Karnataka High Court
Namtech Consultants Private Limited ... vs Ge Thermometrics India Private Limited ... on 13 November, 2007
Equivalent citations: ILR2008KAR1187, 2008 (2) AIR KAR R 61, 2008 CLC 510 (KAR)
Author: V. Gopala Gowda
Bench: V. Gopala Gowda
JUDGMENT
1. This Company Appeal is filed under Section 10F of the Companies Act 1956 (herein after referred to as "The Act") by the appellant Nos. 1 and 2. aggrieved by the order dated 12.05.2006 passed by the Company Law Board, Additional Principal Bench, Chennai (herein after referred to as "CLB") in C.P. No. 11/06 praying this court to set aside the direction in the said order that the appellants shall sell their shareholding in the first respondent company (herein referred to as JV Co.,) to second respondent company namely General Electric Pacific (Mauritius) Limited to direct the second respondent and its nominees to sell their shareholdings in JV Co. to the appellants at the value to be determined by M/s. Price Waterhouse Coopers, Chartered Accountants.
2. Brief facts that are necessary for the disposal of this appeal are as under:
(a) Appellant No. 1 namely Namtech Consultants Private Limited is a company incorporated under the Act. Appellant No. 2 namely K.P.P. Nambiar being a nominee of the first appellant has been a shareholder of the first respondent company namely GE Thermometries India Private Limited which was originally incorporated under the Act in the year 1993 as a Private Limited Company under the name and style "Bowthorpe 'Thermometrix (India) Pvt. Ltd" with its registered office at Bangalore with the objective of manufacturing and marketing of sensors including all type of Termistors, 'Thermistors Probes and Thermistors Electronics. This first respondent company has been a Joint Venture Company and hereinafter, it is referred as "JV Co".
(b) The first appellant company and its nominees hold 26% of the issued, subscribed and paid up share capital of first respondent JV Co., and the balance 74% thereof are held by the second respondent company namely GE Pacific (Mauritius) Ltd. This 2nd respondent is a subsidiary company of the third respondent namely General Electronic Company (GE Co. for short). The Board of directors (BOD for short) consists of eight directors. The first appellant company has right to nominate 2 directors and the second respondent has right to nominate 6 directors to the Board of Directors of JV Company as provided under its Articles of Association (herein after referred to as "AoA"). The second respondent company has nominated respondent Nos. 6 to 11 and the first appellant company has nominated second appellant as the director. Respondent No. 12 namely Mr. Padman G. Nambiar has been nominated by first appellant of the JV Co. He holds 10 equity shares in it and he was one of the initial subscribers to the Memorandum and Articles of Association of JV Company.
(c) The Second respondent company has been incorporated under the laws of Mauritius and it is a subsidiary company of the third respondent company namely GE Co. During the year 2001, this GE Co., acquired the 74% of shareholdings of JV Co., which were held by Bowthorpe B.V. Netherland (which was by then renamed as Spirent Ple). The fourth respondent is the Vice Chairman of the third respondent company GE Co., and fifth respondent is one of its officers. Respondents Nos. 6 to 11 are full time employees of the GE Company.
(d) Respondent no. 12, the Managing Director of JV Co., along with the first appellant company, filed Company Petition No. 11/06 before the CLB under Sections 397, 398, 399, 402, 403 and 406 of the Act against all the respondents herein seeking against them several reliefs of declarations that the acts of the second respondent company and its nominee directors i.e., respondent Nos. 6 to 11, as alleged in the petition, are prejudicial to the interests of JV Co., and are oppressive against the petitioners and that the resolution Nos. 82 to 84 passed by the BOD of the JV Co., in its meeting held on 23.12.2005 are illegal, inoperative, null and void and not binding on the JV Co., and violative of its AoA and also of the relevant provisions of the act oppressive to the petitioners (appellants) etc., and also seeking the relief of injunction against the respondents Nos. 2 and 6 to 11 restraining them from providing the confidential information in respect of JV Co., to respondent No. 3, 4 and 5 and other officials of the GE Co., and farther restraining respondent No. 3 GE Co., from interfering with the affaire of JV Company either directly or through its nominees/employees; restraining the respondents 2 to 11 from acting against the interest of the appellants, JV Co., and public etc.
(e) After the enquiry in the matter, the CLB though did not incline to grant any of the relief of declarations and injunctions sought for by the appellants in the said petition, but, by the impugned order dated 12.05.2006, it directed the appellants, who are minority shareholders, to sell their shareholdings to second respondent company which has been a majority shareholder of JV Company at a fair value which shall be determined by an independent and reputed firm of Chartered Accountants.
(f) Aggrieved by the said order of CLB, the appellants have filed the present appeal praying this court to set aside the said direction in the said impugned order and to direct that the second respondent and its nominees to sell their shareholdings in JV Co., by giving the appellants first option to purchase the same at a fair value to be determined by M/s. Price Waterhouse Coopers, Chartered Accountants. The appellants have also sought for in the appeal such further orders as considered appropriate and necessary by this court having regard to facts and circumstances of the case.
3. We have heard the arguments of the learned Counsel for both the parties. Though the appellants have formulated in the Memorandum of Appeal as many as eight questions of law, during the course of his arguments, the learned Senior counsel Sri. Naganand, appearing for the appellants submitted that only two questions of law formulated at para Nos. 11.1 and 11.3 would arise in this appeal for our consideration and decision. They read as under:
11.1) Whether the order of the CLB is sustainable in law as it has been passed by disregarding the voluminous documentary evidence (admitted by the contesting Respondents) which clearly demonstrates that the acts of oppression are part of a concerted conspiracy to make the Appellants "shrivel and die".
