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BEFORE THE
COMPANY LAW BOARD, PRINCIPAL BENCH
Appearances : I. M. Chagla, senior advocate (I. T. Khambatta, R. I. Chagla,
Rashmi Kant & Sandeep Mittal with him) for the Petitioner. Anil Divan
& Sudipto Sarkar, senior advocates, T. N. Subramaniam, Sumip Sen,
Mahesh Agarwal, Anil Wani, Bahram Vakil, Atul Chitale & Syed Naqvi
for the Respondents.
ORDER
BALASUBRAMANIAN
1. The petitioner hereinabove, holding 49 per cent shares in AIA Magotteaux
Ltd. ('the company'), has filed this petition under section
397/section 402
and section 403 of
the Companies Act, 1956 ('the Act') alleging oppression in the affairs
of the company. Along with the petition, he also filed CA 237 of 1999
seeking certain interim reliefs. Both the petition and the application
were mentioned on 17th September, 1999. Directions were issued to the
respondents to file their replies to the application and hearing of the
application was fixed on 4th October, 1999. In the meanwhile, the 1st
respondent filed an application CA 248 of 1999 in terms of the provisions
of section 45 of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as the Arbitration Act '1996 Act') on the ground that the
disputes raised in the petition arise out of and in connection with certain
agreements entered into between the parties in which there is an arbitration
clause for arbitration by International Chambers of Commerce ('ICC') and as such the petition should be dismissed and the parties be referred
to arbitration. In the meanwhile, the 1st respondent had invoked the jurisdiction
of the ICC in terms of the arbitration clause in the joint venture agreement.
In view of this, the petitioner filed CA 254/1999 seeking for staying
the arbitration proceedings before the ICC. Accordingly, both these applications
were taken up for hearing.
2. Before we deal with the arguments of the counsel, we shall narrate
certain factual aspects. A joint venture and shareholders' agreement (hereinafter
'the JVA') was entered into between the petitioner and the 1st respondent
on 28th June, 1991 consequent to which the company was incorporated. The
company is not a party to this agreement. On the same day, 3 other agreements
- technical and financial collaboration agreement, trade mark licence
agreement - both between the 1st respondent and the company and a sole
distributor agreement between the 2nd respondent and the company were
entered into and were annexed to the JVA. Later, a non competition agreement
was entered into between the 1st respondent, the 10th respondent and the
petitioner. A technical collaboration agreement was entered into on 1st
July, 1994 between the 1st respondent and the 9th respondent. Another
technical collaboration agreement was entered into on 22nd November, 1996
between the 1st respondent and the 8th respondent. As per the JVA, the
1st respondent was to have 51 per cent and the petitioner 49 per cent
shares in the company. The JVA also provided for the appointment of the
petitioner as the managing director and his continuance as such up to
the age of 65. It also provided for affirmative votes by both the groups
on certain matters. Some of the terms of the JVA were to be incorporated
into the article of the company. All these agreements, except the non-competition
agreement, provided for arbitration more or less in the following terms:
"Notwithstanding clause ....., any dispute, controversy claim arising
out of or relating to this agreement or the breach, termination or invalidity
thereof shall be settled with arbitration, pursuant to the rules of conciliation
and arbitration of the International Chamber of Commerce in the city of
London. The decision by arbitrators shall be final and conclusive and
binding upon the parties. Judgment upon any award rendered may be entered
in any court having jurisdiction thereof or application may be made to
such court for a judicial acceptance of the award and an order of enforcement
as the case may be."
The JVA also provided for termination of the agreement in case of default
of one of the parties of its obligations under the agreement, in which
case, the non-defaulting party would have the option to purchase the shares
held by the defaulting party at the fair market value. In accordance with
the terms of the JVA, the present holding of the petitioner is 49 per
cent and that of the 1st respondent 51 per cent shares in the company.
The petitioner was appointed as the managing director and the terms of
the articles were amended to incorporate the terms of the agreement as
at annexure C to the JVA. Certain disputes seemed to have arisen between
the parties in the conduct of the affairs of the company culminating in
the filing of this petition.
3. We have, in this order, considered the arguments of the counsel in
3 parts. The first part - on the scope of section 45 of the Arbitration
Act, the second part - on CA 248199 filed by the 1st respondent seeking
for referring the matter to arbitration and the third - on CA 254/99 filed
by the petitioner seeking for staying the proceedings before ICC/restraining
the 1st respondent from further prosecuting the arbitration proceedings.
4. We shall first deal with, without reference to the facts of this case,
the scope of the provisions of section 45 of the Arbitration Act and its
applicability to the proceedings under section
397/section 398
as that is the issue that has arisen of on the application filed by the
respondent. Before we deal with the arguments of the counsel in detail
on this issue, we may sum up their arguments in a nutshell, noting the
fact that the respondent has already initiated proceedings before ICC
in terms of the arbitration clause contained in the JVA. According to
Shri Diwan, senior counsel for the respondent, since the entire allegations
in the petition arise out of and in connection with various agreements
entered into between the parties, all of which provide for arbitration
in ICC, the Company Law Board is bound to refer the parties to arbitration
in terms of section 45 of the Arbitration Act. According to Shri Chagla,
senior counsel for the petitioner, the question of referring the matter
to arbitration does not arise for 3 main reasons : that invoking the jurisdiction
of the Company Law Board in case of oppression is a statutory right which
cannot be taken out by the provisions of any other law, that the Company
Law Board is vested with exclusive powers to deal with matters of oppression
which cannot be delegated to a private forum and that the powers exercisable
by the Company Law Board under section
402 of the Act is so wide an comprehensive that these reliefs cannot
be granted by an arbitrator and as such the question of referring the
parties to arbitration does not arise. In short, his contention is that
section 45 of the Arbitration Act is not applicable to section
397/section 398
proceedings. Both of the counsel relied on a number of authorities to
substantiate their stand.
