1. In this order, we are considering two petitioners - CP 14/2002 filed by M/s Tenneco Mauritius Limited (hereinafter referred to as "the Foreign Block") and CP 19/2002 filed by M/s Bangalore Union Services Limited (hereinafter referred to as "the Indian Block"). Both the petitions have been filed under Sections 397/398 of the Companies Act, 1956 ("the Act") alleging oppression and mismanagement in the affairs of M/s Hydraulics Private Limited (the Company).
2. Before dealing with the merits of these cases, it is necessary to narrate the background in brief. The Company was incorporated in 1953 in the name of M/s Armstrong's Patents (India) Limited and was subsequently changed into the present name in the same year. The main object of the Company is to carry on the business of manufacture etc.
of all automobile components and presently the main line of manufacture is shock absorbers and related items for automobiles. The authorized capital of the Company is Rs. 12 crores consisting of 1,19,750 equity shares of Rs. 1,000/- each and 2,500 redeemable cumulative preference shares of Rs. 100/- each. Presently, 1,19,723 equity shares have been subscribed as fully paid. The Foreign Block acquired 3207 shares in 1995 by transfer and was allotted 3763 shares by the Company for a consideration of Rs. 2,600 per share (with a premium of Rs. 1,600/-).
The total acquisition cost was of the order of US $ 16.6 million.
Presently Foreign Block holds 51% equity shares and Indian Block 49% equity shares. The Foreign Block entered into a Shareholders Agreement with Indian Block on 21.8.95. Most of the terms of the Shareholders Agreement have been incorporated into the Articles of Association of the Company. The Articles provide that on director from each block should be present in Board meetings to constitute quorum and that for certain matters classified as fundamental matters, special resolution in the general meeting is necessary. In the year 1999, both the sides decided to induct further equity - Foreign Block 51 per cent and Indian Block 49 per cent. Accordingly, both the Blocks invested, in total, US $ 2.43 million as equity capital. In 2001, the Foreign Block proposed a recapitalisation programme requiring investment of Rs. 17.75 crores in the ratio of 51 and 49. This amount was proposed to be inducted as equity share capital. The main reason for the suggestion of induction of additional capital was to avoid reference to the BIFR since as at 31^st March, 2001, the net-worth of the Company had become negative.
The Indian Block suggested that instead of bringing in equity capital, the Foreign Block could bring the entire amount as the preference share capital. In a Board meeting held on 05.02.2002 at Chicago, the directors representing the Foreign Block passed a resolution for issue of right shares to the extent of Rs. 17.75 crores and also resolved to a meeting of the Shareholders for increasing the authorized capital from Rs. 12 crores to 30 crores. Immediately thereafter Foreign Block remitted Rs. 11 crores to the Company as share application money and thereafter filed CP 14 of 2002 on 06.02.2002.
3. The Foreign Block filed CP 8/2002 on 06.02.2002 before the Principal Bench at Delhi (later renumbered as CP 14/2002) with the main allegations that the Indian Block had failed to fulfill their financial obligations of infusing proportionate equity capital into the Company in terms of the Shareholders Agreement dated 21.08.1995 and had also failed to pay off the Company's debts which resulted in a situation of deadlock between both the groups. Accordingly, it sought for direction to the Company to issue equity shares worth Rs. 11 crores to the Foreign Block in respect of the amount it has already brought in and for directions to the Indian Block to bring in their proportionate equity contribution.
4. The Indian Block filed CP 19/2002 on 25.2.2002, alleging that the Foreign Block had failed in its commitment to provide management, technology, marketing and Board level support to the Company in accordance with the Shareholders Agreement, which has resulted in the Company's performance going down from 1996 and that the Foreign Block has supplied unsuitable machinery at huge cost which has also resulted in high production cost. Accordingly, they have alleged because of these acts, the Company which was making good profits earlier has started incurring heavy losses. They have also questioned the validity of the Board meeting held on 05.02.2002 in Chicago. With these allegations, they have sought for removal of the nominee directors of the Foreign Block, for a direction to the Foreign Block to purchase the defective machinery costing Rs. 5 crores, for directing the Foreign Block to make a reference to the BIFR and that a declaration that the Foreign Block has no right of claim against the Company in regard to Rs. 11 crores brought in by the Foreign block which was utilized to pay back Bank of America without the approval of the Board.
5. Since both the petitions relate to the affairs of the Company, both the petitions heard together are being disposed by this common order.
6. Shri. P.V. Kapur, Senior Advocate appearing for the Foreign Block submitted that the Foreign Block, being a subsidiary company of Tenneco Automotive Inc. ("Tenneco") is holding 51 per cent of paid-up equity share capital in the Company. The Indian Block is holding 49 per cent of paid-up equity share capital in the Company. The respondents 2 & 3 are the nominee directors of the Indian Block. The parties had entered into a Shareholders Agreement on 21.08.1995, according to which the Foreign Block and the Indian Block are obliged to capitalize the Company and contribute proportionately towards operational expenses as well as other working capital requirements. Apart from investing a total amount of USD 16.6 million towards 51 per cent of share capital in the Company, the Foreign Block has provided letters of credit to the Bank Of America and City Bank for the borrowings of the Company to the tune of USD 8.5 million. The company had acquired in August 1996, 83% equity stake in Renowned Auto Products Mfrs. Limited ("RAPS"), a sick company, increasing the financial burden of the Company. After the year 1999, the business of the Company was adversely affected due to a general slump in the economy and the competition in the automotive filed on account of the entry of new players and increasing costs. As the Company failed to achieve the targeted projections, the Foreign Block and Indian Block infused in February, 2000 and additional equity capital contribution amounting to USD 2.43 million in proportion to their equity share holding. Nevertheless, the Company could not achieve its targeted revenue, mainly on account of general recession in the automotive industry. In view of the financial constraints faced by the Company, the Foreign Block came out with a new Recapitalisation Plan to the tune of USD 3.78 millions in the year 2001. Accordingly, the Foreign Block was to bring in additional capital of 1.93 USD million and the Indian Block USD 1.85 million in exchange for the allotment of additional equity shares in proportion to their respective shareholdings in the Company. However, the Indian Block rejected the Recapitalisation Plan, 2001 in the Board meeting held on 27.11.2001. In this connection, Shri Kapur referred to the correspondence exchange between the Foreign Block and the Indian Block and the minutes of the various Board meetings. The Indian Block has suggested that the Foreign Block should assume the entire burden of the investment in the form of preference capital and also proposed that the indian Block would serve as management consultants to the Company for which they would be paid consultancy fees. The proposal for increasing the authorized capital of the Company from Rs. 12 crores to Rs. 30 crores was rejected by the Indian Block at the said Board meeting. In view of the urgent requirement of funds for the Company, the Foreign Block took steps to convene a Board meeting with a shorter notice in order to sanction the increase in the authorized share capital of the Company and to make a rights issue. Accordingly the meeting was held on 05.02.2002. The Indian Block abstained from the Board meeting compelling the nominees of the Foreign Block to approve the proposal for increasing the authorized capital and issue of shares on rights basis. Accordingly, the Foreign Block brought in additional funds of Rs. 110 million pursuant to the decision taken at the Board meeting held on 05.02.2002 without participation of the Indian Block, mainly to avoid making any reference to the BIFR due to erosion of its net-worth as on 31.03.2001.