11.3) "Whether the finding of CLB that since there is stalemate in the management of Respondent No. 1 (caused due to the acts of oppression of contesting Respondents), the Appellant should exit from the JV Company, is perverse in law, having regard to the law laid down by the Hon'ble Supreme Court, in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan (2004)4 Comp LJ 1(SC)?
4. However, it is pertinent to note that though CLB, by passing the impugned order has refused to grant in favour of the appellants (petitioners in the Company Petition) any of the reliefs of declaration, injunction etc. as prayed for specifically in their petition on the ground of alleged oppression, the appellants have not prayed in this appeal for any of the said reliefs. But, they have prayed for an order setting aside the direction issued by the CLB in the impugned order that they should sell their share holdings in JV Co. to the second respondent Co. and for issuing direction that the second respondent Co. and its nominees shall sell their share holding in JV Co. to the appellants giving them first option to purchase the same. Therefore, in our view, the only question of law that would arise for our consideration and decision in this appeal would be, Whether the CLB was justified in directing the appellants being minority shareholders of JV Co. to sell their share holding in the JV Co. to the 2nd respondent Co. at a fair value certified by an independent and reputed firm of Chartered Accountants?
5. In the impugned order itself, the CLB directed both the contentious parties to appear before it on 19.6.2006 at 2.30 p.m. to suggest a mutually acceptable name of a valuer for valuation of shares of JV Co. In compliance with the said direction, on dated 6.6.2006. the authorized signatory of the first respondent-JV Co. addressed a letter to the appellants and respondent No. 12 (the Managing Director of JV Co.), suggesting names of 3 firms of Chartered Accountants for the said purpose. In response to this letter, the respondent No. l2-Padman wrote his letter dated 14.6.2006 on behalf of the first appellant Company to the second respondent Co. stating that the appellants agree with the suggestion of the first two firms mentioned in the letter dated 6.6.2006 for appointment as valuer for determining the fair price of shares of JV Co. in compliance with the said order of CLB and that in the event of the firm of Chartered Accountants at serial No. 1 viz., Price Waterhouse Coopers expressing its inability to conduct valuation, then they accept the firm at Sl. No. 2 viz., Ernst & Young as the valuer. The copies of these two letters are produced by the appellant along with the memorandum of appeal and they are found respectively at page Nos. 58 and 57 of paper book and they are not disputed by the other side.
6. It is an undisputed fact that in compliance with the said direction of CLB in the impugned order, both the parties appeared before the CLB on 19.6.2006 and on that day, respondent. No. 12 S. Padman, filed his affidavit and copy of the same is at Annexure-B. It is stated by the said Padman in the said affidavit as under:
That this Hon'ble Board vide its Order dated May 12, 2006 has ordered that "the petitioner group will exit by sale of its shares to the second respondent group at a fair value which shall he certified by an independent and reputed firm of Chartered accountants. Towards this end, the contesting parties will appear before this Bench on 19.6.2006 at 02.30 p.m." The second respondent, vide its letter dated June 6, 2006 has suggested appointment of Price Waterhouse Coopers, Chartered Accountants or Ernst & Young, Chartered Accountants or Deloitte, Haskins & Sells as the Valuers and requested Petitioner 1 to confirm as to which of the three names is acceptable to the Petitioner 1. Without prejudice to its rights, the petitioners have given their consent to appointment of Price Waterhouse Coopers, Chartered Accountants failing which Ernst & Young, Chartered Accountants, by their letter dated June 14, 2006. Copies of the said communication are annexed and marked as Annexure A. (para 2) The present affidavit is filed by the petitioner-Company to inform this Hon'ble Court about the agreement between the parties, without prejudice, for appointment of Price Waterhouse Coopers, Chartered Accountants failing which Ernst & Young, Chartered Accountants, to determine the value of the Shares of the JV Company, appropriate orders may be passed.
7. Further, Annexure-C is the copy of the order dated 19.6.2006 passed by the CLB appointing Price Waterhouse Coopers, New Delhi as the valuer for determining the fair value of shares of JV Co. On perusal of this order it could be seen that the said firm of Chartered Accountants was appointed by it as valuers in view of the consensus reached between both the parties. The relevant portion of the said order read as under:
I have heard the learned Counsel for the parties. In view of the consensus reached between the contesting parties on a common Valuer, M/s Price Waterhouse Coopers, Chartered Accountants, New Delhi 110002, are appointed to determine fair value of the shares of the Company as at 31.3.2006"(para2).
8. Thus, from the said letters, the statement of respondent No. 12 in his said affidavit which are all undisputed by both the sides, and the order of CLB dated 19.6.2006, it is clear that both the contesting parties have accepted that portion of the impugned order which relates to appointment of an independent valuer for determining the fair value of the shares of the first respondent-JV Co. However, though the contesting respondents have unconditionally accepted the finding of the CLB that in view of the strained relationship between the parties, they cannot go together in the administration of the first respondent-JV Co. and accordingly they must part their ways, and therefore the appellants should sell their shareholdings in JV Co. to the 2nd respondent Co., the appellants and respondent No. 12 have accepted the same, as stated by respondent No. 12 in his said affidavit, without prejudice to their right to challenge its correctness. This being so, the appellants have challenged in this appeal this finding along with all other findings recorded by CLB against them. The relevant observations of the CLB in the impugned order as to this finding is as under:
The cumulative effect of these developments led to deadlock situation in the affairs of the Company, warranting a permanent solution, as held in Caparo India Limited (U.K.) v. Caparo Maruti Limited reported in 2000 CLC 467. Thus, the chances of running the JV Company jointly by the minority as well as the majority shareholders are rather bleak and their co-existence will only be prejudicial to the interests of the JV Company itself. The only way, to my mind, to ensure smooth and healthy functioning of the JV Company and its shareholders is that the parties must part their ways without any adverse consequences to either of them. (page 20 of the impugned order).
