1 mpt IN THE HIGH COURT OF JUDICATURE OF BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO. 1143 of 2008 IN SUIT NO. 959 of 2008 1) Onyx Musicabsolute.com Pvt.Ltd. 2) Kishore Patel 3) Rajan Patel 4) Bharati Patel 5) Rupa Patel .. Plaintiffs versus 1) Yash Raj Films Pvt.Ltd. & ors. 2) Onyx Mobile Pvt.Ltd. 3) Virtual Marketing India P.Ltd. .. Defendants ... Mr.D.J. Khambatta, Sr. Counsel with Shyam Mehta, Gautam Ankhad i/b M/s.Federal & Rashmikant for the plaintiffs/petitioners. Dr.V.V. Tulzapurkar, Sr.Counsel with P. Palkhiwala i/b Deven Dwarkadas & Partners for defendant no.1/ respondent no.1. Mr.T.N. Subramaniam, Sr.Advocate with G.R. Joshi i/b I.C.Legal for defendant no.3/respondent no.3. W I T H ARBITRATION PETITION NO.169 OF 2008 2 AND ARBITRATION PETITION NO.170 OF 2008 Onyx Musicabsolute.com Pvt.Ltd. and others .. Plaintiffs versus Yash Raj Films Pvt.Ltd. & ors. .. Defendants ... Mr.D.J. Khambatta, Sr. Counsel with Shyam Mehta, Gautam Ankhad i/b M/s.Federal & Rashmikant for the petitioners. Dr.V.V. Tulzapurkar, Sr.Counsel with P. Palkhiwala i/b Deven Dwarkadas & Partners for defendant respondent no.1. Mr.T.N. Subramaniam, Sr.Advocate with G.R. Joshi i/b I.C.Legal for respondent no.3. None for respondent no.2. CORAM : D.G.KARNIK,J DATED : 4th July 2008 ORAL JUDGEMENT:- ORAL JUDGEMENT:- ORAL JUDGEMENT:- 1. These matters were heard on 27th April 2008 and the order was reserved. In the meanwhile, the plaintiffs/petitioners moved the vacation Bench by filing Arbitration Petition nos.239 and 240 of 2008 and the papers of these matters were called by the Vacation Bench and the papers are now returned 3 after passing some ad-interim orders. Those arbitration petitions are however not placed on Board. After reopening of the courts I have heard the counsel again. By consent, the matters are heard finally. 2. The plaintiffs in the suit are the petitioners and the defendants in the suit are the respondents in the arbitration petition nos.169 and 170 of 2008. Hence, for the sake of convenience the parties are referred to as the plaintiffs and the defendants. 3. In the suits as well as in the arbitration petitions, the plaintiffs seek an order of injunction restraining the defendants, their agents and servants from selling, re-selling, sub-licencing, distributing, exploiting, promoting, marketing any form of content in the films produced or to be produced by the defendant no.1 and covered by the contract (licence agreement dated 23rd April 2005) between the defendant no.1 and defendant no.2. The plaintiffs also seek a further order directing the defendant nos.1 and 3 to return the content of the film "Tashan" and other reliefs. Basic facts. Basic facts. Basic facts. 4 4. Plaintiff no.1 is a company incorporated and registered under the Companies Act, 1956 and plaintiff nos.2 to 5 hold the entire share capital of plaintiff no.1. Plaintiff no.1 is engaged in the business of producing internet and net enabled solutions and related services. Defendant no.1 is also a company incorporated and registered under the Companies Act and is engaged in the business of production distribution, marketing and sale of cinematographic films. The plaintiffs and the defendant no.1, after negotiations decided to establish a joint venture to engage in and undertake business of providing mobile and internet content of Bollywood movies and other related businesses. Accordingly, they formed defendant no.2 as a joint venture company incorporated and registered under the Companies Act, 1956. A joint venture agreement was executed between the plaintiffs, the defendant no.1 and the defendant no.2 on 23rd April 2005. The business of the joint venture interalia was to set up one or more unique Short Codes to offer mobile internet content, to provide online service of mobile phone net works and to secure and obtain mobile and internet rights of the contents of Bollywood movies. On the same day, the defendant no.1 granted to the defendant 5 no.2 exclusive licence for internet rights and mobile rights in the Bollywood films produced and to be produced by the defendant no.1 with a right to the defendant no.2 to grant sub-licences to third parties. The licence was to remain in force till the joint venture agreement remained in full force and effect. 