Delhi High Court
Industrial Development Bank Of India vs Spectrum Power Generation Ltd. on 13 September, 2002
JUDGMENT S.K. Agarwal, J.
1. The plaintiff by this application under Section 39 Rules 1 and 2 read with Section 151 of the Code of Civil Procedure, 1908 (for short "CPC"), has prayed for an ad-interim injunction directing National Thermal Power Corporation (for short "NTPC"-defendant No. 4) to keep the amount received by it from Spectrum Power General Ltd. (for short "SPGL"-defendant No. 1) in pursuance of the compromise agreement dated 9th April, 2001, in a separate interest bearing "no lien account", pending final disposal of the suit.
2. Brief facts are that the Industrial Development Bank of India (for short "IDBI"-plaintiff) filed the suit against SPGL (defendant No. 1), Jaya Food Industries Ltd. (for short, "JFIL"-defendant No. 2), M. Kishan Rao (defendant No. 3), NTPC (defendant No. 4), Spectrum Technologies, USA (for short "STUSA"-defendant No. 5) in its capacity as the lead institution representing a consortium of financial institutions, namely, IFCI, ICICI, LIC, UTI, IIBI, GIC, NIC, NIA, OIC and UII collectively, "the Lenders". The plaintiff in this suit has challenged the legality and validity of the Compromise Agreement dated 9.4.2001 being contrary to the conditions of the Loan Agreements and the power of defendant No. 1-SPGL to make such payment under the compromise agreement or to enter into such a settlement. It is pleaded that SPGL (defendant No. 1) was incorporated under the promoters"
agreement between NTPC (a corporation wholly owned by The Government of India), STUSA and JFIL; that defendant No. 1 SPGL planned to set up 208 MW combined cycle gas based power project in the State of Andhra Pradesh and for this purpose the lenders sanctioned financial assistance to the company to the tune of Rs. 326.20 crores, out of which Rs. 321.30 crores have already been disbursed, which includes amount of Rs. 123.29 crores disbursed by IDBI-the plaintiff. The grant of loan by the Lenders to defendant No. 1-SPGL company was subject to the terms and conditions of the Loan Agreement dated 11th August, 1994 and 17th May, 1995 (hereinafter referred to as "Loan Agreements"). The disputes arose amongst promoters. Consequently, STUSA filed a suit (S.No. 1256/96), praying for a decree of mandatory injunction directing the Promoters in management to effect necessary amendment sin the Article of Association of defendant No. 1 SPGL, so as to bring it in conformity with the requirements of the Promoters Agreement. NTPC also filed a suit (S.No. 1905/96) praying for a decree of specific performance directing SPGL (defendant No. 1), and others to perform their obligations as contained in the Promoters Agreement and for a decree of mandatory injunction requiring SPGL to issue and deliver 77.7 lacs equity shares of NTPC by accepting its contribution for the same. In these two suits , STUSA and NTPC had also filed applications for grant of interim injunction which were dismissed. Their appeals were also dismissed. Against the order passed by the Division Bench, Special Leave Petitions (for short, SLPs), were filed in the Supreme Court. While appeals were pending in the High Court, in pursuance of the order dated 28th August, 1998, plaintiff-IDBI convened two meetings of the promoters of the company to resolve their inter-se disputes. However, it could not succeed. In the meetings, during discussion, it was indicated by the representative of NTPC that it was considering to opt out of the project, but it was never mentioned by either NTPC or other party that negotiations for out of court settlement was also being exclusively held amongst JFIL and NTPC. The plaintiff-IDBI was always under the impression that promoters namely JFIL and NTPC were negotiating for a settlement without any financial involvements of defendant No. 1 (SPGL). However, in the Supreme Court JFIL and NTPC filed a compromise agreement dated 9th April, 2001 whereby defendant No. 1 (SPGL company) agreed to pay a sum of Rs. 41.57 crores to NTPC, in 12 monthly Installments together with interest @ 9% per annum from 1.1.1999. The plaintiff was taken by surprise as such a huge amount, the company SPGL could not be made to pay in consideration of NTPC agreeing to withdraw its suit. This was in additional to Rs. 15.0 crores already paid by the company towards the costs of land, clearances, permission, technical services etc. The plaintiff was not a party before the Supreme Court. The Compromise Agreement was taken on record and SLP was disposed of by order dated 9th April, 2001. However it was clarified that taking of the Compromise Agreement on record or acceptance of undertakings etc. would not preclude parties affected by it from challenging in an appropriate court, the authority of defendant No. 1-SPGL to make such payment to NTPC or to enter into any such settlement and that the competent court shall decide the same on its own merits, without being influenced by the fact that terms of the compromise agreement are taken on record and/or that undertakings have been accepted, by the Supreme Court.
