Draegerwerk Aktiengesellschaft vs Usha Drager Pvt. Limited And Anr.
2006 Latest Caselaw 2009 Del

JUDGMENT

Sanjiv Khanna, J.

Page 0045

1. The present petition under Section 433(f) read with Sections 434 and 439 of the Companies Act, 1956 (hereinafter referred to as the Act) has been filed by Draegerwerk Aktiengesellschaft (hereinafter referred to as the petitioner, for short) for winding up of M/s Usha Drager Pvt. Ltd. (hereinafter referred to as the company or respondent No. 1, for short). Subsequently, vide amended memo of parties dated 5.11.2005, RKKR Infotech Pvt. Ltd. was made a party to this Petition. The said company has been hereinafter referred to as the respondent group or Usha group.

2. The petitioner is seeking winding up of the company on "just and equitable" ground for the reason that the petitioner and the respondent group are both holding 50% shares in the company and there is complete deadlock between them. It is stated that the substratum of the company has been lost in view of the irreconcilable differences between the two groups. It is further stated that the business of the company has come to a stand still and there is complete failure to comply with the statutory requirements. It is submitted that there is mutual loss of confidence and lack of probity between the two groups with civil and criminal litigations and defaults in compliance with statutory provisions of the Act including appointment of statutory auditor, annual audit, filing of balance sheet etc. A number of other submissions have been made, which have been noticed in the latter portion of this order.

3. The respondents, on the other hand, have stated that present petition is nothing but a ploy by the petitioner to wriggle out of it's obligation under the joint venture agreement and to set up a competing business in India. Allegations have been made about the conduct of the petitioner with the objective to show that the petitioner's conduct was inequitable and unjust. It is stated that the petitioner has mis conducted itself and is not entitled to take shelter and advantage of Section 433(f) of the Act.

4. I refrain myself from burdening this order with the entire case law on the subject. Case law has been referred to in case of Brown Forman Mauritius Ltd. v. Jagatjit Brown Forman India Ltd. and Anr. (2004) 51 SCL 214(Delhi) wherein after referring to the principles of deadlock it has been held as under:

Since the shareholding is equally distributed between the Petitioner and the Respondent and neither of them have shown any proclivity of selling or acquiring of the holding of the other a deadlock in the management has manifested itself. This deadlock is also evident in that there is no consensus on the vital questions of injecting further funds into the company's coffers; on the sales or depleted goals which the company shall achieve; and these warring parties are already embroiled in litigation.

5. Principles of partnership have been applied as a ground for winding up under Section 433(f) of the Act. The words 'just and equitable" occur in Page 0046 Section 44(g) of the Partnership Act as a ground for winding up. Supreme Court in the case of Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 46 Company Cases 91 has held as under:

33. Where more than one family or several friends and relations together, from a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides it is only when shareholding is more or less equal and there is a case of complete deadlock in the Company on account of lack of probity in the management in the Company and there is no hope or possibility of smooth and efficient continuance if the Company as a commercial concern, there may arise a case for winding-up on a just and equitable ground. 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.

6. In this case the Supreme Court referred to two English cases, Yenidje Tobacco Co. Ltd. (1916) 2 Ch 426 and Ebrahimi and Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL). However, while referring to Yenidje's case the Supreme Court held that though said case was of complete deadlock that by itself was not made sole basis for winding up the company. The Supreme Court also noticed that the House of Lords did not approve of undue emphasis on the contractual rights over the equitable principles derived from partnership law.

7. In Ebrahimi v. Westbourne Galleries Ltd., Lord Wilberforce had observed (at pages 499 and 500 of [1972] 2 All ER):

... in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own : that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act, 1948, and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; Page 0047 considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. ... The Superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:

(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;

(ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business;

(iii) restriction upon the transfer of the members' interest in the company so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

8. In Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad , it has been held that in certain situations, corporate veil can be lifted to apply principles of partnership, for judging true character of the company and business realities of the situation, enquiry should not be confined to a narrow legalistic view. Principles of quasi-partnership are not foreign to the concept of the Act and can be applied even to a public limited company. Reference was also made to Hind Overseas (P) Ltd.(supra) and Kilpest (P) Ltd. v. Shekhar Mehra and the observations made therein that where more than one family or several friends and relatives together form a company and there was no right as such agreed upon for active participation of members who were sought to be excluded from management, the principles of dissolution of partnership should not be liberally invoked. However these judgments, it was held were not an authority for the proposition that for no purpose whatsoever should the principles of quasi-partnership be applied to an incorporated company. The real character of the company for the purpose of judging the dealings between the parties and the transactions impugned, assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked.

