Company Law Board
Jagjit Singh Chawla And Ors. vs Tirath Ram Ahuja Ltd. And Ors. on 5 December, 2001
Equivalent citations: [2004]119COMPCAS385(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. The substantive allegation in this petition filed under Section 397/398 of the Companies Act, 1956 ("the Act"), in relation to the affairs of Tirath Ram Ahuja Ltd., is that the petitioners group collectively holding 12 per cent. shares in the company have been completely excluded from the management of the company in spite of its having been a part of the management for over 45 years.
2. According to the petitioners, the company which was incorporated in the year 1950 was all along being jointly managed by members of three families headed by Sri R.S. Tirath Ram Ahuja, Sri J.S. Chawla and Sri S.K. Bagai. None of the three is alive today. Even though the original subscribers to the memorandum were the late Tirath Ram Ahuja and the late S.K. Bagai, yet, immediately after incorporation, the late Chawla was also inducted as a director and he continued to be so till his demise in 1996. The late Tirath Ram Ahuja was a permanent director and chairman of the company as per the articles of association of the company. All the three were electors right from incorporation of the company on February 28, 1950, and the affairs of the company were being managed in line with partnership principles among the heads of the three families. When Tirath Ram expired in 1985, the late J.S. Chawla became the chairman of the company and he continued to function as such till he expired in 1996. In 1985, the second respondent who is the son of the late Tirath Ram Ahuja became the managing director and Sri P.S. Chawla, a son of late J.S. Chawla became the joint managing director, a post created for the first time. When Sri Bagai expired, his son Sri R.R. Bagai joined the company as an employee and he continues to be so even now. In 1997, Sri P.S. Chawla died in an accident. Since the petitioners belonged to Chawla's family, in spite of repeated requests made to the respondents for a representation on the board, the same has been denied notwithstanding the fact that the business of the company is in the nature of a partnership between the three families. In addition to this grievance, the petitioners have also made allegations of financial mismanagement.
3. Dr. Singhvi, senior advocate appearing for the petitioners submitted : Right from incorporation of the company, the heads of the three families who were related, were managing the affairs of the company more or less in the nature of a partnership among themselves even though there was no formal written agreement to that effect. Originally, Chawla's family was represented only by the late J.S. Chawla and later on in 1966, Sri P.S. Chawla also joined the board as the joint managing director. Thus, from 1966 to 1996, the Chawla family was being represented on the board by two directors. Sri J.S. Chawla was a director of the company for 46 years while Sri P.S. Chawla was a director for 37 years. In other words, the Chawla family was represented on the board right from the beginning till 1997. A perusal of the list of directors would indicate that as and when one of the directors died, a family member of that director was inducted into the board to ensure that all the three families were represented on the board of the company. When Sri S.K. Bagai expired, his son Sri K.K. Bagai who was an employee in the company was made a director in 1976. Another son of Sri S. K. Bagai joined the company as an employee and worked with the company till his premature death in 1965. Dr. K.S. Chawla son of Sri J.S. Chwala joined the company as a consultant in 1978 and worked as such for about five years in the company. When Sri K.K. Bagai expired in 1983, his son Sri Lalit Bagai was appointed as a manager in 1984. Since Lalit Bagai was not made a director in spite of several requests, he resigned from the company in 1995. In 1991, Sri S.S. Dugal son-in-law of Sri R.S. Tirath Ram joined the company as a whole-time director and Sri Arun Ahuja son of Sri N.K. Ahuja also joined the company in 1993. Thus, it is evident that all the three families had participated in the management of the company either as a director or in employment. However, when both Sri J.S. Chawla and P.S. Chawla from the petitioners' family expired, it was expected that one of the family members would be taken on the board of the company. But the respondents have refused to do so and instead Sri Arun Ahuja was made a director in June, 1998. Thus, the petitioners have been denied their legitimate expectation of participation in the management of the