FAO No.4297 of 2011 IN THE HIGH COURT FOR THE STATES OF PUNJAB AND HARYANA AT CHANDIGARH FAO No.4297 of 2011 Date of Decision. 24.08.2011 TELENOR ASIA PTE LTD (A Company incorporated under the laws of Singapore) having its registered office at 51 Goldhill Plaza, #21-07, Singapore 308 900 through its authorized person-Charles Woodworth son of Mr. Gedeon Woodworth and another …………Appellants Versus Unitech Limited (A company incorporated under the Companies Act, 1956) having its registered office at 6, Community Centre, Saket, New Delhi-110017 and its Corporate/Principal Office at Unitech House, South City-I Gurgaon 122 001 Haryana through its Authorized Signatory Mr. Gaurav Jain and others ……Respondents Present: Mr. Rajiv Nayyar, Senior Advocate with Mr. Sumeet Goel, Advocate, Mr. Ritesh Mukherjee, Mr. Ashish Dholkia, and Mr. Ashish Bhan, Advocates for the appellants. Mr. Ashok Aggarwal, Senior Advocate with Mr. Mukul Aggarwal, Mr. Amit Aggarwal, Mr. Pradyuman Dubey and Mr. Prashant Mishra, Advocates for respondents No.1 to 4. Mr. M.L. Sarin, Senior Advocate with Mr. N. Ganpathy, Mr. Rohit Khanna, Mr. Manvender Rathee and Mr. Nitin Sarin, Advocates for respondent No.5. 2. FAO No.4299 of 2011 Unitech Wireless (Tamilnadu) Private Limited (A company incorporated under the Companies Act, 1956) having its Corporate/Principal Office at “The Masterpiece, Plot #10, Golf Course Road, Sector 54, DLF-V, Gurgaon Haryana through its authorized signatory Mr. Vishal Jain …………Appellant Versus Unitech Limited (A company incorporated under the Companies Act, 1956) having its registered office at 6, Community Centre, Saket, New Delhi-110017 and its Corporate/Principal Office at Unitech House, South 1 FAO No.4297 of 2011 City-I Gurgaon 122 001 Haryana through its Authorized Signatory Mr. Gaurav Jain and others Present: Mr. M.L. Sarin, Senior Advocate with Mr. N. Ganpathy, Mr. Rohit Khanna, Mr. Manvender Rathee and Mr. Nitin Sarin, Advocates for the appellant. Mr. Ashok Aggarwal, Senior Advocate with Mr. Mukul Aggarwal, Mr. Amit Aggarwal, Mr. Pradyuman Dubey and Mr. Prashant Mishra, Advocates for respondents No.1 to 4. Mr. Rajiv Nayyar, Senior Advocate with Mr. Sumeet Goel, Advocate, Mr. Ritesh Mukherjee, Mr. Ashish Dholkia, and Mr. Ashish Bhan, Advocates for respondent Nos.5 and 6. CORAM:HON'BLE MR. JUSTICE K. KANNAN 1. Whether Reporters of local papers may be allowed to see the judgment ? Yes/No 2. To be referred to the Reporters or not ? Yes/No 3. Whether the judgment should be reported in the Digest? Yes/No -.- K. KANNAN J. I. Array of parties 1. The parties are described as per their status in FAO No.4297 of 2011. The said appeal is at the instance of M/s Telenor Asia Private Limited and Telenor Mobile Communications but hereafter they shall be called for merely Telenor unless context requires otherwise. The 5th respondent is M/s Unitech Wireless Tamil Nadu Private Limited, which is the appellant in FAO No.4299 of 2011. Respondents No.1 to 4 are the Indian Companies, who were the petitioners originally before the District Court at Gurgaon under Section 9 of the Arbitration and Conciliation Act. 2 FAO No.4297 of 2011 II. The nature of orders passed and the cause for fresh adjudication 2. The appeals are against the orders passed on 15.6.2011 by the District Judge Gurgaon directing that the ex parte interim order passed on 1.3.2011 shall be effective till the duly appointed arbitrators deemed it necessary to modify during the pendency of arbitral proceedings as per the provisions of S.17 of the Arbitration & Conciliation Act. By the ex parte order dated 1.3.2001 the Court had restrained the appellants and the 5th respondent to give effect to the resolutions that may be passed at the meeting of Board of Directors of the 5th respondent scheduled to take place. The prayer in the petition was that the Board Resolution passed at the meeting held on 15.1.2011 relating to the rights offer and valuation of shares shall not be given effect to and restrain from tabling or approving the Business Plan dated 16.2.2011 without the consent of the petitioners (respondents 1 to 4 herein). The latter had an immediate bearing on the determination of prices of the shares at which the rights issues would come into operation. 