Aes Opgc Holding (Mauritius) And Another v. Orissa Power Generation Corporation Ltd. And Others

S. Balasubramanian, Chairman:— The main complaint of the peti-tioners in this petition is about the role and conduct of the nominee directors of a State Government, which has divested 49 per cent, shares in its wholly owned power generating company in favour of the petitioners as a part of power sector reforms, on the ground that such act and conduct of these directors are in breach of the fiduciary duties owed by them to the company and also oppressive to the minority shareholders.

2. The facts of the case are that M/s. Orissa Power Generation Corporation (the company) was incorporated in November, 1994, as a 100 per cent. Orissa Government owned company. The main object of the company is to establish, operate and maintain electricity power generating stations. In the year 1998, in pursuance of its policy of reform in the power sector, the Orissa Government decided to divest 49 per cent, shares in the company in favour of a strategic partner through international competitive bidding. By a detailed shareholders agreement between the Government of Orissa and AES Corporation, Delaware, USA, 41 per cent, shares were transferred to the petitioners and another 8 per cent, shares were allotted for a total consideration of Rs. 603.4 crores. Most of the terms of the shareholders agreement have been incorporated in the articles of association of the company. The entire electricity power generated by the company is to be supplied to Grid Corporation of Orissa which is a 100 per cent. Government company. In turn, GRIDCO supplies the entire power to various distribution companies including CESCO in which one of the subsidiaries of M/s. AES hold 51 per cent, shares. The company had entered into a power purchase agreement (PPA) with GRIDCO. This power purchase agreement was amended by a tripartite agreement entered into between the company, the Government of Orissa and GRIDCO. As per this agreement, an escrow account to be set up by GRIDCO in favour of the company in which all the proceeds of sale by GRIDCO would be credited for timely payment to the company and every month the Government of Orissa shall make good the amount unpaid by GRIDCO to the company to the maximum of 25 per cent. GRIDCO is also to open a revolving letter of credit in favour of the company to meet its power bills. At the time when the petitioners acquired the shares, there was an outstanding of Rs. 206 crores payable by GRIDCO to the company and in the tripartite agreement it was provided that this amount would be discharged by payment of Rs. 146 crores in cash and the balance Rs. 60 crores by allotment of 15 per cent. GRIDCO Power Bonds. The bonds were to be redeemed in three instalments over a period of seven years. The interest of 15 per cent, was to be paid semi-annually in September and March every year. The bond holders had the right to seek redemption of the bonds at the expiry of three years (put option) and the repayment commitment of GRIDCO and interest thereon the bonds is backed by an unconditional irrevocable and without recourse guarantee of Government of Orissa. In terms of the articles, the second respondent has appointed the chairman and the director (finance) and the petitioners have appointed the managing director and director (operation). In addition, the second respondent has also appointed the MD of GRIDCO as one of its nominees and the petitioner has also appointed another nominee on the board. Thus, both the sides have equal number of nominees on the board. In terms of the articles, the chairman has a casting vote. Certain disputes have arisen between the parties resulting in filing of this petition. Shri Sarkar appearing for the petitioners submitted: The petitioners invested a huge amount of money paying a substantial control premium to acquire 49 per cent, shares in the company on the assurance of the second respondent, namely, the Government of Orissa that the strategic partner would have absolute control over the management of the company. However, the third to fifth respondents who are the nominees of the Government of Orissa have gained the complete control of the company and have been acting against the interest of the company in breach of their fiduciary duties. The petitioners entered into the shareholders agreement with the Government of Orissa in good faith and with a view to protect not only the interests of the petitioners but also the company. Most of the terms of the shareholders agreement have been incorporated into the articles of association of the company. The shareholders agreement sets out the valuable, infallible, and inviolable right of the petitioners including vesting of all day-to-day affairs of the company and operations in the nominees of the petitioners. As per the articles of association of the company/shareholders agreement, the petitioners have the right to appoint the managing director vesting with him all the powers of day-to-day management of the company. However, the second respondent and his nominee directors have blatantly violated this agreement and are also carrying on the affairs of the company in a manner prejudicial to the company, the petitioner shareholders and public interest. The second respondent and his nominees on the board have progressively tried to over reach the terms of the shareholders agreement and articles and taken decisions wholly contrary to the same. They have also been acting in breach of their fiduciary duties as directors of the company.

3. Learned counsel continued: In terms of the tripartite agreement, GRIDCO had allotted 15 per cent, power bonds aggregating to Rs. 60 crores on April 1, 1998, redeemable in three instalments. In terms of the allotment of the bonds, the company had the right to seek redemption after three years from the date of allotment. GRIDCO had failed to pay the interest after two semi-annual instalments. The nominees of the majority shareholder, namely the second respondent, did not exercise the put option on the bonds only with a view to benefit GRIDCO as it is a 100 per cent, company of the second respondent. Similarly, they had also not invoked the unconditional irrevocable and without recourse guarantee of the Orissa Government because they are its nominees. This inaction to favour the second respondent and GRIDCO is clearly in breach of their fiduciary duties to the company. Likewise, the second respondent through its nominee directors, diluted a valuable security available to the company qua GRIDCO with regard to payment of energy bills. In terms of the tripartite agreement, the second respondent had undertaken to disburse the amount which remains unpaid by GRIDCO subject to a maximum of 25 per cent, of the monthly bills payable by GRIDCO to the company, treating the same as a loan given to GRIDCO at 15 per cent, interest. In spite of default committed by GRIDCO in payment of monthly bills, the second respondent did not contribute its 25 per cent, to the escrow account. Instead, the fifth respondent—director (finance)—a nominee of the second respondent, entered into an agreement with GRIDCO on September 15, 2000, to the effect that interest payment default under GRIDCO bonds would be adjusted against excess amount available in the GRIDCO escrow account after payment of monthly bills. When this agreement was entered into, there was already an outstanding of over Rs. 140 crores payable by GRIDCO to the company towards energy bills. This being the case, the question of adjusting the excess amount in the escrow account after payment of monthly bills towards payment of interest on the bonds did not arise. The purpose of the fifth respondent entering into this agreement was only to benefit GRIDCO and this act is against interest of the company. This is also an act in breach of his fiduciary duties to the company. The managing director had to write to the escrow agency, namely, Union Bank of India to reverse the entries made in terms of the agreement entered into by the fifth respondent. Another act in breach of their fiduciary duties relates to improper adjustment of dividend. In the year 1998, the company declared a dividend for the previous year 1996-97, in the sum of Rs. 33.75 crores which was payable to the second respondent. Additionally, the company also owed a further sum of Rs. 12.41 crores towards loan instalment and guarantee commission. Thus, a total amount of Rs. 46.17 crores was payable by the company to the second respondent. After the petitioners became shareholders, in the year 1998, in the tripartite agreement, it was provided that this sum of Rs. 46.17 crores would be adjusted against the 25 per cent, contribution to be made by the second respondent towards the escrow account. A sum of Rs. 31.71 crores was adjusted immediately. Of the balance, Rs. 8.46 crores was adjusted in anticipation of the approval of the second respondent. The remaining balance of Rs. 5.98 crores was paid to the second respondent. This was done in the year 1999 and was duly recorded in the letter issued by the nominee directors of the second respondent (annexure M). Due credit was also given to GRIDCO. However, in spite of the fact that outstanding dues to the company were mounting, and the second respondent, which was in breach of its 25 per cent, contribution commitment, issued two letters to the company dated August 13, 2001 and September 26, 2001, seeking for payment of Rs. 8.46 crores adjusted against the dividend as early as in 1999. The fifth respondent, being the nominee of the second respondent, without any consideration for the interest of the company, released the said amount for payment to the second respondent notwithstanding the fact that due credit had already been given to GRIDCO. This action of the fifth respondent in releasing the amount without seeking an affirmative vote of the petitioner nominees in terms of article 30 amounts to complete breach of his fiduciary duties. In terms of the said article, affirmative vote of the nominees of the petitioners is required for any release/adjustment of any amount in excess of Rs. 1 crore.

4. Learned counsel further submitted: The nominee directors of the second respondent have been acting in breach of the provisions of the articles, according to which, any modification to contracts which materially affects the business of the company, requires the affirmative vote of one of the nominee directors each of the petitioners and the second respondent. The non-enforcement of the rights under the bonds, the escrow agreement, power purchase agreement, etc., were also incidents of contracts with GRIDCO and/or second respondent. While respondents Nos. 3 and 5 are officers of the second respondent, the fourth respondent is the chairman and the managing director of GRIDCO. Thus, they are all interested parties in these agreements and they have always been acting either in the interest of the second respondent and/or GRIDCO disregarding the interests of the company and without seeking the affirmative vote of the nominee directors of the petitioners. The conflict of interest on their part is evident. It is the managing director, being the nominee of the petitioner, with a view to protect the interest of the company, has been taking action in the interest of the company. For instance, he addressed a letter on October 4, 2001, to CMD, GRIDCO protesting against the decision of the nominee of the second respondent, viz., the director (finance) agreeing for adjustment of dues by way of interest on bonds against monies in the escrow account. In his letter, he had pointed out that a sum of Rs. 22.5 crores was payable by GRIDCO towards interest on the bonds and seeking for immediate payment. Likewise, by a letter dated October 10, 2001, he called upon the escrow agent to reverse all entries of setting off of interest due under GRIDCO bonds against monies in escrow account. By a notice to GM (Finance) GRIDCO dated August 10, 2000, the MD of the company pointed out to various defaults committed by GRIDCO under the power purchase agreement. Similarly, he had also taken up with the second respondent and GRIDCO to comply with the terms of the tripartite agreement. The constant disregard of the mandate of the minority protection contained in the articles of association of the company is a grave act of oppression against the petitioners who have invested substantial amount of money in the company as a strategic partner.

