Maharashtra Power Development … vs Dabhol Power Co. And Ors. on 2 September, 2003

JUDGMENT

D.G. Karnik, J.

1. Both the appeals are directed against an order dated April 2, 2003, on Company Petition No. 45 of 2002 passed by the Principal Bench of the Company Law Board, since reported in Maharashtra Power Development Corporation Ltd. v. Dabhol Power Company [2003] 117 Comp Cas 467. Appeal (Lodging) No. 4 of 2003 is filed by the original petitioner while Appeal (Lodging) No. 6 of 2003 is filed by the original respondents Nos. 2, 3, 4 and 5 before the Company Law Board. For the sake of convenience, the original petitioner is hereinafter referred as “the appellant” and original respondents are referred to by their respective numbers before the Company Law Board. Respondent No. 1 is a company incorporated and registered under the Companies Act, 1956. Respondent No. 2 is a director of respondent No. 1-company. Respondent No. 3 was also a director of respondent No. 1 till he resigned on June 4, 2002, and was replaced by respondent No. 4. Respondent No. 5 purports to be the managing director/manager special affairs of respondent No. 1. Respondents Nos. 6 to 9 are the directors purportedly appointed by Enron Mauritius Company and respondents Nos. 10 and 11 are the directors nominated by the IDBI and the ICICI, respectively.

Basic facts :

2. The Dabhol Power Company, respondent No. 1 herein, was incorporated on April 9, 1993, as a private company with unlimited liability under the provisions of the Companies Act, 1956 (for short “the Act”). Respondent No. 1 was promoted by Enron Development Corporation, a company incorporated in the State of Delaware, USA. General Electric Company, a company incorporated in the State of New York, USA and Bechtel Enterprises, Inc., a company incorporated in the State of Delaware, USA. Respondent No. 1 became a deemed public company with effect from October 31, 1998, under Section 43A(1) of the Act and was reconverted to a private company under Section 43A(2A) of the Act with effect from February 9, 2001. Respondent No. 1 originally had three shareholders, viz., (i) Enron Mauritius Company (for short “EMC”), a special purpose vehicle of Enron Development Corporation holding 80 per cent. of the equity share capital of respondent No. 1 ; (ii) Capital India Power Mauritius (for short “CIPM”), a special purpose vehicle of General Electric Company (GE) holding 10 per cent. of the equity capital of respondent No. 1 and (iii) Energy Enterprises Mauritius Company (for short “EEMC”), a special purpose vehicle of Bechtel Enterprises Inc. holding 10 per cent. equity share capital of respondent No. 1.

3. The appellant, Maharashtra Power Development Corporation Ltd. is a public limited company incorporated on December 4, 1997, under the Act and its 100 per cent. share capital is held by Maharashtra State Electricity Board (for short “MSEB”) which in turn is controlled by the Government of Maharashtra. The appellant was formed as a special purpose vehicle of the MSEB/Government of Maharashtra which had then decided to acquire some equity in the share capital of respondent No. 1. In or about December, 1998, the appellant purchased 30 per cent. of the equity share capital in respondent No. 1 from EMC. Respondent No. 1 issued phase II equity shares in January, 2002, or thereabout. The appellant did not contribute any additional share capital and after the phase II issue of shares. EMC holds 65.85 per cent. equity and the appellant holds 14.15 per cent. equity share capital of respondent No. 1. EEMC and CIPM continue to hold 10 per cent. equity in the equity share capital of respondent No. 1.

4. Under the articles of association, the board of directors (for short “the board”) of respondent No. 1 is to consist of a minimum of three and a maximum of thirteen directors. Each of the shareholders holding 10 per cent. of the voting power is entitled to nominate one candidate for the election as a director in respect of each 10 per cent. of the total voting power, so that ten shareholder directors in the aggregate would be in office.

5. At or about the time of its incorporation the promoters of respondent No. 1 had agreed to certain arrangements regarding the management, voting power, share ownership and transfer of shares. The terms which were agreed between the promoters were included in the memorandum and articles of association of respondent No. 1. On December 20, 1994, i.e., soon after the incorporation, a “shareholder agreement” was executed between EMC, CIPM and EEMC and respondent No. 1. It may be noted that the appellant was not a promoter and consequently was not a party to the shareholders agreement, nay, the appellant was not even incorporated when the shareholders’ agreement was signed.

6. Since the time the appellant became a shareholder, respondent No. 1 had 11 directors on its board, out of which ten were the shareholder directors and one was nominated by the Industrial Development Bank of India (for short “IDBI”) who was one of the lenders. Out of the ten shareholder directors, EMC which held 50 per cent. of phase I equity had nominated five, the appellant which held 30 per cent. of the phase I equity had nominated three and CIPM and EEMC who held 10 per cent. of phase I equity had nominated one director each. In or about September, 2001, the Industrial Credit and Investment Corporation of India (for short “ICICI”), another lender, nominated one more director and thus on and from September, 2001, respondent No. 1 had a board of 12 directors. Respondent No. 1 held its eighth annual general meeting on September 26, 2001. It was the last annual general meeting of the company which was held without any disputes.

7. Respondent No. 1 is a power utility company with the main objects of : carrying on business of producers, generators, suppliers, distributors, transformers, transmitters, developers, storers and dealers in electricity and any by-products derived from this business as also dealing in hydro-carbons, fuel handling equipment and machinery. Respondent No. 1 has set up a plant for generation of electric power at Dabhol in the State of Maharashtra. The first phase of the plant became operational and respondent No. 1 started supplying power to the MSEB under an independent “Power purchase agreement” (hereinafter referred to as the “PPA”). A copy of the PPA has not been filed on record but it appears that this PPA has become the focal point of disputes between the parties. According to learned counsel for the respondents, the MSEB who had agreed to purchase power from respondent No. 1 and pay for it did not make the payment for the power purchased in accordance with the terms and conditions of the PPA, with the result, respondent No. 1 was unable to repay the loan instalments to the various financial institutions as also to the suppliers, contractors and providers of various services and utilities. Respondent No. 1 has initiated arbitration proceedings in London against the MSEB and the Government of Maharashtra for recovery of damages and a host of other claims for breach of the PPA. Learned counsel for the respondents submitted that the appellant, the MSEB and the Government of Maharashtra have taken several steps to thwart the arbitration proceedings and the present proceedings are also aimed at that end.

8. In or about December, 2001, Enron Corporation, USA filed a petition for bankruptcy protection under the laws of the USA. Though several subsidiaries of Enron Corporation were included respondent No. 1 was excluded from the said proceedings.

9. In or about January, 2002, the equity holding of the appellant in respondent No. 1-company was reduced from 30 per cent. to 14.15 per cent. after issue of phase II equity capital to EMC, CIPM and EEMC. Consequently, the appellant withdrew two out of the three directors from the board of respondent No. 1 and from February, 2002, Mr. Ravi Budhiraja was the sole nominee of the appellant on the board of respondent No. 1. Around that time, respondent No. 1 was unable to pay its lenders, creditors, suppliers and contractors. Disputes had also arisen between respondent No. 1 and the MSEB regarding the PPA, the computation and payment of the charges for the power purchased. Respondent No. 1 was in financial crisis and around January, 2002, it terminated the services of most of its employees and appointed 18 individuals as core team of consultants to take care of the corporate business and legal matters. In the meanwhile, the IDBI filed a suit in the High Court of Judicature at Bombay and took out a motion for appointment of a receiver. By an order dated March 21, 2002, the High Court appointed the court receiver as the receiver of the various assets of respondent No. 1. On or about April 2, 2002, the court receiver took charge of the various assets of respondent No. 1. On March 28, 2002, Mr. Mohan Gurunath resigned as the managing director and on March 29, 2002, six other nominee directors appointed by EMC resigned as directors of respondent No. 1. On or about April 5, 2002, the two nominee directors appointed by the IDBI and the ICICI also resigned from the board of respondent No. 1. Therefore, on and from April 5, 2002, respondent No. 1 had only three directors, viz., Mr. Donald Stummer, respondent No. 2 herein, Mr. Richard Allison, respondent No. 3 herein and Mr. Ravi Buddhiraja, the nominee of the appellant. On May 2, 2002. Mr. Ravi Buddhiraja also resigned and so respondent No. 1 was left with only two directors after May 2, 2002.

10. As per its articles of association, respondent No. 1 has to have a minimum of three and a maximum of 13 directors. Coram for the meeting of the board is three. Since May 2, 2002, respondent No. 1-company was left with only two directors. Respondent No. 1 therefore, was unable to hold any board meeting to manage its affairs. Something had to be done immediately. An application was filed before the Arbitral Tribunal in London by the MSEB/Government of Maharashtra praying for dismissal of the claims made by respondent No. 1 and closure of the arbitration proceedings alleging that respondent No. 1 was not pursuing the arbitration proceedings diligently and had not filed detailed submissions of claim though directed by the Arbitral Tribunal. Learned counsel for the respondents say that Mr. Ravi Buddhiraja resigned from the board to create an impasse so that respondent No. 1 would not be able to act without there being a board of minimum three directors and that respondent No. 1 would not be able to instruct its attorneys and pursue the arbitration proceedings. According to learned counsel, the appellant was acting contrary to the interest of respondent No. 1 and all further actions were taken by the appellant only for thwarting the arbitration proceedings.

11. A meeting of the board of respondent No. 1 was held on June 4, 2002, at San Francisco, USA with only two directors, viz., respondents Nos. 2 and 3 present. In that meeting, in response to the request from CIPM, its nominee Mr. Allison was replaced by Mr. Kevin Walsh, respondent No. 4. In addition Mr. Peter C. Freeman was appointed as a director to hold office till the next annual general meeting. The meeting continued thereafter with Mr. Freeman present thereat. In that meeting, various other decisions were taken. A notice of the meeting of the board held on June 4, 2002, was not served on the appellant. According to learned counsel for the appellant, the meeting on June 4, 2002, was held surreptitiously without notice to the appellant and decisions taken therein were not conveyed to the appellant. On or about June 18, 2002, the appellant came to know of the replacement of respondent No. 3 by respondent No. 4 as a director nominated by CIPM and the purported appointment of respondent No. 5 as a director of respondent No. 1. After exchange of some correspondence the appellant filed a petition bearing Company Petition No. 45 of 2002 under Section 397 of the Act before the Company Law Board (for short “CLB”) from the order in which the present appeal arises. In the company petition, the appellant, inter alia, alleged that the meeting of the board of respondent No. 1 held on June 4, 2002, and the appointment of respondent No. 4 as a director made thereat was illegal, oppressive and unfairly prejudicial to the rights of the appellant as a shareholder and against public interest.

