Delhi High Court
K.G. Khosla And Anr. vs Rahul C. Kirloskar And Ors. on 18 July, 1995
Equivalent citations: [2001]103COMPCAS984(DELHI), 59(1995)DLT405, 1995(35)DRJ124
JUDGMENT Jaspal Singh, J.
(1) Winston Churchill once remarked that some see private enterprises as a predatory target to be shot others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon. But then what is to be said when what it evolves is friction, nonresponsiveness, and hostility ? This suit presents such a spectacle.
(2) Let me first introduce the main characters. Mr. K.G. Khosla and Mr. Deepak Khosla are the plaintiffs. The first is the Chairman and the second the Managing Director of K.G. Khosla Compressors Ltd. (hereinafter called the Company). There are three defendants. The first is Mr.Rahul C.Kirloskar while the second is Mr.Sanjay C.Kirloskar. While the first happens to be the Managing Director, the second is the Director of Kirloskar Pneumatic Company Ltd. The third defendant is K.G. Khosla Compressors Ltd.
(3) The plaintiffs named above instituted a suit for declaration and injunction on July 10, 1995 and Along with it was moved an application under Order 39 Rules 1 and 2 read with section 151 of the Code of Civil Procedure. This order has its seeds in that application.
(4) It so happened that on March 27, 1995 the Board of Directors decided to convene an Extra "1.To consider and, if thought fit, to pass the following Resolution with or without modification as a Special Resolution : Resolved that pursuant to section 31 and other applicable provisions, if any, of the Companies Act, 1956, the Articles of Association of the Company, be and are hereby altered in the following manner : a) The existing Article No.108 be deleted and the following Article be substituted in place thereof. "The quorum for a meeting of the Board shall be determined in accordance with the provisions of Section 287 of the Act and at least one Director representing Kirloskar Pneumatic Co. Ltd. or Kalyani Steels Limited and one of the nominee Directors appointed by Financial Institutions or Banks shall necessary be present." b) Article No.120 be deleted. c) The existing Article No.122 be deleted and the following Article be substituted in place thereof "Subject to the provisions of the Act and in particular to the prohibitions and restrictions contained in Section 292 thereof, the Board may, from time to time, entrust to and confer upon a Managing Director and whole-time Director or the time being such of the powers exercisable under these presents by the Board as it may think fit and may confer such powers for such time and to be exercised, for such objects and purposes, and upon such terms and conditions, and with restrictions as it thinks fit, and the Board may confer such powers, either collaterally with, or to the exclusion of, and in substitution for all or any of the powers of the Board in that behalf, and may, from time to time, revoke, withdraw, alter or vary all or any of such powers". d) Article No.123 be deleted".
(5) To have a clearer picture let me reproduce Articles 108, 120, 122 and 123 as they exist at present. They are as under : "108The quorum for a meeting of the Board shall be determined in accordance with the provisions of Section 287 of the Act and at least one Director representing Khosla Group, one Director representing Kirloskar Pneumatic Co. Ltd. or Kalyani Steels Limited and one of the nominee Directors appointed by Financial institution or Banks shall necessarily be present. 120 Subject to the provisions of Section 255 of the Act, a Managing Director of Joint Managing Director shall not, while he continues to hold that office, be subject to retirement by rotation, and he shall not be reckoned as Director for the purpose of determining the retirement by rotation of Directors or in fixing the number of Directors to retire, but (subject to the provision of any contract between him and the Company) he shall be subject to the same provisions as to resignation and removal as the other Directors, and he shall, ipso facto and immediately, cease to be a Managing Director if he ceases to hold, the office of Director from any cause provided that if at any time the number of Directors (including the Managing Directors and the Nominee Directors) as are not subject to retirement by rotation shall exceed one third- of the total number of Directors for the time being, then the Managing Directors for the time being, then the Managing Directors or any one or more of them, shall be liable to retirement by rotation in accordance with Article 85 to the intent that the number of Directors not liable to retirement by rotation shall not exceed one third of the total number of Directors for the time being. 122 Subject to the provisions of the Act and in particular to the prohibitions and restrictions contained in Section 292 thereof and subject to Article 123 thereof, the Board may from time to time entrust to and confer upon a Managing Director for the time being such of the powers exercisable under these present by the Board as it may think fit and may confer such powers for such time and to be exercised for such objects and purposes, and upon such terms and conditions, and with restrictions as it thinks fit, and the Board may confer such powers, either collaterally with, or to the exclusion of, and in substitution for all or any of the powers of the Board in that behalf and may, from time to time, revoke, withdraw, alter or vary all or any of such powers. 