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RELIANCE NATURAL GAS v RELIANCE INDUSTRIES.

Introduction

In this case the conflict between the two Ambani brothers arise based on the basis of
Memorandum of Understanding. Finally it was held that the MoU entered by private parties
cannot be binding. As the Ambani brothers had the MoU arriving out of family arrangement
within private parties.

Facts of the case

The dispute between RIL and RNRL has its origins in events following the decision of the Indian
Government to allow limited private sector participation in gas exploration. The Government
awarded particular blocks to private companies, and this relationship is governed by several
documents that are well-known in the oil and gas industry, of which the most important for this
case was the Production Sharing Contract [PSC]. Such a block in the Krishna-Godavari
basin, known as KG-D6 was awarded to a RIL Consortium in 1999, and a PSC was duly entered
into. In 2003, RIL tendered for the supply of gas to the National Thermal Power Corporation
[NTPC], won the bid, and entered into an agreement to supply a specified quantity of gas at
$2.34/mmBtu. In the meanwhile, differences had begun to emerge between the RIL principals
Mukesh and Anil Ambani and a family arrangement or Memorandum of Understanding
[MoU] was entered into between the two brothers and their mother, on 18 June, 2005, dividing
RIL concerns between the brothers. The MoU gave RNRL a specified entitlement of oil and gas
at the price at which RIL had agreed to supply gas to NTPC in short, $2.34/mmBtu. The
Bombay High Court approved the consequent Scheme, which required that suitable
arrangements be made for the supply of gas by RIL to RNRL, and the Scheme became effective
on 21 December, 2005.

Following this, the RIL and RNRL Boards (controlled at the time by the MDA Group) approved
a draft Gas Sale Master Agreement [GSMA] and Gas Sale Purchase Agreement [GSPA].
Once control was transferred to the ADA Group, RNRL contended that the GSPA and GSMA
were inconsistent with the scheme. Subsequently, the Ministry of Petroleum and Natural Gas
declined to approve RILs request to supply gas to RNRL at the NTPC price of $2.34/mmBtu.

RNRL filed an application in the Bombay High Court requesting the Court to direct RIL to
supply gas at the price agreed in the MoU.

. Questions to be decided
There were many Questions to be decided, but the major issues were -
1. Whether the PSC overrides all other contracts, and affords the Government the power to
control prices?
2. The binding nature of a MoU on a company in the absence of an express provision in its
Articles of Association is valid?

Contention of parties-

Contention of Petitioner RNRL


1. Order and Direct RIL to take all necessary steps in order to ensure actual supply of 28
MMSCMD or 40 MMSCMD of gas to RNRL on the NTPC Contract Terms and as per
the commercial aspect set out.
2. Order and Direct RIL to execute an amendment to the Gas Supply Master Agreement
dated January 12, 2006 and to the Form of Gas Sale and Purchase Agreement attached in
Schedule 3.2 thereto, to bring them in line with the Gas Supply Master Agreement and
Form of Gas Sale and Purchase Agreement as set out in Ex. J to this Application.
3. Restrain RIL from creating any third party interests or rights in respect of
- 28 MMSCMD of Gas to be supplied to the Applicant;
- 12 MMSCMD to be supplied to the Applicant on firm basis in case NTPC Contract
does not materialize; and/or entering into any contract(s) and/or use or supply to any
third party said gas (28 MMSCMD or 40 MMSCMD, as the case may be) which is
required to be supplied to the Applicant under the Scheme.
4. pending the hearing and final disposal of the application, direct RIL to supply the said 28
MMSCMC or 40 MMSCMD gas, as the case may be, to the applicant on the same terms
as per NTPC Contract.
Contention of Respondent RIL
1. A Scheme for the demerger of a large company with majority of shares being held by the
public and by institutions has to be in larger public interest as well as in the interest of the
company. It must necessarily safeguard the interest of large body of shareholders of the
Demerged Company as also the shareholders of the Resulting Companies. Any settlement
of the disputes stated to have taken place between or amongst the promoters has, as a
necessity, to abide by the final decision of the Board of the Demerged Company and such
adaptations as may be necessary to protect and further the interests of the large body of
shareholders or public interest.
2. Once the Scheme as was placed before and duly approve by; the shareholders (99%
shareholders approved the Scheme) which suggests that the Scheme had the support not
merely of the General Body of shareholders but also the members of the promoters'
family-all anterior or underlying agreements become irrelevant. The senior-most
member of the family who resolved all the disputes has, at no point, contested the
Scheme as being inconsistent with any arrangement that may have been arrived at. The
present application is a thinly disguised attempt to reopen the Scheme after it has been
fully implemented in a manner that is completely inconsistent not only with the demerger
of the businesses but the provisions of Section 392 of the Companies Act, 1956.
3. That none of the heads of so-called Agreement are a part of the Scheme as proposed by
the Board of Directors of RIL and approved by the creditors and general body of
shareholders. These allegations have no place in an application made for implementation
of the Scheme as sanctioned by the High Court. The averments made therein are
completely extraneous and irrelevant. The issues, if at all, as between Shri Mukesh
Ambani and Shri Anil Ambani were personal to the Ambani family and the Board of RIL
was not aware of the details of the settlement between Shri Mukesh Ambani and Shri
Anil Ambani.
4. The Vice Chairman and Joint Managing Director of RIL, at the relevant time, Shri Anil
Ambani was or in any event, should be deemed to be fully aware of the nature of the
rights of RIL in relation to exploration and production of gas from various gas-fields as
also the provisions of the Production Sharing Contract (PSC). Significantly, the
Production Sharing Contract for Block KG-D6 was executed way back in the year 2000.
Being Board managed company, the business and affairs of RIL are under control and
supervision of the Board of Directors and in fact the Minutes of the Board meeting
clearly show that in all matters in which Shri Mukesh Ambani was or could be said to be
an interested director, he had refrained from participating in the deliberations and voting
on the resolutions. The terms and conditions on which the gas was to be supplied to the
power plants of Reliance Patalganga Power Limited and REL was to be at the discretion
by the Board of Directors of the Demerged Company who were not bound by any
"agreement" as between two groups of promoters. The Board of Directors of Demerged
Company was obliged and in fact had at all times kept the interest of the general body
of shareholders as being a paramount importance and had taken such decisions
as in the best judgment of the Board, accorded to their duty as the Board with the
shareholders interests being of utmost importance.

