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TMI Blog2007 (3) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... eement which prohibited the parties thereto from undertaking any business similar to that of the joint venture during its currency. 2. So far as the basic facts are concerned, there is no material dispute and to the extent necessary, they are noticed hereinafter. The petitioner M/s Modi Rubber Ltd., (hereinafter referred to as 'MRL' for brevity) entered into a Memorandum of Understanding ('MOU') dated 1st July, 1988 with M/s Guardian International Corporation arrayed as respondent before this Court, (hereinafter referred to as 'Guardian'). 3. Guardian is stated to be a leader in manufacturing float glass and the agreement between the parties states that it has acquired unique and valuable engineering skills and expertise for designing, constructing and operating plants for the manufacture of float glass by the float process. The agreement between the parties also notices that the MRL is a renowned industrial establishment of India with extensive expertise in the manufacturing and marketing of high quality industrial products in India and other countries. 4. Besides the parties to the present petition, the agreement between the parties also involved M/s Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed that the equity subscription in GGL would be held between the parties to this SHA as follows: (i) By Guardian International Corporation 40.00% (ii) By MRL 20.00% (iii) By Gujarat Alkalies and Chemicals Ltd. and its nominees 11.00% (iv) By the public 20.00% The amount of issued and the subscribed capital was agreed to be valued by mutual agreement between Guardian and MRL and it was agreed that if any additional shares were issued, GGL was first to offer such shares at the price at which the shares are to be offered to new share holders, to Guardian, MRL or the other share holders in proportion to the equity shares owned by each of them on the date of such offer. 9. So far as the agreement of the parties which was set out as Clause 7 in the MOU is concerned, the parties reiterated the prohibition therein contained and co opted the same as Clause 14 of the SHA whereby the parties covenanted as follows: Clause 14 - Additional Projects/Exclusivity During the term of this Shareholders Agreement, neither MRL nor Guardian International, nor any Affiliates or Associates of either one of them shall, without the consent of MRL and Guardian International, participate, negotiate or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d GACL shall select one (1) arbitrator, Guardian International shall select one (1) arbitrator, and the two arbitrators so selected shall select the third arbitrator. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 15. It now becomes necessary to examine certain other aspects of the functioning of the joint venture placed before this Court by both sides. The admitted position is that no dividend was distributed to the share holders of shares in the joint venture GGL for 16 years since its incorporation. MRL has complained that dividend was declared for the first time in the last financial year which was also only to the extent of ₹ 2 per share. As a result of this policy, the position of the reserves and surplus considerably enhanced. The petitioner has placed reliance on a letter dated 19th November, 2003 written by Guardian to Mr. Vinay Kumar Modi as Chairman of the joint venture GGL adverting to restructuring alternatives. This communication refers to several alternatives and proposals which were discussed between the parties and refers to growth of the company in India to be financed by internal accruals and leveraging. 16. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons above), can we do a return on capital' If so, what percentage or amount of the paid in capital would be returned' Would there be a withholding tax on this. This fax is evidence of the fact that so far as the reservation of amounts in the books of accounts of the joint venture GGL was concerned, the entries to this effect in the accounts had been reversed. Undoubtedly this communication also confirms availability of substantial reserves. 20. A further communication dated 12th August, 2005 was addressed by Guardian to Mr. V.K. Modi as Chairman of GGL pointing out that so far as its considerations with regard to the distribution of the dividends was concerned, they were based on the tax impact on its earnings of the dividends. In this communication, Guardian wrote thus: As you requested, I also wanted to let you know that due to the mechanics of U.S. Tax Law, Guardian has the ability until December of this year to receive its share of a GGL dividend in the range of $17 - $45 million and only be taxed $5 million on the first $17 million .Therefore, anything above $17 million is tax free. We understand from Mr. Surana that the legal limit for a total GGL dividend would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erspective, for both of us to receive dividends. 22. In this communication of 2nd February, 2006, a suggestion was made on behalf of the Guardian with regard to purchase of shares held by MRL in the joint venture as well. In this behalf, Guardian had written thus: ...Summarizing Guardian's perspective on various GGL restructuring issues, it has become increasingly clear that if and when shares change hands, they will do so at a premium price. As you know, during your visit, we were discussing the possibility of a GGL share price in the range of ₹ 60 to ₹ 65 per share. Our view is that this price is at, or even beyond the upper end of any reasonable discounted cash flow analysis, EBITDA multiple, or similar 'investment banker' formula beyond taking a multiple from the current overheated Mumbai stock exchange. If our restructuring conversation had continued into Tuesday, I would have proposed a Guardian/Modi relationship with some modifications to the elements that have been discussed over the last couple of years. If Guardian were to purchase shares at a price that reflects this premium level, we would prefer to own over 75% of the company. However, at wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s uncertain. (b) Modi Rubber's management and affairs are under the effective control and mandate of the BIFR, and the appointed Operating Agency, IDBI. (c) There are inter-se disputes between the promoters, which further exacerbates Modi Rubber's distressed condition. The Agreement was founded on the premise of two financially stable and reliable partners. This understanding stands completely eroded as a consequence of Modi Rubber being declared a sick company by the BIFR, thus striking at the very substratum of the Agreement. Therefore, the Agreement stands frustrated and is terminated effective immediately. Further, pursuant to the terms of the Articles of Association of GGL, we assume you will not transfer your shareholding in GGL without our prior consent. We will continue to comply fully with the Articles of Association and expect that you will do the same. 24. On the same date, Guardian addressed another letter dated 21st July, 2006 to MRL requesting MRL to provide written consent to Guardian for building and operating a wholly owned float glass manufacturing unit and fabrication plaint in India. It is imperative to also consider the tenor of this communicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this business would be separate from the existing joint venture, Gujarat Guardian Ltd.('GGL'). Finally, Modi Rubber also understands that Guardian is seeking FIPB approval under Press Note 18 and Press Note 1 for this planned expansion. As such, Modi Rubber has no objection to Guardian proceeding, through one or more wholly owned subsidiaries in India, to build and operate float glass manufacturing and fabrication facilities such as those described above, and Modi Rubber gives its consent to Guardian to undertake such activities independently of Modi Rubber and GGL. 26. The petitioner points out that such consent was imperative under the SHA and that the very fact that Guardian has sought the consent under the SHA negates its contention that the SHA stood terminated. 27. Immediately thereafter on the 22nd of July, 2006, the respondent made an application to the Foreign Investment Promotion Board (FIPB for brevity) for approval to set up a wholly owned subsidiary in the glass manufacturing and glass coating sector. 28. In the meantime, the Board of Directors of MRL passed a resolution dated 12th August, 2006 deciding to oppose the attempts of the respondent to terminat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement, entirely ignores Indian law on the subject of 'frustration of contract' which governs the Shareholders Agreement. 29. In this communication, MRL also pointed out that despite continuous profitability of the joint venture during the last many years, no dividend had been declared by GGL to its shareholders since inception. Consequently, at the next meeting of the Board of Directors of GGL, it was stated that an interim/final dividend of at least 80% of the permissible distributable dividend be declared. 30. Guardian replied to this communication by a letter dated 25th September, 2006 baldly disagreeing to MRL's submissions and again stated thus: ...We have received your letter of August 21, 2006 on behalf of Modi Rubber Limited (MRL) in response to our letter of July 21, 2006 with regard to the termination of the Shareholders Agreement dated January 23, 1990 (the Agreement) between us. We respectfully disagree with your assertions in the letter that there is no valid basis for the termination of the Agreement. Given, inter alia , the uncertain future of MRL arising from its 'sickness' and the continuing public disputes between the promoters the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully request that GACL provide written consent for Guardian to build and operate a wholly owned float glass manufacturing and fabrication plant in India. It would be helpful to us if you written consent were to certain the language shown on the enclosed sheet. xxxx xxxx 33. Despite the stand taken by Guardian in its letter dated 21st July, 2006 purportedly terminating its SHA with MRL, on the 24th July, 2006, it also filed O.M.P. No. 337/2006 titled Guardian International Corporation v. Modi Rubber Ltd. before this Court seeking the following prayers: (a) to restrain the respondent from transferring its shareholding in Gujarat Guardian Limited without the prior consent of the petitioner and without giving a pre-emptive right to purchase the said shares to the petitioner. (b) pass such further or other orders as this Hon'ble Court may deem fit and proper in the circumstance of the case. 34. It has been pointed out on behalf of MRL that by way of this petition, Guardian was again seeking enforcement of its rights under the SHA. In answer to this submission Mr. Mukul Rohatagi, Senior Advocate has argued at great length on behalf of the respondent that it was merely ensuri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f BIFR. It further transpires that the inter se disputes between the promoters of the Respondent company are also fuelled by their interest and intention to participate in GGL. It is in fact the stand of the petitioner that given the circumstances under which the Shareholders Agreement stood frustrated, the very raison d'etre for the participation of the Respondent in GGL no longer stands. The petitioner is willing to buy the respondents shareholding in GGL and willing to pay a fair price for the same, and the petitioner believes that the respondent ought to transfer its shareholding in GGL in favor of the petitioner. These are, however, all disputed issues which perforce would need to be resolved as per the arbitration clause (Clause 26) in the Shareholders Agreement. It is, however, imperative that pending such imminent arbitration proceedings, urgent interim orders are passed by this Hon'ble Court. Hence this petition. xxxx xxxx xxxx 23. Therefore, in the interest of justice and in aid of the Arbitration Agreement in the Shareholders Agreement, the petitioner is seeking to restrain the respondent from taking any steps from transferring its shares in GGL without the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the averments of Guardian in O.M.P. No. 337/2006 and as well as the relief sought therein bears out the fact that the SHA stood neither frustrated nor terminated and that Guardian was itself treating the same subsisting. 