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Judgment
Indra Prasanna Mukerji, J.
INTRODUCTION:
Dr. Purnendu Chatterjee is an entrepreneur. He is a non resident Indian. He is the controlling hand of two companies incorporated in Mauritius. One is Winstar India Investment Company Ltd., (Winstar), the petitioner and the other is Chatterjee Petrochemical (Mauritius) Company, (CP(M)C), the third respondent. There is also a third company, India Trade (Mauritius) Ltd. CP(M)C has also an Indian subsidiary or a group company by the name of Chatterjee Petrochemical (India) Ltd. Dr. Chatterjee had very ambitious plans. He wanted to control Haldia Petrochemical Ltd. (HPL), an Indian company through these entities. He entered the field towards the middle of the 1990''s, at the invitation of the West Bengal Government (Go. W.B.).
Till 2005, Mr. Chatterjee was in control. He fell out with the GoWB or the GoWB fell out with him. Thereafter, he was shunned by this government.
He complained of oppression and mismanagement. He, through the above entities, or some of them approached the Company Law Board by filing an application on 2nd August, 2005, under sections 397 and 398 of the Companies Act, 1956. The Board ruled in his favour from the interim stage. It directed, on 4th August, 2005, that there would be no further allotment of shares, no change in the issued and paid up capital of the company. The parties should maintain status quo of shares. The Board ultimately also, ruled in his favour. A 10F appeal was preferred in this Court. It reversed the decision of the Board. It held that the Board did not have the power to make orders that it did. The matter was carried to the Supreme Court. On 30th September, 2011, it affirmed the Appeal Court''s order. All this while, the interim order passed by the Board continued. All this while, Winstar waited in the wings. It says it could not file the present application earlier because of the above interim order, which bound them.
A Share Subscription Agreement dated 30th July, 2004 was executed between HPL, CP(M)C, WBIDC and Winstar. Under it Winstar was allotted shares worth Rs. 127 crores. Rs. 16 crores was invested by friendly investors, which meant that Dr. Chatterjee''s group brought Rs. 143 crores into HPL. This agreement had mutual rights and obligations.
Now, I come to more details.
SHARE SUBSCRIPTION AGREEMENT
The Share Subscription Agreement was dated 30th July, 2004. It had four parties, HPL, CP(M)C, WBIDC and Winstar India Investment Company Ltd.
The recital part of the agreement is most important.
It states as follows: The issued and paid up share capital of HPL comprises of 1,152,857,148 fully paid up equity shares of Rs. 10/- par value each.
WBIDC, CM(M)C and Tatas had entered into a Joint Venture Agreement on 20th August, 1994 for setting up of a petrochemical complex at Haldia, "through the above company (HPL)".
WBIDC, CP(M)C and Tata Group Companies together held the entire share capital as stated above.
GoWB, WBDIC, CP(M)C and HPL had thereafter entered into an agreement dated 12th January, 2002 and WBDIC, CP(M)C and Chatterjee Petrochem (India) Private Ltd. had entered into an agreement dated 8th March, 2002 relating to transfer of shares of the company.
CP(M)C was presently in "management control" of the company.
WBDIC had entered into an agreement to purchase the holding of the Tata Group of Companies.
HPL from time to time had borrowed substantial sums of money from banks and financial institutions of which the lead financial institution was the Industrial Bank of India (IDBI).
Dr. Purnendu Chatterjee by his letter dated 30th June, 2003 had written to IDBI for preparation of a "debt restructuring package" for HPL. The IDBI by their letter dated 15th July, 2003 informed HPL of its decision to refer them to "the Corporate Debt Restructuring System" for restructuring the debts of the company in a time bound manner.
CDR is defined in the definition Clause as follows:
"CDR" means Corporate Debt Restructuring by Banks and Financial Institutions ("Fls") participating in the CDR System comprising the CDR Standing Forum constituted by the Reserved Bank of India (RBI) vide its circular No. BP.BC. 15/21.04.114/2000-01 dated August 23, 2001 as amended by its circular No. BP.BC. 68/21.04.132/2002-03 dated February 5, 2003.
"The CDR package" which was sent to the company by a letter dated 12th February, 2004 by the CDR cell advised HPL to arrange for equity by an initial public offer of the equity shares of the company or otherwise.
To implement this advice, CP(M)C and HPL had requested Winstar(India) Company Ltd. to subscribe to 127,400,000 equity shares of HPL and arranged for subscription of the balance 15,605,828 shares by others aggregating to Rs. 1,430,058,280. Winstar had agreed to this.
