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Enercon Gmbh Versus Enercon (India) Ltd. And Ors.

2007 (10) TMI 609 - Company Law Board

Dated:- 29-10-2007 - 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 Ener .....

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ercon (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 meetin .....

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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, .....

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ts. 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 balanc .....

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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 .....

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ts 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. Sim .....

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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 .....

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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 agreem .....

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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 .....

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hri 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 .....

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d 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)(b) "Arbitration Agreement" means an agreement referred to in Section 7. Section 2(1)(h) "Party" means a party to the arbitration agreement. Section 7: "Arbitration Agreement-(1) In .....

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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 .....

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al 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 .....

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tisfy 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 t .....

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ng 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 i .....

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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 .....

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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 o .....

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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 pe .....

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oceeding 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 petition .....

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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 standstil .....

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o 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 .....

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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 E .....

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ffairs 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 carryi .....

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zation 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 g .....

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res 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 su .....

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ndment 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 petiti .....

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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 respond .....

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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 petiti .....

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o 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 Sec .....

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on 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 pursu .....

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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 .....

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f 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 p .....

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ction. 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 .....

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006 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 .....

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006, 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 .....

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ould 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 w .....

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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 s .....

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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 gr .....

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oner. 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 gua .....

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ease 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 C .....

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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 .....

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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 S .....

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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 fa .....

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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 base .....

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d 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 petit .....

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s 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 r .....

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etitioner 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 convenie .....

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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 .....

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omponents 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 tha .....

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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 th .....

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ate 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 direction .....

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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 Jo .....

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