9. As discussed by us supra, though CLB declined to grant in favour of the appellants any of the reliefs of declaration, injunction, etc. claimed by them in the company petition, they have not prayed in this appeal for any of the said reliefs despite challenging in this appeal all the findings of the CLB recorded against them in the impugned order. Therefore, it is not necessary for us to examine the correctness or otherwise of the findings recorded by the CLB in the impugned order as to the alleged oppression on the appellants by the respondents and we need not also examine whether the CLB was justified in declining to grant in favour of the appellants any of the reliefs claimed by them in their petition. Therefore, we need to examine only that whether CLB was justified in holding that both the parties cannot jointly run the JV Co. and therefore one of them should quit the company and that whether CLB is further justified in directing the appellants being minority share holders to quit the company by selling their shareholdings to the 2nd respondent.
10. It is not in dispute that by reason of the strained relationship between the appellants and respondent No. 12 on the one side and other contesting respondents on the other, the first respondent JV Co. has not been able to hold meetings of its Board of Directors periodically for taking decisions on the matters of day-to-day administration of the company, and it could not hold Annual General body meeting before the end of September 2007 which is mandatory as per the provisions of the Act Further, it is also not in dispute that the contesting respondents have filed before the CLB in the said company petition Company Application Nos. 104/06 and 96/07 seeking several reliefs against the appellants and respondent No. 12 in respect of holding of periodical meetings of the BOD of JV Co, and other matters relating to administration of its day to day affairs. Besides this, the second respondent has also filed I. A.11/07 in this appeal seeking directions of this Court restraining respondent No. 12, the Managing Director of JV Co. from taking any action in the name of the said company without consent of its BOD and also seeking directions against him to hold the meeting of BOD and to take all actions as per the decisions of the BOD. Besides these facts there are several other undisputed facts also, such as correspondence between the appellants and the 3rd respondent GE Co. and its nominees in the JV Co., making allegations against each other, the passing of resolutions by the BOD of JV Co. providing for supervision of BOD the functioning of Respondent No. 12 as the Managing Director of JV Co, in respect of its management and for issuing certain directions to him by the BOD with regard to his powers and functions, etc, which have been referred to and discussed by the CLB in its impugned order, clearly establish that the both the parties can not go together in running J.V. Company.
11. In the case of Kamal Kumar Dutta and Anr. v. Ruby General Hospital Ltd. and Ors. (2006) 7 SCC 613 which is relied upon by the learned senior counsel for the respondents, the Hon'ble Supreme Court has quoted with approval at para 38 of its judgment (on page 635) the observations made by it in the case of Sangramsinh P. Gaekwad and it reads as under:
The jurisdiction of the court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. The Court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may deem fit and proper, are warranted. Moreover, in a given case the court despite holding that no case of oppression has been made out may grant such relief so as to do substantial justice between the parties.
Further, in the case of Chander krishan Gupta v. Pannalal Girdhari Lal Private Ltd. and Ors. reported in 1984 Vol. 55 Company cases 702 relied upon by the learned Counsel for the respondents, the Hon'ble Supreme Court has observed at page 719 as under:
Even if no case had been made out under Section 397 of the Act, the effect of the decision of the Supreme Court in the Needles case would be that technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by the Companies Act In that case the Supreme Court had specifically come to the conclusion that the petitioner had failed to make out a case of oppression. In the exercise of its equitable jurisdiction the Supreme Court nevertheless did grant relief. Similar is the case here. I cannot lose sight of the fact, and this is an admitted case of the parties, that the two sets of shareholders, namely, respondents Nos. 3 and 5 on the one side and the others on the other, cannot do business together. They have been fighting litigation for years. There is a complete lack of probity amongst the parties. The dismissal of the petition will not solve the problems and, therefore, as far as possible, a permanent solution has to be found which would enable the company, thereafter, to function smoothly.
A number of suggestions are mooted as to how the deadlock in the company could be resolved. It was suggested that the factory of the company be given on lease. Another suggestion was that the shares of the company should be purchased by any one group. I have given considerable thought to this problem. To my mind giving the property of the company on lease would not solve the problem. The solution can only be found in one of the groups purchasing the shares of the other.
12. All the said undisputed facts referred to supra, considered together in the light of the observations of Hon'ble Supreme Court in the above two cases, we find that the above finding of the CLB that there are no chances of both parties jointly running the said company and therefore the only way to ensure smooth and healthy functioning of the said company is that the parties must part their ways is quite justified. Therefore, we are of the considered view that this finding does not call for any interference in this appeal.
