Madras High Court
R.Ramesh vs M/S.Devi Polymers Private Ltd
Author: Rajiv Shakdher
Bench: Rajiv Shakdher
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON : 16.11..2016
DELIVERED ON : 18.04.2017
Coram
The Honourable Mr.Justice RAJIV SHAKDHER
Com.Apel.No.9 of 2015
and M.P.No.1 of 2015
R.Ramesh ... Appellant/Petitioner
Vs
1. M/s.Devi Polymers Private Ltd.,
TNK House, 48, Anna Salai,
Chennai - 600 002.
2. K.N.Krishnaswamy
3. K.N.Varadarajan
4. K.N.Mohanram
5. P.Srinivasan
6. P.Natarajan
7. R.Gowrishankar
8. M.Sivaprakash
9. G.Chandrashekar
10.G.Srikanth
11.V.Mari Chettiar (now deceased) ... Respondents/Respondents
* * *
Prayer : Appeal filed under Section 10F of the Companies Act, 1956, praying to set aside the impugned order of the Company Law Board, dated 28.05.2015, in Company Petition No.40 of 2009.
* * *
For Appellant: Mr.Murari, Senior Counsel
for M/s.Preeti Mohan and
Badri Natarajan
For Respondents : Mr.R.Venkatavaradan
JUDGEMENT
Preface :
1. This is an appeal directed against the judgement and order dated 28.05.2015, passed by the Company Law Board, Chennai Bench, in C.P.No.40 of 2009.
1.1. The appellant herein was the petitioner before the Company Law Board (hereafter referred to as "CLB").
2. By virtue of the said C.P.No.40 of 2009, the appellant/the petitioner had sought the following reliefs, based on the assertions of oppression and mismanagement of the affairs of the respondent No.1, i.e., Devi Polymers Private Limited (in short "DPPL"):
(i).With a view to regulate the affairs of the first respondent company, it is just and convenient that the respondents should be restrained from holding any meeting in particular Extra-Ordinary General Meeting on the lines contained in the notice dated 17.06.2009 either on 27.06.2009 or any other dates.
(ii).Permanent injunction restraining the respondents from interfering with the carrying on duties enjoined on the petitioner in relation of Unit 'C' at NP 23 & 24 Developed Plot, Ekkattuthangal, Chennai 600 097 of the first respondent.
(iii).Permanent injunction restraining the respondents from disqualifying / removing the petitioner from the post of Executive Director of the first respondent company.
(iv).For costs and such other further reliefs that the Honourable Company Law Board deem fit and proper given the facts and circumstances of the case and thus render justice.
3. As is usual the case in such like actions, this petition was filed under Sections 397, 398, 402 and 403 of the Companies Act, 1956 (in short the "1956 Act"). The immediate instigation for instituting the action and seeking the aforementioned reliefs, was the clear possibility of the appellant being removed from the post of Executive Director of DPPL.
3.1. Coupled with the plea for grant of injunction, the assertion made was that the appellant would be prevented from managing the affairs of Unit C, which is one of the units of respondent No.1, located at NP 23 & 24 Developed Plot, Ekkattuthangal, Chennai 600 097.
4. It may be pertinent to note that with the dismissal of the Company Petition by the CLB, the payment of remuneration and perquisites granted to the appellant was stopped, to be revived only upon an interim order dated 25.04.2016, being passed by this Court.
4.1. The reasoning provided in the order dated 25.04.2016, is suggestive of the fact that, since, the remuneration and perquisites of the appellant, had been paid without a direction of the Court between 2009 and 2015, and because, the disputes which arose for adjudication pertained to members of a family, the said dispensation qua remuneration and perquisites should continue, till the matter is examined by the Company Judge.
4.2. This order was passed by Hon'ble Mr.Justice V.Ramasubramanian (as he then was), upon the matter being, specially listed before him, pursuant to the orders of the Hon'ble Chief Justice, albeit, on account of change in portfolio and on posting of Judges at Madurai Bench.
4.3. It may also pertinent to note that while passing the said order, the learned Judge also took note of the judgement of the Supreme Court dated 19.04.2016, whereby, the appellant's Crl.A.No.133 of 2016 was allowed and the judgement passed by a Single Judge of this Court was set aside. Notably, the learned Single Judge via his judgement had dismissed the appellant's petition under Section 482 of the Code of Criminal Procedure, 1973, (in short "CrPC"). However, the Supreme Court, as indicated above, while allowing the appeal, quashed the First Information Report (in short "FIR"), lodged against the appellant, wherein, allegations of forgery, misappropriation of funds and breach of trust had been levelled qua him. These allegations were pivoted on the allegation that the appellant had set up a separate entity by the name of Devi Consultancy Service (in short "DCS"), without the approval of the Board of Directors (in short "BOD") of DPPL.
4.4. The Supreme Court, however, came to the conclusion that no offence, as alleged, was made out against the appellant, and that, the criminal proceedings initiated against the appellant were part of an on going dispute between the parties, which seemed to have arisen out of a private and/or a personal grudge.
4.5. I have adverted to this aspect of the matter, as the CLB has returned findings qua the appellant's conduct in the context of him having set up DCS.
4.6. I may also indicate that against the aforementioned order, a review petition was filed by DPPL. This revision petition was numbered as : Review Petition (Criminal) No.668 of 2016. The Supreme Court, however, rejected the said review petition in limine, vide its order dated 23.11.2016.
Background Facts :
5. In order to adjudicate upon the present appeal, briefly, the following facts are required to be noticed :
5.1. The appellant is a member of the family, which, to begin with, had set up a partnership firm by the name of Devi Reinforced Plastics Products (in short "the firm"). The said firm was set up by late Shri.K.N.Gnanaprakasam along with nine other persons. Each partner held equal shares. To begin with, the partnership firm set up an unit in a rented premises. This unit commenced production in 1975. The appellant, along with respondents No.4 and 8, to begin with, were in-charge of the said unit.
5.2. The appellant, evidently, visited U.K., in and about 1973-74. During his visit, the appellant purchased a Sheet Moulding Compound (SMC) plant, along with requisite technical know-how for SMC, as also for Dough Moulding Compound (DMC) from a U.K. company, namely, one, Fothergill and Harvey Limited. Accordingly, these plants were imported and installed in the aforementioned unit.
5.3. Evidently, there was difficulty in selling SMC and DMC, as these were new compounds. According to the appellant, the firm was able to survive in the initial years of business, as it was able to sell, due to his marketing efforts, those compounds to entities like, L & T Ltd., Siemens Ltd., Crompton Greaves Ltd., English Electrical Company Ltd., etc. 5.4. The firm, however, got converted to a private limited company, in 1983, which, gave birth to DPPL. With the formation of DPPL, the business was diversified into moulding of components, by using Hydraulic Presses, which had capacities ranging from 100 to 250 tonnes. Consequently, DPPL started supplying finished switch gear parts to various electrical industries.
5.5. To facilitate its business, a tool room was set up by respondent No.8, which was designated as Unit A. The said unit, i.e., Unit A, was, thereafter, moved to Guindy, where, DPPL had already set up another unit, which was designated as Unit B. As it appears from the record that Unit A was, thereafter, used for manufacturing compounds and mouldings and was run and managed by the appellant and respondent No.4, while Unit B was managed by respondent No.8.
5.6. Evidently, since, the market for mouldings was not growing, as expected, the appellant, on his visits abroad, came up with the idea of developing Water Tank Panels in India, as it could, according to him, provide captive market for SMC. Since, the DPPL was manufacturing Cinema Projectors at one of its unit located at Ekkatuthangal, at that point in time, and given the fact that this business was steadily shrinking, a decision was taken to close down the said business and convert the same into a third unit, which was, designated as Unit C. 5.7. Consequently, at Unit C, DPPL manufacturered Electrical Parts and Water Tank Panels. To facilitate its business, the appellant ordered a Press, having a capacity of 1000 tonnes, and also, developed tools to further the manufacturing activity carried out at unit C. In addition, at this very unit, the appellant developed the skill to manufacture fibreglass enclosures for a German company. According to the appellant, the high quality of its fibreglass enclosures attracted the attention of Stahlin Fibreglass Enclosures, U.S.A. 5.8. In sum, the appellant claims that, in trying to achieve high quality, the appellant made innovations on several fronts. It is the appellant's case that due to his efforts, the sales of Unit C grew from Rupees (Rs.)1 to 2 crores to Rupess (Rs.)29.56 Crores in 2008-2009.
5.9. It is also the appellant's case that several tools and machines were built in-house, and that, the in-house technology led to the development of 1500 tonnes hydraulic press and door moulds. The appellant claims that DPPL manufactured high quality SMC door skins, which compared with the best in the world.
6. The appellant also claims that he had obtained approval from DPPL's BOD for a capital budget of Rs.4.50 Crores, to further develop and expand the projects at Unit C. The appellant asserts that Unit C has the ability to produce world class products.
6.1. It is, thus, the appellant's assertion that he is a well known and respected business leader in the Composite Fibreglass Industry.