12. Initially, Company Petition No. 45 of 2002 was filed on July 23, 2002, challenging only the legality and validity of the board meeting dated June 4, 2002, and the decisions taken thereat, as illegal and oppressive. On August 2, 2002, Mr. Sibal, learned counsel appearing for the respondents, submitted before the CLB that since the board of respondent No. 1 had only two directors left in office after resignation of Mr. Buddhiraja on May 2, 2002, Mr. Freeman was appointed as a director to ensure that there was a quorum at board meetings. He further submitted that if the appellant was willing to appoint its own nominee on the board. Mr. Freeman could be relieved as a director, as there would be a quorum of board meetings with the appointment of a nominee director by the appellant. On request of learned counsel for the appellant, who sought time for instructions, the petition was adjourned. In the next hearing, on August 22, 2002, the appellant declined the offer to appoint a nominee director on the board of respondent No. 1. The Company Law Board thereafter passed an order directing that the general body meeting of respondent No. 1 be convened on September 9, 2002, to elect the directors. Mr. Sibal states that this order was passed by consent of the parties though such consent was not recorded in the order. Despite this, the appellant filed an appeal (bearing Lodging No. 711 of 2002) before this court challenging the order of the CLB directing holding of the general meeting on September 9, 2002. By an order dated September 9, 2002, a learned single judge of this court allowed the general meeting to go on with certain directions. Accordingly, the general meeting was held on September 9, 2002, under the chairmanship of Sri C. R. Mehta, former Member of the Company Law Board. In that meeting, EMC though entitled to propose six nominees in its own right by virtue of 65.85 per cent. of the equity share capital held did not propose nomination of any director. Two other shareholders, viz., EEMC and CIPM nominated Mr. Stummer and Mr. Walsh and they were elected. The IDBI nominated Mr. G. M. Rammurthy (respondent No. 10 herein) who was also elected. On September 11, 2002, the appellant filed an appeal before a Division Bench of this court challenging the order of the CLB and the learned single judge. While the appeal was pending before the Division Bench, by a letter dated October 8, 2002, EMC conveyed nomination of four persons for appointment as directors on the board of respondent No. 1. An issue regarding the said nomination was also sought to be agitated before the Division Bench. By an order dated October 30, 2002, the Division Bench permitted the appellant to amend the petition before the CLB to include all the issues including the events subsequent to the filing of the petition and requested the CLB to endeavour to dispose of the petition within a period of eight weeks. The petition was heard by the CLB on February 17 and 18, 2003. By an order dated April 2, 2003, the CLB disposed of the petition and that order is challenged in these appeals.

Preliminary objection about the maintainability of the appeal :

13. Mr. Dwarkadas, learned counsel for respondent No. 1 submitted that whether the acts complained of by the appellant were oppressive or not was essentially a question of facts. Almost all the findings recorded by the CLB were findings of fact. All issues raised as questions of law in paragraph No. 4 of the appeal memo in Appeal No. 4 of 2003 were questions of fact and not questions of law. An appeal lies only on questions of law under Section 10F of the Act which reads as under :

“10F. Any person aggrieved by any decision or order of the Company Law Board may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order :”

(Proviso not included)

14. Mr. Dwarkadas relied on the judgment of the Division Bench of this court in Minoo H. Mody v. Hemant D. Vakil, , in support of the contention that an appeal under Section 10F lies only on questions of law and not on questions of facts. Mr. Dwarkadas is right in his submission that an appeal under Section 10F of the Act is maintainable only on questions of law and not on questions of facts. However, it cannot be said that the impugned decision of the Company Law Board involves only questions of facts. As would be seen from the further discussion, that appeal involves questions of interpretation of the articles of association and in particular Article No. 10 and its various sub-clauses. In Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., , the Supreme Court has held that the question of interpretation of a document is a question of law. The appeal also involves several other questions of law. The appeal cannot therefore, be dismissed at the threshold, though the findings which are pure findings of facts, cannot be assailed in the appeal.

Whether an action which is illegal or irregular is per se oppressive ?

15. Mr. Andhyarujina, learned counsel for the appellant contended that convening and holding of the meeting of the board of respondent No. 1 on June 4, 2002, as also all decisions taken therein were illegal, contrary to the provisions of the articles of association and the shareholders’ agreement and in any event were grossly irregular against public interest and oppressive. Mr. Sibal, Mr. Doctor and Mr. Dwarkadas, learned counsel for the respondents countered this submission and contended that there was no irregularity, no breach of the articles of association, no breach of the shareholders’ agreement much less there being any illegality. They further submitted that assuming that there was any breach of any provision of the articles of association or any provision of law, every breach, irregularity or even an illegality cannot be termed as oppressive or against public interest. In my opinion, a distinction must be made between an act which is illegal or irregular and an act which is oppressive of some group of shareholders. An act or action may be perfectly legal and yet be oppressive and conversely an irregular and even an illegal act may not be oppressive of any shareholders. For example, declaring of a dividend without there being adequate profits and out of the capital is illegal but may not be oppressive of any shareholders. There can be numerous illustrations of an acts which are contrary to law being done bona fide for the benefit of the company and its members in general.

16. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. , the Supreme Court (in para. No. 49) quoted a passage from the judgment of Bhagwati J. in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. to the effect (page 780 of 51 Comp Cas) :

“A resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company.”

17. The Supreme Court then held (page 780) :

“Neither the judgment of Bhagwati J. nor the observation in Elder [1952] SC 49, are capable of the construction that every illegality is per se oppressive or that illegality of an action does not bear upon its oppressiveness.”

18. It can therefore, be safely held that an irregular or illegal action is not per se oppressive but the illegality of an action may have a bearing upon its oppressiveness.

Acts of oppression :

19. Mr. Andhyarujina, learned counsel for the appellant submitted that the actions of the majority of the shareholders, viz., EMC CIPM and EEMC were illegal and oppressive of the minority and against the public interest. The actions complained of are divided in three sets of events, viz., (i) the meeting of the board of directors held on June 4, 2002, and decisions taken thereat; (ii) the conduct of the shareholders at the general meeting held on September 9, 2002, in pursuance of the directions of the CLB and this court; (iii) the subsequent conduct of EMC in nominating four nominees for directorship on the board of respondent No. 1 under a letter dated October 8, 2002. Before I consider these actions it is necessary to deal with the preliminary objections raised by the respondents about the maintainability of the petition before the CLB.

Preliminary objections regarding the maintainability of the petition under Section 397 of the Act:

20. Sri Sibal submitted that there were four requirements for maintainability of a petition under Section397 of the Act, viz., (i) The petitioner must prove continuous acts of oppression ; a single act, howsoever oppressive cannot be cause for filing of the petition; (ii) The acts of oppression must continue up to the date of filing of the petition; a fortiori actions subsequent to the petition cannot be taken into consideration ; (iii) The oppression must be of minority shareholders by majority shareholders ; (iv) The petitioner must prove that facts exist which would justify winding up of the company on the ground that it would be just and equitable to do so but in the facts and circumstances, to wind up the company would unfairly prejudice the petitioner. All these grounds mentioned above, submitted Mr. Sibal, were cumulative. As the petitioner had not made out any and all of the grounds the petition was not maintainable. I would presently consider the preliminary objections raised by Mr. Sibal.

(i) Whether a petition under Section 397 can be filed on account of single act of oppression ?

21. Mr. Sibal relied on the decision of the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. in support of the proposition that a petition under Section 397 of the Companies Act cannot be filed alleging a single act of oppression. In paragraph No. 49 of the judgment, the Supreme Court observed (page 780) :

“The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed.”

22. In Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235, B. N. Kirpal J. of the Delhi High Court (as his Lordships then was) following the decision of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. quoted (page 242 of 54 Comp Cas): “there must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members.” It is ordinarily correct to say that a single act of oppression would not give rise to a cause of action for filing of a petition under Section 397 of the Companies Act. However, this is not a rule of law, but a rule of prudence evolved by the courts to prevent a frivolous litigation so that a dissatisfied group of shareholders does not obstruct the regular working of the company at the hands of majority of the shareholders by complaining of any trivial act of oppression by filing a petition under Section 397 of the Act. If the effects of the single act which is burdensome, wrongful and oppressive are of continuing nature, and the member concerned is deprived of a right and privileges for all time to come in future, then the petition under Section 397 of the Act can be filed even in respect of a single act. In Tea Brokers Pvt. Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp LJ 463, 521, a Division Bench of the Calcutta High Court observed (at para. 46) :

“This is undoubtedly, a right and privilege which a member enjoys in his capacity as a member of the company. It will ordinarily be an act of oppression on the member if he is deprived of his privilege and right. Such an act will undoubtedly be harsh, burdensome and wrongful and will necessarily be an act of oppression to the member concerned. Such an act may be even a single act done on one particular occasion, if the effect of such an act will be of a continuing nature and the member concerned is deprived of his rights and privileges for all time to come in future.”

23. In Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., also it was held that a petition under Section 397 would be maintainable even if the oppression was of a short duration and of a singular conduct if its effects persisted indefinitely. I respectfully agree with the view expressed in the aforesaid judgment. In any event, in the present case, at least three events, viz., the board meeting dated June 4, 2002, the general meeting dated September 9, 2002, and nomination of four directors by a letter dated October 8, 2002, are alleged to be oppressive and they constitute a series of acts and hence the petition cannot be dismissed on this ground.

(ii) Whether subsequent events could be considered ?

24. The petition as originally filed on July 23, 2002, made grievance only in respect of a single act, viz., meeting of the directors held on June 4, 2002, and the decisions taken thereat. Since the act was a single act, Mr. Sibal submitted, the petition could not have been filed under Section 397 of the Act. The petition was subsequently amended and further actions, viz., the decisions taken at the general meeting on September 9, 2002, and further nomination of four directors made by EMC by a letter dated October 8, 2002, were also challenged as oppressive acts. It was alleged that all these actions were part of the series of acts designed to oppress the appellant. Mr. Sibal however, submitted that events subsequent to the filing of the petition cannot be taken into consideration. He relied on the observations of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. . In that case, the Supreme Court observed (page 377) :

“In this connection reliance is placed on certain matters which transpired after the application was filed on September 14, 1960. These matters however cannot be taken into account for the application has to be decided on the basis of the facts as they were when the application was made.”

