BEFORE
THE COMPANY LAW BOARD
PRINCIPAL
BENCH
NEW
DELHI
Dated 5th December 2001
2. Shri S. Balasubramanian, Vice Chairman
In the matter of
Companies Act, 1956-Sections 397/398
AND
In the matter of
Shri Jagit Singh Chawla & ors
Versus
PETITIONERS:
1.
Shri Jagjit Singh Chawla
2.
Shri Pritpal Singh Chawla
3.
Mrs. Narinder Kaur
4.
Mrs. Romilla Chawla
RESPONDENTS:
1.
Tirath Ram Ahuja Limited
2.
Shri N.K. Ahuja
3.
Shri Arun Ahuja
4.
Shri Ramesh Sawhney
Present on behalf of parties:
1. Dr. A.M.
Singhvi, Sr. Advocate .. for petitioners
2. Shri Arun
Kathpalia, Advocate .. for petitioners
3. Ms. Shellka
Arora, Advocate ..
for petitioners
4. Shri R. S.
Ahuja, CA ..
for petitioners
5. Shri U.K.
Chaudhary, Sr. Advocate ..
for respondents
6. Shri U.P.
Mathur, Advocate ..
for respondents
7. Shri
D.D.Pande, Advocate .. for respondents
8. Ms. Ranjana
Roy Gawai, Advocate .. for
respondents
(Date of final
hearing: 7.8.2000)
S. BALASUBRAMANIAN:
1. The
substantive allegation in this petition filed under Sections 397/398 of the
Companies Act, 1956 ( the Act ) in relation to the affairs of M/S Tirath Ram
Ahuja Limited is that the petitioners Group collectively holding 12% shares in
the company have been completely excluded from the management of the company in
spite of its having been a part of the
management for over 45 years.
3. Dr.
Singhvi, Sr. Advocate appearing for the petitioners submitted: Right from
incorporation of the company, the heads of the 3 families who were related,
were managing the affairs of the company more or less in the nature of a
partnership among themselves even though there was no formal written agreement
to that effect. Originally, Chawla’s
family was represented only by late Shri J.S.Chawla and later on in 1966, Shri
P.S. Chawla also joined the Board as the
Joint Managing Director. Thus, from 1966 to 1996, Chawala family was
being represented on the Board by two directors. Shri J.S. Chawla was a director of the company for 46 years while
Shri P.S. Chawla was a director for 37 years.
In other words, Chawla family was represented on the Board right from the beginning till
1997. A perusal of the list of
directors would indicate that as and when one of the directors died, a family
member of that director was inducted into the Board to ensure that all the 3
families were represented on the Board of the company. When Shri S . K. Bagai expired, his son Shri
K.K. Bagai who was an employee in the company was made a director in
1976.Another son of Shri S.K. Bagai joined the company as an employee and
worked with the company till his pre-mature death in 1965. Dr. K.S. Chawla son
of Shri J.S. Chwala joined the company as an Consultant in 1978 and worked as
such for about 5 years in the company.
When Shri K.K. Bagai expired in 1983, his son Shri Lalit Bagai was
appointed as a Manager in 1984. Since Lalit Bagai was not made a director in
spite of several requests, he resigned from the company in 1995. In 1991, Shri
S.S. Dugal son in law of Shri R.S. Tirath Ram joined the company as a whole
time director and Shri Arun Ahuja son of Shri N.K. Ahuja also joined the
company in 1993. Thus, it is evident
that all the 3 families had participated in the management of the company
either as a director or in employment. However, when both Shri J.S. Chawla and
P.S. Chawla from the petitioners’ family expired, it was expected that one of
the family members would be taken on the Board of the company. But the respondents have refused to do so
and instead Shri Arun Ahuja was made a director in June, 1998. Thus, the petitioners have been denied of
their legitimate expectation of participation in the management of the company.