Decision

Decision of High Court


Bomaby High Court gave the decision in favour of the petitioners. The single judge, having
rejected jurisdictional objections, agreed with RNRL that the GSPA was in breach of the scheme,
and directed the parties to comply with the suitable arrangement requirement in the Scheme, in
light of the MoA. Both parties appealed to the Division Bench, which allowed the Union of India
to intervene.

Decision by the Division Bench


he Division Bench held that the suitable arrangement in the Scheme had to be formulated in
light of the MoA, and further observed that nothing in the PSC prevented RIL from selling gas to
a third party at a rate lower than that prescribed by the Union of India. All three parties RIL,
RNRL and the Union of India appealed to the Supreme Court,

Decision of Supreme Court


The majority held that the MoU could not bind the companies, because it was entered into by
private persons. The majority rejected Mr. Jethmalanis reliance on the doctrine of
attribution/identification (para 35) with the proposition that the doctrine of identification 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, in such a situation, one cannot make the companies
personality the same as that of persons involved. The Court cited no authority for this
proposition. Justice Sudershan Reddy reached a similar conclusion (para 140), on the basis that
the MoU was executed in the private domain, with the help and aid of a lawyer and then marked
confidential. Justice Reddy also held that the doctrine of identification applies mainly in cases
of criminal or tortious liability. Both the majority and Justice Reddy (para 145) referred to s. 293
of the Companies Act to establish that the Board retained power to act, although it is not clear
what the undertaking in question was. In one of the most important passages in the judgment,
the majority held that the MoU is an external aid to ascertain the intention of the parties to the
Scheme, but that considerations of national interest, natural resources etc. are relevant in
formulating a suitable arrangement for gas supply (for eg, para 36).
he majority appears to have held that, in any event, the MoU is not binding on the company, and
cited its decision in VB Rangaraj v. VB Gopalakrishnan.

in perhaps the most significant issue in the context of the case, the majority and Justice Reddy
agreed that the power of the Union to distribute natural resources for the good of the community
overrides private agreements. In this respect, the Court relied on Art. 297 of the Constitution,
which vests natural resources in the Union of India, Art. 39(b), which requires distribution of
resources to subserve the common good, commercial practice in the oil and gas
industry(para 84), the international principle of permanent sovereignty over natural resources
adopted by the UN General Assembly in Resolution 1803 (para 88), the provisions of the PSC,
the doctrine of public trust (para 97) etc.
Finally, Justice Sudershan Reddy (paras 21, 141) observed that directors owe a fiduciary duty
to shareholders. Construed literally, this is a departure from the settled proposition that such
duties are owed to the company. However, although this point is not free from doubt, it appears
to be a passing observation, and the reference to shareholders seems to be intended to refer to the
company as a body of shareholders.

The Supreme Court has ruled in favour of Mukesh Ambani-promoted Reliance Industries
Limited (RIL) in its battle against Anil Ambani-controlled Reliance Natural Resources Limited
(RNRL).