1999-(004)-CLJ -0379 -CLB
ATMARAM MODI v. ECL AGROTECH LTD. AND OTHERS.
Company Petition No. 51/98 (Date of hearing : 10.4.1999), decided on June 3, 1999.
(Date of final hearing 10.4.1999)
S. BALASUBRAMANIAN. – This petition under section 397/section 398 of the Companies Act (the Act) has been filed by the petitioner hereinabove with the consent of 12 other shareholders, all together collectively holding 25% shares in ECL Agrotech Ltd. (the company), alleging acts of oppression and mismanagement in the affairs of the company. The main grievance of the petitioner is that he was wrongly/illegally removed from the position of a director of the company and that such removal is an act of oppression in view of the company being in the nature of a partnership. In addition to this main grievance, the petitioner has also alleged siphoning off of funds, etc., by the respondents. On the basis of these allegations, various reliefs have been sought including for a declaration that the 1st petitioner continues as a director of the company and that the company is a quasi-partnership, restraining the respondents from committing any act in breach of the partnership principles in the conduct of the affairs of the company, for directions to the respondents to purchase the shares held by the petitioners or, in the alternative, directing the respondents to sell the shares held by them to the petitioners.
2. It is appropriate to narrate, in brief, the contents of the petition. This company was incorporated in June, 1995, by 4 groups consisting of the petitioner and the 2nd to 4th respondents along with their associates, with 25% shares to each group, with the object of taking over the business of ECL Agrotech (ECL), a unit of one Electro Steel Castings Limited. ECL was engaged in the business of high breed seeds. This unit was being headed by one Shri P. Bhotika. One of the main customers of this unit was Heinz, an American company. This unit was taken over by the company along with its assets, liabilities and businesses for a total consideration of Rs. 75 lakhs. Shri Bhotika, being an expert in high breed seeds, also joined the company. All the four groups were represented by one director each and the petitioner became the Chairman and Shri Bhotika undertook a foreign trip to USA and Germany for exploring export possibilities, by incurring an expenditure of about Rs. 7 lakhs from the company funds. After their return, differences cropped up between the petitioner and other respondents leading to the petitioner being prevented from attending the office of the company and the respondents seeking to appoint one Shri Arun Aggarwal as the Chief Executive of the company. In view of this, the petitioner stopped attending the office from August, 1996. It seems there was an offer by the petitioner group to sell their shares to the respondents and that a Committee of arbitrators determined the value to be Rs. 17.5 lakhs. This did not materialise. Thereafter, the petitioner floated a new company in the name of Oriental Biotech Limited (Oriental) to pursue the seeds business. Shri Bhotika also joined the new company after leaving the services of the company. Heinz also started to have business dealings with the new company terminating their business relationship with ECL. Some other employees also left ECL and joined the new company. Later, the company informed the petitioner that he had allegedly vacated the office of director in terms of section 283 (1) read with section 299 of the Act. Further, in an EOGM held on 23.12.1996, the shareholders had allegedly passed a resolution removing the petitioner as a director of the company. Initially the petitioners had filed a winding up petition in Karnataka High Court, which was later withdrawn after the present petition was filed before the CLB.
3. Shri Raghavan, advocate for the petitioner, submitted that the removal of the petitioner as a director is a grave act of oppression and, therefore, the same should be declared as null and void, especially, in view of the fact that the company is in the guise of a quasi-partnership, wherein equal shareholding and equal participation in the management have been agreed to among the shareholders. To urge his point that the company is in the guise of a quasi-partnership, he traced the relationship between the petitioner and the respondents for a long period before the incorporation of the company. According to him, the petitioner, respondents 2, 3 and one Shri P. K. Rungta, the husband of the 4th respondent, were having business relations for a number of years prior to the incorporation of the company and, as a matter of fact, the petitioner and Shri Rungta were active members of Aggarwal Samaj, Bangalore, and as such, knew each other well. Their association continued when a partnership firm in the name of Bangalore Developers was formed with the petitioner and respondents 2, 3, and 4 as partners. When ECL was to be taken over, a sum of Rs. 10 lakhs was paid through this firm. The company was the outcome of the personal relationship between the petitioner and the respondents 2, 3, and 4. That is why, he pointed out that, when the company was incorporated, it was ensured that all the four groups were allotted 25% shares each and each group was represented in the Board with one representative. This itself, according to the learned counsel, would indicate that the company is in the guise of a quasi- partnership wherein equal shareholding and equal participation in the management has been ensured. Therefore, according to him, the company having been incorporated on the basis of mutual trust and confidence among the shareholders, it has all characteristics of a partnership and is governed by the discipline of relationship amongst the partners in a partnership firm. Referring to Synchron Machine Tools (P) Ltd. v. U. M. Suresh Rao (1994) 3 Comp LJ 340 (Karn) : (1994) 79 Comp Cas 868 (Karn), wherein the court has laid down certain tests to determine whether a company could be treated as a partnership, he submitted that the tests laid down in that case are fully satisfied in the present case. Thus, he submitted that the complaints of the petitioner should be considered in this background and once the petitioner is able to establish that there has been a failure of mutual trust and confidence brought about by the acts of the respondents, then such acts would justify winding up of the company on just and equitable grounds as in a case of a partnership in terms of section 45 (g) of the Indian Partnership Act. He further submitted that even though there are 31 shareholders, as a group, there are only 4, and each share-holder could be identified with only one group. Further, no invitation to the public was made. He referred to Loch v. John Blackwood Ltd. (1924) AC 783 wherein the Privy Council observed that as long as it is established that the company is a closely held one and that the directors are guilty of lack of probity in dealing with other share-holders, the principles of dissolution of partnership could be applied to such companies.