25. As subsequent events cannot be taken into consideration. Mr. Sibal submitted, the amendment should not have been allowed and the subsequent events introduced by means of ah amendment should have been ignored by the CLB. I am unable to agree for the reasons mentioned below.

26. By an order dated October 30, 2002, the Division Bench of this court permitted the appellant to amend the petition before the CLB to challenge the general meeting dated September 9, 2002, and the decisions taken thereat. The appellant was thus allowed to include events subsequent to the filing of the petition. This order of the Division Bench is binding on the parties as on me and the CLB. The CLB has, therefore, rightly considered the events added in the petition by way of an amendment.

27. The matter can be looked at from another angle. The petition which was originally filed on July 23, 2002, was amended in November, 2002, in pursuance of an order of the Division Bench of this court dated October 30, 2002. While it is true that normally the amendment relates back to the date of the institution of the proceedings, in some cases it is possible to hold that the petition is deemed to have been instituted, at least as regards the grounds added by an amendment, on the date when the amendment was made. If so construed, the petition would be deemed to be instituted qua the amended grounds on the date on which the amendment was carried out and the CLB would be entitled to take into consideration the events up to the date of the amendment of the petition. This would avoid multiplicity of litigation, for if the CLB was not to take into consideration the events subsequent to the filing of the original petition and if subsequent events have happened which are oppressive then the petitioner could always file a second petition in respect of the subsequent events giving rise to multiple proceedings. The courts strive to avoid multiplicity of litigation. This course of treating a proceeding to be instituted qua the amended grounds on the date of the amendment, to avoid multiplicity of litigation, was adopted by the Supreme Court in the case of B. Banerjee v. Smt. Anita Pan . In that case, the court was required to consider whether the amendment in the West Bengal Premises Tenancy Act, 1956, made in the year 1969, retrospectively prohibiting the new landlord who had purchased the premises, from filing of a suit on the ground that the premises were required for the purpose of building or rebuilding, or were required for his own use and occupation, for a period of three years from the date of the purchase of the premises was valid and was applicable to the pending suits and appeals. The Division Bench of the High Court had upheld the amendment but struck down the retrospective effect and its applicability to the pending suits and proceedings. On appeal to the Supreme Court, Krishna Iyer J., speaking for the majority observed at paragraph No. 28 (page 182) :

“We are satisfied that as far as possible courts must avoid multiplicity of litigation. Any interpretation of a statute which will obviate purposeless proliferation of litigation, without whittling down the effectiveness of the protection for the parties sought to be helped by the legislation, should be preferred to any literal, pedantic, legalistic or technically correct alternative. On this footing we are prepared to interpret Section 13 of the Amendment Act and give effect to Section 4 of that Act. How do we work it out ? We do it by directing the plaintiffs in the two cases to file fresh pleadings setting out their grounds under Clauses (f) and/or (ff) of Sub-section (1) if they so wish. On such pleading being filed we may legitimately hold that the transferee-landlord institutes his suit on grounds mentioned in Clause (f) or (ff) of Sub-section (1) on that date.”

28. It is possible for the court to avoid multiplicity of proceedings, by holding that the proceedings (i.e., the petition under Section 397) on the amended grounds of oppression were instituted on the date on which the amendment was allowed. So construed, the court would be entitled to take into consideration the oppressive actions up to the date of the amendment and avoid multiplicity of litigation.

(iii) Whether it is necessary that oppression must be of minority shareholders by majority shareholders ?

29. Mr. Sibal also referred to the decisions in Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi) at (pages 242, 243); Hungerford Investment Trust Ltd. v. Turner Morrison and Co. Ltd. [1972] 1 ILR Cal 286 at (pages Nos. 307, 313, 314, 416 and 419) ; Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal) at (pages Nos. 212 to 214) to contend that a petition under Section 397 of the Act can be filed only where the actions complained of are oppressive of the minority. Mr. Sibal further submitted that a petition under Section 397 would be maintainable if any only if, apart from other requirements like there being a justification for winding up of a company, the actions complained of are oppressive of some group of shareholders or against public interest. Merely because certain acts or actions are irregular or are even illegal, a petition under Section 397 would not lie. The ordinary remedy by way of a suit under Section 9 of the Code of Civil Procedure, 1908, for a declaration that any acts or actions are illegal is always available to the aggrieved shareholders. Section 397 is a special remedy available for special purposes and that too, not to all but in the case of a company having a share capital, only to those members who constitute 10 per cent. of the total number of members or 100 whichever is less, or who hold 10 per cent. or more of the voting power and who complain of an oppression.

30. Mr. Sibal submitted that barring the action of appointment of four directors made by EMC by a letter dated October 8, 2002, there is not even an allegation in the petition of any oppressive actions by EMC who is a majority shareholder holding 65.85 per cent. equity. Under the articles of association, EMC was entitled to appoint six directors in its own right by virtue of its holding of more than 60 per cent. of the equity share capital and nomination of the four persons as directors by it as per the articles of association cannot be regarded as an act of oppression. It was not even alleged in the petition that the said four nominees had performed any further acts or taken any actions which were oppressive. Mere nomination of four directors by EMC in exercise of its right under Article 10 of the articles of association cannot be construed as oppressive. If the act of appointment of four directors by EMC is held to be not oppressive and excluded for the purpose of this petition, then the allegations of oppression would be only against CIPM and EEMC each who themselves were minority shareholders, holding only 10 per cent. equity each. Mr. Sibal submitted that the oppressive acts giving rise to a petition under Section 397 of the Act must be acts of oppression by majority shareholders against minority shareholders. There can be no oppression of one group of minority shareholders by another group of minority shareholders nor can there be an oppression of majority shareholders by minority shareholders. In support of this proposition, Mr. Sibal relied upon the decision of the Supreme Court in Shanti Prasad Jain’s case and the decision of the Delhi High Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235.

31. In Kalinga Tubes’ case the Supreme Court observed (at page 366 of Comp Cas) :

“It must further be shown that the conduct of majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company’s affairs, and such oppression must involve at least an element of lack probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”

32. It is true that at first blush, these observations seem to show that the oppression must be of minority shareholders by majority shareholders. In that case, the allegation was of an oppression of minority shareholders by a group of majority shareholders and therefore, the court was considering what constitutes the oppression of minority shareholders by majority shareholders. The court was not called upon to consider and decide the precise issue which arises in this case, viz., whether there can be oppression of one group of minority shareholders by another group of minority shareholders ? The observations that the conduct of majority shareholders must be oppressive of minority shareholders were only made in the context of allegation of oppression of minority shareholders by majority shareholders and are neither the ratio nor even the obiter but are of facts alleged in that case.

33. In reply, Mr. Seervai referred to the judgment of the Supreme Court in Needle Industries Ltd.’s case and stated that in that case the petition under Section 397 of the Act was filed by a holding company, which obviously was a majority shareholder, complaining of actions by minority shareholders as oppressive. He specifically invited my attention to the following observations made in paragraph No. 40 of the judgment (page 773) :

“It is necessary to refer briefly to the relevant part of the pleadings before examining the charge of oppression made by the holding company against a group of the minority shareholders of the NIIL.”

34. He then submitted that the Supreme Court specifically considered the charge of oppression made by a majority shareholder against minority shareholders and did not dismiss the petition at the threshold on the ground that the petition under Section 397 of the Act could be filed only for an oppression of minority shareholders by majority shareholders. The fact that the petition was ultimately dismissed on the merits was immaterial and what was material was that the Supreme Court did not dismiss the petition on the ground that majority shareholders cannot complain of an oppression at the hands of minority shareholders.

35. Mr. Seervai also referred to and relied upon a judgment of a single judge of the Calcutta High Court in Hungerford Investment Trust Ltd.’s case [1972] 1 ILR Cal 286. In paragraph 57 of the judgment it was observed :

“A Division Bench of this court in Ramashankar Prosad v. Sindri Iron Foundry Ltd., also discussed this aspect of the case and noticed the difference between English law and the Indian law on the point and came to the conclusion that an application for relief under Section 397 even by a majority of shareholders was maintainable.”

36. Mr. Seervai also referred to and relied upon another judgment of the Calcutta High Court in Tea Brokers Pvt. Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp LJ 463. In paragraphs Nos. 44 to 46 of the said judgment, a Division Bench of the Calcutta High Court has held that if a member who holds majority of the shares in the company was reduced to the position of minority in the company by a mala fide act of the company or by its board such an act could be considered to be an act of oppression of the said member. The petition was held to be maintainable by such a majority shareholder.

37. On principle also, there seems to be no support for the proposition that the petition under Section 397 of the Act can be filed only by minority shareholders who complain of oppression by the majority. Section 397 begins with the words : “Any members of the company who complain …” indicating no requirement that the members who complain must be minority shareholders. The qualification of the members who can apply under Section 397 and/or 398 of the Act is prescribed in Section 399 of the Act. Section 399 lays down that in the case of a company having a share capital, not less than 100 members of the company or not less than l/10th of the total number of its members, whichever is less, or any member or members holding not less than l/10th of the issued share capital of the company, are entitled to file a petition under Section 397 or 398. Thus, Section 399 of the Act requires a certain minimum number of members or members holding certain minimum voting power to file a petition. Section 399 of the Act does not put a cap on the maximum number of members or the maximum voting power of the members. A restriction which is not imposed by the Legislature upon the right of members to file a petition under Section 397 or 398 of the Act cannot be introduced artificially by judicial interpretation. If a new right is created or conferred by a statute and the remedy for enforcement of the right is also provided therein, then the remedy can be enforced in the manner provided in the statute and no artificial restriction on the enforcement of that right in that manner can be imposed by judicial interpretation unless such restriction can be found expressly or by necessary implication in the statute itself. In today’s commercial world, it is possible that even a minority shareholder can cause oppression of the majority. In fact, Mr. Sibal himself in the latter part of his argument submitted that the appellant who is a minority shareholder is by oblique methods causing an oppression of majority shareholders by preventing respondent No. 1-company from lawfully pursuing arbitration proceedings lawfully instituted by it. The said allegation, if correct, itself would be an act of oppression of the majority shareholders by minority shareholders. It cannot be said that if minority shareholders are oppressed by majority shareholders, the oppressed would have the special remedy, but if minority shareholder oppresses majority shareholder, the oppressed would not have the special remedy provided under Section 397 of the Act. I am therefore, of the opinion that a petition under Section 397 of the Act is maintainable by members who complain of the oppression even if they do not form the minority shareholders or the oppressors are not the majority shareholders. The only restriction on the members who can file the petition is to be found in Section 399 of the Act.

