M L THUKRAL Vs. KRONE COMMUNICATION LIMITED BANGALORE

JUDGEMENT

(1.) An unusual dimension of the law in relation to Sections 397 & 398 of the Companies Act has arisen in this case. Chapter VI of the Act basically deals with cleansing action or, more correctly defined, with the supervisory powers of the Company Law Board directed towards maintenance of purity of administration and functioning of a company which is why, the chapter has rightly been titled 'Prevention of Oppression & Mismanagement'. A member of the Company is entitled to apply for relief in cases of oppression and similarly, in cases of mismanagement. What is important is that the section deal with the concept of preventive action essentially in order to forestall the damaging effects of such wrongful activity. In this regard therefore, it is essential that the legislative intent namely that the relief should be prophylactic rather than curative requires to be emphasised. While considering pleas of this type, the Co. Law Board and the court will have to be extremely circumspect because allegations are often false, exaggerated, misconceived, contrived or mischievous and in those of the cases where this appears to be the position such complaints will have to be shot down as often times, the genesis of such complaints is motivated. Similarly, the forum before which such a complaint is made must be on guard and just as in appropriate cases it is necessary to pierce the veil of the Company, while dealing with this category of cases, it is equally essential to sift out the chaff from the grain and ascertain the true nature and genuineness of the complaint and more importantly, whether it qualifies for a relief or action under Sections 397 or 398. In this regard, the real issue posed is as to whether, in a case where a share holder or for that matter a director seeks a relief in relation to a dispute and a grievance that is totally and completely extraneous to .the fair exercise of his rights under Section 397 and 398 of the Companies Act. Whether at all the Co. Law Board would have jurisdiction to entertain such a complaint howsoever adroitly it may be presented or interlinked and intertwined with other issues that may come within the ambit of Chapter VI. The answer is undisputedly no.

(2.) This appeal assails the correctness of an interim order dated 1-2-1995 passed by the Company Law Board (hereinafter referred to as 'CLB'), Prl. Bench, New Delhi. The dispute basically is one between Mr. Krone Communication Ltd. and Mr. M.L. Thukral who is a Director of a Company by the name of Sterling Transtel Limited. The latter company is the main distributor of the telecommunication products manufactured by Krone Ltd. The present appellant claims to be a promoter Director of the company and it is his case that the entire venture was started as a joint venture between the Germans and him. Pursuant to the setting up of the company, Sterling has been marketing its products under a distributorship agreement which was valid initially for a period of 3 years but which has been extended. Under the terms of the agreement, Krone is required to give six months' notice if the agreement is to be terminated. The appellant has, as will be indicated below, filed a petition under Sections 397 and 398 of the Companies Act before the C.L.B. wherein he has made serious allegations in respect of the manner in which the company is being managed inter alia to the effect that abnormally large amounts of money have been unjustifiably repatriated outside the country and according to the appellant, because of this action, a decision is imminent whereby the distributorship agreement will be terminated. He had applied for interim reliefs to the C.L.B. and the same have been rejected on the ground that the nature of the dispute is outside the scope of Sections 397 & 398 of the Companies Act and it is against this order that the present appeal has been filed.

(3.) In support of the appeal, Mr. Ganesh, on behalf of the appellant took me through certain relevant parts of the record. He sought to demonstrate that effectively, the business being carried on by the company was initially conceived of as a joint venture in so far as the appellant possesses not only certain expertise in relation to the telecommunication products in question but is. also well acquainted with equipment for distribution of these products in the Indian market. With this background, Mr. Ganesh submitted that the appellant is a 11% share holder and that he was, right from the very inception not only a Director of the company but was instrumental in achieving impressive results as far as the sales are concerned through his company M/s. Sterling Transtel Ltd. (hereinafter referred to as 'Sterling') which was the main distributor for the products in question. Mr. Ganesh thereafter pointed out to me, on the basis of figures that the sales through Sterling had increased from 1990 when the figure showed approximately Rs. 9 Million to Rs. 93 Millions in 1994. He also relied on certain extracts from the records of the respondent company Krone to indicate that the performance of the appellant and Sterling had been very much appreciated by the Board of Directors. According to Mr. Ganesh, in the month of June 1994 he was required to file a composite petition before the C.L.B. asking for certain reliefs. Principally, the appellant had contended that several decisions and Acts on the part of the Board of Directors of the company, and the Managing Director individually, were not in the interest of the company and that they could be construed as indication of gross mismanagement. The appellant had also contended that the Board of Directors of the company is not correctly constituted and that consequently, he as a minority director was virtually being sidelined. Another charge was that several of the decisions were being taken without these matters having been formally referred to the Board and even in those instances when such a reference was made for decision, that the result was a foregone conclusion, because of the lopsided nature of the Board. Even though the appellant was still a Director of the Company, relevant information and document on crucial issues was either not supplied to him or, worse that he was kept in the dark in respect of other important developments. The appellant had basically made out a case of mismanagement and he therefore sought for appropriate reliefs from the C.L.B. It is material to mention here that in the original petition filed before the C.L.B., one of the reliefs asked for is that the non-exclusive distributorship agreement between the appellant's company Sterling and Krone should not be terminated. I need to record in passing that this agreement was for a period of 3 years which have elapsed in the year 1994 and that according to Mr. Ganesh, the record will demonstrate that it was to be renewed and that it was only because of his complaint to the C.L.B. that it is very clear that the same will be terminated. Even though the agreement in question was not formally renewed, it is still in operation and is being acted upon by the parties as the same has been extended and for that matter not formally terminated. In sum and substance, among other things, the company will be required to give the appellant a clear six months notice under the terms of that agreement which will be effective on and from the date on which the decision is taken to terminate the agreement.