5. Learned counsel further submitted: In terms of article 25 of the articles of association, the managing director appointed by the petitioners shall be in charge of all day-to-day affairs of the company. Unit No. 2 of the 1b Thermal Power Station was shut down for maintenance in May, 2001. Since an enormous amount of dues was outstanding from GRIDCO, the managing director decided to resume supply at a reduced load. The fifth respondent had also earlier expressed his concern that in view of the mounting arrears from GRIDCO, it would not be justifiable to operate the plant at a high plant load factor as a high PLF would result in the company being entitled to incentive and having to pay tax on income which was not being realised by the company. Therefore, when the managing director issued a letter to GRIDCO on May 17, 2001, that unit 2 would be operated at a reduced load, the CMD, GRIDCO, who is also a director in the company initiated a circular resolution by his letter dated May 19, 2001, curtailing the financial and commercial powers of the managing director with the director to resume power supply from unit 2 immediately. At no time, the managing director had closed down the unit on account of arrears of payment by GRIDCO. It had been closed for maintenance and the MD had only decided to resume power supply with a reduced load. His action was a part of his day-to-day functions taken in the interest of the company. Passing this resolution of curbing the powers of MD, is completely against the provisions of the articles. Without amendment to the articles, the board cannot pass a circular resolution curbing his powers. The manner in which the resolution was passed, is also questionable. Even though, the board consisted of equal number of directors from the petitioners and the second respondent, one of the nominees of the petitioners has resigned on May 7, 2001, and therefore the second respondent had majority on the board when the resolution was circulated. In terms of section 289 of the Act, the three directors being in majority, approved the said circular resolution without either of the nominees of the petitioners signing the same. Even after the plant resumed normal PLF, the said resolution curtailing the powers of the MD continued to operate. This is in spite of the fact that the Government of Orissa, in its letter dated May 24, 2001, asked its nominees to reconsider the decision to strip the MD of his financial and commercial powers.

6. In terms of the articles, the finance director is to exercise such powers as may be delegated by the board and to function subject to its superintendence. So far, there had been no delegation of powers to the finance director. However, by an office order dated May 24, 2001 (annexure Z-1), the chairman of the company has brought the entire financial wing of the company under the control of the finance director (page 239). By assuming powers that he did not have, the director (finance) has acted contrary to the instructions given by the MD in the matter of payment of bills for supply of coal. The company has been buying coal from MCL. Since the quality of coal supplied by MCL, a PSU, was not up to the mark resulting in a huge loss to the company, the managing director issued instructions that part payment from the bills of MCL be withheld till the quality improved. Accordingly, the director (operations), a nominee of the petitioners, issued instructions that future payments to MCL should not exceed 50 per cent, of the bill amount without clearance by the MD. However, on September 19, 2001, the director (finance) released the entire monthly bill of MCL. When the matter came up for consideration in the 100th board meeting, the nominee directors of the second respondent in spite of protest by the MD voted in favour of full payment to MCL and since there was a tie, the chairman exercised his casting vote in favour of payment to MCL. In that meeting, the director (finance) and CMD, GRIDCO expressed the view that while the managing director has the authority to order payment of coal bills, he has no authority to withhold the payment.

7. Continuing his arguments, learned counsel submitted that the acts of oppression and mismanagement continued even after filing of this petition. In the interest of the company and to ensure that dues from GRIDCO are recovered, the MD had invoked arbitration in terms of PPA which was not to the liking of the second respondent and its nominees. Apprehending that the nominee directors of the second respondent would take some decisions regarding arbitration, the petitioners filed an application C.A No. 48 of 2002 seeking for certain reliefs. On that day, this Bench had passed an order that the board of the company will not pass any resolution relating to pending arbitration proceedings. However, in spite of this direction, in the board meeting held on March 20, 2002, the board authorised the director (finance) to appear before the Arbitration Tribunal on behalf of the company and present the facts in their right perspective before the Tribunal. When the MD had invoked the arbitration on behalf of the company, the very purpose of authorising the director (finance) to represent the company before the Arbitration Tribunal was only to favour GRIDCO as the second respondent holds 100 per cent, shares in that company and the director (finance) and the chairman are the nominees of the second respondent. When there is a conflict of interest, the directors have to act for and in the interest of the company. Further, such a decision also amounts to usurpation of the powers of the managing director. In the same meeting, it was also proposed to restrain the MD from initiating any law suit against PSUs and quasi-judicial authorities. These acts by the nominees of the majority shareholders are not only against the articles but also acts of oppression against the minority shareholders. It is to be noted that only because of invoking the arbitration by the MD, the company has been able to recover large amount of dues from GRIDCO and establishment of LC by GRIDCO for an enhanced amount.

8. Another grave act of oppression against the minority shareholders is the attempt of the nominees of the majority shareholders to make the functions of the director (finance) independent. For the 104th board meeting, the agenda contained item No. 18 relating to delegation of powers to the director (finance). The MD gave a detailed dissenting note protesting against any such delegation. Instead of putting the proposal for voting, it has been recorded in the minutes that the proposal had been approved. Such delegation of powers to the finance director is a deliberate attempt to encroach upon the day-to-day management powers of the MD in terms of article 25 especially when it has been proposed that financial powers delegated to the MD and other full time directors will be exercised by them only after due consideration with the director (finance). For delegation of power to the director (finance), the nominees of the second respondent have relied on the guidelines which are applicable to public sector undertakings. Once the Government has taken a policy decision to divest in favour of a strategic partner, the question of application of the guidelines pertaining to public sector undertakings does not arise. It has been very clearly spelt out in the articles that the managing director shall be in charge of the day-to-day affairs of the company and therefore by this delegation of financial powers to the director (finance), the nominees of the second respondent have attempted to curtail the powers of the managing director. After the delegation of powers, the director (finance) has the power to even fix the tariff for the power generated by the company. By this arrangement, the nominees of the second respondent are attempting to bring about a material change in the management control in violation of the articles and vest the director (finance) who is nominee of the majority shareholders with enormous powers. By this arrangement, the MD has been made a powerless head and subordinate to the director (finance).

9. Summing up his arguments, Shri Sarkar submitted: The stand of the respondents that a nominee of the petitioners being the MD and in charge of the management of the company, the petitioners cannot invoke the provisions of section 397/398 of the Act is not correct. It is a well established principle of law that irrespective of who is in the management, a shareholder has the right to invoke the provisions of section 397/398. In K.N Bhargava v. Trackparts of India Ltd., [2001] 104 Comp Cas 611 (CLB), this Board has held that oppression could be either by the majority against the minority or vice versa and it is immaterial as to who is in management and that it cannot be held as a general proposition that shareholders in management cannot file a petition under section 397 or section 398. Even otherwise, as most of the allegations made in the petition relate to acts of omission and commission by the nominees of the majority shareholders, the petitioners have every right to present the petition. The acts of omission and commission by the nominees of the second respondent clearly establish that they have been acting in the interest of the second respondent and GRIDCO. In Rolta India Ltd. v. Venire Industries Ltd., [2000] 100 Comp Cas 19, the Bombay High Court has held that the directors being in fiduciary relationship with the company and the shareholders, it is their duty to do what they consider best in the interest of the company. Now a situation has arisen that the nominees of the petitioners have become silent spectators as the MD is restrained from exercising his commercial and financial powers, and his decisions are voted against by the exercise of casting vote by the chairman, parallel power center is sought to be created by vesting the director (finance). All these acts of the nominees of the majority shareholders have effectively nullified the minority protection given in article 25. The only way by which the interest of the company could be protected and the oppressive actions of the second respondent and his nominees could be put an end to is by deletion of article 26, which empowers the board to delegate powers to the director (finance) and also by direction to the second respondent to divest further 2 per cent, of the shares in favour of the petitioners so that the petitioners who are experts in power generation business become the majority shareholders. The power of the Company Law Board to alter/delete has been answered in the affirmative by the Bombay High Court in Bennet Coleman and Co. v. Union of India, [1977] 47 Comp Cas 92. When the petitioners joined the company as strategic partners by paying a huge amount of over Rs. 600 crores for 49 per cent, shares in the company it was on the basis of the commitment of the Government of Orissa to enhance the holding of the private sector participant, to a majority by 2000-2001. This decision was communicated by the Principal Secretary, Energy Department of Orissa Government to DSP Merryl Lynch Limited by a letter dated December 10, 1997. The Government of Orissa is bound by this promise. In Union of India v. Anglo Afghan Agencies, [1968] 2 SCR 366; AIR 1968 SC 718 and in Century Spinning and Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council, (1970) 1 SCC 582 : AIR 1971 SC 1021, the Supreme Court has held that when a person acts on the basis of a representation made by the Government, then, the Government is bound by it as equity arises in favour of a person who has acted on that representation. Therefore, when the Government had made a representation that by 2000-2001, the private sector participant would become majority, it should divest at least 2 per cent, shares in the company in favour of the petitioner so that they become the majority. Even otherwise, as decided by the Board in EIH Ltd. v. Mashobra Resort Ltd., [2004] 119 Comp Cas 993 (CLB), the petitioners being experts in the business of power generation, should have the majority shareholding.