9. This Court in International Caterers Pvt. Ltd. and and Anr. v. Manor Hotels Pvt. Ltd. reported at has examined Section 433(f) of the Act and Principles of quasi partnership, deadlock and loss of substratum. The following observations/paragraphs are relevant for the present case:

29. Even 'just and equitable' ground contained in Section 433(f) of the Act on which second petition is filed appears to have been established. Admittedly, in this case the two groups are having equal say in the Page 0048 management and equal shares having voting rights. If they are not able to along well, situation of deadlock is inevitable. Black's Law Dictionary defines deadlock as under:

Deadlock 1. A state of inaction resulting from opposition or lack of compromise. 2, Corporations. The blocking of corporate action by one or more factions of shareholders or directors who disagree about a significant aspect of corporate policy.

30. The parties have not been able to resolve the impasse. Moreover, the very raison d'etre of the JVA has evaporated by parting with the management of the hotel to the Guardian. The company itself was formed for the purpose of running the hotel. By handing over the management to the Guardian it has proved its ineffectiveness, nay, incapacity to undertake this venture. The wedge between the parties grew deeper. Mr. Sundaram would be right in his submission that if the hotel was to be given to a third party, his client could have done so directly and there was no necessity to form a joint venture company for this purpose.

38. It may also be of benefit to note that the Calcutta High Court in the case of Modern Furnishers (Interior Designers) (P) Ltd. and Ors. reported as (1985) 58 Comp. Cas. 858 carried the aforesaid principle further while holding that in case of deadlock it would not of use to invoke provisions under Sections 397 and 398 of the Act before filing the winding up petition. Following observations made in the process are very pertinent:

If there is a genuine and irreconcilable difference of opinion between petitioner No. 1 and petitioner No. 2 on the one hand and respondent Nos. 2 and 4 on the other, over the management of the company, then the classic position of a deadlock in management has arisen as the shareholding of the two groups are equal. Proceedings under Sections 397 and 398 of the Companies Act cannot be resorted to for solving a genuine deadlock in the absence of any established misfeasance or malfeasance by one group to the prejudice of the other. If the parties have lost all confidence amongst them and it is not possible for them to carry on business jointly or provide for an acceptable management, the only way out seems to be to wind up the company and if necessary in the instant case to dissolve the existing partnership. The assets, if any left, will be available to the parties for distribution. On the facts of this case, the dispute in the management of the company cannot be solved in the domestic forum inasmuch as the two opposing groups hold equal shares. The Court also cannot through its officers continue to manage the company for all times to come. The petitioners have also not been able to make out a case of substantial injustice which can be set right by the Court invoking the principles laid down in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. .

Page 0049

39. In the case of O.P. Basra s/o Guari Shanker and Ors. v. Kaithal Cotton and General Mills Co. Ltd. reported as , the Court laid down the tests to find out whether the substratum of the company had been lost. These test can be found in para 6 of the judgment which reads as under:

The usual tests for determining whether the substratum of the company has disappeared are when (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or (d) the existing and probable assets are insufficient to meet the existing liabilities, vide In re Cine Industries and Recording Co. Ltd. AIR 1942 Bom 231. Failure of any one of these tests is deemed a good ground for winding up of the company. There seems to be no reasonable hope that this company will be able of carrying on its business, for which it was formed, profitably. Looking at the entire history of this concern, I am satisfied that its substratum is gone and it is just and equitable that it should be wound up.

40. In the case of Nestle S.A. and Ors. v. I.D. Kansal and Ors. reported as , this Court opined that when there were differences between the parties with regard to very basics as to the management of production in factory of the company and on account of these differences deadlock occurred inasmuch as after agreeing to certain terms on the basis of which amended joint venture agreement was prepared and signed by the petitioner, the respondent declined to sign the agreement, it was proper to wind up the company.

10. Section 433(f) of the Act permits the Court to wind up a company when it is just and equitable to do so. The words 'just and equitable' are flexible and the primary objective is to be fair and do equitable justice. It is now well settled that the said words are not to be read as ejusdem generis. These are general words, which have been used for winding up a company in a variety of situations. As the said words are also a ground for winding up of a partnership under the Partnership Act, the courts have wound up companies which have often been described as quasi partnership. These are companies based on personal relationships involving mutual confidence and where there is some basic understanding or an agreement that all or some of the shareholders shall participate in the conduct of business and working of the company. In these cases normally principles of partnership or quasi partnership can be invoked.

