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Suresh Kumar Sanghi Vs. Supreme Motors Ltd. and Others - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Petition No. 73 of 1980
Judge
Reported in[1983]54CompCas235(Delhi); 1981RLR418
Acts Companies Act, 1956 - Sections 43A, 149, 292, 299, 300, 314, 314(1B), 370, 397, 398, 398(2), 402 and 403
AppellantSuresh Kumar Sanghi
RespondentSupreme Motors Ltd. and Others
Cases Referred(See K. R. S. Narayana Iyangar v. T. A. Mani
Excerpt:
a) the case dealt with the petition filed under section 397 of the companies act, 1956 - in the instant case, the two group in question were holding equal share capital and thereforee, there was no question of one group being minor and the other one major or vice versa - in view of the fact, it was ruled that section 397 of the act, would not be applicable - moreover, in the instant case, the negligence and inefficiency did not amount to mismanagement or oppression within the meaning of section 397 and 398 of the actb) the case debated on whether the oppression can be equated with mismanagement - the instant case involved a petition filed under section 397 of the companies act, 1956- it was ruled that the remedy under section 397 of the act would only be available to the minority.....1. this is a petition under ss. 397, 398, 402 and 403 of the companies act, 1956, filed by a shareholder of m/s. supreme motors limited (herein after called 'the respondent company'), alleging, inter alia, that there has been oppression on the petitioner group (hereinafter referred to as 'suresh group'), by the group led by respondent no. 2 (hereinafter referred to as 'amrit group'), and certain reliefs should be granted under s. 402 of the companies act. 2. it is an admitted case of the parties that suresh group and amrit group have equal shares in the company. both the groups own 500 shares each. each share is not of the face value of rs. 1,000. the petitioner and the respondents are closely related. they are cousins. according to the averments made in the petition amrit group has been.....
Judgment:

1. This is a petition under ss. 397, 398, 402 and 403 of the Companies Act, 1956, filed by a shareholder of M/s. Supreme Motors Limited (herein after called 'the respondent company'), alleging, inter alia, that there has been oppression on the petitioner group (hereinafter referred to as 'Suresh group'), by the group led by respondent No. 2 (hereinafter referred to as 'Amrit group'), and certain reliefs should be granted under s. 402 of the Companies Act.

2. It is an admitted case of the parties that Suresh group and Amrit group have equal shares in the company. Both the groups own 500 shares each. Each share is not of the face value of Rs. 1,000. The petitioner and the respondents are closely related. They are cousins. According to the averments made in the petition Amrit group has been acting to benefit itself at the cost of Suresh group. It has been alleged that the company was in the nature of a partnership between the members of the two groups and that Amrit group is conducting the affairs of the company in a manner which is unlawful and highly prejudicial to the petitioner and his family. Instance of illegal and arbitrary acts have been set out in the petition. It is contended that there is a lack of probity in the conduct of the affairs by the Amrit group and that there is a state of complete deadlock which has been created in the business. The reliefs which have been prayed for include the relief of the appointment of a committee of management, removal of respondent No. 2 from the board of directors or restraining him from acting as managing director, appointing the petitioners as managing director in place of respondent No. 2 or directing that the board of directors should not implement any decision without the concurrence of the petitioner and some other ancillary reliefs.

3. On behalf of the respondents the allegations set out in the petition have been denied. It is contended by the respondents that the petitioner has not come with clean hands and has concealed some material facts. It is admitted by the respondents that the company was more like a partnership firms in which the two groups had equal shares. It is also stated by the respondents, and not denied by the petitioner, that there is a partnership firm knows as M/s. Sanghi Motors in which again the groups have equal shares. There is now a dispute going on with regard to the said firm which is pending on the original side of this court. It is contended in reply affidavit, that by mutual arrangement amongst the two groups the business of the business of the respondent-company has, since its inception, been managed by respondent No. 2, who was appointed as its managing director, while the business of Sanghi Motors, the partnership firm, was being managed by the petitioner as managing partner. The petitioner admits that respondent No. 2 has been the managing director since the inception and that the petitioner has been a managing partner of Sanghi Motors but the petitioner has been guilty of acts of misfeasance and non-feasance and it also guilty of breach of trust reposed in him in the performance of his duties as managing partner of the aforesaid firm, there by causing huge loss. It is also alleged that the petitioner has been abusing his position as a managing partner and has started two business units in the name of 'Sanghi Aviation ' and Sanghi Travels'. It is alleged that the expenses with regard to these town units are being borne by the partnership firm and fact these two units are also using the business premises of M/s. Sanghi Motors. Just as the petitioner has alleged that the respondents have ousted him form the affairs of the company, the respondents in the turn have alleged that they have been ousted from the affairs of the aforesaid firm. It is further contended by the respondents No. 2 in the affairs of the of the respondent-company and has been trying to create a deadlock. The respondents have also denied and/or explained the averments of the petitioner, with regard to the illegalities which are alleged to have been committed by the respondents.