Presently, the entire management of the company is in the hands of only Ahuja’s
family even though the company was incorporated on the principles of quasi
partnership with participation in the management by all the 3 groups with
remuneration. Chawlas group, even
though holds only 12% shares in the company, had otherwise invested substantial
amount of funds in the business of the company as is evident from the statement
presented before the Bench. Such investment was made only because the company
was in the nature of a partnership.
Even though, it is contended by the respondents that late Shri J.S
Chawla was not one of the promoters
since he had not subscribed to the Memorandum, he had always been
considered to be one of the founder of the company as is evident from the
Explanatory Statement in connection with the Special Resolution proposed in the
30th AGM of the company convened on 25th June, 1988
wherein it has been specifically stated that he was one of the founders of the
company and was responsible for completion of prestigious projects of the
company. When the heads of 3 families
had jointly managed the company for a long time and when only the members of
one family control the company, in exclusion of the members of the other two
families, it is a great act of oppression. In case of a partnership in which
all the partners have been in active management, exclusion of one of the partners from the management would merit
dissolution of the partnership on just and equitable grounds. Since this company is a de-facto partnership
wherein all the 3 families had participated in the management, exclusion of one
of the family would justify winding up of the company on just and equitable
grounds, which in the present case would not be in the interest of the petitioners
and as such the reliefs sought in the petition viz., issue of directions
to the company/respondents to induct
either Shri K.S. Chawla or Shri C.S. Chawla as a whole time director of the
company should be granted.
4. He
further argued: After the company was
taken over by the respondents, the performance of the company has deteriorated in view of siphoning of funds of
the company as is evident from the fact that the profitability has gone down.
Further, not withstanding the fact the
petitioners constitute a single block of shareholders, the company is
not allowing inspection of the accounts of the company. The petitioners are not
given notices for the Board or general body meetings. The petitioners have been
completely sidelined and are kept in dark about the affairs of the company.
Therefore, an investigation into the affairs of the company is necessary.
5. Summing
up his arguments, Dr. Singhvi submitted that there should be atleast one
representative from the petitioners group on the Board or in the alternative,
the petitioners are willing to go out of the company on receipt of fair
consideration fro their shares.
6. He
relied on the following case laws:
·
Synchron
Machine Tools Private Limited Vs. U.M. Suresh Rao ( 1994 3 CLJ
340 Kar) wherein the
Court has observed that in a given case, principles of dissolution of
partnership may apply squarely in case the apparent structure of the company is
not the real structure and on piercing the veil, it is found that in reality it
is a partnership and if there was an understanding that persons investing in
the shares of the company would be appropriately remunerated by way of salary
and perquisites with the right to participate in the management, in lieu of or
in addition to the dividends, the interest created by such an understanding has
to be held as a component of a proprietary right of sets of shareholders while
applying equitable consideration.----In the case of small private limited
company having very limited number of shareholders, an understanding as to
management of the company and remuneration payable in lieu of or in addition to
the participation in the profits of the company, could be taken note of by the
court in exercise of its jurisdiction under Section 397/398/402 of the Act and
grant an appropriate relief.
·
Hind Overseas Private Limited Vs.
Raghunath Prasad Jhunjhunwala (AIR
1976 SC 565 ): In a given case,
the principles of dissolution of partnership may apply squarely if the apparent
structure of the company is not the real structure and on piercing the viel it
is found that in reality it is a partnership.
·
Vijay Krishan Jaika Vs. Jaika Motor
Company Limited ( 1997 1 CLJ 268 CLB ): In this case, the CLB has held that to
apply partnership principles and special relationship between the parties, it
is not necessary that there should be pre-existing partnership and there is no
need of equality in the shareholding to invoke quasi partnership
principles.
