D.R. Sondhi And Ors. vs Hella Kg Hueck & Co. And Ors.
2001 Latest Caselaw 1855 Del

JUDGMENT

V.S. Aggarwal, J.

1. Shri D.R. Sondhi & Ors (hereinafter described as the petitioners) have filed the present petition under Section 9 of the Arbitration and Conciliation Act, 1996 seeking stay of the operation and effect of the letter of 3rd September, 2001 issued by the respondents (Hella KG Hueck & Co.) seeking to cancel/terminate shareholder agreement of 18th June, 1999 pending award of arbitration on the disputes created by the respondents. It further seeks to restrain the respondents, its directors or nominees from taking any steps as a consequence of the alleged termination of the shareholders agreement and to restrain them from committing any breach or acting contrary to the terms of the shareholders agreement dated 18th June, 1999. They should not implement the resolution of 19th October, 2001 passed in the Boards meeting of JMA Industries Ltd removing petitioner No. 2 from chairmanship of the company.

2. The facts alleged are the petitioner No. 1 was the promoter of JMA Industries Ltd. (for short the company). It was incorporated in 1959. In 1961 respondent No. 1, Hella KG Hueck & Co. entered into a joint venture agreement with petitioner No. 1. The respondents initially had 34% stake in the company. The remaining shareholding was held by the petitioner and their friends and companies managed by the petitioner. In 1980 after public issue was taken out share holding of the petitioners became 40% and share holding of respondent became 26%. Till 1999 the business of the company was under the management and control of the petitioners. It made a mark in the field of automotive lighting signalling equipment. Respondents were actively involved in the functioning of the company and were aware of the aspects of the company.

3. In 1999 there was a change in the Governments policy and the Indian industry started opening up in the era of liberalisation. Now it was possible for the foreign company to have majority stakes in the Indian companies. Respondents were desirous of having majority of stake in the company. With a view to make petitioners agree to their proposal they represented that they should be allowed to have majority shares in the company and they would bring in latest technical know-how and technology. it is alleged that respondents even went to the extent of indulging in deceitful campaign as regards the capability of the company. It is on basis of those false representations and assurance that petitioners agreed to allow the respondents to take over the control and management of the company. The respondents appointed M/s Arthur Anderson to carry out comprehensive due diligence of the company with a view to look into the financial, tax, commercial and legal aspects of the company. The due diligence which was spread over many months involved in depth verification, evaluation and analysis of assets and liabilities of the company. It was after being satisfied as regards all aspects of the functioning of the company and after careful scrutiny of due diligence report that respondents decided to take over control and management of the company. As per shareholders agreement it was agreed between the petitioners and the respondents that a preferential issue of the company would be taken out and allotment thereof was to be made to respondent No. 3 so that respondent No. 3 who had 51% of the issued and paid up shares. Following the allotment of these preferential shares the share holding of the petitioners came to 26%. The petitioners were not paid any consideration for allowing the respondents to take over the majority stakes and control and management of the company. Petitioners 1, 2, 3 and late Mrs. Kunti Sondhi entered into a non-competing agreement with respondent No. 1. Petitioner No. 2 assigned trade mark HELTEX and HELLATEX to respondent No. 1 under the Trade Mark Assignment Agreement of 18th June, 1999.

