A.M. Khanwilkar, J.@mdashThese four appeals can be disposed of by common judgment, as they are between the same parties and are directed against the common judgment and order passed by the Company Law Board, Principal Bench, New Delhi, dated October 29, 2003, in Company Petitions Nos. 40 and 41 of 2002, since reported in Kishore Kundan Sippy v. Samrat Shipping and Transport Systems P. Ltd. [2004] 118 Comp Cas 472.
2. These appeals pertain to Samrat Shipping Co. Pvt. Ltd. (hereinafter referred to as "the SSCO") and Samrat Shipping and Transport Systems Pvt. Ltd. (hereinafter referred to as "the SSTS"). Both these companies are controlled jointly by two groups. For the sake of convenience, we shall refer to those groups as the Puri group and the Sippy group. Both the above numbered company petitions under Sections 397, 398, 399, 402 and 406 of the Companies Act, 1956, were filed by Sippy group. Company Petition No. 40 of 2002 Was filed in respect of SSCO for the following substantive reliefs :
"(a) The board of directors of the company be superseded ;
(b) An administrator and/or special officer be appointed to take charge of the management and affairs of the company and its books, papers, records and documents ;
(c) An inquiry be conducted into the accounts of the company and a special audit of its accounts be directed ;
(d) A scheme be framed for the management, administration, control and affairs of respondent No. 1-company on such terms and conditions as to this hon''ble Board may seem fit and proper ;
(f) Perpetual injunction restraining respondents Nos. 2 and 3 acting as, representing themselves to be or holding themselves to be directors of respondent No. 1 company in any manner whatsoever ;
(g) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from interfering and/or intermeddling with the management and affairs of respondent No. 1-company in any manner whatsoever ;
(h) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from altering the composition of the shareholding of and in respondent No. 1-company in any manner whatsoever and/or altering the composition of the board of directors of respondent No. 1 company without leave of this hon''ble Board in any manner whatsoever ;
(i) Mandatory injunction directing respondents Nos. 2 and 3 jointly and/or severally to refund to respondent No. 1-company a sum of Rs. 2.21 crores misappropriated by respondent No. 2 in the manner specified in para. 15 hereinabove ;
(j) An enquiry be conducted with regard to the dealings and transactions of respondents Nos. 2 and 3 in relation to the management and affairs of respondent No. 1-company and the said respondents be directed to render accounts in this regard and on the rendition of such accounts and completion of such enquiry, appropriate direction be given, if necessary for compensation to be paid to respondent No. 1-company by the said respondents on the basis of such enquiry and rendition of accounts ;
(k) Declaration that the resolution of the board of directors of respondent No. 1-company dated May 8, 2000, is null and void ;
(l) Appropriate directions be given with regard to sale and purchase of the shareholding of the petitioners by respondents Nos. 2 and 3 of and in respondent No. 1-company at a fair value ;
(m) An investigation be made with regard to the dealings and transactions of respondents Nos. 2 and 3 in relation to the management and affairs of respondent No. 1-company by an independent person to be appointed by this hon''ble Board for conducting such investigation and thereafter appropriate orders be passed u/s 406 of the Act read with Schedule XI thereof ;
(n) An independent auditor, be appointed to audit the accounts of respondent No. 1-company ;
(o) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them altering the memorandum and articles of association of respondent No. 1-company in any manner whatsoever ;
(p) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from dealing with, disposing, encumbering, alienating or transferring the assets and properties of respondent No. 1-company in any manner whatsoever ;
(q) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from utilising the funds of respondent No. 1-company for the purpose of the instant litigation in any manner whatsoever ;
(r) Ad interim order in terms of prayers above;
(s) Costs of an incidental to this application be paid by the respondents ;
(t) Such further and other order or orders be made and/or direction or directions given as to this hon''ble Board may seem fit and proper."
3. Company Petition No. 41 of 2002 was filed in respect of the SSTS for following substantive reliefs :
"(a) The board of directors of the company be superseded ;
(b) An administrator and/or special officer be appointed to take charge of the management and affairs of the company and its books, papers, records and documents ;
(c) An inquiry be conducted into the accounts of the company and a special audit of its accounts be directed ;
(d) A scheme be framed for the management, administration, control and affairs of respondent No. 1-company on such terms and conditions as to this hon''ble Board may seem fit and proper ;
(e) Perpetual injunction restraining respondents Nos. 2 and 3 acting as, representing themselves to be or holding themselves to be directors of the company in any manner whatsoever ;
(f) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from interfering and/or intermeddling with the management and affairs of respondent No. 1-company in any manner whatsoever ;
(g) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from altering the composition of the shareholding of and in respondent No. 1-company in any manner whatsoever and/or altering the composition of the board of directors of respondent No. 1-company without leave of this hon''ble Board in any manner whatsoever ;
(h) Mandatory injunction directing respondents Nos. 2 and 3 jointly and/or severally to refund to respondent No. 1-company a sum of Rs. 15 crores ;
(i) An enquiry be conducted with regard to the dealings and transactions of respondents Nos. 2 and 3 in relation to the management and affairs of respondent No. 1-company and the said respondents be directed to render accounts in this regard and on the rendition of such accounts and completion of such enquiry, appropriate direction be given, if necessary, for compensation to be paid to respondent No. 1-company by the said respondents on the basis of such enquiry and rendition of accounts ;
(j) Appropriate directions be given with regard to sale and purchase of the shareholding of the petitioners by respondents Nos. 2 and 3 of and in respondent No. 1-company at a fair value ;
(k-i) The board of directors of respondent No. 4 be superseded ;
(k-ii) An administrator and/or special officer be appointed to take charge of the management and affairs of respondent No. 4 and its books, papers, records and documents ;
(k-iii) An inquiry be conducted into the accounts of respondent No. 4 and a special audit of its accounts be directed ;
(l) An investigation be made with regard to the dealings and transactions of respondents Nos. 2 and 3 in relation to the management and affairs of respondent No. 1-company by an independent person to be appointed by this hon''ble Board for conducting such investigation and thereafter appropriate orders be passed u/s 406 of the Act read with Schedule XI thereof ;
(m) An independent auditor be appointed to audit the accounts of respondent No. 1-company ;
(n) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them altering the memorandum and articles of association of respondent No. 1-company in any manner whatsoever ;
(o) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from dealing with, disposing, encumbering, alienating or transferring the assets and properties of respondent No. 1-company in any manner whatsoever ;
(p) Perpetual injunction restraining respondents Nos. 2 and 3 and each one of them from utilising the funds of respondent No. 1-company for the purpose of the instant litigation in any manner whatsoever ;
(q) An independent person be appointed as financial controller of respondent No. 1-company on such terms and conditions as to this hon''ble Board may deem fit and proper with a further direction empowering such financial controller to countersign all cheques issued by respondent No. 1-company ;
(r) An independent person be appointed as general manager of respondent No. 1-company to conduct its day-to-day affairs as to this hon''ble Board may deem fit and proper ;
(s) Perpetual injunction restraining respondents Nos. 2 to 5 and each one of them from transferring out any funds outside the country with regard to the agency agreement entered into between respondent No. 5 and respondent No. 4 or Samrat Shipping and Logistics Pvt. Ltd. ;
(t) Mandatory order directing respondent No. 5 to deposit before this Bench, the commission, fees, remuneration due to respondent No. 4 for the services rendered by them to respondent No. 5 and as provided in the agency agreement, forthwith on such terms and conditions as to this hon''ble Bench may seem fit and proper ;
(u) Ad interim order in terms of prayers above ;
(v) Costs of an incidental to this application be paid by the respondents ;
(w) Such further or other order or orders be made and/or direction or directions given as to this hon''ble Board may seem fit and proper."
4. As mentioned earlier, the Company Law Board disposed of both the company petitions by a common judgment and order. It is relevant to note that by way of interim order passed in the company petitions ; inspection of the records of the two companies was directed by the company Law Board. Certain aspects were noted during the said inspection. On the basis of the findings in the inspection, the Sippy group had prayed for investigation into the affairs of the two companies, as also other companies. However, the Company Law Board rejected that prayer on the finding that no case for directing an investigation was made out. It has noted that both the groups are not only shareholders holding 50 per cent. each, but also they have equal representation on the board. The diversion/deficiencies noted during the inspection carried out in their companies mostly pertained to 1999-2000/2000-2001. The Board has noted that accounts of both the companies have been audited up to March 31, 2001, and approved by the board of directors, so much so that even of the subsidiary company, Messrs. Meridian, have also been approved up to March 31, 2000. The Board, therefore, went on to observe that even if there have been deficiencies/diversions, the same could not have happened without the knowledge and consent of both the groups of directors. It further observed that, perhaps, as long as the relationship between the two groups continued to be cordial, the action of one group was approved or condoned by the other group. On that finding, the Board took the view that it was not a case for investigation into the affairs of the two companies as also other companies. The finding so reached in respect of the relief of investigation into the affairs of the two companies as also other named companies has not been seriously challenged before me. However, the finding recorded by the Board in relation to the affairs of SSTS at the instance of the Puri group is the main controversy that needs to be resolved in these appeals. That aspect has been considered by the Board in paragraphs 18 to 23 of the judgment under challenge. The Board proceeded to examine that aspect on the basis as to whether the Puri group had breached its fiduciary duties to SSTS in getting the contract to the fourth respondent (Seaworld Shipping and Logistics Pvt. Ltd.--hereinafter referred to as "the SSL") and, the Puri group and SSL is accountable to SSTS for the benefits derived by the fourth respondent (SSL) from the contract with the Contship, which was initially impleaded as respondent No. 5. At this stage, it is relevant to note that Contship, respondent No. 5, was deleted from the array of the respondents by a speaking order passed by the Board accepting the plea of Contship that no allegation was made qua them in the petitions as filed. Be that as it may, the Board further examined whether the Puri group--second respondent and the third respondent in Company Petition No. 41 of 2002, being the managing director and director respectively of SSTS--has breached the fiduciary duties to SSTS in getting the Contship agency to SSL, which is under their sole control and was a newly formed company to take away the business of the Contship agency from the SSTS. In para. 18 of the judgment, it is noted that the admitted position is that the agency with Contship contributed nearly 90 per cent. of the business of SSTS, which had two groups of shareholders, and now the entire business has gone to SSL, the newly formed company of the Puri group, fully controlled by the Puri group. In this para. 18, the Board has also noted that the agency agreement between SSTS and Contship was coming to an end on November 30, 2001. It has also made reference to the fact that in the past, Contship had changed its agents. The Contship agency was initially given to SSCO in 1991, when the company constituted three groups of shareholders. Later on, the agency was given to SSTS in 1996 and SSTS was thereafter controlled only by two groups of shareholders, namely, the Puri group and the Sippy group. In the later part of the same para., referring to the judicial precedents, the Board went on to examine as to whether the Puri group could have avoided the loss of business caused to SSTS due to terminating the agency agreement in its favour and taking away the same agency business to SSL, which was controlled solely by the Puri group, even though the Puri group continued to be the managing director and director of SSTS. On the basis of principles deduced from the judicial precedents, referred to in para. 18, the Board has observed that it is universally recognised