This amount was utilized to pay back a portion of the loans granted by the Bank of America. This reduced the debt burden of the Company from Rs. 388 millions to Rs. 278 millions. Shri Kapur pointed out that by virtue of the rigid and unreasonable attitude of the Indian Block, in considering the Recapitalisation Plan, 2001, a dead lock situation has been created between the Foreign Block and the Indian Block. The Indian Block is not interested in reviving the Company and they are not acting for the benefit of the Company. The Foreign Block made every effort in pursuing the Indian Block to contribute additional capital. The Foreign Block provided Indian Block a fair and equal opportunity of making a proportionate capital contribution, which was not conceded to by the latter. The Foreign Block has incurred an amount of USD 557,010 towards servicing cost of the letters of credit provided for the borrowings of the Company, which should be borne by the Company in terms of Clause 18.1 of the Shareholders Agreement. The Company is liable to pay royalties to Tenneco, in terms of the Licensing Agreement and a Separate Marketing Agreement entered into in the year 1995 between the Company and Monroe Auto Equipment Company, a Tenneco subsidiary, amounting to USD 108,000. The Indian Block failed to honour these obligations, which are burdensome on the Foreign Block. The continuous acts of omission and commission on the part of the Indian Block have resulted in acts of oppression against the Foreign Block and created a dead-lock in the management of the Company. The Indian Block has acted prejudicially to the interest of the Company by neglecting and refusing to act in accordance with the obligations imposed under the Shareholders Agreement. In this connection, Shri Kapur made a reference to many of the clauses contained in the Shareholders Agreement dated 21.08.1995 (Annexure A-5) and particularly invited our attention to Article 119A of the Articles of Association of the Company (Page 42 of Petition in CP 14/2002) to show that the clauses in Shareholders agreement relating to fundamental matters have been incorporated in the Articles of Association of the Company. According to Article 73, two members personally present shall be the quorum for a general meeting and no business shall be transacted at any general meeting unless the requisite quorum is present at the time when the meeting proceeds to business. According to Article 112, the quorum for meeting of the Board shall be two directors comprising on director nominated by each of the Foreign Block and Indian Block. If within half-an-hour from the time appointed for a meeting a quorum is not present, the meeting shall stand adjourned as stipulated therein, provided that the Board of directors shall not consider the business in relation to any fundamental matter at such adjourned Board meeting. Article 64 provides that the Company may alter the conditions of its Memorandum subject to Article 119A of the Articles of Association. Shri Kapur urged that the various clauses contained in the Shareholders Agreement and the Articles of Association of the Company categorically show that Indian Block is put in equal footing with the Foreign Block. The Company cannot take a decision in any of the fundamental matters without the affirmative voting of the Indian Block. The Company cannot be run without the support and co-operation of the Indian Block. The second respondent being the Chairman of the Company chaired all the Board meetings and he never raised any objection in regard to the functioning of the Company. Shri Kapur, in support of his claim, has referred to the following:- The Board meeting held on 09.06.1997 (page 91 of petition) was chaired by the second respondent and reviewed performance of the Company upto May 1997. The Board considered the working of the different units of the Company and cited general economy conditions and the recession in the automobile industry as the main factors for poor performance of the Company. The profits of the Company were also affected due to the sales mix between two to four wheelers. The Board resolved to obtain credit facilities to meet the additional working capital as well as the pending capital expenditure.
The Board meeting held on 17.09.1998 was chaired by the second respondent and reviewed performance of the Company for the year 1998. The second respondent made suggestions for improvement of the business of the Company. The cash flow projections for the year and borrowing status of the Company were discussed.
The second respondent chaired the Board meeting held on 01.12.1998 (Page 113 of petition), wherein he expressed his concern about the reduction in volume of business during the current year. He suggested various measures for increase in production in volumes of business and reduction in raw material content etc. and sought for a concrete plan for improving the business. The second respondent actively involved in the affairs of management of the Company and apprehensive of the funds requirement of the Company.
The Board meeting held on 19.03.1999 (Page 118 of petition) was attended by three directors, out of whom two of them represented Indian Block and the remaining one represented the Foreign Block.
The second respondent chaired the Board meeting. The Board discussed the cash flow position of the Company and apprehended the need to infuse funds for the immediate tiding over of quarterly interest, payment to Bank of America, which was met by Tenneco. The Board discussed about the term loan liability of Rs. 112.50mm with Bank of America and also of the first instalment payment of Rs. 37.50mm in favour of Bank of America. The board also resolved to increase the authorized share capital of the Company from Rs. 2,50,00,000 to 12,00,00,000 divided into 1,19,750 equity shares of Rs. 1,000/- and 2,500, 11 per cent redeemable cumulative preference shares of Rs. 100/-, each ranking paripasu with the existing shares in the Company. The Board further resolved to alter the Articles of Association of the Company in regard to the clause relating to share capital of the Company.
The Board meeting held on 28.06.1999 (page 126 of Additional set of documents by Foreign Block) at Chicago was attended by Mr. Hari Nari and the third respondent. The Board adopted the accounts for the year 1998 and the Company suffered a net loss of Rs. 5,81,61,000.
The Board meeting held on 29.11.1999 (page 131 of petition) was chaired by the second respondent. The Board reviewed the performance of the Company for the year 1999. The second respondent reported that excessive interest cost, inefficient material consumption and increasing overheads are responsible for the poor performance of the Company for the three consecutive years. He was concerned with the deceased production in shock absorbers. He also made suggestions for replacing high cost loans with low cost loans. The second respondent made suggestions for improving the production, controlling the expenses and reduction of cost and improving the business of the Company. The Board meeting of the Company held on 21.02.2000 (page 136 of petition) was chaired by the second respondent and reviewed the performance of the Company. The net loss of Rs. 3.74 million incurred by the Company was attributed for the following major factors:- i. High cost interest on account of the borrowing for expansion activities.
v. The Board had also discussed the annual operating plan for the year along with the challenges and opportunities for achieving the target.
7. Shri Kapur pointed out that the proceedings of the Board meetings enumerated herein above clearly show that the second respondent never attributed the losses of the Company towards the Foreign Block. These proceedings belie the letter dated 2.8.2001 (Annexure A-8 at page 112) and the letter dated 13.10.2001 (Annexure A-10 at Page 120) of the Indian Block. In these letters, the Indian Block has found fault that the Foreign Block has not provided management, technology, marketing and Board level support and that Tenneco is responsible for the defective equipment procured by the Company. Indian Block has emphasized that Tenneco failed to redress the operational deficiencies created by them. Shri Kapur has emphatically denied that none of these deficiencies was ever raised at any of the Board meetings by the Indian Block. Thus, the letters dated 02.08.2001 (Annexure A-8) and 13.10.2001 (Annexure A-10 are inconsistent with the proceedings of the Board meetings. The supplemental agreement dated 28.08.1996 executed between the Foreign Block, the Indian Block and the Company furnishes funds flow statement of the Company and justify the Foreign Block bringing in additional capital. He further pointed out that the Indian Block has not denied the requirement for additional funds in their letter, dated 13.10.2001 (Annexure A-10). The Foreign Block by their letter dated 19.10.2001 (Annexure A-11) forwarded a detailed summary of the Recapitalisation Plan to the Indian Block and thereafter reiterated the same in their letter dated 07.11.2001 (Annexure A-12). In the Board meeting held on 27.11.2001, the Foreign Block had presented this plan and proposal for increasing the authorized capital. The Foreign Block was prepared to contribute the entire amount of capital in the event of the Indian Block were not willing to participate in the capitalization subject to proportional dilution of the Indian Block equity interest in the Company. The Indian Block opposed the proposal made by the Foreign Block and suggested that the Foreign Block may invest funds in the form of preference shares and that the Indian Block can serve as management consultants to the Company at a cost. Thus, Indian Block rejected the proposals made by the Foreign Block at the said Board meeting. Later the Foreign Block, by their letter dated 27.12.2001 (Annexure A-15) conceded to the suggestion of the Indian Block to bring additional capital in the form of preference capital carrying divided at the rate of 15 per cent per year and proposed that preference shares could be converted into equity shares at any time after one year following the allotment. The Foreign Block was willing for the Indian Block to purchase from it 49 per cent of its preference shares at any time during the one year period following the allotment to preserve the equity ratio in terms of the Shareholders Agreement. However, the Indian Block in their letter dated 14.01.2002 (Annexure A-16) imposed various conditions for bringing the funds by way of preference share capital by the Foreign Block. The Foreign Block by their letter dated 28.01.2002, Annexure A-17 emphasised the need to infuse additional funds to keep the Company away from the ambit of the BIFR and expressed its strong desire to arrive at mutually agreeable and amicable course of action which will help restoring the financial condition of the Company. The Board of directors at the meeting held on 05.02.2002 (Annexure A-18) resolved to infuse additional capital to the tune of rs. 177.5 million by both the members and issue equity shares on rights basis for the amount of Rs. 177.5 million. The Board further resolved to increase the authorized capital of the Company from Rs. 12 crores to Rs. 30 crores, subject to the approval of the Shareholders. The Foreign Block, pursuant to the Board resolution, has brought in Rs. 11 crores towards the additional capital and the shares are yet to be allotted by the Company. The funds infused by the Company are used to repay dues of the Company, thereby reducing its debt burden and also by virtue of the funds brought in by the Foreign Block, the Company does not come within the purview of the BIFR. The Company can survive only if the debts are repaid which has been ensured by the Foreign Block in the interest of the members as well the Company.
