Case Law Details

Case Name : Yashovardhan Saboo Vs Groz-Beckert Saboo Ltd. And Ors. (Company Law Board)
Appeal Number : 1995 83 Comp Cas 371 CLB
Date of Judgement/Order : 22/10/1992
Related Assessment Year :
Courts : Company Law Board (19)
Company Law Board
Yashovardhan Saboo
vs
Groz-Beckert Saboo Ltd. And Ors.
Date- 22 October, 1992
Equivalent citations: 1995 83 Comp Cas 371 CLB
Bench: S Upasani, S Balasubramanian

ORDER

1. This is a petition filed on January 22, 1992, under Section 397/398 of the Companies Act, 1956, by Shri Yashovardhan Saboo who holds 14,791 equity shares and supported by other 12 shareholders having 2,71,870 shares of Groz-Beckert Saboo Limited (hereinafter referred to as “the company”) alleging various acts of oppression and mismanagement in respect of the company. The authorised share capital of the company is Rs. 150 lakhs and the paid-up share capital is Rs. 110 lakhs. The petition is supported by shareholders holding 2,86,661 equity shares of Rs. 10 each fully paid up which constitute approximately 25 per cent. of the total shareholding of the company. These shareholders are part of the Saboo group having 40 per cent. of the total equity.

2. The admitted facts about this case are as follows :

Shri R.K. Saboo, father of the petitioner had obtained an industrial licence from the Government of India for the manufacture of hosiery needles in the year 1959. For implementation of the said project, a financial and technical collaboration agreement was finalised with Theodor Groz and Sohne and Ernst Beckert Nadelfabrik Commandet-Gesslschaft (hereinafter called “G. B.”), a partnership firm in Germany. The terms of collaboration were approved by the Government of India, vide their letter dated November 21, 1959. The G. B. group and Shri R.K. Sabpo entered into an agreement on April 1, 1960, to form and promote in India a private limited company and in pursuance of the said agreement the company was incorporated on October 15, 1960. Later the company became a deemed public limited company under Section 45A of the Companies Act, 1956. As per the agreement, Shri R.K. Saboo was to transfer the industrial licence to the newly formed company and the G. B. group to provide technical know-how. The total project cost was Rs. 15 lakhs of which the foreign exchange requirement for the machinery was about Rs. 9 lakhs. The machinery was to be brought in by the G. B. group. In view of this, it was agreed that in the newly formed company, the G. B. group will have GO per cent. shares, while the Saboo group will have 40 per cent. shares.

3. The important terms of the collaboration agreement were as follows :

1. The general administration and the management of the company shall be in the hands of two managing/executive directors having equal powers, one each to be appointed by the promoters and the said managing directors were to carry out the policy as laid down by the board of directors of the company.

2. Both the groups will be entitled to nominate three directors each.

3. The chairman of the board of directors shall always be one out of the three nominees of the G. B. group and the vice-chairman of the board of directors will be one of the nominee directors of the Saboo group.

4. The chairman of a meeting, either of the board or of the company, shall have a casting vote in case of equality of votes.

5. On ten matters mentioned in clause (L) of the agreement, no decision shall be taken by the board of directors or by the company except by unanimous consent of all the directors.

4. The agreement also contained conditions relating to fresh issue of capital, transfer of shares and rights of the G. B. group in the case of the company going or taken into liquidation. As per the terms of agreement, all major terms were incorporated in the articles of association which forms the basis of relationship between the two groups. The company was incorporated on October 15, 1960, and started production in 1961. Article 106 which provided for appointment of managing directors was later amended in the year 1974. to provide that in the event of any group desiring to forgo its right to appoint a managing director, then the managing director appointed by the other group would be the only managing director.  Sometime in 1974, the managing director appointed by the G. B. group, Mr. P. Lemka left the company and the G. B. group did not appoint any managing director till 1989 and Shri R.K. Saboo of the Saboo group was the only managing director till 1989. In 1987, Shri Ivanovski of the G. B. group was appointed as technical director for a period of five years and even before the expiry of this term of five years, he was appointed as managing director in 1989; On the retirement of Shri R.K. Saboo, the petitioner was appointed on November 10, 1991, as managing director from the Saboo group.

5. The German firm consisted basically of two families, one Groz family and the other Beckert family. Prior to 1987; one Mr. Martin Gass belonging to Groz family was, the chairman of the board of the company. In 1987, there was restructuring in the affairs of GB whereby Dr. Thomas Lindner from the Beckert family became the chairman of the board of directory of the company.

6. It is the contention of the petitioner that the collaboration agreement dated April 1, 1960, and the articles of association provide for shared management between the two groups and equal representation of both the groups on the board of directors, despite unequal shareholding. This was further confirmed by an agreement dated February 7, 1989. The business of the company was to be carried on as joint Venture and on, the basis of mutual trust and confidence to be reposed by the two groups on each other. It is the contention of the petitioner that for all purposes, it was a partnership enterprise between the G.B. group and the Saboo group with both the groups having an equal say in the management of the company. The petitioner has submitted that so long as the German group was represented by the Groz family, running of the company was smooth and without any difficulty ; however from 1988 after Dr. Lindner became the chairman of the board, relations took an adverse turn. The G. B. group started insisting on the appointment of Mr. Ivanovski, technical director, as managing director of the Indian company and in order to avoid any possible misunderstanding in future over the management and affairs of the company, both groups arrived at a unanimous agreement dated February 7, 1989, enunciating the principles regarding future dealings in the company and Mr. Ivanovski became one of the two managing directors thereafter. In the agreement it was provided that, upon relinquishment of’ his office as managing director of the company, Mr. R.K. Saboo would be appointed as senior adviser of the company and would be paid a remuneration of Rs. 2,50,000 per annum plus other allowances for a period of seven years. However, on the expiry of his term as managing director of the company, the GB group refused to appoint him as adviser on the ground that he was entitled to be appointed as senior, adviser only if he relinquished office before the expiry of his contractual term. It is the contention of the petitioner that in fact Shri R.K. Saboo submitted his resignation before the expiry of the contract, but this was not given effect to by the board and thus the GB group violated the agreement of February 7, 1989, with an intention to reduce the Saboo group into a helpless and servile minority.

7. The controversies between the two groups relate to the expansion programme approved by the board of directors at the meeting held on August 29, 1989, the reluctance of the GB group to give the commitment to buy back needles at the price of DM 165 per 1,000 needles, the frequent use of casting vote by the chairman, the alleged illegal import of spare parts at highly inflated cost through GB, huge price differentials realised by the GB group on resale of goods exported through GB, the prevention by the GB group of direct exports by the company under its own trade mark, denial by the GB group for lawful use of the GB trade marks by the company, supply of machines and equipment by GB at huge profit margins, non-compliance with requirements of Section 297 of the Companies Act, the exclusion of the Saboo group from the day to day management of the company by withholding important information regarding operations of the company and unilateral take over of certain departments previously looked after by the petitioner, non-declaration of dividend, sale of needles at loss, non-co-operation of the GB group to take effective steps to indigenise raw material supplies and transfer of technology to the company.

8. In the context of issues like maintainability, application of the principles of partnership to a limited company, what constitutes oppression, the nature of the powers of the Bench under Section 397/398 and the type of the reliefs that can be given, both the petitioner and the respondents have referred to the decisions in various court cases. The petitioner relied on the decisions in the following cases :

1. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal).

2. Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. [1983] 53 Comp Cas 883 (Cal).

5. Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom).

4. Cosmosteels Put Ltd, v, Jairam Das Gupta [1978] 48 Comp Cas 312 (SC).

5. Debi Jhora Tea Co. Ltd. v. Barvndra Krishna Bhowmich [1980] 50 Comp Cas 771 (Cal).

6. Ramashankar Prosad v. Sindri Iron Foundry, AIR 1966 Cal 512.

7. Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp Cas 91 (SC).

8. Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL).

9. Needle industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC).

10. Chancier Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi).

11. Bird Precision Bellows Ltd., In re [1984] 1 Ch. 419 ; [1984] 3 All ER 444 (Ch D).

12. H.R. Harmar Ltd., In re [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA).

13. Ebrahimi v. Westbaurne Galleries Ltd. [1972] 2 All ER 492 ; [1973] AC 360 (HL).

14. Five Minnie Car Wash Service Ltd., In re [1966] 56 Comp Cas 566 (Ch D).

9. The respondents relied on the following cases to substantiate their arguments :

1. Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi).

2. Kind Overseas Pvt. Ltd. v. Raghunathprasad fhunjhunwala [197.6] 46 Comp Cas 91 (SC).

3. Rangaraj (V. B.) v. Gopalahrishnan (V. B.) [1992] 73 Comp Cas 201 (SC).

4. Rajakumar (S. S.) v. Perfect Castings Pvt. Ltd. [1968] 38 Comp Cas 187 (Mad).

5. Gnanasambandam (C. P.) v. Tamitnad Transports (Coimbatore) Pvt, Ltd. [1971] 41 Comp. Cas 26 (Mad).

6. Lundie Brothers Ltd., In re [1965] 2 All ER 692 ; [1965] 35 Comp Cas 827 (Ch D).

7. Five Minute Car Wash Service Ltd., In re [1966]’36 Comp Cas 566 (Ch D).

8. Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal).

9. Hamas Vettom (V. J.) v. Kuttanad Rubber Co. Ltd. [1984] 56 Comp Cas 284 (Ker),

10. Srikanta Datta Narasimharaja Wadiyar v. Sri VenkatesitJara Real Estate Enterprises Put. Ltd. [1991] 72 Comp Cas 211 (Kar).

11. Combust Technic Pvt. Ltd. In re [1986] 60 Comp Cas 872 (Cal).

12. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Cas 390 (Delhi).

13. Scottish Co-operative Wfioksale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL).

14. Shanti Prasad Jain v..Kalinga Tubes Ltd, [1965] 35 Comp Cas 351 (SC).

15. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd, [1981] 51 Comp Cas 743 (SC).

16. Chandler Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi).

17. Mohta Bros. Pvt. Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40:Comp Cas 119 (Cal).

18. Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Cas 46 (Cal). :

10. There is another factual aspect of this case which may be conveniently noted at this stage. While the Saboo group holds 40 per cent. of equity capital, the present petition has been supported by only 25 per cent. of the equity holders. When the petition first came up for hearing on January 30, 1992, counsel appearing on behalf of the petitioner and the respondents prayed that orders for interim relief be passed to the effect that the meeting of the board of directors of the company scheduled to be held on February 7, 1992, be held to consider only items Nos. 1, 6 and 7 of the agenda and the other items be postponed and considered in the meeting of the board of directors to be held on or after March 21, 1992, and we ordered accordingly. At the hearing held on April 8 and 9, 1992, counsel for the respondents brought up the issues relating to holding of board meetings. He prayed that the order dated January 30, 1992, restraining the board from considering various items be vacated as the company has to transact some urgent business at the board meeting. It was pointed out that our interim order was in force only up to March 21, 1992, after which the board was free to consider any matter. Counsel for the respondents, then submitted that it has not been possible for the board to take up certain important issues because of the attitude of the directors representing the Saboo group and in particular he mentioned agenda items regarding office space and extension of service of superannuating employees. Counsel for the petitioner objected to these items being taken up by the board for consideration. We made it clear to both counsel that the board of directors can consider any item which was within the competence of the board as per the articles of association and we refrained from issuing any direction as to which items could be taken up and which items could not be taken up in the board meeting. The G. B. group moved an interim application on April 13, 1992, seeking an ex parte interim order extending the services of Mr. R.K. Sehgal, vice president, marketing and sales, till the final disposal of the main petition. This interim application was first heard on April 13, 1992, and we ordered that the services of Shri R.K. Sehgal shall not be treated as superannuated till the disposal of the interim application. The interim application came up for hearing on April 16, 1992, for which notices were served on all the directors of the company, including directors who hold 15 per cent. shares and are part of the Saboo group, but are not party to the main petition. None appeared on behalf of Shri S.P. Mandelia, a director of the company who belongs to the Saboo group. During the hearing, it was brought to, our notice that Shri S.P. Mandelia belonging to the Saboo group, had filed on April 10, 1992, a suit before the Sub-Judge 1st Class, Delhi, praying for an injunction restraining the board of directors from considering the two agenda items relating to office space requirement and extension of services of employees superannuated or due for superannuation. In the said suit, the Sub-Judge 1st Class, Delhi, passed the following ex parte orders ;

” Whereas, in the above noted case, the plaintiff has moved an application under Order 39, rules 1 and 2 of the Civil Procedure Code for ex parte stay. As such the defendants are restrained not to consider the items regarding the extension of contract of the persons who have already superannuated or due for superannuation and shall also not take any decision which may amount to reducing the amount of the space available to the directors so the second group to which the plaintiff belongs in the board meetings.”

11. It was submitted on behalf of the G. B. group that the order of the Sub-Judge was obtained without disclosing to the court that on the same subject a petition was pending before the Company Law Board and that the Company Law Board had permitted the board of directors to consider this matter and the ex parte stay order obtained by Shri S.P. Mandelia, director, belonging to the Saboo group was with the intention of circumventing the orders passed by the Company Law Board. It was further pointed out that in view of the court order the board was unable to take any decision regarding continuation of Shri Sehgal’s services which was essential from the point of view of the company and, therefore, orders may be issued that the services of Shri Sehgal shall not be treated as superannuated till a final decision on the main petition was taken. On behalf of the Saboo group, it was pointed out that Shri S.P. Mandelia, who had sought the jurisdiction of the civil court, was not a party in the present petition and that no orders were passed by the Company Law Board at the hearing concluded on April 9, 1992, and his clients had not given any consent for consideration of the six items mentioned in the interim application.

12. After considering our orders dated January 30, 1992, clarification given in the hearing on April 9, 1992, and averments made before us by both the parties, in our order dated April 16, 1992, we observed :

” We are, therefore, surprised that one of the directors belonging to the Saboo group, petitioners in C. P. No. 4 of 1992, filed under Section 397/398, should have sought the jurisdiction of some other court on issues which are part of the petition and of which we are already seized. We have noted that Shri S.P. Mandelia is not a party in the present petition. However, it is difficult for us to believe that either Shri S.P. Mandelia who belongs to the Saboo group and a member of the board of directors was not aware of the present petition which is pending before us or that the petitioners are not aware of the application moved by Shri S.P. Mandelia in the civil court. “

13. We directed that the services of Shri R.K. Sehgal, vice president, marketing and sales shall not be treated as superannuated till disposal of the main petition and he would proceed on leave on receipt of the order. Counsel for the petitioner also reported at the next hearing that the application filed before the civil court had been withdrawn by Shri S.P. Mandelia.

