Konamaneni & Ors v Rolls Royce Industrial Power (india) Ltd & Ors [2001] EWHC Ch 470 (20th December, 2001)

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URL: https://www.bailii.org/ew/cases/EWHC/Ch/2001/470.html
Cite as: [2002] 1 All ER 979, [2002] 1 BCLC 336, [2001] EWHC Ch 470, [2003] BCC 790, [2002] ILPr 40, [2002] 1 WLR 1269, [2002] 1 All ER (Comm) 532

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Konamaneni & Ors v Rolls Royce Industrial Power (india) Ltd & Ors [2001] EWHC Ch 470 (20th December, 2001)

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

HC 00 03128

Thursday, 20 December 2001

B e f o r e :

MR JUSTICE LAWRENCE COLLINS
____________________

(1) MRS LAKSHMI KONAMANENI

(2) MRS SANTHA REDDY PEKETY

(3) MR VASANTH RAO MITTA

(4) SPECTRUM TECHNOLOGIES USA INC Claimants

and

(1) ROLLS ROYCE INDUSTRIAL POWER (INDIA) LIMITED

(2) HEATON POWER LIMITED

(3) SPECTRUM POWER GENERATION LIMITED Defendants

____________________

APPROVED JUDGMENT
Mr Leslie Kosmin QC and Mr Andrew Thompson (instructed by S J Berwin) appeared on behalf of the Claimants.
Mr Robert Hildyard QC and Mr Robert Miles (instructed by Freshfields Bruckhaus Deringer) appeared on behalf of the First and Second Defendants
Mr David Mackie QC and Ms Sarah Garvey (of Allen & Overy) appeared on behalf of the Third Defendant
Hearing: 21, 22, 23, 26, 27, 28 November 2001.
____________________

HTML VERSION OF HANDED DOWN JUDGMENT
____________________

Mr Justice Lawrence Collins:

I Introduction

These proceedings involve a derivative claim by four claimants. Two of the claimants are individuals resident in India, one is an individual resident in the United States, and the fourth claimant is a company incorporated in Mauritius. They sue as members of Spectrum Power Generation Ltd. (“SPGL”), an Indian company which is joined as a defendant. The claimants seek to enforce a claim by the company against two English companies in the Rolls-Royce group which, it is alleged, paid bribes, through a British Virgin Islands company, Towanda Services Ltd., to the managing director of the company, an Indian resident in India, to secure contracts for the construction and maintenance of a power station in India. The 208MW power station has been fully operational since 1998 and was one of the first power plants in India to be operated in the private sector. The plant was constructed by the Rolls-Royce defendants, and the Rolls-Royce group remains involved in the maintenance of the plant.

There are pending in India some 18 actions or criminal complaints relating to the interests in, and conduct of, the project, in which the principal protagonists are, on the one hand, the managing director of the company, Mr Kishan Rao, and, on the other hand, Dr Mohan Rao who is related to Kishan Rao by marriage, and who was a principal promoter of the project. The information on which the claimants base their action is derived from Mohan Rao, and he gives instructions to their lawyers. The proceedings are funded by his business associate and relative by marriage, Mr Ravi Reddy, who is also a relative by marriage of two of the individual claimants (the other claimant being the wife of a senior employee of one of his companies) and who owns, indirectly, shares in the fourth claimant and thereby in SPGL.

The defendants challenge the existence and/or exercise of jurisdiction by the English court. When Master Moncaster was asked to give permission to serve the Indian company outside the jurisdiction he expressed concerns about whether the English court had jurisdiction to entertain a derivative action brought for the benefit of a foreign company, but those concerns were allayed by the claimants’ advisers on the without notice application. This case raises, apparently for the first time in England, the question of the operation in the international context of derivative claims and the exceptions to the rule in Foss v Harbottle.

II The claim and the protagonists

The claim was brought originally by the first three claimants. Between them they hold 9,000 shares in the third defendant, SPGL. The number of issued shares in SPGL is about 141 million, and the claimants’ shares amounted in aggregate to about 0.005% of the issued share capital, and are worth about the equivalent of £2,000 in aggregate. The fourth claimant, Spectrum Technologies USA Inc., a company incorporated in Mauritius (“STUSA (Mauritius)”), is a company which owns about 22% of the issued shares in SPGL. It is managed by Mohan Rao, who has an indirect interest in some of its shares. STUSA (Mauritius) was added as a claimant to allay the concern of Master Moncaster whether the court would allow a derivative action by shareholders who had no significant interest in the outcome of the proceedings and who were acting on the directions of Ravi Reddy.

Ravi Reddy

Mr Ravi Reddy is a successful businessman who has been resident in the United States since 1978, and who is a non-resident Indian (“NRI”). He is connected with each of the claimants in ways on which I shall elaborate below in paragraphs 8 to 10. He is a non-resident Indian, and is now a United States citizen. His business interests are primarily in the United States, and he says his net worth is more than $100 million. He is related, through marriage, to Mohan Rao. Mr Reddy, who is indirectly a substantial shareholder in SPGL and in STUSA (Mauritius), is funding the claimants (including the provision of security for costs) and has agreed to indemnify SPGL in relation to its costs of the action if leave to continue is obtained by the claimants under CPR 19.9. He says he is funding the litigation because he feels morally bound to support the shareholders, and they do not necessarily have the sophistication or financial means to chase down fraud within the company.

For reasons which will be mentioned below (paragraph 100) the Rolls-Royce group became substantial shareholders in SPGL, through Rolls-Royce Godavari Power Ltd. Ravi Reddy sought to purchase its interest in SPGL. That would have given him and Mohan Rao a controlling interest in SPGL. The negotiations for the purchase terminated in 1999. The Rolls-Royce evidence (from Mr Mead, who was a project development manager with Rolls-Royce, and who left earlier this year) is that Ravi Reddy said on various occasions that if the deal did not proceed he would seek other avenues to exert control over SPGL, and Mr Mead says he understood that to be a threat of further legal action against, amongst others, Rolls-Royce.

Dr Mohan Rao

Dr Mohan Rao is a United States citizen of Indian origin. He has been involved all his working career in the power generation field. After taking a first degree in engineering in Hyderabad, he obtained a PhD in Mechanical and Electrical Engineering from an American university, and then worked for 18 years from 1972 with GE Power Systems, a leading manufacturer of power equipment, where he was a development engineer and subsequently a manager of mechanical systems. Since about 1990 he has been associated with the STUSA group of companies. He was said to be the source of much of the information relied upon by Mrs Konamaneni, the first claimant, and by Mr Mervis, the claimants’ solicitor, in their witness statements in support of the application for permission to serve out of the jurisdiction. In his own witness statement he says that he is responsible for the day to day affairs of STUSA with regard to the litigation concerning the project.

The individual claimants

The first claimant, Mrs Konamaneni, is resident in Hyderabad. She is a deputy manager with Vysya Bank in Hyderabad. She owns 3,600 shares of 10 rupees nominal value each in SPGL out of a total issued share capital of 141 million shares (i.e. about 0.0025% of the issued share capital). She is the wife of Mr K Satish, a senior employee of STUSA. She says that her husband told her that Mohan Rao had told him that Kishan Rao had taken bribes from Rolls-Royce. She was shocked and she jumped at the chance to take legal action when her husband told her that Ravi Reddy (who is a good friend of her husband) was prepared to bear the legal expenses.

The second claimant, Mrs Pekety, who lives in the United States, owns 2,700 shares in SPGL (approximately 0.0019% of the issued share capital). Mrs Pekety is the mother-in-law of Ravi Reddy, and she is also the aunt of Mohan Rao’s wife. She says she heard about the bribery allegation from Ravi Reddy in about 1999. She is a claimant in eight derivative actions on behalf of SPGL in Hyderabad in India against, inter alios, RRIP and Heaton. She is also the complainant in three actions brought against SPGL and various directors of SPGL before the criminal courts in Hyderabad. I deal in sections IX and XII below with these proceedings.

The third claimant, Mr Mitta, is resident in Hyderabad, and owns 2,700 shares in SPGL (approximately 0.0019% of the issued share capital). He is the first named claimant in the eight derivative actions in Hyderabad. Mr Mitta’s brother is Mohan Rao’s brother-in-law. He says that most of his information about the allegations comes from Ravi Reddy.

Kishan Rao and Jaya Food Industries

Kishan Rao has, at all material times, been the managing director of SPGL. He is resident in India. He is Mohan Rao’s relation by marriage, Kishan Rao’s daughter in law being Mohan Rao’s niece. Mohan Rao involved Kishan Rao and his company Jaya Food Industries Pvt Ltd (“Jaya Food”) in the project at its outset in 1992. Jaya Food was engaged in the production of dry foods, such as pasta and was Kishan Rao’s principal business and his vehicle for his original investment in SPGL. It was incorporated in India, and is now called Bambino Agro Industries Pvt Ltd. His sons, M. Raghuveer and M. Subramanyam, are associated with him in business and are directors of SPGL.

SPGL

SPGL was incorporated on October 26, 1992 under the Indian Companies Act 1956. The current shareholders are as follows: (a) Rolls-Royce Godavari Power Limited (a Mauritius Company) and part of the Rolls-Royce group (47.5%); (b) Kishan Rao and associates (about 26%); (c) Mohan Rao and associates (about 25%). The remaining shares are held by the general public.

All the directors of SPGL are Indian citizens and, apart from Mohan Rao and his nominee director Mr Bharteey, are resident in India. Mohan Rao and Mr Bharteey have been directors since 1994. Rolls-Royce is not represented on the board.

According to SPGL, the affiliations of the other directors are as follows:

Name Affiliation

Mr Raghuveer Kishan Rao’s son

Mr Subramanyam Kishan Rao’s son

Mr Bhattacharyya No affiliation, and formerly the Deputy Managing Director of the State Bank of India

Mr Shukla No affiliation, and a chartered accountant who also sits on the Board of companies owned by Kishan Rao

Professor Narain No affiliation, a leading Indian economist from Osmania University in Andhra Pradesh

Mr Krishnan No affiliation, nominated by State Bank of India, of which he was former Chief General Manager

Mr Upasani No affiliation, nominated by Industrial Development Bank of India a former Chief Secretary to the Government of Maharashtra and a former Chairman of the Indian Company Law Board

Mr Loonkar No affiliation, nominated by the Industrial Finance Corp of India Ltd., of which he is the Chief General Manager, Hyderabad

The present debt to equity ratio is about 8:1, and it is obvious that the board members nominated by the financial institutions are there to look after the interests of the lenders, and not simply to decorate the board. I should mention at this point that although SPGL says that Mr Bhattacharyya, Mr Shukla and Professor Narain have no affiliation with either of the Kishan Rao and Mohan Rao camps, the first claimant says that Mohan Rao has told her that they are all close friends of Kishan Rao.

The STUSA group

The relevant companies in the STUSA group are:

(a) STUSA, which is owned by Mohan Rao and Brij Bharteey, and holds about 2 million shares in SPGL;

(b) STUSA (Mauritius), which holds about 26 million shares in SPGL, and which is 100% owned by SIL (Mauritius);

(d) SIL (Jersey), which holds about 900,000 shares in SPGL, and is owned by Mohan Rao and Brij Bharteey;

(e) SPIG, which is owned as to 50% by Ravi Reddy.

Rolls-Royce

The defendants are two companies in the Rolls-Royce engineering group. I shall refer to them together as the “Rolls-Royce defendants.” The first defendant, Rolls-Royce Industrial Power (India) Ltd. (“RRIP”), and the second defendant, Heaton Power Ltd. (“Heaton”), contracted with SPGL in 1994 for the engineering, procurement and construction (“EPC”) of the plant. RRIP contracted with SPGL in 1995 for the operation and maintenance (“O&M”) of the plant. The Rolls-Royce companies were associated with companies in the Westinghouse Electric Corp. group in these contracts, with Westinghouse as a co-contractor or principal sub-contractor. Heaton will be referred to by its current name, although its name was Parsons Turbine Generations Systems Ltd. until 1997, following the sale in 1996 of most of its business to Siemens. RRIP and Heaton are wholly-owned subsidiaries of Rolls-Royce Power Engineering plc, which itself is a subsidiary of Rolls-Royce plc. As I have mentioned already, another company in the group, Rolls-Royce Godavari Power Ltd. (which is incorporated in Mauritius), put equity into SPGL between 1995 and 1998 and holds about 47.5% of its issued shares, but is not represented on its board.

At all times material to this action, the only business of RRIP related to power projects in India. RRIP has several offices in India, and conducts all of its operations in India. It is registered in India as a foreign company, and has filed the names of persons there to accept service on its behalf. Heaton’s business was principally concerned with power projects in India. It now has only two full-time employees. According to their published accounts, RRIP and Heaton did not trade on their own account but acted as agents for Rolls-Royce Power Engineering plc until 1996, and thereafter as agents for Rolls-Royce plc.

The allegations

After setting out some of the history of the project (with which I deal in greater detail in section VI) the particulars of claim allege that on November 1, 1993 Heaton and RRIP entered into two Agency Agreements (“the Agency Agreements”) with a British Virgin Islands company, Towanda Services Ltd. (“Towanda”), under which Towanda was to assist them in presenting bids for, and promoting the securing of, the EPC and O&M contracts for the Rolls-Royce defendants. If the contracts were secured, $19,300,000 was to be paid to Towanda in respect of the EPC contract and £1,500,000 was to be paid in respect of the O&M contract.

It is alleged that the Agency Agreements were shams, that Towanda was a creature of Kishan Rao which had no relevant expertise and was not intended to perform any genuine services; and that the Agency Agreements were intended by Kishan Rao and the parties to the Agency Agreements as a cloak for payments to Kishan Rao in the nature of bribes, intended by RRIP and Heaton to induce Kishan Rao as managing director of SPGL to procure or do his best to procure that SPGL awarded the EPC Contract and the O&M Contract to companies in the Rolls-Royce group; that the payments were made by the Rolls-Royce defendants or other companies in the Rolls-Royce group to Towanda; that the Rolls-Royce defendants knew that Towanda was beneficially owned and/or controlled by Kishan Rao; that the bribes were not disclosed to shareholders of SPGL, either in general meeting or otherwise; or disclosed to the board of SPGL; and that Kishan Rao was influenced by the bribes to procure or use his best endeavours to procure that SPGL granted the EPC Contract and the O&M Contract to companies in the Rolls-Royce group (or that is in any event to be irrebuttably presumed as a matter of law).

