TMI Blog2007 (10) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 in Sukanya Holdings [ 2003 (4) TMI 435 - SUPREME COURT] , 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. 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. Grant of interim reliefs - maintenance of status quo with regard to the shares - stoppage of supplies - If the shares are sold by Mehra Group to ILFS during the pendency of the proceeding challenging such a sale, irreparable damage wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to both the sides. - S Balasubramanian,J. ORDER 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itration 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 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, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 2n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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-suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealizing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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