3. M/s Telenor has 67.25% share in the equity hold with the 5th respondent, while the respondent Nos.1 to 4 hold the remaining percentage of shares. The Share Holders Agreement (SHA) provided for an arbitral clause in case of dispute between parties amongst whom an agreement had been brought about and the final order passed by the District Judge, as we have seen before was cryptic and did not advert to the merits of contention between parties. The order dated 1.3.2011 was to be effective till 26.3.2011, but it was later extended on 23.4.2011 and ultimately held to be effective till the duly appointed 3 FAO No.4297 of 2011 Arbitrators thought it fit to nullify/ modify the directions by passing a specific order to that effect during the pendency of arbitral proceedings as per the provisions of Section 17 of the Act. In the appeals filed before this Court earlier in the cases referred to above, this Court again held that since two Arbitrators had already been nominated, one each by the respective parties and that it was only left for the nominated Arbitrators to selected the third Arbitrator, there was no need to disturb the order passed by the District Court and the order would continue till any modification was done by the Arbitrators. In SLP taken to the Hon'ble Supreme Court in SLP No.18870 of 2011, the Hon'ble Supreme Court set aside the order passed by the District Court and this High Court holding that final order could not have been passed without going into the merits of the case as advanced by the parties and accordingly allowed the appeals and remanded the matter to this Court for fresh disposal on merits by reasoned order. It directed that the trial Court's order dated 01.03.2011 would be in force for a period of three weeks from 15.07.2011 to enable the parties to approach this Court and seeks appropriate interim or final orders. The interim orders were subsequently directed to be extended till the final disposal of the appeal by an order dated 28.07.2011 and the case was taken up subsequently for final disposal with consent of both parties. III. Interim protection under section 9 is final vis a vis the proceeding before the court and the adjudication has to be on merits 4. In the manner in which the earlier disposals have come about, it would only mean that an ex parte order that was passed originally on 4 FAO No.4297 of 2011 01.03.2011 came to be confirmed without discussion on merits by a final order and the case was, therefore, argued before me as though the case required fresh adjudication before this Court for the first time. Though section 9 contemplates only interim protection of the subject matter of arbitration, the power of the court could be invoked before, during and after the arbitral proceedings. Again, any interim order that may be passed by arbitral tribunal itself is appealable under section 37 of the Act and consequently, the court passing an order cannot abdicate its duty and make the adjudication, although interim, provisional to what interim decision could be taken by the arbitral tribunal. The minimal supervision that the Act envisages to arbitral tribunals cannot be understood as requiring tentative decisions. The interim protection is itself the final order under section 9 and since no reasons are adopted for the orders issued, which are appealed against the case, the case would remain to be adjudicated on the pleadings of the respective parties. IV. Case is heard on amended pleadings 5. After the matter was remitted from the Hon'ble Supreme Court for fresh disposal, the appellants had filed applications for amending the grounds of appeal and taking up pleas on various contentions raised in the petition under Section 9 of the Arbitration and Conciliation Act. The application for amended grounds is contested by the respondents by pointing out that the appellants had rest contended with merely filing a short reply before the District Court and even when an opportunity had been given for filing brief reply on 6.6.2011 and when the respondents 5 FAO No.4297 of 2011 No.1 to 4 had objected to the brief reply without traversing all the contentions raised, the District Judge rejected the objections and when the matter was posted for arguments on 13.06.2011, the appellants stated that they would not file any further replies in the matter. It is, therefore, objected that the appellants shall not bring any new facts in the amended grounds. The amended grounds of appeal seek to bring about the justification for the decision on one of the key issues of controversy between parties, viz., the hierarchy of funding as mentioned in SHA and the rights issue that was brought about in the Agenda. The appellants have tried to explain the efficacy of rights issue with equal participation of both parties and the need for raising additional resources for servicing the short term loan taken by the 5th respondent to the tune of Rs.5875 crores. Since the whole issue is before this Court on whether there are sufficient grounds for grant of the interim order as sought for, I would allow the additional grounds of appeal as purely incidental to the grounds already taken and I would, therefore, proceed to dispose of the appeals on the basis of the amended pleadings and the replies given by the respondents. V. The SHA terms and the core area of conflict (a) Preparing the ground – the incipient caveat 6. Since the core issue in this case arises with reference to the terms of the SHA and the alleged breach of such terms through the agenda brought through the Resolutions, it would become necessary to reproduce the relevant terms to consider whether there had been such a breach. Since the controversy