ORDER S.P. Balasubramanian, Chairman
1. In this order I am considering C.A. 494/2007 filed under Section 8 of the Arbitration and Conciliation Act 1996 (the Act)( originally filed under Section 45 of the Act and later amended to Section 8) seeking for referring the parties to the proceeding to Arbitration in terms of arbitration agreements. This application has been filed by the 2nd respondent in CP 121/2007 which has been filed under Sections 397/398 of the Act in respect of M/s Enercon (India) Limited. In addition, I am also considering the interim prayers sought by the petitioner (depending on the decision in the application).
2. The facts of the case are: The respondents 2 to 8, known as Mehra group, incorporated the 1st respondent company (the company) on 10.5.1993, in the name of Wind World Power Limited. On 12.1.1994. They entered into a shareholders' agreement (SHA) with the petitioner, a German company, pursuant to which the name of the company was changed to Enercon (India) Limited with the main object to produce Wind Turbine Generators in collaboration with the petitioner. On the same day, i.e., 12.1.1994, pursuant to the SHA, the company and the petitioner also entered into a Technical Know how Agreement.(TKA) by which the petitioner had agreed to supply technical know how, information, assistance, supply of equipment and material etc to the company. The SHA is a comprehensive one covering capital structure, transfer and sale of shares, board meetings, directorships etc. It contains an arbitration clause also (Article XVI). Most of the terms, particularly relating to transfer of shares and directorship were thereafter incorporated into the Articles of the company. As per the terms of the SHA, Articles provide for equal representation of both the petitioner and Mehra group on the board of the company. Similarly, in line with the SHA, the Articles also provide that the MD of the company would be a nominee of Mehra group and the Chairman that of the petitioner. TKA also contains an arbitration clause (Clause 19). In terms of the SHA, the petitioner subscribed to 51% shares in the company while Mehra group subscribed to 49%. Thereafter, by another shareholders' agreement dated 19.6.1998 both the petitioner and Mehra group subscribed to further shares by which the petitioner's holding became 56% while that of the Mehra group to 44%. Presently, the Board consists of two nominees from each. While the nominees of Mehra group viz, respondent 2 is the MD and respondent 3 is the whole time director, the nominees of the petitioner viz. respondent No. 36 is the Chairman and respondent No. 37 is a director. The effective management of the company has been with that of the Mehra group right from the beginning. The company has 16 subsidiaries and 11 associated companies and they all have been arrayed as respondents 9 to 35.
3. The present petition filed by the petitioner was mentioned on 30.8.2007 with a notice to the respondents. In the petition, the petitioner has alleged that the 2nd and 3rd respondents, being in exclusive management of the company, are guilty of systematic concealment of the state of affairs of the company, financial mismanagement, like indiscriminate borrowings, indiscriminate investments in subsidiaries and associate companies, manipulation of accounts etc, non supply of required information by the petitioner, non payment of royalty to the petitioner, non inclusion of certain items in the balance sheet and most importantly that they are attempting to sell their group shares to an outsider in violation of the provisions of preemption clause in the Articles. With these allegations, the petitioner has sought for removal of the 2nd and 3rd respondents as MD and WTD respectively not only of the company but also of the subsidiary and associate companies, for amending Article 171 to delete the provision for representation on the board to Mehra group, for directions to Mehra group to transfer their 44% shares to the petitioner, directions for investigation into the affairs of the company etc. While mentioning the petition, Shri Sarkar, Senior Advocate for the petitioner also sought for certain interim reliefs which was opposed by Shri Dave, Senior Advocate for Mehra group on the ground that the petition was not maintainable and that pending disposal of the instant application, no interim reliefs could be considered. Accordingly, I heard both on the application and the interim reliefs.
4. Moving CA 484/2007, Shri Dave, Sr. Advocate for Mehra group submitted: The disputes raised in the petition have arisen squarely out of the terms SHA and the TKA both of which contain arbitration clauses. The main prayer of the petitioner in the petition is removal of the 2nd and 3 rd respondents as MD and whole time director, respectively as also directions to Mehra group to sell their shares to the petitioner. In terms of Article 2(5) of the SHA, Mehra group is entitled to appoint one of its nominee as the MD with considerable powers of management and the right to remove its nominee is vested only with Mehra group in terms of Article 2.2 of SHA. Similarly, Article 5 of the SHA deals with the provision relating to transfer of shares and preemptive rights. This being the case, the main matters raised in the petition are matters covered in the SHA and therefore in terms of Section 8 of the Arbitration & Conciliation Act of 1996, the parties should be referred to arbitration. Similarly, regarding non payment of royalty which is one of the other allegations, TKA under which this claim has arisen, also provides for arbitration. The petitioner has alleged that is that royalty has not been paid on the basis of the alleged intellectual property licence agreement (IPLA) dated 29th September, 2006. The consistence stand of Mehra group is that no such agreement was ever entered into and it was only a draft agreement to be finalized later on and no such finality was given to the draft. Therefore, if the petitioner has any grievance relating to payment royalty, it has to seek remedy in an appropriate court of law and not through a petition under Sections 397/398. Since the Articles have been amended in consonance with the terms of the SUA., the petitioner cannot seek amendment to the Articles in a petition under Sections 397/398 and has to go before the arbitrator.
