Company Law Board
Shri M.S.D. Chandrasekar Raja vs Shree Bhaarathi Cotton Mills Private ... on 16 August, 2004
Equivalent citations: [2005]57SCL72(CLB)
ORDER
K.K. Balu, Member
1. This petition is filed under Sections 397 and 398 of the Companies Act 1956 ('the Act') alleging that the affairs of M/s Shree Bhaarathi Cotton Mills Private Limited ('the Company') are being conducted in a manner oppressive to the petitioner and prejudicial to the interest of the Company and claiming the following reliefs:
a) to appoint one or more suitable persons to act as directors of the Company;
b) to amend Article 5 of the Articles of Association of the Company to the effect that "Until otherwise decided by the General Meeting, the company shall have not less than three and not more than nine directors."
c) to direct the Company to redeem the preference shares in accordance with Article 3 (C) of the Articles of Association;
d) to direct the Company to issue duplicate share certificates in respect of the 284000 Equity shares issued and allotted to the Petitioner;
e) to amend Article 4(a) of the Articles of Association of the Company in the following manner: -
(i) Any share may be transferred by a member to any other member or the spouse or major child of such member. Provided that the Board of directors shall be bound to recognize and record such transfers;
(ii) Any share may also be transferred to any person other than members of the Company provided no member is willing to purchase the same.
2. Shri R. Murari, learned Counsel, while initiating his arguments submitted that the Company was incorporated in January, 1984 for the purpose of manufacturing and selling cotton, yarn etc. The entire equity shares in the Company are held by the petitioner with 2,84,000 equity shares of Rs. 10/- each, his son the second respondent, holding 2,83,999 shares and the remaining one share with M/s Visva Bharathi Textiles Private Limited, which is held equally by the petitioner and the second respondent. The petitioner is holding shares of the Company in his own right, as borne out by the register of members and the annual report filed by the Company (pages 85-94 of company petition). Moreover, as early as in the year 1973, there was a partition taken place between the petitioner and the second respondent, upon which continuance of the Hindu Undivided Family came to an end. The statement made before the tax authorities showing the shareholding of the petitioner as the HUF was for taxation purpose and does not apply to the present proceedings. This issue can only be agitated in a competent civil court. While the petitioner is the Managing Director, the second respondent is the whole time director of the Company. The second respondent being an equal shareholder and director of the Company deliberately blocked the resolutions at the Board meetings for co-option of an additional director to break the dead lock; issuance of the duplicate share certificates in favour of the petitioner and for surrender of the surplus power viz., 100 K.V.A, unutilized by the Company in favour of the Tamilnadu Electricity Board, saving substantial amount every month. Though the second respondent opposed the co-option of a third director on the Board for no reasons, yet belatedly contended that he did not have good relationship with the person who was proposed to be co-opted by the petitioner. The second respondent many a time declined to participate in the proceedings of the Board, despite attending the meetings, but preferred to abuse the petitioner and refused to sign the attendance register leading to adjournment of the Board meetings. The second respondent on the other hand is making false accusation that the petitioner neither recorded the minutes of the Board meetings nor maintained the minutes book and the attendance register properly and that the minutes books were withheld from his inspection, as borne out from the letters dated 02.05.2003 and 10.06.2003 of the second respondent. (Pages 69, 71-73 of the company petition). The Company could not declare any dividend on preference shares or redeem the same in terms of the Articles of Association of the Company due to non co-operation of the second respondent. The second respondent entrusted with the functions relating to sales, purchases etc, was solely responsible for accumulation of the finished stocks worth about Rs. 6.70 crores, which affected the Company's financial health, liquidity and profitability. The second respondent harassed the petitioner and victimized certain office staff by refusing the increment on the false ground that a sum of Rs. 8,15,000/- was withdrawn from the Company's account for personal gain, which according to the petitioner was for making advance payment to cotton suppliers, in tune with the prevalent practice, but entrusted to him by the Accountant, while proceedings on leave. The amount of cash received from the Accountant was remitted in the Company's bank account on the very next day itself as borne out by the bank challan, bank statement and extract from the ledger account maintained by the Company (Pages 75 to 80 of the company petition). The Company neither incurred any loss on account of this cash transaction. The second respondent has raised the disputes in regard to use of the guest house belonging to the Company and the custody of the original documents of title pertaining to the guest house. Thus, the second respondent has been subverting the functioning of the Company by either not attending meetings or by attending and refusing to participate or by voting against the resolutions concerning the petitioner or