1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION APPEAL NO.24 OF 2005 IN NOTICE OF MOTION NO.553 OF 2004 IN SUIT NO.233 OF 2004 Severn Trent Water Purification Inc .. Appellants V/s Chloro Controls (India) Pvt.Ltd. & Ors. .. Respondents WITH APPEAL NO.528 OF 2005 IN NOTICE OF MOTION NO.553 OF 2004 IN SUIT NO.233 OF 2004 Hi Point Services Pvt.Ltd. .. Appellants V/s Chloro Controls (India) Pvt.Ltd. & Ors. .. Respondents Mr.Rohit Kapadia, Senior Advocate with Mr.J.P.Sen, Mr.Yash R.Kapadia, Mr.Simil Purohit, Mr.Pranav Desai, Mr.H.K.Sudhakara and Ms.Arundhati Iyer i/by Khaitan & Co.for the Appellants in Appeal No. 24/2005 and for Respondent No.2 in Appeal No.528/2005. Mr.Pradip Sancheti, Senior Advocate i/by M/s.Legal Associates for the Appellants in Appeal No.528/2005 and for Respondent No.4 in Appeal No.24/2005. 2 Mr.S.H.Doctor, Senior Advocate with Mr.Naval Agarwal and Ms.Ankita Singhania i/by Bachubbai Munim & Co.for Respondent No.1 in both appeals. CORAM: D.K.DESHMUKH & R.G.KETKAR, JJ. DATE: 28th July, 2011. JUDGMENT: (Per R.G.Ketkar, J.) 1. Both these appeals are instituted against the common judgment and order dated 23.12.2004 passed by the learned Single Judge in the Notice of Motion No.553 of 2004 and the Notice of Motion No.2382 of 2004 in Suit No.233 of 2004. By the impugned order, the learned Single Judge made the Notice of Motion No.553 of 2004 absolute in terms of prayer clauses (a) to (c)(i), (ii) & (iii) with clarification that the order will not affect the Defendant No. 3’s rights vis-a-vis Seaclor Mac regarding the manufacturing and distributing. In view of granting of prayer clauses (c)(i), (ii) & (iii) of the Notice of Motion No.553 of 2004, the learned Single Judge disposed of the Notice of Motion No.2382 of 2004 as not surviving. 2. The facts giving rise to the present appeals, briefly stated are as under:- 3 Appeal No.24 of 2005 is preferred by Severn Trent Water Purification Inc, Defendant No.1. Respondent No.1 is the plaintiff and Respondent Nos.2 to 11 are the Defendant Nos.2 to 11. Appeal No.528 of 2005 is preferred by Hi Point Services Pvt.Ltd., Defendant No.4, wherein the Respondent No.1 is the plaintiff and Respondent No.2 to 11 are the Defendant Nos.1 to 3 and 5 to 11 respectively. The parties shall hereinafter be referred as per their status in the suit. 3. Plaintiff is a private limited company incorporated under the Indian Companies Act, 1956 and is a holding company incorporated to hold 50% share holdings in the Capital Controls India Private Limited (Defendant No.5), which is the Joint Venture Company. The plaintiff is registered and beneficial holder of 375000 equity shares (being 50% of the equity share capital) of and in the 5th Defendant Company. Defendant No.1 is a Corporation organised and existing under the laws of the State of Pennsylvania, Unites States of America (for short U.S.A.). Defendant No.2, Capital Controls (Delaware) Company Inc is the Corporation organised and existing under the laws of the state of Delaware, U.S.A. Defendant Nos.1 & 2 carry on business of 4 manufacture, supply, sale and distribution of Chlorination equipments including gas and electro chlorination equipments. Defendant Nos.1 & 2 are group companies and were earlier part of Capital Controls group not being Defendant No.5 herein. 4. Defendant No.3 is the company incorporated under the Indian Companies Act, 1956 and carries on business of manufacture and marketing of electro Chlorination equipments. In or about in the year 1989-90, Defendant No.3 was floated as Joint Venture in technical and financial collaboration with De Nora group of Italy who hold 51% of equity share capital of the Defendant No.3. Hi Point Services Pvt.Ltd., Defendant No.4 is a private limited company incorporated under the Indian Companies Act, 1956 and interalia carries on business in electro chlorination equipments. Defendant No.4 had a tie up with American Company called Exceltec Inc who were engaged in the business of electrolytic disinfection equipment. 5. Defendant No.5 viz.Capital Controls India Pvt.Ltd., is a private limited company incorporated under the Indian Companies Act, 1956 in implementation of the Joint Venture Agreement dated 16.11.1995 executed between the plaintiff and Madhusudan 5 B.Kocha (Defendant No.9) on one hand and Defendant Nos.1 & 2 on the other. 