company. Presently, the entire management of the company is in the hands of only Ahuja's family even though the company was incorporated on the principles of quasi-partnership with participation in the management by all the three groups with remuneration. Chawla's group, even though holds only 12 per cent. shares in the company, had otherwise invested substantial amount of funds in the business of the company as is evident from the statement presented before the Bench. Such investment was made only because the company was in the nature of a partnership. Even though, it is contended by the respondents that the late J.S. Chawla was not one of the promoters since he had not subscribed to the memorandum, he had always been considered to be one of the founders of the company as is evident from the explanatory statement in connection with the special resolution proposed in the 30th annual general meeting of the company convened on June 25, 1988, wherein it has been specifically stated that he was one of the founders of the company and was responsible for completion of prestigious projects of the company. When the heads of three families had jointly managed the company for a long time and when only the members of one family control the company, in exclusion of the members of the other two families, it is a great act of oppression. In the case of a partnership in which all the partners have been in active management, exclusion of one of the partners from the management would merit dissolution of the partnership on just and equitable grounds. Since this company is a de facto partnership wherein all the three families had participated in the management, exclusion of one of the families would justify winding up of the company on just and equitable grounds, which in the present case would not be in the interest of the petitioners and as such the reliefs sought in the petition viz., issue of directions to the company/respondents to induct either Sri K.S. Chawla or Sri C. S. Chawla as a whole-time director of the company should be granted.
4. He further argued ; After the company was taken over by the respondents, the performance of the company has deteriorated in view of siphoning off of funds of the company as is evident from the fact that the profitability has gone down. Further, notwithstanding the fact the petitioners constitute a single block of shareholders, the company is not allowing inspection of the accounts of the company. The petitioners are not given notices for the board or general body meetings. The petitioners have been completely sidelined and are kept in the dark about the affairs of the company. Therefore, an investigation into the affairs of the company is necessary.
5. Summing up his arguments, Dr. Singhvi submitted that there should be at least one representative from the petitioners' group on the board or in the alternative, the petitioners are willing to go out of the cqmpany on receipt of fair consideration for their shares.
6. He relied on the following case laws :
Synchron Machine Tools Pvt. Ltd. v. U.M. Suresh Rao [1994] 79 Comp Cas 868 (Karn); [1994] 3 Comp LJ 340 wherein the court has observed that in a given case, principles of dissolution of partnership may apply squarely in case the apparent structure of the company is not the real structure and on piercing the veil, it is found that in reality it is a partnership and if there was an understanding that persons investing in the shares of the company would be appropriately remunerated by way of salary and perquisites with the right to participate in the management, in lieu of or in addition to the dividends, the interest created by such an understanding has to be held as a component of a proprietary right of sets of shareholders while applying equitable consideration. In the case of a small private limited company having very limited number of shareholders, an understanding as to management of the company and remuneration payable in lieu of or in addition to the participation in the profits of the company, could be taken note of by the court in exercise of its jurisdiction under Section 397/398/402 of the Act and grant an appropriate relief.
Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp Cas 91 ; AIR 1976 SC 565 : In a given case, the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.
Vijay Krishan Jaidka v. Jaidka Motor Co. Ltd. [1997] 1 Comp LJ 268 (CLB) : In this case, the Company Law Board has held that to apply partnership principles and special relationship between the parties, it is not necessary that there should be a pre-existing partnership and there is no need of equality in the shareholding to invoke quasi-partnership principles.
