Punjab-Haryana High Court
Telenor Asia Pte Ltd (A Company ... vs Unitech Limited (A Company ... on 24 August, 2011
Author: K. Kannan
Bench: K. Kannan
FAO No.4297 of 2011 1
IN THE HIGH COURT FOR THE STATES OF PUNJAB AND HARYANA AT
CHANDIGARH
FAO No.4297 of 2011
Date of Decision. 24.08.2011
TELENOR ASIA PTE LTD (A Company incorporated under the laws of
Singapore) having its registered office at 51 Goldhill Plaza, #21-07,
Singapore 308 900 through its authorized person-Charles Woodworth son
of Mr. Gedeon Woodworth and another
............Appellants
Versus
Unitech Limited (A company incorporated under the Companies Act,
1956) having its registered office at 6, Community Centre, Saket, New
Delhi-110017 and its Corporate/Principal Office at Unitech House, South
City-I Gurgaon 122 001 Haryana through its Authorized Signatory Mr.
Gaurav Jain and others
......Respondents
Present: Mr. Rajiv Nayyar, Senior Advocate with Mr. Sumeet Goel, Advocate, Mr. Ritesh Mukherjee, Mr. Ashish Dholkia, and Mr. Ashish Bhan, Advocates for the appellants.
Mr. Ashok Aggarwal, Senior Advocate with Mr. Mukul Aggarwal, Mr. Amit Aggarwal, Mr. Pradyuman Dubey and Mr. Prashant Mishra, Advocates for respondents No.1 to 4.
Mr. M.L. Sarin, Senior Advocate with Mr. N. Ganpathy, Mr. Rohit Khanna, Mr. Manvender Rathee and Mr. Nitin Sarin, Advocates for respondent No.5.
2. FAO No.4299 of 2011 Unitech Wireless (Tamilnadu) Private Limited (A company incorporated under the Companies Act, 1956) having its Corporate/Principal Office at "The Masterpiece, Plot #10, Golf Course Road, Sector 54, DLF-V, Gurgaon Haryana through its authorized signatory Mr. Vishal Jain ............Appellant Versus Unitech Limited (A company incorporated under the Companies Act, 1956) having its registered office at 6, Community Centre, Saket, New Delhi-110017 and its Corporate/Principal Office at Unitech House, South FAO No.4297 of 2011 2 City-I Gurgaon 122 001 Haryana through its Authorized Signatory Mr. Gaurav Jain and others Present: Mr. M.L. Sarin, Senior Advocate with Mr. N. Ganpathy, Mr. Rohit Khanna, Mr. Manvender Rathee and Mr. Nitin Sarin, Advocates for the appellant.
Mr. Ashok Aggarwal, Senior Advocate with Mr. Mukul Aggarwal, Mr. Amit Aggarwal, Mr. Pradyuman Dubey and Mr. Prashant Mishra, Advocates for respondents No.1 to 4.
Mr. Rajiv Nayyar, Senior Advocate with Mr. Sumeet Goel, Advocate, Mr. Ritesh Mukherjee, Mr. Ashish Dholkia, and Mr. Ashish Bhan, Advocates for respondent Nos.5 and 6.
CORAM:HON'BLE MR. JUSTICE K. KANNAN
1. Whether Reporters of local papers may be allowed to see the judgment ? Yes/No
2. To be referred to the Reporters or not ? Yes/No
3. Whether the judgment should be reported in the Digest? Yes/No
-.-
K. KANNAN J.
I. Array of parties
1. The parties are described as per their status in FAO No.4297 of 2011. The said appeal is at the instance of M/s Telenor Asia Private Limited and Telenor Mobile Communications but hereafter they shall be called for merely Telenor unless context requires otherwise. The 5th respondent is M/s Unitech Wireless Tamil Nadu Private Limited, which is the appellant in FAO No.4299 of 2011. Respondents No.1 to 4 are the Indian Companies, who were the petitioners originally before the District Court at Gurgaon under Section 9 of the Arbitration and Conciliation Act. FAO No.4297 of 2011 3 II. The nature of orders passed and the cause for fresh adjudication
2. The appeals are against the orders passed on 15.6.2011 by the District Judge Gurgaon directing that the ex parte interim order passed on 1.3.2011 shall be effective till the duly appointed arbitrators deemed it necessary to modify during the pendency of arbitral proceedings as per the provisions of S.17 of the Arbitration & Conciliation Act. By the ex parte order dated 1.3.2001 the Court had restrained the appellants and the 5th respondent to give effect to the resolutions that may be passed at the meeting of Board of Directors of the 5th respondent scheduled to take place. The prayer in the petition was that the Board Resolution passed at the meeting held on 15.1.2011 relating to the rights offer and valuation of shares shall not be given effect to and restrain from tabling or approving the Business Plan dated 16.2.2011 without the consent of the petitioners (respondents 1 to 4 herein). The latter had an immediate bearing on the determination of prices of the shares at which the rights issues would come into operation.
