ORDER
K.K. Balu, Member
1. This company petition is filed under Sections 397, 398, 402, 403 and 409 of the Companies Act, 1956 (“the Act”) alleging that the affairs of M/s Natural Remedies Private Limited (“the Company”), a private limited company incorporated in April, 1998 and engaged, inter-alia, in manufacture and sale of vetenery medicines, animal feeds, herbal extracts etc., are conducted in a manner oppressive to the petitioners and prejudicial to the interests of the Company and claiming appropriate reliefs with a view to bringing to an end the matters complained of therein.
2. The Company is continuation of a pre-existing partnership engaged in the joint family business of (late) R.L. Agarwal, manufacturing and selling of pooja articles, vetenary medicine etc., the entire paid-up share capital of which is held among the petitioners and the respondents 2 to 4. The first petitioner and the second respondent being sons of (late) R.L. Agarwal are brothers. The second petitioner is wife and the petitioners 3 & 4 are sons of the first petitioner. The respondents 3 & 4 are sons of the second respondent. The first petitioner and the respondents 2 & 3 are the first directors, who shall hold office for life until they resign from the board and that they are not liable to retire by rotation or liable to be removed from office by the shareholders in general meetings as envisaged in the Articles of Association of the Company. The Company has been in the joint management of the first petitioner and the respondent group. There are charges and counter-charges levelled against each other. In response to the suggestion made by this Bench, the parties being closely related explored the possibility of settlement of the disputes, without going into the merits of the company petition, which culminated into the order dated 26.02.2004 reading thus: –
“In the course of submissions, this bench has suggested to the parties to sort out the disputes amicably in view of the fact that they are brothers. As a consequence, the parties have agreed that an independent valuer, preferably a Chartered Accountant, will be appointed by this Bench to ascertain value of the shares of the Company. The parties will exchange a list of Chartered Accountants among themselves through their Counsel and file the names before the Bench by 05.03.2004, upon which the Bench will appoint a valuer for the purposes of valuation of the shares. Towards this end, the Chartered Accountant so appointed will take the assistance of any expert, if found necessary. The cost will be borne by both the parties. Both the parties are at liberty to make their submissions before the valuer and extend their fullest cooperation in valuing the shares expeditiously. For the purpose of valuation of shares, value of trade mark in respect of the products manufactured or marketed by the Company will be excluded in view of the pendency of the civil suit filed by the petitioner before the City Civil Court, Bangalore. The valuer will file a report before this Bench by 31.03.2004 and serve copies on the respective parties. The valuer in his report will, inter-alia, indicate valuation of the units of the Company separately and any feasibility of division of such units. After giving an opportunity to both the parties, it will be decided as to whether the Company will be divided unit-wise between the parties or whether the respondents will purchase the shares of the petitioners at the value indicated by the valuer in his report….”
Pursuant to the consent order dated 26.02.2004, M/s Brahmayya & Co., Chartered Accountants, Bangalore were appointed (a) for valuation of the units of the Company including the feasibility, if any, of division of the units of the Company; and (b) valuation of shares of the Company as on 31.03.2003. The valuer took the assistance of Shri A.R. Dhanankar, chartered engineer, Bangalore and upon hearing the parties and considering the materials placed by them, the chartered engineer as well as valuer submitted their reports dated 28.06.2004 and 07.07.2004 respectively, according to which the feasibility of division of the units belonging to the Company is not found favoured. The valuer, in his report dated 07.07.2004 valued the shares of the Company at Rs. 20.85 per share as per Net Asset Value method and at Rs. 16.19 as per Earnings Capitalisation method. The petitioners are disputing the report of the valuer and the chartered engineer both on the feasibility of division of the units and valuation of shares of the Company. In the meanwhile, the petitioners aggrieved by the consent order dated 26.02.2004, denying the petitioners of any opportunity to purchase shares of the respondents preferred an appeal in miscellaneous first appeal No. 2288/2004 before the High Court of Karnataka at Bangalore, which came to be disposed of by an order dated 11.01.2005 thereby directing “the Company Law Board to decide whether or not the appellants have the right to purchase the shares of the respondent, but without being influenced by any of the observations made during the course of the impugned order.”