7. Shri
Choudhary, Sr. Advocate appearing for the respondents submitted: The principles of partnerships cannot be
applied in this case. Late Chawla was
not a signatory to the Memorandum nor was named as a first director in the
Articles. Further, the company was not
formed to take over any partnership business carried on by all the three. As a matter of fact the company took over
the proprietary business of late Shri Tirath Ram Ahuja as is evident from the
Income Tax Assessment at Annexure ‘C’ to the Reply and also the Resolution of
the BOD on 28.2.1950. As a
practice only those employees who had
proved their worth were being appointed as directors. Late Shri Chawla was known to late Ahuja as having
expertise, and therefore, he was made
a director. The same is the
position with Shri S.K. Chawla also who was earlier an employee of the
company. Therefore, none of the
shareholders had or has an inherent right to be in the management. Further, the Articles do not provide for
proportional representation on the Board except that late Shri Ahuja was named
as the permanent director in Article 19B in as much as his business had been
taken over by the company. Further, a
perusal of the list of directors would show that there was no regular pattern
in the composition of the Board and the composition was decided on functional
needs. Even though, Ahuja’s family held
majority shares, it had only two representatives on the Board which also later
on came down to one while Chawla family having only 12% shares in the company
also had two representatives on the Board.
From 1983 onwards, Bagai family was not represented on the Board at all
and only in 1993, Bagai family members
were appointed as an employees. Even
now, Bagai family has not complained about non representation on the
Board. Further when Shri J.S. Chawla
expired, the petitioners never sought for substitution. Only now, after Shri
S.P.Chawla expired they have raised this issue. When Chawlas were on the Board,
they never bothered to give representation to Bagais since they knew that no
one could claim directorship as a matter of right.
8. He
further submitted: The claim of the petitioners that they should be taken on
the Board has no basis. There is no right of inheritance recognized in law for
appointment to the Board. Just because, a person is appointed as a director in
recognition of his expertise, it does not necessarily follow that his legal
heir would also prove to be a good director.
In the absence of any written shareholders agreement providing for
perpetual participation in the management by the shareholders, nor a provision
to that effect in the Articles, no one can, relying on customary practice, even
assuming it was so, claim representation on the Board as a matter of
right. Further in the present case, the
petitioners are carrying on a competing business and are participating in
tenders participated by the company.
Therefore, to induct a representative from the petitioners’ side on the
Board of the company would be detrimental to the interests of the company.
9. As far
as the financial management alleged by the petitioners is concerned, no
particulars have been furnished. Mere
suspicion on the basis of reduction in the profits or incurring losses cannot
lead to a presumption that there is financial mismanagement. In regard to notices for meetings, since the
petitioners are not on the Board, no notices for the Board meetings are sent to
them but for the general meetings, as per the usual practice, the notices are
sent by the ordinary post as in the case of dividend warrants. When the petitioners have encashed dividend
warrants sent by ordinary post, they cannot complain of non receipt of notices
for meetings sent by ordinary post. In
relation to the complaint that they are
not allowed inspection of the books of
accounts, it is to be noted that
shareholders are not entitled for inspection of the books of
accounts, and therefore, the company
has not given inspection of the same. The petitioners have to establish that
the acts complained of are such that the company is liable to be wound up on
just and equitable grounds which in the present case, the petitioners have not
so established. Further, the company
can also not be wound up in as much as it has been functioning very profitably.
Even though, the learned counsel for the petitioners submitted that in case the
respondents are not willing to appoint a representative from the petitioners
group on the Board, the petitioners were willing to go out of the company on
selling their shares on a fair value, the respondents are not willing to accept
this suggestion and the petitioners are at liberty to sell their shares
notwithstanding the provisions of the
Articles.
10. In regard to the
contention of the petitioners that they had made substantial investment in the
company besides the share capital, he pointed out that all the deposits made by
the petitioners had been repaid as early as in 1981. In 1991, the Ahujas brought in Rs.30 lacs into the company when
the company was in need of funds and the Chawlas did not bring any funds at
that time. In regard to the contention
of the petitioners that the Explanatory Statement mentions late Shri J.S.
Chawla as a founder, the learned counsel pointed out that the said Explanatory
Statement had been signed by Shri Chawla himself and as such cannot be relied
upon. Long tenure as a director does not
create a right to claim that the company is in the nature of a
partnership.