that the director of a company stands in a fiduciary capacity with the company, the extent of his fiduciary duties is not codified by any statute and is tested on the facts of each case. It further observed that the nature of fiduciary duties has to be strictly construed and not liberally, as suggested by the Puri group. According to the Board, the fiduciary responsibility of a director enjoins that he should not take away the running business of a company, nor could he use the resources of the company for his own personal benefits. It has referred to certain American precedents and observed that the recognised defences in cases of complaint of taking away a corporate opportunity are : that the company is not financially capable of taking the opportunity for itself ; that the company is either legally or technically not in a position to pursue that opportunity ; that the third party refuses to deal with the company ; and that the opportunity was offered to the director in his personal capacity. It has also observed in the said para, that one of the main elements of fiduciary duties of a director is loyalty to the company. It has referred to the defences taken on behalf of the Puri group, which were that the agency with SSTS had come to an end, therefore, even if Puri continued as a director of SSTS, he could take away the agency to his own company ; Puri had brought the agency of Contship to Samrat group ; he was free to take it ; that Contship did not want to have the agency with the company ; that Contship desired to have the agency with Puri because of his expertise. The Board has straightway rejected the defence that since Puri had brought the agency to the company, he could have taken away the same, because such a plea could not be countenanced and would be anathema to the fiduciary duties of the director/managing director. Thereafter, by applying the principles deduced from the judicial precedents, referred to in para. 18, the Board in para. 19 proceeded to examine the question as to whether the Contship agency was a corporate opportunity for SSTS. It has found that the admitted position was that SSTS was carrying on the same agency for five years prior to the expiry of the period of agency and the agency business was in the line of business of SSTS, it (SSTS) had expertise and experience in that business. It further found that it is not the case of the Puri group that SSTS was financially incapable of taking the agency further. It also found that Contship had not abandoned its business in India, for which reason any further agency contract in contemplation of Contship in India was a corporate opportunity for SSTS. It then found that the Contship agency having gone to SSL, a company fully controlled by the Puri group from December 1, 2001, was loss of corporate opportunity to SSTS. In so far as the defence of the Puri group that since the Contship agency with SSTS had come to an end and that Contship did not want to deal with SSTS, but because of the personal relation of Puri with Contship, on account of which there is no breach of fiduciary duty to SSTS, was examined and has been answered against the Puris by applying the principle stated in the English judgment in the case of Industrial Development Consultants Ltd. v. Cooley [1972] 2 All ER 162. The Board then went on to discuss the factual matrix of the case and the sequence of events that led to the Contship agency being given to SSL, the newly formed company fully controlled by the Puri group. It will be apposite to reproduce para. 20 of the judgment which deals with this aspect. It reads thus (page 494 of 118 Comp Cas) :
"In the present case, from the sequence of events, it appears that the whole exercise of getting the agency to the fourth respondent had been preplanned even while the agency was subsisting with SSTS. The second respondent did not disclose the notice of termination dated September 1, 2001, which was received in his name, to the board of the company. Had he disclosed, the board could have made efforts to persuade Contship to renew the agency with SSTS. As a matter of fact, as a director, the second respondent himself was obliged to persuade Contship to renew the agency with SSTS. Instead, it appears that he had been interacting with Contship to get the agency for the fourth respondent even prior to the expiry of the agreement with SSTS as is evident from the fact that Contship entered into a deed of agreement with the fourth respondent on December 1, 2001, and the fourth respondent commenced the agency assignments immediately as is evident from the Service Schedule issued by the fourth respondent dated December 14, 2001. The agreement could not have been signed on December 1, 2001, without prior consultation with Contship. Therefore, it is obvious that he used the knowledge derived in his official capacity that Contship was terminating the agency with SSTS effective from December 1, 2001, to his own advantage. In other words, even when the agency was subsisting with SSTS, he was planning to take the same subsequently without disclosure to the board of SSTS. The Sippys have alleged that the fourth respondent was incorporated only with a view to take over the agency business. It appears to me that the sequence of events would support this allegation. One Shri Virah M. Barucha applied to RoC, Goa for incorporating a company in the name of ''Samrat Shipping and Logistics Pvt. Ltd.'' on December 22, 2000. In this application it is stated that the proposed company would be a group company of SSTS and the proposed promoters/directors were the second and third respondents. These two respondents in their capacity as directors of SSTS, gave no objection to RoC by letters dated January 10, 2001, for allotting the proposed name to the proposed company. The RoC approved the name by a letter dated January 11, 2001, valid for a period of six months. Shri Barucha sought extension of the time by an application dated July 13, 2001, and the RoC granted another six months time by a letter dated July 23, 2001. By a letter dated October 18, 2001, Shri Barucha informed the RoC that since he was unable to participate as a subscriber/director of the proposed company, he had no objection in the company being incorporated by the other promoters. On October 18, 2001. Form No. 32 indicating that the second and third respondents had been appointed as directors with effect from incorporation of the company in terms of the articles was filed with the RoC. Thus the incorporation of the company proximate to the date of expiry of the agency agreement with SSTS also raises a strong presumption that while acting as directors of SSTS and while the agency was subsisting with SSTS, the second and third respondents were been planning to take away the Contship agency to the fourth respondent, which is definitely a breach of their fiduciary duties to SSTS."
5. In para. 21, the Board has examined the defence of the Puri group that Contship was not willing to deal with SSTS in view of the disputes between the Sippys and the Puris. It found that this plea was unsubstantiated. To form this opinion, it has referred to the letters pressed into service on behalf of the Puri group dated September 1, 2001, and April 26, 2002, issued by Contship. It has found that none of these letters mention anything about termination of SSTS agency in view of the disputes between the two groups. It found that the first letter only mentioned about termination on expiry of the period of agency and the second letter referred to Contship''s desire to deal with the Puris reposing confidence in the second respondent in Company Petition No. 41 of 2002. It has also made a reference to the affidavit dated August 19, 2002, wherein Contship had averred that it has never been concerned and is not concerned with any internal matters between the shareholders of SSTS nor its co-directors and having nothing to do with them at any time. It then proceeded to hold that the unwillingness of the third party (Contship in this case) to deal with the company (SSTS) cannot be permitted as a defence to corporate opportunity claim, sans disclosure. It was of the view that such defence, especially after the opportunity has been taken away, will have to be rejected mainly because it would present significant evidentiary problems, inasmuch as the fiduciary and the third party would not come forward to admit that the third party was also interested in working with the company. The Board then proceeded to express the view that if the third party shows unwillingness to deal with the company, the director should disclose this fact and should attempt to cure the problem. To buttress this view, reliance is placed on the decision in Industrial Development Consultants'' case [1972] 2 All ER 162 and another decision of the Appeal Court of Massachusetts in Energy Resources Corporation v. Porter (438 NE 2d 391). It found that since the Puris were aware that Contship did not want to deal with SSTS as fiduciary, they should have unmistakably disclosed the refusal to the company (SSTS) together with a fair statement of the reasons for the refusal and failure to do so resulted in breach of fiduciary duties. It observed that a director is always under the constant duty of loyalty to the company ; even if opportunity is presented to him in his individual capacity, he should disclose the fact to the company first, which was lacking in the present case.
6. In para. 22, the Board then went to examine the question as to whether the Puri group was liable to account for the benefit derived by SSL from the Contship agency business. That question is answered against the Puri group on the reasoning that being a fiduciary, they were acting as trustee and, therefore, benefits derived by the fourth respondent (SSL), which was formed and fully controlled by the Puri group and which was used as vehicle to get the agency, for there was no separate identity between the Puri group and the fourth respondent, they were accountable to SSTS.
7. In para. 23, the Board then proceeded to determine the quantum of benefits/profits derived by the fourth respondent (SSL) as a constructive trustee for SSTS. It was of the view that the same ought to be confined from the date of commencement of agency by SSL from December 1, 2001, to the date of hearing of the company petitions on July 21, 2003. Accordingly, direction was issued to the Puri group and the fourth respondent to account for all the benefits/profits derived from the fourth respondent (SSL) during the said period to SSTS. In para. 23 it has clearly observed that the said direction was being issued on the ground of breach of fiduciary duties by the Puri group, which is not only an act of oppression in terms of Section 397, but also prejudicial to the interest of the company (SSTS) and an act of mismanagement in terms of Section 398.
8. In para. 24, the Board went on to consider the case in respect of SSCO. It has found that the Sippys had not come with clean hands, inasmuch as they have made allegations with regard to investment in Neptune Orient Line (NOL) by the Puri group which, in fact, was with the full knowledge and consent of the Sippys, as is evidenced by the record. On analysing the record, it has found that both the groups (Sippy and Puri) in company''s board meeting agreed to such an arrangement. That is a finding of fact which, however, has not been assailed before me. In spite of this finding, the Board, in the later part of the same para., yet proceeded to give relief to Sippys directing the Puri group to pay reasonable interest being simple interest of 12 per cent. for the period beyond four years from October 15, 1992, till the refund of the amount. Only this direction has been challenged on behalf of the Puris by way of Company Appeal No. 2 of 2004.
9. In para. 25, the Board considered the question of relief to be granted. It found that since there was complete deadlock in the affairs of both the companies and because of the loss of confidence between the two groups, it would warrant winding up of the company on just and equitable grounds. It, however, observed that instead of winding up, the best solution was of parting of ways by the two groups, which would not only be in the interest of the concerned groups, but also of the companies in question. It took the view that in such a peculiar situation, the appropriate course would be to direct the Sippy group to take one company and the Puri group to take the other company. It recommended the Sippy group to take over the control and management of SSCO by purchasing the shares held by the Puri group in that company, and likewise, the Puri group to take over the control and management of SSTS, which was incorporated only in 1996 with main business relating to the agency with Contship by purchasing the shares of the Sippy group in that company.
10. In para. 26, it then indicated that for completing the process of buying shares of the respective groups, an independent valuer needs to be appointed either with the consensus of the two groups or by the Board ; and till the valuation is done and shares purchased by the respective groups, the arrangement directed under consent order dated July 18, 2002, between the parties would continue to operate.
11. On the above basis, both the petitions came to be disposed of by a common judgment and order.
12. Company Appeal No. 1 of 2004 has been filed by the Puri group challenging the finding reached by the Board regarding breach of fiduciary duties and of loss of business opportunity of SSTS as well as the view taken that the Puri group and SSL, newly formed company of the Puri group, were accountable to the SSTS in relation to the profits derived by SSL from the Contship agency.
13. Company Appeal No. 4 of 2004 is filed by SSL, the company controlled by the Puri group, challenging the direction issued by the Board against it to account for the benefits derived from the Contship\\agency.
