JUDGMENT
S.K. Agarwal, J.
1.
The plaintiff by this application under Section
39 Rules 1 and 2 read with Section 151 of the Code of
Civil Procedure, 1908 (for short “CPC”), has prayed for an
ad-interim injunction directing National Thermal Power
Corporation (for short “NTPC”-defendant No. 4) to keep the
amount received by it from Spectrum Power General Ltd.
(for short “SPGL”-defendant No. 1) in pursuance of the
compromise agreement dated 9th April, 2001, in a separate
interest bearing “no lien account”, pending final disposal
of the suit.
2. Brief facts are that the Industrial Development
Bank of India (for short “IDBI”-plaintiff) filed the suit
against SPGL (defendant No. 1), Jaya Food Industries Ltd.
(for short, “JFIL”-defendant No. 2), M. Kishan Rao
(defendant No. 3), NTPC (defendant No. 4), Spectrum
Technologies, USA (for short “STUSA”-defendant No. 5) in
its capacity as the lead institution representing a
consortium of financial institutions, namely, IFCI, ICICI,
LIC, UTI, IIBI, GIC, NIC, NIA, OIC and UII collectively,
“the Lenders”. The plaintiff in this suit has challenged
the legality and validity of the Compromise Agreement
dated 9.4.2001 being contrary to the conditions of the
Loan Agreements and the power of defendant No. 1-SPGL to
make such payment under the compromise agreement or to
enter into such a settlement. It is pleaded that SPGL
(defendant No. 1) was incorporated under the promoters”
agreement between NTPC (a corporation wholly owned by The
Government of India), STUSA and JFIL; that defendant No. 1
SPGL planned to set up 208 MW combined cycle gas based
power project in the State of Andhra Pradesh and for this
purpose the lenders sanctioned financial assistance to the
company to the tune of Rs. 326.20 crores, out of which
Rs. 321.30 crores have already been disbursed, which
includes amount of Rs. 123.29 crores disbursed by IDBI-the
plaintiff. The grant of loan by the Lenders to defendant
No. 1-SPGL company was subject to the terms and conditions
of the Loan Agreement dated 11th August, 1994 and 17th
May, 1995 (hereinafter referred to as “Loan Agreements”).
The disputes arose amongst promoters. Consequently, STUSA
filed a suit (S.No. 1256/96), praying for a decree of
mandatory injunction directing the Promoters in management
to effect necessary amendment sin the Article of
Association of defendant No. 1 SPGL, so as to bring it in
conformity with the requirements of the Promoters
Agreement. NTPC also filed a suit (S.No. 1905/96) praying
for a decree of specific performance directing SPGL
(defendant No. 1), and others to perform their obligations
as contained in the Promoters Agreement and for a decree
of mandatory injunction requiring SPGL to issue and
deliver 77.7 lacs equity shares of NTPC by accepting its
contribution for the same. In these two suits , STUSA and
NTPC had also filed applications for grant of interim
injunction which were dismissed. Their appeals were also
dismissed. Against the order passed by the Division
Bench, Special Leave Petitions (for short, SLPs), were
filed in the Supreme Court. While appeals were pending in
the High Court, in pursuance of the order dated 28th
August, 1998, plaintiff-IDBI convened two meetings of the
promoters of the company to resolve their inter-se
disputes. However, it could not succeed. In the
meetings, during discussion, it was indicated by the
representative of NTPC that it was considering to opt out
of the project, but it was never mentioned by either NTPC
or other party that negotiations for out of court
settlement was also being exclusively held amongst JFIL
and NTPC. The plaintiff-IDBI was always under the
impression that promoters namely JFIL and NTPC were
negotiating for a settlement without any financial
involvements of defendant No. 1 (SPGL). However, in the
Supreme Court JFIL and NTPC filed a compromise agreement
dated 9th April, 2001 whereby defendant No. 1 (SPGL
company) agreed to pay a sum of Rs. 41.57 crores to NTPC,
in 12 monthly Installments together with interest @ 9% per
annum from 1.1.1999. The plaintiff was taken by surprise
as such a huge amount, the company SPGL could not be made
to pay in consideration of NTPC agreeing to withdraw its
suit. This was in additional to Rs. 15.0 crores already paid
by the company towards the costs of land, clearances,
permission, technical services etc. The plaintiff was not
a party before the Supreme Court. The Compromise
Agreement was taken on record and SLP was disposed of by
order dated 9th April, 2001. However it was clarified
that taking of the Compromise Agreement on record or
acceptance of undertakings etc. would not preclude
parties affected by it from challenging in an appropriate
court, the authority of defendant No. 1-SPGL to make such
payment to NTPC or to enter into any such settlement and
that the competent court shall decide the same on its own
merits, without being influenced by the fact that terms of
the compromise agreement are taken on record and/or that
undertakings have been accepted, by the Supreme Court.