4. With these preliminary submissions, Shri Raghavan dealt with the merits of the case. According to him, after the petitioner returned from the foreign trip, the attitude of the respondents towards him suddenly changed and they did not like his having any participation in the affairs of the company. In view of this, the petitioner volunteered to go out of the company by selling the shares held by his group. Even the value for the shares was determined by a committee of arbitrators at Rs. 17.5 lakhs. Even though the respondents were initially agreeable to purchase the shares at Rs. 17.5 lakhs, later they did not do so. Since he had no say in the affairs of the company, he floated another company by name Oriental Biotech Ltd. (Oriental) in September, 1996, to carry on a similar business. Shri Bhotika did not like the working conditions in the company and as such, he resigned from the company in July, 1996, and later on joined the new company on his own volition. This is the position with Heinz also, which did not want to have any business relations with the company, as it was with Shri Bhotika that Heinz were having dealings for a long time and when they learnt that he had joined the new company, they started dealing with the new company. Referring to Annexure A-22, he pointed out that it was the company which informed Heinz, through a fax on 23.8.1996, that Shri Bhotika had left the company and again by a fax, dated 28.8.1996 (Annexure A-23), the company informed Heinz that the petitioner would also be leaving the company. He referred to Annexure A-24 in which the company had informed Heinz on 11.9.1996 that new start-up companies would find it difficult to provide the same level of technical expertise and the comfort of dealing with a proven person. These documents have been conveniently concealed by the respondents in their reply. Because of these faxes and since Heinz were keen on dealing only with Shri Bhotika, through a fax, dated 13.9.1996 (Annexure-9), Heinz asked the company to deliver all stock seeds to Shri Bhotika. Thus, it is clear that the petitioner did not take away Heinz from the company. However, the respondents, with a mala fide intent, fabricated minutes of an allegedly held Board meeting on 26.9.1996, to indicate that the petitioner suggested some business arrangements with Oriental, without disclosing his interest as the promoter of Oriental. There was no Board meeting on that day, and even if there had been one, the petitioner did not attend the meeting for want of notice. On the basis of this fabricated minutes, the respondents claimed that the petitioner had not disclosed his interest in terms of section 299 and as such, vacated his office as a director in terms of section 283 (1)(i) of the Act. In a Board meeting held on 23.10.1996, they also resolved to intimate the Registrar of Companies about his vacation of office and, accordingly, filed Form 32 with the Registrar. Drawing our attention to page 2266 of Guide to Companies Act by Ramaiah (14 Edn), wherein the decision in Turnbull v. West Riding Athletic Club (1894) WN 4 has been quoted, according to which in case of non-disclosure under
section 299, the concerned director must be given a chance to explain his conduct before ejecting him from the Board, the learned counsel submitted that no opportunity was given to the petitioner before filing Form 32. He also pointed out that the minutes of the alleged Board meeting was produced for the first time only on the last date of hearing, clearly indicating that the same had been manufactured after filing of the petition. He further stated that the respondents are guilty of suppressing material facts.
5. He also pointed out that, not having been satisfied with the action of fabrication of minutes and filing of Form 32 with the Registrar in relation to his cessation of office under section 283 (1)(g), the respondents also claim that the petitioner was removed as a director in a requisitioned meeting held on 23.12.1996. Neither the petitioner, nor anyone in his group, received the notice for the EOGM. Referring to the submission of the company that the notices for the EOGM were sent together with the notices for the AGM held on the same date in a single envelope to each shareholder, he submitted that some of the members of his group had opened the envelopes and found only the notices for the AGM and no notice of the EOGM was found to have been enclosed therein. He also produced 9 envelopes which had not been opened by the shareholders with the request that the Bench should open the envelopes and see whether these envelopes contained the notices for the EOGM. According him, his removal without notice is bad in law, besides being an act of oppression.
