ORDER
S. Balasubramanian, Chairman
1. In this petition filed under Sections 398 and other connected Sections of the Companies Act, 1956 (the Act), the main allegation is that the 3rd respondent, an employee director of the 1st respondent company has acted in breach of his fiduciary obligations to the company and the shareholders.
2. When the petition was mentioned on 1.6.2005, Dr. Singhvi, Sr. Advocate appearing for the petitioner sought for various interim reliefs as at pages 19 to 21 of the petition. Shri Mukul Rohatgi, Sr. Advocate for the 2nd respondent and Shri Rajiv Nayyar, Sr. Advocate for the respondents 4 to 6 supported the grant of interim reliefs sought for. Shri Dave, Sr. Advocate appearing for respondents 3, 9 and 10 opposed grant of any interim relief at this stage on the ground that he should be given a few days time to argue the matter. Accordingly, by an order dated 3.6.2005, while adjourning the matter for considering grant of interim reliefs, I also froze the bank accounts of the respondents 1, 10 and 11. The matter was again heard on 7.6.2005.
3. Dr. Singhvi appearing for the petitioner submitted: The 1st respondent company is in the business of travel agents and tour operators mainly doing the agency business of M/S TUI Nordic, Sweden. The petitioner and the 2nd respondent each hold 50% shares in the company. The 3rd, 4th and 5th respondents were appointed as employee directors of the company in terms of an agreement dated 26.2.2003, wherein they have been styled as “original team”. The 3rd respondent, in breach of his fiduciary duties to the company, has attempted to enrich himself at the cost of the company by taking away a corporate opportunity available to the company. He entered into an agency agreement with TUI, Nordic on 13th January, 2005 without the approval of the Board of the company nor he had supplied a copy of the same to the respondent directors. He had also entered into an addendum to the said agreement on 14th January, 2005 by which one Across India Tourism Private Limited has been added as a party. This company has been incorporated by the 3rd respondent along with his wife on 23.12.2004. He also executed another agreement between Across India and TUI Nordic on 13th January, 2005, by which The petitioner came to know of all these 3 agreements only in the proceedings before the civil court filed by the company against TUI, Nordic seeking for specific performance of the said agreements. A perusal of these agreements would indicate that the 3rd respondent, while being a director of the company has high jacked a corporate opportunity of the company to his own company. He has also tried to take advantage of his association with the company for his own benefit. TUI Nordic appeared to have decided to have a hotel in Goa to accommodate its clients and for that purpose it was to advance a sum of Rs. 2.85 crores to be adjusted against bookings to be made by the 1st respondent company. Instead of getting the hotel constructed by the 1st respondent company, the 3rd respondent incorporated the 10th respondent to which this amount was given. He also got the 11th respondent incorporated by the 7th and 8th respondents who are employees of 1st respondent company and this amount was given to this company for construction of the hotel. From the agreements, it is apparent that the 3rd respondent has misrepresented that the 10th respondent is a subsidiary or a division of the 1st respondent company and on this representation, TUI Nordic has advanced this amount. Both 10th and 11th respondents were incorporated on the same day and the memorandum and articles of these two companies are practically verbatim copies of the Memorandum and Articles of the 1st respondent company. Both these companies were incorporated prior to the date of the agreements indicating very clearly that the 3rd respondent had by a pre-meditated plan diverted the business of construction and running of the hotel from the company to the 10th /11th respondents. This Board has held in Kishore Kundan Sippy v. Samarat Shipping & Transport Systems Private Ltd. (118 CC 472) that if a director diverts a corporate opportunity of a company to his own benefit, it would be in breach of his fiduciary duties to the company. This decision has been upheld by Bombay High Court in 2005 1 CLJ 407. Since in the present case, it is the 1st respondent company which should have got the benefit of construction and running of the proposed hotel and as such it was its corporate opportunity. Since the same has been diverted to 10th/11th respondent by the 3rd respondent, he has to account for the same to the 1st respondent company. As the respondents have not yet filed their replies to the petition, some protective interim order is necessary till the petition is disposed of. The protective reliefs sought for are: (1) The 3rd respondent should be restrained from resigning as director of the 1st respondent company as in terms of the agreements with Nordic, in case he resigns, all the benefits arising out of the agreements would vest in him; (2) Respondents 3 and 9 be restrained from acting as directors of and/or carrying on business in the name of the 10th respondent and respondents 7 and 8 be restrained from acting as directors of the 11th respondent or in the alternative permit the petitioner to appoint 3 nominees as directors on the Board of respondents 10 and 11; (3) Restrain respondents 3 and 9 from exercising their voting rights in respondent No. 10 and also restrain respondents 7 and 8 from exercising their voting rights in respondent No. 11; (4) Direct the bank accounts of respondents 10 and 11 be operated by the nominees of the petitioner.
