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2010 (4) Supreme 325
SUPREME COURT OF INDIA
K.G. Balakrishnan, CJI., P. Sathasivam, J.
Reliance Natural Resources Ltd. — Appellant(s)
versus
Reliance Industries Ltd. — Respondent(s)
Civil Appeal No. 4273 of 2010
(Arising out of S.L.P. (C) Nos. 14997 of 2009)
with
Civil Appeal No. 4274 of 2010
(Arising out of S.L.P. (C) No. 15033 of 2009)
Civil Appeal No. 4275-4276 of 2010
(Arising out of S.L.P. (C) No. 15063-15064 of 2009)
Civil Appeal No. 4277 of 2010
(Arising out of S.L.P. (C) No. 18929 of 2009)
I.A. NO. 1 in C.A.Nos.428-4281/2010
@ S. L. P. (C) .14414- 14415/2010 @ CC NO. 16126-16127 of 2009
Decided on : 7-5-2010
(2004) 4 SCC 489 – Relied upon
(b) Constitution of India – Article 39(b) – ‘Distribute’ – Expression ‘distribute’ embraces the entire material resources of the community and fulfills the basic purpose of re-structuring the economic order – Its goal is so to undertake distribution as best to sub-serve the common good – To distribute, would mean, to allot, to divide into classes or into groups and embraces arrangements, classification, placement, disposition, apportionment, the system of disbursing goods throughout the community. (Para 19)
(1984) 1 SCC 515; (1972) 1 SCC 23; (1989) 3 SCC 709 – Relied upon
(c) Government Contract – In the award of tenders and the distribution of national property and State largesse, the State is bound to follow the dictate of Article 14. (Para 23)
(1979) 3 SCC 489; (1993) 1 SCC 71 – Relied upon
(d) Companies Act, 1956 – Section 391 – The limit on the Court’s power is always to see that the modifications are done for the proper working of the scheme and not for any other purpose – Company Court is not permitted to so modify a scheme as to change its basic fabric – In the guise of modifying a scheme, Company Court cannot substitute a portion of the original scheme. (Para 28)
(1997) 1 SCC 579; (1979) 3 SCC 54; (2007) 7 SCC 753 – Relied upon
(e) Companies Act, 1956 – Section 392 – Section 392 creates a duty to supervise the carrying out of the compromise or arrangement – The Court can remove hitches and difficulties in working the scheme while sanctioning or hereafter. (Para 28)
(f) Companies Act, 1956 – Section 392 – There being no other provision except Section 391 to Section 394 which deal with the procedure and power of the Company Court to sanction the Scheme, same was sanctioned both u/ss 391 and 394 – All these provisions being interconnected, the Company Court can pass appropriate order for sanctioning of any Scheme including of arrangement, demerger, merger and amalgamation – Therefore, the application filed by RNRL under Section 392 is maintainable. (Para 28)
(g) Companies Act, 1956 – Section 36 – Only Articles and Memorandum of Association of a company is binding on the shareholders – Agreement between the shareholders is not binding on the company unless the company adopts it and it is incorporated in the Articles of Association. (Para 28)
AIR 1992 SC 453 – Relied upon
(h) Doctrine of Identification – A company is identified with such of its key personnel through whom it works – May be applicable only in respect of small undertakings but in the case of RIL and RNRL, the companies have more than three million shareholders the companies’ personality cannot be identified with persons involved. (Para 36)
(1997) 8 SCC 683; AIR 2004 SC 86; (1966) 1 All. E.R. 193; (1996) 6 SCC 665 – Distinguished impliedly
(i) Family arrangement/MoU – Though the family arrangement is very important for the family members, it is not binding between the companies RIL and RNRL for various reasons – First, ‘doctrine of identification’ does not apply to large companies as the parties instantly – Secondly, there is no specific requirement that the GSMA must confirm completely with the MoU – Thirdly, MoU is only one of the means of construing suitability of the arrangement and not the sole means. (Paras 35 to 37)
(1976) 3 SCC 119; (1998) 3 SCC 573 – Referred
(k) Suitable arrangement – Determinative tests – MoU may be part of the suitable arrangement – Other considerations include role of the Government – Proper interpretation of PSC relating to pricing and valuation – National interest relating to the interest of consumers – Protection of natural resources – Other consideration must relate to the interest of RNRL, i.e., whether the GSMA results in RNRL becoming a shell company and whether it is a bankable agreement. (Para 43)