7. The record shows that the appellant's troubles, so to say, started, when, he received a Show Cause Notice (in short 'SCN') dated 17.06.2009, via an e-mail sent by DPPL, while he was on a family visit to U.S.A. 7.1. The charge levelled against the appellant in the SCN was two fold : first, that he had set up a consultancy service in U.S. Second, that he had registered certain patents in the name of his family members.
7.2. As indicated at the outset, the consultancy concern, to which reference had been made in the SCN, is DCS.
7.3. The appellant sent a reply dated 18.06.2009, whereby, inter alia, he rejected the charge that he had commenced a parallel business, as alleged or at all. It was the appellant's contention that DCS was set up with the knowledge of DPPL and, with a view to satisfy the needs of its U.S. customers. The appellant made it a point to emphasise that the DCS was a division of DPPL and that a name had been given to the said entity, only to give it an identity.
7.4. It may be pertinent to note that prior to the issuance of SCN dated 17.06.2009, on 15.06.2009, a notice was issued by DPPL to convene a BOD meeting on 17.06.2009, to consider the issue pertaining to setting up of DCS, by the appellant, outside India. All the Directors were requested to attend the meeting. The notice was also sent to other persons, which included the Auditors, albeit, in their capacity as a special invitees. Quite clearly, the aspect pertaining to issue of SCN was triggered at the BOD meeting held on 17.06.2009, at which, the appellant was not present, as he was in U.S.A. 7.5. Pertinently, along with the SCN, a notice for Extra Ordinary General Body Meeting (in short 'EOGM') was, also, issued on the very same date, i.e., 17.06.2009. The EOGM was fixed for 27.06.2009. In the notice convening the EOGM, it was indicated that the BOD, at their meeting held on 17.06.2009, had occasion to consider the following infractions said to have been committed by the appellant :
(i).That he had set up DCS along with, one, Michael Jackson, in U.S.A., to offer consultancy service to various customers qua all the process and products in which DPPL was engaged quite actively. Furthermore, since, the Memorandum of Association (in short "MOA") of DPPL did not permit offering consultancy service, the business so carried out, was illegal.
(ii).That DCS was set up by the appellant, without the knowledge and the approval of the BOD.
(iii).The appellant had registered certain patents at the expense of DPPL, albeit, in the name of his son and daughter. In this behalf, it was also stated that one of the patents was registered in the joint names of the appellant, his son and, one, Mr.Martin Fitzer. Though, the appellant had promised to assign the said patent to DPPL, no assignment in favour of DPPL had happened till that date.
7.6. Notably, the notice convening the EOGM also drew attention to the fact that DPPL had issued a communication dated 17.06.2009, to the appellant, calling upon him to explain his conduct in writing prior to the date of the meeting.
8. Evidently, on 19.06.2009, DPPL, via its Advocate, published a notice in "The Hindu", cautioning the public, at large, that the appellant was carrying out "parallel business", which had nothing to do with DPPL, and that, anyone, who dealt with DCS, would do so, at his/her own risk and cost. Furthermore, the notice also indicated to the public, at large, that the DPPL was contemplating initiation of action against the appellant and others, who, had colluded with him in carrying on a parallel business, without the knowledge and authority of DPPL's BOD.
8.1. As a follow up action, DPPL, vide communication dated 23.06.2009, informed the appellant that it had received a notice from one of its shareholders seeking his removal from the BOD. The said communication indicated that a resolution was intended to be moved, in that behalf, at the EOGM on 27.06.2009. A copy of the resolution was enclosed for the perusal of the appellant. Furthermore, the appellant's attention was drawn to Section 284(3) of 1956 Act, whereby, he was informed that he had a right to be heard qua the resolution proposed to be moved at the EOGM, to be held on 27.06.2009.
8.2. The appellant, evidently, received the said notice of intended resolution on 24.06.2009. The appellant, thus, attended the EOGM held on 27.06.2009, whereat, he filed a reply of even date. In the reply, the appellant took the following stand :
(i).First, that, as per the provisions of Section 284(2) read with Section 190 of the 1956 Act, a special notice was required to be served on the company, i.e., DPPL. It was stated that, since, the EOGM notice was dated 17.06.2009 and the proposed resolution was not appended thereto, there was no compliance with the mandate of law.
(ii).Second, that the appellant had already moved the CLB by way of a company petition and therefore, the matter was sub-judice. Consequently, it was stated that any decision taken at the EOGM would be subject to the proceedings pending before the CLB; as per its order dated 26.06.2009.
(iii).On merits, the appellant asserted that he was one of the first Directors of DPPL and had spent 34 years of his life with the said company. Furthermore, it was emphasised that in all these years not even a single allegation had been made against him with regard to the management of the affairs of DPPL.
(iv).The appellant also stated that he had entered into a MOU with, one, Michael Jackson of U.S.A. only to enhance the business prospects of DPPL.
(v).The appellant indicated in unequivocal terms that he had neither carried out any business nor received any money, individually, pursuant to the MOU. It was reiterated that, if, any moneys are generated by virtue of the MOU, the amounts so received would only be deposited with DPPL. Elaborating upon the point, the appellant stressed that because DPPL was rendering consultancy service to two U.S. Customers, i.e., Stahlin Enclosures and New Basis, it had earned during 2006-2008, revenue to the extent of USD 3,46,000, and, since, there was a huge potential to earn further revenues that he had entered into a MOU with Michael Jackson.
(vi).The appellant also provided an explanation, as to what, necessitated the creation of a website. It was indicated that, since, the business approach of U.S. Companies had changed, on account of domestic pressures, it was decided to provide technical solutions to manufacturing problems encountered by U.S. Companies. This decision was taken, according to the appellant, on account of the fact that the U.S. Companies had decided to go for "Knowledge Process Outsourcing", as against "Business Process Outsourcing", since, they were desirous of providing employment to its U.S. based, Citizens.
(vii).The appellant, thus, asserted that it was for this reason that DCS was conceived as a part of a larger strategy to market DPPL's business. The appellant, also, indicated that it was to further this end that Mr.Michel Jackson, who was part of Stahlin Enclosures, U.S.A. was roped-in, to lend his expertise in the matter.
(viii).Thus, in effect, the appellant argued that DCS was set up to create new avenues of business, not only in the area of design, but also to develop proto-type moulding, and to carry out pilot and bulk production. In this behalf, the appellant drew the members attention to the Review Note dated 03.04.2009, sent to the BOD of DPPL, qua Unit C.
(ix).The appellant also sought to draw the attention of the members to the fact that the DCS website itself stated that the said entity was part of DPPL, and that, it was because of this reason, that a link was provided to DPPL's website.
(x).Furthermore, it was emphasized that in the MOU executed with Michael Jackson, it was, clearly, stated that commission would be paid to him, only, on a case to case basis. Thus, the stress was on the aspect that no permanent commitment had been made to Michael Jackson vis-a-vis payment of commission.
(xi).The appellant made it a point to indicate that there was no violation of statutory provisions of law, and that, no permission of RBI was required, and that, payments, if any, made would be subject to withholding tax and other statutory obligations.
(xii).In so far as rights in patents were concerned, it was indicated that a draft assignment deed had already been forwarded to the Auditor of DPPL for his approval.
(xiii).It was, specifically, averred that via a Deed of Assignment dated 26.06.2009, all the patents had been assigned to DPPL. A letter of the patent agent De Penning and De Penning was also enclosed for this purpose. This apart, the appellant, inter alia, also extended his apologies, in the event, his act involving execution of the MOU with Michael Jackson, had caused embarrassment to DPPL.
9. Evidently, despite the aforesaid explanation and apology rendered by the appellant, he was removed from the office of the Director for his alleged mala fide acts and deeds - which, according to the resolution, were detrimental to the interest of DPPL.
9.1. I must also indicate that pending the adjudication of the company petition, the appellant had also instituted a suit for declaration and permanent injunction against various persons and entities, which included, the respondents (including DPPL), who are parties to the instant proceeding. DPPL, in particular, was arrayed, in the suit, as defendant No.6. The appellant, in his capacity as the plaintiff, inter alia, sought declaration qua a family arrangement, which according to him, got fructified in the family meetings held on 14.09.1982, 19.01.1984 and 27.03.1997.
9.2. The appellant's case is that the said arrangement was recorded in the memorandum dated 27.03.1997. Based on the family arrangement, a consequential relief of permanent injunction was also sought by the appellant, against individual defendants, impleaded as parties in the suit, with regard to his participation in the management of entities, which were arrayed as defendants 1 to 6.
9.3. The record shows that, in the suit, initially, interim injunction was granted by this Court, which was extended from time to time, and that, vide order dated 13.09.2010, the extension of the injunction was discontinued. Liberty, however, was given to the appellant to raise all contentions with regard to family arrangement in the proceedings pending before the CLB, for seeking the appropriate reliefs. The defendants were, likewise, given liberty to contest assertions, if any, put forth by the appellant, in that behalf, before the CLB.
9.4. The appellant contends that even though, the family arrangement, i.e., memorandum, dated 27.03.1997, was placed before the CLB, no finding was returned qua the same.