14. Company Appeal No. 5 of 2004 has been filed by the Sippy group challenging the restricted relief granted by the Company Law Board to account for the benefits derived from the Contship agency between December 1, 2001, till July 21, 2003, only. Instead, according to them, once it is held that the Puri group had fiduciary duty qua SSTS and was, therefore, obliged to account for all the benefits derived by it in the form of taking away the Contship business to SSL, which was fully controlled by it, therefore, the Puri group as well as SSL, which was used as vehicle by the Puri group, to take away the Contship agency to itself, would be accountable to SSTS till the shares of the Sippy group are fully purchased by the Puri group in SSTS or, till the termination of agency by Contship, whichever is earlier.
15. Whereas, Company Appeal No. 2 of 2004, has been filed by the Puri group questioning the direction issued by the Board to pay simple interest for the period beyond four years from October 15, 1992, till the refund of the amount of Rs. 49 lakhs to the SSCO.
16. These appeals, having been filed u/s 10F of the Companies Act, 1956, could be maintained only on questions of law arising out of the order passed by the Board. The questions of law formulated in the respective appeals are as follows. In Company Appeal No. 1 of 2004, following questions of law, filed by the Puri group, as amended, are formulated, namely :--
"(A) What is the correct law in India relating to the existence, effect, nature and extent of directors fiduciary duties ?
(B) Whether a Tribunal is bound to apply the law in this behalf as set out in a judgment of the Supreme Court and Full Bench of a State High Court in preference to judgments of foreign courts ?
(C) Whether, after independent termination by the third party principal of an agency agreement with the company, a director of the company had a fiduciary duty to the company qua that agency business/ agreement ?
(D) Whether an agency business arrangement with a company, duly terminated by the third party principal, can ever represent a lost business or corporate opportunity capable of diversions from the company ?
(E) Whether in Indian law, third party unwillingness to deal with a company (and its willingness to deal only with a director of that company) was a defence to an action based on alleged diversion of business ?
(F) Whether a director is liable to account to the company for profits made by him under an arrangement entered into independently by a third party with the director on account of the personal qualifications and relation with the director individually ?
(G) Whether the learned Company Law Board has jurisdiction under Sections 397, 398 and 402 to direct a third party (who is not a shareholder or a director of the company) to render accounts and pay over amounts to the company for alleged diversion of business by one of the common directors ?
(H) Whether the learned Company Law Board in exercise of its jurisdiction under Sections 397, 398 and 402 can grant relief of accounts and damages ?
(Rider A)
Whether the hon''ble Company Law Board committed a jurisdictional error in purporting to make orders u/s 397 without either considering or holding that to wind up the company would be prejudicial to the interests of the petitioners ?
(I) Whether a Tribunal like the Company Law Board is in breach of the principles of natural justice when it bases its decision on judgments of foreign courts and an American law doctrine and other materials which were never disclosed to the party against whom they are used ? Whether such a breach of natural justice vitiates the judgment ?" In Company Appeal No. 4 of 2004, filed by SSL, the company newly formed and fully controlled by the Puri group, the following questions of law are formulated :
"(A) Whether an agency arrangement with a company, duly terminated by a third party principal, can ever represent a lost business or corporate opportunity capable of diversion from the company ?
(B) Whether the unwillingness of a principal to deal with a company is not a defence to an action by that company based on alleged diversion of the company''s agency business ?
(C) Whether the learned Company Law Board has jurisdiction under Sections 397, 398 and 402 and 406 to direct a third party (who is not a shareholder or a director of the company) to render accounts and pay over amounts to the company for alleged diversion of business by one of the common directors ?
(D) Whether the learned Company Law Board in exercise of its jurisdiction under Sections 397, 398 and 402 and can grant by way of reliefs of accounts and damages against a party who is neither a shareholder nor a director of the company ?"
17. In Company Appeal No. 5 of 2004, filed by the Sippy group, no specific question of law has been formulated in the memorandum of appeal as filed, but an attempt is made to articulate questions of law in the synopsis, accompanying the memorandum of appeal. The same reads thus :
"A. The appeal raises the following questions of law, which in the respectful submission of the appellants require to be finally adjudicated upon and determined by this hon''ble court :
(i) In a case where a director breaches his fiduciary duties to the company and diverts business to another company, how is the quantum of benefits/profits that the director has so derived, to be calculated and in what manner is the company to be reimbursed for such diversion of business ?
(ii) Whether, having concluded that respondents Nos. 2 and 3 (by taking away the agency of Contship Container lines to respondent No. 4) has breached his fiduciary duties to the company, the CLB ought not to have directed respondent No. 4 to pay over all the benefits/profits that respondent No. 4 has derived and/or is to derive from the agency of Contship Container lines, to the company ?
B. The hon''ble CLB having concluded that respondents Nos. 2 and 3 (by taking away the agency of Contship Container lines to respondent No. 4) has breached his fiduciary duties to the company, ought to have directed respondent No. 4 to pay over all the benefits/profits that respondent No. 4 derived and/or is likely to derive from the agency of Contship Container lines, to the company.
C. The hon''ble CLB failed to give due weightage to the fact that the agency of Contship Container lines is a continuous/running agency commencing from December 1, 2001, and respondent No. 4 ought to have been made accountable to the company for all the benefits that it would derive from the agency of Contship Container lines for the entire period of the agency.
D. The hon''ble CLB erred in recording that ''agency take over by fourth respondent is a running agency for a period of five years commencing from December 1, 2001''. The agency agreement does not stipulate that the agency is for a period of five years.
E. The hon''ble CLB gave undue weightage to the fact that the agency agreement between Contship Container lines and respondent No. 4 was terminable by giving a three months'' notice.
F. The hon''ble CLB having wrongly noted that the agency agreement was for a period of five years, further wrongly concluded that there was no certainty that the agency agreement would continue for the entire period of five years.
G. The hon''ble CLB failed to appreciate that with respect to the agency agreement between Contship Container lines and respondent No. 4, the only facts that ought to have been noticed are that the said document does not stipulate any fixed term, but is terminable by either party by giving a three months'' notice.
H. The hon''ble CLB having concluded that (a) the accepted principle of law in the case of any benefit derived by a fiduciary who is in fact a trustee, by breach of his fiduciary duties, is that the benefit so derived has to be held by him as a constructive trustee of the beneficiary, (b) in the present case, whatever benefit/profit that respondent No. 4 has derived from the agency of Contship Container lines, respondent No. 4 is accountable to the company, ought not to have limited such payment only to fifteen months, i.e., the period from December 1, 2001, to March 31, 2002.
I. The hon''ble CLB erred in concluding that it was just and proper to direct respondent No. 4 to account to the company for all the profits that respondent No. 4 has derived from the agency of Contship Container-lines, for a reasonable period between December 1, 2001, and March 31, 2003.
J. The hon''ble CLB erred in concluding that the period between December 1, 2001, and March 31, 2003, was ''reasonable'' when admittedly the agency agreement between Contship Container lines and respondent No. 4 did not stipulate any specific period.
K. The hon''ble CLB after having directed respondent No. 4 to account for all the benefits/profits that it derived from the agency contract with Contship Container lines, ought not to have limited such payment to fifteen months, i.e., the period from December 1, 2001, to March 31, 2002.
L. The hon''ble CLB erred in concluding that the valuer will compute the amount of profit that respondent No. 4 has derived from the agency with Contship Container lines from December 1, 2001, to March 31, 2003.
M. The hon''ble CLB ought to have directed the valuer to compute the valuation of the company on the basis that the agency of Contship Container lines is ongoing with the company.
N. The hon''ble CLB has not exercised its discretion judicially and judiciously.
O. The impugned order and decision is contrary to law, equity and good conscience and is liable to be set aside.
P. The findings recorded and the order passed by the CLB are otherwise contrary to the settled principles of law on the facts and circumstances of the case."
18. In Company Appeal No. 2 of 2004, filed by the Puri group, the following questions of law, as amended, are formulated in the memorandum of appeal, which read thus :
"(A) Whether the petitioners who are found to have come with unclean hands and have made demonstrably false statements on oath and suppressed material particulars are entitled to the grant of any reliefs in a petition filed under Sections 397, 398 and 402 of the Companies Act, 1956 ?
(B) Whether, in the circumstances set out in (A) above, any reliefs can in law be granted to such petitioners ''purely on equitable considerations'' ?
(C) Whether grant of reliefs ''purely on equitable considerations'' to the petitioners who have been found on facts to have ''come with unclean hands'' is a perverse exercise of discretionary powers ?
(D) What is the true scope and extent of the Company Law Board''s jurisdiction under Sections 397, 398 and 402 of the Companies Act, in the absence of any case made out for or a finding recorded of, oppression or mismanagement in the conduct of the affairs of the company ?
(E) Whether, in the facts and circumstances of the case, a director of a company can be directed to pay interest to the company in exercise of powers under Sections 397 and 398 of the Companies Act on account of alleged delayed repayment of amounts due when the amount was expressly advanced as an interest free loan and the amount on repayment was accepted by the company unconditionally and without demur with no demand for principal or interest being made by the company at any time ?
(F) Whether the Company Law Board in exercise of its jurisdiction under Sections 397, 398 and 402 of the Companies Act, can direct payment of interest to a company ''purely on equitable considerations'' without any entitlement to the same being shown and no claim for the same being made ?
(G) Whether a situation of alleged ''deadlock'' by itself is sufficient to warrant the exercise of jurisdiction under Sections 397, 398 and 402 of the Companies Act, when no case of oppression or mismanagement has been made out and no finding to that effect recorded by the Tribunal, particularly when the remedy of winding up of the company was available to the parties ?
Rider A
Whether the hon''ble Company Law Board committed a jurisdictional error in purporting to make orders u/s 397 without either considering or holding that to wind up the company would be prejudicial to the interests of the petitioners ?"
19. After hearing counsel for the parties, to my mind, broadly the following questions will have to be addressed in the present appeals :
(1) What is the correct law as applicable in India relating to the existence/effect/nature and extent of director''s fiduciary duties ?
(2) Is the case held as proved by the Company Law Board pleaded against the Puri group and SSL, which is newly formed and fully controlled by the Puri group ?
(3) Whether the Puri group has breached its fiduciary duties to SSTS in getting the contract to SSL and not to SSTS, of which they continue to be the managing director and director ?
(4) When the agency is not subsisting or, in fact, was terminated, can the company (SSTS) or any of its members, complain of breach of fiduciary duties by the managing director/director of the company, and more particularly, of diverting business of SSL, a newly formed and fully controlled company of the Puri group ?
(5) Whether SSL, a company newly formed and fully controlled by the Puri group, is accountable to SSTS for the benefits derived by it from the contract with Contship ?
(6) Whether in the absence of a finding on the issue of oppression and mismanagement, an order or direction under Sections 397 and 398 is permissible ; and whether mere deadlock in the company can be the basis to invoke powers under the said provisions ?
(7) Whether the relief granted by the Company Law Board was permissible, having regard to the nature of the present proceedings under Sections 397 and 398 of the Act ; and whether the relief as granted is adequate ?
