C.P. No. 19/2008. Case: K Venugopal Reddy and Others Vs NECTAR Laboratories Ltd. and Others. Company Law Board

Case NumberC.P. No. 19/2008
CounselFor Appellant: J.P. Rao and Ms. C. Salila Reddy and For Respondents: Sriram Panchu, Senior Advocate (Arun Anbumani, K. Moorthy, B. Ravi and S. Anil Sandeep with him)
JudgesLizamma Augustine, Member
IssueCompanies Act, 1956 - Sections 267, 299, 301, 397, 398; Negotiable Instruments Act, 1881 - Section 138
Citation2012 (111) CLA 477
Judgement DateFebruary 24, 2012
CourtCompany Law Board


Lizamma Augustine, Member, (Chennai Bench)

  1. The dispute in the company petition is centered around the activities of Nectar Laboratories Ltd., a company limited by shares and incorporated in the year 1995, under the Companies Act, 1956 ('the Act') with registered office in Hyderabad. The company is engaged in the manufacture of n-Butyl Cyanoacrylate, pessaries, sachets, tins and injectables. The process know-how for the manufacture of n-butyl cyanoacrylate (the bio-adhesive for suture-less surgery) was released by the Indian Institute of Chemical Technology, Hyderabad. After obtaining the non-exclusive licence for the manufacture and sale of n-butyl cyanoacrylate, Nectar Laboratories commenced commercial production in the year 1997 under the brand name Nectacryl, utilising a conditional and convertible term loan from the Industrial Development Bank of India ('IDBI'). The company, according to the petitioners, began to face financial crisis due to excess borrowing and misappropriation of such borrowings by the 2nd respondent, who is the managing director, and his family directors. The company became defunct in 2002 and the creditors initiated proceedings for recovery of outstanding dues. When the respondent-directors, after about five years, contemplated a revival scheme, the petitioner sent a legal notice to the 2nd respondent demanding the blueprint of the revival scheme. It was not given.

  2. The first petitioner, who is a founder director of the company, holding 10,750 equity shares of Rs. 100 each, has filed this petition on his behalf and on behalf of the other six petitioners, who are shareholders. The authorised capital of the company is Rs. 2.50 crore divided into 2,50,000 equity shares of Rs. 100 each. The company was promoted by 14 members. Petitioners 1, 3 and 4 were among them.

  3. This petition is filed alleging acts of oppression, mismanagement and misappropriation on the part of the 2nd respondent and the other respondents who are members of his family. According to the petitioner, the acts of manipulation and misrepresentation started with the licensing agreement with the Council for Scientific and Industrial Research ('CSIR') and the Indian Institute of Chemical Technology ('IICT') for the transfer of technologies for the manufacture of bio-adhesives, etc., in the year 1994. The petitioners claim that the licence to process and manufacture the bio-adhesive was always belonging to the company. However, the second respondent, on behalf of a partnership firm floated by himself and respondents 3 and 4 in the name and style of Dr. C.C. Sahadev & Associates, signed a memorandum of understanding ('MoU') with the 9th respondent (Dr. Reddy's Laboratories) and received Rs. 60 lakh for the transfer of the licenced technology. There was also an assurance that the 9th respondent would further transfer Rs. 1.30 crore at the time of final transfer of vital technology. The petitioner complains that the 2nd respondent and his family directors had, thus, transferred the intellectual property and know-how of the company to the 9th respondent and kept the consideration in their personal account.

  4. The petitioner seeks a declaration to the effect that the floating of Dr. C.C. Sahadev & Associates by the respondents and transferring the know-how of the company to the 9th respondent are illegal. The petitioner also wants the amount received from the 9th respondent refunded with interest. He further wants to induct himself as the managing director after declaring the continuance of the 2nd respondent as managing director illegal.

  5. In a common counter on behalf of respondents 1, 3, 4, 5 and 7 beside himself, the 2nd respondent admits the existence of a licensing agreement, entered on 21st January, 1994. But that, according to him, was between CSIR and himself. The terms and conditions for the release of the process know-how for the manufacture of butyl cyanoacrylate and the grant of a nonexclusive licence to the 2nd respondent for the manufacture and sale of Butyl Cyanoacrylate in India or elsewhere as per the said process are detailed in the agreement. Pursuant to this agreement, the IICT transferred the process know-how to the 2nd respondent. On 10th February, 1994, IICT certified the Completion of Transfer of Process know-how. It was also certified that in pursuance of the licensing agreement mentioned above, the process know-how of n-butyl cyanoacetate and n-butyl-2-cyanocrylate was given to the 2nd respondent. It was only subsequent to this that Nectar Laboratories (P.) Ltd. was incorporated on 10th March, 1994.