39. On the 22nd July, 2006, Guardian also filed a caveat petition under Section 148A of the Code of Civil Procedure, 1908 before this Court. 40. In O.M.P. No. 337/2006, the following order was recorded on 28th July, 2006: O.M.P. No. 337/2006 Notice. Mr. Arjun Pant, Advocate accepts notice for the respondent and prays for time to file reply. Let the reply be filed within six weeks. Rejoinder thereto, if any, be filed before the next date. The petitioner, inter alia, places reliance on the Article of Association of the petitioner company to point out that as per the Memorandum and Article of Association of the company, Clause 3 (b) governing the share capital clearly provided the pattern and shareholding of the company. This position is not disputed on behalf of the respondent. The petitioner has expressed apprehension that respondent would transfer its shareholding in violation of clause 3 (b) of the Memorandum and Articles of Association. Such transfer would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s matter, the petition was put to final hearing. Long arguments have been addressed by both sides and voluminous submissions laid before this Court. During the course of the hearing, it appears that Guardian has on 16th October, 2006 filed a reference for arbitration before the London Court of International Arbitration. 45. MRL has submitted that, in its reply, it has opposed the reliefs prayed for by the respondent and has also made counter claims against the respondent company to the effect that the SHA including clause 14 continues to be valid and binding between the parties. 46. Mr. Arun Jaitley, learned senior counsel for the petitioner has contended that the purported termination of the agreement by the letter dated 21st July, 2006 by the respondent is ex facie illegal as well as unlawful and being contrary to the specific stipulations between the parties as contained in clause 16 of the SHA. The term of the SHA has been set out in the agreement and termination can be only in accordance with the specific stipulations therein. It is submitted that the respondent in its request for Arbitration to the LCIA has itself raised a question about the validity of the termination and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the agreement itself. Consequently, the unilateral termination by the respondent for reasons which are not stipulated in the agreement between the parties, is illegal and so long as the parties continue to maintain the shareholding in terms of the SHA, the agreement subsists. The respondent is consequently bound by the non compete clause. 51. It has further been contended that before this Court, the respondents have tried to place reliance on the tentative proposals placed by one of the directors of the petitioner before the BIFR giving different alternatives whereby MRL could liquidate its liabilities. Such proposal, it is explained, was not by or on behalf of the petitioner company. According to Mr. Jaitley, learned senior counsel, so far as the transfer of shareholding held by the parties to the SHA is concerned, clause 6 permits transfers to affiliates and associates provided that they are not competitors in the business. One of the alternative suggested by the Director related to a proposal to transfer shareholding in the joint venture. This proposal nowhere stipulated that the transfer would be in violation of clause 6 of the SHA. Such a tentative proposal which is one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the health of the joint venture is not impacted in any manner by the proposed new subsidiary. Consequently, it is urged that instead of Guardian being like the 'big fish trying to eat a small fish', it is in fact, acting as the big brother protecting the smaller brother. 56. On the afore-noticed facts, it is vehemently submitted that the new project to be set up by Guardian is its wholly owned subsidiary. It is not a collaboration with any other Indian or foreign partner. Consequently there is no question of there being any competition with the joint venture or any outsider becoming privy to the business secrets of the joint venture. On these facts, Mr. Mukul Rohtagi, learned senior counsel has urged at great length that despite repeated promises that MRL would get out of its industrial sickness promptly and ensure finalization of the proceedings before the BIFR, it has been unable to do so. On the contrary, it has put forth a proposal of sale of its shareholding in the joint venture resulting in extreme insecurity and uncertainty. For all these reason, Guardian is satisfied and is not willing to participate in the expansion activities of the joint venture which would in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Its total dues as on 31st March, 2003 were in excess of ₹ 250-300 crores and its net worth had been completely eroded. MRL's industrial operations and products stood shut down since 2001. (ii). Shares of the joint venture GGL as held by MRL have been treated by it as investments. Under the provisions of Sick Industrial Companies (Special Provisions) Act, the operating agency has the power to sell the assets of MRL in order to revive the company. Shares of GGL as held by MRL are the most valuable assets of MRL. Consequently, there is continuing uncertainty with regard to the sale of GGL's shares held by MRL to a third party. This would lend uncertainty to the partner with whom Guardian would be compelled to work in the joint venture. (iii). By the order dated 20th May, 2004 passed by the High Court of Judicature at Allahabad, MRL had been ordered to be wound up. This matter was even on date pending before the Supreme Court. (iv). It has been submitted that MRL has filed an application dated 22nd August, 2006 wherein it has been repeatedly contended in paras 5.3, 5.4, 6.2 and 7.4 that the revival could be funded by sale of shares of MRL in GGL. There is continuous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need for a new project to be set up which would complement the joint venture GGL's production facility. (xii). The Foreign Investment Promotion Board FIPB has granted permission to Guardian, USA to start a new project on terms and conditions stipulated in the permission granted to it. The FIPB stands satisfied that the joint venture would not be harmed or prejudiced if the Guardian is permitted to set up a new wholly owned subsidiary. The findings of the FIPB are those returned by the expert body set up by the Government of India which is prima facie evidence of the fact that the new venture shall not compete with the joint venture but rather complement it. It has been submitted that FIPB gave a personal hearing to both sides; that FIPB is an expert body of the Government of India and it has passed its orders after giving a detailed hearing to the objections raised by MRL. (xiii). Guardian has repeatedly offered to buy out the MRL's shareholding in the joint venture at a valuation arrived at by ICICI Securities Ltd. and an application to this effect was also filed in the pending proceedings before the BIFR. Guardian has had discussions with Mr. V.K. Modi in this beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, Mr. Arun Jaitley, learned senior counsel for the petitioner, has urged that Clause 14 of the SHA did not relate to a matter effecting the affairs of the joint venture. Learned senior counsel has placed reliance on another pronouncement of the Apex Court reported at (2004)9SCC204 M.S. Madhusoodhanan and Anr. v. Kerala Kaumodi Pvt. Limited and Ors. to urge that such a covenant as contained in clause 14 would bind the parties thereto irrespective of whether it was contained in the Article of Association or not. 62. It is well settled that a judgment would be relied on the facts in which it has been rendered. A judgment cannot be applied in an abstract without consideration of the facts in which the principles were laid down. In [2002]1SCR621 Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. the Supreme Court state that: 19. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are not to be read as Euclid's theorems nor as provisions of the statute. These observations must be read in the context in which they app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s thereof which has to be deciphered from reading the entire judgment. A judgment may also have to be read on the touchstone of pleadings of the parties. 65. It Therefore becomes necessary to consider the facts which were before the Supreme Court in AIR1992SC453 V.B. Rangaraj v. V.B. Gopalkrishnan and Ors. In this case, the plaintiffs had placed reliance on an oral agreement to the effect that two branches of the family who were the shareholders in the company, would continue to hold equal number of shares therein and that if any member in either of the branches wished to sell its share/shares, he would give the first option to purchase the members of that branch. Only if the offer so made was not accepted that the shares would be sold to others. The defendant No. 1, who was the son of one brother sold shares to the sons of the other brother without giving the first option to the member of his father's family. In these circumstances, the sale of shares and their transfer was challenged by his brothers. It was held by the court that the restriction which was urged on behalf of the plaintiff, was a blanket restriction on all the shares, present or future, and that such a restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported at 2000 (100) Company Cases 19, Rolta India Ltd. v. Venire Industries Ltd. and Anr., the court held that subject to the provisions of the Companies Act, the company and its members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the company and define the powers of its officers. It was also observed that the Articles would be a contract between the company and its members and between the members interest and that the contract governs the ordinary rights and obligations incidental to the membership in the company. It was in this background that the court held that the provisions in the Subscription cum Share Holders Agreement as contained in clause 3.10 cannot be given effect to so far as the management of the affairs of the company is concerned unless those provisions have been incorporated into its Articles of Association. 