3. It is further pleaded that thereafter in April,
2001, STUSA (defendant No. 5) filed a suit (S.No.
765/2001) for restraining SPGL in pursuance of Compromise
Agreement dated 9.4.2001 to make any payment of NTPC. By
orders dated 22.3.2002 the intervention application of the
IDBI was dismissed by observing that the prayers made by
financial institutions were beyond the prayer made in the
suit and that the financial institutions could file
separate suits. On the basis of the above averments, the
plaintiff is seeking ad interim relief directing the NTPC
to keep the amount received by it in an interest bearing
no lien account. Defendants 1 & 3 and 4 have filed the
reply opposing the same (hereinafter “contesting
defendants”).
4. NTPC-defendant No. 4 in its reply has pleased
that the plaintiff has failed to make out their prima
facie case and the balance of convenience in their favor;
that the Compromise Agreement dated 9th April, 2001 is
valid, lawful and that Mr. M. Kishan Rao, Managing Director,
on behalf of defendant No. 2-JFIL had given an undertaking
stating that if the company cannot make payment at any
stage or is prevented from making payment then he shall
make payment personally of the amount, as per terms of the
Compromise Agreement. The undertakings were accepted by
the Supreme Court on 9.4.2001 while taking Compromise
Agreement on record. It is also pleaded that defendant
No. 5-STUSA filed a suit for declaration, perpetual and
mandatory injunction (S.No. 765/2000) praying for similar
relief. On 21st September, 2001 their application for
interim relief was disposed of directing SPGL to continue
to pay Installment to NTPC; that the unsecured loan of
Rs. 27.0 crores advanced by defendant No. 2-JFIL to
defendant No. 1-SPGL, shall remain with the company as
guarantee of JFIL till the final outcome of the suit an
for payment of remaining Installments, banking guarantees
were ordered to be furnished. In appeal (FAO(OS) Nos.
426-427/2001) last direction by which JFIL and M. Kishan
Rao were directed to furnish bank guarantees was set
aside. And in appeal of STUSA (FAO(SO) No. 518/2201) it
was ordered that undertaking furnished in pursuance of the
order of the Supreme Court dated 9th April, 2001 shall
continue to remain in force till the decision in the suit
filed by them. The plaintiff-IDBI’s application for
intervention was also declined.
5. It is further pleaded that the amount of
compensation was agreed to be paid on the basis of the
report of CRISIL, an independent agency, as an
“opportunity costs” to the NTPC and its associated
good-will. It is denied that it was in the nature of a
payment being made by one promoter to opt out another
promoter and that if on trial of the suit it is found that
the payment should not have been made, in that eventuality
the interest of SPGL is fully safeguarded by the
undertakings of defendant-JFIL and M. Kishan Rao, to pay
the amount to the company; that it was for this reason
that the court directed that the unsecured loan of Rs. 27
crores advanced by JFIL to SPGL shall remain with the
company as guarantee of JFIL till the final outcome of the
suit filed by STUSA. It is also pleaded that NTPC is a
profit making undertaking company of the Government of
India. In the year 2000-2001 a net profit after tax, of
the company is R.s 3733.80 crores and in case any decree is
passed against NTPC it would be in a position to comply
with the decree. Defendant No. 1-SPGL in its reply has
also taken the similar stand. Reliance is placed on the
observations made in order dated 21st September, 2001
while disposing of interim application in the suit filed
by STUSA.