(iv) Whether facts exist which would justify the winding up of respondent No. 1-company on the “just and equitable” ground, but the order of winding up would unfairly prejudice the appellant ?

38. It is necessary for the appellant to allege and prove that facts exist which would justify the winding up of respondent No. 1 on the ground that it is just and equitable to do so but under the circumstances, it would unfairly prejudice the appellant to pass an order for winding up. Mr. Sibal pointed out that in the petition as originally filed, there were no averments at all which, if proved, would justify that respondent No. 1 should be wound up on the ground that it was “just and equitable” to do so. Even in the amended petition, there is no material in the body of the petition about existence of facts which would justify winding up of respondent No. 1, except only a prayer c(i) which reads as under :

“That this hon’ble court be pleased to consider whether it is just and equitable that the company be wound up or whether any provisions be made with regard to the conduct of the affairs of the company in future.”

39. Apart from the prayer to consider whether it would be just and equitable that respondent No. 1 should be wound up, there are no pleadings to show why it would be just and equitable to wind up respondent No. 1. Further, it is not enough for the appellant to make out a case for winding up of respondent No. 1 on the ground that it is just and equitable to do so but the appellant should prove that passing of the winding up order would unfairly prejudice it. This is the bare requirement under clause (b) of Sub-section (2) of Section 397 of the Act. Nowhere in the petition, is it averred as to how the appellant would be prejudiced if an order for winding up of respondent No. 1 is to be passed on the ground that it is just and equitable to do so.

40. Sri Andhyarujina submitted that for the purpose of considering whether it is just and equitable be wind up respondent No. 1. It is necessary to consider the nature of the company. It is necessary to pierce the corporate veil and to look to the real nature of the company. If the corporate veil was pierced, respondent No. 1 was a quasi-partnership. Respondent No. 1 has only four shareholders. They had entered into a shareholders agreement and had agreed to carry out business in accordance with the shareholders agreement. Things which were a ground for dissolution of a partnership would also be a ground for winding up of respondent No. 1 ; it would not be necessary to prove a complete deadlock in the management of respondent No. 1 to invoke the principle of “just and equitable” for winding up of respondent No. 1, In support, Mr. Andhyarujina relied upon the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd, [1973] AC 360. In Ebrahimi’s case, the House of Lords allowed winding up of the company holding that a limited company was more than a legal entity with a personality in law of its own but, there was a room in the company law for recognition of the fact that behind it, or amongst it, there were individuals with rights, expectations and obligations inter se which were not necessarily submerged in the company structure ; equity always enabled the court to subject the exercise of legal rights to equitable considerations. The superimposition of equitable considerations requires something more, which typically may include one or more of the following elements : (i) an association formed or continued on the basis of personal relationship involving mutual confidence; this element would often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement or understanding, that all or some (for there may be sleeping members) of the shareholders shall participate in the conduct of business; (iii) a restriction on transfer of the members interest in the company–so that even where the confidence is lost a member cannot take out his share and go elsewhere. After having found that Mr. Ebrahimi was excluded from the management of the company the House of Lords allowed the petition for winding up. The decision of the House of Lords in Ebrahimi’s case [1973] AC 360 was considered by the Supreme Court in Hind Overseas P. ltd. v. Raghunath Prasad Jhunjhunwalla . In paragraph No. 19 of the judgment, the Supreme Court noted the distinguishing features in Ebrahimi’s case [1973] AC 360 (HL) including; (i) there was a prior partnership between two members who later on formed a company ; (ii) shareholders were directors sharing profits equally as remuneration and no dividends were declared ; (iii) one of the shareholders acquired shares from his father and from the second shareholder Ebrahimi and joined the company as a third shareholder director; (iv) after that, there was a complete ouster of Ebrahimi from the management by the votes of other two directors, father and son; (v) although Ebrahimi was a partner, Nazar had made it perfectly clear that he did not regard Ebrahimi as a partner but regarded him as an employee in repudiation of Ebrahimi’s status as well as relationship ; (vi) Ebrahimi on ceasing to be a director, lost his right to share in the profits as director’s remuneration retaining only the chance of receiving dividends as a minority shareholder. After noticing the peculiar features in Ebrahimi’s case [1973] AC 360 (HL), the Supreme Court held that following the principles in Ebrahimi’s case generally in all cases could create problems and difficulties, the Supreme Court observed in paragraph No. 32 of its judgment (page 104 of 46 Comp Cas) :

“In a given case, the principles of dissolution of a partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil, it is found that in reality, it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company.”

41. In the present case also, I am not inclined to hold that respondent No. 1 in reality is a quasi-partnership and that equitable considerations exist which would justify pressing of an order for winding up.

42. Sometimes a small family business or partnership business is converted and incorporated into a company in order to have the advantages of a limited liability. I am conscious that it is not always necessary that there should be a pre-existing family business or partnership for applying the principle of quasi-partnership to a company but, the pre-existence of a partnership or family business is certainly a factor which would to be taken into consideration while considering the real nature of the company. Secondly, in a company which is quasi-partnership, the business is usually a small business at least in the beginning, though it may grow in the course of time. Thirdly, the members of the company are usually few in number with restrictions on their right to transfer the shares as in the case of a partnership a partner cannot transfer his right and share in the partnership to a stranger. In the present case, there was no pre-existing business. The business by no means was small nor was it intended to be small; it was of generation of hundreds of 700 mega watts of power involving investment of thousands of crores of rupees. Though the members were few and initially only three, they were all multinational corporations. Enron before its fall, was a “Fortune 500” company. G. E. and Bechtel continue to be “Fortune 500” companies. The normal reason why a partnership firm is converted into an incorporated company, viz., to avail of the benefits of limited liability was absent as respondent No. 1 was incorporated with unlimited liability of members. The appellant who is the subsidiary of the MSEB–an arm of the Government of Maharashtra–was not a promoter shareholder and was not a party to the shareholders agreement. It is only after several years of incorporation that the appellant became a shareholder by purchasing 30 per cent. of the equity from the EMC. The appellant did not join respondent No. 1 as a quasi-partner but joined it as a purchaser of part of the equity from an existing shareholder. In Kilpest Pvt. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615, the Supreme Court laid down that the submission that the limited company should be treated as a partnership should not be readily accepted. At page 622 of the report, the Supreme Court observed :

“The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that the limited company should be treated as a quasi-partnership, should therefore, not be easily accepted.”

43. I am therefore, unable to accept the submission of Mr. Andhyarujina that respondent No. 1-company was a quasi-partnership and the principles of dissolution of a partnership should be applied for considering whether it was “just and equitable” to wind it up.

Loss of confidence. Packing the board–an oppression, and a ground for winding up.

44. Mr. Andhyarujina then submitted that the conduct of EEMC and CIPM was so oppressive that that the appellant had completely lost faith in the majority shareholders and consequently it was just and equitable to wind up respondent No. 1. He submitted that EEMC and CIPM have virtually hijacked respondent No. 1 by appointing majority of the directors either by themselves or by securing nomination of their own employees as nominee directors of EMC. They have grabbed the management of respondent No. 1 by packing the board with their own men resulting into total loss of confidence.

45. In Shanti Prasad Jain v. Kalinga Tubes Ltd. the Supreme Court observed (page 366) :

“As has already been indicated, it is not enough to show that there is just and equitable cause for winding up of the company, though that must be shown as preliminary to the application of Section 397 . . . The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company’s affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”

46. I would hesitate to come to a conclusion that there was lack of probity on the part of the CIPM, EEMC or EMC. All that was done in the meeting of June 4, 2002, was to appoint a third director as respondent No. 1 could not function with only two directors. The CLB has recorded a finding of fact (in paragraph No. 29 of its judgment) that all decisions taken in the meeting of June 4, 2002, were in the interest of respondent No. 1. Firstly, this being a finding of fact cannot be assailed in an appeal under Section 10F of the Act. Secondly, the said finding is not only a possible finding but even if I were to reappreciate the facts, I would come to the same conclusion. There is no lack of probity or fair dealing and no violation of proprietary rights of the appellant as a shareholder. The appellant has not proved that it would be just and equitable to wind up respondent No. 1. Consequently the essential element for maintainability of the petition under Section 397 of the Act was absent.

Regarding the board meeting held on June 4, 2002 :

47. The appellant has challenged the holding of the board meeting dated June 4, 2002, as also the decisions taken thereat as illegal and oppressive on several grounds which are considered below.

(A) Absence of notice of board meeting to the appellant:

48. Mr. Andhyarujina contended that the meeting was illegal because it was convened without notice to the petitioner. He submitted that respondent No. 1 was a closely held company, there being only four shareholders. As on June 4, 2002, two shareholders, viz., CIPM and EEMC each had their nominee on the board. EMC had become bankrupt and its nominees had resigned. Mr. Ravi Buddhiraja, nominee of the fourth shareholder had also resigned on May 2, 2002. Until the appellant had its nominee director on the board, notice given to the nominee director was a notice to it but after the resignation of Mr. Ravi Buddhiraja on May 2, 2002, notices of all future board meetings were required to be given to the appellant as a shareholder who was entitled to nominate a director on the board. The notice of the proposed board meeting dated June 4, 2002, was deliberately omitted to be given to the appellant, to carry out the business clandestinely and in a manner oppressive of the appellant. Decisions taken at the board meeting were illegal and oppressive. The holding of the board meeting without notice to the appellant was illegal. Mr. Andhyarujina relied upon the judgment of the Supreme Court in Parmeshwari Prasad Gupta v. Union of India, , in support of the contention that the requirement of notice was mandatory and resolutions passed at the meeting of the board of directors without prior notice to all the directors were invalid. In the case of Parmeshwari Prasad Gupta, notice was not given to one of the directors and he was not present at the meeting. In para. No. 11 of the judgment the Supreme Court referred to a passage from the Halsbury’s Laws of England to the effect (page 4): “It is essential that notice of the meeting and of the business to be transacted should be given to all persons entitled to participate and that if a member whom it is reasonably possible to summon is not summoned, the meeting will not be duly convened, even though the omission is accidental or due to the fact that the member has informed the officer whose duty it is to serve notice that he need not serve notice on him.”

