MANU/CL/0049/1999

Equivalent Citation: [1999]98C ompC as463(C LB)

BEFORE THE COMPANY LAW BOARD

PRINCIAL BENCH, NEW DELHI
C.P. No. 51 of 1998
Decided On: 15.07.1999
Appellants: Atmaram Modi
Vs.
Respondent: ECL Agrotech Ltd. and Ors.
Hon'ble Judges/Coram:
S. Balasubramanian, Chairman and K.K. Balu, Member
Counsels:
For Appellant/Petitioner/Plaintiff: K.G. Raghavan, Adv.
For Respondents/Defendant: S.S. Naganand, Adv.
ORDER
S. Balasubramanian, Chairman
1. This petition under Section 397/398 of the Companies Act, 1956 ("the Act"), has
been filed by the petitioner hereinabove with the consent of twelve other
shareholders, all together collectively holding 25 per cent shares in ECL Agrotech
Limited (the company), alleging acts of oppression and mismanagement in the affairs
of the company. The main grievance of the petitioner is that he was wrongly/illegally
removed from the position of a director of the company and that such removal is an
act of oppression in view of the company being in the nature of a partnership. In
addition to this main grievance, the petitioner has also alleged siphoning off of
funds, etc., by the respondents. On the basis of these allegations, various reliefs
have been sought including for a declaration that the first petitioner continues as a
director of the company and that the company is a quasi-partnership, restraining the
respondents from committing any act in breach of the partnership principles in the
conduct of the affairs of the company, for directions to the respondents to purchase
the shares held by the petitioners or in the alternative, directing the respondents to
sell the shares held by them to the petitioners.
2 . It is appropriate to narrate, in brief, the contents of the petition. This company
was incorporated in June, 1995, by four groups consisting of the petitioner and the
second to fourth respondents along with their associates, with 25 per cent shares to
each group, with the object of taking over the business of ECL Agrotech (ECL), a unit
of one Electro Steel Castings Limited. ECL was engaged in the business of high breed
seeds. This unit was being headed by one P. Bhotika. One of the main customers of
this unit was Heinz, an American company. This unit was taken over by the company
along with its assets, liabilities and businesses for a total consideration of Rs. 75
lakhs. Shri Bhotika, being an expert in high breed seeds also joined the company. All
the four groups were represented by one director each and the petitioner became the
chairman and managing director of the company. In May, 1996, the chairman and
Shri Bhotika undertook a foreign trip to the USA and Germany for exploring export

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 possibilities, by incurring an expenditure of about Rs. 7 lakhs from the company
funds. After their return, differences cropped up between the petitioner and other
respondents leading to the petitioner being prevented from attending the office of the
company and the respondents seeking to appoint one Shri Arun Aggarwal as the chief
executive of the company. In view of this, the petitioner stopped attending the office
from August, 1996. It seems there was an offer by the petitioner group to sell their
shares to the respondents and that a committee of arbitrators determined the value to
be Rs. 17.5 lakhs. This did not materialise. Thereafter, the petitioner floated a new
company in the name of Oriental Biotech Limited (Oriental) to pursue the seeds
business. Shri Bhotika also joined the new company after leaving the services of the
company. Heinz also started to have business dealings with the new company
terminating their business relationship with ECL. Some other employees also left ECL
and joined the new company. Later, the company informed the petitioner that he had
allegedly vacated the office of director in terms of Section 283(1) read with Section
299 of the Act. Further, in an extraordinary general meeting held on December 23,
1996, the shareholders had allegedly passed a resolution removing the petitioner as a
director of the company. Initially the petitioners had filed a winding up petition in the
Karnataka High Court, which was later withdrawn after the present petition was filed
before the Company Law Board.
3 . Shri Raghavan, advocate for the petitioner, submitted that the removal of the
petitioner as a director is a grave act of oppression and, therefore, the same should
be declared as null and void especially in view of the fact that the company is in the
guise of a quasi-partnership, wherein equal shareholding and equal participation in
the management have been agreed to among the shareholders. To urge his point that
the company is in the guise of a quasi-partnership, he traced the relationship
between the petitioner and the respondents for a long period before the incorporation
of the company. According to him, the petitioner, respondents Nos. 2, 3 and one P.
K. Rungta, the husband of the fourth respondent were having business relations for a
number of years prior to the incorporation of the company and as a matter of fact,
the petitioner and Shri Rungta were active members of Aggarwal Samaj, Bangalore,
and as such knew each other well. Their association continued when a partnership
firm in the name of Bangalore Developers was formed with the petitioner and
respondents Nos. 2, 3 and 4 as partners. When ECL was to be taken over, a sum of
Rs. 10 lakhs was paid through this firm. The company was the outcome of the
personal relationship between the petitioner and respondents Nos. 2, 3 and 4, That is
why, he pointed out that, when the company was incorporated, it was ensured that
all the four groups were allotted 25 per cent shares each and each group was
represented in the Board with one representative. This itself, according to learned
counsel, would indicate that the company is in the guise of a quasi-partnership
wherein equal shareholding and equal participation in the management has been
ensured. Therefore, according to him, the company having been incorporated on the
basis of mutual trust and confidence among the shareholders, it has all
characteristics of a partnership and is governed by the discipline of relationship
amongst the partners in a partnership firm. Referring to Synchron Machine Tools P.
Ltd. v. U. M. Suresh Rao [1994] 79 Comp Cas 868 (Kar), wherein the court has laid
down certain tests to determine whether a company could be treated as a
partnership, he submitted that the tests laid down in that case are fully satisfied in
the present case. Thus, he submitted that the complaints of the petitioner should be
considered in this background and once the petitioner is able to establish that there
has been a failure of mutual trust and confidence brought about by the acts of the
respondents, then such acts would justify winding up of the company on just and
equitable grounds as in a case of a partnership in terms of Section 45(g) of the

