The Hindu Business Line : Valuation to end warring

DISPUTES amongst promoters are not uncommon. In India, there was the recent squabbling between two brothers, which resulted in a much-publicised split. At present, the company law and legal restrictions provide a long-winded route to settlement, as was evidenced in the recent Manmohan Singh Kohli (MSK) vs Venture India Properties (P) Ltd and Ors (VIPL) (2005 54(I) CC) case that appeared before the Company Law Board in Delhi. The need for a law to avoid or, at least, minimise litigation appears a necessity under such circumstances.

VIPL was initially a partnership company, with MSK and SR being the main partners. SR's son PR, apparently a chartered accountant and an advocate, was given the logical task of managing the finances of the partnership. It was this task that was the main challenge in the petition, since it appears that PR was quick to apply for conversion of the partnership to a private limited company in an office of the RoC that had nothing to do with the registered office without MSK knowing much about it. When he knew and objected, PR filed an application with the office of the RoC that was to receive the application.

PR then sent the books of account of the company to Delhi from Gurgaon and was able to convince the remaining partners to attest blank cheques. Deeper inquiry revealed that cheques were issued to people who were non-existent while some cheques went through the ultimate embarrassment — being returned. Sensing that MSK was a whistle-blower, PR did what he thought best — removed MSK as a director of the company. MSK did not relent and filed before the CLB pleading restoration of his directorship; operation of bank account jointly; investigation into the affairs of the company; and winding up.

The case was filed in 2002 and came up for hearing in 2004 — a period which would appear to be passé as per normal company law requirements, but which would be considered to be ages in an era of instant juries and spot judgments.

While the CLB did not interfere with the other allegations on grounds of jurisdiction, it took upon the case of removal of MSK from the company.

Enquiries revealed that the notice for the crucial board meeting removing MSK was issued from the Shahdara Post Office. When the jurisdictional post office was Noida, posting the notice from Shahdara raised some eyebrows. However, the CLB ruled that a post office is as good as any other and, hence, it is immaterial from where it has been posted. However, PR appeared to have overlooked Section 284(2), which makes it mandatory for a director who is proposed to be removed to be given a special notice.

MSK apparently received nothing from the company and objected to being removed without his knowing about it. The company failed to prove that the notice was actually sent, which forced the CLB to rule that the removal of MSK and his ilk was bad in law. However, the experiences were enough for MSK to raise issues of oppression and mismanagement. To settle matters, the CLB ruled that MSK should be given an opportunity to leave the company on return of his investment in the company. To facilitate the valuation, the CLB recommended valuation of the shares of the company at a prior date to enable amicable settlement of the dispute.

The solution to warring corporates is contained in the Irani Committee report as also in the Committee's previous avatar — the Concept Paper on company law. While the Irani Committee is recommending one-man companies, the Concept Paper has thrown open the concept of limited liability partnerships.

While the concept of one-man companies appears to be farfetched at least for now, limited liability partnerships have proved to be a tried and tested model in other countries which could be tested over here, too, and implemented with necessary adjustments.

The CLB's decision to get the valuation report of shares done by an independent valuer is one of the other recommendations of the Irani Committee that appears to have judicial blessings. Both of these together would help minimise corporate feuds — a good way to de-clog the congested courts. Is it not time to implement the non-controversial suggestions of the Irani Committee without batting an eyelid?

(The author is a Hyderabad-based chartered accountant.)

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