TMI Blog2007 (3) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... m undertaking any business similar to that of the joint venture during its currency. 2. So far as the basic facts are concerned, there is no material dispute and to the extent necessary, they are noticed hereinafter. The petitioner M/s Modi Rubber Ltd., (hereinafter referred to as 'MRL' for brevity) entered into a Memorandum of Understanding ('MOU') dated 1st July, 1988 with M/s Guardian International Corporation arrayed as respondent before this Court, (hereinafter referred to as 'Guardian'). 3. Guardian is stated to be a leader in manufacturing float glass and the agreement between the parties states that it has acquired unique and valuable engineering skills and expertise for designing, constructing and operating plants for the manufacture of float glass by the float process. The agreement between the parties also notices that the MRL is a renowned industrial establishment of India with extensive expertise in the manufacturing and marketing of high quality industrial products in India and other countries. 4. Besides the parties to the present petition, the agreement between the parties also involved M/s Gujarat Alkalies Chemicals Ltd., a Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in GGL would be held between the parties to this SHA as follows: (i) By Guardian International Corporation 40.00% (ii) By MRL 20.00% (iii) By Gujarat Alkalies and Chemicals Ltd. and its nominees 11.00% (iv) By the public 20.00% The amount of issued and the subscribed capital was agreed to be valued by mutual agreement between Guardian and MRL and it was agreed that if any additional shares were issued, GGL was first to offer such shares at the price at which the shares are to be offered to new share holders, to Guardian, MRL or the other share holders in proportion to the equity shares owned by each of them on the date of such offer. 9. So far as the agreement of the parties which was set out as Clause 7 in the MOU is concerned, the parties reiterated the prohibition therein contained and co opted the same as Clause 14 of the SHA whereby the parties covenanted as follows: Clause 14 - Additional Projects/Exclusivity During the term of this Shareholders Agreement, neither MRL nor Guardian International, nor any Affiliates or Associates of either one of them shall, without the consent of MRL and Guardian International, participate, negotiate or engage, or be financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... select one (1) arbitrator, Guardian International shall select one (1) arbitrator, and the two arbitrators so selected shall select the third arbitrator. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 15. It now becomes necessary to examine certain other aspects of the functioning of the joint venture placed before this Court by both sides. The admitted position is that no dividend was distributed to the share holders of shares in the joint venture GGL for 16 years since its incorporation. MRL has complained that dividend was declared for the first time in the last financial year which was also only to the extent of ₹ 2 per share. As a result of this policy, the position of the reserves and surplus considerably enhanced. The petitioner has placed reliance on a letter dated 19th November, 2003 written by Guardian to Mr. Vinay Kumar Modi as Chairman of the joint venture GGL adverting to restructuring alternatives. This communication refers to several alternatives and proposals which were discussed between the parties and refers to growth of the company in India to be financed by internal accruals and leveraging. 16. It has been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumptions above), can we do a return on capital' If so, what percentage or amount of the paid in capital would be returned' Would there be a withholding tax on this. This fax is evidence of the fact that so far as the reservation of amounts in the books of accounts of the joint venture GGL was concerned, the entries to this effect in the accounts had been reversed. Undoubtedly this communication also confirms availability of substantial reserves. 20. A further communication dated 12th August, 2005 was addressed by Guardian to Mr. V.K. Modi as Chairman of GGL pointing out that so far as its considerations with regard to the distribution of the dividends was concerned, they were based on the tax impact on its earnings of the dividends. In this communication, Guardian wrote thus: As you requested, I also wanted to let you know that due to the mechanics of U.S. Tax Law, Guardian has the ability until December of this year to receive its share of a GGL dividend in the range of $17 - $45 million and only be taxed $5 million on the first $17 million .Therefore, anything above $17 million is tax free. We understand from Mr. Surana that the legal limit for a total GGL div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding from a tax perspective, for both of us to receive dividends. 22. In this communication of 2nd February, 2006, a suggestion was made on behalf of the Guardian with regard to purchase of shares held by MRL in the joint venture as well. In this behalf, Guardian had written thus: ...Summarizing Guardian's perspective on various GGL restructuring issues, it has become increasingly clear that if and when shares change hands, they will do so at a premium price. As you know, during your visit, we were discussing the possibility of a GGL share price in the range of ₹ 60 to ₹ 65 per share. Our view is that this price is at, or even beyond the upper end of any reasonable discounted cash flow analysis, EBITDA multiple, or similar 'investment banker' formula beyond taking a multiple from the current overheated Mumbai stock exchange. If our restructuring conversation had continued into Tuesday, I would have proposed a Guardian/Modi relationship with some modifications to the elements that have been discussed over the last couple of years. If Guardian were to purchase shares at a price that reflects this premium level, we would prefer to own over 75% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able partner and its future is uncertain. (b) Modi Rubber's management and affairs are under the effective control and mandate of the BIFR, and the appointed Operating Agency, IDBI. (c) There are inter-se disputes between the promoters, which further exacerbates Modi Rubber's distressed condition. The Agreement was founded on the premise of two financially stable and reliable partners. This understanding stands completely eroded as a consequence of Modi Rubber being declared a sick company by the BIFR, thus striking at the very substratum of the Agreement. Therefore, the Agreement stands frustrated and is terminated effective immediately. Further, pursuant to the terms of the Articles of Association of GGL, we assume you will not transfer your shareholding in GGL without our prior consent. We will continue to comply fully with the Articles of Association and expect that you will do the same. 24. On the same date, Guardian addressed another letter dated 21st July, 2006 to MRL requesting MRL to provide written consent to Guardian for building and operating a wholly owned float glass manufacturing unit and fabrication plaint in India. It is imperative to also co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de of Gujarat. Modi Rubber understands that this business would be separate from the existing joint venture, Gujarat Guardian Ltd.('GGL'). Finally, Modi Rubber also understands that Guardian is seeking FIPB approval under Press Note 18 and Press Note 1 for this planned expansion. As such, Modi Rubber has no objection to Guardian proceeding, through one or more wholly owned subsidiaries in India, to build and operate float glass manufacturing and fabrication facilities such as those described above, and Modi Rubber gives its consent to Guardian to undertake such activities independently of Modi Rubber and GGL. 26. The petitioner points out that such consent was imperative under the SHA and that the very fact that Guardian has sought the consent under the SHA negates its contention that the SHA stood terminated. 27. Immediately thereafter on the 22nd of July, 2006, the respondent made an application to the Foreign Investment Promotion Board (FIPB for brevity) for approval to set up a wholly owned subsidiary in the glass manufacturing and glass coating sector. 28. In the meantime, the Board of Directors of MRL passed a resolution dated 12th August, 2006 deciding to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise. Guardian's action purporting to terminate the agreement, entirely ignores Indian law on the subject of 'frustration of contract' which governs the Shareholders Agreement. 29. In this communication, MRL also pointed out that despite continuous profitability of the joint venture during the last many years, no dividend had been declared by GGL to its shareholders since inception. Consequently, at the next meeting of the Board of Directors of GGL, it was stated that an interim/final dividend of at least 80% of the permissible distributable dividend be declared. 30. Guardian replied to this communication by a letter dated 25th September, 2006 baldly disagreeing to MRL's submissions and again stated thus: ...We have received your letter of August 21, 2006 on behalf of Modi Rubber Limited (MRL) in response to our letter of July 21, 2006 with regard to the termination of the Shareholders Agreement dated January 23, 1990 (the Agreement) between us. We respectfully disagree with your assertions in the letter that there is no valid basis for the termination of the Agreement. Given, inter alia , the uncertain future of MRL arising from its 'sickness' an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond phase, a glass coating operation. We are writing to respectfully request that GACL provide written consent for Guardian to build and operate a wholly owned float glass manufacturing and fabrication plant in India. It would be helpful to us if you written consent were to certain the language shown on the enclosed sheet. xxxx xxxx 33. Despite the stand taken by Guardian in its letter dated 21st July, 2006 purportedly terminating its SHA with MRL, on the 24th July, 2006, it also filed O.M.P. No. 337/2006 titled Guardian International Corporation v. Modi Rubber Ltd. before this Court seeking the following prayers: (a) to restrain the respondent from transferring its shareholding in Gujarat Guardian Limited without the prior consent of the petitioner and without giving a pre-emptive right to purchase the said shares to the petitioner. (b) pass such further or other orders as this Hon'ble Court may deem fit and proper in the circumstance of the case. 34. It has been pointed out on behalf of MRL that by way of this petition, Guardian was again seeking enforcement of its rights under the SHA. In answer to this submission Mr. Mukul Rohatagi, Senior Advocate has ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factum of the Respondent being a 'sick' company within the purview of BIFR. It further transpires that the inter se disputes between the promoters of the Respondent company are also fuelled by their interest and intention to participate in GGL. It is in fact the stand of the petitioner that given the circumstances under which the Shareholders Agreement stood frustrated, the very raison d'etre for the participation of the Respondent in GGL no longer stands. The petitioner is willing to buy the respondents shareholding in GGL and willing to pay a fair price for the same, and the petitioner believes that the respondent ought to transfer its shareholding in GGL in favor of the petitioner. These are, however, all disputed issues which perforce would need to be resolved as per the arbitration clause (Clause 26) in the Shareholders Agreement. It is, however, imperative that pending such imminent arbitration proceedings, urgent interim orders are passed by this Hon'ble Court. Hence this petition. xxxx xxxx xxxx 23. Therefore, in the interest of justice and in aid of the Arbitration Agreement in the Shareholders Agreement, the petitioner is seeking to restrain the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the respondent Guardian was treating the SHA dated 23rd January, 1990 as subsisting and the averments of Guardian in O.M.P. No. 337/2006 and as well as the relief sought therein bears out the fact that the SHA stood neither frustrated nor terminated and that Guardian was itself treating the same subsisting. 