9.5. On the other hand, learned counsel for the respondents contends that no leave was sought to amend the pleadings filed before the CLB, and therefore, no fault could be found with the CLB, in that regard.
9.6. The stand of the appellant, though, is that by the time, order dated 13.09.2010, came to be passed, the pleadings stood completed, and that, in any event, reference to the family arrangement, has been made in the written submissions, and therefore, it ought to have been taken note of, by the CLB, given the observations of this Court, on that aspect of the matter.
10. It is, in this background that the appellant had approached the CLB.
11. The CLB, via the impugned judgment, rejected the petition of the appellant, broadly, on the following, broad, grounds :
(i).That the remedy under Sections 397 and 398 of the 1956 Act is available to the members of a company for articulating their grievances in their capacity only as members. The acts of oppression and mismanagement should be directed against the members. In other words, according to the CLB, there was no provision in the 1956 Act, whereby, "directorial complaints" could be addressed. Therefore, even though, the appellant was a member of DPPL holding 10% of paid up share capital, on the date of institution of the company petition, he was seeking to ventilate his grievance in respect of the directorial issues.
(ii).The decisions to execute the MOU with Michael Jackson should have been backed by an approval of the BOD of DPPL. The commencement of parallel business in the name of DCS, without the approval of the BOD, amounted to breach of fiduciary duty.
(iii).The BOD of DPPL had not given any permission to set up a division to facilitate marketing of products manufactured by Unit C.
(iv).The registration of patents had been obtained by the appellant, at the cost of DPPL without the patents being assigned in its favour.
(v).As regards, non-compliance of provisions of Section 190 of the 1956 Act, the CLB came to the conclusion that, since, Article 15 of the Articles of Association (AOA) provided for a shorter notice period of not less than seven (7) days, the resolution passed at the EOGM was valid. In other words, according to the CLB, a private limited company via its AOA could provide for a shorter notice period to convene a general meeting, and, since, such a notice in writing had been given as per provisions of the said article, no fault could be found with the resolution passed at the EOGM.
(vi).The CLB went on to hold that the decision taken at the EOGM to remove the appellant from the office of the Director was valid, as not only, the appellant was served with the notice qua the EOGM, but also on account of the fact that he was given an opportunity to make a representation before the shareholders.
(vii).The CLB also held that the principles of quasi partnership were not applicable to the instant case, as the appellant only held 10% of the total shareholding, and that, there was no deadlock in the management of DPPL. In coming to this conclusion, the CLB relied upon the judgment of the Supreme Court in the matter of : Kilpest Private Limited and Others V. Shekhar Mehra, (1996) 10 SCC 696 and, went on to distinguish the judgment of the Supreme Court rendered in : Sangraminh P.Gaekwad and Others Vs. Shantadevi P.Gaekwad, AIR 2005 SC 809.
(viii).Furthermore, according to the CLB, there was no force in the argument that there was lack of probity displayed by the respondents in as much as the appellant himself had committed a breach of fiduciary duty, by setting up a parallel business under the name and style of DCS.
(ix).The EOGM was held in democratic manner, which complied with the provisions of AOA and the extant provisions of law.
(x).The appellant, i.e., the Director, could continue in the office, only as long as he enjoyed the confidence reposed in him by the shareholders.
(xi).The concept of a family company would subordinate itself to the interest of the company, and hence, the decision taken by the majority of shareholders would be final and binding.
(xii).The appellant could not continue in the office of the Director against the collective wish and/or decision of the shareholders of DPPL under the "garb" that it is a "family company".
(xiii).Since, the members of the family had inter se disputes, DPPL ceased to be a family company as the underlying principle of "give and take" did not subsist.
(xiv).Since, the proposal to remove the appellant, as the Director of DPPL had been sustained, by virtue of the decision taken at the EOGM held on 27.06.2009, he could not have sought the relief of permanent injunction, thereby restraining the respondents from interfering with the management of the affairs of Unit C.
(xv).Furthermore, AOA of DPPL empowered the BOD to appoint one or more of its members as Managing/Executive Director, and because, the appellant had ceased to be a Director, he had no locus standi to continue as the Executive Director.
(xvi).Finally, the appellant had failed to make out any case of oppression or mismanagement.
12. The appellant, however, being aggrieved by the judgement of the CLB, and the findings recorded therein, to which I have made a reference above, has approached this Court by way of the instant appeal.
13. As indicated right at the outset, there was some amount of consternation between the appellant and the respondents herein, in particular, DPPL (respondent No.1), with regard to the payment of remuneration and perquisites to the former, during the pendency of the appeal. This issue was temporarily resolved, by virtue of the interim orders passed by this Court on 25.04.2016 and 15.07.2016. The position, as it obtains today, is that the appellant continues to get remuneration and perquisites.
Submissions of Counsels :
14. In support of the appeal, arguments were advanced by Mr.Murari, learned Senior Advocate, assisted by Ms.Preeti Mohan, while on behalf of the respondents, submissions were advanced by Mr.R.Venkatavaradan.
15. Mr.Murari, learned Senior Advocate for the appellant, broadly, submitted that none of the charges levelled against the appellant, which, apparently, formed the basis of his removal as the Director, and consequent thereto, his removal from the post of Executive Director, were sustainable. In this behalf, Mr.Murari made the following submissions :
(i).The allegation that the appellant was running a parallel business was false. DCS was set up with a view to attract business for DPPL. The charge levelled against the appellant, in this behalf, was contradictory in as much as, on the one hand, it was alleged that the business carried on by the appellant under DCS was outside the scope of DPPL's MOA, while on the other hand, it was alleged that the appellant was running a parallel business under the name and style of DCS. A perusal of the website would show DCS was only an offshoot of DPPL. There was no attempt, as alleged or at all to set up a parallel business. To buttress this submission, it was emphasized that there was no diversion, whatsoever, of any funds from DPPL to DCS. In support of this submission, reliance was placed on DPPL's website and also the web page of DCS. In sum, learned counsel submitted that DCS was a subset of DPPL and was, thus, conceived to, provide, brand equity for DPPL's consultancy and design services. The fact that this exercise had the blessings of the respondents was sought to be demonstrated by adverting to the fact that payments, that were made to the agency, which created the DCS website, had the approval of the respondents.
(ii).In so far as the allegation with regard to execution of MOU dated 05.03.2009, with, one, Mr.Michael Jackson, as also, payments made to him was concerned, learned counsel sought to explain that the charge by asserting that the appellant in his capacity as the Executive Director, was entitled to execute an MOU of the like nature. This submission was sought to be supported by the learned counsel, by relying upon preceding seventeen (17) such MOUs, which had been executed between January 1991 and July 2008, by the appellant, in his capacity as the Executive Director of DPPL. Furthermore, it was submitted that the subject MOU dated 05.03.2009, did not involve a major transaction. It was stated that the tenure of the said MOU was confined to a period of one year, with the liability of DPPL limited to USD 1000. The fact that payments made to Mr.Michael Jackson had the approval of the respondents, was sought to be demonstrated, by placing reliance on the e-mails sent to DPPL by the concerned branch of the State Bank of India.
(iii).As regard the charge levelled against the appellant that he failed to assign patents registered in his name, despite assurance given to that effect, was sought to be countered by the learned counsel in the following manner :
(a) First, that the respondents in making this charge lost sight of the fact that, since, the appellant was the inventor, the patents had to be, necessarily, registered in his name.
(b) Second, that the fact that the appellant never reneged on his promise to assign the patents in favour of DPPL, was demonstrable from the fact that a draft deed of assignment had been sent to the Auditors of DPPL, even prior to the issuance of SCN to him, and that, the patents were, as a matter of fact, assigned in favour of DPPL, before the date of the EOGM.
(iv).In so far as the impugned judgment and order of the CLB was concerned, learned counsel submitted that it suffered from various apparent errors, which included the lack of appreciation of the fact that despite, the respondents having failed to establish the alleged breach of fiduciary duty by the appellant, in his capacity as the Executive Director, the CLB had sustained his removal as the Director, which led to his consequential removal from the post of Executive Director. In support of this submission, learned counsel contended that there is no basis set out in the impugned judgement, which could have led one to come to a conclusion that setting up of DCS involved running of parallel business by the appellant.
(v).Furthermore, it is stated that the CLB had wrongly concluded that the decision of removing the appellant as the Director at the EOGM held on 27.06.2009, was cured by the fact that the appellant had attended the meeting. The submission made, in this behalf, was that, the provisions of Section 190 of the 1956 Act, which required the issuance of special notice, in the mode and manner stipulated therein, was mandatory for triggering the removal of a Director. The participation by the appellant in the EOGM held on 27.06.2009, could not have cured this fundamental error.
(vi).Learned counsel for the appellant further submitted that the CLB committed an error in law in holding that Article 15 of the AOA, which provided for a shorter notice period, would override the provisions of law as engrafted in Section 190 of the 1956 Act.