49. Relying on this passage, Mr. Andhyarujina submitted that giving of notice of the board meeting to the appellant as a member was mandatory. The word “member” used in the passage quoted above is to denote a “member of the board” and not a “member of the company” or a shareholder. A shareholder is not entitled to a notice of meeting of the board of directors even in respect of a closely held company. Article 10.7 also contemplates notice of a board meeting to be given to the directors and not to the shareholders. Therefore, it was not necessary to give a notice of the meeting of the board to the appellant in its capacity as a shareholder. In the absence of any director in office nominated by the appellant, it was not entitled to a notice of meeting of the board. Mr. Andhyarujina, however, referred to the letter of Mr. Stummer dated July 30, 2002, in which he has stated that the notice of the future board meetings would be given to the appellant. Firstly, Mr. Stummer has no authority to bind respondent No. 1 with an obligation to give a notice of a board meeting to a person who is not entitled to a notice. Secondly, any assurance given by Mr. Stummer to give notice of a meeting of the board of respondent No. 1 would only be a courtesy or a concession made by him and such concession can only be prospective. It cannot be said that notice of the meeting of the board held on June 4, 2002, was required to be given in view of the concession made by Mr. Stummer in his subsequent letter dated July 30, 2002. The finding of the CLB (para. 28 of the judgment) that only directors are entitled to a notice of a board meeting as also, the further finding that non-sending of the notice of the board held on June 4, 2002, to the appellant cannot be considered to be an act of oppression are hereby affirmed.

(8) Quorum for the board meeting :

50. Mr. Andhyarujina contended that under article No. 10.8, of the articles of association of respondent No. 1 (for short “the articles” or the “articles of association”) quorum for the meeting of the board was of minimum three directors. At the board meeting of June 4, 2002, there were initially only two directors till Mr. Freeman was co-opted (co-option is also challenged as illegal). As there were only two directors in office and only two directors attended the meeting on June 4, 2002, the meeting was without quorum and therefore, the decision taken by the said two directors in co-opting and/or appointing Mr. Freeman as a director was illegal for want of quorum. Article No. 2 of the articles adopts regulations set forth in Table E of the Companies Act which itself incorporates all of the regulations of Table A except some regulations. Regulation 75 of Table A reads : “The continuing directors may act notwithstanding any vacancy in the board, but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or summoning the general meeting of the company, but for no other purpose”. The main purpose of regulation 75 is to ensure that the board does not become non-functional for want of quorum and that is the reason why continuing directors are authorised to appoint a director or directors to the extent necessary to form the quorum or to call for a general meeting. Regulation 75 thus permits the continuing directors to convene a board meeting for the purpose of increasing the number of directors to that fixed for the quorum. As there were only two directors in office which number was less than the quorum fixed by article No. 10.8 of the articles of association, they could by virtue of the powers conferred by regulation 75 either convene a general meeting or convene a meeting of the board for the purpose of increasing the number of directors to the extent fixed for the quorum. Thus, the two existing directors could validly convene and hold the board meeting on June 4, 2002, for the purpose of co-option or appointment of one more director in accordance with the provisions of the articles of association. The finding of the Company Law Board that regulation 75 permitted continuing directors to convene and hold a board meeting for the purpose of increasing the number of directors to that fixed for the quorum and therefore, convening of the meeting of the board on June 4, 2002, was not illegal or oppressive is hereby affirmed.

(C) Appointment of Mr. Freeman as a director :

51. Mr. Andhyarujina submitted that assuming that regulation 75 permitted convening of a board meeting to appoint an additional director to increase the number of directors to that fixed for the quorum, it did not permit the directors in office to appoint a person who was not qualified to be a director of respondent No. 1. Mr. Freeman was not qualified to be appointed as a director. Mr. Andhyarujina placed reliance on articles Nos. 10.2 and 10.3 in support of this contention. Per contra, Mr. Sibal submitted that Mr. Freeman could be appointed under article 10.13. The relevant articles are quoted below:

“10.1 Unless and otherwise determined by the members, the maximum number of directors shall be thirteen and the minimum number of directors shall be three.

10.2 Each member shall be entitled to nominate one candidate for election to the board in respect of each 10 per cent. of the total voting power held by it and its affiliates (and so on for integral multiples thereof). Any member or group of members holding in the aggregate 10 per cent. of the total voting power (excluding any voting power taken into account in nominations under the preceding sentence) also shall be entitled to nominate one candidate for election to the board in respect of each ten per cent. of the total voting power they collectively hold. If any time fewer than ten candidates have been nominated as provided in the preceding two sentences or elected, the members whose voting power has not been taken into account in making a nomination under the preceding two sentences shall, by a majority vote of the voting power not so taken into account, nominate a candidate(s) so that 10 shareholder directors in the aggregate are in office.

10.3 The members agree to vote in favour of the appointment of the candidates nominated pursuant to article 10.2 or article 10.4 at a general meeting of the company.

10.13 Directors other than shareholder directors shall be elected by members having a majority of the shares. The members agree to procure the election of individuals as directors (other than shareholder directors) to the extent required under the financing agreements.”

52. Article No. 10.1 prescribes the minimum number of directors to be three and maximum number of directors to be 13. The scheme of article No. 10 contemplates shareholder directors who are nominees of the shareholders appointed under articles Nos. 10.2 and 10.3 and other directors. The shareholder directors cannot exceed ten. The articles prescribe the maximum number of directors to be 13. Thus, three more directors other than shareholder directors can be appointed. The source of power for the appointment of these three directors is to be found in article No, 10.13. Mr. Andhyarujina contended that under article No. 10.13, only nominees of the financial institutions can be elected or appointed as directors. I am unable to read any such limitation in article No. 10.13. Any person other than a shareholder director would be covered by article No. 10.13. The second sentence of article No. 10.13 is only permissive and records an agreement between the shareholders that they would vote in favour of an election of an individual director who is nominated by the financial institutions in pursuance of a financing agreement. If there is no financing agreement or if the financing agreement does not provide for the nomination of three directors by/of the financial institutions or if it so provides but the financial institutions do not nominate any director or nominate less than three directors, then the vacancy can always be filled in by appointment of any other person as a director. The articles do not prescribe any qualification shares to be held by a director nor do they prescribe any other qualification for a person to be appointed as a director. In the absence of three nominations by the financial institutions, it was possible for the shareholders of respondent No. 1-company to appoint, by a majority vote, any person as a director. Any other interpretation could create a deadlock in the management of respondent No. 1. For, as in the present case, on and from May 2, 2002. Respondent No. 1-company had only two directors. All other directors had resigned. The two shareholders, viz., EMC and the appellant had not nominated any of their representatives as a director. If no person other than a nominee of financial institutions could be appointed as director under article No. 10.13, then respondent No. 1 would not have three directors which is the quorum prescribed under article 10.1 for holding of a board meeting. Respondent No. 1 would thus be unable to function without having a quorum for a meeting of the board. It must also be noted that before the CLB, the respondents made an offer to voluntarily substitute Mr. Freemen with a nominee of the appellant if the appellant chose to appoint one. The offer was not accepted by. the appellant and this fact is recorded by the CLB at the end of paragraph No. 28 of its judgment. It is thus, clear that the real intention of the appellant in challenging appointment of Mr. Freeman is for collateral purpose of making respondent No. 1 non-functional by ensuring that the total number of directors of respondent No. 1 is reduced below the quorum prescribed by the articles. Looked at from this angle, even if it is held that the appointment of Mr. Freeman in the meeting of June 4, 2002, was illegal, it cannot be said to be oppressive of the appellant as it was made to make the board functional. If at all there is an oppression, it is by the appellant who wants respondent No. 1 to be without an effective management without there being a quorum for meetings of the board and it is for this reason that the appellant appears to have declined the offer made by the respondents to substitute Mr. Freeman with the nominee of the appellant if it chose to appoint one as a director of respondent No. 1.

(D) Replacement of Mr. Allison by Mr. Walsh :

53. In the meeting of the board dated June 4, 2002, Mr. Allison resigned and Mr. Walsh who was nominated in his place was appointed as a director. Though initially, the validity of replacement of Mr. Allison by Mr. Walsh was questioned, the challenge, as noted by the CLB, was given up in view of article 10.4 of the articles which permitted substitution. Before me, no grievance was made regarding the replacement of Mr. Allison by Mr. Walsh.

(E) Agenda for the board meeting dated June 4, 2002 :

54. Mr. Andhyarujina lastly contended that no agenda of the business to be transacted at the board meeting was circulated to the directors and on that ground also the board meeting dated June 4, 2002, and decisions taken thereat were illegal. Reliance was placed on article No. 10.7 of the articles of association which reads as under :

“10.7 Board meetings shall be held no less than four times in every year and with intervals of not more than three months. Unless waived by the shareholder directors, not less than five business days’ notice shall be given to each of the directors of the date, time and place of all meetings of the board, to the address notified from time to time by each director to the secretary. Additional board meetings may be called at the request of any shareholder director to the secretary. Each such notice shall contain, inter alia, an agenda specifying in reasonable detail the matters to be discussed at the relevant meeting, and shall be accompanied by any relevant papers for discussion at such meeting and shall be sent by courier or by fax.”

55. Article 10.7 mandates that every notice of the board meeting shall contain an agenda specifying with reasonable details the matter to be discussed at the relevant meeting. Notice is also required to be accompanied by the relevant papers for discussion at the meeting. Again relying upon the decision of the Supreme Court in the case of Parmeshwari Prasad Gupta v. Union of India, , it was contended that the requirement of circulating the agenda is mandatory and cannot be waived. Mr. Sibal pointed out that neither in the original petition nor in the amended petition, it was ever alleged that no agenda was circulated for the board meeting dated June 4, 2002. Whether an agenda was circulated or not is a question of fact. Therefore, absence of agenda is required to be pleaded. In the absence of the necessary pleadings, the respondents had no opportunity of placing on record the relevant facts relating to the circulation of the agenda and/or waiver thereof by the directors. It was also contended that under article No. 10.7, the directors could not only waive the notice of the meeting altogether but could, in any event, waive the requirement as to the period of the notice and accept shorter notice as valid. If a shorter notice could be valid then the notice of the meeting could be as short as a few minutes and can be given just prior to the meeting when the directors assembled on June 4, 2002. The agenda could then be circulated along with such notice.

56. Relying upon two judgments of the Calcutta High Court in Mohta Bros. Pvt, Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119 and of this court in P. S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [1992] 75 Comp Cas 583, Mr. Sibal submitted that the contention about absence of agenda cannot be considered in the absence of pleadings. In Mohta Bros. Pvt. Ltd. ‘$ case [1970] 40 Comp Cas 119 a Division Bench of the Calcutta High Court observed (at page 128 of the report) :

“In our view, this contention on behalf of the respondent is well founded. Full particulars must be given by a petitioner in an application under sections 397 and 398 of the acts of mismanagement and oppression.”