7. Sri Choudhary, senior advocate appearing for the respondents submitted : The principles of partnerships cannot be applied in this case. The late Chawla was not a signatory to the memorandum nor was he named as a first director in the articles. Further, the company was not formed to take over any partnership business carried on by all the three. As a matter of fact the company took over the proprietary business of the late Tirath Ram Ahuja as is evident from the income-tax assessment at annexure C to the reply and also the resolution of the board of directors on February 28, 1950. As a practice only those employees who had proved their worth were being appointed as directors. The late Chawla was known to the late Ahuja as having expertise, and therefore, he was made a director. The same is the position with Sri S.K. Chawla also who was earlier an employee of the company. Therefore, none of the shareholders had or has an inherent right to be in the management. Further, the articles do not provide for proportional representation on the board except that the late Ahuja was named as the permanent director in article 19B inasmuch as his business had been taken over by the company. Further, a perusal of the list of directors would show that there was no regular pattern in the composition of the board and the composition was decided on functional needs. Even though, Ahuja's family held majority shares, it had only two representatives on the board which also later on came down to one while the Chawla family having only 12 per cent. shares in the company also had two representatives on the board. From 1983 onwards, Bagai family was not represented on the board at all and only in 1993, Bagai family members were appointed as employees. Even now, the Bagai family has not complained about non-representation on the board. Further, when Sri J.S. Chawla expired the petitioners never sought for substitution. Only now, after Sri S.P. Chawla expired they have raised this issue. When Chawlas were on the board, they never bothered to give representation to Bagais since they knew that no one could claim directorship as a matter of right.
8. He further submitted : The claim of the petitioners that they should be taken on the board has no basis. There is no right of inheritance recognized in law for appointment to the board. Just because, a person is appointed as a director in recognition of his expertise, it does not necessarily follow that his legal heir would also prove to be a good director. In the absence of any written shareholders agreement providing for perpetual participation in the management by the shareholders, or a provision to that effect in the articles, no one can, relying on customary practice, even assuming it was so, claim representation on the board as a matter of right. Further in the present case, the petitioners are carrying on a competing business and are participating in tenders participated by the company. Therefore, to induct a representative from the petitioners' side on the board of the company would be detrimental to the interests of the company.
9. As far as the financial management alleged by the petitioners is concerned, no particulars have been furnished. Mere suspicion on the basis of reduction in the profits or incurring losses cannot lead to a presumption that there is financial mismanagement. In regard to notices for meetings, since the petitioners are not on the board, no notices for the board meetings are sent to them but for the general meetings, as per the usual practice, the notices are sent by the ordinary post as in the case of dividend warrants. When the petitioners have encashed dividend warrants sent by ordinary post, they cannot complain of non-receipt of notices for meetings sent by ordinary post. In relation to the complaint that they are not allowed inspection of the books of account, it is to be noted that shareholders are not entitled for inspection of the books of account, and therefore, the company has not given inspection of the same. The petitioners have to establish that the acts complained of are such that the company is liable to be wound up on just and equitable grounds which in the present case, the petitioners have not so established. Further, the company can also not be wound up inasmuch as it has been functioning very profitably. Even though, learned counsel for the petitioners submitted that in case the respondents are not willing to appoint a representative from the petitioners group on the board, the petitioners were willing to go out of the company on selling their shares at a fair value, the respondents are not willing to accept this suggestion and the petitioners are at liberty to sell their shares notwithstanding the provisions of the articles.
10. In regard to the contention of the petitioners that they had made substantial investment in the company besides the share capital, he pointed out that all the deposits made by the petitioners had been repaid as early as in 1981. In 1991, the Ahujas brought in Rs. 30 lakhs into the company when the company was in need of funds and the Chawlas did not bring any funds at that time. In regard to the contention of the petitioners that the explanatory statement mentions the late J.S. Chawla as a founder, learned counsel pointed out that the said explanatory statement had been signed by Sri Chawla himself and as such cannot be relied upon. Long tenure as a director does not create a right to claim that the company is in the nature of a partnership.
11. He relied on the following cases :
Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp Cas 91 ; AIR 1976 SC 565 : When more than one family or several friends or relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is complete deadlock in the company on account of lack of probity in the management of the company and there is no possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on just and equitable ground.
Jaladhar Chakraborty v. Power Tools and Appliances Co. Ltd. [1994] 79 Comp Cas 505 (Cal) : Under Section 397/398 of the Act, the court should be satisfied that the affairs of the company are being carried on in a manner oppressive to the members and that the complaining members should establish that the company is liable to be wound up on just and equitable grounds.