3. Against the above background, Shri Karthik Seshadri, learned Counsel appearing for the petitioners, in support of his claim that the units of the Company are divisible, submitted: The Company has two units situated separately at plot No. 5A and 5B respectively in Veerasandra Industrial Area, 19th K.M. Stone, Hossur Road, Bangalore-561 229. The unit in plot No.5B (AHP unit) has been in existence since formation of the Company manufacturing animal health products and the other unit (HHP) at plot No. 5A established in March, 2003 is 100 per cent export oriented unit obtaining EOU licence from Cochin Special Economic Zone and is manufacturing herbal extracts and human health-care products, as borne out by the minutes of the board of directors of the Company dated 23.11.2001 and the licence dated 15.02.2002, which never stipulated the requirement of a separate R & D for HHP unit. The board of directors of the Company explored the possibility of reorganising the activities of the directors by creation of separate business units, viz., (i) AHP Division; (ii) Herbal Extracts Division; (iii) R & D Division; and (iv) Incubation Centre Division with management of each of these separate business units as independent profit units in terms of minutes of the board meetings dated 12.06.2002, 30.08.2002 and 16.09.2002. Similarly, the Company made a provisional profit and loss account for the year ended 31.03.2002 in respect of AHP division and extracts separately. After separation of the business of the Company into AHP and HHP divisions, it would always be open for each of the divisions to purchase extracts from the other division or third parties. The report of Ernst and Young discloses the business prospects and profitability in the area of human health care products envisaging the scope for HHP unit over a period of five years in terms of the projected profit and loss account statement and projected balance sheet as reflected therein, which would justify the viability of HHP division. However, the valuer brushed aside the report of Ernst and Young in regard to the potential earning, pricing and business plan of the Company.
The conclusion of the valuer is contrary to the observations made by the chartered engineer, according to which division of the business into independent units is feasible, but will not be cost and quality effective. The valuer, while studying the feasibility of dividing the business has not considered the feasibility of (a) physical separation; (b) operational separation; and (c) legal separation. AHP unit is physically separate from HHP unit in terms of being in different building and having independent infrastructure. Each unit can apply for separate registration with the relevant R & D facility, which is not a mandatory requirement. The common facilities and common machineries being enjoyed both by AHP and HHP units can be replicated for each unit without any significant investment. The R&D Division can be hived off with one unit and separate facilities will be set up for the other unit. The R&D Division does not form integral part of the business, as observed by the chartered engineer. In the alternative, the R&D facilities may be divided between the units. The feasibility of division of the units has been categorically emphasised by the second respondent in his communication dated 28.09.2001. The bank loans and securities can be segregated unit-wise and apportioned among the units upon such division of the units. The Company can execute separate agreements for each unit whereby each unit can create charge on its immovable property, viz. Plot No. 5A & 5B in favour of the bank in proportion to the facilities availed by each unit. The objections, if any, raised by the Company’s banker cannot be the criteria to determine whether the Company is divisible unit-wise or not. There is every possibility of clubbing the extracts and the human healthcare units together splitting them from AHP unit and such division is possible and viable if the units are valued as on 31.03.2004. The valuer’s report is silent on the viability of AHP and HHP units. It is, therefore, clear that the AHP and HHP divisions can be run independently and profitably.
The report of the valuer shows that the new unit at plot No. 5A having commenced operation with effect from 17.04.2003 has not been valued, since the valuation exercise has been made as on 31.03.2003. The Company has invested huge sums from its existing resources on HHP unit as borne out by the report of the Ernst and Young. Nevertheless, the valuer has not considered the value of HHP unit before arriving at the value of shares of the Company. The valuer has not considered the expenses incurred in HHP division but instead depicted as capital/recurring expenses, which is erroneous. The projected business of the unit over a period of five years would be around Rs. 20 crores, but the valuer has ignored the same without valuing this unit. The valuer has neither valued the R & D division, while arriving at valuation of shares of the Company. While the valuer considered the profits for the past five years, failed to take into account future profits of the Company. The shares have not been valued following the Discounted Cash Flow or the Future Earnings method. The valuer relied solely on the weighted average profits of the Company over the past five years. The Company being a going-concern, the valuer ought to have considered the potential for the increased profitability, expansion of the business and the estimated future earnings of the Company. The valuer has not adopted the principles of valuation as laid down by the Supreme Court while carrying out the valuation exercise. The Company being a closely held private limited company, there are restrictions on the transfer of shares and, therefore, the Net Asset Value method as well as Earnings Capitalisation method based on past earnings would not be realistic. The valuer has not taken into consideration the intellectual property including the patents and trade marks held by the Company. The valuer is to exclude only the trade marks which are the subject matter of the civil suit filed by the petitioners, but excluded the entire trade mark portfolio of the Company from the valuation exercise. The valuation arrived at by the valuer does not represent the true value of the Company and no importance must be attached to valuation report of the valuer. According to the valuer, AHP unit proposes to use herbal extracts from HHP unit, after it becomes fully operational and, therefore, AHP division is dependent for the herbal extracts on HHP unit. This is erroneous in view of the fact that HHP unit is 100% export