11. He relied on the
following cases:
·
Hind Overseas Private Ltd. Vs. Raghunath
Prasad Jhunjhunwala (AIR 1976 SC
565 ): When more than one family or several
friends or relations together form a company and there is no right as such
agreed upon for active participation of members who are sought to be excluded
from management, the principles of dissolution of partnership cannot be
liberally invoked. Besides, it is only when shareholding is more or less equal
and there is complete deadlock in the company on account of lack of probity in
the management of the company and there is no possibility of smooth and
efficient continuance of the company as a commercial concern, there may arise a
case for winding up on just and equitable ground.
·
Jaladhar Chakaraborti Vs. Power Tools & Appliances Co. Ltd. (
79 CC
506 Cal. ): Under
Sections 397/98 of the Act, the court should be satisfied that the affairs of
the company are being carried on in a manner oppressive to the members and that
complaining members should establish that the company is liable to be wound up
on just and equitable grounds.
·
Ashoka Betelnut Company Pvt.Ltd. Vs. M.K.
Chanderkant ( 1997 40 SCL
33 Mad. ):
In the absence of proof that the petitioners had a right for active
participation and shareholding was more or less equal, lifting of corporate
veil by applying principles of partnership is not justified.
·
Sanchilal Mani Bhai Patel Vs. Laxmi Film
Laboratory & Studio Pvt.Ltd. ( 56 CC
110 Guj ): Principles of dissolution of partnership
would be applicable if the company is a domestic concern. It should also be shown that irresolvable
deadlock in the administration of the company has resulted because of groupism
among the shareholders and directors of the company and it has rendered it
impossible for the company to transact business and the only alternative is to
wind up the company.
·
Hanuman Prasad Bagri Vs. Bagrass Cearls
Private Ltd. ( 2001 41 CLA 258
SC ): The petitioners have to make out a case for winding up of
the company on just and equitable grounds and if facts fall short of the case
set out for winding up on just and equitable ground, no relief can be granted
to the petitioner.
12. Shri Arun
Khatpalia, Advocate for the petitioners in Rejoinder submitted: Since late Shri J.S. Chawla was appointed as
a director right from the day of incorporation, the claim of the learned
counsel for the respondents that the company was rewarding good employees with
a post of director does not stand to scrutiny.
Since all the three original promoters of the company were related to
each other, the company is nothing but a family company wherein the principles
of partnership could be applied considering the fact that there had been
financial as well as managerial participation by all the three families. Further, most of the senior employees of the
company have been drawn only from the three families as is evident from the
details at Page 57 of the Petition. On
the death of Late Shri Tirath Ram
Ahuja, Shri J.S. Chawla was appointed as the Chairman since he was the senior
most Member among the families. The
petitioners are not claiming representation on the Board on the ground of
proportional representation but on the basis of trust, good faith and fair dealing. The Chawlas including their family members funded the company
with substantial loans and deposits which they would not have done but for the
business being conducted in the nature of a partnership. Shri Lalit Bagai left his employment only
when he found that he was not being taken as a director. The entire claim of the petitioner for a
representation on the Board arises out of an implied agreement between the
original promoters for participation of all the families in the management of
the company as is evident from the long association of over 45 years by Chawla
family in the management of the company.
Further, it is also evident that it is only the Chawlas contribution
that resulted in the company
accumulating over Rs.3.75 crores
reserve as on 31st March, 1998.
The present value of the assets is over Rs.30 crores which was also due
to the efforts of Chawlas. The
contention of the respondents that the business of a proprietorship of Late
Thirathram Ahuja was taken over by the company is not correct and what was
taken over by the company was a part of uncompleted project by late Ahuja. This is a fit case wherein the principles
applied in Ebarahimi Vs. Westborne Galleries Limited ( 1972
2 AER 492 ) could be applied and the company be treated as a
quasi partnership for considering the grant of the prayers of the petitioners.
13.
We have considered the pleadings and the arguments of the
counsel. With the view to put an end to the disputes, in view of the suggestion
of the counsel for the petitioners, that his clients would be willing to go out of the company on receipt of fair
value for the shares in case the respondents were not willing to induct a
representative petitioners on the Board, we advised the counsel for the
respondents to consider this suggestion. However, he reported that his clients
were not willing to accept this suggestion and that the matter be decided on
merits.