5. Shri Diwan, initiating his arguments, submitted that the proceedings
under section 397 are
no exception to the of provisions of the Arbitration Act. As long as the
disputes/allegations raised in the petition arise out of or in connection
with an agreement containing an arbitration clause, then, if it is domestic
arbitration, the Company Law Board is bound to refer to the parties to
arbitration in terms of section 8 of the Arbitration Act and, in case
of foreign arbitration, under the provisions of section 45 of the Arbitration
Act. According to him these are mandatory provisions without any exception.
He pointed out that the Company Law Board itself had acted in terms of
the binding nature of the provisions of section 45 of the Arbitration
Act in Navin Kedia v. Chennai Power Generation Ltd. [1998] 31 CLA 1 in
which, in view of the arbitration clause contained in the agreement providing
for arbitration by London Chambers of Commerce the Company Law Board dismissed
the petition since all the disputes raised in the petition related to
that agreement. Likewise, in Escorts Finance Ltd. v. G. R. Solvents &
Allied Industries Ltd. [1999] 33 CLA 124, wherein the agreement between
the parties provided for domestic arbitration, the Company Law Board declined
to entertain the petition on the ground that the allegations were in relation
to and arising out of the said agreement. He further submitted that where
the Company Law Board found that some of the allegations related to an
agreement providing for arbitration, it had declined to entertain those
allegations and kept for examination only the other allegations which
were not related to arbitration agreement. In this connection, he referred
to the decisions of the Company Law Board in 20th Century Finance Corpn.
Ltd. v. RFB Latex Ltd. [1997] Comp Cas 636 (sic) and Khandwala Securities
Ltd. v. Kowa Spinning Mills [1999] 34 CLA 273.
6. He submitted that in all the above 4 cases, the Company Law Board had
examined various cases cited in those proceedings and held that an those
cases related to the provisions of section 34 of the Arbitration Act,
1940 in which discretion had been given to a court to decide whether or
not to refer the parties for arbitration and that such discretionary power
is no longer available to a court after coming into effect the provisions
of the Arbitration Act, which mandates a judicial authority to refer the
parties to arbitration once it is satisfied that the matter before the
judicial authority is covered by an arbitration agreement.
7. He countered the arguments of Shri Chagla that various courts have
held that matters in a winding up petition cannot be referred to arbitration
since an arbitrator has no powers to do so and as such, in the same manner,
reliefs under section 402
can also not be granted by an arbitrator. Shri Diwan submitted, relying
on Pradeshiya Industrial & Investment Corpn. v. North India Petrochemicals
Ltd. [1994] 13 CLA 363, that in case of a claim which is the subject-matter
of arbitration requiring adjudication by the arbitrator, then, the court
will not entertain a winding up petition on the same issue. In the same
way, as decided in Thakur Paper Mills v. Kailash Chand Jain AIR 1968 Pat.
289, winding up petition could be admitted only when there is no bona
fide dispute on the subject-matter of the petition. He also pointed out
that even in a proceeding under section
397/section 398,
the Delhi High Court itself referred the of parties to arbitration in
Gurnail Singh Gill v. Sanz International Put. Ltd. [1987] 62 Comp Cas
197. Therefore, he submitted that just because an arbitrator cannot grant
the relief sought in a petition under section
397/section 398,
of does not mean that the matters cannot be referred to arbitration if
they directly arise out of or in connection with an arbitration agreement.
He further submitted that it is wrong to suggest that the Company Law
Board has the sole and exclusive jurisdiction to decide matters covered
under section 397/section
398 as Calcutta High Court in Pradeep Kumar of Sarkar v. Laxmi Tea
Co. Ltd. [1990] 67 Comp Cas 491 has held at p. 512 that these sections
do not oust the jurisdiction of the civil court to entertain suits on
the same subject-matter. If it is so, then, the learned counsel contented,
that an arbitrator can also entertain such complaints as long as they
arise out of or in connection with the arbitration agreement and grant
appropriate relief. On the same proposition that the jurisdiction of civil
court is not bar, he relied on Marikar Motors v. MI Ravi Kumar [1982]
52 Comp Cas 362. (Ker.).
8. He submitted that the relationship between the parties is of a commercial
nature and when the agreement resulting in such a relationship provides
for arbitration in case of any differences arising out of such a relationship,
then, the only course available is that such differences should be referred
to the arbitration as agreed upon. It is more so, in case of a foreign
arbitration as held by the Supreme Court in R. M. Investment & Trading
Co. (P.) Ltd. v. Boeing Co. [1994] Suppl. CLA 75/[1994] 4 SCC 54] in which
the Supreme Court taking this view, stayed the proceedings under section
3 of Foreign Awards (Recognition and Enforcement) Act, 1961 pending the
arbitration proceedings. On the same proposition he relied on Svenska
Handelsbanken v. Indian Charge Chrome Ltd. [1994] Suppl. CLA 60 (SC)/[1994]
2 SCC 155 wherein at para 43 [of scc], the Apex Court held that the right
to foreign arbitration provided by the Parliament is an indefeasible right
in which the court does not have any kind of discretion. He also pointed
out, referring to the Singaron Coal Syndicate Ltd. v. Bal Mukand Marwari
AIR 1931 Cal. 772 wherein the court held that if matters which are agreed
to be referred are mixed up in action with matters not agreed to be referred,
there is no reason why the matters agreed to be referred should not be
referred for arbitration leaving the action to go on as to the other matters.
