A Norwegian company which holds a 49.5 per cent stake in Esat Digifone is challenging in the High Court the right of another company to have two directors on the board when it has just one per cent of the shares.

But the smaller shareholder, Dermot Desmond's IIU Nominees Limited, said it had a significant interest in retaining a presence on the board, particularly in circumstances where, it said, disputes have arisen between the Norwegian company and Esat Telecom, the latter also holding a 49.5 per cent stake.

Mr Justice O'Sullivan is being asked by Telenor Invest AS of Oslo to restrain Dermot Desmond and Michael Walsh, directors of IIU, with registered offices at the International Financial Services Centre in Dublin, from attending Esat board meetings or participating in the management of the company.

IIU have counter-claimed for an order staying the Telenor proceedings and remitting the issues between the parties to arbitration.

In an affidavit, Mr Leiv Svenning, chief executive of Telenor Ireland Limited, said his company entered into a joint venture arrangement with Esat Telecom, of which Mr Denis O'Brien is chairman, in June 1995 and made a successful bid for the second mobile licence in the State.

Telenor and Esat Telecom each held a 50 per cent shareholding in Esat Digifone but each agreed to transfer 10 per cent of their stake to IIU Nominees, leaving both with 40 per cent each and IIU with 20 per cent.

Esat Telecom and Telenor each had three directors on the board and IIU had two. It was later agreed to increase the total number of directors from 8 to 10.

Subsequently, IIU sold back half its stake and was paid over £6 million, reducing its holding to 10 per cent. In January this year, it disposed of another 9 per cent of its holding for almost 114 million US dollars.

Mr Svenning said Telenor believed that once the IIU shareholding dropped below 10 per cent, it should cease to continue to have Board representation. However, IIU had continued to assert its rights to have two directors.

He said IIU effectively held the balance of power on the board. In the event of a dispute between Esat Telecom and Telenor directors, the IIU nominees would have a casting vote.

Telenor had paid over £34 million and IIU on the other hand had received a total of £91 million.

Mr Michael Walsh, director of IIU, refuted Mr Svenning's claims. At no time was it agreed or understood on the part of his company that in the event of its shareholding going below 10 per cent, this would give rise on the part of its Directors to resign.

IIU had a significant interest in maintaining its presence on the Board, particularly in circumstances where disputes have arisen between Telenor and Esat Telecom, he said in an affidavit. In many instances, it had been the intervention of IIU that had resulted in the best and most appropriate decision being made for Esat Digifone.

Mr Walsh said that if IIU's nominees were removed from the Board, it appeared that the inevitable consequence would be to create a situation of deadlock.

The hearing was adjourned until today.