5. The defendant no.2 commenced its business immediately after the licence agreement dated 23rd April 2005. The major and perhaps the only business so far undertaken by the defendant no.2 is to make available mobile content of the films produced by the defendant no.1. According to the plaintiffs, seeing the huge potential in the internet business the defendant no.1 made various attempts to exclude internet content from the licence agreement, with a view to exploit the internet rights by itself to the exclusion of the defendant no.2. The defendant no.1 firstly attempted to persuade and pressurise the plaintiffs to modify the terms of the licence agreement. On being unable to succeed in its design the defendant no.1 adopted three pronged approach. Firstly it tried to exploit the internet content in respect of its various film on its own in gross violation of the terms of licence agreement; secondly, it tried 6 to obstruct exploitation of the internet rights by the defendant no.2 by adopting a non operative stand; and thirdly, it attempted to try and contrive/engineer a Dead Lock with regard to the operations and management of the defendant no.2 company. According to the plaintiffs the defendant no.1 is trying to give internet and mobile rights in its film "Tashan" to the defendant no.3. The plaintiffs therefore filed the aforesaid two arbitration petitions to restrain the defendant no.1 from giving away the internet or mobile rights in the contents of the films produced or to be produced by the defendant no.1 and for preventing it from committing breach of the licence agreement. However since the defendant no.3, to whom the internet and mobile rights are sought to be transferred, is not a party to the joint venture agreement or the licence agreement (which contain arbitration clause) the plaintiffs have filed the suit for claiming relief of injunction against all. Submissions of the plaintiffs. Submissions of the plaintiffs. Submissions of the plaintiffs. 6. Mr.Khambatta, learned Sr.Advocate for the plaintiffs submitted that by the licence agreement dated 23rd April 2005, the defendant no.1 had granted exclusive licence to the defendant no.2 for 7 exploiting internet rights as well as mobile rights in respect of all films produced as also the films to be produced by defendant no.1 from time to time. No person (including the defendant no.1) other than the defendant no.2 has a right to exploit the internet and mobile content in the films of defendant no.1. However in breach of the licence agreement the defendant no.1 has attempted to give the internet and/or mobile rights in respect of his films covered by the licence agreement. The film "Tashan" produced by defendant no.1 was due for release on 24th March 2008. As per the licence agreement the internet and mobile right in the content of the film "Tashan" exclusively belongs to the defendant no.2. However in breach of the said agreement the defendant no.1 was trying to give the internet and mobile rights of the content of the film "Tashan" to the defendant no.3. Disputes therefore arose between the plaintiffs and defendant no.1 for the resolution of which the plaintiffs have initiated the procedure for appointment of arbitral tribunal. Pending the resolution of the disputes by arbitration, plaintiffs have claimed the relief of injunctions in the arbitration petitions. Learned counsel for the plaintiffs submitted that the deadlock notice issued by the defendant no.1 on 27th November 2007 8 is invalid as the grounds specified for deadlock in the joint venture agreement do not exist and in any event, the defendant no.1 has waived the deadlock notice. He submitted that the joint venture agreement as well as the licence agreement were therefore, in full force and effect. Under the licence agreement, the defendant no.2 is the exclusive licencee in respect of the internet and mobile content of all the films covered by the licence agreement. Under section 2(j) and section 54 of the Copyright Act, the defendant no.2 is entitled to exclude even the plaintiff from use of the copyright in the mobile and internet content of the said films and plaintiffs are entitled to an injunction restraining the defendant no.1 from committing breach of the licence agreement. Counsel further submitted that the defendant no.2 was a joint venture company and since the plaintiff nos.2 to 5 on the one hand and defendant no.1 on the other hand were equal shareholders and each party had two directors on the Board of Directors of defendant no.2, it was not possible for the defendant no.2 to file any suit or arbitration petition and therefore plaintiffs were entitled to sue and/or file arbitration petitions by way of a derivative action on behalf of and for the benefit of defendant no.2. 9 Submissions of the defendant nos.1 and 3. Submissions of the defendant nos.1 and 3. Submissions of the defendant nos.1 and 3. 