Breakdown Of Trust: NCLT Mumbai Orders Buyout In Family Dispute Over Stake In R.K. Paper, Jai Kaushal Industries

The National Company Law Tribunal (NCLT) at Mumbai has ordered a buyout in a family-run company dispute, holding that a breakdown of trust in a quasi-partnership justified an exit instead of winding up.

A bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar, in its order dated April 7, observed, “There is a breakdown of trust and confidence amongst Petitioner group on one side and the Surendra Group, Jatindra Group and Sushil Group on the other side,” while directing an exit mechanism for the petitioners.

The dispute arose from petitions filed by Sunil Kapur along with his family members and HUF, forming the petitioner group, against the Surendra Kapur group, Jatindra Kapur group and Sushil Kapur group, who were arrayed as respondents, in relation to R.K. Paper Industries Pvt Ltd and Jai Kaushal Industries Pvt. Ltd.

The companies were promoted by their parents and have been held almost equally by five family groups since a 1996 arrangement, namely the Sunil Kapur group, Surendra Kapur group, Jatindra Kapur group, Sushil Kapur group and Ravindra Kapur group.

The petitioners alleged exclusion from management, denial of dividends, diversion of business, and increase in remuneration to controlling members despite falling revenues.

The respondents denied the allegations. They argued that the petitioners were not part of management and had themselves engaged in competing business activities. They also pointed to failed settlement attempts and opposed any disruption of control, while expressing willingness to buy out the petitioners at a valuation discussed between the parties.

The tribunal held that the companies had the characteristics of quasi partnerships, with equal shareholding and mutual confidence forming the basis of their structure. It noted that there was no functional deadlock but found that relations had broken down.

Declining to wind up the companies, the tribunal observed, “We note that the Surendra and Jatindra have consistently maintained that the modernization or expansion or change in the line was not possible due to a continuous rift in the family, however, it does not follow from that such modernization or expansion or change is not feasible in case rift in the family is addressed and sorted out. Accordingly, we do not find it just and equitable to windup the affairs of the both the Companies”

Taking note of failed settlement efforts since 2007 and competing offers exchanged in recent years, the tribunal directed the respondent groups to purchase the petitioners' shareholding. It fixed the valuation of R.K. Paper Industries at Rs 24.42 crore, valuing the petitioners' stake at Rs 4.81 crore, and accepted a valuation of Rs15.24 crore for Jai Kaushal Industries, with payment to be completed within 60 days through a structured mechanism.

It directed, “Respondent Nos. 2 to 10, jointly or severally as they mutually decide, are hereby directed to purchase the entire shareholding of the Petitioners in R.K. Paper Industries Private Limited constituting 19.73% for a sum of Rs.4.81 crores. This amount shall further be increased by a sum equivalent to 19.73% of the amounts drawn as remuneration from the year 2010-11 till FY 2022-23 by Surendra and Jatindra in excess of annual remuneration drawn by each of them in FY 2009-10. In view of this price adjustment, Surendra and Jatindra shall not be liable to refund the remuneration as directed vide para no. 13.”

The tribunal also clarified that other family groups may exit on the same terms, stating, “Needless to say, Sushil Group and Ravindra Group shall be at their discretion to exit from the Companies. However, if they communicate their desire to exit from the Companies within 15 (fifteen) days from the date of this order, they shall be offered the same terms and condition at which the Petitioners group is exiting in terms of this order.”