Delhi High Court
K.K. Modi Investment & Financial ... vs Apollo International Inc. & Ors. on 31 October, 2014
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Pronounced on: 31.10.2014
+ I.A. Nos. 16903-16906/2010 in CS (OS) 2205/2010
K.K. Modi Investment & Financial Services
Pvt. Ltd. ....Plaintiff
Through Mr. Arvind K. Nigam, Senior
Advocate with Ms. Liza M. Baruah
and Ms.Manmeet Arora, Advocates
Versus
Apollo International Inc. & Ors. ..... Defendants
Through Mr. Dhruv Mehta, Senior Advocate,
Mr. K.R. Singh, Mr. Manish Dembla
& Mr. Ashish Sindhu, Advocates for
D2 to D8.
CORAM:
HON'BLE MR. JUSTICE JAYANT NATH
JAYANT NATH, J.
I.A. No. 16903-16906/2010
1. These are two applications one filed by defendant No.2 to 8 under
Order I Rule 10 CPC for deletion of the applicants as parties and under
Order VII Rule 11 CPC respectively for rejection of the plaint.
2. The suit has been filed by the plaintiff for permanent injunction. As
per the plaint, the plaintiff is a company incorporated under the Companies
Act, 1956 said to be part of the K.K. Modi Group of Companies. It is
claimed that K.K. Modi Group of Companies has a strong presence in the
field of education.
3. The plaint is a verbose document running into more than 53 pages and
102 paras. The basic facts which can be culled out from this verbose
document is that there are a total of nine defendants. As per the averments in
the plaint, defendants No.5 and 6 control defendants No.1 to 4 and 8. It is
averred that defendants No.5 and 6 together control the John Sperling
Voting Stock Trust and Peter Sperling Voting Stock Trust. The said
defendants No.5 and 6 and the two trusts collectively own 100% of
defendant No.2's class B common stock. Defendant No.2 is said to be a
body corporate under the laws of the State of Arizona, USA. It is averred
that each of defendants No.1,3,4 and 8 are the subsidiaries of defendant
No.2 and further on their own account or through trust, respondents No. 5
and 6 exercise complete control on the business operations of defendants
No.1 to 4 and 8. Together they form part of the group of companies known
as Apollo Companies.
4. Defendants No.3 and 4 are also body corporates constituted under the
laws of the State of Arizona, USA offering degree and non-degree
programmes in various fields of education. Defendant No.7 is the Vice
President of defendant No.2. Defendant No.8 is said to have been
incorporated by defendant No.2 to pursue investments in international
education services and to capitalise on the global demand for education
services. Defendants No. 1 and 8 are said to have identical objects.
Defendant No.9 was incorporated on 14th December, 2001 as a joint venture
company of plaintiff and defendant No.1.
5. It is averred that defendants No.1 and 2 have entered into a 20 year
long Master agreement dated 15.10.1999. In furtherance of the Master
Agreement and with object of offering education programmes in India,
defendant No.1 has entered into a shareholders agreement dated 30.08.2001
with the plaintiff for creation of a joint venture company for exclusively
providing educational offerings of defendant No.2 and its subsidiaries in
India. The shareholders agreement is valid for 40 years. Pursuant to said
shareholders agreement, defendant No.9 was incorporated on 14.12.2001
wherein the plaintiff holds 54.1% of total equity shares.
6. Reference may be had to clause 1.3 of the shareholders agreement
which is the main issue between the parties and which clause reads as
follows:-
"1.3 Purpose:..... With respect to this Section 1.3, Apollo and
Modi agree that neither party will, unless acting in accordance
with the other party's prior written consent (which may be
withheld in the other party's sole discretion), directly or
indirectly pursue, operate, manage, fund, join, operate or
control, or participate in the ownership, management, funding,
operation or control of, or be connected as a partner, consultant
or otherwise with, or permit its name to be used by or in
connection with, any profit or non-profit business or
organization within India which involves a HES, or any
component thereof, and/or other similar purposes as set forth in
this Section; or be engaged in any activity in India, which may
directly or indirectly compete with the activities of the
Company, provided, however, that nothing contained in this
clause shall affect the ability and competence of Apollo and
Modi and their affiliates to continue, implement and pursue the
projects and agreements described in Exhibit C hereto. The
rights of the Company in India shall be exclusive."
7. Defendant No.1 has also entered into a license agreement and
implementation agreement both dated 06.09.2002 with defendant No.3
under which defendant No.3 is obligated to make available educational
programmes in India through defendant No.1 or its subsidiaries and to
provide faculty, personnel and curriculum etc, for such programmes. In
return, defendant No.3 is receiving 5% of gross tuition revenue earned as a
fee.