50% share capital of Defendant No.5 is held by the plaintiff and the balance 50% share capital is held in the name of Defendant No.2. Plaintiff and Defendant No.2 are the Joint Venture partners constituting Defendant No.5. Defendant No.6 (W.A.Stimeling), Defendant No.7 (Marwan Nesicolasi) and Defendant No.8 (R.Fernandez) are the directors of Defendant No. 5 Company appointed by Defendant No.2 Company for and on behalf of Defendant No.1 Company. Defendant Nos.6 to 8 are Directors/officers of various Severn Trent group companies. Defendant No.6 is also the director of Defendant No.1. 6. Defendant No.9 is the Managing Director of Defendant No.5 and Defendant Nos.10 (Milin M.Kocha) & 11 (Nilesh M.Kocha) are whole time directors of Defendant No.5. The entire share holding of the plaintiff is held by Defendant Nos.9 to 11, who shall hereinafter be referred as the Kocha family. 7. Plaintiff instituted Suit No.233 of 2004 on 19.01.2004 interalia praying for (a) a declaration that the Joint Venture Agreements dated 16.11.1995 at Exhibit ‘B’ and Supplemental Collaboration Agreement at Exhibit ‘M’ are valid, subsisting and binding and 6 that the scope of business of Defendant No.5 includes manufacture, sale, distribution and services of the entire range of chlorination equipments, including electro chlorination equipments of the Defendant Nos.1 & 2, their parents, associates and affiliated companies as well as of the Kocha family/ Chloro Controls Equipment Company; (aa) a declaration that the notice dated 23.01.2004 (Exhibit ‘BBBB’) is illegal, invalid, malafide and of no effect whatsoever; (aaa) a declaration that the notice dated 21.07.2004 (Exhibit ‘CCCC’) is wrongful, illegal, invalid, malafide in breach of the joint venture agreement and of no effect whatsoever; (b) an order and permanent injunction restraining the Defendant Nos.1 & 2, their parents, associates and affiliated companies from committing breach of their obligations under the joint venture agreements read with the supplementary collaboration agreement (Exhibits B & M) and/or from committing breach of their obligations as partners in Defendant No.5; (c) an order and permanent injunction restraining the Defendant Nos.1 & 2, their parents, associates and affiliated companies from directly or indirectly selling, distributing, manufacturing, dealing in or being financially interested in 7 chlorination equipments, parts, accessories and related equipments, including electro chlorination equipments in India and the designated territory, save and except through Defendant No.5 or from conducting any competing business in India or the designated territory; (d) an order and permanent injunction restraining Defendant Nos.1 & 2, their parents, associates and affiliated companies from in any manner interfering with and/or preventing Defendant No.5 from conducting its business of chlorination equipments, including electro chlorination equipments, of the Kocha family/Chloro Controls Equipment Company, Proprietary concern of Defendant No.9, among other prayers. The plaintiff as beneficial and registered owners of 3,75,000 equity shares of th 5th Defendant has instituted this suit, a derivative action to correct and remedy the illegality and wrong done to the 5th Defendant and its share holders by Severn Trent through Defendant Nos.1, 2 and 6 to 8. 8. It is the case of the plaintiff that Defendant No.5 was incorporated on 14.11.1995 and the main object mentioned in the Memorandum of Association of Defendant No.5 is to the following effect:- 8 “A” THE MAIN OBJECT OF THE COMPANY TO BE PURSUED BY THE COMPANY ON ITS INCORPORATION: 1. To design, manufacture, import, export, act as agent, deal in assembling, testing, erecting, servicing and marketing of gas and electro chlorination equipments....” Before formation of 5th Defendant company the Kocha family carried on business of manufacture and sale of gas chlorination equipments. On and from 1980 the Kocha family developed and commenced manufacturing of electro chlorination equipments. The business of Kocha family was done in the name of Chloro Controls Equipments Company which is the sole proprietory concern of Defendant No.9. Prior to formation of Defendant No. 5, the Chloro Controls Equipment Company was