4. The petitioner filed a rejoinder to the reply. This rejoinder was filed after the petitioner had, with the help of a court order, inspected the records of the company. After the petition was admitted and the pleadings were completed, by order dated 2nd December, 1980, it was directed that the parties may file affidavits by way of evidence abd documents within four weeks. Admission and denial of documents was to take place before the Deputy Registrar. The Central Government was given liberty to file a representation and parties were given an opportunity of filing affidavits in reply to the representation, it filed. By the said order liberty was also given to the parties to summon oral evidence, if necessary. The parties were also entitled by the said order to take steps to cut short the trial by service of interrogatories, notice to admit and deny documents, notice to produce documents, etc. It was further directed that if the said steps were not taken by the parties, the case would be notified by the Deputy Registrar and listed for hearing. Reference has been made by me to the aforesaid order for the reason that, though some documents were filed by the parties, no affidavits by way of evidence have been filed nor did the parties take any steps to summon any oral evidence nor were any interrogatories served. The result is that the petition and the various averments made by the parties have to be decided merely on the basis of the pleadings and the admitted documents on the record. During the course of arguments averments were made by the respective counsel but in so far as they go beyond the pleadings, no notice need to taken of them.

5. On behalf of the petitioner three contentions were raised. It was contended that the petitioner group had been completely excluded. The second contention was that there was lack of probity on the part of the management and, thirdly, it was contended that there were persistent contravention of the provisions of the Company Law by the respondents. These allegations have, of course, been denied by the respondents who, in turn, have alleged that the petitioner has not come to the court with clean hands and, further, because of laches and past conduct the petitioner has disentitled himself to any relief.

6. Before referring to the rival contentions it is necessary to analyze the relevant provisions of the Companies Act. Any application under s. 397 can be made by the requisite number of persons and relief obtained only if the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member and, though the facts would justify the making of a winding-up order on the ground that it is just and equitable to do so, it would unfairly prejudice such members in winding-up the company.

7. Relief under s. 398 can be obtained only if (1) the affairs of the company are being conducted in a manner prejudicial to public interest, (2) if the affairs are being conducted in a material change which interest of the company, or (3) if there is a material change which has take place in the management or control of the company, in the manner sent out in the said section, and they by reason of such change it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company.

8. The powers of the court while deciding a petition under ss. 397 or 398 are very wide. Apart from the powers which can be exercised under these sections the court has further been given powers to pass orders in terms of s. 402 of the Act. One thing is clear, however, that no orders under s. 402 can be issued or relief granted under ss. 397 or 398 unless and until the case can be brought by the petitioner within the ambit of ss. 397 or 398 of the Act.

9. The aforesaid three contentions of Mr. Ved Vyas were urged with a view to establish that in the present case the provisions of ss. 397 to 398 are attracted. He has sought to argue that there has been an oppression on the petitioner and members of his group and, further, the respondents have acted in a manner which is prejudicial to the interests of the company. The respondents, of course, have denied the aforesaid allegations of the petitioners.

10. The specific instances which were pointed out by Mr. Ved Vyas with regard to the alleged contravention of the provisions of the Company Law by the respondents were as follows :

(a) It is alleged that no notices for meetings of the board of directors of the company which are alleged to have been held on 28th December, 1979, and 28th February, 1980, were received by the petitioners. Similarly no notice with regard to the holding of the annual general meeting on 28th March, 1980, was received. It might here be noted that respondent No. 2 had been reappointed as the managing director, prior to 1980, on 1st February, 1975. In the general meeting on 28th March, 1980, respondent No. 2 is stated to have been reappointed as managing director at a remuneration of Rs. 3,500 plus some perquisites which were allowed to him while the petitioner was reappointed as a working director at a remuneration of Rs. 1,500 per month.

(b) Respondent No. 2 could not be appointed as a managing director because the approval of the Central Government had not been obtained which is required as the provisions of s. 314(1B) were attracted to the present case.

(c) No balance-sheet as for the year ending 30th September, 1979, has been passed or filed in time.

(d) Loans had been given to the Installment Supply Company but no resolutions had been passed under s. 292 of the Companies Act by the board of directors of the company and there had also been a contravention of s. 370.