57. In the case of P. S. Offshore Inter Land Services Pvt. Ltd. [1992] 75 Comp Cas 583, a learned single judge of this court observed (at page 592 of the report):

“The grounds of challenge not to be found in the petition but evolved during the course of arguments will have to be ignored. In a petition under sections 397 and 398 of the Companies Act (1 of 1956), all material facts must be set out in the petition itself and allegations of fraud, coercion, mala fides, if any, must be supported by particulars.”

58. At page No. 594 of the report, the court further observed :

“I must state that I will have to restrict my prima facie enquiry to the ground set out in paragraph No. 12 of the petition and I cannot allow the parties to travel beyond the petition and reply to the contentions (sic-not) urged in the petition.”

59. Grounds of oppression are set out in paragraph No. 23 of the petition. They are four in number. Further grounds have been added by an amendment in paragraph numbers No. 23(A) and 23(B) of the petition. A contention that no agenda was circulated before the board at the meeting of June 4, 2002, is not raised therein or anywhere else in the petition, before the CLB. If the contention was taken specifically in the petition, submitted Mr. Sibal, the respondents could have adduced evidence of agenda having been circulated to members of the board. Hence, the appellant cannot be allowed to raise the contention of absence of agenda. It must also be noted that none of the directors who were present at the meeting of June 4, 2002, nor Mr. Freeman who was co-opted/appointed as a director in that board meeting has made a grievance that the agenda for the board meeting was not circulated. The agenda of the board meeting is meant for the directors and it is strange that the appellant, a shareholder, is complaining about the absence of the agenda without there being any complaint on the part of the directors. Let us take a case of a board meeting where the agenda contains usual last item “any other business with the permission of the chair”. An item not contained in the agenda is raised by a member of the board with the permission of the chair and is discussed by the board members without anybody raising any objection thereto, and all the board members participate in the discussion and finally a resolution is passed on that item. Can a board member who raised no objection to the item discussed with the permission of the chair and who took part in the discussions without any demur be subsequently allowed to contend that the resolution was bad in law, because it was not specifically included in the agenda ? In my opinion, not. If a director himself cannot raise an objection, no shareholder be allowed to do it. If allowed, it would open a back door challenge by a director who, participates in the resolution without any objection and challenges the resolution subsequently through a shareholder, who could be his own nominee. In P. S. Offshore Inter Land Services Pvt. Ltd. case [1992] 75 Comp Cas 583 (Bom), also it was contended that no agenda for the board meeting was forwarded even though it was stated in the notice of the meeting that agenda would follow. After referring to the judgment of the Supreme Court in the case of Parmeshwari Prasad Gupta v. Union of India, , this court held that the alleged defect was curable and declined to interfere in view of the subsequent conduct of the parties (see pages Nos. 604 and 605 of the report) Mr. Sibal also referred to and relied upon the judgment of a Division Bench of the Delhi High Court in Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Cas 390 (page 413), In that case the Division Bench pointed out the distinction between section 172 of the Act which deals with general meetings of a company and section 286 of the Act which deals with board meetings. It was held that any business whatsoever can be transacted at a board meeting while the shareholders are required to be informed in advance of the agenda in the case of a general meeting. In Needle Industries Ltd.’s case , the Supreme Court rejected the contention that the appointment of an additional director was invalid as there was no item on the agenda of the meeting for the appointment of the additional director, (see para. 117 of the judgment). Matters to be discussed are required to be included in the notice of the general meeting of the company, but the rigours of Section 172 of the Act of items being informed in advance does not apply to board meetings. The articles of a company may provide, and in the present case do provide, that the agenda for the board meeting should be circulated along with the notice of the meeting but article No. 10.7 itself provides for a waiver. Assuming that the notice cannot be waived, the period of notice can certainly be waived and there is nothing in the case of Parmeshwari Prasad Gupta, that the requirement as to the period of notice cannot be waived. Mr. Sibal is right in his contention that if absence of agenda was pleaded as a ground, the respondents could have adduced evidence that agenda was circulated at or prior to the board meeting.

(F) Further decisions taken at the board meeting dated June 4, 2002 :

60. In paragraph No. 29 of its judgment, the CLB has recorded a finding of fact that all decisions taken in the board meeting dated June 4, 2002, were in the interest of the company. This is a finding of fact is not appealable under section 10F of the Act. Even otherwise, this finding was not challenged before me by learned counsel for the appellant.

61. The CLB has held that in the meeting of board dated June 4, 2002, the continuing directors could only have considered the proposal to increase the number of directors to that fixed for the quorum and nothing else. The CLB has further held that all other decisions taken in the board meeting dated June-4, 2002, were null and void and all further actions taken on the basis of those decisions were also null and void. This finding is assailed by respondents Nos. 2 to 5 by filing an Appeal Bearing (Lodging) No. 6 of 2003. The meeting of the board dated June 4, 2002, can be divided into two parts. In the first part, Mr. Allison was replaced by Mr. Walsh by nomination by CIPM and Mr. Freeman was co-opted/appointed as a director. Replacement of Mr. Allison by Mr. Walsh is not challenged before me. In the second part the meeting was continued after appointment of Mr. Freeman and establishment of quorum, and some decisions were taken by the reconstituted board. This second part of the meeting can be construed as a separate and independent meeting of the reconstituted board. There is nothing in law which prevents two board meetings being held one after the other. The only possible objections about absence of notice and absence of agenda for this second meeting of the econstituted board have been considered and rejected earlier. Therefore, the finding of the CLB that further decisions taken in the meeting dated June 4, 2002, after reconstitution of the board were illegal is required to be set aside. Assuming however, that the holding of the board meeting of the reconstituted board on June 4, 2002, was irregular or even illegal, the questions that are required to be considered are : (i) Whether the decisions taken in the continued board meeting were oppressive of the respondent ? (ii) If they were not oppressive, whether the CLB could have entertained the petition under Section 397 of the Act and declared the continued board meeting or the decisions taken thereat as null and void.

62. The decisions taken in the meeting of the reconstituted board on June 4, 2002, can be summarised as follows :

(i) Resignations of the various directors from March 28, 2003, onwards were accepted (though acceptance may not be necessary) ;

(ii) Mr. Freeman was appointed as the manager, special affairs of respondent No. 1 ;

(iii) The services of counsel including but without limitation of Mr. P. Chidambaram and firm Bhaishankar Kanga and Girdharlal and other attorneys) were retained ;

(iv) It was resolved to pursue the arbitration proceedings pending against the Union of India and others ;

(v) The firm of Lehman and Eilen was retained to represent respondent No. 1 and answer the suit brought against respondent No. 1 in the State Court in New York. They were directed to file answers substantially similar in nature to that presented to the board in which the liability of previously certified payments was to be admitted but interest was to be recalculated and other liabilities were to be contested ;

(vi) Mr. Freeman, manager special affairs, was authorised to retain qualified individuals or entity or provide corporate secretarial services to respondent No. 1.

63. Mr. Andhyarujina challenged as oppressive the decisions mentioned at Serial Nos. (iv) and (v) above. It was contended that Lehman and Eilen were directed to file a defence admitting the liability relating to payment to certain contractors in the suit before the State Court in New York and that was against the interests of respondent No. 1. Mr. Andhyarujina stated that the contractors who had made claims were G. E. and Bechtel or their associate or sister concerns. Per contra, Mr. Sibal pointed out that the claims made by contractors were previously certified by MSEB or its officers. A draft reply prepared by Lehman and Eilen admitting the certified claims was previously approved by the board. Lehman and Eilen were directed to admit only previously certified claims, and that was not against the interests of respondent No. 1. All other liabilities were disputed and were to be contested. Therefore, the said decision was not against the interests of respondent No. 1 and certainly not oppressive of the appellant. Continuation of the arbitration proceedings was also a decision which was in the interest of respondent No. 1. If respondent No. 1 succeeds in the arbitration, it would receive money by way of compensation and/or damages. May be that compensation would be required to be paid by MSEB the holding company of the appellant, or the Government of Maharashtra or the Union of India. The interest of the appellant as a member of respondent No. 1 and the interest of the appellant as a subsidiary of MSEB are clearly conflicting. The recovery of money through the arbitration proceedings is for the benefit of respondent No. 1 and all its creditors and members including the appellant in the capacity as a member. The fact that the compensation may come from the coffers of the Government of Maharashtra or MSEB is against the interest of the appellant. The money would come to respondent No. 1 and for the benefit of respondent No. 1. It would also benefit the members of respondent No. 1 inasmuch as their liability–unlimited as it is–would be reduced. The fact that the holding company of one of the members, would be a loser in a different capacity and some other members would be beneficiaries (in their capacity as creditors who have supplied the plant and machinery), cannot make the decision taken by the board to continue the arbitration proceedings oppressive of the appellant.

64. In my opinion, the continued meeting of the board after establishment of a quorum by appointment of Mr. Freeman can be construed as an independent and separate board meeting to which the provisions of regulations 75 would not apply. Therefore, the meeting was legal. Assuming however, that the said meeting was illegal, the decisions taken at the said meeting were in the interest of respondent No. 1 and were not oppressive. In the absence of a finding of oppression, the CLB could not assume jurisdiction under Section 397 of the Act to declare the meeting dated June 4, 2002, and the decisions taken thereat as null and void. The jurisdiction of the CLB is limited only in respect of the acts of oppression. The words of crucial significance used in Section 397 of the Act are “in a manner oppressive to any member or members”. Section 397 of the Act does not speak of any irregularity or illegality in the conduct of affairs of the company but speaks of oppressive manner in the conduct of the affairs of the company. As held earlier, an illegal act is not per se oppressive. As the acts were not oppressive, the CLB lacked jurisdiction to declare them to be null and void. That part of the decision of the CLB is therefore, required to be set aside.

Regarding general body meeting dated September 9, 2002 :

65. Mr. Andhyarujina submitted that the decisions taken at the general body meeting dated September 9, 2002, were illegal and oppressive of the respondent for :

(i) The appellant was entitled to nominate two directors. The two directors nominated by the appellant were not elected because the EMC and CIPM voted against the resolution and committed breach of article No. 10.3.

(ii) Mr. Freeman could not be elected and appointment as a director as he was neither a shareholder director nor a nominee of a financial institution.