3. M/s Telenor has 67.25% share in the equity hold with the 5th respondent, while the respondent Nos.1 to 4 hold the remaining percentage of shares. The Share Holders Agreement (SHA) provided for an arbitral clause in case of dispute between parties amongst whom an agreement had been brought about and the final order passed by the District Judge, as we have seen before was cryptic and did not advert to the merits of contention between parties. The order dated 1.3.2011 was to be effective till 26.3.2011, but it was later extended on 23.4.2011 and ultimately held to be effective till the duly appointed FAO No.4297 of 2011 4 Arbitrators thought it fit to nullify/ modify the directions by passing a specific order to that effect during the pendency of arbitral proceedings as per the provisions of Section 17 of the Act. In the appeals filed before this Court earlier in the cases referred to above, this Court again held that since two Arbitrators had already been nominated, one each by the respective parties and that it was only left for the nominated Arbitrators to selected the third Arbitrator, there was no need to disturb the order passed by the District Court and the order would continue till any modification was done by the Arbitrators. In SLP taken to the Hon'ble Supreme Court in SLP No.18870 of 2011, the Hon'ble Supreme Court set aside the order passed by the District Court and this High Court holding that final order could not have been passed without going into the merits of the case as advanced by the parties and accordingly allowed the appeals and remanded the matter to this Court for fresh disposal on merits by reasoned order. It directed that the trial Court's order dated 01.03.2011 would be in force for a period of three weeks from 15.07.2011 to enable the parties to approach this Court and seeks appropriate interim or final orders. The interim orders were subsequently directed to be extended till the final disposal of the appeal by an order dated 28.07.2011 and the case was taken up subsequently for final disposal with consent of both parties.
III. Interim protection under section 9 is final vis a vis the proceeding before the court and the adjudication has to be on merits
4. In the manner in which the earlier disposals have come about, it would only mean that an ex parte order that was passed originally on FAO No.4297 of 2011 5 01.03.2011 came to be confirmed without discussion on merits by a final order and the case was, therefore, argued before me as though the case required fresh adjudication before this Court for the first time. Though section 9 contemplates only interim protection of the subject matter of arbitration, the power of the court could be invoked before, during and after the arbitral proceedings. Again, any interim order that may be passed by arbitral tribunal itself is appealable under section 37 of the Act and consequently, the court passing an order cannot abdicate its duty and make the adjudication, although interim, provisional to what interim decision could be taken by the arbitral tribunal. The minimal supervision that the Act envisages to arbitral tribunals cannot be understood as requiring tentative decisions. The interim protection is itself the final order under section 9 and since no reasons are adopted for the orders issued, which are appealed against the case, the case would remain to be adjudicated on the pleadings of the respective parties.
IV. Case is heard on amended pleadings
5. After the matter was remitted from the Hon'ble Supreme Court for fresh disposal, the appellants had filed applications for amending the grounds of appeal and taking up pleas on various contentions raised in the petition under Section 9 of the Arbitration and Conciliation Act. The application for amended grounds is contested by the respondents by pointing out that the appellants had rest contended with merely filing a short reply before the District Court and even when an opportunity had been given for filing brief reply on 6.6.2011 and when the respondents FAO No.4297 of 2011 6 No.1 to 4 had objected to the brief reply without traversing all the contentions raised, the District Judge rejected the objections and when the matter was posted for arguments on 13.06.2011, the appellants stated that they would not file any further replies in the matter. It is, therefore, objected that the appellants shall not bring any new facts in the amended grounds. The amended grounds of appeal seek to bring about the justification for the decision on one of the key issues of controversy between parties, viz., the hierarchy of funding as mentioned in SHA and the rights issue that was brought about in the Agenda. The appellants have tried to explain the efficacy of rights issue with equal participation of both parties and the need for raising additional resources for servicing the short term loan taken by the 5th respondent to the tune of Rs.5875 crores. Since the whole issue is before this Court on whether there are sufficient grounds for grant of the interim order as sought for, I would allow the additional grounds of appeal as purely incidental to the grounds already taken and I would, therefore, proceed to dispose of the appeals on the basis of the amended pleadings and the replies given by the respondents.
V. The SHA terms and the core area of conflict
(a) Preparing the ground - the incipient caveat
6. Since the core issue in this case arises with reference to the terms of the SHA and the alleged breach of such terms through the agenda brought through the Resolutions, it would become necessary to reproduce the relevant terms to consider whether there had been such a breach. Since the controversy between the parties arising out of the FAO No.4297 of 2011 7 decision is a subject of arbitration, I would sound a caveat that the case is being considered on the prima facie strength of the respective contentions and they would not taken to pronounce upon the merits of the claims of parties if the final adjudication is undertaken before the arbitral tribunal. To that extent, the issue of whether the hierarchy of funding has been duly followed as per SHA and whether the agenda brought before the Board of Directors constitute any breach, must again be construed as an adjudication of prima facie consideration that could not bind the parties for the final adjudication.
