2000-(036)-CLA -0291 -CLB Companies Act Judgements

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703

K. N. BHARGAVA AND OTHERS v. TRACKPARTS OF INDIA LTD. AND OTHERS.

C.P. No. 35 of 1998, decided on November 30, 1999.

BEFORE THE COMPANY LAW BOARD, PRINCIPAL BENCH, NEW DELHI

Appearances : Gopal Subramanian, senior advocate (U. P. Mathur, D. D. Pande, Kamal Budhiraja & Anupam Verma with him) for the Petitioners. Sudipto Sarkai, senior advocate (Ms. Bina Gupta, Adesh Tandon & J. S. Goswami with him) for the Respondents. Rajiv Nayyar, senior advocate (Rishi Maheshwari & Akash Nath with him) for VLS Finance Ltd.

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ORDER

BALASUBRAMANIAN

1. Trackparts of India Ltd. (‘the company’) in the affairs of which this petition under section 397 of the Companies Act, 1956 (‘the Act’) alleging acts of oppression and mismanagement in the affairs of the company have been filed, is a public listed company. This company was incorporated as a private limited company in the year 1969 to take over the running business of a partnership firm, viz., Trackparts India. At that time, the shareholding position was as follows : Shri H. N. Bhargava : 24 per cent, Shri. K. N. Bhargava : 24 per cent, Prem Bhargava : 12 per cent, Others,. 40 per cent. There are, presently four groups of shareholders, all brothers/their family members controlling among themselves about 80 per cent shares in the company. They are known as H. N. Bhargava group (‘HNB’), K. N. Bhargava group (‘KNB’), B. N. Bhargava group (‘BNB’) and M. N. Bhargava group (‘MNB’). Presently, KNB and BNB are on one side and HNB and MNB are on the other side – the finance being the petitioners and the latter being the respondents. On the demise of HNB and MNB, their groups are headed by Shri Dilip Bhargava, son of HNB and Mrs. Veena Bhargava, the wife of MNB. Now the HNB group is referred as DB group. KNB is the first petitioner and BNB is the second petitioner. DB is the second respondent and Smt. Veena Bhargava is the 3rd respondent. At the time of the incorporation of the company, HNB was the chairman and the managing director of the company and after his demise in 1979, KNB and the BNB became the chairman and managing director and joint managing director respectively. This company had about 46 per cent shares in another company known as EMA India Ltd. From 1983 onwards DB group had been controlling the affairs of EMA while KNB, BNB and MNB controlled the company. The company has four divisions, namely, Track components division, Forge division, Track re-building division, all located in Kanpur and plastic division in Mumbai. On the date of the petition, the petitioners’ group held 27.29 per cent shares and the respondents’ group 51.87 per cent, the financial institutions about 9 per cent and the public held the balance.

2. A family agreement was entered into on 23rd March, 1991 between the families of all the four brothers. At this time, the families of KNB, BNB and MNB were on one side known as KN group and the DB group on the other side. (Annexure F). This agreement provided for : DB group having 5 directors on the Board of the company, an operations committee consisting of two nominees each of KN group, DB group, the eldest member of the group being the CMD, equalisation of shareholding of both the groups, pre-emptive right with each group to acquire the shares of the other group in case the other group desired to sell the shares and amendment to the articles as per the Annexure B enclosed to the agreement, etc. Subsequent to this agreement, the articles were amended to incorporate relevant clauses of the agreement. Five nominees of the DB group were inducted into the Board as per the agreement. The 2nd respondent was also inducted as a director and he was appointed as a wholetime director some time in 1996. Some time in 1994, a new division, viz., Plastic division was started in Maharashtra with an investment of about Rs. 20 crore. Unfortunately this division has not been doing well and it started accumulating heavy losses and the genesis of this petition can be directly traced to the differences between the parties on the functioning of this division.

