Nestle S.A. And Others vs I.D. Kansal And Others
1994 Latest Caselaw 361 Del

ORDER

1. I have heard arguments in order to decide whether this petition seeking a winding up order against respondent No. 3 company should be admitted or not.

2. Facts of the case, in brief, are that respondent No. 1, Sh. I. D. Kansal, floated respondent No. 3 company which was incorporated on 19th February, 1987 and Certificate of Commencement of its business was obtained on March 12, 1987. The objects of the company were to manufacture, produce, refine, preserve, distribute and deal in import and export of all kinds of processed foods, etc. In early part of 1988, respondent No. 1 approached M/s. Food Specialities Limited (latter on converted as Nestle India Limited) for setting up a joint venture. Nestle India Limited is one of the major manufactures, producers and sellers of food products and it has the brand backing of Nestle SA, petitioner No. 1, which is a multinational company incorporated in Switzerland.

3. Under the then prevailing law in India, petitioner No. 1 could acquire only 40% equity share holding and the management of the Nestle India Limited seeing the possible viability of the project brought about the manufacturing license and technical assistance agreement between petitioner No. 1 and respondent No. 3. That agreement contemplated the provision of know-how and technical assistance to be provided by petitioner No. I for commissioning the project and for efficient manufacturing of high quality breakfast cereals. At that time Nestle India Limited made it clear to respondent No. 1 that there would not be any equity participation on its behalf. Respondent No. I was, however, not agreeable and again the terms were negotiated between respondent No. 1 and Nestle India Limited and respondent No. 1 wanted participation in equity share holding by Nestle India Limited and assured that he would have no objection in manufacturing the final products exclusively under the Nestie's brand name.

4. It is averred in the petition that petitioner No. 1 has been having joint venture collaboration agreements in different countries in which it normally holds the major part of the equity share capital and the ethos and principles behind the same had been that wherever the petitioner-company had entered into the collaboration/joint venture which involves the usage of Nestle brand in the promotion and sale of the final products. It ensures that it has an effective overall superintendence over the management and complete control on the manufacturing operation involving its technical impacts and sales policy of the company involving use of its brand names.

5. During the discussions with respondent No. l, it was agreed that petitioner No. 1 would have 40% share holding whereas respondent No. 1 would have 26 to 40% share holding whereas remaining shares would be issued publicly and the total paid up capital envisaged at that stage was Rs. 2.5 crore and it was also agreed that petitioner No. 1 would have full control over the production of the final products and its sale and distribution for ensuring quality of its products. It was also agreed that each of the group would have three Directors, later on changed to two Directors, to be nominated by either parties and no decision could be taken at the Board Meeting without at least one of the nominated Directors of either parties being present and consenting to pass a particular resolution.

6. A joint venture agreement was executed between the parties on October 24, 1988. Some of the important clauses of the joint venture agreement provided that the principal object of the company was to manufacture, pack and sell the products under trade mark acceptable to Nestle and plant shall be installed and constructed in accordance with the standards acceptable to Nestle and the equity share holding of respondent No. I was never to exceed the percentage of equity share of petitioner No. 1 unless otherwise agreed to in writing and it also provided that parties are not entitled to sell or assign their shares without first offering their shares to the opposite party. It was also provided that in case of termination of the agreement for any reason whatsoever the promoters, i.e. respondent No. 1, guaranteed that it will, at the option of petitioner No. I, acquire the shares held by petitioner No. 1 at the relevant time at a price not less than book value of the shares.

7. This joint venture agreement was approved by the Government of India vide letter dated November 30, 1988. Then some addendum was added on December 21, 1988 which defined the products to be manufactured and sold to mean extruded foods including breakfast cereals and other related processed foods. It also contemplated for increasing the capital to Rs. 4 crores divided into 40 lakh equity shares of Rs. 10/-each and the paid up capital was increased from Rs. 13,30,000/- to Rs. 35 lakhs by creation of 31,97,000 new equity shares. The promoters were to have 60% of the said shares and Nestle was to have 40%. pending public issue and there were to be Directors of the each party. Respondent No. I was appointed as permanent Director of respondent No. 2. D. K. Jain was appointed as nominee of respondent No. I as Director and R. N. Wahi and Jean Claude Degaudenzi as nominee Directors of the petitioner. Ranjit Raj was appointed as Alternate Director of Jean Claude Degaudenzi.

8. It is the case of the petitioner that there took place some perceptional differences between the petitioner No. 1 and respondent No. I as petitioner No. 1 wanted the new project to be a Board managed company whereas respondent No. 1 viewed the same as his sole proprietary concern. The petitioner's anxiety was to ensure that the products which are to be manufactured and sold with which Nestle name is associated should be of high standard and quality and letter dated 23rd January, 1990 was issued by petitioner to respondent No. 1 emphasising the need for team work, openness and transparency. In subsequent letter dated 13th January, 1990, again it was emphasised that as respondent No. 3 was to be part of the Nestle group, it was necessary to have team work, openness and transparency and respondent No. 3 should imbibe a Nestle system. These differences in perception were again highlighted in letter dated 2nd February, 1990.

