Company Law Board
Shri Kishore Kundan Sippy And Shri ... vs Samrat Shipping & Transport Systems ... on 11 November, 2002
Equivalent citations: [2003]115COMPCAS868(CLB), [2003]41SCL350(CLB)
ORDER
S. Balasubramanian, Vice Chairman
1. In this order, I am considering the application CA 162 of 2002 in CP No. 41 of 2002 wherein the 5th respondent, namely, Contship Containerlines Limited has sought for being dropped as a party respondents No. 5 to the petition.
2. The facts of the case are that the 1st respondent company was incorporated on 28th August, 1996. The petitioners' group known as Sippy Group holds 50% shares in the company while the 2nd and 3rd respondents known as Puri Group holds the balance 50% shares. Both the groups had controlling interest in another company known as Samrat Shipping Company Pvt. Ltd. (SSCO). The 2nd petitioner as the Chairman of both the companies while the 2nd respondent is the managing director of both the companies. On incorporation of the 1st respondent, it appears that substantial business activities of SSCO were transferred to the company. Sometimes in 2001, the Puri Group incorporated the 4th respondent in the name of Samrat Shipping & Logistics Private Ltd. and later changed to the present name. The applicant is a shipping company based in UK carrying on the business of operating vessels for transport of cargo. This applicant company had entered into an agreement with SSCO whereby the later was appointed as an agent of the former for all agency functions in connection with their vessels calling at ports in India. This agreement was entered into on 1st February, 1991. Clause 7.01 of the said Agreement provided or termination of the agreement by either party by giving the other not less than 3 months notice in writing. This agency was terminated by a notice dated 30th June, 1996 effective from 30th September, 1996. With effect from 1st October, 1996, the applicant company appointed the 1st respondent company as its general agents by an agreement dated 1st October, 1996. This agreement also provided that he agreement shall continue until terminated by either party giving the other not less than 3 months notice in writing. By a notice dated 1st September, 2001, the applicant company terminated this agreement with the 1st respondent effective from 30th November, 2001. Thereafter, the applicant company entered into an agreement appointing the 4th respondent as its general agents. In this petition, the petitioners have alleged that the agency business with the applicant company was of a substantial nature and the 2nd respondent being the managing director of the company, in breach of his fiduciary obligations to the company, got the agency with the company terminated and induced the applicant company to enter into the agency agreement with SSLP which is owned and controlled by Sippy Group exclusively. But arraying the applicant company as the 5th respondent, the petitioner have prayed for injunction restraining respondents 2 and 5 from transferring out any funds outside the country with regard to the agency agreement entered into between the applicant company and SSLP and for a mandatory order directing the applicant company to deposit before this Bench the commission, fees, remuneration due to SSLP. Aggrieved by its inclusion as a respondent in these proceedings, the applicant company has filed this petition praying that it be dropped as a party to the proceedings on the grounds sated in the application.
3. Shri Ashok Desai, Sr. Advocate appearing for the applicant company submitted: The petitioners have not established the need to implead the 5th respondent which is neither a shareholder in the company nor a director. It does not even have a subsisting agreement with the company. All the allegations in the petition relate to Puri Group. In Para 27 of the petition, they have only stated that 2nd and 3rd respondents have caused the 5th respondent to terminate the agency agreement and further caused the 5th respondent to enter into a agreement with the 4th respondent. Again in Para 35, they have averred that by causing the 5th respondent to enter into an agreement with the 4th respondent, they have ushpered and taken away the main business of the company. This is the only allegation as far as the 5th respondent is concerned and on this basis, they have sought to restrain respondents 2 to 5 from transferring any funds out of the country with regard to the agreement with the 4th respondent and for a mandatory injunction directing the respondent No. 5 for depositing dues to the 4th respondent. The agreement entered into by the 5th respondent with the company was terminable with a three months notice and it has exercised that right to terminate the agreement with effect from 1.12.2001 after giving the prescribed 3 months notice. As of date, the 5th respondent has no business connection with the company and as such is neither a necessary nor a property party. Whatever contractual relationship that existed between the 5th respondent and the company, the same came to an end on 1.12.2001. By its very nature, an agency is a mater of contract and the agent is in a fiduciary relationship with the principal. Neither in the law nor the contract in question requires the principal to give reasons for termination of the contract of agency. In a petition under Sections 397/398 of the Act, there can be no allegation of oppression and