Suryakant Gupta and ors. Vs. Rajaram Corn Products (Punjab) Ltd. and ors. - Court Judgment

Excerpt:
company - winding up - appellants are share holder of respondent company - appellant filed company petition for its winding up on ground of mismanagement - company law board (clb) passed impugned order whereby clb directed that in event of sale, respondent-company shall purchase shares of appellants - aggrieved, appellant filed present company appeal - held, in view of direction that their shares shall be sold in favour of either respondents nos. 2 to 5 or third party-joint developer, it may not be necessary to carry on with affairs of company - under such circumstances, setting aside order of clb and remitted to clb with direction for deciding to value shares of company by competent expert - offer shares so assessed to respondents nos. 2 to 5 and if they decline, to third party-joint developer - if neither respondents nos. 2 to 5 nor third party is willing to purchase shares at valuation so made, in manner referred to above, having regard to finding that there are just and equitable circumstances for winding up of company, company shall be ordered to be wound up - appeal is allowed in above terms - administrative law - government contract: [vijender jain, c.j., rajive bhalla & sury kant, jj] government contract rejection of highest bid challenge as to held, state has no dominus status to dictate unilateral terms and conditions when it enters into contract. its actions must be reasonable, fair and just in consonance with rule of law. as a necessary corollary thereto, state cannot refuse to confirm highest bid without assigning any valid reason and/or by giving erratic, irrational or irrelevant reasons. the state is free to enter into a contract just like any other individual and the contract shall not change its legal character merely because other party to contract is state. though no citizen possesses a legal right to compel state to enter into a contract, yet latter can neither pick and choose any person arbitrarily for entering into such agreement nor can it discriminate between persons similarly circumstanced. similarly, where breach of contract at hands of state violates fundamental rights of a citizen or its refusal to enter into a contract is contrary to statutory provisions or public duty, judicial review of such state action is inevitable. likewise, if state enters into a contract in consonance with article 299 rights of the parties shall be determined by terms of such contract irrespective of fact that one of the parties to it is a state or a statutory authority. for these precise reasons the equitable doctrine of promissory estoppel has been made applicable against the government, as against any other private individual, even in cases where no valid contract in terms of article 299 was entered into between the parties. hence, if government makes a representation or a promise and an individual alters his position by acting upon such promise, the government may be required to make good that promise and shall not be allowed to fall back upon the formal defect in the contract, though subject to well known limitations like larger public interest. the state, thus, has no dominus status to dictate unilateral terms and conditions when it enters into contract and its actions must be reasonable, fair and just and in consonance with rule of law. as a necessary corollary thereto state cannot refuse to confirm highest bid without assigning any valid reason and/or by giving erratic, irrational or irrelevant reasons. -- consumer protection act, 1986 [c.a. no. 68/1986]. articles 14 & 300a: government contract noon-acceptance of highest bid held, it does not result in taking away right to property of highest bidder highest bid, per se, unless it is accepted by competent authority, and consequential sale certificate is issued, does not grant the highest bidder right to property of type which is protected under article 300a right to property is limited to confer highest bidder the right to challenge action of appropriate authority in refusing to accept highest or other bids. [air 1984 p&h 282 (fb) explained] articles 14 & 226: government contract rejection of highest bid held, highest bidder has locus standi to maintain writ petition and assail action of state government or its authorities by contending that his bid has been turned down for arbitrary, illegal or perverse reasons however in such matters, heavy onus would like on petitioner bidder to establish his allegations as state action shall always be presumed to be in accordance with law - 7. at the stage of appeal, the butt of attack of the reasoning of the company law board by the appellants was that consistent with the admitted facts of systematic sale of the properties in bangalore, disposal of the plant and machinery at mohali and the non-declaration of dividend ever since the commencement of the operation, the company law board ought to have found that the plea of oppression and mismanagement had been clearly established. 9. even at the outset, it could be seen that the original purpose for which the company was started, namely, for industrial manufacture of starch has completely failed. the company's failure and the respondents' rationalisation: 10. for each one of the events that has come about necessitating the depletion of its assets for a period of time gradually, there have been attempts to rationalise and bring out reasons for the failure. the poor state of affairs in management is indeed conceded in one way or the other by the respondents by saying that there has been enough bad blood between the appellants and respondents by reference to several letters of complaints written by the petitioners to the chairman, punjab national bank not to accept any one-time settlement proposals; it is almost somewhat like a golden egg, that the property which remains for the company is a valuable land in mohali.k. kannan, j.i. nature of lis:1. the company appeal is against the order of the company law board, principal bench, new delhi dated november 27, 2007 passed in the company petition no. 109 of 2007 (surya kant gupta v. rajaram corn products (punjab) p. ltd. [2008] 142 comp cas 416), filed by the appellant herein. the