8. Defendants No. 1 and 9 have also entered into a royalty agreement
dated 31.01.2003 whereby defendant No.9 has been given rights to offer
educational programmes of defendant No.3 in India and the right to use the
name, trade mark and/or logos associated with defendant No.3. Defendant
No.9 is required to pay royalty of 5%.
9. The plaintiff prays for the following reliefs in the plaint:-
(i) Pass a decree of permanent injunction against the Defendants,
restraining the Defendants or its affiliates or associates or partners
from
(a) Directly or indirectly pursuing, operating, managing, funding,
joining, operating or controlling or participating in the ownership,
management, funding, operation or control of, or be connected as a
partner, consultant or otherwise with, or permit its name to be used
by or in connection with any profit or non-profit business or
organization within India which involves a Higher Education
Service or any component thereof, or be engaged in any activity in
India, which may directly or indirectly compete with the activities
of the Plaintiff and thus be in violation of Article 1.3 of the
Shareholders Agreement;
(b) From taking any step in setting up a wholly owned subsidiary in
India connected to the Higher Education Service."
10. Based on the above averments, it is averred in the plaint that though
shareholders agreement was ostensibly signed between plaintiff and
defendant No.1, it was clearly understood by plaintiff and representatives of
defendants that each one of them were bound by the shareholders
agreement. There is said to be economic unity between defendant No.1 and
defendant No.2. It is further urged that defendant No.5 to 7 directly or
indirectly control defendant No.1 to 4 and 8. Hence, it is urged that
defendants No. 1 to 8 have unity of interest and common business goals. It is
further urged that defendants are attempting to misuse the artifice and device
of complex business arrangement between various corporations. It is further
pointed out that though the shareholders agreement between the plaintiff and
defendant No.1 dated 30.08.2001 is for 40 years, the licence agreement and
implementation agreement between defendant No.1 and 3 is only for two
years with renewal, subject to the mutual agreement between all the parties.
11. It is stated that in April, 2009, the CEO of defendant No.9 received
copy of the letter dated 22.04.2009 from the law firm representing defendant
No.3 ostensibly addressed to defendant No.1 terminating the implementation
and licence agreement. Hence, it is urged that defendants are now attempting
to abandon and frustrate the shareholder agreement and enter into Indian
education market directly. Towards this end, it is urged that they have
created defendant No.8 with said same object and purpose as defendant No.1
to make a direct entry into the Indian market. It is urged that under Clause
1.3 of the shareholder agreement, defendant could not enter into the Indian
market directly through defendant No.1 and they were bound to run business
activities in India exclusively in collaboration with plaintiff as envisaged in
the shareholder agreement. Hence, it is urged that the corporate veil be lifted
and as such defendants No.1 to 4 and 8 who are directly or indirectly
controlled by defendant No.5 to 7 are liable to be forbidden from frustrating
or otherwise breaching exclusivity of the non-compete clause in the
shareholder agreement.
12. It is pointed out that defendant No.3 filed a suit before this Court
being CS(OS) 1123/2009 where it sought to restrain defendant No.9 from
enrolling students after 22.05.2009 and from using the trademark or other
intellectual property of defendant No.3. This Hon'ble Court passed an
interim order on 20.07.2009 and 10.08.2009 restraining defendant No.9
from enrolling students. It is urged that as the reputation and goodwill of
defendant No.9 was at stake and students were enrolled with defendant
No.9, plaintiff has entered into a partnership with American Transport
Institution to carry out education of Stratford University. It is further pointed
out that defendant No.3 filed another suit being CS(OS) 2313/2009 against
the plaintiff and defendants No. 1 and 9 for relief of permanent and
mandatory injunction. It is averred that the said suit seeking implementation
of the order passed in the first suit is not maintainable. No interim order has
been passed in the said suit.
13. It is urged that shareholder agreement is valid and subsisting as per
the article 10.1. It is further urged that the said agreement is binding on the
parties for a period of 40 years so long as each party continues to hold 40%
of the shareholding. It is further urged that the defendants are bound by the
negative covenant explicitly set out in Article 1.3 of the shareholder
agreement.
14. It is urged that this Clause sets out that neither party unless acting in
accordance with the other party's prior consent directly or indirectly can
pursue, operate, manage, fund, join, operate or control or participate in the
ownership, management, funding, operation or control of, or permit its name
to be used by any profit or non-profit business or organisation within India
which may directly or indirectly compete with the company.
15. It is also pointed out that in OMP 292/2009 filed in Delhi by the
plaintiff this Court held that defendants No. 2 to 8 are not bound by the
Arbitration Clause as contained in the shareholder agreement.