(e) At the annual general meeting held on 28th March, 1981, the petitioner had asked for list of debtors and other information but the same was not supplied by respondent No. 2.

(f) A Local Commissioner had been appointed by order dated 5th August, 1980, for the purpose of inspecting the books. According to the first report of the Local Commissioner he was not shown the books.

(g) The minute book of the board of directors' meeting after 1975 had been changed. In connection with this contention it may be observed that on such averment has been made by the petitioner either in the petition in the rejoinder and as such he cannot be permitted to raise this contention for the first time during arguments.

(h) Directors had not disclosed their interest while getting loan from M/s. Minar Investment (P.) Ltd. and as such ss. 299 and 300 have been contravened. This allegation has again not been made either in the petition or in the rejoinder.

(i) Annual return which is required to be filed under s. 149 of the Act had been filed late.

(j) Resolution by the board of directors could not have been passed on 20th February, 1980, as the directors were interested in the said resolution. This contention again has not been raised in the pleadings by the petitioner.

11. It is not necessary to deal with the aforesaid allegations for the purpose of finding out whether the provisions of s. 397 are attracted or not. The provisions of s. 397, which is similar to the provisions of s. 210 of the English Companies Act, have been interpreted by the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351. After referring to the case decided in England with regard to s. 210 of the English Act, the Supreme Court observed as follows p. (366) :

'These observations from the court cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each case in whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of s. 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.'

12. In a later portion of the judgment the Supreme Court further observed, while referring to s. 398, as follows (pp. 375, 376) :

'This section only comes into play, as the marginal note shows, when there is actual mismanagement or apprehension of mismanagement of the affairs of the company. It may be contrasted with section 397 which deals with oppression to the minority shareholders, whether there is prejudice to the company or not.'

13. From a reading of the aforesaid passages it is clear that s. 397 would be applicable only in the case of oppression by the majority shareholders of the minority shareholders. Section 397 does not come into play in the case of wrongful acts being done by the management. That may be a ground for winding up. One of the pre-requisites of the applicability of s. 397 is that the complaint of oppression has to be by the minority shareholders. In the present case, it is an admitted fact that the shareholding amongst the two groups is equal. The shareholding being equal, no group can be said to be either belonging to the majority or the minority group of shareholders. The allegations referred to above, if true, may be a ground for the winding up of the company but are not relevant for the purpose of invoking the provisions of s. 397 because the petitioner and members of his group are not minority shareholders.

14. Even if it be assumed that the aforesaid instances are correct, to my mind, they would not form acts of oppression or show lack of probity, which can entitle the granting of relief under s. 397 of the Companies Act. It has been held in Hungerford Investment Trust Ltd. v. Turner Morrison & Co. Ltd., 2nd [1972] Cal 1 that if an action of the directors is illegal or invalid then the company or the shareholders may take appropriate action in a court of law by challenging the validity of such an action but a petition under s. 397 or 398 of the Act is not appropriate remedy for the purpose. In this very case, it has been observed that negligence and inefficiency do not amount to mismanagement or oppression under ss. 397 and 398 of the Companies Act. Reliance, in this connection, was placed on the case of Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co Ltd. [1964] 34 Comp Cas 777. In that case, P. N. Bhagwati J. (as his Lordship then was), while dealing with the applicability of ss. 397 and 398, observed at page 813 as follows :

'... the power of the court under both the sections is confined only to making an order for the purpose of putting an end to oppressive or prejudicial conduct and the court cannot make an order setting aside or interfering with past and concluded transactions which are not longer continuing wrongs or giving compensation to the company or the aggrieved shareholders in respect of such transactions.