(8) Whether, in spite of the finding reached that the Sippy group approached the court with unclean hands, the Board could grant any relief whatsoever on the petition instituted by such party for any equitable relief under Sections 397 and 398 ?
20. We shall now proceed to examine the plenitude of fiduciary duties of director of the company as applicable in India. Indeed, serious grievance was made on behalf of the Puri group before me that it was specifically contended before the Board that the law on this aspect can be spelt out from the provisions of Section 88 of the Indian Trusts Act, 1882. However, even though the Board, adverted to that contention, it has not amplified the same in the judgment under appeal, but proceeded to decide the issue on the basis of rulings of the American courts, which were not pressed into service by either side during the arguments nor brought to the notice of counsel appearing for the parties before the delivery of judgment. There is substance in the grievance as made on behalf of the Puri group that the approach of the Board has taken them by surprise--of adverting to the American decisions and applying those principles to the fact situation of the present case. Indisputably, the Board could have legitimately made reference to the precedents of American courts, which it thought was relevant, but, then, the appropriate course, in such a situation, was to bring those decisions to the notice of counsel appearing for the parties before delivery of the judgment. Besides, there is also substance in the grievance of the Puri group that the Board has not amplified the purport of Section 88 of the Indian Trusts Act, 1882, and discarded the decisions cited in respect of that provision, on the specious reasoning that those decisions were cases of partnership coming to an end and no fiduciary liability subsisted, and in one of the cases, the facts were that the third party did not want to give business, as the company was dealing with the competitor ; and in one case, the principal itself gave up particular business. This can be found from the observations in para. 18 of the judgment under appeal.
21. Be that as it may, the appropriate course, to my mind, is to straightaway refer to Section 88 of the Indian Trusts Act, 1882. The same reads thus :
"88. Advantage gained by fiduciary.--Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or, where any person so bound, enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained."
22. This provision came up for consideration before the apex court in the case of
"If there had been a specific stipulation in the partnership deed, or even an indication that the partnership business would continue even after the expiration of the 17 years, which was the term of the partnership, different considerations may have arisen. It could then have justly been said that the managing partner owed a duty to the other partners to obtain a renewal of the previous lease."
23. In the same decision, in para. 17, the apex court has observed that the Indian Legislature has substantially adopted the English law while enacting the rules laid down in the provision, such as, Sections 88 and 90 of the Indian Trusts Act. The apex court has adverted to the statement of law summarised in Halsbury''s Laws of England, second edition, volume 24 (Lord Hailsham''s edition) with approval in para. 16 of this decision. The same reads thus (page 197) :
"The renewal of a lease of the partnership property by one or more of the partners without the privity of the others enures for the benefit of all. The rule is the same when the intention to renew is communicated to the others if the latter are prompt to assert their rights ; and is immaterial whether the term of the partnership is definite or indefinite, or whether the lessors would have refused to renew to the partners who are not privy to the renewal. The representatives of a deceased partner may have a right to share in the profits derived from a renewal of the lease by the surviving partner."
24. The apex court then went on to observe that as per the English law, there is no absolute rule of law or equity that a renewal of a lease by one partner must necessarily enure for the benefit of all the partners. It observed that there is a presumption of fact as distinguished from a presumption of law, that there is an equity in favour of the renewal of the lease enuring for the benefit of all the partners. But such a presumption being one of fact, is rebuttable and must, therefore, depend upon the facts and circumstances of each case. Since I am dealing with this judgment, it is necessary to point out that the Puri group placed emphasis on the dictum in the later part of para. 14 of this judgment, which reads thus (page 196) :
"... This is a business in which the personal factor of the persons in charge of managing the business, is more important than anything else. Another important matter which has a bearing on the case, has also to be adverted to. Between the years 1939 and 1942, that is to say, during the last three years of the term of the partnership, the partners were not on cordial terms, and there does not appear to have been much of confidence between them. They had already started quarrelling and attributing unworthy motives. There is, therefore, hardly any room for importing the idea of such confidence amongst partners as would render the contesting defendants occupying a fiduciary position, apart from the fact that they were partners."
25. To my mind, these observations will be of no avail to the Puri group. The same are made in the context of fact situation of that case. In that case, it was found as a fact that the lease deed, as well as the partnership, was co-terminus and there was no provision in the partnership of continuation of the partnership firm after expiration of the specified period. Moreover, it was found as a fact that the renewal lease given to one of the partners was in his personal capacity, coupled with the fact that it was not the case that the renewed lease was "obtained clandestinely". In so far as the fact situation of the present case is concerned, I shall advert to the same a little later. Suffice it to observe that on a proper reading of this decision, the fiduciary duty and the liability for its breach is spelt out by Section 88 of the Indian Trusts Act. Besides, the general principles of law regarding fiduciary duties as applied in England, referred to in paragraph 16 of the decision, as produced above, will have to be borne in mind.
26. There is yet another decision of the apex court in the case of
"It is a settled rule of equity that any person bound in a fiduciary character to protect the interests of another person should not put himself in a position where his interest and duty conflict. If by availing himself of this fiduciary character or by entering into any dealings under circumstances in which his interests are or may be adverse to those of such other person he gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained, see Trusts Act, Section 88. But there is no rule which incapacitates a trustee from dealing with a cestui que trust. In Coles v. Trecothick [1804] 9 Jun 234; 32 ER 592 (597) Lord Eldon said : ''a trustee may buy from the cestui que trust, provided there is a distinct and clear contract, ascertained to be such after a zealous and scrupulous examination of all the circumstances, proving, that the cestui que trust intended, the trustee should buy ; and there is no fraud, no concealment, no advantage taken by the trustee of information acquired by him is the character of trustee. I admit, it is a difficult case to make out, whenever it is contended that the exception prevails. As stated in Kerr on Fraud and Mistake, sixth edition, page 192 :
''Thus a trustee for sale may purchase the trust estate, if the cestui que trust fully and clearly understands with whom he is dealing and makes no objection to the transaction, and the trustee fairly and honestly discloses all that he knows respecting the property and gives a just and fair price, and does not seek to secure surreptitiously any advantage for himself. The onus, however, rests upon the trustee, and he is bound to produce clear affirmative proof that the parties were at arms'' length, that the cestui que trust had the fullest information upon all material facts, and that having this information he agreed to and adopted what was done."
27. In para. 4 of the same decision, the apex court has upheld the view taken by the High Court that the appellant therein stood in a fiduciary relationship towards the old company and was bound to protect its interest. The legal position regarding onus is also spelt out in para. 4. It is observed that the onus is upon the appellant-company, which was fiduciary, to establish affirmatively that the transaction was righteous and that it did not gain any pecuniary advantage by availing itself of its fiduciary character. A priori, the settled legal position is that in transaction entered into by the fiduciary, there will be presumption of fact against the fiduciary and in favour of the trust or the beneficiary, which, of course, is a rebuttable presumption. Whether the presumption is rebutted will have to be examined having regard to the facts and circumstances of each case. In that case, the apex court observed that the appellant-company which was fiduciary of the old company satisfactorily discharged the burden with reference to various circumstances to support that conclusion, as can be discerned from the discussion in para. 5 of the said judgment.
28. Besides the above decisions of the apex court, my attention was invited to the decision of the Punjab High Court in the case of
29. Much emphasis was placed on behalf of the Puri group on the observations made in the latter part of para. 39 of the Punjab High Court that there may be cases when a partner during the continuance of the partnership can secure a new lease to himself without the new lease being held to be for the benefit of the partnership and it would depend on the facts and circumstances of each case. I shall elaborate on this aspect a little later, while dealing with the facts of the present case. This decision was also pressed into service on behalf of the Puri group to contend that in view of the stand taken by Contship, it was clear that the agency could no longer be secured by SSTS ; and, in that situation, the fiduciary relation ends and the director was free to look after his own interest and secure the benefit for himself. Whether such a plea is available to the Puri group will be considered a little later.
30. Besides the above decisions, my attention was also drawn by learned counsel appearing for both the sides to several other English and American decisions and statement of law in different authorities. However, to my mind, the ratio culled out from the above-said decisions is sufficient to decide the controversy in issue. To put it differently, it is not necessary for this court to examine the argument canvassed on behalf of the Puri group that there is marked difference in the English and Indian law on the one hand and the American view on the other. However, only to complete the record, I will advert to the other decisions and authorities pressed into service.
31. My attention was drawn on behalf of the Puri group to the decision in Industrial Development Consultants'' case [1972] 2 All ER 162 an attempt was made to distinguish the principle stated in the said decision. My attention was also invited to the decision of the Appeals Court of Massachusetts in Energy Resources Corporation v. Porter (438 NE 2d 391) which is relied by the Board, as referred to earlier. Reference was also made to para. 1313 of the American Jurisprudence, second edition, volume 19, page 720, which deals with opportunities not available to, or rejected by, the corporation. The same reads thus :
"A business opportunity ceases to be a corporate opportunity and becomes personal when the corporation is definitely no longer able to avail itself of the opportunity. The view is taken that the doctrine forbidding a corporate director or officer to appropriate a corporate opportunity for his own benefit is not applicable if the opportunity is one which the corporation is financially unable to undertake. At least this is so where the corporation is financially insolvent. In the case of a corporation which, by reason of insolvency, has ceased to prosecute its business, the directors and officers thereof are under no obligation to refrain from engaging in the same line of business, notwithstanding by doing so they appropriate to themselves the business which otherwise would have gone to the company had it continued operations. An officer or director of a corporation has no specific duty to use or to loan his own personal funds to assist the corporation to take advantage of a business opportunity.
However, there is authority that mere financial inability of a solvent corporation to enter into a transaction is not enough to warrant appropriation of the opportunity by its directors or officers to their own benefit. It is said that the corporation must be actually insolvent to such a degree that it cannot carry on business ; it is not sufficient that the corporation is technically insolvent, such as in the case of inability to pay current bills when due or where mere inability to secure credit prevails. The inability of a corporation to take advantage of an opportunity because of lack of funds may not be relied upon by directors when their own lack of diligence was responsible for the corporation''s momentary fiscal condition.
Where a corporation declines, because of legal barriers, to avail itself of a business opportunity, or it is the settled policy of the corporation not to engage in a particular line of business, or it has declined the opportunity for business reasons, or the opportunity is not available to the corporation either because one refuses to deal with it or because the corporation sought without success to obtain it, the opportunity may be embraced by an officer or director as his own without accountability to the corporation for the profits."
32. My attention was also invited to the decision of US, 9th Circuit Court of Appeals in Robinson v. Nelson (US Ninth Circuit Court of Appeals), which deals with the question of burden of proof and business opportunity.
33. Learned counsel appearing for the Sippy group has placed reliance on several decisions, to which I shall make reference a little later. To my mind, as already mentioned earlier, the decisions of the Supreme Court, referred to above, clearly spell out the legal position regarding the extent of director''s fiduciary duties in the context of express provision of Section 88 of the Indian Trusts Act.
