Kirloskar brothers spar over non-compete agreement, family settlement deed

Sanjay Kirloskar moves Supreme Court to enforce family settlement

One of India’s oldest business families is witnessing yet another sibling rivalry with Sanjay Kirloskar, promoter of Kirloskar Brothers, moving the Supreme Court to enforce a family settlement signed in 2009.

While the Supreme Court has adjourned the hearing to July 24, 64-year old Sanjay Kirloskar, who is in an ownership dispute with his brothers -- Atul and Rahul – wants to move the Pune civil court for any dispute resolution instead of arbitration. At stake is a combined business empire valued at Rs 16,000 crore by market capitalisation. Of this, Sanjay Kirloskar-owned Kirloskar Brothers' market cap is Rs 3,800 crore, which has grown 88 per cent since 2017 when the brothers started the ongoing litigation (see chart).

As of now, Atul Kirloskar, 65, runs KOEL and Kirloskar Ferrous Industries Ltd, while Rahul, 58, is managing Kirloskar Pneumatic Co Ltd. Their cousin brother, Vikram Kirloskar, 62, manages Toyota Kirloskar Motors Ltd. The group was founded by their great grandfather, Laxman Kirloskar in 1910 and most of the listed companies are now doing well financially.

KBL reported sales of Rs 1,800 crore and a profit of Rs 93.2 crore in FY21. Kirloskar Oil Engines, chaired by Atul, reported sales of Rs 2,700 crore and a profit of Rs 170 crore and Kirloskar Ferrous reported sales of Rs 2,038 crore and a profit of Rs 302 crore in the same period. Kirloskar Pneumatic, chaired by Rahul,  reported sales of Rs 823 crore and a profit of Rs 64 crore.  

The three brothers are among the fourth generation of the Kirloskar family who fought many battles with each other in the past.

"The good news is that all companies are doing well as demand for their products is rising. Both Rahul and Atul are now looking to diversify into other businesses and this dispute is dragging them down," said a Mumbai-based lawyer. Their mother is siding with the Rahul and Atul faction thus giving them an edge, he said.

Legal Tangle  

The dispute between the siblings ignited after Rahul and Atul-led Kirloskar Oil acquired La Gajjar Machineries in June 2017 which competes with pumps made by Kirloskar Brothers Ltd.  SAccording to Sanjay, the companies run by his siblings cannot compete with KBL, in line with a family settlement signed in 2009. Sanjay wants the dispute to be tried in a Pune civil court, but the Bombay High Court sent the entire dispute to arbitration according to the family settlement agreement of 2009.

In his submissions to the Bombay High Court, Sanjay said while he had complied with all the obligations of the family settlement, he was shocked to learn that the other family members ventured into a business which was competing and hence acted in breach of the non-compete agreement signed among the family members. The family settlement prohibits any party or any Kirloskar Group company under their control from competing with one another.

On June 21, 2017, Sanjay said he learnt from media statements that Kirloskar Oil had acquired a 76% stake in La Gajjar Machineries -- which was manufacturing and selling electric submersible pumps in direct competition with his own business. The continued sale of such submersible pumps by La Gajjar was in contravention of the family settlement.  Since the family members had agreed not to enter competing businesses as a matter of policy and tradition which has been formally recorded in the settlement, the other family members engaged in mala fide transactions to undermine the family settlement and had committed gross and fundamental violations of the settlement by systematically attempting to erode its basic tenets, Sanjay informed the court.

In its submissions, the Rahul and Atul faction argued that the original agreement was in possession of late Gautam Kulkarni and his family which was produced in the court and therefore the matter may be referred to arbitration. They further said that mere filing of the suit cannot frustrate the arbitration clause and therefore the suit is required to be referred to arbitration.

In its order pronounced on June 21, the Bombay High Court observed that the Supreme Court has already held that the judicial authority is bound to refer the matter to arbitration once the existence of a valid arbitration clause is established. The High Court further said the finding of the Civil Judge, Pune, that the arbitration clause had expired along with the family settlement is erroneous.

The court said as long as signatory entities to the agreement are operational, the family settlement would continue to govern the relationship between parties.

“In our view, in the facts at hand, the appellants (Rahul and Atul) have clearly established that a valid arbitration agreement exists. On the other hand, it is not possible to hold at this stage that the arbitration clause in the family settlement is invalid," the Bombay High Court said and referred the disputes to arbitration. The matter is now pending in the SC.