The claim is for restitution of the amounts paid or for damages in the same amounts. The particulars of claim make it clear that this is a derivative claim by the claimants as members of SPGL to enforce causes of action vested in SPGL and to seek relief on its behalf. In order to bring the claim within one of the exceptions to the rule that a shareholder cannot normally sue for a wrong done to the company (the rule in Foss v. Harbottle, with which I deal below in section III), the particulars allege that the general meeting of SPGL is controlled or is capable of being controlled by Rolls-Royce Godavari Power Ltd and Kishan Rao and his group of companies and thereby indirectly by Rolls-Royce plc and/or the Rolls-Royce group and Kishan Rao. Accordingly, it is said, it is plain that the general meeting of SPGL would not pass a resolution authorising or approving the pursuit of proceedings by SPGL against RRIP and Heaton; and that of the 10 directors (including Kishan Rao) at least 5 are closely associated with him, and it is highly unlikely that the board would pass any resolution which might facilitate a decision that the company should pursue proceedings against the Rolls-Royce defendants and/or Kishan Rao seeking the relief sought in the claim.

Applications

There are before the court: (a) the application of the Rolls-Royce defendants for a declaration that the court has no jurisdiction, or for a stay of the proceedings on grounds of forum non conveniens, or for an order to set aside the order of Master Moncaster of February 2, 2001 granting permission to serve SPGL out of the jurisdiction and service made thereunder; and (b) the application by SPGL to set aside the order of Master Moncaster.

The applications raise, among others, the following issues:

(a) whether the English court ever has jurisdiction to hear a derivative claim in relation to a foreign company;

(b) whether the action falls within the provisions of CPR Part 6, which allows service to be permitted on a person outside the jurisdiction who is “a necessary or proper party” to a claim against someone who is served or is to be served within the jurisdiction, and where there is between the claimant and the person within the jurisdiction “a real issue which it is reasonable for the court to try” (CPR 6.20(3));

(d) whether there was any material non-disclosure on the without notice application to Master Moncaster and, if so, whether the order should be set aside as a result.

III Derivative actions

It is an elementary principle that “A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C”: Prudential Assurance Co Ltd v. Newman Industries (No.2) [1982] Ch 204, 210.

The usual rule is that a company is the proper claimant in an action to redress a harm done to the company or enforce a cause of action vested in the company (the so-called “Rule in Foss v. Harbottle”). There are, however, a number of exceptions to the rule. The exception relied upon in this case is an alleged “fraud on the minority”. The remedy was “introduced on the ground of necessity alone in order to prevent a wrongdoing without redress”: Smith v. Croft (No.2) [1988] Ch 114, 185. Where what has been done amounted to a fraud and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring a minority shareholders’ action on behalf of themselves and all others. The reason for this is that if they were denied that right, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue: Edwards v. Halliwell [1950] 2 All ER 1064, 1067; Prudential Assurance at 211. As Browne-Wilkinson LJ said in Nurcombe v Nurcombe [1984] BCLC 557, 565:

“Since the wrong complained of is a wrong to the company, not to the shareholder, in the ordinary way the only competent plaintiff in an action to redress the wrong would be the company itself. But, where such a technicality would lead to manifest injustice, the courts of equity permitted a person interested to bring an action to enforce the company’s claim.”

A “fraud on the minority” involves two elements. The first is a cause of action in the company that can be characterised as an equitable fraud. Fraud includes all cases where the wrongdoers are endeavouring, directly or indirectly to appropriate themselves money, property or advantages which belong to the company or in which the other shareholders are entitled to participate: Burland v. Earle [1902] AC 83, 93. The second element is control of the company by the wrongdoers.

Wrongdoer control may be established by proof that the wrongdoers own a majority of the shares carrying votes, but the essential question is whether the claimant (or perhaps, more accurately, the company) is being prevented from pursuing a claim which the company legitimately has: see Smith v Croft (No.2) [1988] Ch 114 at 184-185, per Knox J., who said:

“Ultimately the question which has to be answered in order to determine whether the rule in Foss v. Harbottle applies to prevent a minority shareholder seeking relief as plaintiff for the benefit of the company is ‘Is the plaintiff being improperly prevented from bringing these proceedings on behalf of the company?’ If it is an expression of the corporate will of the company by an appropriate independent organ that is preventing the plaintiff from prosecuting the action he is not improperly but properly prevented and so the answer to the question is ‘No’. The appropriate independent organ will vary according to the constitution of the company concerned and the identity of the defendants who will in most cases be disqualified from participating by voting in expressing the corporate will”.

For present purposes, the following propositions may be derived from the modern cases:

(1) Since the bringing of the derivative claim requires the exercise of the equitable jurisdiction of the court on the grounds that the interests of justice require it, the court will not allow such an action to be used in an inequitable manner so as to produce an injustice: Nurcombe v Nurcombe [1984] BCLC 557, 565, per Browne-Wilkinson LJ;

(2) accordingly, a claimant who has participated in the wrong of which complaint is made will be disqualified from bringing the action: Gower’s Principles of Modern Company Law (6th ed. Davies, 1997, p. 669), the then equivalent passage of which was approved in Nurcombe v Nurcombe [1984] BCLC at 562, per Lawton LJ;

(3) the claimant must be acting bona fide for the benefit of the company: Nurcombe v Nurcombe [1984] BCLC at 562; Barrett v. Duckett [1995] 1 BCLC 243 at 250.

The defendants also rely on a further proposition, namely that there must be no other adequate remedy available, which is derived from Barrett v. Duckett [1995] 1 BCLC 243 at 250. That was a case in which the alternative remedy was a claim by the liquidator, since a petition had been presented to wind up the company. Both Peter Gibson and Beldam L.JJ considered that the decision whether to pursue an action against directors alleged to have diverted the business of the company was best left to the judgment of an independent liquidator. Peter Gibson LJ relied on two other decisions (Ferguson v. Wallbridge [1935] 3 DLR 66, P.C.; Fargro Ltd v Godfroy [1986] 1 WLR 1134) in which derivative actions failed because there was a liquidator who was in a position to take action. This is not the occasion to express a final view, but it seems to be that the notion that there must be no alternative remedy expressed in Barrett v Duckett is not an independent bar to a derivative action, but simply an example of a case where there will be no relevant wrongdoer control.

Procedural aspects

A derivative action is brought in representative form, and the company is joined as a defendant in order for it to be bound by any judgment and to receive the fruits (if any) of the judgment, and because the action has not been authorised by its board or general meeting: Spokes v. Grosvenor and West End Railway Terminals Hotel Co. Ltd. [1897] 2 QB 124.

In Prudential Assurance the Court of Appeal considered what course was to be taken by the court if, as happened in Foss v. Harbottle and in the Prudential Assurance case itself, the court was confronted by a motion on the part of the delinquent or by the company, seeking to strike out the action. A dilemma would emerge if the claimant could require the court to assume, as a fact, every allegation made by the claimant, since this would absolve the claimant from the burden of bringing himself within the exception simply by alleging fraud and control. But if the claimant had to prove fraud and control before he could establish his title to prosecute the action, then the action may need to be brought to a conclusion before the court could decide whether or not the claimant should be permitted to prosecute it.

Accordingly, the Court of Appeal held (at 221-222)

“…whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of and proceedings at, that meeting”.

In Smith v. Croft (No.2) [1988] Ch 114 Knox J considered that the striking out procedure was appropriate for the determination of the right of the shareholders to sue, since questions of fact could be gone into on such applications and in exceptional cases cross-examination could be permitted on affidavits, although in that case there was no application for cross-examination. He said (at 138-139):

“But my conclusion is that it is the question stated by the Court of Appeal as a preliminary matter that has to be decided, that it is a special form of procedure concerned with giving sensible operation to the rule in Foss v. Harbottle, 2 Hare 461 and which was concerned with avoiding the Scylla and Charybdis, on the one hand of having a preliminary issue which effectively requires one to try the whole action where the rule serves no useful purpose, and on the other side of the strait, of assuming that everything the plaintiffs allege is necessarily correct as a matter of fact, which is of course the technique the court adopts when it has what was called a strict demurrer. The Court of Appeal, it seems to me, has laid down a halfway house for this very special type of case, one in which the legal issues in this particular case are sufficiently well defined for the parties to be able to argue them. Further, I am satisfied that they will determine the result of the action completely if answered in one particular way – not if answered in the other way, but that is seldom obtainable.”

Knox J said (at 183) that the purpose of the adjournment referred to in the Prudential Assurance case to enable a meeting of shareholders to be convened was not to discern whether the defendants had control, but was to secure for the benefit of the judge, who was deciding whether to allow the minority shareholder’s action on behalf of the company to go forward, the commercial assessment whether the prosecution of the action was likely to do more harm than good or, the phrase used in argument in Prudential Assurance, “kill the company by kindness.” He said that the whole tenor of the Court of Appeal’s judgment was directed at securing that a realistic assessment of the practical desirability of the action going forward should be made by the organ that has the power and ability to take decisions on behalf of the company.

In 1994 RSC Ord. 15, r.12A was added to introduce a filter, and its provisions are substantially reproduced in CPR 19.9, which applies to “derivative claims,” i.e. “where a company, other incorporated body or trade union is alleged to be entitled to claim a remedy and a claim is made by one or more members…for it to be given that remedy…” In such a case, after the claim has been issued the claimant must apply, with written evidence in support to the court for permission to continue the claim. There is no reported case on how the power under the rule is to be applied in order to deal with the concerns expressed in Prudential Assurance, although it has been suggested that the rule is not providing an effective filter: Reed (2000) 21 Company Lawyer 156.

IV The foreign element

SPLG is an Indian company. Four shareholders pursue a derivative action on its behalf against two companies incorporated in England. Two of the individual claimants are resident in India, a third is resident in the United States and the corporate claimant is incorporated in Mauritius.

Three questions arise:

(a) does the English court have jurisdiction in a derivative claim on behalf of a foreign company?

(b) if so, what law applies to determine whether a derivative claim can be brought?

(c) if there is jurisdiction, and the applicable law permits a derivative claim, how do forum conveniens rules apply in the context of applications to stay proceedings or to set aside service outside the jurisdiction?

The position of the claimants is that if the company has a cause of action against wrongdoers within the jurisdiction, then the court has jurisdiction in a shareholders’ derivative action against the wrongdoers and the company can be joined as a necessary or proper party under CPR 6.20(3); that whether a derivative claim can be brought is a matter of procedure, and therefore governed by English law as the lex fori, and the necessary procedure is regulated by CPR 19.9. On the principles for staying of actions or setting aside service out side the jurisdiction, the claimants argue that the normal rules apply, and the court is primarily concerned with the appropriate forum for the underlying claim, and that the derivative nature of the claim is insignificant in the context of the question of the appropriate forum.

The claimants say that it makes practical sense for there to be no blanket rule excluding jurisdiction in respect of all derivative claims made on behalf of foreign companies. Such a rule would make no practical sense at all:

(1) There might be no other court which would be competent to hear the action (which, ex hypothesi, the English court does have jurisdiction to hear).

(2) If there were another competent court, it might not be the appropriate court.

(3) In particular, the courts of the place of incorporation of the company might well be either not competent or not appropriate.

(4) Further, there is no reason why a derivative claim on behalf of a foreign company would necessarily be inconvenient to hear in England. For example, procedural issues arising from the derivative nature of the claim may be insignificant or even non-existent (as in this case).

SPGL’s position is that the court either does not have jurisdiction to determine a derivative claim because there is no applicable provision in CPR Part 6 for service on the foreign company, or, if there is in theory a basis for the application of Part 6, then the court will not exercise jurisdiction because (a) CPR 19.9 does not or may not apply to foreign companies or (b) there is a general rule that the court will not interfere in the management of a foreign company. Alternatively it is argued that if the court has jurisdiction under Part 6, and if CPR 19.9 applies to foreign companies, then the jurisdiction should be exercised very rarely and not extraterritorially.

CPR Part 6

The provisions for service out of the jurisdiction, replacing RSC Order 11, are in CPR Part 6. The overriding principle is that the court will not give permission unless satisfied that England is the proper place in which to bring the claim: CPR 6.21(2A).

The effect of CPR 6.20(3) is that a claim form may be served out of the jurisdiction if

“a claim is made on someone on whom the claim form has been or will be served and - (a) there is between the claimant and that person a real issue which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim".

By CPR 6.21(2) in such a case the written evidence must state the grounds on which it is said that there is between the claimant and the person on whom the claim form has been, or will be served, a real issue which it is reasonable for the court to try.

SPGL argues that there are two reasons why the court has no jurisdiction in a derivative claim in relation to a foreign company. First, there is no real issue between the claimants and the Rolls-Royce defendants, because the underlying claim is by the company and not by the claimants, who are suing on behalf of the company. The second is that the reference in CPR 19.9 to companies and other incorporated bodies should be interpreted to mean only English companies.

In my judgment, there is no basis for restricting CPR 19.9 to English companies, and in any event to do so would not have the effect of depriving the court of jurisdiction to entertain a derivative claim. There is more substance in the argument on CPR 6.20(3), but I do not consider that it is right. The requirement that there should be a real issue between the claimant and those served, or to be served, within the jurisdiction is intended to ensure that the claim was brought bona fide against the defendant in the jurisdiction, and not merely in order to bring in the foreign defendant as a necessary or proper party: see the cases cited in Civil Procedure 2001, para 6.21.28. If that conclusion is right then there can be no doubt that, if it were an appropriate case for service outside the jurisdiction, SPGL would be a necessary party since it has long been the rule, confirmed by CPR 19.9(2), that the company for whose benefit a derivative claim is brought must be a defendant to the claim.

Governing law

The arguments in this case canvassed the question of what law governs the right of a shareholder to bring a derivative action in England. The main candidates are English law as the lex fori on the basis that the right of shareholders to sue is a matter of procedure, and the second is the law of incorporation as the law governing the relationship of the company and its shareholders. Master Moncaster, when considering the without notice application, canvassed the possibility that the English court might not allow a derivative action unless and until it had been authorised by the foreign court. There is little to be said for another possible candidate, the law of the underlying claim which it is sought to bring on behalf of the company.

In favour of English law as the lex fori is that in English law, but not necessarily in cases with a foreign element, the exceptions to the rule that only the company which is injured may sue are regarded as remedial or procedural. It was probably in this sense that Browne-Wilkinson LJ spoke of the courts of equity permitting the action if a technicality led to manifest injustice: Nurcombe v Nurcombe, at 565. Gower, p.665, goes as far as to say that the basic rule in Foss v Harbottle is part of the law of civil procedure, although it is not easy to see how the basic rule stated in Prudential Assurance that “A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C” ([1982] Ch 204, 210) can be regarded as a merely procedural rule.