concerning the interest of the Company so as to prevent such items being transacted, as evidenced from the various minutes of the Board meetings and a series of correspondence exchanged between the petitioner and second respondent (pages 44 to 74 of company petition), which reflect the oblique and malafide intention of the second respondent to oust the petitioner from the office of the Managing Director and usurp absolute control of the Company for himself. Shri Murari, learned Counsel pointed out that while the second respondent was regularly going to the mill, failed and neglected to attend any of the Board meetings convened subsequent to filing of the company petition to ensure the statutory compliance on flimsy grounds. The smooth functioning of the Company is hampered on account of the prejudicial acts of the second respondent in breach of his fiduciary duty as a director of the Company, which resulted in a deadlock situation in the affairs of the Company, adversely affecting the rights of the petitioner both as a shareholder and director of the Company. The deadlock requires to be resolved expeditiously in the interest of proper running of the Company. The whole situation would establish the existence of circumstances justifying the winding up of the Company, which would cause prejudice to the interest of the Company and its shareholders, especially when the Company is carrying on its business profitably. The only remedy is the exit of either of the parties. The petitioner is willing to sell his holdings to the second respondent or any third party or in the alternative is willing to purchase the entire shares held by the second respondent at a value which may be determined by a valuer appointed by this Bench. Shri Murari, in support of his claim relied on Daulat Makanmal Luthria v. Keshav S. Naik - (1992) 3 Comp LJ 119 and Yashovardhan Saboo v. Groz-beckert Saboo Ltd. - [1995] 83 CC 371 - to show that the CLB directed one group of shareholders to purchase the shares of the other group of shareholders, where the parties had lost mutual trust necessary for working together with managing the affairs of the company and where it was not possible for both the groups to carry on the working of the company smoothly in view of the dispute between the two groups of shareholders adversely affecting the working of the company and employees and when the relationship of the two parties reached a stage where reconciliation was difficult.
3. Shri Venkatraman, learned Counsel appearing for the second respondent submitted: The second respondent's grand father had started a partnership firm manufacturing and selling cotton, yarn etc, which was subsequently converted into the present Company with the petitioner and the second respondent as signatories to the Memorandum and Articles of Association. The equity shares held by the petitioner are in his fiduciary capacity as Karta of the HUF which consists of the petitioner and the second respondent. The partition between the petitioner and second respondent is only a partial partition and therefore, the shares held by the petitioner are in his capacity as Karta of the HUF. The second respondent has been on the Board since the very inception of the Company actively taking part in the day to day affairs of the Company and participating in all the meetings and proceedings in relation to the functioning of the business and co-operating with the petitioner in all the corporate affairs. Shri Venkatraman, learned Counsel, specifically referred to the minutes of several of the Board meetings to show that the second respondent cooperated fully and carried out his duties as a director of the Company by approving the agenda beneficial to the Company viz., clearance of the accumulated stocks, recovery of the outstandings due from one of the customers, approval of the Balance Sheet and the annual accounts, declaration of dividend for various years etc. The second respondent raised objections to such actions which in his opinion were (a) disruptive and prejudicial to the interest of the Company (b) only for the benefit of the petitioner; (c) against the interest of the second respondent and (d) without adequate particulars. The induction of a third director was proposed by the petitioner with malafide intention to remove the second respondent from the Board and usurp power to himself. Moreover, the appointment of any director requires prior approval of the Financial Institution, which extended the financial assistance in favour of the Company. The Company never issued any share certificates to its members and therefore, the second respondent did not favour the issue of duplicate share certificates in favour of the petitioner. In view of the textile markets showing definite signs of revival and considering the future trend and needs of business, the second respondent did not agree to the proposal of surrendering the surplus power in favour of TNEB. All his decisions are purely business decisions and cannot amount to acts of oppression or mismanagement. The accumulation of stock was due to the severe recession faced by the textile industry and the lower realization of the yarn prices. When the second respondent adopted the prudent business practice of not selling the stocks below their costs, he is blamed for his business strategy. The stand of the second respondent is now vindicated with better yarn prices prevailing in the current market and the recent central excise concession by which the Company is benefited to the extent of Rs. 16 lakhs. The mere fact that the second respondent exercised his legal right as a shareholder or