15. In that very case, it was also observed that the action of the directors, if it illegal or invalid may be challenged in a court of law by an appropriate action. The learned judge held that challenge to such an action was not appropriate under s. 397 or 398, of the Companies Act. It was, of course, held that under s. 397 or 398, action of the directors could be challenged if that action was oppressive to the minority shareholders or prejudicial to the interests of the company. In Kalinga Tube's case [1965] 35 Comp Cas 351 also it was held by the Supreme Court that in order to constitute oppression within the meaning of s. 397' there must be continuous acts on the part of the majority shareholder, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some apart of the members'. From the aforesaid judgments it clearly follows that (1) past acts which have come to end cannot be challenged under s. 397 or 398, (2) the relief under ss. 397 and 398 would available only if there are continuous acts of oppression by the majority shareholders, (3) illegal acts committed by the directors, unless they are oppressive on the minority shareholders, cannot be challenged in a petition under s. 397 of the Act. The instances of violation of the provisions of the Companies Act, which were referred to by the learned counsel for the petitioner, cannot be complained of in the present proceedings under s. 397 or 398 of the Act. Whether the provisions of s. 292 or s. 314 have been violated or not is not a matter which is to be gone into in these proceedings. What has to be seen is whether there has been any action taken, legal or illegal, which has resulted in the oppression of the minority shareholders. It will be seen that respondent No. 2 has been the managing director of the company since its very inception. If there was any illegality or irregularity in the convening of the meeting in March, 1980. Wherein respondent No. 2 was reappointed as a managing director, that cannot amount to an act of oppression. By the said resolution the existing state of management of the company was permitted to continue. No change was brought about by any resolution which was purported to be passed in that annual general meeting. If the meeting was illegally held it may be that the petitioner may have a causes of action of challenging the same in other appropriate proceedings, but such an allegedly illegal meeting did not, to my mind, result in any oppressive act being committed on the petitioner. The decisions which have been referred to by Mr. Ved Vyas, namely, Loch v. John Blackwood Ltd. [1924] AC 783, Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Comp Cas 91, C.P. No. 39 of 1973 decided by this court on 30th April 1975 and C.P. No. 8 of 1975 decided on 18th March, 1977, by this court are relevant for deciding as to whether it is just and equitable to wind up the company or not. For the purposes of this petition, I am assuming that the principles laid down in Ebrahimi's case [1972] 2 All ER 492 apply and that it may be just and equitable to wind up the company. It might here be stated that this contention is controverter by the learned counsel for the respondents. Nevertheless, merely because grounds or circumstances may justify a winding-up order being passed, that is not enough to entire the petitioner to obtain relief under s. 397 of the Companies Act. The petitioner has not proved or shown that there has been any continuous acts of oppression by the majority on the minority shareholders. No relief can, thereforee, be granted to the petitioner under s. 397 of the Act. The allegation that the petitioner has not been given access to the books of account and has not been given information which he had asked for at the time of the annual general meeting are also not such which would fall within the ambit of s. 397 or 398 of the Act. The alleged ouster of the petitioner from the management of the company may be a ground for winding up but that is not a ground for seeking relief under s. 397 or 398 of the Act. In fact the petitioner has failed to prove that he has been ousted from the management of the company. It is an admitted case of the parties that the respondent-company has four directors. Each of the group has two of its nominees on the board. The petitioner and his brother are directors along with respondents 2 and 3. The shareholding of the two groups being equal and the number of directors on the Board being equal and none of the directors having been removed by the respondents, I fail to see how it can be contended by the petitioner that he has been ousted from the company's management.

16. In view of the fact that the shareholding is divided amongst the two groups equally, and also for the reason that both the groups have equal number of directors on the Board there is a possibility that this may lead to a deadlock in the working of the company. Whether it has already led to a deadlock or not is a different question. One thing, however, is clear that both the groups of shareholders are at each other's throats. The infighting amongst the groups has affected not only the business of this company but also the business of the partnership firm known as Sanghi Motors. The disputes between the parties are not confined only to this company. The disputes amongst the families are with regard to all the business concerns in which both of them have interests. The disputes reached such a pitch that actions were taken by the parties which were completely detrimental to the interests of the company. On 29th August, 1979, respondent No. 2 wrote letters to company's bankers indicating that there were disputes between the two groups. It was stated in the said letters that the banks should not honour any cheques issued by any of the directors of company including respondent No. 2 himself. It was alleged in the said letters that this step was being taken by respondent No. 2 as one of the two groups of shareholders was acquiring the management the company in its hands forcibly and illegally and was hampering the day to day conduct and running of the company's business. This allegation made in the petition has not been denied by respondent No. 2 It has, however, been stated that the petitioner had been abusing his position as managing partner of the firm, Sanghi Motors, and had started to quarrel and interfere with the working of respondent No. 2 in the affairs of the company and thereby trying to create a deadlock. According to the said respondent he was left with no alternative but to write a letter to the banks to stop the operation of the account of the company as well as of the partnership firm, M/s. Sanghi Motors. It is also admitted by respondent No. 2 that letters were written to M/s. Mahindra & Mahindra Ltd., from whom Sanghi Motors had obtained agency to distribute their vehicles, and to Telco Limited, whose vehicles were being sold by the company. In the said letters it was stated that supply of vehicles should be temporarily suspended in view of the differences which had arisen between the two groups. Though the first stone, in this regard, was thrown by respondent No. 2 the petitioner was not far behind. The petitioner also wrote a similar letter for stopping the bank operation of the company and for withdrawing the guarantee submitted by the petitioner's group with the company's bankers. It is admitted by the petitioner in the rejoinder that such letters were written but it is contended that they never wrote for the withdrawal of the guarantees. Good sense apparently prevailed upon the groups thereafter. The disputes were apparently resolved and an agreement dated 21st September, 1979, was entered into between the parties. The said agreement, inter alia, provided as follows :