mismanagement against a third party more so when there is no existing relationship between the company and the third party. The petitioners have not so far chosen to challenge the termination of the agreement in any appropriate forum and as a matter of fact even in the present proceedings, they have not done so perhaps because the agreement was with the company and not with the petitioners. Even if they have challenged, at the best, they could only claim damages for 3 months notice period and the same would also be subject to arbitration clause in that agreement. In Indian Oil Corporation v. Amritsar Gas Service (1991 1 SCC 533) it has been held that an agreement being revocable by either of the parties, the only relief that can be granted is award of compensation for the period of notice. In Central Bank of India v. Hartford Insurance Company Ltd. (AIR 1965 SC 1288), it has been held that a right to terminate at will cannot be reason of the circumstances, be read as a right to terminate for a reasonable cause. In Southern Roadways Limited v. S.M. Krishnan (1989 4 SCC 603), it has been held that the principal has the right to carry on business as usual after the removal of his agency. The courts are rarely willing to imply a term fettering such freedom of the principal unless there is an agreement to the contrary. Therefore, neither the termination of the agreement nor entering into a fresh agreement with the 4th respondent could give rise to a cause of action to the petitioners to implead the 5th respondent as a party in these proceedings. if at all it is necessary,t he 5th respondent could be called as a witness to give evidence. It has been held in Ramesh H. Kundanmal v. Municipal Corporation of Bombay (1992 2 SCC 524) that "What makes a person a necessary party is not merely that he has relevant evidence to give on some of the questions involved. That would only make him a necessary witness". Further, the principle of law of impleading as propounded by the Apex Court in Dy. Commissioner v. Ramakrishnan (AIR 1953 SC 521) is that the following two conditions should be fulfilled for making a person as a party. They are: (a) There must be a right to some relief against such party in respect of the matter involved in the proceedings in question and (b) It should not be possible to pass an effective decree in the absence of such a party. In the present case neither of the conditions is met to make the 5th respondent as a party to the proceedings. Only in the reply to the present application, the petitioners have alleged that the 2nd and 3rd respondents have diverted the business of the company to the 4th respondent and the 5th respondents has acted mala fide and in collusion with the other respondents. A party cannot improve his case in reply to the application without setting all material facts in the petition itself more so, when the allegations relate to fraud and mala fide. Further, under Section 402(e) this Bench has no powers in respect of a terminated agreement.
4. The learned counsel further submitted: The main complaint of the petitioners is that the substantial business of the company has been diverted to the 4th respondent in breach of the fiduciary duties to the company. In other words, the allegations are all against 2nd and 3rd respondents who may be owing fiduciary duties to the company. As far as the 5th respondent is concerned, it had only contractual obligations which also came to an end with the termination of the agency. Therefore, there is no need to keep the 5th respondent as a party to the proceedings.
5. Shri Devitre, Sr. Advocate appearing for the 2nd and 3rd respondents submitted: Right from the beginning, the 5th respondent was dealing with Puris since it has a lot of confidence in Puris. When the 5th respondent entered into an agreement with SSCO, that company and 5 shareholders. When this agreement was terminated end the 5th respondent entered into a fresh agreement with the company, none of the shareholders of SSCO complained the business of a 5 member company was diverted to a 2 member company as they were all aware that the 5th respondent had confidence only in Sippys. When now, the 5th respondents has entered into an agreement with the 4th respondents, the petitioners are complaining of diversion of the business knowing fully well that the 5th respondent had always been dealing only with Puris. In the petition, there is no allegation against the 5th respondent that it had acted in a mala fide manner either in canceling the agreement or in entering into a fresh agreement with the 4th respondent and only in the reply to the application, the petitioners have made these allegations. Therefore, there is absolutely no justification in keeping the 5th respondent as a party to the proceedings.
6. Shri Sarkar, Sr. Advocate appearing for the petitioners submitted: This application is pre-mature. This Bench cannot, at this stage, get into the merits of the case, to decide whether any relief can be granted against the 5th respondent. The petitioners are "dominus litis" and as such they can chose as to whom they can proceed against. All the judgments cited by the other side deal with cases where parties sought to join themselves and not cases where a party who has already joined by the petitioner wanted itself to be deleted. Therefore, the question of deleting the name of the 5th respondent as a party to the proceedings does not arise.
