Delhi High Court
Spectrum Technologies Usa Inc. vs Spectrum Power Generation Company Ltd. on 21 September, 2001
Author: J.D. Kapoor
Bench: J.D. Kapoor
JUDGMENT J.D. Kapoor, J.
1. The scope of the instant application involves the limited question as to whether at this stage a prima facie case has been made out in favor of the plaintiff/applicant and against defendant no.1-Company for injuncting the latter from acting upon the agreement dated 9th April, 2001 whereby it has entered into a 'plea bargain'. In lieu of withdrawal of the suit for specific performance by defendant no.3-NTRC for implementing the terms of the Promoters Agreement, to which plaintiff-STUSA was one of the parties and also for opting out of the said Promoters Agreement, defendant no.1-SPGL has paid compensation of Rs.41.57 crores with interest in 12 equal monthly Installments.
2. This is suit restraining the defendant no.1-Company from making the payment of compensation cost to the defendant no.3-NTPC on the following grounds:-
Firstly the agreement is in breach of the promoters agreement.
Secondly, it is an act of fraud played by the Managing Director of the defendant no.1-Company upon the plaintiff and other shareholders with an eye on the wealth of the Company by way of siphoning off its funds as demonstrated though various statutory orders of Income Tax Authorities and reports of S.B. Billimoria and Company.
Thirdly, it is contrary to the interests and welfare of the Company particularly to those of plaintiff-STUSA and share holders at large, as instead of receiving equity, the funds of the Company have been depleted by making payment of compensation as ' opportunity cost'.
Fourthly, the agreement is outside the purview of Order 23 Rule 3 CPC, inasmuch as it has not been filed before the Court where the suit of defendant no.3-NTPC is pending nor has it been accorded the satisfaction of the Court as to its being lawful.
Fifthly, it is contrary to Sub-Section (5) of Section 21 of the Specific Relief Act which provides that no compensation shall be awarded unless the plaintiff has claimed such compensation in his plaint, provided that where the plaintiff has not claimed such compensation in the plaint the Court shall at any stage of the proceedings allow him to amend the plaint on such terms as may be just for including a claim for such compensation and since in the case filed by the NTPC no compensation was claimed nor was the plaint amended, the amount of compensation by the defendant No.1 to NTPC is illegal facts and void.
Sixthly, that it was a major policy decision whereas the Supreme Court had ordered for maintaining the status quo subject to the conduct of the day-to-day affairs and lastly that neither NTPC or SPGL were competent to enter into the agreement in terms of the Promoters Agreement.
3. Conspectus of relevant and events that has embroiled the parties in the morass of litigation and given rise to the instant application need to be recapitulated in brief:-
The plaintiff (in short STUSA) entered into a Promoters Agreement (in short 'PA') on 29th June, 1993 with defendant no.2-JFI and defendant no.3 NTPC (in short NTPC) for constructing, maintaining and running a gas-based Power Project at Kakinada, Andhra Pradesh for this purpose. The defendant no.1 Company (in short 'SPGL') was incorporated as a Joint Venture Company. The said Promoters Agreement spelt out in detail the equity structure, management structure of SPGL and also the rights and obligations of its Promoters namely STUSA, JFI and NTPC. The plaintiff-STUSA made an equity contribution of US $9.03 million equivalent to 29.9 crores to SPGL which in due course of time was utilised by SPGL for fuel deposit with GAIL, for purchaser of land from NTPC and for making advance payment for the Engineering, Procurement and Construction(EPC) contract with Rolls Royce Group(RRG) executed between SPGL and Rolls Royce Group. Rolls Royce was also granted Operation & Maintenance(O & M) contract. This contract was executed on 16th November, 1993. On 14th December, 1995 in General Meeting of SPGL's Board of Directors decision was taken to revoke or rescind Promoters Agreement on account of non-funding of personal guarantee by the plaintiff-STUSA to financial institutions and non-contribution of equity capital by NTPC. On 8th April, 1996 NTPC decided to put in its equity of 10% and nominated its Director on the SPGL Board.
4. On 18th May, 1996 the plaintiff-STUSA filed a suit being S.1256/96 for mandatory injunction directing the defendant no.2-JFI & defendant no.3-NTPC to make necessary amendments in the Articles of Association of SPGL in accordance with the requirements of Promoters Agreement dated 29th June, 1993 and declaring the resolution passed by the Board of Directors in its meeting held on 16th December, 1995 as illegal and ultra vires the Promoters Agreement including the relief of permanent injunction. NTPC also filed a suit being suit no.1905/96 for specific performance of he Promoters Agreement and mandatory injunction directing the SPGL to issue and deliver 777.77 lac equity shares and accept its nominee as a Director on their Board. On 25th June, 1997 plaintiff-STUSA also wrote to SPGL indicating its desire and willingness to bring in the remaining equity . However in the month of October, 1997 i.e. during the pendency of the aforesaid suit of the plaintiff, the plaintiff was finally issued and delivered shares certificate by SPGL for which the payments had been made long back and thus the plaintiff came to hold 20% of the equity.
5. On 5th November, 1997 the learned Single Judge rejected the interim application of the plaintiff as well as of NTPC and vacated the ex parte interim order restraining SPGL from issuing any further equity to third parties. Both plaintiff-STUSA and NTPC filed the Appeals. However the Appeal was dismissed by the Division Bench vide order dated 7th July, 2000. SPGL was granted permission to raise funds by way of redeemable preference shares. Dis-satisfied with the order, the plaintiff as well as NTPC filed the SLPs against the order of the Division Bench. The Supreme Court stayed the operation of the order dated 7th July, 2000 of the Division Bench and ordered for maintenance of status quo with the direction that no major decisions would be taken by the SPGL except the decisions to carry on day-to-day functions.
6. However during the pendency of the SLP defendants 1, 2 and 4 to 6 decided to enter into an out-of-Court settlement with NTPC in order to buy peace. A private agreement was executed between defendant no.1-SPGL and defendant no.3 NTPC whereby SPGL agreed to pay Rs.41.57 crores as well as interest @ 9% with effect from 1st January, 1999 and in return NTPC agreed to withdraw the suit for specific performance of the Promoters Agreement for enforcing the right to subscribe 10% equity in SPGL under the Promoters Agreement. Defendant no.4 Mr.Krishna Rao on behalf of defendant No.2 JFI also gave the undertaking that if the Company cannot make such payment on any stage or order preventing Company form making payments is obtained then he shall personally make payment of the amounts, as per terms. The Supreme Court accepted the undertaking and dismissed the SLP of NTPC vide order dated 9th April, 2000 which is as follows:-
"Heard learned counsel for the parties.
Mr. Shanti Bhushan and Mr.Chidambaram, learned senior counsel state that their clients have settled their suit out of Court in terms of the agreement which is placed on record. This special leave petition stands disposed of as withdrawn. Undertaking are accepted.
7. However, it is clarified that taking the terms on record or of the acceptance of undertaking by this Court does not preclude any other party from challenging power of the Company to make such payment or of the NTPC to enter into such settlement or to take, in an appropriate court any objection available in law. If such a challenge is raised before a competent Court the same shall be decided on its own merits without being influenced by the fact that the terms are kept on record and/or that the undertakings are given to and accepted by this Court. It is clarified that the undertaking given by the Company is subject to any Order which may be passed by any competent Court including holding that the Company cannot make such payment and/or give such undertaking etc. If it is decided that the Company cannot make such payment on any stage or order preventing Company form making payments is obtained then the director, namely, Respondent No.2, Shri Krishan Rao, Managing Director undertakes to this Court that he shall personally make payment of the amounts, as per terms either to the Company or to NTPC, as the case may be. This undertaking is also accepted.
8. As is apparent form the aforesaid order of the Supreme Court , it gave liberty to the plaintiff-STUSA to challenge the said private arrangement/agreement in appropriate proceedings and at the same time observed that the Court entertaining the said challenge would not be influenced by the fact that the undertaking has been given before and accepted by the Supreme Court.
