Kapil N. Mehta, Surat Vs Shree Laxmi Motors Limited

Specialists who draft these shareholders’ agreement (SHAs) should consider the enforceability of these speculator rights when relocating from other undeniably more all around created PE markets which, subsequently, might be an outright rebel under Indian law.
Estimated Reading Time: 11 minutes

Introduction

In Kapil N. Mehta, Surat V. Shree Laxmi Engines Restricted[1], the organization passed a roundabout goal which was permitted by the Articles, however not imagined under the Organizations Demonstration at that point. A case was raised to deliver the goal void as the Organizations Demonstration was quiet on the issue. The Gujarat High Court excused the case on the grounds (bury alia) that without a particular law that denied roundabout goals, the way that the Articles empowered the organization to pass round goals was not violative of the Organizations Demonstration.

Facts

  1. Prior to the incorporation of the respondent-company, His Highness Maharaja of Chhota Udaipur, Virendrasinhji and one Shri Jamshedji Panthki and one Shri Mukund Amratlal Shah ran a business in partnership in the name and style of M/s. Laxmi Motors and this firm was the authorised dealer in South Gujarat for sale of vehicles and spare parts manufactured by Telco. The said firm established a service station at Surat. The partners of the firm appointed the first petitioner as the Manager of the said firm and put him in-charge thereof. Sometimes in January 1972, the Maharaja of Chhota Udaipur retired from the firm and in February 1972, Jamshedji Panthki died and the business became vested in Shri M. A. Shah subject to the liabilities payable to the heirs of Jamshedji Panthki. In July 1972, said Shri M. A. Shah, Shri Homi, son of Shri Jamshedji Panthki, and the first petitioner formed the respondent private limited company. The company took over the business formerly carried on by the above firm together with its assets, properties, and liabilities.
  2. In pursuance of article 11 of the articles of association of this company, the shares of this company were allotted amongst the three groups equally. Thus, Shri M. A. Shah and persons constituting Shah Group have 33.33% shares; Homi J. Panthki and persons constituting Panthki Group have 33.33% shares and the first petitioner and his relatives constituting the Mehta Group have 33.33% share. The second and third petitioner are sons of the first petitioner. Shortly after the registration of this company, the agreement of agency or dealership between Telco and this company was executed in August 1972, and the agreement was renewed from time to time.
  3. It appears that in the year 1990-91, on coming to know that the company was in financial difficulty, Homi Panthki and Dinesh Shah, son of M. A. Shah went to Surat from Mumbai (where they normally reside) and started looking into the financial position of the company. It is the case of the respondents that they were prevented from examining the books of accounts and records of the company by the first petitioner. Thereafter having found that the brother of the first petitioner one Natwarlal Mehta (who was working as spare parts manager) was responsible for some of the mismanagement, he was removed from his services in 1994. The sales of petrol and diesel during 1986-87 to 1991-92 were looked into by one Agarwal Kailash and Associates, a firm of chartered accountant, which found that sale of large quantity of petrol and diesel during those six years was not accounted for. Another firm of chartered accountants, namely, Natwarlal Vepari & Co. was appointed to look into the financial affairs, and they submitted three separate reports dated 18.3.1996 certifying that due to the difference in credit sale, the company had suffered substantial losses in the three years.
  4. The respondent-company received a letter, dated 31.1.1996 addressed to the Chairman by the Manager (Sales) of Telco asking them to inform as to who was in the management of the respondent-company. Two circular resolutions came to be passed by the majority directors on 5.2.1996 and 8.2.1996 appointing Homi Panthki and Dinesh Shah as the managing director and joint director respectively in spite of the opposition by the petitioners. On 8.5.1996 Telco was informed that the Mehta Group was without any management or administrative power in the company. The petitioners by their letter of 9.8.1996 protested against their removal from management by contending that the same was violative of article 65 of the articles of association.
  5. M/s. Natwarlal Vepari & Co. further submitted a report, dated 7.8.1996. One significant aspect of the report was that the payee receipts for rebate allowance received from the company to the tune of Rs. 1,98,000 during 1988-1992 were not available. The chartered accountants also pointed out that in respect of rebate pertaining to Daman office amounting to Rs. 6,44,150 for the year 1990-91, the payments amounting to Rs. 6,10,650 were made in cash after three years in February-March 1994, and the receipts of the payees were not available. The chartered accountants expressed opinion that the veracity of these payments appeared to be doubtful since it does not stand to reason that the customers would wait for three years for receiving the rebate.
  6. The said report was sent to the petitioners and their explanation was sought. That led to further correspondence between the parties. It appears that the petitioners started another company in the name of Auro Motors Private Limited in the meanwhile with the object of acquiring dealership of Tata diesel vehicles. The respondents alleged that petitioners made frantic efforts to obtain dealership from Telco though they did not get it. Thereafter, further correspondence between the lawyers of the parties has ensued. Criminal proceedings were filed against the petitioners. The petitioners challenged the same by filing Special Criminal Application No. 491 of 1997 in this court. This court directed that the investigation be properly done by another officer and it appears that thereafter, charge sheet has been filed against the petitioners