14.
The main complaint of the petitioners is that they have been
denied a representation on the Board. Normally, as a principle, directorial
complaints cannot be agitated in a 397/98 petition as the complaints in such a petition should be relating to the rights qua a member. However, this Board has been taking a view that
this principle cannot be strictly
applied in family companies, companies with a few identifiable groups of
shareholders or companies in the nature
of partnership, wherein there has been active management participation by all
the groups of shareholders. In the present case, the petitioners have invoked
the principles of partnership and have sought for a place on the Board of the
company on the basis of active participation in the management by all the
groups of shareholders from the incorporation of the company, which stand is challenged by the respondents.
15.
There is no readymade yardstick to determine as to when an
incorporated company could be considered to be a quasi partnership for the
purposes of a petition under Section 397/98. It would depend on the facts of a
particular case. The cases cited by the counsel for the parties indicate some of the circumstances- where equality in
the shareholding and there is deadlock in the management, conversion of a pre existing partnership into a company, where there is an agreement
for equal participation in the company etc are some of the circumstance. The
contention of the respondents is that there is no question of applying the
principles of partnership on various grounds as indicated as part of the
arguments of their counsel. - there was no pre-existing partnership, there is
no equality in the shareholdings, there
is no deadlock in the management, there is no written agreement to the effect
that the company would be jointly managed, there is no provisions in the
Articles stipulating joint management, Late J.S Chawla was not a signatory to
the memorandum not was named as a first director etc. Normally, when two or more persons form a company, the presumption is that they have decided to work within the
framework of the Articles and subject themselves to the discipline applicable
to an incorporated company. Viewing this manner, the respondents would be right
in contending that in the absence of the provisions in the Article for joint
management, a share holder cannot demand a position on the Board. In this connection it is worthwhile
referring to the Jaidka Motor
case wherein, after discussing various decided cases, practically all the objections as in this case were examined by
this Board and it concluded that to treat a company as a partnership it was
not necessary to have equal shareholdings, no need for deadlock, no need
for pre-existing partnership etc. It also observed that an analysis of various decisions showed that courts have been looking for some basic
understanding written or unwritten between parties. Therefore, if the facts reveal
some basic understanding between parties that the company would be
managed on partnership principles, then the same could be applied in a 397/98
petition
16.
In the present case, the petitioners have invoked this
principle on the ground that late J.S.Chawla was one out of the three promoters of the company and the company was
being managed on the principles of partnership with active participation of all the three promoters in
the management of the affairs of the company right from incorporation. This joint management and subsequent
induction of members of the three families on to the management, would,
according to them, prove that the company is in the nature of partnership. Even
though in Kilpest Pvt Ltd V Sekher Mehra (87 CC 615 SC) the
Supreme Court has held that only in rare cases the principles of partnership
should be applied, the Court has not completely barred application of the
principles of partnership to a company. Therefore, once the facts and
circumstances of a case indicate that on piercing the corporate veil, the real structure is found to be not that
of a company, equitable consideration applicable to a partnership could be applied
to that company. In Shri Dipak Mehta
V Shree Anupar Chemicals Pvt Ltd ( 1999 33 CLA 33 CLB) the foundation
of that petition was that the company was to be run on the principles of
partnership and it was claimed that
there was an agreement for equal shareholding and directorship. Even though
the Bench found that there was no
agreement as claimed, considering that, in reality there was equal shareholding and that there was joint management,
it held that the principles of partnership could be applied. In cases of
legitimate expectations, the denial of the same could be considered to be
an act of oppression. For the authority on the principles of legitimate
expectations reference could be made to Boyle
& Birds’ Company Law III Edition
wherein it is stated that In a quasi-partnership type company, the
Court may take account of legitimate expectations of members.” In Re Elgindata Ltd.: [1991] BCLC 959 it
has been held that “In general members of a company have no legitimate
expectations going beyond the legal rights conferred on them by the
constitution of the Company, i.e., to say its Memorandum and Articles of
Association. Nonetheless legitimate
expectations super imposed on a member’s legal rights may arise from agreements
or understandings between the members. In Atmaram Modi Vs. ECL Agrotech (1999 98 CC 463) this Board has held that in the course of business of a partnership, a
partner is entitled to have certain legitimate expectations. Now in the present
case the admitted position is that there is no agreement relating to joint management
and the Articles also do not provide for the same. Therefore, as held by this
Board in Shree Anupar Chemicals Pvt Ltd case, we have to examine
whether the facts reflect the existence of any understanding of joint
management justifying the claim of legitimate expectation of being on the Board
by the petitioners.
