1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION jmi CONTEMPT PETITION NO. 3 OF 2009 IN COMPANY APPLICATION NO. 762 OF 2009 IN COMPANY PETITION NO. 488 OF 2009 IN COMPANY APPLICATION NO. 439 OF 2009 In the matter of Scheme of Arrangement between Reliance Communications Ltd. And Reliance Infratel Ltd. And its respective shareholders & Creditors. S. Anantharaman. ..Petitioner/Org.Applicant/ Intervenor. v/s. Reliance Infratel Ltd. & Ors. ..Respondents. .... Mr. N. Venkatraman, Senior Advocate, a/w. Mohd. Safiq & M. Venkatraman, i/b. M/s. Madekar & Co., for Petitioner. Mr. Iqbal Chagla, Senior Advocate, i/b. Rajesh Shah, for Respondent Nos. 1 to 7. Mr. Janak Dwarkadas, Senior Advocate, i/b. RES Legal for Respondent Nos. 8 & 9/ Auditors. Mr. C.J. Joy, i/b. S.K. Mohapatra, for Regional Director. .... CORAM : S.J. KATHAWALLA, J. DATE : 26TH FEBRUARY 2010. P.C. This contempt petition is filed by the Petitioner Mr. 2 S. Anantharaman against nine respondents named in the petition. The Respondent No.1 is the Reliance Infratel Limited (RITL). The Respondent Nos. 2 to 6 are the Directors of the Respondent No.1. The Respondent No.7 is the Company Secretary and Compliance Officer of Respondent No.1 and Respondent Nos. 8 and 9 are the Chartered Accountants, Statutory Auditors of Respondent No.1. 2. By the present contempt petition, the Petitioner has prayed that the respondents be dealt with and punished in accordance with the Contempt of Courts Act, 1971 for having willfully and deliberately disobeying and flouting the order dated 18 th July 2009 passed by this Court, i.e. by failing to comply with the undertaking given to this Court, that RITL will comply with the accounting standard AS-11. The Petitioner has also prayed that the Respondents be ordered to issue fresh financial statements, directors’ report and auditors’ report for the financial year 2008-2009 after complying with AS-11. 3. According to the Petitioner, the company petition nos.487 of 2009 and 488 of 2009 were filed by the Respondent No.1 RITL to obtain sanction of this Court to the scheme of 3 arrangement (“scheme”) between Reliance Communications Limited (Petitioner in Company Petition No. 487 of 2009 - “Demerged Company” or “RCOM”) and Reliance Infratel Limited (Petitioner in Company Petition No. 488 of 2009 - “the Resulting Company” or “RITL”) and their respective shareholders and creditors, whereunder the Optic Fiber Undertaking of the Demerged Company was transferred to and vested in the Resulting Company with effect from the appointed date in terms of the scheme without any further act or deed pursuant to Sections 391 to 394 of the Companies Act, 1956. 4. The Petitioner had filed Company Application Nos. 759 of 2009 and 762 of 2009 in the Company Petition Nos. 487 of 2009 and 488 of 2009 respectively, objecting to the scheme being sanctioned inter-alia alleging the fact that the accounting treatment prescribed in clause 2.4.3 of the scheme was extraneous to the scheme and that it did not comply with the mandatory accounting standard 11 (AS-11) notified under Companies (Accounting Standards) Rules, 2006 and that the scheme was being used as a device to obtain the sanction of this Court to violate AS-11. 4 The Petitioner had therefore, prayed for setting aside of the scheme filed by the RCOM and RITL. The Petitioner, in the alternative had also prayed for an order, directing the National Advisory Committee on Accounting Standards (NACAS) to confirm whether the accounting treatment appearing in clause 2.4.3 of the scheme was not contrary to the Companies (Accounting Standards) Rules, 2006. The other objections and prayers raised and sought by the Petitioner are not mentioned in the contempt petition since they are not relevant for the purpose of this contempt petition. 5. The Regional Director, Ministry of Corporate Affairs had alleged that the accounting treatment prescribed in clause 2.4.3 of the scheme was not in conformity with the mandatory accounting standard AS-11 and had prayed that this Court be pleased to direct RITL to comply with the accounting standard AS-11. The objection raised by the Regional Director was dealt with by this Court in paragraphs 42 and 43 of the judgment and order dated 18 th July 2009. The same is reproduced hereinbelow` :- “42. The second objection raised by the Regional 5 Director is that clause 2.4.3 of the scheme is not in conformity with mandatory accounting standard – 11 prescribed by the Institute of Chartered Accountants of India. The Regional Director insists that the Resulting Company be directed to comply with Accounting Standard-11 as applicable to it in respect of losses on account of changes in exchange rates relating to foreign currency loans. Clause 2.4.3 reads thus :- 2.4.3. Losses on account of changes in exchange rates, relating to loans/liabilities denominated in foreign currencies taken/ incurred which have been or are debited to profit and loss account of any year upto the year ending March 31, 2011 may as determined by the Board of Directors and to the extent the balances are available, be adjusted by a corresponding withdrawal from the General Reserves of the Resulting Company. 