3. The allegations in the petition could be summarised as follows (the first petitioner and the second respondent will, hereinafter, be referred to as the petitioner and the respondent, respectively) : The DB group as not complied with the terms of the family settlement relating to the equalisation of the shareholding in terms of clause 20 of the family settlement, even though it had nominated five directors on the Board including the 2nd respondent as per the said agreement. In view of this, instead of having equal shareholding, the petitioner group holds only 1,49,948 shares compared to the holding of the respondent group of 2,07,759 shares. After the respondent came on the Board, he had been acting in an autocratic manner resulting in many of the senior executives leaving the company. In the year 1994, the respondent forced the Board to approve the setting up of a plastic division at Mumbai after giving a very rosy picture of the fortunes of this business, involving an investment of Rs. 14.93 crore with a projected annual turnover of about Rs. 20 crore. With a view to maintain the family harmony, the Board approved the proposal and left the plastic division completely under the sole control of the respondent. The Board also appointed him as the deputy managing director and vice chairman with effect from 1st October, 1996. Even though originally the respondent assured the Board that no assistance to set up and run the plastic division would be needed from Kanpur, yet, over a sum of Rs. 8 crore was transferred from the Kanpur division to plastic division. However, the performance of the plastic division had been dismal right from the beginning and the accumulated loss stood at about Rs. 8.3 crore as on 31st December, 1997. The net worth of this division was completely eroded because of the losses incurred by the plastic division due to the mismanagement of this division by the respondent. The respondent also indulged in siphoning of funds of this division and with a view to hide this, refused to furnish the accounting details of the division resulting in non-finalisation of the accounts of the company for the year 1997-98. The financial institutions also expressed their unhappiness over the affairs of this division. Various attempts were made to restructure the plastic division but no proposal was accepted by the respondent. In a Board meeting held on 13th June, 1998 which was attended by the respondent, it was decided to sell the plastic division. However, the respondent did not take any further action in this matter. Further, it transpired that the respondent had fabricated a Board resolution allegedly passed on 13th June, 1998 by which some of the respondents had been made additional signatories to the operation of the bank accounts in addition to the then existing signatories consisting of petitioners’ group. The company filed a civil suit against the banks for acting on the resolution in, the alleged meeting held by the respondent and the civil court had allowed the operation of the bank accounts by the earlier signatories. It also transpired that the respondent had illegally convened a meeting on that date and appointed himself as the chairman in contravention of the family agreement as well as article 108(a). In view of this, the banks had suspended the operation of all the accounts resulting in bouncing of cheques issued by the company earlier. Further, in that illegal meeting, the respondent had appointed four additional directors which is in violation of the family agreement. Thus, the respondent has illegally usurped the control of the management of the company. Accordingly, the petitioner filed a civil suit praying for staying the resolution allegedly passed in the Board meeting convened by the respondent and the court had stayed the resolution. In addition, the respondent caused a notice to be reissued for convening an extraordinary general meeting (EGM) to remove 2 of the independent directors and appoint 2 directors from the respondents’ family in their place. With these allegations, the petitioners have sought for various reliefs, inter alia, including the removal of the respondent as a director, for declaration that the Board meeting allegedly held by the respondent on 13th June, 1998 as null and void, for restraining the respondent from holding the EGM as requisitioned by them, for ordering an investigation into the affairs of plastic division, for permitting the petitioners to increase their shareholding to bring on par with that of the respondent as per the family agreement, for freezing of voting rights of the respondent, etc.