8. Summing up his arguments, Shri Kapur submitted:-The basis of the Shareholders Agreement is that both the sides should take both financial and administrative responsibilities for the well being of the Company. Most of the terms of the Shareholders Agreement have been incorporated in the Articles. In terms of the Articles, the Foreign Block is to have four directors including the Managing Director, while the Indian Block will have three directors including the Chairman, for which consent of both sides is necessary. Even though the Foreign Block holds majority shares and has majority on the Board, yet in terms of Article 112, no business can be transacted in Board meeting unless one director from each side is present in that meeting. Likewise in terms of Article 119A, many items have been classified as fundamental matters for which a special resolution is necessary in the general body meeting. Thus, non cooperation by the minority shareholder with the majority is an act of oppression. In Dr. V. Sebastian v. City Hospital P.Ltd. - (1985) 57 CC 453 - it has been held that Sections 397 and 398 of the Companies Act, 1956 are intended primarily to protect the minority interest. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings.
But where majority is prevented from doing so, despite the clear indication in the Articles that majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection under Sections 397 and 398. In the present case, unless both the parties cooperate with each other, the business of the Company cannot be carried on. Therefore, when the Indian Block refused to contribute funds for the survival of the Company, the Foreign Block had to necessarily take appropriate decisions to ensure the survival of the Company. That is the reason why they moved this Bench on 7.02.2002 and sought for a direction to convene the general body meeting for increasing the authorized capital. Even when the meeting was held in pursuant of the order of this Bench on 08.02.2002, the second respondent being the Chairman of the company delated that the resolution had not been carried since the same required special resolution. From this, it is evident that the Indian Block is not interested in the welfare of the Company and would prefer the Company being referred to the BIFR. In view of this, directions should be given to allot shares worth Rs. 11 crores to the Foreign Block and direct the Indian Block to subscribe 49 per cent. In the alternative since the financial contribution/commitment of the Foreign Block is much larger than the Indian Block, the Indian Block should be directed to sell their shares to the Foreign Block on a valuation made by an independent valuer as provided in the Shareholders Agreement as decided by this Board in Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. 9. Shri Kapur, in support of his other contentions relied upon the following decisions:Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd. - (1982) 1 CLJ 1 - to show that the Court has power to grant relief under equitable jurisdiction conferred under Section 397 even where case of oppression is not proved.
(ii) Jadav Lal Dutt v. Hooghly Ink Company Limited - (1982) 1 CLJ 422 - to show that the Court must endeavour to do justice on the basis it thinks fit from all the materials available to it at the time of making of the order. Absence of pleadings or inartistic drafting is of no consequence. The Court has very wide power under Section 402 to pass any order it thinks fit in an application under Sections 397 and 398 of the Companies Act, 1956.
(iii) Daulat Makanmal Luthria v. Keshav S Naik - (1992) 3 Comp LJ 119 (CLB) - to show that the CLB may pass an order directing one group to sell their shares to the other group in order to remove the deadlock created on account of loss of mutual trust between the two warring groups.Kilpest P.Ltd. v. Shekhar Mehra - (1996) 87 CC 615 (SC) - to show that Sections 397 and 398 of the Companies Act, 1956 provide relief to the Shareholders against oppression and mismanagement. The powers exercisable in such petitions by the Company Law Board have been set out in Section 402. In regard to the wide powers under Section 402, it would rarely necessary to wind up any company in view of the fact that the primary consideration should be of general interest of Shareholders.
(v) Russell v. Northern Bank Development Corp Ltd - (1992) BCLC 1016 - to show that though a provision in a company's Articles of Association which restricted its statutory power to alter the Articles is invalid an agreement outside the Articles between Shareholders as to how they would exercise their voting rights on a resolution to alter the Articles in not necessarily invalid.
(vi) In Re Sindhri Iron Foundary (P.) Ltd. - (1964) Vol.XXXIV Company Cases 510 - to show that if the facts in a case are such as would justify an order for winding up, but an order for winding up would unfairly prejudice the petitioners, relief can be granted under Sections 397 and 398.
(vii) Standard Chartered Bank v. Walker - (1992) BCLC 603 - to show that where the conduct of the Shareholders was manifestly injurious to the interests of the company, the Court could intervene and that a failure to approve of the restructuring would result in the end of the company, the court would grant the injunctions sought by the plaintiffs.Srihari Rao v. Sri Gopal Automotive Limited - (1998)4 Com LJ 140 (CLB) (b) Prakash Timbers Private Limited v. Smt. Sushma Singla (1996) 1 CLJ 133 - to show that the Company Law Board has been given powers under Sections 397/398 read with Section 402 to make any order with a view to end matters complained of.Synchron Machine Tools P.Ltd. v. U.M. Suresh Rao - (1994) 79 CC 868 - to show that the court may make an appropriate or der under Section 397 proceeding for the exit of one of the groups to enable the company to run smoothly provided such an order is just and equitable in the circumstance of the case.
(x) C.N. Shetty v. Hillock Hotels (P) Ltd. - (1997) 1 CLJ 84 - to show that there is no limitation upon the powers of the Court to pass appropriate orders under Section 402 of the Companies Act, 1956, to suit the circumstances of the case and that the only limitation upon the powers of the court is that the order could not be violative of the provisions of the Act.
(xi) Milan Sen v. Guardian Plasticote Ltd. - (1998) 2 CLJ 320 (Cal) - to show that the question whether the company did nor did not need additional capital for the rights issue is primarily decided by the directors of the Company and if the directors are of the view that further capital in the form of the rights issue is required, the court will be very slow to disturb the same unless there are extreme circumstances of mala fides or breach of trust.
(xii) Combust Technic P.Ltd. In re. - (1986) 60 CC 872 - to show that the CLB can grant relief under Section 398 where a company with two Shareholders who are directors, a director holding majority of shares does not co-operate resulting in mutual lack of confidence.
(xiii) Rakhra Sports Private Ltd. v. Khraitilal Rakhra - (1993) 76 CC 545 - to show that under Section 397 of the Companies Act, 1956, the court is empowered to make an order "as it thinks fit"; similar is the power vested in the court under Section 398. Power under Section 402 is a power which may be exercised, without prejudice to the generality of the powers of the court under Sections 397 and 398, and, therefore, such a power can in no way be of a limited nature. A power to make an order as the court thinks fit would necessarily comprise within it a power to make an order which is just and equitable in the circumstances of the case, because essentially, this is an unlimited judicial power.Keredla Suryanarayana v. Sri Ramadas Motor Transport Limited - (1993) 3 Comp LJ 422 (CLB) - to show that though the allegations raised in the petition were not established, considering the facts of the case, the CLB may order purchase of shares of one group by the other group in the interest of the company.
(xv) Sunil Dev v. Delhi and District Cricket Association - (1994) 80 CC 174 - to show that it is not within the province of the court to interfere with matters concerning the affairs of the company unless there was some malafide action.Jagjit Singh Chawla v. Tirath Ram Ahuja Limited - (2002) 2 CLJ 72 - to show that where the petitioners have established oppression, there will be legitimate expectation and denial of such legitimate expectation would be a ground to wind up the company on just and equitable grounds and since the company is financially sound it would not be in the interest of the company or the Shareholders to wind up the company, in which case, the CLB will grant the relief to the petitioners under Sections 397 and 398.Shiv Nath Rai Bajaj v. Nafabs India Private Limited - (2002) 1 CLJ 152 (CLB) - to show that if the increase in the share capital of the company is bonafide required in the interest of the company cannot be considered to be an act of oppression even though the same might give some advantage to a particular group.
(xviii) In re: a company (No. 006834 of 1988), Ex Parte Kremar (Chancery Division) 365 - to show that in case of oppression in a offer by majority Shareholders to purchase shares of the minority Shareholders, where Articles of Association contain a preemption provision setting out procedure for the valuation of shares of a selling Shareholders, such application is maintainable.Chander Krishan Gupta v. Pannalal Giridhari Lal Pvt. Ltd.- (1984) 55 CC 702 - to show that the court can intervene under Section 398 and order takeover of a company by a majority Shareholders against whom petition under Section 397 has been made in case directors are quarrelling and not having interest in the affairs of the company.
