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Cds Financial Services (Mauritius) Limited, a Body Corporate Incorporated in Mauritius Vs. Bpl Communications Limited, Vectra Financial Services Pvt. Ltd, Electro Investment Pvt. Ltd., Nambiar International Investment Company Pvt. Ltd., Namfil Finance Company Pvt. Ltd., Deccan Asian Infrastructure (Mauritius) Inc., Astra Telecom Pvt. Ltd., Aidtel Holdings (Mauritius) Inc., South Asia Regional Fund a Trust Incorporated in Mauritius., Inditel Holdings Ltd., Grasim Industries Ltd., Atandt Wireless Se - Court Judgment

LegalCrystal Citation
SubjectCivil;Company
CourtMumbai High Court
Decided On
Case NumberAppeal No. 926 of 2001 in Notice of Motion No. 2040 of 2001 in Suit No. 3222 of 2001
Judge
Reported in[2004]121CompCas374(Bom); [2004]56SCL665(Bom)
ActsCompanies Act, 1956 - Sections 2, 10, 81, 111A, 155, 293(1), 397, 398 and 408; Company (Court) Rules, 1959 - Rules 11B and 17
AppellantCds Financial Services (Mauritius) Limited, a Body Corporate Incorporated in Mauritius
RespondentBpl Communications Limited, Vectra Financial Services Pvt. Ltd, Electro Investment Pvt. Ltd., Nambia
Appellant AdvocateI.M. Chagla, ;Aspi Chinoy, ;J.P. Awasia, ;P. Popat, ;A. Gupta and ;S.N. Hassan, Advs., i/b., D.H. Law Associates
Respondent AdvocateP. Chidambaram, ;R.M. Kadam, ;S.V. Doijode, ;Parag Kabadi, ;Veerendra V. Tulzapurkar, ;S.V. Doijode, ;Parag Kabadi, ;Virag V. Tulzapurkar, ;S.V. Doijode and ; Parag Kabadi, Advs., i/b.,
Excerpt:
company - injunction - sections 2, 10, 81, 111a, 155, 293 (1), 397, 398 and 408 of companies act, 1956 and rules 118 and 17 of company (court) rules, 1959 - plaintiff (foreign investor) held 40% equity in defendant - defendant unable to fulfill requirement for initial public offer - possibilities for consolidation of business of defendant explored - agreement signed for consolidation of business - suit filed by plaintiff that agreement was without sanction of shareholders under section 293 (1) (a) - prayer for injunction also made - further prayer to exercise all rights on preference shares held by it - granting right to plaintiff to vote on preference shares would violate condition of 49% equity cap - consolidation of business required for interest of business - held, injunction not.....shah, j.1. the appellant is the originalplaintiff in the suit. the plaintiff isaggrieved by the impugned order passed by thelearned single judge declining to grant to theplaintiff an ad-interim order of injunctionrestraining defendant nos.1 to 8 and 13 to 17from taking steps in implementation of theagreement dated 27.6.2001 without obtaining theapproval of the shareholders of defendant no.1company under sec. 293(1)(a) of the companies actand from giving effect to the resolution dated25.7.2001 passed by the board of directors pursuantto the said agreement and further from in anymanner interfering with the exercise of votingrights by the plaintiff of its preference shares. 2. on the request of the learnedcounsel for the parties, considering the factsand circumstances of the case, we have.....
Judgment:

Shah, J.

1. The appellant is the originalplaintiff in the suit. The plaintiff isaggrieved by the impugned order passed by thelearned single Judge declining to grant to theplaintiff an ad-interim order of injunctionrestraining defendant nos.1 to 8 and 13 to 17from taking steps in implementation of theagreement dated 27.6.2001 without obtaining theapproval of the shareholders of defendant no.1Company under sec. 293(1)(a) of the Companies Actand from giving effect to the Resolution dated25.7.2001 passed by the Board of Directors pursuantto the said agreement and further from in anymanner interfering with the exercise of votingrights by the plaintiff of its preference shares.

2. On the request of the learnedcounsel for the parties, considering the factsand circumstances of the case, we have taken up fordecision the Notice of Motion in the suit for grantof interim injunction instead of only consideringthe question of grant of ad-interim injunction.In order to appreciate the rival contentions, thefacts in brief may be stated as follows.

3. The plaintiff is a body corporateincorporated under the laws of Mauritius and isa wholly owned subsidiary of C.D.C. Group plc, acompany incorporated under the laws of Englandand Wales. The plaintiff and defendant nos.9 to 12are foreign investors who own approximately40% of the equity in defendant no.1 BPLCOM. Theplaintiff, in addition, holds 14,870,000non-convertible preference shares in defendantno.1. The defendant nos.2 to 6 and defendantno.8 are Indian promoter-shareholders of defendantno.1. The defendant no.7 is the Executive Chairmanof defendant no.1. The defendant nos.13 to 15are parties to the agreement dated 27.6.2001which is being impugned by the plaintiff. Thedefendant no.1 has four subsidiaries, includingdefendant no.16 (BPLMobile) and defendant no.17(BPLMCL). The defendant no.1 holds 74% shares indefendant no.16 and 51% in defendant no.17.France Telecom holds the remaining 26% sharesin defendant no.16 and Media One holds remaining49% shares in defendant no.17. The defendant no.16holds a Cellular Telephony Operating Licencefor and conducts the business of offering cellularservices in the circle of the MumbaiMetropolitan Area. The defendant no.17 holdsoperating licences for and conducts the businessof cellular services in the circles ofKerala, Maharashtra and Tamilnadu.

4. The plaintiff has averred that theinvestment of the foreign investors in defendantno.1 is in the region of US $ 214 million.According to the plaintiff, the foreign investorshave invested in defendant no.1 on the basisof certain rights assured to them undervarious agreements entered into with the Indianpromoters and defendant no.1. These agreementsrequire, inter alia, the affirmative vote of eachof the foreign investors in respect ofimportant decisions, including the disposition ofany business (whether by way of merger, sale ofstock, sale of assets or otherwise). Theirconsent is also required in respect of thedisposition of all or any part of defendantno.1s shareholding in any of thesubsidiaries, including defendant nos. 16 and 17.However, we hasten to add that the plaintiff hascategorically stated in the plaint that theplaintiff is not enforcing the rights andprivileges arising from any of these agreements.

5. It appears that in view ofdefendant no.1s inability to fulfillthe requirements for initial public offer,and as the foreign investors opposed injection offresh equity various possibilities forconsolidation of cellular business ofdefendant no.1 were explored since December 2000.At the end, the following three consolidationoptions were short-listed and pursued:- (i)consolidation with Hutchison Group; (ii)consolidation with Bharti Group; and (iii)consolidation with the combined ofgroup of Birla-Tata-AT&T; (BTAL) hereinafterreferred to as 'Blue tooth'. On 7.6.2001, theBoard of Directors of defendant no.1 met atMumbai. All the above options were discussed andall material parameters and information relating toBlue tooth transaction including valuation wereplaced before the Board. The C.F.O.informed theBoard that best effort negotiation will be carriedout by the company to conclude a binding MOUincluding a commitment to bid together for thefourth licence, the last date for the bidding being29.6.2001. The Board unanimously approved theCompany proceeding with finalizing one of theconsolidation transactions expeditiously.

6. On 27.6.2001 the impugnedagreement was signed by the four parties whichare the four groups viz. defendant no.1 BPLCOM,Birla Group, Tata Group and AT & T Group. Insubstance the agreement arrived at between the fourgroups is that the cellular business of thedefendant no.1 conducted through its subsidiariesi.e. defendant nos.l6 and l7 except Maharashtrabusiness would ultimately be merged with thecellular business of operating subsidiaries of BTALand towards this end, the shareholding ofdefendant no.1 in defendant nos.l6 and l7 shall betransferred to BTAL or to such other entity as maybe agreed to by the parties to the agreement, whichis referred to as 'NewCo'. The agreement furtherstipulates that Media One and France Telecom wouldparticipate in the consolidation process bytransferring their shareholding in defendantnos.16 and 17 in consideration for shares of newcompany in proportion to their shareholding andconsequently equity holding of each group in thenew company will be as follows:

BTAL Group 50.68%BPLCOM alongwith France Telecom & Media One 49.32%The agreement also stipulates that the MaharashtraBusiness would be separately sold and eventuallythere will be voluntary winding up of defendantnos. l6 and l7 and the winding up of defendantno.1 and the shareholders of defendant no.1 willbecome shareholders of the new company. Clause 23of the agreement sets out the time frame for theexecution of the final documents. Clause 24provides that the agreement would become effectiveupon each party obtaining approval of theirrespective Board of Directors.