oriented unit. The chartered engineer failed to mention the details of installation of machinery as per their allocation in different units and considered the replacement value and the market value to be the same, which is not so. Many of the equipments have been shown as having nil value based upon market valuation. The valuer in his reply dated 06.12.2004 to the Memo of Objections filed by the petitioners on the issue of divisibility of the units has not considered any of the objections raised by the petitioners, but the reply is quite bald. The CLB should consider rejecting the valuation report and explore the feasibility of division of the Company unit-wise, viz., AHP unit and HHP unit. Shri Karthik Seshadri, while concluding his arguments reiterated that if the units are found divisible, the question of purchase of shares, either by the respondent group or the petitioners, in the light of the order dated 11.01.2005 of the High Court of Karnataka does not arise. The first petitioner being one of the sons of (late) R.L. Agarwal is entitled to carry on the joint family business continued by the Company which cannot be denied by the respondents. Shri Karthik Seshadri, in support of his legal submissions relied upon the following decisions: –
K.K. Framji v. Consulting Engineering Services (India) Ltd and Ors.-2002 (Vol.110) CC 482 – wherein the CLB appointed a new valuer to determine the fair price in view of the huge variations in the fair value of the shares as claimed by the petitioner and the respondent and the valuer and also in view of the various accounting and valuation issues raised by the parties, even though the CLB has to finally decide the fair price in terms of the agreements.
In the present case the valuer failed to follow the order of this Bench while carrying out the valuation of HHP division and R&D division.
Dr. Mrs. Renuka Datla v. Solvay Pharmaceutical B.V. and Ors. -2003 (Vol.117) CC-585 – to show that while valuing the shares in a private limited company, the proper method of valuation to be adopted would be the profit earning method. The profit earning method takes into account the profits which the company has been making and should be capable of making and the valuation according to this method is based on the average maintainable profits.
Commissioner of Gift Tax v. Smt. Kusumben D. Mahadevia;
Commissioner of Wealth Tax v. Smt. Madhuriben Y. Mafatlal;
Commissioner of Wealth Tax v. Sh. Hrishikesh Arvindprasad;
Commissioner of Wealth Tax v. Jayshreeben S. Lashkari and Ors. -1980 2 SCC – 238 to show that where the shares are in a private limited company, the proper method to be adopted would be the “profit earning” method.
Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir Prasad Jalan and Ors. etc – – to show that the general principle of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustment, etc.
4. Shri Murali, learned Counsel appearing for the respondents submitted: The valuer has been appointed with mutual consent of the petitioners as well as respondents and, therefore, the order dated 26.02.2004 is binding on them. The valuer after affording an opportunity to both the parties came to the conclusion that there is no feasibility of dividing the Company unit-wise between the parties. These findings of the valuer are binding upon the petitioners. AHP and HHP units though situated in plot No. 5B and 5A, they are in the same compound and, therefore, there is no feasibility of dividing the units. Consequently, the respondents have the option to purchase the shares of the petitioners at the value arrived at by the valuer in his report dated 07.07.2004. However, the petitioners have challenged the consent order made by this Bench before the High Court of Karnataka which resulted in an order dated 11.01.2005, wherein the CLB has been directed to decide whether or not the petitioners have the right to purchase the shares of the respondents. At the same time, the petitioners are insisting for division of the units which is not found to be feasible as per the report of the valuer. When the Company proposed to establish HHP unit, the petitioners were against such establishment of the unit by the Company; opposed any investment on HHP unit and further expressed their dissent for availing financial assistance to run HHP unit. They raised dispute in the civil court in regard to the patents and trade marks relating to products of the Company. The sequence of events show the conduct of the petitioners and their contradictory stand taken by them from time to time in the course of the proceedings before the CLB and in the other civil proceedings. The board of directors approved the reorganisation of the activities and work allocation of the directors and not division of the units as seen from the report of the valuer. The Company was valued as on 31.03.2003 in terms of the order of this Bench and, therefore, HHP unit which came into operation only on 17.04.2004 was not valued by the valuer. The Company took over the business from a partnership run by the family members of (late) R.L. Agarwal. The respondents 2 & 3 established AHP unit. The first petitioner came and joined the Company, long after the establishment of AHP unit. The respondents 2 & 3 have given personal guarantee for the advances extended by the banks for running of HHP unit. They further enhanced their shareholding in the Company to secure the advances. The petitioners have not given their personal guarantee to secure the dues of the bank, but opposed even the establishment of HHP division. The first petitioner has been acting against the interests of the Company by addressing communications to the Company’s banker making false allegations as borne out by his communications dated 19.07.2003 and 01.10.2003 addressed to the Exim Bank, Bangalore and the customers of the Company. The financial institutions and banks reposing faith in the respondents have reported that they would be recalling the loans sanctioned to the Company in the event of the Company being handed over to the petitioners. The first petitioner already commenced his own new business and equity does not entitle him to seek for himself either AHP unit or HHP unit. The respondents constituting majority are in the management and, therefore, they must be given the option to purchase the shares held by the petitioners. Shri A. Murali, learned Counsel, in support of his legal submissions relied upon the following decisions: –
Dr. Renuka Datla (Mrs.) v. Solvay Pharmaceuticals B.V. – to show that when a valuer is appointed on basis of the settlement reached before the court, valuation arrived at by the valuer shall be final and binding.