39. On the 22nd July, 2006, Guardian also filed a caveat petition under Section 148A of the Code of Civil Procedure, 1908 before this Court. 40. In O.M.P. No. 337/2006, the following order was recorded on 28th July, 2006: O.M.P. No. 337/2006 Notice. Mr. Arjun Pant, Advocate accepts notice for the respondent and prays for time to file reply. Let the reply be filed within six weeks. Rejoinder thereto, if any, be filed before the next date. The petitioner, inter alia, places reliance on the Article of Association of the petitioner company to point out that as per the Memorandum and Article of Association of the company, Clause 3 (b) governing the share capital clearly provided the pattern and shareholding of the company. This position is not disputed on behalf of the respondent. The petitioner has expressed apprehension that respondent would transfer its shareholdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of clause (a) to (d) above; and xxxx xxxx'. 44. Inasmuch as no interim relief was granted in this matter, the petition was put to final hearing. Long arguments have been addressed by both sides and voluminous submissions laid before this Court. During the course of the hearing, it appears that Guardian has on 16th October, 2006 filed a reference for arbitration before the London Court of International Arbitration. 45. MRL has submitted that, in its reply, it has opposed the reliefs prayed for by the respondent and has also made counter claims against the respondent company to the effect that the SHA including clause 14 continues to be valid and binding between the parties. 46. Mr. Arun Jaitley, learned senior counsel for the petitioner has contended that the purported termination of the agreement by the letter dated 21st July, 2006 by the respondent is ex facie illegal as well as unlawful and being contrary to the specific stipulations between the parties as contained in clause 16 of the SHA. The term of the SHA has been set out in the agreement and termination can be only in accordance with the specific stipulations therein. It is submitted that the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mains valid and binding. The respondent cannot terminate the agreement for any reason other than the stipulations contained in the agreement itself. Consequently, the unilateral termination by the respondent for reasons which are not stipulated in the agreement between the parties, is illegal and so long as the parties continue to maintain the shareholding in terms of the SHA, the agreement subsists. The respondent is consequently bound by the non compete clause. 51. It has further been contended that before this Court, the respondents have tried to place reliance on the tentative proposals placed by one of the directors of the petitioner before the BIFR giving different alternatives whereby MRL could liquidate its liabilities. Such proposal, it is explained, was not by or on behalf of the petitioner company. According to Mr. Jaitley, learned senior counsel, so far as the transfer of shareholding held by the parties to the SHA is concerned, clause 6 permits transfers to affiliates and associates provided that they are not competitors in the business. One of the alternative suggested by the Director related to a proposal to transfer shareholding in the joint venture. This prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. 55. Mr. Mukul Rohtagi, learned senior counsel for the respondent has pointed out that even the FIPB has required a guarantee that the health of the joint venture is not impacted in any manner by the proposed new subsidiary. Consequently, it is urged that instead of Guardian being like the 'big fish trying to eat a small fish', it is in fact, acting as the big brother protecting the smaller brother. 56. On the afore-noticed facts, it is vehemently submitted that the new project to be set up by Guardian is its wholly owned subsidiary. It is not a collaboration with any other Indian or foreign partner. Consequently there is no question of there being any competition with the joint venture or any outsider becoming privy to the business secrets of the joint venture. On these facts, Mr. Mukul Rohtagi, learned senior counsel has urged at great length that despite repeated promises that MRL would get out of its industrial sickness promptly and ensure finalization of the proceedings before the BIFR, it has been unable to do so. On the contrary, it has put forth a proposal of sale of its shareholding in the joint venture resulting in extreme insecurity and uncertainty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner has failed to make out a prima facie case for grant of injunction in the following circumstances: (i). MRL had been declared sick by the BIFR. Its total dues as on 31st March, 2003 were in excess of ₹ 250-300 crores and its net worth had been completely eroded. MRL's industrial operations and products stood shut down since 2001. (ii). Shares of the joint venture GGL as held by MRL have been treated by it as investments. Under the provisions of Sick Industrial Companies (Special Provisions) Act, the operating agency has the power to sell the assets of MRL in order to revive the company. Shares of GGL as held by MRL are the most valuable assets of MRL. Consequently, there is continuing uncertainty with regard to the sale of GGL's shares held by MRL to a third party. This would lend uncertainty to the partner with whom Guardian would be compelled to work in the joint venture. (iii). By the order dated 20th May, 2004 passed by the High Court of Judicature at Allahabad, MRL had been ordered to be wound up. This matter was even on date pending before the Supreme Court. (iv). It has been submitted that MRL has filed an application dated 22nd August, 2006 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xi). M/s Saint Gobain and M/s Asahi Glass, the competitors to the joint venture GGL in India, have already set up second plants in India which has aggravated the need for a new project to be set up which would complement the joint venture GGL's production facility. (xii). The Foreign Investment Promotion Board FIPB has granted permission to Guardian, USA to start a new project on terms and conditions stipulated in the permission granted to it. The FIPB stands satisfied that the joint venture would not be harmed or prejudiced if the Guardian is permitted to set up a new wholly owned subsidiary. The findings of the FIPB are those returned by the expert body set up by the Government of India which is prima facie evidence of the fact that the new venture shall not compete with the joint venture but rather complement it. It has been submitted that FIPB gave a personal hearing to both sides; that FIPB is an expert body of the Government of India and it has passed its orders after giving a detailed hearing to the objections raised by MRL. (xiii). Guardian has repeatedly offered to buy out the MRL's shareholding in the joint venture at a valuation arrived at by ICICI Secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Company Limited and Arn. v. Birla Perucchini Limited and Ors. it is contended that it is only the Article of Association which binds the shareholders. 61. On the other hand, Mr. Arun Jaitley, learned senior counsel for the petitioner, has urged that Clause 14 of the SHA did not relate to a matter effecting the affairs of the joint venture. Learned senior counsel has placed reliance on another pronouncement of the Apex Court reported at (2004)9SCC204 M.S. Madhusoodhanan and Anr. v. Kerala Kaumodi Pvt. Limited and Ors. to urge that such a covenant as contained in clause 14 would bind the parties thereto irrespective of whether it was contained in the Article of Association or not. 62. It is well settled that a judgment would be relied on the facts in which it has been rendered. A judgment cannot be applied in an abstract without consideration of the facts in which the principles were laid down. In [2002]1SCR621 Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. the Supreme Court state that: 19. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. The judgment of a court must also be implemented. But what would be the effect of a judgment must be considered from the reliefs claimed in the writ petition as also the implications thereof which has to be deciphered from reading the entire judgment. A judgment may also have to be read on the touchstone of pleadings of the parties. 65. It Therefore becomes necessary to consider the facts which were before the Supreme Court in AIR1992SC453 V.B. Rangaraj v. V.B. Gopalkrishnan and Ors. In this case, the plaintiffs had placed reliance on an oral agreement to the effect that two branches of the family who were the shareholders in the company, would continue to hold equal number of shares therein and that if any member in either of the branches wished to sell its share/shares, he would give the first option to purchase the members of that branch. Only if the offer so made was not accepted that the shares would be sold to others. The defendant No. 1, who was the son of one brother sold shares to the sons of the other brother without giving the first option to the member of his father's family. In these circumstances, the sale of shares and their transfer was challenged by his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Association of the company. The effect of Article 3.10 was that the respondent No. 2 was rendered a permanent director of the company. Placing reliance on the Division Bench pronouncement reported at 2000 (100) Company Cases 19, Rolta India Ltd. v. Venire Industries Ltd. and Anr., the court held that subject to the provisions of the Companies Act, the company and its members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the company and define the powers of its officers. It was also observed that the Articles would be a contract between the company and its members and between the members interest and that the contract governs the ordinary rights and obligations incidental to the membership in the company. It was in this background that the court held that the provisions in the Subscription cum Share Holders Agreement as contained in clause 3.10 cannot be given effect to so far as the management of the affairs of the company is concerned unless those provisions have been incorporated into its Articles of Association. 