In the above background the share subscription agreement of 30th July, 2004 was executed.
The above shares were duly allotted to and registered in the name of Winstar.
Now, the terms and conditions of this share subscription agreement are very relevant. Some of those terms are inserted below:
Before coming to the actual terms and conditions the definition of "IPO" in the agreement is to be seen, which is as follows:
"IPO" means Initial Public Offering of Equity Shares by the Company, pursuant to which the Equity Shares are listed on the Exchanges. Such IPO shall be at a price per Equity Share of not less than Rs. 10/- (Rupees Ten only) and of such number of Equity Shares as may be decided by Board, subject to regulatory requirements.
Now, the important terms and conditions:
COMPLETION
4.1 Subject to the fulfillment of the Conditions Precedent to the satisfaction of the Investor, Completion shall take place at such venue and on the Completion Date or at such later date as may be agreed between the Parties, provided that such date shall not be beyond 31st July, 2004 within which the Conditions Precedent be fulfilled in accordance with the provisions of this Agreement. On Completion, the events set out in the following provisions of this clause 4 shall take place. The obligations of each of the Parties in this clause 4 are interdependent, Completion will not occur unless all of the obligations set out in this clause 4 are compelled with and are fully effective and the Other Investor Group has subscribed to 16,000,000 (sixteen million) Equity Shares.
4.2 The Investor shall give instructions to its bankers to remit the Investor Subscription Price on or before completion, to a designated bank account of the Company in India as already intimated by the Company to the Investor.
4.3 The Company shall hold a meeting of its Board or any committee thereof, and the following shall be resolved;
a) the Investor be allotted and issue the Investor Shares.
b) the Board shall soon thereafter allot all other Equity Shares, the Preference Shares and the Lenders Shares as required to be allotted by the Company under the CDR Package;
c) the name of the Investor be entered in the register of members of the Company as the holder of the Subscription Shares;
d) the Investor Director shall he appointed as an additional director of the Company.
4.4 The Company shall duly issue the Subscription Shares mentioned in Clause (2) and the same shall be credited to the Depositary Account of the Investor and the Company shall provide the Investor with evidence thereof. The Company shall not be required to pay any stamp duty in respect of the Subscription Shares so issued in dematerialised form.
INVESTOR DIRECTOR
7.1 The Board shall at all times comprise a maximum of (15) (or such higher number as the shareholders may decide) directors, of whom the investor shall be entitled to appoint and maintain in office one director ("Investor Director"), This appointment of the Investor Director shall be by direct nomination by the Investor to the extent permissible by Law and any appointment or removal under this clause shall, unless the contrary intention appears, take effect from the date. It is notified to the Company in writing. If the law does not permit the person nominated by the investor to be appointed as a director of the Company merely by nomination by the investor, the Company, WBIDC and CP(M)C shall ensure that the Board forthwith (and in any event within 30 Business days of such nomination or at the next Board meeting, whichever is earlier) appoints such person as a director of the Company and further that, unless the Investor changes or withdraws such nomination, such person is also elected as a director of the Company at the next general meeting of the shareholders of the Company. For this purpose the Company, EBIDC and CP(M)C agree to and CP(M)C agrees to ensure that its Affiliates shall exercise all powers and rights available to them so as to fix the number of directors in accordance with this Clause 7 and to ensure that the person nominated by the Investor is expeditiously appointed or removed (as the Investor may specify) as a director of the Company and the appointments and removals referred to in the clause 7 result in the person nominated/appointed or removed becoming or ceasing to be directors of the Company.
CORPORATE GOVERNANCE
8.1 At least 10 Business Day''s notice of each Board meeting shall be given to each director in accordance with the Articles of Association of the Company unless in any particular case a majority of the directors agree otherwise. The agenda for each Board meeting and all papers connected therewith and/or proposed to be placed or tabled before the board shall be circulated together with the notice to each director at least 10 days prior to the Board meeting. 11.10 The Company shall as soon as may be after the execution of this Agreement but in not event later than 3(three) months from the date of execution, amend its Articles of Association in the manner required by the Investor. WBIDC and CP(M)C shall ensure that the Articles of Association of the Company are amended accordingly to reflect the changes in shareholding and other clauses of this Agreement.
INITIAL PUBIC OFFERING (IPO)
12.1 The Company shall make best endeavour to ensure that it makes an IPO on or before March 31, 2005 subject to applicable securities laws and WBIDC and CP(M)C shall use all their powers to support the same.