Subir Kumar Basu v. New Central Group Engg. P. Ltd (1986) 59 CC -222 (Cal) – to show that the report of the valuer is binding upon the parties if the parties consented for appointment of valuer.
Brij Mohan Bansal v. Bansal Gems Pvt. Ltd. (PB) – Manu/CL/0016/2002 -to show that in a family company run by brothers, if mutual trust is lost equity demands that the minority shall sell their shares for reasonable value and leave the company, where no acts of oppression have been made out.
Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. – -to show that the relief if any under Section 397 can be invoked by a share holder in his capacity as share holder and not qua director.
Yashovardhan Saboo v. Groz-Beckret Saboo Ltd. and Ors. (1995) 83 CC -371 (CLB)- to show that in a 397/398 proceeding it is unusual to compel the majority to sell shares to the minority and in a situation of deadlock it shall be ensured that the minority is required to sell shares at a fair price.
N.S. Prasad Rao v. V.L. Narasimha (1991) 70 CC – 303, 323 (AP) – to show that a person who floated the company to buy the shares of aggrieved, in the case of default of the promoters to buy shares of the aggrieved, then the aggrieved person must be given an opportunity to buy the shares.
Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (P) Ltd – (1991) 3 Comp L J – 336 (Karn) – to show that any person claiming relief under Section 397 & 398 must act in good faith, which can be tested by the conduct of such person as reflected not only in the proceedings under Section 397/398 but also in the parallel proceedings in the civil courts and in all other civil litigations in other courts.
Surinder Singh Bindra v. Hindustan Fasteners (P.) Ltd – (1990) 69 CC 718 – to show that the CLB is vested with the powers under Section 397/398 to install one group in the position of power with a direction that they should take over the shares of the other group.
5. Shri S.R. Ravi, the authorised representative and the Company Secretary of the Company supplementing the arguments of Shri A. Murali, learned Counsel contended that both AHP and HHP units are located in the same survey number and herbal extracts are used in both these units. The Company is engaged in manufacture of herbal extracts and animal health products. HHP division established for manufacture of herbal extracts and human health care products commenced commercial operation in April, 2003. The Company has been producing herbal extracts even before setting up of HHP division on the common facilities provided by AHP division and R & D division. Both the plots, viz., Plot No. 5A & 5B have been jointly mortgaged in favour of the banks securing the credit facilities availed by the Company. The requirement of R & D facility is a legal requirement and cannot be dispensed with while dividing the Company unit-wise. The R & D services are absolutely essential for running of the units as pointed out by the chartered engineer in his report dated 28.06.2004. Any creation of a new and separate R & D may not be viable and will be devoid of the research activities conducted by the R & D division. Any division of the units will dilute the efforts of R & D department and make the new entities weak in these areas. There are 50 scientists working in the R & D division. It is not feasible to bifurcate the R & D division. Both AHP and HHP utilise common facilities like power, water, steam and compressed air for production and use common machinery and, therefore, division of units is not viable. The importance of the R & D division and its expenses since the year 1994 have been outlined by the valuer in his report dated 07.07.2004. Any division of the Company unit-wise would result in winding up of the Company. The second respondent who appeared in person submitted that he is solely responsible for development of the business and the first petitioner started his own business similar to the business carried on by the Company and therefore, none of the units need be allotted towards the share of the petitioners.