67. The issue raised before the Bombay High Court in IL and FS Trust Co. Ltd. was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the power of share holders to unite is not extended to a contract whereby restrictions are placed on the powers of directors to manage the business of the corporation. The only restriction which would be recognised as binding on the company would be under the statute or in the Articles of Association. It was such an agreement between the shareholders which was held by the court as being capable of such construction as to constitute a contract not binding on the company even if the company had taken note of the same or acted thereupon. The court had held that an interim injunction restraining the right of the company to be a director in the interest of a company would amount to stultifying the management of the company. The principles laid down herein certainly do not apply to the instant case. 72. At this stage, it would be topical and instructive to refer to the judicial pronouncement reported at (2004)9SCC204 M.S. Madhusoodhanan and Anr.Vs. Kerala Kaumudi Pvt. Ltd. The court was called upon to consider the validity of an agreement dated 16th January, 1986 referred to as 'karar' which sought to get the partition of assets by mutual consent and was executed betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Rangaraj case and observed thus: 144. The decision does not in any way hold that the transfer of shares agreed to between shareholders inter se does not bind them or cannot be enforced like any other agreement. 145. In Rangaraj case relied upon by the respondents, an agreement was entered into between the members of the family who were the only shareholders of a private company. The agreement was that for all times to come each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch sold his shares to members of the second branch. Such sale was challenged in a suit as being void and not binding on the other shareholders. This Court rejected the challenge holding that the agreement imposed a restriction on shareholders' rights to transfer shares which was contrary to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld Guardian International (or its Affiliates or Associates) fail to sell or otherwise dispose of such shares at the said price, any of them shall be entitled to sell or otherwise dispose of the shares to third parties at a lower price; provided, however, that Guardian International (on behalf of such proposed disposing party) shall first have offered the shares at such lower price to MRL in accordance with the aforesaid procedure. Guardian International (or its Affiliates or Associates) shall be entitled at any time, without liability to any person, to decline to sell or otherwise dispose of its shares if the price approved by the Controller of Capital Issues, the Reserve Bank of India or any other institution or department of the Government of India or any political subdivision thereof is below its offer price. In addition, Guardian International (or its Affiliates or Associates) shall be entitled, without liability to any person, to decline to sell or otherwise dispose of its shares if it is not satisfied that the proceeds of such sale or disposition of the shares can be repatriated to the United States of America or to a country of Western Europe selected by it. 6.2 If MRL (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Inasmuch as the SHA permits transfer of equity to an 'affiliate' or an 'associate', it would be useful to also set out the definition of these expressions as agreed upon between the parties which was provided in clause 15.1 and reads thus: 15. 'Affiliates' and 'Associates' 15.1 For purposes of this Shareholders Agreement, the term 'Affiliates' shall mean any legal person (other than the company) who, directly or indirectly, is controlled by controls, or is under common control with, a party to this Shareholders Agreement; and the term 'Associate' shall mean a business partner, agent or adviser of either party to this Shareholders Agreement or of any other company or person proposed as an investor by that party and accepted in writing by the other party. 77. The respondent has itself asserted rights based on the pre-emptive right to purchase the shares in GGL by virtue of clause 6 of the share holders agreement dated 23rd January, 1990. In this behalf, the respondent filed O.M.P. No. 337/2006 entitled Guardian International Corporation v. Modi Rubber Ltd., wherein para 21 it was inter alias stated thus: 21. Petitioner is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent its officers and directors are restrained in any manner from transferring any of its shareholdings in GGL without the consent of the petitioner and without giving a pre-emptive right to purchase the said shares to the petitioner. The petitioner also craves leave that in the event of change in the ultimate and beneficial ownership of the respondent they be permitted to seek other reliefs. Finally, the following prayers have been asserted by the respondent: (a) to restrain the respondent from transferring its shareholding in Gujarat Guardian Limited without the prior consent of the petitioner and without giving a pre-emptive right to purchase the said shares to the petitioner. (b) pass such further or other orders as this Hon'ble Court may deem fit and proper in the circumstance of the case. 78. There is no dispute that clause 6 of the SHA did not translate into a clause in the Articles of Association. Yet, the respondent is itself asserting binding ness of the pre-emptive rights to purchase of shares as contained in the SHA. The respondent has not challenged Clause 14 of the SHA on any ground under the Contract Act also. 79. The shareholders agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the non-compete clause as contained in clause 14 of the SHA. It is apparent that the respondent has itself raised an issue with regard to the validity and legality of the termination effected by it by the letter dated 21st July, 2006. 82. I find that the petitioner has filed the present petition based on the averments that the purported termination of the SHA effected by the letter dated 21st July, 2006 is contrary to the terms of the contract and is illegal and wrongful. Thus, it is the petitioner's case that the termination was in violation of clause 16 of the SHA and was not permissible. The material averments in this behalf are contained in paras 3.9, 4, 6, 8-10, 14, 17 and 18 of the petition. Inter alias the petitioner has averred thus: 3.9 Further, the petitioner has, vide letter dated 21st August, 2006, responded to respondent's letter dated 21st July, 2006. In the said letter the petitioner has expressed surprise and extreme disappointment in receiving the said termination letter from the respondent. The petitioner drew the attention of the respondent to the clause 14 of the SHA and stated that there has been no contractual breach of any of the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is contrary to law or the agreement between them. The adjudication on the entitlement to the relief necessarily requires an inquiry into the legality of the action of the defendant. In such a case, a declaration that the action of the defendant is illegal is inherent in the adjudication. It is well settled that such a declaration does not require to be specifically prayed for. The courts have held that the correct test is as to whether there is a legal necessity for the plaintiff to get a declaration of his right before he can get an injunction. (Ref: Harchand Singh v. Dalip Singh; AIR 1941 Mad 91 Sri Rajah Nayani v. Sri Rajah Tadakamalla.) In [1978]113ITR389(Delhi) Mahant Purshottam Dass v. Narain, while considering a question as to the court fee payable on the plaint, the court held that a prayer for declaration would be a surplusage if the plaintiff can get the relief for injunction without praying for declaration, but declaration has to be prayed where an obstacle has to be removed before the plaintiff can claim the relief of injunction simplicitor. 84. In this behalf, it would also be useful to advert to the pronouncement of this Court reported in 1985 RLR 398, Time Prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection as to the maintainability of this is based on the plea that the petitioner has not invoked the dispute redressal mechanism by way of arbitration and for this reason as well, the present petition at its instance, is misconceived. 91. In order to appreciate the submission on behalf of the petitioner, it becomes necessary to consider the concerned statutory provisions at this stage. Section 9 of the Arbitration and Conciliation Act, 1996 empowers a court to pass interim orders at the instance of a party. This statutory provision reads thus: 9. Interim measures, etc. by court ' A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a court: (i) for the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or (ii) for an interim measure of protection in respect of any of the following matters, namely: (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; (b) securing the amount in dispute in the arbitration; (c) the detent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterim relief to be available to either party to the arbitration. 