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Matters related to the company are filed under the Company Law Board who hold equivalent power same as the Civil Court, but in cases when parties are not satisfied with the order of the Board, they can approach the High Court for appeal. A similar application has been filed by the appellant for disposal of their pending suit in the Company Law Board. The present case revolves around the issue of passing a restraining order against a similar competing business. Herein an Interlocutory application was filed by the appellant under Order 39 Rule 1 and 2 of the Civil Procedure Code 1908 in the High Court of Delhi praying for the disposal of the pending suit and restraining order against Defendant no. 4 and Defendant no. 5 from practicing competing business similar to that of the plaintiff. The Court has later taken into account the contentions of both the parties and directed the Company Law Board to resolve the matter.
Statement of Facts
The facts of the case are a bit baffling as it involves the joint family business which included various businesses carried out by the sons of the Late GD Khandelwal as co-partnership or as private limited companies. The share of their respective branches was either as partners or shareholders of the companies as per the share each one of them holds in their joint family assets. There are 2 companies, Plaintiff and Uma Shankar Forging Limited, and 2 other partnership firms M/s Uma Shankar Khandelwal & Co., and M/s Bansi Dhar Chiranji Lal was constituted.
After a point, it became difficult for the groups to stay together and a minutes meeting was conducted on 15/1/2004 where the plaintiff company was assigned to the family members of 4th son and the present plaint is filed by Gautam Khandelwal, son of 4th son acting as director of the Plaintiff company. As per the plaintiff, it was stated that Defendant no. 4 and Defendant no. 5 have started siphoning funds from the family business by Abhay Khandelwal, Subhash Khandelwal and Sameer Khandelwal by setting up two competing businesses in the name of M/s USK Exports Pvt. Ltd. (Defendant 4) and M/s USK Trading Pvt Ltd (Defendant 5)
As per the mentioned facts, the plaintiff has accused M/s USK Exports Pvt Ltd of setting up a business dealing with iron and steel and manufacturing of forgings, etc, which makes the nature of business similar to that of the plaintiff and is directly competing with the plaintiff. The other business M/s USK Trading Pvt Ltd deals with the purchase and sale of licenses along with the business of trading in iron and steel and other related works.
Issues of the case
The major issue of the case revolves around granting an interim injunction for preserving the funds of the family joint business and keeping the funds out of the reach of the disputing parties till the case is dismissed. The main issues of the case are –
- Whether an interim injunction is granted by the Court under Order 39 Rule 1 and 2 of Civil Procedure Code 1908?
- Whether the Court shall deal with the case or direct the Company Law Board to dispose of the case?
These are the two main issues being dealt with in this case and the allegation posed by the plaintiff that Defendant no. 4 and Defendant no. 5 are running a competitive business similar to the plaintiff.
Contentions/ Arguments from both the sides
There are numerous contentions presented by the plaintiff before the High Court for grant of Interim injunction under Order 39 Rule 1 and Rule 2 of the Civil Procedure Code 1908. Some of the factual contentions of the plaintiff are that Memorandum of Association and Article of Association of M/s USK Export Pvt Ltd will prove that the company deals with manufacturing, processing and export of forgings. It is also contended that after the incorporation of M/s USK Exports Pvt Ltd, Sameer Khandelwal (Defendant no. 1) and his family, Subhash Khandelwal, Kapil Khandelwal (Defendant no. 3) and Abhay Khandelwal started conniving together to siphoning funds from the family business for their new venture of USK Exports and also adopted methods of diverting the orders of their family business into their USK Exports and USK Trading Pvt Ltd.
It was also contended that orders received for their family business were diverted by Defendant no. 1 and 2 to USK Exports and USK Trading Pvt Ltd and it could be diverted to the plaintiff as he had sufficient capacities to execute orders but due to siphoning funds and diversion of orders, Plaintiff has suffered monetary loss and damage. Further allegations have been posed by the plaintiff, that Defendant no. 1 and 2 misused the business contacts and practices of Khandelwal Group for Defendant no. 4 and procured raw materials at lower prices. This was majorly done to close down the plaintiff company. Further, allegations by the plaintiff pose that Defendant no. 4 and 5 are being controlled by Defendant no. 1 to 3 and they are functioning in the competing business of the plaintiff. They have breached fiduciary duties owed towards the Plaintiff company where they or their family members are either shareholders or directors and should not associate themselves in companies with competing business.
It was also mentioned that Defendant no. 1 and 2 were dealing with customers on behalf of the plaintiff and using the business connections and resources of the family business for their USK Exports and USK Trading Pvt Ltd, they were also negotiating with vendors of the family business and procuring raw materials at lower prices for USK Exports and USK Trading and instructing them to not work with the plaintiff. Mr. Sameer Khandelwal (Defendant no 1) in collusion with Abhay Khandelwal and Subhash Khandelwal sometimes even purchased raw materials at a higher rate for the family business but obtained those materials at a lower rate from the same supplier for their USK Exports and USK Trading companies. Plaintiff has further mentioned that petition filed for similar reliefs before Hon’ble Company Law Board in CA No. 39/2006.
The application was opposed by the Defendants stating the following contentions that incorporation of Defendant no. 4 and 5 was very well within the knowledge of all family members and diversion of funds has been strongly denied by the Defendants and it was further stated by Defendants that there is no prohibition for the Directors of a Company to be directors of any second company doing competing business. The defendants further argue that the plaintiff has failed to disclose to the Court, that Defendant no 1 to 3 had filed CP No. 110/2005 before the Company Law Board as Gautam Khandelwal (Plaintiff’s representative) and his group had ousted them from the management of Plaintiff Company under Section 397 of the Companies Act 1956, (application for relief before Company Law Board in case of oppression.)
