Monday, May 10, 2010

The Supreme Court's Judgment in the Reliance Dispute - Part II

A previous post outlined the issues that arose in the Reliance judgment and summarised the Court’s conclusions. In this post, I discuss two of these in more detail – the doctrine of identification, and the binding nature of an MoU under the Companies Act, 1956.

As to the first issue, it was argued by RNRL that the MoU signed by the Ambani brothers was binding on their respective companies, by virtue of the doctrine of “identification”. The majority (Sathasivam J. and Balakrishnan C.J.) rejected this contention on the basis that the doctrine of identification “may be applicable in respect of small undertakings” but not to RIL and RNRL, which have more than “three million shareholders”. Justice Sudershan Reddy did not go as far, but did observe that it is “typically applicable in criminal and tortious liability cases”. Justice Reddy also relied on s. 293 of the Companies Act, and on the fact that the Board had acted “independently”. There is substantial uncertainty over the scope of the doctrine of identification in Indian law, and it is perhaps unfortunate that the Court did not consider the matter in greater detail in its judgment in Reliance.

While the doctrine is often attributed to the 1915 House of Lords decision in Lennard’s Carrying Company v. Asiatic Petroleum, [1915] AC 705, it clearly emerged through a trilogy of cases in 1944. Since then, it has been applied across common law jurisdictions, and three decisions are considered to be a classic exposition of the subject – Tesco Supermarket v. Nattrass, [1971] 2 WLR 1166, Canadian Dredge, [1985] 1 SCR 662 and Meridian Global, [1995] 3 WLR 413 (Privy Council). Of these, it is useful to refer to Meridian.

In Meridian, the Privy Council noted that rules of attribution are necessary to ascertain the circumstances where the acts of natural persons through whom the company acts are considered, in law, to be acts of the company. The Privy Council explained that a company, for this purpose, has “primary rules” of attribution, found in the memorandum and articles of association, and “secondary” rules of attribution found in doctrines of agency and company law such as ostensible authority, constructive notice, indoor management. The following passage is one of the best explanations of the principle underlying the doctrine of identification:

…a reference to a company 'as such' might suggest that there is something out there called the company of which one can meaningfully say that it can or cannot do something. There is in fact no such thing as the company as such… To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company… The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability … This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy [emphasis mine].

Applying this principle to the RIL judgment, the question was whether, by virtue of a primary rule of attribution, a rule of agency, or through a special rule of attribution, the act of signing the MoU may be considered an act of the company. It is significant, in this respect, that the RIL Board resolved on July 27, 2004, to vest “all the powers of the Board” in Mukesh Ambani, except those the Board is required to retain (¶29, per Justice Reddy). The only possible objection to applying rules of attribution is that the principals were not acting in their corporate capacity. The language of the MoU does not supply a satisfactory answer to this question, since it contains provisions that expressly refer to the corporate entities, and also states that the object is to resolve a family dispute between the principals. However, it is respectfully submitted that it is incorrect to reject the doctrine of identification on the basis that it does not apply to “large” companies, or outside the realm of tort law and criminal law. Mihir has analysed this issue on his blog, which is available here.

Secondly, s. 293(1)(a) prevents a Board from selling or otherwise disposing of an “undertaking” of a company except with the consent of the company in general meeting. Parts of the MoU would have attracted this ban, but other provisions would not, and it is possible for the MoU to be binding on the company, subject to consent by general meeting. The Court’s reference to s. 293, however, appears to suggest that the MoU is not binding because it was entered into by a director. Finally, the majority noted its decision in Rangaraj v. Gopalakrishnan, and observed “it is seen from the above decision that the agreement between the two groups of shareholders which impose restrictions on the transferability of shares was not binding…” The decision in Rangaraj has proved controversial, and it has been suggested that its ratio has been too widely interpreted subsequently. We have discussed Rangaraj here. In addition, the majority made the observation in the course of recording the submissions of the senior counsel for RIL, and it is not clear whether this constitutes a part of the Court’s opinion, for this passage is followed immediately by the Court once again recording submissions. Unfortunately, this is not a new phenomenon – in Venture Global, which we have discussed here, there was a dispute as to whether a passage in earlier case constituted the “decision” of the Court or the “submissions” of counsel.

In sum, it is submitted that the Court’s observations on the scope of the doctrine of identification may require reconsideration. The dispute over the scope of Rangaraj persists.

1 comment:

Anonymous said...

healthy discussion