petition had been filed for reliefs complaining of oppression and mismanagement under sections 397 and 398 of the companies act, 1956.2. the complaint was at the instance of the petitioners holding 10.7 per cent. equity shares and 19 per cent. preference shares in the first respondent-company. the second respondent, who entered the main contest in the petition is the elder brother of the first petitioner. the board of directors of the respondent-company consisted of the second respondent, his wife and daughter. the company was incorporated on june 22, 1974 and it was engaged principally in the manufacture of starch. the complaint was that the company had been systematically stripped off of its assets to tide over the losses occurring over 34 years. dividend had not been declared even once. the factories, which were started in bangalore and mohali had both been closed. the property in bangalore was sold first and the entire plant and machinery in mohali have also been sold subsequently. the only asset which is available is the land over which the business was being run at the mohali and even that is sought to be sold by the second respondent by entering into a joint venture agreement with a third party for construction of a multiplex.3. the audited annual statements track a downfall in the affairs of the company and the total assets of the company have been reduced by 94.27 per cent. there has been a complete lack of transparency in the approach of the second respondent and other respondents. the company having lost its substratum is being merely a shell company and liable to be wound up under section 433(f) of the companies act. an appropriate direction that should be issued under the circumstances would only be to uphold the contentions of the petitioners that there have been brazen acts of oppression and a clear case of mismanagement in the affairs of the company and consequently an administrator shall be appointed ; the petitioners be declared that they have voting shares on the cumulative redeemable preference shares on the basis that no dividend has been declared ever since the incorporation of the company and for injunction restraining the respondents from alienating the assets of the company or in the alternative to appoint an independent committee to oversee the sale of the assets.ii. the plank of defence by the respondents:4. the respondents refute every one of the allegations except that there is no denial of the fact that the purpose for which the company was incorporated is no longer carried out. the justification brought out is that the factory in bangalore was sold as early as in 2001 when the pollution control board directed the cessation of its operations on the ground that the use of chemicals and the discharge of effluents signalled public hazard. the mohali unit was also required to be closed by a similar direction by the pollution control board. the company had itself filed a reference before the bifr for registering it as a sick company but the reference was dismissed on the ground that it was not an industrial company and the act itself was not applicable. all the plant and machinery were required to be sold, after directions for closure of the industrial operations had been made by the respective state pollution control boards. sale was the only option when the idea was to discharge the loans contracted for establishing the manufacturing units and the bona fides could not be doubted.5. it is not as if the company was without any substantial assets. the land of over 6 acres in mohali itself was worth over rs. 55 crores and the company was proposing to hand over the land to some promoters to set up a multiplex. the project was to be completed within a period of three years but the petitioners have been causing every obstruction to prevent any meaningful arrangement to be made with reference to developing the property.iii. disposition by the company law board:6. the company law board (for short 'clb'), which dealt with the petition found no substance in the allegation that the second respondent was stripping off the assets of the company and found the action of the pollution control board as sufficient justification for closure of the industrial operations. even the sale of the land in bangalore and the disposal of the plant and machinery done with the consent of the secured creditor, punjab national bank was found to be justified in view of the fact that the industrial operations could not have continued in the teeth of closure orders by the pollution control board and especially when the proceeds of the sale had been utilised for discharge of loans. the board found even the apprehension that the land at mohali would be sold as baseless. the only protection, which the company law board gave, under the circumstances, was to preserve the petitioners' right to secure full details of the joint venture agreement if the respondents finalised such an agreement by convening immediately the annual general meeting after the agreement was entered into. noting that there had been irreconcilable differences amongst the members of the family, the board directed the purchase of the minority interest either by the company or by the shareholders other than the respondents, who had already expressed their inability to purchase the petitioners' shares. the company law board gave a further direction that in the event of sale, the respondent-company shall purchase the shares of the petitioners at the value at which the land was sold. as regards the plea of the petitioners that there had been no declaration of dividend for over 34 years, the company law board affirmed, the voting rights of the petitioners in terms of section 87 of the companies act, 1956, in respect of their holding of preference shares and further directed that the respondent-company should give notice of the general meetings by registered post to the petitioners to protect the interest of the petitioners.iv. the principal grounds of challenge in appeal:7. at the stage of appeal, the butt of attack of the reasoning of the company law board by the appellants was that consistent with the admitted facts of systematic sale of the properties in bangalore, disposal of the plant and machinery at mohali and the