67. The issue raised before the Bombay High Court in IL and FS Trust Co. Ltd. was also Therefore not the issue which is being considered by this Court. 68. The instant case is certainly not concerned with any restriction or stipulation relating to management of the affairs of GGL, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognised as binding on the company would be under the statute or in the Articles of Association. It was such an agreement between the shareholders which was held by the court as being capable of such construction as to constitute a contract not binding on the company even if the company had taken note of the same or acted thereupon. The court had held that an interim injunction restraining the right of the company to be a director in the interest of a company would amount to stultifying the management of the company. The principles laid down herein certainly do not apply to the instant case. 72. At this stage, it would be topical and instructive to refer to the judicial pronouncement reported at (2004)9SCC204 M.S. Madhusoodhanan and Anr.Vs. Kerala Kaumudi Pvt. Ltd. The court was called upon to consider the validity of an agreement dated 16th January, 1986 referred to as 'karar' which sought to get the partition of assets by mutual consent and was executed between Madhavi, Mani, Madhusoodhanan, Srinivasan and Ravi. It also provided that Madhavi would be the Chairman of the company known as Kerala Kaumudi Pvt. Ltd. during her lifetime; that there would be no change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In Rangaraj case relied upon by the respondents, an agreement was entered into between the members of the family who were the only shareholders of a private company. The agreement was that for all times to come each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch sold his shares to members of the second branch. Such sale was challenged in a suit as being void and not binding on the other shareholders. This Court rejected the challenge holding that the agreement imposed a restriction on shareholders' rights to transfer shares which was contrary to the Articles of Association of the Company. It was, Therefore, held that such a restriction was not binding on the Company or its shareholders. The decision is entirely distinguishable on facts. There is no such restriction on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r price; provided, however, that Guardian International (on behalf of such proposed disposing party) shall first have offered the shares at such lower price to MRL in accordance with the aforesaid procedure. Guardian International (or its Affiliates or Associates) shall be entitled at any time, without liability to any person, to decline to sell or otherwise dispose of its shares if the price approved by the Controller of Capital Issues, the Reserve Bank of India or any other institution or department of the Government of India or any political subdivision thereof is below its offer price. In addition, Guardian International (or its Affiliates or Associates) shall be entitled, without liability to any person, to decline to sell or otherwise dispose of its shares if it is not satisfied that the proceeds of such sale or disposition of the shares can be repatriated to the United States of America or to a country of Western Europe selected by it. 6.2 If MRL (and/or its Affiliates or Associates) wishes to sell or otherwise dispose of some or all of the shares of the company owned by it or allotted to it (or owned by such Affiliates or Associates), MRL (on behalf of such proposed selle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.1 and reads thus: 15. 'Affiliates' and 'Associates' 15.1 For purposes of this Shareholders Agreement, the term 'Affiliates' shall mean any legal person (other than the company) who, directly or indirectly, is controlled by controls, or is under common control with, a party to this Shareholders Agreement; and the term 'Associate' shall mean a business partner, agent or adviser of either party to this Shareholders Agreement or of any other company or person proposed as an investor by that party and accepted in writing by the other party. 77. The respondent has itself asserted rights based on the pre-emptive right to purchase the shares in GGL by virtue of clause 6 of the share holders agreement dated 23rd January, 1990. In this behalf, the respondent filed O.M.P. No. 337/2006 entitled Guardian International Corporation v. Modi Rubber Ltd., wherein para 21 it was inter alias stated thus: 21. Petitioner is deeply concerned about the future of respondent and the status of respondent's shareholding in GGL. A scheme of rehabilitation has still not been formulated. The petitioner apprehends that the respondent's shareholding in GGL may be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner also craves leave that in the event of change in the ultimate and beneficial ownership of the respondent they be permitted to seek other reliefs. Finally, the following prayers have been asserted by the respondent: (a) to restrain the respondent from transferring its shareholding in Gujarat Guardian Limited without the prior consent of the petitioner and without giving a pre-emptive right to purchase the said shares to the petitioner. (b) pass such further or other orders as this Hon'ble Court may deem fit and proper in the circumstance of the case. 78. There is no dispute that clause 6 of the SHA did not translate into a clause in the Articles of Association. Yet, the respondent is itself asserting binding ness of the pre-emptive rights to purchase of shares as contained in the SHA. The respondent has not challenged Clause 14 of the SHA on any ground under the Contract Act also. 79. The shareholders agreement between the parties in the instant case does not cast an absolute restriction on the transfer of shares. The pre- emptive right conferred on the parties has been relied upon by the respondent itself in OMP No. 337/2006. Even such agreement relates only to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner has filed the present petition based on the averments that the purported termination of the SHA effected by the letter dated 21st July, 2006 is contrary to the terms of the contract and is illegal and wrongful. Thus, it is the petitioner's case that the termination was in violation of clause 16 of the SHA and was not permissible. The material averments in this behalf are contained in paras 3.9, 4, 6, 8-10, 14, 17 and 18 of the petition. Inter alias the petitioner has averred thus: 3.9 Further, the petitioner has, vide letter dated 21st August, 2006, responded to respondent's letter dated 21st July, 2006. In the said letter the petitioner has expressed surprise and extreme disappointment in receiving the said termination letter from the respondent. The petitioner drew the attention of the respondent to the clause 14 of the SHA and stated that there has been no contractual breach of any of the provisions of the SHA by the petitioner and that there was no provision in the SHA for termination thereof by either party. Therefore, there was no valid basis for termination of the SHA and as such its terms remain in full force and effect and continue to bind the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the adjudication. It is well settled that such a declaration does not require to be specifically prayed for. The courts have held that the correct test is as to whether there is a legal necessity for the plaintiff to get a declaration of his right before he can get an injunction. (Ref: Harchand Singh v. Dalip Singh; AIR 1941 Mad 91 Sri Rajah Nayani v. Sri Rajah Tadakamalla.) In [1978]113ITR389(Delhi) Mahant Purshottam Dass v. Narain, while considering a question as to the court fee payable on the plaint, the court held that a prayer for declaration would be a surplusage if the plaintiff can get the relief for injunction without praying for declaration, but declaration has to be prayed where an obstacle has to be removed before the plaintiff can claim the relief of injunction simplicitor. 84. In this behalf, it would also be useful to advert to the pronouncement of this Court reported in 1985 RLR 398, Time Properties v. DDA. It was held in this case that even if a plaintiff had filed a suit simply for injunction, however, there was a legal necessity for a declaration before grant of the relief for injunction. Such suit would not be treated as a suit for injunction. It is only if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the petitioner, it becomes necessary to consider the concerned statutory provisions at this stage. Section 9 of the Arbitration and Conciliation Act, 1996 empowers a court to pass interim orders at the instance of a party. This statutory provision reads thus: 9. Interim measures, etc. by court ' A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a court: (i) for the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or (ii) for an interim measure of protection in respect of any of the following matters, namely: (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; (b) securing the amount in dispute in the arbitration; (c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 seeking interim relief in respect of the share holding in GGL. 94. Subsequently thereafter, the respondent herein has made a request for arbitration dated 16th October, 2006 before the London Court of International Arbitration (LCIA). This request for arbitration was made by the respondent invoking clause 26 of the SHA which provided that any dispute or difference arising under or in connection with the SHA or breach thereof shall be settled by arbitration conducted in accordance with the rules of the LCIA by three arbitrators in conformity with the rules. The petitioner has intimated the name of its arbitrator in the communication dated 18th October, 2006 to the LCIA. The respondent's request for arbitration contains elaborate submissions by the respondent in relation to the contract containing the arbitration agreement which reads as follows: II.THE CONTRACT CONTAINING THE ARBITRATION AGREEMENT 7. This dispute arises in connection with a Shareholders Agreement dated 23 January, 1990 between Guardian International and MRL (the 'Shareholders Agreement), a copy of which appears as Exhibit 1 to this Request for Arbitration. 