'I. The company/firms covered by this agreement are :

(a) Supreme Motor Ltd., Asaf Ali Road, New Delhi, holding the Franchise for Tata Disel Vehicles for the State of Delhi and part of Haryana;

(b) Sanghi Motors, 7E Jhandewalan, New Delhi, having the dealership for Mahindra jeep range of vehicles for the Union territories of Delhi and Chandigarh and parts of Haryana and Punjab.

(c) Sanghi Oxygen, Industrial Estate, Jaipur, manufacturing oxygen and other industrial gases;

(d) Central Transport Company, Jhandewalan, New Delhi, who are Transport Contractors for M/s. TELCO and Mahindra and Mahindra.

II. (a) The first party will sell and transfer 500 (Five hundred) shares held by them in Supreme Motors Ltd. to the second party for a consideration of Rs. 4,250 (Rupees four thousand two hundred and fifty only) for each share.

(b) The second party will withdraw from the partnership firm of Sanghi Motors, Delhi, Sanghi Oxygen, Jaipur, and Central Transport, Delhi.

(c) The second party have hired their premises at Jhandewalan, New Delhi, and Industrial Estate, Chandigarh, belonging to M/s. Supreme Motors Ltd. to the first party at monthly rental of Rs. 1,500. (Rupees one thousand and five hundred only) and Rs. 750 (Rupees seven hundred and fifty only) respectively for each of the premises. It is agreed that both the above premises will continue to be leased to the First Party on the present terms with the further agreement that the First Party will have the option to buy both the premises as per details given below.

The premises at Chandigarh belong with the fittings and fixtures will be transferred at its books value as on 30-9-79. As regards the property at Jhandewalan it comprises 2 plots 7E and 8E. It shall be the responsibility of the Second Party to secure title to the 2 plots in their names and transfer the same along with the buildings to the First Party. The value of the premises with the land will be determined as per the cost of the plots after securing the titles thereto and the books value of the building as on 30-9-79. The Second Party will take suitable action in this regard expeditiously.

(d) The premises at Nizamuddin New Delhi, which is presently under lease of Supreme Motors Ltd. at a monthly rental of Rs. 700/- (Rupees seven hundred only) will be transferred to the First Party along with all the constructions at their book value as on 30-9-79 and vacant possession given to them immediately. It is understood that there is a dispute between the owners of the aforesaid premises and the matter is before the court and consequently the rent for the premises is being credited to the Party's account by Supreme Motors Ltd. The First Party will pay the rental amount to the Second Party who will pass necessary receipt to the First Party. Both the parties will try with the owners for the transfer of the lease in favor of the First Party.

(e) All expenses connected with the transfer of various properties as envisaged in this agreement will be shared and shared alike by both the parties.

(f) Similarly any unearned increase in the value of the land payable to the Delhi Development Authority or any other Government body will be shared and shared equally by both the parties.'

17. The said agreement, however, was not carried out. Each group blames the other. According to the petitioner his group exercised the option to purchase the premises at Jhandewalan. It is stated that the respondent-company was not in a position to transfer absolute title of the said property as there was not dispute or cloud with regard to the title of one of the two plots at Jhandewalan. It is not denied by the respondents that with regard to one of the plots at Jhandewalan the company does not have an absolute title which could be conveyed. The respondents, however, contend that it is the petitioner who broke the agreement, inter alia, for the reason that the properties had to be transferred, under the said agreement, to M/s. Sanghi Motors and the petitioner had not supplied the names of all the partners of Sanghi Motors. On 5th January, 1980, the petitioner sent a notice to the effect that the aforesaid agreement dated 21st September, 1979, was no longer blinding as it had to be completed by 31st December, 1979 and this had not been done.