non-declaration of dividend ever since the commencement of the operation, the company law board ought to have found that the plea of oppression and mismanagement had been clearly established. the finding that there was no basis for the apprehension of sale of the assets of the company, but still providing that in the event of sale, the company of the respondent should be directed to purchase the shares at value at which the property was sold was inconsistent. according to the appellants, the decision raised several questions of law, namely: (i) the substratum of the company having been completely lost on account of systematic sale of the assets, any further sale was to be barred or independent committee shall be constituted to oversee any further sale of the assets to protect their interest; (ii) on clear proof of the fact that the respondents were trying to dispose of the valuable land of the company, directions ought to have been issued either to the respondent or the joint venturer to buy the shares of the petitioners at the market value of the land in order to put an end to the acts of oppression and mismanagement ; (iii) without merely directing the disclosure of the details of the joint venture at the annual general meeting, the company law board ought to have directed the respondents to seek the permission of the petitioner apart from other substantial groups of representatives of the company before any decision was made with regard to the joint venture agreement; (iv) the direction should have been issued under section 402(b) for purchase of shares of the petitioners at the market value than merely making it conditional upon a future contingency that in the event of sale, only the petitioners' share should be purchased ; and (v) even if a direction of purchase of the shares was not feasible, the property itself ought to have been vivisected in proportion to which the petitioners held percentage of shares including the shares held by the proprietary firm of which the first petitioner was the proprietor.8. incidentally, it must be pointed out that the questions of law are sought to be raised with reference to 18,300 shares by the proprietary firm of which the first petitioner was alleged to be the owner. but, admittedly, there is a suit as regards the ownership of 18,300 equity shares before a civil court and hence the point raised in that regard would not be required to be answered in this appeal.v. uneventful performance of the company on all fronts:9. even at the outset, it could be seen that the original purpose for which the company was started, namely, for industrial manufacture of starch has completely failed. the company has lost the entire property at bangalore for discharge of its own debts. the plant and machinery at mohali were also lost for discharge of debts and in pursuance of directions for closure of the factory by the pollution control board. there were still debts owing by the company and on no occasion, since the incorporation of the company more than 34 years back, has there been a single incident when the company has posted profits and declared any dividends. if the company has any value left till date, it is by sheer default by the market forces operating without any effort on the part of the directors of the company. the prodigious escalation of value of 6 acres of land at mohali between the year 1974 till date could not obviously be by any effort of the company or its directors. nothing has happened, except the intrinsic appreciation of value of land but every value addition that was sought to be made by construction and by installation of machineries has come to naught. there are more debts than when the company started and there are no source of productive income. there exists a complete lack of cohesion between the first petitioner and the second respondent, who were the promoters of the company. their family feud has spilt to the public domain through complaints and counter complaints, arrests and releases and civil and criminal cases galore. if the second respondent or the persons who are the directors of the company could take any credit, the only thing that could be stated is that they have not disposed of the only valuable asset of the company, namely, the 6 acres of land at mohali.vi. the company's failure and the respondents' rationalisation:10. for each one of the events that has come about necessitating the depletion of its assets for a period of time gradually, there have been attempts to rationalise and bring out reasons for the failure. for the sale effected for the property in bangalore, the respondent would justify by saying that the sale was made by the express orders of the company law board in c.p. no. 50 of 1994 (suryakant gupta v. rajaram corn products (punjab) ltd. [2002] 108 comp cas 133). by the closure of the factory at mohali, a justification is the direction for closure by the pollution control board. the need for sale of the plant and machinery at mohali was the cessation of industrial activity and for discharge of debt to the punjab national bank by one-time settlement of 140 lakhs. the poor state of affairs in management is indeed conceded in one way or the other by the respondents by saying that there has been enough bad blood between the appellants and respondents by reference to several letters of complaints written by the petitioners to the chairman, punjab national bank not to accept any one-time settlement proposals; the representation to the secretary, company affairs and chief minister, punjab, relating to the affairs of the company; representations to the president and rbi governor to stop the company from availing of any one-time settlement facility and the attempt to stall the joint venture agreement, which the respondents had entered into for effective use of the land into another business. the decision through the annual general meeting had also been convened as per the directions of the company law board and the collaboration agreement entered into by the company with m/s. suncity projects p. ltd., new delhi, was read out and none of the appellants attended the meeting but the appellants filed only an application in c. a. no. 1 of 2009 seeking for a restraint against the sale of the property. when