4. 2nd and 4th respondents have filed their counters to the petition. The reply of the 2nd respondent, in a nut shell, is as follows : The 1st petitioner is the managing director and another a joint managing director and as such they have no locus standi to file this petition alleging oppression and mismanagement in the affairs of the company. This petition has been filed with an oblique motive of retaining the control of the company even though the petitioners are in minority. Since the entire petition is founded on the family agreement which itself provides for arbitration in case of disputes, the petitioners cannot file this petition for execution of the family agreement especially when the company is a listed company. Further, the petitioners have already filed two civil suits on the same issues that have been raised in this petition. The respondent is the son of the founder of the company, namely, Shri H. N. Bhargava, elder brother of the petitioner. After the death of Shri Bhargava, the petitioner, being the eldest in the family was appointed as the managing director. The respondent is a chartered accountant and joined the company in 1973 as executive (finance) and later became the director (finance) and remained as such till 1983. After his appointment as managing director, the petitioner started promoting his own sons and forced the respondent and his brother to leave the company in 1983. He did not allow any of the family members of his brother who was the promoter of the company to become a director. No doubt, in the year 1991, a family agreement was entered into, yet, the petitioner was promoting his sons and the son of the 2nd petitioner, completely neglecting the family of Shri M. N. Bhargava (respondent Nos. 3 and 4), which was originally on the side of the petitioner. All the divisions were under the control of the petitioners even though, as per the family agreement, all the family members would have equal participation in the management. Thus, it is the petitioners’ group which has oppressed the majority shareholders. As far as the plastic division is concerned, this project was appraised by ICICI at a cost of Rs. 20.81 crore and that of expansion of Kanpur unit at Rs. 5.111 crore totaling to Rs. 26.31 crore. The financing of the project included public issue of Rs. 9.5 crore. Since the capital market conditions showed signs of weakness, the company could not resort to public issue and, accordingly, the Board decided to finance the project by resorting to inter-corporate deposits. The entire project was executed and supervised by the 4th petitioner and not by the respondent as alleged in the petition. Only in January 1996, the respondent sought for a role in the company and since the petitioner did not want him to be associated with the Kanpur unit, he made the respondent in charge of the ailing plastic division, which Was being looked after by the 4th petitioner till then. Only in October 1996, after a lot of persuasion, the petitioners made the respondent a whole-time director. Even though, Kanpur divisions were supporting the plastic division till the 4th petitioner was in charge of the plastic division, after the respondent took control of the plastic division, no financial support was forthcoming from Kanpur unit. The petitioners did not take any interest in the affairs of plastic division. In view of the liquidity problem, the financial institutions urged the company to go for a right issue of Rs. 8 crore and at the initiative of the respondent, VSL Finance Ltd. agreed to sponsor the right issue. However, the petitioner was not interested in the right issue being made and as such this right issue did not materialise even though the respondent and his family members had contributed Rs. 1.5 crore towards the right issue. Even though plastic division was not doing well, yet the petitioner wanted remittances from this division to Kanpur. Instead of assisting the plastic division, the petitioner, with a view to oust the respondent from the company, suggested closing of this division, sale of the division or in the alternative advised forming of a separate entity for this division, even though the petitioner was fully aware that the financial institutions would not support this move. In spite of the financial difficulties experienced by the plastic division, the petitioner issued instructions to the bank to transfer sale proceeds of the plastic division to Kanpur resulting in non-payment of salary to the workers consequent to which the workers went on a flash strike in May 1998 and the electric connection was also disconnected due to non-payment of electricity bill. In spite of these matters having been brought to the notice of the petitioner, no remedial action was taken by him. In the meanwhile, with a view to consolidate his position, the petitioner allegedly held a Board meeting on 25th August, 1998 which was attended only by, three out of the ten directors, in which one Mr. Bhalla was appointed as a director and far reaching decisions were taken. It was done without the knowledge of the directors belonging to DB group. The proceedings of this meeting have been stayed by a civil court. The respondent gave a notice for convening a Board meeting on 13th June, 1998 in which eight of the ten directors were present. When the issue relating to appointment of Shri Bhalla in the earlier meeting was raised, the petitioner along with the 2nd petitioner left the meeting. The meeting continued with the respondent as the chairman and four additional directors were appointed and change of operation of bank accounts was also approved. These resolutions have now been stayed by a civil court. Later, some of the shareholders requisitioned a general body meeting for removing two directors and appointing two other directors and this requisition was considered through a circular resolution by the majority of the directors and these directors decided to convene the EGM. In the meanwhile, the Board allegedly passed a resolution in a Board meeting convened by the petitioner rejecting the requisition. However, the requisitionists themselves convened the said meeting and passed the resolutions as propose. Thus, it is the petitioner with minority backing has oppressed the majority shareholders.

5. After the petition was filed, a number of applications were filed, both by the petitioners as well as by the respondents making allegations against each other in the conduct of the affairs of the company subsequent to the filing of the petition. The petitioners also filed an amendment application CA 198/98, seeking to bring on record that in a Board meeting held on 8th July, 1998, three more directors were inducted and that one director had resigned.  The main allegations of the petitioners were that, through a circular resolution, the respondents claim that the petitioner was removed as the managing director and the 2nd petitioner as the joint managing director with effect from 30th December, 1998; that the respondent had forcibly taken over the Kanpur division of the company on 28th December, 1998; that the petitioners were not allowed entry into the factory : premises. The allegations of the respondents were that without notice to his group of shareholders, the petitioner allegedly held the annual general meeting (AGM) for 1997-98 on 28th December, 1998 whereat far reaching decisions were taken; that the registered office of the company was shifted to the residence of the petitioner; that all the records of the company had been removed from the registered office; that clandestinely and without the approval of duly constituted share transfer committee, a number of shares held by the respondents which were in pledge with VLS Finance Ltd. had been transferred to VLS Finance Ltd. resulting in the respondent being reduced to minority.

6. In the hearing held on 22nd July, 1998, CA 133 of 1998 was moved wherein the petitioners had sought for restraining the requisitionists from convening the EGM as per the requisition dated 15th June, 1998. On that day, without passing any order on the application, in view of the close relationship between the parties, the counsel were advised to impress upon their clients to settle the dispute amicably. In the next few hearings, the matter of amicable settlement was considered. In the meanwhile, certain disputes arose between the parties regarding an AGM allegedly held on 28th December, 1998 and also on the passing of a circular resolution removing the petitioner as the managing director and the 2nd petitioner as the joint managing director. In the hearing held on 8th January, 1999, we directed that none of the resolutions both in the AGM and in the Board meeting shall be given effect to. In the hearing held on 10th February, 1999, with a view to explore the possibility of amicable settlement between the parties, as an interim measure, the 5th petitioner representing the petitioners and the 2nd respondent representing the respondents agreed to have a working arrangement and in terms of the consent given by them, we passed an order on 10th February, 1999, a gist of which is as follows : The Board to be reconstituted with two directors from each side with Shri Justice Sahai, former Judge of the Supreme Court as the chairman; the petitioner group to manage the day-to-day affairs of the forge division and the respondents the other two divisions in Kanpur; the Board to decide the fate of the plastic division; bank accounts were to be operated jointly with one member from each group; no transfer of shares during the pendency of the proceedings; none of the parties to pursue any pending proceedings, etc.