6. Summing up his arguments, Shri Raghavan submitted, notwithstanding the allegations against the respondents, that the petitioner is prepared to walk out of the company along with his group, provided the respondents comply with the agreement already reached, by paying a sum of Rs.17.5 lakhs together with 18% interest. Otherwise, he submitted that the valuation of the shares should be made as on the date when the disputes between the parties arose, i.e., August, 1996. According to him, even though the normal rule is that the date of valuation is the date of filing of the petition, yet, the same need not be applied in all cases. It would depend on the facts of each case and the date has to be based on fairness. According to him, the company earned enormous profit during 1995-96 and no dividend was declared. In 1996-97, the company suffered losses. Therefore, if the date of valuation is to be the date of filing of the petition, then, it would be prejudicial to the interest of the petitioner. On the proposition that the valuation need not be based on the date of filing of the petition, he relied on London School of Electronics Ltd., Re (1985) BCLC 273.
7. Shri Naganand, Advocate for the respondents, initiating his arguments, stated that the only allegation dealt with by the counsel for the petitioner is about alleged illegal removal of the petitioner as a director. According to him, it is a settled law that in a section 397/section 398 petition, grievances qua members alone can be agitated and not directorial complaints and as such, the petition itself is not maintainable. On this proposition, he relied on Shanti Prasad lain v. Kalinga Tubes Ltd. (1965) 1 Comp LJ 193 (SC) : AIR 1965 SC 1535. He stated that the company is a public company with 31 share-holders including some minors. At no point of time, was there any agreement regarding any group among the shareholders as also regarding equal shareholding or equal participation in the management. The allotment of shares was made in response to the applications received. The company has not been formed on the basis of personal relationship among the petitioner and the respondents. Even otherwise, 31 members cannot, in law, constitute a partnership and the company has been managed since its inception under the provisions of the Companies Act. Relying on Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwala AIR 1976 SC 565, and Kilpest (P) Ltd. v. Shekhar Mehra (1999) 2 Comp LJ 261 (SC) : (1996) 87 Comp Cas 615 (SC), he submitted that in an incorporated company, the principles of dissolution on partnership principles cannot be liberally invoked. He also submitted that there is no deadlock in the management of the company and as a matter of fact, the company has, started doing well after an initial set-back due to the petitioner taking away Heinz. He raised a query as to why the shareholders should have formed this company instead of a firm of partnership like Bangalore Developers. It is because, he submitted that the promoters wanted to have a company, that too a public limited company, as they did not envisage the endeavour to be in the form of a partnership. According to him, these so called groups in the company do not exist. Even otherwise, he pointed out that in a section 397 petition, one of the essential, ingredients, is that the petitioner should establish that there are grounds to wind up the company on just and equitable grounds which the petitioner has not been able to establish, especially, when this company cannot be wound up as it is a profitable company having a large number of shareholders. He also pointed out that the petitioner is not interested in the welfare of the company as is evident from the fact that before coming to the Company Law Board, he had filed a winding up petition before the Karnataka High Court.