14. The above episode clearly brings out that technically though the 15 per cent. of the shareholders belonging to the Saboo group are not before us, the case of the petitioner has been made out as if he represents the entire Saboo group having 40 per cent. equity shares and the pleadings are also centred around the core argument, “60 per cent. equity holder G. B. group oppressing 40 per cent. equity shareholder Saboo group”, and that the enterprise was started as a joint venture and both groups having an equal say in the management of the company. In the documents filed to support various averments made in the petition, documents supplied by Shri S.P. Mandelia have been included and relied on. In view of these facts, though only 25 per cent. shareholders belonging to the Saboo group are parties to the petition, it is obvious that the petition has been filed to protect the interests of all the shareholders belonging to the Saboo group.

15. One more factual aspect also could be noted at this stage before we take up in detail the various controversies between the two groups. The Foreign Exchange Regulation Act, 1973 (hereinafter referred to as “the FERA”), came into operation on January 1, 1974. Section 29 of the FERA, inter alia, provides that a company, in which the non-resident holding is more than 40 per cent. would require permission of the Reserve Bank of India (RBI) to carry on business in India. Under Section 29(4), the Reserve Bank of India has power to give directions for disinvestment of foreign equity holding or impose conditions while granting licence to carry on business in India. In 1973-74, the Government required G. B. to reduce their equity ownership in. the company but considering the nature of the technology, the Reserve Bank of India permitted them to retain 60 per cent. of equity and in this matter the Saboo group supported the case of the G. B. group to retain majority shareholding as admitted by them in para 11 of the rejoinder.

16. In various controversies in this case, reference is made to provisions in the articles of association of the company and, therefore, it would be relevant to set out the various articles around which these disputes are centred :

” Article 79. — The number of directors of the company shall not exceed eight including managing directors.

Article 80. — The following shall be the first directors of the company :-

1. Mr. Walter Groz.

2. Mr. Tarachand Saboo.

3. Dr. Carl Foehl.

4. Mr. Surya Prakash Mandelia.

5. Mr. Otto Oelwein.

6. Mr. Rajendra Kumar Saboo.

Article 81. — So long as the said Groz-Beckert group and the said Saboo group shall respectively hold 60 per cent. and 40 per cent. of the share capital of the company each shall be entitled to nominate four directors (including the two managing directors to be appointed under Article 106 hereof) on the board of directors of the company. The said directors shall not be liable to retirement by rotation, Article 95.–Subject to the provisions contained in Article 105 hereof the directors may exercise all the powers to borrow money or to mortgage or charge all or any of the undertakings and property of the company (including its uncalled capital or any part thereof), to issue debentures and other securities whether outright or as security, for any debt, liability or obligation of the company or of any third party, provided that the company’s borrowing powers shall not be exercised by the directors without the unanimous consent of all the directors. Subject as aforesaid, the directors shall duly comply with the provisions of Section 292 of the Act.

Article 98,–The directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings as they think fit. Subject to the provisions contained in articles 95 and 105 hereof questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the chairman shall have a second or casting vote. A director may, and the secretary on the requisition of a director shall, at any time summon a meeting of the directors. It shall not be necessary to give notice of a meeting of directors to any, director for the time being absent from India.

Article 99.–The quorum necessary for the transaction of the business of the directors shall be two directors, one of whom shall be from the Groz-Beckert group and the other from the Saboo group. However, with the consent of the Groz-Beckert group in the case of non-presence of any of the directors on their behalf the quorum will be any two directors.

Article 105– Subject as herein mentioned and except as delegated to a managing director local board committee agency or attorney effectively appointed or established under these articles every decision of the directors shall be made by a simple majority of those present and voting at a meeting of the directors. However, the following decisions and matters shall not be effected unless made in the presence of director/directors or both groups and unanimously by all the directors present :

(a) Making of appropriations out of the profits : Provided that in case it proves impossible to reach unanimity the dividends will be paid in accordance with Section 23A of the Indian Income-tax Act or any statutory modification or re-enactment thereof for the time being in force.

(b) Carrying on of any business activity other than that of manufacturing and selling hosiery needles.

(c) Location of the company’s factory or other premises in India.

(d) Fixation of commissions or discount for sales or other agents.

(e) Fixation of sale prices for sale of the company’s products whether in India or outside India if it is intended to sell below the cost of production.

(f) The taking of loans for the purposes of the company as well as the granting of loans by the company.

(g) Fixation of salaries and remuneration including benefits whether in respect of directors or any of them or staff on special contract.

(h) Payment of any remuneration/commission/allowance or benefit to any person who is not already an employee of the company.

(i) Liquidation of the company and in particular voluntary liquidation.

(j) Sale, mortgage, pledge or otherwise creating any incumbrance on any of the assets of the company.

If any of the aforesaid matters comes up before the company in general meeting the decision thereof shall be arrived at by a special resolution of the company.

Article 106.–(a) Both the groups that is, the Groz-Beckert and the Saboo group, will be entitled to appoint one managing director each who will have equal powers and will be paid equal remuneration and will look after the day-to-day administration and affairs of the company. However, any group, if it so desires may forgo its rights to appoint managing director and in that event the managing director appointed by the other group will be the only managing director of the company.

(b) Subject to the restrictions contained in the next succeeding clause, the directors for the time being such of the powers exercisable under these articles by the directors as they may think fit and may confer such powers for such time and to be exercised for such objects and purposes and upon such terms and conditions and with such restrictions as they may think expedient and they may confer such powers either collaterally with or to the exclusion of all or any of the powers of the directors in that behalf and may, from time to time, revoke, withdraw, alter or vary all or any of such powers. Unless and until otherwise determined the managing directors will jointly exercise all the powers exercisable by the directors save such powers as by the Act or by these articles shall be exercisable by the directors themselves.

(c) The managing directors shall not exercise the powers to :

(i) make calls on shareholders in respect of moneys unpaid on the shares in the capital of the company ;

(ii) issue debentures ; and

(iii) except as may be delegated by the board under Section 292 of the Act invest the moneys of the company and make loans or borrow moneys.

Article 107 — The company shall always have as the chairman of the board of directors one out of the four nominees of the Groz-Beckert group on the board of directors of the company. Similarly the company shall have as its vice-chairman of the board of directors one of the nominees of the Saboo group on the board of directors of the company.”

17. As noted in para 3 above, there are a large number of areas indicated by the petitioner in the petition about which there are acrimonious controversies, most of which spring out of the proposed expansion programme. These controversies mainly relate to the period after the signing of the settlement arrived at between the two parties on February 7, 1989, regarding their understanding about future management of the affairs of the company. In 1988, GB proposed an expansion programme for 20 million needles based on total export as there was good scope for it and the project would be financially viable: This expansion programme was approved by the board on August 29, 1989, and the board noted that the salient features of the expansion programme were :

1. The expansion would be advantageous to the company in upgrading the overall technology and improvement in the quality of its product.

2. The expansion would reduce the cost of its product.

3. The price of needles in foreign markets was not subject to much variation and, therefore, it would be reasonably safe to assume that the expansion would not be adversely affected by any fall in the price in the export market in future.

18. There were four alternatives before the board and the board approved alternative B.2.1.4. at a cost of Rs. 5.81 crores on a production base of 20 million needles plus 10 million additional capacity to be achieved over four years for export purposes as it was considered fairly realistic and financially viable even after providing for selling expenses on a sale price of DM 165 per 1,000 needles. The board resolution also authorised Shri R.K. Saboo, managing director and Mr. M. Ivanovski, technical director to take further action for implementation of the expansion programme including arrangement of finance and Government approvals, as would be necessary. At the board of directors meeting held on November 4, 1989, the minutes of the board meeting dated August 29, 1989, approving the expansion programme were confirmed. In the list of events submitted by counsel, it is also mentioned that at the said board meeting, item No. 5(a) regarding the expansion programme was considered and respondent No. 4 informed the board that the first phase of the expansion programme was complete and that the civil work had started and the equipment required for the project would be ready in Germany and would be despatched in May/June, 1990. In January, 1990, the company made an application to the Central Government for an import licence for the machinery required in connection with the expansion programme. At the board meeting held on February 8, 1990, detailed time schedule and status report in respect of the expansion programme were submitted to the board by respondent No. 4. In the month of March, 1990, an officer of the Exim Bank visited the company for appraisal of the project. The aide memoire prepared by the officer of the Exim Bank in connection with this visit stipulated that the company would arrange to obtain firm commitment from GB in form and substance satisfactory to the Exim Bank to the effect that GB will buy back up to 20 million needles per annum from the company at a minimum average price of DM 165 per 1,000 needles excluding agency commission payable, if any, and the price will be increased corresponding to the increase in the price of the raw material. On May 4, 1990, a board meeting was held which confirmed the minutes of the February 8, 1990, meeting, in which the detailed time schedule of the expansion programme was considered. On August 16, 1990, while approving the expansion programme of the company, the Government of India imposed export obligation in respect of the proposed expanded capacity of 20 million needles, in addition to the existing exports of 17 million needles. On September 3, 1990, Shri S.P. Mandelia, a director belonging to the Saboo group, wrote to Dr. Linder, respondent No. 2, calling for a board meeting as early as possible to clarify the economic viability of the expansion programme before any further steps were taken in connection with the same. In the letter, it is mentioned “at the board meeting held on August 31, 1990, during discussions about loans from the banks and financial institutions for expansion, when asked by me for GB to furnish a guarantee for the transfer price for export, you informed the board that the international market of the needles was very uncertain and GB could not give any guarantee but could consider giving the assurance only for DM 120, against the DM 165 indicated for the cash flows, on which profitability had been calculated under your advice and applications made to the Government of India accordingly.” He had also mentioned in the letter that at the board meeting the implication of Section 299 of the Companies Act should also be discussed. At the board meeting held on October 16, 1990, the issue regarding the price of DM 165 per 1,000 needles was further discussed at length. In the same meeting a resolution appointing Shri Yashovafdhan Saboo as managing director of the company from November 10, 1990, was also passed. On October 22, 1990, the Government of India issued a capital goods import licence subject to the conditions of export obligation; On November 12, 1990, Mr. R.K. Saboo wrote to Dr. Lindner raising a number of issues relating to the expansion programme more specifically regarding the buy-back guarantee at DM 165 for 1,000 needles in the context of the export obligation imposed by the Government of India and increase in the cost of project from Rs. 5.8 crores indicated in August, 1989, to around Rs. 9 crores. The board of directors considered all these issues at the board meeting held on December 4, 1990 ; however, there are no agreed minutes of this meeting. Since the company was an independent organisation, the GB group maintained that the guarantee requested by the Saboo group for DM 165 for 1,000 needles was not possible, this being a business risk which the company should consider and take and GB could not provide guarantee for profits. According to the Saboo group, GB refused to give minimum price of DM 165 for 1,000 needles and offered a much lower price of DM 120 per 1,000 needles. It is further contended that GB was prepared to give a buy-back guarantee for 20 million needles at DM 165 per 1,000 needles for one year and DM 120 per 1,000 needles for the next four years and the price of DM 165 per 1,000 needles for five years could be considered if the company was prepared to accept itself as an affiliate subsidiary company of GB rather than an independent unit. Another point of dispute in respect of the minutes of the board meeting held on December 4, 1990, relates to the issue regarding the Saboo group insisting on reconsideration of the project, while, according to the GB group, the project was reapproved and confirmed by the use of the casting vote of the chairman. The meetings were held in February-March, 1991, between the Saboo group and GB in Germany to resolve the dispute. It is stated by the petitioner that at these meetings GB declared that whereas the Saboo group perceived the company to be an independent Indian company, GB wanted the Indian company to be a part of its global marketing strategy and a subsidiary and GB reiterated the proposal made in 1988 that the Saboo group should sell its shares and let GB assume total control over the affairs of the company. In the reply filed by the respondents, the respondents have denied the averments made by the petitioner but confirmed that there was a difference in the business philosophy and objectives of the two groups in relation to the working of the company and they had suggested that the Saboo group sell their shares in the company. On March 19, 1991, a letter was sent by the Joint Chief Controller (Import and Export) to the Export Commissioner to review the export obligation of the company in order to meet the indigenous requirement of hosiery needles. An application dated April 24, 1991, was made by the company and submitted to the Ministry of Texthes for removal of the total export obligation of 37 million hosiery needles. In the board meeting held on August 25, 1991, the board was informed that the Government had agreed to delete the export obligation clause in the licence granted for import of capital goods. While the minutes of the board meeting held on August 25, 1991, are disputed, this fact that the export obligation has been deleted and was mentioned in the board meeting is not disputed.

19. The events of August 25, 1991, have assumed substantial importance in this case. Probably by this time, both the parties had realised that the compromise effected as per the agreement of February 7, 1989, and intensive discussion held in Germany during February and March, 1991, to resolve the disputes between the two groups, were not enough to resolve the disputes between the parties. It has been alleged by the respondents that before the crucial board meeting of August 25, 1991, at which items relating to almost all the controversies were taken up for discussion, the Saboo group submitted a list of 17 demands to the GB group as a pre-condition for mutual settlement and for extending co-operation for the company’s working. It is also mentioned in the reply filed by the respondents that in these demands, demands relating to protection of benefits enjoyed by the Saboo group till then as well as sharing of profits realised by GB in all business transactions with the company were also included. It is also the contention of the respondents that the demands made by the Saboo group show that the primary concern of the Saboo group is not the alleged oppression by the majority or the denial of the legitimate right of the minority shareholders but perpetuation of their exclusive power and control over the company and ensuring for themselves the benefits and perquisites over and above those to which they are entitled to in the ordinary course. In the rejoinder filed by the petitioner this has been denied and disputed by the Saboo group and reference was made to a number of points the Saboo group had raised at the board meeting which the GB group refused to discuss and got postponed. While none of the parties has filed the entire disputed minutes before us in support of their contentions, extracts of some of the disputed items have been filed by both the parties. The issues that were considered at the board meeting included issues relating to the expansion project, the dividend policy, compliance with the provisions of Section 297, continuation of the lease of the transit house at Delhi and the respective authority of the two managing directors over the executives for the smooth functioning and management of the company, At the next board meeting held on November 18, 1991, again all the items relating to various controversies were considered but there are no agreed minutes of that meeting and it has been alleged by the petitioner that the GB group tried to defeat the various resolutions suggested by the Saboo group by the casting vote. It is the contention of the petitioner that even for approval of the directors’ report and proposals like indigenisation, travel by economy class instead of business class as an economy measure were defeated by the GB group by exercising the casting vote. On December 30, 1991, the annual general meeting of the company was held and as per the extract from the draft minutes of the annual general meeting filed along with the petition, some of the controversial issues were also raised again at the meeting and these minutes are disputed. Thus, the relations between the parties have become so strained that the minutes of the board meetings held on December 4, 1990, August 25, 1991, and November 18, 1991, and the minutes of the annual general meeting held on December 30, 1991, could not be finalised as both the parties have different versions of what transpired at these meetings. Ultimately, on January 22, 1992, the present petition under Section 397/398 was filed by the petitioner transferring the battle from the board room to the court room.

