K.K. Balu, Member - (1.) THE petitioners holding 19.5 per cent. of the paid up capital in M/s. ACI (Agro Chemicals Industries) Limited ("the company") have filed this petition under Section 397/398 of the Companies Act, 1956 ("the Act"), alleging various acts of oppression and mismanagement in the affairs of the company.
(2.) The main acts of oppression and mismanagement in the affairs of the company, agitated in the petition relate to the following : (a) exclusion of the petitioners' nominee from the day-to-day affairs and management of the company ; (b) mismanagement of respondents Nos. 2 to 5, directors of the company leading to fall in the turnover, reduction of profits and ultimate losses suffered by the company; and (c) diversion of the business from the company by the sixth respondent. Shri C. Harikrishnan, senior advocate, for the petitioners, while initiating arguments submitted that the company was originally a proprietary concern, carrying on business in pesticides by one Mr. P. M. Gangadharan. The proprietary concern was later converted into a partnership in the name and style of Agro Chemical Industries in January, 1981, wherein, the petitioners were inducted as partners. The sixth respondent entered into a marketing and consignment agency agreement with the said firm by an agreement dated January 2, 1989 (annexure A-4) for sale of the products manufactured by the firm. Thereafter, the petitioners and M/s. Dalhousie Chemcials Limited, a subsidiary of the sixth respondent entered into a memorandum of understanding dated October 11, 1985 (annexure A-5), thereby, the company was incorporated in February, 1986, in order to take over the business of the firm. Shri S. Parthasarathy became the chairman of the company. Later, the partnership firm had entered into an agreement on December 29, 1988 (annexure A-7) with the company, in terms of which the firm would cease to carry on the business of the manufacture and marketing of formulation of pesticides and the company would carry on the said business. The company took over the assets and liabilities including the licence, privileges and other franchise belonging to the firm. The agreement prohibited the petitioners from carrying on business of formulation of pesticides. As on the date of the petition, the shareholding pattern of the parties in the company is as follows : JUDGEMENT_452_TLCL0_20020.htm The petitioners hold 19.5 per cent. of the share capital and the remaining 80.5 per cent. of the shares is held by the corporate bodies, which are the subsidiaries of the sixth respondent. In terms of the agreement dated December 29, 1988, the company took the factory sheds on lease from the firm and the plant and machinery belonging to the firm on lease. The lease of the factory shed and plant and machinery with the firm was extended from time to time. The sixth respondent has been the consignment sales agent of the company with effect from January 1, 1989. Shri S. Parathasarathy, husband of the first petitioner and father of the second petitioner continued to be a whole-time director of the company. The persons having controlling interest in the company at the relevant point of time have been observing the principles of partnership at all times. However, respondents Nos. 2 to 5, executives and nominees of the sixth respondent and directors of the company started ignoring the interest of the company and acted as per the wishes of the promoters of the sixth respondent. On account of the mismanagement of respondents Nos. 2 to 5, the turnover of the company for the year 1999-2000 touched the lowest, namely, Rs. 670.49 lakhs and consequently the company incurred a loss of Rs. 47.36 lakhs for the first time. The fall in turnover, reduction of profit and the ultimate losses sustained by the company are contributed to the following factors : (i) Failure of the sixth respondent to procure the potential products from the company. (ii) Diversion of the orders by the sixth respondent from the company to its Hyderabad unit. (iii) Increase of price by the sixth respondent for the raw materials supplied to the company, and (iv) Non-procurement of products by the sixth respondent from the company and procurement of the same from its Hyderabad unit.