Asoka Betelnut Co. Pvt. Ltd. v. M.K. Chandrakanth [1997] 88 Comp Cas 274 (Mad) ; [1997] 40 SCL 33 : In the absence of proof that the petitioners had a right for active participation and shareholding was more or less equal, lifting of the corporate veil by applying principles of partnership is not justified.
Shantilal Manibhai Patel v. Laxmi Film Laboratory and Studios Pvt. Ltd. [1984] 56 Comp Cas 110 (Guj) : Principles of dissolution of partnership would be applicable if the company is a domestic concern. It should also be shown that irresolvable deadlock in the administration of the company has resulted because of groupism among the shareholders and directors of the company and it has rendered it impossible for the company to transact business and the only alternative is to wind up the company.
Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. [2001] 105 Comp Cas 493; [2001] 41 CLA 258 (SC) : The petitioners have to make out a case for winding up of the company on just and equitable grounds and if the facts fall short of the case set out for winding up on the just and equitable ground, no relief can be granted to the petitioner.
12. Sri Arun Khatpalia, advocate for the petitioners in rejoinder submitted : Since the late J.S. Chawla was appointed as a director right from the day of incorporation, the claim of learned counsel for the respondents that the company was rewarding good employees with a post of director does not stand to scrutiny. Since all the three original promoters of the company were related to each other, the company is nothing but a family company wherein the principles of partnership could be applied considering the fact that there had been financial as well as managerial participation by all the three families. Further, most of the senior employees of the company have been drawn only from the three families as is evident from the details at page 57 of the petition. On the death of the late Tirath Ram Ahuja, Sri J.S. Chawla was appointed as the chairman since he was the seniormost member among the families. The petitioners are not claiming representation on the board on the ground of proportional representation but on the basis of trust, good faith and fair dealing. The Chawlas including their family members funded the company with substantial loans and deposits which they would not have done but for the business being conducted in the nature of a partnership. Sri Lalit Bagai left his employment only when he found that he was not being taken as a director. The entire claim of the petitioner for a representation on the board arises out of an implied agreement between the original promoters for participation of all the families in the management of the company as is evident from the long association of over 45 years by the Chawla family in the management of the company. Further, it is also evident that it is only the Chawlas' contribution that resulted in the company accumulating over Rs. 3.75 crores reserve as on March 31, 1998. The present value of the assets is over Rs. 30 crores which was also due to the efforts of the Chawlas. The contention of the respondents that the business of a proprietorship of the late Tirath Ram Ahuja was taken over by the company is not correct and what was taken over by the company was a part of the uncompleted project by the late Ahuja. This is a fit case wherein the principles applied in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL) could be applied and the company be treated as a quasi-partnership for considering the grant of the prayers of the petitioners.
13. We have considered the pleadings and the arguments of counsel. With the view to put an end to the disputes, in view of the suggestion of counsel for the petitioners, that his clients would be willing to go out of the company on receipt of fair value for the shares in case the respondents were not willing to induct a representative of petitioners on the board, we advised counsel for the respondents to consider this suggestion. However, he reported that his clients were not willing to accept this suggestion and that the matter be decided on the merits.
14. The main complaint of the petitioners is that they have been denied a representation on the board. Normally, as a principle, directorial complaints cannot be agitated in a Section 397/398 petition as the complaints in such a petition should be relating to the rights qua a member. However, this board has been taking a view that this principle cannot be strictly applied in family companies, companies with a few identifiable groups of shareholders or companies in the nature of partnership, wherein there has been active management participation by all the groups of shareholders. In the present case, the petitioners have invoked the principles of partnership and have sought for a place on the board of the company on the basis of active participation in the management by all the groups of shareholders from the incorporation of the company, which stand is challenged by the respondents.