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 Indian Partnership Act. He further submitted, that even though there are thirty-one
shareholders, as a group there are only four and each shareholder could be identified
with only one group. Further no invitation to the public was made. He referred to
Loch v. John Blackwood Ltd. [1924] AC 783 (PC), wherein the Privy Council observed
that as long as it is established that the company is a closely held one and that the
directors are guilty of lack of probity in dealing with other shareholders, the
principles of dissolution of partnership could be applied to such companies.
4 . With these preliminary submissions, Shri Raghavan, dealt with the merits of the
case. According to him, after the petitioner returned from the foreign trip, the attitude
of the respondents towards him suddenly changed and they did not like his having
any participation in the affairs of the company. In view of this, the petitioner
volunteered to go out of the company by selling the shares held by his group. Even
the value for the shares was determined by a committee of arbitrators at Rs. 17.5
lakhs. Even though the respondents were initially agreeable to purchase the shares at
Rs. 17.5 lakhs, later they did not do so. Since he had no say in the affairs of the
company, he floated another company by name Oriental Bio-tech Ltd. (Oriental) in
September, 1996, to carry on a similar business. Shri Bhotika did not like the
working conditions in the company and as such he resigned from the company in
July, 1996, and later on joined the new company of his own volition. This is the
position with Heinz also, which did not want to have any business relations with the
company, as it was with Shri Bhotika that M/s. Heinz were having dealings for a long
time and when they learnt that he had joined the new company they started dealing
with the new company. Referring to annexure A22, he pointed out that it was the
company which informed Heinz, through a fax on August 23, 1996, that Shri Bhotika
had left the company and again by a fax dated August 28, 1996 (annexure A23), the
company informed M/s. Heinz that the petitioner would also be leaving the company.
He referred to annexure A24 in which the company had informed M/s. Heinz on
September 11, 1996, that new start-up companies would find it difficult to provide
the same level of technical expertise and the comfort of dealing with a proven
person. These documents have been conveniently concealed by the respondents in
their reply. Because of these faxes and since M/s. Heinz were keen on dealing only
with Shri Bhotika, through a fax dated September 13, 1996 (annexure 9), M/s. Heinz
asked the company to deliver all stock seeds to Shri Bhotika. Thus, it is clear that the
petitioner did not take away Heinz from the company. However, the respondents,
with a mala fide intent, fabricated the minutes of an allegedly held board meeting on
September 26, 1996, to indicate that the petitioner suggested some business
arrangements with Oriental, without disclosing his interest as the promoter of
Oriental. There was no board meeting on that day and even if there had been one,
the petitioner did not attend the meeting for want of notice. On the basis of the
fabricated minutes, the respondents claimed that the petitioner had not disclosed his
interest in terms of Section 299 and as such vacated his office as a director in terms
of Section 283(1)(i) of the Act. In a board meeting held on October 23, 1996, they
also resolved to intimate the Registrar of Companies about his vacation of office and
accordingly filed Form No. 32 with the Registrar. Drawing our attention to page 2266
of Guide to the Companies Act by Ramaiah (14th edition), wherein the decision in
Turnbull v. West Riding Athletic Club Leeds Ltd. [1894] WN 4 has been quoted,
according to which in case of nondisclosure under Section 299, the concerned
director must be given a chance to explain his conduct before being ejected from the
board, learned counsel submitted that no opportunity was given to the petitioner
before filing Form No. 32. He also pointed out that the minutes of the alleged board
meeting were produced for the first time only on the last date of hearing, clearly
indicating that the same had been manufactured after filing of the petition. He further