4. The respondents after taking over majority, management and control of the company held out to the petitioners that steps were being taken to give effect to all the undertakings and assurances given by the respondents to the petitioner which formed the basis of the petitioner to accept the offer of the respondent. After taking over the majority management and control of the company respondents started managing the company to the exclusion of the petitioners. They appointed their manages and executive and had complete control over all the assets and records of the company. After taking over the majority, control of the company respondents completely ignored their obligations towards petitioners. The petitioners had agreed to hand over management and control of the company to the respondents and had allowed the respondents to increase their stakes to 51% on basis of the undertakings given by the respondents. However, respondents not only failed to honour their commitment but sought to fabricate charges with a view to deny the petitioners their rights under the shareholders agreement. They alleged that petitioners had not given correct information to the respondents at the time of execution of the shareholders agreement. A legal notice was issued by the respondents which was an attempt to over up their breaches. They issued another notice of 3rd September, 2001 seeking to terminate shareholders agreement. A reply was sent by the petitioners stating that the same was illegal. Thereafter respondents through their counsel sent a letter of 18th September, 2001 in response to the reply of the petitioners to the legal notice. The petitioners have not been paid any amount for giving up control and management of the company. It is alleged that respondents failed and neglected to take steps to incorporate the shareholders agreement into Articles of Association of the Company and carry out necessary amendments in the Articles of Association. Similarly no steps were taken for re-organisation of the company to settle the issue of surplus lands. The petitioners gave a notice to the company under Section 169 of the Companies Act for calling Extraordinary General Meeting for incorporation of shareholders agreement into Articles of Association and for initiating steps for reorganisation of the company.

5. The respondents are stated to be having five directors on the board of the company but they in an illegal manner removed petitioner No. 2 from Chairmanship of the company in complete violation of the terms of the shareholders agreement. It is contended that respondents are further taking steps to call an extra ordinary general meeting for purposes of increasing the share capital of the company, to destroy the status and rights of the petitioners and their group holding 26% of the companies shares. The respondents are making frivolous claims in order to justify their failure to honour their commitments. Payments due and payable to petitioner No. 2 on account of fees towards retainer/advisor to the company are outstanding. No steps for reorganisation of the company in accordance with understanding reached between petitioners and respondents for transfer of the surplus lands have been taken. The personal guarantee provided by the petitioners 1 to 3 to the lenders of the company have not been revoked. With the alleged cancellation of the shareholders agreement respondents are in illegal manner trying to deny the petitioners rightful dues. It is pleaded that there is an arbitration clause and the petitioners had acted in good faith for acceptance of promises made and assurances hold out. In these circumstances Section 9 of the Act has been pressed into service for an interim relief.

6. Notice had been accepted and petition has been contested.

7. Though arguments were addressed on the merits of the matter but on behalf of the respondents it was urged that keeping in view the provisions of Section 14(1)(c) read with Section 41 of the Specific Relief Act the interim order in the facts of the present case under Section 9 of the Act is not called for.

8. At the outset, it can well be stated that Section 9 of the Act gives the power to the court at the instance of the party to pass interim orders for preservation, interim custody or sale of goods and also for interim injunctions or appointment of the receiver etc. But the said order, if any, for interim measures or for interim injunctions necessarily has to be passed in accordance with the provisions of law including Specific Relief Act.

9. Learned counsel for the respondents contended that in Section 14(1)(c) of the Specific Relief Act prohibits specific enforcement of a contract when the contract in which its nature is determinable. He further contended that no injunction can be granted under Section 41 and prohibition is under Section 41 of the Specific Relief Act to prevent the breach of the contract performance of which could not be specifically enforced. In answer to the same learned counsel for the petitioner in the first instance vehemently urged that the contract in the present case is not in the nature of a contract which is determinable and in any case according to him, the provisions of Specific Relief Act are not exhaustive. Herein it is not the case that damages is an adequate remedy. He further contended that keeping in view Section 41 of the Specific Relief Act and the negative covenants the interim relief can be granted in the facts of the case.

10. To appreciate the said controversy reference can well be made to Section 14(1)(c) of the and Section 41(e) of the Specific Relief Act.

14. Contracts not specifically enforceable-

(1) The following contracts cannot be specifically enforced, namely:-

(a) xxxxx

(b) xxxxx

(c) a contract which is in its nature determinable;

41. Injunction when refused- An injunction cannot be granted-

(a) to (d) xxxxx

(e) to prevent the breach of contract the performance of which would not be specifically enforced.