This principle, he submitted, had also been followed by the Company Law
Board itself in two of the cases referred to by him earlier. He further
submitted that reference to arbitration can be refused only when there
are matters outside the arbitration agreement or where fraud, falsification
of documents or forgery is alleged or where the claims of plaintiff is
based on matters foreign to the original agreement. He pointed out that
J&K High Court has taken the similar view in UOI v. Laxmi Ice Factory
AIR 1964 J&K 10. Therefore, he submitted that the legal position is
if the parties had decided to chose their own forum consciously, then,
the court is bound to refer them to the forum chosen by them once it is
established that the matters under consideration arise out of and in connection
with an arbitration agreement.
9. Referring to the decision of the Supreme Court in Haryana Telecom Ltd.
v. Sterlite Industries Ltd. [1999] 34 CLA 246/[1999] 5 SCC 688 on which
Shri Chagla heavily relied on to urge that since the Supreme Court has
laid down the law in that case that matters in a winding up petition could
never be referred to an arbitrator since the arbitrator has no power to
order winding up, similarly, matters covered under a section
397 petition can also not be referred of to an arbitrator, Shri Diwan
pointed out that the Supreme court has not laid down any such law or principle
in this case and the observation made therein was related only in facts
of that particular case and not as a general proposition of law. He pointed
out that the above case was an appeal against the decision of the Division
Bench of High Court of Punjab and Haryana reported in [1999] 3 Comp LJ
91. The Supreme Court did not examine the issue as to whether as a principal
of law, matters in a winding up petition could or could not be referred
to arbitration. Referring to Municipal Corporation of Delhi v. Gurnam
Kaur [1989] 1 SCC 101, he submitted that in this case, the Supreme Court
has laid down the principles of interpretation of a judgment, wherein
it has held that pronouncements of law which are not part of the ratio
decidendi are classed as obiter dicta and not authoritative. In the Haryana
Telecom's case (supra), there were no arguments on the powers of the court
to refer matters covered in a winding up petition to an arbitrator, as
is evident from absence of any mention of such arguments in the judgment.
Therefore, he contended, that only in facts of that case, the Supreme
Court decided that an arbitrator cannot order winding up of a company,
the jurisdiction being exclusive to a court. A reading of the High Court
judgment, he pointed out, would reveal that in case of bona fide disputes,
even matters covered in a winding up petition could be referred to arbitration.
Since the High Court found that there were no bona fide disputes, allowed
the winding up petition. The Supreme Court also upheld the decision of
the High Court observing that the company had become commercially insolvent
and, therefore, in the matters like this, the company should be wound
up. Having come to the decision, the court had observed that an arbitrator
would have no jurisdiction to order winding up of a company. From the
reading of this judgment, he submitted that it would be apparent that
the Apex Court had not disagreed with the proposition of law as laid down
by the Division Bench as indicated earlier, stating that bona fide disputes,
even in a winding up petition could be referred to arbitration' In this
connection, he also referred to Goetze India Ltd. v. Pure Drinks (India)
Ltd. [1993] 3 Comp LJ 68 (P&H) wherein also, the same High Court has
held that if there are bona fide disputes, then, even in winding up proceedings,
the matter could be referred to arbitration.
10. Referring to the contention of Shri Chagla that the word "action"
used in section 45 of the Arbitration Act would cover only matters which
could be agitated in a civil court either by way of a suit or writ and
not proceedings under section
397, Shri Diwan referred to Halsbury's of Laws of England in which
the word "action" has been defined as 'any civil proceedings commenced
by a writ or any other manner rescribed by rules of court. It has a wide
signification as including any method prescribed by those rules of invoking
the court's jurisdiction for the adjudication of determination of alis
or legal right or claim or any justiciable issue, question or contest
arising between two or more persons or affecting the status of one of
them. In its natural meaning "action" refers to any proceeding in the
nature of a litigation between a plaintiff and a defendant. Thus, he submitted
that a proceeding under section
397/section 398
is nothing but a litigation and such the of term "action" would cover
any proceeding initiated before ajudicial authority. He pointed out that
this definition has been approved in Bharat Bank Ltd. v. Ruby General
Insurance Co. Ltd. AIR 1951 Punj. 97. Accordingly, he stated that it is
wrong to suggest that the word "action" used in section 45 of the Arbitration
Act relates only to matters like suit or writ which could be instituted
in a civil court.
11. Summing up his arguments on the scope and application of the provisions
of section 45 of the Arbitration Act, Shri Diwan submitted that once it
is established that the allegations in the petition arise out of or in
connection with an arbitration agreement providing for foreign arbitration,
the Company Law Board has no option but to refer the parties to the arbitration
and this right view has already been taken by a two Member Bench of the
Company Law Board in Navin Kedia's case (supra) and in case of domestic
arbitration, the right view of referring the parties to arbitration in
terms of section 8 of the Arbitration Act has again been taken by a two-Member
Bench of the Company Law Board in three other cases. Therefore, he contented
that the present Bench consisting of two Members cannot take a different
view on this issue. Accordingly, he submitted that as long as the disputes/allegations
in the petition arise out of or in connection with a foreign arbitration
agreement, even in a proceeding under section
397, the of Company Law Board is bound to refer the parties to arbitration
as mandated by section 45 of the Arbitration Act.
