)) IN THE HIGH COURT OF GUJARAT AT AHMEDABAD APPEAL FROM ORDER NO. 457 OF 1997. WITH CIVIL APPLICATION NO. 8831 OF 1997 For Approval and Signature: Hon'ble MR.JUSTICE M.S. SHAH Sd/- ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? Yes 2. To be referred to the Reporter or not? Yes 3. Whether Their Lordships wish to see the fair copy of the judgement? No 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? No 5. Whether it is to be circulated to the Civil Judge? No -------------------------------------------------------------- Appearance: MR SB VAKIL for the Appellant. MR SN SHELAT instructed by MR DS NANAVATI of M/S NANVATI & NANVATI, for the Respondents. -------------------------------------------------------------- CORAM : MR.JUSTICE M.S. SHAH Date of decision: 24/10/97 C.A.V. JUDGEMENT This appeal is filed by the original plaintiff against the interlocutory order dated September 11, 1997 passed by the City Civil Court, Ahmedabad rejecting the Notice of Motion filed by the appellant-plaintiff in Civil Suit No. 3533 of 1997. IN A NUTSHELL 2. The subject matter of the present suit is transfer of 3,81,000 equity shares in defendant no. 1 - a Public Limited Company - Gujarat Gas Company Limited (hereinafter referred to as "the Company" or as "Gujarat Gas") engaged in the supply and distribution of natural gas to domestic and industrial consumers in the State of Gujarat. The appellant - plaintiff, which is a Company engaged in manufacturing textiles and chemicals, is a shareholder in Gujarat Gas with 49,95,325 shares amounting to about 39% of the shareholding. In all 5,00,000 shares amounting to 3.87% of the total equity capital were sold by the plaintiff to defendant no. 2 a Foreign Institutional Investor (FII) in October, 1993 and the said transfer was registered by the Company in December, 1993. Defendant no. 2 (through defendant no. 8 also an FII) thereafter sold 5,89,000 shares to defendant nos. 6 and 7 (also FIIs) between March and November, 1996 and defendant no. 2 sold 1,19,000 shares to the plaintiff in June, 1997. Claiming a right of pre-emption, the plaintiff has filed the present suit for a decree against defendant No. 2 (FII) to execute transfer forms in respect of the suit shares (i.e. 3,81,000 shares) at the price at which defendant nos. 2 and 8 executed transfer forms in favour of defendant nos. 6 and 7 and in the alternative the plaintiff has prayed for a decree of Rs. 5.25 Crores by way of damages in lieu of specific performance against defendant no. 2. The plaintiff has taken out the present Notice of Motion for an interim injunction to restrain defendant no. 2 from alienating, encumbering, dealing with or creating any third party rights or selling 3,81,000 shares to any person and also to restrain defendant No. 1 (i.e. Gujarat Gas) from registering the transfer of 3,81,000 shares or any party thereof in favour of any person and has also prayed for appointment of a Receiver to take possession of the share certificates and transfer forms of the suit shares, pending the hearing and final disposal of the suit. The trial Court has dismissed the Notice of Motion. Hence, this appeal by the plaintiff. 3. Before narrating the contentions urged by the learned counsel for the parties, it is necessary to refer to the relevant dates and events in chronological order in order to appreciate the controversy between the parties. FACTS 4. In 1980, Gujarat Gas was jointly promoted by the plaintiff and defendant no. 4 Gujarat Industrial Investment Corporation - GIIC which is a Government of Gujarat undertaking. The authorised share capital of Gujarat Gas is 1,28,25,000 equity shares of Rs. 10/each. As per clause 2.20 of the shareholders agreement between the said promoters executed on April 23, 1991, so long as the GIIC holds 5% of the paid up equity share capital of the Company, the plaintiff can reduce its shareholding only with the prior written consent of the GIIC and to such person/s, Companies, institutions acceptable to the GIIC, provided that before offering the shares to any other person, the plaintiff shall offer the shares to the GIIC and in case of acceptance of the offer by the GIIC, the price of the shares shall be determined as per the formula provided in the agreement. Liberty was however reserved to the plaintiff to sell and/or to transfer the shares to any of its subsidiaries or any member of the plaintiff group under intimation to the GIIC and such transferees would also be bound to abide by the shareholders agreement. Article 33 of the Articles of the Association of the Company provides "........ No transfer of shares shall be registered in violation of Shareholders Agreement dated April 23, 1991 between the GIIC and the MIL (plaintiff) so long as the said Agreement subsists." Of course, there was an absolute prohibition against transfer of shares during the gestation period. There is no dispute about the fact that the gestation period is already over. Thereafter the Company changed its name to the present name. 5. In view of Article 2.20 of the shareholders agreement, the plaintiff could reduce its shareholding in the company only with prior written consent of the GIIC and, therefore, the plaintiff wrote a letter dated September 27, 1993 (Page 165) to the GIIC stating that the plaintiff was desirous of disposing of upto 38,50,000 shares out of the total of 49,95,325 held by the plaintiff and, therefore, in view of the terms of the shareholders agreement, the plaintiff was offering the shares to the GIIC for the first purchase and that in the event of the GIIC declining to take up the shares, the plaintiff would offer the shares to HOEC/HDFC and its associates or to any other interested party at a negotiated price not lower than the price determined under the formula prescribed by the shareholders agreement. The plaintiff also mentioned that in the event of shares being offered to HOEC and its associates, a fresh shareholders agreement would be drawn up between the purchasers, the plaintiff and the GIIC. The GIIC did not immediately respond to the aforesaid request, and sometime in October, 1993 the plaintiff sold 5,00,000 shares to defendant no. 2 (Jardine Fleming India Pacific Trust, an FII) at the rate of Rs. 119.45. Defendant no. 2 entered into the said transaction through defendant no. 8 (Fledgeling Nominees International Ltd., another FII). The Company (defendant no. 1) registered in December 1993 transfer of the said 5,00,000 shares in favour of defendant no. 8 a/c. defendant no. 2 i.e. "Fledging Nominees International Limited Account Jardine Flaming India Pacific Trust.". 6. Thereafter, the GIIC sent its reply dated March 7, 1994 (page 162) to the plaintiff. While granting approval to the plaintiff's proposal for sale of its shares as contained in the aforesaid letter of September 27, 1993, the GIIC imposed the following condition:- "If and when the new partners disinvest their holding in GGCL (Gujarat Gas), they should make the offer to GIIC, which will have the first right to refusal. Even if GIIC refuses to acquire the shares so offered, disinvestment in favour of another party can be done only with the prior approval of GIIC." After the aforesaid letter of the GIIC imposing the above condition, a letter dated March 16, 1994 (Page 90) was written by Khanna Securities Pvt. Ltd. ( a wholly owned subsidiary of Jardine Fleming India Securities Pvt. Ltd.) to the plaintiff and the letter reads as under :- "Dear Sirs, This has reference to the 500,000 shares of Gujarat Gas Limited sold by you to Jardine Fleming India Pacific Trust. They have confirmed that in the event of their wanting to sell these shares, the first refusal will be given to Mafatlal Industries Limited at the market rate prevailing at the time or at any offer price that they might be having at the time. Thanking you, Yours faithfully, For KHANNA SECURITIES PVT. LTD. Sd/- Rafiq Dossani Director-Broking" 7. The GIIC sent a letter dated August 26, 1994 (Page 133) to the Managing Director of Jardine Fleming India Securities Pvt. Ltd. that Jardine Fleming India Securities Pvt. Ltd. has invested in 3.89% of the total equity capital of Gujarat Gas as nominees of the plaintiffs and that being a nominee of the plaintiff Jardine Fleming India Securities Pvt. Ltd. was requested to abide by the terms and conditions of the shareholders agreement between the GIIC and the plaintiff signed on April 23, 1991 and that in order to complete these formalities, a draft of Nominee Shareholders Agreement was enclosed; on finalization of this draft, the Nominee Shareholders Agreement would be signed by the GIIC, the plaintiff and Jardine Fleming India Securities Pvt. Ltd. In view of the above, Jardine Fleming India Limited, having their office at the same premises where Jardine Fleming India Securities Pvt. Ltd. has its office, sent its letter dated September 9, 1994 (Page 134) to the Company (Gujarat Gas - defendant no. 1) which reads as under :- "To, Gujarat Gas Company Limited 2-C Embassy Apartments, Opp. Vandana School, Dr. V. Sarabhai Road, Ambawadi, AHMEDABAD 390 015. Dear Sir, We have received the enclosed letter reference No. GIIC/SEC/MD/3636 dated August 26, 1994 from Gujarat Industrial Investment Corporation Limited. We would like to inform you that as a representative of Fledgeling Nominees International Limited in India, we are writing on their behalf to say that we have not entered into any Nominee Agreement with Mafatlal Industries Limited. Therefore, unless you revert with a clarification on the purpose of the enclosed letter, we do not intend to reply to the same. Thanking you, Yours faithfully, For Jardine Fleming India Limited, Sd/- Dr Rafiq Dossani." 