Issue

  • Whether under section 439 of the Companies Act, 1956, (hereinafter referred to as ‘the Act’) by invoking the principal, namely, ‘just and equitable’ the respondent-company could wound up?

Contentions

Petitioner’s Argument

On behalf of the Petitioner, it was argued that the formation of the company was based on personal relationship and mutual confidences amongst partners. There were breaches of the basic understandings that the petitioners would participate in the conduct of the business. The respondent-directors were guilty of oppression and mismanagement. They had mismanaged, misconducted, and misappropriated to the detriment of the petitioners who were oppressed by the said directors in management. The structure of the company only comprised of 3 groups of directors who were equal partners in business of Telco dealership. The petitioners were one of the equal partners who had been vested with the management by the articles of association and by contracts at the outset.

However, the other group of directors had misconducted to oust the petitioners from their vested right to control and manage the affairs of the company. Petitioners state that this had brought about total loss of confidence and lack of mutual faith and understanding. It was submitted that the petitioners were sought to be excluded from the management, and, therefore, or otherwise, principles of dissolution of partnership were required to be invoked. This was a case of irretrievable and irreversible deadlock in the company on account of lack of probity in the management of the company and there was no hope or possibility of smooth and efficient continuance of the company as a commercial concern. That in the circumstances, it was just and equitable that the company would be wound up, particularly, on the principle of dissolution of partnership”.

Respondent’s argument

On behalf of the respondents, an exhaustive reply had been filed by Homi Panthki, affirmed on 10 March 1997. It was submitted therein that the petitioners had not come to the court with clean hands and that they were themselves responsible for the deterioration in the financial affairs of the respondent-company which was prevented by timely intervention by himself as well as by Mr. Shah. It was submitted that when one is invoking just and equitable clause, firstly, one must come to the court with clean hands.

Judgements

Hon’ble Supreme Court held that the so-called grievance of the petitioners was that they were removed from the management and as observed by the Hon’ble Supreme Court, the general interests of the shareholders should not be readily sacrificed at the altar of squabbles of directors for power to manage the company as in Mehra’s case [(1999) 2 Comp LJ 261 (SC)]. Hence, for the reasons stated above, it was difficult to exercise the powers under section 433(f) of the Act in the present case and the petition was dismissed.

Analysis

In this case the Hon’ble Supreme Court noted the provisions under sections 397 and 398 and 402 of the Act and observed that sections 397, 398 of the Act provide relief to shareholders against oppression and mismanagement. Thereafter, having referred to the specific provisions of section 402, the Hon’ble Supreme Court observed as follows:

“The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398.”

It was stated that though there was a good amount of force in the submissions of Mr. Soparkar with respect to theoretical possibility of a deadlock in the meeting of the Board of directors, yet, at the same time, it was material to note that so far, a deadlock has not occurred, and the company is continuing to function. If required, it may function by passing circular resolutions. What the petitioners were doing was to threaten creation of a deadlock in future.