7. The learned counsel further submitted: The petitioners are not seeking enforcement of any agreement by impleading the 5th respondent. The company is in the nature of a partnership with the petitioners' holding 50% shares and the Puris holding balance 50%. 90% of the business of the company is accounted for by the agency business with the 5th respondent. When the 4th respondent was incorporated, the 2nd respondent gave a no objection certificate, without consulting the Board of the company for use of the word "Samrat" as a part of the name of the 4th respondent. Only when the petitioners filed a suit challenging the use of the term "Samrat" in the name of the 4th respondent, the petitioners came to know of all these facts. Thereafter only the 4th respondent changed its name to the present one. Having incorporated the 4th respondent in collusion with the 5th respondent, the 2nd and 3rd respondents got the agency contract with the company terminated and arranged to have the 5th respondent entering into agency contract with the 4th respondent. Therefore, it is essential that the 5th respondent files its reply to explain the circumstances under which the contract with the company was terminated and a fresh contract with the 4th respondent entered into. Termination of contract with the company was with an oblique motive to enter into a fresh contract with the 4th respondent. It is not the mere exercise of its right to terminate the contract that the 5th respondent terminated the contract with the company. The 5th respondent fully knew that the 2nd and 3rd respondents were directors of the company and the owed fiduciary responsibilities to the company and taking away the main business of the company to their own company is in breach of their fiduciary responsibilities. Therefore, the 5th respondent is also responsible for the heavy loss of business occasioned to the company and as such is answerable to the company. The circumstances would clearly establish that without the complicity and connivance of the 5th respondent, the 2nd and 3rd respondents could not have incorporated the new company and divert the main business of the company. Further, it is seen from the accounts of the company that a huge sum of around Rs. 21 crores is shown as due to the 5th respondent from the company and no details are available nor any confirmation has been received from the 5th respondent. To ascertain the correctness of this figure also, the presence of the 5th respondent as a party is necessary. Further, there are two specific prayers in relation to the 5th respondent which cannot be granted unless the 5th respondent continues as a party and files its reply to the petition. Even the termination letter sent by the 5th respondent was addressed to the name of the 2nd respondent and he never informed the Board about the termination. The terms of agreement between the 5th and the 4th respondent identical to the one with the company and the 5th respondent. 90% of the business of 50:50 company has been taken away to a 100% company of Puris. It is an established principle of law that a director cannot divert the business of a company to his own benefit. It has been held in Cook v. GS Deeks (AIR 1916 PC 161) that directors of a company cannot sacrifice the interests of the company and divert the business of the company to their own benefit. Since the 2nd and 3rd respondents have, in breach of their fiduciary duties, diverted the main business of the company, they are bound to restore to the company whatever benefit the 4th respondent has received from the agency agreement with the 5th respondent (Industrial Development Consultants Limited v. Cooley - 1972 2 AER 162) and Regal (Hastings) Limited v. Gulilliver (1942 AER 378).
8. The Learned counsel further submitted: The entire allegation against 2nd and 3rd respondents revolves around the diversion of agency contract with the 5th respondents and therefore without its presence, these allegations cannot be adjudicated especially since the 5th respondent has assisted in breach of trust by the 2nd and 3rd respondents. Even though termination of the contract by the 5th respondent may be contractually right but not in equity since immediately after termination it has entered into a fresh contract with the 4th respondent controlled by Puris. In other words, the motive for termination was to join afresh with Puris exclusively. Therefore, the 5th respondents is both a property and necessary party to the proceedings. In Malhotra bros Ltd. case, wherein this Board held that with out the presence of M/s. Gillette, the disputes between the parties cannot be adjudicated, the Calcutta High Court upheld that view (Cal Lt 1998 (1) SC 371). Similarly, in the present case also, without the presence of the 5th respondent as a party, the disputes between the parties cannot be properly adjudicated. Therefore this application should be dismissed.