8. On October 17, 1994 (Page 155), the plaintiff sent a letter to the GIIC stating that the circumstances under which the plaintiff had sought to encash a part of their holding in Gujarat Gas in order to meet certain pressing obligations on the plaintiff's cash flow were explained by the plaintiff to the GIIC at various meetings. There was a protracted delay in replying to the plaintiff's proposal for approval for partial disinvestment and hence the plaintiff had no choice but to make alternative arrangements. The plaintiff further informed the GIIC under the said letter that the conditions stipulated by the GIIC as per their communication dated March 7, 1994 (Page 162) were found unacceptable to Indian Institutional Investors. Therefore, the plaintiff was unable to proceed with their proposal and had only made a small disinvestment of 5,00,000 shares amounting to 3.87% in favour an FII and that the plaintiff has an undertaking from Jardine Fleming India Securities Pvt. Ltd. that if and when they seek to sell the shares, they would offer the first right of refusal to the plaintiff and that the plaintiff would be in a position to strictly observe the terms of the shareholders agreement regarding the right of first refusal. The plaintiff further clarified that Jardine Fleming India Securities Pvt. Ltd. had purchased the shares as an FII and that they were not in a position of nominee shareholders who are contributing any part of the promoters' capital, but they are basically secondary investors. 9. It appears that nothing note worthy happened between October 1994 and March 1996. But on March 27, 1996 defendant no. 2 sold 50,000 of the aforesaid shares in the open market at Rs. 148.50 per share. Thereafter in September, October and by November 6, 1996, defendant nos. 2 and 8 sold in all 5,89,000 shares to defendant nos. 6 and 7, who are also FIIs at rates ranging between Rs. 133.65 and Rs. 118.80. The share transfer forms with the share certificates were lodged by defendant no. 3, through whom the aforesaid transaction was effected, with defendant no. 1 (i.e. Gujarat Gas) including 4,50,000 shares out of the total 5,00,000 shares purchased by defendant no. 2 from the plaintiff. The aforesaid share transfer forms were lodged by defendant no. 3 acting as a constituted attorney of defendant nos. 6 and 7 on the strength of a power of attorney given by defendant no. 5 which stated that defendant no. 5 had been authorised by defendant nos. 6 and 7 to make investment in Indian stocks and shares. 10. Having come to know about the aforesaid transfer, the plaintiff sent a letter dated November 13, 1996 (Page 97) to the Company - Gujarat Gas stating that in 1993 the plaintiff had sold 5,00,000 shares to defendant no. 2 and that there was a clear understanding that the plaintiff will have a right of pre-emption on those shares; the plaintiff was surprised to know that out of the said 5,00,000 shares, 1,90,000 shares were purportedly lodged for transfer by defendant no. 2 in favour of defendant no. 6. The plaintiff, therefore, protested that the purported transfer of the aforesaid shares was in breach of the undertaking given by Jardine Fleming India Pacific Trust through their representatives Khanna Securities Pvt. Ltd. and in breach of the provisions of the Articles of Association. The plaintiff, thus, lodged their objection before the Company (Gujarat Gas) against the transfer of shares in the name of defendant no. 6. The plaintiff also addressed a letter dated November 26, 1996 to Khanna Securities Ltd. referring to the letter dated March 16, 1994 and its contents and making a grievance about the breach of the agreement for the first right of refusal by transfer to shares by defendant no. 2 to defendant nos. 6 and 7. Mr Ted Pulling of Jardine Fleming Investment Management Ltd. sent his reply on December 10, 1996 by Fax in the following terms :- ------------------------------------------------- To: Mafatlal Industries, Fax: 9122 202 7750 Mumbai P.R. Amin From: Ted Pulling Date: 10 December 1996 Jardine Fleming Invt. Mgmt. Subject: Gujarat Gas No. of Page(s) : 1 ------------------------------------------------ P.R. Amin In reference to your fax of 26 November, I must profess ignorance of this agreement. I note that your fax was addressed to Rafiq Dossani who no longer work for JF in India, nor indeed was he ever employed by the fund management division. That would explain why I was