(b) Issue of amalgamation of licensee companies and its possible effect if it is not approved by DOT: Objection not necessary for consideration, since it runs counter to pleadings
7. Before the arguments proceeded the respondents No.1 to 4 attempted to short-circuit the whole exercise by stating that control of 5th respondent company through the resolutions made a fundamental assumption that the scheme of amalgamation of all the licensee companies had come to reality to control them also but the scheme was required to be approved by the Department of Tele-Communication. The senior counsel, Sh.Ashok Agarwal appearing for the respondents would contend that the order of the Company Court at Delhi approving of the amalgamation of the licensee companies has not been fully approved yet by the DOT and would refer to a similar situation of an order of amalgamation issued by the Delhi High Court in yet another case that dealt with amalgamation of Spice Communication with Idea Cellular Limited which recalled the order taking the objection filed through an application filed post court approval that there had been a suppression FAO No.4297 of 2011 8 of fact relating to the objection of DOT prior to the approval of Amalgamation Scheme, but it was not set out in the pleadings while securing an order from the Court approving the merger. I would not want to be detained on the objection that since the amalgamation of all the licensing companies have not been approved by the DOT, no binding decision could be taken through any Resolution passed by the 5th respondent company, since the financial requirements were conceived as though all the licensing companies are being amalgamated.
8. As pointed out by the learned senior counsel on behalf of the Telenor, Sh. Rajiv Nayyar, the whole edifice of the case has been built on such an assumption of amalgamation with the 5th respondent company and there are express averments in the petition under Section 9 of the Arbitration and Conciliation Act to the following effect:-
"The Shareholders Agreement ("SHA") and subsequent Correspondence between parties.
Pursuant to the Subscription Agreement of 28th October 2008, as amended on 16th March 2009, the SHA was entered into on 20th March 2009 against the same parties who executed the Subscription Agreement:
a. Unitech Limited (the Petitioner No.1) b. Unitech Wireless (Tamilnadu) Private Limited (the respondent No.1). c. Telenor Asia Pte Ltd, Singapore (the respondent No.2.). d. Telenor Mobile Communications AS, Norway (the respondent No.3.) e. Unitech Wireless Companies (which later merged into the Respondent No.1.) f. Cestos Unitech Wirelss Private Limited (the petitioner No.2.) g. Simpson Unitech Wireless Private Limited (the petitioner No.3.) h. Acrous Unitech Wireless Private Limited (the petitioner No.4.) It must be noted that in September, 2010, the aforesaid eight licensee companies/Unitech Wireless Companies merged into the respondent No.1. A copy of the order dated 27th September, 2010 of the Hon'ble High Court of Delhi approving the scheme of merger is annexed as Annexure-3 hereto. Thus, as on date, all the eight licensee companies stand merged into one entity-Unitech Wireless (Tamilnadu) Private Limited (also known as 'Uninor'), the respondent No.1 herein. The shareholding of the parties in the respondent No.1 stays the same i.e. Teleonor has 67.25% and the petitioners hold 32.75% shareholding.FAO No.4297 of 2011 9
9. Even apart from the averments in the petition, the SHA brought between the parties themselves declare that it had been the intention of all the parties to merge the licensee companies into the company (referred to the 5th respondent company) through a Court scheme for merger under the Act and requisite steps and actions have been taken. This is brought through para 2.2.1 that records the fact that the best efforts have been made with the objective to enable the completion of the merger process by 30.09.2009.
10. If the merger does not come into effect for any reason, it may have different ramifications but suffice it for the purpose of the case in assuming that the merger is effective as far as the four contesting parties are concerned before this Court. This assumption is only for the purpose of this case on a fundamental precept that the party shall not be allowed to stray from pleadings and bring up a new self-defeating objection that the merger itself has not taken place and the financial requirements of the the 5th respondent company as envisaged does not exist. If there is no funding requirement, there is not even a cause of action for the petition and there ought not to any grievance against the attempt of the 5th respondent to bring the resolutions. The preliminary objection would bring a brutum fulmen situation and I would therefore discard such an objection to come in the way for examining the case in its fuller perspective.
(c) Capitalisation of the Company, as perceived in SHA FAO No.4297 of 2011 10
11. Clause 3 of SHA provides for capitalization of the 5th respondent company and defines the initial funding amount as Rs.240 billion (Rs.24,000/- crores):-
"The parties agree and acknowledge that the requirements of each of the Licensee Companies for the implementation of the Business and development thereof will be capital intensive in nature. The parties anticipate and agree that the total funding requirement of the project involving the roll out of the network of the Licensee Companies based on 2G technologies ("Project") is approximately Rs.240 billion "Initial Funding Amount"). The funding of the Initial Funding Amount shall be undertaken in the manner as contemplated under this Section 3.1.
(The Plan for funding of Initial Funding Amount as contemplated under this Section 3.1 shall be approved by the Board and is hereinafter referred to as the "Initial Funding Plan").