7. Per Contra Mr.Tulzapurkar, learned Sr. Advocate appearing for the defendant no.1 submitted that suit and the arbitration petitions by the present plaintiffs were not maintainable. Under the licence agreement dated 23rd April 2005, the licence was granted by the defendant no.1 to joint venture company i.e. the defendant no.2. Assuming, without admitting, that there was any breach of the terms and conditions of the licence, it was the defendant no.2 who alone could take an action either by filing of a suit or by arbitration petition. The plaintiffs had no cause to take an action for the alleged breach of the licence. The plaintiff nos.2 to 5 as shareholders of the defendant no.2 company could not take an action for the alleged cause of defendant no.2. The case of the plaintiff no.1 was worse in as much as he is not even a shareholder of the defendant no.2. It was the defendant no.2, if at all, who was aggrieved by the alleged breach of licence and a shareholder of group of shareholders of defendant no.2 were not entitled to sue for the alleged breach. The defendant no.3 was not a party to the licence agreement and therefore, a petition under 10 section 9 of the Arbitration Act could not be filed against the defendant no.3. He submitted that on merits the plaintiffs were not entitled to an injunctive relief. The joint venture agreement and the licence agreement were executed on the same day and simultaneously. The licence agreement was to remain valid so long as the joint venture agreement remained in full force and defect. In other words, the licence agreement was co-terminus with the joint venture agreement. The joint venture was terminated and in any event had ceased to be in full force and effect. On account of the several breaches by the plaintiffs and it was impossible to run the joint venture business smoothly resulting into a deadlock in the working of the joint venture. There were irreconcilable differences between the parties regarding the management of defendant no.2. Therefore the defendant no.1 had issued a appropriate notice of a "deadlock" in exercise its right under clause no.11 of the joint venture agreement. The joint venture agreement therefore ceased to be in force and effect. As the joint venture agreement ceased to be in full force and effect the licence agreement stood terminated. Therefore, the plaintiffs were not entitled to an injunction. He further submitted that the suit related only in respect of the film "Tashan". The 11 rights in the film Tashan were transferred to the defendant no.3 even before the filing of the suit. The suit had therefore become infructuous and no relief could be granted in the suit. He further submitted that the principles which ordinarily apply for grant of an injunction in a suit do also apply for grant of an injunction in a petition under section 9 of the Arbitration Act. In order to get an injunction in a suit the plaintiff is required to make out a strong prima facie case, including on the point of maintainability of the suit and show the balance of convenience was in his favour. In a petition u/s.9 of the Arbitration Act the same would be required to be shown by a petitioner. Since the plaintiffs, who were the petitioners in arbitration petition, had not made out a strong prima facie case and as the arbitration petition at their instance was not maintainable they were not entitled to any relief in the suit as well as the arbitration petitions. He further submitted that since the plaintiffs had filed the suit (suit No.959 of 2008) after the filing of the Arbitration Petitions claiming that the relief of injunction on the very same cause, the Arbitration Petitions were not maintainable as two forums cannot, in law, hear and decide the same issues. Since the plaintiffs themselves had chosen 12 public forum (of a Civil Court) getting their grievance redressed, they were not entitled to proceed with the private forum viz. the arbitral tribunal and consequently they were not entitled to any reliefs in the petitions u/s.9 of the Arbitration Act. . Derivative action by way of a suit. . Derivative action by way of a suit. . Derivative action by way of a suit. 8. Admittedly, the licence was granted by the defendant no.1 in favour of defendant no.2. By the alleged breach of the licence by the defendant no.1 in granting licence to defendant no.3 the person who could be aggrieved was the defendant no.2. The defendant no.2 has not taken any action for the alleged wrong done to it. The action is taken by the plaintiffs in their own name for the wrong allegedly done to the defendant no.1 company. The short question that arises for consideration is whether the plaintiffs can sue in their own name for the wrong allegedly done to the defendant no.2 company in which they hold 50% of the shares capital. 