12.2 For the purpose of IPO, to the extent permissible in Law the Investor Shares shall not be subjected to a lock-in or other restriction on transfer as applicable to promoter''s contribution under the guidelines of SEBI or any other statutory or regulatory authority as applicable from time to time.
12.3 The Company shall bear all costs of such IPO.
12.4 The Company will take all such steps, and extend all such co-operation as may be required by the lead managers, underwriters and others for the purpose of expeditiously making and completing the said IPO.
12.5 In all event that the Company does not make an IPO on or before March, 31, 2005, then, without prejudice to the other rights of the Investor under this Agreement, the Company, WBIDC and CP(M)C shall in good faith discuss the matter with the Investor and try to arrive at a mutually agreeable solution. The parties shall try to arrive at such a mutually agreeable solution as soon as possible but in any event not later than July 31, 2005.
12.6 In the event the Parties are not able to arrive at a mutually agreeable solution before July 31, 2005 provisions of clause 12.7 below shall apply.
12.7 If the Parties are not able to arrive at a mutually agreeable solution within the date mentioned in 12.6 above, then the parties shall cause to ensure that the company make reasonable efforts to arrange sale of such shares. If the Company does not or is not been able to make such arrangements within 4 weeks after July 31, 2005, in spite of its best efforts, then considering that CP(M)c has the management control of the Company, it shall buy back the Investor Shares at a mutually agreed price.
RESTRICTIONS ON TRANSFERS BY WBIDC AND CP(M)C
Lock-in
15.1. WBIDC and CP(M)C shall not sell any of their Equity Shares in the Company until completion of IPO and for such period as they are required to be locked-in in accordance with the regulations of the Securities and Exchange Board of India. Provided that the provisions of this clause shall not apply to any sale of Equity Shares by WBIDC to CP(M)C but not Vive-versa.
TERM AND TERMINATION
17.1 This Agreement shall become effective upon the execution thereof by the parties hereto.
17.2 This Agreement shall terminate either on:
a. IPO; or
b. Investor transferring more than 60% of Subscription share in the Company, whichever is later.
18.6 Without prejudice to the generality of Clause (18.5), the Company agrees that if any provisions of the Articles of Association of the Company at any time conflict with any provisions of this Agreement, the Articles of Association of the Company shall be promptly amended in accordance with Law and to the extent necessary to give effect to the provisions of this Agreement and in order to ensure that the provisions of the Agreement shall prevail.
DISPUTE RESOLUTION
20.1 If any dispute, controversy or claim between the Parties (or any of them) arises out of or in connection with this agreement, including the breach, termination or invalidity thereof ("Dispute"), the Parties shall use all reasonable endeavours to negotiate with a view to resolving the Dispute amicably,. If a party gives the other Parties notice that a Dispute as arisen (a "Dispute Notice") and the Parties are unable to resolve the Dispute amicably within [15] days of service of the Dispute Notice (or such longer period as the parties may mutually agree), then the Dispute shall be referred to arbitration in accordance with the terms of clause [20.2] below.
20.2. Subject to clause [20.1] above, any Dispute shall be finally settled under the provisions of Arbitration and Conciliation Act, 1996. The number of arbitrators shall be three, of whom the Company shall appoint one arbitrator, the Investor shall appoint one arbitrator and the two arbitrators so appointed shall appoint the third arbitrator. Any arbitral award shall be final and binding on the Parties and the Parties waive irrevocably any rights to any form of appeal, review or recourse to any state or other judicial authority in so far as such waiver may validity be made. The venue of the arbitration shall be English.
20.3. The provisions of clauses [20.1 and 20.2] shall survive any termination of this Agreement.
PRESENT APPLICATION:
Some basic facts are now noted.
CP(M)C was in control of HPL at least till 2005. It lost control thereafter.
Dr. Chatterjee was at loggerheads with the GoWB which included WBIDC.
The IPO was never made. Even now, nobody has told me that the IPO may be held at any future date.
The Articles of the company which were required to be amended under 11.10 of the agreement not later than three months from the date of its execution have not been amended.
According to the Chatterjee Group the Share Subscription Agreement of 30th July, 2004 is still alive; according to GoWB, WBIDC and HPL nothing remains of it anymore.