not apprised of this agreement. As you can see, the shares were sold to another FII, so I trust this transaction has no effect on your overall shareholding structure. Sincerely, Sd/- Ted Pulling 11. It is required to be noted that in June, 1997, defendant no. 2 sold 1,19,000 shares in Gujarat Gas to the plaintiff at Rs. 177/- per share. The plaintiff again wrote to defendant no. 2 on June 18, 1997 (Page 107) and June 19, 1997 (Page 109) stating that the plaintiff was still entitled to get 3,81,000 shares from defendant no. 2. By this time British Gas Asia Pacific Holding Pvt. Ltd. had already made an entry into the market and appears to have offered to purchase shares in defendant no. 1 - Company ( Gujarat Gas ) at Rs. 270/per share. Hence, the plaintiff sent letter dated July 18, 1997 (Page 111) reiterating the above stand and demanding compensation from defendant no. 2 at the rate of Rs. 130/- per share (i.e. Rs. 270/- per share of Gujarat Gas as offered by British Gas Asia Pacific Holding Pvt. Ltd. less Rs. 132/- at which price defendant no. 2 had sold some of the shares to defendant nos. 6 and 7 in November, 1996). The plaintiff thus demanded a sum of Rs. 5,25,78,000/- with 21% interest from defendant no. 2 on account of breach of the agreement to offer 3,81,000 shares. The plaintiff also wrote a similar letter dated December 10, 1996 (Page 98) to defendant no. 2 protesting against violation of the understanding and agreement that defendant no. 2 will not sell the 5,00,000 shares purchased from the plaintiff without first offering the same to the plaintiff and that the understanding and the agreement was confirmed in writing by Mr Rafiq Dossani, but the undertaking and the agreement was being breached by purported sale of the shares by defendant no. 2 to defendant no. 6 and others. THE SUIT AND TRIAL COURT ORDER ON NOTICE OF MOTION 12. On not getting a positive reply from defendant no. 2, the plaintiff filed the present suit on August 4, 1997 praying for the aforesaid reliefs (para 2 above) which are basically in the nature of relief for specific performance of the agreement referred to in the letter dated March 16, 1994. As stated in para 2 above, the plaintiff also filed the present notice of motion, inter alia, to restrain defendant no. 1 (Gujarat Gas Company Ltd.) from registering the transfer of 3,81.000 shares and also to restrain defendant no. 2 from transferring or selling the said 3,81,000 shares to any person pending the hearing and final disposal of the suit. On August 5, 1997, the City Civil Court issued notice and granted ex-pate injunction in terms of the aforesaid prayers. After hearing the parties, the City Civil Court rejected the Notice of Motion and vacated the said ex-parte order on the following grounds :- (i) The Civil Court's jurisdiction is barred. The present civil suit would not lie in view of the judgement of the Supreme Court in the case of 1995 (3) Judgment Today SC Page 42. (ii) The plaintiffs have failed to make out a prima facie case that the suit shares are not freely transferable. Defendant no. 1 company being a public company, the Articles of Association cannot put any restriction on transferability of shares. Reference is also made to the provisions of Section 111-A of the Companies Act. (iii) Defendant no. 2 had never agreed to be the nominee of the plaintiffs. (iv) The plaintiffs have prima facie failed to establish that the writing executed by Khanna Securities Pvt. Ltd. is an undertaking on behalf of defendant no. 2, so as to bind defendant no. 2. The letter dated March 16, 1994 of Khanna Securities Pvt. Ltd. does not disclose as to whether the author of the letter was authorised to give commitment about pre-emption rights. Khanna Securities Pvt. Ltd. is not a subsidiary of defendant no. 2 but a subsidiary of another company called Jardine Fleming India Securities Pvt. Ltd. (v) Considering the conduct of the plaintiff, till the filing of the suit, it appears that the plaintiff was not bonafide interested in the purchase of shares. It is the aforesaid order of the trial Court rejecting the notice of motion which is challenged in the present appeal. With the consent of the learned counsel for the appellant and the learned counsel for the contesting defendants on caveat, the appeal was heard for final disposal. BROAD SUBMISSIONS OF BEHALF OF APPELLANT - PLAINTIFF 13. Mr Vakil for the appellant - plaintiff assailed the order of the trial Court and prayed for interim injunction pending disposal of the suit on the following grounds :- (i) Defendant no. 2 had agreed at the time of purchase of 5,00,000 shares from the plaintiff in October, 1993 that whenever defendant no. 2 will sell the share, it will