9911796707
TMI Blog2009 (7) TMI 780X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ARBITRATION PETITION NO. 222 OF 2008 - - - Dated:- 6-7-2009 - S.J. KATHAWALLA, J. C.U. Singh, Ms. Soma Singh and Sanjay Udeshi for the Petitioner Janak Dwarkadas, F. Devetri, Shaqran Jagtiyani, Federal Rashmikant and V.R. Dhond, Kartikeya for the Respondent JUDGMENT S.J. Kanthawalla, J. This petition is filed by the petitioner under section 9 of the Arbitration and Conciliation Act, 1996 (the Act). 2. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the petitioner, the idea behind forming the said company was to bring together a group of 18 odd cable operators and distributors who would give access to their networking and customer base for transmission of cable video services. The benefits which the said company offered to various cable operators were far more favourable than what was being offered by other MSOs and distributors. The model was designed on the basis of a cooperative like 'AMUL' where the cable operators would have continuous revenues and additionally have a stake in the company which they would be able to unlock after three years. ( ii )On 5 September, 2006, the management contract was signed between the said company through respondent No. 2, and the petitioner, setting out the terms of engagement of the petitioner as executive director and CEO of the company and to provide management services for the period and subject to the terms and conditions set out therein. ( iii )In January, 2007, YOU Telecom India Pvt. Ltd. (for short 'YOU') expressed an interest in the said company and negotiations commenced. On 19 January, 2007, the said company engaged the services of Edelweiss Capital Limited (for short Ede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent; (B)The Group A shareholders (except Mr. Rajiv Vyas) have agreed to provide to the business of the company access to their entire networking and customer base transmission of cable (video) services in the areas more particularly set out against their names in Schedule A. (C)The group A shareholders of the company have agreed to reduce to writing their agreement concerning the ownership, shareholding, management, operation and control of the company. Immediately after the recitals it is provided: NOW, THEREFORE, in view of the foregoing recitals and in consideration of the mutual covenants and promises set forth in this agreement, and for valuable consideration, the parties hereby set forth their commitments and agreements as follows: ( viii )Clauses 1.1( b ), ( c ), ( h ), ( i ), ( j ), ( p ), ( q ), ( r ) and ( s ) define the words/phrases 'agreement', 'business', 'date of execution', 'distributor shareholders', 'Group A shareholders', 'R.V. Co.', 'R.V. Co. shareholding', 'shares', 'shareholder' as under: ( b )'Agreement' shall mean this agreement including the Schedule( s ) hereto'; ( c )'Business' for the purposes of this agreement means doing business as di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding any new shareholder inducted as a Group A shareholder. ( p )'RV Co.' shall mean Mr. Rajiv Vyas and SVJ Networking Private Limited jointly. ( q )'RV Co. shareholding' means the total percentage of the paid up capital of the company held by Mr. Rajiv Vyas and SVJ Networking Private Limited jointly. ( r )'Shares' means all the issued and outstanding shares of the company. ( s )'Shareholder' of the company means each party to this agreement as well as every person who is subsequently inducted as shareholder of the company and who signs the 'Deed of Adherence'. ( ix )Clause 2 of the agreement pertains to the share capital, shareholding and price. It is provided in clause 2.1 that the authorized capital of the company is Rs. 1,00,00,000 (Rupees one crore only), divided into 1,00,00,000 (One crore) equity shares of Rs. 1 (Rupee one only) each. The shareholders agree that they shall increase the share capital of the company to Rs. 10,00,00,000 (Rupees ten crores only) divided into 10,00,00,000 (Ten Crores) equity shares of Rs.1 (Rupee one only) each and memorandum of association and the articles of association of the company shall be amended accordingly. It is provided in cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares to such Investor provided such investor executes a deed of adherence agreeing to be bound by the terms and conditions of the agreement. The investor( s ) upon issue of such shares would be referred as the Group B shareholders. ( x )Under clause 3( a ) of the agreement, it is provided that the board of directors shall consist of minimum of 3 (three) and a maximum of 6 (six) directors appointed by Group A shareholders, out of which 3 (three) directors shall be the permanent directors and shall not be liable to retire by rotation. It is clarified in clause 3( b ) of the agreement that the permanent directors of the company will be Mr. Johnwin Manavalan, (respondent No. 1) Mr. Ganesh Naidu (respondent No. 2) and Mr. Rajiv Vyas (petitioner). Under clause 4 of the agreement, it is provided that the distributor shareholders are required to achieve certain performance parameters as determined by the permanent directors at the end of each half year and in the event of failure on the part of the distributor shareholder to achieve performance parameters for half year, he will be required to transfer his/ its shareholding in the said company to the rest of the Group A shareholders in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Solicit Personnel: During the term of this agreement and for a period of at least 1 year thereafter, the shareholder shall not solicit or attempt to influence any person employed or engaged by the company to terminate or otherwise cease such employment or engagement with the company or become the distributor/employee of or directly or indirectly offer services in any form or manner to himself or any person or entity which is a competitor of the company. 