12. The most crucial clause on which the case of the respondents No.1 to 4 hinged on was the hierarchy of funding, which was said to be breached and therefore, the petition under Section 9 of the Arbitration and Conciliation Act. The terms in SHA relating to 'project financing' and 'hierarchy of funding' would, therefore, require to be reproduced:-
"3.1.6 Project Financing
(i) The Foreign Strategic Partner hereby agrees that immediately upon the Completion Date, it will cause each of the Licensee Companies to initiate obtainment of project financing for the project.
(ii) The parties hereby agree that any credit support required in connection with the Initial Funding Plan, for the purposes of obtaining project financing for the Project shall be provided by the Indian Strategic Partners and the Foreign Strategic Partner on a pro-rata basis provided that the obligation of the Indian Strategic Partners to provide credit support shall be limited to:
(a) such provision in respect of project financing as contemplated under the Initial Funding Plan; and
(b) the provision of pledge of Securities and the corporate guarantees.
It is further clarified that to the extent that here is any change in the Shareholdings, the collaterals/securities (including without limitation, guarantees and pledges) then provided shall be accordingly adjusted such that a Shareholder whose Shareholding increases shall proportionately increase the collaterals/securities (including without limitation, guarantees and pledges).
"3.2 Heirarchy of Funding FAO No.4297 of 2011 11 The shareholders acknowledge and agree that in order to meet their Business requirements, each of the Licensee Companies will require funds in excess of the funding contributed by the Foreign Strategic Partner under the Initial Capitalization. Any additional finance required by each of the Licensee Companies will be funded, at the Board's discretion (except for the financing contemplated in the Initial Funding Plan), in the following sequence:
(i) the aggregate internal cash resources of all the Licensee Companies, subject to respective minimum cash balance requirements;
(ii) external funding which the Board considers appropriate, on the best terms reasonably acceptable (taking into account the terms on which Comparable Companies in India would be able to obtain such financing), from public, private and multilateral lending institutions and agencies on the basis of security provided by the relevant Licensee Companies' properties and assets without requiring any shareholder support in the nature of a project finance model;
(iii) external funding which the Board considers appropriate, with Shareholders' support (excluding guarantees), on commercially reasonable terms, from public, private and multilateral lending institutions and agencies and on the basis of security provided by each of the Licensee Companies' properties and assets;
(iv) loans, including ECBs from Shareholders made pro-rata to their shareholding;
(v) from additional capital contributions in accordance with the provisions of Section 3.4; and
(vi) from additional capital contributions by way of subscription to mandatorily convertible preference shares by Shareholders made pro-
rata to their shareholding.
13. Of the various tiers of funding enumerated above, Clause (i) could mean internal cash resources of the licensee companies; Clause (ii) refers to external funding that could come through public, private and multilateral lending institutions on the basis of security provided by the Licensee Companies' properties and assets without requiring any shareholder support and (iii) external funding with shareholders' support excluding guarantees on commercially reasonable terms from public, private and multilateral lending institutions. Clause (iv) would mean just loans including ECBs (external commercial borrowing) from shareholders made on pro-rata basis as to the shareholding; Clause (v), from additional capital contributions in accordance with the provisions of 3.4. FAO No.4297 of 2011 12 The additional capital contributions that it refers would include the rights offer. The grievance is that this hierarchy had been breached by the 5th respondent company and appellants, who were the major stakeholders for the 5th respondent company by not resorting to any other modes, which had to be undertaken one after another and one failing another. The petitioners saw in this proposal a fraudulent design in attempting to increase the stake to the detriment of respondent Nos.1 to 4, who admittedly did not have the resources to contribute and participate in the rights offer. The manner how the rights offer was to be worked out is provided in Clause 3.4 as follows:-
"3.4 Equity Commitment and Subsequent Capitalisation 3.4.1 Both the Foreign Strategic Partner and the Indian Strategic Partners undertake to meet the Equity Commitment as set out in the Initial Funding Plan on a pro-rata basis as per the procedure set out in Section 3.4.2.
3.4.2 (i) For an issue of Securities pursuant to 3.4.1 or otherwise, each of the Licensee Companies shall make an offer for subscription of Securities (for, the purposes of this Section, the "Rights Offer") to the Shareholders in accordance with the provisions of applicable Law, at a price per Security agreed between the Shareholders failing which at a price per security equivalent to the Independent Value, in proportion to their shareholding as on the date of the Rights Offer (hereinafter "Rights Entitlement"; and each Party's Rights Entitlement, hereinafter ("Pro Rata Security"). The Shareholders shall subscribe, under intimation to the other Shareholder(s) and the relevant Licensee Companies, for their Pro Rata Securities of the Rights Entitlement in accordance with the Rights Offer within a period of 60(sixty) calendar days from the receipt of the Rights Offer."
