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1994 Supreme(Del) 369
High Court Of Delhi
NESTLE S.A. - Appellant
Versus
I.D.KANSAL - Respondent
Company 87 of 1992
Decided On : 05/19/1994
J.LAL, K.P.S.Shankardas, P.CHIDAMBARAM, PALLAV Shroff, S.S.SHROFF
A company may be wound up on just and equitable grounds, including deadlock in management, lack of probity, and where the company is in substance an incorporated partnership with grounds for dissolution.
Headnote:
COMPANY WINDING UP - JUST AND EQUITABLE GROUNDS - DEADLOCK IN MANAGEMENT - LACK OF PROBITY - QUASI-PARTNERSHIP - DISSOLUTION PRINCIPLES - NESTLE INDIA LTD. V. I. D. KANSAL AND ORS.
Fact of the Case:
Nestle India Ltd. (petitioner) and I. D. Kansal (respondent) entered into a joint venture agreement to manufacture and sell processed foods under the Nestle brand. The agreement contemplated Nestle's control over production and management, with equal shareholding between the parties. However, disputes arose regarding management control, product diversification, and financial restructuring. Nestle sought to wind up the joint venture company, alleging a breakdown in the relationship and deadlock in management.
Finding of the Court:
The court found that a prima facie case existed for admitting the winding-up petition. It held that the company was in substance a quasi-partnership, given the equal shareholding and the parties' agreement to jointly manage the company. The court also found that there was a deadlock in management due to the complete breakdown of confidence between the parties, making it impossible to carry on the business effectively.
Issues: 1. Whether the company was in substance a quasi-partnership, allowing for the application of partnership dissolution principles. 2. Whether there was a deadlock in management, rendering it impossible to carry on the business effectively. 3. Whether there was a lack of probity in the management of the company, warranting winding up on just and equitable grounds.
Ratio Decidendi: 1. The court held that the company was in substance a quasi-partnership, considering the equal shareholding and the parties' agreement to jointly manage the company. It noted that the principles of partnership dissolution could be applied to the company, even though it was incorporated before Nestle's involvement. 2. The court found that there was a deadlock in management due to the complete breakdown of confidence between the parties. It observed that no decision could be taken by the Board of Management without the consent of one Director from each party, and that the Articles of Association, which required such consent, had been amended without the petitioner's agreement. 3. The court did not delve into the issue of lack of probity in management, as it found that the deadlock in management and the quasi-partnership nature of the company were sufficient grounds for admitting the winding-up petition.
Final Decision: The court admitted the winding-up petition, but withheld the publication of citations until the disputed questions were finally decided. It directed the parties to file evidence by way of affidavits within specified timeframes and listed the matter for directions and arguments.
( 1 ) I have heard arguments in order to decide whether thispetition seeking a winding up order against respondent No. 3 company shouldbe admitted or not.
( 2 ). Facts of the case, inbrief, are that respondent No. l, Sh. I. D,kansal, floatedrespondent No. 3 company which was incorporated on 19/02/1987 andcertificate of Commencement of its business was obtained on 12/03/1987. Theobjects of the company were manufacture, produce, refine, preserve, distributeand deal in import and export of all kinds of processed foods, etc. In early part of1988 respondent No. 1 approached M/s Food Specialities Limited (later onconverted as Nestle India Limited ) for setting up a joint venture. Nestle Indialimited is one of the major manufacturers, producers and sellers of food productsand it has the brand backing of Nestle SA, petitioner No. 1, which is amultinational company incorporated in Switzerland.
( 3 ) UNDER the then prevailing law in India, petitioner No. 1 could acquire only40% equity share holding and the management of the Nestle India Limited seeingthe possible viability of the project brought about the manufacturing license andtechnical assistance agreement between petitioner No. 1 and respondent No. 3. That agreement contemplated the provision of know-how and technical assistanceto be provided by petitioner No. 1 for commissioning the project and for efficientmanufacturing of high quality breakfast cereals. At that time Nestle India. Limitedmade it clear to respondent No. 1 that there would not be any equity participationon its behalf. Respondent No. 1 was, however, not agreeable and again the termswere negotiated between respondent No. 1 and Nestle India Limited andrespondent No. l wanted participation in equity share holding by Nestle Indialimited and assured that he would have no objection in manufacturing the finalproducts exclusively under the Nestle s brand name.
( 4 ). It is averred in the petition that petitioner No. 1 has been having jointventure collaboration agreements in different countries in which it normally holdsthe major part of the equity share capital and the ethos and principles behind thesame had been that wherever the petitioner company had entered into thecollaboration/joint venture which involves the usage of Nestle brand in thepromotion and sale of the final products, it ensures that it has an effective overallsuperintendence over the management and complete control on the manufacturing operation involving its technical impacts and sales policy of the companyinvolving use of its brand names.
( 5 ). During the discussions with respondent No. 1, it was agreed that petitionerno. 1 would have 40% share holding whereas respondent No. 1 would have 26to 40% share holding whereas remaining shares would be issued publicly and thetotal paid-up capital envisaged at that stage was Rs. 2. 5 crore and it was also agreedthat petitioner No. 1 would have full control over the production of the finalproducts and its sale and distribution for ensuring quality of its products. It wasalso agreed that each of the group would have three Directors, later on changed totwo Directors, to be nominated by either parties and no decision could be taken atthe Board Meeting without at least one of the nominated Directors of either partiesbeing present and consenting to pass a particular resolution.
( 6 ). A joint venture agreement was executed between the parties on 24/10/1988. Some of the important clauses of the joint venture agreement provided thatthe principal object of the company was to manufacture, pack and sell theproducts under trade-mark acceptable to Nestle and plant shall be installed andconstructed in accordance with the standards acceptable to Nestle and the equityshare holding of respondent No. 1 was never to exceed the percentage of equityshare of petitioner No. 1 unless otherwise argeed to in writing and it also providedthat parties are not entitled to sell or assign their shares without first offering t