Now, on 18th June, 2012 in aid of the above arbitration clause in the agreement, Winstar filed the present section 9 Application. They prayed for, amongst others, the following reliefs:
a) Injunction restraining the respondent 2 whether by itself or by its associates or agents or otherwise owners from transferring any shares registered in its name in any manner whatsoever (other than registration of the said 155 million shares in favour of CPIPL)
b) Injunction restraining the respondent No. 1 whether by itself or by its associates or agents or otherwise howsoever from recording any transfer made by the respondent No. 2 other than the said 155 million shares.
c) Injunction restraining the respondent No. 1/Company from holding any Board Meeting until an investor director, i.e. director nominated by the petitioner is appointed on the Board of the Petitioner Company under the Share Subscription Agreement of 30th July, 2004.
d) Injunction restraining the respondent No. 1/Company from holding any Board Meeting until and unless 10 days notice of such Board Meeting is given to the petitioner.
NEGATIVE COVENANT:
It is an admitted position that under the Share Subscription Agreement the shares were allotted to Winstar and registered in their name. The share subscription amount was paid by Winstar and formed part of the capital of HPL.
The Agreement was executed between the parties thereto in the background of HPL, under the control of Dr. Chatterjee. Recital ''E'' of the agreement clearly noted that CP(M)C was in control of the company.
It is also now conceded by all the parties that the IPO cannot be made in the reasonably foreseeable future for several reasons. Dr. Chatterjee has lost control of HPL. There is dissension between the GoWB and WBIDC on one hand and the Chatterjee group on the other. A special resolution is needed u/s 81(1A) of the Companies Act, 1956, at the general body meeting of HPL to have an IPO. That is virtually impossible.
If one comes to the scheme of the agreement, the contingencies arising out of it, are also visualized therein, in my opinion, on the assumption that Chatterjee Petrochem would be in control. This is specifically repeated in Clause 12.7.
One such contingency covered by Clause 12 was the inability of HPL to make a public offer by 31st March 2005. First, HPL, WBIDC, CP(M)C and Winstar would try to come to "a mutually agreeable solution" by 31st July, 2005. In default, HPL would try to sell the shares of Winstar within four weeks after 31st July, 2005. If that was not possible CP{M)C would buy back the shares. Coupled with the above there was a negative covenant in Clause 15.1 which said that till completion of the IPO, WBIDC and CP(M)C would not sell their shares.
Now, what is the effect of all this?
Winstar wants enforcement of the negative covenant.
It was contended by Mr. Kapur, learned Senior Advocate that there was no positive obligation on WBIDC. The obligation was on HPL to make an IPO and if that was not possible even after negotiations, CP(M)C was to buy back the shares. Furthermore, it was said that since the IPO had not been made by the stipulated date, it could no longer be called. The agreement was incapable of further performance and stood discharged. Hence there was no justification for the negative covenant or for its enforcement.
I do not agree. Clause 17.2 of the agreement clearly stipulated that the agreement would come to an end on the IPO being made or Winstar divesting 60% or more of its holding whichever was later.
Even if it is assumed that the IPO cannot be called in the reasonably foreseeable future yet, the agreement would be operative as long as Winstar held 40% of their shares. Winstar has not yet divested its shares. Furthermore, Clauses 12.5 to 12.7 stipulated an IPO by 31st March, 2005, thereafter negotiations for sale of shares in the market, otherwise CP(M)C was to buy back the shares. This arrangement no doubt provided Winstar an exit route. But from the said clauses I can never say that no IPO could ever be made in the future. Neither can it, be said that CP(M)C''s buy back arrangement has come to an end.
It appears from the minutes of the 110th meeting of the Board of directors held on 11th October 2004, as placed by Mr. Siddhartha Mitra three book running lead managers gave a detailed presentation before the Board of Directors regarding the "initial public offering". The following resolution was taken:
3.10 Initial Public Offering
Mr. Naresh Chandra, Director, did not participate in the discussion in view of his engagement as Strategic Advisor with M/s. J P Morgan, one of the Book Running Lead Managers.
The Board considered the note as placed at the meeting and after having detailed deliberation on the subject decided to launch the initial public offering of equity shares of the Company of a minimum of 276,000,000 equity shares and not exceeding 300,000,000 equity shares of the Company, inclusive of a Green Shoe Option of 15% of the issue size, of the face value of Rs. 10/- each.
The Directors thereupon passed the following resolution:
�RESOLVED" that subject to;
(i) Approval from shareholders of the Company u/s 81(1A) of the Companies Act, 1956 and other applicable provisions, if any, of the Companies Act, 1956, (including any statutory modifications or reenactments thereof for the time being in force),
(ii) The Listing Agreements to be entered into by the Company with the Stock Exchanges where the Company''s equity shares are to be listed,
(iii) The provisions contained in the relevant Reserve Bank of India (RBI) guidelines,
(iv) The provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000,
(v) Approval of the Foreign Investment Promotion Board (FIPB), if required;
(vi) Such other approvals, permissions and sanctions of all concerned authorities, and departments, if any, and to the extent necessary,
(vii) Subject to such conditions and modifications as may be prescribed in granting such permissions, approvals, and sanctions which may be agreed to by the Board of Directors or a Committee thereof,....