VI. Several factors that contributed to the run-up to the litigation
(a) Project financing, the relevant provision and the failed initiatives of 5th respondent at raising them
14. It is not as if the parties did not accept that there would be immediate need for funding besides the initial capitalization amount. FAO No.4297 of 2011 13 Para 3.1.1 that refers to assessment of capital structure and initial capitalization specifically acknowledged that the requirements of each of the licensee company for implementation of the business in the development would be capital intensive in nature. The parties anticipated and agreed that the total funding requirement of the project involving the roll out of the network was, as we have already seen, Rs.24,000 crores. This project financing was essentially to be undertaken by the foreign strategic partners requiring each of the licensee companies to initiate obtainment of project financing for the project. The licensee company in this context is the 5th respondent company and the petitioners would contend that immediately after the completion date, which meant the date mentioned in the subscription agreement entered into between the parties on 28.10.2008 as amended by an addendum dated 16.03.2009, the 5th respondent should have made attempts to secure the project financing. The manner of carrying out the project financing has already been extracted above.
(b) Telenor's pre-conditions for bank funding
15. Respondents No.1 to 4 would contend that without requiring the 5th respondent to obtain the additional resources in the manner referred to for the project financing, the appellants had deliberately resorted to rights issue to dilute their holding in the company. They would find fault with the appellants in resorting to such a course by obtaining a short- term bridge loan from the State Bank of India, which constituted the first departure from the SHA. In the meeting of the Finance Committee of the Board of Directors of the 5th respondent, Telenor-appointed Chief FAO No.4297 of 2011 14 Financial Officer gave out (i) no more equity contribution would be expected from shareholders; (ii) SBI capital markets had been appointed as lead find-raiser; (iii) the funding project for more than Rs.100 billion would be launched by January, 2010. The CFO kept issuing out postures as if to suggest that the business plan as proposed by the 5th respondent was acceptable to the lender bank and on 05.07.2010, the SBI had issued a Letter of Intent sanctioning a project finance of Rs.9,475 crores to the 5th respondent company. Differences between the parties came in the open when a revised sanction letter came from SBI on 14.08.2010 that called upon certain undertakings as a condition to offer project financing to 5th respondent. Telenor suddenly informed the 5th respondent on 11.11.2010 that it shall have the ability to charge a guarantee that reflected the risk associated in the operations of Uninor in order to be willing to provide the guarantee for short term loans and also shot off a letter to the Bank on 26.11.2010 that virtually had the Bank folding up on all past sanction orders. The communication to the Bank sought to change the business plan and announced to the bank on 26.11.2010 that:-
"In this connection, we would like to apprise you that taking into account the over all progress of implementation and the change in market dynamics, we are contemplating a change in our expansion strategy, which would result in substantial revision of the business plan. We propose to re-calibrate our business strategy circle-wise, and submit a revised business plan for seeking long terms funding.
We would also like to apprise you that we have received a positive response from the circles wherein we have already launched operations. Some of the salient features of the operating performance are mentioned herein:-
. Completed commercial rollout in 13 out of 22 circles in India post initial launch in December 2009 . Out of the balance 9 circles, we have already met the minimum rollout obligation in 8 circles and are yet to receive spectrum in Delhi.FAO No.4297 of 2011 15
. Subscriber Base in excess of 13.5 million by the end of October 2010 indicating favourable response from customers.
. In the last 3 months, Uninor has been adding in excess of 2 mn subscribers which is the second highest amongst all telecom players As per the terms of the Agreement executed in 2009, the said fund has based facilities of Rs.2500 crore are due for repayment on 8th December 2010. In view of the required changes in the business plan, at this stage, we propose to seek an extension in the repayment terms of the said short term facility (continuation of fund based limit at the existing level) of Rs.2500 crore and reduction in NFB limit from Rs.2500 crore to Rs.1500 Crore) by a period of 12 months with the following terms:-
. Telenor ASA, Norway has offered to extend a corporate guarantee in lieu of the Letter of Comfort extended earlier, in order to backstop the exposure of various Lenders of the said short term facility.
. Considering the operational procedure involved in furnishing an overseas Corporate Guarantee, Telenor ASA proposes to furnish the required Corporate Guarantee by December 31, 2010 and in the meantime the existing Letter of Comfort shall continue.
. Uninor may prepay all or any portion of the loan availed by it upon repayment of a prepayment premium of one percent (1%) of the amount so prepaid. Provided that no prepayment premium shall be payable if the prepayment occurs under the following circumstances:-
The prepayment is after having provided a prior written notice to the Lenders regarding such prepayment at least fifteen (15) days before the date of the prepayment from any source.
. Uninor is permitted to raise unsecured loans from any other source."
When a revised business plan was announced, the Bank lost no time to pull out of its existing sanction). Telenor forced the issue for a unilateral change to the business plan when it made an issue of the conditions that it would impose and if its conditions were not accepted, then it would not provide any undertaking to the SBI, in which case, the 5th respondent would have to go for short-term financing by December, 2010. Unitech claimed that it was prepared to join with Telenor for exploring all options available to them to the SBI's revised sanction letters but it opposed Telenor's contention that it should have full power to decide the source of funding in future including the replacement of project finance loans with alternative funding. Unitech was miffed that FAO No.4297 of 2011 16 Telenor took a unilateral decision that project financing was not the appropriate route for the 5th respondent, by the new declared wisdom of Telenor's pronouncement Several other meetings had taken place in India and abroad, details of which may not be immediately relevant for us, except that it turned out that the appellants were of the view that for the additional resources, which were necessary for 5th respondent company, it had no other option but to resort to the rights issue and for preparation of revised business plan.