13. After having found that the CLB was justified in recording its finding that both the parties cannot go together in the administration of the Company, now the question arises as to which of the parties shall have to be ordered to quit the company by selling their shareholdings to the other party. On this question Sri Naganand, Sr. Counsel appearing for the appellants, placing his reliance on the following decisions;
i) Scottish Co-operative Wholesale Society Ltd v. Meyer and Anr. reported in (1958) 3 All England Law Reports 66;
ii) Re Brenfield Squash Racquets Club Ltd. reported in (1996) 2 Butterworths Company Law Cases 184;
iii) Mahabir Prasad Jalan and Anr. v. Bajrang Prasad Jalan and Ors. reported in (1999) 2 Company L.J. 71(Cal)72;
iv) Dale and Carrington Invt. (p) Ltd., v. P.K. Prathapan and Ors. ;
strongly contended that the CLB committed serious error in directing the appellants to sell their shareholdings in JV Co. to the second respondent company and its nominees inasmuch as it has amounted to awarding the oppressor and penalising the oppressed. He further urged that the first appellant company, respondent No. 12, being the Managing Director of the first respondent JV Co. and the members of their group besides being founders of JV Co. during the year 1993 developed it to its maximum extent till the third respondent GE Co. acquired its shares during the year 2001 and, thereafter, the 12th respondent has been managing the affairs of the company without giving rise to any occasion for the respondents' group to complain against him of any mismanagement and therefore it is the appellants who are entitled to continue to run the JV Co. and not the respondents' group and as such the impugned direction to the appellants to sell their shares to the second respondent and its nominees cannot be sustained in law.
14. Per contra, Sri Sudhipto Sarkar, learned senior Counsel appearing for the second respondent, placing his reliance on the decisions:
i) Re Brenfield Squash Racquets Club Ltd. reported in (1996) 2 Butterworths Company Law Cases 184;
ii) Chander Krishan Gupta v. Pannalal Girdhari Lal Private Ltd and Ors. reported in (1984) 55 Com. Cases 702;
iii) Mahabir Prasad Jalan and Anr. v. Bajrang Prasad Jalan and Ors. reported in (1999) 2 Com. L.J. 71 (Cal)72;
iv) Ramashankar Prasad and Ors. v. Sindri Iron Foundry (P) Ltd. and Ors. reported in AIR 1966 Calcutta 512 (V 53 C 91);
v) Combust Technic Pvt. Ltd. in re. reported in (1986) 60 Company Cases 872;
strongly contended that the CLB, by considering all the facts and circumstances of the case including the fact that it is only after the third respondent OK Co. purchased 74% of the shares in JV Co. the latter company started earning huge profits which could never have been earned by it in the absence of GE Co. and also in the best interest of the Company, its shareholders and employees, has rightly directed the appellants being minority shareholders to sell their shareholdings in the said company in favour of the second respondent company and as such the said direction does not call for any interference in this appeal.
15. In Scottish Co-operative Wholesale Society Ltd. which is relied upon by the learned Sr. Counsels for both parties it is observed at pages 66, 72 and 89 as under:
The conduct of the appellants was oppressive and, in view of the facts that the company was a subsidiary of the appellants and that the appellants' nominees on the board of the company were participating in the policy of the appellants, was also oppressive conduct of the affairs of the company within Section 210 of the Companies Act, 1948, although the misconduct of the nominee directors was negative, being passive neglect of the company's interests. (page No. 66 ) Some criticism was made of the relief given by the order of the court It was said that only that relief could be given which had as its object and presumably its effect the "bringing to an end of the matters complained of' and that on order on the society to purchase the respondents' shares in the company did not satisfy that condition. This argument is without substance. The matter complained of was the oppression of the minority shareholders by the society. They will no longer be oppressed and will cease to complain if the society purchase their shares. (page No. 72) One of the most useful orders mentioned in the section -which will enable the court to do justice to the injured shareholders-is to order the oppressor to buy their shares at a fair price; and a fair price would be. I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is, in effect, money compensation for the injury done to them; but I see no objection to this. The section gives a large discretion to the court, and it is well exercised in making an oppressor make compensation to those who have suffered at his hands. (page No. 89) On careful reading of the above observations, it could be seen that the same are not helpful to the appellants but they support the case of the respondents inasmuch as in the said case the minority shareholders who were found oppressed were ordered to sell their shares to the majority shareholders who were the oppressors.
16. Further, the decision in Re. Brenfield Squash Club Ltd. reported in (1996) 2 Butterworths Company Law Cases 184 (Chancery Division: Companies Court) is relied upon by the learned Counsel for both the parties. In the said case it was found that as alleged by the petitioners therein in their petition, the affairs of the company had been and were being conducted in a manner unfairly prejudicial to their interests who were minority shareholders and therefore they had sought that they should be given first preference in the matter of sale and purchase of the shares of the Company. On these facts the court made its observation (on pages 190-191) as under:
It may be comparatively unusual for a majority shareholder of the company to be ordered to sell its shares to minority shareholder petitioners, but in all the circumstances of this case I consider it appropriate, I bear in mind that, having regard to evidence of the unsatisfactory financial position of FMR, it may well be that the petitioners have in any event become entitled to purchase the shares in the company held by FMR under the provisions of the shareholders' agreement of 23 July 1987, to which I referred earlier in this judgment on the ground that FMR has ceased to trade or is unable to pay its debts. I shall consider with counsel the form of order to be made to provide for the sale of FMR's shares to the petitioners.
Placing strong reliance on these observations Sri Naganand, learned senior Counsel for the appellants submitted that CLB ought to have ordered the majority shareholders to sell their shares to the minority shareholders (appellants). Rebutting this argument Sri Sudhipto Sarkar, the learned senior counsel for the second respondent, submitted that as could be seen from the above observation in the said case there was evidence as to unsatisfactory financial position of FMR and it had ceased to trade or was unable to pay its debts and therefore it was ordered to sell its shares to the petitioners who were minority shareholders but the same is not the situation in this case. This argument deserves acceptance and therefore we hold that the above observation cannot be made applicable to the facts of the present case inasmuch as it is not the case of the appellants that the 2nd respondent company and its nominees who have been majority shareholders are not in a position to pay their debts or that they are not capable of running the company.