34. The next question is whether the conclusion reached by the Company Law Board against the Puri group and SSL is supported by the pleadings of the Sippy group. The grievance against the Puri group in relation to SSTS is articulated in Company Petition No. 41 of 2002. It will be useful to peruse paras. 10 to 46 of the said petition. In para. 10, reference is made to the fact that the Contship agency was the important source of revenue and profits initially for SSCO and later on for SSTS (upon its incorporation), which commenced in terms of the agreement dated February 1, 1991, which was valid till September 30, 1996, and thereafter continued from October 1, 1996. The turnover and net profit, after tax, to SSTS during 1996-97 up to March 30, 2001, is stated in the statement annexed to the petition as annexure P3. In para. 11 of the petition, it is clearly averred that on or about December 7, 2001, "for the first time", the Sippy group became aware of a company (SSL) having come into existence with the name "Samrat Shipping and Logistics Pvt. Ltd." with the word "Samrat" as a dominant and significant part of its name and trading style. On enquiries, it is stated that, it was revealed that the shareholders and directors of SSL were none other than the Puri group. It is expressly stated in the same paragraph that the petitioners (Sippy group) verily believe that "if the Samrat Shipping and Logistics Pvt. Ltd. have acquired" the agency of respondent No. 5 (Contship), this has been only due to respondent No. 2 (Mr. Puri), who, till date, continues to be the managing director of the company (SSTS) and SSCO, misusing and/or abusing his position and in violation of "fiduciary obligations" towards SSCO and the company (SSTS). It is further averred that the petitioners (Sippy group) found that without the "knowledge and consent" of the company (SSTS) and SSCO and/or the Sippy group, the Puri group "had set up" Samrat Shipping and Logistics Pvt. Ltd., as their own independent company and had got the same incorporated with a corporate name and trading style almost identical with and in any event deceptively similar to the corporate name and trading style of the company (SSTS) and SSCO, particularly with the identical domain, name "SAMRAT" as the dominant and significant part thereof. In para. 13, it is averred that on the Sippy group''s instructions, the advocates addressed a letter dated January 2, 2002, to SSL regarding some relevant facts and called upon them to forthwith desist from using the name and mark "SAMRAT" as part of the corporate name and trading style or as a part of their domain/name or otherwise howsoever. This legal notice also records, it is stated, that SSCO and the company (SSTS) would hold SSL and respondents Nos. 2 and 3 (Puri group) responsible and liable for "all losses and damages" caused by SSL to SSCO and company''s (SSTS) goodwill, reputation and "business". It is expressly stated in para. 13 that the said letter records that the Puri group was controlling SSL and that they themselves were wrongfully and dishonestly "diverting the business" and assets and funds of SSCO and the company (SSTS) to their own use, which they were not entitled to at all, for which also SSCO and the company (SSTS) would hold them responsible and liable. The said letter, it is stated, also called upon SSL to forthwith account for all the business, assets and funds diverted by them (Puri group) and SSL. The Puri group''s attention was also drawn to the fact that by their wrongful acts, they had breached all the fiduciary obligations towards SSCO and the company (SSTS) and called upon them to forthwith remedy their breaches. Indeed, para. 13 is narration of events by the Sippy group, but the nature of grievance is reflected therein. Even paras. 14 to 25 refer to several other events and clearly hinting at the breach of fiduciary obligations committed by the Puri group. The assertions made in para. 26 onwards are again of some significance. It is clearly alleged that the Puri group "had floated" a company with the name "SAMRAT" for their personal benefit and at the cost of and causing loss and damage to SSCO and the company (SSTS). It is then averred that the Puri group are seeking to derive wrongful personal gain to themselves by their said wrongful acts, which are a fraud on SSCO and the company (SSTS) and its shareholders. It is then averred that in breach of the trust and confidence reposed by the Sippy group on the Puri group in relation to the management and affairs of the company, the Puri group are in breach of their obligations, which were fiduciary in character towards the company SSTS and its shareholders, including the Sippy group and have purported to conduct and manage the affairs of the company in a manner harsh, burdensome and "oppressive" to the petitioners (Sippy group) and in a manner prejudicial to the interests of the company (SSTS) and prejudicial to public interest. The foundation for these allegations as mentioned earlier is provided in the earlier paras. Thus, the stand contained in para. 26 not only complains of oppression of the Sippy group and the shareholders, but also of the mismanagement of the affairs of the company (SSTS), which is prejudicial to the interests of the company (SSTS). In para. 27, it is alleged that the Puri group have "caused" Contship to terminate the agency agreement it had with SSTS, without giving any reasons and in contravention of the terms and conditions of the agency agreement dated October 1, 1996, entered into between the Contship and the SSTS. It is further alleged that the Puri group have "caused" Contship to enter into agency agreement with SSL. It is then alleged that the personal interest of the Puri group in their association with SSL directly conflicts with the interest of SSCO and the company (SSTS) and their shareholders. It is again alleged that the Puri group have committed deliberate fraud and wrongful acts qua SSCO and SSTS. The allegations constituting the case of oppression of the Sippy group and mismanagement of the affairs of the SSCO and SSTS are expressly stated and reiterated in the later paras. Suffice it to hold that on a fair reading of the petition as a whole, it can be safely concluded that the case held to be proved by the Company Law Board against the Puri group and SSL, which is newly formed and fully controlled by the Puri group is not only clearly pleaded in the petitions as filed, but also reiterated in the subsequent affidavits filed before the Company Law Board. Understood thus, I find no substance in the argument as was canvassed before me that the Company Law Board has travelled beyond the pleadings of the parties. Indeed, the Puri group may be right in contending that in proceedings such as the present one under Sections 397, 398 and 399 of the Act, the court should confine the adjudication in the context of the pleadings as filed. Reliance has been rightly placed on the decision of this court in the case of P. S. Offshore Inter Land Services P. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [1992] 75 Comp Cas 583, as well as of the Calcutta High Court in the case of Mohta Bros. P. Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119. However, as observed earlier, in my opinion, the conclusion reached by the Company Law Board against the Puri group and SSL is fully supported by the pleadings of the Sippy group. The pleadings will have to be construed as a whole and in their proper perspective and, so understood, the decision of the Company Law Board cannot be faulted on the ground of lack of pleadings.
35. The principal question is whether the Puri group has breached its fiduciary duties to SSCO or SSTS in the manner concluded by the Company Law Board. The expression "fiduciary duty" or "fiduciary character" is not defined either in the Companies Act or the Indian Trusts Act. The meaning ascribed in the relevant provisions can, however, be discerned from the meaning provided to expression "fiduciary" in the Black''s Law dictionary, which reads thus :
"Fiduciary. --The term is derived from the Roman law, and means (as a noun) a person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. A person having duty, created by his undertaking, to act primarily for another''s benefit in matters connected with such undertaking. As an adjective it means of the nature of a trust; having the characteristics of a trust ; analogous to a trust ; relating to or founded upon a trust or confidence.
A term to refer to a person having duties involving good faith, trust, special confidence, and candor towards another. A ''fiduciary'' includes such relationships as executor, administrator, trustee, and guardian. ABA Code of Judicial Conduct, Canon 3C(3)(b)... A lawyer is also in a fiduciary relationship with the client.
A person or institution who manages money or property for another and who must exercise a standard of care in such management activity imposed by law or conflict ; e.g. executor of estate ; receiver in bankruptcy ; trustee. A trustee, for example, possesses a fiduciary responsibility to the beneficiaries of the trust to follow the terms of the trust and the requirements of applicable State law. A breach of fiduciary responsibility would make the trustee liable to the beneficiaries for any damage caused by such breach.
The status of being a fiduciary gives rise to certain legal incidents and obligations, including the prohibition against investing the money or property in investments which are speculative or otherwise imprudent. Many States have adopted the Uniform Fiduciaries Act, and the Uniform Management of Institutional Act.
See also fiduciary capacity ; fiduciary or confidential relation. Foreign fiduciary.--A trustee, executor, administrator, guardian or conservator appointed by a jurisdiction other than the one in which he is acting."
36. It will be useful to refer to expressions "fiduciary capacity" and "fiduciary duty".
"Fiduciary capacity.--One is said to act in a ''fiduciary capacity'' or to receive money or contract a debt in a ''fiduciary capacity'', when the business which he transacts, or the money or property which he handles, is not his own or for his own benefit, but for the benefit of another person, as to whom he stands in a relation implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part. The term is not restricted to technical or express trusts, but includes also such offices or relations as those of an attorney at law, a guardian, executor, or broker, a director of a corporation, and a public officer.
Fiduciary duty.--A duty to act for someone else''s benefit, while subordinating one''s personal interests to that of the other person. It is the highest standard of duty implied by law (e.g., trustee, guardian)."
37. It is plain from the above that a fiduciary is obliged to act for someone else''s benefit while subordinating his personal interest to that of the other person. From the events as have been discussed by the Company Law Board and, more particularly, in para. 20 of its decision, as reproduced above, there can be no hesitation in taking the view that the Puri group have breached their fiduciary duties to SSCO and SSTS.
38. I find substance in the argument canvassed on behalf of the Sippy group that having regard to the nature of arrangement obtaining between the two groups in managing the affairs of both the companies, it is more than clear that even though they are registered as private companies, but, in substance, it was a glorified partnership. Once this position is reached, although the provisions or the requirements governing the principles of a partnership firm may not be directly applicable, the principles underlying the same can be pressed into service. While examining the case on hand, as rightly contended on behalf of the Sippy group, the court will be obliged to examine the matter as a bystander and apply the objective tests of whether the acts of the Puri group have caused unfair prejudice to the Sippy group, or, for that matter, the companies (SSCO and SSTS).
39. In this context, reliance was placed on the statement of law occurring in Palmer''s Company Law, twenty-fourth edition, volume I, page 992, which reads thus :
"The same approach was adopted by Hoffmann J., in Re A Company (No. 00477 of 1986), where the learned judge observed that the interests of members were not necessarily limited to their strict legal rights, since the use of the word ''unfairly'' in Section 459 enabled the court to have regard to wider equitable considerations ; thus, Hoffmann J. said, the interests of member who had ventured his capital in the business of a small private company might include the legitimate expectation that he would continue to be employed as director, so that his dismissal would be unfairly prejudicial to his interests as a member.
However, a petitioner who alleges infringement of the equitable expectations which have been superimposed on his legal rights must be able to point to the special circumstances which create the legitimate expectations. In many cases it will be an informal agreement, accompanying the establishment of the company, but not embodied in the articles, that the petitioner will participate in a particular way in the management or profits of the company. In the absence of such special circumstances the petitioner will be bound by the articles. Moreover, even where such legitimate expectations have been established, the courts will recognise that in a quasi-partnership company personal relations may deteriorate without obvious fault on either side, so that continuation of the business activity on a joint basis is impossible. In such a case the court''s consideration of unfair prejudice will concentrate not so much on the exclusion as such of the petitioner from the business but on the fairness or otherwise of the terms upon which the relationship came to an end.