(vii).Furthermore, according to the learned counsel, the observation of CLB in the impugned judgement that the precept of quasi partnership would not apply, where the shareholding was not equal and/or there was no deadlock in the management - was flawed for the following reasons :
(a) In so far as the equality of shareholding was concerned, the condition was met, in the instant case, in view of the fact that the shares were distributed equally amongst five branches of the family, which control and manage DPPL.
(b) As regards, the other observations of CLB, which is that, there was no dead lock in DPPL, since, one branch of the family was arrayed against other four branches would, by inference, if accepted, exclude all such cases, where, family companies are run by more than two branches.
(viii).Lastly, learned counsel referred to the judgement of the Supreme Court dated 19.04.2016, whereby, the FIR, lodged against the appellant was quashed. It was submitted that the allegation of misappropriation of funds and forgery etc. was based on the very same allegations, which are part of the SCN and were propounded by the respondents in defence of their actions. In other words, it was submitted that the charge that the appellant was running a parallel business in setting up of DCS was repelled by the Supreme Court. In this connection, my attention was also drawn to the fact that one of the ingredients of the FIR was, the alleged diversion of funds to Michael Jackson, which, at the end, the respondents could not sustain before the Supreme Court.
15.1. Based on the aforesaid submissions, Mr.Murari, Senior Advocate, stressed that the impugned judgement and order of CLB deserved to be set aside.
15.2. In support of his submissions, Mr.Murari, placed reliance on the following judgements :
(i).K.K.Modi V. K.N.Modi, (1998) 3 SCC 573 ; (ii) Sangramsinh P.Gaekwad V. Shantadevi P.Gaekwad, AIR 2005 SC 809 ; (iii) M.S.D.C.Radhramanan V. M.S.D.Chandrasekara Raja and Another, AIR 2008 SC 1738 ; (iv) Vithalrao and Others V. State of Maharashtra and Another, MANU/MH/0463/1987 ; (v) Shoe Specialties P. Ltd. and Others V. Standard Distilleries and Breweries P. Ltd. and Others, MANU/TN/0114/1996; (vi) Dipak G.Mehta and Others V. Anupar Chemicals (India) Pvt. Ltd. and Others, MANU/CL/0051/1999; (vii) Queens Kuries and Loans (P.) Ltd. V. Sheena Jose and Others, MANU/KE/0097/1992; (viii) Order of the CLB, Chennai Bench, dated 03.12.2010, in CP No.96 of 2010, titled : Natwarlal Pranlal Patel and Another V. Patel Veneers Pvt. Ltd. and Others. (ix) B.S.Chopra V. The Management of Karnataka Handloom Development Corporation Limited and Another, MANU/DE/2005/2005 ; (x) B.V.Thirumalai and Others V. Best Vestures Trading (P) Ltd., (2004) 4 Comp.L. J. 519 (CLB); (xi) N.Murali (HUF) and Others V. Kasturi and Sons Ltd., and Others, MANU/CL/0078/2010; (xii) Ebrahimi (A.P.) V. Westbourne Galleries Limited and Others, MANU/UKHL/0019/1972; (xiii) Sudershan Singh Sethi and others V. Sakhi Resorts and Farmlands P. Ltd. and others, (2015) 190 Comp Cas 349 (CLB); (xiv) V.Natarajan V. Nilesh Industrial Products Private Limited, MANU/CL/0097/2002; (xv) Naresh Trehan V. Hymatic Agro Equipment (P) Ltd., (1999) 4 Comp LJ 369 (CLB); and (xvi) Dinesh Sharma V. Vardaan Agrotech (P) Ltd., (2007) 73 SCL 338 (CLB).
16. As against this, Mr.R.Venkatavaradan, largely, relied upon the judgment of the CLB in rebuttal to the submissions advanced on behalf of the appellant. It was submitted by the learned counsel that, as rightly concluded by the CLB, the appellant had breached his fiduciary duty in setting up DCS, qua which, no approval of the BOD of DPPL was taken. The contention was that the BOD had no knowledge that the appellant had set up DCS, till just before the time the SCN was issued to the appellant.
16.1. Furthermore, learned counsel submitted that the appellant filed a company petition before the CLB, in his capacity as a shareholder, the grievances, though, articulated therein were, essentially, in the nature of directorial complaints; which were made with sole motive of securing his position as Executive Director of Unit C, albeit, for life.
16.2. On the aspect of approval of BOD of DPPL with regard to the setting up of DCS, learned counsel submitted that the appellant had taken contrary stands in as much as while before the CLB reference was made to instances to demonstrate knowledge and approval of BOD, in the Civil Suit filed by the appellant (i.e., C.S.No.701 of 2010), the appellant had averred in paragraph 52 of the plaint, that he had informal approval of the BOD with regard to the setting up of DCS.
16.3. Learned counsel further submitted that the appeal was not maintainable, as none of the findings returned by the CLB could be termed as perverse. In other words, according to the learned counsel, there was no question of law, which arose for consideration before this Court.
16.4. Learned counsel also submitted that the CLB has correctly concluded that the principles of quasi partnership would not apply to the instant case. It was submitted that the CLB, in this behalf, has correctly appreciated the ratio of the judgments of the Supreme Court rendered both in Kilpest Private Limited and Others V. Shekhar Mehra, (1996) 10 SCC 696; and in Sangraminh P.Gaekwad and Others Vs. Shantadevi P.Gaekwad, AIR 2005 SC 809.
16.5. In so far as the alleged violation of provisions of Sections 190 and 284 of the 1956 Act was concerned, learned counsel submitted that the real legal issue had been appropriately dealt with by the CLB. In support of this submission, my attention was drawn to the fact that the appellant had not only received special notice but had also attended the EOGM, and thereupon, presented his defense to the proposed resolution. It was, thus, stated that given these circumstances, no fault could be found with the decision taken to remove the appellant as the Director of DPPL.
16.6. It was the submission of the learned counsel that no case of oppression was made out, and that, the only grievance, as indicated above, which was articulated by the appellant, was with regard to his removal as the Director of DPPL. The said grievance, according to the learned counsel, did not fall within the scope of the provisions of Sections 397 and 398 of the 1956 Act. It was sought to be emphasised that it was not only a case pivoted on a directorial complaint, but was also an isolated act, which, even, if, it is assumed to be true, cannot form the basis, on which, a petition for oppression and mismanagement can be instituted and/or maintained.
16.7. In support of the submissions, learned counsel placed reliance on the following judgements :
(i) I.T. Commissioner V. S.S.Navigation Co., Ltd., AIR 1961 SC 1633; (ii) Iqbal Singh Marwah and another V. Meenakshi Marwah and another, (2005) 4 SCC 370; (iii) Incable Net (Andhra) Limited V. AP Aksh Broadband Limited, (2010) 6 SCC 719; (iv) Ayoli Abdulla V. Meezan Realtors Pvt. Ltd. and Others, MANU/KE/0975/2016. (v) V.M.Rao V. V.L.Dutt and Others, (1987) 61 Comp. Cases 20 ; (vi) The Sirsilk Ltd. and Others V. Government of Andhra Pradesh and Another, MANU/SC/0140/1963; (vii) Sri Venkatramana Devaru and Others V. The State of Mysore and Others, MANU/SC/0026/1957; (viii) Sultana Begum V. Prem Chand Jain, MANU/SC/0227/1997; and (ix) Needle Industries (India) Ltd. and Others V. Needle Industries Newey (India) Holding Ltd. and Others, MANU/SC/0050/1981.
REASONS :
17. I have heard the learned counsel for the parties and perused the record.
17.1. What has emerged, upon perusal of the record, is as follows :
(i).DPPL, in its previous avatar was a partnership firm comprised of ten (10) persons, who belonged to five separate branches of a single family.
(ii).The said partnership firm ran its business under the name and style of Devi Reinforced Plastics Products.
(iii).The appellant was involved in the business of the aforementioned partnership firm from its very inception, i.e., 1975.
(iv).DPPL was an offshoot of the aforementioned partnership firm and was, thus, incorporated in 1983.
(v).The equity shareholding of DPPL stands divided, albeit, equally amongst five separate branches of one single family; each branch holds 20% of the shareholding of DPPL.
(vi).The appellant, along with his brother, i.e., respondent No.7, holds 20% of shares in DPPL. Individually, the appellant and his brother hold 10% of the shares of DPPL.
(vii).The appellant has to his credit several inventions and patented products, which form part of the business of DPPL. The appellant, till his removal as the Director at the EOGM held on 27.06.2009, was running and managing Unit C, which is involved in the manufacture and sale of electrical parts and water tanks.
(viii).The appellant prior to his removal as the Director at the EOGM held on 27.06.2009, held the post of Executive Director.
(ix).The appellant, vide inter-office memorandum dated 09.06.2009, had informed the respondents that he would be proceeding on leave for two weeks.
(x).Vide notice dated 15.06.2009, intimation was given that the BOD of DPPL would be held on 17.06.2009, to, inter alia, consider the aspect involving setting up of DCS by the appellant outside the shores of India.