10. Shri S. Raghavan, Senior Counsel appearing for the Indian Block, while opposing the petition-CP 14/2002, at the outset submitted that the Foreign Block has not made out a case under Section 397/398. The Foreign Block has failed to establish that the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member. The Foreign Block has also failed to show that the facts and circumstances of the case would justify the making of a winding up order on just and equitable grounds and that in case the Company is wound up it would unfairly prejudice such member or members. In Hanuman Bagri V Bagres Cereals Ltd (105 CC 493) the Apex court has held petitioners should establish that the company is liable to be wound up on just and equitable grounds and that such winding up would be prejudicial to the interest of the shareholders. In the present case, these requirements of Section 397 have not been satisfied. Shri Raghavan further pointed out that the Foreign Block has acquired a controlling interest of 51 per cent in the Company. The majority of the directors are nominated by the Foreign Block.
Therefore, the Foreign Block being in the management and control of the Company cannot complain that the affairs of the Company are mismanaged by the Indian Block. The respondents 2 & 3, being nominee directors of the first respondent do not have control over the affairs of the Company and they cannot manage the affairs of the Company causing prejudice to the interest of the company. Consequently, the requirements of provisions of Section 398 are not satisfied. Shri Raghavan pointed out that there is no pleading in regard to mismanagement and consequently the petition does not lie under Section 398. In regard to acts of oppression, Shri Raghavan pointed out that according to the Foreign Block, the respondents have not infused the funds towards additional equity capital and failed to pay all debts of the Company in terms of the Clause 3.3 of the Shareholders Agreement.
The Foreign Block has leveled charges against the Indian Block for not acting in accordance with Clause 3.3 of the Shareholders Agreement.
These acts, according to the Foreign Block, are oppressive and burdensome of the Foreign Block. This Clause 3.3, according to Shri Raghavan has to be enforced in a competent court of law. The Foreign Block cannot seek any relief under Section 397 in seeking specific performance of Clause 3.3. The CLB cannot direct the India Block to fulfill their obligations to contribute its proportionate capital contribution in terms of Clause 3.3 of the Shareholders Agreement. The Foreign Block seeks a money decree, thereby circumventing civil remedy which is available to the Foreign Block. The Foreign Block ha got every civil right to be enforced in a civil court and the CLB is not the competent forum. The Foreign Block is abusing the process of law by invoking the provisions of Sections 397/398. According to Shri Raghavan, the Board of directors have to determine any obligation arising out of Clause 3.3. In the present case, the Board has not determined to infuse funds towards additional equity capital. Any obligation arising out of Clause 3.3 will have to be enforced only the Company and that too in a civil court when especially the Company is only the beneficiary and not the Foreign Block. In view of this, the Foreign Block has no locus standi to determine the obligation to contribute towards additional capital of the Company. While recapitulating the history of the Company, Shri Raghavan submitted that the Company has been in existence for nearly 50 years having a successful track record and good clientele in India as well as abroad.
The Company was consistently making profits during the years 1991 to 1996. The Company started making losses only after entering into joint venture agreement with the Foreign Block. In the meanwhile, Indian Block brought in additional share capital to the tune of Rs. 6 crores and again the Foreign Block is seeking infuse additional funds towards the equity share capital of the Company. The Foreign Block was to nominate the first Managing Director of the Company under the Shareholders Agreement, but the Managing Director nominated by the Foreign Block was a non-resident, who could not personally look after the units of the Company. Shri Raghavan pointed that the raw material consumption was excessive. The Company was to procure machinery, valuing Rs. 50 million, which was defective, at the instance of the Foreign Block. The Foreign Block failed to train the people and failed to impart technical training to the staff members. The losses incurred by the Company are attributable on accounts of these factors. The Foreign Block is now interested ind is charging the dues of the Company guaranteed by the them so as to get out of the guarantee obligation.
Moreover, the Foreign Block is adopting a dubious route to dilute the shareholding of the Indian Block adopting the course under Section 397.
In terms of Article 109(2) of the Articles of Association of the Company, the Managing Director may call at his discretion a meeting of the Board. However, the Board meeting held on 05.02.2002 at Chicago was not convened by the Managing Director. The Indian Block were not given 30 days notice in accordance with Section 109A(a) of the Articles of Association of the Company. The notice sent on by e-mail on 4.2.2002 convening the Board meeting was received by the Indian Block only after the meeting was over. The action of the Foreign Block is not bonafide and the Board was convened with the intention of causing prejudice to the Indian Block. Pursuant to the Board resolution made on 05.02.2002, the Foreign Block brought money and discharged the dues of the Company guaranteed by the Foreign Block, thereby regularizing the illegal transactions. The Indian Block are not sure whether the RBI permission was obtained for bringing foreign funds towards share capital of the Company. Therefore the Foreign Block has not come with clean hands before the CLB. The intention of the Foreign Block as seen from the supplemental agreement dated 28.08.1996 executed between the Foreign Block, Indian Block and the Company (page 433 of petition) is to take over RAPS. However, the stand of the Foreign Block in the rejoinder is entirely different. Shri Raghavan pointed out that the Indian Block have no objection for the Foreign Block to bring funds by way of preference capital with reasonable period for redemption without diluting the shareholding of the Indian Block. There is no transparency and fairness adopted by the Foreign Block. The Foreign Block cannot bring any additional capital without the approval of the Board. The funds brought by the Foreign Block cannot be treated as share application money. Therefore, the Foreign Block is not entitled for any equitable relief. As per Article 64(1)(a) of the Articles of Association of the Company alteration to Memorandum is subject to provisions of Article 119(A). Article 119(A) also stipulates special resolution for all fundamental matters and alteration to Memorandum and Articles is a fundamental matter. Since the Company has altered the authorised capital by means of an ordinary resolution the same is not valid. The Foreign Block cannot contribute towards capital and if the Foreign Block fails to prove any act of oppression, it cannot claim any relief under Section 402. The whole of the petition is to bring additional funds to discharge the debts of the Company guaranteed by the Foreign Block. The amount has been brought in without consent of the Indian Block as per the Shareholders Agreement. The contribution by the Foreign Block is without approval of the Board. Therefore, the act of the Foreign Block is malafide. The Foreign Block and filed caveats in Madras and Delhi High Courts on 04.02.2002, held the Board meeting on 05.02.2002 and filed the Company Petition before the CLB and obtained ex-parte order on 07.02.2002. This would indicae that the Foreign Block knew that their action was wrong and wanted to preempt the Indian Block questioning the validity of the Board meeting in a court of law. It also obtained ex-parte interim order from the CLB, thus getting a seal of approval of whatever they had done illegally.
The Indian Block by their letter dated 02.08.2001 has raised fundamental issues in regard to the running of the Company, which has not been replied till date. The Foreign Block by their letter dated 28.01.2002 (Annexure A-17) refused to consider the counter proposal put forth on behalf of the Indian Block. The Indian Block never objected to the Foreign Block bringing additional funds by way of preference capital redeemable over a period of seven to ten years, thereby the deadlock could have been avoided. Shri Raghavan pointed out that the Foreign Block has started a new company in violation of the Shareholders Agreement which has not been disclosed to the Indian Block. The Board of directors has neither approved the new venture of the Foreign Block. The statutory auditors of the Company in their report for the year ending 31.03.2001 (Annexure R-13) have declared that the Company had become "sick industrial undertaking" within the meaning of Section 3(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 thereby the Company had already become a sick industrial undertaking as on 31.12.2001, when the balance sheet of the Company as on 31.03.2001 was adopted by the Shareholders of the Company. IT is obligatory on its part to make a reference to the BIFR and the Foreign Block is bound by the statutory obligation and cannot resort to the oppressive method adopted by them. The loss of profitability caused the Company in 1989 to acquire additional capital to continue operations and an amount of USD 2.43 million in proportionate to equity share capital of Indian and Foreign Block was made in February, 2000. Nevertheless, the Foreign Block failed to fulfill its promises and the losses continued. There has been no marketing assistance on the part of the Foreign Block to boost the sales and expand the clientele of the Company. At the Board level there was total lack of support from the Tenneco. The performance of the Foreign Block from the view point of the management and technology support is also consistently poor. Shri Raghavan referred to the letter dated 13.10.2001 (Annexure R-15) of the second respondent relating to the failure of Tenneco to provide management technology, marketing and Board level support. This letter of the Indian Block has not been seriously taken by the Foreign Block. The Foreign Block and its nominee directors were responsible in acquisition of poor quality machineries unilaterally and without reference to the Indian Block and their nominee directors, thereby increasing the cost of debt burden. Though the acquisition of machineries is a fundamental matter, the Foreign Block and its nominee directors ignored compliance with the provisions of the Articles of Association of the Company. The losses suffered by the Company are due to the inaction and inefficiency on the part of the Foreign Block and their nominee directors who are solely responsible for the inefficient management of the Company. Shri Raghavan, therefore, sought the dismissal of the petition of the Foreign Block and sought for the grant of the reliefs made in the petition of his clients. As far as the prayer of the learned counsel for the respondents that this Bench should direct the Indian Block to sell their shares to the Foreign Block on valuation made by an independent valuer, Shri Raghavan Submitted that his clients were not willing to sell the shares unless a reasonable price is offered by the Foreign Block.