5. Shri Sarkar, Senior Advocate for the petitioner submitted: In terms of Section 8, to refer the parties to arbitration, this Board should be satisfied that the subject matter of the petition is the subject matter of the arbitration agreement and that there is a commonality of parties. In the present case, the SHA is between the petitioner and the Mehra group and the company is not a party. Similarly, TKA is an agreement between the petitioner and the company and Mehra group is not a party. This TKA has already expired by efflux of time and is no longer effective. That is why IPLA was entered into. As a matter of fact, when the petitioner stopped supply of equipments etc., the Mehra group filed a suit seeking for a direction to the petitioner to supply equipment in terms of SHA/TKA instead of submitting the same to arbitration, thus, very clearly indicating that Mehra group has given a go bye to arbitration. This would indicate that they do not rely on the arbitration clauses. Further, respondents 9 to 35, against which reliefs have been sought, are not parties to either of the two agreements. Further in the petition, the petitioner alleged mismanagement and there is no provision regarding the same in either of the two agreements. Even in respect of removal of the 2nd and 3rd respondents and also relating to transfer of shares, the petitioner has relied on the Articles and not on the terms of the SHA. Therefore, in view of the fact that there is no commonality of parties, and that many of the allegations particularly in relation to financial mismanagement are not matters arising out of the arbitration agreements and that bifurcation between the Board and the Arbitration Tribunal is not permissible, the application should be dismissed.
6. The learned Counsel relied on the following cases to support his contention.
(1) Griesheim GmbH v. Goyal MG Gases Pvt. Ltd. and Ors. 123 CC 280 CLB: When a petition contains allegations concerning matters covered in the arbitration agreement and also other matters not covered by the said agreement, the matters cannot be bifurcated and those in the agreement referred to arbitration.
(2) Sukanaya Holdings Pvt. Ltd. v. Jayesh H. Pandeya : The words "a matter" as in Section 8 of the Act indicate that the entire subject matter of the suit should be subject to arbitration agreement. Where a suit is commenced "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8.
(3) Shri Gautam Kapoor v. Limrose Engineering Manu/CL/0123/2004 CLB: The test to determine as to whether a matter in a petition under Sections 397/398 is to be relegated to arbitration is to examine as to whether the allegations of oppression & mismanagement contained therein can be adjudicated without reference to the terms of arbitration agreement. If it can be, then, the question of referring the matter to arbitration does not arise even if the agreement covers the same matter. Further, there should be commonalities of parties.
(4) Premier Automobiles Ltd. v. Fiat India Ltd. 124 CC 40 CLB: The petition was dismissed on the following grounds -the company in the affairs of which the petition had been filed was not a party to the arbitration agreement and it could not be added as a party even if it was willing. There are certain allegations on matters which were not covered under the arbitration agreement which can be examined only by this board; bifurcation of matters between this board and arbitration tribunal was not permissible.
7. I have considered the arguments on this application carefully. To determine whether the parties should be referred to arbitration, it is necessary to examine the relevant provisions of the Arbitration & Conciliation Act 1996.
Section 2(1)(h) "Party" means a party to the arbitration agreement.
Section 7: "Arbitration Agreement-(1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in - (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
Section 8: Power to refer parties to arbitration where there is an arbitration agreement (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
(2) The application referred to in Sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under Sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.
8. It is evident from the provisions of Section 8 that if the subject matter brought before this Board is the subject matter of arbitration agreement, the Board is bound to refer the parties to arbitration. Therefore commonality of the subject matter is a prerequisite to invoke/apply Section 8. Likewise, a reading of Section 7(1) read with Section 2(1)(h) would indicate that the parties before the judicial proceedings should be parties to the arbitration agreement to refer the disputes between them arising out of the defined relationship. This would indicate that there should be a commonality of parties also. Section 7(3) mandates that an arbitration agreement has to be in writing or in terms of Section 7(4), it should satisfy one of the requirements as specified in Sub-sections (a) to (c). Thus, before referring parties to arbitration, this Board has to satisfy itself, that there is commonality of parties, subject matter and the requirements of Section 7(3) or 7(4) are met with.