6. Shri Karthik Seshadri, learned Counsel, in his rejoinder submitted: AHP and HHP units are in different locations though forming part of the same survey number. The board of directors had taken the conscious decision to run these divisions as separate units, as reiterated by the second respondent in his communication dated 28.09.2001. HHP division was to be run as a separate entity in terms of the Ernst and Young report. The minutes of the board meeting dated 24.01.2002 show that the extracts and human health care products will be brought under the export oriented unit and that the fourth respondent would involve in the new business. The petitioners have no objection for the petitioner group keeping R&D for themselves. The amount incurred on account of the consumption of raw-materials common for AHP, extracts and human health care products as reflected in the financial statement of the Company for the year 2002-2003 is misleading.
7. After considering the elaborate arguments of the learned Counsel, the short issue that arises for my consideration is whether the Company is divisible into AHP unit and HHP unit for the exclusive and independent apportionment between the contesting parties. If not so, whether the petitioners, being minority shareholders or the respondents constituting majority will go out of the Company selling their shares to the other group at the value determined by the valuer or at any higher rate, as may be determined by this Bench. Towards this end, the report dated 07.07.2004 of the valuer and the report dated 28.06.2004 of the chartered engineer, whose services have been utilised by the valuer for the purpose of (a) valuation of the units of the Company and feasibility of division of such units; and (b) valuation of shares of the Company assume importance.
The report of the chartered engineer apart from depicting general information on AHP unit and HHP unit gives finer details of the manufacturing process, existence of scheme of quality assurance and control, role of R & D division, investment on the equipment and man power in R & D, maintenance of the plant and machinery etc. The valuation method adopted in respect of the land, building, equipments has been set out therein and, thereafter, valuation of the land & building, plant and machinery, furniture and fixtures, office equipments, equipments in R & D division, software, computers and vehicles has been elaborately dealt with and ultimately valued the land, building and others at Rs. 2.58 crores and plant & machinery & others at Rs. 4.54 crores. The report while dealing with the feasibility of running the plant and machinery independently for each of the products, viz., animal health product and extracts, elaborates the raw materials procurement process and quality control process. It is reported that the manufacturing process requires common utilities like power, water, steam and compressed air for production and concludes that segregating any process may not be viable. This will result in separation of man power and duplication of support work like finance, administration, marketing, maintenance etc. The chartered engineer enlightens the advantages of a single unit in the following words: –
“A single unit as of now will give better economies of scale, reduce cost of procurement, production, better quality control, avoid re-engineering cost in case of a split, higher scope for R & D and new product development, better marketing reach in addition to high personnel morale”.
The report of the chartered engineer draws the following inferences:
Any division of the production process will result in loss of economies of scale, and lack of the expertise and the existing vendor contracts.
Any division of the R & D and quality control departments constituting the Company’s brain, will dilute the efforts of these departments, in the area of new research and product development, making the new entities weak but at the same time expensive in these areas, apart from loss of common source of talent or knowledge.
Common utilities can be re-engineered but at the cost of viability of the units.
Common pool of personnel in support functions like finance, marketing would be lost.
The sum and substance of the chartered engineer’s report does not rule out any scope for division of the business, but such division of AHP and HHP units would affect the overall cost on account of procurement and production process, quality control, R & D man power, planning, common utilities etc. At this juncture, it shall be borne in mind that when the units enjoying common utilities and facilities are sought to be divided, it can never be cost effective but would perhaps, involve enhanced cost. However, what is required to be seen is whether division of units, notwithstanding the disadvantages pointed out by the chartered engineer, is worthwhile in the facts and circumstances of the present case. All hurdles arising out of any division of the units must be weighed in the light of reliefs which are warranted to bringing to an end the acts complained of in the company petition, which are being considered separately.
A summary of the relevant observations and findings of the valuer set out in the report dated 07.07.2004 on divisibility of AHP and HHP. units is as under:-
The Company has been manufacturing herbal based products at its unit (AHP Unit) situated at Plot No. 5B, Veerasandra Industrial Area, Hosur Road, Bangaloare-561229. AHP has been in existence since formation of the Company with R&D forming part of the unit.
The Company obtained license in February, 2002 to manufacture herbal extracts and human health care products at Plot 5A, Veerasandra Industrial Area, Hossur Road, Bangalore-561229. HHP unit became operational with effect from 17.04.2003. An amount of Rs. 1.08 crores invested as on 31.03.2003 on HHP unit is lying in capital work-in-progress. The Company further invested till 31.03.2004 an aggregate sum of Rs. 4.17 crores.
No separate registration is given by any of the regulatory authorities for AHP or extracts.