8. Clause 26 of the Shareholders Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian International's construction of further flat glass plants in India. IV.THE GOVERNING LAW, PLACE, AND LANGUAGE OF THE ARBITRATION 37. Clause 25 of the Shareholders Agreement provides that the law applicable to the Shareholders Agreement is the laws of the Union of India. 38. The Shareholders Agreement does not specify the place of the arbitration. Accordingly, pursuant to Article 16.1 of the LCIA Rules, the place of the arbitration shall be London. 39. The Shareholders Agreement does not specify the language of the arbitration. Accordingly, pursuant to Article 17.1 of the LCIA Rules, the language of the arbitration shall be English. VI. RELIEF REQUESTED 42. As a consequence of the foregoing, Guardian International respectfully requests the following relief: a. a declaration that the Shareholders Agreement has been frustrated or has been validly terminated or otherwise discharged; and /or b. alternatively, a declaration that Clause 14 of the Shareholders Agreement is null and void and/or unenforceable against Guardian International and/or has been frustrated or otherwise discharged and/or may not be invoked by MRL to prevent Guardian International from constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98. Frustration of contract is not an abstract or nebulous concept. In India, it is statutorily recognised in Section 56 of the Indian Contract Act which relates to performance of a contract. Undoubtedly, frustration of contract is a class of circumstances under which performance of a contract is excused or dispensed with. Section 56 of the Indian Contract Act reads thus: 56. An agreement to do an act impossible in itself is void. A contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promise did not know to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promise sustains through the non-performance of the promise. In the agreement between the parties, admittedly they have agreed that adjudication would be governed by laws in India. 99. The doctrine of frustration was considered by the Apex Court in Satyabrata Ghose v. Mugneeram Bangur and Co. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpossible' has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promissor finds it impossible to do the act which he promised to do. 10. Although various theories have been propounded by the Judges and jurists in England regarding the juridical basis of the doctrine of frustration, yet the essential idea upon which the doctrine is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expression. The changed circumstances, it is said, make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The parties shall be excused, as Lord Loreburn says If substantially the whole contract becomes impossible of performance or in other words impr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent's case before this Court that the petitioner has committed breach of any term of the SHA which could impact its binding ness or the validity of the SHA between the parties. On the contrary, the petitioner has discharged all its obligations there under. 105. On this aspect it would also be useful to advert to the pronouncement reported at [1968]1SCR821 , Naihati Jute Mills Ltd. v. Khayali Ram Jagannath. wherein the court has held that it is not hardship or inconvenience or material loss which brings the principle of frustration of contract as envisaged under Section 56 of the Indian Contract Act into play. There must be a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that which was contracted for. The court cited with approval the principles laid down by the Apex Court in Satyabrata Ghose v. Mugneeram Bangur and Co. 1954 SCR 310. In the facts of the case before the Apex Court, it was held that performance of the contract had not become impossible by reason of any force majeure, nor by reason of any change in government policy which could not be foreseen by the parties. No question also could a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld reflect the financial status of the company on the relevant dates. This balance sheet of the joint venture company as on 31st March, 2006 reflects that it had reserves and surplus of ₹ 1,810,265,716/- as on 31st March, 2005. These reserves showed a sharp increase on the 31st March, 2006 and the position of the reserves and surplus had reached the figure of ₹ 2,544,825,934/-. These figures reflect an increase of over ₹ 70 crores within one year. It is pointed out that this increase was for the reason that GGL recorded average internal accruals of US $ 2 million which was equivalent to approximately ₹ 90 crore per month net of taxes and that, for the last month, the joint venture recorded internal accruals of over US $ 3 million which was equivalent to approximately ₹ 135 crores. 109. The principal ground for urging that the SHA stood frustrated is based on the orders of winding up dated 12th March, 2004 passed by the learned single Judge of the High Court of Judicature at Allahabad in Company Petition No. 1/2002, copy whereof has been placed by the respondent on record, whereby the petitioner was found unable to pay its debts and that it was found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered before the BIFR with regard to the management of MRL are concerned, the same are required to be considered by this Court only to the extent that they concern the joint venture company or the involvement of Guardian, the present respondent therein. 115. It has been pointed out by MRL that the financial institutions hold 44.25% equity in MRL. Before any scheme of revival could be submitted to BIFR, these financial institutions put up a precondition of purchase of their shareholding by the promoters. Consequently, an open bid sale for the 44.25% stake of the financial institutions was held. M/s ICICI Securities Ltd. addressed a letter dated 19th July, 2006 to Shri V.K. Modi informing the acceptance of his offer to purchase the shareholding of the financial institutions in MRL and required Mr. V.K. Modi to deposit into an Escrow account of the Financial Institutions, a non-refundable amount of 20% of the purchase consideration on 1,10,79,061 Equity Shares on or before July 26, 2006. It was also stipulated that the transaction documents need to be executed on or before August 18, 2006, failing which the Financial Institutions shall be free to explore other possibilities in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors nominated by the financial institutions will be at liberty to consider an offer from Guardian if the proposed agreement with Mr. Modi is not signed by the end of the month or if the BIFR restructuring process is riot completed by September 30, 2006. 120. From the above, it is apparent that even till 9th June, 2006, Guardian had no real evidence of malfunctioning in MRL. In any case, there was no evidence whatsoever of the industrial sickness which was complained of before the BIFR impacting in any manner the stability or the growth of the joint venture company GGL. 121. However, the admitted position is that in the meantime, the Board of Industrial and Financial Reconstruction (BIFR) has appointed an operating agency and was considering a scheme for revival of the petitioner company. Certain interim measures with regard to the purchase of the shareholding of the financial institutions by the directors of the company stood approved. The petitioner has contended that in these circumstances, no liquidator has been appointed and that the petitioner's company is being managed by its own directors which is functioning even on date. 122. The material fact is that no breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 127. It is not the respondent's case also that the petitioner has committed breach of any term and condition of the SHA which could impact its binding ness or the validity of the agreement between the parties. Furthermore, the petitioner has discharged all its obligations under the contract with the respondents and continues to be functioning. 128. It is noteworthy that in every document relating to the affairs of the joint venture GGL, the respondent has acknowledged the continued success of the joint venture as also reiterated its stability and profitability in every communication addressed by it. 129. It is trite that in a private contract, a party is free to choose the person as also the subject matter of the transaction according to its own free will. No restriction or fetter could be imposed on either of the parties as to the manner, mode and the nature of the agreement that they choose to enter into. Such freedom is available in the realm of private law. 130. In exercise of such right which is available to a private party, a party may give to itself a right to terminate the agreement without cause. This has been held in common law to be a valid power which the party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. 135. In the factual matrix laid before this Court, considered in the light of the legal principles noticed hereinabove. Prima facie , there is Therefore force in the submissions on behalf of the petitioner that merely because one of the partners of the joint venture is before the BIFR, would not give immunity to the respondent against its contractual obligations under the SHA. 136. The respondent has also not set up a case that it required the petitioner to contribute any finances in GGL which it failed to do so. There is also no allegation of administrative mismanagement on the part of any nominee director of MRL. 137. Before this Court Mr. Mukul Rohtagi, learned senior counsel for the respondent has placed strong reliance on a proposal dated 22nd August, 2006 submitted in the proceedings before BIFR alleging on behalf of the petitioner for revival of MRL. 138. This has been termed as the evidence of ``anticipatory breach by MRL of the Shareholders Agreement'` and has been pleaded as a strong ground for contending frustration of this agreement. 139. The petitioner on affidavit in its rejoinder has stated that such proposal was not made by the petitioner company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties to certain persons including the affiliates of the parties. 144. I find that this submission on behalf of the respondent really deserves to be noticed for the sake of rejection. Certainly, such a proposal could not have founded the basis of the letter of termination dated 21st July, 2006 primarily for the reason that the proposal had not emerged by then. There is nothing contained in the proposal which would support that the submission that it was on behalf of the petitioner company. Para 12 of this proposal states that it was subject to the approval of the Board of MRL. There is no dispute that the proposal was advanced by Mr. V.K. Modi who was a promoter- director of MRL. There is nothing to evidence a resolution of the Board of Directors of MRL to support that such proposal was made by the company. 