(xi).The appellant was issued a SCN dated 17.06.2009, to explain his conduct which, inter alia, included setting up of DCS and non-assignment of patents in favour of DPPL.
(xii).The appellant responded to the aforementioned SCN by dispatching a reply dated 18.06.2009.
(xiii).DPPL, via its Advocate, issued a public notice dated 19.06.2009. By this notice, the public, at large, was informed that the appellant was running a parallel business via DCS, and therefore, dealings, if any, with the said entity could only be at the concerned person's own risk and cost, since, the said entity had nothing to do with DPPL.
(xiv).On 23.06.2009, a special notice was issued to the appellant to remove him from the position of the Director.
(xv).The special notice dated 23.06.2009, was received by the appellant along with the proposed resolution seeking his removal, only on 24.06.2009.
(xvi).The appellant presented his reply to the said notice dated 23.06.2009, only, at the EOGM held on 27.06.2009.
(xvii).At the EOGM held on 27.06.2009, a resolution was passed removing the appellant as the Director of DPPL, and consequently, from the post of Executive Director.
(xviii).The appellant continues to enjoy pay and perquisites of the Executive Director, consequent to the interim orders passed by the CLB, which, subsequently have continued to date, on account of the interim orders passed by this Court.
18. In the context of the aforesaid facts and circumstances, in my view, there are three broad issues, which the CLB was required to deal with :
(i).First, as to whether both, the basis and the manner of removal of the appellant as the Director of DPPL was valid in the eyes of law ?
(ii).Second, as to whether in the facts and circumstances of this case, the removal of the appellant as the Director would constitute oppression and mismanagement of the affairs of DPPL ? and
(iii).Lastly, as to whether the principle of quasi partnership would apply in the facts and circumstances of the instant case ?
19. Before I proceed to deal with each of these issues, what is required to be noticed is that the appellant, in his company petition, has made exhaustive reference to his contribution to the business of DPPL right from the time, it was first conceived.
19.1. The appellant, as indicated above, adverted to the fact that the business was, first, run and managed by a partnership firm, and thereafter, in a corporate form, under the umbrella of DPPL. The fact that he was instrumental in setting up Unit C and had contributed to the business of the company, both, by employing his managerial skills and as an inventor, has been asserted in the company petition. Pertinently, none of these assertions, which have been made in the company petition, have been refuted by the respondents. These assertions were made by the appellant in the first eight paragraphs of the company petition. In response thereto, the respondents, before the CLB, have merely stated that these are matters of record. Thus, in effect, the contribution of the appellant to the business over a period of thirty four (34) years is not disputed.
19.2. Therefore, quite clearly, what the CLB was required to consider was the events, which led to the issuance of SCN and those which transpired, immediately, thereafter.
20. As indicated hereinabove, the record shows that, while, the appellant was away on a visit to the U.S.A., the other members of the family, i.e., shareholders, via DPPL, decided to issue a SCN to the appellant with regard to the setting up of DCS. The inter-office memorandum dated 09.06.2009, does indicate that the appellant had informed DPPL that he would be proceeding on leave for a period of two weeks. Therefore, the respondents could not but have known, that the SCN was being issued to the appellant, at a time, when, he would not be present in the country.
20.1. The appellant, upon receiving the SCN, did file a reply dated 18.06.2009. In the interregnum, the BOD of DPPL held a meeting on 17.06.2009, pursuant to a notice issued, in that behalf, on 15.06.2009, whereat, the appellant's conduct concerning setting up of DCS was discussed. At this meeting, a decision was taken to convene an EOGM. Therefore, de hors, the fact that the events, which transpired between 15.06.2009 and 17.06.2009, had the blessings of the respondents, what one has to examine is as to whether the charges levelled against the appellant are made out. In this connection, one would, to my mind, thus, have to discern, the outcomes of the following sub-issues :
20.2. The first sub-issue, which arises for consideration, is : as to whether the appellant had breached his fiduciary duty in setting up DCS. There is no dispute that the appellant, in his capacity as the Executive Director, was the point man in so far as the management of the affairs of Unit C was concerned. Therefore, given the fact that the appellant projected DCS as a division and/or as the sister concern of DPPL, one can only conclude that there was no attempt to divert the business of DPPL.
20.3. This fact emerges upon a perusal of the website of DPPL and the web page of DCS. In the website of DPPL, there is a link given to DCS which reads as follows : "www.devidcs.com".
20.4. That the respondents were aware of the creation of the website of DCS is sought to be established by drawing attention to the fact that approval was given by the respondents to an entity, by the name of Easy Link, which was, in turn, instrumental in creating the website for DCS. A set of documents has been filed by the appellant to establish that the payments made to Easylink had the approval of the respondents. The documents filed include the invoice dated 26.03.2009; the voucher dated 31.03.2009; the copy of the account payee cheque dated 31.03.2009, which bears the signature of respondent No.5 and respondent No.9; and the receipt dated 06.04.2009. A perusal of the aforesaid documents would show that the payment in the sum of Rs.17,000/- was made to Easy Link, after it had passed through the usual checks and balances, established at DPPL.
20.5. The argument advanced on behalf of the respondents that they were unaware of the purpose for which payment was made cannot be accepted, once, it is shown that payments were subjected to usual scrutiny in the ordinary course and were made under signature of respondent Nos.5 and 9, who are both members and Directors of DPPL. Adverse inference, if any, has to be drawn against the respondents in this regard.
21. Which brings me to the other sub-issue as to whether the appellant could have executed the MOU dated 05.03.2009, with Michael Jackson, without the authority of the BOD of DPPL.
21.1. It has been asserted by the appellant that the Michael Jackson was, originally, an employee of one of the customers of DPPL, i.e., Stahlin Fibreglass Enclosures, U.S.A. The appellant, in this behalf, has also asserted that Michael Jackson left the services of Stahlin Enclosures, and since, he had the necessary skill sets, he was approached by the appellant, to hasten, the enhancement of DPPL's business prospects in the field of consultancy and design services. The fact that the Michael Jackson was an employee of Stahlin Enclosures has not been refuted by the respondents. To that extent, Michael Jackson was not an unknown or an untested professional.
21.2. The respondents, however, submit that there was no need and/or necessity to set up DCS, as the same business could have been carried on under the name and style of DPPL. The appellant, however, appears to have taken this decision, given the fact that he was the Executive Director of DPPL and had been given a free rein to run and manage exclusively the affairs of Unit C. The appellant, therefore, as in the past, executed the MOU dated 05.03.2009, with Michael Jackson, as it appears, to enhance the business prospects of DPPL.
21.3. The fact that the appellant had executed such like MOUs in the past was sought to be demonstrated by relying upon seventeen (17) MOUs, which had been executed by him between January 1991 and July 2008. The list of seventeen (17) MOUs executed by the appellant, in his capacity as the Executive Director, and as the person in-charge of Unit C, was furnished to buttress the aforesaid submission.
21.4. The respondents, as it appears, took no objection to the appellant executing those MOUs in the past. However, in this, one, instance, the respondents chose to object, and thus, projected it as one of the grounds for removal of the appellant.
22. Coupled with this charge, it was sought to be portrayed by the respondents that the payments made to Michael Jackson had no approval of the respondents.
22.1. The appellant, on the other hand, has placed reliance on e-mails, dated 06.02.2009, 17.03.2009 and 25.03.2009, to show that the concerned Branch of the State Bank of India, had e-mailed the Debit Advice for Outward Remittances made in favour of Michael Jackson to respondents No.4.
22.2. Therefore, for the respondents to, now, turn around and say that they had no knowledge about the payments made to Michael Jackson qua the work, that he had done, does not appear to be correct.
22.3. Curiously, none of these documents, that is, the seventeen (17) MOUs or those pertaining to payment, have been referred to by the CLB in its judgement on the matter.
23. Therefore, the sub issues, which I have adverted to above, would, clearly, have to be answered in favour of the appellant.
24. Not only did the appellant, to my mind, act within the four corners of the duties assigned to him to run and manage Unit C, but also the factum of setting up of DCS, in my view, did not constitute running a "parallel business" in the pejorative sense to the detriment of DPPL. If at all, DCS could have only enhanced the business prospects of DPPL.
24.1. As indicated above, payments to Michael Jackson were made via proper banking channels, qua which, respondent No.4 was kept in the loop. Respondent No.4 is also one of the other two Directors, who, as per the website of DPPL, handles and manages Unit A.
25. Which brings me to the other issue as to whether the appellant avoided assigning the rights in the patents in favour of DPPL.
25.1. The appellant, as is evident, even from the reply dated 18.06.2009, had taken the stand that all patents filed on behalf of the DPPL were the property of DPPL, and that, he and his kin would execute assignment deeds, accordingly, in favour of DPPL.