(c) The resolution on 15.1.2011 finalises rights offer, the respondents being dissenters
16. In the 46th meeting of Board of Directors held on 15.01.2011, the following steps had been undertaken that towards the funding requirements of 82.47 billions till December, 2011, there was no alternative source of funding other than the rights offering. This was not acceptable to respondent Nos.1 to 4, who said that there was no business plan yet and there had been internal compulsions for Unitech due to which it was not in a position to raise the additional resources. After deliberations, the issue of hierarchy of funding was put to vote and the majority decision of going through with rights offer was carried through as the decision of the Board. The resolution affirmed unanimously that there were not internal cash resources to meet the additional funding and loans including ECBs on pro rata basis was also not available. This meant that the primacy of project funding in the manner contemplated and clauses (i) and (iv) of the hierarchy of funding was accepted as not worthy of being tried. On the issue whether there was no external funding possible in the manner set through Clauses (ii) FAO No.4297 of 2011 17 and (iii) of the Hierarchy Funding, there was no unanimity. The perception of the appellants being the Foreign Strategic Partners was that hierarchy of funding had crashed by a complex combination of several factors existing in India with the grant of 2G licences.
(d) Assumptions in the proposed revised Business plan that led to the consternation between parties
17. Telenor had presented to the Board on 16.2.2011 a draft business plan that suggested that equity infusion of INR 50 billion would be necessary by 2012. Elsewhere it had stated that the requirement was INR 45 billion. In the minutes of the meeting held on 15.1.2011, it had been suggested that the funding requirement was INR 82.47 billion till December 2011. The several assumptions and changes suggested in the modified business plan, Unitech complained, were unilateral, biased and self serving, since it was prepared in consultation with an entity called Lazard, Telenor's financial advisor in relation to funding options of Uninor and it leaned heavily towards one shareholder to the utter detriment of the other. The financial health as projected in the business plan would have adverse impact on the its ability to raise financing, impact its credit rating and depress the valuation of the company in the event of IPO. Added to all these woes, even the meeting notice proposed to take place on 3.3.2011 was complained of being brought about with insufficient time interval.
(e) Battle lines drawn; Respondent's apprehensions of being marginalized in the holding over the Company (5th respondent) FAO No.4297 of 2011 18
18. When the Board passed a resolution that it will resort to the rights offer, the battle lines were clearly drawn. Although there had been a complaint that the business plan had not been drawn up, the proposed plan for a period of 10 years was suddenly perceived as a deliberate ploy to undervalue the shares in an already depressed market and knock off the rights issue to Telenor's' own benefit. The respondents No.1 to 4 claimed that they had noticed to their dismay that operations were sought to be curtailed from 22 circles to 13 circles. Telenor had sought to allay some of the apprehensions and offered a fresh ground for discussion and also postpone the date of meeting beyond 3.3.2011 by a email communication sent to Unitech on 2.3.2011, the damage had already been done. The case had been instituted before the District Court at Gurgoan, complaining: (i) that the rights issue would mean thinning the extent of their control on the Board and increasing the strength of the appellants since the respondent Nos.1 to 4 did not have the resources to convert the occasion as an opportunity to retain their own holding pro rata. The proposal cast a new responsibility to shoulder the capitalization initiatives, which could have been avoided if the project financing had been undertaken by the 5th respondent itself. (ii) The attempt to secure an independent valuation of the shares was premature and constituted a breach of SHA where each party had a right to make their valuation and if only the difference was in excess of 10% then independent valuation could have been done. The initiative for an independent valuation of the shares even without involving the respondents No.1 to 4 to state their valuation was under such circumstances unjustified.
FAO No.4297 of 2011 19VII. Issues raised against the grant of injunction
(a) Telenor's justifying stand: the basis
19. The appellants would respond to these contentions by pointing out that the hierarchy of funding could not be at all times resorted to and in the manner in which the terms had been expressed in the SHA that it was subject to the decision of the Board of Directors. It was thought to be the most viable alternative in a situation where there were imminent need for funds and financial institutions were not prepared to back the requirements in the changed political environment where the allotment of licences to the 2G companies by vitriolic public criticism and 2G allocations had been caught in a web of controversies with the investigating agency and the Supreme Court's monitoring literally on a day-to-day basis enquiring into how the licences had been granted and the Supreme Court even making oral observations that the Public Sector Banks ought not to be seen funding the financial requirements of the licensees.