16. The present suit is pending at the stage of completion of pleadings.
The defendants No.2 to 8 have now filed the present two applications,
namely IA16906/2010 under Order 7 Rule 11 CPC for an order for rejecting
the plaint as being without cause of action and barred by law and to dismiss
the suit as being not maintainable, and IA16903/2010 under Order 1 Rule
10(2) CPC for deleting defendants No.2 to 8 from the array of the parties in
the plaint. The basic premise of these applications is that the suit centres
around the alleged violation of Article 1.3 of the shareholders agreement
dated 30.08.2001. It is stated that the applicants/defendants No. 2 to 8 are
not parties to the shareholders agreement and the said agreement is only
between the plaintiff and defendant No.1. It is further stated that the plaint
discloses no cause of action against defendants No.2 to 8 and is barred by
law. Hence, it is averred that there is no privity of contract or any legal
contractual or jural relationship between the plaintiff and defendants No.2 to
8 and that no cause of action has arisen against defendants No.2 to 8 as a
consequence of the shareholders agreement and hence injunction or any
other relief whatsoever cannot be granted in favour of the plaintiff and
against defendants No.2 to 8. Hence, it is averred that the plaint can be
rejected in part or alternatively, defendants No.2 to 8 being neither necessary
nor proper parties to the suit, be deleted from the array of parties.
17. Learned senior counsel for the plaintiff and defendant nos. 2 to 8
respectively have made detailed submissions spread over several hearings.
18. Learned senior counsel appearing for the applicants/defendants No.2
to 8 has submitted that the shareholders agreement has been admittedly
executed between the plaintiff and defendant No.1 only. It is further urged
that Clause 1.3 which is the non-compete Clause would obviously bind only
the parties to the agreement. It is further submitted that the implementation
agreement dated 06.09.2002 entered into between the plaintiff and defendant
No.3 for providing the courses of defendant No.3 in India through defendant
No.9 does not also grant exclusive right to defendant No.1. Hence, it is
urged that nothing prevents the applicant from doing business in India
independently inasmuch as they are not bound by the non-compete Clause.
The contention of the plaintiff that there are representations made by the
applicants that they were bound by shareholders agreement is said to be not
borne out of any of the documents filed by the plaintiff. It is stated that
under Clause 11.7 of the shareholders agreement, there is a clear statement
that the shareholders agreement sets forth the entire understanding of the
shareholders and supersedes all the prior agreements arrangements etc
whether written or oral. Hence, it is urged that if any representation was
made prior to the execution of the shareholders agreement, then such
representations stand superseded by the specific provisions of the
shareholders agreement. The so called representations made do not lead to
an automatic amendment of the shareholders agreement. It is averred that
the plaintiff has merely resorted to clever drafting in an effort to create an
illusion of a cause of action. It is averred that even otherwise the present suit
for injunction would not lie as the plaintiff has an alternative remedy and
can seek damages for alleged breach of the agreement as provided for under
Section 41(h) of the Specific Relief Act.
19. Learned counsel has relied upon I.T.C. Ltd. v. Debts Recovery
Appellate Tribunal & Ors. (1998) 2 SCC 70, to contend that a clear right to
sue has to be shown in the plaint. Mere claver drafting creating illusion of
cause of action is not permitted in law. He also relies upon Indowind
Energy Ltd v.Wescare (India) Ltd. & Anr. (2010) 5 SCC 306 to contend
that each company is a separate and distinct legal entity and the mere fact
that two companies have common shareholders or common Board of
Directors, will not make the two companies a single entity. He also relies
upon Sunil Kumar & Anr. v. Ram Prakash & Ors. (1988) 2 SCC 77, to
submit that section 41(h) of the Specific Relief Act bars grant of injunction
where the party has an equally efficacious alternative remedy.
20. Learned senior counsel appearing for the plaintiff has of course
denied the submissions of the applicants. He submits that privity of contract
is also created by conduct or by acknowledgment. He relies upon a judgment
of this High Court in the case of Utair Aviation v. Jagson Airlines Limited
and Another (2012)129 DRJ 630 where it has been held that when there is
no privity of contract in the first place, a party by acknowledgment and
conduct can proceed to create such privity with the said third party. It is
averred that a perusal of the plaint and documents annexed would amply
demonstrate that defendants No.1 and 2 are intertwined and the business,
transactions, accounts, management and staff are all intermingled. All
negotiations leading to the execution of shareholders agreement were held
between the plaintiff and defendants No.5 to 7 and other representatives of
defendant No.1 at the office of defendant No.2. The Apollo Group held out
to the public at large that defendant No.1 is not separate from it.