66. In paragraph No. 31 of the judgment, the CLB has held that the appellant was not entitled to nominate two directors by virtue of its 14.15 per cent. equity holding but was entitled to nominate only one director. In my opinion, the said finding is correct for the reasons mentioned below :

67. Under article No. 10.1 respondent No. 1 is to have minimum three and maximum 13 directors. Under article No. 10.2. ten directors are to be elected by the shareholders in the manner mentioned therein. Article No. 10.2 consists of only three sentences. The first sentence says that each member is entitled to nominate one candidate for election to the board in respect of each 10 per cent. of the total voting power (voting power in the present case is proportionate to the equity shareholding) held by it. In the present case, EMC would be entitled to nominate six candidates on account of its 65.85 per cent. voting power. The appellant would be entitled to nominate one director by virtue of its 14.15 per cent. voting power and EEMC and CIPM each would be entitled to nominate one director by virtue of 10 per cent. voting power held by each of them. This makes a total of nine shareholder directors. The second sentence of article No. 10.2 lays down that members who do not hold voting power in exact multiple of 10 per cent. are allowed to consolidate their fractional unused voting power which is not exact multiple of 10 per cent. and by mutual consent nominate one director for each 10 per cent. of the consolidated voting power. If all the shareholders holding fraction of 10 per cent. of the unutilised voting power agree upon a common nomination or nominations then obviously, ten directors would be in office. The third sentence of article No. 10.2 would be required to be resorted to only where the persons who hold unutilised fraction of 10 per cent. of voting power are unable to reach a consensus about a nominee. The third sentence of article No. 10.2 lays down that if fewer than ten candidates have been nominated as provided in the preceding two sentences then the members whose fractional voting power has not been utilised under the preceding two sentences shall, by a majority vote of the unutilised voting power, be entitled to nominate a candidate or candidates so as to make total number of shareholder directors equal to ten. In the present case, the EMC holds 65.85 per cent. of the shares, the appellant holds 14.85 per cent. of the shares and CIPM and EEMC each holds 10 per cent. of the voting power. They would thus be entitled to nominate 6, 1, 1, and one person respectively as directors, and 60 per cent. 10 per cent., 10 per cent. and 10 per cent. of their respective voting power would get utilised in the nomination of nine directors. After nomination of six nominees for the election to the post of directors EMC would have 5.85 per cent. unutilised voting power and after nomination of one nominee for the post of a director the appellant would have 4.15 per cent. of unutilised voting power. Under the second sentence of article No. 10.2, the appellant and EMC, by a consensus, can nominate one more director as they together hold 10 per cent. unutilised voting power. As EMC and the appellant did not agree upon a common nominee in respect of their respective 5.85 per cent. and 4.15 per cent. of unutilised voting power the nomination of one director had to be made by them by a majority of their respective unutilised voting power. Thus, EMC who held 5.85 per cent. i.e., majority of unutilised 10 per cent of the voting power was entitled to nominate the tenth director. The appellant was entitled to nominate one director in its own right by virtue of its 10 per cent. voting power and in respect of its unutilised fractional 4.15 per cent. voting power, it being minority of unutilised 10 per cent. of the voting power, could not nominate one additional director. Therefore, the stand taken by the CIPM and EEMC that the appellant was not entitled to nominate the second director was lawful. At the meeting of September 9, 2002, the appellant nominated two persons, viz., Mr. A. K. Mago and Mr. R. B. Budhiraja for the post of directors. CIPM and EEMC objected to the nomination of two persons and requested the appellant to nominate only one. The appellant did not agree. CIPM and EEMC then suggested that the resolutions regarding election of two persons nominated by the appellant as directors be put to vote separately. This would have enabled the CIPM and EEMC to vote in favour of the appointment/election of one nominee of the appellant and to vote against the appointment/election of the second nominee which was not the appellant’s right. However, as Section 263 of the Act is not applicable to respondent No. 1 being a private company, the appellant insisted upon putting to vote the resolution for appointment of its two nominee directors, as a single resolution. EEMC and CIPM voted against the said resolution as voting in favour of the resolution would have been contrary to articles Nos. 10.2 and 10.3. It therefore, cannot be said that voting by CIPM or EMC against resolution for the election of two persons nominated by the appellant as directors constituted breach of the articles or that it constituted oppression of the appellant. At this stage, it must also be pointed out before the resolution for election of two nominees of the appellant as directors was put to vote, the resolution for election of Mr. Kevin Walsh–nominee of CIPM was put to vote. The appellant did not vote in favour of the resolution but abstained from voting. Under article No. 10.3 members had agreed to vote in favour of the appointment of the candidates nominated by members pursuant to article No. 10.2. Abstaining from voting on the resolution of appointment of Mr. Walsh thus constituted a breach of article No. 10.2 by the appellant. The articles of association constitute a contract between the company and its members and between the members inter se. The appellant was bound by the contract contained in article No. 10.3 of the articles of association to vote in favour of the resolution for election of a nominee of CIPM as a director. The contract contained in article No. 10.3 consists of reciprocal promises made by each member to vote in favour of the appointment of the candidates nominated by other members in accordance with article No. 10.2. Breach of the reciprocal promise by the appellant by abstaining from voting at the election of Mr. Walsh, the nominee of CPIM, as a director absolved the other members from performed their reciprocal promises. The principle laid down in Section 51 of the Contract Act that in respect of the reciprocal promises, a promisor need not perform his promise if the promisee fails, to perform the reciprocal promise given by him would be applicable in the facts and circumstances of the case. Thus, CIPM and EEMC were entitled to vote against the single resolution moved for election of two nominees of the appellant as directors on two grounds, viz., (i) the appellant was not entitled to nominate two directors by virtue of article No. 10.2 and (ii) the appellant had itself committed a breach of article No. 10.3 by abstaining from voting on the resolution for election of Mr. Walsh, the nominee of CIPM, as a director and the other members of respondent No. 1 were consequently not bound to perform their reciprocal promise contained in article No. 10.3.

68. In para. No. 32 of its order, the CLB has held that CIPM, EEMC and EMC should have supported appointment of the second nominee director of the appellant on equitable grounds especially because place for one more director was unfilled under article No. 10.13. As stated earlier, the appellant was entitled to nominate only one director by virtue of 14.15 per cent. of the voting power. This decision of the CLB regarding appointment of the second nominee director by the appellant is assailed by the respondents by filing an appeal bearing lodging No. 6 of 2003. The challenge appears to be correct. The minimum number of directors required to form a quorum was elected in the general meeting of September 9, 2002. The members have agreed to the manner in which directors should be appointed/elected and the provision regarding the manner of appointment of directors have been made in the articles. There was no occasion for the CLB to interfere in the said arrangement unless the articles were breached and such breach, in the opinion of the CLB was oppressive. In my opinion, there was no oppression of the appellant. The CLB could have permitted nomination of one person as a director by the appellant on the board. And if one nominee is nominated by the appellant even now, the other members of respondent No. 1 would be bound to elect him in the general meeting and pending a general body meeting, the board would be required to co-opt him as required in article No. 10.4. Subject to this, the order of the CLB regarding the reconstitution of the board of respondent No. 1 is also required to be set aside.

Regarding nomination of respondents Nos. 6 to 9 by EMC by a letter dated October 8, 2002.

69. Mr. Andhyarujina challenged the nomination of respondents Nos. 6 to 9 for appointment as directors made by EMC by a letter dated October 8, 2002, on the following grounds :

(i) EMC was bankrupt. EMC had filed a proceeding for bankruptcy before the Supreme Court of Mauritius. By an order dated May 9, 2002, the Supreme Court of Mauritius had appointed joint provisional liquidators (for short “JPLs”) for EMC. After the appointment of JPLs, the board of directors of EMC ceased to have any powers and therefore, they could not nominate respondents Nos. 6 to 9 as directors.

(ii) Respondents Nos. 6 to 9 were employees of EEMC and CIPM who wanted to hijack respondent No. 1 CIPM and EEMC prevailed upon the EMC to appoint their own employees as nominee directors of EMC. Employees of CIPM and EEMC could not be nominated as directors, by EMC.

(iii) The directors could be elected only in the general meeting of the company and as EMC had not nominated respondents Nos. 6 to 9 for the election as directors in the general meeting held on September 9, 2002, it could not nominate them soon after the general meeting.

70. As regards the first ground by Mr. Andhyarujina submitted that as the JPLs were appointed by an order of the Supreme Court of Mauritius, its board of directors stood superseded and ceased to have any powers. The board of directors of EMC did not have a power to nominate, by a letter dated October 8, 2002, respondents Nos. 6 to 9 as directors. The contention has no force. The order of the Supreme Court of Mauritius dated May 9, 2002, itself makes it clear that all powers were not vested with the JPLs. Paragraph No. (vi) of the order of the Supreme Court of Mauritius reads as under :

“(vi) Save as specifically set out herein :

(a) JPLs will have no general or additional powers or duties with respect to the property or records of the company ; and

(b) the board of directors of the company shall continue to manage the company’s affairs in all respects :

Provided that should the JPLs consider at any time that the board of directors of the company is not acting in the best interests of the company and creditors of the company and the creditors of Enron group, the JPLs shall have the power to report the same to this court and seek such directions from this court as the JPLs are advised as appropriate.”