11. It is abundantly clear from aforesaid that a contract cannot be specifically enforced which in its nature is determinable and injunctions are not to be granted on breach of contract non performance of which could not be specifically enforced. With this backdrop one can conveniently refer to the facts of the present case particularly the shareholders agreement that was entered into on 18th June, 1999, which was not subject matter of controversy. Clause 1.12 of the agreement provided that 'HELLA' undertakes not to participate in competing activities in the territory of India independently or in partnership with other individual persons or legal entities without the consent of the other party and similarly families have agreed to cause Dr. D.R. Sondhi, Mrs. Kunti Sondhi, Ranji Bhandari and Prama Bhandari to enter into non-competing agreement with HELLA on mutually agreed terms and conditions. With respect to the future share holding situation it provided:

"3.3.1 Following the execution of this Agreement the FAMILIES will cause the COMPANY to make a preferential issue of one million seventy one thousand four hundred (1,071,400) equity shares of the COMPANY to Reinhold Poerch at a price of Rupees Thirty Seven and Paise Thirty Only (Rs. 37.30) per share such that, following allotment of such share to it, Reinhold Poerch shall own and control fifty one percent (51%) of the issued and paid up equity capital of the COMPANY. Reinhold Poerch shall subscribe for the said shares within thirty (30) day of receipt of the offer subject to receiving all corporate and regulatory approvals for the issuance of and subscription to the shares by Reinhold Poersch. The Parties shall cause the COMPANY to complete the allotment of the said share of the COMPANY to Reinhold Poersch within seven (7) days of receipt of the subscription amount from Reinhold Poersch."

12. The agreement further recites about further financing of the company. It was proposed that the board shall cause the company to intimate the families about such proposed increase at least 90 days prior to the receipt of the subscription. There was to be 7 Board of Directors as per Clause 8.2 and it was further provided that families shall own not less than 26% but upon 49% of the share capital of the companies, the family shall be entitled to nominate three directors on the board. The most important aspect of the same is Clause 13.4 as to in what circumstances the agreement can be terminable with immediate effect by one party and the said para reads:-

"13.4 This Agreement shall be terminable with immediate effect by one PARTY, if

(i) the other PARTY or a constituent thereon commits a material breach of any of its obligations under this Agreement, which it fails to remedy within sixty (60) days of receipt of written notice requiring that the breach be remedied.

(ii) a constituent of the other PARTY holding at least ten percent (10%) of the shares of the COMPANY becomes insolvent or a bankruptcy order is made for dissolution or liquidation.

(iii) if either PARTY is not willing to hold shares in the COMPANY and neither the other PARTY nor any third party is willing to acquire the offered shares within twelve (12) month after the other PARTY has been notified in writing about such offer."

13. Acting on the said agreement a notice had been issued to the plaintiff and thereupon it is alleged that the shareholders agreement of 18th June, 1999 have been terminated. The short question as referred to above and re-mentioned at the risk of repetition that comes up for consideration is as to whether the said agreement is terminable in terms of Section 14(1)(c) of the Specific Relief Act or not. It clearly provides that if one party itself in a material breach of any of its obligations which it ails to remit within 60 days of the receipt of the written notice the agreement can be terminated.

14. Question as to whether material breach has been committed or not or if there is any breach at all was agitated but it is not being gone into for the reason that it is not the question for determination at present.

15. Learned counsel for the petitioner urged that only those agreements would be taken to be terminable which are voidable etc. According to the learned counsel otherwise every agreement could be taken to be terminable and that was never the intent of the legislature.

16. The said argument of the learned counsel which was eloquently put forward in the facts of the present case carriers little weight. Reference in this connection can be made to the decision of Supreme Court in the case of Indian Oil Corporation v. Amritsar Gas Service . In the cited case there as a distributorship agreement of 1.4.1976 made between Indian Oil Corporation and Amritsar Gas service as distributor of the Corporation for sale of Corporation's liquefied petroleum gas. Clause 27 of the agreement provided for termination of the agreement of the Corporation forthwith on happening of the specified events while Clause 28 provided that without prejudice to the other provisions the agreement was terminable by 30 days notice to the other party without assigning any reasons. The Supreme Court while looking into the said clauses and Section 14 of the Specific Relief Act held:-