9. The fundamental principle of our law is that a company is a legal person with perpetual succession and common seal. It is a body corporate 13 having identity, separate and distinct from the directors of the shareholders with its own property rights and interest to which along it is entitled. Just as the individual and personal property of any of the members of a company is not the property of the company, the property of the company is not the property of its directors or shareholders or members. Being so, if the company is defrauded or wronged by a wrongdoer, the company itself is the person to sue the wrongdoer for damages. Such is the rule in Foss Vs. Harbottle (1843) 2 Hare 461. The rule is easy enough to apply when the company is defrauded by the outsiders. In that event, the company is the only person who can sue but what would be the position if the company is defrauded by insiders who control it by the directors or persons who hold a majority of the shares? Would the company sue such insiders or wrongdoers? This would be a practical impossibility. Subsequent decisions of the court appear to have toned down rigour of the rule in Foss Vs. Harbottle or atleast have created exceptions to the rule. It would be interesting to note that in Estmanco (Kilner House) Ltd. Vs. Greater London Council (1982) 1 All E.R 437, Sir Robert Megarry V-C while recognising that there could be a number of exceptions to the rule in Foss Vs. Harbottle 14 observed that difficulties could arise in determining the exceptions. He said: "If the rule in Foss V. Harbottle had remained unqualified, the way would have been open for the majority to stultify any proceedings which were for the benefit of the minority and to the disadvantage of the majority. Accordingly, a number of exceptions from the rule have been established; and it is here that the difficulties begin. Though difficulties may arise, as observed by Sir Robert Magerry, as to what should be the exception to the rule in Foss Vs. Harbottle, one thing is clear that the exception have been recognised by the courts to the rule in Foss Vs. Harbottle. Court of Appeal recognised it in Moir Vs. Wallersteiner (No.2) reported in 1975(1) All E.R 849. 10. In India in Dr.Satya Charan Law & ors. Vs. Rameshwar Prasad Bajoria & ors, AIR 1950 Federal Court 133. the Federal Court, after recognising well settled principle of law that in order to redress the wrong done to a company or to recover monies or damages alleged to be due to the company, 15 the action should prima facie be brought by the company, accepted that misconduct on the part of a director provided an exception to the rule in Foss Vs Harbottle. The Court held: "The correct position seems to us to be that ordinarily the directors of a company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted mala fide or beyond their powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders must in such a case be entitled to take steps to redress the wrong. There is no provision in the articles of association to meet the contingency, and therefore the rule which has been laid down in a long line of cases that in such circumstances the majority of the share-holders can sue in the name of the company must apply. In MacDougali Vs. Gardsner (1876) 1 16 Ch.D. 18 (45 L.J. ch.27) and Pender Vs. Lushington, (1877) 6 ch D.70: (46 L.J.ch. 317), specific reference was made to the fact that the directors, being the custodians of the seal of the company, were the persons who should normally sue in the name of the company, but nevertheless it was held that the majority of the share-holders were entitled to sue in the name of the company when relief was sought against the directors themselves. Even in Automatic Self-Cleansing Filter Syndicate Co.Ltd. Vs. Cunninghams (1906) 2 ch.34: (75 L.J. ch.437), it was recognised that "misconduct" on the part of the director provided an exception to the rule laid down in that case." 11. It is true that in the case of Dr. Satya Charan Law, the Federal Court has observed that majority of the shareholders are entitled to take steps to redress the wrong and even sue in the name of the company. That was so held because in that case the plaintiffs were the majority of the shareholders. The issue whether the shareholders 17 who hold 50% or less of the shares in the share capital of the company can sue in the name of the company did not specifically arise for consideration in that case and therefore that was not considered by the Federal Court. There is however nothing in the decision to suggest that the rule in Foss Vs. Harbottle admits of no exception. On the other hand, the Federal Court did recognise the exception to the rule in Foss Vs. Harbottle. 