8. Dealing with merits of the case, Shri Naganand submitted as follows : The petitioner is responsible for the breach of faith between himself and respondents 2 to 4. The petitioner abandoned services of the company, incorporated a new rival company in the name of Oriental Biotech Limited and started carrying on the seeds business. The petitioner diverted the business of the company including the export order from Heinz, to his newly formed company and took away with him a few of the employees of the company including Shri P. Bhotika who is the main architect of the company. The petition has been filed for collateral purpose of interfering with the business of the company and solely for his personal benefit. The petitioner’s conduct cannot be approved. In this connection, he relied on Lindley & Banks on Partnership, 17 Edn., at page 494. The petitioner seeking equitable relief must come with clean hands and good conduct, which are absent in the case of petitioner. The petition, therefore, constitutes a gross abuse of the process of court and the petitioner is not entitled for any relief under sections 397 and section 398, as held in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkatesha Electrical Industries (P) Ltd. (1991) 3 Comp LJ 336 (Karn) : (1991) 72 Comp Cas 211 (Karn). The petitioner failed to disclose his interest in Oriental Biotech Limited as the chief promoter at the meeting of the Board of directors of the company held on 26.9.1996, in which the petitioner suggested some arrangement with Oriental Biotech Ltd. The petitioner failed in his fiduciary duties to act in the best interests of file company, thereby he had violated the provisions of section 299 of the Act and he had vacated the office of the director under section 283 (1)(i) of the Act. Accordingly, on 23.10.1996, a meeting of the Board of directors of the company was held and resolved to send the intimation of the petitioner vacating the office of director of the company to the Registrar of Companies and, accordingly, filed Form No. 32 intimating the Registrar of Companies regarding vacation of the office of director by the petitioner. The petitioner having vacated office of director by operation of law and not on account of any action of respondents, the petitioner cannot have any grievance whatsoever. Shri Naganand, while summing up his submissions on director’s fiduciary duty, relied on Island Export Finance Ltd. v. Umunna and Indian Law Reports (1986) BCLC 460 (QBD). The Board of directors of the company convened an extraordinary general meeting of the company on 23.12.1996 pursuant to a requisition, dated 21.11.1996 and the special notice under section 284 sent by certain members for removal of the petitioner, after due notice to the members including the petitioner along with the notices of the annual general meeting. Both annual general meeting and extraordinary general meeting were held on 23.12.1996. The petitioner did not attend either of the meetings. At the extraordinary general meeting, the shareholders and their proxies in all comprising 74.62 per cent of paid up share capital of the company unanimously passed a resolution removing the petitioner from the office of director of the company. Though there was an attempt to settle the disputes between the petitioner, respondents 2 to 4 through intervention of 3rd parties, no settlement could either be reached or implemented on account of non-cooperation on the part of the petitioner. He further submitted that the respondents are not willing for any compromise as the petitioner had acted against the interest of the company. He also prayed that the petition should be dismissed.
9. We have considered the pleadings and arguments of the counsel. Before dealing with the same, it is essential to note that, in the hearing held on 27.10.1998, we had advised the parties that they should try to settle the disputes amicably by the respondents purchasing the shares of the petitioners’ group at Rs. 17.5 lakhs that was agreed earlier together with the payment of interest at 18% from September, 1996. In the hearing held on 16.11.1998, it was informed that while the respondents were prepared to pay Rs. 17.5 lakhs without interest, the petitioner demanded payment of interest also. In view of this, the compromise efforts failed. Even after the conclusion of the arguments on the petition, we suggested that even then, the dispute could be sorted out amicably. While the petitioner was interested in getting the shares valued as at August, 1996, the respondents were not prepared, as according to them, the pre-judicial action by the petitioner has affected the fortunes of the company and as such, they were not prepared for any compromise.
10. One aspect that, we feel, should be recorded is that, in the pleadings, there are repeated references to Shri Rungta, Shri Bhotika and Heinz. While the petitioner refers to the role of Shri Ranguta, the respondents have made allegations against Shri Bhotika. Unfortunately, neither of them has been impleaded as a party to the proceedings. We have no independent version of Heinz as to why it transferred its business to Oriental. No doubt, that they may not be necessary parties in view of no relief having been sought against them, yet, they are proper properties [parties ?] to have been impleaded, so that we would have their versions on the controversy relating to them.
11. Even though the petition contains allegations other than the removal of the petitioner as a director, arguments were advanced only in respect of the removal of the petitioner as a director and as such we are restricting our finding only to this allegation. As rightly pointed out by the counsel for the respondents, relying on Shanti Prasad lain v. Kalinga Tubes Ltd. (1965) 1 Comp LJ 193 (SC) : AIR 1965 SC 1535, supra, that in a section 397 petition, acts of oppression should be in the matter of one’s proprietary rights as a shareholder. This right does not extend to one’s claim to the office of a director as held in V. M. Rao v. Rajeshwari Ramakrishnan (1986) 1 Comp LJ 1 (Mad) : (1987) 61 Comp Cas 20 (Mad). However, there is an exception to this general rule in case of a family company or a company in the guise of a partnership. In these cases, where there is an agreement, express or implied, (as may be established), or the articles so provide, that the shareholders would participate in the management of the company, then, exclusion/ouster of one of the shareholders from the management, could be considered to be an act of oppression. In a recent case of Dipak G. Mehta v. Shree Anupar Chemicals India (P) Ltd. (1999) 2 Corp LJ 539 (CLB) : (1999) 33 CLA 393 (CLB), we held, in facts, of that case in which it was established that the company was in the guise of a partnership, removal of the petitioner as a director was an act of oppression. In the same way in Naresh Trehan v. Hymatic Agro Equipments (P) Ltd. (1999) 4 Comp LJ 369 (CLB), in view of the company being a family company, wherein implied agreement relating to participation of all the shareholders in the management was established, we held that ouster of one of them as a director was an act of oppression warranting winding up of the company on just and equitable grounds. However, in Karedla Suryanarayana v. Shri Ramdas Motor Transport Ltd. (CP 15/94) (1999) 3 Comp LJ 422 (CLB), we declined to entertain the complaint of removal as a director, since the company was neither a family company nor a company in the guise of a partnership. Even in the cases cited by Shri Naganand, viz., Hind Overseas [Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwala AIR 1976 SC 565] and Kilpest [Kilpest (P) Ltd. v. Sliekliar Mehra (1999) 2 Comp LJ 261 (SC) : (1996) 87 Comp Cas 615 (SC) 1 cases, supra, the Supreme Court has not held that partnership principles should not be applied to a company, but has only cautioned that it should not be liberally applied. Therefore, the contention of the counsel for the respondents that directorial complaint cannot be agitated in a section 397 petition, cannot hold good in all cases.