  6. According to the 2nd respondent, he, in his individual capacity, was the licence holder of the process and technical know-how for the manufacture of n-butyl-2-cyanocrylate. He signed a memorandum of understanding on 15th February, 1994 with Nectar Laboratories, granting a non-exclusive sub-licence for five years. It was specifically agreed that the company would not part with the possession or control of the process know-how in any way whatsoever.

  7. After commencing production, the company entered into an agreement on 14th August, 1997 with the 9th respondent, granting exclusive right to market, sell and distribute the bio-adhesive Nectacryl. In 2000 a supplementary sub-licensing agreement was made between the company and the 2nd respondent and it was agreed that royalties payable by the company to the 2nd respondent should be used for research and development of new pharmaceutical formulations.

  8. On the basis of the 1997 agreement, the company received Rs. 1.5 crore from the 9th respondent, which, contrary to the allegation in the petition, was used to clear debts. The company, as legal owner of the trade mark Nectacryl, transferred the same to the 9th respondent. The partnership firm under the name Dr. C.C. Sahadev & Associates was formed in 2001 for effecting the transfer of the technical know-how because the 2nd respondent was the non-exclusive holder of the licence. All the money collected by the partnership firm was remitted to the company. The petitioner was aware of these arrangements and he had acknowledged Dr. C.C. Sahadev & Associates as part of the Nectar group.

  9. The contesting respondents 2-7 deny the allegation in the petition that the company was suffering from their misdeeds. Occasional setbacks were corrected promptly and appropriately. For the ups and downs of the company, the petitioner, as a director on the Board, is also responsible. The company is earnestly and successfully trying to overcome the difficulties by having compromise with banks and other creditors. Though production was stalled because of labour problems, and set-backs in the business, the company had never become defunct. The callous and negative attitude of the petitioners, making derogatory and defamatory statements, will thwart the genuine attempts of the respondents to rejuvenate the company.

  10. On the basis of the averments in the petition, the petitioners are seeking the following main relief:

    (a) A declaration that the floating of a partnership firm by the 2nd respondent and transferring the know-how of the 1st respondent-company to the 9th respondent is illegal and also a direction for refunding the amount received from the 9th respondent.

    (b) Reconstitution of the Board, inducting the petitioner as managing director after removing the 2nd respondent from that position by invoking section 267C of the Act.

    (c) Declare the decisions taken by the Board at its meetings held on 10th March, 2008 and 25th April, 2008 as null and void.

    (d) Declare the continuance of the 2nd respondent as managing director of the 1st respondent-company as illegal in the light of the conviction and invoke section 267 of the Act for his removal.

  11. The petitioners are supportive of R10 (elder brother of R2) who got impleaded in the CP on 20th February, 2009 (CA No. 57/2009). According to him, in continuation of a partnership firm, R1 was promoted by R2, R10 and other five brothers (NRIs). The IICT entered into a licensing agreement on 21st January, 1994 with R2 who was the chief promoter for and on behalf of the company and the consideration of Rs. 3.70 lakh was paid from the account of the company. It is asserted that R2 has no independent right over the technical know-how of 'the product', or rather he was a mediator or an intervener between the company and the IICT. The IICT, in its letter dated 13th October, 1994 to the Drugs Controller of India, had made it Clear that it had transferred the technology to the company. RIO claims to have sent Rs. 16 lakh to R2 during the period 1994-97 which has not been, accounted for in the company. Dr. Sahadev & Associates had been formed with the intention to siphon-off the money and assets of R1. R2 forged the signature of RIO and secured loans for the company by pledging the immovable properties' owned by RIO and his sister. Their mother had invested Rs. 90,000 in the company but no shares were allotted during her lifetime. R2 has forged certain documents in respect of that investment after her demise in June 2002. One Savita Jaiswal had invested Rs. 1.30 lakh in the year 1994 but her name finds no place in the list of investors and subscribers in that signature of RIO and many others. Though a sum of Rs. 30,48,912 has been shown in the book of accounts of Genesis Solutions to have been credited to accounts of the R1-company, the said amount has not been credited in the account of the company. From the year 2003 onwards there has been no proper annual general meeting ('AGM') conducted in the company and no notice has been sent to this respondent. There has been an unauthorised increase of the authorised share capital without calling for the AGM, as per the balance sheet dated 31st March, 2008. The power of attorney executed by this respondent and others in favour of the second respondent had been misused for his personal benefits. When the second respondent was...

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