3. It is further pleaded that thereafter in April, 2001, STUSA (defendant No. 5) filed a suit (S.No. 765/2001) for restraining SPGL in pursuance of Compromise Agreement dated 9.4.2001 to make any payment of NTPC. By orders dated 22.3.2002 the intervention application of the IDBI was dismissed by observing that the prayers made by financial institutions were beyond the prayer made in the suit and that the financial institutions could file separate suits. On the basis of the above averments, the plaintiff is seeking ad interim relief directing the NTPC to keep the amount received by it in an interest bearing no lien account. Defendants 1 & 3 and 4 have filed the reply opposing the same (hereinafter "contesting defendants").
4. NTPC-defendant No. 4 in its reply has pleased that the plaintiff has failed to make out their prima facie case and the balance of convenience in their favor; that the Compromise Agreement dated 9th April, 2001 is valid, lawful and that Mr. M. Kishan Rao, Managing Director, on behalf of defendant No. 2-JFIL had given an undertaking stating that if the company cannot make payment at any stage or is prevented from making payment then he shall make payment personally of the amount, as per terms of the Compromise Agreement. The undertakings were accepted by the Supreme Court on 9.4.2001 while taking Compromise Agreement on record. It is also pleaded that defendant No. 5-STUSA filed a suit for declaration, perpetual and mandatory injunction (S.No. 765/2000) praying for similar relief. On 21st September, 2001 their application for interim relief was disposed of directing SPGL to continue to pay Installment to NTPC; that the unsecured loan of Rs. 27.0 crores advanced by defendant No. 2-JFIL to defendant No. 1-SPGL, shall remain with the company as guarantee of JFIL till the final outcome of the suit an for payment of remaining Installments, banking guarantees were ordered to be furnished. In appeal (FAO(OS) Nos. 426-427/2001) last direction by which JFIL and M. Kishan Rao were directed to furnish bank guarantees was set aside. And in appeal of STUSA (FAO(SO) No. 518/2201) it was ordered that undertaking furnished in pursuance of the order of the Supreme Court dated 9th April, 2001 shall continue to remain in force till the decision in the suit filed by them. The plaintiff-IDBI's application for intervention was also declined.
5. It is further pleaded that the amount of compensation was agreed to be paid on the basis of the report of CRISIL, an independent agency, as an "opportunity costs" to the NTPC and its associated good-will. It is denied that it was in the nature of a payment being made by one promoter to opt out another promoter and that if on trial of the suit it is found that the payment should not have been made, in that eventuality the interest of SPGL is fully safeguarded by the undertakings of defendant-JFIL and M. Kishan Rao, to pay the amount to the company; that it was for this reason that the court directed that the unsecured loan of Rs. 27 crores advanced by JFIL to SPGL shall remain with the company as guarantee of JFIL till the final outcome of the suit filed by STUSA. It is also pleaded that NTPC is a profit making undertaking company of the Government of India. In the year 2000-2001 a net profit after tax, of the company is R.s 3733.80 crores and in case any decree is passed against NTPC it would be in a position to comply with the decree. Defendant No. 1-SPGL in its reply has also taken the similar stand. Reliance is placed on the observations made in order dated 21st September, 2001 while disposing of interim application in the suit filed by STUSA.
6. I have heard the learned counsel for the parties and have considered their respective arguments. At the outset, it would be useful to refer to the law regarding grant of interlocutory injunctions, during pendency of the proceedings, which is well settled by several authoritative pronouncements of the Apex Court as well as of this Court. In Gujarat Bottling Co. Ltd. and Ors. v. Coca Cola Co. & Ors. it was held:
"The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise 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 favor of the plaintiff; and (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 that plaintiff during the period before the uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against 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 favor 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."
7. In this case, the plaintiff has challenged the legality and validity of the compromise agreement dated 9th April, 2001 on the ground that the same is violative of the conditions of the loan agreement particularly Section 7.3(2). On the other hand, case of the defendants is that the loan agreements do not prohibit compromise between the defendants and NTPC. This section, inter alia, provides that the borrower will not issue any debenture or raise any loan or change capital structure of the company or crate any charge on the assets or give any guarantee without prior approval of Lead Institutions. Sections 7.3(2) of Loan Agreements runs as under:-
Section 7.3 GENERAL COVENANTS The borrower shall,
(i) xxxxx
(ii) LOANS AND DEBENTURES Not issue any debentures, raise any loans, accept deposits from public, issue equity or preference capital, change its capital-structure or create any charge or its assets or give any guarantees without the prior approval of the Lead Institution. This provision shall not apply to normal trade guarantees or temporary loans and advances granted to staff or contractors or suppliers in the ordinary course of business or to raising of unsecured loans, overdrafts, cash credit or other facilities from banks in the ordinary course of business.