7. A meeting of the Board of Directors ofDefendant no.1 was held in Mumbai on 25.7.2001and the Board by a majority of 5:3 approved thesaid agreement and authorised two Directors and theCompany Secretary to carry out all necessary acts,deeds and things as may be necessary for implementation of the agreement. The dissent was bythe three nominee directors of foreign investors,the fourth nominee director having abstained fromvoting. The objection to the resolution was mainlyon the ground that the proposed transaction amountsto sale or disposal of the undertaking of theCompany and as such requires the approval of theshareholders under section 293(1)(a) of theCompanies Act and moreover such approval is neededby virtue of the shareholders agreements. In fact,these objections were raised by the plaintiff by anotice through its Solicitors two days prior to theBoard meeting wherein it was also contended thatthe plaintiff is entitled to vote as if they wereordinary shareholders since no dividend hadbeen paid on the preference shares since 1997.In this regard, the provisions of section87(a)(b)(ii) of the Companies Act were relied on.This controversy was further precipitated bythe exchange of letters between the partiesafter the passing of the Board Resolution. Again ameeting of the Board of Directors was convenedon 6.9.2001. The meeting was, however, postponedjust a couple of days prior to the meeting byMr.B.K.Syngal, a nominee Director of theIndian promoters by his e-mail dated 4.9.2001.

8. On 12.9.2001 the plaintiff filed thepresent suit, being Suit no.3222 of 2001,seeking a declaration that the agreementdated 27.6.2001, without the approval and sanctionby the shareholders of the company under section293(1)(a) of the Companies Act, is null andvoid. A declaration is also sought that theresolution of the Board of Directors in themeeting dated 25.7.2001 is null and void. Theplaintiff has also prayed for a permanentinjunction restraining defendant nos.1 to 8 anddefendant nos.13 to 17 from givingeffect to the agreement dated 27.6.2001 andthe resolution of the Board of Directorsdated 25.7.2001. A further declaration is soughtthat the plaintiff is entitled to the exercise ofall rights on the preference shares held by itunder section 87(2)(b) of the Companies Act anda prayer is also made for permanent injunctionrestraining defendant nos.1 to 8 and defendantnos.13 to 17 from interfering in any manner withthe voting rights by the plaintiff on itspreference shares. Along with the suit, a Notice ofMotion was taken out for interim and ad-interimreliefs. The learned single Judge by his orderdated 19.9.2001 refused to grant ad-interim relief,granting liberty to the plaintiff to move foran ad-interim relief in case there is an agreementreached with Media One and France Telecom,before the Notice of Motion is finally heard.

9. In the suit, the plaintiff haschallenged the impugned action mainly on threegrounds:-

(i) that the conduct of defendant nos.2to 6 and defendant no.7 (Indian promoters)is actuated by mala fides;

(ii) that the transaction requires theconsent of the shareholders in general meetingas required by section 293(1)(a) of theCompanies Act;

(iii) and that the transaction, ifcompleted, without the approval of the companyin general meeting will be ultra vires thecompany.

In addition to challenging the impugned action,it is claimed that plaintiff is entitled to adeclaration and injunction in respect of thevoting rights pertaining to the preference sharesheld by it by virtue of section 87(2)(b)(ii) ofthe Companies Act.

10. It is not necessary to elaboratethe well-settled principles in the matter of grantof injunctions. In a recent decision in ColgatePalmolive (India) Ltd. Vs . Hindustan LeverLtd., : AIR1999SC3105 , the Supreme Court hassuccinctly laid down the parameters in that regard.The Court has observed:

'24. We, however, think it fit tonote hereinbelow certain specificconsiderations in the matter of grant ofinterlocutory injunction, the basicbeing non-expression of opinion as tothe merits of the matter by the Court,since the issue of grant ofinjunction usually, is at theearliest possible stage so far as thetime-frame is concerned. The otherconsiderations which ought to weighwith the Court hearing theapplication or petition for the grant ofinjunctions are as below:-

(i) Extent of damages being anadequate remedy;

(ii) Protect the plaintiffs interestfor violation of his rights thoughhowever having regard to the injurythat may be suffered by thedefendants by reason therefor;

(iii) The Court while dealing withthe matter ought not to ignore thefactum of strength of one partyscase being stronger than the others;

(iv) No fixed rules or notions oughtto be had in the matter of grant ofinjunction but on the facts andcircumstances of each case--therelief being kept flexible;

(v) The issue is to be looked fromthe point of view as to whether onrefusal of the injunction theplaintiff would suffer irreparableloss and injury keeping in view thestrength of the parties case;

(vi) Balance of convenience orinconvenience ought to be considered asan important requirement even if thereis a serious question or prima facie insupport of the grant;

(vii) Whether the grant or refusal ofinjunction will adversely affect theinterest of general public which can orcannot be compensated otherwise.'

Bearing in mind the above principles we proceed todeal with the submissions advanced by the rivalparties. Mr.Chagla made submissions on behalf ofthe plaintiff and the learned counsel appearing forthe defendant nos. 9 to 12 adopted his submissions.Mr.Chidambaram made submissions on behalf of thedefendant no.1 which were adopted by the learnedcounsel appearing for defendant nos. 2 to 8 anddefendant nos. 13 to 17.

11. Regarding ground (i):

Mr Chagla fairly stated that in view ofthe decision of the Supreme Court in V.N.Rangarajvs V.B.Gopalkrishnan : AIR1992SC453 , the plaintiffis not in a position to claim enforcement of rightsemanating from shareholders agreements. In fact inthe plaint it is categorically stated that theplaintiff is not claiming enforcement of theshareholders agreements. Mr. Chagla, however, strongly urged that inspite of the abovelegal position it was represented to the foreigninvestors by the company's solicitors themselvesthat the shareholders agreements were valid andenforceable in India, notwithstanding the judgmentof the Supreme Court in Rangaraj's case. He drewour attention to the opinion to that effect givenby Mr.S.N.Talwar of M/s Crawford Baley and Co. asSolicitors to the Company. However, same Mr.Talwarwho is also a Director of the Company taking adifferent stand in the meeting of the Board ofDirectors stated that the share holders agreementsare not enforceable. According to Mr.Chagla thisis a clear evidence of the malafides on the part ofthe Indian shareholders. He submitted that theIndian Promoters have acted in complete breach notonly of the utmost good faith expected betweenthe partners, but with ulterior motives and signedthe impugned agreement without approval of Indianshareholders and behind their back, whichagreement has the effect of ultimate dissolutionand civil death of defendant no.1 company.

12. Mr.Chagla submitted that there wastotal denial of information and participationto the foreign investors regarding the proposedBlue tooth merger. The Committee appointed forthe merger comprising the nominee Directors of theforeign investors was totally by-passed by theIndian Promoters. Mr.Edward Hummer who wasappointed by the foreign investors as anindependent consultant was also kept in darkand was not provided with sufficientinformation. Mr.Chagla went on to submit thatthough the foreign investors were provided withterm sheets, drafts of the agreement, anymeaningful participation was prevented bysigning the agreement in haste in completedisregard to the interests of the foreigninvestors. According to Mr.Chagla signing of theagreement stands vitiated as the agreement wassigned in haste without active consultation withthe foreign investors and even the e mail copy sentto the foreign investors on 28.6.2001 is atvariance with the signed agreement in materialrespects. According to him, these facts aresufficient to demonstrate the mala fides ofthe Indian shareholders. Further, accordingto Mr.Chagla, even in the Board of Directorsmeeting, sufficient opportunity was not given tothe nominee Directors of the foreign investorsand this is obvious from the fact that the copyof the resolution was supplied to the nomineeDirectors only four hours before the meeting. Hesubmitted that the fact that all powers for dueexecution of the agreement were delegated to aCommittee of two Indian Directors and theCompany Secretary contrary to Art.70 of theArticles of Association is also indicative ofthe intention of the Indian Promoters to preventthe plaintiffs participation in the proposedtransaction. He submitted that even thereafterthere was an attempt to exclude the foreigninvestors from the Blue tooth merger which isevident from the fact that a duly convenedmeeting of the Board of Directors on 7.9.2001 fordiscussing these very issues was unilaterallypostponed by one of the nominee Directors of theIndian Promoters at the last minute with the soleintention to frustrate the participation of theplaintiff and other foreign investors. Therefore,according to Mr.Chagla, the agreement dated27.6.2001 and the ratification thereof arevitiated by malafides.