As per the CA No. 39/2006, Plaintiff prayed for submission of accounts of Defendant no. 4 and 5 to the Board and the profits derived by Defendant no. 4 and 5 should be paid over to Norma (India) Ltd. (Plaintiff). The prayer also mentioned that Defendant No. 4 and 5 should be restrained from creating third-party liabilities regarding their movable and immovable assets.
Summary of court decision and Judgement
The High Court of Delhi was of the opinion after hearing out the plaint of Plaintiff and opposing arguments of Defendants and it is explicit that Defendant no. 4 and 5 are involved in the business of forging flanges which is similar to the business of steel forgings and export of flanges of the Plaintiff. The minutes of the meeting held on 15th January 2004, at Norma (India) Ltd clearly provide that the said two companies are indulged in exporting metal products.
As per the Court, the abovementioned facts are not sufficient for granting interim relief to Plaintiff and therefore, the Court wouldn’t discuss other criteria for grant or refusal of interim injunction and the Court further opines that this is a subject matter of Company Law Board and as the arguments of both the parties are heard by the Board and the judgment is reserved for said parties. Hence, the Court dismisses IA No. 8386/2006 and the ex-parte injunction granted on 31/7/2006 is annulled. The Court has accurately handed over the case to its original jurisdiction of Company Law Board for its final judgment rather than granting the interim injunction as the interim injunction is usually granted only in cases where the plaintiff shall undergo irreparable loss and injury if such injunction is not granted.
Analysis of Case
This case offers many areas subject to analysis which were very well addressed by the Court, but the Court could have dived more into the records and contentions of the parties rather than handing over the case to the Company Law Board. The decision of the court was definitely appropriate, as per the status of both the parties because granting an interim injunction under Order 39, Rule 1 and 2 was not needed in this case. For grant of interim injunction, the plaintiff should be able to establish a prima facie case and convince the Court that if such injunction is not granted, the party shall suffer irreparable loss and damage which couldn’t be compensated with money and hence injunction would act as the best remedy. Further, it was examined that injunction is an equitable relief and the person requesting such relief should be truthful about the entire facts of the case and give full disclosure which the Plaintiff has failed to do so, as it didn’t mention about the CP no. 110/2005 in its plaint. Thus, this might have been one of the reasons for not granting an interim injunction to the plaintiff.
The main plea of Plaintiff was to restrain the Defendants from practicing any competitive business with that of plaintiff company and even direct them to disclose their nature and operations of the business of USK Exports Pvt Ltd and USK Trading Pvt Ltd including the entire details of their land, building, and machinery for establishing the siphoning of funds from the family business. The plaintiff also prayed for payment and disclosure of all the profits derived by the defendants by using the business connections of the Plaintiff’s company. All these demands made by the Plaintiff were not well supported by evidence and were mere contentions and thus, Court didn’t have enough proof to grant interim injunction but as per the minutes of the meeting, it was concluded that family members were aware of the business of Defendant no. 4 and 5 as relied upon by the Plaintiff itself. But even the Court has suggested that the minutes of the meeting dated 15/1/2005 is a debatable issue among the parties and both of their contentions need to be heard before granting any decision in favor of any one party.
It can be further noted by the contents of the minutes that various branches of Khandelwal family members including Gautam Khandelwal had the knowledge of the nature of business of Defendant no. 4 and 5 as there has been mention of competing business done by 2 companies, so the question arises if the Plaintiff was aware of the nature of the business, why was it not contended within the meeting and suit was also filed much later in 2006. There are many grey areas of this case that shall be addressed before the Board, where the original jurisdiction of the case lies.
The reasoning behind the dismissal of this application was rational as the case was pending in the Company Law Boards and it would not be fair to interfere with the jurisdiction of the Boards and the final judgment should be reserved by the Company Law Board. Thus, the court’s decision of refraining from granting or refusing an interim injunction was balanced. The decision would have been the same if the order would have been passed in recent years as the Company Law Boards would be replaced by the NCLT and such issue of the pending case might not have risen for the parties.
Further, the jurisdiction of Company Law boards under the Companies Act under Section 397 is regarded as concurrent jurisdiction which can be exercised by civil courts as well as it deals with oppression and mismanagement partake of the civil dispute, thus it would have been beneficial for the plaintiff if they would have made contentions regarding their pending dispute under Section 397 in their respective injunction application, to make every fact clear before the Court, especially the Plaintiff should have mentioned about CA No. 39/2006. As these issues were omitted by Plaintiff, the Court must have noticed that Plaintiff was not completely true to his facts in its application and thus, the decision couldn’t be made in favor of Plaintiff until judgment was received by the Company Law Board. Thus, this case is private in nature doesn’t really impact any public policy, the main principle of the case is that Law of interim Injunction can be applied only in those cases where the plaintiff will suffer irrecoverable losses if not done so, which was not the case of the Plaintiff and hence Court decided correctly to dismiss the application and render the case to the Board for its reserved judgment.
From the above facts, issues, and analysis of the case, it can be stated that the High Court was right in rendering the case to the Company Law Board as the suit was pending before the board, and granting an interim injunction in between the proceedings would interfere with the normal course of the suit. There aren’t any significant findings in this application, as it was completely based on facts and contentions, although there was a need for more proof from both parties in order to make their contentions full proof. Even the Plaintiff was not completely true in its injunction application and failed to mention the pending suits of the Company Law Board. The main reason for not being able to avail injunction was that there was no concrete reasoning provided as to why Plaintiff asked for interim injunction now, as the competing business was in the knowledge of the Plaintiff way before, as per the minutes of the meeting. Thus, the Court was accurate that the application is a subject matter of the Company Law Board and should be rightly heard there only and this case is private in nature and might not have any significant impact on general principles of company law.