21. It is urged that parties acted in the aforesaid manner and performed
their obligations accordingly. It is further urged that defendants No.2, 5 and
7 have made communications on behalf of defendant No.1. Defendant No.3
in June 2001 had applied for permission to the Higher Learning Commission
Northern Central Association for permission to operate a campus in India at
New Delhi. It was represented that proposed campus was through a
partnership between defendant No.1 to 3 and the plaintiff.
22. Hence, in the above facts it is urged that all the defendants are
necessary and proper parties for adjudication of the disputes and for
determining real issues. It is urged that there is unity of control among the
Group companies. Reliance is placed on Ramesh Hiranand Kundanmal v.
Municipal Corporation of Bombay (1992) 1 Current Civil Cases III 594;
Mumbai International Airport Pvt Ltd v. Regency Convention Centre &
Hotels Pvt. Ltd. (2010) 7 SCC 417. It is further urged that there cannot be
any partial rejection of the plaint under Order VII Rule 11 CPC. Reliance is
place on Sopan Sukdeo Sable v. Assistant Charity Commissioner AIR 2004
SC 1801. Reliance is also placed on various paras of the plaint to contend
that a bare reading of the plaint discloses a cause of action against the
defendants.
23. Essentially relief sought in the two applications are interlinked. Order
VII Rule 11 CPC provides amongst others that a plaint can be rejected if it
does not disclose any cause of action. The Supreme Court in the case of
Sopan Sukdeo Sable vs. Assistant Charity Commissioner;AIR 2004 SC
1801 held that Order VII Rule 11 CPC does not justify rejection of any
particular portion of the plaint. Relying on this judgment this Court in the
case of Dr. D.K.Modi vs. Y.K.Modi & Ors. vide judgment dated 24.09.2013
in CS(OS) No. 991/2009 held that there cannot be a partial rejection of the
plaint.
24. However learned senior counsel appearing for the applicant has
stressed that what he is seeking is rejection of the plaint qua the applicants
namely defendant nos. 2 to 8. For this he relies upon the judgment of the
Rajasthan High Court in the case of Phool Sundari vs. Gurbans Singh AIR
1957 RAJ 97(DB) which held that there is nothing in Order VII Rule 11
(a)(d) CPC which prohibits the Court from rejecting the plaint as a whole
against some of the defendants. He also relies on some similar observations
of the Punjab & Haryana High Court in the case of Balwant Singh vs. State
Bank of India & Ors.; AIR 1976 P&H 316 (FB) and judgment of this
Court in the case of M/s.Sakthi Sugars Ltd. vs. Union of India AIR 1981
Delhi 212.
25. We may also look at Order I Rule 10 CPC. Order I Rule 10(2) CPC
reads as follows:-
"(2) Court may strike out or add parties--The court may at
any stage of the proceedings, either upon or without the
application of either party, and on such terms as may appear
to the court to be just, order that the name of any party
improperly joined, whether as plaintiff or defendant, be struck
out, and that the name of any person who ought to have been
joined, whether as plaintiff or defendant, or whose presence
before the court may be necessary in order to enable the court
effectually and completely to adjudicate upon and settle all
the questions involved in the suit, be added."
26. Hence, the Court may at any stage strike out the name of any party
who has been improperly joined or such person may be joined whose
presence before the Court is necessary in order to enable the Court to fully
or completely adjudicate upon and settle the questions.
27. Given the above legal position we may now see the averments in the
plaint. As per the plaintiff, the defendants are operating through a web of
companies for the purpose of creating confusion. In Para 18 it is urged that
defendant nos. 1 to 8 have unity of interest and common business goal i.e.,
to offer various educational programmes and products in an efficient and
profitable manner. In Para 19 it is urged that defendants are attempting to
use the artifice and device of complex business arrangement between
various corporations to abandon and frustrate existing contracts entered into
by them under the guise of corporate veil. In Para 21 it is urged that till
2007 the said defendants had gained sufficient systematic knowledge of the
Indian market through their operations with the plaintiff and having realised
the potential of Indian market in HES, defendants changed their mind and
started nursing the desire to enter into Indian market directly and abandon
the existing contractual agreement with the plaintiff. Para 22 states that
while the term of the shareholder agreement was for 40 years, the term of
both the Implementation Agreement and the Licence Agreement was kept
two years with renewal subject to mutual agreement of the parties.
Ordinarily, it would have been expected that the term of both the
Implementation Agreement and the Licence Agreement will be concurrent
with that of shareholders agreement. It is urged in Para 24 that defendants
are intending to entirely abandon and frustrate the shareholders agreement
altogether and enter into the Indian education market directly and towards
this end they have created defendant no.8. In Para 24 it is urged that as
defendants could not have entered into the Indian market directly through
defendant no.1 in view of the shareholders agreements, they have now
created defendant no.8 to evade the non-compete clause under the guise of
the corporate veil as the object is that defendant no.8 is a separate distinct
personality and juristic person and so would not be bound by the
shareholders agreement. It is urged that once corporate veil is lifted this
Court will find that defendant nos.1 to 4 and 8 are directly/indirectly
owned/controlled by defendant nos. 5 to 7 and as such are liable to be
forbidden from frustrating or otherwise breaching the aforesaid exclusivity
and non-complete clauses in the shareholders agreement.