13. Before dealing with Mr Chaglascontention that the agreement and the boardresolution are vitiated by malafides, we must takenote of a preliminary objection raised by Mr.Chidambaram that the arguments based on malafidesare really in substance allegation of oppressionand mismanagement by majority shareholders comingunder the purview of sections 397 and 398 of theCompanies Act and the plaintiff should haveapproached the Company Law Board for appropriatereliefs. Mr. Chidambaram contended that the CompanyLaw Board has adequate jurisdiction and powers toenquire into the allegations of mismanagementincluding allegation of malafides and grantreliefs and hence the jurisdiction of the civilcourt is implied barred. Mr.Chidambaram placedstrong reliance on the decision of the SupremeCourt in Amonia Supplies Corporation Pvt Ltd vs.M/s Modern Plastic Containers (Pvt) Ltd and ors : AIR1998SC3153 . According to Mr.Chidambaram, thelaw has undergone a significant change after thedecision of the Supreme Court in Ammonia SuppliesCorporations case ( supra) and as the Company LawBoard has been invested with exclusivejurisdiction to deal with the allegations ofmismanagement and oppression by the majority shareholders, the jurisdiction of the civil courtwould be impliedly barred. He also referred to thedecision of the learned single Judge of the DelhiHigh Court in Vijay M. Shah and ors. vs. FlexIndustries Ltd (l996) 21 CLA l77. . We have heardthe detailed arguments advanced by both the learnedcounsel. We are unable to accept the preliminaryobjection raised by Mr.Chidamabam.

14. Under section 9 of the Code ofCivil Procedure, civil courts have jurisdiction totry all suits of civil nature except those of whichcognizance by the civil court is either expresslyor impliedly excluded. Such exclusion is not to bereadily inferred, the rule of construction beingthat every presumption should be made in favourof the existence rather than exclusion ofjurisdiction of the civil courts. In Dhulabhai vs.State of M.P : [1968]3SCR662 a five judge Bench ofthe Supreme Court considered the earlier decisionson this aspect and laid down the followingpropositions:

'(1). Where the statute gives finalityto the orders of the special tribunals,the civil courts jurisdiction must beheld to be excluded, if there isadequate remedy to do what the civilcourts would normally do in a suit. Sucha provision, however, does not excludethose cases where the provisions of theparticular Act have not been compliedwith or the statutory tribunal has notacted in conformity with the fundamentalprinciples of judicial procedure.

(2) Where there is an express bar ofjurisdiction of the court anexamination of the scheme of theparticular Act to find the adequacy orthe sufficiency of the remedies providedmay be relevant but is not decisive tosustain the jurisdiction of the civilCourt. Where there is no expressexclusion, the examination of theremedies and the scheme of theparticular Act to find out theintendment becomes necessary and theresult of the inquiry may be decisive.In the latter case, it is necessary ifthe statute creates a special right orliability and provides for thedetermination of the right or liabilityand further lays downs that all questionsabout the said right or liability shallbe determined by the Tribunals soconstituted, and whether remediesnormally associated with action in civilcourts are prescribed by the saidstatute or not...

An exclusion of thejurisdiction of the civil court is notreadily to be inferred unless theconditions above set out apply.'

15. In Raja Ram Kumar Bhargava vs . Union ofIndia : [1988]171ITR254(SC) , the principle regardingimplied exclusion of jurisdiction has beenexplained as follows:

'Generally speaking, the broad guidingconsiderations are that wherever aright, not pre-existing in common law,is created by a statute and that statuteitself provided a machinery for theenforcement of the right, both the rightand the remedy having been created unoflatu and a finality is intended to theresult of the statutory proceedings,then, even in the absence of anexclusionary provision the civil courtsjurisdiction is impliedly barred. If,however, a right pre-existing in commonlaw is recognised by the statute and anew statutory remedy for its enforcementprovided, without expressly excludingthe civil courts jurisdiction, thenboth the common law and the statutoryremedies might become a concurrentremedies leaving open an element ofelection to the persons of inherence.'

16. From the above two decisions of theSupreme Court it is clear that when there is noexpress provision excluding jurisdiction of thecivil courts, such exclusion can be implied only incases where a right itself is created and themachinery for enforcement of such right is alsoprovided by the statute. If the right is traceableto general law of contract or it is a common law right, it can be enforced through civilcourt, eventhough the forum under the statute alsowill have jurisdiction to enforce that right.There is a plethora of decisions of various HighCourts including the decisions of the High Courtsof Kerala, Andhra Pradesh, Madras, Punjab andHaryana, and Calcutta in favour of the view thatthese sections, 397, 398 and 408 do not conferexclusive jurisdiction on the Company Court togrant relief against oppression and mismanagement.The scope of these sections is to provide aconvenient remedy for minority shareholders undercertain conditions and the provisions therein arenot intended to exclude all other remedies. Thesuits by minority shareholders against oppressionand mismanagement,have been time-honouredexception to the rule in Foss vs Harbottle ( l843)2 Hare, 46l and in the absence of word expressly orimpliedly barring them it cannot be said thatsections 397, 398 and 408 of the Companies Actexclude jurisdiction of the ordinary courts.

17. Section 10 of the Companies Actprescribes that the 'court' having jurisdictionunder the Act shall be the High Court havingjurisdiction with respect to a Company, exceptwhere it is specifically conferred on the DistrictCourt by the Central Government. The section alsoauthorised Central Government to investjurisdiction in the District Courts to deal withsome of the provisions in the Companies Act.Section 2(ll) defines 'court' as meaning the courthaving jurisdiction under section 10 as regards allcivil matters. In Avanti Explosives (P) Ltd vsPrincipal Subordinate Judge, Tirupati (1987) 62 Comp.Cas 301 ( A.P) M Jagannathrao J. ( as he thenwas) held that section 10 only proceeds toenumerate or specify the court having jurisdictionunder the Act, wherever such jurisdiction isconferred on the court by the other provisions ofthe Act. Section 10 by itself does not conferjurisdiction on the High Court or district court onall mattes relating to companies .This is the viewexpressed by M.P.Menon J in R. Prakasam vs. ShriNarayana Dharma Paripalan Yogam in 1980 (50) Comp Cas 61 ( Ker) also which was accepted by thedivision bench of that Court in R.R.Rajendra Menon(II) vs Kochin Stock Exchange Limited . In Avanti Explosives Pvt Ltdscase ( supra) Jagannathrao J has considered all theearlier authorities including the decisions ofKerala, Andhra Pradesh, Madras and Punjab andHaryana High Courts in favour of the view thatsection 10 does not confer any exclusivejurisdiction on the company court. Similar is theview taken by the Andhra Pradesh High Court inDr.T.M.Paul v. City Hospital (Pvt.) Limited,1999(97) Comp.Cas 216,.

18. In Ammonia Supplies Corporation(supra) the Supreme Court was considering thescope of section 155 of the Companies Act. In thatcase the Supreme Court held that the jurisdictionexercised by the court under section 155 is asummary jurisdiction. The Court considered thedefinition of word 'court' under section 2(ii) ofthe Companies Act and came to the conclusion thatin respect of any question raised within theperipheral field of rectification the court asreferred under section 155 read with section 2(ii)and section 10 viz the Company Court alone hadexclusive jurisdiction. However, in case any claimis based on some seriously disputed civil rights or title, denial of any transaction or any other basicfacts which may be the foundation to claim to be amember and if the court feels that such claim doesnot constitute to be a rectification but insteadseeking adjudication on basic facts falling outsidethe rectification, it has discretion to send aparty to seek his relief before the civil courtfirst for the adjudication of such facts. In thatcontext the Court observed:

'Unless jurisdiction is expressly orimplicitly barred under a Statute,for violation or redress of any suchright Civil Court would havejurisdiction. There is nothing underthe Companies Act expressly barringthe jurisdiction of the Civil Courtbut the jurisdiction of the court asdefined under the Act exercisingits powers under various sectionswhere it has been invested withexclusive jurisdiction, thejurisdiction of the Civil Court isimpliedly barred. We have alreadyheld above the jurisdiction of thecourt under Sec. 155, to theextent it has exclusive, thejurisdiction of Civil Court isimpliedly barred. For what is notcovered as aforesaid the Civil Courtwould have jurisdiction.'

19. In Ammonia Supplies Corporationscase (supra) the court was not concerned with theinterpretation of sections 397 and 398, which aftertheir amendment vested in the Company Law Board.The decision of Delhi High Court in Vijaya M.Shahscase relied upon by Mr. Chidambaram does not dealwith the question of ouster of civil courtsjurisdiction. In that case the petitioner had filedcompany petition under sec. 81 and section 10 of theCompanies act read with Rule 11-B and Rule 17 ofthe Company (Court) Rules, 1959. The learned Judgeheld that as the petition alleged fraud and oppression by management resulting in deprival ofopportunity for the petitioner to subscribe torights shares issued by the company under sec. 81,the matter would fall under sections 397 and 398 coming within the jurisdiction of the Company Lawboard and, therefore, not maintainable before theHigh Court. Moreover, there is nothing to indicatein the language of sections 397 and 398 that theCourt as specified under section 10 has exclusivejurisdiction. The said provisions have been in thestatute book from 1951 onwards. But thoseprovisions have not been understood as excludingthe jurisdiction of the civil Courts to entertainsuits and grant relief as held in a series ofdecisions by various High Courts noticed earlier.