25.2. In so far as the patent filed along with, one, Mr.Martin Fitzer was concerned, the appellant had explained that, since, the said person had provided inputs in respect of the subject invention, his name was also included in the patent, and that, on the appellant's request, the said patent would be assigned to DPPL. Accordingly, by way of an example, reference was made to the patent dealing with "hole plugs", qua which, it was stated by the appellant, in the said reply, that the original concept was that of Michael Jackson, and, since, the appellant had provided additional inputs to make the invention workable, his name was added as a joint patentee. The appellant asserted that the patent pertaining to "hole plugs" had generated revenues for DPPL on a continuous basis upon its obvious assignment in favour of DPPL.
25.3. The appellant had, in this behalf, contended that the assignment deeds were, in fact, executed with respect to the patents held by the appellant along with his daughter, in favour of DPPL. For this purpose, reliance was placed by the appellant on the assignment deed dated 26.06.2009 and the letter of even date, i.e., 26.06.2009, given by the "De Penning and De Penning; Patents, Trademarks, Designs and Copyright Agents".
25.4. A perusal of the documents pertaining to assignment of patents held by the appellant, and the details of revenue generated in favour of DPPL, with regard to the invention, such as hole plug, quite clearly, establishes that the charge levelled against the appellant that he did not intend to transfer patents in favour of DPPL, qua which, registration charges had been paid by the said entity, was clearly untenable.
25.5. As a matter of fact, though the assignment deeds were placed before the CLB, for some curious reasons, there is no discussion qua them in the impugned judgement.
26. Having regard to the aforesaid, quite clearly, the basis of issuing the SCN and thereafter, a special notice for removal of the appellant as the Director seems untenable.
26.1. The CLB could not, to my mind, have come to the conclusion that the appellant was running a parallel business without appreciating the contents of the documents placed before it, by the appellant. A perusal of the documents, referred to above, would show that the appellant, who was in-charge of Unit C, had been attempting to only enhance the business prospects of DPPL. The respondents, to my mind, were unable to bring forth any worthwhile material, which would demonstrate that the appellant had either tried to divert the business of DPPL, or, otherwise, had secured any benefit, personally, from setting up of DCS.
27. The appellant, in fact, had executed the MOU with the Michael Jackson, in the usual and ordinary course of business, under the bona fide belief that like in the past, he could execute the MOU with Michael Jackson for the greater good of DPPL.
27.1. A perusal of the MOU would also show that it was limited both in terms of tenure and payment. The tenure of the MOU was only one year and the total liability of DPPL could not exceed USD 1000. Furthermore, fees was payable to Michael Jackson based on mutually agreed percentage calculated on the basic price of each sale, generated via his assistance. A perusal of the MOU would also show that it clearly reflected therein that DCS was a division of DPPL.
28. Therefore, for all these reasons, to my mind, it cannot be said that the basis put forth by the respondents for removing the appellant as a Director was valid.
29. As a matter of fact, the Supreme Court, in its order dated 19.04.2016, has come to a somewhat similar conclusion, qua the accusation of diversion of funds, levelled against the appellant. The Supreme Court has observed in no uncertain terms that the allegation of misappropriation, forgery and fraud levelled against the appellant was not made out, and that, these allegations emanated from a personal and a private grudge of the complainants, i.e., respondents vis-a-vis, the appellant.
29.1. Having said so, while I am conscious of the fact that this judgement was rendered by the Supreme Court in the context of a criminal proceeding, it would, however, lend some weight, to my mind, to the contention advanced on behalf of the appellant that there was not a shred of evidence available to even begin considering the allegation of diversion of funds. The strength of this argument, quite obviously, flows from the fact that the Supreme Court quashed the FIR at the incipient stage, thus, declining the request of the State to even consider commencing an investigation qua the allegations.
29.2. In this context, one cannot, but agree with Mr.Venkatavaradan's submission that finding returned in a criminal proceeding may not be final and/or binding on a Court dealing with civil proceeding, as each case has to be decided based on evidence adduced before it. (See M.S.Sheriff V. State of Madras, 1954 scr 1144, and Iqbal Singh Marwah and Another V. Meenakshi Marwah and Another, [2005] 4 SCC 370).
29.3. However, from this proposition, to conclude, that no interference can be drawn as to the conduct of the contesting parties, would be, to extrapolate the principle beyond its scope and effect. In any event, given the facts obtaining in the instant case, the aforesaid aspect would not detain me, as independent of what is stated by the Supreme Court in the criminal proceedings, one has reached a conclusion that conduct of majority shareholders was both harsh and unfair.
30. This brings me to the aspect pertaining to the process, by which, the appellant was removed as the Director at the EOGM held on 27.06.2009.
30.1. In this connection, as indicated above, it is not disputed that the special notice dated 23.06.2009, was served on the appellant only on 24.06.2009. As per the provisions of Section 284(2) read with Section 190 of the 1956 Act, a special notice is required to be served on the concerned company with regard to the intended resolution, which is proposed to be moved for removal of a person as the Director of the said company. The concerned company, thus, in terms of Section 190 of the 1956 Act, is required to be served with a notice of intention to move a resolution for removal of a person as the Director, at least fourteen days prior to the date of the meeting. The concerned company, in turn, upon receiving such notice of intention, is required to give its members notice of the intended resolution in the same manner, in which, it gives notice of the meeting, or, if that it is not practicable, it is empowered to give notice of the same, either by way of advertisement in a newspaper having appropriate circulation, or, via any other mode permitted by its Articles. Such notice, which the concerned company serves on its members is mandated by law (i.e. provisions of Section 190) to not have a time gap of less than seven days. In other words, the period between the service of notice on the members, and the date, when, the meeting has to be convened cannot be less than seven days.
30.2. In the instant case, while, a notice dated 17.06.2009, was issued to the members informing them about the fact that the EGOM was being convened on 27.06.2009 - the special notice dated 23.06.2009, enclosing therewith, the intended resolution, proposed to be moved to bring about the removal of the appellant as the Director of DPPL, was served upon him, only on, 24.06.2009.
30.3. The notice convening the EOGM, which is, dated 17.06.2009, only indicated that the discussion would be held with regard to various infractions allegedly committed by the appellant with regard to setting up of DCS and the purported failure displayed by the appellant in executing assignment deeds in respect of patents registered at the cost and expense of DPPL. Pertinently, the notice dated 17.06.2009, convening the EOGM, did not advert to the purported intention to remove the appellant, as the Director of DPPL.
30.4. Therefore, the first communication to the appellant, with regard to, DPPL having received a notice of intimation from a shareholder, seeking to move a resolution qua his removal as the Director, was the notice dated 23.06.2009, which was received by him, as indicated above, only on 24.06.2009.
30.5. Clearly, notice of intention to move a resolution for removal of the appellant as the Director was not issued in consonance with the provisions of Section 190 of the 1956 Act. The minimum time gap of fourteen days required to be factored in between the date of service of notice of intended resolution and the date of EOGM, was not, adhered to. DPPL, clearly had given short notice. Consequently, DPPL, in turn, could not give notice to the members, in terms of Section 190(2) of the 1956 Act. The minimum time gap, which the company, i.e., DPPL, was required to keep between the receipt of the notice and the convening of EOGM, was seven days.
30.6. The reason why the 1956 Act makes a provision for special notice with respect to certain matters, appears to be that, these are aspects, which have an impact on the work, ethic and integrity of the company. Therefore, the statute mandates that both the company and the members are made aware, well in advance, with regard to such like proposed resolution. The purpose being to ensure that adequate time is given both to the company and its members to prepare for the issue at hand and equally, importantly, to give leeway to not only the affected party, but also to members, generally, to make themselves available at the meeting. Therefore, like for removal of Directors and for appointment of another person against vacancy caused by removal of a Director, a special notice is also required to be given with respect to the following eventualities, which may arise in the course of managing the affairs of the company : filling up of casual vacancies in the office of the Auditor; re-appointing a retiring Auditor, as the Auditor, by the Directors to fill up a casual vacancy; removal of an Auditor; to appoint, as an Auditor, a person other than a retiring Auditor; and to appoint a person as a Director, other than a retiring Director.
30.7. The CLB's view that, since, Article 15 of the AOA of DPPL permitted convening of a EOGM by giving notice in writing of not less than seven days - it would sustain the decision taken at the EOGM held on 27.06.2009, is not, to my mind, the correct position in law.
30.8. The fact that the AOA of a company provides for convening a general meeting other than AGM, by giving a notice in writing, which is not less than a period of seven days, cannot override the provisions of the statute, which requires serving a special notice, and that too, in a particular manner.
31. Section 284(2) of the 1956 Act says that for removal of a Director, a special notice has to be given in the manner, in which, the special notice is provided for in Section 190 of the 1956 Act. Therefore, the time lines given therein cannot be shortened, when, it involves a business, qua which, special notice is required to be served.
31.1. The provision incorporated in Article 15 of the AOA of short notice qua general meetings other than AGMs, is pivoted on the provisions of Section 170 of the 1956 Act. Notably, the provisions of Section 170 are applicable only qua provisions of Sections 171 to 186 of the 1956 Act. Section 170 does not make any reference to Section 190 of the 1956 Act. Therefore, the conclusion reached by the CLB that the EOGM, at which, the resolution for removal of the appellant as the Director was intended to be moved could be moved without following the mandate of Section 190 of the 1956 Act, is, clearly, flawed.