4. Shri U.K. Choudhary, Sr. Advocate appearing for respondents 3, 9 and 10 submitted: Even though the petitioner and the 2nd respondent are the only shareholders in the company, they were mere investors and they do not know anything about travel business. It is the 3rd respondent who is the face of the company and it is he who brought all the business including the business of Nordic to the company. Thus, for all practical purposes, he is the promoter and prime mover of the company. Even though, he is not a shareholder, the entire management was vested in him as per the agreement entered into with the company. In other words, he is the creator of the company and even though in terms of the agreement with the company, the “original team” included the 3rd, 4th and 5th respondents, actually “original team” meant only the 3rd respondent. Since he has been vested with all managerial and administrative powers, it was within his domain to enter into the impugned agreements. At no time, there had been board meetings to take decisions. Whatever he did was only for the benefit of the company. Respondent 11 is nothing but a subsidiary of the 1st respondent company as is evident from the fact that its directors are the employees of the 1st respondent company. Only paper work remains to be done to legally to make the 11th respondent as a subsidiary of the 1st respondent company. If the intention of the 3rd respondent was to take away Rs. 2.85 crores for Ms benefit, he would not have caused incorporation of the 11th respondent with the responsibility to construct the hotel. In terms of the agreement with Nordic, the hotel has to become operational by November, 2005 and therefore grant of any relief sought for by the petitioner would result in breach of terms of the said contract which would not be in the interest of either the 1st respondent company or its shareholders. However with a view to ensure that the interest of the 1st respondent company are protected, status quo in regard to the shares in the 10th and 11th respondents may be directed as also the 11th respondent be restrained from alienating the hotel property.
5. Shri Manmohan Singh appearing for the 11th respondent submitted: Since the petitioner and the supporting 2nd respondent hold the entire 100% shares in the company, they cannot allege oppression in the affairs of the company and whatever action they need to take, they could do so by exercise of their majority shareholding, in the domestic forum. In other words, the maintainability of the petition itself is a big question and has to be argued. However, at this stage, in the interest of all concerned, the construction of the hotel project should be allowed to be proceeded with to keep up November, 2005 deadline. The promoters of the 11th respondent have already tied up loans to the extent of Rs. 5 crores for the hotel giving their personal guarantee and any relief sought for by the petitioner, if granted, would jeopardize the entire hotel project. The completion of the hotel project in time would also benefit the 1st respondent in case at the end of the day this Board directs that the hotel project should go to the 1st respondent company. Since Nordic is already in litigation with the 1st respondent company, stalling of the hotel project would escalate the disputes. However, to protect the interest of the 1st respondent and the shareholders, the interim reliefs suggested by Shri Choudhary may be granted.
6. Shri Mukul Rohtagi, Sr. Advocate appearing for the 2nd respondent submitted in rejoinder: Even though, the matter was adjourned at the request of the counsel for the contesting respondents, no reply has been filed and none of the arguments of the counsel for the contesting respondents is based on any pleading. The entire case of the petitioner is based on undisputed agreements filed along with the petition from which it is evident that the 3rd respondent has attempted to play a fraud on the company and its shareholders. When the petitioner’s claim is that the hotel project should have come to the company, 11th respondent cannot be allowed to proceed with the project in as much as it would ultimately affect the interest of the company if the 11th respondent creates unnecessary liabilities on the project. Therefore, grant of mere restraint orders as suggested by Shri Choudhary cannot protect the interest of the company and the shareholders and as such the prayers sought for by the petitioner should be granted.