(iii) to (xii) xxxxx
(xiii) MERGER, CONSOLIDATION ETC.
Not undertake or permit any merger, consolidation, reorganisation scheme of arrangement or compromise with its creditors or shareholder or effect any scheme of amalgamation or reconstruction.
(xiv) to (xvii) xxxxx
8. Analysis of the above Section shows, that it consists of two parts. First part is that the borrower is prohibited from issuing any debenture, raise any loan, accept any deposit from public, issue equity or preferential capital, change in its capital structure, create any charge on the assets, or give any guarantee without prior "approval" of the Lead Institutions. The second part is the proviso to the first. It provides that conditions contained in the first part would not apply to the normal trade guarantees, temporary loans and advances granted to the staff or contractors or suppliers in ordinary course of business or to raising of unsecured loans, overdrafts, cash credit or other facilities from banks " in the ordinary course of business". Thus, the restrictions contained in this section only apply when the capital structure etc. of the company is sought to be changed. These restrictions would have no application to the day-to-day business transactions. The argument that if the plaintiff's interpretation of the loan agreement is accepted then the borrower would have to take permission of the lenders even for buying furniture for the company, is without merit.
9. Learned counsel for plaintiff argued that giving of Rs. 52.0 crores by the company to NTPC in terms of the compromise has changed the capital structure of the company, therefore, sanction of the Lead Institutions was required. Learned counsel for defendants argued to the contrary that the said payment made by the company to NTPC in terms of compromise does not change its capital structure. Black's Law Dictionary (Sixth Edition) defines "capital structure" as follows:-
"Capital structure. The composition of a corporation's equities; the relative proportions of short-term debt, long-term debt, and owner's equity. In finance the total of bonds (or long-term money) and ownership interests in a corporation; that is, the stock accounts and surplus. See also Capitalization."
In the plaint it is pleaded that as a result of the said payment, coupled with non-availability of equity capital, the debt equity ratio of the company has been disturbed. The same is 84:16 as against 70:30 as per the institutional norms. Para 19 of the plain reads:-
"19) That the stake of the Financial Institutions in the project is much higher than that of all the equity holders, what to talk about JFIL Group and hence the Financial Institutions are vitally interested in the affairs of Defendant No. 1-Company. In brief, the investment of different stake holders in the project is as under:-
EQUITY CAPITAL Bambino Group 32.69 Crores Spectrum Technologies Inc. USA 29.19 Crores Rolls Royce 56.05 Crores Total 117.93 Crores Financial Institutions Rs. 32.1.30 Crores Banks Rs.4.40.76 Crores Total Rs.762.06 Crores As a consequence of the above payment coupled with the non-availability of equity capital, the debt equity ratio of the Company has been completed disturbed and is 84:16 as against 70:30 as per the institutional norms."
10. Learned counsel for defendants in support of their arguments, heavily relied upon the observations made by Hon'ble Mr. Justice J.D. Kapoor in the order dated 21st September, 2001, while disposing of the interim applications in the suit filed by STUSA. The observations are:-
"(a) As regards the apprehension of IDBI, it is misplaced as company-SPGL has not raised any loans nor have accepted any deposits or issued any equity. The IDBI has only agreed to this arrangement on the consideration that the 10% equity shall be shared by the STUSA. This agreement has not caused any prejudice to the IDBI as the company has drawn up the schedule for payment which take scare of the interest of the IDBI.
(b) However, as regards the concerns of the IDBI, it appears to be justified mainly for the reason that the debt equity ratio should not be disturbed but so far as the locus standi of the IDBI to challenge the agreement or undertaking given by M. Krishan Rao is concerned it is of doubtful nature as in the instant case IDBI had not only agreed to this arrangement but also participated in mooting the proposal for the agreement that 10% equity shall be shared by the plaintiff-STUSA. Moreover the company has already drawn up the schedule of payment to IDBI.
(c) The present agreement is not a bolt from the blue for the plaintiff. It is apparent from the affidavit of P. Mohan Ram of IDBI that pursuant to an order of the Division Bench of this Court passed way back in the year 1998, IDBI took initiative to resolve the dispute. It is pertinent to mention here that the plaintiff is also one of the respondents in the suit filed by the NTPC. Various orders passed in the proceedings show that the matter at one stage was adjourned for NTPC to pass the resolution as to the settlement between the NTPC and defendant company and the matter was adjourned from time to time as the talks for settlement were going on between the parties that the instant settlement vis-a-vis NTPC fruitified whereas it failed with the plaintiff.