between the parties arising out of the 6 FAO No.4297 of 2011 decision is a subject of arbitration, I would sound a caveat that the case is being considered on the prima facie strength of the respective contentions and they would not taken to pronounce upon the merits of the claims of parties if the final adjudication is undertaken before the arbitral tribunal. To that extent, the issue of whether the hierarchy of funding has been duly followed as per SHA and whether the agenda brought before the Board of Directors constitute any breach, must again be construed as an adjudication of prima facie consideration that could not bind the parties for the final adjudication. (b) Issue of amalgamation of licensee companies and its possible effect if it is not approved by DOT: Objection not necessary for consideration, since it runs counter to pleadings 7. Before the arguments proceeded the respondents No.1 to 4 attempted to short-circuit the whole exercise by stating that control of 5th respondent company through the resolutions made a fundamental assumption that the scheme of amalgamation of all the licensee companies had come to reality to control them also but the scheme was required to be approved by the Department of Tele-Communication. The senior counsel, Sh.Ashok Agarwal appearing for the respondents would contend that the order of the Company Court at Delhi approving of the amalgamation of the licensee companies has not been fully approved yet by the DOT and would refer to a similar situation of an order of amalgamation issued by the Delhi High Court in yet another case that dealt with amalgamation of Spice Communication with Idea Cellular Limited which recalled the order taking the objection filed through an application filed post court approval that there had been a suppression 7 FAO No.4297 of 2011 of fact relating to the objection of DOT prior to the approval of Amalgamation Scheme, but it was not set out in the pleadings while securing an order from the Court approving the merger. I would not want to be detained on the objection that since the amalgamation of all the licensing companies have not been approved by the DOT, no binding decision could be taken through any Resolution passed by the 5th respondent company, since the financial requirements were conceived as though all the licensing companies are being amalgamated. 8. As pointed out by the learned senior counsel on behalf of the Telenor, Sh. Rajiv Nayyar, the whole edifice of the case has been built on such an assumption of amalgamation with the 5th respondent company and there are express averments in the petition under Section 9 of the Arbitration and Conciliation Act to the following effect:- “The Shareholders Agreement (“SHA”) and subsequent Correspondence between parties. Pursuant to the Subscription Agreement of 28th October 2008, as amended on 16th March 2009, the SHA was entered into on 20th March 2009 against the same parties who executed the Subscription Agreement: a. Unitech Limited (the Petitioner No.1) b. Unitech Wireless (Tamilnadu) Private Limited (the respondent No.1). c. Telenor Asia Pte Ltd, Singapore (the respondent No.2.). d. Telenor Mobile Communications AS, Norway (the respondent No.3.) e. Unitech Wireless Companies (which later merged into the Respondent No.1.) f. Cestos Unitech Wirelss Private Limited (the petitioner No.2.) g. Simpson Unitech Wireless Private Limited (the petitioner No.3.) h. Acrous Unitech Wireless Private Limited (the petitioner No.4.) It must be noted that in September, 2010, the aforesaid eight licensee companies/Unitech Wireless Companies merged into the respondent No.1. A copy of the order dated 27th September, 2010 of the Hon’ble High Court of Delhi approving the scheme of merger is annexed as Annexure-3 hereto. Thus, as on date, all the eight licensee companies stand merged into one entity-Unitech Wireless (Tamilnadu) Private Limited (also known as ‘Uninor’), the respondent No.1 herein. The shareholding of the parties in the respondent No.1 stays the same i.e. Teleonor has 67.25% and the petitioners hold 32.75% shareholding. 8 FAO No.4297 of 2011 9. Even apart from the averments in the petition, the SHA brought between the parties themselves declare that it had been the intention of all the parties to merge the licensee companies into the company (referred to the 5th respondent company) through a Court scheme for merger under the Act and requisite steps and actions have been taken. This is brought through para 2.2.1 that records the fact that the best efforts have been made with the objective to enable the completion of the merger process by 30.09.2009. 