17.
At the time of incorporation of the company, Shri J.S.
Chawla was not a subscriber to the Memorandum which according to the
respondents would indicate that he was not a promoter of the company. This stand, we are of the view, cannot be sustained for the simple reason
that on the day of incorporation itself, he was appointed as a director and his
group acquired 800 shares in the company within 4 days thereafter. Further, in the Explanatory Statement for
Shri J.S. Chawla’s appointment as whole time director and Chairman w.e.f. 15th
September, 1993, it was specifically
mentioned that he was one of the founders of the company and was responsible
for completion of prestigious projects
of the company. Even though it
was contended that this Statement has been prepared by Shri J.S. Chawla
himself, yet, the very fact his appointment
was approved by the general body on the basis of this statement, the
respondents are estopped from challenging the statement. Further, even though, Ahuja’s group held
more than 50% shares in the company, yet, their approval of Shri J.S.Chawla as
whole time director and Chairman clearly indicates that his being a founder of
the company had weighed with them in approving his appointment. The respondents further contend that Shri Chawla cannot be
considered to be a promoter of the company since it was the business of the
proprietorship of late Shri Tirath Ram that was taken over by the company. We have seen the agreement between Shri
Tirath Ram and the company dated 1.3.1950, Income Tax assessment order for
1951-52 and the Board resolution dated 28.2.1950. Even though it is contended
by the petitioners that all these would only show that a particular project
being implemented by Shri Tirath Ram
had been transferred to this company and since there is nothing in the Memorandum of the company to indicate
that the proprietary business of Shri
Tirath Ram was taken over by the company, we find that the agreement indicates
that Shri Tirath Ram had abandoned his sole business in favour of the company.
For this we find that he had been adequately compensated in the form of
majority shareholding and since the other two also had taken shares and were
actively involved in the business right from incorporation, all the three had
to be termed as promoters of the company. Therefore, it is beyond doubt that
Shri J.S.Chawla was one of the founders of the company and it appears to us that the 3 of the original
promoters joined together to incorporate the company with the view to jointly manage the same as is
evident from the fact that all the 3 were appointed as directors right from the
date of incorporation. Now, the issue
is whether there had been an understanding of joint management by all the 3
families for all times to come.
18.
The admitted
position is that there is no written agreement nor there is any provision in
the Articles to this effect that the company would be jointly managed by the 3
families. In Smt. Nupur Mitra
And Another V. Basubani (P.) Ltd. And Others.( 2001 41 CLA 306 –CLB) a
family consisted of 6 brothers. Four of the brothers were the signatories to
the memorandum and they were also the first directors of the company
incorporated in 1948. The total share capital consisted of 500 shares of Rs.