28. Similarly, in paragraphs 42 to 44 of the plaint it is averred as follows:-
"42. In the aforementioned circumstances, acting upon the
representations and pursuant to the detailed discussion held with
defendant No.5, Defendant No.6, Defendant No.7, Defendant
No.2, Defendant No.3, Defendant No.4 and its directors,
employees and authorized agents who prevailed upon and
invited the plaintiff to sign a Letter of Intent (LOI) dated
16.11.2000 incorporating the proposed terms of a joint venture
or the partnership proposed between Apollo Companies, all
acting through their affiliate defendant No.1 and plaintiff. The
LOI was signed at New Delhi by defendant No.7. Under the
terms of the LOI the parties agreed to establish on an exclusive
basis, a higher education presence throughout India through the
joint development of a Higher Education System (HES).
43. That acting in furtherance of the aforesaid LOI, on
22.03.2001, the defendant No.2, Defendant No.5, Defendant
No.6 and Defendant No.7 caused its wholly owned subsidiary
Defendant No.3‟s Board of Directors to unanimously approve a
resolution to enable Defendant No.3 to enter into a relationship
with Defendant No.1 and plaintiff with the intent of offering
Defendant No.3‟s programmes in India through the joint venture
of Defendant No.1 and the plaintiff.
44. That as per the applicable laws of Arizona, to enable
defendant No.3 to offer its programs in India it was mandatory
for defendant No.3 to obtain accreditation of the educational
programs, to be made available in India, from Higher Learning
Commission, Northern Central Association of schools and
colleges, State of Arizona, USA (NCA-HLC). Accordingly, the
plaintiff, Defendant No.3 and Defendant No.2 along with its
affiliates worked together in making a proposal to be submitted
to NCA-HLC for obtaining accreditation of educational
programs of Defendant No.3 to be made available in India. For
this purpose, around June 2001, Defendant No.3 under the
instructions of Defendant No.2, Defendant No.5, Defendant
No.6 and Defendant No.7 made a „Request for Change‟ to the
NCA-HLC."
29. It is further averred in the said „Request for Change‟ there was an
express representation that defendant No.1 through its Agreement with
defendant No.2 has a mandate to work with Apollo Group entities. It also
repeated that top management of defendants No.1 to 3 and the plaintiff
backed the extension of the proposed WIU (defendant No.3) Campus in
India.
30. In para 47 it is averred that the plaintiff and defendants have adopted,
acted upon and benefitted from the shareholder‟s Agreement and are
stopped from acting against the specific terms of the said agreement.
31. Reliance is also placed on the fact that shareholder‟s Agreement was
modified vide addendum dated 13.9.2002 and another addendum dated
13.03.2003. The said addendums were proposed by defendants No.1 and 2.
32. It is further averred that pursuant to the royalty Agreement dated
31.1.2003 executed between Defendant No.1 and Defendant No.9, bills were
raised by Defendant No.2 and its affiliates including Defendant No.3 and
Defendant No.4 on account of professional inputs provided by them for
conceptualisation, establishment, commencement and continuation of
operations at New Delhi. These bills have been directly paid by Defendant
No.9 to the said defendants. Prior to execution of the royalty Agreement
Defendant No.9 used to pay directly to Defendant No.2.
33. It is further averred that all communications between Defendant No.3,
plaintiff and Defendant No.9 were direct and not through Defendant No.1.
The implementation of the obligations assumed by Defendant No.1 under
Article 5 of the shareholder‟s agreement were discharged by Defendant No.3
directly to the plaintiff and Defendant No.9. All emails and letters of
extension of license agreement and implementation agreement were
addressed to the plaintiff‟s representative by the defendants.
34. It is further stated that upon Defendant No.7 exiting from Defendant
No.1 and re-joining Defendant No.2 there was no person left in charge of
Defendant No.1. All communications with plaintiff and Defendant No.9
were made directly with Defendant No.2, Defendant No.5 and 7 only.
35. We can now examine the merits of these submissions. I will first deal
with the application under Order VII Rule 11 CPC for rejection of the plaint.
As per the applicants, the plaint discloses no cause of action against
defendants No.2 to 8.