director to vote against any resolution cannot amount to a deadlock in the management. There has never been a deadlock situation in the affairs of the Company. The petitioner was using different attendance registers for the meetings of the Board and failed to maintain regular minutes book, which were often written in pieces of papers and no Board minutes were placed before the meetings since March 2003. The attendance register and the minutes books were not made available to the second respondent for his scrutiny and verification. The second respondent is maintaining good relationship with the staff members of the Company and giving due respect to the petitioner. Shri Venkataraman, learned Counsel pointed out that the amount of Rs. 8,15,000/- was not kept towards advance for purchase of cotton and never placed by the Accountant with the petitioner for safe custody, which does not require any accounting entry or voucher. When the second respondent came to know about the huge balance shown in the books of account, the petitioner had prepared a false voucher and made false entries in the cash book with connivance of the Accountant. Moreover, it is not the practice of the textile mills at Rajapalayam to give any advance in cash for purchase of cotton. The petitioner attempted to misappropriate the amount illegally out of the books of the Company. The misappropriated amount was remitted by the petitioner the next day after the closing hours of the Bank. The second respondent objected to the increment being sanctioned to the Accountant and Cashier, as they were involved in assisting the petitioner to remove the cash of the Company and falsification of the records. While the petitioner is making use of the guest house of the Company at Chennai, the second respondent was never permitted to stay at the guest house for unknown reasons. The personal properties belonging to the petitioner offered as security to the Financial Institution for the facilities extended to the Company, were alienated in favour of his wife, exposing himself to criminal action by the Financial Institution. The share issue register maintained by the petitioner is not in accordance with the Companies (issue of share certificates) Rules, 1960. No authorized signatory has signed the counter foil of the register and the Board resolution is silent on the person authorized to sign the share certificate. There was no proposal in the Board meeting for redemption of the preference shares. The second respondent did not attend the Board meetings convened after filing of the company petition, as the issues are sub-judice before the CLB. Shri Venkataraman, learned Counsel, while concluding his arguments submitted that the petitioner failed to prove oppression to any shareholders or prejudice to the public interest on the Company. There is no deadlock in the functioning and management of the Company. The requirement of Sections 397 & 398 are not satisfied. The petitioner failed to show that there are "continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members ", as held in Shanti Prasad Jain v. Kalinga Tubes, Ltd - (1965) 1 Comp.LJ 193. There "is no averment in the company petition showing grounds for winding up of the Company, which would jeopardize the interest of the Company and the shareholders. For these reasons, the company petition is liable to be dismissed.
4. Shri Murari, learned Counsel, in reply to the arguments of the learned Counsel for the second respondent pointed out that while the petitioner being a shareholder is entitled for the duplicate share certificates, which was refused by the second respondent, the petitioner does not deny the entitlement of the second respondent for the duplicate share certificates in respect of his shares provided he duly applies for the same. The transfer of one equity share made by the second respondent in favour of M/s Viswa Bharti Textiles Pvt. Ltd., 25 redeemable non-cumulative preference shares in favour of 25 different persons are entered in the register of members of the Company. The transfer of preference shares was approved at the Board meeting held on 01.04.1985 by the Board of directors comprised of the petitioner and the second respondent. These transfers could not have been effected in favour of the transferees without the original share certificates. This confirms the issuance of the share certificates in favour of the shareholders. The Company has been convening the Board meetings and maintaining the minutes duly signed by the Chairman of such meetings from time to time in strict compliance with the relevant provisions of the Act. The Company is not benefited on account of the accumulated stock pursuant to the excise duty exemption granted by the Government of India, but only the consumers. The various correspondence show the lack of confidence between the petitioner and the second respondent. The averments made in the reply statement and in particular the transfer of the personal property of the petitioner in favour of his wife, being mother of second respondent referred to as third party explicitly show the aversion of the second respondent towards his parents. Shri Murari, learned Counsel, in conclusion submitted that the petitioner having established the acts of oppression committed by the second respondent is entitled for the relief and pointed out that the CLB has power to grant relief under equitable jurisdiction even where case of oppression is not proved as held in Hydraulics (P) Ltd. And Tenneco Mauritius Ltd. v. Bangalore Union Services Ltd. and Bangalore Union Services Ltd. v. Tenneco Mauritius Ltd. - (2003) 2 Comp. LJ 315.