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 stated that, the respondents are guilty of suppressing material facts.
5. He also pointed out that, not having been satisfied with the action of fabrication of
minutes and filing of Form No. 32 with the Registrar in relation to his cessation of
office under Section 283(1){g), the respondents also claim that the petitioner was
removed as a director in a requisitioned meeting held on December 23, 1996. Neither
the petitioner, nor any one in his group received the notice for the extraordinary
general meeting. Referring to the submission of the company that th'e notices for the
extraordinary general meeting were sent together with the notices for the annual
general meeting held on the same date in a single envelope to each shareholder, he
submitted that some of the members of his group had opened the envelopes and
found only the notices for the annual general meeting and no notice of the
extraordinary general meeting was found to have been enclosed therein. He also
produced nine envelopes which had not been opened by the shareholders with the
request that the Bench should open the envelopes and see whether these envelopes
contained the notices for the extraordinary general meeting. According him, his
removal without notice is bad in law, besides being an act of oppression.
6 . Summing up his arguments, Shri Raghavan submitted, notwithstanding the
allegations against the respondents, that the petitioner is prepared to walk out of the
company along with his group provided the respondents comply with the agreement
already reached, by paying a sum of Rs. 17.5 lakhs together with 18 per cent
interest. Otherwise, he submitted that the valuation of the shares should be made as
on the date when the disputes between the parties arose, i.e., August, 1996.
According to him, even though the normal rule is that the date of valuation is the
date of filing of the petition, yet, the same need not be applied in all cases. It would
depend on the facts of each case and the date has to be based on fairness. According
to him, the company earned enormous profit during 1995-96, and no dividend was
declared. In 1996-97, the company suffered losses, Therefore, if the date of valuation
is to be the date of filing of the petition, then, it would be prejudicial to the interest
of the petitioner. For the proposition that the valuation need not be based on the date
of filing of the petition, he relied on London School of Electronics Ltd., in re [1985]
BCLC 273.
7. Shri Naganand, advocate for the respondents, initiating his arguments stated that
the only allegation dealt with by counsel for the petitioner is about alleged illegal
removal of the petitioner as a director. According to him, it is a settled law that in a
Section 397/398 petition, grievances qua members alone can be agitated and not
directorial complaints and as such the petition itself is not maintainable. For this
proposition, he relied on Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp
Cas 351 ; MANU/SC/0368/1965 : AIR 1965 SC 1535. He stated that the company is a
public company with thirty-one shareholders including some minors. At no point of
time, there was any agreement regarding any group among the shareholders as also
regarding equal shareholding or equal participation in the management. The
allotment of shares was made in response to the applications received. The company
has not been formed on the basis of personal relationship among the petitioner and
the respondents. Even otherwise, thirty-one members cannot, in law, constitute a
partnership and the company has been managed since its inception under the
provisions of the Companies Act. Relying on Hind Overseas Pvt. Ltd. v. Raghunath
Prasad Jhunjhunwala [1976] 46 Comp Cas 91 ; MANU/SC/0050/1975 : AIR 1976 SC
565 and Kilpest Pvt. Ltd. v. Shckhar Mehra [1996] 87 Comp Cas 615 (SC), he
submitted that in an incorporated company, the principles of dissolution on
partnership principles cannot be liberally invoked. He also submitted that there is no