7. Accordingly, the Board was re-constituted and the petitioners’ group took charge of the forge division and the respondents the other two divisions at Kanpur. On receipt of a report from the chairman of the Board, we gave further directions in our order dated 21st April, 1999 which provided for opening of separate bank accounts for the forge division and for the other divisions and also for supply of raw materials by the forge division to track part division and also for maintenance of status quo in regard to the shareholding in the company. Even though, later, the respondents complained of non-supply of raw material by the forge division and the petitioners took the stand that the respondents were not making payment for the supplies already made, in the hearing held on 28th May, 1999, the parties agreed that the disputes could be resolved by division of the assets of the company by which the forge division would vest in the petitioners and the other two divisions in the respondents. Accordingly, an order was passed on 31st May, 1999 giving certain directions for conducting the affairs of the company in the interim period till the modalities of the divisions of the assets of the company were worked out. In the same order, in view of the settlement between the parties, the interim Board was dissolved. However, neither of the parties complied with the interim directions given in the order dated 31st May, 1999 and later the respondents withdrew their offer of amicable settlement by division of the assets of the company, even though the petitioners were prepared for the same. Accordingly, the petition was heard on merits. After the hearing was concluded, the State Bank of India, Kanpur and ICICI, who had given financial assistance to the company, filed applications praying for protecting their interests in the order to be made by the Company Law Board on the petition.

8. Even though various counsel appeared for both the parties during the earlier hearings, at the stage of final hearing the petitioners were represented by Shri Gopal Subramanian, senior advocate and the respondents by Shri Sarkar, senior advocate. Shri Gopal Subramanian initiating arguments on the petition submitted that the respondent is a stranger to the management of the company inasmuch as he came in as a director only in 1991 after the family settlement dated 23rd March, 1991. One of the conditions of the family settlement was that the shares between the KN group and DB group should be equalised. He submitted that the respondents had been clandestinely acquiring shares of the company and that was why equalisation was agreed upon.  However, he did not implement this term of settlement in spite of the petitioner’s request for such equalisation even as late as in 1996 (Annexure-L to rejoinder). The idea of equalisation was ‘With a view to have joint management of the company by both the groups since in the earlier partnership firm, both the petitioner and the father of the respondent, being brothers held equal shares. Further, the respondent had always been creating problems in the family as is evident from the fact that he had disputes with his own brother in EMA which resulted in filing of a petition before the Company Law Board culminating in the respondent’s coming out of EMA. Further, he was instrumental in getting the shares held by MNB family transferred to VLS Finance Ltd. in 1995 which also resulted in filing of a petition under section 111A before the Company Law Board. However, of notwithstanding these aspects, at the insistence of the respondent, the Board of directors decided to accept his suggestion to invest in plastic division and he was made sole in charge of that division. The respondent so mismanaged that division that the Kanpur divisions, which were doing extremely well, are now starved of funds financing of plastic division. Even the accounts of the company could not be finalised due to non supply of accounting details by the respondent relating to the plastic division for 1997-98. Further there have been instances of siphoning of funds of plastic division and that is the reason why the respondent has not been furnishing the accounting details. In spite of repeated advice to the respondent either to sell off the plastic division or to close the same or to form a separate company, he did not take any action. In addition, the respondent is also guilty of attempting to remove the petitioner-directors from their managerial positions through a special resolution on 30th December, 1998. Further, without taking into consideration the interests of the company, his action also resulted in stoppage of the operation of the bank accounts and with a view to increase his majority on the Board, he also tried to induct four more directors from his group. He also pointed out that the respondent illegally took control of the track components division on 28th December, 1998 even though the petitioners were managing that division for over 20 years. Thus, he submitted that the respondent, in view of his majority shareholding, has tried to oppress the petitioners by ousting them from the management of the company. In regard to transfer of shares to VLS Finance, the learned counsel pointed out that when the VLS Finance to which the shares had been pledged, lodged the transfer instruments seeking registration, the company was legally bound to transfer the shares and the same was not with a view to reduce the majority shareholding of the respondents.