9. It may be pointed out at this stage that NTPC and SPGL have filed a joint application under Order 23 Rule 3 CPC before this Court for withdrawal of the suit on account of the impugned agreement. this itself shows that the agreement arrived at between. This itself shows that the agreement arrived at between SPGL and NTPC is still an out-of-court settlement and has not received the satisfaction and concurrence of the Court as to its legality or validity.
10. The order of the Supreme Court also shows that the impugned agreement is nothing more than an out-of-court agreement. had the Supreme Court treated the agreement and the undertaking as settlement under Order 23 Rule 3 CPC it would have ordered the dismissal of the suit as withdrawn. The very fact it left the right of the plaintiff-STUSA intact or open to challenge the validity or legality of the said agreement in appropriate proceedings before the competent court that this agreement was neither under the provisions of Order 23 Rule 3 CPC nor an agreement that has received the approval of the Court as to its validity or legality. The Supreme Court merely accepted the undertaking of JFI and Mr.M.Krishna Rao and referred to the terms of the agreement between SPGL and NTPC in its order while dismissing the SLP as withdrawn.
11. There is no gain-saying the fact that dismissal of Appeal or SLP either as withdrawn or compromised on account of out-of-court settlement does not amount to dismissal of the suit on merits or decree in terms of Order 23 Order 23 Rule 3 CPC. There are certain legal and factual aspects the Court is required to satisfy itself before decreeing the suit under the provisions of Order 23 Rule 3 CPC in terms of the agreement of settlement between the parties.
12. These are as under:-
1) that the suit has been adjusted wholly or in part by lawful agreement or compromise in writing and signed by the parties;
2) that such a settlement or agreement or satisfaction of the court is irrespective of the fact whether or not the subject matter of the compromise agreement or satisfaction is the same as the subject matter of the suit.
13. An agreement or compromise which is void or voidable under Section 23 of the Indian Contract Act, 1872 is not deemed to be lawful within the meaning of this Rule. Section 23 provides as under:-
"23.What consideration and objects are lawful, and what not- The consideration or object of an agreement is lawful, unless-
It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it is immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void."
14. Since till date no order has been obtained by the plaintiff to the satisfaction of the Court that the suit field by NTPC has been adjusted wholly or in part in terms of the alleged agreement or that SPGL has satisfied the NTPC in respect of the whole or any part of the subject mater of the said suit nor has the satisfaction of the Court been recorded as to the agreement being lawful, neither the agreement nor the dismissal of the SLP on account of its having been withdrawn can be deemed as a settlement of the suit in terms of the Order 23 Rule 3 CPC. Thus, the impugned agreement does not fall within the ambit of Order 23 Rule 3 CPC and, therefore, cannot be subject to the scrutiny or scanning there under.
15. The Supreme Court has only placed the agreement on the record and accepted the undertaking of defendant no.2. Had this agreement been accorded the satisfaction of the court or for that purpose had the Supreme Court provided final stamp on the validity and legality of the agreement there was no occasion for the Supreme Court to allow the plaintiff to challenge its vires and it would not have made the specific observations that if such a challenge is raised before a competent Court the same shall be decided on its own merits without being influenced by the fact that the terms are kept on record and/or that the undertaking are given to and accepted by this Court.
16. Even if we assume for a moment that the agreement and the undertaking has been recorded by the Court and even if we assume that the Court has allowed the same recording its satisfaction as to its being lawful as provided under Order 23 Rule 3 CPC still this agreement is not binding upon the plaintiff either as a shareholder or as a co-promoter as he not a party to the agreement. It will always remain open to the plaintiff to challenge the legality or validity of the agreement on any ground including the ground that it is in breach of the promotes agreement or is vitiated by fraud.
17. However, in order to project the impugned agreement fraudulent in nature and effected with intention to defeat the rights and obligations accruing to the plaintiff under the Promotes Agreement and the monstrous growth of the defendants 4 to 6 other family members in the company at the cost of the plaintiff and other shareholders, the plaintiff-STUSA has relied upon and referred to various statutory orders passed by the Income Tax Authorities demonstrating that the monies were being siphoned form the Company though the contractors and then brought back into the SPGL as share application money whereas the contractors performed no work as one of such contractor company was a shell company which did not even possess a telephone.
18. The plaintiff has also referred to the report of S.B. Billimoria & Company, Chartered Accounts who were appointed by the IDBI as complaints were being received about the irregularities and fraudulent manners the funds of the company were being dealt with. One of the Directors of the IDBI is also on the Board of the SPGL. For instance it is alleged that although the EPC contract was given on turn-key basis to Rolls Royce Group, the defendant no.4 purportedly appointed several sham entities such as Blue Star Construction, Kris Engineers, Kris Engineers Pvt. Limited etc. for the land and site development. This was done purely to siphon out the funds of SPGL and all these funds were eventually transmitted to SPGL as share holding of defendants 2, 4 to 6 share holding as the purported companies of M.Krishnarao and his family members wherein the 4th defendant had specified interest. However these fraudulent acts have been challenged by the shareholders of the Company in a city civil court Hyderabad.
19. Further even the report of S.B. Billimoria & Co., has established that huge amounts have been siphoned off from the SPGL by defendant no.4 and his family members and the corporates owned and controlled by them in the name of land and site development contracts through the bogus book entries and secondly that the amount so siphoned off was brought in by them as alleged equity contribution in the SPGL. It further showed that the credits to the accounts of the parties were based on the debit notes and the debit notes carried the narration being the amount debited to the Company by cash paid through M.Krishna Rao.
20. According to the plaintiff-STUSA the Company-SPGL and defendant no.4 have not only played fraud upon the plaintiff but also upon the shareholders as the amount of Rs.41.57 crores calculated as a compensation on account of 'opportunity cost' seeks to compensate a promoter who was required to contribute funds by way of equity. Thus depletion of such a huge amount is going to have an adverse effect on the already ailing financial health of the Company whose debit equity balance has been disturbed immensely. As per norms of financial institutions debt equity ration should be 70:30 but at present it is 88:12 and if the aforesaid amount is paid to the NTPC by way of compensation it would further dwindle down.
21. Mr.Kapil Siblal, Sr. Advocate and counsel for the plaintiff-STUSA has assailed the impugned agreement on multifarious grounds. These are-
(i) Since both the plaintiff as well as the NTPC had filed suits for specific performance of the Promoters Agreement, the NTPC was debarred under sub-Section (5) of Section 21 of the Specific Relief Act from claiming damages or compensation. Sub-Section (5) of Section 21 provides that no such compensation shall be awarded unless the plaintiff claims such compensation in the plaint; provided that where the plaintiff has not claimed any such compensation in the plaint, the court shall, at any stage of the proceedings allow him to amend the plaint on such terms as may by just for including a claim for such compensation.
In this case the NTPC has neither claimed the compensation nor has amended the plaint. In the suit these NTPC had asked for issuance and delivery of 777.7 lac equity shares of defendant no.1-Company and not for compensation.
(ii) That SPGL has paid compensation or damages despite the fact that there was not method of evaluating the compensation and further that the question of compensation and damages would arise if the relief sought is incapable of being granted.
(iii) That inspite of the order of the Supreme Court for maintaining status quo and allowing the company only to attend to day-to-day affairs the Company-SPGL has entered into the impugned agreement which involves huge amount of compensation to be paid to NTPC and such a decision cannot by any stretch of imagination be deemed as a day-to-day affair of the company. It is a major policy decision.
(iv) That on the one hand the Company has taken the stand int he earlier suit that the NTPC has hugely profited form the sale of land to SPGL as well as through the consultancy agreement while on the other hand the Company is paying the compensation and this itself sounds fallacious and self-contradictory and self-serving.
(v) There is collusion between defendant 4 to 6 as no Company would pay instead of receiving money as equity. The Company is not only ready to deprive it form the equity by way of allotting shares to NTPC but is also ready to deplete its funds by paying the compensation or damages to a promoter who is otherwise not legally entitled.