15. There is no ready made yardstick to determine as to when an incorporated company could be considered to be a quasi-partnership for the purposes of a petition under Section 397/398. It would depend on the facts of a particular case. The cases cited by counsel for the parties indicate some of the circumstances where equality in the shareholding and there is deadlock in the management, conversion of a pre-existing partnership into a company, where there is an agreement for equal participation in the company, etc., are some of the circumstances. The contention of the respondents is that there is no question of applying the principles of partnership on various grounds as indicated as part of the arguments of their counsel. There was no pre-existing partnership, there is no equality in the shareholdings, there is no deadlock in the management, there is no written agreement to the effect that the company would be jointly managed, there is no provision in the articles stipulating joint management, the late J.S. Chawla was not a signatory to the memorandum not was named as a first director etc. Normally, when two or more persons form a company, the presumption is that they have decided to work within the framework of the articles and subject themselves to the discipline applicable to an incorporated company. Viewing in this manner, the respondents would be right in contending that in the absence of the provisions in the article for joint management, a shareholder cannot demand a position on the board. In this connection it is worthwhile referring to the Jaidka Motor case [1997] 1 Comp LJ 268 (CLB) wherein, after discussing various decided cases, practically all the objections as in this case were examined by this board and it concluded that to treat a company as a partnership it was not necessary to have equal shareholdings, no need for deadlock, no need for pre-existing partnership, etc. It also observed that an analysis of various decisions showed that courts have been looking for some basic understanding written or unwritten between parties. Therefore, if the facts reveal some basic understanding between parties that the company would be managed on partnership principles, then the same could be applied in a Section 397/398 petition.
16. In the present case, the petitioners have invoked this principle on the ground that the late J.S. Chawla was one out of the three promoters of the company and the company was being managed on the principles of partnership with active participation of all the three promoters in the management of the affairs of the company right from incorporation. This joint management and subsequent induction of members of the three families on to the management, would, according to them, prove that the company is in the nature of partnership. Even though in Kilpest Pvt. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615 the Supreme Court has held that only in rare cases the principles of partnership should be applied, the court has not completely barred application of the principles of partnership to a company. Therefore, once the facts and circumstances of a case indicate that on piercing the corporate veil, the real structure is found to be not that of a company, equitable consideration applicable to a partnership could be applied to that company. In Dipak G. Mehta v. Anupar Chemicals (India) Pvt. Ltd. [1999] 98 Comp Cas 575 ; [1999] 33 CLA 393 (CLB), the foundation of that petition was that the company was to be run on the principles of partnership and it was claimed that there was an agreement for equal shareholding and directorship. Even though the Bench found that there was no agreement as claimed, considering that, in reality there was equal shareholding and that there was joint management, it held that the principles of partnership could be applied. In cases of legitimate expectations, the denial of the same could be considered to be an act of oppression. For the authority on the principles of legitimate expectations reference could be made to Boyle and Birds' Company Law III edition wherein it is stated that "in a quasi-partnership type company, the court may take account of legitimate expectations of members". Elgindata Ltd., In re [1991] BCLC 959, it has been held that "in general, members of a company have no legitimate expectations going beyond the legal rights conferred on them by the constitution of the company, i.e., to say its memorandum and articles of association. None the less legitimate expectations superimposed on a member's legal rights may arise from agreements or understandings between the members". In Atmaram Modi v. ECL Agrotech Ltd. [1999] 98 Comp Cas 463 this Board has held that in the course of business of a partnership, a partner is entitled to have certain legitimate expectations. Now in the present case the admitted position is that there is no agreement relating to joint management and the articles also do not provide for the same. Therefore, as held by this Board in Anupar Chemicals (India) Pvt. Ltd.'s case [1999] 98 Comp Cas 575, we have to examine whether the facts reflect the existence of any understanding of joint management justifying the claim of legitimate expectation of being on the board by the petitioners.
