. The accepted principle of law in case of any benefit derived by a fiduciary who is in fact a trustee, by breach of his fiduciary duties, is that the benefit so derived has to be held by him as a constructive trustee of the beneficiary. Therefore, in the present case, whatever benefit/profit that the 4th respondent derived from Contship agency, the 4th respondent is accountable to SSTS. A feeble attempt was made by Shri Devitre that since the 4th respondent is not a shareholder of SSTS, no relief can be granted against the 4th respondent. This stand has to be rejected straightway. All along the claim of Puri Group has been that since the 2nd respondent was an expert in Liner Business, Contship desired to have dealings only with him. The vehicle that he used to get the agency for himself is the 4th respondent which is owned and controlled only by Puri group. Therefore, there is no separate identity between the 2nd respondent and the 4th respondent and as such for the breach of fiduciary duties of the 2nd and 3rd respondents, the 4th respondent which derived the benefit, has to be accountable.
23. The determination of the quantum of benefits/profits that the 4th respondent is held to have kept as a constructive trustee for SSTS poses a problem. The agency taken over by the 4th respondent is a running agency for a period of 5 years commencing from 1.12.2001. It is not a one time contract, the benefit derived/derivable from which is easy to compute. There is no certainty in the present case that the agency agreement between the 4th respondent and Contship would continue for the entire period of five years as Contship has a right to terminate the agency by a 3 months notice. Therefore, it would not be proper to direct the 4th respondent to be accountable to SSTS for the benefits that it would derive from the Contship agency during the entire period of 5 years. The Contship agency with the 4th respondent commenced on 1.12.2001. The present petition was filed on 9.7.2002. The hearing was concluded on 21.7.2003. I am of the view that it would be just and proper if I direct the 4th respondent to account for all the benefits/profits that it derived from agency contract with Contship for a reasonable period between 1.12.2002 and 21.7.2003. I feel that it would be reasonable that the 4th respondent accounts to SSTS for all profits that the 4th respondent derived from Contship agency for the period from 1.12.2001 to 31.3.2003. Accordingly, I direct that whatever profit the 4th respondent derived from the Contship agency during this period should be paid to SSTS. This direction is on the ground that breach of fiduciary duties is not only an act of oppression in terms of Section 397 but also prejudicial to the interest of the company and an act of mismanagement in terms of Section 398.
24. As far as the second petition is concerned, the complaints of the Sippy Group relate to the shares held in NOL and situation of deadlock in the company. As far as the shares held in NOL is concerned, it is crystal clear that the petitioners have not come with clean hands. The Puri Group has produced a photocopy of the minutes of the board Meeting held on 15th October, 1992 wherein it was decided to lend a sum of Rs. 49 lacs to the 2nd respondent for investment in NOL and this Board Resolution has been signed by the 2nd petitioner himself. In the Board Meeting held on 8th May, 2000, the Board of the company decided to allow the 2nd respondent to sell the shares in NOL and refund the money of Rs. 49 lacs. The minutes of the Board also has been signed by the by the 2nd petitioner. The sale agreement regarding the sale of shares in NOL has been witnessed by the 2nd petitioner and even the transfer instrument has been witnesses by the 2nd petitioner. This being the case, the petitioners cannot disown their knowledge that the shares were held in the name of the 2nd respondent. Shri Sarkar pointed out that since the shares have been shown as a part of the assets of the company in the balance sheet, the 2nd respondent cannot claim any ownership right on those shares and any consideration received in respect of those shares should come to the company. He further submitted that no reliance can be placed on the photocopies of the documents placed by the Puri Group without the originals. Recourse to originals becomes essential if the 2nd petitioner has disputed his signatures on these documents. He has not disputed through an affidavit. As a matter of fact the rejoinder filed to the reply which contained all these documents has been signed not by the 2nd petitioner but by the 1st petitioner wherein also he has not denied the signature of the 2nd petitioner on all these documents. Whether such transaction of sanction of loan and showing the shares purchased in the name of the 2nd respondent as a part of the assets of the company is permissible or not, I am of the view, needs no examination as both the groups in the company have agreed to such an arrangement. Further, there is no denial to the averment of the respondents that sizeable number of executives of the company have gone over to NOL without severance benefits from the company. This has benefited the company. Therefore, the arrangement agreed to between the two groups of shareholders even assuming may not be within the provisions of statute cannot be challenged only on the ground that disputes have arisen between the parties. However, in terms of the resolution dated 15th October, 1992, the 2nd respondent was to repay the amount of Rs. 49 lacs within a period of 4 years. Since he has not paid the amount within 4 years purely on equitable consideration, I am of the view that the 2nd respondent should pay reasonable interest on this amount for the period beyond 4 years till he refunded the amount. Accordingly, the 2nd respondent is liable to pay to the company a simple interest of 12% for the intervening period and accordingly I direct so. This interest amount should be paid within a period of one month from the date of this order.
