1. Jurisdiction of Court even after company is shifted is not ousted where pleadings reveal cause of action arising there

Spices Valley Estate Ltd. vs. T C Forexpress Ltd. [(2007) 137 Comp. Cas 364 (Mad)]

In a suit filed by the respondent company before the Civil Court at Chennai contending that it being a 25% shareholder of the petitioner company was fraudulently removed from the Board of Directors of the petitioner company in the annual general meeting held in July, 1998 and Form No. 32 was filed with the Registrar of Companies, Chennai wherein it had been shown that the nominee of the respondent company had resigned, even though there had been no letter of resignation furnished by the respondent company to the petitioner company, that the petitioner company without notice to the respondent had shifted its registered office to Calcutta on and from 11-2-2000 and further, that the petitioner company had fraudulently transferred the shares of the respondent company without its due consent, the petitioner company filed an application to set aside the plaint on the ground that there was no cause of action which arose to initiate the suit before the City Civil Court at Chennai and, therefore, there was no territorial jurisdiction for the court to entertain the suit. The trial court dismissed the application on the finding that there existed a cause of action for the respondent company to file the suit before the Civil Court at Chennai as the respondent company was removed from the directorship of the company by a resolution at Chennai.

On a revision petition, the Court dismissing the petition held that the jurisdiction of the Civil Court was not ousted since the pleadings in the court revealed that cause of action had arisen for instituting the suit in Chennai and there was allegation of misrepresentation, fraud, failure to furnish details, dishonest or mala fide intention, suppression of material facts, removing of the respondent company from the directorship by a resolution etc. which were disputed questions of fact which had to be necessarily determined and adjudicated only by the Civil Court after letting in oral and documentary evidence. To file a petition before the Company Law Board u/s 10 of the Companies Act, 1956, the respondent company should be a member holding not less than 1/10th of the issued share capital. However, the shareholding of the respondent company had been disputed by the petitioner company. Hence, the issues involved required the adjudication of the Civil Court and, therefore, the dismissal of the application by the trial court needed no interference.

2. Civil Court may exercise jurisdiction of Company Law Board in relation to section 397 petition where allegation of oppression and mismanagement form part of civil dispute

Norma (India) Ltd. vs. Sameer Khandelwal & Ors. [(2007) 137 Comp. Cas 259 (Del)]

In a suit filed by the plaintiff company, it was contended that G.D. Khandelwal had five sons who carried on various businesses either as co-partnerships or as private limited companies. The shares of the respective branches, whether as partners or as shareholders of the companies were in proportion to their shares as if the assets were joint family assets. The two companies, namely the plaintiff company and Uma Shanker Forging Ltd. and two partnership firms M/s. Uma Shanker Khandelwal & Co. and M/s. Bansi Dhar Chiranji Lal were constituted by the brothers and were popularly known as the ‘Khandelwal Group’. It was further contended in the plaint that as the family grew, it became more and more difficult for the various groups to stay together and on 15th January, 2004 minutes of a meeting were recorded under which the plaintiff company was assigned to the family members of the fourth son of G.D. Khandelwal. Meanwhile, the family of second and fifth son of G.D. Khandelwal; i.e., defendants Nos. 1 to 3 incorporated defendant Nos. 4 & 5; i.e., M/s. USK Exports P. Ltd. and M/s. USK Trading P. Ltd. and were carrying on similar businesses , the plaintiff company thereby directly competing with the plaintiff company by siphoning off funds, diverting orders of the plaintiff, processing raw materials in bulk at lower prices for their companies, etc.

On an application under Order 39, rules 1 and 2 of the Code of Civil Procedure, 1908, by the plaintiff an order dated 31-7-2006 was passed by which defendants Nos. 1 to 3 were restrained from transferring, alienating or creating third party rights in the movable and immovable properties of the defendant companies. An affidavit was filed by the director of the plaintiff company contending that similar matter was pending before the Company Law Board.

The Delhi High Court dismissed the application and held that it is settled law that jurisdiction of the company Law Board under the Companies Act, 1956 in relation to section 397 of the Act is a concurrent jurisdiction which may be exercised by civil courts where allegations pertaining to oppression and mismanagement partake the character of a civil dispute pending before the Company Law Board. It was clear from the affidavit that proceedings were pending before the Company Law Board and the reliefs prayed for in the application before the Company Law Board and in the suit were similar.

Further, the Court observed that the law of interim injunction is clear. Apart from establishing a prima facie case, the plaintiff has to establish that the balance of convenience lies in favour of grant of injunction and that irreparable loss and injury would be caused to the plaintiffs, which loss and injury cannot be made good by granting money, if injunction is not granted. Further, since injunction is an equitable relief, a person coming to the Court must make complete and truthful disclosure of relevant facts and must not do something which takes away equities away from him. In the present case all the members of the Khandelwal group had knowledge about the business of the defendants Nos. 4 & 5 which was evident from the minutes of the meetings relied upon by the plaintiff. Though the said minutes were the subject matter of debate between the parties, the contents thereof showed that the various branches of the Khandelwal family and the plaintiffs group were aware of the nature of business conducted by defendants Nos. 4 and 5 companies. The complete business done by the two companies was brought out in the minutes of the meeting. The minutes also showed that the said two companies were exporting products to their companies. Thus it was held that these facts were sufficient to non suit for the plaintiff for the purposes of being granted any interim relief and hence the ex parte injunction granted on 31-7-2006 was vacated.