123 Notwithstanding anything to the contrary in Article No.122 and other powers conferred by these Articles, it is hereby expressly declared that the Managing Director land the Joint Managing Director shall always subject to the provisions of the Act, have the following powers jointly and severally, that is to say : (1) To purchase or otherwise acquire for the Company any property, right or privileges which the Company is authorised to acquire at such price and generally on such terms and conditions as they think fit. (2) At their discretion to pay for any property rights or privileges acquired by or services rendered to the Company, either wholly or partly in cash or in shares, bonds, debentures or other securities of the Company and any such shares may be issued either as fully paid up or with such amount credited as may be agreed upon, and such bonds, debentures or other securities may be either specially charged upon all or any part of the property or the Company and its uncalled capital or not so charged. (3) To secure fulfilllment of any contract or agreement entered into by the Company by mortgage or charged of all or any of the property of the company and its uncalled capital for the time being or in such other manner as they may think fit. (4) To appoint, at their discretion remove or suspend such Manager, Secretaries, officers, clerks, agents and servants, for permanent, temporary or special services, as they may from time to time think fit, and to determine their powers and fix their salaries or emoluments and to require security in such instance and for such amounts as they think fit. (5) To make and give receipts, releases and other discharges for money payable to the Company and for the claims and demands of the Company. (6) From time to time provide for the management of the affairs of Company abroad in such manner as they think fit and in particular to appoint any person to be attorneys or agents of the Company with such powers (including power to sub delegate) and upon such terms as may be thought fit. (7) Subject to the provisions of the Act invest and deal with any of the moneys of the Company not immediately required for the purposes thereof upon such securities (not being shares in the company) in such manner as they may think fit, and from time to time to vary or realise such investments. (8) To execute in the name of land on behalf of the company in favor of any Director or other persons who may incur or be about to incur any personal liability for the benefit of the Company such mortgage of the Company's property (present and future) as they think fit and any such mortgage may contain a power of sale and such other powers, covenants and provisions as shall be agreed upon. (9) From time to time to make, very and repeal bye-laws or the regulations of the business of the company, its officers and servants. (10) To enter into all such negotiations land contracts and rescind and vary all such contracts and execute and do all such acts, deeds and things in the name and on behalf of the Company as they may consider expedient on in relation to any of the matters aforesaid, or otherwise for the purposes of the Company. (11) To give to any person employed by the Company a commission on the profit of any particular business transaction, or a share in the general profit of the Company, and such commission or share of profit shall be treated as a part of the working expenses of the Company. (12) To give award or allow any bonus, pension, gratuity or compensation to any employee of the Company or his widow, children or dependents, that may appear to the Directors just or proper, whether such employee, his widow, children or dependents have or have not legal, claim upon the Company. (13) Before declaring any dividend to set aside such portion of the profits of the company as they may think fit, to form a fund to provide for the pension, gratuity, or compensations or create a provident fund or benefit fund in such manner as the Directors may deem fit subject to the provisions of Section 205(2A) of the Act. (14) Subject to the provisions of section 292 of the Act and provisions contained in Article 122 hereof, to sub-delegate all or any of the powers, authorities and discretion for the time being vested in them subject, however, to the ultimate control and authority being retained by them. (15) To borrow or raise or secure the payment of money in such as the company shall think fit, and in particular by the issue of debentures or debenture-stock, perpetual or otherwise charged upon all or any of the company's properties (both present and future) including its uncalled capital and to purchase, redeem or pay off such securities. (16) Subject to the provisions of Section 293A of the Act, to establish, maintain, support or subscribe to any charitable scientific, national or public or useful political or any other institution, objects or purposes or for any exhibition. (17) To institute, prosecute, compound, defend, compromise, withdraw or abandon any legal proceedings by or against the company or its officers or otherwise concerning the affairs of the Company and to act on behalf of the Company in all matters relating to insolvencies of liquidations land to apply for and obtain letters of administration with or without will annexed to the estate of persons with whom the company have dealings. (18) To realize-compound and allow time for the payment or satisfaction of any debts to or by the Company and any claims or demands by or against the Company and to refer to arbitration and observe and perform the awards. (19) To draw, sign, accept, endorse and negotiate all cheques, promissory-notes, drafts, pay-orders, bills or exchange, bills of lading and other documents of title and securities (including Government and other promissory notes) contracts, transfer deeds and other instruments as shall be necessary for carrying on the business of the company.