145. Therefore, in the light of the above discussion, certainly, the proposal dated 22nd August, 2006 submitted to the Operating Agency and not even the BIFR, cannot be either cause or justification for issuance of a prior letter of termination dated 21st July, 2006. In my view, this proposal does not prima facie evidence breach of any term of the SHA. 146. Looked at from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained a clause whereby term of the agreement was specified and also a negative stipulation contained in Clause 14 of the agreement dated 23rd January, 1990, Mr. Arun Jaitley, learned senior counsel for the petitioner has relied on the exception provided in Section 42 of the Specific Relief Act to contend that even if it was to be held that the contract is in express terms determinable, still the petitioner would be entitled to an injunction directing enforcement of the negative covenant against the respondent. 153. In this behalf, it would be appropriate to advert to the principles laid down by the Apex Court in AIR1995SC2372 Gujarat Bottling Company v. Coca Cola and Anr. In this case, Coca Cola had granted franchise to the Gujarat Bottling Company to manufacture, bottle, sell and distribute various beverages for which trade marks were acquired by Coca Cola. Under this commercial agreement, both parties undertook obligations for promoting the trade in such beverages for their mutual benefits. The agreement contained a negative stipulation restraining the Gujarat Bottling Company in dealing with beverages of any other brand or trade mark/trade name during the subsistence of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer. 155. Placing reliance on 1898 (1) CH 671 : (1895) All ER 1680 Ehrman v. Bartholomew and its earlier pronouncement reported in N.S. Golikari at page 389, the Apex Court emphasized that relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before the uncertainty relating to the alleged violation could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of its right for which it could not be adequately compensated by damages recoverable in the action if the uncertainty was resolved in its favor at the trial. The court cautioned that the requirement of such protection has, however, to be weighed against the corresponding need of the defendant to be protected against the injury resulting from his having been prevented from exercising his own legal right for which he could not be adequately compensated. To do this, the court weighs one need against other and arrived at a finding as to whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief. The plaintiff's conduct should Therefore be fair and honest. 160. Observing that the Gujarat Bottling Company had not acted in conformity with the terms of the agreement, it was held that this company was prima facie responsible for the breach of the agreement and that no consent was also taken by Coca Cola before the shares were transferred. Consequently, it was held that though Coca Cola had a right to terminate the agreement but it did not do so. On the contrary, it was done by Gujarat Bottling Company. Therefore, the Gujarat Bottling Company, having itself acted in violation of the terms of the agreement and having breached the contract, could not claim vacation of the interim injunction. Hence, it was primarily responsible for having brought about the state of things complained of. 161. It would be useful to refer to the pronouncement of this Court reported at AIR1993Delhi32 Welman Hindustan Ltd. v. NCR Corporation. In this case, the court was required to consider a letter of termination issued by a foreign partner in a joint venture company wherein a contention has been raised by the defendants that the agreement was not complete because further agreements had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of GMG and that as a consequence Goyals would have no other option but to ultimately sell their interests in GMG to Messer. Thus the plea of balance of convenience was set up on the ground that the very existence of GMG/Goyals was at stake and the proposed acquisition of BOCL was contrary to the agreement between the parties. Reliance was placed on clause 9 in the agreement dated 12th May, 1995 to urge that this was a non-compete clause which prohibited Messer from entering into any activity of competition with regard to gas business and conferred a right of first refusal on the business option to GGL. 163. The respondent Messer had opposed the grant of injunction on the ground that the promoters of BOCL had refused to sell its shares to M/s Goyal and as a result the contract between the parties had been rendered impossible to perform. It was urged that clause 9 was not in the nature of a negative covenant. Furthermore a plea of balance of convenience in its favor and irreparable injury resulting to it was pleaded on the ground that a number of steps had already been taken including obtaining permission from the Foreign Investment Promotion Board for acquisition of the shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite the several agreements between the parties, 'Messer will go ahead to acquire the shareholding of BOCL not jointly and in concert with GMG but to its derogation and take some steps for the acquisition thereof, it cannot turn around and say that balance of convenience and equities are in its favor. While considering the balance of convenience and equities, the conduct of a party to litigation is of paramount importance. The conduct of Messer was not above board. They did not conduct themselves in a business like manner. They are attempting to give a go by to their agreements with GMG. The court held that a negative covenant was implied in clause 9 and that it, in any case, contained a right of first refusal. Consequently finding that the appellant had established a prima facie case and that balance of convenience were also in its favor, it was also held that the appellant would suffer irreparable loss and injury if the injunction prayed for was not granted. The appeals were consequently allowed and Messer was restrained from taking any steps to acquire the shares of BOCL pursuant to its agreement till decision of the arbitration and proceedings. 165. The principles laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk (India) Pvt. Ltd. v. Zaheer Khan and Anr. AIR2006SC3426 . In this case, the Supreme Court was concerned with post contractual covenants which were held to be restrictive of trade and vocative of Section 27 of the Contract Act. As noticed in para 54, the contract between the parties had come to an end by efflux of time. However I find that in this case also the Supreme Court re- affirmed the legal position that there are instances where the negative covenant in the contract is valid and can be enforced. In this behalf, the court had observed thus: 61. Clause 31(b) was also to operate only during the term i.e. from the conclusion of the first negotiation period under clause 31(a) on 29-7- 2003 till 29-10-2003. This Respondent 1 has scrupulously complied with. So long as clause 31(b) is read as being operative during the term of the agreement i.e. during the period from 29-7-2003 till 29-10-2003, it may be valid and enforceable. However, the moment it is sought to be enforced beyond the term and expiry of the agreement, it becomes prima facie void, as rightly held by the Division Bench. 169. In the present case, the respondent has not laid a challenge to any of the terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the same not only cannot be enforced but in respect of such a contract no injunction could also be granted and this is mandate of law. This, however, is subject to an exception, as provided in Section 42 that where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstances that the Court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement. 15. Learned Single Judge considered various covenants of the agreement and referred to clause 8 of the Technical Assistance Agreement regarding termination saying that similar provision is incorporated in the Technical Know how agreement and both agreements provide that the same could be terminated even by the appellant at its option at the occurrence of any of the events, which are specifically mentioned in the agreement. Learned Single Judge extracted clauses relating to Technical Assistance Agreement under which the respondent could terminate the contract and as the termination had to take place at the instance of the respondent Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, the court held that under Section 9 of the Arbitration and Conciliation Act, an interim order could be passed in accordance with the statutory provisions which would include the provisions of the Specific Relief Act for the purposes of preservation, interim custody or sale of goods. In this case it was held that the parties were acting pursuant to a share holders agreement dated 18th June, 1999 whereby the respondents had been permitted to acquire 51% stake in the company and the petitioners had already entered into a non-competing agreement with the respondent No. 1. The petitioners were not paid any consideration for allowing the respondents to take over the majority stakes and control and the management of the company. The court had arrived at a conclusion that the respondents had failed to honour their commitment and also had fabricated charges and issued a letter dated 3rd September, 2001 seeking to cancel/terminate the shareholders agreement between them. 175. In this case, it had been urged on behalf of the petitioner that only those agreements could be treated as terminable which are voidable. This submission was rejected and the law on this aspect was succinctly lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act which is in its nature revocable, cannot be specifically enforced and that damages in specific performance or injunction would be an adequate remedy. I find that in this case also the court was not concerned with enforcement of any negative covenant which is being considered in the present case. 177. Again the judicial pronouncement of the High Court of Bombay rendered in Star India Pvt. Ltd. v. Lakshmi Rajsita Ram Nagar and Anr. Notice of Motion No. 2933/2002 in Suit No. 3452/2002 reported at 2003(3)BomCR563 does not further the case of the respondent before this Court in any further inasmuch as this case related to a contract of service and the court held that the plaintiff had failed to establish irreparable injury if the injunction prohibiting the employee from joining any other business was not granted. It was held that by granting injunction in favor of the plaintiff to enforce the negative covenant as contained in clause 12 of the agreement between the parties, the court would been forcing a contract in respect of personal service after the employee had tendered his resignation from service. The court was of the view that grant of injunction would cause greater harm and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the joint venture and the petitioner is quantifiable in monetary terms so as to disentitle the petitioner to the interim protection. 