9. Respondent No. 1, vide his letter dated I9th February. 1990, was not inclined to accept any staff on deputation from Nestle from implementing the project and he only expressed his desire to acquire more funds from the petitioner in the form of loan at subsidised rates of interest.

10. According to the petitioner, this letter depicted that respondent No. I was not treating the project as quasi-partnership and this letter brought about beginning of breakdown in the working relationship. The letter dated 23rd March, 1990 issued by petitioner to respondent No. 1 is emphasised to show that it was necessary to have revised financial structure because of lack of funds and the delay having resulted in burdening the respondent No. I with heavy debt services liability and the only way out was to increase the equity from Rs. 3.5 crores to Rs. 6 crores. During the negotiations, it was emphasised by the petitioner that respondent No. 3 would be a Board Managed Company and the peti-tionerNo. I would have effective control over the production in order to maintain qualitative standards of the final product and the Managing Director i.e. respondent No. I would have to work under the control of the Board of Management. On 9th April, 1990, the Government of India granted approval to the fresh reconstructing of the capital of the respondent No. 3.

11. Respondent No. 1 in his letter dated 18th April, 1990 expressed apprehensions about his powers as Managing Director being curtailed and he wanted the petitioner No. 1 to agree to diversify the product line in this Joint Venture as the petitioner No. 1 had at that time taken steps to enter into a Joint Venture for manufacturing chocolates in India and there being no bar in the Joint Venture Agreement, disabling the petitioner from entering into any such project with anyone else. The petitioner, vide his letter dated 30th April, 1990 to respondent No. 1, again emphasised the necessity for petitioner No. I exercising control over the production of the end product as the products were to be marketed under the Nestle's brand name and the petitioner was to have enough control over the quality products of the reputed name and petitioner wanted amendment of Joint Venture Agreement so that said facts may be highlighted in the amended agreement.

12. The respondent No. 1 wrote a letter dated 16th May, 1990 in which he expressed apprehension that perhaps his powers as Managing Director are being curtailed and the petitioner wanted to take over the whole of the management and he wanted the petitioner to increase the product line. Respondent No. 1 again wrote a letter dated 9th December, 1990 proposing reconstructing of the capital of the respondent No. 3 to have more new products added and petitioner should contribute 76% of the equity while respondent No. 1 would contribute 26% of the equity and the respondent No. 3 need not go public. He also indicated that if Government did not permit the same then ratio of equity should be 50-50 between the petitioner and the promoter.

13. On 27th December, 1990, the petitioner and respondent No. I agreed to certain new terms which provided for equity of 3.5 crore and loans of Rs. 6.5 crores. The petitioner was to have 40% equity while Nestle India was to have 10% equity and respondent NO. 1 and his associates were to have 50% of equity and no interest subsidy to be provided" to promoters and there was no commitment for going public in future. The respondent No. 1 was to be Managing Director but was to report to the Board and the Chairman was to have a casting vote and there were certain specific matters indicated which were to be cleared by the Managing Director only with the prior approval of the Board and it also provided for the Project Implementation Committee. After agreeing to these terms, respondent No. 1 started having reservation and wrote a letter dated 29th December, 1990 mentioning that he was having some doubts about dropping of public issue in view of Income-tax and Wealth-tax and required the petitioner to agree to new product lines and the chocolate project be also given to respondent No. 3 and he also expressed his grievance of petitioner No. 1 not advancing a loan of Rs. 65 lakhs or interest subsidy to the respondent.

14. It is the case of the petitioner that after lot of discussions and exchange of letters dated 27th December, 1990, 29th December, 1990 and 15th January, 1991, it was agreed to have an amended Joint Venture Agreement which was finally discussed and agreed on 5th June, 1991 which inter alia provided that the Board was given power to appoint a Project Implementation Committee. The authorised capital was increased from Rs. 6 crores to Rs. 10 crores though paid up capital was to remain as Rs. 6 crores. The Managing Director was to work under the superintendence Board and the petitioner was to appoint Production Manager and respondent No. 3 was to introduce Nestle system of accounting, reporting and other controls. The internal auditors were to be nominated by the petitioner and the banking operations were to be under dual signatures.