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 deadlock in the management of the company and as a matter of fact the company has
started doing well after an initial setback due to the petitioner taking away M/s.
Heinz. He raised a query as to why the shareholders should have formed this
company instead of a firm of partnership like Bangalore Developers. It is because, he
submitted that the promoters wanted to have a company, that too a public limited
company, as they did not envisage the endeavour to be in the form of a partnership.
According to him, these so-called groups in the company do not exist. Even
otherwise, he pointed out that in a Section 397 petition, one of the essential
ingredients is that the petitioner should establish that there are grounds to wind up
the company on just and equitable grounds which the petitioner has not been also to
establish especially when this company cannot be wound up as it is a profitable
company having a large number of shareholders. He also pointed out that the
petitioner is not interested in the welfare of the company as is evident from the fact
that before coming to the Company Law Board, he had filed a winding up petition
before the Karnataka High Court.
8 . Dealing with the merits of the case, Shri Naganand submitted as follows : The
petitioner is responsible for the breach of faith between himself and respondents Nos.
2 to 4. The petitioner abandoned the services of the company, incorporated a new
rival company in the name of M/s. Oriental Bio-tech Limited and started carrying on
the seeds business. The petitioner diverted the business of the company including the
export order from M/s. Heinz, to his newly formed company and took away with him
a few of the employees of the company including P, Bhotika who is the main architect
of the company. The petition has been filed for collateral purpose of interfering with
the business of the company and solely for his personal benefit. The petitioner's
conduct cannot be approved. In this connection, he relied on Lindley and Banks on
Partnership 17th edition at page 494. The petitioner seeking equitable relief must
come with clean hands and good conduct, which are absent in the case of petitioner.
The petition, therefore, constitutes a gross abuse of the process of the court and the
petitioner is not entitled for any relief under Sections 397 and 398, as held in Srikan
ta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.)
Ltd. [1991] 72 Comp Cas 211 (Kar). The petitioner failed to disclose his interest in
M/s. Oriental Biotech Limited as the chief promoter at the meet ing of the board of
directors of the company held on September 26, 1996, in which the petitioner
suggested some arrangement with Oriental Biotech Ltd. The petitioner failed in his
fiduciary duties to act in the best interests of the company, thereby he had violated
the provisions of Section 299 of the Act and he had vacated the office of the director
under Section 283(1)(i) of the Act. Accordingly, on October 23, 1996, a meeting of
the board of directors of the company was held and it was resolved to send the
intimation of the petitioner vacating the office of director of the company to the
Registrar of Companies and, accordingly, Form No. 32 was filed intimating the
Registrar of Companies regarding vacation of the office of director by the petitioner.
The petitioner having vacated the office of director by operation of law and not on
account of any action of the respondents, the petitioner cannot have any grievance
whatsoever. Shri Naganand, while summing up his submissions on the director's
fiduciary duty, relied on Island Export Finance Ltd. v. Umunna [1986] BCLC 460. The
board of directors of the company convened an extraordinary general meeting of the
company on December 23, 1996, pursuant to a requisition dated November 21, 1996,
and the special notice under Section 284 sent by certain members for removal of the
petitioner, after due notice to the members including the petitioner along with the
notice of the annual general meeting. Both annual general meeting and extraordinary
general meeting were held on December 23, 1996. The petitioner did not attend
either of the meetings. At the extraordinary general meeting, the shareholders and

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 their proxies in all comprising 74.62 per cent of the paid up share capital of the
company unanimously passed a resolution removing the petitioner from the office of
director of the company. Though there was an attempt to settle the disputes between
the petitioner and respondents Nos. 2 to 4 through intervention of third parties, no
settlement could either be reached or implemented on account of non-co-operation
on the part of the petitioner. He further submitted that, the respondents are not
willing for any compromise as the petitioner had acted against the interest of the
company. He also prayed that the petition should be dismissed.
9. We have considered the pleadings and arguments of counsel. Before dealing with
the same, it is essential to note that, in the hearing held on October 27, 1998, we
had advised the parties that they should try to settle the disputes amicably by the
respondents purchasing the shares of the petitioners' group at Rs. 17.5 lakhs that
was agreed earlier together with the payment of interest at 18 per cent from
September, 1996. In the hear ing held on November 16, 1998, it was informed that
while the respondents were prepared to pay Rs. 17.5 lakhs without interest, the
petitioner demanded payment of interest also. In view of this, the compromise efforts
failed. Even after the conclusion of the arguments on the petition, we suggested that
even then the dispute could be sorted out amicably. While the petitioner was
interested in getting the shares valued as at August, 1996, the respondents were not
prepared, as according to them the prejudicial action by the petitioner has affected
the fortunes of the company and as such they were not prepared for any compromise.
10. One aspect that we feel should be recorded is that, in the pleadings there are
repeated references to Shri Ranguta, Shri Bhotika and M/s. Heinz. While the
petitioner refers to the roll of Shri Ranguta, the respondents have made allegations
against Shri Bhotika. Unfortunately neither of them has been impleaded as a party to
the proceedings. We have no independent version of Heinz as to why it transferred its
business to Oriental. No doubt that they may not be necessary parties in view of no
relief having been sought against them, yet, they are proper parties to have been
impleaded, so that we would have had their versions on the controversy relating to
them.
1 1 . Even though the petition contains allegations other than the removal of the
petitioner as a director, arguments were advanced only in respect of the removal of
the petitioner as a director and as such we are restricting our finding only to this
allegation. As rightly pointed out by counsel for the respondents, relying on Shanti
Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SO, in a Section 397
petition, acts of oppression should be in the matter of one's proprietary rights as a
shareholder. This right does not extend to one's claim to the office of a director as
held in V. M. Rao v. Rajeswari Ramakrishnan [1987] 61 Comp Cas 20 (Mad).
However, there is an exception to this general rule in the case of a family company or
a company in the guise of a partnership. In these cases, where there is an
agreement, express or implied, (as may be established), or the articles so provide,
that the shareholders would participate in the management of the company, then
exclusion/ouster of one of the shareholders from the management, could be
considered to be an act of oppression. In a recent case of Dipak G. Mehta v. Shree
Anupar Chemicals India Pvt. Ltd. [1999] 98 Comp Cas 575 (CLB) ; [1999] 33 CLA
393 (CLB), we held, in the facts of that case in which it was established that the
company was in the guise of a partnership, removal of the petitioner as a director
was an act of oppression. In the same way in Naresh Trehan v. Hymatic Agro
Equipments P. Ltd. [1999] 97 Comp Cas 561 (CLB) in view of the company being a
family company, wherein an implied agreement relating to participation of all the