18. After the agreement of 21st September, 1979, had been entered into, a meeting of the board of directors was held on 21st September, 1979. All the four directors, including the petitioner, were present. According to the minutes of the meeting, the chairman, namely, Shri N. K. Sanghi, explained the circumstances under which letters for suspension of operation of the accounts had been written to the bankers by the managing director and other directors of the company. It is further noted in the minutes that in view of the changed circumstances it was agreed that the operation of the bank accounts should be recommenced. A resolution was passed unanimously authorising the managing director to write appropriate letters to the bankers to the effect that the letters written earlier for suspension of the operation of the accounts should be treated as cancelled and that the banking operations should be permitted to be resumed. These letters were apparently written and the banking operation resumed. Letters were apparently written to the principles, namely, Telco also, and the dealership was not cancelled. It appears that the petitioner approached Telco for transfer of the dealership of Supreme Motors to him. Whether the petitioner approached Telco before or after the filing of the petition on 4th August, 1980, is not clear. A letter dated 15th September, 1980, written by Shri D. S. Narayanan of Telco to the petitioner has, however, been place on record. The relevant portion of the said letter reads as follows :

'During your last visit to Bombay, I had made it clear to you that it would not be possible for Telco to transfer the dealership of Supreme Motors Ltd. in your favor.

The dispute between you and Mr. A. K. Sanghi and others has not yet been settled, in spite of the terms of settlement having been finalised long back. I would appreciate you taking necessary action for resolving this matter without further delay.

I would like to caution you that any delay in settling this matter will result in Telco taking serious action with regard to the dealership entrusted to Supreme Motors Ltd. I do hope that this matter will not be further delayed. I look forward to hearing from you in this connection.'

19. The aforesaid letter clearly shows that, contrary to the interests of the company, the petitioner tried to have the dealership transferred in his favor. In the said letter it was specifically stated that the disputes between the parties should be settled. Far from settling the disputes the same apparently aggravated which resulted in the filing of the present petition. A letter dated 9th April, 1981, received by the company from Telco has been placed on record. In the said letter it has been stated that due to the differences in the members of the family and directors of the company legal proceedings had been instituted by some members of the family which involved the dealership of Telco. It was, inter alia, stated in the said letter as follows :

'We have patiently borne with you for quite some time in the hope that things would be sorted out in due course. In fact, as you know, at the end of August, 1979, we had terminated your dealership at your instance and as a result of a specific statement made by you in your letter dated 29th August, 1979, that you had not been able to reconcile your differences with Mr. Suresh Sanghi. However, thereafter, by your letter of the 25th September, 1979, you assured us that the differences had been resolved and requested us to withdraw the termination notice. Relying upon the correctness of your assurance and representations, we withdrew the notice. However, we find that the serious rift between you and the other directors of your company still continues and the litigation directly involving the Telco dealership including allegations regarding one of the parties for cancellation or suspension of the Telco franchise is still pending in the Delhi High Court. It is differences between the members of your family, no amicable solution would be forthcoming at least in the foreseeable future.'

20. By the said letter Telco informed the respondent-company that 90 days' notice of termination was being given to the said company and that the dealership shall stand terminated on the expiry of 90 days from the date the company received the said letter.

21. As already noticed, it is an admitted case of the parties that the only business of the company is the dealership of Telco. That business of the company is now under notice of termination, as is evident from the aforesaid letter dated 9th April, 1981. The only business of the company has been jeopardised and closure is threatened because of the disputes amongst the shareholders and the management. Earlier when the disputes were not settled there was termination of dealership in 1979. After the settlement of the disputes by the drawing up of the agreement dated 21st September, 1979, the dealership was restored. This restoration was done by Telco's letter dated 5th October, 1979. This letter reads as follows :

'We have received your letter No. 7357 dated the 25th September, 1979, informing us that the differences amongst the directors of Supreme Motors have sine been resolved. We have also seen the photocopy of the agreement dated 21st September, 1979, which, inter alia, provides for the transfer of 500 shares of Supreme Motors from Messrs. Suresh Kumar Sanghi, Satish Chandra Sanghi and Sharad Kumar Sanghi of the first part to Messrs. Narendra Kumar Sanghi, Amrit Kumar Sanghi, Ratan Kumar Sanghi and Mahendra Kumar Sanghi of the second part.

From the representation made by you, we presume that the parties of the second part will become the full owners of Supreme Motors Ltd. in accordance with the said agreement and based on this representation, we hereby inform you that our letter No. ADT/PS-13348 dated the 31st August, 1979, giving the notice under clause 23(a)(i) of the Dealership Agreement terminating your dealership with effect from the 1st December, 1979, stands withdrawn.'