12. Shri Subramanian, advocate, supplemented the arguments of Shri Diwan
that we should refer the matter to arbitration by citing two Supreme Court
cases wherein the Apex Court has held that if it is necessary to take
recourse to the terms of the contract for the purpose of deciding the
matter in dispute, then, it must be held that the matter is within the
scope of the arbitration clause and the arbitrator has the jurisdiction
to decide that dispute UOI v. Silween Timber Construction Co. AIR 1969
SC 448 and once the dispute is found to be within the scope of the arbitration
clause, it is no part of the province of the court to enter into the merits
of the dispute A. M. Mair v. Gordhandas Sajarmull AIR 1951 SC 9.
13. Shri Chagla, initiating the arguments on this issue, submitted that
section 45 of the Arbitration Act covers only civil suits/writs, as is
evident from the word "action" as used in that section and does not cover
matters like matrimonial disputes, allegations of oppression, etc. He
also pointed out that section 45 of the Arbitration Act is not a non obstante
section as is evident from the beginning of the section which reads "Notwithstanding
anything contained in Part 1 or in the Code of Civil Procedure, 1908".
Thus, it does not exclude the provisions of other Acts or statutes. The
right under section 399
to file a petition under section
397 for relief against oppression is a statutory right conferred by
the Act and as such not covered under the provisions of section 45 of
the Arbitration Act unlike other common law rights. Further, the reliefs
under section 402 of
the Act cannot be granted by an arbitrator. As a matter of fact, he submitted,
that for application of section 45, the subject-matter of dispute should
be capable of being settled by the arbitrator as provided in article 2(1)
of First Schedule to the Arbitration Act. Unless and otherwise a judicial
body is satisfied that the arbitrator is capable of settling the dispute,
the question of referring the matter to arbitration under section 45 of
the Arbitration Act does not arise. Even section 44 of the Arbitration
Act speaks of only disputes of commercial nature while under section
397 the acts complained of are in the nature of oppressive actions
and has nothing to do with commercial relationship. The provisions of
section 397 are not
invoked for the personal benefit of a shareholder but for the benefit
of the company as well as a large body of shareholders in the representative
capacity. Since the provisions of section
397/section 398
are an exception to the rule of majority, of the forum designated for
looking into allegations of oppression can alone have the jurisdiction
to deal with the same and not a private forum agreed upon by the parties.
14. He pointed out that the power of an arbitrator is limited to settle
the disputes between the parties and he cannot provide the relief to put
an end to the acts of oppression unlike the Company Law Board which has
wide powers under section
402 of the Act unlimited by the other provisions of the Act - Bennet
Coleman & Co. v. UOI [1977] 47 Comp Cas 92 (Bom.). He further stated
that an arbitrator cannot invoke the provisions of section
406 of the Act while the Company Law Board can do so in a section
397/ section 398
of petition. He supplemented this argument by referring to Cosmos Steels
(P.) Ltd. v. Jairamdas Gupta AIR 1978 SC 375 wherein the court held that
in case of ordering of purchase of shares held by the shareholders by
the company in proceedings under section
397/section 398
there is no need to of follow the provisions of section
100 to section 104
of the Act.
On the proposition
that no civil court can have jurisdiction in a matter of allegations of
oppression and mismanagement under section
397/section 398
he cited the case of Piyush K. Guha of v. West Bengal Pharmaceuticals
[1982] 1 Comp LJ 199. To the proposition that Company Law board has wide
powers to give directions even contrary to the provisions of articles,
he relied on Kishore B. Patel v. Patel Engineering Co. Ltd. [1992] 8 CLA
179(Bom.)/AIR 1992 Bom. 114. To the proposition that the role of an arbitrator
is limited and that he cannot grant the reliefs provided by designated
adjudicating bodies, he relied on Chiranji Lal Shirilal Goenka v. Jasjit
Singh [1993] 2 SCC 507 wherein the Apex Court held that in the matters
of probate, only the probate court has exclusive jurisdiction and an arbitrator,
even with the consent of the parties, has no jurisdiction to adjudicate
upon the proof or validity of the will propounded by the executor. He
further submitted that in section
397/section 398
proceedings, the reliefs of are granted on just and equitable grounds
while in case of arbitration it is purely based on legal grounds in terms
of the agreement. In other words, he submitted that when the relief sought
are on equitable grounds, the question of referring the matter to arbitration
does not arise. On the exclusive jurisdiction of the Company Law Board
in the matter of oppression, since it is a special tribunal created by
the Statute, he relied on Premier Automobiles Ltd. v. Kamalkar Shantaram
Wadke AIR 1975 SC 2238 wherein the court held that if an industrial dispute
relates to the enforcement of a right or an obligation created under the
Act then, the only remedy available to the suitor is to get an adjudication
under the Act and only the Industrial Tribunal created under the Act and
not a civil court will have jurisdiction. In this connection, he also
referred to Muddada Chayanna v. Karna Narayana AIR 1979 SC 1320 wherein
the court held :
"Where a special tribunal, out of the ordinary course is appointed by
an Act to determine questions as to rights which are the creation of that
Act, then, except so far as is otherwise expressly provided or necessarily
implied, that tribunal's jurisdiction to determine those questions is
exclusive.'