17. The decision of Calcutta High Court in the case of Mahabir Prasad Jalan and Anr. v. Bajrang Prasad Jalan and Ors. reported in (1999) 2 Com. L.J. 71 (Cal.) 72 is also relied upon by the learned Counsel appearing on both sides. The facts in the said case were; "The two rival groups of the company were more or less equal in holding the shares of the company and were related to each other, "The trial court, having found that they could not carry on the business smoothly, directed the sale of shares of the appellants and their group who were holding majority shares in favour of respondents-1 to 3 therein who held minority shares. Aggrieved by the said order the appeal was filed before the Calcutta High Court". On these facts it was observed by the High Court as under:
The provisions of Sections 397 and 398 of the Companies Act, 1956, can be taken recourse to, inter alia, in a case where there has been a complete breakdown in the machinery so far as running of the affairs of the company is concerned, and in such a situation, the court can keeping in view the nature of business, the assets which include the shares of the company by way of investment or otherwise, in other company or the other companies being the shareholders of the company in question, can issue appropriate direction. The court in a given situation can also frame a scheme.
The Court, therefore, has to take into consideration the cumulative effect of the finding of the fact so as to arrive at a decision as to whether it is a mismanagement, simplicity or an oppression.
It may be true that the court has an unfettered discretion in view of Clause (b) of Section 402 of the Companies Act. The Court in proceedings under Section 397/398 of the Companies Act may in a given situation apart from the direction of sale of the shares in favour of the majority shareholders pass on order which sub-serves the public interest or the interest of the parties concerned.
It is true that the discretion exercised by the trial court is not normally interfered with, but if a discretion has been exercised on the basis of wrong legal principles or by not following the precedents, the appeal court can interfere with the discretion so exercised by the trial court. In this case, the trial court, while issuing the impugned directions, did not at all take into consideration that, in all other cases, minority shareholders had been directed to sell their shares in favour of the majority shareholders. An exceptional case ought to have been made out for granting the extended relief in favour of respondent Nos. 1 to 3.
On the facts, the impugned order was modified, that is to say, it was ordered that instead and in place of the appellants selling their shares in favour of respondent Nos. 1 to 3 and their group, respondent Nos. 1 to 3 and their group shall sell their shares to the appellants and their group on the same terms and conditions and upon determining the market value in the manner laid down by the trial court The submission of Sri Naganand the learned Sr. Counsel for the appellants, made on the basis of those observation of Calcutta High Court that the CLB exercised its discretion in issuing the impugned direction on the basis of wrong principles of law and also without following the precedents and therefore the said direction is to be set aside and respondents' group be directed to sell their shares to appellants' group cannot be accepted.
18. The learned senior counsel for the appellants has relied on the decision of the Hon'ble Supreme Court in the case of Dale and Carrington Invt. (P) Ltd. v. P.K. Prathapan and Ors. . The facts in the said were; "The Company Law Board had taken a view that Ramanujam, the Managing Director of the said Company had committed an act of oppression as against the respondent P.K. Prathapan and others not only by not informing Prathapan the issue of further share capital of the company but also by not offering him (Prathapan) the further share capital which was being issued by the Company. Having given a finding of oppression in favour of the said Prathapan the CLB had given an option to Prathapan to sell his share to the oppressor Ramanujam. In the appeal that was filed before the High Court by the said Prathapan aggrieved by the said order so far it related to the relief given to him that he should sell his shares to Ramanujam, the High Court held that the said ad of Ramanujam was an act of fraud inasmuch as he had allotted 6,865 equity shares of the company in his favour only without informing the said Prathapan. Ultimately the High Court allowed the said appeal holding that perpetrator of fraud could not be allowed to take benefit of his own wrong and therefore the observation of the CLB that the appellants can sell their shares to the said Managing Director was not justified. The said Ramanujam had also filed an appeal before the High Court aggrieved by the order of the CLB holding him as the oppressive. In the said appeal the High Court held that the act of allotting 6,865 equity shares in his favour by Ramanujam was an act of fraud committed on the respondent Prathapan and therefore it ordered setting aside of the said allotment and rectification of the registration of shares. Aggrieved by the said order the appellant Ramanujam approached the Hon'ble Supreme Court on the question of relief granted to Prathapan." On these facts the Hon'ble Supreme Court observed at para No. 25 of its judgment on page 233 as under:
A majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders, if per chance through fortuitous circumstances or otherwise, the minority group of shareholders comes into power and management of the company. The majority shareholders by virtue of their majority will usually be in a position to redress all wrongs done and to undo the mischief done by the minority group of shareholders, as it will always be possible for the majority group of shareholders to regain control of the company so long as they remain in majority in the company by virtue of the majority. Except in unusual circumstances, the majority group of shareholders in my opinion, should never be ordered or directed to sell their shares to the minority group of shareholders. An order directing the majority group of shareholders to sell his shares to the minority group of shareholders will not redress The wrong done to the majority group of shareholders and will not give him sufficient compensation or relief against the act of oppression complained of by him, and, on the other hand, may add to his suffering and grievance and cause him greater hardship. Such an order will not further the ends of justice and indeed the cause of justice may be defeated", (para No. 25).