the distributor in India for the products of Capital Controls for more than a decade. The joint venture agreements between Defendant Nos.1 & 2 and the plaintiff/ Defendant No.9 were executed on 16.11.1995. The financial and technical know how licence agreement was entered into between Defendant No.1 & Defendant No.5, under which Defendant Nos.1 & 2 (Capital Controls) agreed to furnish technical know how relating to the manufacture, quality control, installation, testing and servicing of its products existing on the 9 date of the agreement. The International Distributor Agreement (being Appendix II to the Share Holders Agreement) was entered into between Defendant No.1 and Defendant No.5 whereunder Defendant No.1 appointed Defendant No.5 as its exclusive distributor for the products manufactured and marketed by Defendant No.1 viz.chlorination and water disinfection equipments, machineries, parts, accessories and related equipments and services in the territory of India, Afganisthan, Nepal and Bhutan. The list of products offered for distribution at attachment ‘A’ to the said agreement, included “Hypogen Equipment Series 3300” which is electro chlorination equipment and which was the only brand of electro chlorination equipment of Capital Controls (Defendant Nos.1 & 2). However the plaintiff has specifically asserted in Paragraph 20 of the plaint that the Defendant No.5 did not deal with “Hypogen” brand in view of its exorbitant pricing. 9. It is the case of the plaintiff that it was also the intention of the parties that the business of Defendant No.5 would include the entire range of chlorination business of Chloro Controls Equipments Company (Proprietary concern of Defendant No.9) 10 including its range of electro chlorination equipments. It was also intended that the entire range of chlorination equipment of Severn Trent which was initially divided between the Technical Know How Agreement and Distributors Agreement, was ultimately to be manufactured by Defendant No.5 indigenously. The purpose of formation of Defendant No.5 was to fuse and pull together the resources and technology and business in the range of chlorination equipments including electro chlorination equipment of Severn Trent (which at that time was conducted through Defendant Nos.1 & 2 only) with that of Kocha family/ Chloro Controls Equipment Company (Proprietary concern of Defendant No.9). Plaintiff has set out various circumstances in the plaint to contend that these circumstances establish that to the knowledge and with the acquiescence of Defendant Nos.1 & 2, Defendant No.5 was in fact carrying on business of manufacture, sale and distribution of electro chlorination equipments. 10. It is the case of the plaintiff that some of the actions of Severn Trent (including Defendant Nos.1 & 2) on and from December 1998 onwards were in breach of joint venture agreement, the negative covenants contained therein and to the detriment of 11 Defendant No.5. Some of those acts were clear systematic scheme and design to thwart, scuttle and throttle the business of Defendant No.5 and to illegally conduct the competing business through their group, affiliated and associated companies, as Severn Trent (including Defendant Nos.1 & 2) envisaged Defendant No.5 becoming a serious competitor on the termination of joint venture agreements and the Severn Trent did not have the majority /controlling interest in Defendant No.5. 11.In or about December, 1998, Severn Trent acquired Exceltec Inc and thereafter Defendant No.1 issued circular which was received by Defendant No.5 on 01.02.1999 stating that Defendant Nos.1 & 2’s Hypogen brand of electro chlorination equipment was to be completely replaced by Exceltec’s “Omnipure” and “Sanilec”. Upon such replacement of Hypogen, Defendant No.5 was exclusively entitled to conduct business of “Omnipure” and “Sanilec” in India. As noted earlier, the plaintiff has asserted that Defendant No.5 did not deal with “Hypogen” brand in view of its exorbitant pricing. 12.Prior to acquisition of Exceltec by Severn Trent, Exceltec had existing tie up and arrangement with Defendant No.4 in India. 