Bombay High Court
Jer Rutton Kavasmaneck @ Jer ... vs Gharda Chemicals Ltd. And 4 Ors on 12 December, 2014
Bench: K.R. Sriram
1 nms.3567.2011 s.2932.11 J.doc3665
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION NO. 3567 OF 2011
IN
SUIT NO. 2932 OF 2011
Darius Rutton Kavasmaneck ]
residing at 626, Parsi Colony, Dadar, ]
Mumbai 400 014 ]
].. Plaintiff
Versus
1) Gharda Chemicals Limited, a ]
Company incorporated under the
ig ]
Companies Act, 1956 and having its ]
registered address at Gharda House, 48, ]
Hill Road, Bandra (West), Mumbai 400 ]
050.
2) Keki Hormusji Gharda of Mumbai, ]
Indian Inhabitant, having his address at ]
Gharda House, 48, Hill Road, Bandra ]
(West), Mumbai 400 050. ]
3) Aban Keki Gharda of Mumbai, Indian ]
Inhabitant, having his address at ]
Gharda House, 48, Hill Road, Bandra ]
(West), Mumbai 400 050. ]
4) Almitra H. Patel of Mumbai, Indian ]
Inhabitant, having his address at ]
Gharda House, 48, Hill Road, Bandra ]
(West), Mumbai 400 050. ]
5) D.T. Desai of Mumbai, Indian ]
Inhabitant, having his address at ]
Gharda House, 48, Hill Road, Bandra ]
(West), Mumbai 400 050. ].. Defendants
Dr. Virag Tulzapurkar a/w. Mr. Shriraj Dhru, Ms. Khyati Pandit i/b Dhru
and Co. for Plaintiff.
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Mr.Mustafa Safiyuddin a/w. Mr.Sumeet Rane, Mr.Vaibhav Keni for
Defendants.
-----
CORAM : K.R.SHRIRAM, J.
DATE : 12TH DECEMBER, 2014
JUDGMENT :
1 This is a derivative action filed by the Plaintiff exercising his right as
a minority shareholder. It is the Plaintiff's case that the claim made in the
suit is not for his personal or individual benefit but for the benefit of
Defendant No.1. Though there are five Defendants, the quarrel basically is
between the Plaintiff and the Defendant No.2. Defendant No.2 is the
Chairman and Managing Director of Defendant No.1. Defendant No.3 is the
wife of Defendant No.2 and Defendant Nos. 4 and 5 are the Directors of
Defendant No.1. Defendant No.2 is the uncle of the Plaintiff (mother's
brother). The relationship between the uncle and the nephew has been
estranged from what is seen from the pleadings for couple of decades. The
Plaintiff has filed many legal proceedings against Defendant Nos. 2 and 3
including proceedings in Company Law Board under Sections 397 and 398
of the Companies Act, 1956 with regard to Defendant No.1. The present suit
is one such proceeding filed by the Plaintiff.
2 The grievance of the Plaintiff briefly put is that Defendant No.2 has
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obtained and/or applied for several patents in his own name whereas the
patents ought to have been obtained and/or applied for in the name of
Defendant No.1.
The Plaintiff, in this derivative action, is seeking to make a claim on
behalf of Defendant No.1. The supporting layer put-forth is the suit cannot
be filed in the name of the Company Defendant No.1 and Defendant No.1 is
not in a position to make such claim in its own name because the Plaintiff
does not hold majority shares and the management of the Company is in the
control of Defendant No.2/Defendant No.3. The Plaintiff also states that
Defendant No.2 was in a fiduciary relationship as the promoter, director,
majority shareholder and the Research Head of Defendant No.1 and by
registering the patents in his individual name and not in the name of
Defendant No.1, Defendant No.2 was in breach of his fiduciary duties.
The Plaintiff, therefore, states that as the minority shareholder the
Plaintiff became entitled to file and has filed the present suit.
3 The right of a minority shareholder to file a derivative action is
recognised in law. It is open for a minority shareholder to take action against
the wrong doers for the benefit of the Company if majority shareholders
are preventing the Company itself from taking any such action as they
are the people committing the wrong. Recognising a right does not
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mean that the action is correct or has merits. It also does not mean that in
every case a minority shareholder can bring out a derivative action.
(i) Palmer's Company Law 24th Edition paragraph 65-02, (page.
976-978) :
"Alternatively, the individual shareholder may seek to enforce
the company's rights by suing in representation form on behalf of
himself and all the other shareholders in the Company (except the
wrongdoers) against the wrongdoers. This procedure is founded on
R.S.C. 1965, Ord. 15, r.12, but it is not a true representative action.
The Plaintiff is seeking to enforce, not his own right of action, but a
right of action vested in or derived from company. Hence in modern
discussions the action is referred to as a derivative action. The
alleged wrongdoers are made the Defendants in the action, but the
Company itself is joined as a nominal Defendant in order that it can
be bound by the judgment................................
The derivative action is subject, however, to the doctrine of
clean hands. As an equitable invention, the derivative action cannot
be used to do injustice. This principle has been applied in cases of
acquiescence by the Plaintiff shareholder in the wrongdoing of
which he later complains and in cases where the Plaintiff has been
regarded as the puppet of outsiders whose interests are opposed to
those of the company. The requirement of clean hands does not
apply to the personal action."
(ii) In Onyx Musicabsolute.com Pvt. Ltd. vs. Yash Raj Films Pvt.
Ltd.1 in paragraph 13, the Ld. Judge observed as follows :
"13............ I therefore hold that a suit at the instance of a
minority shareholder for a wrong done to a Company is
maintainable where it is shown that the wrong doers are
insiders, say directors of the Company or majority of the
shareholders who are unlikely to take any action for the
wrong done to the company......."
(iii) In Nirad Amilal Mehta vs. Genelec Ltd.2 in paragraph 7, it was
1 [2008 (6) Bom.CR 418]
2 [2008 (6) Bom.CR 499]
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observed as follows :
"7. .............. The suit should therefore normally be filed
by the Company for setting aside the alienation. The
Plaintiff who is only a shareholder of the Company would
not normally have a right to file a suit on behalf of the
Company as the person aggrieved is the Company and not
a shareholder. More than one and a half century ago, in
(Foss vs. Harbottle), (1843)2 Hare 461, the Court laid
down the rule that normally an individual shareholder
would not be entitled to bring an action for a wrong
allegedly done to the company. It is the Company who
alone can bring an action for a wrong done to it. The rule
however has been subjected to more than one exception.
In (B.B.M. (UK) Limited vs. Janardan Mohandas Rajan
Pillai), 1993 (3) Bom. C.R. 228, this Court while
upholding the rule that it is the Company who is entitled to
maintain an action for wrong allegedly done to it and a
shareholder has no locus standi to maintain the suit,
affirmed one of the exceptions to the aforesaid rule that
where a shareholder can show that the wrong doers are in
control of the Defendant Company and hence the
Company would be unable to maintain the action, he can
maintain an action."
4 The issue involved in the Notice of Motion is whether the Plaintiff is
entitled to protection as sought, i.e., to restrain Defendant No.2 from selling
or transferring or assigning or licensing or exploiting or encumbering or
creating any third party rights or interest or otherwise dealing with the
patents which Defendant No.2 has obtained in his individual name and/or
applied for in his individual name. The Plaintiff's case is that they want to
preserve the property which belongs to Defendant No.1 so that Defendant
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No.2 does not transfer the patents to any third party and by filing this action
the Plaintiff has no interest or no personal claim. The Plaintiff's main
concern as I could see is that the Defendant No.2 may transfer the patents
that he has in his name to a Section 25 Charitable Company by the name
Gharda Medical & Advanced Technologies Foundation (GMATF)
which is founded by Defendant Nos. 2 and 3 and holds 57% of the shares in
Defendant No.1.
The counsel for the Plaintiff submitted that it is not necessary to treat
this notice of motion as a suit itself as the issue involved in the suit will be
decided after a full fledged trial and the Plaintiff, at this stage, has to only
show a prima-facie case for the grant of the reliefs and seek injunction on
the well recognised principles applied for considering the application for
injunction. The Plaintiff relied upon the following judgments :
"(i) Wander vs. Antox3;
(ii) Colgate Palmolive (I) Ltd. vs. Hindustan Lever Ltd.4;
(iii) Zenit Metaplast Private Ltd. vs. State of Maharashtra5"
6 I am afraid, I cannot agree with the counsel for the Plaintiff because
reading the plaint as a whole and in particular the relief sought in the plaint
3 (1990) Supp. SCC 727
4 (1999) 7 SCC
5 (2009) 10 SCC 388
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and in the motion, any order that I pass in the motion will infact have a
bearing in the final reliefs sought in the suit. If I say that the Plaintiff is not
entitled to maintain this action in view of the facts and circumstances of the
case, the suit will come to an end. If I grant any injunction, as prayed for in
this notice of motion, that itself is a final relief that the Plaintiff is seeking
regarding the patents, i.e., prayer clauses - (a), (b), (c), (d), (f) and (g).
Prayer clause - (e) was not argued.
Before we proceed further, it is necessary to give an analepsis on the
case.