The Hon'ble Supreme Court further observed at para 38 of the said judgment as under:
On the question of relief, the learned Counsel for the parties referred to decisions in support of their respective stands. We do not consider it necessary to refer to these decisions because relief depends on facte of a particular case. We have seen the facts of the present case which to our mind are so manifestly against Ramanujam that two opinions are not possible on the aspect of relief. The only relief that has to be granted in the present case is to undo the advantage gained by Ramanujam through his manipulations and fraud. The allotment of all the additional shares in favour of Ramanujam has to be set aside. In our view, the High Court was fully justified in granting the relief of setting aside the impugned allotments of additional shares in favour of Ramanujam. The approach of the Company Law Board was totally erroneous inasmuch as after having found that there was oppression on the part of Ramanujam, he was still allowed to take advantage of his own wrong inasmuch as he was given the option to buy Prathapan's shares and that too not for a proper price. In our view the Company Law Board was wrong in allowing purchase of shares of Prathapan and his wife by Ramanujam. Such an order amounts to rewarding the wrongdoer and penalising the oppressed party. In the circumstances of this case asking the oppressed to sell his shares to the oppressor not only fails to redress the wrong done to the oppressed, it also results in heavy monetary loss to him. The relief granted by the High Court was a proper relief in the facts of the case.
19. In Chander Krishan Gupta v. Pannalal Girdhari Lal Private Ltd. and Ors. reported in (1984) Vol. 55 Company Cases 702 relied upon by the learned Counsel for the 2nd respondent the Hon'ble Supreme Court has observed on page Nos. 719 and 720 as under:
A number of suggestions are mooted as to how the deadlock in the company could be resolved. It was suggested that the factory of the company be given on lease. Another suggestion was that the shares of the company should be purchased by any one group. I have given considerable thought to this problem. To my mind giving the property of the company on lease would not solve the problem. The solution can only be found in one of the groups purchasing the shares of the other. Two questions would then arise. The first is as to who should be given the first option to purchase and, secondly, what is the price at which the shares be fixed. The managing director is an old man of nearly 84 years of age. Though he is willing to run the company, yet to my mind it will not be a long-term solution to ask him to purchase all the shares. Though all the allegations of oppression have been made against respondents Nos. 3 and 5, to my mind they should be given the first option to purchase the other shares. The oppressor being asked to purchase the shares is not something which is unknown to company law. (See Scottish Co-operative Wholesale Society Ltd. v. Meyer (1958) 3 All ER 66 at page 89 : (1959) 29 Comp Cas 1). It is admitted by the petitioner that for the last few years it is respondents Nos. 3 and 5 who have been managing the affairs of the company. According to the said respondents, and there is nothing to the contrary on the record, after respondent No. 5 had been inducted into the company the said company started making profits whereas previously it was incurring losses. In my view, therefore, it will be more beneficial for the company, at this stage, that the control goes into the hands of respondents Nos. 3 and 5. It may also be noticed that during the course of arguments the counsel for the said respondents had agreed that they would be willing to buy the other shares of the company. It was agreed by all the counsel that whether the petitioner or the said respondents purchase the shares, the father, namely, respondent No. 2 would, as long as he is alive, be continued to be paid the salary which he was drawing as managing director of the company.
20. Further, in the case of Ramashankar Prasad and Ors. v. V. Sindri Iron Foundry (P) Ltd. and Ors. reported in AIR 1996 Calcutta 512 relied upon by Sri. Sudhipto Sarkar Calcutta High Court has observed (on pages 531 and 532, para 66) as under:
A complaint was justly made that the learned Judge failed to evolve a formula for remedying the permanent evil of the company, namely, the conflict between two groups of shareholders. In my opinion, the company cannot function properly if these two warring groups continue to hold the shares. As a matter of fact, at the early stage of the hearing of the appeal, a suggestion was made mat one of the two groups should buy up the other's holding but nothing tangible came out of attempts made by counsel on that behalf. In my opinion, the special auditor should be directed to find out the fair value of the shares at the date of the petition as was directed by Lord Denning in Scottish Co-operative Wholesale Society Ltd.'s case 1959 AC 324. We also order the oppressor i.e., the respondents to the petition to buy the shares of the petitioners. In case the respondents are unable or unwilling to buy the shares, the petitioners should have an option to buy the respondent's shares at the same price. The price is to be arrived at on the basis of the break-up value of the shares. The respondents should be given three months time after the submission of the report of the special auditor and the ascertainment of the value of the shares to buy out the petitioners'. In default the petitioners will have the right to buy up the respondents' shares within a further period of three months from that date. Except for this modification the order made by the learned trial judge will stand.
21. Another decision relied upon by the learned Sr. Counsel for the second respondent on the question of giving direction to majority or minority group of shareholders to sell their shares to the other group is the decision in the case of Combust Technic Pvt. Ltd., in re. reported in (1986) Vol. 60 Company Cases 872. The facts of the said case were; There were only 30 shares and two shareholders-Directors of the said company of whom one was holding 14 shares and another 16. The dispute arose between the said two shareholders and consequently they ceased to attend the Board Meeting and stopped the bank account of the company. The petitioner therein who was a minority shareholder held a Board Meeting by himself and issued to himself further shares and thereby converted himself into a majority shareholder and also co-opted another director. On these facts the court observed as under:
That admittedly there was mutual lack of confidence in the conduct and management of the company's affairs and as NP constituted the majority, it might not be possible for the petitioner to remedy such mismanagement in the domestic forum. On facts, the principles governing the dissolution of a partnership were attracted and the company could be wound up on just and equitable grounds, the application was maintainable. NP could not be kept out of management whatever be her competence. Majority was matter of arithmetic and in law she could not be directed to sell her shares to the petitioner, the fact that the employees were supporting the petitioner made little difference to the legal position. However, as long as the suit against A was pending, it would not be possible to quantify the valid shares held by the petitioner and give any direction for sale of such shares.