12. Let us examine the present case. The claim of the petitioner is that the company is really in the guise of a partnership, which claim is refuted by the respondents. Even though the company is a public company having 31 shareholder, it does not mean that partnership principles cannot be applied. In Loch case [(1924) AC 783 (PC)], supra, even though the company was a public company, the Privy Council held that it was actually a domestic and family company and as such could be wound up on just and equitable grounds. In the present case the petitioner claims that there are 4 identifiable groups of shareholders-Modi Group headed by the petitioner, Maheshwari Group by respondent 2, Daga Group by respondent 3 and Rungta Group by Shri Rungta. An analysis of the shareholding at Annexure A-6 reveals that each group has only closely related family members like father, mother, sister, son, daughter, etc., of the head of the respective groups as shareholders. As a matter of fact, there is nothing on record to show that the company invited any outsider to become a shareholder of the company. The fact that the partners of Bangalore Developers being the petitioner, wife of the 2nd respondent, the wife of the 3rd respondent and the wife of the 4th respondent, who also happen to be the shareholders in the respective group, would indicate that it is not the casual acquaintance between them that motivated them to become shareholders of the company, but definitely the long association of friendship among them that has prompted them to join hands to promote this company. We also note that the company was very careful to ensure that the share-holding of no group exceeded 25%, by refunding excess money received from any group and demanding payment of shortfall, if there was any from these groups. Therefore, it is clear that shareholding parity had been ensured in allotment of shares to each group irrespective of the fact whether there was any agreement or not. While ensuring equal shareholding of each group, the composition of the Board of directors also shows that one member from each group has been taken on the Board as directors. Thus, we find that both equal shareholding and joint management have been ensured. These facts combined with the long personal association between the petitioner and the respondents would prima facie establish that the company has been incorporated with mutual trust and confidence among the shareholders with a view to run it in the form of a quasi-partnership and, therefore, the petitioner is at liberty to challenge his ouster from the management in this petition under section section 397. The learned counsel for the petitioner relied on Synchron Machine Tools case [(1994) 3 Comp LJ 340 (Karn)], supra, to advance his stand that the principles enunciated in that case to treat a company as a quasi-partnership are fully satisfied in this case. We do not propose to deal with this case inasmuch as, on appeal, the Division Bench of the said court has held otherwise.
13. The grievance of the petitioner relating to his removal is two-fold. One is about the contention of the company that he had ceased to be a director in terms of section 283 (1)(i) read with section 299 and another is his removal by the general body on 23.12.1996. According to the respondents, there was a board meeting on 26.9.1996 in which the petitioner suggested having some business relation with Oriental without disclosing his interest in Oriental, and when the respondents came to know of his interest in Oriental, in a Board meeting held on 23.10.1996, the board discussed this matter and decided to file Form No. 32 with the Registrar of Companies intimating him that the petitioner had vacated his office in terms of section 283 (1)(i). According to the petitioner, there was no Board meeting on 26.9.1996 and even if there had been one, he did not attend that meeting for want of notice. Whether there was a meeting on 26.9.1996 could be determined, in view of the conflicting stand taken by the parties, only on the basis of the contents of the minutes of that alleged meeting. The minutes of this meeting was produced only on the final date of hearing. A reading of this minutes shows that no item of any agenda was discussed as per the minutes. Even this discussion relating to Heinz had been initiated by the petitioner. It is on record that the petitioner did not participate in the management of the company after August, 1996. If the company had convened this meeting, some agenda items or some items raised by the company or the respondents, should have found a place in the minutes. It is rather surprising that the company claiming to have convened the said meeting, had no agenda item to discuss. It is not the case of the respondents that the petitioner had convened the meeting to initiate the discussions about Heinz. Thus, we are of the view that the meeting alleged to have taken place on 26.9.1996 had not actually taken place and the minutes are fabricated. Our view gets strengthened from the fact that the respondents have not produced any evidence to show that they had in fact sent any notices for the meeting. The same is the position in regard to the Board meeting held on 23 October, 1996, also. Therefore, we are of the view that the question of the petitioner vacating the office of director under section 283 (1)(i) does not arise.