15. It is averred by the petitioner that amended Joint Venture Agreement was prepared and signed by petitioner No. I on 24th August, 1991 in Switzerland and was sent to respondent No. 1 for his signatures. However, respondent No. I realised from his previous commitments and refused to sign the said agreement on the flimsy ground that the Production Manager of the petitioner would permit sale of substandard products. In this, he suggested that if at any time new products were to be introduced, there should be enhancement of equity participation. The respondent No. 1 wrote letter dated 20th September, 1991 which indicated that respondent No. 1 was not keen to continue the relationship as co-ventured and he only wanted to attract more finance and technical expertise from petitioner No, f. The petitioner No. I, then, vide his letter dated 20th September 1991, suggested a mutual and amicable termination of the Joint Venture on account of basic differences having arisen between the petitioner and respondent No. 1 with regard to the management, production of the products agreed to be manufactured under the Joint Venture Agreement and it also informed respondent No. I that respondent No. I can purchase the shares of the petitioner in terms of the Joint Venture Agreement subject to alt advance being refunded. Then there arose difference with regard to nomination by the petitioner of another Director namely Lakdawala in place of R. N. Wahi and respondent No. 1 not allowing such change in Director.

16. It is, hence, contention of the petitioner that there has occurred complete break-down between the parties and the company being in the nature of quasi-partnership it is just and equitable that this company should be wound up. It is also urged by the petitioner that as the terms of the Joint Venture Agreement contemplated mutual termination of the agreement and respondent No. 1 atone point of time had agreed to such termination of agreement by offering to purchase the shares of the petitioner on the book value in terms of the agreement, the petitioner had offered to jointly terminate the agreement but respondent No. 1 had gone back on his first offer and had not agreed to the mutual termination of the agreement.

17. It is the case of the petitioner that petitioner had served a notice on respondent No. I pointing out numerous lapses and breaches of the terms of the agreements on the part of the respondent No. 1 which may enable the petitioner even to terminate the said Joint Venture Agreement without consent of respondent No. I. However, learned counsel for the petitioner has pointed out that there arose various points for decision in this case that whether the respondent No. 3 had lost its substratum or abandoned its substratum or main objects or it has become totally impossible to pursue them and secondly there has or has not occurred a deadlock in the management which was not capable of being resolved by the internal company machinery and whether there occurred lack of probity involving serious oppression of the minority as proposed or in some other capacity and whether the company is in substance an incorporated partner-

ship and there are grounds on which a partnership could be dissolved are available for winding up the company or not and whether the petitioner is entitled to terminate the agreement in view of the fact that respondent No. 1 had earlier agreed to acquire the shares of the petitioner at book value.

18. It is the case of the respondent, on the other hand, that the present petition is a glaring example of a multinational company using its dominant power unlawfully and illegally and in breach of its commitments to destroy the respondents as the petitioner has committed various violations of the Joint Venture Agreement that petitioner had not contributed its remaining Rs. 100 lakhs towards equity of respondent No. 3 and are not allowing the public issue and by entering into joint agreements with other parties and introducing new product of protein and processed foods in Indian market and by not furnishing an undertaking to I.F.C.I. for non-disposal of shares during the pendency of loan of I.F.C.I, and not allowing Nestle India to execute the firm marketing agreement in lieu of memorandum of understanding and not allowing dispatch of coating equipments to the factory of respondent No. 3 which had resulted in delay in completion of the project, It is averred that respondent No. 3 was in the process of establishing a plant for manufacture of processed food and had placed order on parties abroad for the supply of plant and machinery for which necessary Letters of Credit had been opened and established and thereafter negotiations commenced between the parties and that it was suggested that the products to be manufactured by respondent No. 3 must be conforming to Nestle's standard and they would be marketed under the brand name of 'Nestle' and at that time authorised capital of respondent No. 3 was Rs. 150 lakhs and paid up capital was Rs. 30,30,000/- and petitioner No. 1 got interested in equity participation in about the first week of March, 1988. Then he has referred to the execution of the Joint Venture Agreement.

19. Respondent No. 1 has also referred to various stages which had already been detailed out above and ultimately to the parties agreeing to increase the equity capital of respondent No. 3. According to the respondent, the petitioner was to advance the loan to the respondent to the tune of Rs. 65 lakhs which was not advanced. It is averred that only after the liberalisation of the Government of India Policy on 24th July, 1991, the petitioner No. I realised that it would be in a position to exploit the Indian entrepreneurs by obtaining 51% equity holdings and also full control over the management of the company and that the petitioner started dragging its feet and wanted to terminate the Joint Venture Agreement. The respondent has pleaded that at no point of time the respondent had agreed to the terms incorporated in the amended Joint Venture Agreement which had been signed unilaterally by petitioner No. 1 which respondent No. 1 has rightly declined to sign.