22. Placing his strong reliance on the above observation of the Hon'ble Supreme Court in the case of Dale and Carrington Invt. (P) Ltd. Sri Naganand, the learned senior counsel for the appellants contended that in the instant case the CLB ought not to have directed the appellants to sell their shares in favour of 2nd respondent Company and its nominees who are holding majority shares. Per contra Sri Sudhiptho Sarkar, learned senior counsel for respondent No. 2, placing his reliance on the above observations of the Hon'ble Supreme Court at the beginning of para 38 of the same judgment contended that the decision as to the relief that has to be given to the petitioners in a petition under Sections 397, 398 and 402 of the Act would depend on the facts and circumstances of each case and therefore, since the management of the Company has been with the respondent No. 12 the nominee of the first appellant company and, since the acts as alleged by the appellants against the contesting respondents have not been held to be oppressive against the appellants, the observation of the Hon'ble Supreme Court in the said case that the CLB was not justified in ordering the sale of shares by the minority shareholders in favour of majority shareholders of the said company cannot be applied to the facts of the present case. He further submitted that, as observed by the Hon'ble Supreme Court at para 25 of the same judgment, except in unusual circumstances, the majority group of shareholders should never be ordered or directed to sell their shares to the minority group of shareholders and therefore the direction of the CLB in the impugned order that the appellants being minority shareholders shall sell their shares in the JV Co. to the second respondent Company cannot be said to be unsustainable.
23. On a careful reading of the observations of the respective courts in the cases of Dale & Carrington Invt. (P) Ltd. (supra) and Mahabir Prasad Jalan and Anr. (supra) it could be seen that in both the said cases the rival groups of shareholders were individuals but not the corporate bodies as in the present case. Further, in first of the said cases the acts of Managing Director Ramanujam allotting 6,865 equity shares of the company in his favour only without notice to the respondent Prathapan were held to be constituting fraud against Prathapan besides being oppressive against him and therefore the majority shareholders were ordered to sell their shares in favour of the minority shareholders, which is not the fact situation in the instant case. Further, in second of the said cases i.e., Mahabir Prasad Jalan and Anr. (supra) while modifying the order of the trial court that the appellants being majority shareholders should sell their shares to the respondent No. 1 to 3 therein, who were minority shareholders, the High Court observed that the trial court, while issuing the said impugned directions, did not at all take into consideration that in all other cases minority shareholders had been directed to sell their shares in favour of the majority shareholders and that an exceptional case ought to have been made out for granting extended relief in favour of respondents Nos. 1 to 3. The rival groups in that case were also individuals holding more or less equal shareholdings in the company. Therefore, we are of the opinion that the above observations of Calcutta High Court in the said case cannot be made applicable to the facts of the present case.
24. In the case of Chander Krishan Gupta (1984) 55 Company Cases 702 the Managing Director of the company was an old man of nearly 84 years of age and therefore the Hon'ble Supreme Court, holding that it would not be a long term solution to ask him to purchase the shares of respondent Nos. 3 and 5 therein though all the allegations of oppression were made against them, gave the said oppressor respondents option to purchase the shares of the other party including the said Managing Director. Besides this, the said managing Director was father and said respondents were sons. Therefore the facts and circumstances of the said case cannot be equated with those of the instant case in deciding as to which group of shareholders herein is to be ordered to sell their shares to the other group.
25. In Ramashankar Prasad and Ors. case AIR 1966 Cal. 512 the Calcutta High Court, following the decision in Scottish Co-operative Wholesale Society's case (supra) ordered the oppressor respondents to buy shares of the oppressed petitioners. In Combust Technic Pvt. Ltd., In re. (supra) relied upon by the learned senior counsel for the second respondent there were only two shareholders and directors of the company, one holding 14 shares and another 16 of the total of 30 shares in the company and the petitioner who was a minority group held Board meeting all by himself and issued to himself further shares and thereby converted himself into a majority and also co-opted another director. The facts in these two cases cannot be equated with the facts of the present case in deciding the question as to which of the two groups shall have to be ordered to quit the JV Co.
26. On careful perusal of all the said decisions relied upon by the learned Counsel for both parties it could be seen that in any of the said decisions no law has been laid down as to under which situation and on what facts in a given case the majority shareholders may be ordered to sell their shares in favour of the minority shareholders or vice versa. Further, as observed by the Hon'ble Supreme Court at para 38 of its judgment in Dale & Carrington Invt. (P) Ltd. (supra) the relief that has to be given under Sections 397 and 398 of the Act depends upon the facts of the particular case, therefore, having regard to all the peculiar facts of the present case and in the best interest of the company and its employees we have to see whether the direction issued by the CLB that the appellants shall sell their shares to the second respondent calls for any interference or it deserves to be left undisturbed or it needs to be modified.
27. It is not in dispute in the instant case that the first appellant company and its nominee namely respondent-12 the Managing Director of the JV Co. have founded the said company and contributed to a large extent towards its growth from the day of its incorporation in the year 1993 and till the third respondent GE Co. purchased 76% of its shares through its subsidiary company i.e., second respondent and also thereafter till to this date. Further, it is also not in dispute that by reason of entry of third respondent GE Co. into JV Co. in the year 2001 the latter company could grow to its maximum possible extent inasmuch as the net profits of JV Co. during initial six years (from 1993 to 2000 i.e., before the entry of GE Co.) which were at Rs. 4.18 crores came to be increased to Rs. 32.62 crores during the latter five years (i.e., from 2001 to 2006 ) as a result of entry of GE Co. into JV Co. It is also not in dispute that the total sales of the products of JV Co. during initial five years which were at Rs. 36.98 crores came to be increased to Rs. 195.11 crores during the latter five years. Therefore, as rightly observed by the CLB in its impugned order while the Appellants created, promoted and nurtured the JV Co., the GE Co. too played key role in its present growth both in terms of sales and profits. 'Thus, it is clear that had the first appellant company and respondent No. 12 not promoted JV Co. there could be no occasion for GE Co. to acquire its shares and similarly had the GE Co. not entered into JV Co. the latter company could not have grown to this extent Therefore, the role played by each rival group in the growth of JV Co. is equally important.