At the prima facie stage I accept the contention of Mr. Siddhartha Mitra that the IPO needed approval in a general meeting by a special resolution u/s 81(1)A of the Companies Act, 1956 and that this meant the cooperation of the GoWB which was not forthcoming. Hence the IPO could not be made when CP(M)C was in control.
Sometimes the contract provides for both positive and negative obligations. Even if performance of the positive obligations cannot be ordered, i.e., specific performance, still, the negative covenant can be enforced. The earliest known case on the subject is Lumley v. Wagner reported in (1852) 1 De G.M. & G 604 where an actress had contracted to perform in a theatre but abandoned the contract and signed for another producer. Since, it was a contract of personal service, it could not be ordered to be specifically performed. But, the contract contained a negative covenant prohibiting the actress from signing for anybody else. It was held that the negative covenant could be enforced.
However, if enforcement of the negative covenant leads to specific performance of the agreement, which cannot be ordered in the circumstances, then enforcement of that negative covenant cannot be ordered. For example, if the negative covenant provided that a particular person could not work for any other person except the plaintiff, then enforcing the negative covenant in the above form would inevitably leave the defendant a choice of either working for the plaintiff or starvation. This kind of a negative covenant cannot be enforced (See Whitwood Chemical Cp. v. Hardman reported in 1898 I Ch 671). Although Mr. Chatterjee submitted citing M/s. Gujarat Bottling Co. Ltd. and others Vs. Coca Cola Company and others, that the balance of convenience was a factor to be taken into account while considering grant of an injunction enforcing a negative covenant, I do not think that consideration of the balance of convenience is relevant (See Dohrty v. Allman reported in (1878) 3 AppCas 709 followed in Hampstead v. Diomedous reported in (1968) 3 ALL ER 545). Applying the principles of Dohrty v. Allman it was so lucidly pronounced by Mukherjea, J. in Parma Singh Vs. Tulsi Charan Goswami
...In my opinion, there is no difference between the English and the Indian law on this point. The remedy by way of injunction is always discretionary. It is not more discretionary in India than in England. The rule enunciated by Lord Cairns is not a rule of law, but a rule of practice, which guides and does not fetter the discretion of the Court in a rigid and inelastic manner. In the case of breach of a negative contract, the injunction is granted to enforce specific performance of the contract itself, and both under sec. 54 of the Specific Relief Act as well as under English law, the principles applicable to specific performance of the contract guide the Court in the matter of granting injunction in such cases. In a suit for specific performance of a contract, questions of comparative convenience or inconvenience, or the nature and extent of damage to the Plaintiff do not ordinarily arise, though the Court can grant damages in lieu of specific performance, as laid down in sec. 19 of the Specific Relief Act....
[See also the case of Prestige Pictures Vs. Sree Krishna Cinema (P) Ltd.,
I quote two passages from M/s. Gujarat Bottling Co. Ltd. and others Vs. Coca Cola Company and others, supra:
IN the matter of grant of injunction, the practice in England is that where a contract is negative in nature, or contains an express negative stipulation, beach of it may be restrained by injunction and injunction is normally granted as a matter of course, even though the remedy is equitable and thus in principle a discretionary one and a defendant cannot resist an injunction simply on the ground that observance of the contract is burdensome to him and its breach would cause little or no prejudice to the plaintiff and that breach of an express negative stipulation can be restrained even though the plaintiff cannot show that the breach will cause him any loss [See: Chitty on Contracts, 27th Edn., Vol. I, General Principles, paragraph 27=40 at p.1310; Halsbury''s Laws of England, 4th Edn., Vol. 24, paragraph 992]. In India section 42 of the Specific Relief Act, 1963 prescribes that notwithstanding anything contained in clause (e) of section 41, where a contract comprises an affirmative agreement, express or implied, not to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstance 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. This is subject to the proviso that the plaintiff has not failed to perform the contract so far as it is binding on him. The Court is, however, 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 ether to idleness or to serve the employer. [See: Ehrman v. Bartholomew; N.S. Golikari at p. 389.]