(vi) That even if it is presumed that SPGL has the power to enter into the agreement with NTPC still the plaintiff has to the right to seek interim injunction if it succeeds in proving that the act of the Company amounts to defrauding the shareholders and is not to promote its objects and is to the detriment of the interests of the Company and the malafide intention of the defendants 4 to 6 to enrich themselves by playing fraud through the impugned agreement.
(vii) Some of the following instances and the extracts from the statutory orders passed by the Income Tax Authorities, the observation of the Billimoria & Co., Chartered Accounts demonstrate various acts of fraud and siphoning of the funds of the Company by Mr.M.Krishna Rao:
a) Order of Income Tax Department for the Assessment Year 1995-96 shows that the assessed M/s Blue Star Construction claimed to have received mobilization advance of Rs.2,00,00,000/- from SPGL on which TDS of Rs.4,00,000/- was made which was claimed as refund in the return of income. It is also seen from the list of loans and advances enclosed to the balance-Sheet as on 31.3.1995 the entire mobilization advance was in turn advance as interest free loan to the group concerns namely M/s Marshal Transport Company, M/s Revathi Agencies, M/s Marshal Tours & Travels & M/s Madhava Rolter Flour Mill.
b) Order for Assessment Year 1997-98 shows that the assessed received amounts form SPGL on various dates. The fact clearly proved that funds were being channelised from SPGL to the group concerns of SPGL through the assessed in the name of execution of earth work. If the assessed has really done the contract work as claimed there was no possibility of such huge amounts received from SPGL being diverted to the associate concerns of SPGL. In this order the income declared by the assessed was treated as commission income earned for lending its name to SPGL.
c) Clause 3 of the Agency Agreement dated 8th November, 1993 entered between Rolls Royce Industrial Power(India) Limited and Towanda Services Limited provided that if the O&M Contract is awarded to the Company and becomes effective, the Company will pay to the Agent in accordance with Clause 4 a commission of 1,500,000/- pounds sterling.
d) In another Agency Agreement dated 1st November, 1993 between Parsons Trubine Generators Limited and Towanda Services limited it was provided that if the EPC Contract is awarded to an d enter into the Company, and if a down payment of ten cent of the EPC Contract Price is received by the Company, the Company will pay to the Agent in accordance with Clause 4 a commission of US$19,300,000/-.
(viii) That on the one hand the NTPC has challenged the termination of Promoters Agreement while on the other hand it has entered into the agreement not only to withdraw the suit but also to opt of the Promoters Agreement in lieu of consideration. This is nothing but a fraud on the Company as well as on the plaintiff as the plaintiff was invited to invest in the Company on the assurances and the understanding that NTPC, JFI and their affiliates would be bound by the terms of the Promoters Agreement and Memorandum of Association. After receiving investment of Rs.29 crores, Company is now barred from taking any action contrary to the terms of the Promoters Agreement.
(ix) Clauses 19.1 and 19.4 of the Promoters Agreement prevent both NTPC and the plaintiff as well as JFI from opting out of the Promoters Agreement and therefore the impugned settlement between SPGL and NTPC is contrary to the Promoters Agreement and is detrimental to the interests of the plaintiff, defendant no.1 Company and its shareholders and also against public interest. Clause 19.1 is as under:-
"19.1 - This Agreement shall remain valid until it is terminated in accordance with the provisions hereof with reference to any Party hereto or if any of the parties withdraws its shareholding in the SPGL by way of transfer or sale in accordance with provisions of this Agreement, this Agreement shall stand terminated with reference to such Party only."
Clause 19.4 reads thus:-
"19.4 - No modifications or amendment of this Agreement and no waiver of any of the terms or conditions hereof shall be binding unless made specifically in writing duly executed by the authorized representatives of the Parties."
(x) Further that on 16th November, 1993 services of Rolls Royce Group were availed because of the technical expertise as the others had no technical know-how. Though Rolls Royce was not a co-promoter but it brought equity more than JFI. Since Rolls Royce was an affiliate of the JFI it could not have contributed more than what JFI had contributed.
22. As against this Mr.Chidambram, learned senior Advocate for defendant No.1-SPGL has with all vehemence tried to confute these contentions. At the outset Mr.Chidambram, has mainly dwelt at and challenged the locus standi of the plaintiff to maintain this suit either in its individual capacity as one of the promoters or in its representative capacity of shareholder by way of 'derivative action'. At the same time he has tried to hold the impugned agreement within the competence of the defendant no.1-Company and also wholly lawful when tested on the touch stone or anvil of the provisions of order 23 Rule 3 CPC.
23. According to Mr.Chidambram the averments of the plaintiff demonstrate that the plaintiff is not only initiating this action in its individual capacity but also by way of a derivative action i.e. on its behalf and other shareholders for the welfare of the Company. According to the plaintiff the defendant no.4 wants to enrich himself at the cost of the Company as there are allegations that the Company is being mismanaged and a fraud is being played upon the shareholders.
24. As to the jurisdiction of the Civil Curt, Mr.Chidambram has referred to the provisions of Sections 397, 398 of the Indian Companies Act. As per these provisions wherever there are allegations of mismanagement and operational fraud, remedy lies with the Company Law Board as aforesaid provisions exclude the jurisdiction of the Civil Court. To appreciate this contention in proper perspective, these provisions need to be reproduced. These are:-
"397. Application to Company Law Board for relief in cases of oppression - (1) Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1) the Company Law Board is of opinion -
(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up;
the Company Law Board may, with a view to bringing to an and the matters complained of, make such order as it thinks fit."
"398. Application to Company Law Board for relief in cases of mismanagement - (1) Any members of a company who complain:
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;
may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason for any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. "
25. Allegations of fraud as extracted from para 74 of the plaint are as under:-
"The only genuine promoter of this project is STUSA. Subsequent events demonstrate that JFI's contributions to the project are, to say the least, suspect. Statutory orders, Agency Agreements, audit reports and voluntary disclosures made, reflect, not only fraudulent conduct but mismanagement of the Company by JFI and defendants No.4 to 6. The impugned Agreement would only perpetuate this wrong and keep out the genuine promoter who is, in the light of what is demonstrated above, along entitled to manage the affairs of the company to the exclusion of JFI. This Hon'ble Court should immediately set aside the Impugned Agreement as it seeks to reward the defaulting party and penalise the genuine promoter."
26. The above averments, according to Mr.Chidambram show that the plaintiff is not only initiating his action in its individual capacity but also a s a derivative action i.e. on its behalf and on behalf of other shareholders to protect the interests of the Company and for its welfare as the allegations are against the Managing Director of the Company. It is alleged that he is siphoning off the funds of the Company to grind hi own axe and to enrich himself and his family members unjustly. According to Mr.Chidambram for the success of such an action the initial onus upon the Court is to firstly find out whether the person ha the power to initiate such an action and secondly to inquire into his conduct and bonafides that is whether he has come with clean hands or not.
27. Mr.Chidambram has vehemently urged that the allegations and averments of the plaintiff clearly demonstrate that these fall within the arena of Sections 397 and 398 of the Companies Act and, therefore, the jurisdiction of the civil court is barred as it vests exclusively in the Company Law Board as these provisions take every allegation of mismanagement or operational fraud in their fold.
28. While canvassing the aforesaid proposition Mr.Chidambram has placed reliance upon Barrett Vs. Duckett and others [1995] 1 BCLC 243 wherein the following principles governing the actions in respect of wrongs done by the Directors of the Company or irregularities in the conduct of its affairs were laid down:-
(1) The proper plaintiff is prima facie the Company.
(2) Where the wrong or irregularity might be made binding on the company by a simple majority of its members, no individual shareholder is allowed to maintain an action in respect of that matter.
(3) There are however recognized exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer: in such a case the shareholder may bring a derivative action (his rights being derived from the company) on behalf of the company.