11. In deciding whether a particular company is in the nature of a partnership we have to consider the total relationship of the persons involved, the Articles and the agreement expressed and implied between the parties.

Page 0050

12. Deadlock in the management of a Company is also a ground for winding up of a company under "just and equitable clause". Deadlock exists, as defined in Black's Law Dictionary, "when a control structure permits one or more factions of shareholders to block corporate action if they disagree with some aspect of corporate policy. A deadlock often arises with respect to the election of directors e.g. by equal division of shares between two factions".

13. The following passage from Pennington's Company Law (Fifth Edition) is extremely elucidatory:

Deadlock if it becomes impossible to manage a company's affairs because the voting power at board and general meetings is divided between two dissenting groups, the Court will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and who hold an equal number of voting shares; if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general meeting, and management decisions will cease to be made. In this situation the Court will make a winding up order, even though there is a provision in the company's articles that one director shall have a casting vote at board meetings, or that disputes shall be settled by arbitration. Nevertheless, the petitioner must show that there is no likelihood of the deadlock being resolved in fact, and for this purpose he should set out in his petition or in his supporting affidavit the relevant provisions of the company's articles (if any) and details of the attempts he has made to resolve the deadlock. There may also be a deadlock even though the voting power is not equally divided between the dissenting groups. Thus, where there were three shareholders with equal shareholdings, and two of them were the company's directors, one of the director-shareholders was held entitled to a winding up order when the other persistently refused to attend board meetings and make up a quorum to transact business; the reason for the other director's absence was his fear that the petitioner would insist on a general meeting being called at which, by the terms of the articles, the petitioner could require the other shareholders to purchase his shares, or if they were unwilling to purchase them, to join with the petitioner in passing a resolution to wind up the company voluntarily; the result of the other director's absence from board meetings, however, was that the company's business could not be carried on at all, and for this reason the Court made a winding up order.

14. The conditions required for winding up of a company on the ground that it is merely a quasi partnership and deadlock are satisfied and applicable in the present matter. My reasons are as under:

(a) Both the petitioner and the respondent group hold 50% shares in the company.

(b) As per Articles and Memorandum of Association of the company no item of business specified in Article 143(b) can be transacted in the meeting of Board of Directors unless there is one affirmative vote by a director designated by the petitioner and a director appointed by Usha Page 0051 Services and Consultants Pvt. Ltd. It is the case of the respondent group that it now represents Usha Services and Consultants Pvt. Ltd and, therefore, one affirmative vote of it's director is required for passing of any resolution specified in Article 143(b). The matters included in Article 143(b) include annual plans, appointment of directors, important agreements, investments of more than Rs. four lacs, purchase and sale of fixed assets, borrowing money etc. i.e., all matters of even marginal importance.

(c) Since 2004 not even a single resolution has been passed by the Board of Directors with the one director of the petitioner and the respondent group giving an affirmative vote.

(d) The petitioner and the respondent group have failed to even agree to appointment of statutory auditor, Company secretary etc.

(e) In the present case even the contractual rights arising from the Articles require equal participation between the petitioner and the respondent group. The articles themselves provide for joint participation of both groups in the conduct and business of the company. There was/is also a joint venture agreement between the parties which ultimately resulted in formation of the company. The Joint Venture agreement supports the view that the company is in fact an "equal partnership". The shareholding is equally divided. In view of Article 143(b), the present case, is on a better footing than Hind Overseas, where the finding was that "quasi partnership" did not exist. Moreover there is complete deadlock and the entire functioning in terms of Articles and the Act has become unworkable.

(f) The company is a body corporate for the purpose of doing business. It is a collection of individuals united to form one body and an artificial person, which is required to function and do business as per the wishes and desires of the shareholders in a democratic manner. The Board of Directors is the executive organ of the company which is required to act as per the Memorandum and Articles of Association subject to control of the shareholders who perform the role of legislature. (see in this regard observations of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. and Ors. (1986) 59 Company Cases 548) and Gower's Principles of Modern Company Law as quoted therein). In the present case there exists complete anarchy and the "constitution system" has broken down with no hope for revival. Democratic functioning has come to an end. The legislature i.e. Shareholders, cannot pass any resolution. The Board of Directors, i.e. the executive wing, also cannot take any decision as under the Articles of Association, each group must give one affirmative vote. Both the groups have 50% shareholding and there is no likelihood of the two groups mutually agreeing to transfer of shareholding inter se. Thus, we have a situation where the company for last three years has not functioned as per "the Constitution" i.e. the Page 0052 Act, Rules and the Articles. The deadlock is not confined to the Board of Directors, the executive, but also the legislature and entire electorate i.e. the shareholders who are split half and half.