7. I have considered the matter carefully. At this interim stage and in the absence of any affidavit in reply filed by the contesting respondents, I have to only examine whether the petitioner has established a prima facie case for grant of interim reliefs and that the balance of convenience is in his favour. Whether the 3rd respondent is the face of the company and as such he can do whatever he wants to do is an issue to be decided in the final order. Further I note that the other two directors of the “original team” are not supporting the 3rd respondent. One aspect that is clearly evident from the agreements is that the 3rd respondent has acted in his capacity as a director of the company and that TUI Nordic has entrusted the hotel project to the 10th respondent only on the basis of the representation made by the 3rd respondent that the 10th respondent is either a subsidiary or a division of the 1st respondent company. It is apparent from Clause 11 of the addendum dated 14th January, 2005. This clause reads “The first party has entered into the agency agreement with the second party and has also advanced a sum of Rs. 2.85 crores to the third party which is a subsidiary of the second party solely on account of the fact that for the last several years, the second party has been exclusive to the first party and have never entered into any agency agreement with any other, party or company in the markets of the first party”. It is on record that the 10th respondent which is named as the third party in the said agreement is not a subsidiary of the first respondent company as the former has been incorporated by the 3rd respondent along with his wife. This company has in turn given the money to the 11th respondent incorporated by the employees of the 1st respondent company. From the above paragraph in the agreement, it appears to me prima facie that this project was envisaged to be executed by the 1st respondent. Even though, it was argued that the objects of the 1st respondent company do not envisage hotel business and as such is not a corporate opportunity for the 1st respondent company, the very fact that the 3rd respondent has entered into this agreement would indicate that the 1st respondent company could have either added the hotel business to its objects or it could have incorporated a subsidiary for this purpose as has been done by the 3rd respondent prior to the date of the agreements. Even though, Shri Choudhary contended that the 11th respondent was meant to be a subsidiary of the 1st respondent company and only paper work remained to be completed to make the 11th respondent a subsidiary of the 1st respondent, yet, the stand of Shri Manmohan Singh, counsel for the 11th respondent appears to be contradictory. Both of them, while suggesting certain interim reliefs, appeared to be in the impression that protection should be restricted to the amount of Rs. 2.85 crores. When the petitioner alleges highjacking of a corporate opportunity, it does not restrict only to the amount of Rs. 2.85 crores but the hotel project as a whole. The decision of this Board in Samrat Shipping case (supra) appears to be applicable. But at the same time, I do not approve, especially in the absence of any prayer in the petition that the 11th respondent should be restrained from proceeding with the hotel project, as such an order would not be in the interest of anyone, leave alone, creating unnecessary further legal proceedings. The counsel for the contesting respondents have not argued as to how the grant of interim reliefs sought for by the petitioner would prejudicially affect either the contesting respondents or the hotel project. Since from the agreements, I prima facie find that a possible corporate opportunity has been taken away from the 1st respondent company by the 10th respondent and the 11th respondent, to protect its interest, the 1st respondent company should have a say in the affairs of the 10th and 11th respondents and accordingly I direct that the petitioner shall nominate 3 directors on the Board of 10th and 11th respondents and that status quo in the shareholding of the 10th and 11th respondents should be maintained as of date and that the bank accounts of the 10th and 11th respondents shall be operated jointly by one of the existing directors and one of the directors nominated by the petitioner. All decisions regarding further construction of the hotel project and financing thereof shall be taken only in Board Meetings. One of the terms of the agreement is that if the 3rd respondent ceases to be a. director of the 1st respondent company, all the benefits arising out of the agreement would vest in him. I am of the prima facie view that no fiduciary can have such a clause incorporated in an agreement entered into on behalf of a company and as such I find merit in the prayer of the petitioner that the 3rd respondent should be restrained from resigning as a director of the 1st respondent company and accordingly grant the said prayer. The earlier interim order will stand vacated only after the petitioner nominates 3 directors on the Board of 10th and 11th respondents and authority to operate the bank accounts jointly as stipulated in this order is filed with the banks. The earlier order does not apply to the bank accounts of the 1st respondent company.
8. The respondents will file their replies to the petition by 10.7.2005 and rejoinder, if any, to be filed by 31.7.2005. The petition will be heard on 9.8.2005 at 2.30pm. In the meanwhile the parties may, as discussed among themselves earlier on 12.4.2005, try to resolve the disputes amicably.