The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercises of discretion of the Court. While exercising the discretion the Court applies the following tests - (i) whether the plaintiff has a prima facie case; (ii) whether the balance of convenience is in favour of the plaintiff; (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed. The decision whether or not to grant an interlocutory injunction has to be taken at a time when the existence of the legal right assailed by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against the injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection has, however, to be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The Court must weigh one need against another and determine where the "balance of convenience" lies. [See: Wander Ltd. v. Antox India (P) Ltd., (SCC at pp. 731-32.] In order to protect the defendant while granting an interlocutory injunction in his favour the Court can require the plaintiff to furnish an undertaking so that the defendant can be adequately compensated if the uncertainty were resolved in his favour at the trial.
Paragraph 43 in my view is disjunctive from paragraph 42. I see no principle enunciated in the above Supreme Court decision which suggests that to pass an order for enforcement of a negative covenant the balance of convenience is to be taken into account.
However, in the case of Warner Bros. v. Nelson reported in (1936) 3 ALL ER 160, it was inter alia held by Branson J. that an order enforcing a negative covenant should be reasonable in the circumstances. This simply means and implies that such an order can be so moulded so as to be just without causing undue hardship to the defendant. His Lordship stated:
...The conclusion to be drawn from the authorities is that, where a contract of personal service contains negative covenants, the enforcement of which will not amount either to a decree of specific performance of the positive covenants of the contract or to the giving of a decree under which the defendant must either remain idle or perform those positive covenants, the Court will enforce those negative covenants; but this is subject to a further consideration. An injunction is a discretionary remedy, and the Court in granting it may limit it to what the Court considers reasonable in all the circumstances of the case....
In my view as held in the case of Warner Bros. v. Nelson (Supra) an order which is reasonable in the circumstances has only to be considered by the Court.
Therefore, in my opinion the agreement subsists with its positive obligations, whatever be their worth. It is not for the Court to probe the mind of the makers of an agreement to ascertain why they incorporated certain terms and the basis and the justification thereof. As long as the positive obligations remain the negative covenant can be enforced, to a reasonable degree as held in Warner Bros. v. Nelson (Supra), and as submitted by Mr. S.B. Mookerjee, learned Senior Advocate.
Although there is a negative covenant restraining WBIDC and CP(M)C from selling their shares till completion of the IPO, enforcing this negative covenant, in its entirety would be, in my opinion unreasonable and unjust, because, the IPO can never take place in the foreseeable future and if the injunction, as asked for was granted, it would freeze the shares of WBIDC in HPL. This in my opinion would cause great hardship to WBIDC and HPL. Moreover, passing such an order would not be reasonable in the facts and circumstances of this case. It does not serve any purpose. A substantial part of the Share Subsequent Agreement has been executed by allotment and registration of shares in favour of Winstar. Therefore this negative covenant can be reasonably enforced by only directing that should WBIDC and CP(M)C desire to sell their shares in HPL they are to offer them first to Winstar, to match the best rate obtained by them to sell the shares in the market and buy them at that rate. At least one month''s time has to be given to Winstar to buy the shares. Thereafter, the shares can be sold to anybody else. I order accordingly.
ONE DIRECTOR
Clause 7 of the Share Subscription Agreement entitled Winstar to nominate one person to be a Director of the Board of HPL.
Section 255 of the Companies Act, 1956 inter alia provides that unless the contrary is provided for in the articles, not more than 1/3rd of the number of directors of a public company may not retire by rotation. They would be appointed by the company in a general meeting, unless the contrary is provided in its Articles of Association. Clause 7 of the above agreement also provided that the Board would comprise a maximum of 15 or even a larger number of directors if the shareholders so decided. At the moment the maximum strength of the number of directors of HPL is 15 Directors.
Clause 18.6 said that if any provision of the agreement conflicted with the Articles of Association, the latter would be promptly amended to make it compatible with it. Clause 11.10 provided generally that the Articles would be amended within three months of execution of the share subscription agreement to make the two documents compatible.
The Articles of Association of the Company were not amended to provide for inter alia the stipulation that Winstar would have one director.
At the stage of the S. 9 application, where only the prima facie case of the parties is to be weighed, I accept Mr. Siddhartha Mitra''s submission based on the minutes of the 111th meeting of the Board of Directors of HPL on 2nd November, 2004 at Mumbai when CP(M)C was in control that it took the initial steps for amendment of the articles.
Mr. Mitra suggested that for alteration of the articles of the company 51 % majority was required. Since the 155 million shares were never registered in favour of CPM(C), the Chatterjee group did not have that majority and hence could not push through the proposal for amendment of the articles.
Hence, the allegation that they were in breach of the agreement is unfounded.
