TMI Blog2001 (12) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... June 27, 2001, without obtaining the approval of the shareholders of defendant No. 1-company under section 293(1)(a) of the Companies Act, 1956, and from giving effect to the resolution dated July 25, 2001, passed by the board of directors pursuant to the said agreement and further from in any manner interfering with the exercise of voting rights by the plaintiff of its preference shares. 2. On the request of learned counsel for the parties, considering the facts and circumstances of the case, we have taken up for decision the notice of motion in the suit for grant of interim injunction instead of only considering the question of grant of ad interim injunction. In other to appreciate the rival contentions, the facts in brief be may stated as follows. 3. The plaintiff is a body corporate incorporated under the laws of Mauritius and is a wholly owned subsidiary of C.D.C. Group plea a company incorporated under the laws of England and Wales. The plaintiff and defendant Nos. 9 to 12 are foreign investors who own approximately 40 per cent of the equity in defendant No. 1 BPLCOM. The plaintiff, in addition, holds 14,870,000 non-convertible preference shares in defendant No. 1. Defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Tata-AT T (BTAL) hereinafter referred to as Bluetooth . On June 7, 2001, the board of directors of defendant No. 1 met at Mumbai. All the above options were discussed and all material parameters and information relating to Bluetooth transaction including valuation were placed before the board. The C.F.O. informed the board that best effort negotiation will be carried out by the company to conclude a binding MoU including a commitment to bid together for the fourth licence, the last date for the bidding being June 29, 2001. The board unanimously ap- proved the company proceeding with finalising one of the consolidation transactions expeditiously. 6. On June 27, 2001, the impugned agreement was signed by the four parties which are the four groups, viz., defendant No. 1, BPLCOM, Birla Group, Tata Group AT T Group. In substance the agreement arrived at between the four groups is that the cellular business of defendant No. 1 conducted through its subsidiaries, i.e., defendant Nos. 16 and 17 except Maharashtra business would ultimately be merged with the cellular business of operating subsidiaries of BTAL and towards this end, the shareholding of defendant No. 1 in defendant Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution. Again a meeting of the board of directors was convened on September 6, 2001. The meeting was, however, postponed just a couple of days prior to the meeting by Mr. B.K. Syngal, a nominee director of the Indian promoters by his e-mail dated September 4, 2001. 9. On September 12, 2001, the plaintiff filed the present suit, being Suit No. 3222 of 2001, seeking a declaration that the agreement dated June 27, 2001, without the approval and sanction by the shareholders of the company under section 293(1)(a) of the Companies Act, is null and void. A declaration is also sought that the resolution of the board of directors in the meeting dated July 25, 2001, is null and void. The plaintiff has also prayed for a permanent injunction restraining defendant Nos. 1 to 8 and defendant Nos. 13 to 17 from giving effect to the agreement dated June 27, 2001, and the resolution of the board of directors dated July 25, 2001. A further declaration is sought that the plaintiff is entitled to the exercise of all rights on the preference shares held by it under section 87(2)(b) of the Companies Act and a prayer is also made for permanent injunction restraining defendant Nos. 1 to 8 and defend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the others; (iv) No fixed rules or notion ought to be had in the matter of grant of injunction but on the facts and circumstances of each case-the relief being kept flexible; (v) The issue is to be looked from the point of view as to whether on refusal of the injunction of the plaintiff would suffer irreparable loss and injury keeping in view the strength of the parties case; (vi) Balance of convenience or inconvenience ought to be considered as an important requirement even if there is a serious question or prima facie in support of the grant; (vii) Whether the grant or refusal of injunction will adversely affect the interest of general public which can or cannot be compensated otherwise. (p. 3111) 13. Bearing in mind the above principles we proceed to deal with the submissions advances by the rival parties. Mr. Chagla made submissions on behalf of the plaintiff and learned counsel appearing for defendant Nos. 9 to 12 adopted his submissions. 14. Mr. Chidambaram made submissions on behalf of defendant No. 1 which were adopted by learned counsel appearing for defendant Nos. 2 to 8 and defendant Nos. 13 to 17. Regarding ground No. (i) : 15. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the e-mail copy sent to the foreign investors on June 28, 2001, is at variance with the signed agreement in material respects. According to him, these facts are sufficient to demonstrate the mala fides of the Indian shareholders. Further, according to Mr. Chagla, even in the board of directors, meeting, sufficient opportunity was not given to the nominee directors of the foreign investors and this is obvious from the fact that the copy of the resolution was supplied to the nominee directors only four hours before the meeting. He submitted that the fact that all powers for due execution of the agreement were delegated to a committee of two Indian directors and the company secretary contrary to article 70 of the articles of association is also indicative of the intention of the Indian promoters to prevent the plaintiff s participation in the proposed transaction. He submitted that even thereafter there was an attempt to exclude the foreign investors from the Bluetooth merger which is evident from the fact that a duly convened meeting of the board of directors on September 7, 2001, for discussing these very issues was unilaterally postponed by one of the nominee directors of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Supreme Court considered the earlier decisions on this aspect and laid down the following propositions : (1) Where the statute gives a finality to the orders of the special Tribunals, the civil courts jurisdiction must be held to be excluded if there is adequate remedy to do what the civil courts would normally do in a suit. Such provision, however, does not exclude those cases where the provisions of the particular Act have not been complied with or the statutory Tribunal has not acted in conformity with the fundamental principles of judicial procedure. (2) Where there is an express bar of the jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the civil court. Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s therein are not intended to exclude all other remedies. The suits by minority shareholders against oppression and mismanagement, have been time-honoured exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 and in the absence of word expressly or impliedly barring them it cannot be said that sections 397, 398 and 408 of the Companies Act exclude jurisdiction of the ordinary courts. 21. Section 10 of the Companies Act prescribes that the court having jurisdiction under the Act shall be the High Court having jurisdiction with respect to a company, except where it is specifically conferred on the district court by the Central Government. The section also authorised the Central Government to invest jurisdiction in the district courts to deal with some of the provisions in the Companies Act. Section 2(11) defines court as meaning the Court having jurisdiction under section 10 as regards all civil matters. In Avanthi Explosive (P.) Ltd. v. Principal Subordinate Judge [1987] 62 Comp. Cas. 301 (AP) M. Jagannathrao J. (as he then was) held that section 10 only proceeds to enumerate or specify the court having jurisdiction under the Act, wherever such jurisdiction is conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been invested with exclusive jurisdiction, the jurisdiction of the civil court is impliedly barred. We have already held above the jurisdiction of the court under section 155, to the extent it is exclusive, the jurisdiction of civil court is impliedly barred. For what is not covered as aforesaid the civil court would have jurisdiction. . . . (p. 328) 23. In Ammonia Supplies Corpn. (P.) Ltd. s case (supra), the court was not concerned with the interpretation of sections 397 and 398, which after their amendment vested in the Company Law Board. The decision of the Delhi High Court in Vijay M. Shah s case (supra), relied upon by Mr. Chidambaram does not deal with the question of ouster of civil court s jurisdiction. In that case the petitioner had filed company petition under section 81 and section 10 of the Companies Act read with rule 11B and rule 17 of the Companies (Court) Rules, 1959. The learned Judge held that as the petition alleged fraud and oppression by management resulting in deprival of opportunity for the petitioner to subscribe to rights shares issued by the company under section 81, the matter would fall under sections 397 and 398 coming within the juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the sequence of events is eloquent. The record shows that there was unanimity that injection of fresh equity in the company was not possible and, therefore, the best option was to have negotiations with other parties for consolidation. Accordingly, negotiations were opened with Singtel, Hutchison and BTAL (Bluetooth). A number of e-mails were exchanged between the parties in respect of various options adverted to earlier. Committee was constituted with equal representatives of the Indian shareholders and foreign shareholders to consider and evaluate proposals for merger and to submit its recommendation. Foreign investors were kept appraised of the position by circulating status notes in respect of each of the three options. In the meeting of the board of directors held on June 7, 2001, all the options were discussed and all material parameters and information relating to Bluetooth transaction including valuation were placed before the board. The board unanimously decided to conclude a binding MoU including commitment to bid together for the fourth licence. A faint attempt appears to have been made at a later stage when dispute started between the parties to challenge the authe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d BTAL made a joint bid and succeeded in getting the fourth cellular licence for Delhi as envisaged by the agreement. Every step taken towards the Bluetooth transaction indicates that the transaction was effected with the knowledge and concurrence of the foreign investors and there was no real opposition to the transaction and the grievance of the plaintiff that foreign investors were denied information or were kept in dark in only an afterthought. 