20. As a spin off of the main dispute relating to the expansion programme, a number of inter-linked controversies have been raised which we may also briefly discuss at this stage.

(i) Import of spare parts in contravention of the Import Control Act :

21. Some time after making the application for the import licence for the machinery required in connection with the expansion programme in January, 1990, the company realised that due to oversight spare parts required for the machinery were not included in the application. The company placed orders with GB for import of spare parts under the OGL. Due to this, certain spare parts valued at over Rs. 34 lakhs arrived in India before the arrival of the main machinery. On receipt of the Central Government’s approval for import of machinery on August 20, 1990, and on receipt of the import licence on October 20, 1990, on November 9, 1991, respondent No. 4 made a representation to the Chief Controller of Imports and Exports seeking regularisation of imports of spare parts which were in contravention of the provisions of the Import Control Act.

22. It is the contention of the petitioner that import of these spare parts was made in undue haste and under the direction of GB. It has been further contended that the spare parts which included second-hand parts as well, were imported without any examination as to the possibilities of indigenous manufacture and at very exorbitant prices. No consultations were held with the Saboo group before the letter of respondent No. 4 was sent to the Government for regularisation of the contravention of the provisions of the Import Control Act. This matter came up for discussion at two/ three board meetings and, finally, on November 18, 1991, in connection with the resolution moved by the Saboo group before the board for immediate re-export of spares worth Rs. 40 lakhs supplied by GB and refund of purchase price paid by the company to GB. This resolution was defeated by using the casting vote. It is also submitted by the petitioner that while the company auditors, A. F. Ferguson, earlier circulated a note to the managing director of the company pointing out the contravention of law, this note was later on withdrawn and replaced by a note which did not mention about the contravention of law. It was also submitted by the petitioner that out of imported spare parts of Rs. 38 lakhs, respondent No. 4 was attempting to write off the spare parts worth Rs. 32 lakhs imported for the expansion project but could not do so when the Saboo group objected to such write off on the ground that the matter was not discussed with them.

23. In reply, it has been submitted by the respondents that the expansion programme as well as schedule of implementation were approved by the board and the managing director, Shri R.K. Saboo and respondent No. 4 were authorised to take all steps. It was realised by the company that due to oversight, spare parts were not included in the import licence. Therefore, the company decided to place orders with GB for import of spare parts under OGL and these orders were placed during February-July, 1990, and received by the company from July 27, 1990, to November 26, 1990, The value of spare parts for the new machinery was Rs. 32.39 lakhs, for the old machinery Rs. 1.27 lakhs and for in-house manufacturing/modification of machinery, Rs. 3.92 lakhs. The spare parts arrived before getting the import licence for the machinery as there was unexpected delay in getting the import licence compared to the date indicated in the implementation time schedule. It is further submitted that while the import under OGL was legal, at the best the company might have committed a technical violation of the import policy and, therefore, the company had asked for regularisation of the same. In regard to write off of spare parts, it was explained during the hearing that the suggestion regarding write off did not mean that they had become obsolete and the suggestion was being considered as part of ways and means to overcome the; liquidity problem of the company in view of the stringent credit squeeze measures.

(ii) Supply of raw material, machines/equipment at inflated prices ;

24. In the petition it has been alleged that all the imported raw materials and consumables and most of the imported machinery were being purchased by the company from GB. It has been contended by the petitioner that though GB has given from time to time chartered accountant’s certificates that the prices charged were on the basis of cost plus “reasonable profit”, there is no quantification of this profit and the respondents had consistently avoided discussion on this topic.,It is also further alleged that the imported raw material which was about 85 per cent. of the total raw material requirement in 1986 during the period when Shri R.K. Saboo was managing director, has gone up to nearly 100 per cent. now after respondent No. 4 has taken over as managing director. According to the petitioner, the GB group has ensured that no effective steps were taken for indigenisation of raw material supply and even the proposal of the Saboo group that more Indian manufacturers of raw material should be contacted was defeated by the use of the casting vote. This is because, according to the petitioner, all the supplies of imported raw material are channelised through the GB group which has a vital interest in ensuring that the company remains totally dependent on imported supplies and this continued import of raw material has resulted in a greater outflow of foreign exchange from the country.

25. In reply, the respondents have stated that GB is making only a reasonable profit between 5 to 10 per cent. on the raw materials supplied to the company by procuring the same from manufacturers who have developed the raw material as a result of technical know-how from GB. Even on an earlier occasion, when the customs authorities questioned the valuation of the raw material, on production of the chartered accountant’s certificate by the GB group, the valuation was accepted by the customs authorities. This, according to the respondents, would indicate that there is no unreasonable profit margin on the raw materials supplied. Attempts by the company to develop indigenous sources for raw material were not successful and the Saboo group was interested in procuring raw material through their affiliated companies.

26. In the rejoinder filed by the petitioner, it has been submitted that the chartered accountant’s certificate provided by GB regarding pricing of items supplied by GB to the company never specified the percentage of profit as 5 per cent. to 10 per cent. It is further submitted that even on this basis, during the last three years, on an import of about Rs. 7 crores of raw material through GB, GB has made a profit of Rs. 35 to 70 lakhs. Further allegations have been made in the context of import of jig boring machines, gas compressors, dial indicators, profile projector and trestles. In the counter-reply filed by the respondents, it has been submitted that GB is not the manufacturer of or dealer of these machines and GB had undertaken to procure these items only at the request of the company to supply these items. It was also pointed out that the total cost of these five machines is less than Rs. 90,000 and the respondents have given detailed explanation regarding source of supply, quality of the machines and how the price was arrived at.

27. Regarding the allegation relating to supply of raw material and machines/equipment at inflated prices, Shri Mookherjee pointed out that no efforts have been made to reduce the cost of production by indigenising the raw material production. He further pointed out that GB has been supplying raw material at a very high cost and did not disclose the source so as to allow the Indian company to directly import the raw material. Shri Mookherjee pointed out that instances have been given where machines have been imported when they could have been manufactured in India and that second hand machines were being supplied. The price charged was also substantially higher than the price at which GB was procuring these machines. Referring to the allegation that the Indian company is a dumping ground for all the discarded machines of GB, Shri Chagla pointed out that as per the collaboration agreement, GB has to supply all the new machinery manufactured by GB. There is no obligation on GB to supply machinery not manufactured by it but all along the company has been requesting GB to use their good offices for buying other machinery which was not manufactured by GB. Shri Chagla then elaborated the efforts made by the company to develop local raw material sources over the last so many years and how in the past by use of local raw material, the quality of production had suffered. He challenged the petitioner’s contention that the source of raw materials is hot disclosed by GB and stated that on each and every package of raw material imported, the name and address of the supplier and composition of the raw material are given.

28. He also mentioned that the prices for imported raw materials were fixed once in three years, GB was absorbing any increase in the procurement prices. He pointed out that raw material supplied is not manufactured by GB and GB is only procuring it because of GB’s contacts with the raw material suppliers which have been developed over the years by giving benefit to them of GB’s research and development in this respect. He also mentioned that when the company was under the control of the Saboo group, nothing prevented the company from exploring alternative sources, both indigenous as well as foreign. The present allegation is nothing but another issue essentially arising out of differences between the two groups. Referring to the arguments regarding the supply of machinery at inflated prices and particularly about the five items mentioned in the rejoinder filed by the petitioner, Shri Chagla referred to the, detailed reply given in the surrejoinder, meeting adequately the objections raised by the petitioner arid disclosing all the relevant information such as source, price and quality of the machines as well as the efforts made by the company to obtain similar machines from Indian sources. Shri Chagla also pointed out that considering the value of all these machines together which is less than Rs. 1 lakh, it is evident that the allegations have been made just for the purpose of making the allegations.

(iii) Use of trade mark :

29. It has been alleged in the petition that GB with the collusion of the sales department, denied the company the valid and full use of its trade mark which was expressly agreed to earlier in the collaboration agreement dated April 1, 1960. Clause 9(b) of the said agreement clearly provided as under :

” Groz Beckert agrees to transfer to the new company free of charge all patents, trade marks and trade names belonging to Groz-Beckert or over which it has power of disposal for use in India and, if necessary, grant irrevocable licence in respect thereof, the intention being that needles manufactured by the company be sold under Groz-Beckert’s normal labels and trade marks.”

30. The company has an exclusive perpetual licence for unconditional use of trade mark and the company has been freely using the trade mark GROZ-BECKERT and other GB trademarks/tradenames for exports and domestic sales. It is also the contention of the petitioner that the company with the knowledge and consent of Groz-Beckert registered its own trademark “Groz-Beckert Saboo Limited (Label)” under registration No. 414563 dated December 16, 1983, in respect of needles falling in class 26 and this trade mark was mainly used in domestic sales. According to GB the application for registration of this trade mark was made without prior consultation with GB and as GB objected to the attempts of the Saboo group to register the trade marks owned by GB, it was mutually agreed between GB and Mr. R.K. Saboo that the company would withdraw its application on the condition that GB would register the trade mark in its own name and the company would be permitted to continue to use the trade mark in India. In March, 1988, on the basis of the instructions given by the company, the company’s trade mark lawyers wrote to the Registrar of Trade Marks, withdrawing Application No. 414563 made by the company. Shri R. K, Saboo, in his letter-dated April 1, 1988, to Dr. W. Bannmueller of GB confirmed the withdrawal of application for registration of its trade mark. It is mentioned in the letter that “in order to facilitate the registration of your application by the Trade Mark Registrar of India, we have withdrawn our Application No. 414563-in class 26. In this regard, a copy of the letter written by our trade mark attorneys, the Acme Company, to the Registrar of Trade Marks, withdrawing the application is enclosed herewith.” On October 17, 1989, the trade mark attorneys of the company filed Form TM 35 for self-cancellation of the registration of trade mark. On December 24, 1991, the petitioner, Mr. Y. Saboo, wrote to respondent No. 4 as follows :

” Dear Mr, Ivanovski, Certain trade mark/logo had been registered in the name of our company under registration number 414563.

I am given to understand that sometime back, an application has been made for withdrawal of the above registration. However, as current investigation shows, the withdrawal process was not completed. From recent developments, it is apparent that GB wants to prevent or restrict GBS’ use of its trade mark, which would obviously be detrimental for the company. I consider it essential that all trade marks, trade names, etc., which must rightfully belong to the company, must stand registered in the name of the company. In the best interest of GBS, I have taken necessary steps to restore and renew the aforementioned trade mark registration in the name of GBS.

The aforementioned trade mark now stands renewed in the name of GBS until December, 1997 (copy of the renewal certificate is enclosed). I would like to add that no steps should be taken by anyone seeking to withdraw or transfer with or without consideration or, in any other manner, create any encumbrances on any trade marks/trade names, which rightfully belong to the company and are its valuable assets.

Yours sincerely, (Sd.) Y. Saboo. eNCL : as above.

Mr. M. Ivanovski Groz-Beckert Saboo Ltd.

Chandigarh CC :

The Company Secretary, The Vice-President (Sales) “

31. It is the contention of the petitioner that while the Saboo group want that the Indian company should operate independently and, therefore, should have the right to use the trade labels, the GB group have denied this facility to the company contrary to the collaboration agreement. As against this, the respondent’s contention is that the trade mark is the exclusive property of GB and as per the collaboration agreement, the Indian company is entitled to use the trade mark as permitted by the GB and the Saboo group’s attempt to register the trade mark without the consent of the GB is nothing but breach of agreement as GB had never parted with the ownership of the trade mark, and the conduct of the Saboo group in registering the trade mark without the consent of GB agreeing and confirming self-cancellation of trade mark and again getting the trade mark renewed up to December, 1997, without informing GB is tantamount to theft of the trade mark and shows lack of probity.

(iv) Complaints regarding working of the sales department :

32. In the petition several instances have been pointed out about the working of the sales department which, according to the petitioner, is not in the interest of the company and all these acts were done under the dictates of GB after it was brought under respondent No. 4. It is mentioned in the petition that after the failure of negotiations held in February-March, 1991, in Germany between the two groups, Mr. Ivanovski, respondent No. 4, was called to Germany by GB and after his return he unilaterally took over the sales and public relations department of the company, under his control despite the objections of the petitioner who was looking after these, departments, as all along these departments were looked after and, managed by the managing director nominated by the Saboo group. It is further alleged that not only these departments were taken over by respondent No. 4 but the petitioner was also kept out of the meetings held by respondent No. 4 with the vice-presidents of the concerned departments. According to the petitioner, this was contrary to the agreement reached between the two groups on February 7, 1989, that both the groups would have equal say in the management and affairs of the company and, vide his letter dated April 12, 1991, he had brought his dissatisfaction to the notice of respondent No. 4. In this connection the petitioner has relied on an earlier correspondence exchanged between Shri R.K. Saboo and Dr. Lindner, in letters dated May 17, 1990, and May 31, 1990, in which even though it is stated that there was no official division of responsibilities of the work between the two managing directors, there was an understanding.

33. Another allegation made by the petitioner is regarding deliberate exaggeration of domestic shortage by respondent No. 4 in collusion with the sales department for the purpose of circumventing the export obligation. It is the contention of the petitioner that the domestic market in India is incapable of absorbing all the additional needles that would be produced by the company as per the expansion programme and as a consequence, the surplus production would have to be exported through GB at the rates which would then be directed by GB, as even the present production is not being absorbed by the domestic market.