11. Shri Raghavan, in support of his contentions has relied upon the following decisions:-Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. - (2001) 105 CC 493 - to show that in case of any relief under Section 397/398, the petitioner must prove that the facts warrant the winding up of the company which would unfairly prejudice the petitioner. In absence of these requirements, no relief can be granted by the court.Miheer Hemant Mafatlal v. Mafatlal Industries Ltd. - (1987) Vol.LXXXXIX BLR 86 - to show that the expression authorized share capital in the Articles of Association of the company will mean and refer to the nominal share capital of the company and not the issued share capital.
(iii) Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. - (1991) 72 CC 211 - to show that the relief under Section 397/398 in an equitable relief which is entirely left to the discretion of the company court and, therefore, the requirements of good faith on the part of the petitioner is necessary to grant such an equitable relief. The question of good faith has to be decided by the conduct of the petitioner as reflected not only in the proceedings before the company court, but also in a parallel proceedings in civil courts and other litigations in other courts. The relief under Section 397 and 398 will be granted only to persons who approach the court with a clean record.
(iv) Re Fildes Bros. Ltd. (1970) 1 W.L.R. 592 - to show that in considering whether it is just and equitable to wind up a company, the court must have regard to the facts existing at the time of hearing of the petition, and not those existing at the time the petition was presented.
(v) Ebrahimi v. Westbourne Galleries Ltd. - (1972) 2 All ER 492 -to show that a petitioner who relied on the "just and equitable" clause in a petition for winding up must come to the court with clean hands and if the break-down in confidence between him and other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue.Gopal Krishnaji Ketkar v. Mohamed Haji Latif - AIR 1968 Supreme Court 1418 - to show that a party in possession of best evidence which would throw light on the issue in controversy withholding it, the court would drawn an adverse inference against him notwithstanding the fact that onus of proof does not lie on him.N.K. Mohapatra v. State of Orissa - (1995) 1 Comp LJ 266 (Orissa) - to show that the parties are to be held strictly to the pleadings. A new plea cannot be permitted to be raised in the rejoinder affidavit. A new point taken in the rejoinder affidavit is not to be entertained ordinarily unless petitioner with permission of court amends the main application.
12. Shri Kapur, in his reply, reiterated that the Indian Block started finding fault with the Foreign Block in relation to their failure to extend managerial technical support and also supply of unsuitable machinery etc. only in the year 2001. The Indian Block never raised any of these issues at any of the Board meetings enumerated earlier. In this connection, Shri Kapur referred to the minutes of Board meeting held on 28.02.1994 (Page 140 of Additional set of documents by petition) which speaks about the losses suffered by the Company. He further pointed out that the accumulated losses of the Company eroded its net worth by more than 50 percent prior to February, 1994 for five financial years and that the Company had to make a reference to the BIFR. Shri Kapur invited out attention to par 6.2 of the petition in CP No. 19/2002 disclosing the profitability position of the Company for the years 1991 to 1996, but the statement doe snot give the net worth of the Company during these years. In this connection, he invited our attention to the letter dated 01.03.2002 of the Foreign Block sent to the BIFR (page 22 of rejoinder in CP No. 19/2002). The Foreign Block entered into joint venture agreement with the Indian Block only in the year 1996. The Foreign Block committed to contribute Rs. 100 crores, whereas the Indian Block contributed some money 50 years back and Rs. 6 crores in the year 1999. He referred to the minutes of Board meeting held on 09.06.1997 (Page 91 of additional set of documents by Foreign Block) to show that the general economic conditions and the temporary recession in the automobile industry are the main factors for poor performance of the Company. He further referred to the minutes of the Board of directors of the Company held on 12.03.1998 (Page 100 of Additional Documents by Foreign Block) to show that the main factor contributing to the loss of the Company was higher interest cost on account of borrowing for expansion activities. The Indian Block at the said Board meeting confessed (Page 104 of Additional Documents by Foreign Block) that there was a lot of scope for exports to Singapore, Malaysia and the Middle East with the help of Tenneco's world wide connections. The minutes of meetings of Board of directors of the Company held on 06.09.1994 (page 16 of Additional Documents by Foreign Block) reveal that the Board reviewed the action taken report in regard to the functioning of the Company and suggested the Company would concentrate on reducing the warranty claims and monitor expenses to control cost wherever possible. The Board of directors at the meeting held on 09.03.1995 (page 19 of Additional Documents by the Foreign Block) reviewed the performance of the Company for the period 1st July, 1994 to 30th December, 1994. It was observed that the actual production of struts was lower than the targeted quantity. The Board advised that the factors contributing to lower production should be studied and appropriate corrective action. Shri Kapur made a reference to Article 3 A(i) of the Articles of Association, according to which the Shareholders have agreed and adopted the Shareholders Agreement dated 21.08.1995. If Article 3A is violated, the Foreign Block can seek relief under Section 397. He further pointed out that the Indian Block has adopted a rigid stand in regard to the Recapitalisation Plan, 2001, thereby a situation of deadlock has been created between the parties.
The Indian Block are neither infusing additional capital nor allowing the Foreign Block to bring in the entire required additional capital, by imposing unreasonable conditions, by which the Company is driven to make a reference before the BIFR. The Indian Block are also not settling amounts legitimately due to Tenneco under the Licensing and Marketing agreements and for the establishment and maintenance of letters of credit and other financial support with the banks. On the other hand, the Indian Block are seeking for consultancy fees which is quite unreasonable. By virtue of Clause 3.3 of the Shareholders Agreement and Article 3A(i) of the Articles of Association, the Indian Block are under obligation to contribute their part of additional equity capital, failing which the Foreign Block is entitled to seek relief before the CLB invoking the provisions of Section 397. The CLB can grant appropriate remedy for removing the deadlock in exercise of its powers under Section 402 of the Act. In view of this, the Indian Block is bound to comply with Clause 3.3 of the Shareholders Agreement and 3A(i) of Articles of Association. The CLB may not go by technicalities but has to render justice in removing the deadlock between the parties. Shri Kapur pointed that by bringing funds by way of capital, the Company will come out of sickness. However, if the funds are brought in by way of loan, the Company's net worth will continue to be negative. Moreover, additional interest burden will adversely affect the working of the Company. He further pointed out that the funds brought in by the Foreign Block were used to discharge the liabilities of the Company and that thee is no prohibition to utilize share application money in discharge of liabilities of the Company, which is a listed company. By reducing the debt burden, the Company is benefited and so also the Shareholders including the Indian Block. Shri Kapur categorically stated that the Foreign Block is willing to bring the entire additional equity capital and the Indian Block are at liberty to pick up 49 per cent within a period of one year, so that their interest in taken care. If funds are not infused, the Company as well as 600 employees with their family members will suffer. The Foreign Block in a Memorandum dated 27.12.2001 (Annexure A-15) expressed their willingness to bring the entire additional equity capital on reasonable terms to ensure that the Company doe snot come under the BIFR jurisdiction. Shri Kapur discounted the statement of the Indian Block that the Foreign Block never nominated that Managing Director. He pointed out that the President of the Company was all along functioning as the Managing Director of the Company. Refuting the charges of the Indian Block that Tenneco was responsible in purchasing unworthy machinery, Shri Kapur pointed out that the Board of directors at the Board meeting held on 12.08.1985 approved the purchase of second hand grinding machine for the Company's use, whereas the machinery suggested by the Company was new one and used by the Foreign Block in European countries. While Tenneco has suggested legal recourse against supplier of the machinery, there was no cooperation from the Indian Block to pursue this court of action. While concluding his submissions, Shri Kapur reported that the Foreign Block having been oppressed is entitled to purchase the shares of the Indian Block which will remove the deadlock between the parties, in which case any firm of chartered accountants of high reputation be appointed to value the shares. While valuing the shares, he pointed that the amount of Rs. 11 crores brought in by the Foreign Block need not be taken into account for the purpose of valuation of shares.