The Defendant No.1 was registered and it took over an erstwhile
partnership business by the name M/s. Gharda Chemicals Industries. In this
partnership firm, the Defendant No.2 was to receive 40% of the profits
while the remaining 60% was to be divided amongst the others, viz. the
Plaintiff's father who was to get 30% and the remaining 30% to be shared
between the mother of Defendant No.2 who was also the Plaintiff's grand-
mother and the Plaintiff's maternal aunt. The Defendant No.2 was to receive
40% from the profits though he had invested only 20% of the total
contribution to the firm because of the expertise and ability that the
Defendant No.2 possessed. He was the person on whom the firm relied
upon.
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8 Defendant No.1 is in the business of manufacture and sale of organic,
inorganic chemicals, its byproducts, perfumery chemicals, cement and other
materials. Therefore, the Defendant No.2 was entrusted with the charge of
the partnership firm and later of the Defendant No.1 Company.
9 The shareholding patterns in Defendant No.1 is as under :-
STATEMENT OF SHARES HELD BY THE PLAINTIFF
Sr.No. Name of the Holder Total number of shares Percentage
1.
No.1-since deceased)
Jer. R. Kavasmaneck (Org. Plaintiff 2961 5%
2. D.R. Kavasmaneck- Plaintiff 7555 12%
TOTAL 10,516 17%
STATEMENT OF SHARES HELD BY MRS.M.M.OOMRIGAR, DR.PERCY
KAVASMANECK AND MRS ABAN P. KAVASMANECK
Sr.No. Name of the Holder Total number of shares Percentage
1. Maharukh Murad Oomrigar - sister 3814 6%
of the Plaintiff
2. Percy R. Kavasmaneck & Aban 4301 7%
Percy Kavasmaneck - brother and
sister-in-law of Plaintiff.
TOTAL 8,115 13%
STATEMENT OF SHARES HELD BY REBELLO FAMILY
Sr.No. Name of the Holder Total number of shares Percentage
2. Colin M. Rebello 2544 4%
TOTAL 2,640 4%
STATEMENT OF SHARES HELD/CONTROLLED BY DR.K.H. GHARDA AND
MRS.K.H. GHARDA
Sr.No. Name of the Holder Total number of shares Percentage
1. Dr.K.H. Gharda- Defendant No.2 999 10.5%
2. Aban K. Gharda- Defendant No.3 1000 1.5%
3. Gharda Medical and Advanced 36652 57%
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Technologies Foundation (formerly
known as Gharda Medical
Foundation)
TOTAL 38651 60%
STATEMENT OF SHARES HELD OTHERS INCLUDING EMPLOYEES
Sr.No. Name of the Holder Total number of shares Percentage
1. Others including employees 6%
10 Defendant No.1 has a state of the art research department and spends
substantial amount every year on R & D. It is the case of the Plaintiff that
Defendant No.2 used the R & D facility, support and the R & D team of
Defendant No.1 and therefore, any patent, obtained and/or applied for,
should be in the name of Defendant No.1 and cannot be in the individual
name of Defendant No.2. The Plaintiff's case also is that even assuming for
the sake of argument, Defendant No.2 did not use the resources of
Defendant No.1, still in view of his fiduciary duty, being the Managing
Director of Defendant No.1, the patents should still be registered in the
name of Defendant No.1 only and Defendant No.2 cannot take it in his own
name. Defendant No.2 as Managing Director of Defendant No.1 (coupled
with the fact that he is also the Research Head of the Company) owes a
fiduciary duty to Defendant No.1 and is not entitled to derive any benefit for
himself and any patent acquired by him while he continues to be a
Managing Director of Defendant No.1 and a full time employee of
Defendant No.1 is for the benefit of Defendant No.1. It is the Plaintiff's case
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that substantial amounts have been spent by Defendant No.1 for research
and development and the same has been admitted by Defendant No.2 and
hence the patents should be in the name of Defendant No.1."
However, it is the case of the Defendants that the patents were
individual creation of Defendant No.2 and therefore, should be in the name
of Defendant No.2 only. As regards the research and development
expenditure and as regards the statement by Defendant No.2 that some
amounts have been spent by the Company for the research and development
of these patents, the Defendants' case is that the expenditure has not been for
making or for granting these patented processes for products but only to fine
tune how economically the Defendants can use these patents. We shall
elaborate Defendants' submissions later.
11 The Plaintiff also submitted that under Section 88 of the Indian Trust
Act, 1882, where a Director of a Company bound in a fiduciary character to
protect the interest of the Company gains himself any pecuniary advantage
adverse to those of the Company, he must hold for the benefit of the
Company the advantage so gained. The Plaintiff's in support of this
contention relied upon (i) Ultraframe UK Ltd. vs. Fielding6, (ii) Hop
Extract Co. Ltd. vs. Horst7, (iii) Fine Industrial Commodities Ltd. vs.
6 (2004)RPC 24
7 [36] (supp) RPC 177]
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Powling8, (iv) Patchett vs. Sterling Engineering Coy Ltd. 9, (v) Triplex
Safety Glass Co. Ltd. vs. Scorah 10, (vi) Narayandas Shreeram Somani vs.
Sangli Bank Ltd.11 and (vii) Dale Carrington Invt. (P) Ltd. vs. P.K.
Prathapan 12.
12 The Plaintiff alleged that during the period of 2001 to 2010,
Defendant No.1 has spent an amount of about Rs.186 crores on research and
development and Defendant No.2 cannot take advantage of that and
registered the patent in his own name. The Plaintiff also alleged that
Defendant No.2 has also benefited by the efforts of the employees of
Defendant No.1. It is the Plaintiff's case that Defendant No.2 never did any
work or never made any efforts in his personal capacity but always acted on
behalf of Defendant No.1 in collaboration with other employees of
Defendant No.1 in the matter of research and development and making new
inventions resulting in the grant of patents.
13 The Plaintiff's case is in two parts. The first part as mentioned above,
i.e., Defendant No.2 used facilities of Defendant No.1 and the second part is
that the Defendant No.2 as the Managing Director and in the whole time
8 [71] RPC 253]
9 (72 RPC 50)
10 (15 RPC 21)
11 (AIR 1966 SC 170)
12 [(2005) 1 SCC 212]
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employment of Defendant No.1 was obligated and devoted his whole time
exclusively for the benefit of Defendant No.1 alone. In his capacity as the
Managing Director of Defendant No.1, Defendant No.2 has been receiving
substantial remuneration and commission from Defendant No.1 and for the
past 10 years alone, i.e., upto the date of filing of the suit, has been paid an
amount aggregating to about Rs. 27.54 crores of which Rs.22.7 crores was
commission. In his fiduciary capacity as the Managing Director of
Defendant No.1, Defendant No.2 also owes a duty to the Plaintiff as its
shareholder and this fiduciary duty obligates Defendant No.2 not to misuse
the assets of Defendant No.1 or to convert the assets to his own use. To that
end and intent, Defendant No.2 was obligated not to transfer the valuable
assets and properties of Defendant No.1, to which Defendant No.1 is
entitled to, himself or to any entities owned and/or controlled by Defendant
No.2. The Plaintiff alleged that this fiduciary duty also enjoined the
Defendant No.2 to exclusively work for Defendant No.1 and not to compete
with or divert the business or assets of Defendant No.1.
14 The Plaintiff is also aggrieved by a notice, dated 21 st August, 2013
received by the Plaintiff as shareholder from Defendant No.1 in which it is
mentioned that Defendant No.1 has entered into an agreement with
Defendant No.2 in which Defendant No.1 has acknowledged that Defendant
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No.2 owns and shall continue to own any invention that he has
invented/conceptualized, invents/conceptualizes in future during the tenure
of his engagement as the Managing Director of the Company and the
Company shall not claim any ownership of such inventions unless such
inventions are specially assigned to the Company. It is also clarified in the
notice that any inventions of Defendant No.2, which are used by the
Company are and shall be pursuant to a permission/license granted by
Defendant No.2 and Defendant No.1 shall not have any right, title or interest
therein and Defendant No.2 shall be entitled to apply for patents and obtain
patents in his own name for his inventions.
15 This, according to the Plaintiff, amounts to distribution of assets by
the Company to the detriment of all the shareholders and Defendant No.1
does not have the permission of 100% shareholders to enter into this kind of
agreement with Defendant No.2. The Plaintiff's case is that Defendant No.2
is in control of Defendant No.1 and Defendant No.2 having misused his
position as Chairman and Managing Director of Defendant No.1 will not
allow Defendant No.1 to initiate any action against Defendant No.2 for the
protection and recovery of valuable assets. Moreover, Defendant No.2
owned and/or otherwise controlled the majority of the equity shares in
Defendant No.1 and all the Directors on the Board of Directors of
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Defendant No.1 having been appointed by Defendant No.2, any resolution
moved by the Plaintiff with Defendant No.1 to initiate action against
Defendant No.2 will obviously be defeated.
16 The Defendants' case is that the Plaintiff has no locus. According to
the Defendants the issues raised by the Plaintiff have been decided in
previous litigations and this is the third round of litigation. It was submitted
that the Plaintiff, now in the garb of a derivative suit, is raising the same
issues that have been litigated and decided against the Plaintiff in other
litigations between the same parties. According to the Defendants, the
Plaintiff had filed a Company Petition No. 77 of 1990 where the Plaintiff
had made similar allegations of mismanagement, oppression and
misappropriation of assets of Defendant No.1 Company by Defendant No.2.
During the said proceedings, an MOU, whereby the Plaintiff alongwith
other Petitioners therein had agreed to sell/sold shares to Defendant No.1 to
Godrej, a competitor of Defendant No.1-Company, came to light.