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 shareholders in the management was established, we held that ouster of one of them
as a director was an act of oppression warranting winding up of the company on just
and equitable grounds. However, in Karedla Suryanarayana v. Ramadas Motor
Transport Ltd. [1999] 98 Comp Cas 518 (CLB) we declined to entertain the complaint
of removal as a director, since the company was neither a family company nor a
company in the guise of a partnership. Even in the cases cited by Shri Naganand,
viz., Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhnnwala [1976] 46 Comp Cas
91 (SC) and Mpest Pvt. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615, the Supreme
Court has not held that partnership principles should not be applied to a company,
but has only cautioned that it should not be liberally applied. Therefore, the
contention of the counsel for the respondents that directorial complaint cannot be
agitated in a Section 397 petition cannot hold good in all cases.
12. Let us examine the present case. The claim of the petitioner is that the company
is really in the guise of a partnership, which claim is refuted by the respondents.
Even though the company is a public company having thirty-one shareholders it does
not mean that partnership principles cannot be applied. In Loch v. John Blackwood
Ltd. [1924] AC 783 (PC), even though the company was a public company, the Privy
Council held that it was actually a domestic and family company and as such could be
wound up on just and equitable grounds. In the present case the petitioner claims
that there are four identifiable groups of shareholders--Modi group headed by the
petitioner, Maheshwari group by respondent No. 2, Daga group by respondent No. 3
and Ranguta group By Shri Ranguta. An analysis of the shareholding at annexure A6
reveals that each group has only closely related family members like father, mother,
sister, son, daughter, etc., of the head of the respective groups as shareholders. As a
matter of fact there is nothing on record to show that the company invited any
outsider to become a shareholder of the company. The fact that the partners of
Bangalore Developers being the petitioner, wife of the second respondent, the wife of
the third respondent and the fourth respondent, who also happen to be the
shareholders in the respective group, would indicate that it is not the casual
acquaintance between them that motivated them to become shareholders of the
company, but definitely the long association of friendship among them that has
prompted them to join hands to promote this company. We also note that the
company was very careful to ensure that the shareholding of no group exceeded 25
per cent by refunding excess money received from any group and demanding
payment of shortfall, if there was any from these groups. Therefore, it is clear that
shareholding parity had been ensured in allotment of shares to each group
irrespective of the fact whether there was any agreement or not. While ensuring
equal shareholding of each group, the composition of the board of directors also
shows that one member from each group has been taken on the board as a director.
Thus, we find that both equal shareholding and joint management have been
ensured. These facts combined with the long personal association between the
petitioner and the respondents would prima facie establish that the company has
been incorporated with mutual trust and confidence among the shareholders with a
view to run it in the form of a quasi-partnership and, therefore, the petitioner is at
liberty to challenge his ouster from the management in this petition under Section
397. Learned counsel for the petitioner relied on Synchron Machine Tools P. Ltd. v. V.
M. Suresh Rao [1994] 79 Comp Cas 868 (Kar), to advance his stand that the
principles enunciated in that case to treat a company as a quasi-partnership are fully
satisfied in this case. We do not propose to deal with this case inasmuch as, on
appeal, the Division Bench of the said court has held otherwise.
13. The grievance of the petitioner relating to his removal is two fold. One is about