9. Having dealt with the legal position, I shall deal with the factual aspects of this case. There are two agreements viz. SHA and TKA in which the parties thereto have agreed to refer the disputes to arbitration. The admitted fact is that the company is not a party to SHA and Mehra group is not a party to TKA. As a matter of fact, Shri Sarkar pointed out that the currency of TKA has expired by a flux of time and that is why IPLA relating to supply of technical know how was entered into in September 2006, the existence of which has also been challenged by Mehra group. On the basis of the reliefs sought, Mehra group is contending that the reliefs sought arise out of the SHA. It is on record that the terms relating to shareholding and directorship as in the SHA have been incorporated in the Articles in toto. In such a situation, in Goyal M Gases case relying on the decision of this Board in EIH Limited v. Mashobra Resort Ltd. 119 CC 993, this Board has held that once terms of SHA containing arbitration clause have been incorporated in the Articles of the company, then the terms of the Articles will prevail over the SHA. It also further held that once the terms of the shareholders' agreement have been incorporated in the Article with the omission of arbitration clause, that clause has no validity. In the present case, the petitioner has relied on the Article 58(a) of the Articles of Association of the company in regard to the allegation of depriving the petitioner of its pre-emption rights and likewise the petitioner has sought for amendment to the Articles regarding directorship. Both these matters can be decided independent of the terms of SHA. In Limrose case this Board has held that if the allegations could be examined without reference to the terms of the agreements containing arbitration clause, then the parties need not be referred to arbitration even if the subject mater is covered in the arbitration agreement. Even otherwise, as rightly pointed out by Shri Sarkar, allegation of financial management cannot be traced to any of the terms of SHA. Even otherwise, in view of the judgment of the Apex Court in Sukanya Holdings, there is no possibility of bifurcation of the subject matter between the CLB and the Arbitrator. Whether, there is a breach of right of pre-emption, whether the Mehra group is guilty of financial mismanagement meriting their removal as MD and WTD and whether Articles relating to directorship is to be amended etc. would all depend on the merits of the case and need not be gone into while dealing with the instant petition under Section 8 of the Act.
10. Considering the fact that the company is not a party to SHA and that some of the allegations cannot be traced to the terms of the SHA, even assuming that pre-emption rights and directorship are covered under the terms of SHA, the application is not maintainable and is accordingly dismissed.
11. Having dismissed the application under Section 8 of the Act, now I shall deal with the interim reliefs. At the time of mentioning the petition, giving an overvall view of the allegations contained in the petition, Shri Sarkar sought for appointment of a local commissioner to inspect and sign the books of accounts of the company for the year ending 31.3.2007 and also for the current year and take copies thereof, for maintenance of status quo in regard to the assets of the company as also of the subsidiaries and associate companies, for investigation into the affairs of the company/its subsidiaries and associate companies, for restraining Mehra group from dealing with their shares in any manner and to maintain status quo as on date and also for restraining respondents 1 to 35 from divulging or diverting the technical knowhow of the petitioner.
12. When the petition was mentioned and interim reliefs sought, Shri Dave, Sr. Advocate appearing for Mehra group opposed the grant of any interim relief. He produced a number of documents and argued: The question of grant of any interim relief does not arise as the petition itself deserves to be dismissed on various grounds. Firstly, the petitioner has failed to disclose 36 important documents which have a bearing on the allegations, in the sense, if the petitioner had disclosed these documents, there would not be any basis for the various allegations made in the petition. Secondly, this petition has been affirmed by an advocate of Germany who has nothing to do with the affairs of the company. The affidavit has not been affirmed in line with the requirements of Regulation 14(7) of CLB Regulations. He has affirmed this petition on the basis of authority an given by the petitioner company. In terms of Civil Procedure Code which is applicable to a proceeding under Section 397/396, only a director/secretary or an officer of the company can affirm an affidavit on behalf of the company and not an advocate who has no knowledge about the affairs of the company. On these grounds alone, the petition should be dismissed. Further, the petition has been filed with an ulterior and oblique motive to force Mehra group to transfer/sell their shares to the petitioner. It is on record that negotiations took place between the 2nd respondent and the petitioner for sale of 6% shares of Mehra group to the petitioner. By a letter dated 12.10.2006, respondent No. 36 being the Chairman of the petitioner, offered to buy 6% of the shares of Mehra group for Euros 40 million as a token of appreciation of all the work that has been done by the 2nd respondent. This offer was accepted by the 2nd respondent by a letter dated 10.10.2006. By a communication dated 19.10.2006, the petitioner confirmed that first installment of Euro 10 million towards the shares was being arranged and further amount of 30 million would be transferred to Escrow account. However, later on, by an SMS dated 1st November, 2006, the petitioner informed the 2nd respondent that it would pay 40 million for 12% shares and not for 6% shares. When the 2nd respondent declined to accede to this offer, the petitioner started acting against the interest of the company. In February, 2007, it stopped all supplies to the company due to which the working of the company had come to a standstill. When the 2nd respondent expressed his protest, while resuming the supplies in March, the petitioner also hiked the prices by 300%. From July onwards, the petitioner has again stopped further supplies and now the company is not in a position to execute any of the orders. The petitioner also withdrew its guarantee given to the ABM Amro Bank which has asked the company to repay the loans. The company has to pay a sum of Rs 20 crores because of the action of the petitioner. The petitioner who has acted prejudicially against the interest of the company does not deserve any consideration.
13. The learned Counsel further submitted: The 2nd and 3rd respondents have been in active management of the company right from the beginning and as a matter of fact, nominees of the petitioner had not attended even a single board meeting and had entrusted the entire AA responsibility of running the company to 2nd and 3rd respondents. There has been no complaint of any nature against the respondents and even as late as in September, 2006, the petitioner had agreed that the 2nd respondent would continue to be the MD. In addition, even while conveying its decision to purchase 6% shares of Mehra group, in is letter dated 2.10.2006, the respondent No. 36 had appreciated all the work that the 2nd respondent has done for the company. Having done so, it is highly inequitable on the part of the petitioner to seek tor removal of the 2nd and 3rd respondents by making false allegations against them. These false allegations are designed to only put pressure on Mehra group to come to a negotiation table to purchase the shares held by them at a low price.