12.5The shareholder acknowledges and agrees that the above' restrictions are considered reasonable for the legitimate protection of the business and goodwill of the company, but in the event that such restriction shall be found to be void, but would be valid if some part thereof was deleted or the scope, period or area of application were reduced, the above restriction shall apply with the deletion of such words or such reduction of scope, period or area of application as may be required to make the restrictions contained in this article valid and enforceable. 12.6The shareholder acknowledges and agrees that the covenants and obligations with respect to non-compete and non-solicitation as set forth above relate to special, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall apply to such arbitration proceedings. The place of arbitration shall be Mumbai, India. The language of the arbitration shall be English. ( b )Any decision or award of the arbitral tribunal, subject to correction/recourse provided for under the Arbitration and Conciliation Act, 1996, be binding upon the parties. The arbitral tribunal shall give a speaking award. ( xiv )Under clause 16 of the agreement the parties/signatories thereto have consented to and agreed to be bound by, all the terms and conditions of the agreement. (Emphasis supplied) 2 ( xv )The said agreement is signed by the promoters shareholders, i.e., the petitioner, his company, S.V.J. Networking, respondent Nos. 1 and 2 and distributor shareholders. The signatories to the agreement, according to petitioner, are around 15 including the promoter shareholders and 11 according to the respondent Nos. 1 and 2. It is true that after the promoter and distributor shareholders have signed the agreement, the word 'signature' is typed several times and a blank has been shown, i.e., 'signature ....' It is also true that under Schedule A of Group A shareholders, though numbers 1 to 16 are set out under the capt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner 16 identical letters all dated 1st February, 2008 purportedly addressed by the distributor shareholders were generated by respondent Nos.1 and 2 requesting the company for refund of the share application money. No reason for seeking refund is found in any of the letters. Even respondent Nos. 1 and 2 who are the promoter directors of the company purportedly sought refund of the share application money. According to the petitioner, these letters were never referred to by respondent Nos. 1 and 2 at any time prior to August, 2008, i.e., the petitioner was not even aware of the same even on the date of the filing of the petition, i.e., in April, 2008. ( xix ) On 8 February, 2008, an email was addressed by the advocate of the said company to all parties, namely, the petitioner, respondent Nos. 1 and 2, YOU Telecom and Edelweiss Capital Limited regarding the proposed agreement to be entered into between the company and YOU Telecom. According to the petitioner, on 12th/13 February, 2008, respondent Nos. 1 and 2 unauthorizedly withdrew the money from the account of the said company. The entire bank balance of the company is emptied out by issuing cheques to the recipie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcement thereof, respondent Nos. 1 and 2 be restrained from acting contrary to the second shareholders agreement. ( b )That pending the commencement of the and during the arbitration/ conciliation proceedings and the making of the award therein and the enforcement thereof, the respondent Nos. 1 and 2 be restrained, by an order and injunction of this Hon'ble Court, from in any manner carrying on any business falling within the objects of the said company, whether with Eidelweiss Capital Limited and/or You Telecom India (P.) Ltd. and/or by themselves or through agent( s ) and/or representative( s ) in the name of SCOD-18 Networking Private Limited or in any other name. ( c )That pending the commencement of the and during the arbitration/ conciliation proceedings and the making of the award therein and the enforcement thereof, the respondent Nos. 1 and 2 be jointly and severally be directed to deposit a sum of Rs. 1.89 crores in this Hon'ble Court and a sum of Rs. 10 lakhs per month from 1 May, 2008, and for every month thereafter. As set out at the outset the only relief pressed by the petitioner is to restrain the respondent Nos. 1 and 2 from in any manner committing breach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n if the other