12 Upon such acquisition of Exceltec by Severn Trent and replacement of Hypogen by Exceltec brand of “Omnipure” and “Sanilec”, the said brands of electro Chlorination equipments could only be dealt with in India through Defendant No.5. However, upon such acquisition, Exceltec was none the less supplying its products through both Defendant No.4 and Defendant No.5. Plaintiff through Defendant No.9 repeatedly protested against this conduct at the Board meeting of Defendant No.5 of 26.09.2001. 13.While discussion with Exceltec were still pending, in or about September 2001, Severn Trent Services Inc and one “Gruppo De Nora” purported to merge their sea water and marine disinfection business into a single joint venture under the name of “Severn Trent De Nora LLC to market and service the products manufactured by Exceltec and De Nora. As electro chlorination equipment (Omnipure, Sanilec and Seaclor) fell within the range of Severn Trent’s range of electro chlorination equipment, the same could not be dealt with in India except through Defendant No.5. 14.It is the case of the plaintiff that several discussions were held and 13 it was pointed out that the failure to honour the joint venture agreement and lack of support of Severn Trent was leading to Defendant No.5’s market share in electro chlorination equipment, being captured by competitor. In order to salvage the situation, the Defendant No.9 at the Board meeting of 10.12.2001 and in e- mail dated 12.01.2002 wrongly contended that the plaintiff be permitted to conduct the business of electro chlorination equipment of the Kocha family outside the scope of the joint venture by interpreting the joint venture agreements to be in respect of gas chlorination equipment only and keeping Defendant No.5 away from electro chlorination business. Defendant No.1 through their Advocate’s letter dated 06.09.2002 addressed to Defendant No.5, for the first time, alleged as an afterthought, that the scope of the joint venture agreement was restricted to marketing and sale of gas chlorination equipment only, with the exception of right to distribute the “Hypogen Equipment Series 3300” product line and that any venture by Defendant No.5 into electro chlorination business was in violation of the joint venture agreement. Plaintiff has referred to the correspondence ensued between the parties. In substance, the case 14 of the plaintiff is that having regard to the main object for which Defendant No.5 was incorporated, as also by virtue of agreement entered into between the parties, electro chlorination business of both Severn Trent as well as Kocha family. 15.Chloro Controls Equipments Company (Proprietary concern of Defendant No.9) clearly fell within the scope of business of Defendant No.5. Defendant No.2 being the joint venture partner cannot carry on competing business in gas or electro chlorination equipments in India and cannot divert such business of Defendant No.5 to other concerns either through device of acquisitions and mergers or in any other manner whatsoever. Plaintiff relied upon clause 4.5 of the Share Holders Agreement and contended that in view thereof, the plaintiff is entitled to specific enforcement of the said negative covenant. 16.During the pendency of the suit, Defendant Nos.1 & 2 issued notice dated 23.01.2004 to be a notice to settle the dispute in terms of clauses 22.2 (i) and 21.2.(iv) of the Share Holders Agreement dated 16.11.1995, as also Defendant No.1 terminated the joint venture agreements contained in (i) Shareholders Agreement, (ii) International Distributors Agreement, (iii) 15 Financial and Technical Know How Agreement, (iv) Export Sales Agreement, (v) Trademark Registered User Agreement, by a fax dated 21.07.2004. Plaintiff suitably amended the plaint and has challenged the notice dated 23.01.2004 and the fax dated 21.07.2004. Plaintiff took out Notice of Motion No.553 of 2004 claiming interim reliefs during the pendency of the suit substantially in terms of prayer clauses (c), (d), (e) & (k) of the Plaint. 