28. Now, coming to the alleged differences in the e-mailed copy of the agreement sent to the foreign directors and signed agreement, it appears that it is stated in the e-mailed agreement that: Additional equity contribution means any contribution of enquiry or advances against equity made after the date of this agreement and prior to application by a party to any of the party s representative s business to be combined under NewCo. Shareholders/operations agreement will contain provisions such that all right issues by NewCo after application will be made at a fair market value? Whereas in the signed copy it is stated that: Additional equity contribution means any contribution of equity or advances of equity made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why this contention of the petitioners must fail. It is now settled law that the person against whom mala fides are alleged must be made a party to the proceedings. The allegation that the policy was amended with a view of benefit respondent Nos. 4 and 5 would amount to the petitioners contending that the board of directors of the bank sought to favour respondent Nos. 4 and 5 and, therefore, agreed to the proposal put before it. Neither the chairman nor the directors, who were present in the said meeting, have been impleaded as respondents. This being so the petitioners cannot be allowed to raise the allegations of mala fides, which allegations, in fact, are without merit. (page 166) 31. Since the directors in the impugned meeting have not been impleaded as defendants, the plaintiff cannot ask the court to give a finding on the alleged mala fides without an opportunity to the directors to rebut the allegation. 32. Mr. Chidambaram urged that directors have a duty to the company which must override any allegiance to the shareholders that nominated them. He submitted that the nominee directors are required to place interest of the company above the interest of the shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court in Secretary, Madras Gymkhana Club Employees Union v. Management of the Gymkhana Club AIR 1968 SC 554, Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp. Cas. 325/AIR 1970 SC 564 and Carew Co. Ltd. v. Union of India, AIR 1975 SC 2260/[1976] 46 Comp. Cas. 121 , where the word undertaking appearing in diverse statutes has been construed to mean any business or any work or project undertaken by the company. He also relied on the decision of the Mysore High Court in International Cotton Corporation (P.) Ltd. v. Bank of Maharashtra [1970] 40 Comp. Cas. 1154 , where the Division Bench of the Mysore High Court held that the word undertaking means any business or any work or project which one engages in or undertakes as an enterprise analogous to business of trade and that business or undertaking of a company must be distinguished from the properties belonging to the company. A reference was also made to the decision of the learned Single Judge of this court (Dhanuka J.) in P.S. Offshore Inter Land Services (P.) Ltd. v. Bombay Offshore Suppliers Services Ltd. [1992] 75 Comp. Cas. 583. In particular, our attention was drawn to the following obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d subsidiary. 35. Mr. Chagla pointed out that all the decisions as to the working of the operating subsidiaries are taken by the parent company, the report as to the working of the subsidiaries are presented to the parent company and remuneration to the Chief Executive Officer and managing director of defendant No. 1 is for the work done by them in the business of defendant No. 1 through its subsidiary. According to Mr. Chagla, in determining what constitutes an undertaking of the company, the court will have due regard to the economic realities. He submitted that where there is a holding company and business is conducted through subsidiary, the court will consider whether the business conducted by subsidiary is, in effect, the business of holding company and that for this purpose court would be entitled to pierce the corporate veil, particularly so, in the context of section 293(1)(a), object of which is to safeguard the rights and interests of the sharehodlers. He placed heavy reliance on the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp. Cas. 1 (HL), DHN Food Distributors Ltd. v. London Borough of Tower Hamlets [1976] 3 All ER 462 (CA), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y show the legislative intent that whenever an undertaking is owned by the subsidiary, the section contemplates that a resolution shall be passed in the general meeting of the subsidiary company. The Legislature in enacting section 293 has taken note of the situation where there would be a holding company and also subsidiary company. It is obvious from the language of the section that company which owns the undertaking has to pass the resolution in general meeting. It is not in dispute that defendant Nos. 16 and 17 are the legal owners of the cellular telephone business. Even if business is equated with an undertaking, in the present case there is no transfer of the undertaking inasmuch as the business continues to belong to the subsidiary, i.e., defendant Nos. 16 and 17. If we accept Mr. Chagla s argument that cellular telephone business should be regarded as owned by the holding company, it would lead to an