180. In AIR 1984 Delhi 119 Modern Food Industries India Ltd. v. Shri Krishna Bottlers (P) Ltd., the petitioner had filed a petition under Section 20 of the Arbitration Act, 1940 seeking reference of the dispute between the parties to arbitration. The petitioner also filed an interim application praying for injunction against the respondent seeking enforcement of the negative covenants contained in a franchise agreement with the respondent. Under the agreement between the parties, the plaintiff was to sell concentrate to defendant to manufacture and bottle the aerated water drink and distribute it in Hyderabad. The defendant was prohibited from manufacturing or selling any product akin to that of the plaintiff in Hyderabad without its written permission. Alleging that the defendant had failed to perform his contract and had entered into an agreement with another company to bottle and market their aerated drink, the plaintiff filed an application seeking a restraint of the defendant from manufacturing or marketing or in any other manner dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior counsel for the respondent has pointed out that the prayers made in the present petition are all based on implementation of only the non-compete clause contained in Clause 14 of the SHA without any challenge to the termination of the agreement effected by the respondent. It has been pointed out that the respondent bearing in view the market position, had no option but to proceed with its proposal of setting up a wholly owned subsidiary without the partnership of the petitioner. Towards this end, the respondent after requesting the petitioner for its consent, submitted an application dated 22nd July, 2006 to the FIPB. This proposal has been urged by the petitioner to be in blatant violation of Clause 14 of the shareholders' agreement. 185. There is no dispute that the petitioner did contest this petition before the FIPB and FIPB gave hearing to the petition in the course of its consideration. 186. It has been vehemently urged that Guardian proposes to infuse approximately US $ 60 millions in the subsidiary over the next two years which equity infusion shall be augmented by expected export earning. It has also been urged that the proposed subsidiary would create more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was its offer to purchase GGL's shares held by MRL at a price established in an independent valuation and that it was on account of refusal by the petitioner to do so, that the respondent had terminated the shareholders agreement. It was also urged that the respondent has misrepresented the position that the petitioner had been declared sick in its petition. 190. Before this Court, it has been urged on behalf of the petitioner that Article 2(iii) of Press Note 1 (2005 series) stipulates the enforcement of a non-compete clause between the joint venture partners and that the respondent had not disclosed the factum of the non-compete/non-conflicting clause included in the shareholders agreement. 191. Perusal of the minutes of the meeting dated 5th October, 2006 which have been placed before this Court by the respondent show that the board also noticed that its approval was merely an enabling decision for induction of FDI without prejudice to the legal/adjudicatory rights of the parties concerned, under any existing contractual agreement. 192. Pursuant to the recommendation of the FIPB, the Government of India granted approval to the respondent by its letter dated 26th October, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. The petitioner has pointed out that as per the application of the respondent to the FIPB, the respondent proposes to raise US $ 200 million/equity debt ratio of 1:2 and intended to invest only US $ 66.67 by way of equity, that too, in two or three years. The respondent itself has pointed out that GGL itself admittedly has reserves to the tune of US $ 60 million with profits secured in US $ 2 million per month. It is a debt free company. Consequently it is more than eligible for procuring working capital finances from banks. On these projections, the petitioner has urged that GGL, with its existing reserves, is fully capable in itself for undertaking expansion. 198. The respondent has placed strong reliance on the recommendation given by FIPB to its proposal on 5th of October, 2006. On the other hand, the petitioner has urged that this recommendation cannot impact adjudication in the present case inasmuch as the board was not concerned with the commitment of the respondent that it would not undertake similar business during the subsistence of SHA as per clause 14 of the agreement. 199. In several pronouncements, the courts have held that the irreparable injury which may resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance to Mr. Vinay Modi representing the MRL in resolving its existing problems and since 2003, it had been indicating that expansion of GGL was desirable but only if MRL could resolve its internal problems. 203. The respondent has also opposed the grant of relief in the application on grounds of delay. It has been urged that the termination of the SHA was effected on 21st July, 2006 and the respondent had approached the FIPB on the 22nd July, 2006. The petitioner filed its objections before the FIPB on the 14th August, 2006. The present petition has been filed only on the 9th of October, 2006 after the petitioner has appeared before the FIPB on the 5th of October, 2006 after the proposals of the respondent had been cleared by the FIPB Core Group. 204. The respondent has terminated the SHA by its letter dated 21st July, 2006. The Board of the petitioner considered the matter on 12th August, 2006. On 21st August, 2006, the petitioner requested the respondent to re-consider its action. It was only on 25th September, 2006, that the respondent informed the petitioner that there would be no re-consideration. The petitioner has contended that the first hearing before the FIPB took plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have fallen for consideration in several judicial pronouncements and the principles laid down can be usefully called out thus: (i) Even though Section 9 does not embody the ingredients of Order 38 Rule 5 of the Code of Civil Procedure, 1908 nor the conditions of the Order 38 Rule 5 can be read into it, however for the exercise of discretion there under, the court can take guidance from the provisions of Order 39 as well as Order 38 of the Code of Civil Procedure, 111(2004)DLT816 Rite Approach Group Ltd. v. Roseboron Export). (ii) The scope of Section 9 of the Arbitration and Conciliation Act, 1996 is in pari material with the provisions of Order 39 of the Code of Civil Procedure, 1908. The power vested in the court by virtue of Section 9 must be exercised in consonance with equity which tempers the grant of discretionary relief as the relief of interim injunction is wholly equitable in nature. (Ref: AIR1995SC2372 Gujarat Bottling Co. Ltd. v. Coca Cola and Ors.; (115) 2004 DLT 219 : 2004 (VIII) AD (Delhi) 361 Reliance Infocomm Ltd. v. Bharat Sanchar Nigam Ltd.) (iii) The intention of the defendant is a sine qua non for invoking Section 9 where the claim is to secure the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages which would be recoverable in the action if the uncertainty were resolved in his favor at the trial. (Ref: AIR1995SC2372 Gujarat Bottling Co. v. Coca Cola and Co.; 2006 (iv) AD (Delhi) 38 Country Development and Management Services Pvt. Ltd. v. Brooke side Resorts Pvt. Ltd.) In 133(2006)DLT153 Shaw v. Him Neel Brewaries Ltd., Learned Single Judge of this Court held that the interim orders are calculated to ensure that the assets of the party are not dissipated or frittered away and that such orders do not fall within the moratorium of Section 22. (vii) The application seeking interim measures of protection under Section 9 of the Arbitration and Conciliation Act, 1996 pertaining to the preservation, interim custody or sale of equipment which is the subject matter of the agreement would be covered under Section 9(ii)(a) as also under Section 9(ii)(c), (d) and (e) of the Act. (Ref: AIR2006Delhi134 National Highways Authority of India (NHAI) v. China Coal Construction Group Co.) (viii) The court has the power to pass an order under Section 9 during the pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined in a petition under Section 9 of the statute. (Ref : 2002 (8) AD (Delhi) 617 : 2003 (66) DRJ 239 S. Raminder Singh v. NCT of Delhi). A similar question had arisen before this Court in D.R. Sondhi v. Hella K.G. Hueck and Co. In para 14 of the judgment, it was held by this Court that the question as to whether the material breach has been committed or not or if there is any breach at all was agitated but it was not gone into for the reason that it is not the question for determination at present. 210. This Court while considering the petition under Section 9 of the Arbitration and Conciliation Act, 1996, does not have the jurisdiction to return a finding on the merits of a claim made or a dispute raised by the parties before the arbitrator. However, there can be no dispute that this Court is required to examine the existence of a prima facie case on the assertions of the petitioner with regard to the termination of the agreement in the facts and law applicable and as to strength in the petitioner's case as to the binding ness and subsistence of the SHA. Irreparable Injury and the Balance of convenience consideration 211. In a judgment reported at 1999(4)BomCR809 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meone else. Such an act can be done in different ways and methods. Each of such methods can constitute a bundle of facts giving rise to a cause of action to somebody who is aggrieved by the act of competition. But in order to succeed in such suit, it is necessary to plead and prove all such facts which constituted the act of competition. Mere allegation that similar business started by the defendants amounts to competition with the business of the plaintiff's company cannot amount to a statement of fact pertaining to the competition. It would be rather a submission on the part of the plaintiff. For example, in the case of claim of adverse possession it is not just sufficient to state that the plaintiff is in peaceful possession of the land for over 12 years. It is necessary to state when it became adverse, nature of possession, the fact of the possession being to the knowledge of the owner, etc. Similarly, it is not sufficient to merely allege that the defendants have entered into competition with the plaintiffs by starting similar business. It is necessary to disclose the facts which constitute the competition with the business of the plaintiffs by the defendants. This will in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the growth of glass consumption in the Indian construction industry increasing (roughly 15% per year since last year) and GGL has been unable to satisfy the increased demand as it has been running at its maximum capacity for a few years and has Therefore been unable to ``capitalize on this increased demand. GGL has also not been able to capitalize on the large unfulfilled export market. c) As the competition grows and GGL is stifled, GGL will not be able to offer as diversified a product line as its competitors resulting in reduced profitability. If Guardian is allowed to build a second line, it will help stabilize GGL.' 215. In the same note, the respondent has asserted that in the proposed subsidiary, it anticipates that 50% of the total production would be tainted glass, 20% would be dedicated to the coater and 30% of its production would be devoted to the float glass. It has been unequivocally stated that there would neither be any development of technology, nature of product or the capacity of the joint venture GGL. The respondent has thereby clearly and unequivocally stated that it has no intention of either improving the available technology or the existing plant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no restriction or confinement of its business, distribution or sales to the location where it is proposed to be located lending force to the petitioner's apprehension that its sales and business would be impacted. 