10. Shri Natarajan, company secretary in practice and Shri Mehta, advocate appearing for the respondents submitted: This petition is not maintainable. When the managing director, being the nominee of the petitioners, is in charge of the affairs of the company, the petitioners cannot complain of either oppression or mismanagement in the affairs of the company as held in Rai Saheb Vishwamitra v. Amar Nath Mehrotra, [1986] 59 Comp Cas 854 (All). All the decisions taken in the board meetings till the petition was filed were unanimous and at no point of time, was there any occasion either to seek affirmative vote or for the chairman to exercise his casting vote. Further, to maintain a petition under section 397, the petitioners should establish that sufficient grounds exist for winding up of the company on just and equitable grounds. As against an investment of Rs. 604 crores, the petitioners have already got back an amount of Rs. 266 crores by way of dividends. Having earned a substantial quantum of dividend which is not normally available in an industry which has a long gestation period, the petitioners cannot complain of oppression. Further, during the arguments, the petitioners have sought for reliefs which have not been prayed for in the petition. When corrective action was taken by the nominees of the second respondent through the legitimate medium of the board of directors when the MD exceeded his powers, the petitioners rushed to this Board and obtained ex parte interim orders through gross misrepresentation, concealment of material facts and misleading statements.

11. On the merits, he submitted: The main thrust of the petition is that the nominees of the second respondent have been showing undue favour to GRIDCO and the second respondent in breach of their fiduciary duties. This allegation is baseless. It is true that there have been dues receivable from GRIDCO and such dues were being reviewed practically in every board meeting in which the nominees of the petitioners were always present. At no time, the nominees of the petitioners either suggested any coercive method like invoking the Government guarantee in respect of the bonds or exercise of put option in relating to the same nor the nominees of the second respondent objected to such actions proposed by the nominees of the petitioners.

12. He further submitted: The company is a board managed company, both the petitioners and the second respondent having equal number of nominees on the board. Therefore, the question of the second respondent conducting the affairs is neither a fact nor is permissible in law. Further, it is the nominee of the petitioners being the MD is in charge of the day-to-day affairs of the company. The allegation that the nominee directors of the second respondent are not enforcing the contractual rights arising out of the power purchase agreement and the tripartite agreement are unfounded. The dues of GRIDCO had always been one of the subjects of discussions in the board meeting as is evident from the recording in the minutes of various board meetings. At no point of time, the nominees of the petitioners more particularly the MD has proposed that the contractual obligations of GRIDCO and the second respondent should be enforced. Whether to enforce this obligations or not is for the board to decide in terms of article 30. The question of breach of fiduciary duties by the nominees of the second respondent could be alleged only if the nominee directors had proposed enforcement and the nominees of the second respondent or the MD of GRIDCO who is also a director had objected to the same. There is nothing on record either in the minutes that the nominees of the petitioners had suggested such a course of action or is there any communication from the petitioners in this regard. A perusal of various minutes of the board of directors, before the petition was filed, would show that all the decisions taken in the board meetings have been unanimous, and thee was no occasion of seeking an affirmative vote nor there was any occasion for the chairman to exercise his casting vote. Even though in the rejoinder, the petitioners have contended that the dissents expressed by the nominees of the petitioners have not been incorporated in the minutes, yet, there is no contemporaneous document to establish that the nominees of the petitioner had at any time pointed out the alleged omission of dissents expressed by them in the minutes. The procedure of approval of board minutes is systematic in the company. It is the company secretary who prepares the minutes and he sends the draft minutes to the MD and director (finance) and after incorporation of changes/modifications, it is the MD who forwards the same to the chairman for approval. Therefore, the allegation that the dissent expressed by the nominees of the petitioners are not reflected in the minutes is nothing but an after thought. Such is the situation in respect of exercising put option in respect of GRIDCO bonds also. Therefore, the allegations that the nominee directors of the second respondent have acted in breach of their fiduciary duties, by not enforcing the terms of the PPA and tripartite agreement are baseless. If there was any default in enforcing contractual rights by the company, the nominees of the petitioners are also guilty of the same. It is a settled law that a party to a decision cannot complaint of the same later held by the Company Law Board in Desein Pvt. Ltd. v. Elektrim India Ltd., [2001] 3 Comp LJ 459; [2003] 116 Comp Cas 341 and as held by the Madras High Court in Anugraha Jewellers Ltd. v. K.R.S Mani, [2002] 111 Comp Cas 501. Therefore, all the allegations in regard to bonds and dues from GRIDCO have no basis to allege that the nominees of the second respondent have acted in breach of their fiduciary duties. No doubt, the second respondent holds 100 per cent, shares in GRIDCO. It is equally important to note that it also holds 51 per cent, shares of the company and therefore, there is no reason for the second respondent to show any favours of GRIDCO against the interest of the company. As far as dilution of the escrow arrangement with GRIDCO is concerned, the allegation of the petitioners is that the fifth respondent—the director (finance)—with a view to benefit GRIDCO which is 100 per cent, owned by the second respondent, had entered into an agreement that any surplus remaining in the escrow account after payment of monthly bill could be adjusted against interest due on the bonds. This allegation is also baseless as the fifth respondent did not enter into this agreement on his own volition. In a board meeting held on September 6, 2000, in which the MD as well as other nominees of the petitioners were present, it was unanimously decided that any amount deposited by CESCO in excess of Rs. 35 crores in the GRIDCO escrow account would be utilised by GRIDCO for payment of over due interest amounting to Rs. 13.5 crores on GRIDCO bonds. In terms of this unanimous decision, the director (finance) entered into the agreement on September 16, 2000, that the excess amount available in the escrow account after meeting the monthly bills will be utilised against payment of interest. Therefore, to allege that the fifth respondent being a nominee of the second respondent, has acted against the interest of the company or in breach of his fiduciary duties, is baseless. Further, it is the MD who, by directing the bank to reverse the entries, had unilaterally acted against the unanimous decision taken by the board that too on October 10, 2001, i.e, one year after the agreement was entered into by the director (finance). In addition, this action of the MD was irregular as his commercial and financial powers had already been withdrawn by a circular resolution dated May 21, 2001.

13. Shri Natarajan further submitted: The petitioners have raised a hue and cry on the decision of the second respondent not to allow the company to adjust the balance dividend amount of Rs. 8.46 crores. In the year 1998, the company has declared a dividend of Rs. 33.75 crores for the year 1996-97 and this amount was payable to the second respondent. In addition, the company owed Rs. 12.4 crores to the second respondent towards instalment of loan and guarantee commission. Since there was a shortfall in the payment by GRIDCO, the second respondent permitted the company to adjust Rs. 31.71 crores towards its 25 per cent, contribution to the escrow account. In anticipation of the approval of the second respondent, the company adjusted a further sum of Rs. 8.46 crores later. Since this amount constituted a part of the dividend payable to the second respondent, it took the decision to receive the amount in cash. Therefore, there is nothing illegal or oppressive on the part of the second respondent to ask for payment of the dividend. A company is mandated to pay the dividend to the shareholders and it cannot unilaterally adjust the same against any dues. In the present case, while the second respondent agreed for adjustment of a part of the dividend, it did not agree for the balance. When a shareholder claims the dividend declared, the petitioner cannot say that by claiming the dividend, the second respondent has acted in a manner either prejudicial to the interest of the company or oppressive to the minority shareholders. As a matter of fact, the company had no business to adjust a part of the dividend on the basis of certain contractual obligations. Even otherwise, such adjustment was subject to the consent to be given by the second respondent. Therefore, this allegation has been made for the sake of making the allegation.