20. The decision in Ammonia SuppliesCorporation was considered by the division benchof this court in Hurburtson's case in Appeal Nos.6to 8 and 11 to 13 of 2000 decided on 28.9.200l. Inthat case relying upon the decision in AmoniaSupplies Corporation it was argued that theplaintiffs could approach the Company Law Boardunder section 111A of the companies Act, which wasthe competent forum to go into such matter andjurisdiction of civil courts was impliedly barred.The division bench held that the plaintiff had acommon law right to seek rectification of registerof members and pre-existing common law right can betaken away only by express enactment or necessaryimplication. It was held that there is nothing insection 111A which has the effect of taking awaythe common law right of a member of the company toseek rectification of register of members. At bestit can be said that after insertion of section 111Awith effect from 20.9.l995, a member of the companyhas a statutory right to approach the companycourt to seek rectification of register ofmembers. First common law right, however, remainsintact and he can assert that right by filing asuit before the court of competent jurisdiction. Inthe light of this settled legal position we are ofthe opinion that the preliminary objection raisedby Mr.Chidambaram is liable to be rejected.

21. Now as regards the contention ofmalafides it is required to be noted that it is notdisputed that the proposed Blue tooth transaction isin the interest of the Company. This position isnot disputed in the plaint nor was any suchcontention advanced during the course of argumenton behalf of the plaintiff or the defendantssupporting the plaintiff. Further the sequence ofevents is eloquent. The record shows that there wasunanimity that injection of fresh equity in thecompany was not possible and, therefore, the bestoption was to have negotiations with other partiesfor consolidation. Accordingly, negotiations wereopened with Singtel, Hutchison and BTAL(Blue tooth). A number of e-mails were exchangedbetween the parties in respect of various optionsadverted to earlier. Committee was constituted withequal representatives of the Indian shareholdersand foreign shareholders to consider and evaluateproposals for merger and to submit itsrecommendation. Foreign investors were keptappraised of the position by circulating statusnotes in respect of each of the three options. Inthe meeting of the Board of Directors held on7.6.2001, all the options were discussed and allmaterial parameters and information relating toBlue tooth transaction including valuation wereplaced before the Board. The Board unanimouslydecided to conclude a binding MOU includingcommitment to bid together for the 4th licence. Afaint attempt appears to have been made at a laterstage when dispute started between the parties tochallenge the authenticity of the minutes of theBoard meeting by contending that the words 'bindingMOU' are incorrectly recorded in place of 'semibinding MOU'. This is clearly an after thought andno credence can be attached to the belated plea ofincorrect recording of the minutes.

22. Later on term sheets were sent tothe plaintiff and other foreign investors andvaluation report of ABN AMRO was also circulated toall investors including foreign investors. Copiesof the draft agreements were also circulated tothem. All this was done with the knowledge and inactive consultation with the foreign investors. Thee-mail dated 20.6.2001 jointly sent by the foreigninvestors clearly mentions :- 'We strongly supportyour efforts to hold BPLCOM a completeconsolidation. We agree Blue tooth should be toppriority for BPLCOM and for all of us.....' Thiswas followed by e-mail dated 25.6.2001 from ABNAMRO to all investors including foreign investorsindicating that the agreement will be signed incouple of days. The impugned agreement was signedon 27.6.2001 and a copy thereof was sent to foreigninvestors by e-mail.

23. During the period from May 2001till the signing of the agreement, at no time, wasany objection raised on behalf of the foreigninvestors that they were not consulted or wereexcluded or were opposed to the merger. Even duringthe Board meeting of 25.7.2001, Mr. Donald Peck,nominee Director of the plaintiff, supported theBlue tooth transaction in principle although hestated that he does not approve the methodology ofthe transaction. The e mailed copy of theagreement contains a specific clause to the effectthat the agreement is required to be approved bythe Board of Directors. Even at that point of timethere was no whisper of dissent or objection on thepart of foreign investors nor was it suggested thatthe agreement requires the shareholders approvalunder sec. 293 of the Companies Act. On the contrarythe nominee director of the plaintiff vide his e mail dated 29.6.2001 stated that '.....there isclearly a lot of work still to go on in addition towhat has been achieved so far.' Between 29.6.2001and 22.7.2001 despite the conference calls, e mailsand meetings, no complaint was made by the foreigninvestors regarding the agreement or any clausestherein. In the mean time pursuant to the agreementdefendant no.1 and BTAL made a joint bid andsucceeded in getting the 4th Cellular licence forDelhi as envisaged by the agreement. Every steptaken towards the Blue tooth transaction indicatesthat the transaction was effected with theknowledge and concurrence of the foreign investorsand there was no real opposition to the transactionand the grievance of the plaintiff that foreigninvestors were denied information or were kept indark is only an afterthought.

24. Now coming to the allegeddifferences in the e mailed copy of the agreementsent to the foreign Directors and signed agreement,it appears that it is stated in the e mailedagreement that :-

'Additional Equity Contributionmeans any contribution of equity oradvances against equity made afterthe date of this Agreement andprior to application by a party toany of the partys representativesbusiness to be combined under New Co.'

'Shareholders/operations agreementwill contain provisions such thatall right issues by New Co afterApplication will be made at a fairmarket value?

Whereas in the signed copy it is stated that : -

'Additional Equity contribution meansany contribution of equity or advances of equity made in cash tothe Operating Companies after31.3.2001 and prior to application'.

'Shareholders Agreement willcontain a provision that allrights/similar equity issued by NewCoafter application and upto an initialpublic offerings will be made byNewCo at a valuation agreed to byparties and which valuation shall bemade by the Board in the bestinterests of NewCo as a whole.'

25. Prima facie, it appears to us thatthe above variances did not indicate any ulteriormotive or design as suggested by the plaintiff. Thefirst change is apparently done with a view to makethe deal more transparent as urged byMr.Chidambaram. As regards the other change it ispointed out by Mr.Chidambaram that in any event thefinal decision relating to valuation is necessarilywith the Board of Directors of the new company. Hesubmitted that even assuming that fair market valueis to be based on valuation received from theexpert valuer, the question of valuation would haveto be still finally decided by the Board and theterms stipulated in the final agreement maintainspractically the same position by requiring thatvaluation would have to be agreed to by all theparties and such valuation would have to be in thebest interest of new company. Therefore, it is notpossible to conclude even at this prima facie stagethat variances were intended to cause prejudice tothe foreign investors.

26. The appointment of CompanySecretary on the Sub-Committee for carrying outfurther implementation of the agreement and doingother needful acts does not and cannot vitiate theimpugned agreement as contended by Mr.Chagla. Moreover, we find that the committees job is to carryout ministerial functions and, therefore, thecomplaint that there was violation of Article 70 ofthe Articles of Association does not seem to becorrect. We may mention that Mr.Chidambaram hasstated that one director nominated by foreigninvestors will be taken on the committee if they sodesire.

27. There is yet another reason for rejecting the plea of malafides. It is submitted byMr.Chidambaram and, in our opinion rightly so, thatthe allegation of malafides against the Directorscannot be entertained without impleading them asparties. In All India State Bank OfficersFederation Vs . Union of India : (1997)ILLJ419SC , theSupreme Court has observed as follows:

'22. There is yet another reason whythis contention of the petitioners mustfail. It is now settled law that theperson against whom malafides arealleged must be made a party to theproceeding. The allegation that thepolicy was amended with a view tobenefit respondents 4 and 5 would amountto the petitioners contending that theBoard of Directors of the Bank sought tofavour respondent 4 and 5 and,therefore, agreed to the proposal putbefore it. Neither the Chairman nor theDirectors, who were present in the saidmeeting, have been impleaded asrespondents. This being so thepetitioners cannot be allowed to raisethe allegations of malafides, whichallegations, in fact, are withoutmerit.'

Since the Directors in the impugned meeting havenot been impleaded as defendants, the plaintiffcannot ask the Court to give a finding on thealleged malafides without an opportunity to theDirectors to rebut the allegation.

28. Mr.Chidambaram urged that Directorshave a duty to the company which must override anyallegience to the shareholders that nominated them.He submitted that the nominee Directors arerequired to place interest of the Company above theinterest of the shareholders who nominated them andin the event of a conflict of interest, theinterest of the Company should prevail. Hereferred to the decision in Building and CompanyVs. Association of Cinematograph, Television andAllied Technicians (1963) 2 QB 606 where the Courtheld that the directors have to discharge duties ofa fiduciary nature and no stipulation is valid bywhich he agrees to act in accordance with thedirection of his patrons. Mr.Chidambaram submittedthat although the nominee directors of the foreignshareholders agreed that Blue tooth transaction isbeneficial to the Company, they opposed theresolution only at the behest of the foreignshareholders. Under the circumstances the charge ofmalafides against the Directors who voted in favourof Blue tooth resolution has no force. We find meritin this submission of Mr.Chidambaram.