10. If the merger does not come into effect for any reason, it may have different ramifications but suffice it for the purpose of the case in assuming that the merger is effective as far as the four contesting parties are concerned before this Court. This assumption is only for the purpose of this case on a fundamental precept that the party shall not be allowed to stray from pleadings and bring up a new self-defeating objection that the merger itself has not taken place and the financial requirements of the the 5th respondent company as envisaged does not exist. If there is no funding requirement, there is not even a cause of action for the petition and there ought not to any grievance against the attempt of the 5th respondent to bring the resolutions. The preliminary objection would bring a brutum fulmen situation and I would therefore discard such an objection to come in the way for examining the case in its fuller perspective. (c) Capitalisation of the Company, as perceived in SHA 9 FAO No.4297 of 2011 11. Clause 3 of SHA provides for capitalization of the 5th respondent company and defines the initial funding amount as Rs.240 billion (Rs.24,000/- crores):- “The parties agree and acknowledge that the requirements of each of the Licensee Companies for the implementation of the Business and development thereof will be capital intensive in nature. The parties anticipate and agree that the total funding requirement of the project involving the roll out of the network of the Licensee Companies based on 2G technologies (“Project”) is approximately Rs.240 billion “Initial Funding Amount”). The funding of the Initial Funding Amount shall be undertaken in the manner as contemplated under this Section 3.1. (The Plan for funding of Initial Funding Amount as contemplated under this Section 3.1 shall be approved by the Board and is hereinafter referred to as the “Initial Funding Plan”). 12. The most crucial clause on which the case of the respondents No.1 to 4 hinged on was the hierarchy of funding, which was said to be breached and therefore, the petition under Section 9 of the Arbitration and Conciliation Act. The terms in SHA relating to ‘project financing’ and ‘hierarchy of funding’ would, therefore, require to be reproduced:- “3.1.6 Project Financing (i) The Foreign Strategic Partner hereby agrees that immediately upon the Completion Date, it will cause each of the Licensee Companies to initiate obtainment of project financing for the project. (ii) The parties hereby agree that any credit support required in connection with the Initial Funding Plan, for the purposes of obtaining project financing for the Project shall be provided by the Indian Strategic Partners and the Foreign Strategic Partner on a pro-rata basis provided that the obligation of the Indian Strategic Partners to provide credit support shall be limited to: (a) such provision in respect of project financing as contemplated under the Initial Funding Plan; and (b) the provision of pledge of Securities and the corporate guarantees. It is further clarified that to the extent that here is any change in the Shareholdings, the collaterals/securities (including without limitation, guarantees and pledges) then provided shall be accordingly adjusted such that a Shareholder whose Shareholding increases shall proportionately increase the collaterals/securities (including without limitation, guarantees and pledges). “3.2 Heirarchy of Funding 10 FAO No.4297 of 2011 The shareholders acknowledge and agree that in order to meet their Business requirements, each of the Licensee Companies will require funds in excess of the funding contributed by the Foreign Strategic Partner under the Initial Capitalization. Any additional finance required by each of the Licensee Companies will be funded, at the Board’s discretion (except for the financing contemplated in the Initial Funding Plan), in the following sequence: (i) the aggregate internal cash resources of all the Licensee Companies, subject to respective minimum cash balance requirements; (ii) external funding which the Board considers appropriate, on the best terms reasonably acceptable (taking into account the terms on which Comparable Companies in India would be able to obtain such financing), from public, private and multilateral lending institutions and agencies on the basis of security provided by the relevant Licensee Companies’ properties and assets without requiring any shareholder support in the nature of a project finance model; (iii) external funding which the Board considers appropriate, with Shareholders’ support (excluding guarantees), on commercially reasonable terms, from public, private and multilateral lending institutions and agencies and on the basis of security provided by each of the Licensee Companies’ properties and assets; (iv) loans, including ECBs from Shareholders made pro-rata to their shareholding; (v) from additional capital contributions in accordance with the provisions of Section 3.4; and (vi) from additional capital contributions by way of subscription to mandatorily convertible preference shares by Shareholders made pro- rata to their shareholding. 