The application of English law as the lex fori is supported by a decision of the Court of Appeal, albeit a decision in which the point does not appear to have been taken, still less arisen for decision. In Heyting v. Dupont [1964] 1 WLR 843 the plaintiff was a minority shareholder in a Jersey company which had been incorporated to exploit an invention of the defendant. The articles had deadlock provisions. The plaintiff contended that the defendant had by misfeasance damaged the company. In the Court of Appeal it was observed that it was “essentially a dispute between two discordant partners” ([1964] 1 WLR at 848). The plaintiff obtained leave to serve the company out of the jurisdiction: p.846. It was held that on the assumption that there was a general exception to the rule in Foss v Harbottle where the interests of justice so require (an assumption no longer justified since Prudential Assurance), there was no basis for the application of that exception. Although no point on jurisdiction or choice of law appears to have been taken, Russell LJ said ([1964] 1 WLR at 848):

“I dare say that the rule in Foss v. Harbottle is a conception as unfamiliar in the Channel Islands as is the Clameur de Haro in the jurisdiction of England and Wales. But clearly this is a matter of procedure to be decided according to the law of the forum.”

The second candidate for the law applicable to the question whether a shareholder has a right to claim in respect of wrongs to a company is the law of the place of incorporation. There is no authority in England which is directly on point, but the question has been considered in the United States, where derivative actions are frequently brought in one state in relation to the affairs of corporations which have been incorporated in another state. The approach in these cases is that the right of the shareholder to bring the derivative action is governed by the law of the state of incorporation, but that the wrongdoers may be sued in a state which has personal jurisdiction over them, but subject to the American principles of forum non conveniens. In the international context it has been held also that the right to bring a derivative action depends on the law of the place of incorporation.

49. In Batchelder v. Kawamoto, 147 F. 3d 915 (9th Cir. 1998), a holder of American Depository Receipts (ADRs) for shares of the Japanese corporation Honda Motor Co. Ltd. brought a derivative action for wrongs allegedly committed by directors and other officers and employees of Honda Japan and its American subsidiary. Under Japanese law only shareholders, and not holders of ADRs, had a right to bring a derivative action. The action in the federal court in California was dismissed. The principal ground was that Japanese law did not give the holder of ADRs a right to sue and that Japanese law applied because the plaintiff purchased his ADRs pursuant to a deposit agreement expressly providing for the law of Japan to govern shareholder rights. But it was held that even if there had not been the choice of law provision in the deposit agreement (at 920):

“….ordinary conflicts-of-law principles would direct us to apply Japanese law to Batchelder’s claim. Batchelder holds an interest in Honda Japan, not American Honda. Under the ‘internal affairs’ doctrine, the rights of shareholders in a foreign company, including the right to sue derivatively, are determined by the law of the place where the company is incorporated. See Hausman v. Buckley 299 F2d. 696, 702 (2d Cir. 1962); McDermott Inc. v. Lewis, 531 A 2d 206, 214-17 (Del. 1966); cf. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89, 107 S.Ct. 1637, 95 L.Ed. 2d 67 (1987) (“This beneficial free market system depends at its core upon the fact that a corporation – except in the rarest situations – is organised under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of incorporation”).”

It is possible that this approach is influenced by the notion (mentioned by Browne-Wilkinson LJ in Nurcombe v. Nurcombe [1984] BCLC at 656) that in the United States the derivative action is really two actions, one of which is a claim by the minority shareholder against the company for failure to enforce the company’s rights, and the other being the claim by the company against the wrongdoer. In the present case, the important question of choice of law does not arise for decision, because there is no material difference between English law and Indian law. It is clear from the evidence, and the texts on Indian company law (Ramaiya, Guide to the Companies Act, 15th ed. 2001 pp 165 et seq) that the Indian courts follow English case-law on the point and permit derivative actions based on the exceptions to the rule in Foss v Harbottle. If it had arisen for decision I would have held that the law of the place of incorporation governs. That is because the basic rule is that the shareholders have no direct rights, as Prudential Assurance makes clear. Although for purely English domestic purposes, the exceptions to the rule have been regarded as a procedural device, I do not consider that in the international context their real nature is procedural. They confer a right on shareholders to protect the value of their shares by giving them a right to sue and recover on behalf of the company. It would be very odd if that right could be conferred on the shareholders of a company incorporated in a jurisdiction which had no such rule, and under which they had acquired their shares.

Discretionary powers and jurisdiction

The question of choice of the applicable law is therefore not decisive for present purposes. But in contending that the law of the place of incorporation governs, Mr David Mackie QC for SPGL has relied on material which I do consider is relevant to the issues. He relies on Dicey and Morris, Conflict of Laws (13^th ed 2000), Rule 154(2), p.1110: “All matters concerning the constitution of a corporation are governed by the law of the place of incorporation”; and on the comment (p.1112): “English courts are reluctant to intervene in domestic issues between members of a foreign corporation. In particular they will not seek to exercise powers which are given to officers of a foreign corporation by its constitution. The reluctance of the courts to intervene is perhaps responsible for the dearth of authority on Rule 154(2), but none the less it is submitted that the Rule is soundly based in that reference to any other legal system would be absurd.”

The authority cited for the reluctance of the English court to intervene is Pergamon Press Ltd. v. Maxwell [1970] 1 WLR 1167, a decision of Pennycuick J. The case arose out of the first main Maxwell cause celebre in the late 1960s. In 1969 an American company, Leasco, was proposing to make a bid for Pergamon Press Ltd. (“Limited”), an English public company. Limited held 70% of the shares of a New York company, Pergamon Press Inc. (“Inc”). The bye-laws of Inc. provided that special meetings of shareholders were to be called at any time at the request in writing of shareholders earning a majority of the shares. While the Leasco takeover of Limited was still in prospect, Robert Maxwell, who was then Chairman and Managing Director of Limited, used the voting powers of Limited in Inc to procure the bye-laws of Inc. to be amended by removing the power of shareholders to call a meeting. The Leasco bid was withdrawn when accounting irregularities were discovered.

Maxwell was ousted from the board of Limited, but he and his co-directors refused to give up control of Inc. The new board of Limited failed in proceedings in New York to obtain an order convening a meeting of shareholders to remove the directors of Inc. Limited and then brought proceedings in England against Maxwell for an order that he should, under the bye-law which gave the President of Inc power to convene a meeting, forthwith convene a special meeting of Inc for the purpose of the shareholders removing him and his co-directors and of re-amending the bye-laws so as to restore the pre-existing rights. Limited contended that Maxwell had acted in breach of his fiduciary duty to Limited by casting its votes in favour of the resolution of Inc since he had thereby deprived Limited of the valuable right of insisting that a special meeting of Inc should be called.

The argument of Limited was that Maxwell had been in breach of his fiduciary duty to Limited by procuring the alteration of the bye-laws of Inc and that he should be ordered to use his power as director of Inc to convene a meeting to restore the position. But it was held that, because his power under the bye-laws of Inc to convene a special meeting was a fiduciary power of a discretionary nature invested in him as President of Inc., the only proper court in which to seek to control the exercise of that power was the New York court, and that an English court could not control the exercise of a fiduciary power arising in the internal management of a foreign company. Pennycuick J said (at 1172):

“….the power [to call a meeting of the New York subsidiary in his capacity as President] is a fiduciary power of a discretionary nature, vested in the defendant in the capacity of an officer of Incorporated. It follows that the defendant is bound to exercise that power in good faith in the interest of Incorporated as a whole. There is no suggestion that the law of New York is different in this respect from that of England. That being the position, it seems to me, in the first place, that the court of New York is the only proper tribunal in which the members of Incorporated could seek to control the exercise of this discretionary power. It cannot be open to an English court to control the exercise of a fiduciary power arising in the internal management of a foreign company.”

Two points are being made by Pennycuick J. The first is that the extent of the duties of the director of a foreign company is governed by the law of that company, the place of incorporation. The second is that the courts of that place are “the only proper tribunal” in which the members can seek to control the exercise of that power. The first point is unexceptional and indeed obvious, but it may be that the second proposition goes too far, in allocating exclusive responsibility to the courts of the place of incorporation for making orders controlling the exercise of discretionary powers. The decision predates the development of the modern forum non conveniens principles from later in the 1970s (The Atlantic Star [1974] AC 436), and was given at a time when the prevailing view was that if the English court had jurisdiction, there was not normally a discretion to refuse to exercise it. If a similar point were to arise for decision today, I consider that the correct approach would be to say that the courts of the place of incorporation are very likely indeed to be the appropriate forum, but not so overwhelmingly that they will necessarily be the exclusive forum. So understood Pergamon Press Ltd. v Maxwell confirms that questions of internal management are governed by the law of the place of incorporation, and that the courts of that place are best suited to give decisions on the control and extent of the powers of the management.

Forum and Discretion

The relevant forum conveniens principles on the application to set aside service out of the jurisdiction and the application for a stay of proceedings are set out authoritatively in Spiliada Maritime Corp v. Cansulex Ltd [1987] AC 460. English defendants may take advantage of these principles, although there are very few cases in which English defendants have succeeded.

There is an important difference between the principles applicable to the discretion to set aside service and the discretion to order a stay. In the case of service out of the jurisdiction the claimant has to show that England is “the proper place in which to bring the claim” (CPR 6.21(2A). But also because the exercise of jurisdiction involves bringing foreign parties to England:

“The effect is, not merely that the burden of proof rests on the plaintiff to persuade the court that England is the appropriate forum for the trial of the action, but that he has to show that this is clearly so. In other words, the burden is, quite simply, the obverse of that applicable where a stay is sought of proceedings started in this country as of right.” ([1987] AC at 481, per Lord Goff of Chieveley)

In order to obtain a stay of proceedings the basic principle is that a stay will only be granted on the ground of forum non conveniens where the court is satisfied that there is some other available forum, having competent jurisdiction, which is the appropriate form for the trial of the action, i.e. in which the case may be tried more suitably for the interests of all the parties and the ends of justice; the defendant must show not only that England is not the natural or appropriate forum for the trial but to establish that there is another available forum which is clearly or distinctly more appropriate than the English forum: [1987] AC at 476-477.

If the defendant does satisfy that test, then the proceedings will be stayed unless the claimant establishes that there are circumstances by reason of which justice requires that a stay should nevertheless not be granted: [1987] AC at 478; Connelly v RTZ Corp. plc [1998] AC 854, 872; Lubbe v Cape plc [2000] 1 WLR 1545, 1554 (H.L.). Connelly v RTZ Corp. plc [1998] AC 854, 872 shows, by the citation of Oppenheimer v Louis Rosenthal & Co. [1937] 1 All ER 23, that in some circumstances a similar policy may work in cases of service outside the jurisdiction. There are some circumstances where the claimant would not obtain a fair trial in the foreign court, or where the injustice which would be done by restricting the claimant to the foreign court would be so great that the foreign court would not be regarded as an available forum. In such circumstances, provided the case came within the provisions for service out of the jurisdiction, England would be regarded as the appropriate forum.

In Connelly v. RTZ Corp. plc [1998] AC 854 Lord Goff said (at 872-873), in relation to stay applications:

“[The] general principle … is that, if a clearly more appropriate forum overseas has been identified, generally speaking the plaintiff will have to take that forum as he finds it, even if it is in certain respects less advantageous to him than the English forum. He may, for example, have to accept lower damages, or do without the more generous system of discovery….Only if the plaintiff can establish that substantial justice cannot be done in the appropriate forum will the court refuse to grant a stay…”

The relevant factors "include not only factors affecting convenience or expense (such as availability of witnesses), but also other factors such as the law governing the relevant transaction… and the places where the parties respectively reside or carry on business" (Spiliada [1987] AC at 478). "In considering this question the court must take into account the nature of the dispute, the legal and practical issues involved, such questions as local knowledge, availability of witnesses and their evidence and its expense": Amin Rasheed Shipping Corp. v. Kuwait Insurance [1984] AC 50, at 72, per Lord Wilberforce.

There are two points of principle which I should deal with at this stage. The first is whether this is a case for the application both of the principles relating to stay of proceedings and the principles with regard to service out of the jurisdiction. The second is whether I am concerned purely with the identification of the appropriate forum for trial of the bribery allegations or whether I am also concerned with the appropriate forum for determination of the question whether this is a proper case for a derivative action.

On the first question I am satisfied that I should approach the matter on the basis of the application of the principles relating to service out of the jurisdiction. SPGL are necessary parties to the action, and unless the claimants can show that England is clearly the appropriate forum, service will be set aside, and the action cannot proceed in the absence of SPGL. Conversely, if the claimants can show that England is clearly the appropriate forum, then any application for a stay by the Rolls-Royce defendants would be doomed to failure.

The Rolls-Royce defendants have joined SPGL in arguing the service out of the jurisdiction points, and have also applied to set aside the order of Master Moncaster permitting service on SPGL. The point taken by the claimants that the Rolls-Royce defendants have no standing to apply to set aside an order which does not directly affect them is sterile, since they can only succeed if SPGL succeeds, and if SPGL succeeds then there will be no proceedings in England against the Rolls-Royce defendants by the claimants. Nor do I consider that SPGL can be criticised for making the application to set aside the order granting permission. The claimants say that a company in relation to which a derivative action is brought should be essentially neutral. SPGL says that it is entirely neutral with regard to the underlying dispute, but that it is entitled to say that these matters should not be dealt with in England at great expense and inconvenience. I do not consider that this attitude is open to criticism.

On the second question, I am satisfied that the questions which arise on whether the fraud exception to the rule in Foss v Harbottle applies are to be taken into account in determining the appropriate forum, and that they are a significant factor. This is so notwithstanding that the forum conveniens cases habitually speak of the appropriate forum for trial of the action, and that the peculiarly Foss v Harbottle issues may be determined at a preliminary stage without trial. But it is clear that these issues are an integral part of the claim in a derivative action, and it would be wholly unjust and inappropriate to treat them as a purely procedural matter to be excluded from the equation.

I also consider that the effect of Pergamon Press Ltd v Maxwell is, at the least, that if issues arise relating to the exercise of what Pennycuick J described as discretionary powers of management, then I should accord considerable weight to the potential role of the courts of the place of incorpration. I doubt whether they have exclusive jurisdiction to deal with such issues. For example it may be wholly unjust to require recourse to an off-shore haven to pursue fraudulent directors in a case which has no connection with the jurisdiction other than that it is the place of incorporation.