17.Affidavit in reply was filed by Mr.K.V.Ramesh on behalf of Defendant No.1 on 27.04.2004. In substance, it was contended that the Memorandum and Articles of Defendant No.5 cannot be interpreted to expand the scope of activities as the object clause of the Memorandum of Association is in general and broad based terms and includes objects which the company may undertake in future. The actual scope of activities of Defendant No.5 as well as terms, rights and obligations of the parties are set out in the Joint Venture Agreement alone. The Joint Venture Agreement clearly describe and specifically set out the list of products which the Defendant No.5 can manufacture, sell or distribute. Clause 4.5 of the Shareholders Agreement dated 16.11.1995 clearly provides 16 that the plaintiff, Defendant No.9 and Kocha family shall not during the term of agreement, engage directly or indirectly or be financially interested in the manufacture, sale or distribution of chlorination equipments and related products which are similar to those manufactured or sold by Defendant No.5 Joint Venture Company. There is no such provision under the said clause restricting the erstwhile Defendant No.2 now Defendant No.1, and further goes on to say that during the term of this agreement the erstwhile Defendant No.2 now Defendant No.1, its parents & associates will not directly or indirectly engage and/or be financially interested in the manufacture, sale and distribution in India of the products manufactured or sold by Defendant No.5. The non-compete obligations of the plaintiff and Defendant No.9 on one hand and that of Defendant No.1 on the other, are conspicuously different. It is further contended that the specific products list in the joint venture agreement and in particular International Distributors Agreement (Appendix II to the Shareholders Agreement) only lists the Hypogen Equipment Series 3300” brand line of electro chlorination equipments. At the time of joint venture agreement, erstwhile Defendant No.2 17 manufactured the Hypogen Equipment Series 3300, the electro chlorination equipment. The erstwhile Defendant No.2 discontinued the manufacture of hypogen product line in U.S.A., and said discontinuation was done before acquisition of Exceltec. Hypogen brand was not superseded by the brands of Exceltec viz. “Omnipure” and “Sanilec”. It was further contended that had the parties actually intended in 1995 to include all present and future lines of Defendant No.1’s lines of electro chlorination products, they would have (i) made the non-compete provision identical for both parties, (ii) drafted the list of products to include all lines of gas and electro chlorination equipment produced then or to be produced in future. It was reiterated that the scope of joint venture agreement can be clearly ascertained from the bare perusal of these agreements, and by plaintiff’s own admission the plaintiff has shown clearly that the scope of joint venture did not extend to electro chlorination business. 18.By the impugned order dated 23.12.2004, the learned Single Judge partly allowed the Notice of Motion No.553 of 2004 as mentioned earlier and in view thereof disposed of the Notice of Motion No.2382 of 2004 as it does not survive. It is against this 18 order, Defendant No.1 has preferred Appeal No.24 of 2005 and Defendant No.4 has preferred Appeal No.528 of 2005. 19.In support of Appeal No.24/2005 we have heard Mr.Rohit Kapadia, learned Senior Advocate and Mr.J.P.Sen, learned Advocate. In support of Appeal No.528/2005 we have heard Mr.Pradip Sancheti, learned Senior Advocate. We have also heard Mr.S.H.Doctor, learned Senior Advocate and Mr.Naval Aggarwal, learned Advocate on behalf of Respondent No.1- original plaintiff in both the appeals. 20.Mr.Kapadia in support of Appeal No.24/2005 submitted that the learned Single Judge posed the question whether the joint venture agreement between the parties was only for gas chlorination equipment or whether it was also for electro chlorination equipments. He submitted that the scope of business between the parties has to be ascertained from the joint venture agreement alone and that the learned Single Judge committed serious error in issuing the injunction without considering the scope of negative covenant viz. Clause 4.5 in the Shareholders Agreement. If the joint venture agreement is carefully perused, it would be clear that the joint venture agreement between the parties was only for gas 19 chlorination equipments. In so far as electro chlorination equipments are concerned, the only one product viz. Hypogen Equipment Series 3300 manufactured by Defendant No.1 was to be distributed by Defendant No.5. The joint venture agreement did not contemplate manufacture or sale of electro chlorination equipment by Defendant No.5. 