"This finding read along with the reasons given in the award clearly accepts that the distributorship could be terminated in accordance with the terms of the agreement dated April 1, 1976, which contains the aforesaid Clauses 27 and 28. Having said so in the award itself, it is obvious that the arbitrator held the distributorship to be revokable in accordance with Clauses 27 and 28 of the agreement. It is in this sense that the award describes the Distributorship Agreement as one for an indefinite period, that is, till terminated in accordance with Clauses 27 and 28. The finding in the award being that the Distributorship Agreement was revokable and the same being admittedly for rendering personal service, the relevant provisions of the Specific Relief Act were automatically attracted. Sub-section (1) of Section 14 of the Specific Relief Act specifies the contracts which cannot be specifically enforced, one of which is a contract which is in its nature determinable'. In the present case, it is not necessary to refer to the other clauses of Sub-section (1) of Section 14, which also may be attracted in the resent case since Clause (c) clearly applies on the finding read with reasons given in the award itself that the contract by its nature is determinable. This being so granting the relief of restoration of the distributorship even on the finding that the breach was committed by the appellant-Corporation is contrary to the mandate in Section 14(1) of the Specific Relief Act and there is an error of law apparent on the face of the award which is stated to be made according to 'the law governing such cases'. The grant of this relief in the award cannot, therefore, be sustained."

17. In other words, it was concluded that the contract was terminable. The learned counsel for the petitioner tried to distinguish the cited decision that it was a commercial contract. I am afraid the said argument has simply to be stated to be rejected. It has to be seen that the law has to be made applicable to contracts. It cannot be made a distinction in terms that a particular contract is commercial contract or is otherwise. That will have little impact in this regard and the decision of the Supreme Court indeed clearly supports the contention of the respondents learned counsel.

18. Almost a similar question came up before this court in the case of Indian Oil Corporation Ltd. v. Shriram Gas Service 57 (1995) DLT 273. In paragraph 13 dealing with almost similar clauses as in the case of Indian Oil Corporation v. Amritsar Gas Service (supra) this court concluded that the contract was terminable.

19. More close to the facts of the present case is the decision of the Division bench of this court in the case of Rajasthan Breweries Ltd. v. Stroh Brewery Company AIR 2000 Delhi 452. The question as has been raised and pressed in the present controversy was alive to the Division Bench of this court. It was urged there as to if in such like contracts under Section 14(1)(c) of the Specific Relief Act would come into play or not. The argument that is being advanced in the present case was floated before the Division Bench. The same was rejected and the Division Bench held after noticing the argument that was advanced:

16. "Learned counsel for the appellant contended that the word "determinable" used in Clause (c) to Sub-section (1) of Section 14 means that which can be put an end to. Determination is putting of a thing to an end. The clause enacts that a contract cannot be specifically enforced if it is, in its nature, determinable not by the parties but only by the defendant. Although clause does not add the word "by the parties or by the defendant" yet that is the sense in which it ought to be understood. Therefore, all revocable deeds and voidable contracts may fall within "determinable" contracts and the principal on which specific performance of such an agreement would not be granted is that the Court will not go through the idle ceremony of ordering the execution of a deed or instrument, which is revocable at the will of the executant. Specific performance cannot be granted for a terminable contract.

17. We are unable to persuade ourselves to accept the submissions put forth on behalf of the appellant that when a contract was determinable by the parties, the same cannot be treated as such a contract as is referred to in Clause (c) to Sub-section (1) of Section 14 is a contract, which in its nature is determinable."

20. One finds in respectful agreement with the said view point. It can only be added that it is not only voidable contracts but where the contracts provides that it is terminable on a particular event then it must be taken that in terms of Section 14(1)(c) of the Specific Relief Act it would come into play and injunction as such will not be granted. Here the contract provided the conditions and that it was terminable. Exactly same is the position herein and therefore the application of the petitioner must be taken to be misconceived.

21. For these reasons petition fails and is dismissed.

22. Thus, IA 14987/2001 also must become infructuous.

22. By way of abundant caution it is added that nothing said herein is any expression of opinion on the merits of the matter, parties are left to bear their own costs.