I therefore proceed on the following basis. The court has power to permit service on SPGL in a derivative claim by shareholders against English defendants, but the order for service can stand only if the claimants can show that England is the clearly appropriate forum for determination of the questions whether they are entitled to bring a derivative action and whether the defendants are liable to SPGL for the alleged bribery.

V The availability of the Indian forum

There were several rounds of written evidence on the Indian law relating to jurisdiction. The evidence for the claimants was that of former Chief Justice Ahmadi and Mr Raghunandan Rao, a practising lawyer; for the Rolls-Royce defendants, Ms Goswami, an Advocate of the Supreme Court who acts for the Rolls-Royce group in India; and for SPGL, Mrs Shroff, a partner in a firm of advocates and solicitors acting for SPGL in India, and Mr Vaidyanathan, a Senior Advocate, practising chiefly before the Supreme Court.

Most, but not all, of the rules relating to the jurisdiction of the Indian courts are statutory. For present purposes they derive from the Code of Civil Procedure of 1908, which appears to have been designed to deal primarily with territorial jurisdiction as between the different parts of India, but has been applied to international cases to determine the jurisdiction of Indian courts in relation to persons outside India; and from the Indian Companies Act of 1956, which contains provisions in sections 591 to 597 equivalent to those in Part XXIII of the Companies Act 1985 relating to registration of foreign companies with places of business within India and the filing of the name and address of one or more persons authorised to accept service of process.

The potentially relevant provisions of the Code of Civil Procedure are sections 19 to 21. The broad effect of these provisions is as follows:

(a) an action for damages may be brought within the jurisdiction where the wrong was done or in the place where the defendant resides, or carries on business, or personally works for gain: section 19;

(b) an action may be brought in a jurisdiction in which the defendant (or, if more than one, each of them) actually and voluntarily resides, or carries on business, or personally works for gain: section 20(a);

(c) an action may be brought against more than one defendant in the jurisdiction in which one of them actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such a case either (i) the leave of the court is given or (ii) the defendants who do not reside etc in the jurisdiction acquiesce in the institution of the suit: section 20(b);

(d) an action may be brought in the jurisdiction within which the cause of action, wholly or in part, arises: section 20(c); and

(e) for the purposes of determining where a corporation carries on business, it is deemed to carry on business at its sole or principal office in India, or, in respect of any cause of action arising at any place where it has also a subordinate office, at such place: Explanation to section 20.

There are two relevant statutory provisions recognising the possibility of submission to the jurisdiction. The first is in section 20(b), referred to above, the effect of which is that if an action is properly brought against someone within the jurisdiction, another defendant may acquiesce in the institution of the proceedings. The second is in section 21(1), which deals only with the effect on appeal of a failure in the court below to object to jurisdiction, and provides:

“No objection as to the place of suing shall be allowed by any Appellate or Revisional Court unless such objection was taken in the Court of first instance at the earliest possible opportunity…”

In order to guard against the possibility that there would be some doubt as to whether they might otherwise be subject to the jurisdiction of the Indian courts, the Rolls-Royce defendants have agreed to submit. If that is effective under Indian law, then that would make India an available forum for the purposes with which I am concerned: Lubbe v. Cape plc [2000] 1 WLR 1545, 1552-1556 (H.L.).

It is also clear that if the claimants were to sue Kishan Rao in India the Rolls-Royce defendants could be joined either if leave were given, or if they submit. This is conceded by the claimants, and is confirmed by the course of the litigation in sections VIII, IX and XI below, in which parties outside India have been joined in actions in which there are Indian defendants.

On the other possible bases of jurisdiction, the defendants’ evidence is to the effect that

(a) the Indian courts have jurisdiction to give leave to serve out of the jurisdiction, because the alleged wrong was done in India, or the cause of action arises wholly or partly in India, because SPGL is wholly in India and it suffered the damage there: sections 19 and 20(c);

(b) RRIP has an office in India, and therefore falls within definition of carrying on business or personally working for gain in Indian jurisdiction. Heaton operates plant and so carries on business or personally works for gain. Consequently there is jurisdiction under section 20(a) and (b);

(c) RRIP has liaison office in Delhi which is registered with Registrar of Companies, and several project/site offices, and has filed under section 592 of the Indian Companies Act 1956 the name of a person authorised to accept service;

(d) a foreign party could submit to the jurisdiction of an Indian court.

The claimants’ evidence, from former Chief Justice Ahmadi, is:

(a) no part of the cause of action arose in India because no part of the wrong/fraud took place in India;

(b) there is no jurisdiction over a foreign corporate defendant unless it has either (i) its principal office in India, or (ii) a subordinate office in India in circumstances where the cause of action also arose in India; and accordingly since neither of the Rolls-Royce defendants has its principal office in India, the Indian court would not have jurisdiction; if a company has more than one place of business, then the cause of action must arise at the place where the action is brought;

(c) parties cannot submit because parties cannot by consent confer jurisdiction where none otherwise exists under the Code, except where two courts potentially have jurisdiction.

Following the conclusion of argument in these applications, I sent a note on December 4, 2001, to the parties to say that it seemed to me that the evidence did not sufficiently deal with the question whether a party could simply submit to the jurisdiction of the Indian court by appearing and not objecting to territorial jurisdiction; and that having looked at statements in Mulla on the Code of Civil Procedure (the leading work in India on the subject), and two decisions of the Supreme Court of India, it seemed to me that a party could submit to the jurisdiction of a court with general competence and could waive any objection based on territorial jurisdiction. I asked leading counsel to take instructions from the experts. On December 12, all parties lodged further opinions from their experts.

The cases to which I referred the parties were Hira Lal v. Kali Nath, AIR 1962 SC 199 and Bahrein Petroleum v. Pappu, 1966 AIR SC 634. In Hira Lal v. Kali Nath, AIR 1962 SC 199 the Supreme Court of India said (at 201):

“The objection to its territorial jurisdiction is one which does not go to the competence of the court and can, therefore, be waived ... It is well settled that the objection as to local jurisdiction of a court does not stand on the same footing as an objection to the competence of a court to try a case. Competence of a court to try a case goes to the very root of the jurisdiction, and where it is lacking, it is a case of inherent lack of jurisdiction. On the other hand an objection as to the local jurisdiction of a court can be waived and this principle has been given a statutory recognition by enactments like S.21 of the Code of Civil Procedure.”

In Bahrein Petroleum v. Pappu, 1966 AIR SC 634 the Supreme Court of India confirmed (at page 636) that section 21 was a statutory recognition of the principle that the defect as to the place of suing under sections 15 to 20 may be waived. Mulla, Code of Civil Procedure, 16^th ed, p.461, says precisely the same (but without any citation to the case).

The experts for the defendants, Ms Goswami and Mr Vaidyanathan, both give clear evidence that the effect of the decisions of the Supreme Court of India, as confirmed by Mulla on the Code of Civil Procedure is that a party may submit to the jurisdiction of a court of general competence and may waive any objection based on territorial jurisdiction.

Former Chief Justice Ahmadi gave an opinion that the parties to a legal dispute could not by agreement confer jurisdiction as to competence and territorial jurisdiction on an Indian court, although there was a form of statutory estoppel available in certain limited circumstances provide by section 21 of the Code of Civil Procedure 1908 which applied only at an appellate or revisional level. He relied on decisions of the Supreme Court and of the Privy Council, each relating to jurisdiction over land, and a decision in 1928 of the Lahore Court of Appeal. Kiran Singh v. Chaman Paswan, AIR 1954 SC 340 dealt with an action for recovery of possession of land, and in that case it was said (at 342):

“A defect of jurisdiction, whether it is pecuniary or territorial, or whether it is in respect of the subject matter of the action, strikes at the very authority of the Court to pass any decree, and such a defect cannot be cured even by consent of parties.”

In Raja Setrucherla Ramabhadraraju v. Maharaja of Jeypore, AIR 1919 PC 150, the action at first instance in Vizagapatam was for the sale of land subject to a mortgage. Section 17 of the Code of Civil Procedure provided that a suit to obtain relief in respect of immovable property might be instituted in the court within the local limits of whose jurisdiction any portion of the property was situate. The land was outside the jurisdiction of the court, but no point was taken on jurisdiction at trial. It was held by the Privy Council that the point could be taken on appeal, notwithstanding section 21, which provides that no objection could be taken on appeal (in this case before the Madras Court) “as to the place of suing” unless the objection had been taken in the court below. The reason was (at 156): “this is not an objection as to place of suing; it is an objection going to the nullity of the order on the ground of want of jurisdiction.”

The decisions of the Supreme Court and of the Privy Council do not appear to me to be inconsistent with the later decisions of the Supreme Court in 1962 and 1966, each of which state that section 21 is declaratory of the principle that, at least in actions in personam, objections to territorial jurisdiction can be waived. All that Kiran Singh v. Chaman Paswan, AIR 1954 SC 340 appears to say is that a court has no authority to make a decree in relation to land outside its jurisdiction. So also Raja Setrucherla Ramabhadraraju v. Maharaja of Jeypore, AIR 1919 PC 150 holds that the provision that objections as to “place of suing” which cannot be raised on appeal if they have not been taken below does not apply to jurisdiction over land in the Agency Tracts which was excluded from the operation of the Code of Civil Procedure. If the former Chief Justice were right in saying that objections to territorial jurisdiction could not be waived under section 21, not only would it be contrary to the two decisions of the Supreme Court in 1962 and 1966, but it would deprive section 21 of all meaning.

The decision of the Lahore Court of Appeal in Bhamboo Mal v Ram Narain, AIR 1928 Lahore 297 cited by former Chief Justice Ahmadi does say that section 21 has no application to foreigners not otherwise subject to the jurisdiction. But the opposite was decided in 1978 in Andhra Pradesh in Far Eastern Steamship Co v Koika Trading Co., AIR 1978 Andhra Pradesh 433, and the decision in Bahrein Petroleum v. Pappu, where it was held there had been a submission to the Cochin court, was an international case and does not appear (despite the references to Bahrein Petroleum having an agent in Bombay) to have depended on there being another court in India with jurisdiction.

My conclusion is that India is an available forum for these reasons:

(a) RRIP has a place of business in India and has registered an agent to accept service, and the claimants have not disputed this either as a matter of fact or law, and Heaton could be joined with leave to an action against RRIP, or could acquiesce in such an action under section 20(b) of the Code of Civil Procedure; or

(b) Kishan Rao is amenable to the jurisdiction of the Indian courts, and the Rolls-Royce defendants could be joined with leave, or could acquiesce under section 20(b): if the claimants are right in their allegations, Kishan Rao is liable, and any failure to sue him would be purely tactical; or

(c) The strong weight of authority is that a submission to the jurisdiction of the Indian court would be effective, and the Rolls-Royce defendants have offered to submit.

The claimants purported to introduce new matters in the final opinion of former Chief Justice Ahmadi, for which they had neither sought nor been granted permission. The point on jurisdiction is that because the action would be a derivative action, permission is required to commence it and the court might refuse permission if it appeared that the cause of action had not arisen within its jurisdiction or that the defendants did not reside or carry on business within the jurisdiction; and that third parties interested in the suit might join the proceedings and raise the issue of jurisdiction. The defendants have not had an opportunity to answer this evidence, which should not have been sought to be introduced at this stage. But former Chief Justice Ahmadi does not appear to have been instructed on RRIP’s registration under the Indian Companies Act as a foreign company and its having filed the name of a person authorised to accept service. In any event, the problem would not arise if Kishan Rao were a defendant, and has not arisen in the eight derivative actions in Hyderabad to which the Rolls-Royce defendants (and other foreign companies) are parties. A point on limitation is taken, to the effect that if time had begun to run in India, it would not have been prevented from running by the institution of the English proceedings. If that is so, then the remedy for that has always been in the hands of the claimants. But I take no account of this point, raised as it is without permission after numerous rounds of evidence.

VI History of the project

In this section I shall set out the history of the project. Not all of the facts are common ground, and in setting out the history, which is derived from the witness statements and exhibits, I am not intending to make any finding of disputed fact.

The project

In the late 1980s National Thermal Power Corporation (“NTPC”) was given a licence to set up a gas-based power project at Kakinada, Andhra Pradesh. NTPC is a state-owned power utility company, and the largest supplier of power in India. In the early 1990s the Andhra Pradesh State Electricity Board invited tenders for the construction and maintenance of the plant. With the encouragement of the then chief minister of Andhra Pradesh, Mohan Rao resigned from GE Power Systems, and established Spectrum Technologies USA Inc., a New York company (“STUSA”) to make a bid for the project.

In March 1992 the government of Andrah Pradesh issued a letter of intent to STUSA to give it the responsibility of setting up the project. Following meetings with NTPC and officials of the power ministry in India, it was decided that the project would be established and run by a joint venture company in which CMS (a major United States power generation company), STUSA and NTPC would participate. It was also decided that Kishan Rao’s Jaya Food would be added as a promoter to and participant in the project due to the close family relationship between Mohan Rao and Kishan Rao, and his access to local capital.

A joint venture company was formed using the STUSA name, i.e. Spectrum, and it was registered on October 26, 1992, as Spectrum Power Generation Ltd. Because STUSA and Mohan Rao could not purchase shares in the Indian company without first obtaining exchange control approvals, Kishan Rao and his sons were the notional promoters of the company. In January 1993 the Indian Ministry of Energy required NTPC’s participation in the equity on a minority basis.

Once the joint venture company had been formed, it became necessary to formalise the relationship between the three joint venture partners in a promoters’ agreement. A Promoters Agreement was executed on June 20, 1993 between STUSA, Jaya Food and NTPC, on which I elaborate below at paragraphs 96 and 97. In June 1994 the relationship between CMS and the other parties broke down, and CMS agreed to a lump sum payment for the expenses it had incurred was agreed. SPGL was unable to obtain exchange control clearance and as a result CMS instituted proceedings in a Michigan federal court for the money. The only relevance of this for the purposes of these proceedings is that the Rolls-Royce defendants rely on statements made by Mohan Rao in those proceedings.

Award of contracts

SPGL sought tenders for the project from 1992. The main contracts were to be contracts for engineering, procurement and construction (EPC) and operation and maintenance (O&M). Tenders for the EPC contract were received from ABB, Siemens, a Rolls-Royce/Westinghouse consortium, Bharat Heavy Electricals of India, and General Electric. There was a separate tendering process for the O&M contract, in which the tenders were Rolls-Royce/Westinghouse, NTPC and three US companies.