Thereupon the Plaintiff withdrew from the said Petition, but the other
Petitioners continued the same.
By an order dated 14th November, 2008, this Court dismissed the said
Petition finding that there were no grounds of oppression or
mismanagement made out. In the said order, in paragraph 6, the Court had
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observed that the Plaintiff (who was petitioner 1/2 ) withdrew from the
Petition and has observed as under :-
"As aforesaid, the original Petitioner Nos.1, 2, 3, 6 and 7
have withdrawn from the present proceedings
unconditionally. As per their request, they have been deleted
from the array of Petitioners. The effect of unconditional
withdrawal from the proceedings by the said Petitioners is
that they have given up their challenge with regard to the
alleged acts of oppression and mismanagement. In that,
those Petitioners have consciously acquiesced in the acts
complained of."
The Defendants also submitted that in another order dated 14th June,
2011 of this Court, in another Petition filed by the Plaintiff against the
Defendants, the Court has observed as under :-
"Thereafter the Plaintiffs filed a Company petition No. 132
of 2009 before the Company Law Board. Essentially
similar allegations as in the earlier petition and in the
present suit pertaining to mismanagement, oppression and
misappropriation of funds were made including prayers for
restraining Defendant Nos. 2 and 3 herein from transferring
their shares. For example in paragraph 9.2 of the petition
reads as follows:
9.2 The 2nd Respondent is required to be restrained from in
any manner selling, transferring, alienating, encumbering,
or otherwise dealing with the other assets and properties of
the 1st Respondent. The 1st Respondent has developed
considerable process / technical knowhow with regard to (i)
making of rock phosphate (ii) extraction of iron ore (iii)
manufacture of temperature resistant polymers and (iv) the
development of high grade cement from the ash of coking
coal furnaces. These processes / technical knowhow are
hereinafter referred to as "the Specific Process Knowhow".
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The Specific Process Knowhow is developed by the 1 st
Respondent by the funds of using the labs of, using the
resources of and research staff of the 1 st Respondent. The
Specific Process Knowhow is owned by the 1 st Respondent
and would constitute a valuable asset of the 1 st Respondent.
The 2nd Respondent had publicly evinced his desire to take
away the Specific Process Knowhow and to encash the
same for his own exclusive benefit, thereby depriving the 1st
Respondent and its minority shareholders including the
Petitioners from the benefit of the Specific Process
Knowhow. The 2nd Respondent, who has access to and
possession of the Specific Process Knowhow is required to
be restrained by this Hon'ble Bench from in any manner
selling, transferring, alienating, encumbering, or otherwise
dealing with the Specific Process Knowhow."
In the said Company Petition the Plaintiffs had inter alia
sought the following prayer being prayer (iv) therein:
(iv) That pending the hearing and final disposal of the
Petition, this Hon'ble Bench be pleased to pass a temporary
order and injunction restraining Respondents directly or
indirectly by themselves and / or through their servants or
agents or in any manner howsoever, directly or indirectly,
from selling, transferring, disposing, alienating,
encumbering, creating third party rights or otherwise
dealing with the assets, properties, intellectual property
including but not limited to the processes, knowhow,
technology and or the benefit of Research and Development
(including the Specific Process Knowhow referred to in
paragraph 9.2 above) of the 1st Respondent."
Therefore, the same issues are being re-agitated in the present suit.
18 The Defendants further submitted that when the Company Law Board
dismissed the Petition No.132 of 2009, the Plaintiff filed a Company Appeal
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No.24 of 2010 which was dismissed by this Court and while dismissing the
said Appeal, the Court inter-alia observed as follows :-
"128] ...In this behalf, it must be immediately noticed that
the appellants were parties to Company Petition No.77 of
90. Some of the instances that have been highlighted before
me were part of the pleadings in this Company petition.
Further, this Company petition was extensively amended.
The original as well as amended petition has been dealt with
by the learned Single Judge of this Court by his judgment
and order dated 14th November 2008. He proceeded to
dismiss the same. While dealing with self same allegations,
the learned Single Judge has observed thus:-
'49.
On the other hand, the respondents have not only
denied material grounds and would submit that proper
compliance has been observed. In addition, the respondents
would contend that the petitioners should be non-suited for
having approached this Court with unclean hands. In that
the fact that the petitioners have already entered into a
MOU with Godrej Soaps Ltd., to acquire shares in
respondent No.1 Company was kept a secret arrangement
till it became known for the first time to the respondent in
February 2005. It is common ground that even the present
petitioners are signatories to the said MOU. In fact, even the
present petitioners have sold 27 and 66 shares respectively
to Godrej Soaps Ltd., without following the regime of Article
57. On the one hand, the petitioners were questioning the
intention of the 2nd respondent but at the same time, the
petitioners were themselves indulging in act which was not
only illegal but against the interests of the company.
According to the respondents, the petitioners group was bent
upon selling their shares to a person who happens to be the
competitor of respondent company. Besides, it is the
petitioners group who on the one hand were opposed to
increase of authorised share capital resulting in respondent
No.1 not being able to declare bonus shares; and on the
other hand were acting against the interests of the Company
by committing themselves to sell their shares to person who
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happens to be the competitor of respondent company.
According to the respondents the present petition is a
speculative petition for which reason also the grievance
made at the instance of petitioners with regard to meeting
dated 15th February 1990 cannot be countenanced.'
'50. The fact that even the present petitioners were
party to MOU and have committed themselves to espouse
the cause of the alleged competitor of the Company and in
fact transferred part of the shares to an outsider, have come
to the notice of the respondents only in February 2005.
Those material facts have been suppressed by the
petitioners. For this reason alone, the petitioners deserve to
be non-suited. It is well established that no indulgence can
be shown to a litigant who approaches the court with
unclean hands. In any case, as observed earlier, after the
withdrawal of other petitioners from the present proceedings
unconditionally, thereby giving up all the allegations and
claim against the respondent company, the issue regarding
validity of meeting dated 15th February 1990 survives only
at the instance of present petitioners. They have less than
7% of share holding in the respondent company. At their
instance, therefore, the question of overturning the decisions
taken in the said General Meeting particularly having
referred to their conduct does not arise. Even if the matter
was to be examined on facts, on its own merits, the
grievance of the petitioners in respect of each of the grounds
will have to be stated to be rejected. By no standards, the
decision to convene meeting to consider the eight items
stated in the notice dated 16th January 1990 can be said to
be oppression against minority shareholders. The necessity
to increase borrowing powers was in the context of
expansion plans in relation to which ample explanation has
been offered by the respondent company. Insofar as
changing of name from private limited Company to one of
public limited Company was also out of necessity. Even the
explanation offered by the respondent Company to increase
the authorised capital of the Company can, by no standards,
be said to be oppression against the minority shareholders.
No tangible material has been produced to substantiate that
position. Even the amendments suggested to the A.O.A. were
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not to favour only the majority shareholders but would
apply across the board and every member would be
benefited by the said amendment. The controversy regarding
deletion of Article 123 as raised is also without any
substance. Besides, it is common ground that the Company
has now become a public limited company. Even on account
of this change, it has become redundant to entertain the
grievance of the present petitioners in relation to the issues
concerning extra ordinary general meeting dated 15th
February 1990. More so, when the stand taken by the
present petitioners at the time of arguments plainly suggests
that they are interested in walking out of the Company and
sell their shares at a fair price.'
129] .....
130] The argument is that the appellants were not parties to
this judgment and, therefore, it does not bind them.
However, it is pertinent to note that the appellants were
original petitioners. They withdrew from Company Petition
No.77 of 1990. There is nothing on record to indicate that
they withdrew with liberty to raise the pleas raised by them
again. Once the learned Judge has found that the conduct of
the remaining petitioners was entirely blameworthy and they
could not substantiate the charge and/or allegation leveled
of being oppressed as minority shareholders, then, I do not
see how the present appellants can on the same material
succeed in proving the said allegation. Apart from finding
that they are raising the same issues based on the same
allegations and identical arguments, I am of the opinion that
the observations of the learned Single Judge would be
applicable to the present appellants too. Any wider
controversy, including about applicability of Order XXIII
Rule 1 of CPC to a Company Petition need not be gone into
and decided. Assuming that this provision and/or principles
analogous thereto apply, apart from the appellants not
seeking any liberty from the learned Single Judge while
withdrawing themselves from Company Petition No.77 of
1990, I find that their arguments in the present appeal are
identical to those raised by the remaining petitioners in
Company Petition No.77 of 1990."
Shraddha Talekar PA 19/57
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19 The Defendants submitted, therefore, that the Plaintiff should not be
allowed to re-agitate the same issues now in the garb of a derivative action.
The Defendants also submitted that though the Plaintiff has preferred an
SLP against the order dated 14th June 2011, which has been admitted, but no
stay has been granted, the findings of this Court in the above two decisions
continue to hold ground. It was also submitted that mere pendency of an
SLP without the grant of a stay does not affect the validity or the binding
force of the judgment under Appeal. It was also submitted that the Plaintiff
is not entitled to bring a derivative action and therefore, cannot ask for any
relief.