14. He further submitted: As far as release of payment to MCL for purchase of coal is concerned, it was a commercial decision taken by the director (finance) in the interest of the company. MCL is the only supplier of coal which is an essential ingredient for generation of power. It is true that there were some quality problems, yet, stoppage of payment for the coal supply might result in suspension of supply by MCL resulting in shut down of the plant. If the MD desired to stop payment for the coal, he should have made an alternative arrangement for supply of better quality coal. Further, this decision of stopping the payment was taken by the MD when his commercial and financial powers had been withdrawn. When the matter was placed before the board, for the first time in the history of the company, the chairman had to exercise his casting vote supporting the action of the director (finance) in releasing the payment for the coal.

15. The MD being the nominee of the petitioners has been acting beyond the powers vested in him. In terms of article 30, arbitration proceedings can be invoked only on a decision taken in a board meeting. The managing director, in violation of the provisions of this article and also during the period when his commercial and financial powers had been withdrawn, invoked arbitration against GRIDCO. The nominees of the second respondent were of the view that instead of resorting to arbitration, the matter should be sorted out by mutual negotiations. This is what they had pointed out in the board meeting on September 29, 2001. Ultimately, after spending over Rs. 50 lakhs, the matter was resolved only by mutual negotiations. As far as the powers of the chairman are concerned, there is nothing in the articles to bar him from exercising any powers. No doubt, in the offer document, it was stated that the chairman would be a non executive functionary, but the company had passed a resolution in a board meeting as early as on February 19, 1996, conferring full and concurrent powers of management to the chairman, managing director and director (finance) and this resolution has not been amended or modified till date. Even otherwise, the chairman had to issue an office order because the managing director transferred some of the functionaries in the Finance Department in March, 2001, without any consultation with director (finance). After the orders were issued, in spite of the protest made by director (finance) and the advice given by the chairman to amicably resolve the dispute, the MD was adamant. Since the transfers created considerable confusion in the Finance Department, the chairman had to intervene and had to issue the office order and therefore the exercise of executive powers by the chairman cannot amount either to an act of oppression or mismanagement.

16. Shri Natarajan further submitted: As far as delegation of powers to director (finance) is concerned, he had always enjoyed parallel and concurrent powers with the managing director in terms of the board resolution dated February 19, 1996. However, since disputes arose regarding the powers of director (finance), the nominee directors of the second respondent desired to explicitly spell out the powers of the MD and director (finance). But the nominee directors of the petitioners did not co-operate. While the director (finance) had given his proposal of his powers and functions, MD has not so far given his proposal as to what all constitute day-to-day management. Inaction on his part have been minuted in the minutes of the board meetings held on July 13, 2002 and September 29, 2001. Since the second respondent holds 51 per cent, shares in the company, in terms of section 617 of the Act, it continues to be a Government company and therefore guidelines relating to Government companies can definitely be applied and since specific guidelines are there relating to the powers and functions of director (finance) in a Government company, the nominee directors of the second respondent desired to delegate similar powers to the director (finance) as under article 26, the board has the authority to delegate powers to him.

17. Summing up his argument, Shri Natarajan submitted that the prayers relating to deletion of article 26 and direction to the second respondent to divest further shares to enable the petitioners to become majority shareholders cannot be considered. The question of invoking the principles of promissory estoppel, as per the decision of the Supreme Court in Anglo Afghan Agencies' case, [1968] 2 SCR 366; AIR 1968 SC 718 does not arise in this case in as much as the relationship between the petitioners and the second respondent is governed only by the shareholders' agreement as is evident from clause 15.8 of the shareholders' agreement. Further, the second respondent has not made any representation to the petitioners that by 2000-2001, the second respondent would divest further shares in favour of the petitioners to make them the majority shareholders. The letter referred to by the petitioners was not written to the petitioners. As far as deletion of article 26 which provides that the finance director shall exercise such powers as may be delegated by the board and will function subject to superintendence of the board is concerned, the petitioners have not made out a case to seek this prayer. The petitioners have relied on Bennet Coleman's case, [1977] 47 Comp Cas 92 (Bom) for the proposition that this Bench has the power to amend articles. While the respondents do not dispute the powers of this Bench to amend or delete an article, yet, in the present case the same is not warranted. Further, it is the nominees of the petitioners who by their actions, by taking advantage of the various interim orders passed by this Bench, have made the board practically non functional. They either ask for postponement of the board meetings on flimsy grounds or do not attend the board meetings. They blocked the passing of annual accounts for 2000-01 on flimsy grounds, the MD has been granting indiscriminate promotions in violation of the company rules, interferes with the administrative powers of the director (finance). Therefore, it is the nominees of the petitioners who are acting in an oppressive manner and against the interest of the company and as such do not deserve any relief. Even otherwise, the petitioners have not established that the nominee directors of the second respondent have acted in breach of their fiduciary duties nor the second respondent have acted in an oppressive manner and as such the petition should be dismissed.

18. I have considered the pleadings and arguments of counsel and also their written submissions except that I have not referred to some of the case law relied on by the petitioners in the written submissions which were not cited during the hearings. When the petition was mentioned on November 13, 2001, certain interim reliefs were sought ex parte. Considering the facts and circumstances of the case, this Bench stayed the circular resolution relating to curtailment of the financial and commercial powers of the managing director. Thereafter, the petitioners filed a few more applications seeking for certain interim reliefs on which this Bench had passed appropriate orders.

19. The respondents have raised an objection on the maintainability of the petition on the ground that since the nominee of the petitioners is the MD in charge of the management, they cannot allege either oppression or mismanagement on the part of the respondents. As elaborated later, it is the same respondents who have also taken the stand that the MD does not have powers to do so many things and it is the complaint of the petitioners that their nominee is not allowed to exercise his powers. Any way, when there are only two groups of shareholders and both are having equal number of nominees on the board, either of the shareholders can allege oppression or mismanagement by one group. In this regard Shri Sarkar has relevantly cited the decision of this Board in Trackparts' case, [2001] 104 Comp Cas 611 which was also upheld by the Allahabad High Court.

20. This petition has been filed under section 397/398 of the Act. While section 397 deals with the conducting of the affairs of a company in a manner prejudicial to public interest or in a manner oppressive to any member or members, section 398 deals with conducting the affairs of a company in a manner prejudicial to public interest and/or prejudicial to the interest of the company. While according to the petitioners, part of the allegations relate to oppressive acts against the minority shareholders, part of the allegations relate to acts which are against the interest of the company. They have based many of the allegations on breach of fiduciary duties and conflict of interest by the nominee directors of the majority shareholder. The concept of fiduciary duty of a director in relation to a company is well recognised and established. In a nut shell, since a director is a trustee and also an agent, he cannot do anything which would be against the interest of a company nor he could profit at the expense of the company. Conflict of interest would arise when a person owes allegiance to two or more entities/persons and is placed in a situation to take a decision which would affect the interest of all those to which/whom he owes allegiance. If a director of a company is placed in such a situation either he should recuse himself or he is duty bound to take the decision which would be in the interest of the company failing which he would be in breach of his fiduciary duties. It is more so in the case of nominee directors when there is a dash of interest between the company and their nominators. Some of the allegations of the petitioners are that the nominees of the majority shareholders are guilty of inaction in the sense that they have failed to enforce contractual obligations of their nominator, viz., the second respondent and/or that of GRIDCO. The question as to whether acts of omission/inaction could also be considered to be oppressive has been examined in Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1958] 3 All ER 66; [1959] 29 Comp Cas 1 (HL) which has also been followed in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC). In terms of the decision in these cases, shareholders can complain that the directors have acted in an oppressive manner when with ulterior motive, they do nothing to defend the interest when they ought to do something. Similarly, if they fail to enforce contractual rights, the shareholders could definitely claim that the directors have acted in an oppressive manner. Keeping these principles in mind, the allegation of the petitioners have to be examined.