93. In the instant case, the admitted position is that the respondent approached this Court by way of O.M.P. No. 337/2006 which was filed on 24th July, 2006 by the respondent under Section 9 of the Arbitration and Conciliation Act, 1996 seeking interim relief in respect of the share holding in GGL. 94. Subsequently thereafter, the respondent herein has made a request for arbitration dated 16th October, 2006 before the London Court of International Arbitration (LCIA). This request for arbitration was made by the respondent invoking clause 26 of the SHA which provided that any dispute or difference arising under or in connection with the SHA or breach thereof shall be settled by arbitration conducted in accordance with the rules of the LCIA by three arbitrators in conformity with the rules. The petitioner has intimated the name of its arbitrator in the communication dated 18th October, 2006 to the LCIA. The respondent's request for arbitration contains elaborate submissions by the respondent in relation to the contract containing the arbitration agreement which reads as follows: II.THE CONTRACT CONTAINING ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /or c. alternatively, the non-competition provisions of Clause 14 of the Shareholders Agreement are null and void and/or unenforceable against Guardian International and/or have been frustrated or otherwise discharged; and/or d. alternatively, MRL has unreasonably and/or wrongfully withheld its consent to Guardian International's construction of further flat glass plants in India. IV.THE GOVERNING LAW, PLACE, AND LANGUAGE OF THE ARBITRATION 37. Clause 25 of the Shareholders Agreement provides that the law applicable to the Shareholders Agreement is the laws of the Union of India. 38. The Shareholders Agreement does not specify the place of the arbitration. Accordingly, pursuant to Article 16.1 of the LCIA Rules, the place of the arbitration shall be London. 39. The Shareholders Agreement does not specify the language of the arbitration. Accordingly, pursuant to Article 17.1 of the LCIA Rules, the language of the arbitration shall be English. VI. RELIEF REQUESTED 42. As a consequence of the foregoing, Guardian International respectfully requests the following relief: a. a declaration that the Shareholders Agreement has been frustrated or has been valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the promoters of MRL; the petitioner was before the BIFR, had been declared sick; there was a winding up order against it, all of which lent insecurity to its partnership with the respondent and consequently jeopardizing the future of GGL. Consequently, it was stated that the SHA stood frustrated and did not bind the parties. 98. Frustration of contract is not an abstract or nebulous concept. In India, it is statutorily recognised in Section 56 of the Indian Contract Act which relates to performance of a contract. Undoubtedly, frustration of contract is a class of circumstances under which performance of a contract is excused or dispensed with. Section 56 of the Indian Contract Act reads thus: 56. An agreement to do an act impossible in itself is void. A contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promise did not know to be impossible or unlawful, such promisor must make compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot de derogate from the general words used in the enactment. This much is clear that the word 'impossible' has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promissor finds it impossible to do the act which he promised to do. 10. Although various theories have been propounded by the Judges and jurists in England regarding the juridical basis of the doctrine of frustration, yet the essential idea upon which the doctrine is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expression. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s change of situation. (Chitty on contracts, 29th Edition, Vol.I, Page 23 Para 007). 103. Furthermore, it is an admitted position that the petitioner continues to be under its Board of Directors. 104. It has not even been argued by the respondent that any of the terms of the contract have become incapable of performance for any reason. It is also not the respondent's case before this Court that the petitioner has committed breach of any term of the SHA which could impact its binding ness or the validity of the SHA between the parties. On the contrary, the petitioner has discharged all its obligations there under. 105. On this aspect it would also be useful to advert to the pronouncement reported at [1968]1SCR821 , Naihati Jute Mills Ltd. v. Khayali Ram Jagannath. wherein the court has held that it is not hardship or inconvenience or material loss which brings the principle of frustration of contract as envisaged under Section 56 of the Indian Contract Act into play. There must be a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that which was contracted for. The court cited with approval the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as issued and continued to do so when hearing in the present matter commenced and concluded. 108. So far as the performance of the joint venture GGL is concerned, it appears that the demand of float glass has constantly expanded over the period. The balance sheet and the profit and loss account for the year ending 31st March, 2006 has been placed before this Court which would reflect the financial status of the company on the relevant dates. This balance sheet of the joint venture company as on 31st March, 2006 reflects that it had reserves and surplus of ₹ 1,810,265,716/- as on 31st March, 2005. These reserves showed a sharp increase on the 31st March, 2006 and the position of the reserves and surplus had reached the figure of ₹ 2,544,825,934/-. These figures reflect an increase of over ₹ 70 crores within one year. It is pointed out that this increase was for the reason that GGL recorded average internal accruals of US $ 2 million which was equivalent to approximately ₹ 90 crore per month net of taxes and that, for the last month, the joint venture recorded internal accruals of over US $ 3 million which was equivalent to approximately ₹ 135 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies (Special Provisions) Act (SICA). An operating agency was appointed to examine the affairs. The operating agency as well as the petitioner were required to submit a scheme for revival for MRL, if feasible, bearing in mind the provisions of Section 18 of SICA and the enclosed guidelines while carrying out the directed exercise. 114. So far as various proposals which were being considered before the BIFR with regard to the management of MRL are concerned, the same are required to be considered by this Court only to the extent that they concern the joint venture company or the involvement of Guardian, the present respondent therein. 115. It has been pointed out by MRL that the financial institutions hold 44.25% equity in MRL. Before any scheme of revival could be submitted to BIFR, these financial institutions put up a precondition of purchase of their shareholding by the promoters. Consequently, an open bid sale for the 44.25% stake of the financial institutions was held. M/s ICICI Securities Ltd. addressed a letter dated 19th July, 2006 to Shri V.K. Modi informing the acceptance of his offer to purchase the shareholding of the financial institutions in MRL and requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to MRL by making payment in cash within days of reaching an agreement with the financial institutions. Guardian also requested UTI that its agreement with Mr. Modi would not preclude it from supporting a sale of MRL's GGL shares to Guardian in the event that Mr. Modis proposed transaction cannot be consummated within 90 days. Guardian also sought a confirmation that the members of the MRL board of directors nominated by the financial institutions will be at liberty to consider an offer from Guardian if the proposed agreement with Mr. Modi is not signed by the end of the month or if the BIFR restructuring process is riot completed by September 30, 2006. 120. From the above, it is apparent that even till 9th June, 2006, Guardian had no real evidence of malfunctioning in MRL. In any case, there was no evidence whatsoever of the industrial sickness which was complained of before the BIFR impacting in any manner the stability or the growth of the joint venture company GGL. 121. However, the admitted position is that in the meantime, the Board of Industrial and Financial Reconstruction (BIFR) has appointed an operating agency and was considering a scheme for revival of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the BIFR. The petitioner has also claimed that it was Mr. V.K. Modi who had furnished his personal guarantee to the financial institutions for securing the repayment of the dues while the respondent did not undertake any such measure. 126. It has also been pointed out that the respondent has been adequately compensated for its contribution to GGL and according to the petitioner, its interest therein now is minimal. 127. It is not the respondent's case also that the petitioner has committed breach of any term and condition of the SHA which could impact its binding ness or the validity of the agreement between the parties. Furthermore, the petitioner has discharged all its obligations under the contract with the respondents and continues to be functioning. 128. It is noteworthy that in every document relating to the affairs of the joint venture GGL, the respondent has acknowledged the continued success of the joint venture as also reiterated its stability and profitability in every communication addressed by it. 129. It is trite that in a private contract, a party is free to choose the person as also the subject matter of the transaction according to its own free wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase the share holding of the financial institutions in MRL which proposal has been accepted by the BIFR and this faction has also discharged the financial liability towards such purchase so far. As a result the stake of the financial institutions is stated to have come down from over 50% in 1998 to around 44 % before the BIFR. Such a factor would only lend towards stability of the organisation rather than infusing instability or insecurity. 135. In the factual matrix laid before this Court, considered in the light of the legal principles noticed hereinabove. Prima facie , there is Therefore force in the submissions on behalf of the petitioner that merely because one of the partners of the joint venture is before the BIFR, would not give immunity to the respondent against its contractual obligations under the SHA. 136. The respondent has also not set up a case that it required the petitioner to contribute any finances in GGL which it failed to do so. There is also no allegation of administrative mismanagement on the part of any nominee director of MRL. 137. Before this Court Mr. Mukul Rohtagi, learned senior counsel for the respondent has placed strong reliance on a propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te such a proposal. 143. The petitioner has pointed out that even this proposal closely examined in its entirety does not evidence of any intention to violate the petitioner's commitment under the SHA and that there was nothing in the face of the proposal to show that the petitioner intended to dispose of its shares in GGL to a third party. My attention has been drawn to Clause 6.5 of the SHA which itself permits transfer of the shareholding of the parties to certain persons including the affiliates of the parties. 