AHP Division uses herbal extracts as raw material for manufacture of the various animal health products. AHP Division proposes to use herbal extracts from the new unit after it is fully operational. Hence, AHP Division is dependant for the herbal extracts on the new unit to that extent.
There are certain machinery used for the processing of raw materials, which are common for AHP and HHP divisions. The administrative block, packing material store, finished product store, raw material store, tanks, R&D division consisting of as many as five labs etc. situated at plot No. 5B, where AHP division is located are shared commonly by both AHP & HHP divisions.
The Company has incurred an amount of Rs. 6.15 crores towards R&D (including revenue, capital and deferred expenditure) from the inception of the Company against the profits earned of Rs. 4.70 crores and further invested a sum of Rs. 1.20 crores in plant and machinery in R&D Division against the gross block of plant and machinery (excluding R & D) of Rs. 6.53 crores.
The Company has availed financial assistance from the banks and Technology Development Board not for any specific implementation of the units, against security of the land and building situated at plot Nos. 5 A & 5B. The Company shall not effect any change in capital structure or formulate any scheme of merger, amalgamation or reconstruction or enter into scheme of arrangement or compromise with its creditors or shareholders without prior approval in writing of the banks and Technology Development Board.
The Board re-organised the activities of the directors and created Divisions as (i) AHP Division, (ii) Herbal Extracts and Human Health Care Products & EOU, (iii) R & D Division and (iv) Corporate Division. AHP Division, Herbal Extracts Division and R&D and Incubation center Division will be independent and profit making units. None of the directors-in-charge submitted Management Information System (MIS) on the basis of working of independent Divisions/profit centers, in the subsequent board meetings.
Though the provisional profit and loss account for the year ended 31.03.2002 is made for AHP and Extracts separately, there is no bifurcation of R&D expenses separately for each of these products, it is absorbed in total. However, it is not practical to apportion R&D Expenses between AHP and Extracts in view of the expenditure and extensive research initially incurred on AHP in terms of the common “formulations, preparations, activities and others” used in human care products forming part of extracts.
The report of Ernst & Young is a market study of the Company in terms of the global population affected by allergy and not business potential of the Company and, therefore, the projections made by Ernst & Young are not taken into account in the report.
The various features and impediments coming in the way of division of the units, pointed by the valuer, in my view, are not the parameters to clinch the issue whether the Company is divisible unit-wise or not. In this context, the objections of the petitioners on the report of the valuer and the chartered engineer with reference to divisibility of the units and together with their reply thereon assuming importance are dealt herewith:
According to the chartered engineer a single unit will give better economy of scale, reduced cost of procurement, production, better quality control, avoid re-engineering cost in case of a split, higher scope of R & D and new product development, better marketing reach in addition to high personnel morale. This means, according to the petitioners that there is every feasibility of dividing the business into independent units, but there are limitations in such division and that the conclusion of the valuer is contrary to the observations made by the chartered engineer. The explanation offered by the valuer in his reply dated 06.12.2004 to the effect that the findings and conclusion of the valuer and those of the chartered engineer are based on different approaches is unconvincing, especially when neither of the reports deals with the feasibility of physical, operational and legal separation of the business of the Company.
The specific grievance of the petitioners is that the essential parameters for division of the units, viz., (i) feasibility of physical separation, (ii) feasibility of operational separation and (iii) feasibility of legal separation have not been applied by the valuer and the chartered engineer. Though it is reported that all the matters have been adequately dealt with in the report dated 07.07.2004 of the valuer, yet the different modalities for division of the units in the light of the comments made by the petitioners are not found to be addressed in the report of the valuer.
The petitioners have asserted that the Company can be divided into independent units with minimal expenditure in terms of effort and expenses. Each of the units is physically separate from the other in terms of being in different buildings and having independent infrastructure. The common facilities such as administration block, common generator, storage facilities for packing materials, raw-materials and finished products, tanks and R&D division can be replicated for each unit without any significant investment. The R&D unit can be hived off with one unit and separate facilities may be set up for the other units. In the alternative, the R&D facilities may be divided between the different units. The common machineries cannot cause any hindrance for the division of the business, especially when the machineries can be separately procured for each of the divisions for their independent units. The second respondent in his communication dated 28.09.2001 was in agreement with the feasibility of division of the activities of the Company.
The petitioners have further pointed out that the valuer ought to have considered the possibility of clubbing the extracts and the human health care units together and splitting them from the animal health products unit. Such division is possible and would be a violable alternative, if the units are valued as on 31.03.2004.