anomalous position. If defendant No. 1 is the owner, then the question may arise as to what is the status of defendant Nos. 16 and 17. If both are considered to be the owners, then whether such a resolution is required to be passed by the general body of both the companies, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the members within the meaning of section 210 of the Companies Act, 1948, since it was not that the company which had acted oppressively but a subsidiary which it had formed. This argument was rejected since the court found that every step taken by the subsidiary was determined by the policy of the parent and the section warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view. 40. In DHN Food Distributors Ltd. s case (supra) which was relied by learned counsel, DHN Food Distiributors had two wholly owned subsid- iaries and in one of them the landed property of the group was vested, while D.H.N. carried on the business of the group, occupying the property as a licensee. According to the decision of the Lands Tribunal on the compulsory purchase of the land, negligible compensation only was payable since D.H.N. had been deprived merely of a revocable licence and the subsidiary had no business to lose. The court of Appeal reversed that decision on three grounds, the one relevant here being expressed thus by Lord Denning M.R. : This group is virtually the same as a partnership in which all three companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to us, however, that, as mentioned, the concept of lifting the corporate veil is a changing concept and is of expanding horizons. We think that the appellant was in error in not treating Renusagar s power plant as the power plant of Hindalco and not treating it as its own source of energy. The respondent is liable to duty on the same and on that footing alone; this is evident in view of the principles enunciated and the doctrine now established by way of decision of this court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 /AIR 1986 SC 1370, that, in the facts of this case, sections 3(1)(c) and 4(1)(c) of the Act are to be interpreted accordingly. The person generating and consuming energy were the same and the corporate veil should be lifted. In the facts of this case, Hindalco and Renusagar were inextricably linked up together. Renusagar had, in reality, no separate and independent existence apart from and independent of Hindalco. (p. 159) 43. In Fatima Tile Work s case (supra) the learned Single Judge of the Madras High Court held that since the relationship between the holding company and its subsidiary necessarily implies exercise of great ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest effect of holding which may be affecting, etc. (p. 628) In the light of the view taken by the Supreme Court in the above case, and on a proper reading of section 293(1)(a) we do not find anything in the language thereof which would compel us to invoke the doctrine of lifting the corporate veil. In the facts of the case there is no reason whatsoever to apply the said principle. 45. In Free Wheel (India) Ltd. v. Dr. Veda Mitra [1969] 39 Comp. Cas./AIR 1969 Delhi 258 , the Delhi High Court in a case of holding company having 52 per cent of the shares of the subsidiary declined to apply the doctrine of piercing the veil. The court observed : . . .There are, however, limitations to rending the veil, and the courts will not do so except for specific purposes and when compelled by the clear words of the statute. . .It is unnecessary to elaborate on this aspect any more, as here the parent company holds only a nominal majority in the share capital of the subsidiary, which holding is 52 per cent. With the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iny cannot stand. In the instant case both defendant Nos. 16 and 17 would continue to operate until France Telecom and Media One consent to the rolling up. In defendant No. 16 France Telecom owns 26 per cent share whereas in defendant No. 17 Media One owns 41 per cent of the shares and both France Telecom and Media One are yet to take a decision. Mr. Chidambaram pointed out that as a result of the swapping of the shares, defendant No. 1 would be holding 33 per cent shares in the new company and would continue to operate the business of cellular telephone as a part of the new company. As long as a purchaser is not found for the Maharashtra business, defendant No. 17 will continue in business and its business will be intact. Even if France Telecom and Media One agree to the rolling up into the new company and Maharashtra business is sold, voluntary winding up of defendant No. 1 is not possible without the concurrence of foreign shareholders who own 40 per cent equity in defendant No. 1 and without their consent there will not be any merger with the new company. 