20 According to the Defendants a derivative suit is an exception to the
normal rule that the Company has an independent existence and shall sue in
its own name to protect its own interest and a shareholder is not entitled to
sue for or on behalf of the Company to protect the Company's interest. Only
in rare and exceptional cases can shareholders sue by way of a derivative
suit bona-fide in the interest of the Company and the shareholders. A
derivative suit cannot be filed to further a shareholder's personal interest. A
shareholder filing a derivative suit must demonstrate that he is a proper
person, has come with clean hands, has no ulterior motives, is not
competing with the interest of the Company and has no alternate remedy. If
Shraddha Talekar PA 20/57
21 nms.3567.2011 s.2932.11 J.doc3665
the suit (in the garb of a derivative action) is not bona-fide and in the best
interest of the Company or if the person filing the derivative action is not a
'proper person' or has not come with clean hands or has filed the action with
ulterior motives or has a competing interest with that of the Company or has
an alternate remedy, he is not entitled to file a derivative action or atleast he
is not entitled to any interim relief in the suit filed in the garb of a derivative
action. If the Plaintiff does not satisfy even one of the above conditions, a
derivative action by him is not maintainable or atleast he is not entitled to
any interlocutory reliefs in such an action at this stage. The Defendants
whilst alluding to some of the above conditions submitted that the rules
which govern the circumstances in which a derivative action will be
available to a shareholder remain strict.
21 The Defendants also submitted that Defendant No.2 has no fiduciary
duty to invent in the facts and circumstances of the case. It is the
Defendants' case that just because Defendant No.2 is the Managing Director
of Defendant No.1, it does not follow that the patent devised by Defendant
No.2 in his individual capacity should belong to Defendant No.1 or that
Defendant No.2 should hold them in trust for Defendant No.1. It is the case
of the Defendants that Defendant No.2 is the inventor and as an inventor, he
is entitled to apply for the patents as per Section 6 (1) (a) of the Patents Act
Shraddha Talekar PA 21/57
22 nms.3567.2011 s.2932.11 J.doc3665
and there is no provision in law which provides that the employee generated
patent should belong to the employer. It is also submitted that under the
contract whereby Defendant No.2 is appointed as the Managing Director of
Defendant No.1, Defendant No.2 is only entrusted with powers of
management and he is not required to do any research and development or
make inventions. In fact even the other shareholders who are siblings of the
Plaintiff also acknowledged the fact that the patents belong to Defendant
No.2 and not Defendant No.1. The siblings are Percy Kavasmaneck, who is
the brother of the Plaintiff, his wife Aban Percy Kavasmaneck and the
Plaintiff's sister Maharuk Murad Oomrigar, who between them hold 13% of
the shares in Defendant No.1. The Defendants have relied upon the
affidavits filed by these persons, in which they have expressly stated that the
patents belong to Defendant No.2 and not Defendant No.1. Even the
independent Directors being Defendant Nos.3 and 4 have not supported the
Plaintiff's contention.
22 The Defendants also submitted that the renewal of the contract of
appointment dated 15th June, 2013 of Defendant No.2 as the Managing
Director also provides that the patents devised by Defendant No.2 always
belonged to Defendant No.2 and the same has been approved by the
Shraddha Talekar PA 22/57
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shareholders resolution at their meeting held on 13th September, 2013.
23 The Defendants have also stated that Defendant No.2 has not used the
resources of Defendant No.1 for conceiving/devising the patents. Only for
consolidation/verification, small resources of Defendant No.1 have been
used in respect of some of the inventions because the Defendant No.1
wanted to implement the inventions, and the use of such resources is by
way of verification. According to the Defendants such resources have not
been used in the course of conceptualizing the patents and in any event
assuming for the sake of argument, Defendant No.2 has used some
resources of the Company in devising the patents, by merely using such
resources does not mean the patents belong to the Company. It was also
submitted that Defendant No.2 has given a royalty free license to the
Company to use any patent as may be devised which Defendant No.1 may
require in the course of business and Defendant No.1 continues to benefit
from inventive abilities of Defendant No.2 as it may use these inventions
royalty free. It was also submitted that many of the patents listed in the
revised Exhibit 'J' as tendered by the Plaintiff during the course of the
hearing, do not relate to the business of the Company at all and no R & D
expenditure has been incurred in respect of these.
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24 According to the Defendants, if it is to be held that Defendant No.2 is
not entitled to the patents and Defendant No.1 is entitled to, the patents may
itself get revoked or canceled. According to the Defendants, under Section
64 (1)(b) of the Patents Act, any person may apply for revocation of the
patent if "the patent was granted on the application of a person not entitled
under the provisions of the Patents Act to apply therefor". In such a
situation, if it is held that the patent was wrongfully obtained by Defendant
No.2 rather than in the name of Defendant No.1, then any person including
the competitors of Defendant No.1 may apply for revocation/cancellation of
the patent and this can never be in the interest of company.
25 According to the Defendants, the Plaintiff's conduct is also tainted
and he has not come with clean hands because the Plaintiff has engaged the
Defendants in constant litigations which demonstrates that the Plaintiff has
never been and is not a well-wisher of the Company. The Plaintiff has
always been on the look-out for opportunities to harass Defendants and this
action also is a continuation of a series of frivolous litigations initiated by
the Plaintiff to harass Defendant No.1. Through this litigation also, the
Plaintiff is subjecting Defendant No.1 to immense costs and unnecessary
spending of management time and creating uncertainty in the minds of the
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25 nms.3567.2011 s.2932.11 J.doc3665
people with whom Defendant No.1 deals with in an endeavor to suggest that
all is not well. It was also submitted that the finding of this Court in the
matters as mentioned earlier shows that the Plaintiff has been acting against
the interest of the Company and he is a litigant who has approached the
Court with unclean hands. To the submissions of the Plaintiff that the past
conduct of the Plaintiff is not relevant and only the conduct in the present
proceeding should be considered, the Defendants submitted that the entire
conduct of the Plaintiff in a series of related actions is certainly relevant for
the purposes of considering whether his action is in the best interest of the
Company and whether he is entitled to any interim relief in this derivative
suit and in any event the Plaintiff, in the garb of a derivative action, is really
agitating family disputes and personal grievances and vendetta against
Defendant No.2 and Defendant No.1 particularly to benefit the Plaintiffs
competing business.
26 According to the Defendants the Plaintiff through a Company
Western Chemical Industries Private Limited (WCIPL) promoted, controlled
and majority owned by the Plaintiff carries on a competing business with
that of Defendant No.1 in the manufacturing of product PV 23. The process
of manufacturing this product devised by Defendant No.2 and used royalty
free by Defendant No.1 is superior to that of WCIPL thereby reducing the
Shraddha Talekar PA 25/57
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market share of WCIPL and this has been admitted by the Plaintiff in his
affidavit in rejoinder dated 22nd December, 2011 where the Plaintiff has
alleged "I verily believe that the Defendant No.1 forayed into PV 23 only
with a view to impact my business." It is for this reason, the Defendants
submit that the Plaintiff is filing this derivative action to jeopardize not only
the business of Defendant No.1 but the patents themselves. Therefore, as
this conduct is contrary to the interest of Defendant No.1, a derivative action
at the instance of such a party ought not to be encouraged.
27 It is also submitted by the Defendants that the Plaintiff has suppressed
in the plaint the fact that the Plaintiff had agreed to sell his shares in
Defendant No.1 to Godrej, who is a competitor and has agreed to exercise
all his voting rights in respect of his shares in Defendant No.1 as per the
directions of Godrej. This MOU was brought on record by Defendant No.2
in his affidavit of 12th December, 2011. Therefore, the Plaintiff having
suppressed this MOU is dis-entitled to any interim reliefs. The Plaintiffs
tried to argue saying that it was only a pledge. This read with the two
decisions of this Court dated 14th November, 2008 dismissing the Company
Petition No.77 of 1990 and 14 th June, 2011 dismissing the Company Appeal
No.24 of 2008 gives reasons to believe that the Plaintiff is only espousing
Shraddha Talekar PA 26/57
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the cause of Godrej, a competitor. Such an action is not bona-fide or in the
best interest of the Company and hence on this ground alone, the Plaintiff is
not entitled to maintain this derivative action.
28 The Defendants also submitted that the Plaintiff had even filed a
criminal complaint - filed by the original Plaintiff no.2 (mother of the
Plaintiff) against her daughter Maharukh, i.e., Plaintiff's sister and
Defendant No.2. The Police, whilst closing the case, in its report has made
an observation that having regard to the age, physical and mental stage of
the Plaintiff's mother, the complaint has not been filed by the Plaintiff's
mother on her own free will but at the instance of the Plaintiff and there
appears to be a family dispute qua Defendant No.2.
29 According to the Defendants since a derivative action is an equitable
relief available under exceptional circumstances and subject to the
fulfillment of certain strict conditions, as an exception to the rule that the
Company alone is entitled to sue for the wrongs done to it rather than any
shareholder, the existence of an alternative remedy would debar the Plaintiff
from continuing with the derivative action or obtaining any interim relief
therein. The submissions of the Defendants under this head was split into
Shraddha Talekar PA 27/57
28 nms.3567.2011 s.2932.11 J.doc3665
two parts (1) the alternative remedy was available under Section 397 and
398 of the Companies Act and (2) the alternative remedy was available
under the Patents Act, 1970. According to the Defendants the same issues
have been raised in the proceedings commenced by the Plaintiff under
Sections 397 and 398 of the Companies Act.