5. I have considered the pleadings and the arguments of learned Counsel. The issue that arises for my consideration is whether the petitioner has satisfied the requirements of Section 397, entitling him for the reliefs available under this section?
Any person aggrieved on account of the acts of oppression and mismanagement in the affairs of the company may seek the alternative remedy available under Section 397, if the following conditions are satisfied:-
(i) that the affairs of the company are being conducted (a) in a manner oppressive to any member or members or (b) in a manner prejudicial to public interest;
(ii) that the facts would justify the making of a winding up order on the "just and equitable ground" and
(iii) that such winding up would unfairly prejudice such members.
The Supreme Court in Shanti Prasad Jain v. Kalinga Tubes, Limited -(1965) 1 Comp.LJ 193 cited by Shri Venkataraman, learned Counsel, while considering the provisions of Section 397 expressed the position:
"that it is not enough to show that there is just and equitable cause for winding up the Company, though that must be shown as preliminary to the application under Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder."
Whether the conduct of the affairs of a company by the majority of shareholders is oppressive or not will depend upon the facts of a particular case. In the instant case before me, the petitioner as well as the second respondent is holding each 50 per cent of the paid-up capital of the company. These are the only two directors since very inception of the Company. While, according to the respondent, the requirements of Section 397 have not been satisfied, denying the petitioner any relief, it is the case of the petitioner that the affairs of the Company are being conducted in a manner oppressive to the petitioner and that the second respondent and himself have developed great animosity to one another resulting in a deadlock in the affairs of the Company, merits of which are considered herebelow:
(i) Non co-opting of a third director on the Board:
At the Board meeting held on 09.04.2003, when the agenda in regard to the co-option of Shri A. Jayakumar, being son-in-law of the petitioner and brother-in-law of the second respondent came up for consideration the second respondent was not agreeable for his appointment as a director of the Company. The minutes of the Board Meeting (Page 45 of Company Petition) do not disclose any reason as to why the second respondent was not agreeable for the co-option of Shri A. Jayakumar on the Board of the Company. However, according to the second respondent the relationship between Shri A. Jayakumar and himself is not cordial and further prior approval of the lending institution is necessary before making any change in the constitution of the Board, the facts of which are denied by the petitioner as belated and an after thought, with a view to perpetuate the dead lock in the management of the Company. It is observed from the communication dated 30.10.2003 (page 73 of company petition) that the second respondent categorically contended that the petitioner is trying to induct another director without prior knowledge of the lending institution. When the second respondent did not agree for the co-option of Shri A. Jayakumar at the Board meeting held as early as on 09.04.2003 and further reiterated in October, 2003, nothing prevented the petitioner from taking appropriate steps for co-opting any other person on the Board of the Company. By virtue, of Article 6 of the Articles of Association of the Company, "Any person whether a member of the Company or not may be appointed as a director and no qualification by way of shareholding shall be required from any director". The impasse in regard to the appointment of a third director could have been removed by resorting to the appointment of any other person in terms of Article 6, instead of confining only to Shri A. Jayakumar, on which there is no material to show that any such action has been taken by the petitioner and therefore the second respondent alone cannot be blamed in this behalf.