34. Another serious allegation in connection with the sales department is regarding the sale of needles at substantial loss. As per Article 105(e) of the articles of association, unanimous consent of the directors is required for sales when the sale price is below the cost of production. According to the petitioner, during 1991-92, such sales below the cost of production are estimated to have resulted in a loss of about Rs. 100 lakhs and despite the objection taken by the Saboo group, no details were provided to the Saboo group directors for taking a proper decision in the matter. As the efforts made by the Saboo group to bring this to the notice of the auditors also failed to resolve this issue, a resolution was moved by the Saboo group in the board meeting held on November 18, 1991,’for getting information on needles sold at loss but it was defeated by the exercise of the casting vote of the chairman. It is further alleged that at the annual general meeting held on December 30, 1991, the members were misled by respondent No. 4 by stating that no needle-wise costing was available before the year 1991 despite the fact that the sales department was maintaining the needle-wise costing for several years. At the same annual general meeting, while the Saboo group stated that estimated loss on account of sale of needles below cost was around Rs. 100 lakhs in the year 1991-92, respondent No, 4 maintained that only direct cost should be considered for estimating loss and on that basis the loss would be only Rs. 3 to, 4 lakhs. It is the contention of the petitioner that this statement of respondent No. 4 was misleading as even if direct costs are considered, the loss will be over Rs. 56 lakhs and for this purpose the petitioner had filed a duly signed statement of the company’s cost accountant.

35. The petitioner further alleges that, apart from using the sales department to further its own plans and interests, GB arid its nominee managing director, Mr. Ivanovski, are encouraging indiscipline and insubordination towards the Saboo group managing director as seen by the behaviour of the vice-president (sales). Correspondence has been exchanged between the petitioner and respondent No. 4 on the matter regarding insubordination and denial of information by the sales department and was also discussed in the several board meetings. This dispute regarding who should control the sales department ultimately became a major issue in relation to extension of the services of the vice-president (sales), after superannuation, culminating in bringing a stay order even for considering this item in the board meeting and was also argued at great length before us during the hearing on the interim application filed before us.

36. While dealing with this issue, in the reply filed by the respondents, it has been denied that the company needles are being sold at substantial loss as alleged by the petitioner. The respondents have challenged the applicability of Article 105(e) and submitted that this issue was first raised by the auditors of the company in their first year of audit for the financial year ending on March 31, 1989, when Mr. R.K. Saboo was the sole managing director of the company. At that time it was pointed out that Article 105(e) did not apply. Similar contentions were made by the company before the tax authorities for the assessment year 1987-88 and the same has been accepted by them. It is the contention of the respondents that size-wise, batch-wise costing system is not maintained by the company and comparison of cost and net realisable value is done at the year end by taking a composite cost and selling price of all needles. It has been pointed out on behalf of the respondents that while some of the needles might have been sold at a loss, according to market conditions, considering the size of the profits made by the company, by no stretch of imagination it can be concluded that needles are being sold at substantial loss as alleged. It was also submitted on behalf of the respondents that while such practice was prevalent when the Saboo group was in full control of the management, this controversy has been now raised only in the context of the strained relations between the two groups. It is further pointed put that, at the board meeting held on November 18, 1991, the chairman directed both the managing directors to prepare a detailed report on this and at no time the GB group was interested in brushing aside this issue. It is further pointed out that the price at which needles were sold by the company is higher than the price charged by competitors and there is no truth in the allegation that needles have been sold at a loss to eliminate competition.

37. In the counter-reply, the petitioner has pointed out that the provisions of Article 105(e) are very clear and are applicable. It is further pointed out that for the purpose of income-tax returns the method adopted for valuation of the finished stocks has always been on aggregate basis and this has nothing to do with the product costing which is done needle-wise as is essential for marketing purposes. It is pointed out that while the company was selling needles below eost earlier, it was expected to be a short-term phenomenon and the magnitude of the loss was insignificant. However, it is alleged that, presently such sales are made on a very large scale and the estimated loss on account of this during 1991 as per the company’s own records, is expected to be Rs. 56 lakhs. In order to curtail the loss, the proposal made by the Saboo group for indigenisation of raw material, has been opposed by the GB group mainly with a view to enable the GB to make their separate profits on the supply of expensive raw material.

Dividend policy :

38. It has been alleged in the petition that in order to compel the Saboo group to dispose of their shareholding, the GB group is using the dividend policy in such a way to make the investment of the Saboo group in the company unremunerative and effectively reduce the return on investment to shareholders. In this context, the petitioner has referred to the papers presented to the board of directors at the meetings held on August 25, 1991, and November 18, 1991. At the board meeting held on November 18, 1991, Mr. S.P. Mandalia, a director belonging to the Saboo group, had proposed a dividend of Rs. 4 per share ; however, this was opposed by the directors belonging to the GB group and they were ready to consider payment of a dividend of Re. 1 per share. It has been stated by the petitioner that with reference to the contention of the GB group about the requirement of the provisions of Article 105 requiring unanimity on payment of dividend, the Saboo group had pointed out that if there was no unanimity, the dividend was still payable in accordance with the provisions of the articles of association of the company. It has been argued by the petitioner that Article 105 which specifies requirement of unanimity in case of important decisions is designed to protect the interest of the minority group and ensure that their interest and views in the conduct of the business of the company are not overlooked by a majority group. A logical interpretation of Article 105 would require that if there was no unanimity, the shareholders must be paid dividend as per the provisions of Section 23A of the Indian Income-tax Act or any statutory modification or re-enactment thereof for the time being in force.

39. In the reply, the respondents have pointed out that for the last 20 years or so the company has been declaring dividend at 10-15 per cent. and for the most part these recommendations were made by the Saboo group. It was only in one year that dividend of 30 per cent. was declared. It is further submitted that at the board meeting held on November 18, 1991, the Saboo group directors proposed that the company should declare 40 per cent. dividend, something which the company had never done since its inception. During the discussion at the board meeting, respondent No. 4 pointed out that such high payment of dividend was not justified considering the liquidity problems of the company especially when the company had to obtain loans to pay its taxes. In view of this, the GB group had proposed a dividend of 10 per cent., i.e., Re. 1 per share but all the directors of the Saboo group voted against the resolution. It is the contention of the respondents that by not agreeing to the proposal of the GB group for payment of 10 per cent. dividend, the Saboo group Mocked the company from declaring any dividend and, therefore, there is no truth that the GB group was not willing to declare any dividend. The respondents have relied on the minutes of the board meeting held on November 18, 1991, however, the minutes of the board meeting are disputed.

40. In the rejoinder, it has been pointed out by the petitioners that the payout ratio of dividend to net profit of the company consistently averaged about 50 per cent. up to 1986-87. Thereafter, it has steadily dropped to about 15 per cent. and to “nil” in 1991-92. It is also pointed out that although in the past, the dividend had remained more or less in the region of 15 per cent., this was accompanied by liberal issues of bonus shares from time to time which effectively increased the total quantum of return. No bonus shares have been issued by the company for the last 10 years. It is also contended that the proposal by the Saboo group to pay 40 per cent. dividend would have resulted in payment of only 28 per cent. of the net profits which is not only well below the company’s average for the last 25 years but also below the industry-wise average of the last three years. It is also pointed out that there was no justification for a reduction in the dividend when the profits of the company have more than doubled over the previous year. The petitioner has alleged that the whole intention of the GB group in not co-operating in declaring dividend was to minimise the returns of the Saboo group on its investment in the company so as to pressurise them to sell their shares. During the hearing it was also pointed out that if the provisions of Section 23A of the Indian Income-tax Act were made applicable, 50 per cent. dividend would become payable.

41. On the basis of the averments made before us and the various documents filed by the petitioner and the respondent, we find that the admitted facts regarding the controversies relating to the expansion programme and the other aspects mentioned in para 9 above are as below :

(i) The expansion programme was approved by the board unanimously on August 29, 1989, on the basis of the export price of needles at DM 165 per 1,000 needles and the board had authorised the managing director and the technical director to take steps for implementation of the project. Detailed time-schedule and status reports in respect of the expansion programme were considered by the board of directors at the meeting held on November 4, 1989, and February 8, 1990.

(ii) The Government of India, while approving the expansion programme and import of capital goods, imposed an yearly export obligation of 37 million needles inclusive of existing export obligation of 17 million needles. Some time in August, 1991, the Government agreed to delete the export obligation clause on the ground of indigenous requirement.

(iii) Steps were taken as per the time-schedule by the GB group to procure machinery and spare parts required for the expansion programme. Spare parts for the expansion programme were imported on the OGL before arrival of the main machinery. After the receipt of the import licence on October 23, 1990, respondent No. 4 made a representation on November 9, 1991, to the Chief Controller of Import and Exports seeking regularisation of the import of spare parts.

(iv) The project envisaged import of second-hand reconditioned machinery proposed to be imported from the GB group and the valuation was to be on the basis of replacement cost plus overhauling charges with a reasonable margin of profit to the GB group. The valuation was to be certified by an approved surveyor in West Germany and by an approved Indian chartered engineer, if required.

(v) Since inception of the company, contracts for import of raw material, spare parts, reconditioned second-hand machinery, export of needles except export to USSR and certain neighbouring countries, were made by the company with GB and no disputes were raised about the same so long as the Saboo group was in control of the management of the company. On the contrary, objections raised by the auditors about applicability of Article 105 and disclosure under Section 297 of the Companies Act were taken up by the board of directors and they persuaded the auditors to drop them as in the opinion of the directors, they were not applicable.

(vi) The dispute regarding economic viability of the expansion programme started in September, 1990, after a lapse of about one year since the unanimous, approval of the board in August, 1989, and the dispute centred around the issue regarding the price at which the needles were to be exported through GB.

(vii) The company had registered its own trade mark under registration No. 414563 and this trade mark is mainly used in the domestic sales. It was agreed by both the parties that the company would withdraw its application for registration of the trade mark “Groz-Beckert Saboo Ltd. (word and device) in class 26” and owned by GB and would seek self-cancellation. Accordingly an application was also filed on March 18, 1988. But the Saboo group got the trade mark renewed in the name of the company up to December, 1997, without informing GB through another attorney.

(viii) Some of the needles are being sold at a loss since 1987. The relevant costing data are available with the company and the dispute actually is regarding the quantum of loss as well as whether Article 105(e) which requires unanimous approval for sale of needles at loss, is applicable.

(ix) The company has declared dividends in the range of 12 to 18 per cent. from 1980-81 onwards and also bonus shares were allotted on six occasions between 1966-67 to 1982-85. In 1991-92, for the first time, a dispute arose regarding the quantum of dividend and no dividend was declared.

42. In the light of the above admitted facts, the arguments advanced by the learned advocates of the petitioner and the respondents were considered by us. We find that the expansion programme was considered financially viable by the board on the basis of adopting a price of DM 165 for 1,000 needles. In this, regard, Shri Mookherjee argued that the price of DM 165 per 1,000 needles was assured by GB and logically GB should have been ready to enter into a buy-back arrangement with the company at this price. Resistence shown by GB only strengthened the apprehension of the Saboo group that the expansion programme will not be a viable programme and may further create financial difficulties. In reply, Shri Chagla pointed out that the price of DM 165 per 1,000 needles was not an assurance but an assumption on which the viability of the project was based. In this connection, he drew our attention to the minutes of the board meeting to point out that the expansion programme was conceived not only for increasing the capacity of the unit but also for updating the technology and producing quality needles which would also reduce the cost of its products as well as reduce a country’s dependence on import of sophisticated needles. Refuting the allegations that GB has a vested interest in exports through GB at prices lower than DM 165 per 1,000 needles, Shri Chagla pointed out that GB on its own even got the export obligation deleted. He stated that while the GB group was ready to give a commitment for one year at DM 165 for 1,000 needles and a minimum price of DM 120 for 1,000 needles for another four years, it was not appropriate on the part of the Saboo group to expect a long-term commitment from GB as the company has to shoulder the risk inherent in any business. In reply, Shri Mookherjee pointed out that while the Saboo group was not against the expansion programme, its only request was to reassess the project in view of the increase in the cost of the project as well as the non-availability of the buy-back arrangement at DM 165 per 1,000 needles. Even this simple request for reassessment was vetoed by GB. Referring to the arguments of Shri Mookherjee regarding reappraisal of the project, Shri Chagla argued that the intention of the Saboo group in raising this controversy, after a lapse of one year since approval of the project and after taking steps to implement the project and making substantial financial commitments, clearly indicates that the Saboo group wanted to delay the implementation of the project and delay honouring the commitment given to the GB group. He further pointed out that because of this attitude of the Saboo group, it was not possible for the comp’any to avail of the loans from financial institutions to finance the project and the company had to face liquidity crises. In reply to our query whether, in the light of the removal of the export obligation, the project would be viable based on the sales in the domestic market at the prevailing prices, the company had replied in the affirmative.

43. We find that the stand taken by the petitioner and the respondents at the board meetings regarding the expansion programme is a clear reflection of moves and counter moves for settling their main dispute regarding the sharing of the management and controlling the company. The implementation of the expansion project which was very crucial for the financial health of the company and for the public interest has been jeopardised because of the raising of an unwarranted and avoidable controversy and uncompromising attitude showed by both the groups. As stated by the respondents during the hearing, if the project was viable even after the increase in cost and deletion of the export obligation, the GB group should not have had any hesitation in getting the project reappraised by financial institutions which were going to fund the project. A report by an independent financial institution would have resolved this issue. While making this observation we are conscious of the fact that the raising of this controversy after a lapse of one year and in the midst of the implemention of the project using the veto power under Article 105 for rejecting permission to obtain loans from financial institutions on the part of the Saboo group was also not justified and not in the interest of the company. All these facts lead us to conclude that both the groups were fighting on a non-issue and the matter could have been resolved to mutual satisfaction by getting intervention of a third party like financial institutions which were also involved right from the beginning of the appraisal of the project and which had made commitments regarding financing it.

44. Regarding the allegations about import of spare parts in contravention of the Import Control Act, the matter is already before the competent authority and we, therefore, refrain from expressing our views on the subject. We have also noted Shri Chagla’s arguments that the project report gives all the details regarding old machines, new machines and reconditioned machines that will be supplied and the import licence also gives all the details and, therefore, the allegation that there was fraud or misrepresentation is totally unsustainable. We have considered the facts relating to import of spares ahead of arrival of the machinery on OGL and we do not find any mala fides in this matter ; at the most it only shows that the lead time assumed for getting the import licence was not realistic.