48. In view of the foregoing discussion, we have no hesitation in holding that section 293(1)(a) has no application to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the company has power to sell, exchange, mortgage, etc. subject to the shareholders approval under section 293 wherever it is applicable. The words subject to approval of the shareholders under section 293 of the Companies Act , obviously mean whenever such permission is required by terms of section 293. If argument of Mr. Chagla is accepted the words under section 293 would practically render superfluous and meaningless. It would also mean that the approval of the shareholders would be required even in the case of disposal of movable properties such as cars, furniture, stationery, etc. Moreover, if the same analogy is applied to object clause B-36, it would mean that the board of directors may lease the whole of the undertaking without resolution under section 293(1)(a) as Object B-36 does not require approval under section 293. Furthermore, Object B-29 gives power to buy and sell shares and it does not refer to section 293. Then a question will naturally arise whether the case falls under B-29 or B-37. The argument of Mr. Chagla, if accepted, would thus led to absurd results and, therefore, it is not possible to agree with Mr. Chagla that the impugned action is ultra vires t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap. 52. The effect of the above as far as the facts before us are concerned is that since the preference shares are not convertible the same will fall outside the permissible foreign equity cap. Again by virtue of the licence conditions there shall be a cap of 49 per cent of foreign equity and the management control of the first defendant company has to remain with the Indian shareholders. 53. According to Mr. Chidambaram, the conditions contained in the special permission of the Reserve Bank of India will prevail over the provisions of the Companies Act in view of section 29(1) of the FERA which contains a non obstante clause. He pointed out that FERA has been replaced by Foreign Exchange Management Act, 1999 ( FEMA ) and by virtue of section 49 of the FEMA, the special permission is saved and now deemed to have been granted under the corresponding provision of section 6 of the FEMA read with regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statute book. The effect of section 6 certainly is not to repeal any one of those laws or abrogate them. Its objects is simply to bypass them where they are inconsistent with the provisions of the Essential Supplies (Temporary Powers) Act, 1946, or the orders made thereunder. In other words, the orders made under section 3 would be operative in regard to the essential commodity covered by the Textile Control Order wherever there is repugnancy in this order with the existing laws and to that extent the existing laws with regard to those commodities will not operate. By-passing a certain law does not necessarily amount to repeal or abrogation of that law. That law remains unrepealed but during the continuance of the order made under section 3 it does not operate in that field for the time being. The ambit of its operation is thus limited without there being any repeal of any one of its provisions. Conceding, however, for the sake of argument that to the extent of a repugnancy between an order made under section 3 and the provisions of an existing law, to the extent of the repugnancy the existing law stands repealed by implication it seems to us that the repeal is not by any act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement control vests in the board of directors and never with the shareholders of the company. He referred to the decision of the Calcutta High Court in Murarka Paint Varnish Works (P.) Ltd. v. Mohanlal Murarka [1961] 31 Comp. Cas. 301 wherein it was observed: The directors and the shareholders in general meeting are the primary organs of the company between whom the company s powers are divided. The general meeting retains ultimate control, but only through its powers to amend the articles, to take away powers from the directors and to remove the directors and to substitute others to the taste of the shareholders. Until one or other of the aforesaid steps be taken, the directors, under the articles, according to the contention of the plaintiff, can disregard the wishes of the members and that the general meeting cannot restrain the directors from conducting actions in the name of the company. (p. 309) He also referred to the decisions of the Supreme Court in Escorts Ltd. s case (supra) wherein the Supreme Court has observed on page 1421 as under (page 632 of 59 Comp. Cas.): ...the only effective way the members in general meeting can exercise their control o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India would arise only when the plaintiff actually exercises voting rights and its rights cannot be pre-empted prematurely merely on the basis of the apprehension that it would result in violation of the conditions laid down by the Reserve Bank of India. We cannot accept the submission of Mr. Chagla for the simple reason that granting such voting rights would necessarily have the effect of breach of the condition, viz., cap of 49 per cent equity and will result in virtually transferring the management to the non-Indian shareholders. Moreover, if the relief claimed by the plaintiff is granted, it would virtually amount to passing a decree at the interim stage. Therefore, the prayer of the plaintiff for permitting it to exercise voting rights in respect of the preference share cannot be accepted. 59. Even the balance of convenience, in our view, lies in favour of withholding an injunction rather than granting it. It is common ground that the Bluetooth is in the interest of the company and granting of injunction might hinder completion of the transaction and entail serious penalties up to ₹ 100 crores. The Indian shareholders would be directly affected by any such penaltie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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