144. I find that this submission on behalf of the respondent really deserves to be noticed for the sake of rejection. Certainly, such a proposal could not have founded the basis of the letter of termination dated 21st July, 2006 primarily for the reason that the proposal had not emerged by then. There is nothing contained in the proposal which would support that the submission that it was on behalf of the petitioner company. Para 12 of this proposal states that it was subject to the approval of the Board of MRL. There is no dispute that the proposal was advanced by Mr. V.K. Modi who was a promoter- director of MRL. There is nothing to evidence a resolution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic Relief Act 11th Edition Vol.II page 1271). This principle would apply whether the contract is determinable under its express terms or on account of the conduct of the parties seeking specific performance. 151. It now becomes necessary to examine the effect of a negative covenant in an agreement and a prayer for injunction made before the court seeking enforcement of such negative covenant. 152. Inasmuch as the agreement between the parties in the instant case contained a clause whereby term of the agreement was specified and also a negative stipulation contained in Clause 14 of the agreement dated 23rd January, 1990, Mr. Arun Jaitley, learned senior counsel for the petitioner has relied on the exception provided in Section 42 of the Specific Relief Act to contend that even if it was to be held that the contract is in express terms determinable, still the petitioner would be entitled to an injunction directing enforcement of the negative covenant against the respondent. 153. In this behalf, it would be appropriate to advert to the principles laid down by the Apex Court in AIR1995SC2372 Gujarat Bottling Company v. Coca Cola and Anr. In this case, Coca Cola had granted fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plaintiff in the case in hand was entitled to the injunction prayed for to compel enforcement of the negative agreement not to do certain acts. It was held by the Apex Court that the court was empowered to so direct in the light of Section 42 of the Specific Relief Act, 1963. Such power however, would be exercised only if the plaintiff had failed to perform the contract so far as is binding on it. It was further noticed that, the court, however, was not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer. 155. Placing reliance on 1898 (1) CH 671 : (1895) All ER 1680 Ehrman v. Bartholomew and its earlier pronouncement reported in N.S. Golikari at page 389, the Apex Court emphasized that relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before the uncertainty relating to the alleged violation could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of its right for which it could not be adequately compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la in view of the undertaking which was required to be given under the concerned rules. 159. The Apex Court re-emphasised the principle that the relief of injunction was wholly equitable in nature and the party invoking the jurisdiction of the court has to show that he himself was not at fault and that he himself was not responsible for bringing about the state of things complained of and that he was not unfair or inequitable in his dealings with the party against whom he was seeking relief. The plaintiff's conduct should Therefore be fair and honest. 160. Observing that the Gujarat Bottling Company had not acted in conformity with the terms of the agreement, it was held that this company was prima facie responsible for the breach of the agreement and that no consent was also taken by Coca Cola before the shares were transferred. Consequently, it was held that though Coca Cola had a right to terminate the agreement but it did not do so. On the contrary, it was done by Gujarat Bottling Company. Therefore, the Gujarat Bottling Company, having itself acted in violation of the terms of the agreement and having breached the contract, could not claim vacation of the interim inj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the control of BOCL should be with Messer or with GMG or otherwise. The appellant had sought an injunction against such acquisition by Messer on the ground that the same was contrary to the share purchase agreement dated 12th May, 1995 and two subsequent agreements dated 8th November, 1997 and 3rd May, 1998 whereby it was agreed that the management and control of the BOCL shall rest with Goyals or GMG. The contention was that if Messer acquired control of BOCL, it would become a competitor of GMG and that as a consequence Goyals would have no other option but to ultimately sell their interests in GMG to Messer. Thus the plea of balance of convenience was set up on the ground that the very existence of GMG/Goyals was at stake and the proposed acquisition of BOCL was contrary to the agreement between the parties. Reliance was placed on clause 9 in the agreement dated 12th May, 1995 to urge that this was a non-compete clause which prohibited Messer from entering into any activity of competition with regard to gas business and conferred a right of first refusal on the business option to GGL. 163. The respondent Messer had opposed the grant of injunction on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esser resulting in its ruination. In this behalf, the court observed thus: In substance the argument is that in this manner a big fish will altogether eat a small fish in the corporate world despite the agreement referred to above. It deserves to be emphasized that the Messer had repeatedly agreed for acquisition of BOCL and jointly and in concert with GMG and not in the manner sought to be done when BOCL cannot be taken up as agreed between the parties'. The court further observed that if despite the several agreements between the parties, 'Messer will go ahead to acquire the shareholding of BOCL not jointly and in concert with GMG but to its derogation and take some steps for the acquisition thereof, it cannot turn around and say that balance of convenience and equities are in its favor. While considering the balance of convenience and equities, the conduct of a party to litigation is of paramount importance. The conduct of Messer was not above board. They did not conduct themselves in a business like manner. They are attempting to give a go by to their agreements with GMG. The court held that a negative covenant was implied in clause 9 and that it, in any case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oice between the two possible constructions of a contract, I think the Court should tend to prefer the construction which will infer performance and not encourage avoidance of contractual obligations. 168. On the other hand, Mr. Mukul Rohtagi, learned senior counsel for the respondent has placed reliance on several judicial pronouncements in support of his contention that the petitioner herein was not entitled to the relief sought. Reliance was placed on the pronouncement of the Supreme Court in Percept D'mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. AIR2006SC3426 . In this case, the Supreme Court was concerned with post contractual covenants which were held to be restrictive of trade and vocative of Section 27 of the Contract Act. As noticed in para 54, the contract between the parties had come to an end by efflux of time. However I find that in this case also the Supreme Court re- affirmed the legal position that there are instances where the negative covenant in the contract is valid and can be enforced. In this behalf, the court had observed thus: 61. Clause 31(b) was also to operate only during the term i.e. from the conclusion of the first negotiation period under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Specific Relief Act provides that injunction cannot be granted to prevent the breach of contract, the performance of which would not be specifically enforced. Clause (c) of Section 41 enumerates the nature of contracts, which could not be specifically enforced. Clause (c) to Sub-section (1) of Section 14 says that a contract which is in its nature determinable cannot be specifically enforced. Learned Single Judge thus was justified in saying that if it is found that a contract which by its very nature is determinable, the same not only cannot be enforced but in respect of such a contract no injunction could also be granted and this is mandate of law. This, however, is subject to an exception, as provided in Section 42 that where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstances that the Court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement. 15. Learned Single Judge considered various covenants of the agreement and referred to clause 8 of the Technical Assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e idle ceremony of ordering the execution of a deed or instrument, which is revocable at the will of the executant. Specific performance cannot be granted of a terminable contract. 173. The court had also negated the submissions on behalf of the appellant that when a contract was determinable by the party, the court could not treat it as an enforceable contract in the light of clause (c) of Sub-section 1 of Section 14. 174. So far as the pronouncement of this Court in D.R. Sondhi and Ors. v. Hella K.G. Hueck and Co. is concerned, the court held that under Section 9 of the Arbitration and Conciliation Act, an interim order could be passed in accordance with the statutory provisions which would include the provisions of the Specific Relief Act for the purposes of preservation, interim custody or sale of goods. In this case it was held that the parties were acting pursuant to a share holders agreement dated 18th June, 1999 whereby the respondents had been permitted to acquire 51% stake in the company and the petitioners had already entered into a non-competing agreement with the respondent No. 1. The petitioners were not paid any consideration for allowing the respondents to tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequently led to Pravu Dayal to intimating them that the partnership stood abandoned. This was denied by the other parties who filed the suit against Pravu Dayal seeking the relief of specific performance of the agreement. The court held that in view of the terms of the agreement, the partnership if entered into, would be a partnership at will and even if such a contract were to be specifically enforced, it could be terminated immediately thereafter. Consequently under clause (d) of Section 21 of the Specific Relief Act, such a contract which is in its nature revocable, cannot be specifically enforced and that damages in specific performance or injunction would be an adequate remedy. I find that in this case also the court was not concerned with enforcement of any negative covenant which is being considered in the present case. 177. Again the judicial pronouncement of the High Court of Bombay rendered in Star India Pvt. Ltd. v. Lakshmi Rajsita Ram Nagar and Anr. Notice of Motion No. 2933/2002 in Suit No. 3452/2002 reported at 2003(3)BomCR563 does not further the case of the respondent before this Court in any further inasmuch as this case related to a contract of service and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission on the sales of the products which were covered by the joint venture agreement between the parties should be passed. The present case is distinguishable on facts which are before the court in Usha Drager P. Ltd. This Court is not concerned with mere distribution of products but the very existence of the joint venture for its entire manufacturing business is at stake. Furthermore, the respondent in the present case has itself sought adjudication of its action in terminating the agreement. The question is whether damage which may result to the joint venture and the petitioner is quantifiable in monetary terms so as to disentitle the petitioner to the interim protection. 