13. Of the various tiers of funding enumerated above, Clause (i) could mean internal cash resources of the licensee companies; Clause (ii) refers to external funding that could come through public, private and multilateral lending institutions on the basis of security provided by the Licensee Companies' properties and assets without requiring any shareholder support and (iii) external funding with shareholders' support excluding guarantees on commercially reasonable terms from public, private and multilateral lending institutions. Clause (iv) would mean just loans including ECBs (external commercial borrowing) from shareholders made on pro-rata basis as to the shareholding; Clause (v), from additional capital contributions in accordance with the provisions of 3.4. 11 FAO No.4297 of 2011 The additional capital contributions that it refers would include the rights offer. The grievance is that this hierarchy had been breached by the 5th respondent company and appellants, who were the major stakeholders for the 5th respondent company by not resorting to any other modes, which had to be undertaken one after another and one failing another. The petitioners saw in this proposal a fraudulent design in attempting to increase the stake to the detriment of respondent Nos.1 to 4, who admittedly did not have the resources to contribute and participate in the rights offer. The manner how the rights offer was to be worked out is provided in Clause 3.4 as follows:- “3.4 Equity Commitment and Subsequent Capitalisation 3.4.1 Both the Foreign Strategic Partner and the Indian Strategic Partners undertake to meet the Equity Commitment as set out in the Initial Funding Plan on a pro-rata basis as per the procedure set out in Section 3.4.2. 3.4.2 (i) For an issue of Securities pursuant to 3.4.1 or otherwise, each of the Licensee Companies shall make an offer for subscription of Securities (for, the purposes of this Section, the “Rights Offer”) to the Shareholders in accordance with the provisions of applicable Law, at a price per Security agreed between the Shareholders failing which at a price per security equivalent to the Independent Value, in proportion to their shareholding as on the date of the Rights Offer (hereinafter “Rights Entitlement”; and each Party’s Rights Entitlement, hereinafter (“Pro Rata Security”). The Shareholders shall subscribe, under intimation to the other Shareholder(s) and the relevant Licensee Companies, for their Pro Rata Securities of the Rights Entitlement in accordance with the Rights Offer within a period of 60(sixty) calendar days from the receipt of the Rights Offer.” VI. Several factors that contributed to the run-up to the litigation (a) Project financing, the relevant provision and the failed initiatives of 5th respondent at raising them 14. It is not as if the parties did not accept that there would be immediate need for funding besides the initial capitalization amount. 12 FAO No.4297 of 2011 Para 3.1.1 that refers to assessment of capital structure and initial capitalization specifically acknowledged that the requirements of each of the licensee company for implementation of the business in the development would be capital intensive in nature. The parties anticipated and agreed that the total funding requirement of the project involving the roll out of the network was, as we have already seen, Rs.24,000 crores. This project financing was essentially to be undertaken by the foreign strategic partners requiring each of the licensee companies to initiate obtainment of project financing for the project. The licensee company in this context is the 5th respondent company and the petitioners would contend that immediately after the completion date, which meant the date mentioned in the subscription agreement entered into between the parties on 28.10.2008 as amended by an addendum dated 16.03.2009, the 5th respondent should have made attempts to secure the project financing. The manner of carrying out the project financing has already been extracted above. (b) Telenor’s pre-conditions for bank funding 15. Respondents No.1 to 4 would contend that without requiring the 5th respondent to obtain the additional resources in the manner referred to for the project financing, the appellants had deliberately resorted to rights issue to dilute their holding in the company. They would find fault with the appellants in resorting to such a course by obtaining a short- term bridge loan from the State Bank of India, which constituted the first departure from the SHA. In the meeting of the Finance Committee of the Board of Directors of the 5th respondent, Telenor-appointed Chief 13 FAO No.4297 of 2011 Financial Officer gave out (i) no more equity contribution would be expected from shareholders; (ii) SBI capital markets had been appointed as lead find-raiser; (iii) the funding project for more than Rs.100 billion would be launched by January, 2010. The CFO kept issuing out postures as if to suggest that the business plan as proposed by the 5th respondent was acceptable to the lender bank and on 05.07.2010, the SBI had issued a Letter of Intent