(g) Civil and criminal litigations are pending between the two groups. The respondent has filed criminal case against the directors of the petitioner in which stay has been granted by the High Court.

(h) In one of the litigations, this Court had appointed Mr. Justice A B Saharia (Retd) as a neutral chairman to preside over the meeting of the Board of Directors. He tried his best to reconcile the differences between the two groups and to bring about amicable settlement but did not succeed. He filed a report confirming the deadlock between the parties and has stated that in view of the acrimony it was not possible to ensure smooth and proper functioning of the company and compliance with the provisions of the Act. Thereafter, Mr. Justice S K Mahajan (Retd.) was appointed as the chairman of the Board of Directors. He too has not been able to reconcile the differences and the deadlock between the two groups.

(i) The deadlock is not of transitory nature or mere storms in tea cup that settle down with time but have continued with unabated ferocity for the last three years.

(j) The deadlock between the petitioner and the respondent group is not a mere passing phase which is likely to get resolved in near or distant future. The animosity and the differences have resulted in even a criminal case being filed and the litigations which have remained pending in this Court and other forums for the last three to four years. Efforts made from time to time including this Court to have settlement have failed. The reports of the court appointed chairpersons have confirmed the complete deadlock. There does not seem to be any possibility of the two groups resolving their disputes and reaching any settlement.

(k)The respondent group has itself filed a petition under Section 397-398 of the Act alleging oppression and mismanagement on the part of the petitioner. In this petition filed before the Company Law Board the respondent group has admitted complete deadlock in the management and affairs of the company. In this regard it may be relevant to refer to the averments made by the respondent group itself in its petition filed before the Company Law Board under Section 397 and 398 of the Act, which are reproduced below:

42. The respondent No. 2 has systematically destroyed the Respondent No. 1 company since it failed to supply medical equipment and spare parts which are required by the Respondent No. 1 company to meet its obligations to various hospitals in discharge its contractual obligations. The Respondent No. 1 company's operations have come to standstill and there is no running business, as its operations have been completely paralysed.

43. x x x x

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44. The petitioner states that there is a complete lack of trust between the parties on account of lack of probity and fair dealing on the part of the Respondent No. 2 as a result of which, the substratum of the relationship has been destroyed. However, the petitioner states that since this Hon'ble Court has powers to pass appropriate directions, to ensure the survival of the Respondent No. 1 company, Respondent No. 1 company ought not to be wound up to ensure that the Respondent No. 1 company does not loose its business and corporate opportunities and is not destroyed by virtue of the illegal acts of the Respondent No. 2.

45. The petitioner states that the business of the Respondent No. 1 company runs on the basis of the supplies made by the Respondent No. 2. However, the business of the Respondent No. 1 company have come to standstill since the Respondent No. 1 is not technically in a position to discharge its obligation. The Respondent No. 1 company is unable to make use of the opportunities which are available to it. The opportunities are being reaped by the Respondent No. 2 through its various group companies.

46 x x x x

47. The petitioner states that the corporate opportunities available to the Respondent No. 1 company have been taken away and destroyed by the Respondent No. 2. As a result of which, shareholder value of the Respondent company has been systematically eroded.

48. x x x x

49. x x x x

50. x x x

52. The petitioner states that it is now well settled that Section 397 & 398 of the Companies Act can be invoked where there is a deadlock between the two groups of shareholders and where the conduct of one group is oppressive and also prejudicial to the interests of the company under Section 398 of the Companies Act.

53. x x x x

54. The petitioner further states that as there is a complete deadlock in the affairs of the Respondent No. 1 company and Respondent No. 2 is guilty of profitary from impace.

55. x x x x

56. x x x x

57. x x x x

58. x x x x

58A. x x x x

58B. x x x x

58C. x x x x

58D. x x x x

58E. x x x x

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58F. x x x x

58G. x x x x

58H. x x x x

59. x x x x

60. x x x x

61. x x x x

62. It is evident from the aforesaid that circumstances exist for a just and equitable winding up of the Respondent No. 1 company. However, wind up the company would unfairly prejudice the petitioner.