The valuer in his reply reported that the above contentions of the petitioners are their opinion and, therefore, refrained from commenting on such opinion of the petitioners. Any concrete reply on these suggestions of the petitioners would have thrown light on divisibility of the units.
The petitioners have suggested the ways and means in resolving the various issues in relation to the Company’s banker, which may pave way for obtaining clearance from the banker for any division of the units. While the valuer have elaborated the restrictive covenants contained in the loan and security documents executed in favour of the Company’s banker, which would come in the way of any division of the units, he has not chosen to consider the possibilities put forth by the petitioners in resolving the banker connected issues.
It is, therefore, clear that several of the issues raised by the petitioners are not adequately dealt with in the report of the valuer so as to spell out whether the Company is divisible unit-wise. The reports on record, in my considered view, are not of any assistance to give any appropriate finding in this behalf. I am, therefore, constrained to examine the materials on record for adjudicating the contentious issue. The second respondent in his communication dated 28.09.2001 while offering his comments on the feasibility of bifurcation of the Company into different profit centres towards better progress and results expressed thus:
“We are having 4 areas i.e. (i) animal health products (ii) herbal extracts (iii) human products and (iv) R & D which can be divided into 3 or 4 PC’s without much problem of increasing burden of cost and manpower. Out of these 4 units, 3 units has already been well established and started producing results but human products are under development and it may take some more time to become self sufficient. At the moment it is only incurring the expenditure as the sales has not yet started so no generation of profit. I believe this department is having a very good potential and big market to take the company on the international level by providing the name, fame and money. The concept of PC is almost like the concept of different divisions. Each division is having its own facility, manpower and managed by the head of the division and reporting to the Head Office or the Board of Directors. Finalization of the accounts, arrangements of finances, HR and major policy decisions can be taken at that level and conveyed to each PC and is monitored from that level. Each one of them is independent to a larger extent and simultaneously connected with each other, responsible and answerable to the Board of Directors.
Most appropriate knowledgeable person in that area should be made incharge of the PC. There should be a mechanism through which other person should also get the opportunities, first for training and then shifting from one PC to other PC when they develop proper knowledge, capability after the training.”
It is beyond doubt in the words of the second respondent that the business of the Company could be managed as independent divisions, viz., animal health products, herbal products, human products etc. by different personnel. The board of directors had approved on 23.11.2001 the proposal for construction of a new exclusive export oriented production facility at plot No. 5A to manufacture extracts and other products for exports. The chairman further at the board meeting held on 24.01.2002 expressed that “by way of business strategy, the extracts and human health care products will be brought under export oriented unit”, in which the fourth respondent would invest in the shares of the Company to strengthen his involvement in the new business from export oriented unit. At the board meeting held on 06.02.2002, the chairman apprised the board of directors that “it has been decided to create separate business units under each director, viz., 1. AHP division; 2. Herbal Extracts and Human health care products & E.O.U; 3. R&D activities and incubation centre; and 4. Corporate Office, Planning, Finance, taxation.
The minutes of the board of directors of the Company dated 12.06.2002 disclose the steps initiated by the Company “for creation of divisionalisation activities of the Company and defines the role of directors in taking independent charge of the respective divisions”.
At the board meeting held on 30.08.2002 the board of directors had approved the creation of separate business units which would be run as distinct units and passed the following resolutions: –
Resolved that in view of the creation of SBUs under the over all control and supervision of Corporate office, Sri R.K. Agarwal who continues to be responsible for over all management and performance of the company be re-designated as Chairman & Managing Director with immediate effect and consequently Sri. Karthikey Agarwal is re-designated as Director Marketing AHP Division with immediate effect. Further resolved to bring each of the SBU under charge of each Director as follows:
Division Director - in - charge
1. Corporate Office -Sri R.K. Agarwal - Chairman &
Managing Director CMD will also
over see production Purchase and
other related activities of various
SBUs till he finds that Directors of
individual SBUs become conversant
with the matter.