17. At the time of incorporation of the company, Sri J.S. Chawla was not a subscriber to the memorandum which according to the respondents would indicate that he was not a promoter of the company. This stand, we are of the view, cannot be sustained for the simple reason that on the day of incorporation itself, he was appointed as a director and his group acquired 800 shares in the company within four days thereafter. Further, in the explanatory statement for Sri J.S. Chawla's appointment as whole-time director and chairman with effect from September 15, 1993, it was specifically mentioned that he was one of the founders of the company and was responsible for completion of prestigious projects of the company. Even though it was contended that this statement has been prepared by Sri J.S. Chawla himself, yet, the very fact his appointment was approved by the general body on the basis of this statement, the respondents are estopped from challenging the statement. Further, even though, Ahuja's group held more than 50 per cent. shares in the company, yet, their approval of Sri J.S. Chawla as whole-time director and chairman clearly indicates that his being a founder of the company had weighed with them in approving his appointment. The respondents further contend that Sri Chawla cannot be considered to be a promoter of the company since it was the business of the proprietorship of the late Tirath Ram that was taken over by the company. We have seen the agreement between Sri Tirath Ram and the company dated March 1, 1950, income-tax assessment order for 1951-52 and the board resolution dated February 28, 1950. Even though it is contended by the petitioners that all these would only show that a particular project being implemented by Sri Tirath Ram had been transferred to this company and since there is nothing in the memorandum of the company to indicate that the proprietary business of Sri Tirath Ram was taken over by the company, we find that the agreement indicates that Sri Tirath Ram had abandoned his sole business in favour of the company. For this we find that he had been adequately compensated in the form of majority shareholding and since the other two also had taken shares and were actively involved in the business right from incorporation, all the three had to be termed as promoters of the company. Therefore, it is beyond doubt that Sri J.S. Chawla was one of the founders of the company and it appears to us that the three of the original promoters joined together to incorporate the company with the view to jointly manage the same as is evident from the fact that all the three were appointed as directors right from the date of incorporation. Now, the issue is whether there had been an understanding of joint management by all the three families for all times to come.
18. The admitted position is that there is no written agreement nor is there any provision in the articles to this effect that the company would be jointly managed by the three families. In Smt. Nupur Mitra v. Basubani (P.) Ltd. [2001] 41 CLA 306 (CLB) ; [2002] 108 Comp Cas 359 a family consisted of six brothers. Four of the brothers were the signatories to the memorandum and they were also the first directors of the company incorporated in 1948. The total share capital consisted of 500 shares of Rs. 100 each. While one brother had subscribed to 100 shares, the other three had subscribed to 25 shares each at the time of incorporation. In 1950, the balance 325 shares were issued by which shares were issued to all the 6 brothers. The issue and allotment of shares were challenged on the ground that in terms of Section 105C of the 1913 Indian Companies Act, before issue and allotment of shares to outsiders, the then four shareholders who were the signatories to the memorandum alone should have been offered shares and since there was no record to show that it was done and in the absence of any written agreement between the brothers for joint holding and management, the allotment should be declared as null and void. This challenge was made in the year 1998 after the death of all the six brothers. It was contended by the other side that there was an understanding among the six brothers that all would hold shares in the company. After considering the various issues including one relating to limitation, on the merits, this Board concluded that a status which had been in vogue for a long time without any protest, cannot give rise to a cause of action and the course of conduct of the parties would raise a presumption of an unwritten agreement for joint holding and management among the 6 brothers. In the same way, in the present case, we have to only see, in the absence of any written agreement and provisions in the articles and in the absence of any of the original promoters, whether circumstances exist to draw a presumption of an unwritten agreement relating to joint management giving rise to legitimate expectation as that of a partnership as claimed by the petitioners.