proposed parties did not as contended by the petitioner. Such an interpretation would exclude large network areas of other non-signatory cable operators thereby destroying what, even according to the petitioner, was fundamental basis for the agreement, namely, to form a cooperative. ( iii )The consideration for the cable operators was an equity stake in SCOD Networking and a share of the revenues including carriage fees. This was not done. ( iv )The petitioner has not explained why are the numbers of 'distributor shareholders' in Schedule A of the agreement numerically indicated as 'only 16'. Even all the 16 shareholders have not signed the said agreement. The names of all Group 'A' shareholders were to be listed in Schedule A of the agreement which is not done. These facts read with recital 'A' of the said agreement demonstrates that the agreement was not concluded. ( v )The date of execution was proposed to be the date of signing of the agreement or the date set out as the date of making the agreement whichever is earlier. In absence of all 18 or odd cable operators signing the document as contemplated clearly the agreement is undated. The said agreement bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sought to be argued. The words used in recital-C are 'agreed to provide' to the business of the company access to the entire net working and customer base for transmission of cable ( video ) services in the areas as more particularly set out against their names in Schedule A. What is agreed is not to bring something into the company but only to provide access to their entire net working and customer base. This access is to be provided 'for transmission of cable (video) services'. The networking and customer base consists of cables laid to different buildings, and the number of users of the television/cable/video 'feed' in each of those buildings. But access to this networking is only for the purpose of 'transmission of cable (video) services', and, therefore, while the commitment to provide access comes into force immediately on signing the agreement, the actual use of this networking and customer base can only be made once the company starts transmission of cable (video) services. It is for this purpose that the investor capable of putting in over Rs.100 crore was needed in order to enable the transmission through a sophisticated head-end and provision of free set-top bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same time or in presence of each other as was sought to be argued. This is a commercial agreement between the shareholders and prospective shareholders who are men of trade; it is not a will. It is well known that commercial agreements are often signed at different times and by different parties in the absence of each other. The factum of signing is not disputed, and that is the crux of the matter. 9. It was further submitted on behalf of the petitioner that the argument that the 'Schedules' form part of the integral part of the agreement, and that therefore the agreement did not get executed, is untenable. Each one of the signatories has signed at the end of the agreement and had initialed every page of the agreement including the schedules. Just because certain details which were already known to the parties, that is the precise territories in which each distributor shareholder was distributing cable networks, were not entered into the Schedule does not mean that the agreement was not executed, or that it was inchoate or unenforceable. The said agreement is a commercial agreement between men of trade and must be construed in a reasonable manner keeping in mind the realities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiations and carrying on correspondence with the parties, fibre optic cable was purchased and an auditor was appointed who had given a signed report and balance sheet. The consent of the parties to be bound by the agreement is clear from clause 16 of the shareholders agreement. The company was carrying on correspondence (with YOU Telecom, a potential investor and Edelweiss Capital merchant bankers who were brought in by the petitioner to negotiate terms of investment by YOU Telecom) through the law firm of Paras Kuhad and Associates and I S Legal. The petitioner and respondents were party to all such correspondence, but at no time did respondent nos.1 and/or 2 inform the petitioner or the company's lawyers that the distributor shareholders had allegedly asked for their share subscription amount or that the said amount had been allegedly refunded to them and the petitioner as chairman/executive director and/or permanent director was never informed about any such purported development. Respondent Nos. 1 and 2 did not even deem it fit to inform the petitioner about formation of SCOD 18 on 29 January, 2008/12 February 2008 in any of their correspondence with the lawyers or the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement under the caption 'Parties' the word 'Signature ' is typed 26 times, and in Schedule-A after 4 promoter shareholders (after the caption 'distributor shareholders'), numbers 1 to 16 are put in the margin ( i.e., aggregating to 20), defeats the interpretation sought to be given on behalf of respondent Nos. 1 and 2 that the said agreement is incomplete, in the absence of 16/18 distributor shareholders. It establishes beyond any doubt that the word 'signature .... found 26 times in the agreement and numbers 1 to 16 found in margin in Schedule-A are put only at random and no meaning can be ascribed to the same, as sought to be done by respondent Nos. 1 and 2. 