2. Animal Health Care Products -Sri Karthikey Agarwal - Director
Marketing Division AHP Division
3. Herbal Extracts & Human -Sri Anurag Agarwal - Director
Health Care Products & EOU International
Operations
4. R& D Division & Incubation - Sri Amit Agarwal - Director R & D
Centre
It is clear from the foregoing resolutions of the board of directors of the Company that it was decided to create separate business units and divisionalisation of activities of the Company, which would be run as distinct units under the independent control of directors. These resolutions contemplate that AHP unit and HHP unit would be run independently by the first petitioner and the third respondent respectively. It may be observed that all along while the first petitioner opposed the divisionalisation of activities of the Company, the respondents were firmly in favour of such proposal which could ultimately be approved by the board of directors. The respondents in their memo of objections filed on the report of the valuer categorically stated that “the board of directors of the first respondent company sought to bring in the SBU concept for divisionalisation of activities of the Company specifically for assessing the performance of individual directors”. It is, therefore, clear that the activities of the Company are divisible and the purpose for which such divisionalisation was sought to be brought in by the board of directors of the Company need not be looked into by this Bench. The affirmation of the second respondent in his affidavit sworn on 04.02.2005 to the effect that “the financial institutions and banks, viz., “EXIM BANK and SBI have confirmed that they would be recalling the loans sanctioned to the Company in the event of the Company being handed over to the petitioners in the main petition” is not in any way germane to the issue whether the Company is divisible into different units or not. Nevertheless, the apprehension of the financial institutions and banks will have to be adequately safeguarded ensuring their interests. The plea of the respondents in the company application No. 6 of 2005 that “Senior Managers of the Company have also fully supported the present management and have endorsed their views that the Company cannot be divided unit-wise” without explicit reasons, does not merit any consideration. Moreover, the reported lack of confidence of the financial institutions and banks in the first petitioner, in my view, do not answer the issue in question. While AHP unit is an old establishment for manufacture of animal health products and herbal extracts etc., situated at plot No. 513, HHP unit located at plot No. 5A, after obtaining EOU licence from Cochin Special Economic Zone in February, 2002, for manufacture of herbal extract and human health products commenced commercial production with effect from 17.04.2003. When AHP unit could be in operation since the very incorporation of the Company without the existence of HHP unit, being 100% export oriented unit, the plea of the respondents that any division of the units would lead to winding of the Company is ill conceived. In this context the observations of the valuer that AHP division is dependent for the herbal extracts on HHP unit is devoid of any merits. Plot No. 5A and plot No. 5B are adjacent to each other and thus AHP unit is physically separate from HHP unit in terms of being located at different plots, though forming part of the same survey number, which can be sub divided, in the event of division of the units. The first petitioner and second and third respondents being the lenient descendents of (late) R.L. Agarwal are subscribers to the memorandum and articles of association of the Company and are the first directors of the Company. They shall not retire by rotation nor liable to be removed from office by the shareholders in general meetings. The Company consisting of AHP and HHP units has been under the joint management of the first petitioner and the respondent group with 33 per cent and 66 per cent of the paid-up capital of the Company respectively. I do not foresee any impossibility in bifurcation of plot No. 5A and plot No. 5B and any difficulty in separation of common facilities and utilities as well as machinery commonly enjoyed by the different units. In the alternative one group can establish these facilities/utilities on its own to carry on the unit independently. The division of units involves enormous efforts and proper prospective, but is not quite impossible. It is beyond doubt that the parties can no more carry on the business together and separation of business is the only alternative which will remedy the grievances complained of in the company petition. The petitioners have clearly expressed their willingness for hiving off the R&D division and parting the same in favour of the respondent group. In these circumstances, there cannot be any impediment in separating the units between the petitioners the respondents. The respondents constituting 66 per cent and the second respondent having been in the business since the beginning shall be allotted AHP unit with R&D division, while HHP unit will go to the share of the petitioners who are at liberty to incorporate a separate company and obtain the requisite licence to run HHP. I, therefore, in exercise of the powers under Section 402 of the Act, direct accordingly division of the units with a view to put an end to the stage of stalemate and to ensure smooth parting of ways by the parties. In view of the unit-wise division of the Company, I do not deem it fit to go into the issue whether the petitioners or the respondent group would go out of the Company by selling their shares to the other group at the value determined by the valuer or merits of the valuation report. Considering the reliefs awarded in the company petition, the various decisions cited by either sides, in my view, have no application to the facts of the present case. The interim orders already made shall remain in force until AHP and HHP units are taken over by the respective parties in terms of this order. The petitioners will reimburse fifty per cent of the remuneration paid to the valuer, since the same was borne by the Company subject to final outcome of the company petition. With these directions, the company petition and the connected company applications stand disposed of. No order as to cost. The parties will be present on 20.07.2005 at 2.30 p.m. to suggest on the issue of further consequential directions in regard to separation of common machinery, common utilities/facilities, split of the bank liabilities/securities, determination of the difference in valuation of AHP together with R&D division and HHP units in terms of money value etc.