9. He further submitted that there is complete deadlock in the management of the company and even the independent chairman appointed by the Company Law Board could not bring out any settlement between the parties. Shri Subramanian further submitted that due to the conduct of the respondent, the company has a liability of over Rs. 18 crore and as such it is a fit case where the respondent should be removed from the management of the company and the petitioners should be given charge of the management of the company with the instructions to dispose of the plastic division. Otherwise, either the company would become a BIFR (Board for Industrial and Financial Reconstruction) company or go for winding up or before the Debt Recovery Tribunal. Alternatively, the parties should part ways. This could be achieved, he pleaded, only by the division of assets of the company between the two groups, as agreed upon and recorded in the order of the Company Law Board on 31st May, 1999. He submitted that the company is a family company in the guise of a quasi-partnership as is evident from the fact that a partnership firm was converted into a company and that nearly 80 per cent of the shares are held by the family members and that all the family shareholders have pledged their shares for raising funds for the company and as per the family agreement dated 23rd March, 1991, articles of association of the company were amended to ensure participation of both the groups in the management of the company with certain matters to be decided by affirmative votes by both the groups. In this connection, he relied on the decision of the Company Law Board in Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. [1996] 23 CLA 289 in which, even though the company was a public company, the Company Law Board ordered division of the assets of the company on the ground that it was a family company in the guise of a quasi-partnership.

10. Shri Sarkar, appearing for the respondents, submitted that this petition is not maintainable since it is the petitioners’ group which is controlling the management of the company, as the principle of law is that persons in management cannot allege acts of oppression and mismanagement. The entire allegations in the petition relates to the affairs of the plastic division which is one of the divisions of the company. All the decisions relating to this division were taken by the Board of directors and as such the petitioners cannot absolve themselves of their responsibilities in this regard. The main reason for inadequate finance for the plastic division was that the projected public issue could not materialise due to adverse capital market conditions and due to the reluctance of the petitioner to agree for right issue of shares. Just because the plastic division suffered losses under the alleged management of the respondent, it cannot give rise to a cause of action for the petitioners to file this petition. The Board was fully aware of the status of this division as is evident from the approval of the accounts by the Board for the year 1996-97 and also the unaudited accounts up to 30th September, 1997. As a matter of fact it is the petitioner with minority shareholding who has been trying to take over the company as is evident from the fact that without the consent of all the directors, Shri Bhalla was inducted into the Board on 28th May, 1998 and they have also taken a stand that two more directors were appointed in a Board meeting held on 8th July, 1998. In addition, without proper notices, they allegedly held the AGM for 1997-98 on 28th December, 1998. There are various circumstances which would indicate that this meeting alleged to have been held on that day could not have been held and even if held, could not be considered to be legal and valid. He submitted that the company had made an application on 26th November, 1998 seeking extension of time to hold the AGM up to 31st March, 1999. Again, they made another application on 1st December, 1998 for similar extension to the Registrar of Companies.  Even though in the notice signed by the petitioner convening the AGM (such notices are normally signed by the company secretary), the meeting was to be held at the registered office, it was purportedly held at the residence of the petitioner. Even the representative of the financial institution who came to the registered office of the company to attend this meeting has averred that no AGM was held on that day. Therefore, he submitted that even if the meeting had been held, the same is null and void as notices have not been given to all the shareholders. On this proposition, he relied on Parmeswari Gupta v. UOI AIR 1973 SC 2389 and Dipak G. Mehta v. Sree Anupar Chemicals India Ltd. [1999] 35 CLA 68 (Bom.)/[1999] 35 CLA 393 (CLB).

11. In regard to the transfer of shares to VLS Finance Ltd., Shri Sarkar pointed out that the transfer so made constitute nearly 16 per cent of the shares of which the shares held by the respondents account for nearly 13 per cent. Thus, by allowing this transfer without following the provisions of law and the articles, the respondents have been reduced to minority. He pointed out that as per article 110, the transfer committee has to have one representative from the respondents’ group and with the concurrence of such a representative, the transfers could not have been approved. Further, it is doubtful whether the transfers took place on 26th August, 1998 as claimed by the petitioners as they did not mention this fact either in their application CA 221 filed on 4th September, 1998 or CA 291 filed on 27th November, 1998, nor in the meeting held with ICICI in December 1998. Further, the transfer is in violation of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SEBI Takeover Code) and as per law, the VLS Finance Ltd. should have given a notice before foreclosing the pledge. By approving the transfer by which the majority of the respondents had been reduced to minority, the petitioners have acted in a manner oppressive to the respondents and as such this transfer should be set aside as held in Clemens v. Clemens Bros. [1976] 2 All ER 268 and Anupar Chemicals case (supra). He further pointed out that with a view to prevent the respondent to have access to the statutory records of the company and with a view to carry out the manipulation, the petitioners shifted the registered office to the residence of the petitioner without any authority of the Board and as such the registered office should be shifted back to its original location.