14. He further submitted: The allegation of the petitioner that the 2nd and 3rd respondents have kept the petitioner in dark about the affairs of the company is wholly incorrect and malafide. At the instance of the petitioner, the company has installed a system developed by the petitioner, known as 'SAP'. The company has implemented Enterprice Resource Planning (ERP) through SAP. All the business transactions are recorded through SAP since 2002-2003. Through this system, every transaction of whatever may be the nature -being money transaction, purchase, inventory, production, employees, taxes, advances, investments etc. are all captured through SAP and the petitioner, as a supervisory administrative controller, has full access to all this information on line. Thus, to say that the petitioner has been kept in dark about the affairs of the company is absolutely baseless. Nowhere in the petition, the existence of SAP has been disclosed by the petitioner. In spite of the on line facility, when the petitioner sought for certain documents by its letter dated 16.2.2007, all the information was furnished by a letter dated 23.2.2007. As a matter of fact, the petitioner caused a due diligence being carried out by legal and accounts experts during the period March to May, 2007 and the assistance given by the company in carrying out the due diligence was appreciated by the petitioner by a letter dated 25.4.2007. However, till now the petitioner has not given a copy of the due diligence report to Mehra group. Even though, un-audited financial statements up to 31.12.2006 have been given to the petitioner, the company is unable to complete the audit as the petitioner has instructed the auditors by an e-mail dated 10.4.2007 to postpone the commencement of audit. Thus, it is the petitioner who is responsible for non fmalization of the accounts for the year 2006-2007.
15. The learned Counsel further submitted: In the middle of 2006, the parties had decided to modify the existing arrangements between the parties. The petitioner desired to purchase 6% shares held by Mehra group and negotiations took place by which the petitioner agreed to purchase 6% shares of Mehra group at Rs,40 million Euros. Later, the petitioner demanded 12% shares for 40 million Euros which Mehra group declined to accede. By this, the Mehra group has complied with the pre-emptive position in the Articles, according to which, if the shares offered by a shareholder to another shareholder is not accepted, then, the shares could be sold to an outsider. Since the petitioner has rejected the offer, Mehra group has negotiated with IL&FS to sell 6% shares for Rs. 220 crores (40 million Euros) and accordingly informed the petitioner by a letter dated 10.8.2007. This being the case, the question of any restraint on the sale of the shares held by Mehra group to an outsider does not arise as Mehra group has strictly complied with the provisions of Article 58(a)(1) of the AOA relating to preemption rights. In Sangramsinh P. Gaekwad v. Shanta Devi P. Gaekwad it has been held that " it is now well settled that only one pre-emptive offer is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled to be given further pre-emptive rights in respect of those unaccepted shares. Even such a right can be waived or modified (Para 172).
16. The petitioner has alleged that royalty in terms of IPLA has not been paid. It is to be noted that during the middle of 2006 discussions took place between the petitioner and Mehra group relating to various issues. On 29.9.2006, certain Agreed Principles were arrived at between the company and Mehra group and 4 drafts were prepared for final execution. They were IPLA, Successive Technology Transfer Agreement, Name use License Agreement and Amendment to Existing Shareholding agreement. These drafts were never finally executed as legal documents. However, contending that IPLA was not a draft but a final "agreement executed on 29.9.2006, the petitioner started demanding payment of royalty in terms of this IPLA at 5%. It is to be noted that one of the agreed principles was that the 2nd respondent would continue as the MD. The IPLA is only a draft agreement would be evident from the fact by a communication dated 4.10.2006, the petitioner has stressed the need to adopt the agreement at the earliest. By a communication dated 24.11.2006, the petitioner expressed its regret for delay in sending the final agreements as certain discrepancies compared to the agreed principles had to be resolved. By a communication dated 5.12.2006, the 2nd respondent desired to know when final IPLA and the other agreements would be ready for fmalization. By a communication dated 10.1.2007, the petitioner informed Mehra group that revised drafts of all the agreements would be sent to the 2nd respondent. These successive correspondences would clearly show that final IPLA agreement had not been signed by the parties and therefore the contention of the petitioner that IPLA was finalized and signed on 29.9.2006 is completely wrong. Only by a communication dated 29.1.2007, the petitioner forwarded to the 2nd respondent the final drafts of the other three agreements. Immediately on receipt of the same by a letter dated 31.1.2007, the 2nd respondent brought to the notice of the petitioner that the stand of the petitioner that IPLA was "a done deal" was wrong and it had never been finalized. By a communication dated 18.10.2006, the petitioner informed the petitioner that IPLA had been signed on 29.9.2006 which statement is absolutely wrong. Again by a communication dated 8.1.2007, the petitioner reiterated that IPLA was signed on 29.9,2007. Therefore, the petitioner cannot allege that royalty in terms of IPLA has not been paid.