12. In the said agreement, the distributor shareholders are defined as those shareholders listed in Part-II of Schedule-A of the agreement including any new distributor of the company unless otherwise specified. Group-A shareholders are defined as shareholders listed in Schedule-A of the said agreement including any new shareholder inducted as a Group A shareholder. Recital-A of the said agreement provides that the Group A shareholders listed in Schedule A have agreed to jointly engage in the business of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any future events/decisions. Since nothing in the agreement is deferred to a later point of time or made dependent on any future events/decisions, respondent Nos. 1 and 2 cannot be heard to say that the said agreement is incomplete because the shareholders have not provided to the business of the company the access to their networking and customer base or that the shares have not been allotted or that the permanent directors have not determined how the cable channels revenue has to be distributed amongst Group A shareholders. The agreement stood concluded binding and enforceable and capable of being implemented, the moment it was executed. If there would be any breach of the agreement, i.e., not providing to the business of the company access to the networking and customer base of the distributor shareholders or shares not being allotted as agreed, or issue of distribution of cable channels revenue not being decided as agreed, the parties would surely have a right to invoke the arbitration agreement, but the party which has invoked the arbitration, complaining of such breaches cannot be told that since what was agreed to be done under the agreement has not been adhered to, the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f operation of the distributor shareholders are not mentioned in Schedule A to the said agreement. However, in my view, the agreement cannot be treated as incomplete or not a concluded agreement on this ground because the areas of operation of most of the signatory distributors are already shown in Annexure I to the term sheet annexed to the letter of intent dated 9 August, 2007 issued by YOU Telecom and signed by the petitioner and respondent No. 1. Again, in view of this being the commercial agreement pertaining to commercial transactions in which all the parties are aware of the areas of operation of each other, the question of the agreement being incomplete in absence of the areas of operation mentioned in Schedule A of the said agreement does not arise. 16. The submission made on behalf of respondent Nos. 1 and 2 that the interpretation that the shareholders agreement is binding on only those parties that signed it, would exclude large network areas of other non-signatory cable operators thereby destroying what even according to the petitioner was the fundamental basis for the purported agreement, namely, to form a cooperative, cannot be accepted and is defeated by annexur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed not be gone into. 19. The decision of the Hon'ble Division Bench in the matter of Nazir Hussain Films (P.) Ltd. [2010] 2 Comp LJ 393 (Bom), supra, will not be of much assistance to the respondents in the present case. The facts of the said judgment are completely different from the facts in the present matter. In the matter of Nazir Hussain Films (P.) Ltd. [2010] 2 Comp LJ 393 (Bom), supra, as correctly submitted on behalf of the petitioner inspite of the specific pleadings that the case was based on a written agreement the appellants therein during arguments contended to the contrary by submitting that their case was not based on arbitration agreement but was based on the arbitral clause contained in the correspondence exchanged between the parties (in terms of section 7(4)( b ) of the Arbitration and Conciliation Act, 1996). It was held by the Hon'ble Division Bench that from the pleadings, no conclusion could be drawn that it was the case of the petitioner that the correspondence exchanged between the parties resulted into an arbitration agreement. Keeping in mind the facts of that case, in paragraph 14 of the said judgment, the Hon'ble Division Bench has referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in the company. 