12. Countering the arguments of Shri Subramanian that the company is a family company and in the nature of quasi-partnership, Shri Sarkar pointed out that this company is a listed company with over 20 per cent of the shares held by outsiders. Further, even the family settlement relied on by the petitioner that there would be equalisation of the shares between KN group and DB group can no longer stand inasmuch as the MNB group holding about 9 per cent. shares which was a part of KN group has now jointed the DB group. Even otherwise, the company was not a party to the family settlement and as such the same is not enforceable against the company. This agreement has not been made a part of the articles and as such not binding on the company as held in Rangaraj v. V. G. Gopalakrishnan [1991] 6 CLA 211 (SC)/AIR 1992 sc 453. Further, the petitioners had abandoned the claim for equalisation as is evident from various records produced before the Company Law Board. He pointed out to the factual position that even on the date of filing of the petition, the petitioners’ group held only 26 per cent shares while the respondents’ group held over 51 per cent indicating clearly that the respondents were in majority.

13. In regard to the suggestion of Shri Subramanian for division of the assets of the company relying on Jaidka Motor Co. case (supra), Shri Sarkar pointed out that in that case, there were two independent divisible units while in the present case, all the units are inter-dependent and as such no division is possible. Further, for such a division, the consent of the public shareholders and the financial institutions is necessary. There is no deadlock in the management of the company. Accordingly, he submitted that the Company Law Board should set aside the transfer of shares to VLS Finance and that a general body meeting should be convened under the supervision of an independent chairman to elect the Board of directors so that the will of the shareholders would prevail in the composition of the Board.  In the alternative, he submitted that the petitioners being in minority should be directed to sell their shares to the respondents who are in majority as held in Bajrang Prasad Jalan v. Mahabir Prasad Jalan AIR 1999 Cal. 156 and Yashvardhan Saboo v. Groz Beckert Saboo Ltd. [1992] 9 CLA 202 (CLB).

14. Shri Rajiv Nayyar, senior advocate for VLS Finance, submitted that his client had advanced a sum of Rs. 240 lakh to the company for which the family shareholders of all the groups executed deeds of pledge, agreement-cum-pledge and irrevocable power of attorney in favour of VLS Finance together with share certificates constituting 36.60 per cent shares in the company along with blank transfer forms duly signed and executed. As per the agreement, all accruals to the shares by way of bonus, dividend, rights, etc., would be deemed to be pledged with VLS Finance. However, even though, bonus shares were issued and dividends declared, nothing came to the VLS Finance. There was consistent and regular failure on the part of the company to pay back the principal as well as interest in spite of repeated reminders except that a small amount of Rs. 44 lakh towards principal an amount of Rs. 38.18 lakh towards interest was received by VLS Finance. As of date, a sum of Rs. 325 lakh was outstanding towards the principal and interest. Even though, VLS Finance insisted on 40 per cent of the shares to be pledged at the time of sanctioning the loan, yet, in view of non-handing over of the bonus shares, the holding by VLS Finance has come down to around 15 per cent. Since, there was a threat of the company being wound up, with a view to protect the interest of VLS Finance, it had lodged the shares for registering the same in its own name. VLS Finance had already approached the SEBI for seeking exemption from application of the SEBI Takeover Code and the application is pending with SEBI. Shri Nayyar submitted that his clients are not interested in holding the shares and if proper safeguard is made for repayment of its loans together with interest, his client would be willing to give proxies for all the shares to any one nominated by the Company Law Board since his client is not interested in siding with any of the shareholders.

15. We have considered the pleadings, arguments of the counsel and also the written submissions made by them after the conclusion of the hearing. We shall first deal with the objection of Shri Sarkar that the petitioners being in the management, have no locus standi to file the petition.  Section 399 vests with the shareholders the right to move of the Company Law Board in case of oppression under section 397 and in case of mismanagement under of section 398. Oppression could be either by the majority of against the minority or vice versa and as such it is immaterial as to who is in management while in case of mismanagement, it may be relevant. However, when two groups are in management and disputes arise between the two groups, if the same could not be resolved in the domestic forum, then, we do not find any bar in the aggrieved group approaching the Company Law Board even if it is in the management along with other group. In the present case, admittedly there are two groups of shareholder directors and one group has approached us with grievances of oppression and mismanagement on the part of the other group. Therefore, as a general proposition, we are not in a position to accept the contention of Shri Sarkar that shareholders in management cannot file a petition under section 397/section 398. When we say so, we do not mean that the allegations have been established but only mean that there is cause of action to file this petition. Shri Sarkar also pointed out that through this petition, the petitioners are seeking for specific performance of the family agreement relating to the equalisation of shareholding and the Company Law Board has no power to do. We do agree with him in this regard and other than taking cognizance of the fact that there was a family settlement, we do not propose to adjudicate on the claims arising out of the same.