give first right of refusal to the plaintiff. That agreement was also confirmed by Khanna Securities Pvt. Ltd. through Dr. Rafiq Dossani on behalf of defendant no. 2. Jardine Fleming India Pacific Trust (defendant no. 2) and Jardine Fleming India Securities Pvt. Ltd. (of which Khanna Securities Pvt. Ltd. is admittedly a wholly owned subsidiary), Jardine Fleming Investment Management Ltd., Jardine Fleming Holdings Ltd. are all part of the Jardine Fleming group and, therefore, the trial Court had erred in not relying upon the letter dated March 16, 1994 of Khanna Securities Pvt. Ltd. It is known that group companies having their registered offices at the same address very often operate through their sister concerns and in commercial transactions like this, it is but natural that the plaintiff would act on the basis of such a commitment given on behalf of Jardine Fleming group companies. A distinction between Jardine Fleming India Pacific Trust and Jardine Fleming India Securities Pvt. Ltd. cannot be made a decisive factor at the time of considering a prima facie case in the suit for the purpose of equitable relief of injunction. (ii) The plaintiff has a right to have its pre-emption right enforced in the present suit filed before the civil Court and such right is de horse provisions of the Companies Act, and therefore, the Company Law Board established by the Companies Act cannot have exclusive jurisdiction to decide such a dispute about the right of pre-emption. (iii) Irrespective of the merits of the plaintiff's case on the basis of the right of pre-emption, the plaintiff was entitled to get an injunction to restrain defendant no. 1 - Company - Gujarat Gas from registering the transfer of 3,81,000 shares purported to have been transferred by defendant nos. 2 and 8 to defendant nos. 6 and 7 on the following grounds :- (a) The transfer forms lodged by defendant nos. 2 and 8 through defendant no. 3 do not include all the material particulars as required by the provisions of Section 108 of the Companies Act. (b) The transfer forms are lodged by defendant no. 3 without any authority from defendant nos. 6 and 7. All that defendant no. 3 has produced is an authority given by defendant no. 5 stating that defendant no. 5 has authority from defendant nos. 6 and 7 but no such authority given by defendant nos. 6 and 7 in favour of defendant no. 5 is lodged alongwith the transfer forms. (c) Defendant nos. 6 and 7 are limited partnerships and they cannot be members of companies other than companies established under Section 25 of the Companies Act. Hence, the purported transfer of shares in defendant no. 1 company in favour of defendant nos. 6 and 7 is illegal. (iv) The suit under Section 9 of the Code of Civil Procedure is competent not merely for enforcement of the right of pre-emption but also for seeking a permanent or temporary injunction to restrain the company from registering the transfer of shares. Reliance is placed on the decision of the Supreme Court in the case of Public Passenger Service Ltd. v. M.A. Khadar, AIR 1966 SC 489. (v) The plaintiff by its conduct is not disentitled to get this injunction on the ground of delay, laches or acquiescence. BROAD SUBMISSION ON BEHALF OF CONTESTING RESPONDENT - DEFENDANTS 14. In reply, Mr. S.N. Shelat, learned counsel for defendant no. 2 submitted that - (1) As regards as the plaintiff's grievances about the alleged non-compliance of the provisions of Section 108 of the Companies Act, any alleged defect in presentation of the transfer forms and about the alleged disqualification of defendant nos. 6 and 7 becoming shareholders of defendant no. 1 company, these are all matters/disputes regarding the alleged rights and liabilities flowing from the provisions of the Companies Act and, therefore, the forum created under the Companies Act alone has the jurisdiction to entertain such disputes and not the civil Court. For this purpose, reliance is placed on the decision of the Apex Court in the case of Canara Bank vs. Nuclear Power Corporation of India Ltd., JT 1995 (3) S.C. 42, particularly in para 30 of the said judgment where the Apex Court has stated that any question relating to the title of any person who is a party before it to have his name entered upon the company's register, and any question which it is necessary or expedient to decide, the Company Law Board has exclusive jurisdiction (except under the provisions of the Special Court Act, 1992). (2)(a) As far the plaintiff's claim for the right of pre-emption is concerned, the same is vehemently denied. According to the plaintiff, the agreement for giving right of pre-emption alleged to have been executed by defendant no. 2 in favour of the plaintiff