Sex equals marriage rest aside by the Apex Court!

The infamous Madras High Court judgment in Aysha v. Ozir Hassan[1] which lead people to question the intention of the Madras High Court when it stated that if you enter into a sexual relationship with someone you are considered to be married has been finally answered in a Special Leave Petition (“SLP”) by the Apex Court. The SLP was filed by someone not a party to the judgment delivered by the Madras High Court.

To understand the case, let’s look into the brief facts of the case. The petitioner in the case, Aysha, had filed a maintenance suit in the Family Court at Coimbatore, where she claimed for a monthly maintenance for a sum of Rs. 5,000 for herself and her two minor children. The petitioner stated that the respondent herein had married her on September 16, 1994 as per Muslim Customs. Immediately after the marriage both had led their marital life at Coimbatore. Out of wedlock, she gave birth to two female children in 1196 and 1999 respectively. In the year 1999, the respondent (Husband) left the house and deserted the petitioner and their children. Thereafter mediation was conducted by the panchayat for a reunion which was in vain.

The respondent on the other hand contended that the marriage was not valid, firstly denying the fact he even married the petitioner and later contending that such marriage was not maintainable as it was not recorded in the nikah book as per the Muslim customs. He also denied that the children were born out of him.

The family court at Coimbatore, after looking into the facts and the evidence provided by both the parties, came to the conclusion that the respondent was infact the father of the children and thus the children should receive the due maintenance as per the law. However, the court observed, that since the marriage could not be proved by any documentary evidence, the petitioner, Aysha would not receive any maintenance.

The petitioner, Aysha thus approached the Madras High Court against the order of the family court in a revision petition and contended that the Family Court had erred in its decision by holding that the petitioner was not the wife of the respondent solely on the basis of any documentary evidence and non-registration of the marriage in the nikah book. The petitioner went on to state that major evidence such as the signature of the respondent on the declaration and consent form as then husband goes on to prove that he is in fact the husband of the petitioner.

After hearing the contentions of both the parties, the Madras High Court ruled that a valid marriage does not necessarily mean that all the customary rights pertaining to the married couple are to be followed and subsequently solemnized. In the present case, customary formalities were not followed, however, the hospital records go on to show that the respondent was the father of the second child through the “Live Birth Report” submitted as evidence in the Court. The Court looked into several aspects and observed that both the petitioner and the respondent have not been by any means disqualified from marriage and in the absence of any encumbrances or the involvement of any third party rights, the marriage cannot be deemed illegitimate.

The Court noted that since both the petitioner and the respondent led their marital life under the same shelter and begot two children out of the wedlock, the children born out of such a relationship are legitimate and the wife is also a legitimate wife. The Court further observed that if a woman aged 18 or above has a sexual relationship with a man, aged 21 or above, and during the course of such relationship, if the woman becomes pregnant, she would henceforth be treated as the wife and the man would be treated as the husband. Even if the girl does not become pregnant after having such sexual relationship with a man but if there is strong documentary evidence to show the existence of such relationship then also the couple involved in such acts would be termed as wife and husband. The Court further went on to state that even after such a sexual relationship, if both decide to separate due to difference of opinion, the husband cannot marry without getting a decree of divorce from the Court of law against the wife. He could not marry a second time without getting such a decree as it had been established that the sexual relationship had existed between them and consummation had taken place.

Thus, the respondent - husband was liable to pay maintenance to all three, Aysha and her two kids.

Now the SLP filed in the Supreme Court was strictly on the point made by the Madras High Court observing that “a valid marriage does not necessarily mean that all the customary rights pertaining to the married couple are to be followed and subsequently solemnized”. The petitioner in the SLP stated that such observations are not legally sound and go against the institution of marriage.

Answering this, the Supreme Court held that, the observations made by the Madras High Court are pertaining to the facts and circumstances of that case only. The Apex Court relied on several judgments fortifying the view that if a man and woman are living together for a long time as husband and wife, though never married, there would be a presumption of marriage and their children could not be called to be illegitimate and neither can the wife be illegitimate. It was held that the observations made by the Madras High Court are not in universal in nature and are restricted to the facts of the case.