As regards, the alternative remedy under the Patents Act according to
the Defendants the issues in the present suit relate to the question of
ownership of patents. According to the Defendants, the whole scheme of the
Patents Act seems to be that all questions of ownership of patents should be
determined by the patent office which is a specialized forum. The scheme of
the Patents Act provides opportunities at various stages for having the
ownership issue determined by it - a) at the application stage before the
grant of the patent by availing of pre-grant opposition proceedings, b) by
availing of post-grant opposition proceedings within one year of the grant of
the patent, c) by availing of proceedings for rectification of the register of
patents maintained by the patents office and having the name of the rightful
patentee inserted in the register (for which no time limit is prescribed), and
d) by having the name of the rightful patentee substituted for the person who
has wrongfully obtained the patent in revocation proceedings (for which no
time limit is prescribed). Where there is a specialized forum constituted to
Shraddha Talekar PA 28/57
29 nms.3567.2011 s.2932.11 J.doc3665
determine patent ownership rights - the forum being the patent office, the
Court will leave it to the forum to decide rather than endeavoring to make a
decision itself. The Defendants also submitted that there are express
provisions in the Patents Act, like section 71 read with section 117 (C)&(D)
and section 64 (1)(C) read with sections 52 and 117 (C)&(D) where
jurisdiction of the Court appears to be barred. In view thereof, even if the
Court has jurisdiction, it will refrain from exercising that jurisdiction, where
the specialized forum (patent office) is more equipped to deal with complex
issues of ownership rights in patents which is a highly technical subject. The
Defendants also submitted that ownership rights is also linked with the
concept of 'inventive content' which requires specialized knowledge for
correct determination of the ownership rights and hence all the more reason
why such issues should be left to a specialized forum like the patent office
and the Court should not grant an interlocutory injunction where the
Plaintiff has not sought any reliefs before the specialized forum.
30 It was also submitted that Article 160 (a) of the Articles of
Association of Defendant No.1 empowers any Director to initiate legal
action on behalf of Defendant No.1 and that he does not need a Board
Resolution for the same. The Plaintiff not having approached any Director,
particularly Defendant Nos.3 or 4, who are independent Directors for
Shraddha Talekar PA 29/57
30 nms.3567.2011 s.2932.11 J.doc3665
initiating the action on behalf of the Company, the Plaintiff has failed to
establish that the Company has failed to initiate the action against the
wrongdoers which establishment is a pre-requisite before initiating any
derivative action.
31 The Defendants submitted that the Plaintiff merely holds 12% of the
shares in the Company. The Plaintiff's brother, brother's wife and sister,
who in the aggregate hold 13% of the shares in the Company are against this
action and have stated in affidavit that this action of the Plaintiff is not
bona-fide in the interest of the Company and infact the patents in question
belong to Defendant No.2 in his individual capacity and not to Defendant
No.1. The Defendants also submitted that the concept of collective decision
making in bringing a derivative action rather than the decision of a single
shareholder is recognized by the Indian Courts.
32 According to the Defendants, Defendant No.2 is not in control of
Defendant No.1 to such an extent as would prevent Defendant No.1 from
initiating action. According to the Defendants, Defendant No.2 and
Defendant No.3 presently own only about 3% of the shares and the majority
of the shareholding in the Company is with GMATF, which has six
Directors including four independent Directors. The four independent
Shraddha Talekar PA 30/57
31 nms.3567.2011 s.2932.11 J.doc3665
Directors are eminent citizens of the country while one of them is a recipient
of Padma Bhushan and other is recipient of Padma Vibhushan. The third one
is a member of Supreme Court Committee on Solid Waste Management. It
was submitted that though two out of the six Directors of GMATF were
Defendant No.2 and Defendant No.3 and Defendant No.2 was not in control
of GMATF.
Therefore, derivative action is an exception to the rule that only a
Company can sue on its own behalf. In exceptional circumstances an
individual shareholder is permitted to sue on behalf of the Company the
alleged wrongdoers because the wrongdoers are themselves in control of the
Company. The requirements to be complied with to permit an individual
shareholder to sue on behalf of the Company is very strict. In the present
notice of motion, therefore, the Plaintiff has to cross two hurdles to be
entitled to any relief and if the Plaintiff fails even in one of them he will not
entitled to any relief. The Plaintiff has to prove atleast prima-facie that (a)
he is entitled to maintain this action and (b) he satisfies that (i) he has a
prima-facie case for grant of injunction; (ii) if injunction is not granted,
irreparable loss/injury will be caused which cannot be compensated in
damages; and (iii) the balance of convenience is in his favour.
Shraddha Talekar PA 31/57
32 nms.3567.2011 s.2932.11 J.doc3665
34 With this background, let us proceed further :
In Palmer's Company Law, derivative action is explained as an action
where the Plaintiff is seeking to enforce not his own right of action but a
right of action vested in or derived from the Company. Thus, the Plaintiff
may seek to enforce the Company's rights by suing in a representative form
on behalf of himself and all other shareholders in the Company (except the
wrongdoers) against the wrongdoers. Therefore, as derivative action has to
be filed in a representative form, let us see whether the Plaintiff crosses that
first hurdle.
The Plaintiff is the only shareholder of Defendant No.1 who has filed
this action. The Plaintiff's own siblings namely Percy Kavasmaneck, who is
the brother of the Plaintiff, his wife Aban Percy Kavasmaneck and the
Plaintiff's sister Maharukh Murad Oomrigar, who are also the shareholders
in the Company and hold 13% shares between them, have, in fact,
disassociated themselves from the Plaintiff. In this case, the Plaintiff holds
12% shares in the Company. In the plaint, an attempt is made to suggest
that the Kavasmaneck family, of which the Plaintiff is a member, is a group
of shareholders who are allegedly wronged. However, if we consider the
affidavit dated 20th April 2012 of the Plaintiff's brother Percy Kavasmaneck
in support of chamber summons No.669 of 2012 in this suit and Plaintiff's
sister Maharukh Oomrigar's affidavit dated 21st April 2012 in support of
Shraddha Talekar PA 32/57
33 nms.3567.2011 s.2932.11 J.doc3665
chamber summons No.647/2012 also in this suit, does not give any
indication that the Kavasmaneck family is entirely together. Between Percy
Kavasmaneck/Aban Kavasmaneck, wife of Percy Kavasmaneck and
Mahrukh Murad Oomrigar, they hold in aggregate about 13% of the shares
in Defendant No.1-Company. In fact, they have in their respective affidavits
stated that this action of the Plaintiff is not bona-fide and in the interest of
the Company. They have also stated that the patents which are in question
in this suit belong to Defendant No.2 in his individual capacity and not to
Defendant No.1. It appears that Percy Kavasmaneck is also a Scientist with
a Phd. and has experience with patent issues. Though nothing turns out on
his qualification as regards the suit in hand, the fact to be noted is the other
shareholders who are also the Plaintiff's siblings, are not with the Plaintiff
in this action.
35 In the matter of Smith & Ors. Vs. Croft & Ors.13 it was held that the
views of the independent shareholders or majority of the minority
shareholders ought to be determined where the derivative action is in the
best interest of the Company and if use of such independent majority of the
minority shareholders is against the action then the action should be
disallowed. In the matter of Dr.Satya Charan Law and Others V.
13 [1998] Ch.114
Shraddha Talekar PA 33/57
34 nms.3567.2011 s.2932.11 J.doc3665
Rameshwar Prasad Bajoria & Ors.14 the Court also recognized the concept
of collective decision making in bringing a derivative action rather than the
decision of a single shareholder. In Palmer's Company Law, 25 th Edition, at
pages 8238 and 8239, while analyzing the English Companies Act of 2006,
the relevant factor in a derivative action to be kept in mind is discussed as
under :
The six other matters the statute required the Court to take
into account are :
(i) Whether the member is acting in good faith in seeking
to continue the claim.
............
(iv) Finally, there is a factor which is given special
prominence by being out in a sub-section of its own. The
court must have "particular regard" to the views about the
litigation of the members of the Company who have no
personal interest, direct or indirect, in the matter. This
indicates a preference for collective, rather than
individual, decision-making over the litigation, even if the
body of shareholders in question is a minority.
36 Having regard to the aforesaid, the Plaintiff though holding 12% of
the shares of the Company, is all alone in this action particularly when the
other minority shareholders, who collectively own about 13% of the shares
of Defendant No.1, are against the action and do not consider it in best
interest of Defendant No.1. Therefore, in my view, such a Plaintiff should
not be entitled to maintain this derivative action or any relief on this ground
14 AIR (37) 1950 Federal Court 133
Shraddha Talekar PA 34/57
35 nms.3567.2011 s.2932.11 J.doc3665
alone.
37 The next point which is necessary to be considered in a derivative
action is that, the action is in the bona-fide and best interest of the Company.
38 In my view, by virtue of Section 64(1)(b) of the Patent's Act, 1970
this action will not be in the interest of Company because if the order as
prayed for by the Plaintiff is passed, there is a risk of the patents itself being
lost. Section 64(1)(b) of the Patents Act, 1970 reads as under :
"Section 64 : Revocation of patents
(1) Subject to the provisions contained in this Act,
a patent, whether granted before or after the
commencement of this Act, may, be revoked on a petition
of any person interested or of the Central Government by
the Appellate Board or on a counter-claim in a suit for
infringement of the patent by the High Court on any of
the following grounds, that is to say--
(a) ..........
(b) that the patent was granted on the
application of a person not entitled under the provisions
of this Act to apply therefor"
Therefore, any person may apply for revocation of the patent, if the
patent was granted on the application of a person not entitled under the
provisions of this Act to apply therefor.