22. Telco having now come to know the litigation between the parties, which would include the filing of the present petition, have issued the notice of termination. As already observed the first step towards the cancellation of the dealership was taken when the letter dated 29th August, 1979, was written by respondent No. 2 to Telco. That letter was written because it was alleged that the managing director had not been able to reconcile the differences with the petitioner. Whether there was any justification in writing that letters or not, need not be gone into but one thing is clear that the disputes and litigation between the two groups had led to the proposed cancellation of the dealership. It is the duty of the board of directors to see that the affairs of the company are not carried out in a manner prejudicial to the interests of the company. It is evident that litigation amongst the shareholders and amongst the management would amount to carrying on the affairs of the company in a manner prejudicial to the interests of it, if the said litigation results in harm being done to the company. The affairs of the respondent-company are in the hands of the shareholders and the board of directors. The shareholding between the two groups is equal and both the groups have equal representation on the Board. The company does not have any chairman. If in a company where the management between the two groups is equally shared and the affairs of the company are carried out in a manner which is prejudicial to its interests then both the groups have to be blamed for it. It is evident that unless and until a permanent solution is reached whereby the disputes between the shareholders are brought to an end either by compromise or otherwise, the dealership of Telco would be completely lost and the business of the company brought to an end. The infighting amongst the directors of the company has resulted in serious prejudice being caused to the company. To my mind, on this ground alone, the provisions of s. 398 of the Companies Act are attracted. With a view to bring an end to the disputes amongst the shareholders and the management, which disputes are to the prejudice of the company, it is necessary that appropriate order be passed by this court.

23. The petitioner has contended that Amrit Group should be directed to sell the shares to his group. Numerous attempts were made by me during the course of these proceedings to try and have the disputes between the parties amicably settled. It is most unfortunate that no settlement could arrived at. I have to see as to whether it is just, fair and equitable to direct the sale of shares to the Suresh Group or to direct sale of shares to the Amrit Group. I cannot think of any third alternative, which can possibly resolve the disputes between the parties or result in saving the franchise of Telco. It is evident that the two groups of shareholders lack complete confidence and trust in each other. The two groups cannot run the company together. In an effort to destroy each other they will not only destroy themselves but also the company. The only course which is open to me under these circumstances is to direct the sale of shares by one group to the other.

24. The question which arises is as to which group should be given the first option to buy the shares of the other. It will be seen that the company was originally a private limited company. The appointment, initially, of respondent No. 2 as the managing director of the company was for an indefinite period. He was appointed as a managing director since the inception of the company. Even after the company was deemed to be a public limited company by virtue of the applicability of the provisions of s. 43A of the Companies Act, respondent No. 2 continued to be appointed and reappointed as the managing director. Even in the agreement dated 21st September, 1979, all the parties had agreed that the shares in the respondent-company belonging to the petitioner's group would be transferred in favor of the Amrit Group. I further find that Telco does not appear to like having business dealings with the petitioner. This I deduce from Telco's letter dated 15th September, 1980, whereby the request for the transfer of dealership from the respondent-company to the petitioner was specifically declined. I cannot also lose sigh to the fact that admittedly the company is in the nature of a partnership. The two main concerns in which the members have interest, and in equal shares, are the respondent-company and the firm known as M/s. Sanghi Motors. It is an admitted fact that the petitioner has been the managing director of Sanghi Motors whereas respondent No. 2 has always been the managing director of the respondent-company and the petitioner became a director of respondent-company in the year 1979. In my opinion, thereforee, in view of the aforesaid circumstances, the first option of purchasing the shares should be given to the Amrit Group. My decision to give them the first option would remain unchanged even if it be assumed that it is that group which has acted in a manner prejudicial to the interests of the company. It is not unknown that the court does order the purchase of the shares of the petitioners by the majority shareholders even though the majority shareholders have been guilty of acts of oppression (See K. R. S. Narayana Iyangar v. T. A. Mani, : AIR1960Mad338 ). The conducting of the affairs prejudicial to the interests of the company by the person who are in control of the management gives the court jurisdiction to pass appropriate orders to bring to an end the matters complained of. Neither s. 398 nor s. 402 provides that only such orders can be passed which will result in handing over the management of the company to the aggrieved persons. In granting relief under s. 398 and 402 not only is the interest of the company to be kept in view but other equitable considerations have to be taken into account. The managing director of the respondent-company has always been respondent No. 2. Presumably it is he who has been having dealings with Telco. It is evident that Telco has rejected the proposal of transfer of dealership from the respondent-company to the petitioner. Earlier when after the agreement dated 21st September, 1979, Telco, had been informed that Amrit Group has become the full owners of the respondent-company, they, namely, Telco took note of this fact and by their letter dated 5th October, 1979, withdrew the termination latter which had been issued by them. This shows that they had no complaint against Amrit Group and were willing to have business dealing with the respondent-company of which Amrit Group were to be sole owners. Whether they will revoke the notice dated 9th April, 1981, of termination of the dealership if they are told that Amrit Group is to be divested of its shareholding in the company is extremely doubtful. In view of the fact that the partnerships firm of Sanghi Motors is being managed by the petitioner it will be inequitable to deprive the Amrit Group of the control and management of the respondent-company. At this stage, it may be noted that during the talks of compromise it was suggested by respondent No. 2 that he and the members of his group were prepared to over the businesses which were to go to the petitioner's group as per the agreement dated 21st September, 1979. In other words, he was prepared to switch the lots. The petitioner did not agree. Even though it be assumed that respondent No. 2 and members of his group had performed certain acts which were not in accordance with the provisions of the Company Law or it is they who were responsible for the proposed cancellation of the dealership it is still not equitable, just or proper to oust them from the company by giving the first preference of the purchase of shares to the petitioner's group. Moreover, giving of the first option to purchase the shares to the Amrit Group would also be in keeping with the spirit of the agreement dated 21st September, 1979, which had been entered into by the parties.