In my opinion, it is necessary for us to understand the facts of each case individually. When it comes to maintenance laws, it is important to help and understand the situation of the victimized so that an appropriate action can be taken. In the present case, there was enough evidence both documentary and through witnesses produced that the petitioner and the respondent stayed together and shared the same shelter. It’s true that there have been plenty cases where the law has been misused by either party; however, the present case does not seem to fall under that category merely because there was evidence to show that the two not only stayed together but also that he consented and duly signed the documents at the hospital. Observations made by the Madras High Court if read individually do sound absurd however, we have to read it entirety and not just pick and choose certain excerpts and raise unnecessary hype.

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[1] (2013)5MLJ31

Fresenius Kabi - Decoded!

Fresenius Kabi Oncology Limited (“Appellant Company”) in the present case, is a public limited company, incorporated under the Companies Act, 1956. It is engaged in the business of research, development, production and distribution of formulations used in oncology. Its shares are listed on both the Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE”).

Fresenius Kabi (Singapore) Pte. Ltd. (“FKSL”) is the Appellant’s promoter company.

The Public shareholding of the Appellant Company stood at 10% (the promoter shareholding was thus 90%) as opposed to the required 25% as prescribed by the amended Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”).

Rule 19A of the SCRR which was amended in June 2010 provides that the minimum public shareholding within 3 years of a company being listed on the stock exchange should be 25%. To be in compliance with the MPS norms, the Listing Agreement was amended by a circular in December 2010 and further in February 2012 and it provided that the minimum shareholding can be achieved through two methods, (a) Institutional Placement Programme (b) Offer For Sale (“OFS”).

The Appellant thus decided to launch the OFS in 2 tranches of 7.5% each. On October 12, 2012 when the OFS was issued, it was issued with an option to sell an extra 1.5% of the Appellant’s shares if the OFS was received well in the capital market.

As it turned out, the Appellant ended up divesting its shareholding by 9% and consequently, FKSL’s shareholding in the Appellant was reduced to 81% from the previous 90%.

Unfortunately, in January 2013, a Food and Drug Administration (body in the US) inspection which took place in at the Appellant’s Kalyani Plant, found discrepancies in the documentation of the Appellant Company. Following this, the Appellant immediately stopped the functioning of the Kalyani plant. The plant has been inoperative since February, 2013. Also, relevant disclosures were made to the BSE and the NSE as required by the Listing Agreement.

Following this development, the Appellant Company’s Board of Directors decided to undertake voluntary delisting and in April this year proposed to launch a delisting offer to its public shareholders in order to acquire the entire public shareholding of the Appellant i.e. 19% of the Appelant’s capital (since post the OFS it stood at 81%).

By way of postal ballot voting, notices were sent and a successful resolution was passed by way of two-thirds majority as required by Regulation 8(1)(b) of the Securities And Exchange Board Of India (Delisting Of Equity Shares) Regulations, 2009 (“Delisting Regulations”). The result of the ballot was duly reported and communicated to the two stock exchanges.

By a SEBI order (“Said Order”) dated June 4, 2013, more than 100 companies had been asked to submit their replies as regard compliance with the mandatory requirement of 25 percent public shareholding pursuant to Rule 19A of SCRR which was brought into force with effect from 4th June, 2010. Fresenius Kabi’s name was on that list. Pursuant to that, FKSL and the Appellant were prohibited from accessing the securities market in any way whatsoever except in order to comply with the mandatory minimum public shareholding requirement.

The Appellant Company filed an appeal and vide an order dated June 24, the Tribunal considered the fact that the Appellant Company had voluntarily decided to delist its stocks and had progressed a lot in the direction as required by law. The Tribunal observed that the Appellant Company stood on a different footing as compared to the other 99 companies out of the 100 named in the Said Order.  The Tribunal also directed the Appellant to make necessary representations before the Respondent (SEBI) and decide the matter in the next four weeks.

Following the several representations made by the Appellant, an Impugned Order was passed by the Respondent which stated that in order to comply with the delisting offer proposed by the Appellant, the pre-OFS shareholding (90% instead of 81%) of the Appellant Company should be considered in order to comply with Regulation 17 of the Delisting Regulations.

The question which arose in the present appeal against the Impugned Order was that whether it is lawful for the Respondent to amend the Delisting Regulations. The Appellant Company contended that the powers of the Respondent arise from the SEBI Act and it is therefore unlawful on the Respondent’s behalf to prescribe a higher threshold. The Appellants also contended that though the Respondents have the power to take measures under the SEBI Act and the SCRA, it can only do so after undertaking an enquiry in the matter. However, in the present case, no such investigation had taken place.