16. One other aspect that we would like to record, as it would have bearing on the examination of the allegations and the reliefs to be granted, is that there are sufficient material to show that this company is a family company

in the guise of partnership, notwithstanding the fact that it is a listed company. First is that, the company took over the partnership firm, initial allotment of shares was in the same proposition to the share in the partnership, it is the family members who decide about the composition of the Board as is evident from the family settlement in 1991, it is family shareholders who pledged their shares for raising finance for the company, etc.

17. It is evident from the pleadings that the genesis of the present dispute between the parties is in relation to the affairs of the plastic division. It is an admitted fact that the performance of the plastic division has resulted in dire financial difficulties for the company as a whole. While it is the contention of the petitioners that the respondent is responsible for the poor performance of this division, it is the contention of the respondent that it is due to non-availability of sufficient funds. It is on record that this division was established with the approval of the Board and as such whether it was able proposal or was at the instance of the respondent is irrelevant at sensi this point of time. The fact being that this division is the cause for the present financial difficulties, instead of remedying the situation, both the groups, by their unilateral actions, have worsened the situation now leading to a stage where the financial institutions have chosen to send their representation to us. Even assuming that alleged mismanagement of a particular division by a director could give cause of action to file this petition, yet the resolutions by the respondent group of directors on 13th June, 1998 could definitely be considered as an act of oppression considering the relationship between the parties providing cause of action to file this petition. Both the sides have, as elaborated by the respective counsels had taken action to outwit each other. In a proceeding under section 397, it is not the legality/illegality of actions complained that is of primary importance but whether such acts could be classified as acts of oppression. We agree with both the counsel about the wrongs committed by the other side by taking unilateral decisions in the various Board meetings as well as the general body meeting and the EGM. Thus, both the groups are found to be guilty of acts of oppression against the other group. In view of this we do not propose to deal with the allegations in detail.  However, the issue relating to the transfer of shares to VLS Finance requires to be discussed. According to the company, these transfers were registered sometime in August 1998. As rightly pointed out by Shri Sarkar, the fact of these transfers was never brought to our notice in the subsequent hearings raising a doubt as to whether the transfers were effected at all at that point of time. Further, we also note that these transfers have been effected in violation of article 110 without the presence of the directors from the respondents’ group. May be, there is a violation of the SEBI Takeover Code also. But, it is on record that the family shareholders had pledged the shares and on non-repayment of the loans, the VLS Finance had the right to get the shares registered in its name. In the present proceedings, we are dealing with acts of oppression and mismanagement in the affairs of the company and not on the legality or otherwise of the VLS Finance getting the shares registered. If there is any illegality in registration of shares, the concerned shareholders have to initiate separate proceedings and we do not consider it proper to adjudicate on this issue in the present proceedings especially in view of the stand of VLS Finance that they would not exercise any voting rights in respect of these shares.

18. It is very unfortunate that the family shareholders who had carried on the business of the company for nearly 30 years successfully have brought the affairs of the company to the present stage wherein its existence itself is in state of flux. In the recent past, both the groups have tried to outwit each other by adopting various measures unmindful of whether they fall within the four corners of law. That is why, without entering into the controversies, we advised the parties to amicably settle the matter and with a view to assist them in their efforts, we also appointed a former Judge of the Supreme Court as the chairman of the Board. A perusal of the deliberations in the Board shows that both the groups cannot carry on together and realising the same they themselves agreed before us that the assets of the company could be divided. However, later the respondents withdrew from compromise, while the petitioners were willing for the division of the assets.