17. The company is completely dependent on the petitioner not only for technology but also for various components. In the meeting held on 4.2.2006, the production target for 2006-2007 was agreed to and the petitioner had agreed to supply all the necessary material/components to meet with the production. By a communication dated 26.8.2006, the petitioner guaranteed continuous material supply. By a communication dated 10.6.2006, the petitioner had complemented its Indian colleagues for the petitioner getting a rating of "Capital A+". However, all of a sudden, in Feb. 2007, the petitioner stopped the supply of material/components and while receiving the supply in March, it hiked the price by 300%. Thereafter, it had stopped further supplies from July, 2007. Even though IPLA had not been finalized, yet, the company remitted a sum of 986399 Euros towards royalty as per the certificate given by the auditor of the company. Thus an overall assessment of the facts would reveal that no case of oppression and mismanagement has been established and therefore the petition should be dismissed. Any interim relief at this state would be completely against the interests of the company and Mehra group.
18. The learned Counsel relied on the following cases:
Sangramsinh P. Gaekwad v. Shanta Devi P. Gaekwad It has to be borne in mind that when a complaint is made as regards violation of contractual right, a shareholder may initiate a proceeding in civil court but a proceeding under Sections 397/398 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view the wide and far reaching power of the court in relation to the affairs of the company. In this situation, it is necessary that alleged illegality in the conduct of majority shareholders is pleaded and proved with sufficient clarity and precision. If the pleadings and/or evidence adduced in the proceedings remain unsatisfactory to arrive at a definite conclusion of oppression or mismanagement, the petition must be rejected. (Para 185);
The court in an application under Section 397/398 may also look into the conduct of the parties and may refuse to grant the relief where the petitioner does not come to the court with clean hands especially when the petitioner has consented to and even benefited from the company being run in a way which would normally be regarded as an unfairly prejudicial to their interest or they might have shown no interest in pursuing their legitimate interest in being involved in the company. (para 196) It is now well settled that a case for grant of relief must be made out in the petition itself and the defects contained therein cannot be cured by other evidence oral or documentary.(para 200) It is the interest of the company that has to be considered while granting relief and not individual disputes between the petitioner and the respondent, (para 202) In terms of Rule 6 of the Companies(Court) Rules, the provisions of the Code of Civil Procedure will be applicable in a proceeding under the Companies Act. (208) Begam Sabiba Sultan v. Nawab Mohd. Mansoor Ali Khan : The plaint should be read in a meaningful manner to find out the real intention behind the two; Before a court can be held to have jurisdiction to decide a particular matter, it must not only have jurisdiction to try the suit abroad but also have the authority to pass orders sought for. It is not sufficient that it has some jurisdiction in relation to subject matter of the suit. Its jurisdiction must include the power to hear and decide the questions at issue, the authority to hear and decide the particular controversy that has arisen between the parties.
Rajabhai Abdul Rehman v. Vasudev Dadabhai Modi : A party who approaches the court must come with clean hands. If there appear on his part any attempt to over reach or mislead the court by false and untrue statement by withholding true information which would have bearing on the question of exercise of the jurisdiction, the court would be justified in refusing to exercise the discretion or if the discretion has been exercised in revoking the leave to appeal granted even at the time of hearing of the appeal.
S.P. Chengalvaraya Naidu v. Jagananath : A litigant who approaches the court is bound to produce all the documents executed by him which are relevant to the litigation. If he withholds a vital document in order to gain advantage on the other side, then, he would be guilty of playing fraud on the court as well as on the opposite party.
19. Shri Sarkar submitted: The petitioner is the 4th largest producer of wind turbine and it uses the scientific innovations, discoveries and inventions of the Respondent 36, who is a pioneer in the field of wind energy and who has numerous patents and intellectual properties to his credit. The petitioner is supplying to the company the technology and know how developed by the respondent No 36 and without the same the company cannot function. The main grievance of the petitioner is that the 2nd respondent in whom the petitioner has reposed full trust and confidence and has entrusted the full management of the company without interference, has acted in a manner prejudicial to the interest of the petitioner and the company. He has incorporated a number of associate companies in which his group holds majority shares. He is guilty of window dressing of accounts of the company. This fact came to the knowledge of the petitioner only in the later part of 2006, when the petitioner sought for certain adjustments in the accounts, the 2nd respondent raised objections.
20. In so far as IPLA is concerned, discussions on the same were going on right from March, 2006 as the earlier TKA had expired by efflux of time. The draft was prepared on 17.9.2006 and was signed on 29.9.2006 and at every page of the agreement, the 2nd respondent has initialed and at the last page, he has signed in full. As a matter of fact, on 13th September, 2006 i.e. the next day of signing the IPLA i.e. on 30.9.2006, he sent a letter to respondent No. 36 stating "I signed the agreement even without reading it only because I trust you". This would indicate that what he signed was not a draft agreement but the final agreement. Having, done so, now he is disputing that agreement had not been signed. Further, again by a communication dated 10.1.2007 the 2nd respondent was informed that revised drafts of Outstanding contracts would be sent to him for verification. Likewise, when drafts of the other agreements were sent to him on 29.1.2007, IPLA was not shown as a pending agreement. In his communication dated 24.11.2006, even though in the caption the 2nd respondent has mentioned the final IPLA, he has not indicated that the same was being sent along with the latter. The disputes relating to IPLA started only when the 2nd respondent questioned the existence of agreed IPLA in his communication dated 31.1.2007. By a letter dated 18.10.2006, the 2nd respondent was informed that having signed IPLA on 29.9.2006, the petitioner was confident of closing the agreement in relation to the other 3 agreements. The 2nd respondent did not raise any objection to this assertion as he was fully aware that IPLA had been signed. Because the 2nd respondent raised objection on the existence of IPLA, the petitioner stopped the supply. It is not correct to say that the stoppage was with a view to arm twist the Mehra group to part with their shares. Even today, the petitioner is prepared to resume the supply provided the company/Mehra group adhere to the terms of IPLA. Therefore, the petitioner has not acted in any way prejudicial to the interest of the company but only with a view to protect the interest of the petitioner itself.