21. The main complaint of the petitioners is that the nominee directors of the second respondent have, in breach of their fiduciary duties, committed acts of omission with a view to protect the interests of the second respondent—the majority shareholder and also GRIDCO in which the second respondent holds 100 per cent, shares. To substantiate these allegations, they have cited the instances of inaction on the part of the nominees of the second respondent in not enforcing the terms of the tripartite agreement relating to 25 per cent, contribution by the second respondent, non-exercise of the put option in regard to GRIDCO bonds and also failure to invoke the unconditional irrevocable and without recourse guarantee of the second respondent. I do not find much merit in these allegations. I have already pointed out that when the board of directors fails to enforce contractual rights of a company for ulterior motives which would be against the interest of the company, the shareholders can have legitimate grievance. But in the present case, the petitioners are not dormant shareholders. They have three nominees on the board including the managing director. From the various minutes of the board meetings, both before and after filing of the petition, I find that the position regarding arrears of energy bills by GRIDCO had been discussed practically in every board meeting and the CMD, GRIDCO who is also incidentally a member of the board of this company has been assuring clearance of energy bills (minutes dated December 31, 1999, March 29, 2000, May 25, 2000, July 26, 2000, July 13, 2001, etc.). There is nothing in the minutes to show that the nominees of the petitioners had ever suggested taking action in terms of either PPA or tripartite agreement to enforce the company's contractual rights. If they had proposed enforcement and the nominee directors had defeated the said proposal, then the petitioners can have a grievance that the nominees of the second respondent had either conflict of interest or had acted in breach of their fiduciary duties. A feeble attempt has been made in the rejoinder that the stand of the nominee directors of the petitioners has not been recorded in the minutes. If so, there is nothing on record to show that at any time, the nominee directors of the petitioners had protested on nonrecording of their stand in the minutes. Normally, a party to a decision cannot, later on, allege that the said decision is either oppressive or against the interest of the company. In this connection, Shri Natarajan rightly referred to the decisions in Desein Pvt. Ltd. v. Elektrim India Ltd., [2001] 3 Comp LJ 459; [2003] 116 Comp Cas 341 (CLB) and Anugraha Jewellers Ltd. v. K.R.S Mani, [2002] 111 Comp Cas 501 (Mad) cases. Further, I also note that the commitment by the second respondent to contribute towards 25 per cent, was agreed to be an interim arrangement for a period of 18 months from April 1, 1998 and was to be reviewed later (clause 6(ii) of the tripartite agreement). Whether any review was done and the commitment was continued after October, 1999, is not dear. If it had not been renewed, then, the allegation of inaction by the nominees of the second respondent to enforce the said commitment after October, 1999, has no basis. Therefore, I am of the view that all the allegations relating to these issues have been made only for the sake of making the allegations and not on valid grounds.

22. As far as the allegation relating to dilution of the security for payment of energy bills is concerned, the allegation is that the director (finance), a nominee of the second respondent, by entering into an agreement that the interest payment defaulted under GRIDCO bonds could be adjusted against excess amount available in GRIDCO escrow account had acted in breach of his fiduciary duties to favour GRIDCO. I find from the minutes of the board meeting held on September 6, 2000, that the board had discussed the outstanding dues from GRIDCO. This meeting was attended by the MD and other nominees of the petitioners. In that board meeting, it was decided that the amounts deposited by CESCO in excess of Rs. 34 crores in the GRIDCO escrow account would be utilised by GRIDCO for payment of over due interest amounting to Rs. 13.5 crores on GRIDCO bonds. It was also decided that directors (finance) of both GRIDCO and the company would sit together to find out ways and means for liquidating the arrears dues of Rs. 143.04 crores up to the year 1999-2000. Therefore, by this decision of the board, the director (finance) had the authority of the board to enter into an agreement in this regard which he did on September 16, 2000 (annexure K). As per this agreement, energy bills from September, 2000, would be paid in full from the inflows to GRIDCO and excess amount after payment of monthly bills would be utilised to clear the outstanding dues amounting to Rs. 13.5 crores on GRIDCO bonds and this arrangement was to continue till the bonds interest was liquidated. The main complaint of the petitioners in regard to this agreement is that when there were huge arrears of energy bills due for payment by GRIDCO, the director (finance) should not have agreed for adjustment of overdue interest after payment of monthly bills and in doing so he has acted in breach of his fiduciary duties to the company. This stand does not-appear to be correct as the board itself had, on September 6, 2000, while deciding that amount remaining over Rs. 34 crores could be adjusted against the interest due on the bonds, also noted that there was an arrear of Rs. 143.04 crores up to the year 1999-2000 and liquidation of the same was to be discussed by the director (finance) of both GRIDCO and the company. When the director (finance) had acted in terms of the unanimous decision of the board, the petitioners are not justified in making any allegation in this regard.

23. The next allegation relates to the improper adjustment of dividend. In 24 this allegation also, I do not find any merit. Every shareholder—whether a minority or a majority is entitled to receive the dividend declared by a company. The complaint of the petitioners is that the director (finance) had complied with the demand of the second respondent to pay Rs. 8.46 crores which had already been adjusted against a part of 25 per cent, contribution to be made by the second respondent. It is on record that this adjustment was made in anticipation of the approval of the second respondent and was not done with its approval. It is to be noted that an amount of Rs. 31.71 crores was adjusted with the specific approval of the second respondent. If a shareholder makes a concession that some dues from him could be adjusted against the dividend, it does not mean that the company could demand such a concession from him as a matter of right and if he refuses to give the concession, allege that it is an act of oppression. The contention that the release of this payment required affirmative vote of the nominees of the petitioners in terms of article 30(f) is unfounded inasmuch as this article which reads: “Contracting any loan or executing guarantee or indemnity or giving more time for payment than contracted for or making investments in any other body corporate in excess of Rs. 1 crore” has no application as far as release of the dividend is concerned.

24. The petitioners have also taken a stand that the nominee directors of the second respondent have been acting in breach of the provisions of the articles, according to which, any modification to contracts which materially affects the business of the company, requires the affirmative vote of one of the nominee directors each of the petitioners and the second respondent The non-enforcement of the rights under the bonds, the escrow agreement, power purchase agreement, etc., were also incidents of contracts with GRIDCO and/or second respondent. According to them, while respondents Nos. 3 and 5 are officers of the second respondent, the fourth respondent is the chairman and the managing director of GRIDCO and therefore they are all interested parties in these agreements and they have always been acting either in the interests of the second respondent and/or GRIDCO disregarding the interests of the company and without seeking the affirmative vote of the nominee directors of the petitioners. Since the conflict of interest on their part is evident, they should be directed not to participate in the decision-making in these areas. The stand of the respondents is that the company being a private company, the restriction regarding interested directors does not arise in terms of section 300 and that article 30(k) takes care of this situation by providing that in case of any contracts in which any director or any shareholder appointing a director is interested, then affirmative vote by at least one from each group is necessary. This is a case where in the majority shareholder controls the only customer of the company has, and the MD of the customer is also a director of the company. While article 30(b) protects the minority shareholders against any favour attempted to be shown by the nominees of the second respondent either to the second respondent or GRIDCO, by modifying PPA, etc., article 30(f) protects them by providing for affirmative vote of one their nominees for giving extension of time for payment than contracted. It is to be noted that the main grievance relating to GRIDCO is that the nominee directors of the second respondent are not enforcing the terms of payment by GRIDCO resulting in mounting of arrears and as I have pointed out, at no time the nominees of the petitioners insisted, as a proposal to the Board, enforcement of the same to attract the provisions of article 30(f). When the articles protect the interest of the petitioners and the company, in the absence of any concrete instance of the nominees of the second respondent showing any favour either to the second respondent or GRIDCO without the consent of the nominees of the petitioners, seeking for restraining the nominees of the second respondent from participating in decisions relating to second respondent of GRIDCO, does not arise.

25. Other allegations in this petition and counter allegations by the respondents reflect that there is a struggle for power going on between the parties. While the petitioners complain that the nominees of the second respondent have usurped the powers of the MD, it is the complaint of the respondents that the MD has been exercising powers not vested in him. The power struggle appears to have started from the decisions of the MD to resume the power plant with a reduced load and passing of a circular resolution on May 21, 2001, by the nominees of the second respondent restraining the MD from exercising commercial and financial powers.

