VAISHNAV SHORILAL PURI AND ORS. AND SEAWORLD SHIPPING AND LOGISTICS P. LTD. AND ANR. Vs. KISHORE KUNDANLAL SIPPY AND ORS.

JUDGEMENT

(1.) THESE four appeals can be disposed of by common judgment, as they are between the same parties and are directed against the common judgment and order passed by the Company Law Board, Principal Bench, New Delhi, dated October 29, 2003, in Company Petitions Nos. 40 and 41 of 2002, since reported in Kishore Kundan Sippy v. Samrat Shipping and Transport Systems P. Ltd., [2004] 118 Comp Cas 472.

(2.) THESE appeals pertain to Samrat Shipping Co. Pvt. Ltd. (hereinafter referred to as "the SSCO") and Samrat Shipping and Transport Systems Pvt. Ltd. (hereinafter referred to as "the SSTS"). Both these companies are controlled jointly by two groups. For the sake of convenience, we shall refer to those groups as the Puri group and the Sippy group. Both the above numbered company petitions under Sections 397, 398, 399, 402 and 406 of the Companies Act, 1956, were filed by Sippy group. Company Petition No. 40 of 2002 Was filed in respect of SSCO for the following substantive reliefs :

(3.) AS mentioned earlier, the Company Law Board disposed of both the company petitions by a common judgment and order. It is relevant to note that by way of interim order passed in the company petitions ; inspection of the records of the two companies was directed by the company Law Board. Certain aspects were noted during the said inspection. On the basis of the findings in the inspection, the Sippy group had prayed for investigation into the affairs of the two companies, as also other companies. However, the Company Law Board rejected that prayer on the finding that no case for directing an investigation was made out. It has noted that both the groups are not only shareholders holding 50 per cent. each, but also they have equal representation on the board. The diversion/deficiencies noted during the inspection carried out in their companies mostly pertained to 1999 -2000/2000 -2001. The Board has noted that accounts of both the companies have been audited up to March 31, 2001, and approved by the board of directors, so much so that even of the subsidiary company, Messrs. Meridian, have also been approved up to March 31, 2000. The Board, therefore, went on to observe that even if there have been deficiencies/diversions, the same could not have happened without the knowledge and consent of both the groups of directors. It further observed that, perhaps, as long as the relationship between the two groups continued to be cordial, the action of one group was approved or condoned by the other group. On that finding, the Board took the view that it was not a case for investigation into the affairs of the two companies as also other companies. The finding so reached in respect of the relief of investigation into the affairs of the two companies as also other named companies has not been seriously challenged before me. However, the finding recorded by the Board in relation to the affairs of SSTS at the instance of the Puri group is the main controversy that needs to be resolved in these appeals. That aspect has been considered by the Board in paragraphs 18 to 23 of the judgment under challenge. The Board proceeded to examine that aspect on the basis as to whether the Puri group had breached its fiduciary duties to SSTS in getting the contract to the fourth respondent (Seaworld Shipping and Logistics Pvt. Ltd. - -hereinafter referred to as "the SSL") and, the Puri group and SSL is accountable to SSTS for the benefits derived by the fourth respondent (SSL) from the contract with the Contship, which was initially impleaded as respondent No. 5. At this stage, it is relevant to note that Contship, respondent No. 5, was deleted from the array of the respondents by a speaking order passed by the Board accepting the plea of Contship that no allegation was made qua them in the petitions as filed. Be that as it may, the Board further examined whether the Puri group - -second respondent and the third respondent in Company Petition No. 41 of 2002, being the managing director and director respectively of SSTS - -has breached the fiduciary duties to SSTS in getting the Contship agency to SSL, which is under their sole control and was a newly formed company to take away the business of the Contship agency from the SSTS. In para. 18 of the judgment, it is noted that the admitted position is that the agency with Contship contributed nearly 90 per cent. of the business of SSTS, which had two groups of shareholders, and now the entire business has gone to SSL, the newly formed company of the Puri group, fully controlled by the Puri group. In this para. 18, the Board has also noted that the agency agreement between SSTS and Contship was coming to an end on November 30, 2001. It has also made reference to the fact that in the past, Contship had changed its agents. The Contship agency was initially given to SSCO in 1991, when the company constituted three groups of shareholders. Later on, the agency was given to SSTS in 1996 and SSTS was thereafter controlled only by two groups of shareholders, namely, the Puri group and the Sippy group. In the later part of the same para., referring to the judicial precedents, the Board went on to examine as to whether the Puri group could have avoided the loss of business caused to SSTS due to terminating the agency agreement in its favour and taking away the same agency business to SSL, which was controlled solely by the Puri group, even though the Puri group continued to be the managing director and director of SSTS. On the basis of principles deduced from the judicial precedents, referred to in para. 18, the Board has observed that it is universally recognised that the director of a company stands in a fiduciary capacity with the company, the extent of his fiduciary duties is not codified by any statute and is tested on the facts of each case. It further observed that the nature of fiduciary duties has to be strictly construed and not liberally, as suggested by the Puri group. According to the Board, the fiduciary responsibility of a director enjoins that he should not take away the running business of a company, nor could he use the resources of the company for his own personal benefits. It has referred to certain American precedents and observed that the recognised defences in cases of complaint of taking away a corporate opportunity are : that the company is not financially capable of taking the opportunity for itself ; that the company is either legally or technically not in a position to pursue that opportunity ; that the third party refuses to deal with the company ; and that the opportunity was offered to the director in his personal capacity. It has also observed in the said para, that one of the main elements of fiduciary duties of a director is loyalty to the company. It has referred to the defences taken on behalf of the Puri group, which were that the agency with SSTS had come to an end, therefore, even if Puri continued as a director of SSTS, he could take away the agency to his own company ; Puri had brought the agency of Contship to Samrat group ; he was free to take it ; that Contship did not want to have the agency with the company ; that Contship desired to have the agency with Puri because of his expertise. The Board has straightway rejected the defence that since Puri had brought the agency to the company, he could have taken away the same, because such a plea could not be countenanced and would be anathema to the fiduciary duties of the director/managing director. Thereafter, by applying the principles deduced from the judicial precedents, referred to in para. 18, the Board in para. 19 proceeded to examine the question as to whether the Contship agency was a corporate opportunity for SSTS. It has found that the admitted position was that SSTS was carrying on the same agency for five years prior to the expiry of the period of agency and the agency business was in the line of business of SSTS, it (SSTS) had expertise and experience in that business. It further found that it is not the case of the Puri group that SSTS was financially incapable of taking the agency further. It also found that Contship had not abandoned its business in India, for which reason any further agency contract in contemplation of Contship in India was a corporate opportunity for SSTS. It then found that the Contship agency having gone to SSL, a company fully controlled by the Puri group from December 1, 2001, was loss of corporate opportunity to SSTS. In so far as the defence of the Puri group that since the Contship agency with SSTS had come to an end and that Contship did not want to deal with SSTS, but because of the personal relation of Puri with Contship, on account of which there is no breach of fiduciary duty to SSTS, was examined and has been answered against the Puris by applying the principle stated in the English judgment in the case of Industrial Development Consultants Ltd. v. Cooley, [1972] 2 All ER 162. The Board then went on to discuss the factual matrix of the case and the sequence of events that led to the Contship agency being given to SSL, the newly formed company fully controlled by the Puri group. It will be apposite to reproduce para. 20 of the judgment which deals with this aspect. It reads thus (page 494 of 118 Comp Cas) :