29. Mr.Chidambaram also submitted thatreal motive or intention of the plaintiff in filingthe suit is to coerce the Indian shareholders intotransferring some shares of defendant no.1 free ofcost to the plaintiff and other foreignshareholders. According to Mr.Chidambaram, theforeign investors expected a return of 30% inU.S.dollars and since such a high rate of returnwas not possible in the present scenario they wantIndian shareholders to compensate them bytransferring several millions shares in defendantno.1 to them. In support, he referred to theletter dated 20.6.2001 addressed by the NomineeDirector of the foreign shareholders. Mr.Chagla,however, did not agree with Mr.Chitambaransinterpretation of the said letter. He submtitedthat the suggestion for cashless transfer of shareswas in altogether different context and had nothingto do with the Blue tooth transaction. We find itunnecessary to deal with this controversy sinceprima facie we do not find any substance in theplea of malafides raised on behalf of theplaintiff. In our opinion, the plaintiff hasutterly failed to establish malafides.

30. Regarding ground (ii):

This ground is based on section 293of the Companies Act. The argument of Mr.Chagla onthis point runs thus : According to him the word'undertaking' in sec. 293(1)(a) must be construed tomean the business of the company, the physicalassets constituting only the means by which suchbusiness is carried on. He placed reliance on thedecisions of the Supreme Court in Madras GymkhanaClub Employees Vs . Management, : (1967)IILLJ720SC ;R.C.Cooper Vs . Union of India, : [1970]3SCR530 ;and Carrew & Co. Vs . Union of India : [1976]1SCR379 where the word 'undertaking' appearing indiverse statutes has been construed to mean anybusiness or any work or project undertaken bycompany. He also relied on the decision of MysoreHigh Court in International Cotton Corporation (P)Ltd. v. Bank of Maharashtra and another 40Comp.Cas 1154 where the Division Bench of MysoreHigh Court held that the word 'Undertaking' meansany business or any work or project which oneengages in or undertakes as an enterprise analogousto business or trade and that business orundertaking of a company must be distinguished fromthe properties belonging to the company. Areference was also made to the decision of thelearned single Judge of this Court (Dhanuka J.) inP.S.Offshore Inter Land Services Pvt. Ltd. andanother v. Bombay Offshore Suppliers and ServicesLtd. and others (1992) 75 Comp.Cas 583. Inparticular, our attention was drawn to thefollowing observations of the learned Judge on page596;

'In my judgment, the expression'undertaking' used in this sectionis liable to be interpreted to mean'the unit', the business as a goingconcern, the activity of thecompany duly integrated with allits components in the form ofassets and not merely some asset ofthe undertaking. Having regard tothe object of the provision, itcan, at the most, embrace within itall the assets of the business as aunit or practically all suchconstituents. If the questionarises as to whether the majorcapital assets of the companyconstitute the undertaking of thecompany while examining theauthority of the board to disposeof the same without the authorityof the general body, the test to beapplied would be to see whether thebusiness of the company could becarried on effectively even afterdisposal of the assets in questionor whether the mere husk of theundertaking would remain afterdisposal of the assets? The test tobe applied would be to see whetherthe capital assets to be disposedof constitute substantially thebulk of assets so as to constitutethe integral part of theundertaking itself in the practicalsense of the term.'

31. Mr.Chagla submitted that where thebusiness is carried on by a company through itssubsidiaries, sale or disposition of shares of thesubsidiary would in effect be sale or dispositionof the business leaving only the husk of parentcompany . However, he hastened to add that thesale of shares of the company having only aninvestment business, no matter how large thequantum, will not amount to a sale of itsundertaking. He, however, urged that in theinstant case, the holding company, namely,defendant no.1 is conducting the telecom businessthrough its subsidiary i.e. defendant nos. 16 and17 and nearly 90% of the business of defendant no.1is conducted through them. In support of hisargument, he referred to the prospectus of theproposed issue of American Depositary Shares andOverseas listing submitted by defendant no.1. Inthe said prospectus it is mentioned as follows:

'we are a leading provider of cellulertelephone services in India. We conductour operations in -- through BPL MobileCommunications Limited (defendantno.16), a 74% owned subsidiary. Weconduct our wireless operations in --through BPL Cellular Limited (defendantno.17), a 51% owned subsidiary.'

32. Mr.Chagla pointed out that all thedecisions as to the working of the operatingsubsidiaries are taken by the parent company, thereport as to the working of the subsidiaries arepresented to the parent company and remuneration tothe Chief Executive Officer and Managing Directorof defendant no.1 is for the work done by them inthe business of defendant no.1 through itssubsidiary. According to Mr.Chagla, in determiningwhat constitutes an undertaking of the company,Court will have due regard to the economicrealities. He submitted that where there is aholding company and business is conducted throughsubsidiary, the court will consider whether thebusiness conducted by subsidiary is, in effect, thebusiness of holding company and that for thispurpose Court would be entitled to pierce thecorporate veil, particularly so, in the context ofsection 293(1)(a), object of which is to safeguardthe rights and interests of the shareholders. Heplaced heavy reliance on the decision in ScottishCorporative Wholesale Society Ltd. Vs.Meyer andanother 1959 A.C.324, D.H.N.Food Distributors Ltd.Vs.Tower Hamlets L.B.C. (1996) 3 All ER 462, Stateof U.P. v. Renusagar Power Co. A.I.R. 1978S.C.1737, Hackbridge-Hewittic and Easun Ltd. &E.Sun; Vs.G.E.S.Distribution Transformers 74 CompCas 143 and Fatima Tiles v. Sudarsan TradingCo.Ltd. (1992) 74 Comp Cas 423. We propose todeal with these decisions a little later.

33. There cannot be any quarrel withthe proposition that any business or project orunit of a company would amount to an undertaking ofthe company. It is also correct that in the presentcase cellular telephone business is conducted bydefendant no.1 through its subsidiaries i.e.defendant nos. 16 and 17. This position is notseriously disputed by Mr.Chidambaram.Mr.Chidambaram, however, urged that whether theCellular Phone business of the company is anundertaking is not the issue. According toMr.Chidambaram, the real issue is who owns theundertaking. Mr.Chidambaram contended thatdefendant nos. 16 and 17 are separate legalentities with a separate Board of Directors andhave separate balance sheets reflecting the assetsand liabilities of defendant nos. 16 and 17. Hecontended that the defendant no.1 company hasproposed swapping of its share holdings indefendant nos. 16 and 17 with the shares of newcompany. After the swap, defendant no.1 willcontinue to remain in cellular business i.e. itwill continue to carry on the same business throughthe new company. Therefore, according toMr.Chidambaram, the provisions of sec. 293(1)(a) arenot attracted to the present case.

34. Now, sec. 293(1)(a) of the CompaniesAct. Section 293(1)(a) of the Companies Actprovides :-

'S.293:Restrictions on powers of Board. -

(1) The Board of Directors of a publiccompany, or of a private company which is asubsidiary of a public company, shall not,except with the consent of such publiccompany or subsidiary in general meeting, -(a) sell, lease or otherwise dispose of thewhole, or substantially the whole of theundertaking of the company, or where thecompany owns more than one undertaking,of the whole, or substantially thewhole, of any such undertaking.

35. The opening words of thesection that 'The Board of directors of a publiccompany, or of a private company which is asubsidiary of a public company, shall not, exceptwith the consent of such public company orsubsidiary in general meeting' clearly show theLegislative intent that whenever an undertakingis owned by the subsidiary, the sectioncontemplates that a resolution shall be passedin the general meeting of the subsidiarycompany. The Legislature in enacting section293 has taken note of the situation where therewould be a holding company and also subsidiarycompany. It is obvious from the language of thesection that company which owns the undertakinghas to pass the resolution in general meeting. Itis not in dispute that defendant nos.16 & 17 arethe legal owners of the cellular telephonebusiness. Even if business is equated with anundertaking, in the present case there is notransfer of the undertaking in as much as thebusiness continues to belong to the subsidiariesi.e. defendant nos.16 & 17. If we acceptMr.Chaglas argument that cellular telephonebusiness should be regarded as owned by theholding company, it would lead to an anomalousposition. If defendant no.1 is the owner, thenthe question may arise as to what is the statusof defendant nos.16 & 17. If both are considered tobe the owners, then whether such a resolution isrequired to be passed by the general body of boththe companies i.e. the holding company andthe subsidiary company. Section 293(1)(a) obviouslycontemplates one resolution and not two. Moreover,in the present case, the subsidiaries are notwholly owned by defendant no.1. In defendantno.16, defendant no.1 is holding the shares alongwith France Telecom and in defendant no.17 alongwith Media One. If we accept Mr Chaglasargument that the decision of transfer ofundertaking must be taken in the meeting of theshareholders of defendant no.1, it would mean thatsuch a decision could be taken even withoutthe consent of the shareholders of the subsidiaryand those shareholders would not have any say inthe matter. Mr.Chidambaram pointed out that theinterpretation suggested by Mr.Chagla is based on awrong premise that the only kind of subsidiary iswhat is contemplated in section 4(1)(b)(ii). Undersection 4(1)(a) a company is also deemed to be asubsidiary of another company if that companycontrols the composition of its Board of Directors.In case of such subsidiary the holding company maynot hold 51% or more of the equity and stillcontrol the Board of Directors of the subsidiary.If the argument of Mr.Chagla is accepted, it wouldmean that even if the holding company passes aresolution, it can be defeated by the shareholdersof the subsidiary company. This would make section293(l)(a) unworkable.