19. In a proceeding under section 397/section 398, even if the allegations are not established, more so in a family company, we have always taken the view that to protect the interest of the shareholders and the company, appropriate directions should be given especially when there are irreconciliable differences between major groups of shareholders. In the present case, notwithstanding the fact that the conduct of the parties during the proceedings before us amply indicated that they could not carry on together, we also find that after the amendment to the articles consequent on the family statement in 1991, article 68 provides for passing of special resolutions in respect of certain matters and article 109 provides for affirmative vote from both the groups on various matters coming before the Board. With such serious differences and disputes between the parties, the probability of statement in the proceedings of the Board and the general body meetings in future is very high. Thus, parting of ways between the parties is the only solution which would ensure protection of the interest of all the shareholders as well as the company including the financial institutions. As a matter of fact this is what even the counsel for the parties/and the parties themselves expressed, even though they had different perceptions of the modalities of working out the parting of ways. While the counsel for the petitioners proposed division of assets, the counsel for the respondents proposed that the petitioners being in minority should sell their shares to the majority respondents. While, in many cases, we ourselves have directed the minority shareholders to sell their shares to the majority, yet, in the present case, in facts of the case, such a course of action would be prejudicial to the interest of the petitioners. It is an admitted position that KNB was one of the partners of the firm which was taken over by the company and also one of the original promoters of the company and has been the chairman-cum-managing director of the company for nearly a period of 20 years. Admittedly, DB came into the management, notwithstanding the fact that he was the majority shareholder, irrespective of the fact whether the status was acquired rightly or wrongly, only in the year 1991. The Company Law Board, being a court of equity, has to keep these aspects in mind while moulding appropriate relief. It is on record that both the groups agreed for the division of assets. As a matter of fact, there has been de facto division by which the petitioners are managing the forge division and the respondents other two divisions for nearly a year. It is at the last minute that the respondent resiled from this stand. According to us, the most appropriate direction that we could give, with a view to put an end to the disputes between the parties is that there should be division of assets of the company by which the petitioners will continue to control and manage the forge division and the respondents the other two divisions. This would be in line with our decision in Jaidka Motor case (supra) wherein also, even though the company was a public company, in view of the family nature of the company, we directed the division of the assets. Shri Sarkar pointed out that in the present case, the divisions are inter-dependent. As such division of the company is not possible. We find that the forge division supplies certain raw materials to the track components division but such supplies are not large and constitute only a small percentage of the requirements of that division. It has been brought to our notice that there are other suppliers who could cater to the needs of the track components division in case the respondents do not want to enter into a supply agreement on the terms and conditions applicable to other customers. In view of this, we are of the firm view that the division of the company is the only appropriate solution to bring to an end the disputes between the parties.

20. Accordingly, in exercise of our powers under section 402 of the Act, we direct as follows : Presently, the petitioners are managing the forge division and the respondents the other two divisions in Kanpur and this arrangement came into existence some time in January 1999.  We formalise this division of the assets of the company with the cut off date as 1st January, 1999. Each group will manage their divisions independently without any interference from the other group. A balance sheet as on 31st December, 1998 will be prepared after preparing a profit and loss account for the period ending on that date including the accounts of the plastic division. Since the financial institutions have high stake in the company, we consider it expedient that they should be associated with the exercise of partitioning the company so that in the petition arrangement, their interests are also protected. Accordingly, we constitute a fresh Board of directors for the company which will consist of two directors from the petitioners group and two from the respondents group with an independent chairman to be nominated by ICICI. The ICICI will appoint a valuer to value the shares as on 31st December, 1998. Both the sides will be at liberty to make both oral as well as written submissions before the valuer so appointed, which will be taken into account by the valuer in determining the value of shares. Once it is so determined, the company will purchase the shares held by the petitioners’ group and effect reduction in the share capital of the company. The valuer will also determine the value of the forge division which will be sold to the petitioners at that value. In giving these directions, we have taken note of the decision of the Supreme Court in Cosmos Steels (P.) Ltd. v. Jairamdas Gupta AIR 1978 SC 375 according to which the CLB need not have to follow the provisions of section 100 to section 104 of the Act in a proceeding under section 397/section 398. ICICI will nominate a suitable person as the chairman of the company latest by 15th December, 1999, who will ensure that the final division of the assets is completed by 30th June, 2000. The function of this Board will be restricted to working out the modalities of carrying out the above directions. Expenses connected with these tasks will be borne by the company. During this period the company’s bank accounts which stand frozen now, will be operated only as per the directions/ authority of the chairman. However, the petitioners and the respondents are at liberty to open and operate new accounts in the names of the forge division and track components divisions respectively. If there are any outstanding from any customers on the supplies made prior to 1st January, 1999, then realisation of the same will be credited to the accounts standing in the name of the company. Till the partition is effected, no general body meetings of the company will be convened or held either by the company or by any shareholder. This would safeguard the apprehensions of the respondents arising out of the transfer of shares to VLS Finance Ltd.

21. Once the modalities of the division are worked out and the value of the shares and the forge division is determined, the parties may approach us for a formal order for disposal of the petition. All the parties, including the financial institutions are at liberty to apply to us in case of any need.

22. Let a copy of this order be sent to ICICI and State Bank of India, Kanpur drawing their attention to the para 21 of this order.

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