The question whether the agreement is lawful or not is going to be a subject matter of the suit filed by the NTPC wherein an application under Order 23 Rule 3 CPW has been filed and is pending consideration. The fact that IDBI has also not taken away action for 2 years in spite of its Director being one of the Directors of the Board of the Company cannot be lost sight of. So much so in the year 1998 itself the proposal for NTPC opting out of the Promoters Agreement was also considered at one stage. Negotiations failed as Krishna Rao wanted to remain the Managing Directors and also wanted the shares at par and not at the market rate.
As regards the concern of the IDBI that agreement if implemented would jeopardise the interests of the IDBI, it has not basis as IDBI was involved right from the beginning when modalities of negotiation were being worked out. Compensation was determined by the CRISIL on the criteria and principles of 'opportunity cost'.
In the teeth of these facts to hold the agreement being bereft of legal authority or outside the ambit of day-to-day affairs for the purpose of injunction would be preposterous and improper. Furthermore, Board meeting was held on 30th March, 2001. The Board was informed about the impugned agreement. On 30th June a copy of the agreement was placed on record. This prima facie shows that the SPGL was competent to enter into the settlement.
(d) Again the question whether there has been a breach of the Promoters Agreement or not or whether the same cannot be honoured vis-a-vis NTPC are such questions which cannot be taken into consideration at this stage. This a subject matter of the SLP pending before the Supreme Court as the plaintiff has not been successful in getting the injunction for restraining the breach of the promoters agreement. Similarly, the question whether the agreement comes within the ambit of day-to-day affairs of major policy decision needs no consideration at stage as the efforts by IDBI to effect negotiation or settlement commenced more than two years ago in which all the parties including the plaintiff participated. To hold the settlement at the stage as unauthorised would be not only negating but also nugating the efforts of IDBI and also the authority of the company."
11. On the basis of above observations, learned counsel vehemently argued that IDBI was involved right form the very beginning, when the modalities of negotiations were being worked out amongst the co-promoters; compensation was determined by the CRISIL on the criteria of the principles of opportunity cost; arguments of IDBI that the compromise was in violation of the loan agreement was rejected, as efforts by the IDBI to effect negotiations and settlement commenced more than two years ago in which parties had participated. Learned counsel argued that it has already been held that the compromise agreement was not a bolt from the blue, as is apparent from the affidavit of P. Mohan Ram of IDBI; in pursuant to the orders of Division Bench in 1998, IDBI took initiation to resolve the dispute; the IDBI had agreed on consideration that 10% of equity shall be shared by STUSA and that the agreement has not caused any prejudice to the IDBI, as the company had drawn up the schedule for payment which take scare of the interest of the IDBI. Thus, the IDBI cannot be heard at this stage that the compromise agreement was in violation of the lender agreement. Learned counsel for the plaintiff argued to the contrary.
12. It may be re-called that by orders dated 21st September, 2001, while disposing of interim application, it was ordered (i) that the company shall continue to pay Installments to NTPC (ii) that the unsecured loan of Rs. 27.0 crores advanced by JFIL to SPGL shall remain with the company as guarantee of JFIL till the disposal of the suit of STUSA; and (iii) that for the remaining amount of Installments JFIL was directed to furnish bank guarantees. Against this order, three different appeals were filed. By orders dated 22nd March, 2002, Division Bench of this Court, set aside the directions whereby the JFIL and M. Kishan Rao were asked to furnish bank guarantees (Civil Appeal Nos. 426-27/2001). And in the appeal filed by STUSA it was ordered that the undertakings furnished by JFIL and M. Kishan Rao, in pursuance of orders dated 9.4.2001 by the Supreme Court shall remain in force until decision of the suit field by STUSA. On the application filed by plaintiff-IDBI before the appellate court, it was observed that the prayer made by the Financial Institutions were outside the scope of the suit filed by STUSA, and that Financial Institutions-IDBI could file its own substantive suit. Thus, the order dated 21st September 2001 stood merged in the order passed by the appellate court. After the order of the Division Bench, the observations made in the order dated 21st September, 2001 cannot be of any help to the contesting defendants. Reference in this regard can be made to the Supreme Court decision in Kunyahmed v. State of Kerala, . Even otherwise, admittedly, IDBI was not a party to the earlier suits. The observations were collateral and made while disposing of only interim applications in the suit filed by NTPC and STUSA. Those suits are based on the rights flowing from the Promoters' Agreement, whereas the present suit has been filed by IDBI on the basis of the rights emerging from the lenders' Agreement, therefore, in my view, the said observations cannot be pressed in service for determining issues involved here.