20. Sh. Rajiv Nayyar, learned Senior Counsel appearing for the appellants would also state that they were not interested in bull-dozing through with their decisions by the fact that they had majority holding and they would have no objection if instead of the rights issue, the parties substituted the mode of funding through interest free loans from the parties. This was not a part of the pleading but it was a suggestion at the bar to impress upon the Court that they would not press for the rights issue if there was an alternative way for garnering such resources. On the method of valuation of shares, Telenor would contend that FAO No.4297 of 2011 20 respondents No.1 to 4, without even offering to make their own valuation, cannot complain that the independent valuation could not be undertaken. The independent valuation was only to secure a transparency in approach to clear themselves of the charge of deliberately suppressing the value of the shares.
(c) The action of the respondents in seeking injunction mala fide
21. The appellants would contend that the resort to an action for an injunction before the Court was not bona fide and there had been deliberate suppression of facts in making it appears as though the resolutions were made to bring a lopsided strength in favour of the appellants and take their holdings somewhere close to 90% when as per the law prevailing, it was not possible to increase the holding of a Foreign Strategic Partner to any extend beyond 74%. The appellants would also blandish their cudgels against respondents No.1 to 4 to contend that the Court had not been apprised of the fact of inherent delays that were likely in securing the approval for the rights issue and given the disagreement between Unitech and Telenor on price security of Uninor, a whole long process had to be undertaken, beginning with appointment of an independent expert to determine the value of the price per security. This would take not less than 20 business days and on determination of the rights of offer price, the average price per share as determined by the independent expert and the price per share presented by the shareholder closer to price per share determined by the independent expert would be first taken and after a notice of 10 business days, the Finance and Funding Committee of the company FAO No.4297 of 2011 21 would meet and pass a Resolution approving the price and later send the plan to the Foreign Investment Promotion Board (FIPB) and Cabinet Committee on Economic Affairs for approval to the extent to which it involves infusion of funds by Telenor into Uninor and following the approval, a meeting of the Finance and Funding Committee to formally extend an offer to subscribe to the shares of Uninor within 60 calendar days of such offer was to be made. Upon completion of 60 calendar days, if Telenor subscribed to pro rata entitlement and Unitech did not, Telenor could appoint an Indian nominee to subscribe to Unitech pro rata share and Unitech would have 120 calendar days to purchase its proportionate shares purchased by Telenor's nominee at the independent value plus the agreed rate of interest. This time line is shown by the appellants to contend that even a decision of rights offer cannot be put to its realization in a very short time and with a clause for arbitration, the respondents No.1 to 4 could not have been left without appropriate remedy.
(d) Section 9 petition must satisfy the requirements of O.39 CPC principles
22. As an argument on legal principles, the appellants would contend that the Court would not easily interfere with the corporate decision of its indoor management and would rely on the judgment of the Hon'ble Supreme Court in Rajahmundri Electric Supply Corporation Vs. Nageshwar Rao AIR 1956 SC 213 that lays down:-
"It is no doubt the law that Courts will not, in general, intervene at the instance of shareholders in matters of internal administration, and will acting within the power conferred on them under the articles of association. But this rule can by its FAO No.4297 of 2011 22 very nature apply only when the company is a running concern, and it is sought to be interfered with its affairs as a running concern."
23. According to Sh. Rajiv Nayyar, any order of injunction by way of interim protection under Section 9 would have to satisfy the test of the legal requirements provided under Order 39 Rule 1 CPC, which would spell out the fundamental precept that the person who seeks for interim order ought to prove: (i) he has a prima facie case, (ii) the balance of convenience is in his favour, (iii) preservation of status quo and (iv) there is a serious hardship that would be caused, which cannot be compensated in terms of money. According to the appellants, the respondents No.1 to 4 did not have a strong case to project before the Court by making a challenge against a corporate decision by the Board of Directors and the interim orders that the respondents No.1 to 4 were seeking for would literally prevent the infusion of funds and result in close down of the operations of the company. The status quo that respondents No.1 to 4 were asking for was not indeed a status quo but a denouement of its existence, while the decision of the Board, if it was put through, would allow for the status quo to continue in the sense that the company would survive. The balance of convenience was also in favour of the appellants since in the ultimate bargain if the Board's decision was found to be not valid by the Arbitrators, it could become possible for restoring the parties to original position but on the other hand, if the funds infusion was checked by an order of injunction, the company would not survive to restore the parties to the original position. Sh. M.L. Sarin, Senior Advocate argued for the company would rely on the decision in Gujarat Bottling Co Ltd and others v Coca Cola FAO No.4297 of 2011 23 Co and others (1995) 5 SCC 455 to contend that an injunction to enforce a contract ought not to be granted. He would point to a recent pronouncement of the Hon'ble Supreme Court in Ram Rameshwar Devi Vs. Nirmla Devi in Civil Appeal No.4912-13 dated 4.7.2011 where the Hon'ble Supreme Court set down guidelines for issuing interim orders of injunction. He would also rely on the decision in Oswal Fires and Oil Limited Vs. Additional Commissioner Bareily (2010) 4 SCC 728 to contend that parties are bound to bring all facts to the knowledge of Court when they invoke the Court's jurisdiction for obtaining discretionary reliefs. I am merely citing them for revealing the legal plank that the 5th respondent would place for in defence of the claim by the respondents 1 to 4 but I would not have any requirement for applying them to the case for the manner of disposal that I have undertaken.