25. The next question which arises is to what is the value at which the shares are to be transferred. During the course of arguments the respondents had offered to buy the shares of the petitioner's group at the rate of Rs. 6,000 per share. This offer was not accepted. From the evidence on record it is not possible for me to value the shares. The only alternative which is open is that some outside agency should value the shares. I enquired from the counsel, during the hearing of the petition, as to whether a chartered accountant should be acceptable. Mr. Ved Vyas suggested that either the court should value the shares, on valuation reports being submitted by either parties or the court might appoint a retired Judge to value the shares with the assistance of valuers or on the basis and help of valuation reports which might be submitted by both the parties. I think the latter course which has been suggested by Mr. Ved Vyas for the purpose of valuing the shares, namely, the valuation of the shares by a retired judge would be more fair.

26. For the aforesaid reason I dispose of the petition by giving the following directions :

(a) The shares of the respondent-company shall be valued by Shri S. N. Andley, retired Chief Justice of this court. For the purpose of valuation of the shares the parties shall be liberty to file before Shri Andley valuation reports prepared by each party.

In order to enable the petitioner to prepare the valuation report, the company shall give the petitioner full access to all the account books.

(b) The valuation reports shall be filed by the respective groups before Shri Andley within four. Weeks from today or within such further time as Shri Andley may allow.

(c) Shri Andley may endeavor to value the shares within eight weeks from the receipt of the copy of the judgment, after giving opportunity to both the parties to make their representations. No reasons need be recorded or the basis indicated by Shri Andley while working out the value of the shares. The valuation report shall be handed over to the petitioner and respondent No. 2. The first option to purchase the shares shall be with the Amrit Group. They will have the right to exercise this option by intimation to Shri S. N. Andley within two weeks of the receipt of the valuation report, with copy to the Registrar of this court and to the petitioner, of their willingness to purchase the shares of the other group. In the event of the Amrit Group declining or nor exercising such option then similar option can be exercised, within two weeks thereafter, by the Suresh Group to buy the shares of the Amrit Group.

(d) Within 15 days of the exercise of the aforesaid option to purchase the shares being intimated to Shri Andley the proposed seller shall deposit in court, along with duly executed blank transfer deeds, their shares in the company. Within 15 days of the said deposit the proposed purchasers shall deposit in court 50% of the total amount which is found to be payable as the purchase price of the shares.

(e) The balance 50% of the purchase price shall be deposited in court by the proposed purchasers within 8 weeks of the valuation report being given by Shri Andley.

(f) On the full consideration being deposited the same can be with-drawn by the seller and the shares along with the blank transfer deeds handed over to the proposed purchaser.

(g) Shri S. N. Andley shall be paid a total remuneration of Rs. 20,000 plus out of pocket expenses.

(h) Till the transfer of the shares takes place in the aforesaid manner, no immovable assets of the company shall be disposed of.

(i) In order that there may be no deadlock in the working of the company, I nominate Shri P. N. Khanna, a retired Judge of the court, to be a director of the company till the shares are transferred as aforesaid. He shall be paid a monthly remuneration of Rs. 3,000 plus actual out of pocket expenses.

(j) The parties are at liberty to approach this court from time to time for any further order or appropriate directions which may become necessary for the purpose of giving effect to this order.

27. The parties to bear their own costs.


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