43. In response to this objection, the Petitioners, through Counsel, undertake that the Petitioners would not only follow the Accounting Standard-11 but also Accounting Standard-5 in its letter and spirit. Assurance so given by the Petitioners is accepted. The Regional Director has no other objection to any other clause in the Scheme.” 6. According to the Petitioner, after giving an 6 undertaking to this Court that the accounting standard AS-11 will be followed in letter and spirit, RITL has in complete disregard to the above undertaking willfully failed to comply with the undertaking given to this Court in view of the following :- (a) AS-11 does not enable withdrawal from general reserve to set off the foreign exchange losses. In the financial statements, RITL has debited the profit and loss account by 804.29 crores being exchange loss on loans and liabilities and withdrawn an equivalent amount from the general reserve, in gross violation of AS-11. (b) In the Directors’ Responsibility Statement presented by the Directors of RITL as required under section 217 (2AA) of the Companies Act, 1956, the Directors of RITL have mis-stated that all applicable accounting standards have been complied with in the preparation of financial statement for the financial year 2008-2009, when in fact, AS-11 has not been complied with, inasmuch AS-11 does not enable withdrawal from general reserve to set off the exchange losses. (c) In the Auditors’ report issued by the Statutory 7 Auditors of RITL, the Statutory Auditors have connived with the management of RITL and have also mis-stated that RITL has complied with all accounting standards referred to in section 211(3C) of the Companies Act, 1956 in terms of which companies are required to comply with the accounting standards prescribed under the Companies (Accounting Standards) Rules, 2006, which includes AS-11, when in fact, AS-11 has not been complied with. 7. It is therefore, submitted on behalf of the Petitioner that RITL and Respondent Nos. 2 to 9 by flouting the solemn undertaking given to this Court with regard to complying with AS-11 have committed contempt of this Court under the Contempt of Courts Act, 1971 and are therefore, liable to be punished in accordance with the Contempt of Courts Act, 1971. 8. Mr. N. Venkataraman the learned Senior Advocate appearing for the Petitioner has reiterated the submissions made in the Petition and sought to rely on several texts, notification and calculations/workings by way of illustrations in support of the allegation advanced by the Petitioner that clause 2.4.3 of the Scheme is not in conformity with the accounting standard 8 AS-11. It was contended on behalf of the Petitioner that Respondent No.1 was conscious of the fact that Clause 2.4.3 was not in conformity with AS-11 and therefore gave an undertaking to follow AS-11 in letter and spirit. According to the Petitioner, Respondent No.1 could never have implemented Clause 2.4.3. of the scheme as stated in the scheme, thereby suggesting alteration to/ substitution of clause 2.4.3 of the scheme. 9. The Advocate appearing for the Regional Director has informed the court that the Regional Director is not disputing the stand taken by the Respondents in this Petition. 10. An affidavit in reply to the contempt petition dated 5 th February 2010 is filed by Respondent Nos. 1 to 7. In the said affidavit, Respondent Nos. 1 to 7 have denied having committed any breach of the undertaking given by the Respondent No.1 to this Court as recorded in paragraph 43 of the order dated 18 th July 2009. Respondent Nos. 1 to 7 have explained in detail how the withdrawal by Respondent No.1 from the general reserve pursuant to clause 2.4.3 of the scheme is not contrary to or in breach of AS-11 or any other applicable 9 accounting standards. It is submitted that there is full compliance of AS-11 by Respondent No.1 in accordance with the undertaking given to this Court. 