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 the contention of the company that he had ceased to be a director in terms of Section
283(l)(i) read with Section 299 and another is his removal by the general body on
December 23, 1996. According to the respondents, there was a board meeting on
September 26, 1996, in Which the petitioner suggested having some business
relation with Oriental without disclosing his interest in Oriental and when the
respondents came to know of his interest in Oriental, in a board meeting held on
October 23, 1996, the board discussed this matter and decided to file Form No. 32
with the Registrar of Companies intimating him that the petitioner had vacated his
office in terms of Section 283(1)(i). According to the petitioner, there was no board
meeting on September 26, 1996, and even if there had been one, he did not attend
that meeting for want of notice. Whether there was a meeting on September 26,
1996, could be determined, in view of the conflicting stand taken by the parties, only
on the basis of the contents of the minutes of that alleged meeting. The minutes of
this meeting were produced only on the final date of hearing. A reading of these
minutes shows that no item of any agenda was discussed on that day. Only one issue
relating to Heinz was discussed as per the minutes. Even this discussion relating to
M/s. Heinz had been initiated by the petitioner. It is on record that the petitioner did
not participate in the management of the company after August, 1996. If the
company had convened this meeting, some agenda items or some items raised by the
company or the respondents, should have found a place in the minutes. It is rather
surprising that the company claiming to have convened the said meeting, had no
agenda item to discuss. It is not the case of the respondents that the petitioner had
convened the meeting to initiate the discussions about M/s. Heinz. Thus, we are of
the view that the meeting alleged to have taken place on September 26, 1996, had
not actually taken place and the minutes are fabricated. Our view gets strengthened
from the fact that the respondents have not produced any evidence to show that they
had in fact sent any notices for the meeting. The same is the position in regard to the
board meeting held on October 23, 1996, also. Therefore, we are of the view that the
question of the petitioner vacating the office of director under Section 283(1)(i) does
not arise.
14. As far as his removal as a director in the extraordinary general meeting held on
December 23, 1996, is concerned, the allegation of the petitioner is that he did not
receive any notice for this meeting. According to the respondents, notices for the
extraordinary general meeting and the annual general meeting which was also
convened on the same date, were sent to all the shareholders, including the
petitioner, in a single envelope to each. The petitioner does not deny receiving this
envelope and according to him it contained only the notice for the annual general
meeting and no notice for the extraordinary general meeting was found in the
envelope. Counsel for the petitioner produced nine unopened envelopes addressed to
his group of shareholders with a request that we ourselves should open these covers
and see whether the notice for the extraordinary general meeting was enclosed
therewith. The said covers were opened and we found that they did not contain the
notice for the extraordinary general meeting. According to the respondents, these
envelopes had already been opened and had been closed with adhesive tape by the
petitioner and that the company never closed the envelopes with adhesive tapes.
However, counsel for the petitioner asserted that the envelopes were never opened
and had been produced intact. However, he did not elaborate as to why the nine
shareholders in his group did not open the envelopes when the same had been
received from the company. Any way, we are not examining this issue, inasmuch as,
what we are concerned with in this Section 397 petition is whether the removal of the
petitioner is an act of oppression since illegal removal per se, even if established,
cannot be a ground for invoking the provisions of Section 397. It has been held in

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 Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981]
51 Comp Cas 743 (SC) that illegal acts may not be oppressive and that even legal
acts could be oppressive.
1 5 . The extraordinary general meeting was a requisitioned meeting called by
shareholders fulfilling the requirements of Section 169 of the Act. The statement of
material facts enclosed with the requisition reads as follows : "you may be aware that
Mr. Atma Ram Modi, director of the company has incorporated a company by name
"Oriental Bio Tech Limited" with the Registrar of Companies, Karnataka, whose
objects are similar to our company, i.e., ECL Agrotech Limited. Further Mr. Atma Ram
Modi have diverted export order from Heinz, U.S.A., for the year 1996-97, to his
company, i.e., Oriental Bio Tech Limited. Therefore, the continuance of Mr. Atma Ram
Modi as director of ECL Agrotech Limited is detrimental to the interest of ECL
Agrotech Limited. We therefore propose his removal as director of ECL Agrotech
Limited, under Section 284 of the Companies Act, 1956." In the extraordinary general
meeting held on December 23, 1996, the shareholders unanimously resolved to
remove the petitioner as a director, obviously on the basis of the statement of
material facts. We have to examine whether this removal could be considered to be
unjustified and as such an act of oppression against the petitioner. On the basis of
the observation of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd.
[1965] 35 Comp Cas 351 we observed in Dipah G. Mehta v. Shree Anupar Chemicals
India Pvt. Ltd. [1999] 98 Comp Cas 575 ; [1999] 33 CLA 393 (CLB), that "the normal
test to examine whether there is oppression or not, is to find out whether the
majority shareholders, by strength of their shareholding, do things which are unfairly
prejudicial, wrong, burdensome and harsh, and there is an element of lack of probity
or fair dealing, etc., in relation to the interest of minority shareholders". Therefore,
whether the removal of the petitioner as a director is wrong, burdensome and harsh
and whether there is an element of lack of probity, have to be examined.
1 6 . It is on record that the petitioner is one of the principal promoters of the
company and that he played an important role in taking over the business of ECL
Agrotech Division. It is on record that he is one of the promoters of Oriental which is
carrying on the same business as that of the company. It is also on record that the
business with Heinz has now been taken over by Oriental and that two of the officials
of the company along with Shri Bhotika have also joined the new company. While the
petitioner has justified incorporating the new company on the ground that there were
settlement talks by which the shares of the petitioner would be purchased by the
respondents, he has also averred that Shri Bhotika joined the new company of his
own volition and that Heinz also started having business transaction with the new
company because of the association of Shri Bhotika with the new company.
According to the respondents, the entire exercise of incorporating the new company
was with a view to take away Heinz. It would be appropriate to indicate the
chronology of events. There was a cordial relationship between the parties till
January, February, 1996, as per the version of the petitioner at page 21 of the
petition. The petitioner undertook a foreign trip in May, 1996. The petitioner stopped
attending the office in August, 1996. He withdrew his personal guarantees to the
bank on August 30, 1996, (annexure 17). Ms. Beena Sharma gave a letter of
resignation on July 1, 1996 (annexure 3). M. Srinivas submitted his resignation on
August 1, 1996 (annexure 4). The petitioner marked on these papers that they would
be relieved on August 31, 1996. In the meanwhile, Shri Bhotika also resigned. The
name for the new company was applied for on September 5, 1996, and was approved
on September 6, 1996, and Oriental was incorporated on September 17, 1996. These
officials who resigned joined the new company. The sequence of events shows that it