In view of
this, he urged that since Company Law Board has been created under the
Act to deal with matters of oppression, then, only the Company Law Board
will have exclusive jurisdiction to deal with the matter and not any other
forum including an arbitrator.
15. In this connection, he also referred to section 9 of the Act according
to which the provisions of the Act override memorandum and articles or
any agreement and any provision repugnant to the provisions of the Act
would be void. Therefore, when the right to move the Company Law Board
has been statutorily conferred by the Act on a shareholder, such a right
cannot be taken away by an agreement to refer the disputes to arbitration
as such an agreement would 'be void in terms of section 9 of the Act.
In this connection, he relied on Surrender Kumar Dhawan v. R. Vir [1977]
47 Comp Cas 276 and O. P. Gupta v. Shiv General Finance (P.) Ltd. [1977]
47 Comp Cas 80 wherein the Delhi High Court held that arbitration clause
in the articles of association was void in view of the provisions of section
9 of the Act and as such the court would not stay the proceedings under
section 397 on the
ground that of the articles provided for arbitration in case of disputes
between the shareholders. On the exclusive jurisdiction of the Company
Law Board in matters covered under section
397/section 398,
he drew an analogy of the powers of the company court under section
155 of the Act to state that Supreme Court in Ammonia Supplies Corporation
(P.) Ltd. v. Modern Plastic Containers (P.) Ltd. [1998] 30 CLA 238/[1998]
7 SCC 105 has held that only the company court under section
155 of the Act will have exclusive jurisdiction and the jurisdiction
of the civil court will be impliedly barred.
16. Taking up the decision of the Supreme Court in Haryana Telecom's case
(supra), he submitted, that the Supreme Court has laid down the law that
a winding up petition cannot be referred to an arbitrator inasmuch as
he is incapable of ordering winding up of a company, the jurisdiction
of which is exclusively vested in the High Court. He countered the arguments
of Shri Diwan that this decision was applicable only to the facts of that
case. It is evident from that case, he submitted, that once a particular
relief as provided for by the statute cannot be granted by an arbitrator,
then, the matter cannot be referred to him as in this case the Supreme
Court has observed : 'This, however, postulates, in our opinion, that
what can be referred to arbitrator is only that dispute for matters which
the arbitrator is competent or empowered to decide". Since the proceedings
under section 397 are
alternative to winding up proceedings, the same principles of law as applicable
to winding up proceedings should apply to the proceedings under section
397, and since the Apex of Court has held that winding up matters
cannot be referred to arbitration, proceedings under section
397 also of cannot be referred to arbitration.
17. Shri Sarkar, senior advocate, appearing for 8th respondent, while
concurring with the arguments of Shri Chagla, submitted that the provisions
of section 397/section
398 of are beneficial provisions to protect the interest of the shareholders,
the company and the public interest and as such are not amenable to arbitration.
In between a contractual forum and a statutory forum, it is the later
which would prevail. When the allegations are that there have been acts
of oppression and consequent wrongful acts against the shareholders and
the company, the only remedy provided by the statute is to approach the
Company Law Board under section
397/section 398
and the powers of the Company Law of Board cannot be delegated by an agreement
by the parties to a private forum. He further submitted that, earlier,
a composite petition under section
397/section 398
and of section 433
(f) could be filed and in view of the Supreme Court decision in Haryana
Telecom's case (supra), the matter would have been heard by the court
without being referred to arbitration. Just because, Company Law Board
has been designated now to deal with the matters under section
397, Company Law Board cannot take a of different view. Referring
to World Wide Agencies (P.) Ltd. v. Mrs. Margaret T. Desor [1990] 3 CLA
248 (SC)/AIR 1990 SC 737, he submitted that in that case the Supreme court
held that a combined petition under section
397/section 398
and of section 433
(f) could be filed. Referring to the decisions of this Board cited by
Shri Diwan, Shri Chagla submitted that the decision of the Apex Court
in Haryana Telecom's case (supra), should be deemed to have overruled
the decisions of this Board. Therefore, according to him, in line with
the Supreme Court decision in Haryana Telecom's case (supra), the Company
Law Board should dismiss the application filed by the respondent for referring
the matter to arbitration and the Company Law Board should proceed with
the petition.
18. We have considered the arguments of the counsel. From the arguments
of the counsel, it emerges that the contention of Shri Diwan is that,
in terms of section 45 of the Arbitration Act, the Company Law Board is
bound to refer the matter to arbitration while the contention of Shri
Chagla is that matters covered under section
397 are an exception to the provisions of section 45. Section 45 of
the Arbitration Act reads as follows :
"Power to judicial authority to refer parties to arbitration - Notwithstanding
anything contained in Part 1 or in the Code of Civil Procedure, 1908,
a judicial authority when seized of an action in a matter in respect of
which the parties have made an agreement referred to in section 44, shall,
at the request of one of the parties or any person claiming through or
under him, refer the parties to arbitration, unless it finds that the
said agreement is null and void, inoperative or incapable of being performed."