FAO No.4297 of 2011 24VIII. The way out of this imbroglio - as envisaged by this court
(a) Telenor's decision in the present situation could be justified; however, its postures leading to resolution dated 15.1.2011 without examining other options is surely open to challenge
24. If the fundamental issue is whether the appellants were justified in breaching the hierarchy of funding, it would definitely pre-judge the whole issue of what is required to be considered by the Arbitrators. There is no denying the fact that the project financing had not been undertaken through the 5th respondent and Telenor as a major shareholder and which had a control over the Board had not made possible the 5th respondent to resort to such a course. Telenor was trying to make a justification of how it was exigent to go for the rights issue that would ensure that the money was generated from their own resources without upsetting the shareholding pattern, especially when financial institutions were not willing to back them up. This is surely the position as of today but it is doubtful, if the decision could be justified at the time when the Bank was seeking for certain conditions to be fulfilled in August 2010 and Telenor foreclosed all options as envisaged in SHA. I cannot support the contention made on behalf of the appellants that the respondents did not have a prima facie case. Their grievance was justified and I will not go as far as to state that there were no bona fides in the action of the respondents 1 to 4 but only that the balance of convenience was not in favour of the respondents 1 to
4.It is difficult to set the clock back now but there is no denying the fact that the requirement of funds was not an imaginary issue. Learned FAO No.4297 of 2011 25 Senior Counsel for the respondents was not prepared to even join issues on the offer made across the bar that Telenor was prepared to bring the additional requirements on pro rata basis as interest free loans and seeking if the respondents 1 to 4 would bring in their proportionate share as loan to the company. The fund requirements and cash flows, as surely projected, were a short-term loan payable between January 2011 to September 2012 in the range of Rs.5600 crores and out of this about 1400 crores was payable in September 2011; The cash balance with Uninor was only Rs.850 crores and the monthly CAPEX and OPEX including the interest outflow was reported to be Rs.300 to 400 crores. I cannot take only an argument that the rights issue would still take a long time to make it operational as a justification for rejection of the petitioners' case before the District Court, for it would still not answer the imminent requirements of what the appellants themselves admit that the 5th respondent company has to face. Again, if the parties had to wait for the final adjudication by the arbitrator, given a long time line before the rights issue and the business plan could be sorted out, it could not have hurt the appellants in any way, for, after all, even according to them, the rights issue could not have been put through immediately. They had still quite a distance to traverse that would begin with securing DoT's approval for sanction of amalgamation and end with approvals for increasing the holding of Telenor which is a foreign company.
(b) Balancing interests of both parties FAO No.4297 of 2011 26
25. It would be treading on a razor's edge, as it were, to make an intrusion into a corporate decision only as an interim measure. It could just as well be possible that the Arbitrators ultimately found that the decision was not appropriate and it violated a serious breach of SHA but if such a decision would be taken at this time or at least to accept provisionally to find the justification for an interim protection, the survival of the 5th respondent company could itself be put to jeopardy. In other words, the protection of interest of the respondents No.1 to 4 alone would mean a sure death of the 5th respondent. It would result in chopping off the head, as it were, for weeding out headache. Without forcing an order on the parties that could derail the arbitral process, I am of the view that the appropriate via-media would be to allow for the decision of the Board to prevail at this point of time. To protect the interest of respondents No.1 to 4 and to help the parties to get a status quo ante on equitable terms, I would direct that in the event of the Arbitrators' finding that the decision to go for the rights offer was unjustified, the amounts brought through the rights offer must be taken as advances to the rights issue that could enable the parties to figure as creditors of the company and not merely as shareholders. The serious objection of the respondent Nos.1 to 4 that Telenor had caused a needless corporate expense for the company of inviting an expert to value the shares could also be taken care of by a direction that in the event of the rights issue being not approved ultimately, the expenses for such an exercise would be required to be borne wholly by the appellants and debited against them in the accounts of the 5th respondent. The preparation of the business plan for a period of 10 years could not FAO No.4297 of 2011 27 require to be interfered with by an interim order and it would abide by the final decision of the arbitrators.
IX. Disposition
26. Under these circumstances, the dispensation would be that plea of the respondents No.1 to 4 through the application under Section 9 for an injunction ought to fail. There shall be not fetter on the decision of the Board to go through with its resolutions for the rights issue including the activities connected with the rights issue, such as determination of the price through an independent valuer and the expenses incurred therefor and the modified business plan for 10 years. The decision of the Board shall be made subject to: (i) the entire amounts collected through the rights issue shall be treated as advances for the rights issue to rank them as creditors of the 5th respondent company, if the award of the arbitral tribunal adjudicates against the rights issue; (ii) the expenses for rights issue shall be fully indemnified by appellants if the rights issue were not approved by the Arbitrators.
27. The appeals are disposed of as above.
(K. KANNAN) JUDGE August 24 , 2011 Pankaj*