Let’s take a look at what the law actually says with respect to the Delisting Requirements. Regulation 17(b) of the Delisting Regulations states that in order for a successful delisting to take place, the post offer shareholding of the promoter group, should be the total of the pre-offer shareholding and 50% of the offer size.

Applying this equation in the present scenario, we see that this would be 81%(which is the shareholding of the promoter group currently) plus 50% of 19 (which is the offer size) equating that to 9.5% taking it to a total of 90.5% which the Appellant Company would have to achieve in order to delist successfully.

However, what the Respondent ordered was a requirement of a much higher threshold of 95%. This is because the Respondent suggested that the pre offer shareholding of FKSL should be the shareholding before the OFS took place and not post. This would mean that instead of 81%, 90% should be calculated plus 50% of 10 taking it to a total of 95% required for FKSL to delist successfully.

The present appeal revolves exactly on this issue and discusses whether the Respondent has the power to impose the condition on FKSL of taking its shareholding up to 95% in keeping with Regulation 17 of the Delisting Regulation, even though the Appellant was in a genuine predicament.

The Respondent on the other hand contended that it received complaints accusing the Appellant of perhaps having acted in concert with investors purchasing shares amounting to 9% of the Appellants shareholding in response to the OFS. It contended that these investors might have bought the shares concerned with the aim of selling them off at artificial prices when the Appellant makes its delisting offer, to assist the Appellant in successfully completing its delisting offer.

The Respondent submitted that since the company had failed to comply with the minimum public shareholding requirement, it should be forced to offer such compliance, in the absence of any other penalty being levied on it.

The Respondent relied on several judgments to state that it is the duty of the SEBI to protect the investor’s interests and it has wide powers with respect to such a duty.

While deciding the dispute between the Appellant and SEBI, the Tribunal observed that wide powers granted to a public authority cannot be construed as allowing it to amend the law on a case to case basis. The law must operate uniformly to maintain its sanctity. It also pointed out that delisting of a listed company is the company’s prerogative, and as long as the process of delisting is carried out within the four corners of law, no authority can interfere with the same without a solid foundation.

It was stated by the Tribunal that in the facts of the present case, instead of fulfilling minimum public shareholding requirement under SCRR, since delisting of shares under Delisting Regulations had been sought for valid and genuine reasons SEBI while permitting delisting was not justified in directing that the promoters’ shareholding prior to OFS, that is shareholding at 90% instead of 81%, should be taken into consideration for the purpose of delisting.

The Tribunal also stated that the Respondent is, however, at liberty to investigate the complaints made by investors against the Appellant and take necessary action as per law. SAT's verdict thus provided Fresenius the much needed relief as it will now have to purchase 9.5% stake, instead of 14%, in its delisting offer.

Post this, SEBI went ahead and appealed to the apex court contending the irregularity committed by the Appellant Company. However, by an order dated February 02, 2014, the Supreme Court dismissed the appeal but stated that the question of law is left open to be decided in an appropriate case.

In my opinion, SEBI being the primary securities regulator, always has the best interest of the investors in mind. SEBI therefore needs to conduct thorough investigations and then appeal if anything out of the ordinary does appear. Delisting is an option a company can take as and when they need to as long as they keep their investors interest in mind and no irregularity is committed per se. In this case, a genuine predicament caught the company and they decided to delist, taking the lawful route. Therefore, as long as the investors have been given a rightful manner of exiting, there isn’t much SEBI can do about it. 

To solicit or not to solicit

A non-solicitation clause is a negative covenant inserted in a contract preventing a party from taking/soliciting the other party’s customers/employees for a set period of time. Such restrictive clauses are a form of restraint of trade and are enshrined in the doctrine of restraint of trade in the Indian Contract Act, 1872 (“Act”). Section 27 of the Act stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent. This was introduced in India Courts by an earlier decision in Madhub Chunder v. Rajcoomar Doss,[1] wherein, it was held that all agreements in restraint of trade, whether partial or general, qualified or otherwise, was void. It was observed that restraint from exercising a lawful profession, trade or business does not mean an absolute restriction but and are intended to apply to a partial restriction limited to some particular place.

