C.P. No. 51 of 1998. Case: Atmaram Modi Vs ECL Agrotech Ltd. and Ors.. Company Law Board
| Case Number | C.P. No. 51 of 1998 |
| Counsel | For Appellant: K.G. Raghavan, Adv. and For Respondents: S.S. Naganand, Adv. |
| Judges | S. Balasubramanian, Chairman and K.K. Balu, Member |
| Issue | Companies Act, 1956 - Section 397 |
| Citation | 1999 (98) CompCas 463 (CLB) |
| Judgement Date | July 15, 1999 |
| Court | Company Law Board |
Order:
S. Balasubramanian, Chairman
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This petition under Section 397/398 of the Companies Act, 1956 ("the Act"), has been filed by the petitioner hereinabove with the consent of twelve other shareholders, all together collectively holding 25 per cent. shares in ECL Agrotech Limited (the company), alleging acts of oppression and mismanagement in the affairs of the company. The main grievance of the petitioner is that he was wrongly/illegally removed from the position of a director of the company and that such removal is an act of oppression in view of the company being in the nature of a partnership. In addition to this main grievance, the petitioner has also alleged siphoning off of funds, etc., by the respondents. On the basis of these allegations, various reliefs have been sought including for a declaration that the first petitioner continues as a director of the company and that the company is a quasi-partnership, restraining the respondents from committing any act in breach of the partnership principles in the conduct of the affairs of the company, for directions to the respondents to purchase the shares held by the petitioners or in the alternative, directing the respondents to sell the shares held by them to the petitioners.
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It is appropriate to narrate, in brief, the contents of the petition. This company was incorporated in June, 1995, by four groups consisting of the petitioner and the second to fourth respondents along with their associates, with 25 per cent. shares to each group, with the object of taking over the business of ECL Agrotech (ECL), a unit of one Electro Steel Castings Limited. ECL was engaged in the business of high breed seeds. This unit was being headed by one P. Bhotika. One of the main customers of this unit was Heinz, an American company. This unit was taken over by the company along with its assets, liabilities and businesses for a total consideration of Rs. 75 lakhs. Shri Bhotika, being an expert in high breed seeds also joined the company. All the four groups were represented by one director each and the petitioner became the chairman and managing director of the company. In May, 1996, the chairman and Shri Bhotika undertook a foreign trip to the USA and Germany for exploring export possibilities, by incurring an expenditure of about Rs. 7 lakhs from the company funds. After their return, differences cropped up between the petitioner and other respondents leading to the petitioner being prevented from attending the office of the company and the respondents seeking to appoint one Shri Arun Aggarwal as the chief executive of the company. In view of this, the petitioner stopped attending the office from August, 1996. It seems there was an offer by the petitioner group to sell their shares to the respondents and that a committee of arbitrators determined the value to be Rs. 17.5 lakhs. This did not materialise. Thereafter, the petitioner floated a new company in the name of Oriental Biotech Limited (Oriental) to pursue the seeds business. Shri Bhotika also joined the new company after leaving the services of the company. Heinz also started to have business dealings with the new company terminating their business relationship with ECL. Some other employees also left ECL and joined the new company. Later, the company informed the petitioner that he had allegedly vacated the office of director in terms of Section 283(1) read with Section 299 of the Act. Further, in an extraordinary general meeting held on December 23, 1996, the shareholders had allegedly passed a resolution removing the petitioner as a director of the company. Initially the petitioners had filed a winding up petition in the Karnataka High Court, which was later withdrawn after the present petition was filed before the Company Law Board.