13. We have considered the pleadings and arguments of the Counsel. CP 8/2002 (now re-numbered as CP 14/2002) was filed before the Principal Bench, Delhi on 06.02.2002 and was mentioned on 07.02.2002. On that date, this Bench passed an order directing the Company to convene and hold a general body meeting on 18.02.2002 to consider the proposal to increase the authorized capital of the Company from Rs. 12 crores to Rs. 30 crores since no shares could be allotted against Rs. 11 crores brought in by the Foreign Block without increasing the authorized capital. In that order it was also provided that subject to passing of the resolution in the general body meeting an amount of Rs. 11 crores shall be treated as capital. Thereafter, the general body meeting was held in which the Indian Block opposed the proposal for increasing the authorized capital while the Foreign Block supported the proposal. The Chairman of the meeting took a view that since amendment to the memorandum was a fundamental matter in terms of Article 119A the proposal required special resolution and since the Indian Block had not supported the same the resolution was not carried. When this matter was heard on 26.02.2002, the earlier order was modified to the extent instead of an amount of Rs. 11 crores treated as a part of share capital, the same shall be treated as share application money.
14. The main complaint of the Foreign Block in their petition is that the Indian Block is not interested in subscribing to the share capital of the Company in spite of the fact that the Company is in dire need of funds. To avoid reference to the BIFR and as such the Foreign Block has sought for directions to issue equity shares at Rs. 11 crores to itself and for directions to the Indian Block to contribute their shares of 49 per cent. It is true that the Company is in need of funds and this fact is not denied by the Indian Block. The Foreign Block had proposed a recapitalisation plan and this was considered in the Board meeting held on 27^th November, 2001. In the plan it was proposed induction of Rs. 17.75 crores as additional equity - 51 per cent to be subscribed by the Foreign Block and 49 per cent by the Indian Block. The Foreign Block had also suggested that it could contribute the entire amount if the Indian Block was not in a position to subscribe its share. The Indian Block proposed that instead of equity contribution, the Foreign Block could invest the entire amount in the form of preference shares. In that meeting, it was also decided that both the sides would discuss the matter in December, 2001. By a letter dated 27^th December, 2001 (Annexure A-15), the Foreign Block proposed that it would invest Rs. 17.58 crores in preference shares carrying a divided of 15 per cent to be payable before payment of dividend to equity holders and that the entire preference shares would be converted into equity after one year of allotment and that in case the Indian Block was interested it cold acquire 49 per cent of the preference shares. In the same proposal, it was also indicated that in case the Indian Block was not agreeable to the proposal then the Foreign Block would proceed with equity investment so that the Company would not come under the BIFR jurisdiction. This letter was replied by the Indian Block by a letter dated 14th January, 2002 (Annexure A-16), wherein the Indian Block has complained that the decline in performance of the company was on account of non-provision of management, technology, marketing and board level support by the Foreign Block and that the Foreign Block had supplied unsuitable equipment at substantial cost without approval in terms of the Shareholders Agreement and as such till such time these grievances were redressed it would not be prudent to induct further funds in the Company. In that letter it has also been stated that the Indian Block had no objection in the Foreign Block investing in preference share capital, but it should not be convertible and that the rate of interest would be 10 per cent payable only on availability of cash and the redemption should be at the option of the Company and such shares shall not have voting powers. This letter was replied by the Foreign Block by a letter dated 28th January, 2002 (Annexure A-17), rejecting the proposal made in the letter of the Indian Block and stressing that in terms of Section 3.3 of Shareholders Agreement, both the sides should contribute towards the capital of the Company. In the last para of that letter, the Foreign Block had said:- "Accordingly, I look forward to hearing from you as soon as possible with respect to setting up another meeting or conference call to come to a final decision concerning the recapitalization of Hydraulics. I am available at 9.00 am on February 5, 2002 and would suggest we meet at that time if this works within your schedule." From the above, it is clear that the issue of recapitalisation had not reached a final stage and was kept open for further discussion on 5^th February, 2002. However, by an e-mail dated 04.02.2002, the Foreign Block intimated the Indian Block of a board meeting on 05.02.2002 in Chicago, and held the meeting without the presence of anyone from Indian Block. At the said meeting, the Board of Directors approved the following:- (a) Recapitalisation Plan by infusing a sum of Rs. 177.5 million towards additional capital.
(b) Issue of equity shares on rights basis for the amount of Rs. 177.5 million.
(c) Increase of the authorized capital of the Company from Rs. 12 crores to Rs. 30 crores subject to approval of the shareholders.
15. In terms of Article 109A(a), the period of notice for any Board meeting is at least 30 days. The said Article also provides for a shorter notice not less than 14 days. In terms of Article 112, no business shall be transacted at any Board meeting unless a quorum is present and that the quorum shall be two directors comprising one director nominated by each of the Foreign Block and the Indian Block.
It further provides that if the said quorum is not present, the meeting shall stand adjourned to the same day the next week and if in the adjourned meeting also the quorum is not present, the directors present being at least on-half of the Board was to be the quorum. The Articles further provides that no matter referred to as fundamental matters in Article 199A shall be considered in such adjourned meetings. In terms of Article 119A(w) restructuring of the capital is a fundamental matter and as such could not be considered without the presence of a member from both the sides.
16.The manner in which the Foreign Block had gone about this matter appears to be unfair to the Indian Block. The notice for the Board meeting was issued by e-mail one day prior to the meeting. Even though it was contended that thee were earlier occasions when less than 14 days notice was given by e-mail, yet in the present case, such a short notice of one day, apparently, was not sufficient for the nominees of the Indian Block to attend the meeting. Further, the Foreign Block has not given any justification for calling a Board meeting with a short notice. Normally, shorter notice is adopted to consider some urgent and unforeseen matter. In the present case, the justification is the BIFR issue. It is on record that the parties were aware of the need to make a reference to the BIFR on 31.12.2001 itself when the company adopted the accounts and the Foreign Block itself had advised the Indian Block that the matter relating to recapitalisation would be discussed on 5.2.2002. Therefore, holding a Board meeting with a day's notice was not warranted. In this connection, we may also refer to the averment of the Foreign Block at Para 30 of the petition, wherein it has averred "in the light of urgent requirement for funding and reviving Hydraulics, the Foreign Block having no other option issued a shorter notice for Board meeting to sanction the increase under the authorized capital of the Hydraulics and make a right issue consistent with the funding of Hydraulics." Nowhere it is mentioned that only one day notice was given by e-mail on 4^th February, 2002. It is on record that none from the Indian Block attended the said meeting and as such there was no valid quorum. Therefore in all fairness and in accordance with the provisions of the Articles, the Board should have adjourned the meeting. In this connection, it is relevant to quote Clause 3.3 of the Shareholders Agreement on which heavy reliance was placed by the Foreign Block which reads - "The parties agree to capitalize Hydraulics in order to enable it to meet in a timely and adequate manner, of its application as may be expected by the parties, but not limited to reimbursement of party expenses, funding of capital and operating expenditure through a mix of equity, debt and other sources of finance as determined by the Board." From this provision, it is clear that it is for the Board to determine the nature of the capitalization. It could be either equity or debt or a mix of both. We note that on the earlier occasion when equity was raised there was a consensus among the parties to raise the funds by way of equity capital. In the Board meeting held on 17^th February, 1998 the Board recognized the fact that the Company faced liquidity problem at the end of the year and therefore there was a need to infuse further equity by the Shareholders to strengthen the balance sheet and it was also noted that both the Shareholders would jointly support funding requirement. In the Board meeting held on 1^st December, 1998, the Board was requested to consider infusion of equity immediately. In the Board meeting held on 19.03.1999, the Board noted that both the Shareholders had offered to infuse more capital and accordingly it was resolved to amend the Memorandum and Articles. Thereafter in an EOGM held on the same day, the proposals were carried through unanimously and in a Board meeting held on 28^th June, 1999, shares were allotted to both the groups.