During Employment vs. Post Termination

Negative covenants can be made effective both during and post termination of the term of the contract. There have been several decisions of various courts which have dealt with such covenants in both such scenarios. The Apex Court in Superintendence Company of India Pvt. Ltd. v. Krishna Murgai[2] held that doctrine of restraint of trade does not apply during the continuance of the contract and it only applies when the contract comes to an end. The same has been reiterated in several other Apex Court judgments. In M/s. Gujarat Bottling Co. Ltd. and others vs. Coca Cola Company,[3] it was held that negative stipulations in contracts when operative during the period of the contract are not hit by section 27 of the Act. The Supreme Court in this case also rejected the argument that such restraints are to be applicable only to employment agreements and went on to saying that courts take a rather restricted and less favorable view in respect of a employment contracts as compared to other commercial contracts. In Niranjan Shankar Golikari Vs. The Century Spinning and Mfg. Co. Ltd.,[4] the Supreme Court observed that negative covenants operative during the period of employment when the employee is bound to serve his employer exclusively are not to be regarded as restraint of trade and therefore do not fall under the garb of Section 27 of the Act.

Non-Solicitation post termination of contract

In Wipro Ltd. vs. Beckman Coulter International[5], the parties had agreed that for a period of two years after the termination of a distributorship agreement, a non-solicitation of employees’ clause would be operative. The Delhi High Court held that such a clause is enforceable as it is a restriction cast upon the contracting parties and not the employee, and should, therefore, be viewed more liberally than a restraint in an employer-employee contract. Nonetheless, the respondent was restrained from making any solicitation in the future, and it was upheld that the petitioner was entitled to be compensated by way of damages.  In a 2009 Judgment of the Delhi High Court in Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr,[6] a senior marketing manager as part of his employment agreement with Desiccant agreed that for two years following the termination of his employment, he would be bound by a covenant with Desiccant that would prevent him from soliciting Desiccant’s customers, suppliers and employees. After a few years when the employee joined a direct competitor, in an injunctive proceeding against the manager by Desiccant, the non-solicitation clause was upheld and the High Court allowed an injunction against the manager prohibiting him from soliciting Desiccant’s customers, suppliers and employees.

In Embee Software Private Ltd.  Vs. Samir Kumar Shaw & Ors.,[7]the Calcutta High Court drew a separate tangent by observing that when a party induces the clients or customers of its competitors to break their contract, it is a tortuous activity and is against the principles of the law of torts. It was held that if the act of the respondents of soliciting took such an active form so as to induce the customers of the plaintiff to break their legal relationships, such acts of soliciting could not be permitted and would not be hit by section 27 of the act.

When Pepsi brought a claim in tort against Bharat Coca Cola alleging that Coca Cola’s[8] actions of hiring its employees constitute a tortuous interference in the business of the plaintiffs, the Delhi High Court denies injunctions to the plaintiff (Pepsi) on the ground that, if the injunction was granted, the same would have a direct impact of curtailing the freedom of employees for improving their future prospects and service conditions by changing their employment.

In a 2013 ruling of the Madras High Court,[9] the appellant in the course of its business activities developed the respondent as a vendor for manufacturing the products for the appellant company and supplying the same to the customers of the appellant. For the same he entered into a non-disclosure agreement with the respondent which provided for a clause restricting the respondent from directly going to appellant’s for a further period of five years. The Madras High Court held that the appellant should prove that the respondent approached their erstwhile customers and only on account of such solicitation, customers placed orders with the respondent. The learned single Judge held that the non solicitation clause is not hit by Section 27 of the Act and hence valid.

It is important that a restraint upon freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. A restriction on one’s freedom to contract becomes binding upon proof that the restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community.[10] 

In my opinion, while the law seems amply clear that negative covenants restricting a party during the continuance of a contract are enforceable and are not hit by section 27 of the Act, such a clause in a contract which would restrain a party in any manner post termination of the contract seems to be a matter of close scrutiny of facts and circumstances. In the absence of any apex court decision on the same, it seems that the non-solicitation obligations post termination of contract may be enforceable in limited circumstances.

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[1] (1874) 14 Beng. L.R. 76

[2] AIR 1980 SC 1717

[3] AIR 1995 SC 2372

[4] AIR 1967 SC 1098

[5] 2006(3)ARBLR 118(Delhi)

[6] IA No. 5455, 5454 and 5454/2008 in CS(OS) No. 337/2008

[7] AIR 2012 Cal 141

[8] Pepsi Foods Ltd. and Others Vs. Bharat Coca-Cola Holdings Pvt. Ltd. & Others 1999 VAD (Delhi)

[9] M/s. FL Smidth Pvt. Ltd. Vs. M/s Secan Invescast (India) Pvt. Ltd. MANU/TN/0103/2013

[10] Ibid at Note 2