36. The settled legal position is that for the purpose of considering an
application under Order VII Rule 11 CPC only the averments in the plaint
have to be taken presuming them to be correct on the face of it and the
documents filed alongwith it in support of it. (Reference Tilak Raj Bhagat
vs. Ranjit Kaur, 159 (2009) DLT 470 and Indian City Properties Ltd. vs.
Vimla Singh 198(2013) DLT 432).
37. The issue would be as to whether in view of the above averments the
plaintiffs have shown or pleaded a cause of action against defendants No.2
to 8 for the purpose of seeking relief as sought for.
38. A perusal of the plaint shows that what the plaintiff actually pleads is
that the agreement is only between the plaintiff and defendant No.1, but
defendants No.1 to 8 have privity of interest and common business goal and
are attempting to use the device of their complex business arrangement to
frustrate the shareholders agreement. It is averred that defendant No.8 has
been created only to evade the non compete clause, namely, clause 1.3 of the
shareholder‟s agreement. Hence, it is urged that if the corporate veil be lifted
and then it would be discovered that defendants no.1 to 4, and defendant
no.8 are directly/indirectly under control of defendant No.5 to 7 and as such
are likely to be forbidden from frustrating or otherwise breaching the
aforesaid exclusivity and non compete clause in the shareholder‟s
agreement.
39. As to when the corporate veil is to be lifted reference may be had to
the judgment of the Supreme Court in the case of State of UP vs. Renu
Sagar Power , AIR 1988 SC 1737. In paragraphs 62 and 64 the Supreme
Court held as follows:-
"62. Mr Justice O. Chinnappa Reddy speaking for this Court in Life
Insurance Corporation of India v. Escorts Ltd. and
Ors. MANU/SC/0015/1985: [1985] Supp 3 SCR 909 had
emphasized that the corporate veil should be lifted where the
associated companies are inextricably connected as to be, in reality,
part of one concern. It is neither necessary nor desirable to
enumerate the classes of cases where lifting the veil is permissible,
since that must necessarily depend on the relevant statutory or other
provisions, the object sought to be achieved, the impugned conduct,
the involvement of the element of the public interest, the effect on
parties who may be affected. After referring to several English and
Indian cases, this Court observed that ever since A. Salomon & Co.
Ltd's case (supra), a company has a legal independent existence
distinct from individual members. It has since been held that the
corporate veil may be lifted and corporate personality may be looked
in. Reference was made to Pennington and Palmer's Company Laws.
63. It is high time to reiterate that in the expanding of horizon of
modern jurisprudence, lifting of corporate veil is permissible. Its
frontiers are unlimited. It must, however, depend primarily on the
realities of the situation. The aim of the legislation is to do justice to
all the parties. The horizon of the doctrine of lifting of corporate veil
is expanding. Here, indubitably, we are of the opinion that it is
correct that Renusagar was brought into existence by Hindalco in
order to fulfil the condition of industrial licence of Hindalco through
production of aluminium. It is also manifest from the facts that the
model of the setting up of power station through the agency of
Renusagar was adopted by Hindalco to avoid complications in case
of take over of the power station by the State or the Electricity
Board. As the facts make it abundantly clear that all the steps for
establishing and expanding the power station were taken by
Hindalco, Renusagar is wholly-owned subsidiary of Hindalco and is
completely controlled by Hindalco. Even the day-to-day affairs of
Renusagar are controlled by Hindalco. Renusagar has at no point of
time indicated any independent volition. Whenever felt necessary,
the State or the Board have themselves lifted the corporate veil and
have treated Renusagar and Hindalco as one concern and the
generation in Renusagar as the own source of generation of
Hindalco. In the impugned order of the profits of Renusagar have
been treated as the profits of Hindalco.
64. In the aforesaid view of the matter we are of the opinion that the
corporate veil should be lifted and Hindalco and Renusagar be
treated as one concern and Renusagar's power plant must be treated
as the own source of generation of Hindalco and should be liable to
duty on that basis."
40. Hence in certain circumstances as elaborated by the Supreme Court in
the said judgment and other various judgments, the corporate veil could be
lifted and if lifted necessary consequences as per averment in the plaint
would follow.
41. In Utair Aviation vs. Jagson Airlines Limited & Anr., 2012 (129)
DRJ 630 this court held as follows:-
"24...where there is no privity existing at the first place
but, the party may by acknowledgement or by his conduct
can proceed to create such privity with the said third party
by virtue of it being a subordinate to the party to the
contract or dealing with the parties to the contract etc. The
said privity can be created by way of conduct also either
express or implied and the court has to see in those cases
as to whether actually the party can be said to be a
complete stranger to a contract or where the plea is taken
only to defeat the claims of the party. All this can be seen
by looking into the attending circumstances after the
contract.