17. In the present occasion, while the Foreign Block originally proposed equity contribution, yet, it had also agreed to the proposal of the Indian Block for issue of preference shares, but with certain modifications. It is on record that the issue relating to the recapitalisation was kept pending and was to be discussed on 05.02.2002. The strict manner in which the Articles/Shareholders Agreement have been framed would indicate, as pointed out by Shri Kapur himself that there should be a consensus between the parties on all important matters. No scope is left for one group of Shareholders to decide on important matters unilaterally. However, the Board of the company, with the participation of only one group decided on equity contribution and the Foreign Block brought in Rs 11 crores. Assuming that the Foreign Block genuinely felt that the matter of induction of further funds could not be delayed and therefore there was justification to convene a Board meeting with a day's notice, when it found that none from the Indian Block had attended the meeting, it should have adjourned the meeting and moved this Bench for directions to the Indian Block to attend the meeting. It would have been in line with their interim prayer wherein the Foreign Block sought our directions to hold an EOGM to approve increase in the authorized capital which was also granted by this Bench. In the alternative, the Foreign Block could have waited till the EOGM, before bringing in Rs. 11 crores. Now, having brought the funds unilaterally, they are seeking directions to the Indian Block to match the contribution. Further we also note that the decision of the Foreign Block to decide on holding the board meeting and take the impugned decisions does not appear to be a sudden decision. it is on record that the Foreign Block had filed caveats before the Delhi and Madras High Courts on 4^th February, 2002 a day on which the e-mail was sent. The petition, affirmed on 6th February, was filed on the same day before the Principal Bench at Delhi and in this petition, deliberations of the Board meeting on 5.2.2002 have been elaborated as also the fact of remittance of Rs. 11 crores.
It is highly impossible to draft a petition of this kind within a day of the meeting, indicating clearly that the Foreign Block had pre-decided to go ahead with the recapitalisation and remittance of money towards equity unilaterally without the consent of the Indian Block, in contravention of the provisions of the provisions of the Articles and the Shareholders Agreement. The claim of the Foreign Block that a deadlock situation had been created by the Indian Block cannot be accepted as the matter relating to recapitalisation had not reached a finality. When the Articles provide for consensus on important mattes, one group having taken a unilateral decision on an issue on which discussions had been inconclusive, cannot complain of oppression and deadlock. Deadlock situation would arise only when a proposal is placed before the Board and in view of the veto powers with the both the sides, one of the sides uses its veto powers. In Groz- Beckert case cited by Shri Kapur, both the sides used their veto powers in various board meetings and the dead lock situation was clearly established. In the present case, the Indian Block did not attend the Board meeting on 05.02.2002 convened with a day's notice, and the Foreign Block took unilateral decisions in that meeting, notwithstanding the fact that no proper quorum was present in that meeting. Therefore, the claim of the Foreign Block that the Indian Block had created a situation of deadlock cannot be sustained, especially when the issue relating to recapitalisation was still under discussions. Shri Kapur cited the case of Standard Chartered Bank on the proposition that if a shareholder refuses to approve the restructuring of capital, which if not done, would be injurious to the interest of the company, the court can pass appropriate orders. In the present case, as recorded earlier, the recapitalisation had not reached a finality for us to come to the conclusion that the Indian Block has rejected the recapitalisation proposal. The refusal of the Indian Block to approve the increase in the authorized capital in the EOGM, even though would indicate a status of dead lock, yet, since the decision to seek approval of the general body was taken by the Board unilaterally, such refusal cannot be held against the Indian Block. Shri Kapur relied on 1992 BCLC 1016 to the proposition that Articles cannot prescribe for special resolution for amending the Memorandum when in terms of the provisions of the Act, ordinary resolution is sufficient. We are of the provisions of the Act, ordinary resolution is sufficient. We are of the view that provisions in the Articles which are not in the nature of diluting the provisions of the Act but are more stringent, cannot be held to be invalid. For instance, if the Act provides for Special resolution and the Articles provide for ordinary resolution, then, such provision can be declared as invalid. In view of the non approval of the proposal to increase the authorized capital by a special resolution in terms of Articles, the amount of Rs. 11 crores brought in by the Foreign Block, which was ordered to be treated as share application money, will now be treated as loan to the company. In view of this, granting the prayers of the Foreign Block for directing the allotment of shares to itself and for direction to Indian Block to subscribe their share to the equity capital of the Company does not arise.
18. As far as the other petition filed by the Indian Block is concerned, the main complaints in that petition are that the Foreign Block had not provided various support in terms of the Shareholders Agreement and also that it had caused huge losses to the Company on account of supply of unsuitable machinery. We have gone through the minutes of the various board meetings, some which are as recorded as a part of the submissions by Shri Kapur. Some of the extracts as below would indicate that the Indian Block never attributed the sub performance of the company to the Foreign Block.
The minutes of the Board meeting of the members of the Company held on 28.02.1994 (page 140 of Additional Documents by petitioner) reveal that the net-worth of the Company was eroded more than 50 per cent prior to February 1994 for five financial years and that the Company has to make a reference to BIFR. The minutes of the Board of directors of the Company held on 21.08.1996 (Page 75 of Additional Documents by petitioner) show that the Company's three units at Alandur, Pondicherry and Hosur could not achieve their targeted operations for various reasons recorded therein. This meeting was chaired by the second respondent.
The minutes of the meeting of the Board of directors of the Company held on 09.06.1997 (page 91 of Additional Documents by petitioner) and chaired by the second respondent indicate that the performance of the Company for the year upto May, 1997 was poor due to the general economic conditions and the temporary and recession in the automobile industry. The Board further approved to borrow USD 1.25 million from Bank of America against the ECB loan of USD 3.00 million to meet additional working capital as well as pending capital expenditures.
The minutes of the meeting of the Board of directors of the Company held on 24.11.1997 and chaired by the second respondent (page 98 of Additional Documents by petitioner) reveal that the Company had incurred a net loss of Rs. 16.98 million for the period up to September 1997 due to high interest cost of Rs. 24.00 million.
The minutes of the meeting of the Board of directors of the Company held on 12.03.1998 (page 100 of Additional Documents by petitioner) chaired by the second respondent speaks of a net loss of Rs. 3.74 million suffered by the Company due to higher interest cost on its borrowing for expansion activities. The Company had incurred a loss of Rs. 11.79 million for the period up to January and February 1998 on account of depressed market conditions, competition at the hands of other players etc. The second respondent was concerned about increasing trend in receivables -inventories and payables.
At the meeting of Board of directors of the Company held on 01.12.1998 (page 113 of Additional Documents by petitioner) and chaired by the second respondent, he was apprehensive about the reduction in volumes during the year 1998. The second respondent further expressed his opinion that reduction in volumes should not continue, in view of substantial growth in the two wheeler segment.
The minutes of the Board meeting further reveal that the Company's networth as of October 1998 became negative and further that the present level of operation cannot generate funds for the projects under consideration and payments to the tune of Rs. 47.50 million are due to Bank of America by end of December, 1998. These necessitated further infusion of equity.
The minutes of the meeting of Board of directors of the Company held on 19.03.1999 (page 118 of Additional Documents by petitioner) and chaired by the second respondent reveal that the Board while reviewing the performance of the Company in the month of January and February, 1999 felt the need of additional funds for tiding over quarterly interest payment to Bank of America. It is observed that the financial support was received from Tenneco to meet this situation. It is further revealed that the petitioner and first respondent have offered to infuse additional capital in order to upgrade the production facilities at Hosur unit and also to offer compensation to the employees who are retiring voluntarily and also for the purpose of meeting the working capital requirements, for which it was resolved to alter capital clause of Memorandum and Articles of Association of the Company raising the authorised capital from Rs. 2,50,00,000 to Rs. 2,47,50,000.
The minutes of the meeting Board of directors of the Company held on 3.9.1999 (page 130 Additional Documents by petitioner) and chaired by the second respondent show that the performance of the Company for the period ending 31st August, 1999 was reviewed. The Board observed that the Company was losing heavily during the year of operation basically due to lack of production on account of material shortages to the marketing requirements.