11. Mr. I. M. Chagla, the learned Senior Advocate appearing for Respondent Nos. 1 to 7 has submitted that the contempt petition is filed by the Petitioner with malafide intentions. The Petitioner is neither a creditor nor a shareholder of Respondent No.1 and is in no way concerned with the accounts, profits, profitability and/or financial resolutions of Respondent No.1. The Petitioner held some shares only in Reliance Communications Ltd. and not in Respondent No.1. Mr. Chagla has drawn the attention of this court to some of the observations made against the conduct/bonafides of the Petitioner by this court in Paragraphs 17, 18 and 20 of its order dated 18 th July 2009, which reads thus :- “17. As per the Order passed on the earlier occasion, Petitions were notified for hearing on 17th July 2009. At the outset, Counsel appearing for Mr. S. Anantharaman raised an issue that unless the valuation report is furnished by the Company, it may not be appropriate to proceed with the hearing of the 10 Petitions. According to him, if the valuation report is furnished the said Applicant may be in a position to point out several irregularities and illegalities in the proposed scheme….. Insofar as this objection is concerned, I find merit in the stand taken by the Petitioner Companies that this is a subtle attempt to prolong the hearing of the petitions with ulterior design. More over, from the material on record, it can be inferred that this Applicant has been set up by Rajkot Saher/ Jilla Grahak Suraksha Mandal, who in turn, have no locus to oppose the proposed Scheme. There is substance in this grievance. Indeed the said Applicant is a shareholder and had opposed the Scheme of Arrangement by voting, albeit through proxy. However, he did not think it necessary to remain personally present in the meeting so as to educate the other shareholders about the shortcomings, drawbacks or irregularities and illegalities in the proposed scheme…..As a matter of fact, the Applicant admits that he was inspired to file Applications before this Court and to intervene to oppose the sanction of the proposed Scheme only after being persuaded by Mr. Ramjibhai Mavani, founder President of Rajkot Saher/Jilla Grahak Suraksha Mandal. In the affidavit, he has candidly mentioned the date of such meeting on 11th July 11 2009………. In fact, the Applicant has not minced words in stating that he was inspired to file objection by Mr. Mavani. Since Mr. A.S. Ananthraman has filed his intervention Applications and objections to the proposed Scheme at the behest of person who is neither a shareholder or creditor of either company, it will have to be considered with utmost circumspection. The bonafides of Mr.s. Ananthraman to intervene in the proceedings would become questionable.” (emphasis supplied). 18 …………If at all, the Applicant was so keen, he ought to have approached the Court well in advance to seek appropriate directions and make such grievance for the first time on the date of hearing of the petition. The only purpose whereof would be to protract the hearing of the petition for reasons best known to him. (emphasis supplied). 20. Reverting to the objection filed by Shri S. Ananthraman, while dealing with the issue of request for adjournment of hearing of the petitions, I have already noted that the two Applications filed are clearly at the behest of a person who had no casual connection with the proposed Scheme” (emphasis supplied). Mr. Chagla submitted that these findings have been accepted by the Petitioner and none of these findings were challenged in 12 Appeal No. 353 of 2009 and Appeal No.354 of 2009 filed by the Petitioner against the said order dated 18 th July 2009. 12. Mr. Chagla has further submitted that this Court whilst sanctioning the scheme by its detailed order dated 18 th July 2009 has not deleted clause 2.4.3 of the scheme nor has the Respondent No.1 conceded before this Court at the time when the said scheme was sanctioned that clause 2.4.3 of the scheme is not in compliance with AS-11. Mr. Chagla has submitted that since it was contended on behalf of the Regional Director that clause 2.4.3 of the scheme is not in conformity with the mandatory accounting standard 11 prescribed by the Institute of Chartered Accountants of India, the Respondent No. 1 through its Counsel, without conceding that the said Clause is not in compliance with AS-11, undertook that the Respondent No.1 will not only follow the accounting standard 11 but also accounting standard 5 in its letter and spirit. Mr. Chagla submitted that two of the reputed Chartered Accountants, Statutory Auditors of the company namely, Chaturvedi and Shah and S.R. Batliboi and Company have also opined that clause 2.4.3 of the scheme is in compliance with AS-11, and the 13 question therefore of the Respondents willfully failing to comply with the undertaking, as alleged by the Petitioner also does not arise. Mr. Chagla has submitted that it is very pertinent for this court to note that the undertaking was given by the Respondent No.1 in view of the objection raised by the Regional Director. However, the Regional Director who is represented before this court in the present Contempt Petition has informed the court that he is not disputing the stand taken by the Respondents in this Petition. 