(4) When a challenge is made to the right claimed by a shareholder to bring derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity.
(5) In taking that decision it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company.
(6) The shareholder will b allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.
29. Apart from legal impediments to the maintainability of the suit Mr.Chidambram has also referred to certain orders and events showing that the plaintiff was well aware of negotiations for settlement going on not only between the defendant no.1-Company and the NTPC but also with the plaintiff since long but it did not raise any objection to the aforesaid negotiations and now it is no more open to it to challenge and impugned agreement between defendant No.1 Company and NTPC and this fact alone debars the plaintiff from taking the instant action which is nothing but a result of frustration as the negotiations for the settlement with the plaintiff did not succeed.
30. The order dated 5th January, 2001 shows that the matter was first adjourned to enable the NTPC to pass the resolution and the said resolution was passed on 16th January, 2001 and the matter was further adjourned as the talks for settlement were going on between the parties including the plaintiff and ultimately the settlement between the NTPC and defendant no.1-Company was arrived at. It was ratified by way of resolution of the Company. The Resolution dated 16th January, 2001 is as under:-
"Resolved that the report of CRISIL dated 5.1.99 determining the compensation payable to NTPC for withdrawal from he Joint Venture project of Kakinada Gas Based Power Project being executed by Spectrum Power Generation Ltd.(SPGL) as detailed in the Board Memorandum be and is hereby accepted and approved.
Further resolved that subject to decision of Supreme Court of India and proposal to withdraw all court cases against SPGL and others by NTPC, on receipt of compensation in accordance with CRISIL report and interest be and is hereby approved.
Further resolved that the proposal to accept the rate of payment of interest, date from which such interest becomes payable and the mode of payment of compensation of NTPC as may be decided by the Supreme Court of India be and is hereby approved.
Further resolved that the Chairman and Managing Director/Director(Technical) be and is hereby authorised to take all further actions in this matter to implement the decision of the Supreme Court of India."
31. Mr.Chidambram reads the word 'parties' mentioned in the agreement referring to all the parties including the plaintiff-STUSA and not the NTPC alone.
32. According to Mr.Chidambram the aforesaid resolution passed by the Board of NTPC was a self-contained resolution as it left over two matters for the decision of the Supreme Court. As a supplement Mr.Chidambram further referred to the following para 6 of the reply of defendant no.1 to the application which is as under:-
"Without prejudice to the aforesaid it is submitted that the plaintiff is entitled to challenge the said settlement on inter-alia whether the Company had the power to make such payment to NTPC or whether NTPC could enter into such a settlement or take any objection available in law. In so far as the power of the Company to make such payment is concerned the Answering Defendant has made detailed submissions hereinbelow and in so far as the question of whether NTPC could enter into such a settlement or not, it is submitted that the decision to enter into such a settlement has been taken by the Board of Directors of NTPC at its meeting held on 16.1.2001 and it is not open to the plaintiff to question the decision of the Board of Directors of NTPC nor has the plaintiff challenged the decision of the Board of Directors of NTPC in these proceedings nor has the plaintiff opposed or filed any reply to the affidavit of NTPC in the Supreme Court of India. The plaintiff's challenge to the settlement is only an afterthought and only because the without prejudice negotiations for settlement with the plaintiff did not succeed."
33. Advancing his contention further Mr. Chidambram inferred that the aforesaid para shows that the talks of compromise with the plaintiff were already going on and now at this belated stage when the negotiations for settlement with the NTPC have fructified the plaintiff's suit is not only an after thought but also counter blast and act of frustration.
34. Next, while demonstrating the malafides of the plaintiff/applicant, Mr. Chidambram and Mr. A.S. Chandhiok, learned senior counsel for JFI have referred copiously from the plaint which is repletive and repetitive of those allegations and averments which are subject matter of different suits between the parties pending in different courts. For instance para 3(a), 3(b), 4 to 30, 38, 56, 57 and 62 are reproduction or identical to the averments made in Suit No. 1251/96 filed by the plaintiff for specific performance whereas paras 31 to 37, 47, 49, 58 and 60 refer to the averments made in the suit filed by the NTPC for specific performance. Paras 41 to 46 relate to subject matters of interim reliefs inspite of the fact that this matter is now before the Supreme Court. Para 23 is with respect to a suit pending against plaintiff-STUSA in USA. Para 48 refers to the proceedings with Twanda in UK.
35. According to Mr. Chidambram the purpose and object of reference to various litigation pending between the parties at different places namely London, Hyderabad, Madras and the statutory orders of the Income Tax Authorities and the contracts given by the Company to various other companies with which the entire family of M. Krishnarao is connected and concerned or are associated with is to prejudice the Court and to paint the defendant black to extract certain observations of the Court against the defendant which though may be of prima facie nature but would tend to cause prejudice against the defendant and help in drawing undue benefit and advantage.
36. Thus Mr. Chidambram thinks that so far as the present suit is concerned the relevant pleas available to the plaintiff were that the agreement is void and is not in accordance with the provisions of Order 23 Rule 3 CPC and is in breach of the terms of the promoters agreement or is unlawful. Derivative action is a matter of grace and is not to be resorted to by an individual so as to enable him to blackmail the Company for his selfish ends.
37. To concretise the malafide conduct of the plaintiff, Mr. Chidambram referred to the affidavit of P. Mohan Ram, an official of the IDBI which shows that pursuant to order of the Division Bench of this Court dated 28.8.1998, IDBI took initiative to find a negotiated settlement and NTPC filed an application dated 17.11.99 for withdrawing from the project on receipt of compensation towards opportunity cost as determined by CRISIL. Relevant part of the affidavit of Mr. P. Mohan Ram reads as follows:-
"That pursuant to the order passed by this Hon'ble Court on 28.8.1998 and with a view to finding a negotiated settlement of outstanding issues the Industrial Development Bank of India(IDBI) convened a meeting on October 15, 1998 at IDBI's Head Office of all the promoters, namely, Jaya Food Industries Pvt. Ltd. (JFIL), Spectrum Technologies USA Inc. (STUSA) and National Thermal Power Corpn. (NTPC). The said meeting was attended by Shri M. Kishan Rao, Managing Director, JFIL, Dr. Mohan Rao, Managing Director, STUSA and two officials of NTPC. Earlier the promoters namely, JFIL & STUSA had identified major issues for discussions in writing and communicated to IDBI, in addition to some other points, raised by the parties subsequently during discussion."
If NTPC would opt out of the project, 10% equity proposed to be subscribed by it should also be distributed equally between JFIL and STUSA. IDBI would appoint a reputed firm of Chartered Accountants/Merchant Bankers for the purpose of valuation of SPGL's equity shares within 10 days from the date this compromise being approved by the Hon'ble Delhi High Court.
NTPC would take a view on the question of opting out of the project after receipt of report from the merchant Bankers/CRISIL on the compensation amount payable to NTPC for the development work. In the event of NTPC not opting out, it shall subscribe to 10% equity shareholding at a price to be determined separately by a reputed firm of Chartered Accountants/Merchant Bankers and discharge other obligations as provided in the Promoters Agreement."
That for the purpose of obtaining formal confirmation to the aforesaid terms of compromise Shri Kishan Rao and Dr. Mohan Rao were called in the office of IDBI on November 13, 1998. While Shri Kishan Rao confirmed the said draft of the terms of compromise by signing a copy thereof, Dr. Mohan Rao raised a new issue by making a demand that he should be made Joint Managing Director with Shri Kishan Rao as Managing Director. This was not acceptable to Shri Kishan Rao. Though Dr. Mohan Rao had earlier agreed at the meeting held on November 10, 1998, that further shares of the company be issued at a price to be determined by a reputed firm of Chartered Accountants/Merchant Bankers, he requested for issue of the said shares at par value.
38. It is clear from the above affidavit that at that point of time also question of NTPC opting out from the Promoters Agreement was under consideration but the negotiations failed as Krishnarao wanted to remain the Managing Director and also wanted the shares at par and not at the market rate. According to Mr. Chidambram this conduct of Krishnarao also shows that he is not a person whose concern is not for the welfare of the Company.
