Family businesses constitute most businesses in India as anywhere else in the world. With economic liberalisation and industrial expansion, family businesses have had to evolve or otherwise dwindle, depending on capabilities and resources. And in cases of discord within the family, litigation is inevitable, whether of the sophisticated non-adversarial type of the Shriram group trifurcation, or the bitterly contested court battles of Ranbaxy and the Modi group in the last century. But in the recent Ambani brothers’ case it has assumed a different dimension, involving constitutional rights of the nation and its people.
Such was the media hype, that I had the experience of being interviewed by a television channel even before reading the Supreme Court Judgments. Sadasivam, J’s judgment traces the history with precision, going back to NELP in 1999, the formation of NICO, the successful bid by RIL for the Block KG-D6 Basin, execution of the Production Sharing Contract (PSC) in 2000. Two years later, Dhirubhai Ambani died, and the empire was sought to be bifurcated with an MoU recording the arrangement. As the implementation of the businesses required appropriate legal directions for a binding arrangement, the Company Court was approached with a Scheme of Arrangement under Sections 392 and 394 of the Companies Act 1956. This ostensibly provided for the gas to be supplied by RIL to RNRL and further by RNRL to REL and its affiliates on the same terms as the supply to NTPC.
Admittedly, the MoU was not disclosed before the Company Court, and the Supreme Court in Sadasivam, J’s judgment, while upholding the Company Court’s jurisdiction, has observed that the MoU contents were only partially revealed, and therefore though technically not binding, cognisance could be taken that it formed the backdrop of the Scheme “an unconventional, but perhaps realistic position. The Company Court had held the MoU to be binding, even though a catena of case law to the contrary in not falling within the corporate domain. The Company Court further held that the Contractor i.e. RIL had full right to trade in the gas falling in his share according to his commercial wisdom, and directed the parties to work out a suitable arrangement. So while government’s approval was needed, it could not effectively question the decision on commercial aspects. Justice Reddy on the other hand has held both the learned Single Judge and the Division Bench committed a serious error in exercising jurisdiction under Section 392 of the Companies Act, 1956, for such interference has resulted in the provisions of a document (MoU) which was not before the shareholders supersede the Scheme of Arrangement
In appeal, the Appellate Court in dealing with the issues of jurisdiction, and the suitable arrangement for the gas supply to the resulting company held that there is nothing in the PSC to restrict the sale of gas by the contractor at a price lesser than that approved by the Government and that the Contractor has freedom to sell gas at arm’s length price and that the “suitable arrangement” should be negotiated on the basis of the MoU with revert to Mommy if required.
Predictably, no solution emerged. The Supreme Court, other than flagging the issue of maintainability in determining suitable arrangement has averted to Article 297 of the Constitution which provides for all lands, minerals and other resources vesting in the Union, holds the same in trust for the people of India, and that constitutional restrictions bind private players as well. The Court has noted that the mechanism under the PSC between the government and the Contractor, while acknowledging the latter’s right to trade, has made the valuation and price subject to being at arm’s length, beneficial to the Contractor and the Government, and compliant with traded liquid fuel linkages. The Court has refrained from rewriting the contract on the ground that this cannot be done under a Scheme of Arrangement and parties have been directed to renegotiate the contracts in line with the various mechanisms and parameters.
While the decision rightly upholds the supremacy of national assets over private interests, it carries with it insidious implications of price control with which the industry is not happy. There is also a perception, that the Supreme Court should have effected a full closure to the controversy, than directing renegotiation, even with conditions, as the parties have to report to the Company Court, there is scope for a second round of litigation.
Kumkum Sen is a partner at Rajinder Narain & Co, and can be reached at Email: kumkumsen@rnclegal.co