The general test for unfair prejudice has been stated to be an objective one, not a subjective one. Bovey Hotel Ventures Ltd., In re (31st July, 1981 (Ch D) 1. said :
''The test for unfairness must, I think, be an objective, not a subjective one. In other words it is not necessary for the petitioner to show that the persons who have de facto control of the company have acted as they did in the conscious knowledge that this was unfair to the petitioner or that they were acting in bad faith ; the test, I think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner''s interests.''
This view was followed by Nourse J. in R. A. Noble and Sons (Clothing) Ltd., In re [1983] BCLC 273. However, in that case the learned judge granted a winding up petition on the just and equitable ground to a petitioner who had been excluded from participation in its management, following Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 , but refused the petition u/s 459 on the grounds that the respondents conduct had not been unfairly prejudicial to the petitioner. This was mainly on the grounds that the petitioner had shown a lack of interest in being involved in the running of the company. Whether the view that ''unfair prejudice'' connotes a narrower basis for granting a remedy than the just and equitable ground will be followed in future cases remains to be seen."
40. Reliance was then placed on the statement of law occurring in Company Law, seventh edition, by Robert R. Pennington, at page 886, which reads thus : "If the court is satisfied that a petition is well founded, that is, presumably, that the petitioner has proved his allegations and they constitute an unfair prejudice of the petitioner himself, or of the petitioner and all or some of the members of the company taken together, the court may make such order as it thinks fit to give relief in respect of the matters complained of, and so may fashion the remedy to suit the circumstances of the particular case. The court''s jurisdiction is therefore equitable in character although originating in a statutory provision ; this is because the concept of unfairly prejudicial conduct towards the petitioner is akin to the equity notions of oppression, unfair and inequitable conduct and taking improper advantage of the petitioner''s vulnerable position. The elements which induce the court to give or withhold equitable remedies are therefore relevant, and the elasticity of the remedies which may be given is as great, if not greater, than that of equitable remedies in general. The fact that the petitioner complains that the persons in control of the company have proposed to do an act which would be unfairly prejudicial to him, but that the particular act has now become impossible (e.g. the holding of a general meeting to resolve on an unfair alteration of the company''s articles of association on a date which has passed without the meeting being held), does not prevent the court from giving injunctive relief to the petitioner if the act complained of is likely to be repeated. On the other hand, a complaint by the petitioner, a minority shareholder in a small private company, that confidence between himself and the majority shareholder had broken down and that the majority shareholder had offered to purchase the petitioner''s shares at their open market value, has been held insufficient to find a petition for relief, because no unfair or inequitable conduct was alleged on the part of the majority shareholder."
41. Emphasis was also placed on the legal position stated at page 893 of the said book, which reads thus :
"If a private company is formed by its shareholders in order to carry on a business together as its directors, and not merely to provide the shareholders with an investment (a quasi-partnership) and a minority shareholder ceases to act as a director or resigns his directorship as a result of personal differences or difficulties of temperament with the other directors, the minority shareholder is considered under the present statutory provision as being unfairly prejudiced if the controlling shareholders do not make an offer to acquire his shares at a reasonable price, or do not respond favourably to an offer by him to sell his shares to them at a reasonable price."
42. And again, at, page 897, which reads thus :
"Likewise, where the company was formed by its shareholders, who were also its directors, as a quasi-partnership, and the success of the company was envisaged by them as depending on the mutual trust and confidence between them, the removal of the petitioner from his membership of the board, either by a board resolution or by a resolution of a general meeting, may amount to an act which is unfairly prejudicial to the petitioner as a member of the company, unless his removal is for a reason other than a wish to exclude him from the benefits of his shareholding and directorship and a fair offer is made to him for the purchase of his shares. The special treatment under the statutory provision of shareholders of companies which are quasi-partnerships has been generalised by the Court of Appeal in one case that in deciding whether to give relief on petitions by shareholders of such companies the court will take into account not only the rights conferred on them by the company''s memorandum and articles and any agreement entered into between all the shareholders on the company''s formation, but also the legitimate expectations of the shareholders as between themselves that time."
43. And at page 900, which reads thus :
"However, it may well be that as a result of the court''s decisions in cases where the company was formed by its original shareholders and directors to carry on a business undertaking which would be managed by them personally (a quasi-partnership), that there is now a fiduciary relationship between the shareholder/directors and that they do owe each other fiduciary duties comparable to those of partners."
44. Reliance was also placed by counsel for the Sippy group on the statement of law articulated in Gore-Browne on Companies, 44th edition, volume 2, at pages 28.020 and 28.021, which reads thus :
"It should be noted that one of the limitations upon the old Section 210 was that it referred to the affairs of the company are being conducted in a manner oppressive, etc. This was interpreted by the courts so as to exclude isolated acts (even if in themselves oppressive) and to require a continuous course of oppressive conduct up to the time of the hearing. It is now sufficient that the affairs of the company have been conducted in a manner, etc. Furthermore Section 459(1) includes any actual or proposed act or omission of the company (including an act or omission on its behalf) which this ''is or would be so prejudicial''. This would appear to open the way to a petition for a breach of duty by directors or others, which though not of a continuing nature, does sufficient harm to the company to affect the value of the complainant''s shareholding. Such a breach of duty might now extend to seriously negligent management which damaged the company''s business and thus the value of the petitioner''s shareholding. The reference to ''omission'' actual or proposed, might be helpful where the board of directors have consistently refused to declare dividends (where ample distributable profits have been made).
This, of course, was how the courts interpreted Section 210. In a small private company it is legalistic to segregate the separate capacities of the same individual as shareholder, director or employee. His dismissal from the board or from employment by the company will inevitably affect the real value of his interest in the company expressed by his shareholding. It is precisely this recognition which makes the restatement by the House of Lords of the grounds of a just and equitable winding up order under what is now Section 517(1)(g) so notable. The question of who may petition u/s 459 is further examined below."
45. As mentioned earlier, since the nature of arrangement between the two groups for conducting the affairs of the companies was one of a glorified partnership, which fact has been conceded by both parties and in particular the Puri group in the letters dated February 23, 2001 (para. 7.3) as well as dated March 18, 2002, (para. 2.4), counsel for the Sippy group was right in arguing that the principles underlying the general duties and fiduciary duties of a partner of a firm should govern the adjudication of the case on hand. In my view, reliance has been rightly placed on the statement of law relating to the nature of duty of a partner, as appearing in Lindley and Banks on Partnership, seventeenth edition, at pages 483, 484, 486, 488, 490 and 493, which reads thus :
"The general duty
... Perhaps the most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his copartners in all partnership dealings and transactions. Lord Lindley summarised that duty in the following terms :
"The utmost good faith is due from every member of a partnership towards every other member ; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour.''
Thus, if one partner enters into an agreement with another, at a time when he possesses relevant information regarding the state of the partnership accounts which is not known to that other partner and which he fails to disclose, the agreement will not be allowed to stand.
However, if the innocent partner subsequently learns that material facts have been concealed from him by his co-partner, but deliberately elects to stand by the agreement without insisting on full disclosure, the existence of the duty of good faith will not prevent his co-partner from relying on that election and treating the agreement as binding."
"The nature of the duty
It hardly needs to be stated that the duty of good faith is of general application and arises out of the fiduciary relationship which exists between partners, as Vice-Chancellor Bacon made clear in Helmore v, Smith (No. 1) [1887] 35 Ch 436 :
''If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first instance ; it is because they continue to trust one another that the business goes on''."
"The duty of honesty
In addition to the general duty of good faith, a partner owes his copartners a duty to be honest in his dealings with third parties. This duty will apply to all transactions, whether or not they are of a partnership nature.
2. The obligation of partners not to benefit themselves at the expense of their co-partners.
Although this obligation is, for present purposes, formulated separately from the general duty of good faith, it in truth represents no more than a particular branch of that duty. Lord Lindley explained it thus : ''Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership, to do his best for the common body, and to share with his co-partners any benefit which he may have been able to obtain from other people, and in which the firm is in honour and conscience entitled to participate ; Semper enim non id quod privatim interest unius ex sociis servari solet, sed quod society expedit''."
"Full disclosure
If the duty to account is to be avoided in such a case, it is essential that the partner concerned makes full disclosure of his interest to his co-partners. However, nothing short of such full disclosure will suffice. It appears that, in Dunne v. English [1874] LR 18 , the plaintiff knew that the defendant had some interest in the purchase beyond his share of the known profit of 10,000 pound sterlings but he did not know what that interest was and the real position was concealed from him. It was held that the defendant, being the plaintiff''s partner and expressly entrusted with the conduct of the sale, was bound to make full disclosure of the true facts ; having failed to do so, he could not exclude the plaintiff from his due share of the profits realised on the sale."
"Information gained as a partner
If a partner comes into possession of information in the course of carrying on the partnership business or otherwise as a result of his connection with the firm, and uses it to secure some personal benefit from a transaction which is within the scope of the partnership business, he will be accountable therefor. However, no such duty to account will in general arise if the transaction does not involve competition with the partnership business and falls outside its scope, as illustrated by the decision in Aas v. Ben-ham [1891] 2 Ch 244 ; 65 LT 25. There the defendant, a partner in a firm of shipbrokers, used information which he had acquired in transacting the firm''s business when setting up a shipbuilding company, for which he received both remuneration and a salaried directorship. His co-partners sought an account of both remuneration and salary, but failed because the company''s business was held to be entirely beyond the scope of the firm''s business. Nevertheless, an injunction was granted to restrain the defendant from making use of the firm name for his own purposes."
46. In the present case, the demeanour of the Puri group has been found foul by the Company Law Board on analysing the materials on record and in particular, the sequence of events as noted in para. 20 of the impugned judgment, as reproduced above in para. 4. From the findings as reached, it is seen that before the happening of termination of agency of SSTS by Contship on September 1, 2001, to be effective on expiry of three months, much before that, the Puri group had taken positive steps without the knowledge of the Sippy group or SSCO and SSTS, for incorporation of SSL as back as in December, 2000, which was to get engaged in the same business as that of SSTS. There is nothing on record to even remotely suggest that such steps were taken after taking the Sippy group in full confidence. The Board has found as a fact that the letter of termination of agency by Contship was addressed to the Puris and not on the registered office address of SSTS. On receipt of the said letter, the Puri group did not disclose its intention to get engaged in the same business as that of SSTS or the intention of Contship to terminate agency at all. The argument that the Sippy group had knowledge is founded on statements appearing in the petition filed by that Sippy group. That is distorted meaning ascribed by the Puri group. The fact remains, as has been found by the Board, that neither the factum of incorporation of a new company by the Puri group (i.e., SSL), nor the termination of agency by Contship on September 1, 2001, nor the offer of Contship to give the agency to SSL, which was fully controlled by the Puri group, was disclosed by the Puri group to the Sippy group at any point of time. If it is so, applying the above standards applicable to the partners of any partnership firm, it will have to be held that the Puri group committed breach of its fiduciary duties to the SSCO and SSTS. So understood, some error here or there committed by the Board--such as observing that the agreement between SSTS and Contship was coming to an end on November 30, 2001, or of referring to the American decision in the judgment without prior indication in that behalf during the hearing--cannot be the basis to overturn the ultimate conclusion reached by it. On the other hand, the final conclusion and finding that the Puri group had a fiduciary duty to SSTS and SSCO and have breached the same cannot be doubted at all.