Shraddha Talekar PA 35/57
36 nms.3567.2011 s.2932.11 J.doc3665
39 In this case, it is the case of the Plaintiff that Defendant No.2 was not
entitled to register the patent in his own name and it is the Defendant No.1
who was entitled to the patent being registered in its own name. It is the
Plaintiff's case that the patents have been wrongly applied for or obtained by
Defendant No.2 though he is not entitled to the same and in fact it is
Defendant No.1 who is entitled to the same.
If we accept the Plaintiff's contention then any person, it may include
the Plaintiff himself, who is a competitor as explained later, or any other
competitor may apply for revocation/cancellation of the patent. If the patent
is cancelled then Defendant No.1 also will not be able to use the patents,
which it is now using, royalty free. It will cause a tremendous loss to the
Company-Defendant No.1. Therefore, this action can never be considered to
be in the interest of Defendant No.1
40 The next point which goes against the Plaintiff is that the Plaintiff has
himself admitted that the Plaintiff is a competitor of Defendant No.1. The
Plaintiff admittedly is a majority shareholder and controls a Company by the
name 'Western Industrial Chemical Company Private Limited" (WCIPL)
and manufactures a chemical by the name PV-23. The Defendants
submitted that Defendant No.1 also manufactures the same product but the
product was devised by Defendant No.2 and is being used royalty free by
Shraddha Talekar PA 36/57
37 nms.3567.2011 s.2932.11 J.doc3665
Defendant No.1 and the same is superior to that of WCIPL. In fact, the
Plaintiff in his affidavit in rejoinder dated 22 nd December 2011 has stated
that "I verily believe that the Defendant No.1 forayed into PV-23 only with
a view to adversely impact my business". Therefore, it gives a strong
feeling that this action coupled with the past history between the parties
which will be explained later is an attempt by the Plaintiff only to finish this
competition by jeopardizing the business of Defendant No.1. The statement
of the Plaintiff in his affidavit in rejoinder explains the fact that the
Plaintiff's interests are in conflict with that of Defendant No.1 and also the
malice that the Plaintiff has against Defendant No.1.
41 In an unreported judgment of this Court in the matter of Anil
Madhavdas Ahuja Vs. Marvel Fragrances Private Limited and Ors. 15, this
Court has held that derivative action by a party contrary to the interest of the
Company and in furtherance of his personal interest should not be
encouraged. Paragraphs 34 and 39 of the said judgment read as under :
34 It is pertinent to note that a petition under
sections 397, 398 has been filed by the Plaintiff against
the Defendants. The present action, prima-facie, at least,
does not appear to be bona fide for the benefit or
protection of Defendant No.1, but as a part of the overall
litigation and in respect of the disputes between the
Plaintiff and the Defendants. The Plaintiff's conduct even
otherwise does not appear to have been for the benefit of
15 NMS No.767/2011 in Suit No.566/2011, dt.11.08.2011
Shraddha Talekar PA 37/57
38 nms.3567.2011 s.2932.11 J.doc3665
or keeping in mind the interests of the first Defendant
company. The Plaintiff has himself acted contrary to the
interests of the first Defendant and in furtherance of his
personal interests, inter-alia, through Mysore Fine
Bombay and Mysore Scents Company.
.................
39 It appears, therefore, that after the family
settlement, the Plaintiff has been trying to divert the
business of Defendant No.1 to Mysore Scents Company
in which his son has, for all practical purposes, an
exclusive interest. This conduct is contrary to the interest
of Defendant No.1. A derivative action at the instance of
such a party ought not to be encouraged.
In the circumstances, the Plaintiff being a competitor with the
seemingly malicious intent against Defendant No.1, cannot be believed
when the Plaintiff says that the derivative action is bona-fide and in the best
interest of Defendant No.1. On this ground also the Plaintiff cannot
maintain this action and reliefs sought by the Plaintiff cannot be granted.
43 The other points which also exposes the fact that the Plaintiff has
ulterior motives in filing this action is because the Plaintiff had entered into
a Memorandum of Understanding (MOU) with Godrej Soaps Ltd. In the
MOU, the Plaintiff had agreed to sell his shares in Defendant No.1 to
Godrej who is a competitor. In the MOU, the Plaintiff has also agreed to
exercise all the voting rights in respect of his shares in Defendant No.1 as
per the directions of Godrej. The Plaintiff did not disclose about this MOU
Shraddha Talekar PA 38/57
39 nms.3567.2011 s.2932.11 J.doc3665
and the same was brought on record by Defendant No.2 in his affidavit
dated 12th December 2011.
44 The Plaintiff tried to brush aside this MOU by saying that it was only
a pledge. However, reading a copy of the MOU, I cannot accept that it was
merely a pledge particularly because the Plaintiff had agreed to sell his
shares to Godrej and exercise all his voting rights in such a manner as may
be directed by Godrej. The MOU further provides that "the Plaintiff shall be
bound to sell and/or transfer or dispose of any rights in respect of any shares
in Defendant No.1, whether purchased with the finance made available by
Godrej or not, only to Godrej". The Court of Chancery in the matter of
Forrest vs. The Manchester, Sheffield and Lincolnshire Railways
Company,16 at page 3 has held as under :-
"It has been a very wholesome doctrine of this Court that
one shareholder having in view the legitimate purposes of
the Company may be permitted in this Court to maintain a
suit on behalf of himself and the other shareholders of the
company, but the principle upon which that constructive
representation of the shareholders is permitted indisputably
requires that the suit shall be a bonâ fide one, faithfully,
truthfully, sincerely directed to the benefit and the interests
of those shareholders whom the Plaintiff claims a right to
represent. But can I permit a man who is the puppet of
another Company to represent the shareholders of the
Company against whom he desires to establish the interests
and benefits of a rival scheme? That would be entirely
contrary to the principle upon which this constructive
16 45 ER 1131
Shraddha Talekar PA 39/57
40 nms.3567.2011 s.2932.11 J.doc3665
representation has been permitted to be founded. When the
Plaintiff sues in that capacity any personal exception to the
Plaintiff remains, and it would be in direct contradiction of
every principle of truth and justice if I permitted a man to
come here clothed in the garb of a shareholder of Company
A., but who is in reality a shareholder in Company B., and
has no sympathy whatever with, no real purpose of
promoting the interests of the other company. Such a thing
would be so much at variance with the principles of a Court
of Equity that it would be impossible for it to entertain a suit
of that description which is a mere mockery, a mere illusory
proceeding".
(emphasis supplied)
The Plaintiff did rely on certain observations of this Court in the
matter of Godrej Industries Limited & Ors. vs. Collin Mario Rebello &
Ors.,17to contend that the Plaintiff is not espousing the cause of Godrej and
Godrej is not a competitor of Defendant No.1. The relevancy of this
judgment relied upon by the Plaintiff is vastly diluted because neither
Defendant No.2 nor Defendant No.1 were parties to the proceedings
whereby Defendant No. 2 and Defendant No.1 could have refuted the
contention that Godrej was siding with Defendant No.2. Moreover, the
judgment also does not say that Godrej is not a competitor. The judgment
was rendered in a section 9 petition under the Arbitration and Conciliation
Act, 1996 and it is stated in the judgment that the observations therein were
prima-facie and the Arbitration Petition, it appears has been filed by the
Plaintiff against Godrej to enforce the MOU. Therefore, the indisputable
17 2013(7) Bom.CR 55
Shraddha Talekar PA 40/57
41 nms.3567.2011 s.2932.11 J.doc3665
fact is that the Plaintiff had agreed to sell his shares to Godrej.
45 A derivative action is not maintainable if the Plaintiff has an ulterior
motive in bringing the action as then it cannot be regarded as bona-fide in
the interest of the company. This is the principle followed in common law as
is evident from the decision of the Court of Appeal in England in Barrett Vs
Duckett and Others18 where at page 250, paragraph 6 it was held:
"6. The shareholder will be allowed to sue on behalf of the
Company if he is bringing the action bona fide for the benefit
of the Company for wrongs to the Company for which no other
remedy is available. Conversely if the action is brought for an
ulterior purpose or if another adequate remedy is available,
the court will not allow the derivative action to proceed.
.........
First on the necessity for the absence of an ulterior purpose,
the words of Lawton LJ in Nurcombe v Nurcombe [1984]
BCLC 557 at 562, [1985] I WLR 370 at 376 are apposite:
'It is pertinent to remember, however, that a minority
shareholder's action in form is nothing more than a procedural
device for enabling the court to do justice to a Company
controlled by miscreant directors or shareholders. Since the
procedural device has evolved so that justice can be done for
the benefit of the company, whoever comes forward to start the
proceedings must be doing so for the benefit of the Company
and not for some other purpose. It follows that the court has to
satisfy itself that the person coming forward is a proper person
to do so'."