220. Mr. Mukul Rohtagi, learned senior counsel for the respondent has however urged at great length that despite the state in which MRL finds itself, GGL has reached the maximum level of its production capacity and further that there are really no reserves or surpluses in the GGL which could be diverted towards expansion and that an amount of US $ 45 million is actually needed for cold tank repairs. It has been contended that the fact that in an audit conducted by the officials of Guardian as regards the condition of the furnace, it was discovered that the cold tank repairs could be undertaken in the coming two years, does not vary the position that such repairs are required and the amount in question has also to be set aside for this purpose. In this behalf, reliance has been placed on the annual report of GGL for the year 2005 purportedly signed by Mr. V.K. Modi himself. 221. However, from the documents on record it would appear that in the year 2006, these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is any plans for expansion of GGL. My attention has been drawn to the minutes of the meeting of the board of directors of GGL held on 30th August, 2006 which has been filed by the respondent before this Court wherein on a query raised by Mr.C.J. Jose, IAS about expansion of GGL's capacity, Mr. Peter Walters, Vice Chairman of GGL (a nominee of the respondent) replied that 'there is no immediate plans for expansion'. The respondent had addressed a letter dated 6th July, 2006 to the IDBI wherein also it had admitted that it was not proposing to undertake any expansion at GGL if it is permitted to set up a wholly owned subsidiary. The respondent has also clearly stated now that it was unwilling to provide any further technology to GGL for the very reasons that it has given in support of it, terminating the shareholder's agreement. 224. Perusal of the letter dated 6th July, 2006 sent by the respondent shows that the respondent had clearly informed the petitioner to either sell its shares to it or to permit it to expand separately in India. There is no dispute that there was no consideration of the option of expanding GGL's business. It is also an admitted posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern with regard to the instability and chaos at MRL and its emphasis and its concern about acquisition of 75% or, in any case, majority shareholding in the GGL. It was also contended that the reversal of the amount allocated towards the cold tank repairs was only as a financial measure and for no other reason. 231. The petitioner has taken great pains to point out that as per the figures of the accounting of GGL, its estimated profit for the year 2005-2006 was to the tune of ₹ 14,828 million which was expected to go up to ₹ 22,000 million. It was submitted that so far as the current cash availability was concerned, a sum of ₹ 300 crores (US $ 65 millions) was available and based on figures for the current year, upon calculation of the additions and adjustments of the amount of ₹ 202.50 (equivalent to US $ 45 millions) towards the cold tank repairs, there was still a net surplus of ₹ 216.44 crores. 232. In my view, for the purposes of the present case, these elaborate submissions would be immaterial and except that the submissions laid by both sides indicate that GGL is a profitable enterprise having adequate and growing reserves, whether they be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the respondent to its proposed wholly owned subsidiary. 237. The petitioner has also criticised the plea taken by the respondent with regard to generation of additional employment placing reliance on the figures relating to GGL. It has been pointed out that GGL has established itself as a company of standing and has been providing trained personnel to the respondent's international operations in several countries and thereby it is a major resource for provision of skilled men and trained manpower needed for the business of the respondent. According to the petitioner, the wholly owned subsidiary of the respondent would result in diversion of skilled manpower which has been trained by GGL to its detriment. It is further pointed out that even the fact that the wholly owned subsidiary is to be geographically separated from the location of the GGL and is proposed to be set up at a distance from Ankleshwar, Gujarat where GGL is located. However, it was pointed out that as per the proposal, the respondent was required to export 40% of the production from the new plant and Guardian was intending to manage and control both its wholly owned project as well as GGL. The petitioner a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 2007 thousand metric tons per year in the same period which is beyond its maximum capacity. However, despite this position, GGL's share in the float glass production in India has gone down from 33% to 20%. According to the respondent this is because the GGL's plant located in Ankleshwar, Gujarat was the first float glass plant in India which commenced commercial production in the market on 1st March, 1993 with the installed capacity of 550 thousand metric tons per day. Thereafter, its competitors M/s Asahi India Safety (earlier known as Float Glass India) first commenced commercial production in Taloja in Maharashtra in 1995 with a capacity of 500 metric tons per day. However, its second plant is currently under construction in Uttranchal which is expected to go on stream in early 2007 with a production capacity of 700 metric tons per day. St. Gobain located in Perumudur near Chennai also launched its first plant in July, 2000 with a capacity of 650 metric tons per day. A third establishment known as the Triveni Glass (Allahabad) commenced production of float glass using Chinese technology in 1996, also having a production capacity of approximately 230 metric tons per d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he financial, technical and managerial capacity to undertake the same. It has also been submitted that the very basis of the joint venture agreement postulated expansion of the business and that the basic spirit, intendment and purpose of bringing in the latest and improved technology into India had resulted in the parties entering into the agreement and creation of a joint venture company. 244. The petitioner has also argued that improved technology increases scale of operations on a cost-effective basis and that there is no reason why the respondent could not be interested in diverting value added products which are more profitable to its wholly owned subsidiary depriving GGL of potential revenue and profit stream. For the same reason, the petitioner has apprehended prejudice to the imports of products. 245. I find that interestingly, it is not the joint venture GGL's industrial or financial health which is purportedly guiding the respondent's decision but the status of the petitioner. Even though the petitioner has emphasised the impact of the proposed wholly owned subsidiary on the value of its shareholding in GGL, however, the respondent had been at great pains to ur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the trade name 'Modi Guard' which is marked recognition. There is no dispute that the products which are proposed to be sold by the newly set up wholly owned subsidiary would not be sold under the same trade name. The petitioner has pointed out that the consumers in the market will not relate the product of the Modi Guard with that which is manufactured at the proposed subsidiary which would strongly impact the sales of the petitioner as also its goodwill. The petitioner has submitted that GGL would thus suffer loss of market shares, goodwill and profits which are incapable of quantification and consequently, the loss which would be suffered would be irreparable. 249. Therefore, the proposal of the respondent is clearly to freeze the business of the joint venture at its existing point. By setting up the wholly owned subsidiary it proposes to develop not only the second line but also the same product as the petitioner. The respondent is thereby effectuating its refusal to share new technology with GGL and is completely scuttling any attempt for its expansion. It is not either party's contention that the agreement between them when the joint venture was conceptua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this covenant between the parties. Several factors which would support the irreparable harm determination would include an inability to calculate damages, harm to goodwill, diminishment of competitive positions in the market places, loss of employees' unique services and loss of opportunities to manufacture and distribute unique products. There can be no manner of doubt that the respondent's decision to propose the wholly owned subsidiary is based on its intention of capturing the huge customers base at available in the market in the country. 