the appellants filed c. a. no. 3 of 2009 to give particulars of the amounts received by the respondent-company till date with regard to the immoveable property, the respondents had merely stated that they did not wish to file any reply to the application c. a. no. 3 of 2009 filed by the appellants. according to the respondents, the joint venture agreement itself was not a matter of complaint in the petition under sections 397 and 398 of the companies act and therefore, as an event which has taken place after the impugned order, it ought not to be taken as a subject-matter of appeal and it should be taken as flowing outside the scope of the appeal. the joint venture agreement itself, according to the respondents, was a prudent act where the company was in the process of implementing its mega projects over rs. 100 crores and it was a common knowledge that the development of property by involving third parties, who were willing to fund the project could not be done without a trade-off, such as by giving rights of sale of some portion of the assets to the joint developer as consideration for the value additions, which were sought to be made by the execution of the mega projects.vii. propositions of law paraphrased:11. the respective counsel have relied on several decisions of the hon'ble supreme court and high courts, which spell out the principles of law through the following decisions:(1) haryana financial corporation v. official liquidator : [2007] 139 comp cas 500 (p & h).(2) haryana financial corporation v. official liquidator passed in company appeal no. 31 of 2007 on september 28, 2007.(3) fcs software solutions ltd. v. la medical devices ltd. : [2008] 144 comp cas 391 (sc) : [2008] 7 jt (sc) 499.(4) international coach builders ltd. v. karnataka state financial corporation : [2003] 114 comp cas 614 (sc) : [2003] 2 jt (sc) 395.(5) mrs. bacha f. guzdar v. cit : [1955] 25 comp cas 1 (sc) : [1955] 27 itr 1.(6) tata engineering and locomotive co. ltd. v. state of bihar : [1964] 34 comp cas 458 : air 1965 sc 40.(7) suresh kumar sanghi v. supreme motors ltd. : [1983] 54 comp cas 235 (delhi).(8) hanuman prasad bagri v. bagress cereals p. ltd. : [2001] 105 comp cas 493 : air 2001 sc 1416.(9) sangramsinh p. gaekwad v. shantadevi p. gaekwad : [2005] 123 comp cas 566 (sc).(10) needle industries (india) ltd. v. needle industries newey (india) holding ltd. [1981] 51 comp cas 743 (sc).(11) k. muthuswami gounder v. n. palaniappa gounder : air 1998 sc 3118.12. to paraphrase the points adverted to by the above decisions:(i) the company court has power to take note of even subsequent events to give appropriate directions; (ii) the complete loss of substratum of the assets of the company could be sufficient ground for directing winding up of the company for just and reasonable cause as provided under section 433(f) of the companies act; (iii) where the company is run by the members of the family or between close friends and relatives, the partnership principles thereby applicable for dissolution of a partnership, shall equally apply for winding up of the affairs of the company ; and (iv) the complete lack of transparency and systematic disposal of the assets of the company without involving the shareholders in the decision making would constitute oppression and mismanagement.viii. jv agreement not transparent:13. having set out the legal propositions and finding that the affairs of the company have not been carried on to any profitable venture where no dividends have been declared ever since its incorporation in the year 1974, i have no hesitation in finding that there existed circumstances, which would justify winding up the affairs of the company but still having regard to the fact that the principal asset of the company in mohali, which is substantially valuable, there is a scope for turnaround, especially after the alteration of the objects of the company by an amendment brought to the memorandum of association. one thing, however, is clear that the respondents have never allowed the petitioners to take part in any decision relating to the sale of the assets or evolved any strategies to bring a cohesion in the management and afford confidence-building measures with the appellants, who have fallen out from them. it will be futile to imagine that the parties are going to bury the hatchet and come to make a profitable venture by a collaborative effort. the only possible method of dealing with the issue would be to invoke the provisions of section 402 and give appropriate directions, while upholding the contentions of the appellants that the respondents' conduct have resulted in oppression and mismanagement.14. nothing remains for the company but fortunately it is still not the last straw. it is almost somewhat like a golden egg, that the property which remains for the company is a valuable land in mohali. it is valuable not because of any worthy management of the respondent-company but in spite of all the squabbles that have festered the affairs of the company. but even the property is not being retained as such but it has been dealt with, as admitted even by the respondents, by joint venture agreement with m/s. suncity projects p. ltd. it is said to be a mega project involving more than rs. 100 crores. the feasibility of such a project itself is not a matter, which this court can embark on and it should rather be left to the commercial wisdom of the company to go through with it. but it still does not seem possible that the appellants should be compelled to be participants to the whole bargain especially when the respondents have not made any attempts to be transparent about the transaction. even in the application filed in c.a. no. 3 of 2009 that contains a prayer before this court for giving particulars of the amounts received by the respondent-company and the nature of the third party interest that has been created, the representation on behalf of the respondent was only that they did not wish to file any reply to the application. the document itself is not before the court. the respondents, on the other hand, have been evasive to disclose all the relevant details. since the joint venture agreement has been entered into between the respondents and m/s. suncity projects on