21. In regard to transfer of shares, Shri Sarkar submitted: The proposal for transfer of 6% shares was discussed between respondent No. 36 and the 2nd respondent in Feb. 2006 and they had agreed that 6% shares would be purchased by the petitioner for 40 million Euros. The petitioner had proposed payment of consideration in installments. However, the 2nd respondent demanded full payment that too with the stipulation that the transaction should be completed by 27th October, 2006 (By its letter dated 10.10.2006). However, the petitioner once again by a letter dated 19.10.2006 offered to purchase the shares in installments. Since the petitioner's offer of purchase of 6% shares was on deferred payment while the 2nd respondent demanded immediate payment, the petitioner demanded 12% shares for 40 million Euros. Since this was not acceptable to the 2nd respondent, the entire deal fell through. Thereafter, the parties had mutually agreed that the Mehra group will go out of the company. Accordingly, by a letter dated 5.3.2007, the respondent No. 36 wrote to the appellant "As a result, we agreed upon that termination of our partnership in the company by mutual consent will be the best solution for both parties. The termination should be executed in a fair reasonable manner. A detailed proposal on the two options we discussed will be prepared by us as soon as possible". In the same letter, he also informed that a due diligence would be carried out by a team of lawyers and Chartered Accountants. While the due diligence was on, certain information was sought for and certain adjustments were proposed in the accounts, which the 2nd respondent did not agree/consider. Having agreed to sell his group shares to the petitioner when the 2nd respondent sent a letter to the petitioner that he had proposed to sell the shares to IFLS, the same gave a cause of action to the petitioner to file this petition. (By a letter dated 10.8.2007). In terms of the Articles, if the seller and buyer do not agree on a particular price, then, the fair value of the shares is to be determined by chartered accountants acceptable to both. There is nothing in the Articles stipulating that the price quoted by the seller should be accepted by the purchaser. By informing the petitioner that if it does not accept the price of 40 million Euro for 6% shares, the petitioner would sell the shares to IFLS is completely against the provisions of the Articles and as such it is a gross act of oppression. It is seen from the letter of IL&FS that the 2nd respondent has agreed to sell balance 38% also to IL&FS at a later date. In terms of the Articles, once Mehra group sells/transfers 6% shares, its group cannot have any representation on the board and as such cannot appoint its nominee as the MD. Even now, the petitioner is prepared to purchase the entire shares of Mehra group in accordance with the Articles i.e. on a fair price to be determined by an independent chartered accountant appointed by the CLB.
22. The learned Counsel further submitted: The 2nd respondent has not finalized the account for 2006-2007 only with a view to hide the real financial position of the company from the petitioner. By a communication dated 28.6.2007, the petitioner was informed that the accounts had not been finalized and it would take 3 to 4 week for offering the accounts to the auditors. Again by a communication dated 16.7.2007, only un-audited preliminary figures as on 31st December. 2006 were sent to the petitioner. Thus, the contention of Mehra group that accounts have been given to the petitioner is not correct. As far as ABN Ambro Bank is concerned, since Mehra group had withdrawn personal guarantees given in respect of 8 other accounts, the petitioner also decided to withdraw its personal guarantees. It never asked the bank to recall the loan given to the company. Therefore the allegation that by withdrawal of guarantee by the petitioner, the bank was recalling the loan is not correct. Likewise, the allegation that the petitioner has hiked the prices by 300% is also baseless. The price of only one material was changed, that too from the earlier price of 8137.51 to 8293.02. This increase hardly works out to 3%. Therefore the allegation that the petitioner has hiked the prices is not correct. Even though Mehra group has contented that through SAP, the petitioner is petitioner is fully aware of the entire affairs of the company on line, the grievance of the petitioner is that the company has not furnished information to complete the Balance Score Card, that the petitioner has introduced in July 2006 for the whole Enercon group, inspite of repeated reminders.
23. The learned Counsel submitted that in view of the stoppage of supplies on account the company not paying the royalty, the petitioner has stopped supplies. Not only the company did not pay the royalty, but sent a debit note on 31.3.2007 for a sum of 9.6 million Euros as damages for non supply of components/ materials. However, the petitioner is interested in the welfare of the company and therefore it is willing to resume supplies, if one its nominees is appointed as the Joint Managing director of the company and both the sides are directed to maintain status quo with regard to their shareholdings till the petition is disposed of. Since Mehra Group had earlier agreed to part ways with its shares in favour of the petitioner, the share price as on 30.6.2007 be determined by an independent valuer appointed by this Board and in the meanwhile, for Board meetings, 7 days notice should be given and no circular resolution should be passed and no general meeting should be held without the leave of this Board.