39. While distinguishing between the rights of the shareholder or for that purpose minority shareholder and that of the company Mr. Chidambram contended that Company is a juristic person and is distinguished from the shareholders and, therefore, the shareholders are not the shareholders of the property of the Company as no right vests in the Company so far as the shareholder is concerned and, therefore,e the contention of the plaintiff that by way of frittering away Rs. 41.57 crores, the Company is being put to loss is untenable as it is the Company which may or may not suffer the loss but in no way it tantamount to the loss of the shareholder or for that purpose the plaintiff because the shareholder i.e. the plaintiff has no interest in the property of the company but has only a right to participate in the proceedings and to receive dividends in the event of dividends being declared. The shareholders are not the owners of the divisible sum nor are owners of the property of the company. Mr. Chidambram has placed reliance upon the following observations of the Supreme Court in Mrs. Bacha F. Guzdar, Bombay vs. Commissioner of Income Tax, Bombay -
"The true position of a share-holder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the share-holders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole."
40. Though Mr. Chidambram as well as Mr. Chandhiok dwelt at length as to the challenge of the validity of the agreement which according to them is in terms of Order 23 Rule 3 CPC yet it may be pointed out at the very outset that neither was the agreement presented before the Court where the suit of the NTPC was pending decision nor has that Court recorded its satisfaction as to its being lawful. Thus to test the validity or legality of the agreement on the anvil of Order 23 Rule 3 CPC would at this stage be neither permissible nor relevant.
41. Reproduction of the provisions of Order 23 Rule 3 is necessary to appreciate the aforesaid view.
"(3) Where the Court is satisfied-
(a) that a suit must fail by reason of some formal defect, or
(b) that there are sufficient grounds for allowing the plaintiff to institute a fresh suit for the subject-matter of a suit or part of a claim, If may, on such terms as it thinks fit, grant the plaintiff permission to withdraw from such suit or such part of the claim with liberty to institute a fresh suit in respect of the subject-matter of such suit or such part of the claim."
42. Settlement as contemplated under Order 23 Rule 3 CPC has to fulfill the following conditions:-
i) that the agreement is in writing.
(ii) it is signed by the parties.
iii) it is lawful agreement.
43. If these three conditions are satisfied there is no other option for the Court than to order such an agreement or settlement to be recorded and pass a decree in accordance therewith. The observations of the Supreme Court in this regard in M/s Silver Screen Enterprises vs. Devki Nandan Nagpal AIR 1970 SC 559 are quotewrothy. These are:
"Once a dispute is validly settled out of Court, it is open to a party to a litigation to move the Court to pass a decree in accordance with the compromise. Rule 3 of Order 23 of Code of Civil Procedure provides that where it is proved to the satisfaction of the Court that a suit (which expression includes an appeal) has been settled wholly or in part by any lawful agreement, the Court shall order such agreement, compromise or satisfaction to be recorded and shall pass a decree in accordance therewith so far as it relates to that suit. This is a mandatory provision. It is somewhat surprising that the High Court should have felt itself helpless under the circumstances of the case to do justice between the parties."
44. It is also settled proposition that the order on the edifice of Order 23 Rule 3 CPC can be set aside or recalled if it is found to have been obtained by playing fraud either on the party or on the Court. Powers to set aside or recall is inherent in the Court as fraud and justice are alien to each other. Fraud pollutes the sanctity or solemnity of the judicial proceedings.
45. However it does not mean that the plaintiff-STUSA is barred from challenging the vires of the impugned agreement. Agreement can be assailed if it is in breach of terms of the Promoters Agreement or for other ancillary reasons namely that the Company was not competent to enter into this agreement or that the Managing Director M. Krishnarao had no locus standi or powers to enter into the agreement on behalf of the Company or that the said agreement is in violation of the order of the Supreme Court dated 24th July, 2000 whereby status quo was ordered to be maintained with the direction that no major decision except the decisions of day-to-day business shall be taken by the Company. Again the plea of fraud as raised by the plaintiff/applicant is also available to it and has to be dealt with independently.
46. According to Mr. Chidambram and Mr. Chandhiok the object of the agreement was simply to put an end to the litigation initiated by the NTPC on acceptable terms and such an object cannot be termed as fraudulent. Merely because a consideration of Rs. 41.57 crores with interest passed from the SPGL to NTPC in lieu of the withdrawal of the civil suit filed by the NTPC against the SPGL the agreement is in no way fraudulent within the meaning of section 23 read with Section 17 of the Contract Act. Section 17 of the Contract Act defines fraud as under:
"17. 'Fraud' defines - 'Fraud' means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who dies not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent."
47. Mr. Chidambram further pronounced that to test the agreement as to its fraudulent nature the motive is irrelevant and consideration and object alone are relevant and if these are proved to be fraudulent or unlawful the agreement itself is rendered unlawful. In support of this concept Mr. Chidambram relied upon Kashinath and another vs. Bapurao and others Nathusa Pasusa Lad Vs. Munir Khan s/o Jiwan Khan AIR (30) 1943 Nagpur 129. The observations of the Supreme Court in Kashinath and another vs. Bapurao and others are as under:-
"Section 23 is not concerned with motive. It is confined to the object of the transaction an not to the reasons or motives which prompted it. The law doe snot prevent even the most degraded of men from having their own friends and from receiving gifts from them whatever the motive of the donors may be, provided the object is not to induce or encourage the commission of an illegal or an immoral act."
48. In Nathusa Pasusa Lad vs. Munir Khan s/o Jiwan Khan it was observed:-
"The consideration for, and object of, an agreement must be something about which both sides are at one, because unless they are both talking about the same thing and both mean the same thing their minds are not at one and so have not reached agreement. No agreement can be unlawful and thus void under Section 23 unless both sides are concurring parties to the matter which renders it unlawful. If their minds have never been at one they have never agreed, and if they never agreed there is no agreement and, consequently, Section 23 which hits at agreement will not apply.
49. As I have already observed that till date the impugned agreement has not attained the status of settlement as contemplated under the provisions of Order 23 Rule 3 CPC the said agreement has to be prima facie scanned not on the principles envisaged in Order 23 Rule 3 CPC but on the premise of allegations set out above. For the self-same reasons objection as to the agreement being beyond the scope of sub-Section (5) of Section 21 of the Specific Relief Act is of no substance as the legality of impugned agreement is liable to be tested on the touchstone of this provisions unless it is covered under Order 23 Rule 3 CPC.
50. It is beyond the pale of controversy that a Company incorporated under the Companies Act has the power to do those acts as set out in its Memorandum of Association or those that help in attaining its objects. To come to the conclusion whether a particular transaction or act done by a Company is within or outside its purview or is for fulfillment of its objects, the Memorandum of Association is to be looked into in its entirety. If it is found that a particular act of the Company is not adverse to the interest and welfare of the company and rather tends to pursue or attain its objects such an act cannot be held as ultra vires.
51. Here is an apt illustration. In Rolled Steel Products (Holdings) Limited Vs. British Steel Corporation and others 1994 BCLC 466 the plaintiff company owed debt to second company which also owed debt to a third party. Debt to third party was personal guarantee by the Director of the Company. The Company gave guarantee of payment of debt it owed to third party in return for loan to pay off its debt to second company, assuming its liability under the guarantee for amount greater than debt owed by it.
52. The question arose whether the guarantee was within company's objects clause or whether the guarantee given was for unauthorised purpose. Though it was held that there is a difference between object and power but the main ratio laid down in the aforesaid case was that if a particular act is of a category which, on the true construction of the company's memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires of the object of the Company merely because in a particular instance its Directors, in performing the act in its name, are in truth doing so for purposes other than those set out in this memorandum. It was further observed that subject to any express restrictions on the relevant power which may be contained in the memorandum, the stat of mind or knowledge of the persons managing the company's affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity.