21.On the other hand, Mr.Doctor appearing for Respondent No.1- plaintiff submitted that having regard to the main object of Defendant No.5 as mentioned in its Memorandum of Association, it would be clear that Defendant No.5 was to design, manufacture, import, export, act as an agent, deal in assembling, testing, erecting, servicing and marketing of gas and electro chlorination equipments. Thus manufacture and sale of electro chlorination equipments was one of the main objects for which Defendant No. 5 was incorporated. This fact is fortified by the conduct of the parties. At any rate, having regard to the circumstances and the material on record, Defendant No.5 has a right to manufacture and sell electro chlorination equipments, and the actions of Defendant No.1 in acquiring Exceltec, as also merger with De Nora LLC was with a view to competing with the business of 20 Defendant No.5, which was wholly improper in view of clause 4.5 of the Shareholders Agreement. He therefore supported the impugned order passed by the learned Single Judge. 22.We have considered the rival submissions made by learned counsel appearing for the parties. In order to properly understand and appreciate the controversy between the parties it would be relevant and material to note some of the clauses of various agreements entered into between the parties. Clauses 1, 4.5, 7, 14, 17, 20, 21, 26 and 28 of the Shareholders Agreement dated 16.11.1995 entered into by and between Defendant No.2 on one hand and the plaintiff and Defendant No.9 on the other, are relevant, and which read as under:- “(1) Registration of the Company - The parties shall, subject to obtaining all necessary approvals, licenses, and authorizations from the Government of India, register a company with the name “Capital Controls India Private Limited”, or if such name is not available for any reason, then with such other name as may be mutually agreed upon b y the parties, (hereinafter called the “Company) having as its main object the manufacture, sale and service of the Products (as such terms is defined n the Financial and Technical Know- How License Agreement between Capital Controls and the Company referred to in Section 14 of this Agreement. The company’s registered office shall be located in Bombay.” “4.5 Mr.Kocha (and also his wife and sons) and Chloro Controls shall not, during the terms of this Agreement, engage, directly or indirectly, or be financially interested in the 21 manufacture, sale or distribution of chlorination equipment and related products which is similar to those manufactured or sold by the Company. During the terms of this Agreement, Capital controls, its parent and its associates will not directly or indirectly engage in or be financially interested in the manufacture, sale or distribution in India of the products manufactured or sold by the Company.” “7. Distributor Agreement: Capital Controls agrees to appoint the Company as a Distributor in India of the Products manufactured by Capital Controls subject to the terms and conditions of the Distributor Agreement attached hereto as Appendix II. This appointment will normally be renewed as long as Capital Controls holds at least twenty-six (26%) of the shares in the Company.” “14. Financial and Technical Know-How License Agreement – Chloro Controls and Capital Controls shall together cause the Company to enter into the Financial Technical Know-How License Agreement with Capital Controls attached hereto (hereinafter referred to as the License Agreement). Under the said License Agreement and subject to the terms and conditions specified therein, Capital Controls agrees to grant the Company the right and license to manufacture the products in India in accordance with the Technical Know-How and other technical information possessed by Capital Controls.” “17. Sale and Purchase of Chlorination Equipment Assets. - Chloro Controls and Mr.Kocha agree to transfer such of the assets as related to the gas chlorination equipment business presently carried on by Chloro Controls or Mr.Kocha as per Appendix IV attached hereto.” “20. Performance by Capital Controls – The subscription of the equity shares of the Company and the performance of the other obligations