(l) PRODUCTION SHARING CONTRACT (PSC) – PSC is subject to the Constitution of India, the Oil Fields Act, 1948, the Petroleum and Natural Gas Rules, 1959, the Territorial Waters, the Continental Shelf and Exclusive Economic Zone and other Maritime Zones Act, 1976 and also the gas utilization policy – Therefore, it is not permissible for RIL to enter into a contract with RNRL to supply fixed quantity of gas – RIL has no right to dispose off the same without the express approval of the Union of India. (Paras 48 and 49)
(1984) 1 SCC 515 – Relied upon
(m) Constitution of India –Articles 21(1), 39(b), 73 and 77 – Natural Gas is a material resource under Article 39(b) – Therefore the Executive of the Union of India enjoys its Constitutional powers under Article 73 and Article 77 (3) in order to fulfill the objectives of the Directive Principles of State Policy relating to distribution of Natural Gas. (Para 51)
(n) Pricing of gas – APM (Administered Price Mechanism) replaced by PSC – Prices of gas approved by Government at $ 4.2 in accordance with formula based on Arm’s Length principle and other principles. (Paras 55 to 58)
(o) Words and Phrases – Arm’s Length Sales – Means sales made freely in the open market, in freely convertible currencies, between willing and unrelated sellers and buyers – Such buyers and sellers should have no contractual or other relationship directly or indirectly, or any common or joint interest as is reasonably likely to influence selling prices – It would exclude sales (whether direct or indirect, through brokers or otherwise) involving Affiliates, sales between Companies which are Parties to this Contract, sales between governments and government-owned entities, counter trades, restricted or distress sales, sales involving barter arrangements – It would also generally exclude any transactions motivated in whole or in part by considerations other than normal commercial practices. (Para 60)
(p) Gas Pricing – PSC overrides any other contract which may be entered into for the supply of gas – Government has the power to determine valuation as well as price for the purpose of the PSC – The Government can also regulate the price. (Paras 64 to 66)
(q) Companies Act, 1956 – Sections 391-394 – Bankable contract – GSMA – Whether the GSMA is a bankable contract or needs modifications is matter between the parties – Such negotiations must be done within the ambit of the Government policies, including the over-riding effect of the PSC (including the Development Plan under Article 10.7), EGOM decisions and other related national policies – It is not proper for the court under Sections 391-394 to make modifications of this nature in the Scheme. (Para 76)
(r) Constitution of India – Article 297, 14 and 39(b) – Public Trust Doctrine – The people of the entire country has a stake in the natural gas and its benefit has to be shared by the whole country – There should be just and reasonable use of natural gas for national development – Government too is duty bound to provide complete protection to the natural resources as a trustee of the people at large – Therefore transactions between RIL and RNRL are subject to the over-riding role of the Government. (Paras 85, 86)
(2004) 4 SCC 489; AIR 1992 SC 522 – Relied upon
(s) Words and Phrases – “Without prejudice” in the EGOM decision – Right interpretation – Court is to determine whether the Government has the power to determine the valuation and pricing of the gas – Once it is determined that the Government does have the power to determine the price of gas, EGOM’s decision regarding the price would be applicable – The same goes for the general gas utilization policy and the policy of the Government with regard to pricing – Therefore, once the PSC is ready to give power to the Government to determine the price of gas, these policy statements will be applicable. (Para 90)
Facts of the case:
The well known controversy regarding pricing of the gas produced by Reliance Industries Ltd. from petroleum Block KG-D6 among RIL, RNRL and Govt. of India is the issue in these appeals.
Production Sharing Contract entered into between the Government of India and the RIL as also GSMA (Gas Sale Master Agreement) and GSPA (Gas Sale Purchase Agreement) were entered into between RIL and RNRL. However certain clauses of these agreements are bone of contention in this litigation
The MoPNG refused to approve the price of gas agreed between the RNRL and the RIL under the GSMA.
Finding of the Court:
1. Section 392 is applicable to the Company Application filed by RNRL.
2.The MoU is not binding on the Companies.
3.Suitable arrangement must be suitable for the interest of shareholders of RNRL as reflected by MoU and RIL, the obligations of RIL under the PSC, the National Policy of gas including the decisions of EGOM and Gas Utilization Policy (GUP) and the broader national and public interest.