31.2. The minimum notice period, which is prescribed in Section 190 of the 1956 Act is required to be strictly adhered to, as the purpose appears to be, to not only to bring to the notice of the company and its members that special business is afoot, but also to give the affected party adequate time to prepare its defense, and in the case of removal of a person as the Director, adequate opportunity of being heard, as prescribed under Section 284(3) of the 1956 Act.
31.3. In this case, given the aforesaid discussion, in my view, the infraction of Section 190 of the 1956 Act could not have been cured by taking recourse to the fact that the appellant was present at the EOGM and was allowed to place his defense before the shareholders. The time span, which is mandated by the statute, cannot be shortened by a provision in the AOA, which at best, is a contract between the company and its members.
31.4. The provisions of Section 190 of the 1956 Act are incorporated for the benefit of various stakeholders, and therefore, cannot be circumvented, by relying upon the fact that the appellant participated in the EOGM. Acquiescence and/or estoppel by conduct, if, it can be called one, (since, the affected party does not have a choice in the matter) cannot cure the defect.
31.5. To my mind, any other interpretation of the provisions of Section 190 of the 1956 Act, would run counter to the purpose, with which, the said Section has been incorporated in the Statute.
31.6. Mr.Venkatavaradan, in support of his submissions, cited the following judgement of the Supreme Court : The Sirsilk Limited and Others V. Government of Andhra Pradesh and Another, MANU/SC/0140/1963; Sri Venkataramana Devaru and others V. The State of Mysore and Others, MANU/SC/0026/1957; and Sultana Begum V. Prem Chand Jain, MANU/SC/0227/1997.
31.7. The Supreme Court in the aforementioned cases laid down the principle that, wherever, there is conflict in the provisions concerning the Constitution or a Statute, the Court should attempt, if, possible, to reconcile the provisions, so that, effect can be given to the provisions, which appear to collide against each other. This exercise, the Court has indicated, is, in its essence, the application of the rule of harmonious construction. According to me, the conflict, if any, in the provisions of Sections 170, 190 and 284 of the 1956 Act, can only be resolved in the manner indicated above.
32. The other submission of Mr.Venkatavaradan, that, since, the family arrangement said to have been arrived at between the appellant and the other members of the family was neither pleaded nor proved, and therefore, no reliance can be placed on the same, need not detain me, as even otherwise, I have come to the conclusion, de hors, the said aspect of the matter, that the acts of the respondents (other than DPPL), which led to removal of the appellant from the BOD were harsh and unfair and without foundation, and thus, constituted oppression. Therefore, the judgment of the Division Bench of this court in V.M.Rao V. V.L.Dutt and Others, 1987 (61) Company Cases 20, may not have much relevance, given the reasons and conclusions reached by me in the matter.
32.1. Furthermore, as regards, Mr.Venkatavaradan's submission that there was an apparent contradiction between what the appellant has stated in paragraph 52 of the plaint, filed in C.S.No.701 of 2010 and that, what was sought to be portrayed before CLB, with regard to setting up of DCS - I am of the view that there is no contradiction whatsoever. In both actions, the appellant has sought to demonstrate that the respondents were all along aware of the fact that DCS was being set up to enhance the business prospects of DPPL by taking recourse to the surrounding circumstances. Therefore, this submission advanced on behalf of the appellant is only stated to be rejected.
33. The last aspect of the matter, on which, there has been a great amount of debate is as to whether the principle of quasi partnership would be applicable in the facts and circumstances obtaining in the matter.
33.1. In the instant case, what is not in dispute is that DPPL metamorphosed from a partnership firm to its present form. The partnership firm comprised of ten persons, who were members of a family. Upon the partnership firm taking a corporate form, the shareholding, admittedly, was divided equally amongst five separate branches of a single family. As alluded to hereinabove, the appellant along with his brother, represents one branch of the family. Like the other branches, the appellant's branch of the family holds 20% of the share capital of DPPL.
33.2. In these circumstances, one cannot, but conclude that DPPL is, in effect, a quasi partnership firm. To hold otherwise would be, "missing the wood for the trees".
33.3. The CLB's view that the quasi partnership principle will not be applicable, unless there is equality of shareholding and deadlock in the management, seeks to ignore the economic reality of the unincorporated structure, which prevailed at the relevant point in time. The parties involved, which included the appellant and the respondents herein, even while giving a corporate form to their business relationship chose to divide the shareholding equally amongst themselves. The expectation, therefore, of each branch of the family, inter alia, was (apart from receipt of dividend) that they would continue to hold their presence on the BOD. This expectation of the appellant, to my mind, which was legitimate, was destroyed, when he was removed as the Director of DPPL. To say that this did not cause oppression, as it was only a directorial complaint, loses sight of the fact that the presence on the BOD, with the added right to manage exclusively Unit C was the essence of the relationship, which various branches of the family, shared amongst themselves, before it acquired a corporate form.
33.4. The CLB's view that only, if, there was deadlock in the management, i.e., there was equality of shareholdings, could the principle of quasi partnership apply, in my view, is flawed. There is no such principle of law that the principle of quasi partnership would apply, only, where, the parties have equal control, in the absolute sense, over the management of the company. Appellant's family had an equal share of the corporate pie, when, compared with the share of other branches of the family. The fact that in the instant case four branches were pitted against one branch did not militate against the principle of quasi partnership.
34. The principle of quasi partnership gets into the fray in actions filed under Section 397 of the 1956 Act, by virtue of the expression "just and equitable" used in Sub-Section (2), clause (b) of the very same section. In sum, for an action to be sustainable under Section 397 of the 1956 Act, in which, the principle of quasi partnership is invoked, the aggrieved party would have to demonstrate to the Court : (i) that the affairs of the company were being conducted in a manner prejudicial to the public or, in a manner oppressive to any member or members ; and (ii) that to wind up the company would, unfairly, prejudice such member or members, and that, otherwise, the facts obtaining in the matter would justify that the company should be wound up on the ground that it is "just and equitable".
34.1. The word "oppressive" would include, in its widest sense, an action, which is "burdensome, harsh and wrongful" and therefore, while, applying this measure to the facts of a particular case, the Court, is required to look at "business realities", and not be constrained by technicalities, or, a "narrow legalistic view", while adjudging, whether or not a given action falls within the ambit and scope of the expression "just and equitable". The Supreme Court in Needle Industries (India) Limited and Others Vs. Needle Industries Newey (India) Holding Limited, MANU/SC/0050/1981, adopted the following apposite observations made by the Lord Wilberforce in Ebrahimi V. Westbourne Galleries Limited, [1973] AC 360, while expounding on its understanding of the expression "just and equitable":
"48. ...... 'words' just and equitable' are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; and that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure:
"The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust or inequitable, to insist on legal rights, or to exercise them in a particular way". (p.379) Observing that the description of companies as "quasi- partnerships" or "in substance partnerships" is confusing, though convenient, Lord Wilberforce said:
"company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in". (p 380) Finally, it was held that it was wrong to confine the application of the just and equitable clause to proved cases of mala fides, because to do so would be to negative the generality of the words. As observed by the learned Law Lord in the same judgment, though in another context:
"Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances." (pp 374-375)"
(emphasis is mine) 34.2. It is important to note that in Ebrahimi's case, wherein, the "just and equitable" clause was applied, the company against whom action had been filed, was a closely held company, where, one of the Directors was being removed by votes cast by the other two (2) Directors on the Board.
34.3. Furthermore, in this regard, the observations made in paragraph 50 of the Needle Industries (India) Limited case (cited supra), are also required to be noted. The Supreme Court, in nutshell, held that the fact that a company is prosperous and/or makes substantial profits, is not an obstacle to it being wound up, if, it is otherwise, just and equitable to do so.
34.4. This apart, the Supreme Court observed in the very same case that there may be situations, where, a resolution passed against a Director, which may be, otherwise, perfectly, legal, may yet be oppressive. Similarly, it went on to observe that the converse may also be triggered, which is, that a resolution, which is, in contravention of the law could be in the interest of the shareholders and the company.
34.5. This principle was refined, by the Court, with the following observations made in paragraph 54 of the very same judgement :
"54. ...... The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as shareholder. ...."
34.6. Applying the principle adumbrated in the judgement, it cannot be said that in the given case, the quasi partnership principle would not apply, as was suggested by the learned counsel for the respondents.
34.7. Therefore, the observations of the CLB that the provisions of Section 397 and 398 of the 1956 Act would not be applicable in the instant case, as the grievance articulated by the appellant are in the nature of directorial complaints, in my view, does not bear in mind the fact that in a small private limited company, such as DPPL, which emerged out of a partnership comprising of members of one family, who, decided to give a corporate structure to their business relationship, only to manage their affairs in a manner which would benefit each member of the family - would, necessarily, give rise to charge of oppression, upon exclusion of a member, who represents a branch of the family, from an assigned managerial role. In the given case, the appellant, stands excluded from a managerial role, after having invested over a period of 34 years, in a manner of speech, his "blood, toil and sweat" to the growth of DPPL - it cannot but, to my mind, be an act of oppression. To entertain any other view, in my opinion, would cause such deep chasm between law and justice that it would defeat the very purpose, for which these provisions are enacted. More often than not a single infraction, which has a continuing impact, as in this case can be more oppressive than a series of acts. This is not, in substance, a case of a single act of oppression, as was sought to be portrayed by the counsel for the respondents.