36. Mr.Chagla strenuously contendedthat in construing section 293(1)(a) , the courtshould consider business realities. He contendedthat a large number of companies are conductingtheir business through subsidiaries and subsidiarycompanies have practically no say and entirebusiness is controlled by the holding company and,therefore, they must be treated as one entity. Itwas submitted by the learned counsel that modernlaw has laid to rest the ghost of SalomanVs.Saloman. The Court can pierce the corporate veilto consider whether the business conducted by asubsidiary is, in effect, the business of parentcompany. To support his contention, Mr.Chaglarelied on a number of authorities noticed earlier.The first is the decision of the House of Lords inScottish Cooperative Wholesale Cooperative societyVs. Meyer. In that case it had been argued that theappellant could not be said to have conducted theaffairs of the company in a manner oppressive tosome part of the members within the meaning ofsection 210 of the Companies Act, 1948 since it wasnot that the company which had acted oppressivelybut a subsidiary which it had formed. This argumentwas rejected since the court found that every steptaken by the subsidiary was determined by thepolicy of the parent and the section warrants thecourt in looking at the business realities of thesituation and does not confine them to a narrowlegalistic view.

37. In D.H.N. Food Distributors Ltd. v. Tower Hamlets L.B.C. which was relied by thelearned Counsel, D.H.N. Food Distributors had twowholly owned subsidiaries and in one of them thelanded property of the group was vested, while D.H.N. carried on the business of the group,occupying the property as a licensee. According tothe decision of the Lands Tribunal on thecompulsory purchase of the land, negligiblecompensation only was payable since D.H.N. had beendeprived merely of a revocable licence and thesubsidiary had had no business to lose. The Courtof Appeal reversed that decision on three grounds,the one relevant here being expressed thus by LordDenning M.R.

'This group is virtually the sameas a partnership in which all thethree companies are partners. Theyshould not be treated separately soas to be defeated on a technicalpoint. They should not be deprivedof the compensation which shouldjustly be payable for disturbance.The three companies should, forpresent purposes, be treated as oneand the parent company,D.H.N.should be treated as thatone.'

In the same case Goff L.J. observed that

'this isa case in which one is entitled to look at therealities of the situation and to pierce thecorporate veil.'

38. In State of U.P. v. RenusagarPower Co. the question was whether the corporateveil should be lifted and Hindalco and Renusagar betreated as one concern and Renusagars power plantbe treated as the 'own source of generation ofHindalco and should be liable to duty on thatbasis. The Supreme Court has observed in paras 63and 66;

'63. It is high time to reiterate that inthe expanding of horizon of modernjurisprudence, lifting of corporateveil is permissible. Its frontiersare unlimited. It must, however,depend primarily on the realitiesof the situation. The aim of thelegislation is to do justice to allthe parties. The horizon of thedoctrine of lifting of corporateveil is expanding. Here,indubtably, we are of the opinionthat it is correct that Renusagarwas brought into existence byHindalco in order to fulfil thecondition of industrial licence ofHindalco through the production ofaluminium. It is also manifest fromthe facts that the model of thesetting up of power station throughthe agency of Renusagar was adoptedby Hindalco to avoid complicationsin case of take over of the powerstation by the State or theelectricity Board. As the factsmake it abundantly clear that allthe steps for establishing andexpanding the power station weretaken by Hindalco Renusgar iswholly owned subsidiary ofHindalco. Even the day todayaffairs of Renusagar are controlledby Hindalco. Renusagar has at nopoint of time indicated anyindependent violation. Wheneverfelt necessary, the State or theBoard have themselves lifted thecorporate veil and have treatedRenusagar and Hindalco as oneconcern and the generation inRenusagar as the own source ofgeneration of Hindalco. In theimpugned order the profits ofRenusagar have ben treated as theprofits of Hindalco.'

'66. It appears to us, however, that asmentioned the concept of liftingthe corporate veil is a changingconcept and is of expandinghorizons. We think that theappellant was in error in nottreating Renusagar power plant asthe power plant of Hindalco and nottreating it as the own source ofenergy. The respondent is liableto duty on the same and on thatfooting alone this is evident inview of the principles enunciatedand the doctrine now established byway of decision of this Court inLife Insurance Corpn.of India : 1986(8)ECC189 (supra) that inthe facts of this case sections3(1)(c) and 4(1)(c) of the Act areto be interpreted accordingly. Theperson generating and consumingenergy were the same and thecorporate veil should be lifted. Inthe facts of this case Hindalco andRenusagar were inextricably linkedup together. Renusagar had inreality no separate and independentexistence apart from andindependent of Hindalco.'

39. In Fatima Tile Works v. SudarsanTrading Co. Ldt. the learned single Judge of MadrasHigh Court held that since the relationship betweenthe holding company and its subsidiary necessarilyimplies exercise of great control by the formerover latter, the use of a trade mark by subsidiarycan fairly be treated as use by holding company. InHackbridge-Hewittic and Easun Ltd. v. G.E.C. Distribution Transformers Ltd., the divisionbench of the same Court observed that while asubsidiary company may have a distinct legalpersonality, this does not suffice to dispose ofthe possibility that its behaviour might be imputedto the parent company, such may be the case inparticular when the subsidiary although being a district legal personality, does not determine itsbehaviour on the market in an autonomous manner butessentially carries out instructions given to it bythe parent company. When the subsidiary does notenjoy any real autonomy in the determination of itscourse of action on the market, it is possible tosay that it has no personality on its own and it isone and the same as parent company.

40. It is true that the modern tendencyis, where there is identity and community interestbetween the companies in the group, especiallywhere they are related as holding company andwholly owned subsidiary or subsidiaries to ignoretheir separate legal entity and look instead at theeconomic entity of the whole group. Gower in hisbook, Principles of Modern Company Law, hasobserved that that there are only threecircumstances in which the Court can lift the veil.These are (i) when court is construing the statute,contract or other documents; (ii) when the Court issatisfied that the company is concealing the truefacts and (iii) when it can be established that thecompany is authorised agent of its controller orits members, corporate or human. In L.I.C. ofIndia Vs . Escorts Ltd. : 1986(8)ECC189 theSupreme Court has clearly laid down that thecorporate veil may be lifted to the extentpermitted under the statute and to that extent andnot more. The Court observed:-

' ......Generally and broadly speaking, wemay say that corporate veil may belifted where statute itself contemplateslifting the veil or fraud or improperconduct is intended to be prevented ortaxing statute or beneficially statuteis sought to be evaded or whereassociated companies are in extricablyconnected as to be, in reality, part ofone concern. It is neither necessary nordesirable to enumerate the class ofcases where lifting veil is permissible,since that must necessarily depend uponthe relevant statutory or otherprovisions, object sought to beachieved, the impugned conduct, involvement of the element of publicinterest, effect of holding which may be affecting the society.'

In the light of the view taken by the Supreme Courtin the above case, and on a proper reading ofsection 293(1)(a) we do not find anything in thelanguage thereof which would compel us to invokethe doctrine of lifting the Corporate Veil. In thefacts of the case there is no reason whatsoever toapply the said principle.

41. In M/s Freewheels (India) Ltd. Vs . Dr. Veda Mitra and another : AIR1969Delhi258 ,the Delhi High Court in a case of a holding companyhaving 52% of the shares of the subsidiary declinedto apply the doctrine of piercing the veil. TheCourt observed:

turning the veil, and the Courtswill not do so except for specificpurposes and when compelled by theclear words of the statute. It isunnecessary to elaborate on thisaspect any more, as here the parentcompany holds only a nominalmajority in the share capital ofthe subsidiary, which holding is 52 percent. With that meager majority alone I am not prepared tohold, even if it were possible todo so for such a purpose, that thesubsidiary company has lost itsidentity as a separate legalentity. Mr.Lekhi went to the extentof saying that not only for thispurpose but in all cases asubsidiary company must be treatedas an asset of the holding company.This contention is beyond the reachof sustained argument. I am, in thecircumstances, of the opinion thatthe subsidiary company has neitherlost its identity nor merged itselfinto a group consisting of theparent company and the subsidiarycompany. If Mr. Lekhi's argumentwere to be accepted, then suchsubsidiary company will crack notunder the pressure of its ownuncongenial share holders, whichmay invariably exist in everycompany, but also of the pressureof the shareholders and creditorsof the holding company.