At a meeting of the Board of Directors on 2nd July, 2004 Jamshyd Godrej was appointed as an additional director. On 24th February, 2012 Mr. Godrej resigned. On 1st March, 2012 a proposed resolution of the Board by circulation noted that after such resignation the strength of the Board would be reduced to 13. Furthermore, it was stated there that by virtue of the Share Subscription Agreement of 30th July, 2004 Winstar''s claim to appoint a nominee director, was uppermost. It was proposed that Mr. Kishore Bhattacharya would be an additional director of HPL u/s 260 of the Companies Act, 1956 and Article 78 of the Articles of Association of the Company. The resolution was opposed by the majority on the board and defeated. On 7th March, 2012, Mr. Godrej was persuaded by the board of HPL to withdraw his resignation with retrospective effect.
Now, let me deal with the argument made on behalf of HPL and WBIDC that the Articles of Association were not amended, as provided for in the Share Subscription Agreement. The existing Articles of Association did not permit Winstar to have a nominee on the board of directors.
It was said by Mr. Chatterjee relying on the case of Shanti Prasad Jain Vs. Kalinga Tubes Ltd., that an agreement between shareholders not adopted in the Articles of Association of the company was not binding on the company.
It is true that the provisions of this agreement were never grafted into the Articles of the company. But even if that was so, u/s 255(2) of the Companies Act, 1956 a director could be appointed at the general meeting and u/s 260 an additional director appointed till the general meeting was convened.
Mr. Jamshyd Godrej was only appointed as an additional director, by the board of directors. The proposed resolution of 1st March, 2012 was for appointment of Mr. Kishore Bhattacharya, only as an additional director, in place of Mr. Godrej. Furthermore, the company, HPL was a party to the Share Subscription Agreement. Therefore, being a party, HPL, through its board of directors could not act in derogation of the Share Subscription Agreement, which reserved one berth in the board for the nominee of Winstar, by opposing its nominee to be an additional director. Hence the above case has no application, in the facts.
Mr. Mookerji and Mr. Mitra seem to be right when they said that under Article 87(c) of the Articles of Association of the Company, upon tender of the resignation letter by Mr. Godrej, the resignation became effective.
At that point of time, there was a vacancy in the board. Since after execution of the Share Subscription Agreement, Winstar''s nominee had not been appointed as a director, Winstar, in my opinion had the first right to claim appointment of its nominee, on the Board as an additional director. In the proposed resolution of 1st March, 2012 the Board seemed to have realized this claim of Winstar and proposed its representative to be appointed a member of the Board.
In all fairness to Winstar the board ought not to have persuaded Mr. Godrej to withdraw his resignation. It should have appointed the nominee of Winstar as an additional director.
To my mind, the act of recalling Mr. Godrej, by persuading him to withdraw his resignation was a wrongful act, targeted at preventing Winstar from having its nominee on the board. I do not accept the contention on behalf of HPL and WBIDC that any existing vacancy on the Board had to be filled up by nominees of institutions.
Therefore, pending the arbitration reference, the letter of resignation of Mr. Jamshyd Godrej dated 24th February, 2012 is deemed to be operative. Mr. Jamshyd Godrej cannot act as an additional director. A nominee of Winstar may be appointed as an additional director but if no such appointment can be made the vacancy created by Mr. Jamshyd Godrej on the board cannot be filled up. I am not minded to restrain holding of board meetings unless the nominee of Winstar is appointed, because that would amount to granting the final relief in the proposed arbitration. Board meetings may be held but 10 clear days notice as mentioned in the Share Subscription Agreement, has to be given to Winstar, of the convening of the same.
LIMITATION AND DELAY
Now, I come to the question of limitation and delay. The Chatterjee group lost control of HPL in 2005, as submitted. On 2nd August, 2005 an application u/s 397 and 398 of the Companies Act, 1956 was filed by the group before the Company Law Board. On 4th August, 2005 an interim order was passed by the Company Law Board which continued right till disposal of the Supreme Court appeal on 30th September, 2011. This had the effect that the parties, which include Winstar and WBIDC would have to maintain status quo regarding their shares. During the continuation of this order, Winstar could not file the instant application for inter alia the reason that asking for an order directing WBIDC not to sell their shares till an IPO was called, would have been an attempt to invite violation of the order of the Company Law Board. Therefore, there was an express or implied bar on Winstar to get the reliefs prayed for in this application.
This application was filed on 18th June, 2012, on an apprehension that WBIDC was about to dispose of its stake in HPL.