6. I have heard the learned counsel for the parties
and have considered their respective arguments. At the
outset, it would be useful to refer to the law regarding
grant of interlocutory injunctions, during pendency of the
proceedings, which is well settled by several
authoritative pronouncements of the Apex Court as well as
of this Court. In Gujarat Bottling Co. Ltd. and Ors. v.
Coca Cola Co. & Ors. it was held:
“The grant of an interlocutory injunction
during the pendency of legal proceedings is
a matter requiring the exercise of
discretion of the court while exercising the
discretion the court applies the following
tests – (i) whether the plaintiff has a
prima facie case; (ii) whether the balance
of convenience is in favor of the
plaintiff; and (iii) whether the plaintiff
would suffer an irreparable injury if his
prayer for interlocutory injunction is
disallowed. The decision whether or not to
grant an interlocutory injunction has to be
taken at a time when the existence of the
legal right assailed by the plaintiff and
its alleged violation are both contested and
uncertain and remain uncertain till they are
established at the trial on evidence.
Relief by way of interlocutory injunction is
granted to mitigate the risk of injustice to
that plaintiff during the period before the
uncertainty could be resolved. The object
of the interlocutory injunction is to
protect the plaintiff against injury by
violation of his right for which he could
not be adequately compensated in damages
recoverable in the action if the uncertainty
were resolved in his favor at the trial.
The need for such protection has, however,
to be weighed against the corresponding need
of the defendant to be protected against
injury resulting from his having been
prevented from exercising his own legal
rights for which he could not be adequately
compensated.”
7. In this case, the plaintiff has challenged the
legality and validity of the compromise agreement dated
9th April, 2001 on the ground that the same is violative
of the conditions of the loan agreement particularly
Section 7.3(2). On the other hand, case of the defendants
is that the loan agreements do not prohibit compromise
between the defendants and NTPC. This section, inter
alia, provides that the borrower will not issue any
debenture or raise any loan or change capital structure of
the company or crate any charge on the assets or give any
guarantee without prior approval of Lead Institutions.
Sections 7.3(2) of Loan Agreements runs as under:-
Section 7.3 GENERAL COVENANTS
The borrower shall,
(i) xxxxx
(ii) LOANS AND DEBENTURES
Not issue any debentures, raise any loans,
accept deposits from public, issue equity
or preference capital, change its
capital-structure or create any charge or
its assets or give any guarantees without
the prior approval of the Lead
Institution. This provision shall not
apply to normal trade guarantees or
temporary loans and advances granted to
staff or contractors or suppliers in the
ordinary course of business or to raising
of unsecured loans, overdrafts, cash
credit or other facilities from banks in
the ordinary course of business.
(iii) to (xii) xxxxx
(xiii) MERGER, CONSOLIDATION ETC.
Not undertake or permit any merger,
consolidation, reorganisation scheme of
arrangement or compromise with its
creditors or shareholder or effect any
scheme of amalgamation or reconstruction.
(xiv) to (xvii) xxxxx
8. Analysis of the above Section shows, that it
consists of two parts. First part is that the borrower is
prohibited from issuing any debenture, raise any loan, accept
any deposit from public, issue equity or preferential
capital, change in its capital structure, create any charge
on the assets, or give any guarantee without prior “approval”
of the Lead Institutions. The second part is the proviso to
the first. It provides that conditions contained in the
first part would not apply to the normal trade guarantees,
temporary loans and advances granted to the staff or
contractors or suppliers in ordinary course of business or to
raising of unsecured loans, overdrafts, cash credit or other
facilities from banks ” in the ordinary course of business”.
Thus, the restrictions contained in this section only apply
when the capital structure etc. of the company is sought to
be changed. These restrictions would have no application to
the day-to-day business transactions. The argument that if
the plaintiff’s interpretation of the loan agreement is
accepted then the borrower would have to take permission of
the lenders even for buying furniture for the company, is
without merit.
9. Learned counsel for plaintiff argued that giving
of Rs. 52.0 crores by the company to NTPC in terms of the
compromise has changed the capital structure of the company,
therefore, sanction of the Lead Institutions was required.