15. It is equally well settled that Judicial admissions by themselves can be made the foundations of the rights of the parties (Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad and Uttam Singh Duggal & Co. Ltd. v. United Bank of India .

16. Learned Counsel for the respondent while not denying complete deadlock between the two groups, has submitted that this by itself cannot be a good ground to wind up the respondent company under the just and equitable clause. He had argued that the petitioner had acted in an unjust and unreasonable manner and, therefore, should be denied equitable relief under Section 433(f) of the Act. It was further submitted that there was/is no lack of probity or mismanagement in the affairs of the company, which was/is sine qua non for any company to be wound up by applying principles of partnership or deadlock under the just and equitable clause. The respondents submitted that winding up petition has been filed as a ploy by the petitioner to escape liability and obligations under the joint venture agreement including the non-compete clause.

17. There cannot be any doubt that a petitioner who approaches the court under the just and equitable clause must come to the court with clean hands. He should not be responsible for breakdown of confidence between him and the other party. He should be able to satisfy the court that he has not misconducted himself. Misconduct of a petitioner that results in deadlock or breakdown cannot be a ground to wind up a company under the just and equitable clause. There should be lack of probity and confidence between the parties but the person approaching the court should not be responsible for the same. A party cannot take advantage of his own wrong, to ask for winding up under 433(f) of the Act. As the words 'just and equitable' themselves suggest the Court must be satisfied with the allegations of the petitioner that it is just and equitable to wind up a company.

18. The respondents in this regard had during the course of arguments submitted that the petitioner had misconducted itself by violating the joint Page 0055 venture agreement dated 9.5.1987 which prohibits any of the parties to the agreement from directly or indirectly competing with the fields or projects specified in appendix to the joint venture agreement. Learned Counsel for the respondent group and the company referred to the desire of the petitioner group to increase its shareholding in company to 51% and also the resolution passed by the Board of Directors dated 15.2.2002 for change of name of the company from Usha Drager Pvt. Limited to Drager Medical India Pvt. Ltd.

19. As far as change of name is concerned, it never got implemented inspite of the resolution being passed. More importantly, a director of the respondent group had participated and supported the said resolution for change of name. Similarly, one of the directors belonging to the petitioner had send an e-mail stating that no business plan will be presented unless the shareholding of the petitioner group was increased to 51% and the said group had complete control over the board. However, increase in the shareholding to 51% was possible only with the consent of the respondent group. In this regard it may be relevant to state that the Board of Directors of the company had on 1.6.2001 agreed that the petitioner shall take over the management of the company and shall also have prerogative to appoint its nominee as CEO. This resolution was passed with the consent of the director belonging to the respondent group voting in favor for the same. Moreover inspite of the e-mail dated 14.6.2002, nothing in furtherance thereof was done for period of 1-1/2 years and the business of the company had continued as normal. It is not the case of the respondent group that the petitioner had withdrawn itself and was not cooperating or abiding by the terms of the joint venture agreement and/or deliberately withholding any new business plan within the said period. The company continued to function and do business as before for a long time thereafter.

20. The open conflict between the petitioner and the respondent group arose in September, 2003. Perhaps the problems can be traced back to June, 2003 when Drager Medical AG & Co. KgaA wrote letter dated 18th June 2003 to the respondent company stating that payments/remittances had not been made as per the distribution agreement and the respondent company had failed to make payment of the first Installment as was agreed. It was also stated that there were frequent problems causing severe impact on the general business activities due to raid of CBI on the respondent group as well as claim made by EXIM Bank etc. There were also claims pending against RKKR Infotech Pvt. Ltd. By this letter Drager Medical AG & Co. KgaA gave notice to terminate the distribution agreement in accordance with Clause 17 w.e.f. 31st December, 2003 with a clarification that they will get in touch with the respondent company in the last quarter of 2003 to decide about further sales cooperation between the two.

21. It is the case of the petitioner that Drager Medical AG & CO. KgaA or Drager Medizentechnik is a joint venture company between Siemens and Draegerwerk A G with Siemens having veto power. On 22nd February, 1999 the respondent company had entered into a distribution agreement with this company with the clause that the aforesaid agreement could be Page 0056 terminated by giving six months notice. The products covered by the distribution agreement were specifically mentioned therein. The distribution agreement and the joint venture agreement are two separate and distinct contracts. Terms and conditions are separate.