Moreover, and more importantly, Winstar could be said to be bona fide prosecuting the same litigation before the Company Law Board which culminated in the Supreme Court order. The Supreme Court dismissed the appeals on the ground that the Company Law Board did not have the jurisdiction to pass its impugned order. Winstar is entitled to protection u/s 14 of the Limitation Act, 1963. Hence, in my opinion there was no delay in preferring this application.
ARBITRATION CLAUSE
Another point is raised regarding the maintainability of the arbitration and the section 9 Application.
Before dealing with this point let me set out Clause 20 of the agreement:
DISPUTE RESOLUTION
20.1 If any dispute, controversy or claim between the Parties (or any of them) arises out of or in connection with this Agreement, including the breach, lamination or invalidity thereof ("Dispute"), the Parties shall use all reasonable endeavours to negotiate with a view to resolving the Dispute amicably. If a Party gives the other Parties notice that a Dispute has arisen (a "Dispute Notice") and the Parties are unable to resolve the Dispute amicably within (15) days or service of the Dispute Notice (or such longer period as the parties may mutually agree), then the Dispute shall be referred to arbitration in accordance with the terms of clause (20.2) below.
20.2. Subject to clause (20.1) above, any Dispute shall be finally settled under the provisions of Arbitration and Conciliation Act, 1996. The number of arbitrators shall be three, of whom the Company shall appoint one arbitrator, the investor shall appoint one arbitrator and the two arbitrators so appointed shall appoint the third arbitrator. Any arbitral award shall be final and binding on the Parties and the Parties waive irrevocably any rights to any form of appeal, review or recourse to any state or other judicial authority in so far as such waiver may validity be made. The venue of the arbitration shall be Mumbai. The language of the arbitration shall be English.
20.3 The provisions of clauses (20.1 and 20.2) shall survive any termination of this Agreement.
It was said that the letter dated 12th June, 2012 of Winstar invoking the arbitration clause did not specify the disputes. It was stated that mentioning the exact disputes, with their details was essential to maintain the arbitration or a section 9 Application in support thereof. That letter was replied to on behalf of HPL on 26th June, 2012. The reply stated that there was a provision for dispute resolution between the parties under Clause 20.1. Unless the disputes were mentioned this resolution could not be made. The letter went on to add that the absence of any particulars of disputes suggested that there were no disputes.
Mr. Chatterjee went to the extent of submitting, citing M/s. M.K. Shah Engineers and Contractors Vs. State of Madhya Pradesh, and Asia Resorts Ltd. Vs. Usha Breco Ltd., para 17 that the arbitration clause did not have effect because of filing of this application within ten days of the letter dated 12th June, 2012. There was no chance of dispute resolution, he emphasized.
I am unable to accept this contention. There may be an arbitration clause and a procedure for its invocation. Say, for example only the Chairman of a company has the power to appoint an arbitrator. If the chairman is not approached and any other officer is approached, the appointment made by that officer may ''be bad. That would call for a fresh appointment. The Arbitration may not take place, as observed in the above decisions. But the arbitration clause would not fall through. Similarly, here it could be contended, as it has been contended, that unless the details of the disputes were furnished, there could be no dispute resolution in terms of Clause 20.1. Since there was no compliance of 20.1 arbitration could not be commenced. That is one thing. But to say that the arbitration clause became void by alleged non observation of the due procedure is misplaced. S.B.P. and Co. Vs. Patel Engineering Ltd. and Another, enjoins the Court, when the issue is before it, to adjudicate whether there is a valid arbitration clause. I hold on the basis of the above observations that the Arbitration Clause is valid. If the Arbitration Clause is valid, a section 9 Application can be made at any stage (See M/s. Sundaram Finance Ltd. Vs. M/s. NEPC India Ltd., ). It has been so made and it is maintainable. I am careful to add that I am not making any finding whether on the existing facts arbitration can be commenced as it is not necessary, for the purpose of this application.
DECISION:
I direct that Mr. Jamshyd Godrej is not to act as an additional director of HPL. His place is to be filled up by the nominee of Winstar or kept vacant. Subject to this, board meetings of HPL may be held. The negative covenant 15.1 should be enforced reasonably. I restrain WBIDC and CP(M)C from transferring their shares without their giving atleast one month''s notice to Winstar or CP(M)C to buy them at a price not more than that offered to them by an intending purchaser. Thereafter the shares may be sold to anybody else.
This application is allowed to the above extent only. Any existing interim order is modified to the above extent only. Urgent certified photocopy of this judgment/order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.