Learned counsel for defendants argued to the contrary that
the said payment made by the company to NTPC in terms of
compromise does not change its capital structure. Black’s
Law Dictionary (Sixth Edition) defines “capital structure” as
follows:-
“Capital structure. The composition of a
corporation’s equities; the relative
proportions of short-term debt, long-term
debt, and owner’s equity. In finance the
total of bonds (or long-term money) and
ownership interests in a corporation; that is,
the stock accounts and surplus. See also
Capitalization.”
In the plaint it is pleaded that as a result of
the said payment, coupled with non-availability of equity
capital, the debt equity ratio of the company has been
disturbed. The same is 84:16 as against 70:30 as per the
institutional norms. Para 19 of the plain reads:-
“19) That the stake of the Financial Institutions
in the project is much higher than that of all
the equity holders, what to talk about JFIL
Group and hence the Financial Institutions are
vitally interested in the affairs of Defendant
No. 1-Company. In brief, the investment of
different stake holders in the project is as
under:-
EQUITY CAPITAL
Bambino Group
32.69 Crores
Spectrum Technologies Inc. USA
29.19 Crores
Rolls Royce
56.05 Crores
Total
117.93 Crores
Financial Institutions
Rs. 32.1.30 Crores
Banks
Rs.4.40.76 Crores
Total
Rs.762.06 Crores
As a consequence of the above payment
coupled with the non-availability of equity
capital, the debt equity ratio of the Company
has been completed disturbed and is 84:16 as
against 70:30 as per the institutional norms.”
10. Learned counsel for defendants in support of their
arguments, heavily relied upon the observations made by
Hon’ble Mr. Justice J.D. Kapoor in the order dated 21st
September, 2001, while disposing of the interim
applications in the suit filed by STUSA. The observations
are:-
“(a) As regards the apprehension of
IDBI, it is misplaced as company-SPGL has not
raised any loans nor have accepted any
deposits or issued any equity. The IDBI has
only agreed to this arrangement on the
consideration that the 10% equity shall be
shared by the STUSA. This agreement has not
caused any prejudice to the IDBI as the
company has drawn up the schedule for payment
which take scare of the interest of the IDBI.
(b) However, as regards the concerns of
the IDBI, it appears to be justified mainly
for the reason that the debt equity ratio
should not be disturbed but so far as the
locus standi of the IDBI to challenge the
agreement or undertaking given by M. Krishan
Rao is concerned it is of doubtful nature as
in the instant case IDBI had not only agreed
to this arrangement but also participated in
mooting the proposal for the agreement that
10% equity shall be shared by the
plaintiff-STUSA. Moreover the company has
already drawn up the schedule of payment to
IDBI.
(c) The present agreement is not a bolt
from the blue for the plaintiff. It is
apparent from the affidavit of P. Mohan Ram of
IDBI that pursuant to an order of the Division
Bench of this Court passed way back in the
year 1998, IDBI took initiative to resolve the
dispute. It is pertinent to mention here that
the plaintiff is also one of the respondents
in the suit filed by the NTPC. Various orders
passed in the proceedings show that the matter
at one stage was adjourned for NTPC to pass
the resolution as to the settlement between
the NTPC and defendant company and the matter
was adjourned from time to time as the talks
for settlement were going on between the
parties that the instant settlement vis-a-vis
NTPC fruitified whereas it failed with the
plaintiff.
The question whether the agreement is
lawful or not is going to be a subject matter
of the suit filed by the NTPC wherein an
application under Order 23 Rule 3 CPW has been
filed and is pending consideration. The fact
that IDBI has also not taken away action for 2
years in spite of its Director being one of
the Directors of the Board of the Company
cannot be lost sight of. So much so in the
year 1998 itself the proposal for NTPC opting
out of the Promoters Agreement was also
considered at one stage. Negotiations failed
as Krishna Rao wanted to remain the Managing
Directors and also wanted the shares at par
and not at the market rate.
As regards the concern of the IDBI that
agreement if implemented would jeopardise the
interests of the IDBI, it has not basis as IDBI
was involved right from the beginning when
modalities of negotiation were being worked
out. Compensation was determined by the
CRISIL on the criteria and principles of
‘opportunity cost’.
In the teeth of these facts to hold the
agreement being bereft of legal authority or
outside the ambit of day-to-day affairs for
the purpose of injunction would be
preposterous and improper. Furthermore, Board
meeting was held on 30th March, 2001. The
Board was informed about the impugned
agreement. On 30th June a copy of the
agreement was placed on record. This prima
facie shows that the SPGL was competent to
enter into the settlement.