42. It would be useful to refer to thedecision of this Court in Brook Bond India Ltd.Vs. Rubi Mills Ltd. (1994) 3 C.L.J. 279, whereSrikrishna J. (as he then was) held that the saleof shares, whatever be their number, even ifamounts to a transfer of the controlling interestof a company, cannot be equated to the sale of anypart of the undertaking so as to come within themischief of section 293(1)(a). Though theseobservations are made at an ad-interim stage, weare in agreement with the learned Judge that thesale of shares cannot be equated with the sale ofundertaking or any part thereof.

43. Mr.Chagla urged that what is soughtto be effected by the proposed transaction is theultimate winding up of defendant no.1. Hesubmitted that if the transaction is completed, thebusiness conducted through defendant nos. 16 and 17except the Maharashtra business of the defendantno.17 would be transferred to the new company andthen there will be a separate sale of theMaharashtra business and consequently the volunarywinding up of defendant nos. 16 and 17 and,ultimately, the winding up of the defendant no.1itself. According to Mr.Chagla, as a result of theimpugned transaction, defendant no.1 will be leftwith nothing but a husk. Mr.Chagla urged that inthe matter of such great importance, the Board ofDirectors cannot take a decision without theconsent of the shareholders. The argument ofMr.Chagla, though appears to be attractive at thefirst blush, on a close scrutiny cannot stand. Inthe instant case both defendant nos. 16 and 17would continue to operate until France Telecom andMedia One consent to the rolling up. In defendantno.16 France Telecom owns 26% share whereas indefendant no.17 Media One owns 41% of the sharesand both France Telecom and Media One are yet totake a decision. Mr.Chidambaram pointed out that asa result of the swapping of the shares, defendantno.1 would be holding 33% shares in the newcompany and would continue to operate the businessof cellular telephone as a part of the new company.As long as a purchaser is not found for theMaharashtra business, defendant no.17 will continuein business and its business will be intact. Evenif France Telecom and Media One agree to therolling up into the new company and Maharashtrabusiness is sold, voluntary winding up of defendantno.1 is not possible without the concurrence offoreign shareholders who own 40% equity indefendant no.1 and without their consent there willnot be any merger with the new company.

44. In view of the foregoing discussionwe have no hesitation in holding that section293(1)(a) has no application to the present case.

45. Regarding ground .(iii) :This contention of the plaintiff isbased on Object B-37 of the Memorandum ofAssociation which reads as follows:

'37. Subject to the approval of the shareholders under section 293 of theCompanies Act, 1956, to sell, exchange,mortgage, hire, let on lease, pledge,hypothecate, grant licences, easements,options and other rights over and in anyother manner and to deal with or disposeof the whole or any part of theundertaking property, movable orimmovable, easements, privileges,assets, rights and effects of theCompany for such consideration as may bethought fit and in particular forstocks, shares or debentures whetherfully or partly paid up; or securitiesof any other Company having objects inwhole or in part similar to those of theCompany or on payment of any royalty ortribute.'

Relying upon Object B-37, Mr.Chagla argued thatthere is a prohibition against the Board ofDirectors from selling or disposing of any propertyof the Company whether movable or immovable,including the shares. He urged that the words 'under section 293' used in Object B-37 are merelydescriptive of the manner in which such power isrequired to be exercised. He submitted that thereis deliberate departure in the language of ObjectB-37 as compared to objects B-9, 10, 22, 24, 29,30, 31 and 34, all of which have been givenexercise of power subject to the provisions of theAct. Object B-37 alone makes the exercise of powersubject not to any provision of the Act, butsubject to the approval of the shareholders. Itwas submitted that Memorandum and Articlesconstitute a contract between the shareholdersinterest and between the shareholders and Company.It was submitted that it is the duty of the courtto give effect to the bargain of the partiesaccording to their intention and since the partieshave chosen to make any disposition of the propertyof defendant no.1, the matter not for the Board ofDirectors, but for the general body of theshareholders, the court must give effect to theplain words used in the Memorandum. Mr.Chagla alsorefered to section 17(1)(f) of the Act whichentitles the Company to amend its objects to enableit to sell or dispose of the whole or any part ofthe undertaking etc.

46. We are unable to accept thesubmission of Mr.Chagla. In our opinion, the plainmeaning of B-37 is that the company has power tosell, exchange, mortgage etc. subject to the shareholders approval under sec. 293 wherever it isapplicable. The words 'subject to approval of theshareholders under sec. 293 of the Companies Act,'obviously mean whenever such permission is requiredby terms of sect. 293. If argument of Mr.Chagla isaccepted the words 'under sec. 293' wouldpractically render superfluous and meaningless. Itwould also mean that the approval of theshareholders would be required even in case ofdisposal of movable properties such as cars,furniture, stationary etc. Moreover, if the sameanalogy is applied to object clause B-36, it wouldmean that the Board of Directors may lease thewhole of the undertaking without resolution undersec. 293(1)(a) as Object B-36 does not requireapproval under sec. 293. Further more, Object B-29gives power to buy and sell shares and it does notrefer to section 293. Then a question willnaturally arise whether the case falls under B-29or B-37. The argument of Mr.Chagla , if accepted,would thus lead to absurd results and, therefore,it is not possible to agree with Mr.Chagla that theimpugned action is ultra vires the Company.

47. Regarding plaintiffs right to vote onpreference shares:

Now the only question that remains to beconsidered is whether the plaintiff is entitled toexercise voting rights on preference shares heldby it. The case of the plaintiff in short is thatthe dividend has not been paid in respect of thepreference shares for financial year ending March3l,l998, l999, and 2000 and, therefore, by virtueof section 87(2)(b)(ii), the plaintiff is entitledto vote on the said preference shares. Thecompany has not disputed that the dividend inrespect of the preference shares has remainedunpaid and, therefore, the plaintiff as shareholder has acquired voting rights. However, it isthe case of the company that exercising of votingright would violate conditions imposed by theReserve Bank of India. It is the submission of thecompany that plaintiff cannot vote beyond thelimit of 49%. In order to appreciate this issue itwould be necessary to state few admitted facts.When the plaintiff purchased preference shares,it had applied and obtained permission from theReserve Bank of India under section 29(l)(b) ofthe Foreign Exchange Regulations Act,l973('FERA'). While granting such permission undersection 29(l)(b) of the FERA, the Reserve Bank ofIndia vide letter dated l2.l.l998 imposed severalconditions. Two conditions which are relevant forour purpose are as follows:

l) that no shares be acquired by CDCwithout the prior permission of the Reserve Bank ofIndia;

2) that the conditions contained in theletter dated 6.l.l998 shall be complied with: The letter dated 6.l.l998 stipulates thatforeign equity shall not exceed 49% as ispermissible under the policy for investing incompanies. Further the licence granted by theD.O.T when amended by letter dated 29.l.200lstipulated that certain conditions shall always becomplied with and shall not be violated, includinginter alia that there shall be a cap of 49% offoreign equity and the management control of thecompany shall remain with the Indian shareholders.

48. Further the guidelines dated3l.7.l997 issued by the Central Government provideas follows:

'(iii) Preference shareholders shall beincluded as foreign direct equityfor the purposes of sectoral caps onforeign equity where such caps areprescribed, provided they carry aconversion option. If the preferenceshares are structured without suchconversion option, they would falloutside the foreign direct equitycap'.

The effect of the above as far as the facts beforeus are concerned is that since the preferenceshares are not convertible the same will falloutside the permissible foreign equity cap. Againby virtue of the licence conditions there shall bea cap of 49% of foreign equity and the managementcontrol of the lst defendant company has to remainwith the Indian shareholders.

49. According to Mr.Chidambaram theconditions contained in the special permission ofthe Reserve Bank of India will prevail over theprovisions of the Companies Act in view of section29(l) of FERA which contains a non-obstante clause.He pointed out that FERA has been replaced byForeign Exchange Management Act, l999 ('FEMA') andby virtue of section 49 of FEMA, the specialpermission is saved and now deemed to have beengranted under the corresponding provisions sections6 of FEMA read with Regulation 5 of ForeignExchange Management (Transfer or Issue of Securityby a Person Resident Outside India), Regulations2000 and Schedule I thereto read with annexure B tothe said Schedule. Mr.Chidambarams contention isthat the special permission is a statutory orderpassed by a statutory authority viz Reserve Bank ofIndia on which power to grant such permission wasconferred by the Parliament under section 29 ofFERA and the special permission will prevail overthe provisions of the Companies Act.