13. Mr. Chagla has relied on the decision of the Hon’ble Supreme Court in J.K. (Bombay) Private Limited vs. M/s. New Kaiser-I-Hind Spinning and Weaving Company Limited and others, etc., reported in (1970)1 Company Law Journal 151, wherein it is inter-alia held at page 169 that by virtue of the provisions of section 391 of the Companies Act, 1956, a scheme is statutorily binding even on the creditors and shareholders who dissented from or opposed to it being sanctioned. The scheme has statutory force in that sense and therefore, cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in 14 such alteration. Mr. Chagla has submitted that the scheme is sanctioned by this court by its order dated 18 th July 2009. The sanctioned scheme includes clause 2.4.3. If the said clause was to be altered, the same would require a fresh/further sanction of the Court. This is because the Respondent No.1 had not conceded that Clause 2.4.3. was not in compliance with AS-11 or that Clause 2.4.3 needed any alteration. Respondent No.1, only with a view to satisfy the allegation/apprehension of the Regional Director had undertaken to ensure that the Respondent No.1 would not only follow the Accounting Standard -11 but also Accounting Standard 5 in its letter and spirit, which undertaking has been complied with by the Respondent No.1. 14. Mr. Chagla also relied on the decision of the Hon’ble Supreme Court in Indian Airports Employees’ Union vs. Ranjan Chatterjee and Another, reported in (1999) 2 SCC 537, wherein the Hon’ble Supreme Court has held that disobedience of orders of the Court, in order to amount to “civil contempt” under section 2(b) of the Contempt of Courts Act, 15 1971 must be “willful” and proof of mere disobedience is not sufficient. Where there is no deliberate flouting of the orders of the court but a mere mis-interpretation of the executive instructions, it will not be a case of civil contempt. The Hon’ble Supreme Court has further held in Paragraph 11 of its decision : “In our view these rival contentions involve an interpretation of the order of this court, the notification and other relevant documents. We are not deciding in this contempt case whether the interpretation put forward by the Respondents or the Petitioners is correct. That question has to be decided in appropriate proceedings. For the purpose of this Contempt case, it is sufficient to say that the non absorption of these six sweepers was bonafide and was based on an interpretation of the above orders and the notification etc. and cannot be said to amount to ‘willful disobedience’ of the orders of this court.” Mr. Chagla has submitted that according to the Respondent No.1, the Respondent No.1 has complied with AS-11. The Chartered Accountants, Statutory Auditors of the Company have opined that Clause 2.4.3. is in conformity with AS-11. The Regional Director has also not contended that Respondents have 16 committed any breach of the undertaking given to this court as recorded in the order dated 18 th July 2009. In view thereof, by no stretch of imagination, can it be said that there is ‘willful breach’ or ‘disobedience’ on the part of Respondents as alleged by the Petitioner. Mr. Chagla has therefore, submitted that the petition does not deserve to be admitted and be dismissed at the threshold. 15. Mr. Dwarkadas, the learned Senior Advocate for the Respondent Nos. 8 and 9 has taken this Court through the affidavits of Respondent Nos. 8 and 9, both dated 10 th February 2009, wherein the Chartered Accounts/Statutory Auditors of Respondent No.1 have submitted that a perusal of the instant petition itself clearly shows that the said “undertaking” was furnished by the Respondent No.1 and Respondent Nos. 8 and 9 had no role, direct or indirect, in furnishing the said “undertaking” and the instant petition is liable to be rejected against Respondent Nos. 8 and 9 on this ground alone. It is further submitted that sub-section (3d) of section 227 of the Companies Act, 1956 requires a Statutory Auditor to opine in its audit report as to whether the profit and loss account and 17 balance sheet of the company comply with the accounting standards. The Respondent Nos. 8 and 9 in their report dated 7 th August 2009 have duly discharged their statutory obligations. According to Respondent Nos. 8 and 9, what AS-11 requires is that loss occurring on account of change in exchange rates be debited to the profit and loss account of the company. This has duly been done by the Respondent No.1. The AS-11 does not expressly or impliedly, bar the withdrawal of an equivalent amount from the General Reserve of the company. In fact, AS-11 does not deal with the General Reserves of the company in any manner. The withdrawal of an equivalent amount from the General Reserve of the company in the instant case is in compliance with the scheme approved by this Court as provisions for the same was duly made in paragraph 2.4.3 of the scheme. The allegations of connivance between the Respondent No.1 and Respondent Nos. 8 and 9 are also denied. It is submitted that there has been complete transparency in the reporting in the financial statements. It is therefore, submitted that the contempt petition be dismissed with heavy exemplary costs. 