Both sets of contracts were awarded to Rolls-Royce/Westinghouse. Following a series of letters of intent and the signature of an outline version, and after consideration of the tenders, the EPC contracts were entered into on December 12, 1994: between SPGL, RRIP, and Westinghouse International Service Co. Ltd. for the erection, supervision and commissioning of the plant; and between SPGL, Heaton and Westinghouse Electric Corporation for the manufacture and supply of plant. Following board approval in March 1995, Mohan Rao and Kishan Rao were authorised to execute the O&M contract with RRIP. The contract was executed on March 14, 1995, with Westinghouse as principal sub-contractor.

Agency Agreements

On November 1, 1993 two Agency Agreements were entered into with Towanda, which had been incorporated in the British Virgin Islands on October 5, 1993. One was with Heaton for the purpose of securing an EPC contract with SPGL, and the other with RRIP to secure an O&M contract. The commission in the former was to be $19.3 million (in instalments commencing on signature), and in the latter agreement the commission was to be $1.5 million. The agreements were to be governed by English law.

There is a major conflict of evidence on the role of Mohan Rao in the inception and conclusion of these Agreements. He says that he did not see them until 1997 and did not appreciate their significance until 1999, when, in proceedings against him by Kishan Rao in Hyderabad (to which I shall refer below in section XI) Kishan Rao alleged that Towanda was owned and controlled by him. The Rolls-Royce witnesses say that Mohan Rao was not only aware of the Agency Agreements, but that he pressed for them to be completed and participated in the negotiations for their conclusion.

Rolls-Royce has produced a contemporary memorandum to the then head of Rolls-Royce Power Generation Systems Ltd. in October 1993, attaching the “Draft Agency Agreement for handing over during your discussions with Mohan Rao in Hyderabad next week.” It is accepted by some of the Rolls-Royce witnesses that the draft was probably not handed over, and I shall revert to the evidence on this below in section XV.

Promoters Agreement

On June 29, 1993 NTPC, Jaya Food and STUSA entered into a Promoters Agreement to set out the terms on which the promoters would set up and run the power project. It included terms as to the division between equity and debt funding and the extent to which equity would be made available to the public. The Promoters Agreement also provided that of the 90% to be allotted to Jaya Food and STUSA, 50% of such shares could to be issued to an “Affiliate” of those parties. According to Rolls-Royce, it was agreed that Kishan Rao would become managing director, and that representatives of Jaya Food, STUSA and NTPC would sit on the board.

90% of the initial issued and paid up equity capital was to be subscribed and held by Jaya Food, STUSA and its affiliates including CMS, and 10% by NTPC. Out of the 90% held by Jaya Food and STUSA they could offer up to 20% to the public for subscription at par.

On July 27, 1995 STUSA and STUSA (Mauritius) entered into an agreement under which STUSA (Mauritius) as an affiliate of STUSA would invest US $8,335,070 as equity.

According to the evidence of SPGL, no equity contributions were made by NTPC and no shares were issued to it. As a result of NTPC’s failure to make its equity contribution the financial position of the project became difficult. In addition it is said that, in breach of the Promoters Agreement, Mohan Rao failed to furnish guarantees on behalf of STUSA to financial institutions to secure SPGL’s debt. As a result, Kishan Rao arranged for further funds to be contributed from his own resources and those of his companies. He also arranged a loan with ANZ Grindlays of £50 million in 1995 which was guaranteed by the State Bank of India. He also guaranteed other loans, and arranged unsecured loans of £4 million.

As a result of the non-Indian debt the company was required to obtain non-Indian equity, and the board therefore agreed on February 24, 1994 a different shareholding structure: NRIs 4.5%; overseas corporate bodies 13.5%; foreign companies/foreigners 42%; resident Indians 40%. To meet the foreign equity requirement SPGL obtained in 1995 an equity contribution from a Mauritian company in the Rolls-Royce group, Rolls-Royce Godavari Power Ltd, which became, following further contributions in 1998, the largest shareholder with 47.53%. STUSA and its associates took up 24.76%.

According to Rolls-Royce, it was asked to take up equity to demonstrate its confidence in SPGL and to get the project kick-started. It thought that SPGL would issue a substantial number of shares to other subscribers, but this was prevented by the dispute between Kishan Rao and Mohan Rao, leaving Rolls-Royce in the position which it had not anticipated of owning a substantial long term stake.

Relations between the Mohan Rao camp and the Kishan Rao camp broke down after about December 1995 when the board of SPGL rescinded its adoption of the Promoters Agreement. There ensued litigation in India concerning the validity of the board decision to rescind the Promoters Agreement, but the dispute has significantly escalated since 1999 following a criminal complaint made by Kishan Rao against Mohan Rao and his associate Mr Brij Bharteey in the Court for the Special Judge for Economic Offences at Hyderabad. Kishan Rao accused them of having defrauded NRI investors by persuading them to invest in SPGL and then misappropriating the money by purchasing shares in the name of STUSA (Mauritius).

Shortly afterwards Mohan Rao wrote a long and angry letter to Kishan Rao, in which he said:

“Maybe you forgot, but let me try to recollect for your sake that you were in the Chute, Attar and Vermicelli business in a very small way and knew nothing of POWER or power generation, excepting that you were greedy for power, money and had a flair for show of power.

Dear Mr. Kishan Rao, is it not out of trust and the faith I had in you that I associated you with this project right from the time after STUSA responded to the tender of the AP State Electricity Board. Did I not trust you and treated you as an elder, take you to all the meetings and discussions we had with the various departments of Government - both at State level and Central lever? You had every knowledge of the entire project right from the beginning, as you were so close to all our functioning.

Mr. Kishan Rao were you not aware of how we i.e., for STUSA generated funds abroad and how we channelled them into the project after obtaining all the necessary approvals? Which aspect of our involvement is not known to you Mr.Kishan Rao? Being a relative of mine that too close relative, you knew each and every aspect of my life including my bankruptcy proceedings in the USA of the year 1983. You had my every particular and detail with you, which would not have been available to you had we been mere business partners.

Mr. Kishan Rao, I really am amazed at your memory and memory retrieval capacities. What you knew happened in 1983 you found it relevant to use against me now in the yeast 1999. And that too when we started working on the project from 1990. Mr. Kishan Rao your action in doing all these is very apparent. You are doing all these with a deliberate scheming and purpose. Your aim is to harm my name and reputation and ruin me even as a person. This is nothing but sheer slander and criminal intimidation.

...

Dear Mr. Kishan Rao, as it is you started acting mala fide and developed a greedy intent towards SPGL, and wanted to have a monopoly and total control over the project. You acted mala fide and worked hard trying to throw out NTPC, which was there in this project right since the inception of thought for this power project. You had no qualms in cruelly cutting it out from the project.

You then targeted STUSA and started using all the tricks in your hat to throttle and suffocate us and make our existence in SPGL, miserable.

...

Dear Mr. Kishan Rao, I know that you filed this criminal case against me in the Economic Offences Court without any legal basis. I gave any amount of thought as to why you did this. Your letter to Ms Mangala J. Reddy and other NRI Investors gives out the answer and made your malintents clear and transparent. You both got the Court issue summons and address a letter to the US Embassy at Delhi. You obtain copies of the said letter and summons. You then bundle them up copy of the complaint, copy of the letter issued by Court to US Embassy and the summons of Court, and send them to the NRI Investors in US

...

If you fail to act on my letter and comply with calls made by me herein, I will be having no other option but to initiate necessary legal action against you to safeguard myself, my name and reputation, and seek legal remedies including Civil and Criminal against you in all available forums.”

VII Indian litigation: overview

The Indian litigation consists of 18 separate civil and criminal cases, with some considerable overlap in the allegations and the issues. In all but one of the cases (the NTPC action to invalidate the rescission of the Promoters Agreement) the principal protagonists are Kishan Rao and Jaya Food, and SPGL, on the one side and Mohan Rao and his companies or his nominees on the other.

A broadly chronological account of the litigation will show how the dispute has escalated. The proceedings are as follows:

(1) Delhi proceedings by STUSA in 1996 (followed by a similar case by NTPC in 1997) to set aside the board decision rescinding the Promoters Agreement;

(2) 8 derivative actions brought in Hyderabad in January 1999 on behalf of SPGL by nominees of Mohan Rao or Ravi Reddy (including the second and third claimants in this action) against Kishan Rao alleging that he had acquired shares in SPGL by fraudulently paying out its money on bogus construction contracts to entities controlled by him;

(3) a 1999 criminal complaint in Hyderabad by Kishan Rao against Mohan Rao alleging that he had defrauded NRIs by using their money to buy STUSA’s interest in SPGL;

(4) proceedings by Kishan Rao in Hyderabad in May 1999, alleging that he had advanced money through Towanda to Mohan Rao for the purchase of shares in SPGL, which had not been repaid;

(5) 3 criminal complaints in Hyderabad in January 2000 brought by the second claimant in this action, alleging fraud by Kishan Rao in siphoning off money from SPGL to the same bogus contractors alleged in the derivative actions;

(6) proceedings in 2001 by STUSA to challenge the settlement of the NTPC proceedings in connection with the Promoters Agreement;

(7) three criminal complaints brought against Kishan Rao and his sons in July 2001 alleging forgery of revenue-stamped contracts.

In the proceedings to challenge the rescission of the Promoters Agreement there have been many interlocutory applications, involving applications relating to control over the issues of shares and the taking of management decisions. In 1998 the court in Delhi unsuccessfully endeavoured to procure a settlement by making an order under which the Industrial Development Bank of India convened a meeting of all parties to negotiate a settlement. In the course of those negotiations Mohan Rao sought to be made joint managing director with equal representation of STUSA and Jaya Food on the board.

VIII Actions in Delhi by STUSA in 1996 and by NTPC in 1997 to challenge SPGL’s rescission of the Promoters’ Agreement

The defendants are SPGL, Jaya Food, and NTPC. The proceedings alleged that SPGL and Jaya Food were seeking to avoid their obligations under the Promoters Agreement; that the board minutes of December 14, 1995 to rescind the Promoters Agreement had been falsified; that SPGL had failed to issue shares to STUSA and NTPC; that Jaya Food was attempting to grab control and management of SPGL by hijacking the project. The proceedings sought a declaration of invalidity of the board resolution and orders prohibiting any increase in SPGL’s share capital and directing that no steps were taken in SPGL’s management without its and NTPC’s consent.

NTPC’s claim was similar, except that it joined as defendants many more parties, including the Rolls-Royce defendants. The action was settled in April 2001. But the Supreme Court of India said that this did not preclude STUSA from challenging the settlement agreement, and a derivative action was brought by STUSA on its own behalf and on behalf of other shareholders against Jaya Food, and Kishan Rao and his sons, to challenge the Settlement Agreement. In September 2001 Justice Kapok refused to grant an injunction to prevent implementation of the settlement agreement.

Interim applications and appeals

There were numerous interim applications in these actions and on appeal, including applications to restrain management of SPGL without the consent of STUSA (and NTPC), for injunctions to restrain the issue of further shares, for orders that STUSA should jointly operate SPGL, and for the appointment of a receiver. All of these applications were unsuccessful at first instance and on appeal in the Delhi Civil Appellate Division. STUSA has applied for special leave to appeal from the Supreme Court of India, and in that application has asked for the appointment of a receiver. In the course of these appeals STUSA joined the defendants in the NTPC proceedings (including the Rolls-Royce defendants) as additional defendants to its proceedings.

On July 24, 2000 the Supreme Court of India ordered that, pending the appeals, “In the mean time the parties shall maintain status quo as on today and shall not take any major decision except the decisions to carry on day-to-day functions” (the “Status Quo Order”). The evidence of SPGL is that the effect of the Status Quo Order has been to make it difficult for it to raise additional capital without permission of the court. Mohan Rao has successfully challenged an order giving such permission, and made an offer (which was declined) to make capital contributions.

IX Hyderabad derivative actions: January 1999

The eight derivative actions in the Hyderabad City Civil Court were commenced in January 1999. The same six plaintiffs sue in each action, in each case as shareholders claiming to hold 2,700 shares in SPGL. The first plaintiff, Mr Mitta, is Mohan Rao’s brother-in-law and is the third claimant in these proceedings, and the second plaintiff, who sues as Ms Santha Reddy, is Ravi Reddy’s mother-in-law and is the second claimant in these proceedings. The other four plaintiffs are members of the Reddy family.

The claim in each action is that shares in SPGL held by Kishan Rao’s company, Bambino Finance Pvt Ltd., were paid for from money fraudulently diverted from SPGL through bogus contracts with fictitious entities or entities controlled by Kishan Rao and his sons. The entities concerned are Blue Star Constructions Co. and Real Builders, which are said to be sham partnerships, and Kris Engineers, which is said to be owned by Kishan Rao’s sons. Consequently it is alleged that the shares were issued for no consideration, and that the funds of SPGL were used for the purchase of its own shares. The actions seek an order that shares in SPGL held by Bambino be declared null and void, and that the register of SPGL be rectified by cancelling the shares. The Rolls-Royce companies (including Rolls-Royce Godavari Power Ltd.) are parties (for the purpose of requiring them to furnish information) and jurisdiction to try the suit is said to arise from the fact that Bambino, the principal defendant, is within the territorial jurisdiction of the court.

The derivative actions claim that (a) the persons in control of SPGL are close relatives of Kishan Rao; (b) no purpose would be served “in moving the domestic forum”; (c) where the wrongdoers are in control, the shareholders can move the court for the necessary relief; (d) the issue of the shares was wrongful and ultra vires, and a fraud on the minority, and the majority directors would have no interest in protecting the interests of SPGL since they acquired their majority by fraudulent means; (e) there is no alternative remedy before the Indian Company Law Board.

The significant features for present purposes are: (a) the plaintiffs are associated with Mohan Rao and Ravi Reddy; (b) the information for the action comes from STUSA; (c) the actions raise questions of wrongdoer control and the honesty of Kishan Rao.

X Hyderabad criminal proceeding by Kishan Rao against Mohan Rao and Brij Bharateey: 1999

The criminal complaint was made by Kishan Rao against Mohan Rao and Brij Bharateey in the court of the special judge for economic offences in Hyderabad. The complaint alleges fraud under the Indian Companies Act 1956. The essence of the complaint is that the accused induced NRIs to invest in SPGL, and misappropriated the funds so as to buy shares in SPGL in the names of STUSA, Spectrum Infrastructure (Jersey) and STUSA (Mauritius).