53. Thus the main rudimentary determining criteria as to the ultra vires or intra vires of the transaction or act of the Company is the element of 'good faith'. Other considerations are whether the settlement is reasonably incidental to the carrying on the company's business sand has been done for the benefit of the company.
54. As to the powers of the Director or Managing Director of the company of effect any transaction or say settle the disputes, the following view was taken in Rolled Steel Products (Holding) Limited (supra):-
"A company holds out its Directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by its memorandum of association. Unless he is put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume that its directors are properly exercising such powers for the purpose of the company as set out in its memorandum. Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature. If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction."
55. Mr. Sibal has challenged the authority of Mr. M. Krishna Rao to enter into such an agreement on behalf of the Company with great vehemence by contending that the term of M. Krishna Rao as Managing Director of the Company expired at the end of the 5 years on 4th September, 2000 and thus the impugned agreement effected on behalf of the Company by a person who had no authority to act on behalf of the Company and, therefore, is unlawful and cannot be acted upon.
56. I am afraid this contention holds was like that on the back of the duck as neither any Director has since been retired nor has any AGM taken place till date and in view of order dated 24th July, 2000 of the Supreme Court maintaining status quo with the direction that no major decision except the decision of day-to-day business would be taken, all the Directors continued to be de facto Directors and so was the position of the Managing Director. If view of Mr. Sibal is accepted it would mean that after 4th September, 2000 the Company went into limbo and every decision was without any authority and therefore invalid or illegal. But it is not so. Company is still functioning and its day-to-day affairs are being looked after by the same Board of Directors.
57. Director of a Company draws authority from the Memorandum of Association to enter into any transaction but conditions that it should be made in 'good faith' and should be in consonance with its objects and for its purpose. Such a transaction is always binding upon the Company. Article 120 provides general powers to the Company vested in it.
58. Article 125 relates to the powers of the Managing Director as under.
"125. Subject to the provisions of the Act, and in particular to the prohibitions and restrictions contained in Section 292 thereof, the Board may, from time to time, entrust to and confer upon a Managing Director or Whole time Director for the time being such of the powers exercisable under these provisions by the Besides it may think proper and may confer such powers for such time, and to be exercised for such object and purposes and upon such terms and conditions and with such restrictions as it thinks fit, and the Board may confer such powers either collaterally with or to the exclusion of, and in substitution for all or any of the powers of the Board in that behalf any may, from time to time, revoke, withdraw, effect or vary all or any of such powers."
59. For the self-same reasons the contention that even the Company was not competent to enter into this agreement has no teeth as whenever there is an express power there is no other implied restriction. Only express powers have to be taken into consideration and no other power. In this regard view taken in Charterbridge Corporation Limited Vs. Lloyds Bank Limited and another 1969(2) All.E.R. 1185 needs to be quoted:-
"Apart from authority, I should feel little doubt that where a company is carrying out the purposes expressed in its memorandum, and doe san act within the scope of a power expressed in its memorandum, that act is an act within the powers of the company. The memorandum of a company sets out its objects and proclaims them to persons dealing with the company and it would be contrary to the whole function of a memorandum that objects unequivocally set out in it should be subject to some implied limitation by reference to the state of mind of the parties concerned."
60. Even if, for the sake of argument, it is assumed that Mr. M. Krishna Rao has no legal authority to enter into the agreement at the relevant time, still Section 290 of the Companies Act comes to the rescue as it provides validity to all acts of such a person. Section 290 of the Companies Act provides as under:-
"290. Validity of acts of directors - Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualifications or had terminated by virtue of any provision contained in this Act or in the articles:
Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated."
61. Thus the authority of the Managing Director to effect any transaction on behalf of the Company prima facie vested in him. Merely because his term had already expired on the date of agreement did not prevent him from taking decisions as till date the Company is being run by the same Board of Directors and the Supreme Court had also vide order 20th July, 2000 allowed the Board/Managing Director to take decisions of day-to-day business. Since then the parties have maintained the status quo regarding the composition of the Board of Directors. No Director has retired nor has any AGM been held. Validity is attached to all acts done by even that Director whose appointment or continuance is at subsequent point of time found to be invalid due to its being defective or on account of disqualification or termination. However, such validity is not available after discovery of invalidity of appointment.
62. Promoters Agreement contemplate expressed powers of the Company as under:-
"19.1 - This Agreement shall remain valid until it is terminated in accordance with the provisions hereof with reference to any Party hereto or if any of the Parties withdraws its shareholding in the SPGL by way of transfer or sale in accordance with provisions of this Agreement, this Agreement shall stand terminated with reference to such Party only."
63. These provisions show that Promoters Agreement is of terminable nature.
64. As regards the objection that the computation of compensation on the basis of 'opportunity cost' it has neither cogency nor substance. Concept of 'opportunity cost' this is always with regard to the commercial agreement. In principle NTPC was given 10% share against the compensation of opportunity cots. In other words the Company bought back the shares and, therefore,e prima facie compensation assessed on the principle of 'opportunity cost' is not in any way in breach of the promoters agreement.
65. NTPC has through this agreement decided to withdraw the suit and by mere existing from the promoters agreement does not mean that the NTPC has absolved any future liability arising from the suit filed by the plaintiff or any other future proceedings initiated by any other party. Mr. Shanti Bhushan, learned senior counsel appearing on behalf of NTPC contended that the agreement between SPGL and NTPC is not beyond the scope of examination by this Court as it is an agreement between two different entities and private individuals and severability of the two agreements i.e. one between SPGL and NTPC and another between NTPC and JFI is conspicuous from the nature of the agreement and the undertaking as well as from the order of the Supreme Court.
66. On the one hand the SPGL has agreed to pay the compensation amount to the NTPC and on the other hand defendant no.2 JFI or for that purpose Mr. M. Krishnarao in his individual capacity has agreed to pay the said amount in case the company is injuncted from paying the said amount. Thus according to Mr. Bhushan the doctrine of severability of contracts between JFI and NTPC cannot be questioned. The agreement is only for withdrawal of the suit against consideration and nothing more.
67. However Mr. Chidambram does not agree with this interpretation as according to him compensation package was not only for withdrawal of the suit but also from withdrawing the project. According to Mr. Chidambram and Mr. Chandhiok there is no agreement between JFI and NTPC and there is no consideration passing from JFI to NTPC. According to them the agreement is strictly between SPGL and NTPC and at the most JFI and M. Krishnarao are guarantors as there is no independent agreement between JFI and NTPC as is between SPGL and NTPC nor is there any agreement between M. Krishnarao and NTPC on the same terms and conditions as agreed between NTPC and SPGL.
68. I do not find myself in agreement as the undertaking given by M. Krishnarao is an independent undertaking whereas the agreement between the Company and NTPC is on different footing. Had it not been so the question of furnishing of independent undertaking by M. Krishnarao for making the payment of the Installment by him in case the Company is restrained on the premise that the agreement executed by the Company with the NTPC is unlawful or inoperative would not have arisen. The severability of the two agreements i.e. one between SPGL and NTPC and other between M. Krishnarao and NTPC is clear from the agreement itself as well as from the order of the Supreme Court.
69. The contract can have several parts and every part can be independent. So far as agreement between SPGL and NTPC is concerned this is against consideration for withdrawal of the suit. By no stretch of imagination the undertaking or agreement provides the status of guarantor to JFI or for that purpose to Mr. M. Krishnarao.
70. It is not the case that if the Company is held to have not been vested with the power to enter into the agreement or the agreement is held to be unlawful then M. Krishnarao and JFI shall stand absolved from making payment of the Installment. Rather the liability of M. Krishnarao will arise only if the Company is restrained from acting upon the agreement with NTPC. In that case M. Krishnarao will have no other option but to make the payment of the Installment to NTPC. Had M. Krishnarao been in the shoes of a guarantor, he would have also stood absolved and abjured from the liability arising from the undertaking given by him if Company is restrained from making the payment or agreement is held to be illegal. In that case NTPC would have been left high and dry and the whole purpose and object of entering into the agreement for withdrawing the suit and opting out from the promoters agreement would stand defeated.