26. The circular resolution reads as follows: “Resolved that the generation of electricity from unit II of 1b Thermal Power Station be resumed immediately. The unit must be lit up for operation within half an hour of receipt of this circular resolution through fax. Further resolved that the managing director is restrained from taking any of the units out of the grid without the prior approval of the board. He is also restrained from taking any commercial and financial action without approval of the board of directors.” The provocation for issuing the circular resolution was the letter issued by the MD on May 17, 2001, to GRIDCO stating that in view of the mounting dues from GRIDCO, the plant which had remained closed for maintenance would resume supply at a reduced load. While according to the MD, he took the decision as a part of his day-to-day functions and in the interest of the company, the stand of the nominees of the second respondent was that shutting down the power plant was not within the day-to-day functions of the MD and the said decision is also against the interest of the company. Article 25 dealing with the powers of the MD reads: “The managing director shall be in charge of all day-to-day affairs of the company and shall act under the superintendence of the board.” (highlighted by me). There has been a bone of contention as to what constitutes the day-to-day affairs of the company and allegations have been made by the nominees of the second respondent that in spite of directions in various board meetings, the managing director has not given a list of what constitutes the day-to-day affairs of the company. In the system of management of a company, the division of powers is governed by the memorandum and articles of the company and the Act. In terms of section 2(26), the managing director is one who is entrusted with substantial powers of management by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or by virtue of its memorandum or articles of association. In terms of section 291, subject to the provisions of the Act, the board shall be entitled to exercise all powers and to do all such acts and things as the company is authorised to do. There are provisions in the Act according to which certain decisions can be taken only with the approval of the general body and there are provisions according to which certain decisions can be taken only by the board. In terms of the second proviso to section 291(1), the exercise of the powers by the board is inter alia also subject to the provisions in the articles. In the present case, the managing director has been entrusted with all day-to-day affairs of the company by article 25. Article 33 elaborates the powers of the board indicating clearly that the managing director cannot exercise any of those powers. Likewise, in terms of article 30, even the board cannot take certain decisions indicated in that article without an affirmative vote of at least one nominee each of the petitioners and the second respondent. In other words the division of powers is explicit in the articles. Therefore, it appears that except those matters reserved for the board in terms of articles 30 and 33, all other matters would fall within the day-to-day affairs of the MD. To come to this conclusion, I have taken into consideration the nature of participation of the petitioners in the company. It is on record that originally the second respondent had decided to divest 26 per cent, shares in the company. In the invitation for offers for acquisition of 26 per cent, equity (annexure C), it has been mentioned: “The successful bidder would be entitled to nominate proportionate members on the board of OPGC including the director (operations) who would be responsible for day-to-day plant operations”. Perhaps the said invitation did not evoke enough response. Therefore, the second respondent decided to offer 49 per cent. shares. In the invitation for offer of acquisition of 49 per cent, equity (annexure D), it was stated: “The successful bidder and Government of Orissa would have equal nominees on the hoard of OPGC. The Government of Orissa would appoint the non-executive chairman and director (finance). The managing director and functional directors (other than the director (finance)) would be appointed by the investor. The shareholders agreement would have provisions to protect the minority interest of the investor” (emphasis by me). A significant change in these two invitations besides the percentage of shares, is that while as per the invitation for 26 per cent, shares the strategic partner was to be vested with the right to appoint director (operations) responsible for day-to-day plant operations, invitation for 49 per cent, shares, vested the strategic partner with the right to appoint the managing director. Besides, both the shareholders agreement and the article 25 vest the managing director with all day-to-day affairs of the company, of course subject to the superintendence of the board. By giving the nominee MD of the petitioners, the powers of the day-to-day management, the commitment in the invitation of protecting the minority interest has been ensured. In other words, he is the chief executive of the company and should be entitled to exercise financial, commercial, operational, administrative powers, etc., which are essential to cany out his day-to-day responsibilities. It is a part of the day-to-day function of the MD to ensure that the plant is operated optimally, generated power is supplied, supply is billed and bill amount is collected. Therefore, all incidental matters connected with the above would also come under his day-to-day functions. In view of this, there was no need for the board to ask the MD to furnish a list of what constitute the day-to-day affairs of a company, which incidentally, is also very difficult to visualise and list. Further, it is not disputed that at the relevant time, the plant had been closed down for maintenance during the period from May 8, 2001 and the MD had only taken a decision to resume operation at a reduced load and he had not decided to dose down the unit as indicated in the circular resolution. The letter of the MD dated May 17, 2001, to CMD GRIDCO reads: “This letter is to inform you that we expect to have unit 2 of 1b TPS 100 per cent, available tonight. We are however, not going to resume normal operation of the unit due to nonpayment of electricity as required by the PPA. The output of 1b TPS will remain at a reduced load until further notice. It is unlikely to resume until significant progress has been made at reducing the outstanding receivables. You are again requested to urgently take up this matter”. It is not uncommon, as a sound commercial practice, to warn a customer who owes a large amount for the supplies made earlier that further supplies would be either stopped or reduced till the dues are cleared. Such a power is a part of the normal day-to-day function of the chief executive. The haste with which the director (finance) and the MD, GRIDCO had reacted to this letter, had only aggravated the situation. In terms of the letter of the MD of the company, the unit was to resume operation on the night of May 17, 2001, no doubt at a reduced load. Because of the intervention of the nominees of the respondents, it remained closed for extra 4 days till May 21, 2001.1 understand that when a coal fired power generation plant is closed for a week, on resumption, which is known as cold start, it would take 12 to 24 hours for it to reach its normal capacity. This being the case, the best course of action would have been to allow the plant to be operated as proposed by the MD and in the meanwhile try to resolve the disputes. The tenor of the letter of MD, GRIDCO, who is incidentally a director on the board of the company, definitely exhibits conflict of interest. In his letter to the chairman of the company dated May 18, 2001, he has written: “In this connection, you are aware that the dues which CESCO owes to GRIDCO far exceeds the dues of GRIDCO to OPGC. Hence, the unilateral decision of the MD, OPGC is not only unfortunate, but also amounts to sabotaging the electricity supply of the State. The result of this decision will be that GRIDCO will have to buy more amount of high cost NTPC power which will ultimately affect the tariff structure. Apart from this, a proposal to sell surplus power to Karnataka and other States goes for a sixer”. The contents of this letter indicate that the MD of GRIDCO who is also a director of the company, was more interested in the performance of GRIDCO than the company. The contents of the letters exchanged between the MD and the director (finance) in this regard clearly bring out the different perception each has on the authority of the MD. Unfortunately, neither has touched upon the public interest involved in any of their communications. Anyway, considering the public interest involved, whether such a decision to operate the power plant at a reduced load resulting in generation of less power could have been taken by the MD is a very difficult question to answer. The MD could have perhaps examined whether the failure of GRIDCO to clear the bill was wilful or because of its inability to recover dues from its own customer in time, taking into consideration that by delaying the payment of the monthly bills, GRIDCO would not be entitled to the rebates provided for prompt payment. Any way, viewing as a commercial proposition and his authority to do so, the MD cannot be faulted for taking such a decision in the interest of the company and the nominees of the second respondent which is Government of Orissa being the custodian of the public interest, can also not be faulted for directing the resumption of normal supply in public interest. Therefore, instead of passing an urgent circular resolution, the issue could have been sorted out through mutual discussions as it had happened in the past whenever dues from GRIDCO were being discussed in board meetings.

27. As far as the second part of the resolution restraining the MD from exercising his financial and commercial powers is concerned, which has hardened the attitude of the parties, as is evident from subsequent events I am of the firm view that the nominees of the second respondent had grossly erred and as rightly contended by the petitioners over reached the provisions of the articles. When article 25 vests the managing director with powers relating to all day-to-day affairs of the company, the nominees of the second respondent not only should not have proposed withdrawal of commercial and financial powers of the MD, they could not have also passed the same, that to by a circular resolution. The very fact there are two shareholders in the company and that the petitioners having been taken as strategic partners with the power to appoint MD with all powers relating to day-to-day functions with an intent to protect the minority interest, restraining him from exercising commercial and financial powers, which are not only an integral part of his day-to-day functions but are also essential to carry on his day-to-day responsibilities, is a grave act of oppression. During the arguments and in pleadings, it has been averred by the respondents that even after restraining him, the MD had been exercising commercial and financial powers. They have cited the instances of the MD invoking arbitration, issuing of a circular relating to amendment of TA rules, etc., forgetting that this Bench had already stayed the circular resolution relating to restraining MD, in its order dated November 13, 2001. In this connection, it is relevant to point out that even the second respondent, by a letter dated May 24, 2001, advised the board to reconsider the decision of withdrawing the powers of the MD. In view of the forgoing, it is declared that the part of the circular resolution relating to restraining the MD from exercising commercial and financial powers is null and void and non est being in violation of article 25 which is intended to protect the minority interest.

28. Another instance of the struggle for power relates to payment of MCL coal bills. It is an admitted fact that the quality of coal supplied by MCL was not up to the mark. The MD decided to pay only 50 per cent, of the monthly bills to MCL till the quality of supply improved. However, the director (finance) countermanded that decision by ordering full payment giving a justification that stoppage of payment may result in suspension of supply of MCL and since no alternate coal supplier had been identified, the operation of the plant could be affected. I am of the view that the hasty action of the director (finance) was unjustified. I have already observed that the MD being in charge of day-to-day functions, can take decisions in the interest of the company which actually is a fact as no one can expect to be paid for inferior quality of goods supplied. Further, there is nothing on record that MCL had stipulated that in the absence of full payment, further supplies would be suspended. Acting on a mere apprehension and countermanding a bona fide commercial decision taken in the interest of the company by the MD when the fact that the quality of the coal supplied was not up to the mark is fully known, the director (finance) had either exhibited lack of experience in dealing with commercial matters or did so, to favour MCL which is also a PSU. Further, this action of the director (finance) also undermines the diginity of the office of the chief executive (MD) in the eyes of his subordinates, which is not in the interest of the company. It is all the more surprising that even the other nominees of the second respondent should have come to the conclusion, on exercise of the casting vote by the chairman, that the MD had no powers regarding coal bills. On the one hand, the nominees of the second respondent take a stand that the MD has no power when he takes action to recover money due to the company and on the other hand they also take a stand that he has no powers even to ensure good quality of coal which is an essential ingredient for optimum operation of the plant. The assertion of the director (finance), as seen from the minutes of the board meeting on September 29, 2001, that while the MD has the power to order payment but has no power to stop payment, on the face of it, appears illogical. Therefore, the petitioners are justified that the action of the nominees of the second respondent in curbing the powers of the MD in his day-to-day operation is oppressive and against the interest of the company.