20. It is the case of the respondent that petitioner had entered into joint ventures with other local entrepreneurs and just wanted to wriggle out from the agreed terms which is not permissible in law and there are no grounds whatsoever available to the petitioner for seeking winding up of the company. It is also highlighted in the reply that petitioner had made wild allegations for getting the show cause notice issued in this petition as it is recorded in order dated May 19, 1992 that petitioner had made allegations that respondent had been diverting resources of the company into some other business and as a matter of fact there is not an iota of material placed on record by the petitioner to prove such allegations.

21. The short question which arises for decision in this case is as to whether any prima facie case exists in favor of the petitioner or not for admission of this petition?

22. Under just and equitable ground, a company can be wound up if there is a deadlock in the management which cannot be resolved by internal company machinery or it becomes impossible to pursue the main substratum or the objects of the company and where a company is in substance an incorporated partnership and there are grounds on which a partnership could be dissolved.

23. The learned counsel for the respondent has argued that there were no features of partnership present in respect of the Constitution of the company inasmuch as the company was incorporated much before the petitioner No. 1 came into picture and it was in contemplation of the company of issuing the public issue. If that is so, there could arise no question of any partnership being there in the present case.

24. The learned counsel for the petitioner, on the other hand, argued that it may be that initially there was no element of partnership present at the time of incorporation of the company but the Court has to see the Constitution of the company at the time the petition is filed in order to see whether the company in question is in substance an incorporated partnership or not. It is significant to mention that the letter dated 27th December, 1990, which contains the amended terms of Joint Venture Agreement and has been signed by respondent No. 1, shows that the company was to be owned by petitioner and respondent No. 1 by having equal share holding and public issue was not contemplated by this letter. It is not possible to believe respondent No. 1 had not agreed to the terms contained in this letter when he has signed the endorsement appearing in this letter agreeing to all those terms.

25. So, prima facie, there is much to say in favor of the petitioner that present company is in substance a quasi-partnership. So, the principles which are applicable for dissolution of partnership are available to the petitioner in the present case.

26. The respondents may be right, prima facie, in their contentions that there has been no mutual termination of the agreement- in consonance with the terms of the Joint Venture Agreement and at present the petitioner had not taken any steps for unilaterally terminating" the joint agreement on the basis of the grounds available in the Joint Venture Agreement. However, prima facie, it appears that there has occurred a deadlock in the management of the affairs of the company inasmuch as no decision could be taken by the Board of Management unless and until one Director of each party is consenting to such decision. When there is complete breakdown of confidence between the two parties, so prima facie it would not be possible for the company to carry on its business in any effective manner.

27. The learned counsel for respondent has argued that the Articles of Association, which contemplated consent of at least one Director of each party for a particular, resolution, have been amended. Obviously, if such amendment had taken place the same is not agreed to by the petitioner. That would also show that there is complete break-down in the affairs of the company if we keep in view the grounds of dissolution available in any partnership.

28. A Division Bench of this Court in case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd., (1974) 44 Company Cases 390 has held that the powers of the Court under the just and equitable cause are not limited. The Court will, be guided by the Rules of the equity and will do what justice demands keeping in view the facts and circumstances of each case and all the time the principles on which a partnership is dissolved may be applied to a company which consists o,f two members only or where the share holding is equal or where it is a family or domestic company with share-holding equally divided.

29. In Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla , the Supreme Court has held that when shareholding is more or less equal and there is a case of complete deadlock in the company on account of the lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground and in a given case, the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.

30. I have gone through the various documents produced on the record, particularly, letters exchanged between the parties. I, prima facie, come to the conclusion that there has occurred differences between the parties with regard to very basics as to how the management of the production in the factory of the company has to take place. The petitioner has been stressing in all its communications that petitioner would not allow any substandard products being manufactured under Nestle name and they would see that it is a Board managed company and petitioner having control over the production of the products to ensure its world-wide quality but respondent No. 1, on the other hand, was not happy with the petitioner having any control over the productions to be carried on in the factory of respondent No. 3 as he wanted to have his own way as Managing Director as far as management of [he production was concerned. On account of these differences, it appears that later on a deadlock occurred inasmuch as after agreeing to certain terms on the basis of which amended Joint Venture Agreement was prepared by the petitioner and signed by the petitioner but the respondent No. I having second thoughts declined to sign the said agreements. So, it appears that this petition deserves to be admitted. However, it is even agreed by counsel for the petitioner that this petition may be decided without at first publishing any citations in the newspapers.

31. I, hence, admit the petition but I withhold the publication of citations till the disputed questions raised in the pleadings of the parties are decided finally. I require the petitioner to file evidence by way of affidavits within six weeks. The respondents shall also file evidence by way of affidavits within six weeks thereafter and rebuttal affidavits shall be filed by the petitioner within three weeks thereafter. For directions, if any, and for arguments, the mailer shall be listed in Court on 15-9-1994.

32. Order accordingly.