25. This is more so when all the parties are before the court
including the contracting parties as well as the stranger. In
that event of the matter, it cannot be said that the court is
precluded from complete justice between the parties."
.....
"28. A reading of the aforementioned judicial opinion
coupled with well recognized exceptions that the privity can
be created by virtue of conduct acknowledgment and
admission, it becomes clear that any case where one party is
made aware about the relationship of the other party with
that of a stranger and the said party proceeds to contract out
only with other party in question, knowing fully well the
participation and role of the said stranger, further, it
corresponds with the said third party/ stranger, and conduct
suggests kind of relationship, then there can be said to be a
nexus or a privity which can be said to have been created by
virtue of conduct. The said question essentially becomes a
question of fact and basing upon the said fact finding, the
law has to be necessarily applied as to whether the said
person is a complete stranger to a contract or whether the
privity can be said to have been created by way of conduct.
29. Therefore, the said question relating to privity having
been created by virtue of conduct, acknowledgment and
admission becomes a mixed question of fact and law as it
requires a fact finding as well as due application of law.
Furthermore, once the judicial opinion exists that courts are
entitled to do justice when all are before the court, then it is
unwise to reject the plaint at the threshold, considering the
question of privity of contract as a pure question of law
when actually the conduct of the parties and the attending
circumstances reveal otherwise."
42. Similarly, the Supreme Court in the case of The Godhra Electricity
Co.Ltd. and Anr. vs. The State of Gujarat and Anr., AIR 1975 SC 32 in
para 11 held as follows:-
"11. In the process of interpretation of the terms of a contract,
the court can frequently get great assistance from the
interpreting statements made by the parties themselves or
from their conduct in rendering or in receiving performance
under it. Parties can, by mutual agreement, make their own
contracts; they can also, by mutual agreement, remake them.
The process of practical interpretation and application,
however, is not regarded by the parties as a remaking of the
contract; nor do the courts so regard it. Instead, it is merely a
further expression by the parties of the meaning that they give
and have given to the terms of their contract previously made.
There is no good reason why the courts should not give great
weight to these further expressions by the parties, in view of
the fact that they still have the same freedom of contract that
they had originally. The American Courts receive subsequent
actions as admissible guides in interpretation. It is true that
one party cannot build up his case by making an interpretation
in his own favour. It is the concurrence therein that such a
party can use against the other party. This concurrence may be
evidenced by the other party's express assent thereto, by his
acting in accordance with it, by his receipt without objection
of performances that indicate it, or by saying nothing when he
knows that the first party is acting on reliance upon the
interpretation (see Corbin on contracts, Vol. 3, pp. 249 and
254-55)."
43. Hence, what essentially the plaintiff submits is that defendants No.1
to 8 though said to be different entities are essentially one entity having
unity of interest and common business goals. It is urged that the said
defendants are attempting to use the device of various corporations to
frustrate the existing contract entered into initially between plaintiff and
defendant no. 1 under the guise of a corporate veil. It is further sought to be
urged that keeping in view the conduct of defendants No.1 to 8 each one of
them are bound by the terms and conditions of the shareholders agreement
especially clause 1.3. This binding nature is said to have arisen on account
of conduct explicit and implicit of the defendants though it may be that
initially no privity of the contract existed. It is urged that by conduct, privity
has been created between plaintiff and defendant nos. 1 to 8 and further that
this aspect would be a mix question of law and fact. For this reliance is
placed on the judgment of this court in the case of Utair Aviation v. Jagson
Airlines Limited and Another (supra). To the same extent is the ratio of the
judgment of the Supreme Court in the case of The Godhra Electricity
Co.Ltd. and Anr. vs. The State of Gujarat and Anr.(supra).
44. Hence, these averments as contained in the plaint in view of the legal
position cannot be said to be untenable or illegal. It would be a question of
evidence as to whether the plaintiff ultimately succeeds in showing that the
conduct of defendants No.1 to 8 was such as to bind them to the said clause
1.3 of the shareholders Agreement or not. I may hasten to add that these
observations are made only in connection with decision of the application
under Order 7 Rule 11 CPC. I am not for a moment making any observation
as to whether the facts as disclosed by the plaintiff in the plaint and
accompanying documents show any prima facie case in favour of the
plaintiff or not. The averments read with the legal position as elaborated by
the judgments explained above would show that if the entire averments in
the plaint are accepted as correct, a cause of action would certainly accrue in
favour of the plaintiffs and against the defendants No.1 to 8. The plaintiff is
entitled to lead evidence to prove its submissions of averments. Hence,
there is no merit in the application of defendants No.2 to 8 under Order VII
Rule 11 CPC seeking rejection of the plaint qua defendants No.2 to 8 I.A
16906/2010 is hence rejected.