9. I have considered the able arguments of the counsel. First it is necessary to deliberate as to the powers of this Board either to add a party to the proceedings or to discharge a party from the proceedings. Even though the provisions of Civil Procedure Code are not strictly applicable to the proceedings before this Board, as held by Calcutta High Court in Malhotra's case (supra) recourse could be taken to the principles therein. Order 1, Rule 10(2) confers upon a court to either to strike out or add a party to a proceedings to enable the court to effectually and completely adjudicate upon and settle all the questions involved in the suit. The parties to a proceedings should either be proper parties or necessary parties. The Supreme Court in Deputy Commissioner v. Ramakrishna Nair (AIR 1953 DC 521) has approved two tests laid down by Allahabad High Court in Banaras Bank v. Bhagwan Das (AIR 1947 All. 18) to decide whether a certain person is a necessary party. The two tests are (i) that there must be a right to some relief against such party in respect of the matter involved in the proceedings in question (ii) it should not be possible to pass an effective decree in the absence of such a party. Keeping these aspects in mind, the application of the 5th respondents has to be decided.
10. The admitted position in this case is that the 5th respondent had terminated the agreement with the company and had entered into a fresh agreement with the 4th respondent and that the 4th respondent is controlled by Puris. As far as the termination of the agreement by the 5th respondent is concerned, even though the learned counsel for the 5th respondent cited cases to advance his arguments that exercise of the right of termination as per the agreement cannot be questioned, I do not propose to examine this issue in this order in as much as there is no prayer in the petition seeking for restoration of the cancelled agreement. The short question for consideration is whether the 5th respondent should be continued as a party to the proceedings taking into consideration that there is no subsisting agreement between the 5th respondent and the company. Most of the arguments of the counsel for the petitioner and also the cases cited by him related to the fiduciary obligations of the directors of a company and the consequences of such breach of fiduciary obligations. A respondent to a proceeding has to answer the charges made against him in the petition. As pointed out by Shri Desai, in the entire petition, there are averments about the 5th respondent only in paragraphs 27 and 35. A reading of the these averments would indicate that the complaints relate to the conduct of the 2nd and the 3rd respondents and no charges have been made against the 5th respondent. The only argument advanced on the basis of the averments in the reply to the application against the 5th respondent was that it had colluded with the 2nd and 3rd respondents in terminating the agreement malafide with a view to enter into a fresh agreement with the 4th respondent. Admittedly the 5th respondent is a third party being neither a shareholder nor a director in the company. Even assuming that there had been collusion, the act of the 5th respondent cannot be challenged in these proceedings. In this connection we may beneficially refer to the judgment in Industrial Development Consultant Ltd. case cited by Shri Sarkar. In that case, Mr. Cooley was the Managing Director of the petitioner company. The company was trying to get some construction contract from Eastern Gas Board (the Board) but the Board was not interested in awarding any work to the company. However, it separately discussed the matter with Mr. Cooley and desired to employ him as the project manager for the project. In view of this, Mr. Cooley resigned form the company on health grounds and joined the Board. The company brought an action against him for breach of fiduciary duties to the company. From this judgment, I do not find that the Board had been impleaded as a party or any relief granted against it. In the petition, no substantive final relief has been sought against the 5th respondent and as such the first test laid down in Allahabad case is absent. Likewise if the complaint of the petitioners that the 2nd and 3rd respondents had taken away the business of the company or their own benefits in breach of their fiduciary duty to the company is established, appropriate relief can be granted without the presence of the 5th respondent. Thus, the second criteria is also not attracted. In other words, neither of the tests for impleading a party as propounded by Allahabad High Court in respect of the 5th respondent is satisfied in this case. As far as the reliance of the petitioners on Malhotra Bros case is concerned, a reading of the various judgments in that case would indicate, that the main complaint in that case was that the company was entering into a contract with Gillette to acquire outdated technology and the same would be against the interest of the company. Further, there was prayer to cancel that proposed agreement. In view of these allegations and the relief sought, this Board felt that the presence of M/s. Gillette was necessary to answer this charge. However, in the present case, the agency agreement between the company and the 5th respondent is not subsisting and there is no substantive relief sought against the 5th respondent. Even though there are two prayers in the petition in relation to the 5th respondent as indicated in Para 1/ante, these prayers, if deserved to be granted on hearing the merits of the case, notice can be issued to the 5th respondent in terms of powers under Section 402(g) of the Act. Thus on an over all assessment of the case, I allow the application filed by the 5th respondent and direct that its name be struck off as a party respondent to the proceedings reserving the right of this Bench to direct the presence of the 5th respondent in future, if need be.
11. Other respondents will file their replies to the petition by 20.12.2002 and rejoinder to be filed by 20.1.2003. The petition will be heard on 30.1.2003 at 10.30 AM.