24. I have considered the arguments on interim reliefs. The learned Counsel for the respondents has questioned the maintainability on various grounds more particularly on the ground that the matters complained of are contractual disputes; that with a view to gain advantage, the petitioner has suppressed vital documents; that the petition has been filed with an ulterior motive and that the affidavit affirmed by a lawyer in Germany is not valid. In so far as the matter being contractual disputes and therefore should be agitated elsewhere is concerned, in the in the order on the application under Section 8 of the Act, I have already held that the disputes raised in the petition can be adjudicated by this Board. Therefore the application of the decision of Supreme Court in 2007 4 SCC 343 does not arise. In so far as dismissal of the petition on the ground of suppression of material documents is concerned the learned Counsel relied on the two judgments of the Supreme Court viz. AIR 1964 SC 345 and 1984 1 SCC In the first case, the appellant had obtained special leave to appeal without disclosing all material facts. In the second case, a decree was obtained without disclosing relevant and material documents. Thus in both the cases certain reliefs had been obtained by suppression material facts. In the present case, no relief has been granted as yet and whether the documents which are alleged to have not been disclosed are material documents is a matter yet to be determined. Once the other side has produced all the documents, then, the question of suppression of material documents to apply the decision of the Supreme Court does not arise. The other contention of the respondents is that this petition has been filed with an ulterior motive of putting pressure on the respondents to sell their shareste to the petitioner. Whether the petition is a motivated one or not can be determined only after pleadings are complete and at the final stage and not at the threshold. In so far as the argument that only a director or an officer of a company could initiate proceeding in the name of the company is concerned, reliance has been placed on para 208 of Gaekwad Judgment. Code of Civil Procedure is not applicable to the proceedings before the CLB and the proceeding is governed by CLB Regulations. As long as the person filing the petition on behalf of a company has the authority of the company, he can file the petition. In the present case, the shareholders of the petitioner, by a resolution, have authoised the deponent of the affidavit to file the petition. The learned Counsel also argued that a lawyer in Germany cannot have any personal knowledge of the affairs of the company and therefore the requirements of Regulation 14(7) have not been complied with. From the affidavit, I find that the deponent has only relied on documents and as available with the petitioner and submissions made there in are based on advice. He has not averred that any of the averments is based on personal knowledge. Therefore, I do not find any impediment in considering the interim relief sought.
25. From the arguments of the counsel as elaborated above, it is evident that there are a number of contested issues, which require a detailed examination after the pleadings are completed. It is settled principle that at the interim stage, the court is not justified in embarking on anything resembling a trial in order to evaluate the strength of either party's case. It is also a settled principle that where the factors appear to be evenly balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo. Even though, at the time of mentioning the petition, various interim reliefs were sought, at the time of conclusion of the hearing, as I have already noted, Shri Sarkar sought for various other interim reliefs in the nature of interim arrangement as indicated in paragraph 23 ante. Shri Dave argued that to grant interim reliefs, the petitioner should establish balance of convenience, irreparable injury etc. I do agree. The normal principles to be applied for grant of interim relief are that there is a serious dispute in question to be tried, that the court's interference is necessary to protect the parties from injury, that a prima facie case has been established and that the balance of convenience is in favour of the petitioner. Keeping these principles in mind, noting that the issues and counter issues raised by the parties would require detailed examination after completion of pleadings, I shall examine whether a case has been made out for granting interim reliefs taking into Consideration, that, unlike a suit, where the interest of the parties have to be taken care of, in a petition under Sections 397/398 of the Act, the interest of the company is also vitally important.
26. There are two main interim reliefs that have been sought. The first relates to maintenance of status quo with regard to the shares. This relief is mainly on the ground that Mehra Group is proposing to sell the shares to ILFS. Shri Dave, relying on para 172 in Gaekwad case, submitted that the petitioner is entitled to exercise the preemption rights only once and since it had failed to accept the offer made in October 2006, the offer has lapsed and Mehra Group is free to sell their shares to an outsider. Presently, I am not examining this aspect in view of a fresh offer made by the 2nd respondent by a letter dated 10.8.2007 to the petitioner in terms of Article 58(a), wherein he has given the petitioner 60 days time to consider the offer. Even before the expiry of the last date, this petition has been filed alleging that the company is not furnishing necessary information for the petitioner to make a counter offer. Therefore, if the shares are sold by Mehra Group to ILFS during the pendency of the proceeding challenging such a sale, irreparable damage would be caused to the petitioner and therefore, the balance of convenience is definitely in its favour. Accordingly, I direct both the sides to maintain status quo with regard to their shareholdings, till the petition is disposed of.
27. The stoppage of supplies by the petitioner, without looking into whether the said action is justified or not, has affected the company enormously. In the reply filed by respondent Nos. 2 to 8 to the interim reliefs, they have pointed out the effects of stoppage of supplies. I am reproducing their averments.