(d) Again the question whether there has
been a breach of the Promoters Agreement or
not or whether the same cannot be honoured
vis-a-vis NTPC are such questions which cannot
be taken into consideration at this stage.
This a subject matter of the SLP pending
before the Supreme Court as the plaintiff has
not been successful in getting the injunction
for restraining the breach of the promoters
agreement. Similarly, the question whether
the agreement comes within the ambit of
day-to-day affairs of major policy decision
needs no consideration at stage as the
efforts by IDBI to effect negotiation or
settlement commenced more than two years ago
in which all the parties including the
plaintiff participated. To hold the
settlement at the stage as unauthorised would
be not only negating but also nugating the
efforts of IDBI and also the authority of the
company.”
11. On the basis of above observations, learned
counsel vehemently argued that IDBI was involved right
form the very beginning, when the modalities of
negotiations were being worked out amongst the
co-promoters; compensation was determined by the CRISIL
on the criteria of the principles of opportunity cost;
arguments of IDBI that the compromise was in violation of
the loan agreement was rejected, as efforts by the IDBI to
effect negotiations and settlement commenced more than two
years ago in which parties had participated. Learned
counsel argued that it has already been held that the
compromise agreement was not a bolt from the blue, as is
apparent from the affidavit of P. Mohan Ram of IDBI; in
pursuant to the orders of Division Bench in 1998, IDBI
took initiation to resolve the dispute; the IDBI had
agreed on consideration that 10% of equity shall be shared
by STUSA and that the agreement has not caused any
prejudice to the IDBI, as the company had drawn up the
schedule for payment which take scare of the interest of
the IDBI. Thus, the IDBI cannot be heard at this stage
that the compromise agreement was in violation of the
lender agreement. Learned counsel for the plaintiff
argued to the contrary.
12. It may be re-called that by orders dated 21st
September, 2001, while disposing of interim application,
it was ordered (i) that the company shall continue to pay
Installments to NTPC (ii) that the unsecured loan of
Rs. 27.0 crores advanced by JFIL to SPGL shall remain with
the company as guarantee of JFIL till the disposal of the
suit of STUSA; and (iii) that for the remaining amount of
Installments JFIL was directed to furnish bank guarantees.
Against this order, three different appeals were filed.
By orders dated 22nd March, 2002, Division Bench of this
Court, set aside the directions whereby the JFIL and
M. Kishan Rao were asked to furnish bank guarantees (Civil
Appeal Nos. 426-27/2001). And in the appeal filed by STUSA
it was ordered that the undertakings furnished by JFIL and
M. Kishan Rao, in pursuance of orders dated 9.4.2001 by the
Supreme Court shall remain in force until decision of the
suit field by STUSA. On the application filed by
plaintiff-IDBI before the appellate court, it was observed
that the prayer made by the Financial Institutions were
outside the scope of the suit filed by STUSA, and that
Financial Institutions-IDBI could file its own substantive
suit. Thus, the order dated 21st September 2001 stood
merged in the order passed by the appellate court. After
the order of the Division Bench, the observations made in
the order dated 21st September, 2001 cannot be of any help
to the contesting defendants. Reference in this regard
can be made to the Supreme Court decision in Kunyahmed v.
State of Kerala, . Even otherwise,
admittedly, IDBI was not a party to the earlier suits.
The observations were collateral and made while disposing
of only interim applications in the suit filed by NTPC and
STUSA. Those suits are based on the rights flowing from
the Promoters’ Agreement, whereas the present suit has
been filed by IDBI on the basis of the rights emerging
from the lenders’ Agreement, therefore, in my view, the
said observations cannot be pressed in service for
determining issues involved here.
13. In view of the above, I prima facie find merit
in the contention of the plaintiff that payments made by
SPGL (defendant No. 1) in terms of compromise agreement
dated 9th April, 2001, would change capital structure of
the company, and as such it requires prior approval of the
Lead Institutions. The “approval” is the act of
confirming, ratifying or sanctioning to something done by
another. “Approval” implies knowledge and exercise of
discretion after the knowledge. Mere participation at
some stage in the negotiations by the IDBI itself may not
be enough to be termed as the “approval” as envisaged by
the lender agreement.