Since section 44 has been referred in the above section, we shall extract
section 44 also, which reads as follows :
'Definition - In this Chapter unless the context otherwise requires "foreign
award" means an arbitral award on differences between person arising out
of legal relationships, whether contractual or not, considered as commercial
under the law in force in India, made on or after 11th day of October,
1960 -
(a) in pursuance of an agreement in writing for arbitration to which the
convention set forth in First Schedule applies, and
(b) in one of such territories as the Central Government, being satisfied
that the reciprocal provision has been made may, by notification in the
Official Gazette, declare to be territories to which the said convention
applies.'
Since Shri Chagla referred to article II of Schedule I to the Arbitration
Act in terms of section 44, we shall extract the same :
"Each contracting state shall recognise an agreement in writing under
which the parties undertake to submit to arbitration all or any differences
which have arisen or which may arise between them in respect of defined
legal relationship, whether contractual or not, concerning a subject-matter
capable of settlement by arbitration."
19. It is to be noted that this Boardhas decided, at least in 4 cases,
which have all been cited by Shri Diwan that in view of the mandatory
provisions of section 8 and section 45 of the Arbitration Act, once it
is established that the matters agitated in a section
397/section 398
petition arise out of of or in connection with an arbitration agreement,
then, the Company Law Board has to refer the parties to arbitration. To
take a different view in the instant case, there have to be persuasive
materials in the form of new points of law not considered in those orders
or decisions of a higher forum like a High Court or Supreme Court contrary
to the decision taken by this Board. Now we shall analyse the various
issues raised by Shri Chagla, including Haryana Telecom's case (supra),
to examine as to whether the decision of this Board requires reconsideration.
The point urged by him, in a nutshell, is that the proceedings under section
397/section 398
of are outside the purview of section 45 of the Arbitration Act for the
following reasons :
* Matters which could be agitated in a suit/writ in civil courts alone
would be governed by section 45 in view of the term "action" used in that
section.
* The right under section
399 is a statutory right.
* Only a
forum created by a statute could have jurisdiction on rights created by
that statute.
* An arbitrator cannot grant the reliefs envisaged under section
402.
* A statutory forum has precedence over a private forum.
* Section, 9 of the Act is a bar to take away the statutory right by an
agreement.
* In the same analogy that winding up petitions cannot be referred to
arbitration, petitions under section
397 of can also not be referred to arbitration.
20. He cited a number of authorities in support of his arguments. In Nav
in Kedia's case (supra), this Board had examined many of the issues now
raised by Shri Chagla and came to the conclusion :
"14. Having held that the matter before us is covered by arbitration,
the next issue for consideration is whether we are bound to refer the
parties to arbitration in terms of section 45. The stand taken by the
petitioners to advance their arguments that we should not refer the matter
to arbitration, is two-fold. One is that as a specially constituted tribunal
with wide powers to grant various reliefs to put an end to the acts complained
of, to come before which is a statutory right has been conferred on shareholders,
the Company Law Board cannot abdicated its jurisdiction and confer the
same on a private forum. The other ground is that a private forum, namely,
in this case, the arbitrator, cannot grant the reliefs as sought for by
the petitioners which can only be granted by us by virtue of the provisions
of section 402 of the
Companies Act. Mr. Singh relied on a number of cases, which we have already
indicated earlier, to state that matters under section
397 cannot be matters for arbitration. In of all these cases, the
issue that arose was whether a proceeding under section
397/section 398
or proceedings for of winding up could be stayed on account of either
an agreement between the shareholders for referring the disputes to arbitration
or by virtue of the provisions of articles of association to that effect.
It is well known that, to stay or not to stay the proceedings under section
34 of the Arbitration Act, when a plea of arbitration is taken, was solely
within the discretion 1of the court before which such a plea was taken.
While in the cases cited by Shri Singh, the courts had refused to exercise
their discretion to stay the proceedings, in cases cited by Shri Sarkar,
the courts exercised the discretion to stay the proceedings. However,
after coming into force of Arbitration and Conciliation Act, 1996, the
position has changed, more particularly, with reference to foreign arbitration.
Now it is mandatory, by virtue of section 45 that a judicial body will
have to refer the parties to arbitration once it is seized of an action
in respect of which the parties have made an agreement for arbitration
to which convention in the first schedule to the Act applies. The ingredients
of this section are a judicial authority should be seized of an action
in the matter of which the parties have made an agreement for arbitration;
one of the parties should make a request for referring the parties to
arbitration and that the judicial body does not find that the said agreement
is null and void, inoperative or incapable of being performed. The Company
Law Board is a judicial authority and this fact is not controverted. It
has been seized of a matter in which, as elaborated earlier, there is
an agreement between the parties for arbitration. The petitioners did
not advance any arguments to convince us that the agreement is null and
void, inoperative or incapable of being performed. They have only taken
a stand, in reply to the application, that referring the matter to arbitration
would be expensive, time consuming and would require transfer of document
from India to London for production as evidence. This stand, according
to us would not make the agreement as inoperative or incapable of being
performed. Thus, all ingredients of section 45 of the Arbitration and
Conciliation Act, 1996, are present. Once it is so, we feel that there
is no further scope for us to take into consideration the arguments of
Shri Singh about the statutory rights of the shareholders to move the
Company Law Board, and that a specially constituted tribunal cannot abdicate
its jurisdiction, etc. We have to do what the law mandates us to do. Section
45 requires us to refer the parties to arbitration and we have no discretion
in this matter."
