This Application Is Filed Under ...

vs Unknown on 17 July, 2009

Madras High Court Madras High Court This Application Is Filed Under ... vs Unknown on 17 July, 2009 DATED : 17.7.2009 THE HON'BLE MR. JUSTICE P.JYOTHIMANI Original Application No.475 of 2009 This application is filed under Section 9 of the Arbitration and Conciliation Act, 1996 seeking for an order of injunction against the respondent from stopping the supply of power of 50 Million KWH per year to the applicant, pursuant to the power supply agreement dated 2.9.2005, pending disposal of the arbitration. 2. The applicant Company, which is engaged in the business of manufacture and sale of Tyres and Tubes, is having two factories in the State of Tamil Nadu, one at Thiruvotriyur and another at Arakonam. In the year 2005, the respondent Company intended to set up a gas based group captive power project in Valantharavai Village, Ramanathapuram and invited the applicant to participate as an equity participant. The applicant, in order to have a stable operation of power and to reduce the cost, has consented with the respondent Company to set up power generating stations for generating power through natural gas and entered into an agreement for production of power as captive consumer. As per the said project, the power generation was to start from 1.11.2005 and the same would be used by the constituent companies by wheeling through the grids of the Tamil Nadu Electricity Board. After negotiations, the applicant entered into a Memorandum of Understanding and Power Supply Agreement dated 10.6.2005 and 2.9.2005 respectively and the applicant was to invest Rs.50 Lakhs as equity capital. The Power Supply Agreement contains various clauses, including that the respondent had a valid gas allotment for supply of gas covering the period of agreement; that the period of agreement was six years, which was to commence from the date of commencement of supply; that the respondent shall enter into a Power Wheeling Agreement with the Tamil Nadu Electricity Board not later than 15 days from the date of commencement of supply, etc. 3. The applicant has entered into an amendment to the agreement dated 2.9.2005, by which the investment was enhanced from Rs.50 Lakhs to Rs.1.75 Crores. However, in spite of the agreement with the respondent to give continuous and uninterrupted supply of power, the respondent has failed to keep its commitment of the contracted demand of 50 Million KWH. As per the statement submitted by the applicant to the respondent, between the period from March, 2006 to October, 2006 the average wheeled power supply given by the respondent was much lower. In spite of the assurance given by the respondent on 11.12.2006 that, after the Tamil Nadu Electricity Board completes its installation of 230 KV substation at Valathur, supply would be effected as per the contract terms, the agreement terms were not complied with. It is the case of the applicant that, under the terms of the agreement, the power supply was not dependent upon completion of any installation of 230 KV substation at Valathur or on the supply of gas by Gas Authority of India Limited. 4. In October, 2008, the Tamil Nadu Electricity Board had imposed a 40% power cut with effect from 1.12.2008 and also imposed a ban on using power during peak hours. On representation by the applicant and other High Tension consumers, the Tamil Nadu Electricity Board issued a memo dated 17.11.2008, informing that the restrictions would not be applicable to power purchased from captive power generation plants. 5. It is the case of the applicant that the respondent has been continuously giving lame excuses and has even taken a false stand as if the applicant was not in a position to utilize the allotted energy and the metered energy was lower than the allotted energy, resulting in penalties from the Gas Authority of India Limited. The reason for the low meter was because of the non supply of power by the respondent. The respondent has also taken another untenable stand that the wheeling agreement with the Tamil Nadu Electricity Board has become ineffective and inoperative, which has resulted in the inability of the respondent to supply power. The reasons found out by the respondent for the purpose of wriggling out of the situation was only intended to terminate
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This Application Is Filed Under ... vs Unknown on 17 July, 2009