Further at page 256 it was held:
"I can well understand that Mrs. Barrett is upset at what has
18 [1995] 1 BCLC 243
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42 nms.3567.2011 s.2932.11 J.doc3665
occurred between Christopher and Carol and that she is
indignant at the supplanting of Carol by Janet. But her
partiality shows through all her evidence, and it is by her
behaviour in relation to the claims against Carol, in contrast to
the claims against Christopher and Janet, that I have become
convinced that she is not pursuing this action bona fide on
behalf of the company. If she had been, she would have had to
sue Carol no less than Christopher in respect of diverted
moneys. She claims that she did not sue Carol because Carol
does not have any assets. But when Mr. Guy was asked what
assets Christopher had to make him worth suing, the first two
items listed by Mr. Guy were the jointly owned former
matrimonial home in Gerrards Cross and the proceeds of The
Noakes in each of which Carol retains her interest. Mr. Guy
sought to assure us that now that the decision had been made
to sue Carol, the action would proceed against her. I am afraid
that I simply do not believe that Mrs. Barrett would pursue any
claim against her daughter to the point of enforcing judgment:
to my mind it is improbable in the extreme that she would force
her daughter and grandchildren out of their home and I quite
understand why she would not. Her failure to take the order
making Carol a Defendant any further speaks volumes. On the
other hand I do not doubt that she would pursue the other
Defendants as far as she could, regardless of whether there is
any real likelihood of recovery. This is not a satisfactory basis
for an action on behalf of the company".
(emphasis supplied)
46 In Barrett Vs Duckett (supra), the Court was of the view that the
derivative action was in fact prompted by family hostilities which was the
ulterior motive and hence was not regarded as an action bona-fide in the
best interest of the Company.
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47 Similarly in the case under consideration, the suit in the garb of a
derivative action is really prompted by family hostilities and personal anger
that the Plaintiff had against Defendant No.2. In fact the Plaintiff/his mother
had also filed a criminal complaint against Defendant No.2 and the police
whilst closing the case observed that having regard to her age and physical
and mental state, the criminal complaint has not been filed by her (the
mother) but at the instance of the Plaintiff and there appears to be a family
dispute. Even previous litigations initiated by the Plaintiff is also evidence
of family disputes/disputes of a personal nature now being again sought to
be litigated in the garb of a derivative action.
Therefore on this ground also, the Plaintiff will not be entitled to any
relief as sought.
48 It is also quite obvious that the Plaintiff having not succeeded in his
earlier actions against Maharukh Murad Oomrigar, his sister and the
Defendant No.2, he is re-agitating the same points in the garb of a derivative
suit.
49 In Company Petition No.77 of 1990, the petitioners therein had made
similar allegations of mismanagement, oppression and misappropriation of
shares of Defendant No.1 by Defendant No.2 and others. The Plaintiff, who
Shraddha Talekar PA 43/57
44 nms.3567.2011 s.2932.11 J.doc3665
was also one of the petitioners, later withdrew from the petition. The said
petition was, however, dismissed by this Court by an order dated
14th November 2008, inter-alia, holding that no ground of any oppression
or mismanagement and misappropriation was made out. While dismissing
the petition, the Court made an observation on the withdrawal by the
petitioner from the petition by stating that the effect of unconditional
withdrawal from the proceedings by the petitioners is that they have given
up other grievances with regard to the alleged acts of oppression and
mismanagement and the petitioners thereby have consciously acquiesced in
the acts complained of. Though this matter was carried right up to the Apex
Court, the Apex Court, while disposing of the said Appeal, has not made any
observation on this point.
50 The Plaintiff had also filed a Company Petition No.132 of 2009
before the Company Law Board where also similar allegations as in the
earlier petition and in the present suit pertaining to mismanagement,
oppression and misappropriation of funds appear to have been made. In the
said Petition, the petitioners namely the Plaintiff herein also appeared to
have prayed for restraining Defendant nos.2 and 3 herein from dealing with
or alienating or transferring the assets, properties, intellectual property
including but not limited to the processes, knowhow, technology and or the
Shraddha Talekar PA 44/57
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benefits of research and development of the Defendant No.1. From the order
dated 14th June 2011 in Company Petition No.77 of 1990 filed by the
Plaintiff against the Defendants which is reproduced earlier, it is quite
obvious that the Plaintiff is re-agitating the same issues in the present action
as well. The entire attitude of the Plaintiff appears to be get an order
somehow against the Defendant No.2 and if in one action he fails he would
file another action and now in the garb of this derivative action. Therefore,
this action of the Plaintiff is tainted and morally wrong. On this ground also,
no relief as sought by the Plaintiff should be granted. In fact, in another
matter, viz. Company Appeal No.24 of 2010, which is reproduced above,
this Court, while dismissing the Appeal vide order dated 14 th June 2011, has
observed that the Plaintiff herein has come with unclean hands.
In this regard, the Defendants have relied on Palmer's Company Law
24th Edition, where at page 978 it is mentioned "the derivative action is
subject, however, to the doctrine of clean hands. As an equitable invention,
the derivative action cannot be used to do injustice." The Defendants also
relied upon the judgment of the English Appeal Court in the matter of
Nurcombe vs. Nurcombe19, where at page 6 and 7 it is held as under :-
"It is pertinent to remember, however, that a minority
shareholder's action is in form nothing more than a
procedural device for enabling the court to do justice to a
Company controlled by miscreant directors or shareholders.
19 {1985) 1 All ER 65
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46 nms.3567.2011 s.2932.11 J.doc3665
Since the procedural device has evolved so that justice can
be done for the benefit of the company, whoever comes
forward to start the proceedings must be doing so for the
benefit of the Company and not for some other purpose. It
follows that the court has to satisfy itself that the person
coming forward is a proper person to do so. In Gower's
Principles of Modern Company Law (4th edn, 1979) p 652
the law is stated, in my opinion correctly, in these terms:
'The right to bring a derivative action is afforded (to) the
individual member as a matter of grace. Hence the conduct
of a shareholder may be regarded by a court of equity as
disqualifying him from appearing as Plaintiff on the
company's behalf...'"
Further at page 7 of the above decision it was held as
follows:
"My understanding of these judgments is that the court is
entitled to look at the conduct of a Plaintiff in a minority
shareholder's action in order to satisfy itself that he is a
proper person to bring the action on behalf of the Company
and that the Company itself will benefit. A particular
Plaintiff may not be a proper person because his conduct is
tainted in some way which under the rules of equity may bar
relief. He may not have come with 'clean hands' or he may
have been guilty of delay".
(emphasis supplied)
In any event, it is trite that anyone coming to Court with unclean
hands should be shown the door. The Courts have to be very strict on this
and should deal with such people with an iron hand. On this ground also,
therefore, the plaintiff in my view should not be allowed to maintain this
action and relief sought by the Plaintiff should not be granted.
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51 In view of the above, I do not see any necessity to go into the other
grounds of Defendants like alternative remedy etc.
52 On the grounds of fiduciary duty alleged to have been breached by the
Defendant No.2 in filing the patents in his own name, the counsel for the
Plaintiff submitted that as Managing Director of a Company any research
that the Plaintiff did was done in his role as Managing Director and
therefore, the patents should be registered in the name of Defendant No.1.
The alternative submission that was made was that even if Defendant No.2
researched and invented in his own name, as he was employed by Defendant
No.1 as a Managing Director, Defendant No.2's fiduciary duty required that
the patents should be registered in the name of Defendant No.1.
53 The Plaintiff did not produce any document which stated that
Defendant No.2 had to, as part of his employment or role as a Managing
Director, invent or do any research. Therefore, it does not follow that the
patents devised by Defendant No.2 in his capacity, should belong to the
Company or that he should hold that in trust for the Company. The test is
whether Defendant No.2, as Managing Director, had a duty to invent.
If Defendant No.2 did not have a duty to invent, how can he be said to have
breached a fiduciary duty.
Shraddha Talekar PA 47/57
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54 A perusal of the Managing Director Contract dated 6th May 2008, that
Defendant No.1 entered with Defendant No.2 during the subsistence of
which the concerned patent applications have been made shows Defendant
No.2 is only entrusted with powers of management. There is not even an
iota of indication either expressly or by implication that he was also
required to devise inventions.
55 It must also be noted that the in-disputed position is that Defendant
No.2 has given royalty free license to Defendant No.1 to use any patent as
may be devised by him which may required in the course of business. The
Defendant No.1 continues to benefit from the inventive policies of
Defendant No.2 as these inventions are royalty free. If the Plaintiff's prayers
are to be allowed, that would also amount to a fetter in the inventive ability
or in the passion of Defendant No.2 to invent and give royalty free license
and who in his advance age of being in the 80's, still continues to invent. If
the relief sought is granted, Defendant No.1 will not be able to use any of
the patents and that would mean loss to the Company.
Moreover, none of the judgments relied upon by the Plaintiff to
buttress the second point that because Defendant No.2 is working as a
Managing Director, he has a fiduciary duty to register the patents in the
name of Defendant No.1 are applicable. I deal below with these judgments.
Shraddha Talekar PA 48/57
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(a) In Triplex Safety Glass Co. Ltd. v Scorah 20, the chemist who
took out a patent in his own name was employed in the laboratories of the
Plaintiff-Company. He had been directed by the Company to discover a
method for producing Acrylic Acid and hence he had a duty to discover a
method of Acrylic Acid as part of his employment contract. Moreover, under
the employment contract, he was required to assign the patent to the
Company. Accordingly, even though the employer Company did not
express an interest in patents initially but did so subsequently, he was
required to assign the patents to the Company as they had been invented
during the course of his employment and as part of his duty to the Company.
Whilst holding that the chemist held the patents in trust for the
employer Company, the Court held as under :
".....................