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 is not that the petitioner decided on the new company after August, 1996, but had
planned it much earlier. In regard to Heinz also, we feel that the petitioner had a roll
to wean Heinz away from the company as evident from the fact that as early as on
September 13, 1996, through a fax, Heinz asked the company to hand over the seeds
to Shri Bhotika of Oriental (annexure 9) while Oriental itself was incorporated only
on September 17, 1996. Further this fax was addressed to the petitioner and sent at
his home address. This fax has to be read with the fax from Heinz dated March 18,
1996, (annexure 5) by which the company was asked to retain the seeds for the next
season. Even assuming that Heinz, as stated by the petitioner started dealing with the
new company of it own volition because of the association of Shri Bhotika with
Oriental, in all fairness and in compliance with the fiduciary duties to the company
and fair dealings with the other partners, the petitioner should have advised Heinz
suitably and should not have accepted the business.
17. From the narration of the events as above, the only conclusion that we could
come to, is that the petitioner should have planned the incorporation of the company
much earlier and not after August, 1996, and that all the subsequent events followed
such a planning. Even otherwise, it is clear that while continuing as a director, the
petitioner incorporated a rival company and also took away the business of Heinz.
The petitioner had dual responsibilities one to the company as a director and the
second, as a partner to the other partners. At the time when he incorporated the new
company, he continued as a shareholder as well as a director and as claimed by the
petitioner, as the chairman and managing director of the company. While, in law,
there is no prohibition, subject to certain conditions, for a person to be a director in
two rival companies as held in London and Mashonaland Exploration Co. Ltd. v. New
Mashonaland Exploration Co. Ltd. [1891] WN 165, the law is also clear that he
cannot breach the fiduciary responsibilities that he owes as a director to any of these
two companies. In Scottish Co-operative Wholesale Society Ltd. v Meyer [1958] 3 All
ER 66 ; [1959] 29 Comp Cas 1 (HL) it was held "a director cannot subordinate the
interest of the first company to those of the second company". In this connection, the
observation of the Queen's Bench Division in Island Export Finance Ltd. v. Um Unna
[1986] BCLC 460, is relevant, wherein it observed "a director's fiduciary duty did not
necessarily come to an end when he ceased to be a director. "A director was
precluded from diverting to himself a maturing business opportunity which his
company was actively pursuing even after his resignation where the resignation was
prompted or influenced by a desire to acquire that opportunity for himself". Thus the
nature of the fiduciary duties is such that even after leaving a company, a director
should not act against the interest of the company. Further, the petitioner has
claimed that the company is in the nature of a partnership. If so, then he cannot
associate himself with a rival company, more so starting a rival company. At page
495 of Lindley and Banks on Partnership (17th Edition), it is stated "a partner must
not, without the consent of his co-partners carry on any business in competition with
the firm". Thus, we are of the view that by starting the new company, the petitioner
had acted in breach of the partnership agreement and therefore the other partners
were not obliged to comply with the terms of the said agreement. Further, the act of
taking away Heinz is not only against the fiduciary duties the petitioner owed as a
director to the company and other shareholders, but also as a partner to other
partners. The respondents have pointed out that during 1995-96, the company had
earned a profit of about Rs. 45 lakhs due to the business with Heinz, while in the
year 1996-97 there was no profit on account of the petitioner's taking away Heinz. By
taking away the business of Heinz, the petitioner has acted against the interest of the
company also. Further, he even filed a winding up petition against the company.