21A. It is apparent that some disputes arose with regard to minutes of the meeting of board of directors held on 26th September, 2003 but these were only precursor to what followed. Meeting dated 22nd December, 2003, it is alleged by the petitioner was deliberately fixed around Christmas with the idea that the directors of the petitioner would not be able to attend the same. The said meeting was attended by the directors belonging to the respondent group. The directors belonging to the petitioner group were granted leave of absence. One of the purported resolution passed in the meeting held on 22nd December, 2003 was in respect of item No. 5, and reads as under:

DISCUSSION ON CONTINUOUS CONFLICT BETWEEN CEO & COO OF THE COMPANY.

The Board discussed about the persisting conflict between the CEO & COO of the Company. This matter was also discussed in the last board meeting. The Directors felt that it is very sad for the senior executives to have a clash in their thoughts, which was certainly affecting the working of the Company and sending wrong signals down the line. It was further pointed out that the clash of interest of the CEO/COO was detrimental not only to the interests of the Company but the Directors also. While the COO has been leveling charges against the CEO, the CEO has placed the COO under suspension. It was recalled that the board had decided in its previous meeting to review the matter of conflict between CEO and COO in its next meeting and that there was an urgent necessity to resolve the issue.

The letter of suspension issued by Mr. Claus Grabowsky to Mr. Sandeep Sinha was placed on table and discussed. Mr. Sandeep Sinha was asked to explain the charges. After hearing him the board discussed the matter and felt that the charges leveled by the CEO were baseless. Thereafter, Mr. Sandeep Sinha leveled the charges against Mr. Claus Grabowsky, CEO. The board discussed the same and decided that Mr. Claus Grabowsky, the CEO should be placed on suspension with immediate effect.

22. Mr. Claus Grabowsky, CEO was representative of the petitioner group. This conduct of the respondent group, when there were already signs of stress and strain, finally broke the relationship. Confidence snapped. The conduct of the respondent does not stand the test of "reasonable businessman". Lack of probity on the part of the respondent group is apparent.

23. Various other resolutions were also passed including appointment of Mr. Vijay K. Kaul as Additional Director and change of authorised signatories entitled to operate bank accounts. Thus, with the passing of the resolutions in the meeting of the Board of Directors on 22nd December, 2003, the respondent group took complete hold of the respondent company and it also acted contrary to the understanding between them and the petitioner group. What was simmering became an inferno and the mutual trust and confidence Page 0057 broke with the respondent groups declaring its right to exclusively manage and control the company. Thereafter, there have been a spate of litigations with as many as seven original suits, and appeals etc. pending between the parties in addition to a criminal case which has been registered on the complaint of the respondent group against the German directors of company belonging to the petitioner.

24. A group company of the petitioner in these circumstances in January, 2004 applied for registration of a new company in the name of Drager Medical India Pvt. Ltd. and also applied for FIPB approval. Later on, in April and May 2004 a company by the name of H.L. Medical Systems India Pvt. Ltd. was incorporated and the respondent group has alleged that this company is marketing products of the petitioner in violation of the joint venture agreement dated 9.5.1987.

25. The facts stated above clearly reveal that inspite of some disputes and differences, it is only in December 2003 that relationship between the petitioner and the respondent group completely broke down. The respondent group's action to suspend Mr. Claus Grabowsky as CEO of the company, appointment a new director, CEO, new bank signatories etc. when directors belonging to the petitioner were not present, smacks of mala fides and also strikes at the very root of the relationship between the two parties. The trust and the confidence between the two, which was already under strain, snapped and ended and instead of partners we had two hostile litigants taking opposite positions on every issue. The said action of the respondent group was contrary to the Articles of Association that required consent/affirmative vote of at least one director from at least two groups on almost all important decisions.

26. The petitioner in March, 2004 during hearing of one of the suits, had put forward a proposal for amicable settlement. The petitioner wrote letter dated 23rd March, 2004 agreeing to consider the request for change of Mr. Claus Grabowsky as CEO, appointment of additional director belonging to the respondent group upon affirmative vote of the petitioner and appointment of new bank signatories. An alternative proposal was also given that the agenda for the board meeting on 22nd December, 2003 should be put up for re-consideration. More importantly it was stated that the petitioner had full intention to carry on the joint venture and it was clarified that intention of the petitioner was to amicably resolve the matter. This proposal was rejected by the respondent group by again raising up the issue of distributorship agreement.