Mohan Rao claims that the purpose of these proceedings is to cause damage to the STUSA companies and to retain control of SPGL in order “to further siphon off funds with the active connivance of the so-called independent professional Directors”: judgment of Judge Raghavaiah in the Hyderabad debt proceedings.

XI Hyderabad debt action by Kishan Rao: May 1999

117. In this action, commenced in May 1999, Kishan Rao sues Mohan Rao, STUSA, Spectrum Infrastructure Ltd. (Jersey) and STUSA (Mauritius). Kishan Rao claims US $4.9 million, which he says he lent to Mohan Rao in February 1995, because Mohan Rao could not afford to pay for his equity contribution in SPGL. Kishan Rao claims that it was agreed that Mohan Rao would repay the money once he had sufficient funds. There is said to be a document in Mohan Rao’s handwriting giving the payment instructions. Kishan Rao claims that the money was paid to Mohan Rao’s nominee’s account in Panama, and Kishan Rao’s sons were present in Lugano when Mohan Rao withdrew the money. Mohan Rao then used this money to pay for shares in SPGL that were allotted to the STUSA group of companies. It is also alleged (as in the criminal complaint) that Mohan Rao had collected $9,300,000 from NRIs for investment in SPGL but had failed to use the money for that purpose. Kishan Rao claims that Mohan Rao concealed from him that he had been adjudged insolvent by a New York federal bankruptcy court in 1983.

Kishan Rao says that he owns and controls Towanda and that its bank statements indicated that US $4.9 million was remitted to Mohan Rao’s nominee accounts in February 1995: US $4 million to Darofe SA, Panama, account with Banco di Credito, Lugano and US $900,000 to Mount Stevens Investment Ltd, account with BNPI Mauritius. Mohan Rao denies the allegations and says he knows nothing of the companies alleged to be his nominees. Kishan Rao has replied that in an application made in an appeal against the dismissal of an interim application in the 1996 action, Mohan Rao claimed that Mount Stevens Investments Ltd was associated with him, and that his sons were present when Mohan Rao and Ravi Reddy received cash in Lugano. The defendants put Kishan Rao to proof of his assertion that Towanda was his company, and say that no material had been put forward to show that Towanda was owned by Kishan Rao. In the course of dismissing an application for attachment of the defendants’ assets Judge Raghavaiah took the view that Kishan Rao had not placed satisfactory evidence on record to show that Towanda was owned by Kishan Rao, or that the payees were connected with Mohan Rao.

XII Criminal complaints by Mrs Santha Reddy Pekety: January 2000

Mrs Pekety, the second claimant in these proceedings and the mother-in-law of Ravi Reddy, made three separate criminal complaints in the court of the special judge for economic offences in Hyderabad. Each of the complaints was brought in January 2000. In each case Mrs Reddy, as the holder of 2,700 shares in SPGL, says that she “met Dr A V Mohan Rao, one of the Promoter Directors of SPGL and enquired into the reasons for non-payment of dividends by SPGL in spite of making the investment in the shares way back in the year 1995”. In each case it is alleged that “several crores [hundred of millions] of rupees were siphoned off by giving bogus contracts to family or friends of” Kishan Rao. It is alleged that contracts relating to site levelling and construction work were awarded to companies established by Kishan Rao as a device to transfer funds from SPGL; and that Kishan Rao and his sons, having been entrusted with control over the funds of SPGL, have committed criminal breaches of trust. The principal entities alleged to be involved are the same as in the eight Hyderabad derivative actions, Kris Engineers, Blue Star Constructions and Royal Builders.

XIII Criminal complaints by STUSA: July 2001

In July 2001 STUSA lodged three criminal complaints against Kishan Rao and his sons, alleging that the contracts with Kris Engineering, Real Builders, and Blue Star Constructions had been executed on revenue stamped paper which had been obtained fraudulently. STUSA has been seeking to have Kishan Rao arrested.

XIV Allegations of fraud and bribery

In the course of the applications and appeals at first instance and on appeal in the Delhi High Court Mohan Rao alleged that “cost overruns…resulted from the mismanagement and suspected siphoning of funds” by Kishan Rao (January 6, 1998) and that rescission of the Promoters Agreement was part of a strategy of concealing “financial mismanagement and siphoning away of funds from SPGL” and “several crores of rupees were siphoned off by giving bogus contracts to family of friend’s owned companies” of Kishan Rao (November 18, 1999).

In the eight derivative actions and three criminal complaints in Hyderabad, the complainants allege that Kishan Rao defrauded SPGL by siphoning off money to pay for bogus construction work. In the three new criminal complaints by STUSA, Kishan Rao is accused of forgery in relation to the same contracts.

In the application to the Supreme Court of India for the appointment of a receiver, Mohan Rao made an affidavit on January 5, 2001 that he had:

“... recently come to know that two Agency Agreements were executed for procuring the Operation and Maintenance Contract (O&M) as well as Engineering Procurement and Construction (EPC) Contract. While one Agreement was executed between Rolls Royce Industrial Power (India) Ltd. and Towanda Services Ltd. for procuring the O&M Contract, the second Agency Agreement was executed between Parsons Turbine Generators Limited and Towanda Services Pvt. Ltd. for procuring the EPC Contract. ... From the said Agreement it transpires that a sum of 1.5 million pounds and 19.3 million US dollars was to be paid to Towanda Services Ltd. by Rolls Royce Group as agency fee/kick back for obtaining/procuring O&M Contract as well as EPC Contract in respect of the power project at Kakinada i.e. SPGL. The fact that Towanda Services is owned and controlled by Mr. Kishan Rao is admitted fact in the Suit being OS No.239 of 1999 filed in the Court of Chief Judge, City Civil Courts, Hyderabad by Mr. Kishan Rao as Plaintiff.

...

From a collective reading of the above documents, it is apparent that not only bribes have been paid by Rolls Royce to Mr. Kishan Rao for procuring the Engineering Procurement and Construction (EPC) contract as well as Operation and Maintenance (O&M) contract but also a major amount of the alleged bribe has been re-circulated into the Company as equity contribution of RRGP. In fact, as no real funds have actually been invested by RRGP, RRGP has never taken any stand in the matter in Courts below.”

On November 6, 2001 STUSA made an application to the Supreme Court of India for the following relief:

(a) that the present management of SPGL, comprising Kishan Rao and his sons, and Mr Shukla and Mr Bhattacharyya be removed

(b) that the Board of Directors be reconstituted in accordance with the Promoters Agreement

(c) that SPGL be operated, run and managed in accordance with the Promoters agreement and that a representative of STUSA should be appointed as managing director/CEO of the Company with all executive powers

(d) that Kishan Rao and sons be ordered to repay all monies siphoned from SPGL, totalling at least Rs58.21 crores.

According to the application (which remains pending):

“From the limited inspection of SPGL records, it is apparent that the present management of SPGL comprising of Kishan Rao, his family members and friends have not only committed fraud but they have also siphoned off money from SPGL”

In the proceedings commenced earlier this year to set aside the NPTC settlement agreement, Mohan Rao on behalf of STUSA said:

“There is evidence of any amount of collusion between [Kishan Rao] and Rolls Royce Group of Companies in the matter of management of SPGL. Rolls Royce Group of Companies has assisted, colluded and actively aided siphoning out huge sums of money by bogus agency agreements. ... (a) huge amounts have been siphoned of [sic] from SPGL by Kishan Rao, his family members and the Corporates owned-controlled by them in the name of Land and Site Development Contracts and bogus book entries and was already included in the EPC Contract with Rolls Royce (b) The amount so siphoned off was brought in by them as alleged equity contribution in SPGL”.

XV The appropriate forum

General

I have given reasons why India is an available forum for resolution of this claim. The thrust of the claimants’ case on forum is that in determining the question of forum it is not sufficient for there to be Indian contacts with the case. The essential question is with what country the issues are connected, and the relevant issues are primarily those relating to the allegations of bribery rather than the issues relative to the claimants’ right to bring the action. It is clear that in the normal case the starting point must be the identification of the issues which are likely to arise.

In section IV I expressed the view that it was for the claimants to establish that England was clearly the more appropriate forum for the determination of the issues not only in relation to the bribery allegations but also in relation to the question of their standing to sue, even if that question is resolved without any form of trial or oral evidence. In my judgment the courts of the place of incorporation will almost invariably be the most appropriate forum for the resolution of the issues which relate to the existence of the right of shareholders to sue on behalf of the company.

Apart from a reference in the latest opinion of former Chief Justice Ahmadi to permission being required to commence a representative action, there is no material in the evidence to indicate how Indian courts would deal with the problem (recognised in the Indian text on company law) which came to the fore in Prudential Assurance and which is the subject of CPR 19.9. But whether the problem is dealt with by way of a preliminary issue or at trial, the issues will arise at some stage. In any event it is not easy to compartmentalise all of the issues. For example, the Rolls-Royce defendants say that Mohan Rao was well aware of the Agency Agreements, and benefited from the payments to Towanda. This may be relevant to several issues: whether the action is brought for ulterior purposes; whether Mohan Rao participated in the alleged wrongs; and whether the payments were legitimate.

Connections with England and India

I accept that there is an important connection of the proceedings with England, and it is that the Rolls-Royce defendants are English companies. But they conduct no operations in England, and the operations they conduct in India are conducted as agents for other companies in the Rolls-Royce group. In any event Heaton now has a minimal staff. But it seems that most of the Rolls-Royce executives who dealt with the project can be made available in England without difficulty. Of the four individuals who have so far given evidence on their behalf, two live in England, one is in India and the fourth is in Norway.

No doubt many of the relevant documents in the Rolls-Royce group will be in England (although the evidence is that the documents of RRIP are in India), but those which are in India could no doubt be made easily available in England. I do not regard as significant the claimants’ suggestion that an Indian judgment would have to be enforced in England: there has been no suggestion that the Rolls-Royce defendants would not satisfy any judgment against them, and in any event Indian judgments are enforceable in England under the Foreign Judgments (Reciprocal Enforcement) Act 1933.

The only other connections with England are, first, that the Agency Agreements were, it would seem, executed by a Rolls-Royce executive in England. Although the place where transactions take place is a relevant factor, the actual place of signature is often accidental, and there is no reason to believe that in this case it is a significant factor. So also the fact that the Agency Agreements are expressed to be governed by English law and subject to English jurisdiction is of no relevance. If they are shams and utterly bogus, then the choice of law and jurisdiction clauses are equally bogus. If they are genuine the choice is effective, but is irrelevant for the purposes of this case because this is not a claim under the Agreements. It is alleged (and not yet contested) that the payments were made under the Agency Agreements from England. If so, this is not a matter which will require much investigation, and does not point to England as an appropriate forum.

On the other hand, there are very strong connections with India. The claim is a derivative claim by Indians and an NRI, and an NRI controlled Mauritian company. The nominal claimants are linked with non-resident Indians who have substantial investments in India. The claim is made on behalf of an Indian company complaining of a fraud consisting of bribes taken by the managing director in connection with construction and maintenance contracts executed in India for a power project in India. The board which is said to be controlled by the wrongdoers is entirely, apart from Mohan Rao and his colleague, in India. There are many civil and criminal actions pending in India which relate to the project, to the shareholding in the company, and to allegations of mismanagement by the company. As a result of the status quo order of the Supreme Court of India the operations of the company are subject to close scrutiny by the courts.

Other countries

The fact that Mohan Rao and Ravi Reddy (and one of the individual claimants) are mainly resident in the United States does not detract from India being the country with the overwhelmingly strong connections with the case. It is obvious that they have strong connections with India, and there is no evidence that they have substantial connections with England. Their companies are incorporated in New York, Mauritius and Jersey, but no doubt they are in practice controlled from the United States. The fact that Towanda is a British Virgin Islands company and is administered from Switzerland, and that the Towanda payments by Rolls-Royce (and, allegedly, to Mohan Rao) were made to Switzerland, have little or no bearing on the forum issues in this case. Nor is it material that Rolls-Royce’s partner in the project is a United States group, Westinghouse.

The issues

The principal issues which, on the proceedings so far, are likely to arise are these:

(a) is the derivative action brought bona fide for the benefit of the company by shareholders, as the claimants contend, or is it, as the defendants claim, a claim brought by nominees of Mohan Rao and Ravi Reddy as part of their continuing struggle with Kishan Rao for control of SPGL and designed to involve Rolls-Royce in a resolution of that struggle?

(b) is SPGL being improperly prevented from bringing or adopting the claim?

(c) if the payments to Towanda were illegitimate, did Mohan Rao know about them and/or knowingly benefit from them so as to disqualify his nominees from bringing the action?

(d) is there any other remedy available?

(e) were the payments under the Agency Agreements legitimate, and if not, did the Rolls-Royce defendants know?

Ulterior motive

The defendants’ position is this: the current English action is part of the wider factional battle between the two main camps of joint venturers in SPGL. The action has been brought by the Mohan Rao/STUSA/Ravi Reddy camp to seek to pressurise the Rolls-Royce defendants into becoming involved in settling the overall disputes between the two camps. The English proceedings were first threatened at about the time when STUSA’s attempts to achieve results through the Indian courts had been frustrated. The Rolls-Royce defendants say that in the course of settlement negotiations which took place in January-March 2001, part of the settlement proposed was the termination of the English proceedings. The individual claimants say in their witness statements that they knew nothing about that proposal, and the defendants say that this shows that the proceedings in the various jurisdictions are being controlled and maintained by others, and that the individual claimants have allowed their names to be put forward as participants in the wider dispute.

Ravi Reddy has tried and failed to purchase the Rolls-Royce interest in SPGL, and the defendants say that he still has ambitions of acquiring it. They say that the purpose of the proceedings is to seek to force the Rolls-Royce defendants to involve themselves in breaking the impasse between the groups of promoters. This amount to an ulterior purpose, i.e. the furtherance of sectional or factional interests rather than the interests of the company itself.

The resolution of this question is, of course, for the court which decides whether the derivative claim can be brought. The three original individual claimants have no financial interest in the outcome. Even if the proceedings were to succeed and SPGL were to be paid the full amounts claimed, the individual claimants’ proportionate interest would be about £5 each. It would be wholly unrealistic on the material before me to suppose that this is not a claim in reality being pursued by Mohan Rao and Ravi Reddy for their own purposes. The claimants are being funded by Ravi Reddy and get their information from Mohan Rao.