14. As far as his removal as a director in the EOGM held on 23.12.1996 is concerned, the allegation of the petitioner is that he did not receive any notice for this meeting. According to the respondents, notices for the EOGM and AGM which was also convened on the same date, were sent to all the shareholders, including the petitioner, in a single envelope to each. The petitioner does not deny receiving this envelope and according to him it contained only the notice for the AGM and no notice for the EOGM was found in the envelope. The counsel for the petitioner produced 9 un-opened envelopes addressed to his group of shareholders with a request that we ourselves should open these covers and see whether the notice for the EOGM was enclosed therewith. The said covers were opened and we found that they did not contain the notice for the EOGM. According to the respondents, these envelopes had already been opened and had been closed with adhesive tape by the petitioner and that the company never closed the envelopes with adhesive tapes. However, the counsel for the petitioner asserted that the envelopes were never opened and had been produced intact. However, he did not elaborate as to why the 9 shareholders in his group did not open the envelopes when the same had been received from the company. Anyway, we are not examining this issue, inasmuch as, what we are concerned in this section 397 petition is whether the removal of the petitioner is an act of oppression, since illegal removal per se, even if established, cannot be a ground for invoking the provisions of section 397. It has been held in Needle Industries case [Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC) 1 that illegal acts may not be oppressive and that even legal acts could be oppressive.
15. The EOGM was a requisitioned meeting called by shareholders fulfilling the requirements of section 169 of the Act. The statement of material facts enclosed with the requisition reads as follows :
“You may be aware that Mr. Atma Ram Modi, director of the company, has incorporated a company by name ‘Oriental Biotech Limited’ with the Registrar of Companies, Karnataka, whose objects are similar to our company, i.e., ECL Agrotech Limited. Further Mr. Atma Ram Modi have diverted export order from Heinz, USA, for the year 1996-97 to his company i.e., Oriental Bio Tech Limited. Therefore, the continuance of Mr. Atma Ram Modi as director of ECL Agrotech Limited is detrimental to the interest of ECL Agrotech Limited. We, therefore, propose his removal as director of ECL Agrotech Limited, under section 284 of the Companies Act, 1956.”
In the EOGM held on 23.12.1996, the shareholders unanimously resolved to remove the petitioner as a director, obviously’, on the basis of the statement of material facts. We have to examine whether this removal could be considered to be unjustified and as such, an act of oppression against the petitioned.. On the basis of the observation of the Supreme Court in Shanti Prasad Jain case [(1965) 1 Comp LJ 193 (SC)], we observed in Dipak G. Mehta’s case [(1999) 2 Comp LJ 539 (CLB)], supra, that –
“The normal test to examine whether there is oppression or not, is to find out whether the majority shareholders, by strength of their shareholding, do things which are unfairly prejudicial, wrong, burdensome and harsh, and there is an element of lack of probity or fair dealing, etc., in relation to the interest of minority shareholders.”
Therefore, whether the removal of the petitioner as a director is wrong, burdensome, and harsh and whether there is an element of lack of probity, have to be examined.