254. Goodwill is considered as a legitimate business interest and is the company's positive reputation in the community, particularly in the eyes of its customers and potential customers. The respondent has categorically stated that its actions should not impact the current customers' base of the petitioner. But, it is an admitted fact that the petitioner's customers would be targeted by the respondent through its wholly owned subsidiary. Loss of goodwill is recognised as being hard to quantify in terms of compassable damages and certainly gives rise to the need for an equitable injunctive relief. The respondent being clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby it has expanded its business activities without including the plaintiff and to this the plaintiff had not consented. The defendants claimed that the joint venture agreement was void for the reason that it was obtained in breach of the fiduciary duty which the plaintiff owed to the defendant. Consequently, they had unilaterally terminated the joint venture agreement and urged that such a termination had freed it of any further duty to abide by any of the joint venture agreement's provision. The court held that the defendant had not established any right to unilaterally void the agreement between the parties nor had they offered probative evidence to show that the amendment to the agreement was obtained through any breach of the plaintiff's fiduciary obligations to the defendant. It was also held that the defendant was competing with the joint venture by starting a business relationship with a new store without the plaintiff's consent which was in flagrant breach of the parties covenant not to compete which establishes the element of irreparable harm under the New York Law. On these facts, the court reiterated the principle that irreparable injury to the goodwill inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -compete where intangibles like advertising efforts and goodwill were injured); Equifax Servs., Inc. v. Hitz 905 F.2d 1355, 1361 : 10th Cir. 1990 (irreparable harm exists where damages from breach of covenant not-to-compete difficult to calculate); Ferry-Morse Seed Co. v. Food Corn, Inc. 729 F.2d 589, 592 (8th Cir. 1984) (breach of exclusive distribution agreement constituted irreparable harm where company was disadvantaged in competitive market by inability to market unique seed corn); Shred-It USA, Inc., 202 F. Supp. 2d at 233-34 (loss of employee's unique services to competitor in violation of do-not-compete agreement constituted irreparable harm); Green Stripe, Inc. v. Berny's Internacionale, S.A. 159 F. Supp. 2d 51, 56-57 (E.D. Pa. 2001) (violation of exclusivity clause in sales contract constituted irreparable harm where plaintiff was denied ability to sell unique, perishable grape and lacked market substitute to maintain its presence in Mexican grape market); J.C. Penney Co., Inc., 813 F. Supp. at 369 (inherent nature of exclusive provision in lease coupled with damage to goodwill, difficulty of calculating damages, and unique nature of interest in real estate consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the option of expanding GGL's business. It is also an admitted position that the market share of GGL had reduced not because it was not running its affairs profitably but because of other producers in the field. 259. There can be no manner of doubt that so far as the respondent's contribution to GGL is concerned, it has received the contracted consideration for the technical and any other contribution made by it. The products manufactured by GGL are sold under the trade name 'Modi Guard' which is a mark enjoying goodwill and recognition. The respondent has not claimed that it would be selling products manufactured by its proposed wholly owned subsidiary under the same trade name. The petitioner points out that the respondent shall be selling its products under its own worldwide brand ``Guardian'`. The petitioner points out that the wholly owned subsidiary in the market will not relate to the products of Modi Guard. It has apprehended that, as a result, the consumers may be persuaded to shift their purchase to the goods manufactured by the proposed wholly owned subsidiary directly impacting the business and goodwill of the petitioner. 260. In these foregoing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise of its power under clause 2.11 of the shareholders agreement to the prejudice of the petitioner. 263. In this behalf, the petitioner has drawn my attention to the letter dated 6th July, 2006 written by the respondent to the IDBI whereby the respondent communicated a formal offer of a proposal for preparing a scheme of rehabilitation of MRL pointing out that MRL owned 33,335,000 shares in the joint venture, GGL amounting to 21.2% of its share capital and the share holders agreement dated 23rd January, 1990. The respondent submitted that in order to assist the IDBI to put forth a scheme of rehabilitation, Guardian was prepared to provide meaningful liquidity to MRL by entering into only either of the two following arrangements: Guardian hereby offers to buy Modi Rubber's shares in GGL. We understand that ICICI Securities acting on behalf of the Financial Institutions, has recently valued these shares at ₹ 55 per share. In order to facilitate a transaction and eliminate the uncertainty of negotiations with us while you work on other elements of the scheme of rehabilitation, Guardian is prepared to pay ₹ 55 per share (approximately USS40M) and can close and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the above proceedings and needs to be heard with regard to its proposal. xxxx xxxx xxxx PRAYER i) implead the Applicant Guardian International Corp. as a necessary and interested Party in the above proceedings especially in view of its offer as stated in paragraph 7 of the instant application; ii) pass such other or further order as deem fit and proper in the facts and circumstances of this case. 265. This offer to purchase the shares held by the petitioner in GGL was also urged as a ground in support of its application before the Foreign Investment Promotion Board (FIPB). In the submissions filed by the respondent in July, 2006 before the FIPB, it expressed the apprehension that the petitioner would sell its shareholding to a third party without effectuating the pre- emptive right of the respondent to purchase the shares of the petitioner in GGL. 266. In this behalf the respondent stated that in para 21 of O.M.P. No. 337/2006 of the respondent at page 155 wherein it was stated thus: ...It further transpires that the inter se disputes between the promoters of the respondent company are also fuelled by their interest and intention to participate in GGL. It is in fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor was such an offer (to buy Guardian shares in GGL at ₹ 72.50 per share) ever made until the final day when arguments were addressed before this Hon'ble Court. Even then, no time limit was provided as to the payment to be made to Guardian in the unlikely even that the offer was acceptable to Guardian. It is submitted that Guardian is fully committed to its investments in GGL and is not a seller. This has been made clear even before the FIPB. 269. In a later portion of the submissions, the respondent has further submitted in para VI that 'for the first time during the course of arguments before this Hon'ble Court that MRL has made an offer to buy Guardian's shareholding in GGL. Guardian will respond to this offer shortly. Guardian has serious doubts about the financial capability of MRL to make the payment, given that is net worth is eroded.' The respondent had also stated that they harboured serious doubts about the financial capability of MRL to make the payment stating that its net worth is eroded. 270. After judgment was reserved in the matter on 12th November, 2006, the respondent filed I.A. No. 13512/2006 submitting that it had communicated accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement, to share both in profit and losses. 272. Undoubtedly, such an enterprise can best work in a situation of trust, confidence and comfort. Parties to joint ventures couch their bindings in stringent contractual convenience and complexities. The present case is an outcome of purportedly diminishing of confidence levels between two strong business partners; an example of one of the partners declaring complete loss of confidence even though admittedly the joint venture which they have undertaken is going stronger and there is not a single complaint against the other partner of mismanaging the affairs or disturbing the affairs is evident. So far as its contribution to the joint venture is concerned, both parties have placed strong reliance on the milestones achieved by GGL and its profitability and in fact, both parties are justifying their respective positions based on the financial health of the joint venture. 273. An important issue which has been drawn up in the present case relates to the manner in which the parties can effect termination of a joint venture. The complexities of the transactions appear to leave either party at the risk of opportunism by the other party. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised production and profits, it could be stated that this case is an instance of opportunism at its best inasmuch as there is no dispute as to manner of conduct of the business of the joint venture and the joint venture partner is being abandoned after deriving commercial profits from the project while relying on the very agreement which the petitioner claims to rely upon. 277. At this stage, it becomes necessary to notice the several factors which indicate that even after 21st July, 2006, the respondent has treated the SHA to be subsisting and that its intent to set up the wholly owned subsidiary did not commence from its action in terminating the SHA. The intention of the respondent to set up a wholly owned subsidiary without the participation of the petitioner, did not commence from issuance of a letter of termination dated 21st July, 2006 but is evident from the letter dated 17th July, 2006 whereby it attempted to obtain the consent of Gujarat Alkalis and Chemicals Limited to so set up a wholly owned subsidiary. The respondent has sought written consent of the petitioner to allow it to establish the wholly owned subsidiary by the letter of 21st July, 2006 in the first phase a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a triable case or that interest of justice and equity are not in its favor. The petitioner is likely to be suffered irreparable loss and damage. The relief to which the petitioner would be entitled is preservative so as to preserve the subject matter of the dispute. The respondent has relied upon several covenants of the very agreement which it claims to have terminated and has sought adjudication upon the validity of the termination before the arbitrators. Pending such determination, the respondent cannot be permitted to proceed to conduct business which would amount to a breach of Clause 14 of the SHA whereby it is prohibited from conducting any business similar to that of the joint venture. The submissions made by the respondent in is No. 13512/2006 have been taken on record and considered. The prayer made therein, Therefore, stands satisfied. I, accordingly, allow OMP No. 477/2006 to the extent of prayers (a) and (b) and restrain the respondents, its affiliates or associates from participating, negotiating, engaging in or being financially interested, directly or indirectly in any other project for the manufacturing of Float Glass, or for the fabrication of products made fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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