180. In AIR 1984 Delhi 119 Modern Food Industries India Ltd. v. Shri Krishna Bottlers (P) Ltd., the petitioner had filed a petition under Section 20 of the Arbitration Act, 1940 seeking reference of the dispute between the parties to arbitration. The petitioner also filed an interim application praying for injunction against the respondent seeking enforcement of the negative covenants contained in a franchise agreement with the respondent. Under the agreement between the parties, the plaintiff was to sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed merely on the asking of a petitioner who is required to show more as is discussed hereinafter. Impact of approval by the Foreign Investment Promotion Board (FIPB) to the proposal of the respondent 183. An approval of the FIBP is required by virtue of press note 1 (2005 series) which was issued by the Government of India requiring approval of the proposal by a multinational corporation to set up a wholly owned subsidiary in India if it was a party in existing joint venture holding more than three per cent equity. 184. Mr. Mukul Rohtagi, learned senior counsel for the respondent has pointed out that the prayers made in the present petition are all based on implementation of only the non-compete clause contained in Clause 14 of the SHA without any challenge to the termination of the agreement effected by the respondent. It has been pointed out that the respondent bearing in view the market position, had no option but to proceed with its proposal of setting up a wholly owned subsidiary without the partnership of the petitioner. Towards this end, the respondent after requesting the petitioner for its consent, submitted an application dated 22nd July, 2006 to the FIPB. This prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nture and four reasons have been advanced by the respondent for the same which read thus: (I) The MRL is in a state of internal disarray. (II) Proposal to bring in latest and improved technology. (III) Increasing demand for glass (IV) Proposal not to prejudice the interest of existing joint venture. 189. The petitioner, on the other hand, has strongly contested the respondent's claim. It has been pointed out that in the application which was submitted by the respondent to the FIPB, it had indicated that its solution to resolve MRL's internal problems was its offer to purchase GGL's shares held by MRL at a price established in an independent valuation and that it was on account of refusal by the petitioner to do so, that the respondent had terminated the shareholders agreement. It was also urged that the respondent has misrepresented the position that the petitioner had been declared sick in its petition. 190. Before this Court, it has been urged on behalf of the petitioner that Article 2(iii) of Press Note 1 (2005 series) stipulates the enforcement of a non-compete clause between the joint venture partners and that the respondent had not disclosed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November, 2006 filed by the officer (OSD), Capital Marketing and Investment of the Department of Economic Affairs in the Ministry of Finance in Special Civil Application 2206/2006 in the High Court of Gujarat at Ahmedabad, it was stated that the ``SHA under question is binding on the signatories of JV partners. Any breach of the said agreement has to be agitated before the court of law'`. 197. On the own showing of the respondent its submission that it is bringing exchange to the tune of US$ 150 to US$ 200 million for the purpose of setting the wholly owned subsidiary may be misleading. The petitioner has pointed out that as per the application of the respondent to the FIPB, the respondent proposes to raise US $ 200 million/equity debt ratio of 1:2 and intended to invest only US $ 66.67 by way of equity, that too, in two or three years. The respondent itself has pointed out that GGL itself admittedly has reserves to the tune of US $ 60 million with profits secured in US $ 2 million per month. It is a debt free company. Consequently it is more than eligible for procuring working capital finances from banks. On these projections, the petitioner has urged that GGL, with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial facts. According to the respondent the petition does not adequately disclose the proceedings before the FIPB. It has been pointed out that FIPB had given a hearing to the petitioner which fact has not been disclosed in the petition. The petitioner is also alleged to have not disclosed the revival plan dated 22nd August, 2006 submitted to the IDBI which has been appointed as the operating agency. According to the respondent this fact coupled with the clamour for dividends by the petitioner is indicative of its dishonourable motives. The respondent has also urged that it has repeatedly offered assistance to Mr. Vinay Modi representing the MRL in resolving its existing problems and since 2003, it had been indicating that expansion of GGL was desirable but only if MRL could resolve its internal problems. 203. The respondent has also opposed the grant of relief in the application on grounds of delay. It has been urged that the termination of the SHA was effected on 21st July, 2006 and the respondent had approached the FIPB on the 22nd July, 2006. The petitioner filed its objections before the FIPB on the 14th August, 2006. The present petition has been filed only on the 9th of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtaining full information or evidence. The court is empowered to even appoint a receiver in respect of the property which is the subject matter of the arbitration and take such interim measures of protection as may be just and convenient. The powers granted on the court are far reaching. The statute has specifically mandated that the court would have the same power for making such orders as it has for the purposes and in relation to any proceedings before it. 209. It is also necessary to examine the parameters within which the court shall exercise such power. The manner and limits of exercise of such discretion have fallen for consideration in several judicial pronouncements and the principles laid down can be usefully called out thus: (i) Even though Section 9 does not embody the ingredients of Order 38 Rule 5 of the Code of Civil Procedure, 1908 nor the conditions of the Order 38 Rule 5 can be read into it, however for the exercise of discretion there under, the court can take guidance from the provisions of Order 39 as well as Order 38 of the Code of Civil Procedure, 111(2004)DLT816 Rite Approach Group Ltd. v. Roseboron Export). (ii) The scope of Section 9 of the Arbi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the objective of supporting the arbitration, the court must act with alacrity. However, this would not justify grant of interim orders and relief on the mere asking. (Ref: (87) 2000 DLT 449 : 2000 (vi) AD (Delhi) 509 : 2000 (55) DRJ 750 CREF Finance Ltd. v. Puri Construction Ltd.; 2006 (91) DRJ 83 Sea Transport Contractors Ltd. v. Indian Farmers Fertilizers Co-operative Ltd.) (vi) The scope and object of Section 9 of the statute is to grant such relief by way of interlocutory injunction so as to mitigate the risk or injustice to the petitioner during the period before that uncertainty can be resolved. Its object is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages which would be recoverable in the action if the uncertainty were resolved in his favor at the trial. (Ref: AIR1995SC2372 Gujarat Bottling Co. v. Coca Cola and Co.; 2006 (iv) AD (Delhi) 38 Country Development and Management Services Pvt. Ltd. v. Brooke side Resorts Pvt. Ltd.) In 133(2006)DLT153 Shaw v. Him Neel Brewaries Ltd., Learned Single Judge of this Court held that the interim orders are calculated to ensure that the assets of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999]1SCR89 Sudarshan Finance Ltd. v. NEPC; 1998(44)DRJ399 National Building Construction Corporation Ltd. (NBCC) v. Ircon International Ltd.) (xi) So far as the questions which can be considered in a petition under Section 9 of the Arbitration and Conciliation Act, 1996 are concerned, certainly issues which are to be decided in the substantive arbitration proceedings cannot be gone into in a petition under Section 9 of the statute. Thus, a question as to whether the agreement between the parties was validly entered into or whether it was validly terminated has to be determined only in the arbitration proceedings and cannot be determined in a petition under Section 9 of the statute. (Ref : 2002 (8) AD (Delhi) 617 : 2003 (66) DRJ 239 S. Raminder Singh v. NCT of Delhi). A similar question had arisen before this Court in D.R. Sondhi v. Hella K.G. Hueck and Co. In para 14 of the judgment, it was held by this Court that the question as to whether the material breach has been committed or not or if there is any breach at all was agitated but it was not gone into for the reason that it is not the question for determination at present. 210. This Court while considering the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ima facie establish that there is violation by the defendant No. 1 in respect of Clause 4 inasmuch as there has been a business by the defendant No. 1 in competition with the business of the plaintiffs companies. It cannot be said that similar business will always amount to competing with each other. Whether one party is competing with another in similar business is a matter of fact and is to be established by producing sufficient material to establish such fact. In order to establish such fact, there must be pleadings on record. Competition will certainly involve doing something with the intention or purpose of gaining upper hand on someone else. Such an act can be done in different ways and methods. Each of such methods can constitute a bundle of facts giving rise to a cause of action to somebody who is aggrieved by the act of competition. But in order to succeed in such suit, it is necessary to plead and prove all such facts which constituted the act of competition. Mere allegation that similar business started by the defendants amounts to competition with the business of the plaintiff's company cannot amount to a statement of fact pertaining to the competition. It would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide economy of scale to GGL, which would improve its competitive position in the market and hence improved profitability. This would not be the case if the Respondent is allowed to have its own subsidiary. 