71. NTPC agreed to opt out or withdrawn the suit only after extracting two independent and severable contracts, one in the form of the agreement with the Company and another in the form of the undertaking by M. Krishnarao and rightly so as NTPC would not have agreed to withdraw the suit or opt out from the promoters agreement had it not ensured the payment of the consideration for the same.
72. As regards the apprehension of IDBI, it is misplaced as the 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 takes care of the interest of the IDBI.
73. Apart from this Mr. Chandhiok also contended that JFI has also equity participation of 32.5 crores besides the unsecured loan of Rs. 27.5 crores and it is JFI and defendant no.4 who have given the guarantees towards all loans given by the financial institutions whereas the plaintiff has not given any guarantee of any kind and thus even if the agreement is held to be unlawful it will affect the interests of the defendants more than that of the plaintiff, therefore, is not liable to be challenged or question through instant proceedings.
74. As regards challenge to the locus standi of the plaintiff to initiate the instant action in the civil court either in its individual capacity as a promoter and shareholder that his rights are being adversely effected or in its representative capacity as a minority shareholder by way of 'derivative action' that the fraud is being played upon the shareholders or that the agreement is against the interest of the Company as M. Krishnarao, Managing Director wants to enrich himself at the cost of the company, the provisions of Section 397 or 398 of the Companies act are not at all applicable or invokable as the disputes raised by the plaintiff/applicant do not come within their ambit.
75. Reliance was placed upon M/s Ammonia Supplies Corporation (P) Ltd. Vs. M/s Modern Plastic Containers Pvt. ltd. and others to show that wherever the allegations fall within the compass of Section 397 or 398 of the Companies Act, exclusive jurisdiction is that of the Company Law Board. In this case the question before the Supreme Court was whether in the proceedings under Section 155 of the Companies Act the Company Court (read Company Law Board) has exclusive jurisdiction in the matter. Section 155(1)(a)(i) refers to a case where the name of any person is without sufficient cause, entered in the Registrar of Members of a Company. It was observed that in order to qualify for rectification, every procedure as prescribed under the Companies Act before recording the name in the register of the Company has to be stated to have been complied with by the applicant at least that part as required by the Act and assertion of what not complied with under the Act and rule by the person or authority of the respondent-Company before applicant to claim for the rectification of such register.
76. It was in view of these provisions it was observed that so far exercising of power for rectification is concerned, it is the Company Court alone which has exclusive jurisdiction and similarly under Section 446 the Court refers to the Company Law Board which has exclusive jurisdiction to decide matters what is covered under it by itself. More relevant observations of the Supreme Court in this regard are as under-
"But this does not mean by interpreting such 'court' having exclusive jurisdiction to include within it what is not covered under it, merely because it is cloaked under the nomenclature rectification does not mean court cannot see the substance after removing the cloak."
77. However the following observation in this regard are also noteworthy:-
"If it truly is rectification all matter raised in that connection should be decided by the Court under Section 155 and if it finds adjudication of any matter not falling under it, it may direct a party to get his right adjudicated by Civil Court. Unless jurisdiction is expressly or implicitly barred under s Statute, for violation or redress of any such right Civil Court would have jurisdiction. There is nothing under the Companies Act expressly barring the jurisdiction of the Civil Court, but the jurisdiction of the 'court' as defined under the Act exercising its powers under various sections where it has been invested with exclusive jurisdiction, the jurisdiction of the Civil Court is impliedly barred.
78. In Hanuman Prasad Bagri and others vs. Bagress Cereals Pvt. Ld. and others the Supreme Curt discussed and dealt with the scope of Section 397 of the Companies Act and held that in order to invoke the provisions of section 397(2) of the Companies Act the petitioner has to show that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members and that the facts would justify the winding up order on the ground that it is just and equitable that the company should be wound up but the winding up order would unfairly prejudice the applicants.
79. As is apparent from the instant petition the plaintiff has questioned the vires of the agreement as to whether the agreement is in consonance with the provisions of the Promoters Agreement or whether the agreement is not in the interest of the Company as instead of receiving the equity the company is parting with huge amount and fraud is being played upon the shareholders. There are no allegations that would justify the winding up of the Company but winding up order would unfairly prejudice the plaintiff.
80. Moreover Section 402 of the Companies Act vests the right to apply under Section 397 or 398 in a person who has 10% equity but according to the defendants the plaintiff holds less than 2% of the issued and paid up equity share capital of the company and is, therefore, even otherwise debarred to take any action under these provisions. Thus Civil Court does possess the jurisdiction to adjudicate upon the controversy in question.
81. Though no objection as to the form of the action was taken by the defendant-SPGL but during the arguments Mr. Chidambram dwelt at little length on the doctrine that if any of the shareholders wants to sue the company for the wrongs of the Managing Director or Directors of the Company it has to be in form of 'derivative action' which in other words is a representative action and, therefore, a shareholder in his individual capacity as well as on behalf of other shareholders has to sue in the name of the Company and in that case leave of the Court under Order 1 Rule 8 CPC has to be obtained by the individual on behalf of the other shareholders of the Company and the allegations have to fulfill the condition that he is bringing the action bona fide and for the benefit of the Company and if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.
82. The 'derivative action' is an American concept based on the fundamental principle that a company is a legal person with its own corporate identity, separate and distinct from the directors or shareholders and with its own property rights an interest to which alone it is entitled. If some outsider defrauds the company there is no problem for initiating such an action. The problem arises where it is defrauded by this own Directors or Managing Director.
83. The answer to the objection that the suit was required to be filed in the name of the Company after obtaining leave under Order 1 Rule 8 CPC has been provided by the English Courts where this concept is also prevalent. While dealing with the situation where the Company is defrauded by insiders who control its affairs i.e. by Directors as they themselves are the wrongdoers and if the Board Meeting is held, they will not authorise proceedings to be taken by the Company against themselves but still the Company is the person who is damnified and therefore expected to sue, Lord Wigram V-C suggested a solution in Foss Vs. Harbottle 2 Hare 491 (Reference All E R 1975 Vol.I Butterworths edited by RNG Harrison at page 857) as under:-
"A suit could be brought by individual corporators in their private characters and asking in such character the protection of those rights to which in their corporate character they were entitled".
84. This view was fortified subsequently in Merryweather case (1867) LR 5 Eq 464n.
85. In Burland Vs. Earle (1902) AC 83 Lord Davey observed that the form of the action is always 'AB (a minority shareholder) on behalf of himself and all other shareholders of the Company against the wrong doings of directors and the Company and that form of action is a mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress.
86. Professor Gower in Modern Company Law (3rd Edn, 1969) page 587 has taken the view that stripped of mere procedure, the principle is that, where the wrongdoers themselves control the company, an action can be brought on behalf of the Company by the minority shareholders, on the footing that they are its representatives, to obtain redress on this behalf.
87. In Wallersteiner Vs. Moir (No 2) Moir Vs. Wallersteiner and others (No 2) 1975(1) All ER almost similar situation arose. The counter claim by one of the shareholders was prepared by a careful, learned and skilful member of the Bar. The action was not headed on behalf of himself and all the other shareholders. It was just headed 'MJG Moir, plaintiff on counter claim'. The two companies were made parties by being added to the counter claim. The prayer was Mr. Moir counterclaims for several declarations of wrongs done to the two Companies and orders on Dr. Wallersteiner to pay specified suns to the two companies. It was held that it is in accordance with principle as though Mr. Moir sues in his own name but in reality on behalf of the companies just as an agent may contract in his own name but in reality on behalf of his principle.
88. The course suggested by Mr. Chidambram is a circuitous course. It is because of this that a view has been taken that the minority shareholders themselves can bring an action in their own names against the wrongdoing directors for the damage done by them to the Company, provided always that it is impossible to get the Company itself to sue them.
