2009 (7) TMI 780 - HC - Companies Law

Whether the respondent Nos. 1 and 2 have breached clause 12 of the shareholders agreement (Exhibit-A to the petition), i.e., the non-compete and non-solicitation clause? Held that - It is not disputed that there is abandonment of the agreement by the distributor shareholders who were to bring in their business, and the said company is not in a position to carry on its proposed business even if the negative covenant under the agreement is enforced against respondent Nos. 1 and 2. The petitioner, therefore, cannot be heard to say that respondent Nos.1 and 2 cannot raise the plea of idleness or sterilization. Thus balance of convenience on this aspect is in favour of respondent Nos. 1 and 2 and against the petitioner. The petitioner is also not entitled to any relief as sought since the petitioner has himself in paragraph 14 of the petition stated that the petitioner has now learnt that few of the cable operators have started distributing cable channels to various customers from the new company of which the petitioner has no part . Admittedly, respondent Nos. 1 and 2 each have only 3.5% of the total paid up capital of the third respondent company. The entire paid up capital of the third respondent company is held by the aggregate number of 23 shareholders including respondent Nos. 1 and 2. Therefore, even if the negative covenant is enforced against respondent Nos. 1 and 2, balance 21 shareholders including the distributor shareholders shall continue to carry on the business. Therefore, the order passed by this court enforcing the negative covenant against respondent Nos. 1 and 2 will not be effective in substance and will not serve any purpose. It cannot be disputed that the courts are not to pass orders which cannot be made effective or which would not serve the purpose behind passing of such orders.

Summary

Issues Involved:
1. Existence and enforceability of the shareholders agreement.
2. Whether the petition is in the nature of a derivative action.
3. Entitlement to reliefs under section 9 of the Arbitration and Conciliation Act, 1996.

Issue-wise Detailed Analysis:

1. Existence and Enforceability of the Shareholders Agreement:

The petitioner filed the petition under section 9 of the Arbitration and Conciliation Act, 1996, seeking to restrain respondent Nos. 1 and 2 from breaching clause 12 of the shareholders agreement, which includes non-compete and non-solicitation clauses. Respondent Nos. 1 and 2 contended that the agreement was not concluded, incomplete, and inchoate, thus invalidating the arbitration clause. They argued that the agreement required signatures from all 18 cable operators, which was not fulfilled. The court, however, found that the agreement did not specify a mandatory number of signatories and that the absence of some signatures did not render the agreement incomplete. It was concluded that the agreement was binding and enforceable, and the arbitration clause was valid.

2. Whether the Petition is in the Nature of a Derivative Action:

Respondent Nos. 1 and 2 argued that the petition was a derivative action on behalf of the company, which is not maintainable under section 9 of the Act. The petitioner contended that the petition was filed to protect his rights and shareholding in the company. The court held that merely because the petition contained averments typically found in derivative actions, it did not preclude the petitioner from filing it. The court concluded that the petition was not in the nature of a derivative action and was maintainable.

3. Entitlement to Reliefs under Section 9 of the Arbitration and Conciliation Act, 1996:

The petitioner sought to enforce the non-compete and non-solicitation clauses against respondent Nos. 1 and 2. The court considered the principles of granting an injunction, including prima facie case, balance of convenience, and irreparable injury. It was noted that respondent Nos. 1 and 2 continued their business activities despite the non-compete clause, and the petitioner did not object to this earlier. The court found that enforcing the negative covenant would not serve any commercial purpose as the company's business had not commenced and was not in a position to commence. The court also noted that enforcing the covenant against respondent Nos. 1 and 2 would be ineffective as other shareholders would continue the business. Consequently, the petitioner's request for relief under section 9 was denied, and the petition was dismissed without costs.