45. I will now come to the other application under Order I Rule 10 CPC,
namely, that defendants No.2 to 8 are liable to be struck of. The issue is
would it be possible to factually and completely settle all the issues in the
absence of defendants No.2 to 8. Further a connected issue would be
whether the defendants No.2 to 8 would be directly or legally interested in
the action which is subject matter of the present suit.
46. In Mumbai International Airport Pvt. Ltd. vs. Regency Convention
Centre & Hotels Pvt. Ltd.; 2007 SCC 417 the Supreme Court held as
follows:-
"15. A "necessary party" is a person who ought to have
been joined as a party and in whose absence no effective
decree could be passed at all by the court. If a "necessary
party" is not impleaded, the suit itself is liable to be
dismissed. A "proper party" is a party who, though not a
necessary party, is a person whose presence would enable
the court to completely, effectively and adequately
adjudicate upon all matters in dispute in the suit, though he
need not be a person in favour of or against whom the
decree is to be made. If a person is not found to be a proper
or necessary party, the court has no jurisdiction to implead
him, against the wishes of the plaintiff. The fact that a
person is likely to secure a right/interest in a suit property,
after the suit is decided against the plaintiff, will not make
such person a necessary party or a proper party to the suit
for specific performance.
.............
22.Let us consider the scope and ambit of Order 1 Rule
10(2) CPC regarding striking out or adding parties. The
said sub-rule is not about the right of a non-party to be
impleaded as a party, but about the judicial discretion of the
court to strike out or add parties at any stage of a
proceeding. The discretion under the sub-rule can be
exercised either suo motu or on the application of the
plaintiff or the defendant, or on an application of a person
who is not a party to the suit. The court can strike out any
party who is improperly joined. The court can add anyone
as a plaintiff or as a defendant if it finds that he is a
necessary party or proper party. Such deletion or addition
can be without any conditions or subject to such terms as
the court deems fit to impose. In exercising its judicial
discretion under Order 1 Rule 10(2) of the Code, the court
will of course act accordingly to reason and fair play and
not according to whims and caprice."
47. In Ramesh Hiranand Kundanmal vs. Municipal Corporation of
Bombay; (1992)2SCC524 the Supreme Court held as follows:-
"The only reason which makes it necessary to make a person
a party to an action is so that he should be bound by the
result of the action and the question to be settled, therefore,
must be a question in the action which cannot be effectually
and completely settled unless he is a party. The line has
been drawn on a wider construction of the rule between the
direct interest or the legal interest and commercial interest.
It is, therefore, necessary that the person must be directly or
legally interested in the action in the answer i.e., he can say
that the litigation may lead to a result which will affect him
legally that is by curtailing his legal rights."
48. Hence, the issue comes as to whether in the light of the legal position
stated above defendants 2 to 8 are necessary or proper parties to the present
suit filed by the plaintiff. Shorn of details the plaintiff seeks a decree of
permanent injunction restraining the defendants from pursuing, parting,
managing etc any private or non private business or organization within
India which involves higher education services which directly or indirectly
competes with the activity of the plaintiff and from taking any step in setting
up the wholly or a subsidiary in India dealing with the higher education
services. The higher education service is obviously relatable to the
education services provided by defendants No.3 and 4 by and its trade marks
and other such rights. Defendant No.8 is also involved in the said higher
education services. Defendants No.5 to 7 are the officers concerned. If an
injunction was to be passed only against defendant No.1 relating to higher
education services this may impinge upon the rights of defendants no.3 and
4. After all the whole issue revolves around the higher education services of
defendants 3 and 4. Such a injunction could affect the interest of defendants
No.2 to 8. Whether such an injunction should be granted or not is not the
subject matter of the present application. To my mind the presence of
defendants 2 to 8 is necessary to effectively and completely adjudicate upon
the disputes and issues raised by the plaintiff in the accompanying plaint.
There is in my opinion no merit in the contention of the defendants No.2 to
8. Clearly defendants no. 2 to 8 are necessary and proper parties to the
present proceedings.
49. Coming to the last submission of the plaintiff regarding Section 41(h)
of the Specific Relief Act. What the plaintiff seeks is enforcement of a
negative covenant. Hence, in view of section 42 of the Specific Relief Act
the said contention of the applicants is without merits.
50. There is no merit also in the present application IA No. 16903/2010
and the same is dismissed.
51. It is clarified that any conclusions or observations made herein are
only for the purpose of disposal of the present applications. No observations
made herein will prejudice the parties in any manner whatsoever in any
subsequent proceedings.
CS(OS)No.2205/2010
List on 6th January, 2015 before Joint Registrar for further
proceedings.
JAYANT NATH
(JUDGE)
OCTOBER 31, 2014
'raj/mb/n