45. Regarding the allegations relating to supply of raw materials and machines/equipment at inflated prices, clauses 6 and 7 of the foreign collaboration agreement specifically provide for GB to supply all equipment required by the company, at cost. There is no clause in the foreign collaboration agreement relating to supply of raw material by GB. However, right from the beginning, the company has been importing raw material through GB and even during the long period when Shri R.K. Saboo was the sole managing director of the company, more than 86 per cent. of the raw material was being purchased through GB. The complaint of the petitioner is that now this percentage has gone up from 86 per cent. to 100 per cent. and GB is making a profit out of these transactions. We find that in the past, efforts were made to develop indigenous sources for supply of raw material but ultimately rejected on ground of quality. We also find that there is no prohibition on the company to procure raw material directly from the manufacturer especially when the identity of the source was not in doubt and the company is aware of the same. There is nothing on record to show that the company would have been able to obtain these raw materials substantially cheaper than the price at which raw material was obtained through GB. The reasonableness of the price at which this raw material was being supplied by the GB group has already been examined by the customs authorities. Similarly, in regard to supply of equipment and spare parts, nothing has been brought on record before us to indicate that GB has made substantial profits at the cost of the company in supplying these equipments.

46. Regarding the controversy relating to the trade mark, the arguments of both the parties have been given in para 9.3 above and it is very clear from it that the petitioner has not been able to establish his case ; on the contrary it shows that the petitioners have gone back on the agreement reached between the two parties about self-cancellation of the trade mark and got the trade mark registered behind the back of the GB group.

47. A substantial part of the hearing was spent on complaints regarding the working of the sales department. It is quite clear that all these complaints about the sales department started after that department was brought under the control of directors belonging to the GB group. The allegation regarding deliberate exaggeration of domestic shortage, avoidance of giving information to the managing director belonging to the Saboo group and insubordination by the senior officers are complaints which manifest the deteriorating personal relations between the petitioner and respondent No. 4. Most of these matters related to day-to-day matters and no policy issues are involved in it. It is also clear from the various letters exchanged between Dr. Lindner and Shri R.K. Saboo that there was no specific division of work between the two managing directors. The only other allegation in regard to the sales department is regarding the sale of the needles at a loss. As per Article 105 of the articles of association unanimous approval is required for selling needles at loss. We find that detailed data is available about the costing of the needles. The fact that needles have been sold at a loss is accepted by both the parties. The sale of the needles at a loss started in the year 1987. The controversy is only related to the quantum of loss and the requirement of unanimous resolution. We have not been impressed by the arguments advanced by the respondents in defending this allegation. This matter could have been discussed at the board meeting instead of defeating it by exercise of casting vote. The only defence that the respondents have placed before us is that in the past, during the regime of Shri R.K. Saboo such sales were undertaken without passing any unanimous resolution and in the past the board itself had explained to the auditors that such sales can be made on the basis of business/commercial decisions. While we appreciate the logic behind this contention that in a business involving a large mix of products, sometimes some items may have to be sold below the cost of production as a business-decision taking into consideration the market conditions, it may not be appropriate to conclude that it will not require unanimous resolution as it was dispensed in the past. We have carefully considered the arguments advanced by both the parties regarding the non-declaration of dividend in 1991-92 and whether the provisions of Article 105 are applicable to this situation, It is our considered view that the dispute was essentially a matter regarding the quantum of dividend to be recommended to the shareholders and having failed to arrive at any unanimous resolution, no proposal could be placed before the shareholders. However, this does not make out a case of oppression of minority shareholders.

48. Another important controversy is regarding the price paid by GB for needles manufactured by the company and exported through GB in the international market. It is the contention of the petitioner that since GB was not willing to give buy-back guarantee at price of DM 165 per 1,000 needles, enquiries were made in the international market as to the prices realised by GB in the final sale of the needles imported from India. The petitioner has submitted a statement showing the prices supposed to have been realised by GB in the international market vis-a-vis the prices received by the company along with the supporting documents and it is the contention of the petitioner that considering the huge price difference between the prices realised by GB on re-sale of goods purchased from the company, and the price at which GB procured needles for the company, the entire object of the GB group was to have the products manufactured by the company and to purchase the same at extremely low prices for sale at higher prices in the international market. The profits derived from such sales by GB was at the cost and to the detriment of the Indian economy and the Saboo group of shareholders. It is the contention of the petitioner that the resources of the Indian company are thus being utilised against the interest of the company and its minority shareholders. The petitioner had also attempted to obtain relevant information from GB about GB’s ultimate sale prices but the same was not disclosed. On behalf of the petitioner, a resolution was proposed at the board meeting held on November 18, 1951, that an independent market survey be commissioned to explore the export possibility and ascertain the international prices for the company’s products so as to get the best available terms for exports. However, this resolution was defeated by the GB directors by exercise of the casting vote. In view of this, it has been submitted by the petitioner that the GB group has effectively prevented the company from making any further effort to promote direct exports and also even from obtaining independent information regarding the international market.

49. It is the contention of the respondents that the sale prices of needles purchased by GB from the company are not dictated by GB and these transactions are being made for the last so many years and no such allegation regarding export prices was made by the Saboo group in the past. The respondents have challenged the documents relied upon by the petitioner on the ground that they were neither from manufacturers or dealers or with respect to GB products and they are essentially the prices of retailers of certain other products which have no bearing on price at which GB had sold the needles. It is also submitted by the respondents that the percentage of sales through GB has come down substantially and GB has been taking up the obligation of exports only to support the operations of the company. The respondents have filed the details of the exports made by the company, directly and through GB and it is argued that the prices realised by the company from GB are comparable with the prices received by direct exports. It was also pointed out that GB’s ultimate prices not only reflect the cost of acquiring the needles from the company but also profits on re-sale of the needles, marketing cost, after sales service, replacement of defective needles and inventory cost. It is further pointed out that GB is prepared to furnish a chartered accountant’s certificate to show that GB is not making any unreasonable profits on the sale of such needles. Regarding direct exports under the company’s own trade mark, the contention of the respondents is that it would not be possible to build up goodwill for a new trade mark instantaneously. It is pointed out by respondents that the Saboos have been taking contradictory stands regarding the exports through GB. On the one hand, they are saying that GB is making huge profits out of the exports through GB and therefore interested in exporting the larger quantity through GB, on the other hand they are challenging GB’s efforts of getting the export obligation deleted.

50. We have carefully considered the various statements filed by the company, as per our directions. The statement indicating the sale of needles in the domestic and export market indicates that in 1981 the proportion of the value of domestic and export sales was in the ratio of 67 : 33 and in 1990-91 it is 81 : 19 and in terms of quantity, the proportion was 60 : 40 in 1981 78 : 22 in 1991. As against the export obligation of 17 million needles per annum, the company was able to meet this only in the years 1980-81 and 1987-88 and in the remaining years the exports ranged between 9 million and 16 million needles. The chart indicating direct exports and exports through GB shows that while in 1987-88 the sales through GB accounted for 68.52 per cent. and in 1990-91 they were only 44 per cent., statistical data relating to sale to GB in relation to total sales of the company indicate that in 1990-91, the share of sales through GB in quantity was 9.86 per cent. of the total sales and in value, it was 7.78 per cent. It was also noted that in 1987-88 when the Saboo group was in total control of the management, in terms of quantity the sales through GB was 24,24 per cent. of total sales and in value, it was 19.11 per cent. A chart has been given covering all 75 items covering all export contracts direct and through GB for the year 1991 and comparative prices realised in the export market as well as in the domestic market. There are only a few items where comparative data regarding the prices of direct exports and exports through GB are available. On the basis of this data, it is very difficult to arrive at a definite conclusion. In certain cases, the prices realised by exports through GB were higher than the domestic price while in some cases the price realised from direct export was less than the domestic price. There are also a few cases where the prices realised by exporting through GB were less than the domestic prices and vice versa. On the whole, considering the trend of reduction in reliance on exports especially through GB, efforts made by the company to get the export obligation deleted and the inability of the petitioner to substantiate the allegations by proper documents or evidence about the huge margins alleged to have been made by the GB group, and the fact that Shri R.K. Saboo himself undertook certain sales promotion tours abroad to strike deals with dealers of the GB group when he was the sole managing director, we do not think that the allegations made against GB of getting any undue advantage from exports through GB are substantiated.

51. Another major controversy is regarding non-compliance with the provisions of Section 297 of the Companies Act. As seen earlier Groz-Beckert Saboo Limited, regularly enters into contracts with GB for purchase of equipment, plant and machinery and raw materials and sale of needles to GB. The issue is whether the provisions of Section 297 of the Companies Act, particularly the proviso to the section which relates to prior approval of the Central Government of such contracts in respect of companies having a share capital of more than Rs. 1 crore is applicable to the contracts signed with GB. Dr. Lindner is a director of the company and also a partner of GB, which is a German firm and a corporate body under the laws of Germany. Dr. Lindner has given notice under Section 299 of the Companies Act disclosing his interest to the company. Some other directors of the company are also employees of GB. It is the contention of the petitioner that for all these transactions between the company and GB consent of the company in the general meeting and also the permission of the Government is necessary and the GB group has declined to comply with the provisions of Section 297, as it would not like to disclose the relevant details and particulars such as the cost of raw materials supplied and resale prices for the needles purchased from the company. It is further pointed out that the Saboo group’s very reasonable proposal that a clarification be sought from the Central Government regarding the applicability or otherwise of Section 297 in order to protect the company and its directors from any likely proceedings, was defeated by the GB group by exercise of a casting vote by the chairman. According to the respondent, the provisions of Section 297 are not applicable to a foreign firm such as GB and, therefore, there is” no necessity to take permission from the Central Government. The respondent also pointed out that the present auditors of the company had raised the issue of applicability of Section 297 to the transactions of sales to and purchases from GB in the first year of audit at the board meeting held on August 29, 1989. It was then explained by the board to the auditor that the provisions of Section 297 were not applicable to such transactions and that such a view was also accepted in the past by the previous auditors of the company. It is further stated that at the conclusion of the board meeting a note signed by the then sole managing director Mr. R.K. Saboo, and the then technical director of the company (respondent No. 4) was given to the auditors indicating that the section is not applicable and the company would arrange to obtain a written legal opinion. The company obtained a legal opinion from Justice A. N. Grover, a retired judge of the Supreme Court of India confirming that Section 297 was not applicable to such transactions. It is the contention of the respondents that the controversy regarding alleged violation of Section 297 is baseless and raising this issue in a Section 397/398 petition is not bona fide. It is further submitted that the attempt of the Saboo group to convey the impression that it is more concerned with the observance of laws and rules must fail since all the matters complained of were also in existence at the time when Mr. R.K. Saboo was the sole managing director. In the counter-reply, the petitioners have mentioned that following the difference of views regarding applicability of Section 297 to these transactions, the Saboo group obtained a legal opinion from the Attorney-General of India, who has clearly opined that Section 297 of the Companies Act was applicable to the transactions of the company with GB. It is also further pointed out that the opinion of the Attorney-General was placed before the board meeting held on November 18, 1991, but was not accepted by the GB directors. It is also submitted by the Saboo group that non-compliance with Section 297 is leading to a situation where transactions with GB are being kept non-transparent and no objective view can be taken and it is being used by GB to selectively enrich themselves at the cost of the company and the minority shareholders.

52. We have gone through the copies of the opinions given by Justice A. N. Grover on December 28, 1990, and Shri G. Ramaswamy, Attorney-General for India on November 17, 1991. It is stated in Justice A. N. Grover’s opinion :

” The short question which has to be determined is whether the word firm used in Section 297(1) includes a foreign firm like GB or is to be confined to an Indian firm only. The word firm is nowhere defined in the Act. A view which is quite plausible is that the word firm having been used in juxtaposition with the words private company shows that the firm must be an Indian firm and not a foreign firm. It is significant that there may be a marked difference between a firm registered in a foreign country and one constituted or registered in India. As Section 297 contains no indication of the word firm as employed therein to include a foreign firm, it can well be said that such a firm would not be covered by it. The word firm which appears along with the word private company in that provision should normally draw its colour from the word private company which has to be registered in India. If GB has been a company incorporated under the German law even then the provisions of Section 297 would not have been applicable as those provisions apply only to such companies as are registered under the Indian Act. “

53. In the opinion given by the Attorney-General of India, it has been observed “the section has to be interpreted to further the object of the section and not to defeat its object. From this point of view, it does not matter whether one of the contracting parties is a foreign firm or a foreign company. Vice versa, the possible contention that the company as defined in the Act only means an Indian company and it does not include foreign firm is untenable, firstly, because the definition itself is only to be understood in the light of the provisions of the Companies Act, clearly specifying that the word would mean what it says only when the context does not require otherwise. In the context of Section 297, the word “company” would include a foreign company. Moreover, under the Indian law, the English law and the German law a firm is not a legal entity but a collection of individuals, and there is no difference between the position of an Indian firm or an English firm or a German firm and the word “firm” is not defined under the Companies Act. Therefore, in any event, for the purpose of this case, since we are concerned with a foreign firm, even the little doubt about the nature of the company will not arise in regard to a firm and Section 297 will apply to a firm whether the firm is an Indian firm or a foreign firm.”

54. We have carefully considered the arguments advanced by learned counsel of the petitioner and the respondents as well as legal opinions submitted by them. The provisions enacted in sections 297, 299 and 300 of the Companies Act are founded on the principle that a director is precluded from dealing on behalf of the company as himself and from entering into engagements in which he has a personal interest conflicting or which possibly may conflict with the interest of those with whom he is bound by fiduciary duty. A director occupies a fiduciary position in relation to a company and he must act bona fide in the interests of the company. If a director makes a contract with the company and does not disclose his interest he will be committing breach of trust. In this particular case, disclosure under Section 299 has already been made. The only limited question remaining is whether transactions entered into between the company and the GB group requires approval of the Central Government. Section 297 embodies the principles of good faith and fiduciary relationship of a director and enjoins upon him certain statutory obligations. In Globe Motors Ltd. v. Mehta Teja Singh and Co. [1984] 55 Comp Cas 445 (Delhi), the Division Bench of the Delhi High Court observed : “A resume of the law clearly shows that the Companies Act does not forbid a contract being entered into by the company with a firm in which one of the directors is a partner. It is also true that the respondent director disclosed his interest in the agreement when the same was approved by the board of directors at its meeting. But this fact by itself does not automatically prove that the arrangement which had been entered into by the company was not of such a nature which keeping in view the fiduciary relationship of a director of the company, should not have been so entered into”. It was further observed : “Disclosure of interest and not voting on the resolution by the interested director are only formal aspects of the compliance with the statutory provision. The basic question is as to the conduct of the directors and whether it satisfies the test considering their fiduciary relationship to the company”. In the context of the allegation of the petitioner that the GB group is not obtaining the approval of the Central Government as per Section 297 as the GB group does not want to disclose certain information, we have to examine not the formal aspect of compliance with the statutory provision but we have to deal with the basic question as to the conduct of the directors and their fulfilling the test of fiduciary obligation. In this context, we have noted that when such a contract is approved by the board, an application for the approval of the Central Government is to be made in Form No. 24A prescribed under the Companies (Central Government) General Rules and Forms, 1956, with required documents. A perusal of the form indicates that the Central Government requires (i) the proposal for which approval is required, (ii) particulars of the contract to be entered into, (iii) whether the terms of the contract confirm to prevailing market rates, (iv) if the company has entered into any contract with any other person in respect of sale of the same kind of goods, whether the terms of such contract are similar to the terms of the proposed contract and (v) if there is any variation in rates, the reasons for the same. The particulars to be submitted for approval of the Government do not require the purchaser to reveal information at what price he is reselling the goods or at what price he had purchased the raw materials/equipment which he is selling to the company. Therefore, the arguments advanced by the petitioner that the GB group is avoiding to take this permission in order to avoid disclosure of the prices at which the GB group is reselling needles or of the prices at which the equipment was purchased are not well founded.