25. Now that I have given my findings on the main allegations on both the petitions, the question of relief arises. The admitted position is that there is complete deadlock in the affairs of both the companies. In the present case, because of the dead lock and loss of confidence between the two groups, it is the consent order dated 18.7.2002 which is operating between the parties by which the status quo as existed at the time of filing the petition continues in relation to the shares, assets etc of the companies. Shri Devitre contended that no relief can be granted in a Sections 397/398 petition purely on the ground of deadlock and he also relied on the decision of Calcutta High Court in Modern Furnishers case. This Board has been taking a view that in cases of closely held companies with a few identifiable groups of shareholders having more or less equal shareholding and equal participation in the management, deadlock situation would warrant winding up of a company on just and equitable grounds. To avoid winding up, the best solution is that there should be parting of ways by which the interest of not only the shareholders but also the companies could be ensured. The parting of ways could be either asking one of the groups to go out of the company (Yeshovardhan Saboo v. Groz Beckert Saboo Ltd. 83 CC 371-CLB) or directing the division of the assets of the company between the warring groups (Shishu Ranjan Dutta v. Bhola Nath Paper House Ltd.- 53 CC 883- Cal) Even though Shri Sarkar has submitted that both the companies be valued and one group be directed to leave the company on receipt of 50% of the valuation so made, I do not think that such a course of action is necessary in the present proceedings. Since two companies are before me in which both the groups hold equal shares, I am of the view that while Sippi Group could take one company, Puri Group can take the other company. The valuation of both the companies could be made and shares held by one group in one company could be purchased by the other group and vice versa. Thus each company could continue to function with only one group of shareholders in exclusion of the other group. The consideration could be either by way of cash or properties or partly by each. As far as the SSCO is concerned, the Puri Group has made a number of allegations in the working of Maridian in which SSCO holds 90% shares. Further, Sippy Group is one of the promoters of SSCO. Therefore, it would be just and proper that the control and management of SSCO is taken over by Sippy Group by purchasing the shares held by Puri Group in that company. Likewise SSTS was incorporated only in 1996 and the main business of that company related to the agency with Contship which according to the 2nd respondent himself was at his initiative. Further, in regard to SSTS, the Sippi group has made allegations of diversion of funds and use of resources of this company by Puri Group. Therefore, it would be just and proper that SSTS is taken over by Puri Group by purchasing the shares held by Sippi Group in this company. Accordingly, I order so.
26. Since purchase of shares as directed above cannot be done without proper valuation, it is necessary to appoint an independent valuer to value the shares of both these companies. The independent valuer so appointed will also compute the amount of profit that the 4th respondent has derived from the agency with Contship from 1.12.2001 to 31.3.2003. The parties will appear before me on 1st December, 2003 at 2.30PM to suggest the name of a mutually acceptable valuer to carry out the assignment. In case the parties could not agree on a valuer this Bench will appoint one. Till the process of valuation is completed, the terms of the consent order dated 18.7.2002 will continue to operate as an order of this Bench more particularly the terms at Paragraph 2, a, b, d, and f of that order.
27. Both the petitions are disposed of in the above terms reserving the right to appoint the valuer and also to give consequential directions.