89. Without traversing further on this aspect, I find that the objection as to the form and substance of the suit is without any substance and holds no ground.
90. Next, fulfillment of condition no.6 as referred above is required if an action is taken under Section 397 or 398 of the Companies Act. Even if the instant action is deemed in the form of a 'derivative action' which concept is still unknown to Indian law, the non-fulfilment of condition no.6 is of no importance. Even otherwise it is only a procedural matter which is of technical rather hyper technical nature and has no bearing on the substance of the relief.
91. Mr. Ashwini Kumar, senior counsel for IDBI as the intervener showed his concern as according to him without takin the consent of the IDBI such an agreement could not have been entered as the agreement frustrates the conditions of the Lendgers Agreement vide which a loan of more than Rs. 123 crores has been advanced to the Company by the IDBI. According to Mr. Kumar if the payment is allowed to be transmitted or made in terms of the impugned agreement it would further alter adversely the debt equity ratio which originally was 70:30 and without accounting for the payment of Rs. 47.5 crores to the NTPC the current debt equity ratio of the company is 84.16.
92. According to Mr. Kumar as on July, 2001 a sum of rs. 98.26 crores is due to the IDBI, out of which Rs. 35.50 crores is on account of principal, Rs. 39.58 crores by way of interest and the remaining by way of interest. It was in view of the crucial interests of the IDBI that the Division Bench vide its order dated 28th August, 1998 allowed the IDBI to become the intervener. Mr. Kumar is of the view that the interest of the IDBI can be safeguarded only if the parties are directed to discuss the implications of the impugned agreement with the lenders as their interests are widely and crucially involved and if the fiscal discipline and prudence implicit in the terms of the lenders agreement is duly respected and observed.
93. However Mr. Kumar agreed that the IDBI would like the project to retain its strength and economic viability but according to him it should be within the parameters of lenders agreement. Since IDBI has not approved the impugned agreement which is allowed to go through, in the opinion of Mr. Kumar, would negate the fundamental basis of the loan namely the preservations of debt equity ratio at 70:30 and thus the impugned agreement itself is not in the interest of the Company.
94. However as regarded the concern of the IDBI, it appears to be justified mainly for the reasons that the debt equity ratio should not be disturbed but so far as the locus standi of the IDBI to challenge the agreement or the undertaking given by M. Krishnarao 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.
95. Next to say that agreement in question is legal because it has been recorded and accepted by the Supreme Court is itself contrary to the spirit of the order of the Supreme Court. Merely because the parties had left two matters to the Supreme Court viz. to decide the rate of interest and the instant rates will be paid by the parties doe snot mean that the stamp of legality to the agreement and the undertaking has been affixed. head it been so the plaintiff would not have been given the liberty to challenge the same in any court of competent jurisdiction.
96. It is again a disputed question whether the decision taken by the Company is in terms of the Promoters Agreement or is in violation of the orders of the Supreme Court vide which status quo was ordered to be maintained with the direction that the day-to-day affairs and functions of the Company may be continued. Prima face it appears to be in conformity with the powers of the Company by virtue of provisions of Articles and Memorandum of Association and furthermore specific resolution was also passed by the Board of Directors in this regard.
97. I have scanned the allegation of the plaintiff which mainly centre around the fraudulent nature of the agreement in question, unjust enrichment of the defendant on account of having siphoned off the funds of the Company and acts adverse to the interests of the plaintiff in particular and shareholders in general and further that if the payment is allowed to be transmitted in terms of the agreement it would alter adversely the debt equity ratio and this would affect the financial health of the company adversely.
98. So far possible working and obligations of running company should not be disturbed in a manner that may harm or hamper its effective or successful functioning. Defendant-Company is a power producing Company and is catering to the basic needs of public at large. Not only the Company but its co-promoters are already locked in multiple litigations not only in India but in different countries and instant proceedings are off shoot of the suit filed by NTPC for specific performance of the Promoters Agreement. Another independent suit has also been filed by the plaintiff for injunction against the breaches of the promoters agreement.
99. The statutory orders of the Income Tax Authorities and the contacts given to various other companies and allegations of siphoning off funds of the Company are subject matter of another suit between the parties.
100. The present agreement is not a bolt form 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 disputes. It is pertinent to mention here that the plaintiff is alow 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 the defendant-Company and the matter was adjourned from time to time as the talks for settlement were going on between the parties which included the plaintiff also. It was after more than 2 years of negotiations between the parties that the instant settlement vis-a-vis NTPC fruitified whereas it failed with the plaintiff.
101. 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 CPC has been filed and is pending consideration. The fact that the IDBI has also not taken any action for 2 years inspite of its Director being one of the Directors on the board of the Company cannot be lost sight of. So much so in the year 1998 itself the proposal of NTPC opting out of the Promoters Agreement was also considered at one stage. Negotiations failed as Krishna Rao wanted to remain the Managing Director and also wanted the shares at par and not at the market rate.
102. As regards the concern of the IDBI that agreement if implemented would jeopardise the interests of the IDBI, it has no basis as IDBI was involved right from the beginning when modalities of negotiations were being worked out. Compensation was determined by the CRISIL on the criteria and principles of 'opportunity cost'.
103. 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.
104. As regards the allegations that the agreement has been effected with a malafide or improper motive, the prima facie view is to be taken on the basis of the Company's Memorandum of Association whether it is incidental to the attainment or promotion of its objects.
105. Any act even if done outside the objects and purposes referred in the Memorandum the same cannot be rendered ultra vires if it is in pursuit of the interests of the Company. This is an attempt to put an end to its long drawn battle between NTPC and the defendants. It has to be done in lieu of the some consideration. here the compensation has been awarded on the basis of the well established commercial concept of 'opportunity cost'. If the allegations of fraud or siphoning off are established the plaintiff can claim damages or compensation. It has already been granted its share of equity.
106. Again the questions 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 is 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 or major policy decision needs no consideration at this stage as the efforts by IDBI to effect negotiations or settlement commenced more than two years ago in which all the parties including the plaintiff participated. To hold the settlement at this stage as unauthorised would be not only negating but also nugating the efforts of IDBI and also the authority of the Company.
107. However I am mindful of the fact that the Company's debt equity ratio has been disturbed not on account of this agreement but otherwise and if some more funds are to be taken out from the company's funds it is likely to disturb this ratio further. Defendant no.2 has given unsecured loans to the Company to the tune of Rs. 27 crores. Defendants 2 & 4 have given the guarantees for all loans from the financial institutions. If the interests of the Company are going to be adversely affected by this agreement the defendant no.2 is also likely to suffer. However in view of the above referred statutory orders of Income Tax Authorities and reports of S.B. Billimoria and Company and other facts divulged by the plaintiff as the how the funds of the plaintiff company were being siphoned off by mr. M. Krishna Rao for enriching himself and his family, I feel inclined to pass the following order:-
(i) As per agreement the defendant no.1-Company shall continue to pay the Installments to the NTPC.
(ii) The unsecured loans of rs. 27 crores advanced by defendant no.2-JFI to the defendant no.1-Company SPGL shall remain with the Company as a guarantee of JFI till the final out come of the suit.
(iii) As regards the payment of Installments for the months of July, 2001 and August, 2001 the defendant no.2-JFI shall furnish the Bank Guarantee as per interim orders within one months and for the remaining Installments the Bank Guarantee shall be furnished within one week after the due date of the said Installment.
108. However it is ordered that the plaintiff or any of its Directors shall not enter into the communication with Banks or Financial Institutions whereby obstruction is created in furnishing the Bank Guarantees by the defendant no.2-JFI or for that purpose M. Krishna Rao. It is also made clear that the Banks or the Financial Institutions shall not be influenced by any such communications sent to them either in the past or in future and shall take the decision of Bank Guarantee uninfluenced by any other except relevant considerations.
109. The application stands disposed off.