They were threatening to remain absent or to remain present and block any resolutions. In that context also, what was relevant is that it was only the particular kind of items which are mentioned in article 65 that require one affirmative vote from each group. Mr. Shelat stated that nothing of the kind is being done by the respondent-company. There was no allegation whatsoever in the petition that any of those items were violated by the respondent-company. Mr. Shelat also stated that respondents do not plan to take any of those items mentioned in article 65 as of now. That being the position, the argument of creating a deadlock in the Board of directors was an argument of despair.

 What is material to note is that there were serious allegations of misappropriation of funds and mismanagement against the petitioners themselves. They were facing a charge in a criminal court. In a situation like this, in fact, what was expected of them was that they voluntarily step down. They have not done so, if the directors of the other groups take over the management, they could not be faulted for that. Besides, as held by the Hon’ble Supreme Court, normally, the submission that a limited company be treated as a quasi-partnership, cannot easily be accepted.

This is because, as again observed by the Hon’ble Supreme Court, the promoters of a company whether or not they were earlier partners when they elect themselves to avail of the advantages of forming a limited company, they voluntarily and knowingly agree to abide by the provisions of the Act. Besides, as observed by the Hon’ble Supreme Court, the Company Law Board has wide powers under section 402. In the present case, although there are allegations of mismanagement against the petitioners, it is the petitioners themselves who are alleging mismanagement and then oppression on account of their being removed from the management. That is what they have been saying right from the date of issuance of their notice by their advocate on 19.9.1996 by specifically referring to section 397 of the Act. If that be so, they had a remedy under section 402 of the Act.

Section 443(2) of the Act lays down as follows:

“Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.”[2]

The section mandates the court that if there is other remedy available, and if the petitioners are acting unreasonably in seeking to have a company wound up, instead of pursuing that other remedy, the court may refuse to make that order. Here the word ‘may’ will have to be read as ‘shall’. Thus, where these two conditions are satisfied, the court is not expected to make an order of winding up on the ground that it is just and equitable. The so-called grievance of the petitioners is that they are removed from the management and as observed by the Hon’ble Supreme Court, the general interests of the shareholders should not be readily sacrificed at the altar of squabbles of directors for power to manage the company as in Mehra’s case[3]. For the reasons which are stated above, it was difficult to exercise the powers under section 433(f) of the Act in the present case.

Further, the respondents can always point out that the other remedy provided and available in the statute is adequate and efficacious. The powers under section 402 are wide enough and if at all any example is required, Mehra’s case provides for the same wherein on an appropriate application being made, and a case being made out, a Division Bench of the Madhya Pradesh High Court exercised the power under that section and directed Mr. Mehra to be appointed as a director although he had been ousted earlier and that order was left undisturbed by the Hon’ble Supreme Court. [4]

Conclusion

An overall outline of case law would show that courts maintain the recognition of general corporate law and standards while choosing organization law matters. Since this essential standard is supported, there appears to be little explanation behind courts to avoid implementing a stricter norm as a rule concerning the shareholders’ agreement (SHA). Thus, specialists who draft these shareholders’ agreement (SHAs) should consider the enforceability of these speculator rights when relocating from other undeniably more all around created PE markets which, subsequently, might be an outright rebel under Indian law. Staying up with the development of private value (PE) speculations as a standard wellspring of financing, there has been a comparable increment in contrasts and conflicts with investee organizations, advertisers, and different partners.

Such differences emerge on various grounds, going from corporate administration, authoritative rights and commitments, board designation and speculator exit, among others. A large number of these arrangements are recorded in an investors’ understanding (SHA) or a venture arrangement. This centers on the key authoritative lawful rights and commitments in SHAs that induce debates between PE speculators and advertisers as well as the viable moderation, reaction, and goal techniques.


[1] (1999) 1 GLR 341.

[2] Companies Act, Section 443(2)

[3][3] [(1999) 2 Comp LJ 261 (SC)]

[4] [(1999) 2 Comp LJ 261 (SC)].

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