100 each. While one brother had
subscribed to 100 shares, the other
three had subscribed to 25 shares each at the time of incorporation. In 1950, the balance 325 shares were issued
by which shares were issued to all the 6 brothers. The issue and allotment of
shares were challenged on the ground that in terms of Section 105 C of the 1913 Companies Act, before
issue and allotment of shares to outsiders, the then 4 shareholders who were
the signatories to the memorandum alone should
have been offered shares and
since there was no record to show that
it was done and in the absence of any
written agreement between the brothers for joint holding and management, the
allotment should be declared as null and void. This challenge was made in the
year 1998 after the death of all the 6 brothers. It was contended by the other side that there was an
understanding among the six brothers
that all would hold shares in the company. After considering the various issues including one relating to limitation, on
merits, this Board concluded that a
status which had been in vogue for a long time without any protest, cannot give
rise to a cause of action and the course of conduct of the parties would raise
a presumption of an unwritten agreement for joint holding and management among
the 6 brothers. In the same way, in the
present case, we have to only see, in the absence of any written agreement and
provisions in the Articles and in the absence of any of the original promoters,
whether circumstances exist to draw a presumption of an unwritten agreement
relating to joint management giving
rise to legitimate expectation as that
of a partnership as claimed by the petitioners.
19.
In the reply, the respondents have given the details of the directors of the company right from
incorporation till 1998. The three
promoters alone were on the Board from February 1950 to April 53. For
the period from April 53 to September 1958, an outsider was additionally
appointed as a director. On retirement of this outsider, Shri NK Ahuja was
appointed as a director in September 1958 and he continues even now. During the
period 1958 to 1966, while Ahujas had two representatives on the Board, the
other promoters had one each. In June 1966, PS.Chawala and an outsider were
appointed to the Board. When Shri S.K Bagai
expired in 76, his son, Shri K.K.Bagai, who was already in employment of
the company was appointed as a director. Thus, from 1950 to 1983, it is the
three promoters and their family members
who constituted the Board even though for short periods there was an
outsider. From the narration in the petition, we also find that near relations
of the three families had been employed in the company carrying remuneration,
thus making it clear that all the three families have had the benefits of the
fruits of the company, either on the Board or in employment. The petitioners
have also given the details of the loans given by Chawlas’ during the initial
stages of the company to urge that unless the business was to be carried on as
a partnership, they would not have given substantial loans to the company. We
agree with the petitioners. Therefore, the facts and circumstances of the case
clearly indicate that the company is in the nature of partnership between the
three families with the understanding of sharing the fruits of the company and
as such the petitioners have justifiable claim of legitimate expectation of
being on the Board of the company. It was contended by the respondents that
when Bagai family sought for a representation on the Board, Chawlas, who were
on the Board did not consider the request which would indicate that there was
no understanding of joint management. We do not have any material to show that
Bagais’ raised the issue of understanding and that the same was rejected. Any
way, if one group does not enforce its rights, it does not bar the other to
raise this issue. Therefore, we do not consider that the absence of a member of
the Bagai group on the Board would disentitle the petitioners to seek a
representation on the Board.
20.
The respondents have pointed out that besides the members of
the three families, there are outside shareholders and therefore, the
principles of partnership can not be applied. We have seen the shareholding
pattern. From 500 shares in 1950, the total paid up capital increased to 14,800
shares in 1970 by issue of shares on a
number of occasions. All the shares had been issued during the life time of the
three promoters. The manner of issue of shares indicates that the idea seemed
to maintain the majority of the Ahujas’
group at more than 50% and to keep aggregate
holdings of Chawlas’ and Bagais’
at 25% leaving the balance with outsiders. There has been no change in the
shareholdings from 1970 onwards and now it stands at 51%, 12%,13% and 24% with
Ahujas’, Chawlas’, Bagais’ and outsiders respectively. The collective holding
of three groups of 76% shares also
signifies the understanding among the three promoters that they should have
absolute control of the entire affairs of the company not withstanding the
outside shareholding. However, we also note without disputed by the
respondents, the submissions of the petitioners that most of the outside
shareholders are relatives of Ahujas’.
Further, this Board has held in K.N.Bhargava V Trackparts of India Ltd ( 2000 36 CLA 291 CLB)
that if the facts and circumstances of a case reveal that a company is in the
nature of partnership, holding of shares by outsiders would not affect the
application of partnership principles. As a matter of fact, in that case the
company was a listed company, but this Board held that company was
a family company attracting the principles of partnership and this decision
was upheld by Allahabad High Court.
(S.Balasubramanian) (A.K.Banerji)