It must be they who took the decisions and gave the instructions even before STUSA (Mauritius) was joined as a party, for example not to make Kishan Rao a defendant to the English proceedings. I have no doubt that this was purely tactical, and designed to support the case for English jurisdiction, just like the recent application by Mohan Rao on behalf of STUSA in the Indian court to remove the Rolls-Royce defendants because of their claim in England that the proceedings should be stopped because of the Indian proceedings.

It is a striking feature of the case that the claimants have chosen not to join Kishan Rao as a defendant. Their reasons are these: they need to recover only once; there would be difficulty of enforcement against Kishan Rao; joining him would increase the costs and complexity, and he would delay the proceedings, whereas Rolls-Royce would have to consider the merits (i.e. settle). But their case is that he has received many millions of dollars; and that the bribery case is a simple one.

Ravi Reddy says he feels “morally bound to support the individual claimants” and that he is supporting them because (among other reasons) they do not have the “financial means to chase down the fraud within the company.” But if their object is “to chase down fraud within the company” proceedings in England are an absurd method of accomplishing that mission, when it is clear that the Indian authorities have wide powers of investigation under the Indian Companies Act.

Role of Mohan Rao

I have already said that the role of Mohan Rao is relevant to different aspects of this case. There can be no doubt that he and Ravi Reddy are behind the claimants, and that there is therefore a probability that any court seised with the derivative action issues would be prepared to treat him as a claimant for the purposes of those issues. There would then be a serious issue as to whether he had participated in the alleged wrongdoing.

There is a clear conflict of evidence on the role played by Mohan Rao in the negotiations for the contracts in the period 1993 to 1995. According to Mohan Rao, he was in the negotiating team, but was only responsible for the technical side, and Kishan Rao dealt exclusively with the financial/commercial side.

According to the Rolls-Royce evidence, there were intense and very difficult negotiations, principally with Mohan Rao, who led them. At the time of the negotiations Kishan Rao had inadequate command of English to undertake the negotiations without the presence of either of Mohan Rao or one of his own sons. Kishan Rao was a local Indian businessman with no previous experience in power projects but who could bring his governmental and other contacts to assist the development of the project. The Rolls-Royce defendants rely on board minutes in 1994 and 1995 as indicating that Mohan Rao played a very active role in evaluating the tenders and in awarding the contracts. He signed the EPC contract and witnessed the O&M contract. In October 1993 Mohan Rao signed an application on behalf of SPGL addressed to the Industrial Development Bank of India for financial assistance, and in August 1994 he signed the loan agreement between SPGL and IDBI, who are its main bankers, and have board representation in SPGL.

This conflict is of course not to be resolved in these applications, but it is plain that the issues raised are relevant to the issues and are far from frivolous. Apart from the Rolls-Royce evidence to which I have referred there are statements made by Mohan Rao which belie his account of his role, and which suggest strongly that Mohan Rao has significantly down-played his role in SPGL in these proceedings, and support the contention of the defendants that he was the driving force behind the project, and was involved in negotiating all aspects of SPGL’s involvement in the project, including the funding and financial arrangements.

When he verified the 1996 claim by STUSA in Delhi he stated that “the entire project was thought of and conceived” by him and that “he has been the life and soul of the entire project since 1990.” In the course of an appeal in interlocutory proceedings in the same litigation he said in January 1998:

“ [the] EPC contract and O&M contract have been completely initiated, discussed, negotiated and finalised by Dr Mohan Rao. His vital role has been acknowledged….by the EPC contractors and [SPGL]. Both the EPC & O&M contracts have been signed by Dr Mohan Rao on behalf of [SPGL]. All this time, the Managing Director Mr Kishan Rao and his so-called experienced in-house technical team played a passive role and did not make any significant contributions to either the deliberations and it was the technical expertise and effort of [STUSA] and NTPC which are behind the success of the project.”

In the proceedings in the Federal Court in Michigan by CMS for its unpaid expenses a brief on behalf of STUSA stated out that even before his appointment to the board in March 1994 Mohan Rao had held himself out, and acted, as a board member in dealings with potential project partners.

There is also a major conflict of evidence on the role of Mohan Rao in the negotiation and conclusion of the Agency Agreements. The Rolls-Royce defendants say that he played a major role. His position is that he did not know of them until 1997, when he first saw them but did not appreciate their significance. He first became aware of their significance when Kishan Rao alleged in the Hyderabad debt action in 1999 that Towanda was owned and controlled by him. But in those proceedings he put Kishan Rao to proof that Towanda was owned by him, and Mohan Rao told the Supreme Court of India in January 2001 that he had “recently come to know” of the execution of the Agency Agreements.

The documents in this case indicate that a draft agency agreement for the EPC contract was drafted on behalf of RRIP (with a date in June 1993). On October 27, 1993 Mr Hynd, who was then the sales and marketing director of Heaton, wrote a memorandum to Dr Singleton, who was then the head of Rolls Royce Power Generation Systems Limited. The memorandum said:

“Attached is the Draft Agency Agreement for handing over during your discussions with Mohan Rao in Hyderabad next week.”

Dr Singleton’s evidence in these proceedings was that he does not believe that he did in fact hand over the draft to Mohan Rao on that occasion. But he says that he is confident that Mohan Rao was, at that time, already well aware of what became known as the Towanda Agreements and that he was involved in the negotiations of those agreements. Mr Hynd says that he does not recall what happened regarding the Agency Agreement after the date of his memorandum, but the fact that the draft was to be handed over to Mohan Rao is consistent, he says, with his understanding about the knowledge of and involvement in the negotiations on the terms of what became as the Towanda Agreements. Mr Hynd says that given his knowledge of the role of Mohan Rao as the originator of the project and the extent of his involvement in all aspects, he does not accept the statement by Mohan Rao to the effect that he did not appreciate the true nature of the Towanda Agreements.

Mr Lockton, who was then the managing director of Rolls Royce (India) Limited says that he believes that the draft agreement was handed over to both Kishan Rao and Mohan Rao, but his evidence is that it is inconceivable to him that Mohan Rao would not have received or at least been shown a copy of the draft by Kishan Rao, or at the very least have been told about the content. Mr Lockton says that he had several conversations with both Kishan Rao and Mohan Rao in relation to those agreements during 1993, and in particular a meeting in Delhi in June 1993 with Kishan Rao and Mohan Rao at which they discussed, among other topics, a planned visit to the United Kingdom by both of them in July 1993 for discussions in relation to the Agency Agreements. He recalls a further meeting with Mohan Rao in Delhi towards the end of September 1993 in which he pressed for the agency arrangements to be finalised. Mr Lockton says that Mohan Rao pressed him, as his main Rolls-Royce contact in the initial stages of the project, to exert his influence to have the necessary arrangements put in place.

Kishan Rao has alleged in the Hyderabad debt proceedings that Mohan Rao received substantial payments from Towanda, which were used by Mohan Rao to invest in shares in SPGL via STUSA. These allegations are denied by Mohan Rao, and in interlocutory proceedings the judge in Hyderabad ruled that Kishan Rao did not adduce sufficient evidence of his ownership of Towanda or that the payees were connected with Mohan Rao. But there are documents linking Mohan Rao with one of the payees, Mount Stevens Ltd. If the allegations are ultimately made out, it will show that Mohan Rao and STUSA not merely knew of and participated in the production of the original Agency Agreements, but also benefited from payments made by Towanda.

Wrongdoer control

It is already apparent that this unusual case differs from the typical derivative action. One respect in which it differs is that in the normal case the principal defendants are the allegedly fraudulent directors who are said to control the board and the general meeting. In this case not only is the director not a party, but the company has a board which includes senior bankers who are there to look after the interests of lending institutions including the Industrial Development Bank of India, the Industrial Finance Corp of India, and the State Bank of India. The banks have contributed in loans some eight times the capital which has been introduced by Mohan Rao/Ravi Reddy and their associates, Kishan Rao and his associates, and Rolls-Royce. The Industrial Development Bank of India was entrusted by the Delhi court with the task of settling the shareholder disputes, but its efforts failed, apparently because of Mohan Rao’s demands.

The board has independent members of considerable standing. The court seised with the dispute could stay the proceedings until the board has been given an opportunity to consider whether to commence or continue proceedings. The board would have to consider (inter alia) the broad commercial implications of suing SPGL’s most important and vital trading partners and continuing contractors, and whether by suing the Rolls-Royce defendants those defendants may resurrect and bring forward cross-claims against SPGL, the size and importance of the likely return in the context of the commercial project involving a total cost of $250m. If the board decided that there should be proceedings then the action would continue in the name of the company. If it decided not do so, then issues of good faith might arise, and there might have to be evidence from the independent board members.

If the true question is, as I think it is, whether the company is being wrongly prevented from seeking redress then India is plainly the appropriate forum for determining whether the relevant organ is the company in general meeting or the board, and if it is the board, whether there is an independent board which can properly consider whether the prosecution of the action is likely to do more harm than good (cf. Prudential Assurance [1982] Ch at 221). The Indian courts, as the courts of the place of incorporation and business of SPGL, are far better placed as a practical matter to determine questions of wrongdoer control and whether the proceedings are being brought bona fide in the interests of SPGL.

Alternative remedy

The court seised with the question of whether the derivative action is justified will also have to consider whether there is an alternative remedy as expressed by Peter Gibson LJ in Barrett v. Duckett [1995] 1 BCLC 243, at 250, and what is meant by that expression. The defendants argue that the remedies available to the Company Law Board are alternative in a relevant sense. In view of what I have said above (paragraph 29). I need say no more than I am doubtful whether the remedy in the Company Law Board is the type of alternative remedy that the case envisages. But even if it did, I am satisfied that the remedies available in the Company Law Board would not be a substitute for this action if it is held to have the bona fide intention of recovery from the Rolls-Royce defendants. But the remedies under the Indian Companies Act are sufficient if the true purpose of the claimants is, as is said, to chase down the fraud and root out corruption. There are several various avenues under the Indian Companies Act 1956 whereby minority shareholders may apply for an investigation into the affairs of the company by the Company Law Board or inspectors appointed by the Central Government: see sections 235, 237 and 388B to 388E of the Indian Companies Act 1956.

Bribery issues

In relation to the underlying allegations of bribery, the claimants say that the focus is simply on the conduct of the Rolls-Royce companies, rather than SPGL’s internal affairs. A claimant may claim the sum paid by the briber from either the briber itself or the bribed fiduciary on a comparatively narrow basis, in restitution and/or in tort, with the benefit of certain irrebuttable presumptions in the claimant’s favour. The claimants say that the Rolls-Royce defendants have consistently refused to answer the bribery allegations in correspondence, and that even now their case amounts to no more than a bare denial. The claimants say that since the Rolls-Royce defendants have really put forward no case which amounts to a defence of the bribery claim then there are no issues which will go to trial, and therefore England as the place where the defendants are is the appropriate forum for what would in substance be a claim for summary judgment. None of the usual forum factors, location of witnesses, location of documents, governing law etc. would have any significant role to play.

The argument is this. A bribe is a secret commission paid to an agent or other fiduciary by the payer, who knows that the payee is an agent or fiduciary and fails to disclose the payment to the principal or other person to whom the fiduciary duty is owed: Industries and General Mortgage Co v. Lewis [1949] 2 All ER 573, at 575; Petrotrade Inc. v. Smith [2000] 1 Lloyd’s Rep. 486, at 489-490. The motive of the briber when giving the bribe is not relevant and evidence as to such motive will not be allowed; there is an irrebuttable presumption in favour of the claimant that the fiduciary was influenced by the bribe; at least where the agent is “a confidential buyer of goods for his principal from the briber”, there is an irrebuttable presumption in favour of the claimant that the true price of the goods as between him and the purchaser company must be taken to have been less than the price paid by at least the amount or value of the bribe: Hovenden v. Millhoff (1900) 83 LT 41, CA and Mahesan v. Malaysia Government Officers Co-operative Housing Society [1979] AC 374, PC.

Accordingly the claimants contend: (1) Rolls-Royce has paid very substantial sums of money to Towanda; (2) Towanda was beneficially owned by Kishan Rao; (3) Rolls-Royce must have known that Towanda was beneficially owned by Kishan Rao; (4) unless the Agency Agreements were fully disclosed by either Kishan Rao or Rolls-Royce to SPGL’s shareholders, and sanctioned by them in general meeting, those arrangements constituted bribery for civil purposes; (5) therefore, it is to be presumed irrebuttably that Rolls-Royce’s motive was corrupt, that those arrangements did influence Kishan Rao, and that Rolls-Royce would have been prepared to enter into the EPC and O&M Contracts at prices less than the actual prices by the amount of money it promised, or alternatively actually paid, to Towanda. SPGL is therefore entitled to recover those sums promised or actually paid to Towanda.

The claimants argue that it is insufficient for present purposes for Rolls-Royce to do no more than simply assert in evidence that the Agency Agreements “are purely commercial arrangements and do not constitute kick-backs for obtain/procuring [the] O&M Contract as well as the EPC Contract” (David Bale, Rolls-Royce Plc’s Principal Legal Adviser, in the proceedings in the Supreme Court of India in answer to Mohan Rao’s allegation of bribery). The claimants say that Rolls-Royce is in no position to deny that Towanda was owned by Kishan Rao. They also say that the evidence is that Rolls-Royce knew that Towanda was a Kishan Rao creature.

But the evidence on which the claimants rely is the evidence of the Rolls-Royce executives who dealt with Kishan Rao and Mohan Rao, and I have set it out fully in paragraphs 149 to 151. The evidence does not indicate that Towanda was Kishan Rao’s creature. But if, as the claimants say, it would have been plain to Roll-Royce that Towanda must have been Kishan Rao’s creature then the same evidence would show that it was also Mohan Rao’s creature and that he was deeply implicated, as a de facto director and agent of SPGL, in the bribery which they allege. The claimants’ assertion that the evidence that Rolls-Royce knew that Towanda was a Kishan Rao creature is to be derived from their account of the 1993 meetings can only suggest that there is a real issue as to whether Mohan Rao was also to benefit from payments to Towanda.

Evidence and evaluation

I am satisfied that prima facie the court of the place of incorporation is best fitted to deal with the derivative action issues. But in my judgment on any view of the facts of this case the Indian court is clearly the appropriate forum to consider whether the action is brought for ulterior purposes; whether the appropriate organ for the purposes of wrongdoer control is the board or the general meeting; if it is the board, whether it is capable of taking independent decisions, and, if so, how they should be taken; and how to deal with the allegation that Mohan Rao was deeply involved in the impugned transactions. I accept that there may be little need for cross-examination on all but the last issue, but that is a matter for whichever court decides (if it does) to deal with these questions as a preliminary matter.