(3.) THE sixth respondent started procuring the products from a different unit ignoring the company which resulted in steep decline in the turnover of the company and ultimately the company was constrained to incur losses during the period 1999-2000. THE sixth respondent started supplying raw materials to the company at a higher rate than the rate prevailing in the market. THE company was having large turnover varying from Rs. 1,637 lakhs to Rs. 4,145 lakhs during the period between 1988-89 and 1998-99 resulting in profits ranging from Rs. 5.28 lakhs to Rs. 35.91 lakhs. It is only on account of the sixth respondent diverting the business from the company to different organisations and supplying raw materials at higher rates, there was a decline in the business resulting in low turnover and consequent losses suffered by the company. THE company incurred losses of Rs. 47.36 lakhs during the year 1999-2000 and during the current year the loss exceeded Rs. 200 lakhs. Though the sixth respondent had agreed to compensate the loss sustained on account of its diversion of business to the Hyderabad unit, the sixth respondent failed to fulfil the commitment. THE sixth respondent is the sole buyer of the products of the company, but failed to pay the company regularly. THE sixth respondent either delays payment to the creditors or excludes the creditors of the company who are associated with the petitioners. THE sixth respondent used to make direct payments to the creditors of the company without concurrence of the whole-time director and never settled the dues of the creditors introduced by the whole-time director. THE dues to Andhra Bank secured by the properties of the first petitioner and the whole-time director have not been settled. Respondents Nos. 2 to 6 owed a duty to the company and shareholders. THEy hold fiduciary duties to the company. But these respondents are guilty of breach of trust in relation to the company as they have diverted the orders through some other company and failed to compensate the loss sustained by the company. THE whole-time director is the nominee of the petitioners and their interest in the company is represented by the whole-time director and any act of the respondents to oust him illegally would constitute an act of oppression. Respondents Nos. 2 to 5 paralysed the company and the failure in business is attributable to the sixth respondent and its nominees being respondents Nos. 2 to 5 on the board of the company. THE whole-time director has been marginalized by respondents Nos. 2 to 5, by excluding him from the day-to-day affairs of the company and taking away the cheque signing power from the whole-time director. Moreover, the respondents have nominated a factory manager to take care of the day-to-day affairs, who will report directly to the board of directors. THE respondents used to hurriedly convene the board meeting in such a way that their whole-time director would not be available in station to attend the board meeting. THE respondents have violated the interim order dated February 23, 2001 of the Company Law Board and removed the entire machinery. THE intention of the respondents is to make the company a defunct company. Shri Harikrishnan pointed out that in terms of the Moll dated December 29, 1988, the partners of the firm had surrendered everything to the company, i.e., machinery (annexure A-9), shed under annexure A-10 and the machinery in the second shed under annexure A-12. THE petitioners are deprived of carrying on any business in the pesticide. At present, the company is closed. At this juncture, the sixth respondent had offered to sell the entire shares held by them to the petitioners at par value. This shows that the company intends to take undue advantage of the situation after causing huge loss to the company. In the present circumstances, the remedies sought by the petitioners have become meaningless except the remedy of awarding of damages of Rs. 380.39 lakhs towards compensation for the losses caused to the company on account of the misfeasance by the respondents. THE respondents hold 80.50 per cent. of the shares and they owe fiduciary duty to the company on account of the controlling interest in the affairs of the company and also the contractual obligation by virtue of annexure A-27. In the circumstances, the sixth respondent should provide business to the company and should not divert orders to a different unit. Though the Company Law Board can award remedies including directing the sale of shares of the petitioners or to wind up the company or to investigate into the affairs of the company, the petitioners seek the remedy of compensation to the company. Shri Harikrishnan in support of his legal contentions relied upon the following decisions : (a) Regal (Hastings), Ltd. v. Gulliver [1942] 1 All ER 378 (HL) to show the liability of the directors to the company on account of the fiduciary relationship of the directors ; (b) Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL); (c) Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66; [1959] 29 Comp Cas 1 (HL), to show that any act of the parent company, if it is oppressive to its subsidiary, the courts will interfere and grant remedy to the minority shareholders of the subsidiary company ; (d) Maharani Yogeshwari Kumari v. Lakeshore Palace Hotel (P.) Ltd. [1995] 3 Comp LJ 418 (Raj) "to state that the delinquent directors mismanaging the affairs of the company are liable to compensate the company and shall repay with interest amounts misspent and misutilised.;