213. Elsewhere in the petition, the petitioner has stated that the guarantee which the respondent has put forth that the interest of the joint venture would not be prejudiced has no validity and cannot be enforced. 214. My attention has been drawn to the note by the respondent in support of its application dated 22nd July, 2006. In para 5 of this note at page 306 of the paper book, I find that the respondent has categorically stated '(b) that the growth of glass consumption in the Indian construction industry increasing (roughly 15% per year since last year) and GGL has been unable to satisfy the increased demand as it has been running at its maximum capacity for a few years and has Therefore been unable to ``capitalize on this increased demand. GGL has also not been able to capitalize on the large unfulfilled export market. c) As the competition grows and GGL is stifled, GGL will not be able to offer as diversified a product line as its competitors resulting in reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the new plant would be dedicated to the coating technology. However, initially, the major production would be float glass which is the product manufactured by GGL. It is only in the phase-II of the proposed subsidiary that the respondent proposes to add new products which are not made by GGL. In this background, it cannot be said that the apprehension of the petitioner to the effect that the production activities of the wholly owned subsidiary would impact the business of GGL are without any basis. 219. The respondent has urged that its wholly owned subsidiary would be at another location in a different State and geographically removed from GGL. However, there is no restriction or confinement of its business, distribution or sales to the location where it is proposed to be located lending force to the petitioner's apprehension that its sales and business would be impacted. 220. Mr. Mukul Rohtagi, learned senior counsel for the respondent has however urged at great length that despite the state in which MRL finds itself, GGL has reached the maximum level of its production capacity and further that there are really no reserves or surpluses in the GGL which could be divert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gated under the provisions of these Articles by an alternative vote of a majority of directors which majority shall include at least one (1) director nominated or appointed by Guardian and at least one (1) director nominated or appointed by MRL. xxx xxx xxx (xiv) undertaking any new business or substantial expansion of the business including the establishment of plants for the manufacture of other types of glass or for the fabrication of products made from float glass. 223. In the exercise of such power, the respondent has not allowed even discussion of a proposal to expand GGL at any of its board meetings. On the other hand, the respondent has clearly refused that there is any plans for expansion of GGL. My attention has been drawn to the minutes of the meeting of the board of directors of GGL held on 30th August, 2006 which has been filed by the respondent before this Court wherein on a query raised by Mr.C.J. Jose, IAS about expansion of GGL's capacity, Mr. Peter Walters, Vice Chairman of GGL (a nominee of the respondent) replied that 'there is no immediate plans for expansion'. The respondent had addressed a letter dated 6th July, 2006 to the IDBI wherein a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epairs of the cold tank which was not absolutely eminent. 229. The respondent has also considered alternative utilization of the fund which would be available on account of reversal of the entry for the funds which was earmarked for the cold tank repairs and towards this end, it had addressed a communication dated 2nd February, 2006 wherein it had considered supporting a dividend payment of up to 40% and reiterated its preference to use the available cash to repurchase shares from the Gujarat Government. 230. It may be noticed that the respondent has attempted to explain this communication only in its written submissions stating that by this letter, the respondent was emphasising its concern with regard to the instability and chaos at MRL and its emphasis and its concern about acquisition of 75% or, in any case, majority shareholding in the GGL. It was also contended that the reversal of the amount allocated towards the cold tank repairs was only as a financial measure and for no other reason. 231. The petitioner has taken great pains to point out that as per the figures of the accounting of GGL, its estimated profit for the year 2005-2006 was to the tune of ₹ 14,828 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquid assets including a bank balance which was growing at the rate over US $ 2 million per month. Consequently, it is pointed out that the existing joint venture already had adequate resources to meet the entire equity financing for the proposed project and that the expansion of the existing joint venture was definitely a feasible and available option. The joint venture was profit-making and debt-free without any borrowing for its working capital. Such position has been stated to be subsisting for the last few years. The petitioner points out that substantial advantages have been created by the GGL in terms of marketing, distribution and establishment of the brand for which benefit would be diverted by the respondent to its proposed wholly owned subsidiary. 237. The petitioner has also criticised the plea taken by the respondent with regard to generation of additional employment placing reliance on the figures relating to GGL. It has been pointed out that GGL has established itself as a company of standing and has been providing trained personnel to the respondent's international operations in several countries and thereby it is a major resource for provision of skilled m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he joint venture on account of the payments towards the technology which was shared and advanced to it. 239. Another argument which has also been advanced in support of the imperative necessity to proceed with the establishment of the plant by the respondent is based on the status of the float glass industry in India and the growing threat to the business on account of competitors' acquiring a large chunk of the market. Mr. Mukul Rohtagi, learned senior counsel has urged that the production of float glass in India has doubled from 589 thousand metric tons per year in 2003 to 1048 thousand metric tons per year in the year 2007. GGL's production is stated to have gone up from 195 thousand metric ton to 2007 thousand metric tons per year in the same period which is beyond its maximum capacity. However, despite this position, GGL's share in the float glass production in India has gone down from 33% to 20%. According to the respondent this is because the GGL's plant located in Ankleshwar, Gujarat was the first float glass plant in India which commenced commercial production in the market on 1st March, 1993 with the installed capacity of 550 thousand metric tons per da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent that it is intending to bring in latest and improved technology through the wholly owned subsidiary into the country. It has been asserted that this claim itself demolished the intent put forth of the respondent that it had any interest in the development of the business of the joint venture. 243. It is an admitted position that the demand for the product of the joint venture and those manufactured by the respondent is increasing in India and that GGL has ability and resources to address this demand. According to the petitioner, the project which is proposed by the respondent to be implemented by it through its wholly owned subsidiary was first recommended to be implemented by the joint venture which still has the financial, technical and managerial capacity to undertake the same. It has also been submitted that the very basis of the joint venture agreement postulated expansion of the business and that the basic spirit, intendment and purpose of bringing in the latest and improved technology into India had resulted in the parties entering into the agreement and creation of a joint venture company. 244. The petitioner has also argued that improved technology increases scal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider the reasonable apprehension of the petitioner with regard to the impact on the goodwill and business of the GGL. 247. Prima facie, there is strength in the submission of the petitioner that the intent of the respondent to not expand the existing joint venture is guided not by any of the concerns which have been set forth but by the change in the respondent's intention of benefitting itself at the expense of the GGL. 248. So far as the asserted contention of the respondent that the products which are being manufactured by GGL and those manufactured by the newly proposed wholly owned subsidiary would complement each other, I find that the petitioner has pointed out that the products manufactured under GGL are sold under the trade name 'Modi Guard' which is marked recognition. There is no dispute that the products which are proposed to be sold by the newly set up wholly owned subsidiary would not be sold under the same trade name. The petitioner has pointed out that the consumers in the market will not relate the product of the Modi Guard with that which is manufactured at the proposed subsidiary which would strongly impact the sales of the petitioner as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market share of the joint venture shall further go down. There is also reasonable apprehension that hitherto customers of the GGL may divert their business and attention to the new wholly owned subsidiary which the respondent has proposed to set up and which would directly impact the business interest of the joint venture. There can be no dispute that the formation of a new business would impact the goodwill of the on-going business and would, Therefore, impact the petitioner's 'legitimate interest' in the profits of the joint venture. 