29. While dealing with the powers of the MD, it is necessary to note that in terms of article 25, while he shall be in charge of all day-to-day affairs, he shall act under the superintendence of the board. To examine as to whether, in discharging his function, the MD would be under the control of the board and whether the board can issue directions to him, it is relevant to refer to article 28 of the articles of association before the amendment to the articles. Article 28 provided that: “MD be entitled to the management of the whole of the affairs of the company and shall exercise his powers subject to the superintendence, control and direction of the board.” The amended article, while providing that the MD shall be in charge of all day-to-day affairs of the company and shall act under the superintendence has omitted the words “control and direction of the board”. The omission of these words would signify the intention of the parties that, MD would have unfettered powers in discharging his day-to-day functions subject only to the superintendence of the board. In this connection, I may refer to Shaw (John) and Sons (Salford), Ltd. v. Peter Shaw and John Shaw, [1935] 5 Comp Cas 369 (CA) wherein the Court of Appeal has held that if a director has been vested with certain powers by the articles, the board cannot interfere with the same without amending the said article. In the same way, in the present case, since the MD has been entrusted with all day-to-day affairs of the company in article 25, the same cannot be altered either by the board or the general body without amending the articles. However, the same article provides that he shall exercise his powers subject to the superintendence of the board. The term “‘superintendence’ means the act of superintending, care and, oversight for the purpose of direction and with authority to direct” (Law Lexicon by S. Ramanatha Iyer). Therefore, the board has the right to oversee his functions and give directions as to how he is to discharge his functions, without either curtailing or curbing his powers in discharging his day-to-day functions. Further, in every organisation, besides the day-to-day functions, there are policy matters which will not form part of day-to-day functions of the managing director. Policy matters have to be decided only by the board and the MD has to function within the policy framework in discharging his day-to-day functions. As long as the policy decisions do not curtail or curb his powers relating to discharge of his day-to-day responsibilities, there would be no violation of the provisions of article 25. There have been disputes as to whether the MD has the powers to promote officials, transfer officials in the finance wing, modify TA rules, etc. I find from article 33(xvi) that the board is vested with powers to make rules in personal matters. Till such time the board frames rules or regulations, the MD being the chief executive is competent to decide these issues. However, once the board makes rules/regulations, then the MD is bound by the same.

30. The next allegation of the petitioners is in regard to delegation of powers to the director (finance) who is a nominee of the second respondent. Whether the director (finance) could be delegated substantial powers is a question which has to be decided as to whether the company is a Government company or not. In the scheme of functioning of public sector undertakings wherein the Government has controlling interest, the Government has issued various guidelines in regard to financial management of the PSUs. In a PSU, the concept of obtaining financial concurrence of the finance director is a common phenomenon. However, such a phenomenon cannot be extended to a company wherein the Government on its own, has inducted a strategic partner with 49 per cent, shares and with powers to carry on the day-to-day management. The admitted position in this case is that the petitioners hold 49 per cent, shares in the company which they acquired on paying a substantial consideration with the right to appoint the managing director and director (operations). Even though for statutory purposes, more particularly with reference to sections 617 to 620 of the Companies Act, the company may be a Government company, yet the management of the company has to be regulated in terms of the articles of association of the company. It is relevant to mention as pointed out by Mr. Sarkar that clause 8.7 of the shareholders' agreement which reads “so long as the company is a Government company, representatives of the investor and the State Government on the board will render necessary co-operation for enabling the company to fulfil its obligations in accordance with the prevailing rules and regulations applicable to such companies” does not form part of the articles which otherwise contain practically all other terms of the shareholders' agreement. This omission is significant as the second respondent should have been conscious of the fact that such a stipulation in the articles would be counter productive to the reform process. Therefore, guidelines as exist in PSUs cannot be applied to the company. In terms of article 26, the finance director and operating director shall exercise such powers as may be delegated by the board. The respondents have relied on the delegation of powers made by the board on February 19, 1996 (annexure R1). It is to be noted that this resolution was passed when the company was a 100 per cent. Government company. It appears that at that time the posts of chairman and managing director were a combined post and the director (finance) was a full time director and they were to exercise all powers vested in the board except those enumerated in annexure A to the resolution. Once the articles have been amended providing for a full time managing director with full day-to-day management powers and the director finance is to exercise powers to be delegated to him, the question of relying on the resolution dated February 19, 1996, does not arise. Therefore, the contention that the, Chairman, MD and director (finance) have concurrent powers in terms of the resolution dated February 19, 1996, is without any basis. The power of director (finance) would depend on his status—whether he is a full time functional director or a part time director. I find from paragraph 21(a) of the petition that the fifth respondent P.K Mishra—director (finance) is also special secretary to the Government of Orissa, Energy Department. If it is so, then, he is a part time non-functional director. However, from the minutes of the board meeting dated December 29, 2001, I find that one R.R Das has been appointed as director (finance) in place of P.K Mishra and from the minutes of the board meeting held on February 29, 2002, one Mrs. Dharitri Panda has been appointed as director (finance) in place of R.R Das. Whether they are also part time directors could not be ascertained. Even, the assertion of the respondents that the company is a Government company and therefore the director (finance) should have all the powers as per the Government guidelines cannot sustain the claim of the respondents in this regard inasmuch as these guidelines are applicable only if there is a full time functional director (finance) as is evident from the guidelines themselves. Where there is no full time director (finance), in terms of even these guidelines, the financial powers are to be exercised by the full time chief of finance wing. Any way as I have already pointed out, once a strategic partner has been invited to invest 49 per cent, shares with the right to appoint the managing director vested with all day-to-day management functions, creating a parallel power center with concurrent or overriding powers is not only undesirable in the interest of the company but also amounts to encroaching upon the rights of the minority shareholders conferred by article 25. It is rather surprising that the proposal for delegation of powers to the director (finance) stipulates that even to exercise the financial powers delegated to the managing director, the concurrence of director (finance) should be taken. From the shareholders agreement and the articles, it is evident that while the interests of the minority shareholder are sought to be protected by having its nominee as the MD, the majority interests are sought to be protected by having its nominee as director (finance). A minority shareholder cannot claim that only his interests should be protected and not that of the majority shareholder. In terms of article 26, the finance director is to exercise such of those powers that may be delegated by the board. Therefore, the petitioners cannot claim that the board cannot delegate any powers to the finance director. While delegating powers to the finance director, the board should keep in mind that the concepts of financial consultation, financial concurrence and financial advise are not synonymous. While it is a healthy practice and is financially prudent to provide for consultation with or advice of the director (finance) beyond certain financial limits with the final decision resting with the MD, providing for concurrence, especially in the present strained atmosphere, would not be in the interest of smooth functioning of the company and would also amount to undermining the general powers of the MD. In terms of the article the second respondent is entitled to appoint the director (finance) and the petitioners, the director (operation) and they are to be delegated powers by the board. Therefore, the powers delegated to both of them should be similar and on equal footing, of course, considering the nature of their areas of functions and connected responsibilities. Therefore, to ensure that no further disputes arise in regard to delegation of powers to these two directors, I direct that the matter relating to such delegation shall be deemed to be a matter under article 30 which requires affirmative vote from a nominee of each of the petitioners and the second respondent. To this extent, article 30 will be deemed to have been amended with immediate effect. In view of this direction, any delegation made to these two directors earlier will stand cancelled and the board will consider revised delegation at the earliest. While delegating the powers, the board should ensure that there is no dilution on the overall general powers of the MD as provided in article 25.

31. There has been a bone of contention as to whether the MD has the right to invoke arbitration. As I have already pointed out, the MD can exercise all powers which have not been reserved for the board in the articles. Shri Natarajan pointed out that in terms of article 33(viii), reference to arbitration requires the approval of the board and therefore by invoking arbitration the MD had exceeded his authority. The respondents have failed to note, when they rely on the board resolution dated February 19, 1996, to contend that the, Chairman, MD and the finance director have concurrent powers, that in the same resolution, it is also provided that all of them had been delegated full powers to take legal steps including referring disputes to arbitration. However, as I have pointed out, once the articles have been amended, the provisions of the article will prevail and therefore the approval of the board is required to refer any disputes to arbitration. Yet, taking into consideration, that initiation of the arbitration proceedings has brought about an amicable settlement of the disputes, I do not propose to deal with the various issues raised by the parties in this regard.

