ULTRAFILTER INDIA PRIVATE LIMITED AND SHRI KRISHNANAND KINI Vs. ULTRAFILTER GMBH

JUDGEMENT

(1.) THE second petitioner holding 51.82 per cent shares in M/s Ultrafilter (India) Private Limited ("the Company") has filed this petition alleging acts of oppression and mismanagement against the respondent holding 26 per cent shares in the Company. THE facts of this case are that this Company was incorporated by the first petitioner in December, 1985 for manufacture of filter equipment. THE Company and the respondent entered into a 'Technical Collaboration Agreement' on 17th February, 1986 by which the respondent was to provide technical know how and assistance for manufacture of industrial filters by the Company. THEreafter a 'Shareholders Partnership Agreement' was entered into between the respondent and the second petitioner by which the respondent was to subscribe to 26 per cent shares in the Company for a sum of Rs. 7.8 lakhs. This agreement also provide that the Company would enter into a 'Name Protection Agreement' a 'Distributor Agreement', a 'Trade Mark Registered User Agreement' It also provided for amendment to the Articles of the Company. Pursuant to this agreement, Articles were amended providing for requirement of special resolution on certain matters, appointment of one-third of the directors by the respondent, requirement of affirmative votes by the nominees of the respondent in the board meeting on certain matters, providing for quorum only in the presence of at least one nominee of the respondent in the Board meeting. THE respondent acquired 26 per cent of the shares in the Company. While 'Distributors Agreement' was entered into, the other two agreements, namely, 'Name Protection Agreement' and 'Trade Mark Registered User Agreement' were not entered into. THE 'Technical Collaboration Agreement' provided for expiry of the agreement by 16.02.1991 with a provision for premature termination by either of the parties. THE Company started manufacturing ultrafilter int he name and style of "Ultrafilter" which is a trade mark of the respondent. Since the concept of using ultrafilter developed gradually into the use of filters along with dryers, the Company started manufacturing Dessicant type dryers to be sold along with the filters manufactured by it. As far as the other type - Fridge Dryers are concerned, they were being imported. For the purposes of selecting a suitable fridge dryer, the Company consulted the respondent and on its recommendation, the Company started importing Fruilair dryers of Italy for being sold along with the filters manufactured by the Company. A competitive dryer manufactured by Sabore was being marketed by one M/s Pace Equipment, Bombay. Thus there was a competition between the Company using its own filter along with Sabroe dryers. In the meanwhile, the respondent acquired M/s Sabroe. THE respondent also evinced interest in acquiring controlling interest in the Company and certain negotiations had been taking place between the parties, but without any fruitful result. By a letter dated 20th October, 1997 (Annexure-17) the respondent advised the Company that the 'Technical Collaboration Agreement' had come to an end on 16th February, 1991 and as such Company should not use the word "Ultrafilter" in any of the products manufactured by the Company under the 'Technical Collaboration Agreement'. Through this letter, the respondent also issued a notice of termination of 'Trade Mark Registered User Agreement' as on 1st December, 1998. THEreafter, certain negotiations had been going on between the parties without any fruitful results and hence this petition has been filed by the petitioner seeking to restrain the respondent from interfering with the affairs of the Company, restraining the respondent from any act which would be in competition directly or indirectly with the business of the Company, restraining the respondents for claiming any right or do any business in India under the name and style of "Ultrafilter" either as a trade mark as a part of corporate name in India and also for deletion of the Articles which were inserted by virtue of the Shareholders Agreement.

(2.) Shri Raghavan, Advocate appearing for the petitioners submitted that the relationship between the second petitioner and the respondent is in the nature of a partnership and it is not a relationship between a shareholder and a shareholder. Since the Company is in the nature of a partnership, each partner owes a higher degree of duty not only to the other partner but also to the Company. Only by piercing the corporate veil, the real relationship between the parties would emerge and it will show that the association between the petitioner and the respondent is nothing but a pure partnership. this being the case, neither in law nor in equity, a partner can commence or carry on competing business with the Company. Even the title of the Agreement between the parties at Annexure A-4 is styled as 'Shareholders Partnership Agreement'. A reference to Annexure R-13 would indicate that even while considering amendment to the Articles, the stand taken by the respondent was that its interest should be protected as a partner in the joint venture company. All these facts would squarely indicate that the principles of partnership be applied in deciding the disputes between the parties in the present petition. He further argued that having successfully implemented the project and finding that the Company was doing well, the respondent decided to gain control of the Company by seeking to increase its shares to 51 per cent as is evident from Annexure R-1, wherein a threat had been given to the second petitioner that in case the respondent is not allowed to increase its share of 51 per cent, it would be constrained to form a new company to manufacture the products presently manufactured by the Company. Since the second petitioner was not inclined to agree for increasing the shareholding percentage of the respondent, it has started putting spokes in the functioning of the Company. One way of doing was to force the Company to sell Sabroe dryers along with filters manufactured by the Company. This is notwithstanding the fact that M/s Pace Equipment who are competitors to the Company is having collaboration with M/s Sabroe. Unfortunately, since the respondent has acquired M/s Sabroe, it has started supporting Pace not only in spirit, but also in deed as conveyed in its letter at Annexure A-13. The respondent being a partner should be more interested in the better performance of the Company than supporting M/s Pace Equipment with which the respondent does not have any capital commitment. This will be in complete violation of the fiduciary duties that the respondent owes to the Company and the shareholders. As a matter of fact, the respondent even cautioned the second petitioner not to compete with Pace Equipment in taking part in tenders as is evident from Annexure A-15. The second petitioner vide his letter dated 23rd October, 1997 (Annexure A-18) brought to the notice of the respondent that the Company started marketing Friulair dryers only on the recommendation of the respondent and that since Sabroe dryer was very expensive it would not be in a position to market the dryer. However, with a view to put an end to the statement, the second petitioner wrote a letter to the respondent on 20th November, 1997 (Annexure A-21) suggesting that while the Company would market filters along with Sabroe dryers, the Pace Equipment should also market only the filter manufactured by the Company along with Sabroe dryers. This suggestion was not acceptable to the respondent. Instead the respondent informed the second petitioner by its letter dated 19th May, 1998 (Annexure A-22) that it would establish, in India, a strong "Ultrafilter made in Germany" by 1st January, 1999, whatever effort and cost it may take. Thus, it is very clear that the respondent is more interested in furthering its own interest rather than the interest of the Company. Under these circumstances, the second petitioner wrote a letter to the respondent bringing out the various acts of dereliction of fiduciary duties by the respondents and suggested that to put an end to the disputes the petitioner would be willing to purchase the shares held by the respondent on a value to be determined in terms of Article 10(g) of the Articles of Association of the Company. However, the respondent was not agreeable to this suggestion.

(3.) SHRI S.S. Naganand, Advocate appearing for the respondent submitted: Even though the complaints of the petitioner relate to trade mark, attempt of the respondent to gain control of the Company, allegation of carrying on competing business in India and termination of the 'Technical Collaboration Agreement' etc. the real issue is regarding use of the trade name and mark "Ultrafilter" by the Company. In regard to this the respondent has already initiated a civil suit in OS 54 of 1999 in Bangalore. Therefore, no effective decision in this controversial issue could be given by the CLB.