16. It is on record that the petitioner is one of the principal promoters of the company and that he played an important role in taking over the business of ECL Agrotech Division. It is on record that he is one of the promoters of Oriental which is carrying on the same business as that of the company. It is also on record that the business with Heinz has now been taken over by Oriental and that two of the officials of the company along with Shri Bhotika have also joined the new company. While the petitioner has justified incorporating the new company on the ground that there were settlement talks by which the shares of the petitioner would be purchased by the respondents, he has also averred that Shri Bhotika joined the new company on his own volition, and that Heinz also started having business transaction with the new company because of the association of Shri Bhotika with the new company. According to the respondents, the entire exercise of incorporating the new company was with a view to take away Heinz. It would be appropriate to indicate the chronology of events. There was a cordial relationship between the parties till January, February, 1996, as per the version of the petitioner at page 21 of the petition. The petitioner undertook a foreign trip in May, 1996. The petitioner stopped attending the office in August, 1996. He withdrew his personal guarantees to the bank on 30.8.1996 (Annexure-17). Ms. Beena Sharma gave a letter of resignation on 1.7.1996 (Annexure-3). Shri M. Srinivas submitted his resignation on 1.8.1996 (Annexure-4). The petitioner marked on these papers that they could be relieved on 31.8.1996. In the meanwhile, Shri Bhotika also resigned. The name for the new company was applied on 5.9.1996 and was approved on 6.9.1996 and Oriental was incorporated on 17.9.1996. These officials who resigned joined the new company. The sequence of events show that it is not that the petitioner decided on the new company after August, 1996, but had planned it much earlier. In regard to Heinz also, we feel that the petitioner had a role to wean Heinz away from the company as evident from the fact that as early as on 13.9.1996, through a fax, Heinz asked the company to hand over the seeds to Shri Bhotika of Oriental (Annexure-9) while Oriental itself was incorporated only on 17.9.1996. Further, this fax was addressed to the petitioner and sent at his home address. This fax has to be read with the fax from heinz, dated 18.3.1996 (Annexure-5), by which the company was asked to retain the seeds for the next season. Even assuming that Heinz, as stated by the petitioner, started dealing With the new company on its own volitions, because of the association of Shri Bhotika with Oriental, in all fairness and in compliance with the fiduciary duties to the company and fair dealings with the other partners, the petitioner should have advised Heinz suitably and should not have accepted the business.
17. From the narration of the events as above, the only conclusion that we could come to, is that the petitioner should have planned the incorporation of the company much earlier and not after August, 1996, and that all the subsequent events followed such a planning. Even otherwise, it is clear that while continuing as a director, the petitioner incorporated a rival company and also took away the business of Heinz. The petitioner had dual responsibilities – one to the company as a director and the second, as a partner to the other partners. At the time when he incorporated the new company, he continued as a shareholder as well as a director and as claimed by the petitioner, as the Chairman and managing director of the company. While, in the law, there is no prohibition, subject to certain conditions, for a person to be a director in two rival companies as held in London & Mashonaland Exploration Co. Ltd. v. New Mashonaland Exploration Co. Ltd. (1891) WN 165, the law is also clear that he cannot breach the fiduciary responsibilities that he owes as a director to any of these two companies. In Meyer v. Scottish Cooperative Wholesale Society Ltd. (1958) 3 All ER 66, it was held :
“A director cannot subordinate the interest of the first company to those of the second company.”
In this connection, the observation of the Queen’s Bench Division in Island Export Finance Ltd. case [(1986) BCLC 460 (QBD)], supra, is relevant, wherein it observed :
“A director’s fiduciary duty did not necessarily come to an end when he ceased to be a director. A director was precluded from diverting to himself a maturing business opportunity which his company was actively pursuing even after his resignation where the resignation was prompted or influenced by a desire to acquire that opportunity for himself.”
Thus the nature of the fiduciary duties is such that even after leaving a company, a director should not act against the interest of the company. Further, the petitioner has claimed that the company is in the nature of a partnership. If so, then, he cannot associate himself with a rival company, more so starting a rival company. At page 495 of Lindley & Banks on Partnership (17 Edn.), it is stated :
“A partner must not, without the consent of his co-partners, carry on any business in competition with the firm.”
Thus, we are of the view that by starting the new company, the petitioner had acted in breach of the partnership agreement and, therefore, the other partners were not obliged to comply with the terms of the said agreement. Further, the act of taking away Heinz is not only against the fiduciary duties the petitioner owed as a director to the company and other shareholders, but also as a partner to other partners. The respondents have pointed out that during 1995-96, the company had earned a profit of about 45 lakhs due the business with Heinz, while in the year 9596, there was no profit on account of the petitioner’s taking away Heinz. By taking away the business of Heinz, the petitioner has acted against the interest of the company also. Further, he even filed a winding up petition against the company.
18. From our narration of the conduct of the petitioner, we are not in a position to conclude that by removing the petitioner from the position of a director of the company, the shareholders have acted in a malafide manner or in a manner oppressive to the petitioner or his minority group. In respect of a company, partnership principles are invoked only on equitable grounds. The settled principle of law is that when a person seeks equity, he must come with clean hands. In the present case, the conduct’ of the petitioner shows that he has not come with clean hands, in the sense, he has acted in a manner prejudicial to the interests of the company as well as the share-holders and it is he who has acted in violation of mutual trust and confidence. When an action is taken against a wrongdoer, he cannot seek remedy in equity. His prejudicial acts forced the shareholders to remove him as a director and as such, we do not find that there is any act of oppression against him or that there is any lack of probity on the part of the majority shareholders. Thus, there is no scope to declare his removal as invalid on the ground that it was an act of oppression. Even though the petitioner ever questioned the factum of holding the EOGM, and alleged that no EOGM was held on 23.12.1996 yet, we are not in a position to hold so, since the respondents have produced all the necessary documents to prove that this meeting in fact was held. If there had been any illegality in his removal for want of notice to him for the EOGM, he cannot agitate the same in a section 397 petition. Therefore, this petition deserves to be dismissed.