27. In these circumstances I do not think it can be said that the petitioners have conducted themselves in a manner which would disentitle them to approach this Court under Section 433(f) and invoke jurisdiction of this Court under the just and equitable clause. It is quite apparent that respondent group is substantially to be blamed for the impasse and deadlock. The respondent group has acted contrary to the Articles. The relationship between the petitioner and the respondent group was/is purely business and commercial relationship. While protecting one's monetary interest, aspirations and desires, both groups were required to also take care of interest of the other side, balancing of self interest with the other group.

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28. Repeated reference to distributorship agreement dated 22.2.1999 does not, to my mind, help the case of respondent group. Under the said distributorship agreement the respondent company was given right to distribute exclusive products as mentioned in appendix AI and non exclusive rights described in another appendix. As per clause 17 of the agreement the distributorship was to continue till 31st December, 1999 and thereafter from year to year unless terminated by one of the parties at the end of the calendar year by giving six months notice by registered mail. The second clause of the agreement specifically states that with this agreement, all the previous distributorship agreements between the respondent company and the petitioner shall become null and void. After having entered into an agreement with a termination clause, the respondent group cannot claim that the agreement was for an infinite term and by terminating the agreement the petitioner has violated the earlier joint venture agreement. The distrbutorship agreement is later in point of time than the Joint venture agreement. The last distibutorship agreement was executed on 22.2.1999 and the Joint venture agreement was executed on 9.5.1987. The stand that the distributorship agreement and it's clauses were not in the knowledge of the respondent group and was not placed before the Board of Directors deserves to be rejected. It is an after thought. Distributorship agreement was acted upon by both parties for last several years. Commissions had been paid in terms of the said agreement. In the letters written immediately after termination of the distributorship agreement no such stand has been taken. Even in the earlier distributorship agreement dated 24.8.1990, termination Clause 12 was there.

29. The respondent had repeatedly raised and made reference to the joint venture Agreement. It is emphasised that the present Petition for winding-up is merely a ploy to wriggle out of the joint venture Agreement and the obligation of the petitioner under the same with the petitioner selling it's shares in the respondent company or winding up the respondent company. It is submitted that thereafter the petitioner can directly compete with the respondent group.

30. The joint venture Agreement as such is not directly the subject matter of the winding-up Petition. The winding-up Petition is based upon statutory rights and provisions, which cannot be contracted away. At the same time while applying just and equitable clause, contractual obligations cannot be ignored. The respondent-company has already filed Suit No. CS(OS) No. 519/2004 and CS(OS) No. 1216/2005 before this Court in respect of it's purported rights under the joint venture Agreement. A joint venture Agreement is a contract and violation or breach of contract by a party entitles the sufferer to claim damages from the delinquent. Reference in this regard can also be made to the Order passed by this Court on interim application in CS(OS) No. 519/2004 and the appeal filed thereafter. Moreover I may mention that the respondent company is not a party to the joint venture Agreement that was signed prior to incorporation. Lastly but most importantly, the joint venture Agreement itself does not specifically bar transfer and sale of shares by both the petitioner and the Usha Group to third parties. Clause 12 of the joint venture Agreement dated 9th May, 1987 specifically provides that the Drager Page 0059 Group (petitioner) can sell in total or in part, it's shares to a non-shareholder in the joint venture with pre-emptive right to the existing shareholders of Usha group to first purchase the shares on pro-rata basis on the same terms and conditions. Even as per the Memorandum and Articles of Association of the respondent company (Article 53), any shareholder of the respondent company can transfer shares to a non-shareholder after making an offer at the first instance by written notice to the existing shareholders on pro-rata basis. The existing shareholders are entitled to accept or reject the offer within a period of 60 days from the date of receipt of the offer.

31. The joint venture Agreement further stipulates that after the Drager Group (petitioner) is no longer a shareholder, the joint venture will not be entitled to use the trademark, trade name, patent, licenses, know-how, etc made available by Drager. The respondents cannot on the one hand rely upon the joint venture Agreement and at the same time ignore its clauses. It cannot therefore be said that after entering into the joint venture Agreement, the petitioner or for that matter the respondent group had given up its right to transfer shares to any third party and/or had bargained to remain a sleeping partner and transferred all its rights including trademark, trade name, patent, etc in favor of the respondent company. I have made reference to the above clauses and terms of the joint venture Agreement only for the limited purpose of adjudication of the present Petition. As this aspect is being examined in detail in the civil suits between the parties, I refrain from expressing any further opinion or views in this regard.