47. Besides, in my opinion, the Board has rightly found that after the letter from Contship terminating the agency of SSTS was received, no attempt was made by the Puri group to persuade Contship to continue the arrangement with SSTS, even though they continued to be the managing director and director of SSTS. Such a conduct was obviously oppressive qua the Sippy group. Moreover, taking away the business of SSTS to another newly formed company, SSL, which was fully controlled by the Puri group, obviously resulted in mismanagement of the affairs of SSTS. The argument that the opportunity to SSTS was not lost or the same was not available to SSTS is only begging the question. Reliance has been rightly placed on several decisions, which would support the view that I have taken. I shall refer to those decisions a little later. Taking totality of the circumstances into consideration, as have been found to be proved by the Board, each being finding of fact, and duly supported by the materials on record, cannot be overturned in the present appeal, more so because the appeal will have to be confined only to questions of law in terms of Section 10F of the Companies Act.
48. It will be useful to advert to the decision in the case of Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 ; [1959] 29 Comp Cas 1 (HL). The opinion of Lord Simonds at page 85 can be usefully adverted to and applied to the case on hand. The same reads thus :
"My Lords, these views indicate that the conduct of the society on the company''s affairs was negative conduct. That, in a sense, is true, for it is just the other side of the shield from that which displayed the society acting positively to destroy the company. But I cannot think that, where directors, having power to do something to save a company, lie back and do nothing, they are not conducting the affairs of the company, perhaps foolishly, perhaps negligently, perhaps with some ulterior object in view. They are certainly conducting the affairs of the company in breach of their duty as directors. In the present case I would go further, for I think that the production of rayon cloth at the mill was an affair of the company, and that the society, being majority shareholder in the company, cannot claim that, in diverting this production to itself and obstructing supplies to the company, it was acting for itself and not conducting the affairs of the company in a manner unfair and oppressive to the minority shareholders. It was said that the company should have secured its rayon cloth from the mill by a contract ; but that is beside the point looking to the special relationship between the company and the society. A partner who starts a business in competition with the business of the partnership without the knowledge and consent of his partners is acting contrary to the doctrine of utmost good faith between partners. He is also acting in a manner which, I think, may be regarded as oppressive to his partners, for his doing them an injury in their business. In the same way, there was here, in my opinion, oppression by the society of the minority shareholders and it was, I consider, oppression in the conduct of the affairs of the company. Oppression u/s 210 may take various forms. It suggests, to my mind, as I said in Elder v. Elder and Watson [1952] SC 49, a lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members. The section introduces a wide power to the court to deal with such a situation in an equitable manner which it did not have in the case of a company prior to the passing of the Act of 1948. The court has here acted, in my opinion, within the powers conferred on it."
49. And again at page 88, which reads thus :
"It is said that these three director''s were, at most, only guilty of inaction--of doing nothing to protect the company. But the affairs of a company can, in my opinion, be conducted oppressively by the directors doing nothing to defend its interests when they ought to do something--just as they can conduct its affairs oppressively by doing something injurious to its interests when they ought not to do it. The question was asked : What could these directors have done ? They could, I suggest, at least on behalf of the company, have protested against the conduct of the society. They could have protested against the setting up of a competing business. But then it was said : What good would that have done ? Any protest by them would be sure to have been unavailing, seeing that they were in a minority on the board of the society. The answer is that no one knows whether it would have done any good. They never did protest. And it does not lie in their mouths to say it would have done no good, when they never put it to the test : see the decision of this House in Morison, Pollexfen and Blair v. Walton (May 10,1909, unreported), but described by Scrutton L. J., in Coldman v. Hill [1919] 1 KB 443. Even if they had protested, it might have been a formal gesture, ostensibly correct, but not to be taken seriously.
Your Lordships were referred to Bell v. Lever Bros, Ltd. [1932] AC 161 , where Lord Blanesburgh said that a director of one company was at liberty to become a director also of a rival company. That may have been so at that time. But it is at the risk now of an application u/s 210 if he subordinates the interests of the one company to those of the other.
So I would hold that the affairs of the company were being conducted in a manner oppressive to the respondents. The crucial date is, I think, the date on which the petition was lodged--July 14, 1953. If the respondents had at that time lodged a petition to wind up the company compulsorily, the petition would undoubtedly have been granted. The facts would plainly justify such an order on the ground that it was ''just and equitable'' that the company should be wound-up : see Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426."
50. Reliance has been rightly placed by the Sippy group on the decision of the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, at pages 365-366, wherein the expression "oppressive" has been considered. It is observed that the phrase "oppressive to some part of the members" would suggest that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fairplay on which every shareholder who entrusts his money to a company is entitled to rely.
51. Reliance was also placed on the observations of the Supreme Court in the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding ltd. [1981] 51 Comp Cas 743. In this decision, referring to the observations in
52. My attention was also drawn to the Division Bench decision of the Calcutta High Court in the case of
53. Reliance was also placed on some of the English cases in support of the proposition that "the conduct of the fiduciary is also oppressive" when no full disclosure is made by the fiduciary and, instead, he takes advantage for himself to the detriment of the company. Those decisions are :
(1) Keech v. Sandford [1726] 25 ER223 ;
(2) Fitzgibbon v. Scanlan [1813] 3 ER 694 ;
(3) Head v. Gould [1898] 2 Ch 250 , 267-269 ;
(4) Biss v. Biss [1903] 2 Ch 40 , 60 to 62 ;
(5) Clegg v. Edmondson [1857] 8 De 787 ;
(6) Nelson v. Knowles [1948] 1 All ER 866 (CA). Reliance as also placed on the decisions reported in :
(1) Stewarts (Brixton) Ltd., In re [1985] BCLC 4 ;
(2) Cumana Ltd., In re [1986] BCLC 430.
wherein the court has considered that diversion of business would amount to oppression, so as to grant relief.
54. Reliance was also placed on London School of Electronics Ltd., In re [1986] 1 Ch 211, relating to diversion of business and on Five Minute Car Wash Service Ltd., In re [1966] 36 Comp Cas 566 ; [1966] 1 WLR 745, that an act of omission amounts to oppression.
55. The main argument that needs to be addressed is whether the Puri group has rebutted the presumption of fact regarding its fiduciary duty. According to counsel for the Puri group, it had rebutted that presumption, as it is seen from the records that Contship had terminated the agency of SSTS, there was no corporate opportunity to SSTS ; no attempt was made by SSTS to approach Contship, because both parties knew that there was no corporate opportunity to SSTS, whereas the only grievance in the petition was using domain and name "SAMRAT". There is no substance in this defence. The presumption of fact will have to be rebutted and could have been done so by the Puri group by adducing positive evidence that the business opportunity was not available to SSTS and that the agency was given to SSL, after disclosure to the Sippy group and SSTS and that there was refusal or waiver by the Sippy group or SSTS. The materials pressed into service on behalf of the Puri group would only indicate that Contship was keen to deal only with the Puris. That material, however, does not positively point out that Contship was unwilling to deal with SSTS with whom, admittedly, the Puri group continued to be the managing director and director of the companies (SSCO and SSTS). Even accepting the case of Contship that it was keen to deal only with the Puri group, no explanation is forthcoming as to why the arrangement presently obtaining with SSTS, with whom the Puri group was still associated, was required to be terminated and given to SSL, which was newly formed and fully controlled by the Puri group. Understood thus, the presumption of fact remains unrebutted. If it is so, the Puri group being fiduciary of SSCO and SSTS were obviously in breach of their duties to the companies.
56. The next question is whether, even if the agency is not subsisting, or, in fact, was terminated, can SSTS or the Sippy group complain of breach of fiduciary duty by the Puri group. This question stands substantially answered by the discussion in the foregoing paragraphs. The fact that Contship had terminated the agency of SSTS or that the agency agreement with them was not subsisting on December 1, 2001, is of no consequence and cannot be the sole basis of answering the issue of fiduciary obligations and duty of the Puri group. However, taking the totality of the established facts, conclusion as reached by the Board relating to the breach of fiduciary duties by the Puri group is inescapable.
57. The next aspect that needs to be addressed is whether SSL, a newly formed company fully controlled by the Puri group, is accountable to SSTS for the benefits derived by it from the contract with Contship. Even this question will have to be answered against the Puri group and SSL. The substance of the view taken by the Board is that SSL was created only as a vehicle to take away the business of Contship agency from SSTS. Besides, the finding of fact as recorded and which cannot be disturbed is that SSL is a newly formed company and is fully controlled by the Puri group only. More so, SSL has been established by the Puri group to do the same business as that of SSTS and its incorporation procedure was initiated much prior to the termination of the agreement of SSTS. All this has been done "clandestinely". The Board has then lifted the corporate veil of SSL and has found that it is the Puri group who has received the entire benefit by using the corporate entity of SSL as a shield. Understood thus, no fault can be found with the conclusion reached by the Board for requiring the SSL to account for the benefits derived by it from the contract with Contship. Such a direction is possible in the wake of finding recorded that the conduct of the Puri group resulted in oppression of the Sippy group and of the two companies within the meaning of Section 397 of the Act and also mismanagement within the meaning of Section 398, relating to the affairs of the companies, which was in a manner prejudicial to the interests of the company, proceedings such as the present one, there would be no limitation or restriction of power of the Board. Reliance has been rightly placed by counsel for the Sippy group on the Division Bench decision of our High Court in Shanti Prasad Jain v. Union of India [1973] 75 Bom LR 778, which deals with the scope of power to be exercised by the court in the proceedings under Sections 397 and 398 of the Act. Section 402 of the Act is a provision without prejudice to the generality of the powers of the Board under Sections 397 and 398 to bring to an end or prevent the matters complained of or apprehended and make such orders, as it thinks fit. On a conjoint reading of Sections 397, 398, 402 and 406 with Sections 539 to 544 of the Act, it would appear from the legislative scheme that the Board has plenary powers to pass such equitable orders not only to remedy the mischief, but to prevent recurrence thereof.
58. The question, however, is : Can such direction be parsed against the person other than the company or the members of the company. As mentioned earlier, SSL has been created by the Puri group, who continue to be managing director and director of SSCO and SSTS. To put it differently, SSL is none other than the Puri group or its alter ego ; and the direction as passed ostensibly against SSL was, in fact, against the Puri group and such direction can be justified even by virtue of expansive provisions contained in the Act, including Sections 542, 543 and 544, which empowers the Board to pass appropriate directions against "any person" engaged in the objectionable activity so as to affect the company. Viewed in this perspective, there is no substance in the independent appeal preferred by SSL, making a grievance that no direction could have been passed against it at all.