Key Points: - The natural resources belong to the people and are vested in the Union; government to determine price and utilization under PSC and policies. (!) (!) (!) - Whether the GSMA/GSPA can be read into the Scheme; authority of Company Court to modify/ensure "suitable arrangement" without altering basic fabric; MoU binding status. (!) (!) (!) - Government's overriding role in price, quantity, tenure under PSC and EGOM decisions; whether GoI approvals are necessary for gas supply arrangements and whether those arrangements can bind shareholders. (!) (!) (!) - Whether a private family MoU can bind the corporate entity or shareholders; Doctrine of Identification not applicable to large public companies; proper interpretation of "suitable arrangement." (!) (!) (!) - Court’s power under Sections 391-394 of the Companies Act to sanction/modify schemes and limit on changing basic fabric; directions to renegotiate within government policy. (!) (!) (!)
JUDGMENT
P. Sathasivam, J. —
1)I have had the benefit of reading the erudite judgment of my learned Brother, Hon. B. Sudershan Reddy, J. I am unable to share the view expressed by him on some points and must respectfully dissent.
2)Though the facts and provisions of the relevant law have been set out in the judgment prepared by B. Sudershan Reddy, J., keeping in view of the importance in the matter, I propose to refer all the details and deliver a separate judgment in the following terms:-
3)Leave granted.
4)“The people of the entire country have a stake in natural gas and its benefit has to be shared by the whole country.”
- Association of Natural Gas & Ors. vs. Union of India & Ors.1 (2004) 4 SCC 489 (CB).
5)Being aggrieved by the judgment and order of the Division Bench of the High Court of Bombay dated 15.06.2009 in Appeal No. 1 of 2008 in Company Application No. 1122 of 2006 and in Company Petition No. 731 of 2005, Reliance Natural Resources Ltd. (in short “RNRL”) has filed S.L.P.(C) Nos. 14997 & 15033 of 2009. Questioning the same common order of the Division Bench of the High Court, Reliance Industries Limited (in short “RIL”) has filed S.L.P. (C) Nos. 15063-15064 of 2009. Since the Union of India intervened at the stage when the Division Bench heard Appeal Nos. 844 of 2007 and 1 of 2008, it also filed S.L.P.(C) No. 18929 of 2009. One Vishweshwar Madhavarao Raste also filed SLP(C)....CC Nos.16126-16127 of 2009. Since all the appeals arising out of the above special leave petitions emanated from the common order dated 15.06.2009 passed by the Division Bench and the issues raised in all these appeals are one and the same, all the appeals were heard together and are being disposed of by this common judgment.
6)Brief facts:
The case of RNRL:
(a)In 1973, late Dhirubhai Ambani set up the RIL consisting of Oil, gas, refining and exploration, textile, yarn, polyster, petrochemicals and communication business with his two sons Mukesh Ambani and Anil Ambani. In the year 1999, the Government of India announced a New Exploration and Licensing Policy, 1999 (in short “NELP”). This policy provided that various petroleum blocks could be awarded for exploration, development and production of petroleum and gas to private entities.
(b)It is the policy of the Government that Petroleum Resources which may exist in the territorial waters, the continental shelf and the exclusive economic zone of India be discovered and exploited with utmost expedition in the overall interest of India and in accordance with good International Petroleum Industry Practice.
(c)In the same year, i.e. 1999, RIL has formed a Consortium with NIKO. Their consortium was the successful bidder for Block KG-D6 and was called the Contractor.
(d)On 24.03.2000, Reliance Platforms Communications.com Private Limited was incorporated which was changed to Global Fuel Management Services Limited and now called “Reliance Natural Resources Limited (RNRL).
(e)A Production Sharing Contract (in short “PSC”) has been entered into between the Government of India and the Contractor on 12.04.2000. The PSC, as recorded, is within the contract area identified as Block KG DWN-98-3. KG-D6 is situated offshore coasts of Andhra Pradesh in the Indian Ocean. Such blocks are called as “Deep Water Exploration Blocks”. The exploration in such areas require employment of highly skilled and experienced technical personnel and an extremely expensive and time-consuming exercise. As recorded, all exploration expenses required to locate petroleum resources have to be borne by the Contractor. Therefore, the Contractor is bound to incur huge cost and resources for discovery of reserves in the area at their risk. The exploration activities are still in progress, the first gas deal expected in June, 2008. As per the PSC, all the expenses relating to the exploration, development and production of cost incurred by the Contractor can only be recovered from the petroleum/gas actually produced and sold by the Contractor. The C
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