Sparring Business Partners

But once there is a dispute in a closely-knit concern, its status becomes important. Then they realise that partnership and company are not interchangeable concepts. Between the last two weeks, the Supreme Court dealt with this hazy issue in Kilpest Ltd vs Shekhar Mehra.

The two partners started the profit-making company Kilpest Ltd and were its first directors. One was the managing director and the other the joint managing director. Later, the two fell out and the joint managing director stopped attending the meetings.

Meanwhile, the managing director increased his shareholding and later inducted another person as additional director. Besides, at an extraordinary general meeting of the company, the joint managing director was removed. This started litigation between the two original promoters. The latter wanted the concern to wind up, as it was registered as a company and not as a partnership. The high court rejected this plea. Thus the dispute landed in the Supreme Court.

One of the arguments put forward by one side was that since it was a closely-held concern, it should be treated as a quasi-partnership, not as a limited company. But the court rejected this argument. The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. Therefore, they cannot repudiate their status as a company.

There was a similar case in England (Ebrahimi vs Westbourne Galleries). But the Supreme Court observed that although the Companies Act was modelled on the English statute, the Indian law was developing on its own lines and making significant progress.

It was apposite, having regard to the background, conditions and circumstances of the present Indian society and the needs of and requirements of the country that a somewhat different treatment be adopted, the court said. The courts would have to adjust and adapt, limit or extend principles derived from English decisions, entitled as they were to great respect, suiting the conditions of Indian society and the country in general.

This judgment comes close on the heels of a judgment delivered last month by the Supreme Court, in which it held that family members could not be recognised as a separate class (Miheer Mafatlal vs Mafatlal Industries). Though family control of business houses is very common in India, this concept is also outside the scope of the Companies Act.

Both these judgments will benefit the general shareholders, as they are the persons who stand to lose the most, due to squabbles between the persons who manage the affairs. In small companies they are also the voiceless ones. Their interests have been advanced by the court.