19. In the reply, the respondents have given the details of the directors of the company right from incorporation till 1998. The three promoters alone were on the board from February, 1950, to April, 1953. For the period from April, 1953, to September, 1958, an outsider was additionally appointed as a director. On retirement of this outsider, Sri N. K. Ahuja was appointed as a director in September 1958 and he continues even now. During the period 1958 to 1966, while Ahujas had two representatives on the board, the other promoters had one each. In June, 1966, P.S. Chawla and an outsider were appointed to the board. When Sri S.K. Bagai expired in 1976, his son, Sri K.K. Bagai, who was already in employment of the company was appointed as a director. Thus, from 1950 to 1983, it is the three promoters and their family members who constituted the board even though for short periods there was an outsider. From the narration in the petition, we also find that near relatives of the three families had been employed in the company carrying remuneration, thus making it clear that all the three families have had the benefits of the fruits of the company, either on the board or in employment. The petitioners have also given the details of the loans given by the Chawlas' during the initial stages of the company to urge that unless the business was to be carried on as a partnership, they would not have given substantial loans to the company. We agree with the petitioners. Therefore, the facts and circumstances of the case clearly indicate that the company is in the nature of partnership between the three families with the understanding of sharing the fruits of the company and as such the petitioners have justifiable claim of legitimate expectation of being on the board of the company. It was contended by the respondents that when the Bagai family sought for a representation on the board, the Chawlas, who were on the board did not consider the request which would indicate that there was no understanding of joint management. We do not have any material to show that Bagais' raised the issue of understanding and that the same was rejected. Any way, if one group does not enforce its rights, it does not bar the other to raise this issue. Therefore, we do not consider that the absence of a member of the Bagai group on the board would disentitle the petitioners to seek a representation on the board.
20. The respondents have pointed out that besides the members of the three families, there are outside shareholders and therefore, the principles of partnership cannot be applied. We have seen the shareholding pattern. From 500 shares in 1950, the total paid up capital increased to 14,800 shares in 1970 by issue of shares on a number of occasions. All the shares had been issued during the lifetime of the three promoters. The manner of issue of shares indicates that the idea seemed to maintain the majority of the Ahujas' group at more than 50 per cent. and to keep aggregate holdings of Chawlas' and Bagais' at 25 per cent. leaving the balance with outsiders. There has been no change in the shareholdings from 1970 onwards and now it stands at 51 per cent., 12 per cent., 13 per cent. and 24 per cent. with Ahujas', Chawlas', Bagais' and outsiders respectively. The collective holding of three groups of 76 per cent. shares also signifies the understanding among the three promoters that they should have absolute control of the entire affairs of the company notwithstanding the outside shareholding. However, we also note without dispute by the respondents, the submissions of the petitioners that most of the outside shareholders are relatives of Ahujas'. Further, this Board has held in K.N. Bhargava v. Trackparts of India Ltd. [2000] 36 CLA 291 (CLB) ; [2001] 104 Comp Cas 611 that if the facts and circumstances of a case reveal that a company is in the nature of partnership, holding of shares by outsiders would not affect the application of partnership principles. As a matter of fact, in that case the company was a listed company, but this Board held that company was a family company attracting the principles of partnership and this decision was upheld by the Allahabad High Court.
21. Thus, on an overall assessment of the facts of the case, we are convinced that the company is in the nature of partnership with the understanding of joint management by all the three families of the promoters. Presently, the company is managed only by one family, that is, the Ahujas' in exclusion of the other two families and therefore, the petitioners have a legitimate grievance of being oppressed by the majority shareholders, viz., the Ahujas. Therefore, their claim of being taken on the board is justified.