Para 30 - Respondent No. 1 is granted the benefit of effecting imports at a concessional customs duty by the Government of India. Such benefit is granted under the Export Promotion Capital Goods Scheme ("EPCG") which necessitates that export obligation be met by Respondent No. 1 within the given time frame. Presently, Respondent No. 1 is required to complete export obligation to the tune of nearly Euro 100 Million in less than 4 years. Non fulfillment of the said export obligations, due to lack of production ofWECs due to non availability of components from Petitioner would result into substantial financial levies being imposed by the Government of India on Respondent No. 1 and would also expose the Directors of Respondent No. 1 to criminal prosecution under the penal provisions of Foreign Trade (Development and Regulation) Act and the Custome Act 1962.It is submitted that concession on import duty is granted by the Government of India to units in the renewable energy sector. Non-supply of special components by Petitioner can result into lower production resulting in inability on part of Respondent No. 1 to submit the six monthly return of the "End Use Certificates" required to be filed with the Government of India. The failure on the part of Respondent No. 1 to file the aforesaid return can attract penalties of upto 500% of the duty concession apart from exposing all the Directors of Respondent No. 1 to criminal prosecution on account of such breach.
Para 31. It is submitted that Respondent No. 1 has grown to a size of more than 3,500 employees and maintained through its 12 years of existence, excellent industrial harmony, and has effectively ensured that not a single man-day has been lost due to any industrial dispute. The disruption of material supply and stoppage of production has led to undesirable consequences in terms of sending out wrong signals to the employees, which could have long term implications for Respondent No. 1. The answering Respondents submit that any discontinuance of its production and other activities due to non-supply of components by Petitioner can result in the unemployment of the personnel of Respondent No. 1. A closure of such nature has substantial risks attached to it. In this context it is pertinent to mention that Respondent No. 1 has engaged several third party contractors/vendors/producers of component such as civil contractors, crane contractors, electrical installation contractors who are relying on Respondent No. 1 for their business. The answering Respondents submit that such third party contractors and vendors would be in excess of about 10,000 in number.
Para 32. lit is submitted that the Respondent No. 1 company has huge orders on hand worth Rs. 4,000/- crores from major companies in India". Further, during the hearing the learned Counsel for Mehra Group pointed out that as of date this group is exposed to more than Rs 700 crores given as personal guarantees.
28. The above averments would indicate that the position of the company is precarious and there is urgent need that the supplies from the petitioner resume immediately, failing which not only the interests of the company but also of the shareholders would be prejudicially affected. Considering the nature of the business of the company, Public interest is also likely to be affected. It is on record that Mehra group itself, realizing the necessity that the supplies should be resumed urgently, have filed a suit seeking for directions to the petitioner to resume supplies. Therefore, when the petitioner, on its own, is willing to resume supplies, I do not find any justification in the opposition of Mehra Group on grant of the said relief. Perhaps, their objection is that the said offer has come with a rider that the nominee of the petitioner should be appointed as the Joint MD. In the present case, the petitioner has been given the right, in terms of Article 171(1), to appoint its nominee as the Joint MD, even though, it has not exercised the said right so far. When such an appointment would be in the interests of the company, I am inclined to grant the said prayer, taking into consideration that in terms of Section 403 of the Act, this Board has the power to regulate the conduct of the company during the pedency of the proceeding. However, with the view to protect the interests of Mehra Group also will be with checks and balances.
29. Accordingly, I authorize the petitioner to appoint one of its nominees as the Joint MD subject to:
1. The petitioner should first resume supply.
2. The appointment will be made in a Board meeting to be convened within a week of first shipment of the components/materials to the company.
3. The Joint MD will work together with the MDall major decisions will be taken jointly
4. He shall not gather materials/evidence/probe into the past affairs of the company.
5. Status quo with regard to all the issues pending in the proceeding should be maintained and no action in relation to the same shall be taken.
6. No changes shall be brought about in the managerial set up and their responsibilities.
30. Before parting with the order and without prejudice to the contentions/stand of the parties in the proceeding and in line with the desire that I had expressed during the hearing for amicable settlement of the disputes, which the parties also attempted but failed, I am giving the following suggestion for amicable settlement of the disputes:
1. Mehra group may consider selling its entire holding of 44% to the petitioner on a fair value.
2. If, it agrees so, an independent valuer will be appointed by this Board in consultation with both the sides to determine the fair value.
3. The fair value will be determined in line with the note prepared by M/s Deloitte as indicated in the Agreed Principles dated 29.9.2006.
4. Since the Balance sheet as on 31st March 2006 is the last available audited Balance sheet, and disputes have started relating the balance sheet as on 31st March 2007, fair value will be determined on the basis of the balance sheet as on 31st March 2006.
5. Both the sides will have the right to produce documents, advance arguments etc before the valuer.
6. On receipt of the valuation report, the parties will have the liberty to react on the same before this Board.
7. The valuation will be completed within 3 months.
8. The arrangement as at Para 29 ante will continue till the sale/purchase of shares is completd.
31. The parties will appear before me on 12.11.2007 at 2.30 PM to react to my suggestion, at which time, directions for either valuation or for completion of pleadings will be given. Both the sides may also keep a list of reputed valuers for deciding the name of the valuer if the suggestion for valuation as above, is acceptable to both the sides.