18 16. I have considered the submissions of the learned Senior Advocates appearing on behalf of the Petitioner, Respondent Nos.1 to 7, Respondent Nos. 8 and 9, and the Regional Director. I have also considered the decisions of the Hon’ble Supreme Court cited by Mr. Chagla, the Learned Senior Advocate appearing on behalf of Respondent Nos. 1 to 7. The Petitioner in application nos. 759 of 2009 and 769 of 2009 had objected to the scheme being sanctioned inter alia on the ground that clause 2.4.3 of the Scheme does not comply with the Mandatory Accounting Standard 11 (A.S.-11) notified under Companies (Accounting Standard) Rules, 2006 and had himself alternatively prayed for an order and direction to the National Advisory Committee on Accounting Standard (NACS) to confirm whether the Accounting Treatment appearing in clause 2.4.3 of the scheme was not contrary to Companies (Accounting Standards) Rules, 2006. At that point of time it was also contended on behalf of the Regional Director that clause 2.4.3 of the scheme is not in conformity with the mandatory accounting standard -11 prescribed by the Institute of Chartered Accountants of India. This Court by its order dated 18 th July 19 2009 sanctioned the scheme. The sanctioned scheme includes Clause 2.4.3. As held by the Hon’ble Supreme Court in M/s. J. K. (Bombay) Pvt. Ltd. (Supra) the sanctioned scheme has a statutory force and cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alterations. If the said Clause 2.4.3 of the Scheme was to be altered after 18 th July 2009 the same would require fresh/further sanction of the Court. There remains no doubt that the scheme sanctioned by this court by its order dated 18 th July 2009 stood sanctioned along with clause 2.4.3 without any modifications in Clause 2.4.3 and only upon acceptance of the undertaking of Respondent No.1. As contended by Mr. Chagla this is because the Respondent No.1 without conceding that Clause 2.4.3 was not in compliance with AS-11 or that Clause 2.4.3 needed any alteration, in view of the objection of the Regional Director undertook to follow the Accounting Standard -11 as well as Accounting Standard-5 in its letter and spirit. The Chartered Accountants, Statutory Auditors of Respondent No.1 also opined that Clause 2.4.3 of the Scheme is in conformity with AS-11. In view thereof by implementing Clause 2.4.3 20 what the Respondent has done is to obey/follow the sanctioned scheme. That the Respondent No.1 has followed the accounting Standard -11 and Accounting Standard -5 in its letter and spirit after giving its undertaking to this court is also not disputed by the Regional Director at whose instance the Respondent No.1 gave the said undertaking. Under the circumstances argument of the Petitioner that Respondent No.1 was conscious of the fact that Clause 2.4.3 was not in conformity with AS-11 and therefore gave an undertaking to follow AS-11 in its letter and spirit, and the act on the part of Respondent No.1 to implement Clause 2.4.3. of the Scheme as it stood in the scheme amounts to breach of the undertaking given to this Court, thereby committing Contempt of this Court under the Contempt of Courts Act, 1971 cannot be accepted. 17. Even otherwise, the Petitioner has himself admitted that the Statutory Auditors of Respondent No.1 i.e. Respondent Nos. 8 and 9 have stated that all accounting standards referred to in Section 211 (3C) of the Companies Act, 1956 in terms of which companies are required to comply with the accounting standards prescribed under the Companies (Accounting 21 Standards) Rules, 2006 which includes AS-11 have been complied with by Respondent No.1. However, according to the Petitioner the Statutory Auditors have connived with the management of Respondent No.1 and made the above mis- statement. No reasoning/particulars are set out as to why Respondent Nos. 8 and 9 who are professionals of repute should connive with the management of Respondent No.1 and wrongly allege that clause 2.4.3 of the scheme is not in violation of accounting standards 11 and 5. It is therefore clear that the said allegations made by the Petitioner against Respondent Nos. 8 and 9 are irresponsible, and no cognizance can be taken of such irresponsible allegations, by this Court. The Respondent No.1 has therefore proceeded with the implementation of clause 2.4.3 of the scheme after obtaining advice from