3. Conduct of parties assumes importance in deciding disputed ownership of shares

Ram Gopal Gupta vs. National Aluminium Co. Ltd. & Ors. [(2007) 137 Comp. Cas. 402 (CLB)]

In a petition u/s. 111A of the Companies Act, 1956, the petitioner sought a direction to the first respondent company to register his name in the register of members of the company contending that he had purchased 1000 equity shares of the first respondent company through the third respondent and the share certificates along with the blank transfer forms were lost and an FIR was lodged in that connection. On intimating the company of the loss he was advised to furnish a prohibitory order from a competent court to prevent further transfer of shares. A suit was filed and an order of injunction was obtained. In the meanwhile, the petitioner furnished indemnity bond and other documents to enable the company to issue duplicate certificates. The suit was dismissed for want of jurisdiction. The petitioner preferred an appeal before the court of the Civil Judge, Delhi.

Upon receiving a copy of the letter sent by the company to the second respondent, a copy of which was sent to the petitioner, the petitioner came to know that the Second respondent claimed himself to be the registered owner of the shares and had informed the company that he had lost the share certificates and sought to be impleaded in the appeal filed by the petitioner. The petitioner withdrew the appeal with a liberty to file the petition before the Company Law Board.

The Company Law Board held that from the various documents produced by the petitioner it was evident that the petitioner was the purchaser of the shares for valuable consideration. In the absence of share certificates and the instruments of transfer, the conduct of the parties, assumed importance. Even though the respondent had knowledge of the loss of the share certificate in the year 2000 itself, he had failed to take any action such as filing an FIR or taking up the matter with the company by enquiring about the dividend, etc. whereas the petitioner had pursued his case from 1995 culminating in the petition u/s. 111A of the Act. Equity was in favour of the petitioner and he was to be declared as the real owner of the shares. Thus, the company was directed to enter the names of the petitioner in the register of members in respect of the impugned shares and deliver to him 500 new series equity shares and also 5 debenture certificates.

Note: Also see the decision in the case of P.S. Securities Ltd. vs. ITC Ltd. & Ors. [(2007) 137 Comp. Cas 727 (CLB)]

4. (a) Where joint venture agreement containing termination clause, winding up permissible on plea of deadlock
   
   (b) Winding up exclusive jurisdiction of company court, cannot be referred to arbitration

Draegerwerk Aktiengesellschaft vs. Usha Drager P. Ltd. and Anr. [(2007) 137 Comp Cas 569 (Del)]

The respondent company was formed as a joint venture and the petitioner and the respondent group each held 50% of the shares in the company. In a petition u/s. 433(f) of the Companies Act, 1956, the petitioner company sought winding up of the respondent company on the "just and equitable" ground alleging that due to irreconcilable differences between the two groups in the company the business had come to a standstill due to deadlock between them resulting in loss of substratum of the company and defaults in complying with the statutory provisions of the Act. The respondent contended that the petition was filed by the petitioner to wriggle out of its obligation under the joint venture agreement and in order to set up a competing business in India. It also sought to refer the dispute to arbitration as agreed to by the parties under the joint venture agreement.

The Delhi High Court observed that section 433(f) of the Companies Act, 1956, permits the court to wind up a company when it is just and equitable to do so. As the words are also a ground for winding up of a partnership under the Partnership Act, the courts have wound up companies which have often been described as quasi partnerships. These are companies based on personal relationships involving mutual confidence and where there is some basic understanding or an agreement that all or some of the shareholders shall participate in the conduct of business and working of the company. Deadlock in the management of a company is also a ground for winding up of a company under the "just and equitable clause". There should be lack of probity and confidence between the parties but the person approaching the court should not be responsible for it. A party cannot take advantage of his own wrong, to ask for winding up u/s. 433(f) of the Act. As the words "just and equitable" themselves suggest, the court must be satisfied with the allegations of the petitioner that it is just and equitable to wind up a company.

The Court held that the petitioners had not conducted themselves in a manner which disentitled them to approach the court
u/s. 433(f) by invoking jurisdiction under the just and equitable clause. The respondent group was substantially responsible for the impasse and deadlock as it acted contrary to the articles. After having entered into an agreement with a termination clause, the respondent group could not claim the agreement to be for an infinite term. The deadlock in the company was not of a transitory nature that would settle down with time but continued unabated for more than three years. There seemed no possibility of the two groups resolving their disputes and reaching any settlement.

Further, the court held that even if the joint venture agreement contains an arbitration clause, winding up of a company is the exclusive jurisdiction of the company court and it cannot be referred to arbitration.

5. Where issue of further shares in breach of an agreement, relief to be agitated before competent Court, Company Law Board has no jurisdiction under sections 397/398 of the Companies Act, 1956

R. Easwaran & Co. vs. Easwar Oil Industries P. Ltd. & Ors. [(2007) 137 Comp. Cas 605 (CLB)]

The petitioner filed a petition under sections 397 and 398 of the Companies Act, 1956 seeking cancellation of 9000 shares issued in favour of the fifth respondent for want of consideration pursuant to breach of the terms of the agreement entered on 4-10-1975.

The Company Law Board held that section 397 can be invoked when the affairs of the company are being conducted in a manner oppressive to a shareholder or shareholders and section 398 can be invoked only when the affairs of the company are being conducted in a manner prejudicial to the interest of the company. The relief claimed by the petitioners for cancellation of the shares directly arose from alleged breach of the agreement dated 4-10-1975. The grievance and relief flowing from the agreement must be agitated in a competent court having jurisdiction over the matter since the requirements of sections 397 and 398 remained unsatisfied. Therefore, the alleged act did not make any cause of action u/ss. 397 or 398 of the Companies Act, 1956.