12. In Nirad Amilal Mehta Vs. Genelec Limited & ors. (Notice of Motion no.1272 of 2008 in Suit no.888 of 2008) decided on 23rd and 25th April 2008 I have taken a view that a derivative action by a shareholder for a wrong done to a company is maintainable in certain circumstances such as where the directors of the company themselves are the wrong doers and sell the property and substantial undertaking of the company without proper authorisation under section 293 of Companies Act. 13. I see no reason to depart from the view which I have taken earlier. I therefore hold that a suit at the instance of a minority shareholder for a wrong done to a company is maintainable where it is shown that the wrong doers are insiders, say directors of the company or majority of the 18 shareholders who are unlikely to take any action for the wrong done to the company. I am, however, not prepared to go thus far as to hold that even a derivative action by way of an arbitration can be taken by initiating arbitration before an arbitral tribunal, for the reasons indicated a little later. 14. The form of action to be taken by the minority shareholder however may admit of a debate. In case of Dr. Satya Charan Law (Supra) an action was taken by the majority shareholders in the name of the company by joining the company as co-plaintiff. A Single Judge of the High Court of Calcutta held that the company was not properly impleaded as the plaintiff. The learned Judge however observed that it was open for the plaintiffs to make the company a defendant. A Division Bench of the High Court, on appeal, held that the action was correctly made by joining the company as co-plaintiff in the suit. That decision was upheld by the Federal Court. It therefore appears that it would be open to the shareholders who sue for the wrong done to a company on the ground that the persons causing the wrong are insiders and unlikely to take any action for wrong done to the company by joining the company as co-plaintiff along with them. However no final opinion needs to be expressed, at 19 this stage, whether a suit filed by minority shareholders by joining the company as a defendant would be bad in law and not maintainable at all. The issue can be left to be decided at the stage of trial. . Maintainability of Arbitration Petitions by Maintainability of Arbitration Petitions by Maintainability of Arbitration Petitions by or against the persons who are not parties to the or against the persons who are not parties to the or against the persons who are not parties to the arbitration agreement. arbitration agreement. arbitration agreement. 15. Virtual Marketing India Pvt.Ltd. is the defendant no.3 in the suit. It is also joined (by an amendment) as respondent no.3 to both the arbitration petitions. Though a direct interim relief is not claimed against the defendant no.3 in arbitration petition no.169 of 2008 it is clear that a relief is claimed against it indirectly or a prayer is couched in such a language that granting it would affect the defendant no.3. The defendant no.1 has entered into an agreement with defendant no.3 relating to the film "Tashan" which is said to be covered by the licence agreement. In arbitration petition no.169 of 2008, the plaintiff has claimed an injunction restraining the defendant no.1 from granting or creating any interest in respect of the films covered with the licence agreement in favour of any person other than the defendant no.2 company. 20 In arbitration petition no.170 of 2008, an injunction is claimed against the defendant no.1 from granting internet rights covered by the licence agreement in favour of any other person. These reliefs are aimed against the defendant no.3 who is not a party to the arbitration agreement. The defendant no.3 is not a party either to the joint venture agreement or to the licence agreement, both dated 23rd April 2005 which contain arbitration agreement. There is no other agreement between the plaintiffs and the defendant no.3 for reference of any dispute to arbitration. Section 2(h) of the Arbitration Act defines party to mean a party to an arbitration agreement. Section 9 of the Arbitration Act says that a party may, before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced, may apply to a court for interim reliefs mentioned in sub-clause(a) to (e) of clause (ii) of the section. Obviously, the reliefs u/s.9 of the Arbitration Act an interim relief can be claimed by a party to an arbitration agreement against the other party. Since the