28. In view of the fact that JV Co. has been making huge profits and it has bright future in the world market neither of the rival groups is willing to quit it by selling its shares to the other group. Each group is prepared to hold and continue to manage the company. The management of the day-to-day affairs of the company has been in the hands of 12th respondent, (nominee of the 1st appellant company,) and its major share capital is in the hands of 3rd respondent GE Co. Had the Managing Director not managed the company efficiently it could not have maintained the quality of its products for which there has been considerable demand in the world market and it could not have been able to meet the increasing demand for its products and the 3rd respondent GE Co. could not have had an occasion to facilitate the sale of products of JV Co. in the world market. It is also an undisputed fact that 90% of the orders to JV Co. from the world market have been flowing through GE Co. Therefore, it is crystal clear that if the GE Co. had not entered into JV Co. by purchasing the 76% of its shares and if it had not promoted its business, the JV Co. could not have had an opportunity to grow to the present level and thereby to earn such huge profits.
29. Under these peculiar circumstances of this case it is clear that either group has to quit the company most reluctantly in compliance with the directions of the court despite it being capable of running the company. Further, the outgoing group, whether it be the group of appellants or that of contesting respondents, would not be in a position better than the group which continues to run the company because the outgoing group has to spend considerable time and energy to establish its own industry with the proceeds of the sale of its shares and to earn profits therefrom. Besides this such group has to suffer monetary loss also as it would not be getting any income till its new establishment starts earning profits. On the other hand the group which acquires the management of the company and continues to run it would be in a position better than the outgoing group because it could proceed with the production of its products and sell in the world market without any time gap. Therefore, we are of the considered view that the outgoing group has to be adequately compensated by the group which continues to be the management of the company so as to enable the outgoing group to establish its own industry by spending considerable time and earn profits with the money which it gets by sale of its shares.
30. It would not be possible to achieve this object if particular group is directed to sell its shares to the other group at the price to be determined by the third party i.e., an independent firm of Chartered Accountant because though the price of shares would be determined by such Chartered Accountant most scientifically and impartially by taking all the relevant facts into consideration yet such price would only be an 'opinion price' as could be distinguished from the 'competitive price' at which a prospective buyer or seller would opt to buy or sell in competition with the other buyer or seller. This object of adequately compensating the outgoing group of shareholders could be achieved by making both the rival groups to compete with each other in the purchase of shares of the company at a price higher than the one determined by the independent chartered accountants. Therefore, we are of the considered view that the price at which the shares of the JV Co. should be ordered to be sold by one group to the another group should be 'competitive price and it should certainly be higher than the price determined by the independent chartered accountants. This competitive price can be arrived at by directing each rival group to quote in sealed cover its price (which should be higher than the one determined by the chartered accountants) at which it would agree to sell its shares to the other group and also agrees to buy the shares of the other group and then the group quoting higher price than the one quoted by the other group shall be given first option to buy the shares of the other group at such higher price as quoted by the former. Thus, the object of adequately compensating the outgoing group of the shareholders by the group of shareholders continuing to run the company could be achieved.
31. In view of our foregoing discussions we hold that though the CLB was justified in holding that in view of the strained relationship between both the rival groups, one of them should quit the JV Co. by selling its shares to the other group but it was not justified in directing the appellants' group to sell their shares in favour of the respondents' group at the price to be determined by the independent firm of chartered accountants. Therefore, the question of law in this appeal has to be answered partly in favour of the appellants and we answer the same accordingly. In the result, the present appeal deserves to be allowed in part. Accordingly it is allowed in part and consequently the impugned order and the direction therein that the appellants shall sell their shares in JV Co. to the second respondent and its nominees at the price to be determined by the independent firm of chartered accountants need to be modified as under:
The Company Petition No. 11/2006 filed by the appellants is allowed in part as against the contesting respondents-1 to 11 only. After the independent firm of chartered accountants namely M/s. Price Waterhouse Coopers, New Delhi-110002, appointed by the CLB by its order dated 19.6.2006 (Annexure-C, appended to the memorandum of appeal), submits its report determining the price of each share in JV Co. held by both the appellants' and respondents' groups, the same shall be made known to each group and then each group shall quote in sealed cover before the CLB the competitive price of each share in JV Co. which shall be higher than the price determined by the said firm of chartered accountants, agreeing to buy the shares of other group or to sell its shares to the other group at the said higher price and the group quoting its price higher than the one quoted by the other group shall have first option to buy the shares of the group quoting the lower price, thereafter the CLB shall pass appropriate order directing the group quoting higher price to purchase the shares of other group quoting lower price.
32. In view of disposal of this appeal it is not necessary for us to consider the application I.A. No. 11/07 tiled in this appeal by the second respondent herein seeking several directions against respondent No. 12, the Managing Director of JV Co. including the direction to hold the meeting of BOD and to take all actions as per the decision of BOD. Respondent No. 2 is at liberty to file similar application before the CLB if the circumstances so warrant, and in that event the CLB may consider the same.
There is no order as to costs in this appeal.