(6) Why do the plaintiffs seek this relief ? Before the answer gets revealed a brief resume of the background is called for.
(7) As far back as in the year 1945 plaintiff No.1 formed a partnership in the name of K.G.Khosla and Company. In the year 1955 it was converted into K.G. Khosla and Company (P) Ltd. The year 1975 saw the amalgamation of K.G. Khosla and Company (P) Ltd. with K.G. Khosla Compressors (P) Ltd. and in the year 1976 it was converted into a public limited company. In the year 1991 the Company started facing rough weather resulting in huge losses and as business without profit is not business any more than a pickle is a candy a revival plan of the company was evolved which culminated in an agreement with the Kalyani Group. This was some time in May, 1993. The Kalyani Group then brought in the Kirloskars. This gave birth to the Tripartite Agreement of January 21, 1994. As per clause 4 of the said agreement the composition of the Board of Directors was to be as follows : 1.Three Directors representing Khosla Group, one of whom was to be Chairman and the other the Managing Director. 2. Three Directors representing KBC/KSL jointly. 3. Directors, representing the financial institutions/banks.
(8) As a consequence of that Agreement some amendments were made in the Articles of Association one of them being Article 108 which has already been reproduced by me above.
(9) On February 14, 1995 the events took yet another turn. On that date the plaintiffs agreed to offer the shares held by their group in the Company to defendants 1 and 2 subject to their correct valuation. March 31, 1995 was fixed as the last date for such valuation. The valuation report was to be prepared by a mutually acceptable Valuer and in consultation with the ICICI. On the same day at the Board meeting the plaintiffs wrote separate letters that in view of the on going negotiations they shall not exercise any powers vested in them as Chairman and Managing Director of the Company. Admittedly a Valuer did make a report but much after March 31, 1995 and the matter is still hanging fire since there was suggestion for appointment of yet another Valuer. That suggestion had come from none other but the plaintiffs themselves. On March 27, 1995 as already noticed above, the Board of Directors decided to call an Extra-ordinary General Body Meeting of the share holders of the Company to further amend Articles 108 and 120 and to delete Articles 122 and 123.
(10) With the background having come to the fore, it is time now to come into grip with the contentions raised.
(11) It was argued on behalf of the plaintiffs that the Memorandum of Understanding dated February 14, 1995 entered into with defendants No.1 & 2 and the subsequent letters submitted by the plaintiffs on the same day at the meeting of the Board of Directors, did not constitute a concluded contract and it being merely an arrangement which never came out of the negotiating table, it could not be used as a springboard to manoeuvre for the amendment of the Articles of Association in question and that in any case since time was the essence of the contract, even if it was a contract, and the time schedule having not been adhered to, the move to amend the Articles of Association at the peril of the plaintiffs should not be allowed to fructify. In support my attention was drawn to Hare v. Nicoll (1966) 1 All Er and British Holdings Plc. v. Quadrex (1989) 3 All Er 492.