14. Learned counsel for plaintiff next argued that
the balance of convenience is in its favor, as no
professional management could have agreed to pay
substantial amount of Rs. 52.0 crores, to settle the
inter-se disputes of the promoters; the action is not
tenable in law having regard to the well settled principle
that corporate body is a separate legal entity different
from the promoters/shareholders; the compromise agreement
was in violation of Article 7.3(2) of the loan agreement;
the lenders are aggrieved by payments made to NTPC under
the compromise agreement, inasmuch as it has seriously
affected the liquidity of defendant No. 1-company and
impaired the capacity of the company to honour its debt
servicing obligations to the lenders, under the loan
agreement; and that the company has not paid for the fuel
charges to GAIL. It is further argued that the compromise
agreement has seriously disturbed the capital structure of
defendant No. 1-company; NTPC which is one of the
promoters of defendant No. 1-company had in fact made no
contribution to the capital of the company even though it
was expected to contribute 10% equity share capital of the
company under the promoters’ agreement in June 1993;
hence the payment to NTPC so as to ensure withdrawal of
NTPC from defendant No. 1-company is contrary to the
financial health and interest of defendant No. 1-company;
Kishan Rao, Managing Director, is not competent or
authorised to divert the company’s funds to settle
inter-promoters disputes; defendant No. 1-company is not
benefited by such compromise in any manner whatsoever;
that compensation out of the company’s funds amounts to
unjust enrichment as NTPC has not even prayed for
compensation or award of damages in the plaint. Learned
counsel for defendants relying upon observations made in
the order dated 21.9.2001, argued to the contrary. For
reasons recorded earlier, there is merit in the contention
of the plaintiff and balance of convenience is in its
favor.
15. Now the stage is reached to consider whether
the plaintiff would suffer an irreparable loss or injury
if the interlocutory injunction is disallowed. Learned
counsel for the plaintiff argued that the defendant
company SPGL has already made substantial default to the
Financial Institutions regarding payment under the lender
agreement; that SPGL is in default to the financial
institutions, to the extent of Rs. 226.0 crores including
the interest default of Rs. 123.0 crores despite having
received regular payments for servicing the principal and
interest dues from the financial institutions. It was
further argued that the share capital of Rs. 32.5 crores
was brought by Kishan Rao Group has already been utilised
in the project and equity shares have been allotted in
lieu thereof; that 27.5 crores has not been deposited by
Kishan Rao Group and that out of 27.5 crores, Rs. 10.0
crores each has been raised by Kishan Rao and M. Raghuveer
has been obtained from the banks including Indian Overseas
Bank. Payment of interest on these amounts are being
serviced by the company. This amount is actually a loan
to the company, therefore, it cannot be treated as a
deposit. Reference in this regard was made to the letter
dated 25th October, 1999 which confirmed that the
interests on loans, are paid entirely by it to the banks.
On the other hand, NTPC has pleaded that it is a profit
making undertaking of Government of India. Its Annual
Report for the year 2000-2001 shows that it had a
turn-over of Rs. 19,064.76 crores (an increase of 18.24 per
cent over the previous year) and a net profit after tax of
Rs. 3733.80 crores. The plaintiff has not denied these
averments. Therefore, the sound financial condition of
the NTPC stands admitted. The argument that it may go bad
at any day in future cannot be accepted in the absence of
any such material at present. In view of this, I am not
inclined to accept the argument that the plaintiff (which
is also a Government undertaking) would suffer irreparable
loss and injury if the prayers for interlocutory
injunction is disallowed.
For the foregoing reasons, a case for grant of
interim injunction is not made out. However, in the
interest of justice, it is ordered that the undertaking
furnished in pursuant to the orders of the Supreme Court
dated 9th April, 2001 would continue to hold good till
final disposal of this suit. Further the unsecured loan
of Rs. 27.0 crores advanced by the JFIL to SPGL shall also
remain with the company as guarantee till final outcome of
the suit.
With the above observations, application stands
disposed of. The observations made herein, are prima
facie and will not prejudice any of the parties during the
trial of the suit on merits.