55. We find that this is not the first time that the company has entered into an agreement with a firm in which one of the directors is interested. Shri R.K. Saboo of the Saboo group was the sole managing director of the company for about 15 years and the GB group had no managing director on their behalf. The board has unanimously approved such transactions in the past. We have already come to the conclusion that the terms of the contract for plant and machinery spare parts and sale of needles do not indicate any favouritism shown to GB in which foreign directors are interested. The grievance of the minority shareholders is not so much about the export of needles through the GB group but mainly relates to the price paid by GB which, according to them, should not be less than DM 165 per 1,000 needles and GB should give a buy-back guarantee for the same. This clearly shows that the main contention is not disclosure of interest or obtaining approval of the Central Government, but the Saboo group wants that the GB group should pay a better price than the price offered at present. In this context, it may be mentioned that we had examined this issue in the context of allegations made by the petitioner and we have already come to the conclusion that GB is not getting any undue advantage from exports through GB or in transactions relating to import of machinery, spare parts or raw material. The documents placed before us do not in any way show that the terms of contract between the company and GB were unfair or that they were heavily weighted in favour of GB.

56. At this stage, it will be appropriate to deal with the issue of maintainability of the petition raised by the respondent. Shri P. C. Sen and Shri Mookerjee, counsel appearing on behalf of the petitioner pointed out that the petitioners hold requisite percentage of shares in the company and have the right to apply under Section 397/398 of the Companies Act and the petition is maintainable as long as the complaints in the petition indicate instances of oppress ion/mismanagement and a case is made out that it is just and equitable to wind up the company. Referring to the memorandum of understanding, articles of association and the terms of agreement dated February 7, 1989, it was pointed out that though the company is a Section 43A company, in reality it is nothing but a partnership between the German group having 60 per cent. equity and the Saboo group having 40 per cent. equity. Despite the unequal equity holding, both the groups have equal representation in the management. It was pointed out that the partnership was formed in good faith and confidence and now there is no faith and confidence and there is a deadlock in the management. The GB group is not functioning or exercising the casting vote in the interest of the company and even for taking decisions in the day-to-day affairs, the GB group is taking recourse to the casting vote. Shri Mookherjee argued that all the allegations made in the petition are sufficient to make out a prima facie case to seek winding up of the company. Shri Mookherjee then referred to decision in Ebrahimi’s case [1973] AC 360 (HL) and Hind Overseas’ case [1976] 46 Comp Gas 91 ; AIR 1976 SC 565, to substantiate his claim that the company is in the nature of a partnership and the absence of utmost good faith and confidence among the partners, would entitle the petitioner to take recourse to the provisions of Section 397/398 of the Companies Act.

57. Shri I.M. Chagla, counsel appearing on behalf of the respondents, pointed out that the matters complained of in the petition are such as could have been resolved at the meeting of the board of directors or annual general meeting as per the provisions contained in the articles of association which provide for an appropriate domestic forum and methodology for settling the issues in dispute. He submitted that the main grievance of the petitioner is not oppression but is merely a dissatisfaction on being outvoted or resulting from the minority not being able to get what it desires to get. He vehemently denied the existence of any partnership between the Indian group and the German group on the ground that as against the total 40 per cent. of the Indian holding, the petition is supported by only 25 per cent. shareholding which indicates that the holders of other 15 per cent. shares are not dissatisfied with the performance of the German group and, therefore, the petition deserves to be dismissed. He further pointed out that no charge has been levelled against the GB group about lack of probity and fair play. Referring to the arguments advanced by counsel for the petitioner for applying the principles of partnership, Shri Chagla argued that the petitioner has failed to prove that there is a deadlock in the management which is one of the criteria required to be proved in the case of partnership. He submitted that a careful reading of the articles of association shows that a specific provision exists in the articles to take care of the contingency of deadlock by providing for a casting vote to be exercised by the chairman. He referred to the decision in Smt. Abnash Kaur v. Lord Krishna Sugar Mills Limited [1974] 44 Comp Cas 390 (Delhi) and pointed out that it is an accepted principle that where the articles provide for a solution for resolving a deadlock, the court will not interfere. Sim Chagla also pointed out that Shri R.K. Saboo was the sole managing director for over a period of 15 years and most of the instances which have been alleged as mismanagement are not new as similar transactions have been considered and approved by the board of directors of the company during Shri R.K. Sabop’s tenure.

58. Challenging the arguments advanced by counsel for the respondents, Shri Mookherjee pointed out that though the articles provide for exercise of a casting vote by the chairman, the provisions of Article 105 of the articles of association provide for a unanimous decision by all the directors present at the meeting on certain matters and in respect of these matters, the casting vote has no relevance. He also pointed out to the provisions of Article 99 which stipulates that the quorum for a board meeting is two directors, one from each group and if one group is not present, then no board meeting can be held. He further pointed out that there are number of instances relating to issues covered under Article 105 wherein unanimous decision has not been possible. Thus, according to Shri Mookherjee, a deadlock already exists and the articles do not provide for resolving all such deadlocks. Shri Mookhenee further argued that even in a case where the articles provide for exercise of a casting vote, natural justice demands that such use of the casting vote should be to decide the matter in the interest of the company. Shri Mookherjee pointed out that the chairman who belongs to the GB group has no direct interaction with the company’s day-to-day affairs inasmuch as he comes from Germany only to attend the board meetings and when he exercises at such meetings, the casting vote in a deadlock situation and that too for the benefit of the German group, there is a prima fade-case of oppression of the minority. He submitted that such exercise of the casting vote is not only prejudicial to the interest of the company but considering the fact that it has been used for deciding the issues relating to the prices at which needles will be purchased by GB which results in depriving the country of legitimate foreign exchange earnings, it is definitely against the public interest and national interest. Shri Mookherjee then referred to the statement cataloguing board resolutions which were passed by use of the casting vote by the GB group and submitted that the subject and the issues involved in these resolutions clearly bring out that the use of the casting vote by the GB group was prejudicial to the interest of the company and oppressive to the minority shareholders. While concluding his arguments about the maintainability of the petition, Shri Mukherjee pointed out that all these facts clearly point out that there is a deadlock in the management and it cannot be resolved in the domestic forum, i.e., meetings of the board of directors or meetings of the shareholders and this is sufficient to establish a prima facie case of oppression on the part of the German group.

59. We have considered the arguments advanced by learned counsel on behalf of both the parties regarding the issue of maintainability particularly with reference to the application of the principle of partnership and a deadlock situation. In order to make out a case for invoking the provisions of Section 397, the petitioner has to make out that the affairs of the company are being conducted in a manner oppressive to them and, further, that the facts justify the making of a winding up order on the ground that it is just and equitable that it should be wound up though in the circumstances it would unfairly prejudice them if the company were ordered to be wound up. Only if these two conditions are satisfied, an order under Section 397 could be passed. Counsel on both sides have drawn our attention in detail through the correspondence between the parties and also taken us through the several court decisions wherein, particularly, the point regarding application of the principles of dissolution of partnerships to companies was decided. We find that in a domestic or family company, courts have applied the partnership principle when shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. In the case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Gas 390 (Delhi), the Division Bench of the Delhi High Court considered decisions in several cases decided by the English courts and Indian courts on this issue. After examining the decisions in Furrier’s Alliance Ltd., In re [1907] 51 Sol Jo 172, Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 (CA), Davis and Collett Ltd., In re [1935] 5 Comp Gas 467 (Ch D), Lundie Brothers Ltd., In re [1965] 35 Comp Gas 827 (Ch D), it was concluded that the trend of the English cases has been to apply the principle of partnership to deadlock cases. If the deadlock is found to be resolvable by resort to the articles of association, then the applicability of the said principle has been ruled out. The articles have thus been given great importance. The Division Bench of the Delhi High Court then considered decisions in cases in which the matter was examined specifically in the context of the articles of association providing for remedy to resolve deadlock. It referred to the decision of Justice A.N. Ray (as he then was) in Raghunath Prasad Jhuwjhunwala v. Hind Overseas (Private) Ltd. [1971] 41 Comp Cas 279 (Cal). In this case, the original idea was to form a partnership ; however, later on a company was formed and shares were held mainly by the two groups in the proportion of 6 : 10. Disputes arose between the two groups and a petition for winding up was filed in the Calcutta High Court though there was no mismanagement or deadlock in administration. Justice Ray came to the conclusion that partnership principle could not be applied in this case as it was not a case of equal shareholding. In applying the principle of partnership, the emphasis, according to the learned judge, was on equal holding, which are not capable of solution, secondly, there must be exclusion from management, thirdly, there should be exclusion from any benefit as shareholders, fourthly, there must be persistent illegal and wrongful acts for a long continuous period. It was in ‘such a structure of domestic disharmony, that it was often said that no redress was possible except by destruction of the structure itself. The learned judge further observed that the dissolution of partnerships principle had been applied to companies on the ground of complete deadlock or on the ground of domestic or family companies. The complete deadlock was where the board has two real members or the ratio of shareholding was equal. In the domestic or family companies, courts applied the dissolution of partnerships where the shareholdings were more or less equal and there was ousting not only from management, but also from benefits as shareholders. This case went up in appeal before the Division Bench of the Calcutta High Court [1971] 41 Comp Cas 308, which set aside the judgment of the learned single judge. The appellate Bench held that the company had to be wound up applying the principles of partnership on the ground that the company at its inception and for a number of years afterwards was found to be really in substance a partnership. It was held by the appellate court that the three most important indices of partnership, viz., equal status of the partners (though not necessarily equal interest), equal participation in management and mutual confidence, are the basis of association. A private limited company which is an association of persons in a joint stock company, who have agreed to keep the membership amongst themselves and who have divided the participation more or less equally should, therefore, be ordinarily treated as analogous to a partnership. The Division Bench of the Delhi High Court did not agree with these views expressed by the appellate court. It was observed (at page 436 of 44 Comp Cas) :

” For a company, after all, on incorporation, becomes an entity different from a partnership. And the rules for dissolving a partnership on just and equitable grounds cannot easily be imported in a case for dissolving a company on similar grounds. There may be cases where the partnership principles may be applicable, such as deadlock cases ; but, apart from other things, the provision in the articles, whereby the deadlock, if any, can be resolved the availability of the alternative remedies cannot be ignored.”

60. The Supreme Court in Hind Overseas (Private) Ltd. v. Raghunath-prasad Jhunjhunwala [1976] 46 Comp Cas 91, while deciding the appeal on the judgment of the Division Bench of the Calcutta High Court held that it is only when the shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuation of the company as a commercial concern, that there may arise a case for winding up on “just and equitable” grounds. Where the shareholding of two groups in a company not being a domestic company or a company which has come out of a partnership business is substantially disproportionate, the principle of dissolution of partnership because of deadlock will not apply. The Supreme Court reversed the decision of the appellate court.

61. In the context of this, it is safe to conclude that in the case of a company the principles on which a partnership is dissolved may be applied, when the company consists of two members only or where the shareholding is equal or where it is a family or domestic company with the shareholding equally divided between two rival groups which has resulted in a deadlock. If the articles of association of the company help to resolve the deadlock, winding up has to be ruled out. The articles have to be taken as terms of contract between the members, showing their intention as to how they agreed to transact the business of the company and which must, therefore, govern the relationship amongst them inter se.

62. Applying the above principles to the facts of this case it is clear that this is a closely-held company and the shareholding is held by two main groups — the GB group which individually holds 60 per cent. of shares and the Saboo group consisting of friends and relatives which holds 40 per cent. shares. In spite of inequality in the shareholding, there is equal participation in day-to-day management. Both the groups are entitled to nominate three directors each and the general administration and management of the company is in the hands of two managing directors having equal powers, one each to be appointed by both the groups. The chairman of the board of directors shall always be one out of three nominees of the GB group and the vice-chairman of the board of directors will be one of the nominee directors of the Saboo group and the chairman of the company shall have a casting vote. As per Article 99, the quorum necessary for transaction of the business of the company shall be two directors one from each group. In addition, while most of the decisions of the directors shall be taken by simple majority, in respect of ten matters mentioned in Article 105 unanimous resolution of the board of directors would be required. All the above arrangements have been incorporated in the articles of association and the relevant articles have been mentioned in para 7 of this order. While it is clear that the groups do not have equal shareholding, unless both the groups are ready to co-operate and co-exist, no meetings of the board of directors can be held because of the provisions of Article 99 nor can matters relating to the ten items which require unanimous resolution as per Article 105 be decided upon unilaterally. In respect of day-to-day matters, since the chairman has the casting vote, it might be argued that it is possible that the deadlock can be resolved by exercise of this casting vote. However, the deadlock in respect of board meetings, as well as the items which require unanimous resolution can neither be decided at the board meeting nor at the meeting of the members. We have also noted that because of the various controversies between the two groups, projects approved at the board of directors’ meeting in August, 1988, when Shri R.K. Saboo was managing director have been stalled and there is little scope of any progress in view of the requirement of unanimous resolution for raising financial resources. It is also on record that a time had come when minutes of board meetings cannot be finalised because of differences between the two groups about what transpired at the board meetings. We also find that both the groups are obtaining separate legal opinions on the same issues incurring expenditure from the resources of the company which is clearly avoidable. Both the groups are involved in litigation in courts on issues like office space to be allotted to the group managing director, extension to be given to superannuated staff, extension of lease of the transit house of the company which is being occupied exclusively by the Saboo family. We also notice that there is increase in the frequency of use of the casting vote. While the Saboo group feels that they are oppressed by exercise of the casting vote, the GB group feels that they are the victim of Article 105 and Article 99 and the minority is not allowing the majority to run the business in the interest of the company. Considering all these above aspects, we have no hesitation to come to the conclusion that this is a clear case of deadlock in the management and there is no solution provided in the articles of association. Though both the groups do not have equal financial stake in the company, the right of equal participation in the management has been recognised and in fact on certain matters they have been given a veto power. In view of this, we have no hesitation in coming to the conclusion that in the light of the deadlock arising in the conduct of the affairs of the company, a case for winding up on the “just and equitable ground” has been made out.