There are certain new points raised by Shri Chagla which were not considered
in Navin Kedia's case (supra). They are, that the proceedings under section
397/section 398
are alternative of to a winding up petition and since the Supreme Court
has held in Haryana Telecom's case (supra) that winding up matters cannot
be referred to an arbitrator, similarly section
397 proceedings also cannot be referred to arbitration, that section
45 deals only matters which could be agitated in a suit, that only disputes
of commercial nature can be referred to arbitration, that the only matters
which could be agitated in a civil court could come under the purview
of section 45, etc.
21. He also submitted that the arbitration agreement, providing for taking
away the right of the petitioner, created under the Act, to move the Company
Law Board is contrary to the provisions 'of section 9 of the Act. In this
connection, we may refer to the observation of this Board in 20th Century
Finance Corporation's case (supra), wherein it is observed :
"Shri Dholakia referred to section 9 of the Act to state that no provision
of any agreement can take away the statutory rights conferred by the Companies
Act and he also relied on a Delhi High Court case in this regard. Section
9 of the Act deals only with memorandum, articles or any agreement or
any resolution which are repugnant to the provisions of the Act and does
not deal with the provisions of other statutes. As a matter of fact section
5 of the Arbitration Act which reads."
Notwithstanding anything contained in any other law for the time being
in force, in matters governed by this part, no judicial authority shall
intervene except where so provided in this Act makes it clear that in
case of an arbitration agreement, a judicial authority cannot intervene
except as provided in the Arbitration Act, notwithstanding anything contained
in any other law .... In other words, section 9 of the Act does not affect
a right of a shareholder to invoke the provisions of section 8 of the
Arbitration Act in case there is an agreement to refer the disputes to
arbitration. Thus, it is clear that the provisions of Arbitration Act,
have overriding effects on the provisions of section 9 of the Act.
22. Shri Chagla heavily relied on the judgment of the Apex Court in Haryana
Telecom's case (supra), to the proposition that, in that case, the court
has laid down the law that winding up matters cannot be referred to an
arbitrator since he is incapable of ordering winding up. In this connection,
we are inclined to agree with Shri Diwan that the decision in that case
was only with reference to the facts of that case and not as a general
proposition of law. It is to be noted that the Supreme Court considered
the issue on an appeal against the judgment of the Division Bench of Punjab
and Haryana High Court. A reading of that judgment would reveal that it
is that court which had laid down the proposition of law as can be seen
from para 12 of the judgment which reads as follows :
"Therefore, it must be treated as a settled proposition of law that the
arbitration clause does not ipso facto oust the jurisdiction of the company
court to entertain a winding up petition and the party invoking the arbitration
clause for making a request to the company court to refer the matter to
arbitration must satisfy the said court that there is a bona fide dispute
between the parties to the agreement which requires reference to the arbitrator,
and is not sufficient for the applicant to say that the court should refer
the matter to the arbitration because there is a clause in the agreement
for making reference to the arbitrator.'
In this case, the High Court has also referred to the judgment of the
same court in Goetze India Ltd.'s case (supra) wherein the court has held
that if the party making the application under section 34 of the Arbitration
Act, 1940 ('the old Act') is in a position to establish that there are
bona fide disputes, then the court had the discretion to stay the proceedings
in a winding up petition. From these decisions, it emerges that if the
party seeking reference to arbitration is in a position to establish that
there is a bona fide dispute between the parties which requires reference
to the arbitrator, then, the court would refer the matter to arbitration.
In the Supreme Court judgment, we are not able to find anywhere that the
Supreme Court-had taken a different view from that of the High Court.
As a matter of fact the Supreme Court in para 4 has observed : "This,
however, postulates, in our opinion, that what can be referred to the
arbitration is only that dispute or matter which the arbitrator is competent
or empowered to decide'. Having observed so, in para 5, the Supreme Court
has held that since the company had become commercially insolvent, it
should be wound up and that an arbitrator would have no jurisction to
order winding up of a company. Normally, an observation of a court on
a point of law, unless had been made after detailed examination of the
same cannot be considered to be a ratio decidendi. In this case, a reading
of the judgment would show, that there is no discussion, as a point of
law, as to whether, winding up proceedings are outside the scope of section
8 or section 45 of the Arbitration Act. Therefore, we have no hesitation
to hold that the observation of the Apex Court in Haryana Telecom's case
(supra) was specific to that case and not to be taken as a binding decision
to be applied in all winding up proceedings, when the issue of arbitration
is raised. Our line of reasoning in this regard conforms to the principles
laid down by the Supreme court in Gurnam Kaur's case (supra) cited by
Shri Diwan in regard to interpretation of judgments. Even assuming, for
arguments sake, that the Supreme Court has laid down the law, yet it is
to be noted, that the same is with reference to winding up proceedings
and not with reference to proceedings under section
397/ section 398.
These proceedings are of diametrically opposite to winding up proceedings.
The death of a company is the result of a winding up order, while in a
section 397/section
398 proceedings, the result is the continued of survival of a company.
That is why, the Company Law Board has to come to the conclusion that
there are just and equitable grounds for winding up of the company, but
the same would not be in the interest of the shareholders. The reliefs
to be granted under section
402 depend on the facts on of a case, ensuring that such reliefs would
put an end to the acts complained of. Thus, the principles to be applied
to a winding up proceedings cannot be straightaway applied to proceedings
under section 397/section
398. In this connection of the decision of this Board in Dipak G.
Mehta v. Shree Anupar Chemicals (India) (P.) Ltd. [1999] 33 CLA 393 may
be referred. In that case, the petitioners had filed a petition before
the Bombay High Court for winding up of the company under section
433 (f) of the Act. The same was dismissed on the ground that there
were no just and equitable grounds to wind up the company. Later the petitioners
filed a petition, more or less on the same grounds, under section
397/section 398.