22. Sri Choudhary referred to the decision of the Supreme Court in Bagri's case [2001] 105 Comp Cas 493 to submit that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds and that such winding up would not be in the interests of the petitioners, no relief could be granted under Section 397 of the Act. A reading of that judgment would show that the court, after observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (page 495) : "therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground the petitioners have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners". It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit and this would not justify winding up on just and equitable grounds. However, the present case, the claim of the petitioners arises out of their claim of quasi-partnership and we have already held that by denying the petitioners a representation on the board, they are being oppressed by the majority shareholders. In the case of dissolution of a partnership, the just and equitable grounds are wider than the just and equitable grounds applicable in the case of winding up of a company. A similar objection was examined by this Board in Anupar Chemicals case [1999] 98 Comp Cas 575, 597, as follows "learned counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on just and equitable ground. He also relied on the judgment of Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on just and equitable ground. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding on just and equitable ground, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition, first one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the Company Law Board in Associated Limestone case [1998] 92 Comp Cas 525. However, it is difficult, if not impossible, to lay down specific instances which alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Section 397/398 proceedings are alternative to winding up proceedings, it is not that only those grounds which are considered to be just and equitable in a winding up proceeding could be the grounds in a Section 397/398 petition. In the Bombay proceeding, the court held that since there was no deadlock in the management, the company could not be wound up on just and equitable ground. It did not examine whether allegations of oppression had been established. That is why, the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Co-operative Wholesale Society [1954] Scottish Cases 381 referred to in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), wherein it was held : "Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order, but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be open to the minority shareholders with a view to bring to an end the oppressive conduct on the minority".
23. Thus, in the present case, the petitioners have established oppression and since the principles of partnership are applied in this case, denial of legitimate expectation could be a just and equitable ground for dissolution of a partnership and therefore, the company could be wound up on just and equitable grounds and since the company is financially sound it would not be in the interest of the company or the shareholders to wind up the company. Therefore, the prayer of the petitioners for a representation for the Chawlas on the board deserves to be granted. The respondents contend that the petitioners are having a separate company carrying on a similar business as that of the company and that they are also competing with the company in various tenders and as such, taking the petitioners on the board would not be in the interest of the company. It has been explained by the petitioners that even when other Chawlas' were on the board, they were holding shares and this objection was never raised by the respondents at that time. We see merit in this contention. However, now that disputes have started, directing the respondents to induct one of the petitioners on the board as a whole-time director may not be in the interest of the company. Therefore, since the petitioners are willing to go out of the company, their shares could be purchased by the respondents or the company. The respondents have submitted that notwithstanding the provisions in the articles for pre-emptive rights, they would not object to the petitioners selling their shares to any outsider. It is to be noted that the company is a private limited company (deemed public company) and its shares are not traded. Further, the mere 12 per cent. shares held by the petitioners as against 51 per cent. shares held by the respondents would not find any outside buyers. It is on record that for many years, the majority on the board was with the Chawlas and their contribution to the progress of the company has not been denied by the respondents. The very stand of the respondents that they would neither give a representation to the Chawlas nor would purchase their shares is nothing but an oppressive act.
24. The petitioners have alleged financial mismanagement in the company which we find, is not substantiated with any details or particulars. It appears to us that these allegations have been made for the sake of making allegations and as such they do not deserve to be examined in detail. Since the petitioners have established their claim for a representation on the board and have also expressed their desire to go out of the company, we deem it fit that we should give the option to the respondents either to induct one of the nominees of the petitioners as a working director on the board or to purchase the shares held by the petitioners at the fair value to be determined by an independent valuer so that they also share the benefit of the efforts of the Chawlas when they were on the board. This option should be exercised by the Ahujas' group within 15 days from the date of this order by communicating their decision to the petitioners in writing. In case the respondents exercise the option to induct a representative of the petitioners, then the petitioners should indicate the name of their representative, who should be inducted into the board within 15 days from the date of receipt of the communication from the petitioners. As long as the Chawlas hold 12 per cent. shares in the company, they will have the right to appoint a nominee on the board of the company with remuneration as a whole-time director. In case the respondents choose the second option of purchasing the shares held by the petitioners, this Bench will appoint an independent valuer to determine the fair value of the shares and give consequential directions.
25. The petition is disposed of in the above terms with the liberty to the parties to apply for appointment of an independent valuer in case the respondents choose the option of purchasing the shares held by the Chawlas. The purchase could be either by the Ahujas or by the company. In the latter case, the company would be permitted to reduce the share capital to the extent of the face value of the shares in terms of Section 402 of the Act.