50. Mr. Chidambaram placed heavyreliance on the decision of the Supreme Court inHarishankar Bagla vs M.P.State : 1954CriLJ1322 .In that case the Supreme Court was required toconsider the provisions of sections 3 and 6 ofthe Essential Supplies ( Temporary Power) Act,l946. Section 6 provided that an order made undersection 3 shall have the effect notwithstandinganything inconsistent therewith contained in anyenactment other than the said Act or any instrumenthaving effect by virtue of any enactment otherthan that Act. In other words section declared thatif there is inconsistency in the order made undersection 3 with the provisions of any otherenactment, then notwithstanding that inconsistency,the provisions of the order will prevail inpreference to the provisions of other laws whichare inconsistent with the provisions of the order.The High Court had held that the power to dosomething which may have the effect of repealing,by implication, an existing law could not bedelegated in view of the majority decision In reArt l43 Constitution of India and Delhi Laws Act(l9l2) etc. AIR 1951 SC 332 wherein it was heldthat to repeal or abrogate an existing law is theexercise of the legislative power. The High Courtwas of the opinion that the conferment of power ofthe widest amplitude to make an order inconsistentwith the pre-existing laws is nothing short of apower to repeal which in law can only be exercisedby Legislature. The Supreme Court while reversingthe High Court observed as follows:

'In our opinion the constructionplaced on section 6 by the HighCourt is not right. Section 6 doesnot either expressly or byimplication repeal any of theprovisions of pre existing laws;neither does it abrogate them. Thoselaws remain untouched and unaffectedso far as the statute book isconcerned. The repeal of a statutemeans as if the repealed statue wasnever on the statute book. It iswiped out from the statute book. Theeffect of section 6 certainly is notto repeal any one of those laws orabrogate them. Its object is simplyto by by-pass them where they areinconsistent with the provisions ofthe Essential Supplies ( TemporaryPowers) Act l940 or the orders madethereunder. In other words, theorders made under section 3 would beoperative in regard to the essentialcommodity covered by the TextileControl Order wherever there isrepugnancy in this Order with theexisting laws with regard to thosecommodities will not operate.Bypassing a certain law does notnecessarily amount to repeal orabrogation of that law. That lawremains unrepealed but during thecontinuance of the Order made undersection 3 it does not operate inthat field for the time being. Theambit of its operation is thuslimited without there being anyrepeal of an one of its provisions.Conceding, however, for thesake of argument that to the extentof a repugnancy between an ordermade under section 3 and theprovisions of an existing law, tothe extent of the repugnancy theexisting law stands repealed byimplication, it seems to us that therepeal is not by any act of thedelegate, but the repeal is by thelegislative act of the Parliamentitself. By enacting section 6Parliament itself has declared thatan order made under section 3 shallhave effect notwithstanding anyinconsistency in this order with anyenactment other than this Act. Thisis not a declaration made by thedelegate but the legislature itselfas declared its will that way insection 6. The abrogation or theimplied repeal is by force of thelegislative declaration contained insection 6 and is not by force ofthe order made by the delegate undersection 3. The power of thedelegate is only to make an orderunder section 3. Once the delegatehas made that order its power isexhausted. Section 6 then steps inwherein the Parliament has declaredthat as soon as such an order comesinto being that will have effectnotwithstanding any inconsistencytherewith contained in any enactmentother than this Act . Parliamentbeing supreme, it certainly couldmake a law abrogating or repealingby implication provisions of anypre-existing law and no exceptioncould be taken on the ground ofexcessive delegation to the act ofthe Parliament itself. There is nodelegation involved in theprovisions of section 6 at all andthat section could not be held tobe unconstitutional on that ground'.

51. Mr.Chagla urged that whereas underthe Essential Supplies (Temporary Power) Act, aspecific provision was made by the Parliament thatan order under section 3 shall have overridingeffect, such is not the position in the provisionsof FERA. According to Mr. Chagla the right to voteon preference shares conferred under section87(2)(b)(ii) of the Companies Act, cannot bedefeated on the basis of conditions laid down bythe Reserve Bank of India. It must be noted,however, that Mr. Chagla has not disputed that theconditions laid down by the Reserve Bank of Indiaare valid and binding . In L I C vs. Escorts (supra) the Supreme Court has held that it is forthe Reserve Bank of India to consider whether therequirement of the provisions of FERA and thevarious rules, directions and orders issued fromtime to time have been fulfilled and whether thepermission should be granted or not. Oncepermission is granted by the Reserve Bank of India,ordinarily it is not open to anyone to go behindthe permission and seek to question it.

52. Mr. Chagla contended that themanagement control vests in the Board of Directorsand never with the shareholders of the company. Hereferred to the decision of the Supreme Court inMurarka Paints Varnish Works vs. Mohanlal Murarka(1961) 3l Comp Cas 301 wherein it wasobserved :

'The directors and the shareholdersin general meeting are the primaryorgans of the company between whomthe companys powers are divided.The general meeting retains ultimatecontrol, but only through its powersto amend the articles, to take awaypowers from the directors and toremove the directors and tosubstitute others to the taste ofthe shareholders. Until one or otherof the aforesaid steps be taken, thedirectors, under the articles,according to the contention of theplaintiff, can disregard the wishesof the members and that the generalmeeting cannot restrain thedirectors from conducting actions inthe name of the company'.

He also referred to the decision of the SupremeCourt in L I C of India vs. Escorts (supra)wherein the Supreme Court has observed on page l42las under:

'...the only effective way themembers in general meeting canexercise their control over theDirectorate in a democratic manneris to alter the articles so as torestrict the powers of the Directorsfor the future or to dismiss theDirectorate and appoint others intheir place'.

53. According to Mr. Chagla the factthat by exercise of majority voting rights ingeneral meeting the plaintiff may be in a positionto take over control, cannot be equated with thede-facto management control. He drew our attentionto the decision of the Supreme Court inInternational Cotton Corporation (P) Limited vs. Bank of Maharashtra 1970 (40) Comp Cas 1154 wherein the Supreme Court has held that theexpression 'control and management' under section4A(b) of the Income Tax Act,l96l means de factocontrol and management and not merely the right orpower to control and manage.

54. Mr.Chidamabaram, however,submitted and in our opinion rightly, that the twoconditions are two sides of the same coin. Theequity cap of 49% is intended to restrict votingrights to 49%. It is only when voting rights of theforeign share holders are restricted to 49% thatthe other condition, namely that the managementcontrol be in the hands of the Indian shareholderscan be satisfied. Mr.Chidambaram urged that oncethe preference share holder i.e. plaintiff isallowed to vote on preference there will not beany difference between the equity shares andpreference shares. Once preference share holderacquires 72.5 per cent voting rights in the presentcase it is futile to argue that the management willnot pass into their hands. He submitted thatgranting any relief to the plaintiff to vote onpreference share would violate above conditions of49% equity cap. He pointed out that the generalbody appoints the managing director, the auditor,the company secretary. Similarly the general bodyapproves or rejects the accounts. Under Article 58of the Articles of Association it can makeregulations, restricting the power of directors.He submitted that the share holders who control72 per cent equity will be the shareholders whohave 'de facto management control'. We are inclinedto agree with the submission of Mr.Chidambaram andhold that the plaintiff are not entitled to voteon preference shares.

55. Mr. Chagla also submitted that thestage to consider whether there would be violationof conditions of Reserve Bank of India would ariseonly when the plaintiff actually exercise votingrights and its rights cannot be pre-emptedprematurely merely on the basis of the apprehensionthat it would result in violation of the conditionslaid down by the Reserve Bank of India. We cannotaccept the submission of Mr.Chagla for the simplereason that granting such voting rights wouldnecessarily have the effect of breach of thecondition viz cap of 49% equity and will result invirtually transferring the management to the nonIndian shareholders. Moreover, if the reliefclaimed by the plaintiff is granted, it wouldvirtually amount to passing a decree at the interimstage. Therefore the prayer of the plaintiff forpermitting it to exercise voting rights in respectof the preference share cannot be accepted.

56. Even the balance of convenience, inour view, lies in favour of withholding aninjunction rather than granting it. It is commonground that the Blue tooth is in the interest of thecompany and granting of injunction might hindercompletion of the transaction and entail seriouspenalties upto Rs.l00 crores. The Indianshareholders would be directly affected by any suchpenalties inasmuch as under the MOU, only Indianshareholders had given the representations andwarranties. On the other hand, if injunction iswithheld and the several steps contemplated by theMOU are allowed to be completed and the transactionis completed, at worst the plaintiffs share in thenew company will be proportionately reduced to thetotal shareholding of the new company. As apreference shareholder, the plaintiff would beentitled to redeem the preference shares.

57. In the result, in view of theforegoing discussion, the Notice of Motion and theappeal are dismissed. On the request of Mr.Chagla,the ad-interim order dated 7.ll.200l is continuedfor a period of six weeks. It is further directedthat the resolution passed in the AGM to be held on24.l2.200l in respect of item nos. 7 and 8, ifpassed, would not be implemented for a period ofsix weeks.

The parties and theauthorities to act on the ordinary copy of thisorder duly authenticated by the personal secretaryof this court.


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