34.8. Therefore, the removal of the Director in a widely held public limited company may not always compare, with the removal of a Director in a closely held private company, where, as in this case, each branch of the family is expecting to be represented on its BOD. In such cases, removal of a member from the BOD, can amount to oppression and mismanagement, when, it is carried out on made-up and flimsy grounds, as in this case and would, thus, in my opinion, bring the action within the ambit of provisions of Sections 397 and 398 of the 1956 Act.
34.9. In a public limited company, much would depend on the facts obtaining in that case. Say, for example, where, controlling interest is centered in one or more groups, and shares, though, listed on the Stock Exchange, are not freely traded. In such cases, different connotations may arise. The acts of oppression, in my view, will, thus, have to be examined, bearing in mind the totality of circumstances obtaining in a case, without being unduly burdened by the fact that it is a family company, or a private limited company, or even a public limited company. For grant of relief, qua oppression, the principles of quasi partnership are applicable, even to a public limited company. This is clearly borne out from the following observations made in paragraph 238 of the judgment of the Supreme Court in Sangramsinh P.Gaekwad and Others V. Shantadevi P.Gaekwad, MANU/SC/0052/2005 :
238. It is now well-known that principles of quasi-partnership is not foreign to the concept of Companies Act. For the purpose of grant of relief the principles of partnership had been applied even in a public limited company. (See Loch and Another Vs. John Blackwood Ltd., 1924 AC 783, Ebrahimi V. Westbourne Galleries Ltd., and Ors., 1972(2) All ER 492.
35. Since, I have come to the conclusion that oppression is made out qua the appellant, the judgment cited by Mr.Venkatavaradan, in the matter of : Incable Net (Andhra) Limited and Others, V. AP Aksh Broadband Limited and Others, 2010 (6) SCC 719, would not be applicable.
35.1. As a matter of fact, in that case, where, the petitioner before the Court, had filed an action for oppression and mismanagement under the 1956 Act, it was pleaded that the majority of shareholders had oppressed the petitioners. The CLB had dismissed the petition. The appeal filed in the High Court had resulted in a similar fate.
35.2. The facts disclosed demonstrate that a joint venture company (i.e.,respondent No.1) had been set up to undertake a project involving provisioning of broadband network connectivity to all government offices in the State of Andhra Pradesh. Petitioner No.1 before the Supreme Court formed part of the consortium, which operated under the umbrella of respondent No.1. Furthermore, petitioner No.1 had entered into a shareholders' agreement with respondent No.5, in the said case. Respondent No.5 held, as it appears, majority shares in respondent No.1. For implementing the project, respondent No.1 gave a turnkey contract to respondent No.5, who, as indicated above, was a principal shareholder in respondent No.1.
35.3. It appears, the allegation of the petitioners, was that respondent No.5 breached its obligations under the contract with respondent No.1, which, required it to supply certain materials to enable the execution of the contract undertaken by the latter.
35.4. It is, in this context, the Supreme Court observed that breach, if any, of the obligations under the contract, would not furnish ingredients necessary for bringing an action under Sections 397 and 398 read with 402 and 403 of the 1956 Act. The Court observed that, at best, it could, give rise to an action for breach of contract under Section 73 of the Contract Act, 1872.
35.5. To my mind, the facts, as obtaining in the said case, are distinguishable from those which obtain in the instant appeal.
36. Therefore, having regard to the aforesaid discussion, I am inclined to allow the appeal and set aside the impugned order of the CLB dated 28.05.2015. Resultantly, the decision taken at the EOGM convened on 27.06.2009, to remove the appellant as the Director of DPPL and as a consequence thereof, his removal as the Executive Director is held to be bad in law.
37. As a logical corollary, status quo ante, would prevail, as was obtaining prior to the decision taken, qua the appellant, at the EOGM held on 27.06.2009.
38. Accordingly, in terms of what is stated above, the captioned appeal is allowed.
39. While, the appeal has been allowed, the question, which, to my mind, still remains to be answered is, as to whether the contesting parties ought to be forced to continue as part of DPPL, by a judicial fiat, albeit, against their will.
39.1. At the moment, the respondents 2 to 10, represent one group, while, the appellant represents the other group. The fact that the appellant has succeeded in the appeal, would be, in the long run, quite clearly, be a pyrrhic victory, as the respondents, would, perhaps, learn the lessons of this litigation and would tackle the very same issue in a manner, which would, perhaps, be closer and in line with the formalistic requirements of law.
39.2. Clearly, my sense of the matter is that, the contesting parties cannot remain together, in what appears to be an unhappy marriage. Therefore, in the larger interest of the contesting parties, I am inclined to direct the Chennai Bench of the National Company Law Tribunal (in short "NCLT"), to value shareholding interest of the appellant in a manner known to law and provide him an exit route from DPPL.
39.3. I may only indicate that this is a methodology, which is not novel, in as much as the Supreme Court in Needle Industries (India) Limited case (cited supra), after holding that the appellant in that case, i.e., the holding company, had not been able to make out a case of oppression, did pass directions to do substantial justice between the parties before it. The measures employed by the Supreme Court are set out in paragraphs 175 to 185 of the said judgment. The fact that the Court has such powers which enable it to go beyond the ken of Section 402 is emphasised in the following observations of the supreme Court in Sangramsinh P.Gaekwad and Others V. Shantadevi P.Gaekwad, MANU/SC/0052/2005 :
"..... 185. The jurisdiction of the Court to grant appropriate relief under Section 397 the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may seem fit and proper, is warranted. (See Bennet Coleman & Co. Vs. Union of India and Others, MANU/MH/0054/1977 and Syed Mahomed Ali Vs. R. Sundaramurthy and others, MANU/TN/0089/1958.
.....
206. In a given case the Court despite holding that no case of oppression has been made out may grant such relief so as to do substantial justice between the parties.
....."
(emphasis is mine) 39.4. I must indicate that Mr.Venkatavaradan, had opposed such methodology being followed and in support of his submission, has cited the judgment of the Supreme court in the matter of : Commissioner of Income Tax, V. S.S.Navigation Company Ltd., AIR 1961 SC 1633.
39.5. It was submitted by the learned counsel that, since, the issues relating to buy out was not raised before the CLB, it could not be espoused, for the first time, before this Court. It is relevant to note that in that case, the Supreme Court was required to interpret the provisions of Section 66(1) of the Income Tax, 1922. The Court, in that context, was called upon to rule as to what would constitute a question of law arising from the order of the Tribunal. The Court, inter alia, ruled that, when a question of law is neither raised before the Tribunal, nor considered, it cannot be a question arising out of its order, notwithstanding the fact that it may arise in the context of findings given in the order.
39.6. It is relevant to note that the nature of jurisdiction, which stood vested upon the High Court under Section 66 of the Income Tax, 1922, is different from the jurisdiction, which is conferred on the CLB under Sections 402 of the 1956 Act. In the given case, the failure to exercise such jurisdiction may give rise to a question of law under Section 10F. That the power of CLB under Section 402 of the 1956 Act is of the widest amplitude, is statutorily exemplified by clause (g) of the very same provision. Clause (g) of Section 402 brings within its sway, all other matters, qua which it is just and equitable for CLB to make a provision.
39.7. As indicated above, the Supreme Court in Needle Industries (India) Limited case (cited supra), adopted, precisely, the same approach. According to me, the ratio laid down in S.S.Navigation Company Ltd. case, is not applicable to actions filed under Sections 397 and 398 of the 1956 Act.
39.8. Accordingly, the matter is remanded to the NCLT, as against CLB, as the latter is no longer in existence. (see the observations contained in the judgment of the Division Bench of the Kerala High Court in Ayoli Abdulla V. Meezan Realtors Pvt. Ltd., MANU/KE/0975/2016).
40. Therefore, the parties will appear before the NCLT, Chennai Bench, on 07.06.2017, for taking the matter forward in line with the directions contained hereinabove in paragraph 39.2. The NCLT, Chennai Bench, will ensure that due opportunity is given to the contesting parties before a final decision is taken in the matter with regard to the valuation of the appellant's shares in DPPL and the mode and manner of its payment by the other shareholders, if they are desirous of buying his interest in DPPL.
41. Consequently, the connected miscellaneous petition is closed. There shall, however, be no order as to costs.
Speaking Order 18.04.2017
Index : Yes / No
Internet : Yes
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To
The Company Law Board/
The National Company Law Tribunal,
Chennai Bench, Chennai.
RAJIV SHAKDHER,J.
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Pre-Delivery Order in
Com.Apel.No.9 of 2015
Dated: 18.04.2017
http://www.judis.nic.in