In a case of this kind, in my judgment it is a term of the
employment, apart altogether from any express covenant, that
any invention or discovery made in the course of the
employment of the employee, in doing that which the
employee was engaged and instructed to do during the time of
the employment, during working hours and using the materials
of his employers, is the property of the employers and not of
the employee, and that, having made such a discovery or
invention, the employee becomes a trustee for the employer of
it, and he is, therefore, as a trustee, bound to give the benefit of
it to his employer.
.....................
Under those circumstances, in my judgment, by reason of the
fact that the Defendant made this discovery or invention while
20 (Vol.LV RPC Page 21)
Shraddha Talekar PA 49/57
50 nms.3567.2011 s.2932.11 J.doc3665
in the employ of the Company, during the Company's working
hours and in pursuance of the orders of the Company's
servants, he became a trustee of it for the Company and he has
not ceased and cannot have ceased to be a trustee.................."
None of these circumstances are present in the case at hand. In the
present case, Defendant No.2 did not make the inventions in the course of
his employment with the Defendant No.1. Defendant No.2 was not engaged
or instructed to create the inventions during the course of his employment or
during working hours. Therefore, the facts and circumstances are materially
different and hence it cannot be said that Defendant No.2 holds the
inventions in trust for Defendant No.1.
(b) Even Fine Industrial Commodities Ltd v Powling21, the facts
were different from the present case. In that judgment, there is a finding that
Byrne sought to collaborate with the Defendant because the Defendant was
the Managing Director of FIC. The whole tenor of the judgment suggests
that the Defendant being the Managing Director of FIC, was engaged in
conceiving or devising the patent in the course of his employment duties
and during work hours. Accordingly, whilst conceiving the invention, the
Defendant was acting in his capacity as Managing Director of FIC, i.e., he
was acting in the course of his duties towards the Company in conceiving
21 (Vol.LXXI, RPC Page 253)
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the invention whereas Defendant No.2 whilst conceiving the inventions was
acting in his individual capacity and did not conceive the inventions as part
of his duties towards the Company or in his capacity as Managing Director.
He was not required to under his contract as Managing Director with
Defendant No.1.
(c) In the case of Patchett v. Sterling Engineering Co. Ltd.22, the
employee was employed in the department of design and development of
domestic electrical appliances of his employer company. The Court
observed "It was not disputed that in this capacity it was his duty to put his
inventive faculty and skill at the service of the company". During the course
of his employment he created the inventions for which patents were
obtained. It was in these circumstances that the court held "that where the
employee in the course of his employment (i.e. in his employer's time and
with his material) makes an invention which falls within his duty to make
(as was the case here) he holds his interest in the invention and in any
resulting patent as trustee for the employer unless he can show that he has a
beneficial interest which the law recognizes". Further, the court, in this case,
was considering the provision of section 56(2) of an English statute which
recognized the employer being entitled to the benefit of an invention created
22 (Vol.LXXII, RPC, Page 50)
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by an employee.
The facts and circumstances of the present case are therefore,
distinguishable from the findings of the court in the above case as
Defendant No.2 did not create the inventions in the course of his
employment. Defendant No.2 did not have a duty to create the inventions.
He was not employed to make inventions. Further, I was not shown
anything in Indian statute that recognizes that employee patents belong to
the employer.
(d) As regards, Hop Extract Company Ltd.23, relied upon by the
Plaintiff, 'B' acquired a process from one Smith which he sold for a price to
a new Company he promoted (and of which he became the Managing
Director) for the purposes of implementing the process. The process having
been taken over by the Company and the capital having been raised with the
help of 'B', it was discovered that the process was a failure. Accordingly, the
company's chemists and employees with the resources and expenses of the
Company developed an improved process which was patented in the name
of 'B'. 'B' was not a chemist nor a technician nor an inventor. It was in these
circumstances and in this context, it was held that 'B', who was also the
Managing Director, held the patent in trust for the company.
23 (Vol.XXXVI, RPC, Page 177)
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The facts of the above case, therefore, are also distinguishable from
the present case.
(e) Regarding Ultraframe UK Ltd v. Fielding24, also relied upon
by the Plaintiff again, principles set therein are distinguishable from the
present case in that the inventions were not devised by Defendant No.2 in
his position as Managing Director of the Company. Relying on this
judgment the Plaintiff sought to contend that the resolution pertaining to
appointment of Managing Director passed in the shareholders meeting held
on September 21, 2013 (i.e. much after the date of the suit and much after
the suit inventions were conceived) which, inter-alia, contains a clause to
the effect that the Company acknowledges that the patents devised by
Defendant No.2 are and continues to be his own and do not belong to the
Company amounts to an attempt to ratifying an act which cannot be ratified
without the consent of all the shareholders or amounts to unauthorized
distribution of assets of the company.
This point of view of the Plaintiff cannot be accepted. The said
resolution containing the above term does not amount to ratification at all.
Also it cannot amount to unauthorized distribution of assets of the Company
as the assets being the inventions in question are patented in the name of
24 (2004) RPC 24)
Shraddha Talekar PA 53/57
54 nms.3567.2011 s.2932.11 J.doc3665
Defendant No.2 and not Defendant No.1. Hence, it is not a case whereby the
assets belonging to the Company have been sought to be unauthorizedly
distributed or misappropriated. It looks more like clarificatory. Moreover
the said resolution has become final upon its passage by the requisite
majority of the shareholders. The said resolution, I am told, has not been
challenged by the Plaintiff in any legal proceedings and the validity thereof
is not the subject matter of these proceedings and cannot be gone into in
these proceedings.
56 On Plaintiff's submissions that by virtue of Section 88 of Indian Trust
Act, 1882, the Defendant No.2 held the patents in trust for Defendant No.1,
in my view, Section 88 is not applicable. The patents have not been devised
by Defendant No.2 in his role as a Managing Director of Defendant No.1 or
to use the expression in the Section by availing himself of his character as
Managing Director. I am saying this because his contract with Defendant
No.1 dated 6th May 2008 does not require him to devise any invention.
Therefore, in my view, Section 88 is not applicable at all.
57 Even on the Plaintiff's submissions that Defendant No.1 has used the
R & D expenditure of the Company to create the invention, there is nothing
to indicate that the invention conceived by Defendant No.2 were done by
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using funds of the Company. The un-disputed fact is that the patents were
available to Defendant No.1 to exploit royalty free. Certainly, the Company
would have incurred some cost to fine tune how the patents or the process
could be exploited in the best costs effective way. Therefore, it is difficult to
accept, at this stage, that the entire R and D expenditure incurred by the
Company was misused by Defendant No.2.
58 In any event, assuming that the Plaintiff is correct in saying that the
amount spent in R & D of Defendant No.1 was used for the patents
registered in the name of Defendant No.2, still as mentioned above, this
derivative action itself is not maintainable, I cannot grant any relief to the
Plaintiff.
59 In the circumstances, to conclude, the Plaintiff has not made out a
prima-facie case for grant of relief sought in the notice of motion and the
motion required to be dismissed.
60 Even the balance of convenience is against the grant of any interim
relief particularly in view of the fact that under Section 64(1)(b) of the
Patent's Act, the patents itself will be at risk. Moreover, the life of a patent
is only for a period of 20 years from the date of application and the patents
Shraddha Talekar PA 55/57
56 nms.3567.2011 s.2932.11 J.doc3665
start from as far back as 2008. Even some of the patents admittedly, do not
relate to the business of the Company. In addition to this, Defendant No.1 is
able to exploit the patent without payment of any royalty. By keeping in
mind the interest of Defendant No.1, in my view, the Plaintiff should not be
granted any relief.
61 Therefore, the Plaintiff fails in crossing both the hurdles. The Plaintiff
does not make out any case that (a) he is entitled to maintain this derivative
action and (b) consequently the question of making out a prima-facie case
or any irreparable loss being caused or balance of convenience being in his
favour, did not arise. In any event the Plaintiff did not make out a prima-
facie case for injunction nor is able to prove that any irreparable loss will be
caused to the Plaintiff or the balance of convenience is in his favour.
62 In the circumstances, the notice of motion is dismissed with costs.
63 The Courts should be alert in dealing with such speculative suits and
shoot down such bogus litigation at an early stage. This action of the
Plaintiff, it is quite obvious is inspired by vexatious motives. I observe with
regret the infliction of the ordeal upon the Courts by parties like the Plaintiff
by presenting a case which was disingenuous or worse. It may be a valuable
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57 nms.3567.2011 s.2932.11 J.doc3665
contribution to the cause of justice if such speculative and frivolous
litigations are dealt with a tough hand. Substantial judicial time will be
saved if such parties are saddled with substantial costs so that they would
not continue the onslaught on precious judicial time. In view of the past
conduct of the Plaintiff in engaging the Defendants in contesting litigations
which also had a strong bearing in the Court's time, this is one of those cases
where substantial costs have to be imposed on the Plaintiff. The Plaintiff is
directed to pay a sum of Rs. 10 lakhs as costs to the Defendants within four
weeks.
64 The counsel for the plaintiff prays for stay of the order. In my view,
no stay is required since the counsel for defendant nos.2 and 3 makes a
statement that the statement that was recorded in the order dated 1 st
December 2011 read with subsequent orders be continued upto and
including 17th January 2015.
65 The plaintiff is also directed in the meanwhile to file an undertaking
as required under Rule 148 of the Bombay High Court (OS) Rules.
(K.R. SHRIRAM, J.)
Shraddha Talekar PA 57/57