(12) It was further contended that as the meeting was earlier scheduled for May, 9, 1995 and had been adjourned for July 19, 1995, a notice of the adjourned meeting was required to be given in terms of the Regulations contained in Table (A) in the First Schedule to the Companies Act, 1956.
(13) Lastly it was urged that the plaintiffs having worked for the Company right from its very inception and having been assured of their present position in the Articles of Association as well as in the Tripartite Agreement referred to above and their equitable expectations having been accepted by the Company as well as by the share-holders, the same could not be frustrated by resorting to the amendment/deletion of the Articles in question.
(14) Prima facie, I do tend to agree with the learned counsel for the plaintiffs that the Memorandum of Understanding entered into by the plaintiffs with the defendants No.1 and 2 on February 14, 1995 was not a concluded contract. Lord Dunedin tells us in May and Butcher v. The King (1934) 2 Kb 7 that to be a good contract there must be a concluded bargain and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. The principle which one gathers from Courtley Fair Beirn Ltd. v. Tolaini Bros. (Hotels) Ltd. 1975 1 Wlr 297 is that where there is a fundamental matter left undecided and to be the subject of negotiations, there is no contract. In the case before me the price was yet to be settled. That was to be negotiated. If that be so, the Memorandum of Understanding in question does not prima facie appear to have resulted in a concluded contract. However, as at present advised, I am not inclined to agree with the learned counsel for the plaintiff that since the valuation could not be fixed by the date fixed in the Memorandum of Understanding therefore, the contract, if it was really one, became unenforceable. The reason is that the plaintiffs themselves did not hesitate to extend the period and to ask for another Valuer. It is this what distinguishes the present case from the two judgments relied upon by the learned counsel for the plaintiffs. What further distinguishes this case is that the value was not be fixed on the basis of what was being quoted as the price in the open market but on different considerations. In any case neither the Memorandum of Understanding, whether it is taken to be a concluded contract or not, nor the question as to whether time was the essence of the contract really affects the merits of the controversy. No body is seeking to take away the holdings of the plaintiffs. There is no proposal for that. No body wants them to be removed from the chairs they happen to occupy. There is no proposal even for that. What is proposed to be done is to bring in certain changes thought necessary for the smooth and proper functioning of the management. The changes sought thus do not, prima facie, effect the legitimate expectations of the plaintiffs. After all, as stated by Peter Drucker, business has only two basic functions marketing and innovation. And, prima facie, it is innovation which seems in this case to be the guiding force. In any case the matter is being finally left to the wisdom of the shareholders. It is for them to either adopt or reject the proposal. @BTINDENT = It is true that after May 9, 1995 no fresh notice was issued though issuance of such a notice seems to be envisaged by the Regulations contained Table "A" in the First Schedule to the Companies Act, 1956. However, the Articles of Association of the Company would go to show that Table "A" does not apply. This much for the objection regarding notice.
(15) Besides saying that I find no force in the contention raised on behalf of the plaintiffs I feel the need to say a few more words.
(16) During arguments it was not the case of the plaintiffs that the Board of Directors in their meeting of March 23, 1995 could not decide to convene the Extraordinary General Body Meeting. In fact they were a party to that decision. By that decision the Board decided to resort to a wholly democratic process. The challenge to the right of the members to alter the Articles was limited to the three contentions referred to above. They have left me unpersuaded. As already noticed by me above, the holdings of the plaintiff would remain unaffected. They would continue to hold the same positions in the Company as they are holding at present. What is being sought is the deletion of two Articles and amendment in the other two including one relating to quorum. The defendants say that all this has been necessitated to protect the interest of the shareholders holding majority of the shares and to ensure smooth functioning of the management. It would finally be for the share holders to decide in the meeting whether to opt for the proposals or not. And, surely an injunction cannot be granted to restrain the holding of a meeting, when such a meeting is the only way in which the shareholders can decide the matter. Consequently, the application is dismissed.