59. It was argued on behalf of the Puri group that in the absence of a clear finding on the issue of the conduct of the Puri group being oppressive or resulting in mismanagement of the affairs of the companies, no directions could be passed under Sections 397, 398 of the Act. This submission proceeds on the premise that the Board has only found as a fact that there was deadlock between the two groups. According to counsel for the Puri group, mere finding of deadlock cannot be the basis for invoking powers under Sections 397, 398, 399 of the Act. In the first place, the submission is founded on wrong assumptions. Whereas my understanding of the conclusion reached by the Board is that, it proceeded to pass directions having found that there was oppression of the Sippy group and mismanagement in the affairs of the companies. More so, as is rightly contended on behalf of the Sippy group, that the provisions of Sections 397 and 398 cannot be given restricted meaning, whereas, the plain language of the said provisions would suggest that the conduct of the Puri group as alleged and established from the record was fully covered by the purport of the said provisions. Understood thus, there is no substance in the grievance made on behalf of the Puri group to assail the conclusion reached by the Board justifying legitimate exercise of its powers under Sections 397 and 398 of the Act.
60. The next aspect that needs to be considered is whether the Board could have issued the directions, as have been issued in the present case, having regard to the nature of proceedings under Sections 397, 398 and 399 of the Act. Before we proceed to examine this aspect, it needs to be recalled that the direction issued by the Board is qua the SSL to account for the benefits derived by it from the Contship agency. I have already taken the view that such a relief could be legitimately granted if the facts of the case so warrant ; and has been rightly granted in the present case.
61. The other direction is against the Puri group to pay simple interest at the rate of 12 per cent. per annum for the period beyond four years from October 15, 1992, till the refund of the amount of Rs. 49 lakhs. There is further direction issued by the Board directing both the groups to purchase the shares of the other group. In the first place, having regard to the expansive provisions contained in the Companies Act, no fault can be found with the Board for issuing such directions. The directions so issued are obviously for adjusting equities and for bringing to an end or preventing the matters complained of or apprehended.
62. In so far as the direction issued by the Board restricting the period for accounting of the benefits derived by the SSL from Contship agency, only between the period from December 1, 2001 and July 21, 2003, in my opinion, the same is inappropriate. Once it is found that the Puri group was fiduciary, it necessarily follows that any (all) benefits derived by the fiduciary are to be accounted on the assumption that the same have been availed for the benefit of the trust or company. So long as the fiduciary relationship of the Puri group continued with the companies and till the Contship agency is continued with SSL, which is newly formed and fully controlled company of the Puri group, the liability of the Puri group in particular and also of SSL to account the benefits derived from the contract with Contship after December 1, 2001, would subsist. Understood thus, the Puri group as well as SSL being a company newly formed and fully controlled by the Puri group will be liable to account for all the benefits derived from the agency of Contship on and from December 1, 2001, till the Puri group continues to be fiduciary of the companies, or, on the happening of termination of the Contship agency given to SSL, whichever is earlier. To that extent, the appeal preferred by the Sippy group ought to succeed. This is on the analogy that the case of mismanagement of the affairs of the SSTS has been established and which inevitably is in a manner prejudicial to the interests of SSTS. The relief so granted would enure to the benefit of SSTS. Such a direction can be justified by the provisions of Section 398 read with other enabling provisions of the Act.
63. In so far as the direction qua the Puri group to pay simple interest for period till the repayment of the amount of Rs. 49 lakhs to SSCO is concerned, it was argued on behalf of the Puri group that no such relief was claimed in the company petition as filed and such a direction was outside the powers of the Board. It was also argued that once the Board has found that the Sippy group had approached the court with unclean hands, no relief whatsoever could be granted. Reliance was placed on the decision of the Karnataka High Court in the case of Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1991] 72 Comp Cas 211, wherein it is observed that conduct of the party as reflected not only in the proceedings before the company court, but also in parallel proceedings in civil courts and in any other civil litigation in other courts can be the basis for non-suiting the party.
64. I find substance in the submission canvassed on behalf of the Puri group that the court, having taken the view that the disclosures made in Company Petition No. 40 of 2002 filed by the Sippy group were false to their own knowledge, and on that reasoning, the entire petition ought to have been rejected. Indeed, the direction to pay simple interest qua the Puri group was to pass an equitable direction in favour of the company, SSCO. However, in the present case, it is a matter of record that SSCO is constituted only of two groups, namely, the Puri group and the Sippy group. If the shareholders of the company were to be different persons, obviously, the Puri group could have been directed to pay interest for the delayed payment so that the other shareholders would also have been benefited by such an order. Besides, in the present case, the finding as has been recorded by the Board is that the entire transaction was completed with the knowledge and consent of the Sippy group. Understood thus, if the Puri group was required to pay interest, ostensibly to the company, SSCO, the benefit thereof would be received by the Sippy group. As mentioned earlier, the Sippy group having approached the court with unclean hands by making disclosures, which were false to their knowledge, in respect of the same transactions, they would not be entitled to take advantage of their own wrong and, for which reason, the direction issued by the Board to the Puri group to pay simple interest for the delayed payment cannot be sustained. This is more so because no appeal has been filed by the Sippy group challenging the correctness of the conclusion reached by the Board regarding the fact that they had approached the court with unclean hands. Accordingly, the appeal preferred by the Puri group questioning the directions against them to pay interest for the delayed payment should, succeed.
65. The next direction passed by the Board is to purchase the shares of the other group by the respective groups. Even this direction can be sustained having regard to the conclusion reached by the Board that it was obvious that there was deadlock in managing the affairs of the companies, SSCO and SSTS. There seems to be substance in the reasoning adopted by the Board that deadlock results in conduct, which is prejudicial to the interests of the companies and can be the basis to wind up the company on just and equitable grounds. To overcome this position, it was contended on behalf of the Puri group that neither Clause (a) nor Clause (b) of Section 397(2), nor Clause (a) or Clause (b) of Section 398(1) of the Act was attracted in the matters of deadlock. Moreover, no adjudication has been done especially in the context of Clause (a) of Section 397(1) or positive finding recorded that to wind up the company would be unfair prejudice to the Sippy group. In my opinion, this submission is obvious misreading of the judgment of the Board. The Board has recorded a clear conclusion that there has been oppression of the Sippy group and the companies and which clearly attracted provision of Section 397 of the Act, in which case, the company would deserve to be wound up. But, such a course would unfairly prejudice the Sippy group and more so, the company as such. The approach of the Board, on the other hand, was not only to adjust the equities between the two groups, but to ensure that the mischief was brought to an end or to prevent the matters complained of or apprehended and more so, to sustain the companies. Viewed in this perspective, the direction issued by the Board which would enable the Puri group to take over SSTS, which was doing the same business as SSL, the newly formed company fully controlled by the Puri group. On the other hand, the Sippy group would take over the control and management of SSCO of which M/s. Meridian was the subsidiary. It is in that context the Board has issued direction that the Puri group would purchase shares of the Sippy group in SSTS by paying the fair value ; and Sippy group shall purchase shares of the Puri group in SSCO by paying fair value therefor. Such a course was the appropriate relief and direction to be passed in the fact situation of the present case.
66. It was however, contended on behalf of the Puri group that this arrangement clearly overlooks the allegations of the Puri group of diversion of business and funds of SSCO by the Sippy group. However, to my mind, the process of valuation of shares by an independent valuer would obviously reckon that aspect and that should address the grievance advanced on behalf of the Puri group. Moreover, there can be no fool proof scheme adopted in the fact situation of the present case. As has been found by the Board no case for investigation into the affairs of the companies has been made out ; that finding having gone unchallenged, and it is not possible to overturn the same in this appeal, the scope of proceedings cannot be enlarged nor the correctness of the direction be said to be without authority of law. In my opinion, the course as suggested and adopted by the Board was the only way in resolving the problems of the two groups inter se and also to ensure that the companies are not required to be wound up, which order has to be passed only in exceptional situation.
67. On the above reasoning, the relief and directions that have been granted by the Board will have to be modified to the extent, referred to above.
68. The next aspect that needs to be considered is whether in spite of finding reached by the Board that the Sippy group approached the court with unclean hands, whether both the petitions ought to have been dismissed as a whole without granting any relief, as has been granted by the Board. This contention is pressed on the basis of the dictum of the Karnataka High Court in Wadiyar case [1991] 72 Comp Cas 211. However, in the fact situation of the present case, such a drastic view may result in overlooking the bounden duty of the Board to prevent mismanagement in the affairs of the company. As has been seen earlier, the case of mismanagement in the affairs of the companies has been established from the record. Indeed, the action is commenced at the instance of the Sippy group. However, merely because false statements are made in one petition by the Sippy group, that would not warrant dismissal of both the company petitions having regard to the fact\\situation of the present case. That view would result in taking a hypertechnical attitude in the matter in spite of finding of fact that case of oppression and mismanagement is established on record. Accordingly, I find no reason to accept the submission that both the company petitions ought to have been dismissed by the Board because of the finding reached that the Sippy group had approached the court with unclean hands in one matter.
69. On the above reasoning, I proceed to dispose of all the four appeals in the following manner :
(1) Company Appeal No. 1 of 2004 filed by the Puri group is dismissed.
(2) Company Appeal No. 4 of 2004 filed by SSL is also dismissed.
(3) Company Appeal No. 5 of 2004 filed by the Sippy group is allowed. The direction issued by the Board to account for the benefits derived from the Contship Agency from December 1, 2001, only till July 21, 2003, is set aside. Instead, direction is issued to SSL, as well as the Puri group, to account for the benefits derived by SSL from the contract of agency with Contship from December 1, 2001, till they purchase the shares of the Sippy group in SSTS, or, till the termination of agency of SSL by Contship, whichever is earlier.
(4) Company Appeal No. 2 of 2004 filed by the Puri group is partly allowed to the extent that direction issued by the Board to the Puri group to pay simple interest at the rate of 12 per cent. for the delayed payment of Rs. 49 lakhs to the company, SSCO, is set aside.
(5) The common order passed by the Company Law Board in Company Petitions Nos. 40 of 2002 and 41 of 2002 will stand modified to the above extent.
(6) The Company Law Board shall proceed to take steps in terms of the observations made in para. 26 for ensuring appointment of independent valuer, so as to fix the fair price of the shares of the respective companies for carrying out the directions qua the two groups of purchasing the shares of the other group in the concerned companies.
(7) No order as to costs.
70. At this stage, counsel appearing for the Puri group prays for stay of operation of this decision to enable the Puri group to question the correctness of this decision in appeal. This request seems to be reasonable. Accordingly, it is ordered that operation of this decision not to be given effect to for a period of eight weeks from today. It is, however, clarified that the arrangement as directed by the Company Law Board as observed in para. 26 of its judgment shall be maintained for a period of eight weeks as aforesaid.
71. All concerned to act on the copy of this order duly authenticated by the court stenographer of this court. Certified copy expedited.