19. However, we do not propose to do so. In a section 397/section 398 petition, even if the petitioner fails to establish the allegations of oppression and mismanagement, as we observed in Sri Ram Das Motors Limited [(1999) 3 Comp LJ 422 (CLB)], relying on Needle Industries case [(1982) 1 Comp LJ 1 (SC)], the ultimate object in a section 397 petition is that the order passed by Company Law Board should put an end to the matters complained of, taking into consideration the interest of the company and the shareholders. It is an admitted position that the petitioner’s group holds 25% shares in the company, with which they would be in a position to block any special resolution. The petitioner has always expressed his desire to part with his shares and certain efforts were also made towards this end without any success. Therefore, we consider it appropriate, in the interest of the company and the shareholders, that the respondents should purchase the shares of the petitioner’s group. For this purpose, fair value of the shares has to be determined. The normal principle for determining the date of valuation is the date on which the petition was filed. For practical purposes, the Company Law Board has normally adopted the balance sheet date, which is proximate to the date of the petition. In the present case, the petition was filed on 11.8.1998, and as such, the valuation should be made on the basis of the balance sheet as on 31.3.1998. Shri Raghavan, relying on London School of Electronics Ltd. (1985) BCLC 273, submitted that the valuation date need not necessarily be the date of the petition and depending on the facts of the case, could be any date, as long as the same is just and fair. According to him, in the year 1995-96, the company had earned a profit of Rs. 45 lakhs and that the company did not declare any dividend. In the next year, there was no profit and that the previous year profits had been wiped out. Therefore, if the date of valuation is set as the date of the petition, then it would adversely affect the petitioner’s group and as such, the date of valuation should be the date on which the disputes started, i.e., August, 1996. We do agree that the date of the petition need not be the date of valuation always. In Sri Raniadass Motor Transport case [(1999) 3 Comp LJ 422 (CLB)], we did not adopt the date of the petition as the date of valuation, as in that case filed in 1994, the company had issued further right shares and these shares were allotted in late 1997. Therefore’ we directed that the valuation should be based on the balance sheet as on 31.3.1998. As far as the present case is concerned, we do not find any justification to deviate from the general principle for the reasons stated hereinafter. During the year 1995-96, one of the main customers was Heinz. By August, 1997, the petitioner had taken away Heinz which resulted in a substantial reduction in the business of the company. The prayer of the petitioner to take August, 1996, as the valuation date is only to get the benefits of the profits earned during 1995-96. The counsel stressed upon the principle of ‘just and fair’ when he sought for August, 1996, as the valuation date. We feel that the petitioner cannot rely on this principle when he himself has not acted in a just and fair manner. If the company had incurred losses on account of the action of the petitioner in taking away Heinz, then he should also share the losses of the company, (which would have been in any way made up in his new company. Therefore, adopting August, 1996, as the valuation date would only mean that the petitioner is being rewarded with some-thing that he does not deserve due to his prejudicial acts against the interest of the company. Therefore, we do not find any justification to deviate from the normal principle of adopting the date of the petition as the date for valuation of shares. The present petition was filed on 11.8.1998 and, therefore, the valuation has to be based on the balance sheet as on 31.3.1998. To arrive at the fair value for the shares, we appoint Shri N. Nityananda, Chartered Accountant, Bangalore (Telephone No.2232843/2225916) to value the shares of the company. The company will negotiate with the valuer his remuneration and will bear the same. The valuer will take into consideration oral as well as written submissions made by the parties in regard to the valuation. The valuation report will be binding on all the parties. The valuation report should be made available to the parties as well as to this Bench latest by 31.10.1999. The shares will be purchased either by the respondents or by the company as may be decided by the respondents and in case the company purchases the shares, reduction of share capital may be effected on the authority of this order. Within 15 days from the date of receipt of valuation report, the petitioner’s group will hand over all the share certificates along with blank transfer forms to the respondents and the respondents will make payment as per the valuation report, to the respective shareholder.
20. With the above directions, we dispose of the petition without any order as to cost. Liberty to apply in case of any difficulty in working out this order.