13. In view of the above, I prima facie find merit in the contention of the plaintiff that payments made by SPGL (defendant No. 1) in terms of compromise agreement dated 9th April, 2001, would change capital structure of the company, and as such it requires prior approval of the Lead Institutions. The "approval" is the act of confirming, ratifying or sanctioning to something done by another. "Approval" implies knowledge and exercise of discretion after the knowledge. Mere participation at some stage in the negotiations by the IDBI itself may not be enough to be termed as the "approval" as envisaged by the lender agreement.
14. Learned counsel for plaintiff next argued that the balance of convenience is in its favor, as no professional management could have agreed to pay substantial amount of Rs. 52.0 crores, to settle the inter-se disputes of the promoters; the action is not tenable in law having regard to the well settled principle that corporate body is a separate legal entity different from the promoters/shareholders; the compromise agreement was in violation of Article 7.3(2) of the loan agreement; the lenders are aggrieved by payments made to NTPC under the compromise agreement, inasmuch as it has seriously affected the liquidity of defendant No. 1-company and impaired the capacity of the company to honour its debt servicing obligations to the lenders, under the loan agreement; and that the company has not paid for the fuel charges to GAIL. It is further argued that the compromise agreement has seriously disturbed the capital structure of defendant No. 1-company; NTPC which is one of the promoters of defendant No. 1-company had in fact made no contribution to the capital of the company even though it was expected to contribute 10% equity share capital of the company under the promoters' agreement in June 1993; hence the payment to NTPC so as to ensure withdrawal of NTPC from defendant No. 1-company is contrary to the financial health and interest of defendant No. 1-company; Kishan Rao, Managing Director, is not competent or authorised to divert the company's funds to settle inter-promoters disputes; defendant No. 1-company is not benefited by such compromise in any manner whatsoever; that compensation out of the company's funds amounts to unjust enrichment as NTPC has not even prayed for compensation or award of damages in the plaint. Learned counsel for defendants relying upon observations made in the order dated 21.9.2001, argued to the contrary. For reasons recorded earlier, there is merit in the contention of the plaintiff and balance of convenience is in its favor.
15. Now the stage is reached to consider whether the plaintiff would suffer an irreparable loss or injury if the interlocutory injunction is disallowed. Learned counsel for the plaintiff argued that the defendant company SPGL has already made substantial default to the Financial Institutions regarding payment under the lender agreement; that SPGL is in default to the financial institutions, to the extent of Rs. 226.0 crores including the interest default of Rs. 123.0 crores despite having received regular payments for servicing the principal and interest dues from the financial institutions. It was further argued that the share capital of Rs. 32.5 crores was brought by Kishan Rao Group has already been utilised in the project and equity shares have been allotted in lieu thereof; that 27.5 crores has not been deposited by Kishan Rao Group and that out of 27.5 crores, Rs. 10.0 crores each has been raised by Kishan Rao and M. Raghuveer has been obtained from the banks including Indian Overseas Bank. Payment of interest on these amounts are being serviced by the company. This amount is actually a loan to the company, therefore, it cannot be treated as a deposit. Reference in this regard was made to the letter dated 25th October, 1999 which confirmed that the interests on loans, are paid entirely by it to the banks. On the other hand, NTPC has pleaded that it is a profit making undertaking of Government of India. Its Annual Report for the year 2000-2001 shows that it had a turn-over of Rs. 19,064.76 crores (an increase of 18.24 per cent over the previous year) and a net profit after tax of Rs. 3733.80 crores. The plaintiff has not denied these averments. Therefore, the sound financial condition of the NTPC stands admitted. The argument that it may go bad at any day in future cannot be accepted in the absence of any such material at present. In view of this, I am not inclined to accept the argument that the plaintiff (which is also a Government undertaking) would suffer irreparable loss and injury if the prayers for interlocutory injunction is disallowed.
For the foregoing reasons, a case for grant of interim injunction is not made out. However, in the interest of justice, it is ordered that the undertaking furnished in pursuant to the orders of the Supreme Court dated 9th April, 2001 would continue to hold good till final disposal of this suit. Further the unsecured loan of Rs. 27.0 crores advanced by the JFIL to SPGL shall also remain with the company as guarantee till final outcome of the suit.
With the above observations, application stands disposed of. The observations made herein, are prima facie and will not prejudice any of the parties during the trial of the suit on merits.