(ii) Non clearance of accumulated stocks:
The agenda regarding the clearance of stock of finished goods came up for consideration at the Board meeting held on 02.05.2003, wherein it was unanimously resolved to take necessary steps to clear the stock, avoiding liquidity crisis. Similarly, at the Board meeting held on 16.06.2003, the Board of directors, including the second respondent decided to take necessary steps for clearing the stock of finished goods. It cannot be therefore be said that the second respondent failed to co-operate with the first petitioner to liquidate the accumulated stock of finished goods. In this connection the reasons, adduced by the second respondent in his reply statement, for such accumulation assume relevance, which read as under:
"The Textile Industry and the whole of the economy were facing a severe recession during the years 2000 and 2001. Many mills had to shut their shops because of the lower realizations of the yarn prices when compared with the cotton prices. It was a matter of prudent business practice that the 2nd Respondent advised that the stocks should not be sold below their costs and that as the market revival was around the corner, the stocks could be sold out surely at better price realizations. All around Tamil Nadu all the Spinning Mills resorted to store their stocks rather than to sell in the market in a loss margin and to sell them at appropriate time to realize good prices. The stand of the 2nd Respondent has now been vindicated with better yarn prices prevailing in the current market" (para. 15.1 at page 14).
The above specific plea of the second respondent remains uncontroverted by the petitioner in his rejoinder, by merely contending that the petitioner caused the liquidation of such excess stock, avoiding any loss to the Company.
(iii) Surrender of the surplus power in favour of TNEB:
TNEB had sanctioned a maximum demand of 1250 K.V.A for the Textile Mill of the Company. It is observed from the statement on the power demand reached during the period between January 1999 and June 2004, furnished by the petitioner, that the Company had consumed a minimum of 752 K.V.A in the year 2003 and a maximum of 1240 K.V.A in the year 2000. The energy consumed during the year 2004 varies from 800 K.V.A to 1024 K.V.A. Against this background, the decision of the second respondent to oppose the proposal for surrender of 100 K.V.A in favour of TNEB must be considered. Whether the surplus power shall be surrendered or not depends upon the present and future trend and needs of business of the Company. While, according to the petitioner, on basis of the power consumed in the past, the Company could safely surrender 100 K.V.A to the TNEB, it is negated by the second respondent on account of the possible requirement in the future. The positive approach of the petitioner for surrender of 100 K.V.A and the negative decision of the second respondent against surrender of the power, as rightly pointed out by Shri Venkataraman, learned Counsel, are purely business decisions left to the wisdom of directors which shall not be substituted by this Bench.
(iv) Non issue of duplicate share certificates:
At the Board meeting held on 02.05.2003, the agenda for the issue of duplicate share certificates in favour of the petitioner was deferred, as the second respondent "was not in a position to take a decision" on this issue, inspite of the particulars furnished by the petitioner as sought by the second respondent. It is worthwhile to observe that the second respondent did not oppose the resolution and there was no categorical refusal for the issue of duplicate share certificates. That is why the petitioner took up the very same issue again at the Board meeting convened on 20.03.2004, after filing of the company petition. It is on record that the second respondent did not attend the Board meeting on 20.03.2004 on the ground that the subject matter is sub-judice before the CLB. Thus, there is no ultimate denial of the issue of duplicate share certificates by the second respondent in favour of the petitioner.
(v) Non Redemption of preference shares:
According to the petitioner the second respondent did not cooperate either in the redemption of the preference shares or declaration of dividend, which is stoutly denied by the second respondent. It is on record that the Directors' Report appended to the Balance Sheet and Profit and Loss Account for the years ended 31.03.1997 and 31.03.1998 show that the directors recommended a dividend at 50% on the equity shares and 12% on the redeemable cumulative preference shares, proposition of which is duly reflected in the respective Balance sheets. The petitioner has produced the minutes of the various Board meetings held from time to time, wherein there is not even an agenda either for declaration of dividend or redemption of preference shares in accordance with the relevant Articles of Association of the Company. Therefore, there has been no occasion on the part second respondent for not co-operating with the petitioner in the matter of declaration of dividend and redemption of cumulative preference shares.