22. I have considered the submissions advanced on behalf of respondent Nos. 1 and 2 that the petition is in the nature of derivative action and is not maintainable. I have also considered the response on behalf of the petitioner, thereto. It is true that in the petition the petitioner has at several places averred that the conduct of respondent Nos. 1 and 2 would cause loss and damage to the said company which has no means to remedy the loss and damage and that respondent Nos. 1 and 2 have an obligation to the said company and are duty bound to act in the manner most beneficial to the company and also that respondent Nos. 1 and 2 have breached their commitments to the said company. However, only because certain averments, which are normally made in a derivative action, are found in the petition, the same will not preclude the petitioner from filing the petition and it cannot be held that the petition is in the nature of derivative action and is not maintainable. The petitioner has also made averments in the petition to the effect that the conduct of respondent Nos. 1 and 2 is prejudicial to the petitioner and will cause loss to the petitioner. In view thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction, restraining order or such other equitable relief as the court of competent jurisdiction may deem necessary or appropriate for restraining the shareholder/s from committing any violation of the covenant and obligations pertaining to the non compete and non solicitation clause. Clause 12.6 of the agreement also provides that 'these injunctive remedies are cumulative and are in addition to any other rights and remedies that the company may have at law or in equity'. Such an agreement between the shareholders which enables the company to also take independent action against the shareholders for breach of the noncompete and non-solicitation clause, in my view, certainly cannot be interpreted to mean that the right of the shareholders under the said agreement to refer the disputes pertaining to the said clause to the arbitral tribunal is lost or has been taken away. 24. This brings me to the final issue, i.e., whether the petitioner is entitled to any relief/s under section 9 of the Arbitration and Conciliation Act, 1996. As set out earlier the petitioner has not pressed for prayer clause ( c ) of the petition. The petitioner has informed the court that the petitioner is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 905-906 (cited with approval in Gujarat Bottling, supra, at paras 21, 26, 27, 30, 31, 34 and 36) Shell U.K. Ltd. v. Lostock Garage Ltd. (CA) [1976] 1 WLR 1187 at pages 1197-1198) (relies on Esso Petrochemicals, supra, at page 1195) 27. It is also contended on behalf of respondent Nos. 1 and 2 that the said company has never commenced any business and is in no position to commence or carry on any business. It is submitted that admittedly the proposed business of the said company as a multi system operator (MSO) is impossible without cable networks of the distributor shareholders/cable operators. Presently, there are no distributor shareholders of SCOD Networking. The petitioner has not taken any steps to enforce the said agreement or the negative covenant therein against them. The commencement of business by the company in these circumstances is impossibility. Enforcement of the negative covenant in the absence of distributor shareholders would thus be unreasonable and effectively not serve any commercial purpose or further any commercial objective. The grant of any injunction in these circumstances would be contrary to the above settled principles of law. 28. The pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Amongst others the petitioner himself has relied upon clause 16 of the said agreement wherein the parties have consented to be bound by the agreement. This court has already accepted this submission advanced by the petitioner for the reasons set out in the preceding paragraphs of this judgment. Therefore, in my view, the non-compete and non-solicitation clause, i.e., clause 12 of the said agreement also came into effect immediately upon the said agreement coming into effect. It is not in dispute that the petitioner did not object to respondent Nos. 1 and 2 and/or any of the distributor shareholders carrying on their respective businesses, i.e., cable TV and distribution business on or after the date on which the agreement came into effect, despite being in conflict with the business as defined in the shareholders agreement. 30. Section 9(2) of the Arbitration and Conciliation Act, 1996, provides for an interim measure of protection in respect of any of the matters set out therein. The idea is to grant protective relief to the party as an interim measure before or during the arbitral proceedings or at any time after making of the arbitral award but before its enforceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y when the parties would have actually provided access to the entire networking and customer base for transmission of cable (video) services. If that be the case, admittedly, the said cable operators have till date not provided access as proposed. In fact, they have taken a refund of the amounts paid by them to the said company. 32. Admittedly, the said company has not commenced its MSO business and is also not in a position to commence the said business in the absence of the distributor shareholders. 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. I am of the view that balance of convenience on this aspect is in favour of respondent Nos. 1 and 2 and against the petitioner. 33. The petitioner is also not entitled to any relief as sought since the petitioner has himself in paragraph 14 of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