december 3, 2007, that is subsequent to the filing of the application before the company law board, the respondents contend that the issue relating to the joint venture could not be taken up as a subject-matter of adjudication. this contention is without substance for the court has always the power to take into account all subsequent matters also and held to be so by judicial pronouncements, paraphrased supra. it means taking a decision with reference to the only vital asset of the company and involving the company in a large venture running into rs. 100 crores, which is even beyond the value of its existing asset.ix. the viable options:15. in the absence of the party before court who has entered into the joint venture agreement with the respondent-company, namely, m/s. suncity projects p. ltd., it shall not be possible to make any directions to the third party or make any modification with reference to the same. a joint venture agreement is invariably a contract between the owner of a property and a person who is prepared to invest for developing the property. the construction of a multiplex by one party upon the fixed assets would itself be the consideration for sharing the stakes in the company for the benefit of the third party. as for the company itself, it is the value additions to its assets with prospects of a moneyspinner emerging out of its assets which is the attractive feature. the only method by which the transaction could be gone through would be to allow the appellants to stand out of the bargain to which they are not interested and to whom the details of the joint venture agreement have not been disclosed, by allowing the sale of their shares to the respondents. a purchase by the company itself might involve reduction in capital, which may not be possible at a time when the company admittedly does not have adequate liquid resources and it shall be left to the other persons in management of the company to purchase their shares. the direction by the company law board that at any point of time if the respondent disposes of the land, then the company shall purchase the shares of the petitioners at the value at which the land is sold does not appear to be either sound or adequate. in the face of the subsequent development and the admission that there has been a joint venture agreement, which could not be entered into without offering a stake in the company to the third party (m/s. suncity projects p. ltd.), or allowing such party to exploit the asset of the company to their advantage, which though may not be exclusive, will have to be sufficient recompense for the initial investment of erecting the structures. the value of the shares shall have to be required to be assessed and an option given to respondents nos. 2 to 5 to purchase the shares initially. if they decline to purchase, such an option shall be given to the third party developer, who is the party in the joint venture agreement. this would require re-working the terms of the joint venture agreement about the mode of payment and how such third party could be given due credit in the agreement itself for the amount that shall be required to be paid for the value of the shares of the appellants. section 402(e) states that the power of the court under section 397 or 398 may provide for, inter alia, 'the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned'. consequently, in view of the statutory mandate such modification in the joint venture agreement cannot be undertaken without notice to the third party-m/s. suncity projects p. ltd., before finalising on the appropriate modification of terms, in the event of expression of their willingness to purchase the shares on due valuation made by an approved valuer. these processes cannot be undertaken by this court in appeal. the prayer for appointment of an administrator would have meaning only if the petitioners were to be permitted to continue being members of the company and in view of the direction that their shares shall be sold in favour of either respondents nos. 2 to 5 or the third party-joint developer, it may not be necessary to carry on with the affairs of the company. even otherwise, it is a new business which is being contemplated on an express resolution that has been undertaken at the annual general meeting and it shall not be necessary to appoint an administrator to carry forward the new venture.x. the final disposition:16. under the circumstances, while setting aside the order of the company law board, the appeal is allowed and remitted to the company law board:(i) to value the shares of the company by a competent expert, who may be appointed by the company law board ;(ii) offer the shares so assessed to respondents nos. 2 to 5 and if they decline, to the third party-joint developer ;(iii) issue notice to third party-joint developer for consideration of modification of the terms that could provide for an adjustment in the value of the shares that is offered to be purchased (that is in case if the third party-joint developer is interested in purchasing the shares) by increasing the percentage of stake that the third party developer would have in the company or increase the share of income such as to have due regard for value of shares of the appellants to be transmitted to them.17. there still remains a disputed item with reference to 18,300 equity shares that had already stood allotted to m/s. rajaram maize products in respect of which a suit is still pending before the court of additional district judge, rajnandgaon, m.p. if the decree is returned in favour of the appellants, the value of the shares shall also be offered for sale in the manner and in the order of preference mentioned above. the value of the shares shall be determined as on the date of filing of petition before the company law board and the value so determined will carry interest from that date at 7.5 per cent. till the date of payment. if neither respondents nos. 2 to 5 nor the third party is willing to purchase the shares at the valuation so made, in the manner referred to above, having regard to the finding that there are just and equitable circumstances for winding up of the company, the company shall be ordered to be wound up.18. the appeal is allowed in the above terms.