(vi) Non sanctioning of increment to the staff members:
It is observed from the statement giving details of the office staff (page 95 of company petition), that the second respondent had agreed for the increment in favour of eight out of the ten staff members, but declined in respect of the two staff members, who according to him, were purportedly involved in assisting the petitioner to remove the cash belonging to the Company and in falsification of the relevant records. It may observed that the petitioner, despite the objections raised by the second respondent had approved the increment to every staff member, in which case the grievance of the petitioner on this account does not any more survive and furthermore the merits of such grievance are not germane to the present issue.
(vii) Deadlock in the affairs of the Company:
The petitioner has produced copies of the minutes of the Board meetings held during the period between 09.04.2003 and 14.11.2003 and copy of the minutes of the annual general meeting held on 29.09.2003. A perusal of these minutes reveal that at the Board meeting held on 09.04.2003 (page 45 of company petition) the second respondent was not agreeable for the appointment of Shri A. Jayakumar as a director of the Company. The directors at the Board meeting held on 02.05.2003 (pages 51 and 2 of company petition) had resolved to take appropriate steps for liquidating the accumulated stock of goods and for recovery of the outstanding amount due from one of the customers. However, the agenda for the issue of duplicate share certificates in favour of the petitioner was deferred, but not defeated. The directors at the Board meeting held on 16.06.2003 (pages 55 and 56 of company petition) passed the resolutions for liquidation of the accumulated stock and for realisation of the outstanding dues of the Company. At the Board meeting held on 06.09.2003 (pages 59-62 of company petition), the directors considered and adopted the balance sheet and profit and loss account for the year ended 31.03.2003. At the annual general meeting held on 29.09.2003 (page 63 of company petition) the audited balance sheet and profit and loss account were adopted by the members present, namely, the petitioner and the second respondent. The second respondent at the Board meeting held on 14.11.2003 (pages 65-66 of company petition), did not agree for surrender of the excess power in favour of TNEB. Thus, it is observed that during the entire period between 09.04.2003 and 14.11.2003, the agenda in relation to the co-option of a third director and surrender of the surplus power alone could not be passed at the relevant Board meetings, as there was no consensus between the two directors and that the issue of duplicate share certificates was deferred. The entire remaining agenda which came up before the Board of directors from time to time stood unanimously passed. It shall be borne in mind that the affairs of a company are conducted on the principles of corporate democracy of the Board of directors. The courts time and again declined to interfere with the business judgment of directors, unless there is evidence that they have acted in bad faith or the decision is perverse as held in a number of decisions. I do not find adequate material to show that the second respondent acted in bad faith while opposing the resolutions at the relevant point of time. The Board meetings convened on 25.04.2003 and 09.06.2003 could not be held, since the second respondent had refused to sign the register of directors, as borne out by the minutes at pages 57 and 58 of company petition. In this connection, the specific grievances of the second respondent as seen from a series of correspondence exchanged between the petitioner and the second respondent (pages 69-73 of company petition) are that the petitioner was not maintaining the minutes of the Board meeting, the attendance register of directors in accordance with the provisions of the Act and further that the petitioner failed to make available these records for his scrutiny, which are, however denied by the petitioner. While the notice dated 12.06.2003 (page 54 of company petition) issued by the petitioner convening the Board meeting on 16.06.2003 reveals that the Board meeting convened on 09.06.2003 was adjourned for want of quorum, it is stoutly denied by the second respondent as reiterated in his letter dated 16.06.2003 that he was present at the Board meeting on 09.06.2003. However, there is no copy of the minutes of the Board meeting held on 09.06.2003 on record. There has been also difference of opinion in relation to the increment sanctioned in favour of certain staff members and the use of the guest house belonging to the Company, as seen from the communications dated 14.01.2004 and 19.01.2004 (pages 74, 81 & 82 of company petition). When the petitioner convened the Board meetings during pendency of the company petition, the second respondent did not choose to attend any of the meetings on the ground, inter-alia, that the matters as per the agenda are subjudice before the CLB, resulting in protracted correspondence (pages 69-73 of company petition & pages 3 to 21 of vol.11 filed by the petitioner) in this behalf. The sequence