253. So far as the irreparable harm from breach of clause 14 in the instant case is concerned, the determination thereof would not rest solely on the existence and subsequent breaches of this covenant between the parties. Several factors which would support the irreparable harm determination would include an inability to calculate damages, harm to goodwill, diminishment of competitive positions in the market places, loss of employees' unique services and loss of opportunities to manufacture and distribute unique products. There can be no manner of doubt that the respondent's decision to propose the wholly owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs gives a valuable insight into the matter. The Supreme Court of the State of New York had an occasion to consider a matter raising a claim by the plaintiff based on the non-compete clause in its joint venture with the defendant. In the judgment reported at Ned Steinfields v. General Visions Services Inc. (INDEX No. 600942/99-001 Cal# 9-3/8/99 Supreme Court of New York, the plaintiff had moved for a preliminary injunction to enforce the terms of a contract forming a joint venture between himself and the defendant. The court noticed that the defendants did not deny most of the actions which had been complained of by the plaintiff as a breach of the agreement. It was even admitted, as in the present case, that it had entered into an agreement whereby it has expanded its business activities without including the plaintiff and to this the plaintiff had not consented. The defendants claimed that the joint venture agreement was void for the reason that it was obtained in breach of the fiduciary duty which the plaintiff owed to the defendant. Consequently, they had unilaterally terminated the joint venture agreement and urged that such a termination had freed it of any further duty to ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. 60 F.3d 27, 37-39 : 2d Cir. 1995 (loss of prospective goodwill through inability to market unique product constituted irreparable harm); JAK Prods., Inc. v. Wiza 986 F.2d 1080 : 1084 7th Cir. 1993 (under Indiana law, when employee uses experience gained from employer in violation of covenant not-to-compete, irreparable injury occurs); Basicomputer Corp. v. Scott 973 F.2d 507 : 511-12 6th Cir. 1992 (violation of covenant not-to-compete constituted irreparable harm where damages were difficult to calculate, customer goodwill was damaged, and plaintiff suffered loss of competitive position); Rent-A-Center, Inc. v. Canyon Television and Appliance Rental, Inc. 944 F.2d 597 : 603 9th Cir. 1991 (irreparable harm established from violation of covenant not-to-compete where intangibles like advertising efforts and goodwill were injured); Equifax Servs., Inc. v. Hitz 905 F.2d 1355, 1361 : 10th Cir. 1990 (irreparable harm exists where damages from breach of covenant not-to-compete difficult to calculate); Ferry-Morse Seed Co. v. Food Corn, Inc. 729 F.2d 589, 592 (8th Cir. 1984) (breach of exclusive distribution agreement constituted irreparable harm where company was disadvantaged in compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unique product); Green Stripe, Inc., 159 F. Supp. 2d at 56-57 (irreparable harm arises from denial of ability to sell unique product and inability to obtain market substitute); J.C. Penney Co., Inc., 813 F. Supp. at 369 (irreparable harm found, in part, from acknowledgment that damage to interest in real estate is generally viewed as unique); see also Auto skill, Inc., 994 F.2d at 1498 (loss of unique position in marketplace evidenced by harm to goodwill and difficulty in calculating damages). 258. Perusal of the letter dated 6th July, 2006 sent by the respondent shows that the respondent had clearly informed the petitioner to either sell its shares to it or to permit it to expand separately in India. There is no dispute that there was no consideration of the option of expanding GGL's business. It is also an admitted position that the market share of GGL had reduced not because it was not running its affairs profitably but because of other producers in the field. 259. There can be no manner of doubt that so far as the respondent's contribution to GGL is concerned, it has received the contracted consideration for the technical and any other contribution made by it. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cie case in its favor and that there is reasonable apprehension of irreparable damage in case the interim protection is not granted. 262. It is well settled that the intent of the respondent is a relevant factor while consideration of the grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996. The petitioner contends that the entire conduct of the respondent in unreasonably withholding declaration of dividends, persuading UTI and other financial institutions with whom the petitioner's shares are pledged/mortgaged to compel the petitioner who is a minority share holder to sell the shareholding at a distress value. The petitioner has urged that the conduct of the respondent is really in the nature of effecting a corporate take over in exercise of its power under clause 2.11 of the shareholders agreement to the prejudice of the petitioner. 263. In this behalf, the petitioner has drawn my attention to the letter dated 6th July, 2006 written by the respondent to the IDBI whereby the respondent communicated a formal offer of a proposal for preparing a scheme of rehabilitation of MRL pointing out that MRL owned 33,335,000 shares in the joint ventur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities at the direction of the Financial Institutions who have a 44% shareholding in MRL. This offer has already been made to the Operating Agency, IDBI vide letter dated 6.7.06. The applicant has also written to the Financial Institutions who have a 44% shareholding in MRL offering to buy GGL shares from MRL, vide letters dated 14.6.06 and 6.7.06 copies whereof are annexed hereto as Annexure-A(colly). The applicant is seriously concerned that MRL's shareholding in GGL may be sold under a scheme of rehabilitation to third parties without the required express consent of the applicant under GGL's Articles of Association and without giving Applicant a pre-emptive right to purchase said shares. In the above circumstances, the Applicant is an interested and a necessary party in the above proceedings and needs to be heard with regard to its proposal. xxxx xxxx xxxx PRAYER i) implead the Applicant Guardian International Corp. as a necessary and interested Party in the above proceedings especially in view of its offer as stated in paragraph 7 of the instant application; ii) pass such other or further order as deem fit and proper in the facts and circumstances of this case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application to this effect was also filed before the BIFR (see page 439), apart from request being made to the Financial Institutions which hold 44% of the shareholding in MRL (see page 527- 531). Throughout Guardian's discussions with MRL's Mr. V.K. Modi, the intention has always been for Mr. V.K. Modi to acquire GACL, GMDC and MRL's shareholding in GGL which would then be sold to Guardian (see page 522-525 especially the beginning paragraphs where meeting with Mr. V.K. Modi is discussed and then Mr. Modi's offer of sale at ₹ 60-65 is discussed). Never has there been any hint of MRL offering to purchase Guardian's shareholding in GGL ' the very thought was preposterous given that MRL's net worth stood eroded and it was declared sick by the BIFR ' nor was such an offer (to buy Guardian shares in GGL at ₹ 72.50 per share) ever made until the final day when arguments were addressed before this Hon'ble Court. Even then, no time limit was provided as to the payment to be made to Guardian in the unlikely even that the offer was acceptable to Guardian. It is submitted that Guardian is fully committed to its investments in GGL and is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a joint venture by two legal entities to undertake a business for mutual profit. The expression 'joint venture' came up for consideration before the Supreme Court in the judgment reported at (1995)1SCC478 New Horizons Ltd. v. UOI. The Apex Court noticed that the expression 'joint venture' is more frequently used in United States, and that it connotes a legal entity in the nature of a partnership, engaged in the joint undertaking of a particular transaction for mutual profit, or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject-matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. 272. Undoubtedly, such an enterprise can best work in a situation of trust, confidence and comfort. Parties to joint ventures couch their bindings in stringent contractual convenience and complexities. The present case is an outcome of purportedly diminishing of confidence levels between two strong business partners; an example of one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian industrial scene. Guardian has thus been successful in maintaining a joint venture in a culture which is totally dissimilar to its own experience in the USA. It has certainly gained from the experience, knowledge and contribution of MRL in India and derived profits from the technical contribution made by it. In all the complaints made by Guardian in order to justify its action of termination, there is not even whisper of an allegation that either MRL or any of its constitutes or contractors have not fulfilled or have jeopardised GGL's business and functioning in any manner. Therefore, even while, MRL is facing problems within its organisation, however, the disputing factions have been able to put up a combined effort so far as business transactions involving GGL are concerned. Perhaps, having maximised production and profits, it could be stated that this case is an instance of opportunism at its best inasmuch as there is no dispute as to manner of conduct of the business of the joint venture and the joint venture partner is being abandoned after deriving commercial profits from the project while relying on the very agreement which the petitioner claims to rely upon. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect to the validity of the termination of the agreement effected by it on 21st July, 2006 and release of its obligation under Clause 14 of the shareholders agreement. Therefore, prima facie, the respondent remains bound by the terms of SHA and cannot avoid the same. 278. In the instant case, there is no dispute that the wholly owned subsidiary which is being complained of has not yet come into existence. The petitioner has set up a case of apprehended loss of business and goodwill which could not be quantifiable. It is also an undisputed fact that the validity of the very basis on which the entire case of the respondent rests, that is, its action of unilaterally terminating the agreement, has yet to be decided before the arbitrator. In these facts, it cannot certainly be contended that the petitioner does not have a triable case or that interest of justice and equity are not in its favor. The petitioner is likely to be suffered irreparable loss and damage. The relief to which the petitioner would be entitled is preservative so as to preserve the subject matter of the dispute. The respondent has relied upon several covenants of the very agreement which it claims to have te ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