The negotiations and conclusion of the contracts for the commissioning and maintenance of the project will be relevant even if the claimants are right in contending that they will have the benefit of some irrebuttable presumptions.

It is plain that determination of these issues will involve the evidence of a number of participants in the transactions. The Rolls-Royce defendants say that they will wish to say that the Agency Agreements were known to all those then concerned with SPGL, which was then to be identified with Mohan Rao and Kishan Rao; that Kishan Rao had no authority to commit SPGL to the EPC and O&M contracts, and therefore the presumption that the alleged bribe influenced the contract price does not operate. They wish to have the opportunity to adduce evidence of the surrounding circumstances, including the competitive tendering process, the scrutiny given to the tenders by STUSA (i.e. by Mohan Rao), by foreign consultants employed by STUSA and by representatives of NTPC. They do not suggest that the existence of a tendering process is a conclusive answer in itself to the bribe allegations. On the other hand, they say that the existence of a competitive tendering process and the steps taken thereunder are clearly part of the surrounding circumstances which will bear on the court’s determination of the status of the Agency Agreements and their effect.

Apart from three of the Rolls-Royce witnesses, most of the potential witnesses in both the derivative action issues (particularly on motive, wrongdoer control, and “clean hands”) and the bribery issues are in India or are closely connected with India as NRIs, and none are in England. They include (a) the three individual claimants; (b) Kishan Rao; (c) the two sons of Kishan Rao; (d) representatives of NTPC; (e) Mohan Rao; (f) Ravi Reddy; and (g) the other directors of SPGL. The evidence of Westinghouse executives may also be relevant. They may be in the United States, but there is no reason to suppose that they are in England.

This is already an odd case without Kishan Rao as a party. His importance as a witness in these proceedings is obvious. On the claimants’ case he is the principal wrongdoer. He was the managing director of SPGL at the time the allegedly corrupt transactions were entered into, and it is to SPGL that he owed fiduciary duties. He is the person alleged to have received bribes. The Indian courts would be able to compel his attendance as a witness (both to give oral evidence and to provide documents). If the proceedings were to continue in England no such powers of compulsion would be available in relation to his evidence, and the parties would have to resort to letters rogatory, which would be of doubtful utility in a case of this kind. The same considerations apply to his two sons and his advisers, who were involved in the relevant transactions.

The other main protagonist is Mohan Rao. His evidence will be central in relation to many of the issues. It will plainly be relevant to two central questions in the derivative action issues, namely that of ulterior motive and participation in the wrongdoing. Rolls-Royce will seek to show that he has been centrally involved in all the relevant transactions, from the inception of the project; that he was aware of and involved in the negotiation of the Agency Agreements and was also the main contact as SPGL involved in negotiating the EPC and O&M contracts; that he was also centrally involved in the competitive tendering process and the decisions of the SPGL board to award the contracts to the Rolls-Royce defendants.

Ravi Reddy is also likely to be able to give evidence in relation to many of the same issues. In particular, his evidence is likely to be relevant to the question of the purposes for which this litigation has been commenced and, in particular, whether the proceedings can be properly regarded as having been brought in the best interests of SPGL.

The documents of SPGL and NTPC are almost certainly located in India. Mohan Rao accepts his own documents are located in India. The documents of STUSA are located in the United States. It is likely that the documents of Kishan Rao are in India. The documents of RRIP are in India, and those of Heaton are in England. There is no evidence about the location of documents of the Rolls-Royce companies, including those for which they were agents. Most of the relevant documents are likely to be located outside England, and if the proceedings were in England it would be very difficult and cumbersome to use the Hague Evidence Convention to reach Indian documents.

Applicable law

This is not a factor of great significance in this case because there is no evidence of any difference between English law and Indian law on the relevant matters. But the case does involve some developing and controversial areas of law such as the scope of the right to bring derivative actions and the law of bribery. I have expressed the view that the question of the right to bring a derivative action is governed by Indian law, and it is likely that the bribery issues are governed by Indian law: Arab Monetary Fund v. Hashim [1993] 1 Lloyd’s Rep 543, affd on this aspect [1996] 1 Lloyd’s Rep 589 (CA). To the extent that there are controversial issues it would be better for them to be decided by the court which can authoritatively rule on them, and whose judgments are subject to appeal. But since there is no evidence of any differences, and since the application of foreign law is an everyday occurrence in English courts, this is not a significant pointer to India as the proper forum.

Indian litigation

I regard the Indian litigation as a significant factor in India being the forum conveniens. I do so not on the basis of the “Cambridgeshire factor,” identified in Spiliada, i.e. the saving in convenience and costs which would be occasioned by the claim being dealt with by the Indian lawyers who have acquired knowledge and expertise through the Indian proceedings.

This is not a case where there is strictly a lis alibi pendens. The bribery allegations in India are made only in the context of an interim application for a receiver, and will not arise as such at trial, and the Rolls-Royce defendants are only parties to some of the Indian proceedings for the purpose of obtaining discovery or as nominal defendants in their capacity as shareholders.

But there are extensive allegations of mismanagement and fraud in the Indian proceedings against Kishan Rao, and the derivative actions in Hyderabad raise the same questions of wrongdoer control as would arise in these proceedings. There is therefore a risk of inconsistent findings in the broader sense. I have set out in section XIV some of the principal allegations and I will not repeat them. In addition, looked at broadly, the Indian proceedings are to a large extent about control of voting power and of management of SPGL, and support the conclusion that these proceedings are part of a power struggle for control of SPGL. The Indian courts are far better equipped to evaluate them.

Cross claims

I do not consider the fact that the Rolls-Royce defendants may assert cross-claims is of any significance to the forum issues. Earlier this year RRIP repeated to SPGL that it was still owed more than £3 million under the EPC contract. There is also a claim in excess of £10 million under the O&M contract. The contract contains a clause which provides that in the case of currency fluctuation the price may be adjusted following negotiation. If agreement is not reached the either party may terminate the agreement. Rolls-Royce says that the true effect is that a revised price may become due notwithstanding that the only express remedy is termination. The contract is subject to Indian law and arbitration in Switzerland. I heard argument on the merits of the cross-claim and whether it is capable of being a defence to the restitutionary claim made in these proceedings. Those questions do not arise for decision now, but I am satisfied that they are neutral on the issue of forum.

Delay

In a case involving service out of the jurisdiction under CPR 6.20 the burden is on the claimants to show that England is clearly the more appropriate forum, and if they do not discharge that burden, that is the end of the matter and there is no room (as there is in the case of staying of actions) for the English court to retain jurisdiction if the claimant shows that it would be unjust for him to be deprived of a remedy on the ground that, in the words of Lord Goff in Connelly v. RTZ Corp plc [1998] AC 854, 873) “substantial justice cannot be done in the appropriate forum” .

I have expressed the view (above, paragraph 59) that in the context of service out of the jurisdiction there is room only for such an argument if the injustice in what would otherwise be the appropriate forum is such that it cannot be regarded as an “available forum.” In such a case it might be argued that England is clearly the more appropriate forum, because there is no effective alternative. The main objection to India advanced by the claimants is that there is likely to be greater delay there. Mr Raghunandan Rao says that it might take up to 5 years to get to trial in India, and the earliest disposal that could be expected would be about 4 years. Former Chief Justice Ahmadi says that it might be up to 10 years.

Delay has been a factor taken into account in cases involving applications to stay on the ground that India is the appropriate forum: The Jalakrishna [1983] 2 Lloyds Rep 628 and The Vishva Ajay [1989] 2 Lloyds Rep 558; but contrast Radhakrishna Hospitality v. EIH [1999] 2 Lloyds Rep 249. It is well known that in the past there were substantial delays in the Indian legal system, caused by the combination of an enormous population and an overworked and understaffed judiciary, but it is also well known that very great efforts have been made in recent years to reduce the backlog of cases. The evidence in this case goes nowhere near showing that it is so serious as to amount to a substantial injustice, and nowhere near showing that it is such as to deprive the claimants of any remedy at all. It is not seriously arguable that “substantial justice cannot be done” in India in relation to claims by Indian residents and NRIs (and their companies) in relation to an Indian company and its affairs, and it would be a substantial breach of comity to stigmatise the Indian legal system in that way. This is typically the situation in which the claimant will have to “take [the appropriate] forum as he finds it” ([1998] AC at 872).

In any event, these claimants and parties associated with them have brought a series of actions in the courts of India, and they have had ready access to the Indian court system at all levels up to the Supreme Court of India. They have not shown concern about delay. They took more than a year between writing their first letter before action (December 3,1999) and obtaining permission to serve out of the jurisdiction (February 2, 2001).

XVI Non-disclosure

179. In view of the conclusion which I have reached that the order for service should be set aside because the claimants have not clearly shown that England is the appropriate forum, I will deal shortly with the allegations of non-disclosure. About 50 pages of witness statements and more than 400 pages of documents were before Master Moncaster when he made his order in February 2001.

On an application without notice the duty of the applicant is to make a full and fair disclosure of all the material facts, i.e. those which it is material (in the objective sense) for the judge to know in dealing with the application as made: materiality is to be decided by the Court and not by the assessment of the applicant or his legal advisers; the duty is a strict one and includes not merely material facts known to the applicant but also additional facts which he would have known if he had made proper enquiries: Brinks Mat Ltd v. Elcombe [1988] 1 WLR 1350 at 1356-7. But an applicant does not have a duty to disclose points against him which have not been raised by the other side and in respect of which there is no reason to anticipate that the other side would raise such points if it were present.

These principles have long been applied to applications for permission to serve out of the jurisdiction: see, e.g. The Hagen [1908] P 189 at 201 (CA). In that context it has been held that it would not be reasonable to expect an applicant for permission to serve out to anticipate all the arguments or points which might be raised against his case: see The Electric Furnace Co. v. Selas Corporation [1987] RPC 23 at 29 (CA). A failure to refer to arguments on the merits which the defendant might raise at trial should not generally be characterised as a “failure to make full and fair disclosure”, unless they are of such weight that their omission may mislead the Court in exercising its jurisdiction under the rule and its discretion whether or not to grant permission: BP Exploration v. Hunt [1976] 3 All ER 879 at 89, approved in Electric Furnace at 29.

In BP Exploration v. Hunt, Kerr J warned (at page 894) that:

“the Court should not consider the supporting affidavit as though it were marking an examination paper, deciding one way or the other merely on the basis of the extent to which the affidavit could have been improved. The primary question should be whether in all the circumstances the effect of the affidavit is such as to mislead the court in any material respect concerning its jurisdiction and the discretion under the rule.”

I do not consider that, subject to one point, there is any case for setting aside for non-disclosure. The witness statements may have been somewhat partial and over-zealous, but the criticism made by the defendants amounts to no more than the evidence did not fully anticipate all the points on the exercise of the discretion which they have now made.

There was one material fact which was not disclosed before the Master made his order on February 2, 2001. Before that date he had been told that the bribery allegations formed no part of the Indian proceedings. The first claimant’s witness statement denied that the issues were substantially the same as those in the Indian proceedings, and stated that:

“... in fact they are completely different. In particular, I am informed by Dr A V Mohan Rao, the issue of bribery by Rolls-Royce is simply not raised in the Indian proceedings.”

The claimants’ solicitor, Mr Mervis, said: “From my review of extracts of the Delhi and Hyderabad proceedings, it would not appear that those proceedings relate to the Bribes to which the English proceedings relate. Dr Rao has informed me that they do not in fact concern the Bribes.”

After reviewing the papers Master Moncaster wrote to the claimants’ solicitors to say that he was not minded to give permission, and raised a number of concerns about the application, including the question whether there was an overlap with the Indian proceedings. In response the claimants’ solicitors put before Master Moncaster in December 2000 a draft skeleton argument and a further witness statement of Mr Mervis, each of which stated (in slightly different terms) that there was no allegation of bribery in the Indian proceedings and little or no overlap between the issues in these proceedings and the Indian proceedings.

But on January 5, 2001 Mohan Rao swore an affidavit in the proceedings before the Supreme Court of India making those allegations in support of STUSA’s application for the appointment of a receiver. It is clear from the witness statement of Mr Mervis to which I have referred that he was well aware of the importance of the bribery allegations in relation to the English proceedings. When the claimants’ solicitors learned of this they informed the Master, who decided not to revoke his order (as he was entitled to do: CPR 3.1(7)). The claimants accept that the fact that the bribery allegations were referred to in that affidavit should have been disclosed. The non-disclosure was serious, and culpable, but in the circumstances I see no basis for setting aside for non-disclosure, since the non-disclosure cannot be said to have led to the continuance of the order giving permission to serve out of the jurisdiction.

XVII Conclusions

The Indian connections of this case are overwhelming. Even though the first and second defendants are English companies, the joinder of SPGL is a necessary element in the claim, and the claimants have fallen far short of satisfying the burden to show clearly that England is the appropriate forum for the derivative claim. I will therefore set aside the order of Master Moncaster.

I should add this: an order for service out of the jurisdiction can be set aside if the claimant fails to show that there is a serious issue to be tried. SPGL relied on the alternative remedy point in support of the proposition that there would have been no serious issue to be tried on the derivative aspects of the claim. I have already expressed the view that it would be unrealistic to view these proceedings as anything other than as being pursued by Mohan Rao and Ravi Reddy for their own purposes. If that view is right, then the claimants would not have succeeded at the stage of the application under CPR 19.9 in obtaining permission to continue with the claim, and therefore there would be no serious issue to be tried on the derivative claim. That, however, will now be a question for the judge in India.

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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Konamaneni & Ors v Rolls Royce Industrial Power (india) Ltd & Ors [2001] EWHC Ch 470 (20th December, 2001) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2001/470.html Cite as: [2002] 1 All ER 979, [2002] 1 BCLC 336, [2001] EWHC Ch 470, [2003] BCC 790, [2002] ILPr 40, [2002] 1 WLR 1269, [2002] 1 All ER (Comm) 532

	(1) MRS LAKSHMI KONAMANENI
	(2) MRS SANTHA REDDY PEKETY
	(3) MR VASANTH RAO MITTA
	(4) SPECTRUM TECHNOLOGIES USA INC	Claimants
	and
	(1) ROLLS ROYCE INDUSTRIAL POWER (INDIA) LIMITED
	(2) HEATON POWER LIMITED
	(3) SPECTRUM POWER GENERATION LIMITED	Defendants