the power supply agreement. 6. It is the further case of the applicant that, in fact, the respondent, by the letter dated 7.3.2009, has threatened to cut off the supply of power with an intention of selling power generated by them at a higher cost to other consumers. The applicant understands that the respondent has successfully bid a tender and entered into a contract with the Tamil Nadu Electricity Board in January, 2009, committing to supply 40 MW of power to the Tamil Nadu Electricity Board and that is the reason why the respondent has been evading to perform the obligation under the agreement with the applicant. It is also understood that the respondent has approached the Tamil Nadu Electricity Board seeking for conversion of the Captive Power Plant at Valantharavai Village, Ramanathapuram into a Merchant Plant for commercial exploitation. It is stated that certain writ petitions filed against such conduct were also allowed by this Court. 7. It is also stated that, by virtue of the default committed by the respondent, the applicant had to spend huge amount since it had to go for its own generation through Diesel Generator Units. The applicant is having a right of specific performance of the Power Supply Agreement dated 2.9.2005. If the agreement is allowed to be terminated by the respondent, it will result in loss to the applicant as the applicant had no other alternative source of power. The dispute, as per the agreement, has to be referred to arbitration by the Sole Arbitrator appointed by mutual consent of the parties and the applicant is intending to proceed for arbitration. In the meantime, in order to protect the interest of the applicant, the present application is filed for an injunction against the respondent from stopping the supply of power of 50 Million KWH per year pursuant to the Power Supply Agreement dated 2.9.2005. 8. It is the case of the respondent in the counter affidavit that, after the Electricity Act, 2003 has come into effect, captive generation is intended for a power plant set up by any person to generate electricity primarily for his own use, which includes the power plant set up by co-operative society or association. The Electricity Rules, 2005, which was published in the Gazette of India dated 8.6.2005, sets out the requirement for qualifying as Captive Generating Plant. According to the same, the requirement for qualifying as a Captive Generating Plant is not less than twenty six percent of the ownership held by the captive user and not less than fifty one percent of the aggregate electricity generated in such plant, determined on an annual basis, to be consumed for captive use. 9. It is the case of the respondent that, even before the Electricity Act and Electricity Rules came into force, the respondent was intending to put up a power plant and agreement was entered into in the year 1999 After the Electricity Act and Electricity Rules came into effect, the respondent entered into a Memorandum of Understanding and a Power Supply Agreement on 10.6.2005 with the applicant. Similar agreements were also entered into with other captive consumers as per the list furnished in the counter affidavit. 10. It is the case of the respondent that it has fulfilled the conditions provided under the Electricity Rules, 2005 till 31.3.2009, however three of the captive consumers, viz., (i) M/s.Meenakshi Udyog (India) Pvt. Ltd., (ii) M/s.Sri Balaganapathy Mills Limited, and (iii) M/s.Kamachi Steels Limited, in their letters written in March, 2009, have expressed their desire to come out of the Power Supply Agreement with effect from 1.4.2009. The total percentage of equity held by all the captive consumers with the respondent was 27.56% and when the said three companies have decided to come out of equity, the total equity of group captive consumers has come down to 25.04% and the same is less than the statutory requirement of 26% as per the Electricity Rules, 2005. It is also stated that, subsequently, one other captive consumer, viz., M/s.Tulsyan NEC Limited has also terminated power supply agreement, by reducing further 1.48% of the equity, by which the status of the captive generating power plant has come to 23.56%. Therefore, according to the respondent, they lost their status of captive generating plant, which is not due to their fault. 11. It is also stated in the counter affidavit that the agreement is terminable in nature as per the clauses in the said agreement and therefore, the applicant is not entitled to specific performance as per Sections 14 and 41(e) of the Specific Relief Act. It is the case of the respondent that the applicant has filed this application
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This Application Is Filed Under ... vs Unknown on 17 July, 2009

suppressing the said fact. It is also stated that the applicant was aware that the respondent, by virtue of the subsequent event, has lost the status of captive generating plant and in spite of the same, the said fact has not been revealed in the application and therefore, the applicant has not approached this Court with clean hands. 12. It is also stated in the counter affidavit that the applicant has entered into a Power Sale Agreement dated 25.3.2009 with M/s.Raghurama Renewable Energy Limited for purchase of power and in addition to that the applicant has several wind mills and in spite of it the applicant has chosen to deliberately state that they have no alternative source of power supply. It is stated that as per Clauses X.1 and X.2 of the Power Supply Agreement, only after the conditions stipulated therein are complied with and in case there is any failure of settlement between the parties, then only the arbitration clause comes into play and the applicant has not taken any steps as per the said clauses. 13. It is also denied that the respondent is giving lame excuses. The respondent's power plant is a gas based plant and natural gas is the primary fuel, which mainly depends upon the availability of gas made by Gas Authority of India Limited, which, in turn, looks forward to ONGC for supply of the gas and therefore, it is only due to unforeseen circumstances the respondent was unable to supply power. The allegation that the applicant is facing penalty of Rs.7 per unit from the Tamil Nadu Electricity Board is denied. It is also stated that, in any event, the power supply agreement stands frustrated by virtue of the subsequent event, for no fault on the part of the respondent. It is stated that the arrangement with the Tamil Nadu Electricity Board for supply of energy is as per the judgment of this Court in W.A.No.1462 of 2008. In these circumstances, it is stated that the application is devoid of merits and is liable to be dismissed. 14. On the above said pleadings and also the submissions made by the respective counsel, it is clear that the case of the respondent is that subsequent to the coming into effect of the Electricity Act, 2003 and the Electricity Rules, 2005, the condition required for qualifying as a Captive Generating Plant is that it must have minimum 26% of share holding at any given point of time and by virtue of withdrawal of four of the captive consumers from the agreement, the respondent's share holding has come down to 23.56% and therefore, the respondent has lost its status as a Captive Generating Plant and it was only consequently, the respondent was unable to supply power from 1.4.2009. 15. In a batch of cases decided by this Court, by common order dated 29.4.2009 made in O.A.Nos.374 of 2009, etc., while disposing of similar applications filed by various captive consumers against various Captive Generating Plants, including that of the present respondent, this Court has considered exactly the same contention raised by the respondent in the counter affidavit and granted an order of injunction after hearing all the parties with an elaborate discussion. In the order dated 29.4.2009, by referring to Rule 2(3) of the Electricity Rules, 2005 and the illustration contained therein, wherein it is pointed out that if the captive user like that of the applicant is not in a position to take in the required 51%, the entire electricity generated should be treated as if it is a supply of electricity by a generating company, and this Court has also considered about 26% of shares, as stated above, and the contention raised on behalf of the respondents therein in the following words: "7. ........ Besides this, the other condition is that not less than 26% of the shares are to be owned by the captive users. By reason of reduction in holding below 26% without violating the statutory prescription or going against the Rules, it is not possible to supply units in terms of the agreement to the applicants. He pointed out that the respondent no longer enjoyed the status as a captive power plant. Consequently, the respondent contends that the applicants' claim is totally misconceived. " 16. After considering the said illustration as well as the contention of the respondents therein, the learned Judge has held as follows: "11. Having thus given the prescription, where there is a violation, the illustration under the said Rule reads as follows:

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This Application Is Filed Under ... vs Unknown on 17 July, 2009

(2) It shall be the obligation of the captive users to ensure that the consumption by the Captive Users at the percentages mentioned in sub-clauses (a) and (b) of sub-rule (1) above is maintained and in case the minimum percentage of captive use is not complied with in any year, the entire electricity generated shall be treated as if it is a supply of electricity by a generating company. 12. As rightly pointed out by Mr.P.R.Raman, learned counsel for the applicants, Section 9 of the Electricity Act states supply of electricity from the captive generating plant through the grid shall be regulated in the same manner as the generating station of the generating company. Hence, when any one of the clauses is not complied with, thereby making the respondent as non-captive generating plant, it necessarily ceases to be a captive generating company, yet the supply as per the agreement cannot be in any event stalled since as given in the illustration, the respondent becomes a generating company. As on today, unlike which the other commodities or goods which are capable of storage, whatever has been generated, necessarily has to go for consumption. When that being so, if the contractual obligations demand compliance by the respondent, the mere fact of the respondent losing its status as captive generating plant cannot stand in the way of the respondent complying with other obligations to supply electricity as a generating station. This does not require any technical change over for the respondent to supply electricity to the applicants herein. In these circumstances, prima facie I am satisfied of the claim of the applicants to have the supply in terms of the agreement. All that the Rule contemplates is that failure to maintain the level of shareholding and consumption would take the company outside the status of a captive generating unit. Whatever has been generated, hence, has to be supplied for consumption. In this, when the respondent is already bound by the terms of the agreement, I do not find any ground for a breach of the conditions in the Regulations as alleged by the respondent." and ultimately rejected that the claim for breach of conditions, as alleged by the respondents therein, as not maintainable. 17. In the above said order dated 29.4.2009 made in O.A.No.374 of 2009 and batch cases, by referring to the judgment of this Court dated 22.4.2009 made in the Writ Appeal No.1462 of 2008, it was held as follows: "15. Learned counsel for the respondent pointed out that in terms of the orders passed in Writ Appeal dated 22nd April 2008 in W.A.No.1462 of 2008, it had entered into an agreement with TNEB for supply of electricity. It may be noted that the supply under the directions of this Court arises only after a discussion with the TNEB, in its status as a captive power plant, which means over and above 51% alone, the respondent would have to supply to TNEB. On the admitted fact that it no longer retains its status as a captive power plant, whatever might have been the intricacies of the terms of the agreement with the TNEB, the respondent is bound to fulfill its obligations under the agreement with the applicants till such time the disputes between the parties are resolved before the learned Arbitrators as contemplated under the agreement. " 18. It is with such an elaborate order this Court, having found that the applicants therein have made out a prima facie case, allowed the applications and granted injunction. 19. It is now stated that as against the said common order dated 29.4.2009 made in O.A.No.374 of 2009 and batch cases, appeals have been filed and no interim order has been passed against the above said order of the learned Judge. 20. I am in total agreement with the reasoning given by the learned Judge in the above said batch of cases and in these circumstances, I am satisfied that the applicant has made out a prima facie case for grant of an order of injunction. Consequently, the application stands allowed. sasi

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