of events as borne out by the various correspondence on record show the irreconcilable differences and the great animosity developed between the petitioner and the second respondent resulting in a deadlock situation. When the petitioner and the second respondent are equally strong in shareholding, and where there is equal participation in the day-today management of the Company, being a domestic company, and one is unable to oppress the other, there may be a deadlock if not oppression. The CLB in Yashovardhan Saboo's case (supra) after considering the facts of that case held that even if a case of oppression is not established, substantial justice could be done by giving relief between the parties. When deadlock in the management is established the only solution that could put an end to this dispute is severing of the relationship by sale of shares by one party to the other. The charges levelled by the second respondent against the petitioner in several of the paragraphs of the reply statement categorically show that the parties have lost mutual trust and that it would be impossible for them to work together even if an independent chairman is appointed. It is on record that the second respondent's grand father had started a partnership firm, which subsequently became the present Company vested with the petitioner and the second respondent. As the Company has been established on the basis of trust and confidence between the shareholders and such mutual trust and confidence has broken down as seen from the instances narrated above, it is just and equitable that the Company should be wound up, which would be against the interest of the Company, especially when it is a profit making company. Therefore, the only way to ensure the smooth functioning of the Company is that the warring parties must part way in the interest of the Company as held in Daulat Makanmal Luthria v. Keshav S. Naik (supra). Unless one of the parties go out of the Company, it is not possible to avoid the deadlock situation. The CLB has power to grant such relief under equitable jurisdiction conferred under Section 397, even where no case of oppression is established as held in Daulat Makanmal Luthria v. Keshav S. Naik - (1992) 3 Comp LJ 119 and Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. - [1995] 83 CC 371. In this connection, beneficial reference is invited to K.N. Bhargava v. Trackparts of India Ltd. - (2000) 2 Comp LJ 275 to show that in a proceeding under Section 397/398, even if the allegations are not established, more so in a family company, the CLB has consistently expressed the view that, to protect the interests of the shareholders and the Company, appropriate directions should be given, especially, when there are irreconcilable differences between major groups of shareholders. The petitioner has expressed his readiness to either sell his shares or purchase the shares of the second respondent at a fair value, which may be determined by a valuer who may be appointed by this Bench.
6. In view of the foregoing reasons and in the light of the deadlock arising in the conduct of the affairs of the Company, the only alternative, in my view, for the smooth functioning of the Company would be that the petitioner considering his age would sell his shares in favour of the second respondent at a value which would be determined by a valuer. There are disputes in regard to the holding of the petitioners. The equity shares held by the petitioner according to the respondent are in his fiduciary capacity as karta of the HUF, which is opposed by the petitioner. This contentious issue must be seen in the light of the various records produced before this Bench. It is on record that the petitioner and the second respondent are subscribers to the Memorandum of Association of the Company, each subscribing to 500 shares of Rs. 10/-each. It is observed from the Memorandum of Association of the Company that the petitioners had subscribed to the Memorandum of Association in his individual capacity and not as the karta of HUF. It is on record that the Board of directors of the Company had allotted 1,000 equity shares at the Board meeting held on 01.04.1985, 1,25,000 equity shares on 30.03.1996 and 1,25,000 equity shares on 30.03.1998 in favour of the petitioner. These allotments were found to be made in the individual name of the petitioner and not in his capacity as karta of the HUF, which is reflected in the register of members of the Company, as contended in paragraph 7 of the rejoinder, the fact of which has not been disputed by the second respondent and the annual report of the Company (pages 85-94 of company petition). I am, therefore, of considered view that the petitioner has prima-facie established that the shares held by him are in his individual name and not in the capacity of karta of the HUF. In these circumstances, the second respondent will purchase 2,84,000 shares held in the name of the petitioner at a value which may be determined by a valuer, towards which the parties will appear on 20.10.2004 at 2.30 p.m. to suggest a mutually acceptable valuer, on which time, further directions regarding valuation of the shares will be given. Ordered accordingly. No order as to cost.