The minutes of the Board of directors of the Company held on 29.11.1999 (page 131 Additional Documents by petitioner) and chaired by the second respondent show that the performance of the Company for the year 1999 was poor on account of excessive interest cost, inefficient material consumption and increasing overheads. It further reveals that the Company could not repay the loan amount of Rs. 375 lakhs to Bank of America which became due on 31.12.1999. The Company requested the Bank of America to roll the loan amount over a period of one year as the company did not have enough funds to repay the loan. In addition, the loan borrowed from Chiticorp Finance became due in January, 2000, which could also be met by the Company.
The minutes of the meeting of the Board of directors of the Company held on 21.02.2000 (page 136 Additional Documents by petitioner) and chaired by the second respondent show that the second respondent was suggested that the Company should take steps for reducing the material cost and inventories for betterment of the Company.
The minutes of the Audit Committee of the Company held on 16.10.2001 (page 144 Additional Documents by petitioner) reveal that the Company sustained a total loss of Rs. 179.77 million and that the Company requires continued operational and financial support from its shareholders. The second respondent at the audit committing meeting has responded by saying that confirmation from shareholders regarding their support to the Company in its future operations would be conveyed to the auditors.
19. From the foregoing, we find that in none of the minutes of the Board meetings, there is any reference that the unsatisfactory performance of the company is attributable to the Foreign Block. Rather we find that the minutes record that the performance of the Company had been affected due to market conditions and not on account of non-supply of various support by the Foreign Block or the unsuitable machinery. We also find from the minutes, that the Company has decided to take suitable action against the suppliers of the unsuitable machinery and that the Foreign Block has agreed to support whatever action is taken by the Company in this regard. In other words, the Indian Block has not been able to establish that the losses incurred by the company are due to the mismanagement in the affairs of the Company by the Foreign Block.
20. From the discussion as above on the allegations in both the petitions, it is clear that neither of the parties has been able to establish either oppression or mismanagement in the affairs of the Company by the other side other than establishing that the relationship between the parties has soured and the trust and mutual confidence on which the Shareholders Agreement was entered into no longer exist. In view of the present disputes and in view of the provisions in the Articles relating to quorum in Board meetings and fundamental matters requiring special resolutions in the general meetings, deadlock in future is a definite possibility due to which the parties are unlikely to carry on the affairs of the company jointly in the best interest of the company. Parting of ways would alone be in the interest of the company and as a matter of fact, it was also admitted during the hearings. Shri Kapur cited the case of Needles Industries to the proposition that even if oppression is not established, the CLB can pass appropriate orders to do justice between the parties and he also cited the cases of Hooghly Ink Co Ltd, Kilpest P Ltd, Sindri Iron Foundary Ltd, Sri Gopal Automotive Ltd etc to the effect that the CLB has wide powers under Section 402 to pass appropriate order in the interest of the company. His submission is that since the Foreign Block is in majority and has high financial stake, with the view to put an end to the dead lock situation, the Indian Block should be directed to sell its shares to the Foreign Block. He also relied on In Re Company (No. 006834 of 1988) to state that when the parties had agreed for the modality of valuation, then the same can be enforced and as such sought for a direction to value the shares of the Indian Block as provided in the Shareholders agreement by an independent valuer. It is true that, in a number of cases, this Board has decided that the majority which is generally is the oppressor should buy out the minority, being the oppressed, yet there have been exceptions depending on facts of cases.
In Praful M Patel v. Wounderweld Electronic Pvt Ltd (2002 36 SCL 825), - a petition filed by the majority- considering the fact that the minority shareholder had majority on the Board and was in control of the company for a long time, the majority was directed to sell its shares to the minority Likewise, in VLS Finance V Sunair Hotels Ltd, not withstanding the high financial sake of the petitioner in the company, since the respondents had nurtured the project and completed the same, the petitioner was given the option to go out of the company.
Therefore, the final order would depend on facts of each case as held in Hillock Hotels P Ltd and Rakhra Sports P Ltd cases (supra) as cited by Shri Kapur. In the present case before us, the Indian Block has been in management of the Company for fairly a long time before the Foreign Block became Shareholders in 1995. The Indian Block subscribed to further shares as late as in the year 1999-2000 along with the Foreign Block. Discussions on further capitalization had not reached a finality. Further, even though the Indian Block has asserted that it is the Foreign Block which has been in the management of the Company during the last few years, yet, the Foreign Block has also asserted that the Indian Block was also in active management of the Company.
Therefore, directing the Indian Block which has been associated with the company for a very long time even before the Foreign block became shareholders, to go out of the Company would be unfair to them. In the same way, the Foreign Block has majority shares in the company and also has substantial financial commitment in the Company and has also given guarantee of over Rs. 30 crores and therefore it will be inequitable to direct Foreign Block also to go out of the Company. Considering these facts, this Bench tried to bring out an amicable settlement between the parties during the course of hearing the petitions. The Indian Block was willing to go out of the Company on receipt of a fair consideration for its shares, but the quantum of consideration could not be agreed to between the parties. Both the sides made their own valuation through independent valuers. While as per the valuation done by the Indian Block, the share price came to about Rs. 10,975 per share, as per the valuation done by the Foreign Block it was Rs. 31 per share. Even after the hearing was concluded this Bench held discussions with the parties to explore the possibility of an amicable settlement. During the discussion, while the Indian Block was prepared to go out of the Company for a consolidated consideration of Rs. 30 crores, the Foreign Block offered only Rs. 5 crores. This Bench suggested a sum of Rs. 22 crores, which was not acceptable to the Foreign Block and it insisted that the valuation of the share should be carried by an independent valuer which was not acceptable to the Indian Block and it took a stand if the consideration is not adequate it would not be interested in selling its shares but would purchase the Foreign Block at that price.
Normally, this Bench orders valuation of shares only if it directs one of the parties to go out of the Company on the basis of the merits of the case. Without identifying as to which of the parties should go out of the company, carrying out valuation becomes a wasteful exercise. In the present case, as pointed out earlier, it would not be equitable for us to direct, either of the parties to go out of the Company, in view of the fact while the Indian Block has been in control of the Company for a long time even before the Foreign Block came into picture, Foreign Block holds majority shares and has substantial financial commitment in the Company. Therefore, most equitable manner of parting of ways has to be designed. In Hathimal Pincha v. Kattela Tea Company Pvt. Ltd. - (CP 17 of 1996 Order dated 19.2.1997) where two block of shareholders holding equal shares and were in joint management of the company, this Board observed "As to who should go out of the company is a point to be considered in the circumstances that both have equal number of directors on the Board till 1994. The normal principle that the oppressor should buy oppressed cannot be applied in this case.
Since both the groups have been in the management, they would be in a position to know the real worth of the company which may not be apparent from any valuation that may be made by the professionals.
Therefore, according to us, both the groups should bid for the sales in the company and whoever offered the highest bid should take control of the company". Thus observing, this Board ordered both the groups to furnish their bids indicating therein the price per share at which they were prepared to purchase the shares of the other group. It also directed that whichever group acquired the shares of the other group would ensure that all the unsecured loans paid by the other group as per the accounts of the company would also be discharged within two months and also would replace the bank guarantees given by the other groups. It further directed that if the highest bidder failed to accept the shares of the other group at the highest price, the other group shall purchase the shares of the highest bidder at the price which they had quoted. Accordingly, both the groups furnished their bids and the group which offered the higher price was given the option to purchase the other side. In the present case, in view of the fact that it would be inequitable to direct either of the parties to go out of the company by an order, the ratio applied in that case could be applied. Since both the Blocks have been in the management of the company, they would be aware of the real worth of the company- whatever may be the valuation carried out by them. Therefore, we are of the view that the most equitable order that could be passed is that both the Blocks should quote their price per share and the Block that quotes the higher price should purchase the shares of the other Block at that price.
Accordingly we direct so. Both the blocks will appear before us on 2^nd January 2003 at 2.30 p.m., and submit their offers in closed covers indicating the price per share that they are willing to offer. The Block which offers the higher price, will purchase the shares of the other at the price and the consideration for the same should be paid within two months. The Block purchasing the other will also ensure that the other is relived of all their financial commitment/obligation, whatever may be the nature, in the company within the same two months period. For any reason, the Block quoting the higher price fails to purchase the shares of the other Block quoting the higher price fails to purchase the shares of the other Block within two months, the other Block will have the right to purchase the shares of the defaulting Block within the next two months at the price quoted by the other Block.
21. Both the petitions are disposed of in the above terms, reserving the right to pass necessary consequential order on 2^nd January 2003 when both the Blocks will present their offers quoting their price per share in closed covers.