63. As the preliminary issue regarding making out a case to wind up the company on just and equitable grounds has been settled in favour of the petitioner, we may now proceed to examine the second issue whether the petitioner has been able to establish that the various acts alleged on the part of the respondents have resulted in oppression of the petitioner as members of the company. The various allegations and facts relating to them have been dealt with extensively in paras 8, 9, 10 and 11 of this order. Both Shri Mookherjee and Chagla referred to a number of court cases and well known propositions established in respect of what constitutes oppression. Shri Mookherjee elaborately referred to the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Gas 1 (HL) and pointed out close resemblances and similarities in that case and the facts of this case. He pointed out that so long as there was no conflict of interests, nominee directors had no difficulty in doing their duty as directors of the company. But once the “interests” were in conflict, the nominee directors failed to protect the interest of the company because of inaction. Shri Mookherjee pointed out that all the Saboo group’s efforts to make the Indian company independent in respect of raw materials purchases, direct export, etc., have been opposed by the GB group through the nominee directors as there was conflict of interest. Thus, the majority acting through nominee directors subordinated the interest of the company to those of the GB group and, therefore, they conducted the affairs of the company in a manner oppressive to other shareholders.

64. Shri Mookherjee then referred to court decisions in Bhubaneshwar Singh v. Kanthal India Ltd. [1986] 59 Comp Gas 46 (Cal) Five Minute Car Wash Service Ltd., In re [1966] 36 Comp Gas 566 (Ch D), Needle Industries (India) Ltd. [1981] 51 Comp Cas 743 (SC) and Sindhri Iron Foundry (P.) Ltd., In re [1964] 34 Comp Cas 510 (Cal) to highlight the following conclusions :

(i) The oppression must no doubt be oppression of members as such, but it does not follow that the fact that the oppressed are also directors is a disqualifying circumstance when the question of relief arises.

(ii) It is not necessary to prove that there has been a continuous course, of oppression over a period of time before one can get relief under Section 397. The wrongful act complained of may be a single act but its effect should be continuous and result in persistent oppression of the minority. If the oppression is of short duration, but is of such lasting character that redress is impossible by calling board meetings or general meetings of the company, a case for intervention under Section 397 is made out.

(iii) One of the tests of what constitutes ‘oppression’ within the meaning of Section 397 of the Act is to see whether the majority is taking an unfair advantage of their position as a majority. The second test is to find out whether in the exercise of the fiduciary power, the group concerned was attempting to destroy the existing majority or to create a new majority which did not exist previously.

(iv) On a true construction of Section 397, an unwise inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder.

65. Shri Mookherjee then argued that considering these well-established principles and applying them to the various acts alleged to have been committed by the majority shareholders in exercise of their rights as shareholders, a clear case of oppression has been established. He pointed out that the various acts complained of lack in probity and are unfair to the minority. He pointed out that frequent use of the casting vote by the chairman belonging to the GB group left no choice to the minority shareholders but to submit to such conduct.

66. Shri Chagla referred to important considerations which have to be kept in view in determining the issue of oppression and which were summarised in the decision of the Supreme Court in S.P. Jain v. Kalinga Tubes Ltd. [196.5] 35 Comp Cas 351. In that case, the Supreme Court had referred to the decisions of the English courts in Elder v_ Elder and Watson [1952] SC 49, George Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954] SC 381, Scottish Co-operative Wholesale Society Limited v. Meyer [1959] 29 Comp Cas 1 which was an appeal from Meyer’s case [1959] 29 Comp Cas 1 and H. R. Harmer Limited., In re [1959] 29 Comp Cas 305 and summarised the following conclusions :

(i) Although the word “oppressive” is not defined, it is possible by way of illustration, to figure out a situation in which majority shareholders, by an abuse of their predominant voting power, are “treating the company and its affairs as if they were their own property” to the prejudice of the minority shareholders ;

(ii) the oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted ; and the conduct complained of must be such as to oppress a minority of the members qua shareholders ;

(iii) an oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company’s affairs;

(iv) the conduct of the majority shareholders may amount to oppression notwithstanding the fact that their own shares depreciate in value pro rata with those of the minority ;

(v) the word “oppressive” means “burdensome, harsh and wrongful”. The circumstances must be such as to warrant the inference that “there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company’s affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy ;

(vi) the conduct complained of “should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. Absence of mutual confidence per se between partners, or between two sets of shareholders, however relevant to a winding up, has no direct relevance to the remedy contemplated in Section 397. Mere loss of confidence or pure deadlock is not enough. Lack of confidence must spring from oppression of a minority by a majority in the management of the company’s affairs and oppression must show at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder ;

(vii) events have to be considered not in isolation but as a part of consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members,

67. Shri Chagla pointed out that applying these principles, no case has been made out that circumstances are such which could infer an unfair abuse of powers by the majority shareholders. While admitting that there is a deadlock and loss of confidence, Shri Chagla pointed out that it is not enough to establish a case of oppression. He pointed out that the GB group had never shirked from discussing any issue in the meeting of the board of directors and all the necessary information was made available to the Saboo group so as to enable them to discuss the various matters adequately in the board. He, therefore, concluded that the charge of lack of probity or unfair dealing cannot be established against his clients. Shri Chagla argued that the motive of the petitioner in raising all these controversies is not for protecting the interests of any shareholder or the company or the public interest. He pointed out that just before the crucial board meeting in August, 1991, the Saboo group submitted 17 demands which mainly related to protecting their own benefits and which they were claiming as a matter of right in the company. In addition, they also claimed that they should get, somehow, a share in the profit arising out of the transactions of the company with the GB group. Shri Chagla pointed out that this was totally not acceptable to the GB group and hence the disagreement between the two groups. Shri Chagla also pointed out that the petitioners had not come with clean hands before the Bench and had made only partial disclosures though they had complete knowledge of the facts. In this respect, he referred to the episode relating to writing off of spare parts, exports through the GB group and raising matters in other courts when the present petition was pending before the Company Law Board.

68. It is clear from the above referred well known propositions that the existence of oppression is a pure question of fact to be determined in accordance with the circumstances of the particular case. It is impossible to lay down, a priori, certain categories of conduct which in all circumstances either are or are not capable in law of amounting to conduct which is oppressive within the meaning of Section 397/398 of the Act. Each case will have to be examined in the light of its own particular facts and in the light of the personalities of the individual persons concerned and how these personalities reacted on each other. The approach to this issue of fact is somewhat analogous to the approach to the question of fact which arises in matrimonial cases. Looking to the facts of the case we find that there are four phases in the management of this company, namely :

1. During 1960-74, both the groups had managing directors ;

2. During 1974-86, Shri R.K. Saboo was the only managing director ;

3. From 1987, a technical director was appointed on behalf of the GB group ; and

4. From January, 1990, both the groups again have managing directors.

69. It appears that so long as the Saboo group had unchecked control on the management of the affairs of the company, they had never raised any objection in respect of similar acts about which they are now complaining as oppressive. The relation between the two groups took an adverse turn soon after the appointment of the technical director. Just as there were different phases of management in the Indian company, similarly new personalities came on the scene as in the GB group Dr. Lindner representing the Beckert family has come in power in place of the representative of the Groz family. As GB group started asserting its rights of participation in the management, first with the appointment of a technical director and then a managing director, conflicts started. A temporary truce was signed on February 7, 1989, but it did not douse the fire completely. It remained smouldering. Efforts made in February-March, 1991. at the meetings held in Germany failed to improve the situation. The controversies have resulted more in mud splattering than bringing out any real problems. Allegations made by both groups have created more bitterness without resolving the crisis already existing. When the crisis developed, instead of evolving a strategy for solving the problem and conveying a message about the areas of grievance “honestly and transparently” both the groups found more convenient to indulge in shadow boxing and accusing each other of intrigue. Matters which could have been solved by better communication and sharing of information, were made worse by clamming up which only created further antagonism. The allegations relating to exclusion of the Saboo group from day-to-day management, withholding of important information regarding the operation of the company, unilateral take over of certain departments by the GB group, non-co-operation by the staff of the sales department, allotment of space to the directors representing the Saboo group and extension of service of certain senior executives of the company are all matters which clearly point out the state of relationship between the two groups. We have carefully considered the various acts alleged to be oppressive by the petitioner and we find that most of the acts complained of were not new and similar acts were approved with the unanimous approval of the board, when Shri R.K. Saboo was the sole managing director of the company. Some of the acts like sale of needles at a loss may involve violation of the provisions of the articles of association but they alone cannot make out a case of oppression. The relations between the GB group and the Saboo group arose out of a commercial transaction. There is no element of personal relationship. Regarding the demand of the Saboo group that the GB group should disclose the profits made out of the transactions with the company, the GB group has given a certificate of auditors to indicate that they make only a reasonable profit and stated that their nominee directors have not acted in any way to give any undue benefit to the GB group. In the light of the various principles enunciated in various court cases, we find that no case of oppression has been made out. Nothing has been shown to indicate that the majority have abused their predominant voting power and are treating the company and its affairs as if they were their own property. On the contrary, such allegations have been made by, the majority against the petitioner’s group who were in exclusive management in the past. While both the parties have made it clear that there is absence of mutual confidence, the petitioner has failed to prove lack of probity or fair dealing. Frequent use of the casting vote by the GB group cannot form a basis of oppression, when exercise of such vote is contemplated by the articles of association. It only indicates that the relations of both the, parties have reached a stage where reconciliation is not possible.

70. Before dealing with the scope of Section 397/398 and the types of reliefs that can be given under these sections, Shri Mookherjee referred to a decision of the Supreme Court in Needle Industries’ case [1981] 51 Comp Cas 743 to indicate that even if the petitioner fails to make out a case of oppression, the court is not powerless to do substantial justice between the parties. He then referred to the decision in Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom) in which a detailed analysis of various sections contained in Chapter VI of the Act was made and it was pointed out that these provisions are not subject to other provisions contained in sections dealing with usual corporate management of a company in the normal circumstances. It was held that the subjects dealt with by Sections 397 and 398 are such that it becomes impossible to read any such restriction or limitation on the powers of the court acting under Section 402. It was observed “an examination of the aforesaid sections brings out two aspects; first, the very wide nature of the power conferred on the court, and, secondly, the object that is sought to be achieved by the exercise of such power, with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by those sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court’s power. Further, sections 397 and 398 are intended to avoid winding up of the company if possible and keep it going while at the same time relieving the minority shareholders from acts of oppression and mismanagement or preventing its affairs being conducted in a manner prejudicial to public interest and, if that be the objective, the court must have power to interfere with the normal corporate management of the company, and to supplant the entire corporate management, or rather, mismanagement, by resorting to non-corporate management which may take the form of appointing an administrator or a special officer or a committee of advisers, etc. who would be in charge of the affairs of the company. The court could even have a truncated form of corporate management if the exigencies of the case required it, and any truncated form of corporate management can never conform to all the provisions dealing with corporate management. It will all depend on the facts and circumstances of each case as to how, in what manner and to what extent the court should allow the voice of the shareholders and directors and the court’s power in that behalf could not in any manner be curbed. Therefore, the position is clear that while acting under Section 398 read with Section 402 of the Companies Act, the court has ample jurisdiction and very wide powers to pass such orders and give such directions as it thinks fit to achieve the object and there should be no limitation or restriction on such power that the same should be exercised subject to the other provisions of the Act dealing with normal corporate management or that such orders and directions should be in accordance with such provisions of the Act.” Shri Mookherjee then referred to the decision in Debt Jhora Tea Co. Ltd.’s case [1980] 50 Comp Cas 771 (Cal) in which it was held that there can be no limitation on the court’s power while acting under Section 397/398 and 402 of the Companies Act, 1956. Instead of winding up a company, the court has been vested with ample power to continue the corporate existence of a company by passing such orders as it thinks fit in order to achieve the objective by removing any member or members of a company or to prevent the company’s affairs from being conducted in a manner prejudicial to the public interest. The court under Section 398 read with Section 402 of the Act has the power to supplant the entire corporate management. It was also held that the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act and there can be no doubt that the intention of the Legislature was to confer wide and ample powers upon the court for regulation of the conduct of the company’s affairs and to provide for any other manner which the court thinks just and equitable to provide for, in the interests of the corporate body and the general public. Referring to the decision of the Supreme Court in Cosmosteels Pvt. Ltd. [1978] 48 Comp Cas 312 (SC), Shri Mookherjee pointed out that if the court gives a direction under Section 402 to the company to purchase the shares of some of its own members, consequent reduction of share capital can be done and it will not be necessary to give a notice of this reduction of share capital to the creditors of the company nor is it required to follow the prescribed procedure in sections 108 to 111 of the Companies Act. Shri Mookherjee then pointed out that the petitioner is seeking the reliefs in order that the corporate structure should continue and the interest of his client should be protected. He pointed out that the reliefs that have been sought by the petitioners are to appoint three or four independent directors who can formulate the corporate policy as well as to give directions and control the frequent use of the casting vote. He pointed out that in order to ensure that these intentions are not defeated either by the petitioner or by the respondents, the present clause in the articles of association regarding the quorum for board meetings could be also suspended for a limited period of time. In support of this plea for appointment of three or four independent directors to ensure proper functioning of the company, Shri Mookherjee cited the decision in the case of Bubhneshwar Singh [1986] 59 Comp Cas 46 (Gal) Shri Mookherjee pointed out that another alternative relief that could be considered is to bifurcate the assets of the company in the proportion of 60 : 40 so that both the petitioners and the respondents can carry on the business. In support of this plea, Shri Mookherjee referred to the decision in Sishu Rcmjan Dutta v. Bhola Nath Paper House Ltd. [1983] 53 Comp Cas 883 (Cal). Shri Mookherjee pointed out that in this case of a family concern, which was a deemed public company under Section 43A of the Act, the members became divided into two groups holding equal shares and there was a complete deadlock and the two groups could not go together and the company could not be managed smoothly in the situation. It was held that this was a clear case of mismanagement of the company amounting to oppression of one group by another whichever way it was looked at. It was further observed in this case that since there is a complete lack of confidence in each other and both the groups cannot pull on any longer, it is not necessary to go into the question of mismanagement by one group as there are mutual allegations. In this case, both the parties suggested an equitable division of the business and assets of the company in an appropriate manner so that both the groups can carry on business independently of each other and the long standing reputation and goodwill of the flourishing business of the company should be fairly divided between the two groups along with assets in an equitable, just and proper manner so that the matter complained of is brought to an end. Shri Mookherjee pointed out that this was a company which Shri R.K. Saboo started and he has spent 30 years in this business and has no other-business except this. In this context, he also pointed out that the business of the Indian company is a small fraction of the worldwide activity of the GB group and, therefore, they should have no objection if the Bench comes to a conclusion to divide the property and business of the company in the proportion of their shareholding. In this connection, he also referred to Article 131 of the articles of association of the company and pointed out that it would be applicable only if the company goes into liquidation. He also pointed out that Article 131 is ultra vires the Companies Act. Shri Mookherjee then referred to the third alternative relief that can be considered by this Bench in deciding the petitioner’s case. He pointed out that since the petitioner is vitally interested in the business of the company and is willing to buy the shares of the foreign collaborators, there is a case for directing the majority to sell the shares to the minority. He made it clear that they are willing to purchase the shares but are not willing to sell the_shares as this is the only business which the Saboos have. In this connection, he also pointed out that the Reserve Bank of India had made an exception in allowing the foreign shareholders to hold more than 40 per cent. and even in the existing context of the present policy, as a general rule, the Government allows foreign shareholding only up to 51 per cent. In view of this, Shri Mookherjee pleaded that it will be appropriate if the majority is directed to divest shares in favour of minority. In this connection, he cited the case of A Company, In re (No. 00789 of 1987), Ex parte Shooter [1990] BCLC 384 (Ch D), A Company., Jn re (No. 3017 of 1987), Ex parte Broadhurst (No. 2) [1991] BCLC 267 (Ch D). This was a case where the company ran a football club. K acquired a controlling shareholding in the company and became the chairman of the board and secretary. From 1980 K ran the company without regard to formalities ; annual general meetings were not held, annual accounts were not prepared. The petitioner, who had subscribed for some of the new shares and purchased other such shares from members of the company, petitioned under Section 459 of the Companies Act. It was held that since K had shown himself to be unfit to control the company, he should sell the shares to the petitioner on fair terms even though he was holding more than 50 per cent. of the shares.