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Shri Raghavan, advocate for the petitioner, submitted that the removal of the petitioner as a director is a grave act of oppression and, therefore, the same should be declared as null and void especially in view of the fact that the company is in the guise of a quasi-partnership, wherein equal shareholding and equal participation in the management have been agreed to among the shareholders. To urge his point that the company is in the guise of a quasi-partnership, he traced the relationship between the petitioner and the respondents for a long period before the incorporation of the company. According to him, the petitioner, respondents Nos. 2, 3 and one P. K. Rungta, the husband of the fourth respondent were having business relations for a number of years prior to the incorporation of the company and as a matter of fact, the petitioner and Shri Rungta were active members of Aggarwal Samaj, Bangalore, and as such knew each other well. Their association continued when a partnership firm in the name of Bangalore Deve lopers was formed with the petitioner and respondents Nos. 2, 3 and 4 as partners. When ECL was to be taken over, a sum of Rs. 10 lakhs was paid through this firm. The company was the outcome of the personal relationship between the petitioner and respondents Nos. 2, 3 and 4, That is why, he pointed out that, when the company was incorporated, it was ensured that all the four groups were allotted 25 per cent. shares each and each group was represented in the Board with one representative. This itself, according to learned counsel, would indicate that the company is in the guise of a quasi-partnership wherein equal shareholding and equal participation in the management has been ensured. Therefore, according to him, the company having been incorporated on the basis of mutual trust and confidence among the shareholders, it has all characteristics of a partnership and is governed by the discipline of relationship amongst the partners in a partnership firm. Referring to Synchron Machine Tools P. Ltd. v. U. M. Suresh Rao [1994] 79 Comp Cas 868 (Kar), wherein the court has laid down certain tests to determine whether a company could be treated as a partnership, he submitted that the tests laid down in that case are fully satisfied in the present case. Thus, he submitted that the complaints of the petitioner should be considered in this background and once the petitioner is able to establish that there has been a failure of mutual trust and confidence brought about by the acts of the respondents, then such acts would justify winding up of the company on just and equitable grounds as in a case of a partnership in terms of Section 45(g) of the Indian Partnership Act. He further submitted, that even though there are thirty-one shareholders, as a group there are only four and each shareholder could be identified with only one group. Further no invitation to the public was made. He referred to Loch v. John Blackwood Ltd. [1924] AC 783 (PC), wherein the Privy Council observed that as long as it is established that the company is a closely held one and that the directors are guilty of lack of probity in dealing with other shareholders, the principles of dissolution of partnership could be applied to such companies.
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With these preliminary submissions, Shri Raghavan, dealt with the merits of the case. According to him, after the petitioner returned from the foreign trip, the attitude of the respondents towards him suddenly changed and they did not like his having any participation in the affairs of the company. In view of this, the petitioner volunteered to go out of the company by selling the shares held by his group. Even the value for the shares was determined by a committee of arbitrators at Rs. 17.5 lakhs. Even though the respondents were initially agreeable to purchase the shares at Rs. 17.5 lakhs, later they did not do so. Since he had no say in the affairs of the company, he floated another company by name Oriental Bio-tech Ltd. (Oriental) in September, 1996, to carry on a similar business. Shri Bhotika did not like the working conditions in the company and as such he resigned from the company in July, 1996, and later on joined the new company of his own volition. This is the position with Heinz also, which did not want to have any business relations with the company, as it was with Shri Bhotika that M/s. Heinz were having dealings for a long time and when they learnt that he had joined the new company they started dealing with the new company. Referring to annexure A22, he pointed out that it was the company which informed Heinz, through a fax on August 23, 1996, that Shri Bhotika had left the company and again by a fax dated August 28, 1996 (annexure A23), the company informed M/s. Heinz that the petitioner would also be leaving the company. He referred to annexure A24 in which the company had informed M/s. Heinz on September 11, 1996, that new start-up companies would find it difficult to provide the same level of technical expertise and the comfort of dealing with a proven person. These documents have been conveniently concealed by the respondents in their reply. Because of these faxes and since M/s. Heinz were keen on dealing only with Shri Bhotika, through a fax dated September 13, 1996 (annexure 9), M/s. Heinz asked the company to deliver all stock seeds to Shri Bhotika. Thus, it is clear that the petitioner did not take away Heinz from the company. However, the respondents, with a mala fide intent, fabricated the minutes of an allegedly held board meeting on September 26, 1996, to indicate that the petitioner suggested some business arrangements with Oriental, without disclosing his interest as the...
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