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 18. From our narration of the conduct of the petitioner, we are not in a position to
conclude that by removing the petitioner from the position of a director of the
company, the shareholders have acted in a mala fide manner or in a manner
oppressive to the petitioner or his minority group. In respect of a company,
partnership principles are invoked only on equitable grounds. The settled principle of
law is that when a person seeks equity he must come with clean hands. In the
present case, the conduct of the petitioner shows that he has not come with clean
hands, in the sense, he has acted in a manner prejudicial to the interests of the
company as well as the shareholders and it is he who has acted in violation of mutual
trust and confidence. When an action is taken against a wrongdoer, he cannot seek
remedy in equity. His prejudicial acts forced the shareholders to remove him as a
director and as such we do not find that there is any act of oppression against him or
that there is any lack of probity on the part of the majority shareholders. Thus, there
is no scope to declare his removal as invalid on the ground that it was an act of
oppression. Even though, the petitioner even questioned the factum of holding the
extraordinary general meeting and alleged that no extraordinary general meeting was
held on December 23, 1996, yet, we are not in a position to hold so, since the
respondents have produced all the necessary documents to prove that this meeting
was in fact held. If there had been any illegality in his removal for want of notice to
him for the extraordinary general meeting, he cannot agitate the same in a Section
397 petition. Therefore this petition deserves to be dismissed.
19. However, we do not propose to do so. In a Section 397/398 petition, even if the
petitioner fails to establish the allegations of oppression and mismanagement, as we
observed in Ramadas Motor Transport Ltd. 's case (C. P. No. 15 of 1994), relying on
Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 (SC), the ultimate
object in a Section 397 petition is that the order passed by the Company Law Board
should put an end to the matters complained of, taking into consideration the interest
of the company and the shareholders. It is an admitted position that the petitioner's
group holds 25 per cent shares in the company, with which they would be in a
position to block any special resolution. The petitioner has always expressed his
desire to part with his shares and certain efforts were also made towards this end
without any success. Therefore, we consider it appropriate, in the interest of the
company and the shareholders, that the respondents should purchase the shares of
the petitioner's group. For this purpose, the fair value of the shares has to be
determined. The normal principle for determining the date of valuation is the date on
which the petition was filed. For practical purposes, the Company Law Board has
normally adopted the balance-sheet date, which is proximate to the date of the
petition. In the present case, the petition was filed on August 11, 1998, and as such
the valuation should be made on the basis of the balance-sheet as on March 31,
1998. Shri Raghavan, relying on London School of Electronics Ltd., In re. [1985]
BCLC 273, submitted that the valuation date need not necessarily be the date of the
petition and depending on the facts of the case, could be any date, as long as the
same is just and fair. According to him, in the year 1995-96, the company had
earned a profit of Rs. 45 lakhs and that the company did not declare any dividend. In
the next year, there was no profit and that the previous year's profit had been wiped
out. Therefore, if the date of valuation is set as the date of the petition, then it would
adversely affect the petitioner's group and as such the date of valuation should be the
date on which the disputes started i.e., August, 1996. We do agree that the date of
the petition need not be the date of valuation always. In Ramadas Motor Transport
Ltd.'s case [1999] 98 Comp Cas 518 (CLB) we did not adopt the date of the petition
as the date of valuation, as in that case filed in 1994, the company had issued further
rights shares and these shares were allotted late in 1997. Therefore, we directed that

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 the valuation should be based on the balance-sheet as on March 31, 1998. As far as
the present case is concerned, we do not find any justification to deviate from the
general principle for the reasons stated hereinafter. During the year 1995-96, one of
the main customers was Heinz. By August, 1997, the petitioner had taken away Heinz
which resulted in a substantial reduction in the business of the company. The prayer
of the petitioner to take August, 1996, as the valuation date is only to get the
benefits of the profits earned during 1995-96. The counsel stressed upon the
principle of "just and fair" when he sought for August, 1996, as the Valuation date.
We feel that the petitioner cannot rely on this principle when he himself has not acted
in a just and fair manner. If the company had incurred losses on account of the
action of the petitioner in taking away Heinz, then he should also share the losses of
the company (which would have been in any way made up in his new company).
Therefore, adopting August, 1996, as the valuation date would only mean that the
petitioner is being rewarded with something that he does not deserve due to his
prejudicial acts against the interest of the company. Therefore, we do riot find any
justification to deviate from the normal principle of adopting the date of the petition
as the date for valuation of shares. The present petition was filed on August 11,
1998, and therefore the valuation has to be based on the balance-sheet as on March
31, 1998. To arrive at the fair value for the shares, we appoint Shri N. Nityananda,
Chartered Accountant, Bangalore (Telephone No. 2232843/ 2225916) to value the
shares of the company. The company will negotiate with the valuer his remuneration
and will bear the same. The valuer will take into consideration oral as well as written
submissions made by the parties in regard to the valuation. The valuation report will
be binding on all the parties. The valuation report should be made available to the
parties as well as to this Bench latest by October 31, 1999. The shares will be
purchased either by the respondents or by the company as may be decided by the
respondents and in case the company purchases the shares, reduction of share
capital may be effected on the authority of this order. Within 15 days from the date
of receipt of valuation report, the petitioner's group will hand over all the share
certificates along with blank transfer forms to the respondents and the respondents
will make payment as per the valuation report, to the respective shareholder.
20. With the above directions we dispose of the petition without any order as to
costs, Liberty to apply in case of any difficulty in working out this order.

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