71. Shri Mookherjee concluded that one of the above three alternatives would put an end to the oppression being perpetuated by the acts of the respondents and will provide adequate relief to the petitioners.

72. Shri Chagla agreed with Shri Mookherjee that there are no limitations on the powers of the Bench to pass orders so as to put an end to the oppression complained of. Referring to the decision in Srikanta Datta Narasimkaraja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd. [1991] 72 Comp Gas 211 (Kar) he pointed out that it is well settled that the relief under sections 397 and 398 of the Companies Act is an equitable relief which is entirely left to the discretion of the company court. He pointed out that since the petitioner has not come with clean hands he does not deserve any relief. He, however, conceded that the situation in the company has come to such a stage that the petitioner and the respondents cannot live together and cannot work together. In such a situation, there is no other alternative but to sever the relationship. He pointed out that the petitioners are using the provisions of articles 99 and 105 in order to stall the expansion project which was unanimously approved by the board when Shri R.K. Saboo was the sole managing director of the company. He pointed out that all the acts complained of have been discussed in great detail at the meetings of the board of directors and whatever information was required by the Saboo group has been made available at the board meetings. Referring to the plea of Shri Mookher-jee that the Saboo group should be allowed to buy the majority’s shares, Shri Chagla pointed out that the Saboos have only a financial stake in the company while the GB group has a much greater stake in the company. He pointed out that the company was started on the basis of German technology and the technology is an intellectual property of the GB group. Nobody can use the trade mark owned by the GB group and the Indian company cannot use independently the trade mark which is the property of the GB group without their permission. He also pointed out that upgrada-tion of the technology will meet the future domestic demand of Indian consumer only if GB continues in the company. Shri Chagla pointed out that it is a well established principle that it is the majority who is asked to buy out the minority. He referred to the decision of the Calcutta High Court in Combust Technic Pvt. Ltd., In re [1986] 60 Comp Cas 872 in which it was held that the majority was a matter of arithmetic and in law the majority should not be directed to sell shares to the minority. He pointed out that Justice A. N. Sen observed in his judgment in Tea Brokers Pvt. Ltd. v. H.P. Barooah (Appeal from Original Order No. 312 of 1972-February 19, 20, 1974) that to ask the majority who are normally entitled to run the affairs of the company to go out of the company will not meet the ends of justice and except in extraordinary circumstances it would be unfair and unjust to deprive the majority shareholders of their valuable/ rights for all times to come. It was further observed that where the minority complained of oppression by the majority which was more usual, the ends of justice required that the minority should be directed to leave the company against receipt of proper compensation. He also pointed out that the foreign collaboration agreement under which the company has got the benefit of the foreign technology cannot be brushed aside and in case of parting of ways, the GB group as per the agreement has got the right to take the machinery and equipment as provided in the foreign collaboration agreement. He also referred to the case of Chander Krishan Gupta v. Pannalal Girdhari Led Pvt Ltd. [1984] 55 Comp Cas 702 (Delhi) in which it was held that the constant fight amongst the directors, who were also the shareholders of the company, had certainly an adverse effect on the conduct of the company’s business. This by itself would justify appropriate orders being passed under Section 398 of the Act. In such a situation a permanent solution has to be found which would enable the company thereafter to function smoothly. The solution could only be found in one of the groups purchasing the shares of the other and in such a case the first option to purchase the shares had to be given to the majority shareholders against whom the charge of oppression is made. He referred to the case of Bholanath Paper House Ltd. [1983] 53 Comp Cas 883 (Cal) referred to by Shri Mookherjee and pointed out that the division of assets was ordered on the ground that both the parties were having equal shares and it was at the suggestion of the parties. He also brought to our notice that it was a family company doing trading business in which case sharing of goodwill assumes a substantial importance. There is no such case in the present situation. Shri Chagla concluded his arguments stating that in the light of the foreign collaboration agreement, provisions of the articles of association and well established principles in various court cases, whenever a situation of deadlock as in the existing case arises and the functioning of the company is affected because of the serious disputes between the two parties which cannot be reconciled, there is no other option but to ask the minority shareholders to sell their shares to majority. He pointed out that any independent auditor could be appointed to decide the valuation of the shares and the shares can be purchased either by the GB group or by another Indian party or by a non-resident Indian subject to the approval of the concerned authorities both in respect of the level of foreign participation as well as the industrial licence requirements.

73. We have carefully considered the arguments in relation to the type of the relief that could be granted by this Bench. No doubt, we have come to the conclusion that the petitioner has not been able to establish a case of oppression. At the same time, we are aware that a time has come when the relationship of the two parties has reached a stage where reconciliation is difficult. Shri Mookherjee has also drawn our attention to the decision of the Supreme Court in Needle Industries’ case [1981] 51 Comp Cas 743 in which it was held that even if the case of oppression is not established, the Bench has got power to give relief to do substantial justice between the parties. Shri Chagla has also conceded this point that a stage has come in the relationship between two parties that there is no alternative but to sever the relationship; Apart from this assessment of both the parties regarding the state of affairs of the company, we also find that it is not possible for both together to carry on the working of the company smoothly, in view of the dispute between the two groups of shareholders which is having an adverse effect on the working of the company and employees. We also noted that the minutes of the board meetings are also not being finalised because of serious differences between the two groups regarding the contents of the decisions taken at these meetings. Deadlock in the management has been established and admitted also. During the hearing, we had tried to explore the possibility of reconciliation between the parties, in view of their long standing 30 year relationship, but we did not get any positive indication from either of the parties. In view of this, the appointment of three/four independent directors or suspension of certain articles which give veto power to either of the parties would not be a permanent solution. At the most, it will postpone the date of severing of the relationship. An order in a dispute of this nature should be such that it will put an end to the dispute. We do not think that the other alternative suggested by Shri Mookherjee regarding bifurcating the assets is a viable solution as neither is the nature of the business of the company such as to make it a feasible solution nor is it possible in the light of the terms and conditions of the foreign collaboration agreement, the legal issues relating to the trade mark and the provisions of the articles of association. The facts of the case Cited in support of such an alternative by Shri Mookherjee are quite different from the facts of the present case and there is absence of any agreement between the parties on bifurcating the assets. Therefore, the only solution that can put to an end this dispute is severing of the relationship by sale of shares by one party to the other. While the petitioner has made it clear during the hearing that he is not interested in selling his shares, he is willing to buy shares of the respondents and has prayed for such a relief. In this context, Shri Chagla has pointed out the decisions in large number of court cases establishing the principle that it is the majority which has the right to purchase the share of the minority shareholders and it is the oppressor who has to pay the price for the shares of the oppressed. It is settled law that the majority should never be forced to sell its shares to a minority and the relief that can be given in such a case to a minority shareholder is to ensure a fair price for the shares he is required to sell. Accordingly in this case the GB group which is holding 60 per cent. of the shares should buy the shares of the Saboo group. In order to buy shares of the Saboo group, they will have to obtain permission from the Reserve Bank of India and other concerned authorities. If they are not in a position to obtain such permission, they may be required to seek permission to induct non-resident Indians who can hold those 40 per cent. shares or induct an Indian partner who is willing to take these shares. The ultimate purchase of these 40 per cent. shares will depend on the clearance given by the Reserve Bank of India and other authorities. However, in order to protect the financial interest of the minority shareholders, in the meanwhile, it is necessary that funds should be brought in by the majority shareholders and deposited with the company so as to ensure payment as determined by an independent valuer.

74. In view of the above, to do justice between the parties as was done by the Supreme Court in Needle industries’ case [1981] 51 Comp Cas 743, we dispose of this petition by the following orders :

(1) Mr. Y.H. Malegam, chartered accountant of Billimoria and Co., Meher Chambers, R. Kamani Road, Ballard Estate, Bombay-38, is appointed as a valuer and not as an arbitrator for the purpose of valuing the shares of the petitioners held in the company. Mr. Y.H. Malegam shall determine the fair value of these shares as on March 51, 1992, within two months from the date of this order or within such further time as may be extended by the Company Law Board. The parties shall have liberty to make their respective submissions before the valuer who shall be at liberty to make such independent enquiry as the valuer deems fit–to consult such persons including professionals as he deems fit and shall be at liberty to use his own information as he deems fit. The valuer shall file with the Company Law Board his valuation of shares of the petitioner and forward copies thereof to Khaitan and Company, Advocates, 9, Old Post Office Street, Calcutta-700 001, the advocates for the petitioners, to J. B. Dadachanji and Co., Advocates, Jeevan Vihar, (1st floor), 3, Parliament Street, New Delhi, the advocates of the respondents and to Groz-Beckert Saboo Limited, having its registered office at New Asiatic Building, 2nd Floor, H-Block, Connaught Circus, New Delhi. Such valuation should state the value per share. The company will pay Rs. 30,000 as remuneration to Shri Malegam in addition to incidental expenses towards travel, etc. (2) Within one month from the receipt of the copy of the valuation report from the valuer, respondents Nos. 2 and 4 would deposit with the company the value per share for 2,86,661 shares held by the petitioner and 12 shareholders who have supported the petition. The company would immediately deposit this money in interest bearing fixed deposit for not less than 90 days. The company would also inform the petitioner about the fact that the GB group has deposited the amount.

(3) The petitioner and the 12 shareholders supporting the petition will deposit all the 2,86,661 shares along with duly executed transfer forms with the company within 45 days from the date on which this order is served on the petitioner.

(4) The other shareholders belonging to the Saboo group who are not before us, may also avail if they so desire, of this option of selling their shares to the majority shareholders at the price as determined by the valuer appointed under this order. The company will write within 15 days of the receipt of this order to all such shareholders about the option available and within one month from the receipt of the letter from the company they will file their consent, if they want to sell their shares with the company along with share certificates and duly executed blank transfer deeds. Respondents Nos. 2 and 4 would also deposit the amount to be paid to such shareholders within one month from the receipt of the copy of the valuation report and the company would immediately deposit the amount in an interest bearing fixed-deposit for not less than 90 days. The company would also inform all those shareholders who exercise this option about the deposit made by the GB group.

(5) Respondents Nos. 2 and 4 and the company will immediately on receipt of this order approach the Reserve Bank of India and other authorities to obtain necessary permissions for purchase of the Saboo group shares and to complete other formalities for increasing their equity holding in the company or obtain consent of any other Indian partner or nonresident Indian to buy these shares mentioned in paragraphs (2) and (4) above and obtain permission for the same.

(6) If respondents Nos. 2 and 4 belonging to the GB group fail to pay the deposit as indicated in paragraphs (2) and (4) above, the Saboo group will have the right to buy shares of the GB group at the same value indicated by the valuer in his report for which they will deposit the entire sum with the company within one month from the date on which the option to make payment given to the respondents expires. The Saboo group should also obtain necessary permission, after depositing the money, from the Reserve Bank of India and other concerned authorities.

(7) The company will intimate to the Company Law Board immediately on expiry of the period of one month from the date on which valuer gives his report about whether the GB group has deposited the amount as indicated in paragraphs (2) and (4) above and the action taken by the company.

(8) Within 10 days from the date on which permission is received from the Reserve Bank of India, the company and the respondents will inform all the minority shareholders of the date for payment and transfer of shares to persons as approved by the Reserve Bank of India/other authorities. Interest earned on the deposits mentioned in paragraphs (2) and (4) above would be distributed pro rata among all the transferors.

(9) Any transfer of shares belonging to the Saboo group after the date of this order will not be given effect to by the company.

(10) Interim order dated April 16, 1992, stands vacated and the company may decide about Shri Saigal’s further employment as per the rules.

(11) Parties are at liberty to approach this Bench from time to time for any further order or appropriate directions which may become necessary for the purpose of giving effect to this order.

(12) No orders as to costs.

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Category : Company Law (4051)
Type : Judiciary (12274)
Tags : CLB judgment (29)

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