71. The order of the Supreme Court of Mauritius is clear that the power of managing the EMC was not vested with the JPLs but its board of directors continued to have the power to manage the affairs of EMC in all respects. Mr. Andhyarujina however, contended that the order of the Supreme Court of Mauritius, in so far as it conferred powers of management on the board of directors of EMC, was illegal, null and void and should be ignored. He invited my attention to the prayers in paragraph No. 38 of the bankruptcy petition made before the Supreme Court of Mauritius and order passed by the Supreme Court of Mauritius on May 9, 2002, and contended that the Supreme Court of Mauritius granted, almost verbtatim, all the prayers made in paragraph No. 38 of the petition without giving any reasons. He submitted that this showed that the Supreme Court of Mauritius had not applied its mind. He further contended that the order was contrary to the basic principles of the company law as applicable in India, viz., that once a provisional liquidator is appointed, the board of directors of the company ceases to have any powers and all the powers of management stand vested in the provisional liquidator. Mr. Andhyarujina submitted that the order which runs counter to the basic philosophy and principles of the Indian law should be ignored and this court should hold that the board of directors of EMC had no power to nominate respondents Nos. 4 to 6 as directors of respondent No. 1. Mr. Andhyarujina also took me through certain provisions of the (Mauritius) Companies Act, 1984, and submitted that the provisions relating to powers of the provisional liquidator under the Mauritius law were similar to the provisions of the (Indian) Companies Act, 1956, under which the board of directors, on appointment of a provisional liquidator does not have any residuary powers. He submitted that the Supreme Court of Mauritius committed a jurisdictional error in retaining the residuary powers and/or powers of management of EMC in the hands of its board of directors : the judgment of the Supreme Court of Mauritius was contrary to the (Mauritius) Companies Act, 1984, and should be ignored on this ground also. I am unable to accept the submissions of Mr. Andhyarujina. Firstly, the contention of Mr. Andhyarujina that under the (Indian) Companies Act, 1956, the board of directors of a company ceases to have all the powers once a provisional liquidator is appointed is not correct. Even under the Indian law, only those powers which are conferred on the provisional liquidator either under the Companies Act, 1956, or by an order of the court, are divested from the board of directors. All residuary powers vest in the board. Even after the appointment of a provisional liquidator, the board of directors have a power to make a reference to BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (for short “the SICA”) and also have power to propose a scheme of arrangement by way of a compromise or arrangement with its creditors under sections 391 to 394 of the Act so as to rehabilitate the company. In Rishabh Agro Industries Ltd. v. P. N. B. Capital Services Ltd. [2000] 101 Comp Cas 284, the Supreme Court observed (page 292 of the report) :

“It is contended that after the order of the winding up and appointment of the liquidator, the board of directors had no jurisdiction to move the BIFR by passing a resolution. Such a submission cannot be accepted. In a winding up petition the liquidator is appointed to protect the assets of a company for the benefit of its creditors, secured and unsecured and others. It is not the function of the official liquidator to start the process of rehabilitation of the company as is aimed at under the Act. Despite appointment of the official liquidator, the board of directors continue to hold all residuary powers for the benefit of the company which includes the power to take steps for its rehabilitation.”

72. Secondly, a foreign law–the (Mauritius) Companies Act, 1984, cannot be interpreted by us on the basis of interpretation put upon the provisions of the (Indian) Companies Act, 1956, even if some of the provisions (regarding provisional liquidators) appear to be similar. It would be preposterous to hold that an order passed by the highest court of a foreign country is null and void and is without jurisdiction applying principles of the Indian law. Ordinarily, an order passed by the highest court of a foreign country must be accepted as correct, governing rights and liabilities of the parties in that country. Thirdly, this court cannot hold that an order passed by the highest court of a foreign country is passed without application of mind and/or without jurisdiction merely because all the prayers made by a party are granted and the order ex facie does not record any reasons therefor. Often, this court also passes orders exactly in terms of the prayers and merely because reasons are not given ex facie in the order, it does not mean that the order is passed without application of mind, or is without jurisdiction.

73. The second ground of attack of Mr. Andhyarujina has also to be rejected. There is no restriction under article No. 10 as to who can be nominated as director by a shareholder. A shareholder is entitled to nominate any person including the employees of the other shareholders if he thinks fit. No fetters on the power of a shareholder to chose a person as its nominee for the post of a director can be imposed. In any event, mere nomination of the employees of EEMC and CIPM cannot be an act of oppression. If the said nominee directors do anything more so as to oppress the appellant or conduct themselves in the manner which is oppressive of the appellant, the appellant can have a remedy. He cannot object to the nomination of employees of CIPM and EEMC as oppressive without any further actions on their part.

74. The third ground of attack of Mr. Andhyarujina that EMC was not entitled to nominate anybody as directors soon after the general meeting because it had not nominated any directors at the general meeting also cannot be accepted. EMC had previously nominated its nominees on the board of respondent No. 1. They all resigned in March/April, 2002. Under article No. 10.4, the members were entitled to remove and substitute the nominee directors. This power would include the power to nominate another in the place of its nominee director who resigns. Article No. 10.4 does not fix any time limit to nominate a director who is to be replaced or who has resigned. The vacancy could be filled in at any time. In any event, the said vacancy was sought to be filled in, within about six months of the resignation by previous nominee directors. This period cannot be said to be unreasonable, especially taking into consideration that EMC itself was facing a bankruptcy proceedings in the Supreme Court of Mauritius. It must however be noted that the persons who is nominated by EMC as a shareholder directors under article No. 10.4 do not automatically become directors immediately on their nomination. The said nominees would have to be elected in the general meeting and till such general meeting is held, article No. 10.4 obliges the board to co-opt and appoint the nominees as directors. Article 10.4 reads as under :

“10.4 Any shareholder director nominated and appointed pursuant to this article 10 may at any time be removed and substituted by the member that nominated such shareholder director. The members agree to procure that any election pursuant to article 10.3 and any such removal and/or election shall take place at a general meeting of the company to be held as soon as reasonably practicable after receipt from the applicable member of a written notice served on each of the other members or specifying the removal and/or election of the substitute shareholder director and pending such general meeting shall procure that the board shall appoint such candidate. If any shareholder director ceases to hold office, the members shall procure the election of a substitute nominated by the member who appointed such shareholder director.”

75. The CLB, in paragraph No. 33 of its order, has rightly come to the conclusion that respondents Nos. 6 to 9 did not become the directors immediately on their nomination by a letter dated October 8, 2002. They would have to be co-opted or appointed as directors by the board as per the agreement between the members contained in article 10.4. The board would, however, be bound to accept the nomination. In my opinion, there is nothing which prevents a member from exercising his rights under article No. 10.4 soon after the general meeting and nominating its nominees till the next general meeting. The third contention of Mr. Andhyarujina is therefore, rejected.

Public interest :

76. Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest are also entitled to make an application under Section 397 of the Act. Relying on the expression “in a manner prejudicial to public interest”. Mr. Andhyarujina submitted that affairs of respondent No. 1 were being conducted in a manner prejudicial to public interest. In paragraph No. 31 of the application before the CLB, the appellant has stated that the application was made in public interest. The averments about public interest are to be found in paragraph No. 32 which is extracted below :

“The aforesaid facts show that the only interest of EEMC and CIPM (who are acting in concert as minority shareholders) is to control the company so as to continue with the arbitration proceedings which are pending in London, between the company and the State of Maharashtra and of the power sector in India. In such circumstances, this hon’ble Board be pleased to look into the affairs of the company and declare that the affairs of the company are being conducted in a manner oppressive to the petitioner and prejudicial to public interest. It is also necessary, just and proper that this hon’ble Board be pleased to consider whether it is just and equitable that the company be wound up or whether any provisions be made with regard to the conduct of the affairs of the company, in future.”

77. The allegations in the petition are that continuation of the arbitration proceedings in London is against the interests of the State of Maharashtra and the power sector in India and as such it is prejudicial to public interest. Mr. Andhyarujina submitted that the MSEB/State of Maharashtra have lawfully terminated the PPA and respondent No. 1 has unnecessarily dragged MSEB, the Government of Maharashtra and the Government of India in the arbitration proceedings before the Arbitral Tribunal in London. The arbitral proceedings are said to be against the interest of the people in the State of Maharashtra because if an order for payment of compensation or damages is passed in the said arbitral proceedings, the MSEB, the Government of Maharashtra and the Government of India would be required to pay huge amount of money to respondent No. 1 out of the public exchequer and the people of the State of Maharashtra would suffer. Buying of power at an exhorbitant rate charged by respondent No. 1 is not in the interest of the people of the State of Maharashtra and therefore, it is not in public interest to continue the arbitral proceedings. The real purpose of the arbitral proceedings is recovery of money not for the benefit of respondent No. 1 but for being paid and transferred to the principals or associates of EMC and CIPM which is not in public interest. I am unable to accept these submissions. Instituting any legal proceedings whether in a court of law or before any other forum chosen by agreement of parties like the Arbitral Tribunal, for enforcement of contractual rights, in my opinion, cannot be against public interest. The mere fact that the proceedings (in the present case “the arbitral proceedings”) are against the MSEB or the Government which would ultimately be liable to make the payment out of public exchequer would not make continuation of such proceedings against public interest. If exercise of contractual rights against the Government can be considered as against public interest, then no contract against the Government can ever be enforced nor can any claim be made against the Government for compensation or damages for breach of a contract. It is not the public policy to suppress any bona fide legal proceedings against the Government or to prevent any party from lawfully agitating its rights in a legal proceeding. Public policy is to be found in Section 28 of the Contract Act which declares agreements in restraints of legal proceedings to be void, it is also to be found in Section 5 of the Arbitration and Conciliation Act, 1996, which prohibits any judicial intervention in the arbitral proceedings, except as provided in that Act. Mr. Andhyarujina also submitted that it is not in public interest to allow respondent No. 1 to be controlled by directors majority of whom were either employees of or nominated by the CIPM and EEMC. In LIC v. Escorts Ltd, [1986] 59 Comp Cas 548, the Supreme Court upheld the right of the shareholders to appoint directors on the board to protect their interest. The Supreme Court also held that it is not necessary for the shareholders to give any reasons or justification for the change of directors. EEMC and CIPM have a right to nominate one person each as a director by virtue of their shareholding of 10 per cent. each. EEMC also has a right to nominate six directors by virtue of its holding more than 60 per cent. of the equity. It has accordingly nominated respondents Nos. 6 to 9, i.e., as its nominees for the four posts of directors. Exercise of the rights by the shareholders in appointment of directors in accordance with the rights conferred by the articles cannot be said to be against public interest.

Conclusion :

(i) The appellant has not proved that affairs of respondent No. 1-company were conducted in a manner prejudicial to public interest or in a manner oppressive to the appellant.

(ii) The appellant has not proved that the facts exist which would justify making of an order for winding up of respondent No. 1 on the ground that it is just and equitable to do so but to wind up the company would unfairly prejudice the appellant.

(iii) In the absence of any proof that the affairs of respondent No. 1-company were being conducted in a manner prejudicial to public interest or in the manner oppressive to the appellant and also in the absence of any justification to pass an order for winding up of respondent No. 1 On the ground that it was just and equitable to do so, the CLB lacked the jurisdiction to pass any order under Section 397 of the Companies Act.

(iv) The CLB should have dismissed Company Petition No. 45 of 2002 and the same is accordingly dismissed.

78. Company Appeal Lodging No. 4 of 2003 is dismissed and Company Appeal No. 6 of 2003 is allowed in the aforesaid terms.

79. Copies of the judgment should be furnished to the parties under rule 6B of Order 20 of the Code of Civil Procedure.