32. Learned Counsel for the respondent had also raised the plea that the petitioner should have invoked arbitration clause under the joint venture Agreement. I may mention here that the respondent has not filed any application for stay of the present proceedings and/or for reference of the claims and disputes in the Company Petition to arbitration as per the provisions of the Arbitration and Conciliation Act, 1996. The respondent group has participated in the proceedings and filed reply on merits. Further the respondent group as well as respondent company has itself filed a civil suit ignoring and without invoking the arbitration clause. Lastly, it is well settled that a winding up Petition cannot normally be referred to arbitration. Supreme Court in the case of Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. has held :

4. Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.

5. The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like Page 0060 this, that the company has become commercially insolvent and, therefore, should be wound up.

The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the Company. That could obviously not be referred to arbitration and, therefore, the High Court, in our opinion was right in rejecting the application.

33. There is no reason to refer the present winding up petition to arbitration, contrary to Section 10 of the Act, which gives exclusive jurisdiction to this Court. The observations made in paragraphs 38 to 40 in International Caterers case (supra) quoted above squarely apply to the present case and the pendency of the Petition under Section 397 and 398 of the Act does not in any manner bar the jurisdiction of this Court.

34. In the reply filed by the respondent-company/respondent-group, it has been stated that after 2004 till July 2005, the business of the respondent-company was managed in a way that the losses remained within "normal" limits. It is also stated that the respondent-company has diversified into secondary businesses like ambulances and other core areas of competence. It is averred that from April, 2005 till February, 2006 the total turnover of the respondent-company was about Rs. 546.65 lakhs and about 100 employees, are dependent upon the said company for their livelihood. These aspects can be taken into consideration while passing final directions under Section 402 of the Act. At the same time, I cannot ignore the reluctance of the respondent-group to completely take over the company and run it. There is inherent contradiction in the stand of the respondent group who on one hand proclaims self reliance but in the same breath admits dependence on the petitioner by refusing to purchase even on the token price of Re. 1. It is conceded that the respondent-company is incurring losses though stand of the respondent-group is that losses are being kept within limits.

35. I have not specifically dealt with the third ground on which winding up of respondent company is sought i.e. loss of sub-stratum. However, I have quoted the observation of A.K. Sikri, J. in International Caterers (supra) and the judgment of the Punjab & Haryana High Court in O.P. Basara (supra). Sub-stratum of a company disappears when (i) subject matter of the company is gone, or (ii) object for which it was incorporated had substantially failed or (iii) when it is impossible to carry on business except at a loss or (iv) when existing and possible assets are insufficient to meet the existing liabilities. Similar tests have been upheld by the Supreme Court in Seth Mohan Lal and Anr. v. Grain Chambers Ltd. and Ors. reported in (1968) 38 Comp Cases 543 (SC) wherein it has been held as under:

....Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it Page 0061 is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficienct to meet the existing liabilities...

36. In the present case, respondent No. 1 was incorporated as a joint venture between the petitioner and the respondent-group. To this extent the object and purpose has failed. However, it cannot be said that as per the Articles, sale of shares by one group is prohibited or never anticipated. Even the joint-venture does not prohibit sale of shares by one group to third parties, subject to pre-emptive right of the other group.

37. On the question of losses the respondent-group has taken a contradictory stand before this Court and the Company Law Board. Before the Company Law Board the respondent-group has stated that the operations have come to a stand-still and there was no running business and the business operations had been completely paralysed. It is further admitted that respondent No. 1 was technically not in a position to discharge its obligations. However, I need not go into further details on this aspect in view of my findings given above on the question of principles of quasi-partnership and dead-lock. At the same time I would like to observe that if the respondent-group is confident and sure of its ability and strength, they should have accepted the offer of the petitioner to purchase their shares for a token sum of Re. 1.

38. In view of the above I feel that the present petition for winding up should be admitted. I also feel that citations should be published in the newspapers. However, I defer orders for appointment of the provisional liquidator for a period of one month. This is in view of the fact that the petitioner has given an offer to the respondent group to purchase its share in the respondent company for Re. 1/- per share subject to the condition that the word "Drager" shall be removed from the name of the respondent company. Of course, the respondent company will be entitled to claim that it was formerly known as Usha Drager Pvt. Ltd. The respondent group will also be entitled continue with the suits already filed by them and/or claim damages for alleged violation of the joint venture agreement. However, in case this offer is not acceptable to respondent group, this Court will consider the question of appointment of the official liquidator attached to this Court as provisional liquidator to take into custody all the assets of the respondent including statutory records and books of accounts. For this purpose and to await response of the respondent group the case is adjourned to 18th December, 2006. Notice is also issued to the central government.