32. The petitioners have questioned the authority of the chairman to issue office orders and also have voiced their grievances in regard to exercise of casting vote by the chairman in regard to payment of MCL coal bills, etc. The admitted position is that in terms of article 24, the second respondent has the right to appoint the chairman with a casting vote as long as it holds more than 50 per cent, shares in the company. The Companies Act does not provide for or define the office of “chairman” nor does it elaborate his powers. Even, in the articles of the company, other than stating that the chairman will have a casting vote, it has not elaborated his powers. The company has adopted Table A contained in the first schedule to the Companies Act. In terms of article 76 of Table A, the board has the power to elect a chairman of its meetings and determine the period for which he is to hold office. In the present case, in terms of article 24, the second respondent has the right to appoint a chairman. Therefore, in the absence of any powers vested in the chairman by the articles, or by any board resolution, his role has to necessarily be limited to that of chairing board meetings and general body meetings (in terms of article 50 of Table A) with the right to exercise a casting vote. Further, it is also on record that he is the principal secretary to the Government of Orissa, Energy Department and as such is not a full time executive chairman. Therefore, in the normal circumstances, he has no power to exercise any executive powers in the affairs of the company. I have already held the concurrent powers vested in him by the resolution in 1996 can no longer be exercised by him after amendment of the articles. However, considering the fact that he is the representative of the majority shareholder, if exigencies arise in the absence of managing director, and he has to take some decisions urgently in the interest of the company he may do so in consultation with the other nominee of the petitioners, being the whole time director (operation). The office order issued by him on April 25, 2001 (annexure ZI), reads “for smooth functioning of the finance function of the corporation and in pursuance of the provisions contained in the shareholders agreement it is hereby ordered that—1. The Team Leader Finance/Head of the Department of ITPS Finance shall report to the General Manager (finance) on all finance matters. All the employees of the finance department of ITPS shall report to GM (finance) through the departmental head; 2. All approval accorded by the managing director shall be obtained after financial vetting of the director (finance). In case of any difference in opinion, the same shall be reported to the board of directors through the chairman; 3. Director (finance) shall be the final authority to decide in the matter of posting and allotment of work of officials working in the finance wing. He shall consult the MD, if necessary. This will come into force with immediate effect. This supercedes the office order, vide Memo No. 2118, dated March 26, 2001”. A reading of this order would indicate that there is nothing so urgent that the non executive chairman of the company had to issue the circular with a view to protect either the interest of the company or the second respondent. Further, it also appears to be with the view to vesting the director (finance) certain powers which according to article 26 can be done only by the board and not by the chairman. It appears that this circular has been issued only to countermand the order issued by the MD on March 26, 2001 and to establish the right of the authority of the finance director. This circular, I am of the view, is not only beyond the power of the chairman but also against the provisions of article 25 of articles of association of the company and therefore the petitioners have legitimate grievance that the chairman had acted in a manner oppressive of the rights granted to the nominees of the petitioners in terms of article 25. Therefore, till the finance director is delegated powers by the board, this office order can have no effect.

33. As far as the exercise of casting vote by the chairman is concerned no doubt, article 24 provides for the same. Casting vote is exercised when there is a tie. Exercise of casting vote is always discretional. Article 24 is silent as to on what occasions the chairman can exercise his casting vote. Normally, when the chairman has a casting vote, he is entitled to exercise the same in respect of every business that is transacted in a board meeting or in a general meeting. However, in the present case, the MD is vested with all day-to-day affairs of the company and the articles also specifically stipulate matters which are to be decided in the board and also which require the affirmative votes from a nominee from both the groups. Therefore, in respect of any matter that comes before the board in terms of article 33, the chairman has the right to exercise his casting vote. However, in respect of other matters, more particularly relating to the general powers of the MD, if the chairman exercises his casting vote, it would amount to indirectly interfering with the powers of the MD vested in him in terms of article 25, which cannot be done without amending the articles. Therefore, I stipulate that, all matters relating to the general powers of the MD that are brought to the board, shall be subject to the requirement of affirmative votes as provided in article 30. In view of this stipulation, all decisions that the board has taken till now by exercise of casting vote by the chairman relating to matters which are within the day-to-day powers of the MD, stand cancelled.

34. Having given the findings on the various allegations contained in the petition, the question of the relief arises. Even, though the petitioners have sought for various reliefs in the petition, learned counsel for the petitioners finally sought for deletion of article 26 in relation to delegation of powers to director (finance) and also for a direction that the second respondent should divest at least 2 per cent, of the shares in favour of the petitioners so that the petitioners become the majority shareholders. I have already dealt with the aspect relating to delegation of powers to the director (finance) in an earlier paragraph. As far as the second respondent is concerned, the petitioners have invoked the principles of promissory estoppel on the ground that the second respondent had undertaken that it would divest majority shares in favour of the strategic partner acquiring 49 per cent, shares by 2001. Learned counsel for the petitioners relied on the decision of the Supreme Court in Union of India v. Anglo Afghan Agencies, [1968] 2 SCR 366; AIR 1968 SC 728 case to advance the argument that the Government is bound by its representation. In that case, the Government had notified certain import entitlements for the exporters at the time of granting export licence. Later on, on the plea of non-availability of foreign exchange, when the import entitlement was reduced, such reduction was challenged. The Supreme Court held that when persons act on the basis of representations made by the Government, then the Government shall be bound to carry out that promise. However, in the present, the facts are not similar. Neither in any of the two invitations nor in the shareholders' agreement, any commitment or undertaking by the second respondent to the effect that the strategic partner would be made a majority by 2001, is found. There is nothing on record that the petitioners had relied on the letter written to Merrill Lynch by the second respondent, before investing in 49 per cent, shares and that such reliance had been communicated to the second respondent and that the second respondent had also acted on that reliance to bind the second respondent. Therefore, there is no scope for application of the principles of estoppel. The only commitment of the second respondent regarding shares, as is evident from article 9, is that the second respondent cannot transfer its shares without first offering the same to the petitioners and that in case of issue of further shares, the same must be offered to the shareholders in proportion to their existing holding (article 15A). Learned counsel for the petitioners, alternatively submitted, relying on the decision of this Bench in EIH Ltd. v. Mashobra Resort Ltd., [2004] 119 Comp Cas 993 (CLB), that the petitioners being experts in power generation, they must have the majority. In that case, even though this board formed an opinion that the petitioner being an expert in hotel business, it should be entitled to purchase the shares of the Government of Himachal Pradesh, the option to sell was left to the Government. No doubt, in a number of cases, considering the facts and circumstances of those cases, this board has with the view to facilitate parting of ways, directed one party to sell its shares to the other party, when it was found that mere redressal of the grievances in the petition might not be long lasting. But not even in a single case, this board has so far directed a party to part with a portion of its shares to facilitate the other party to gain majority. In the present case, the disinvestment was on the basis of a policy of power reform process of the second respondent and as a policy the second respondent has decided to divest only 49 per cent, shares and therefore, it is for that respondent to decide as to whether to divest further and if so, when to divest. It would not be proper for this Board, on this application to direct the second respondent to divest further shares in favour of the petitioners. Anyway, it appears to me that this prayer for majority shares has been made with a view to deprive the chairman from exercising his casting vote as in terms of article 24, he will have the right of casting vote only till the second respondent holds 50 per cent, or more shares in the company. The aspect relating to casting vote has already been decided in an earlier paragraph. The relief granted in a petition under section 397/398 should ensure putting an end to the matters complained of, which I have done wherever justified. Therefore, the prayer of the petitioners for a direction to the second respondent to divest 2 per cent, shares in favour of the petitioners cannot be granted. Before parting with this order, I consider it necessary to make certain observations. In spite of the disputes among the nominees of the parties and the instances of the chairman exercising his casting vote and the nominees of the petitioners denying their affirmative votes, the company has been performing very well as is evident from the consistent and substantial dividends declared by the company including 30 per cent, for the last year. The company has been honoured with appreciation award of the State Pollution Control Board for the year 2002. The company is planning to go for ISO rating. In these circumstances, it is essential that the nominees of both the groups work together harmoniously and for the benefit of the company and the shareholders. Even though I have given certain directions to protect the interest of the minority with the view to put an end to the acts complained of and also to ensure that such complaints do not occur in future, yet the nominees of the petitioners should be pragmatic and practical when the issues requiring the affirmative votes come before the board and the chairman, in exercising his casting vote. These protective provisions in the articles are not meant to be used for testing the strength of the parties but only to prevent abuse of authority by one against the other. When the second respondent had inducted the petitioners as strategic partners as a part of power sector reforms, the success of the reforms should be reflected in the better performance of the company for which the nominees of both the sides should work together instead of trying to score over the other. I am confident that both could work together successfully forgetting the past, as there is a substantial change in the composition of the board now than what was prevailing when the disputes started. In this connection, I may also refer, for the benefits of the parties, to article 19A according to which both the groups of shareholders shall exercise their respective voting rights in the general meetings in such a way that the rights granted under the shareholders agreement to the respective parties are not in any way affected. The nominees of both the petitioners and the second respondent should thrive to adhere to the same spirit in the board meetings also.

35. The petition is disposed of in the above terms without any order as to costs. While doing so, I also note the allegation of the petitioners that the respondents had used the funds of the company in defending this petition which should not be permitted as the disputes in the petition related to the shareholders. In view of the facts and circumstances of this case, that most of the allegations relate to the conduct of the nominee directors of the second respondent on the board in discharging their functions as directors in the affairs of the company, I am not taking cognizance of this allegation.