The respondents took a stand that since the Bombay High Court had dismissed
the winding up petition on finding that there were no just and equitable
grounds, the CLB could not consider the petition. This Board, after observing
:
"Since section 397/section
398 proceedings are alternative to a of winding up proceedings, it
is not that only those grounds which are considered to be just and equitable
in a winding up proceedings, could be the grounds in a section
397/section 398
of petition. In the Bombay proceedings, the court held that since there
was no dead lock in the management, the company could not be wound up
on just and equitable grounds. It did not examine whether allegations
of oppression had been established. That is why, the court itself suggested
that the petitioners may initiate the present proceeding under section
397/section 398.
...", gave various directions with a view to put an end to the matters
complained of. This order of the Board was taken on appeal to the same
High Court and the High Court upheld the order of the Company Law Board
{[1999] 35 CLA 68 (Bom.)}. Thus, it is not necessary that the principles
applicable to winding up petition ipso facto are applicable to a proceeding
under section 397 /
section 398.
23. Another point raised by Shri Chagla has been that an arbitrator is
incapable of granting the reliefs as provided for in
section 402 of the
Act. In regard to this argument, no doubt Company Law Board has vast powers
under section 402,
yet, granting of relief depends on facts of a particular case and if for
granting the relief, determination of bona fide disputes is required and
the same is covered by an arbitration agreement, then, it is for the arbitrator
to decide these issues and not the Company Law Board. In this connection
we may also refer to the Delhi High Court judgment in Gurnail Singh Gill
case (supra). In this case, the court itself, as pointed out by Shri Chagla,
in exercise of the powers under section
402, referred the parties to arbitration. It did so because, in facts
of that case, it felt that the reliefs justified in that case could be
granted by the arbitrator notwithstanding the fact that the powers under
section 402 are very
wide. This case settles the claim of Shri Chagla that since an arbitration
cannot grant the relief provided for under section
402, the matter cannot be referred to an arbitration. Granting of
relief in a proceeding under section
397/section 398
is of discretionary depending on the facts of a case. If the Company Law
Board comes to a conclusion that appropriate relief justified in a particular
case can be granted by an arbitrator, then, there is no reason why the
matter cannot be referred to arbitration. In other words, even in a section
397/section 398
petition, if the party applying for of referring the matter to arbitration
is in a position to establish that there are bona fide disputes arising
out of and in connection with an arbitration agreement, and that the arbitrator
could settle the disputes by appropriate reliefs, then, the Company Law
Board will have to refer the parties to Arbitration Act. Perhaps, that
is the reason why section 34 of the old Act provided for staying of the
proceedings but presently in terms of section 8 and section 45 of the
Arbitration Act, such a stay of proceedings is not possible other than
referring the parties to arbitration.
24. In regard to the claim of Shri Chagla that a statutory right created
under the Act could only be adjudicated by the specialised forum created
under that Act, both the counsel have cited authorities taking different
views on the subject and it is not necessary to refer them again other
than referring to the Supreme Court decision in a case unreported judgment
in Civil Appeal No. 7055 of 1996 dated 10th April, 1996 referred to by
this Board, in Navin Kedia case (supra) in which matters covered in a
petition under section
111 of the Act, seeking rectification of the register of members,
were directed to be referred to arbitration by the Supreme Court in view
of the agreement between the parties in terms of section 45 of the Arbitration
Act. Therefore, just because the Company Law Board has been constituted
by the Act to have exclusive Jurisdiction, it does not mean that the provisions
of section 45 are not applicable to the proceedings before it.
25. The next
issue raised by Shri Chagla is that section 45 covers only those matters
which could be agitated in suits/writs and not the proceedings under section
397/section 398,
of in view of the term "action" used in that section. In other words,
according to him, only matters which could be agitated in civil courts
could be covered under section 45. We feel that this particular word cannot
be considered in isolation, without reference to the preceding words a
judicial authority, when seized of. The words 'judicial authority' have
not been used in the entire Act, but only in sections 5, 8 and 45. In
other sections, only the word 'court' has been used. If the contention
of Shri Chagla that the term 'action' would mean only suits/writs, which
have necessarily to be instituted only before a court, the Legislature
could have used the word 'court' in section 45, instead of 'judicial authority'.
In that case, an issue that would have come up for examination is, whether
the Company Law Board is a court for the purposes of section 45. Thus
we are of the view, that by using the word 'judicial authority' in section
45, the Legislature has actually enlarged the scope of the word 'action'
and has not restricted to suits/writs. Further, section 44 talks of differences
arising out of legal relationship considered to be commercial under the
law of India. This being the position, any dispute arising out of the
legal relationship of a commercial nature would give rise to initiate
an action. It is how even Halsbury's Law of England defines the term 'action'.
Section 41 of the Act provides that, to become a member of a company,
one has to agree in writing and it is a settled as principle of law that
the covenants of the articles bind a member' if there is a contract between
him and the company. In this connection, we may also refer to section
36 of the Act. Such an implied contract is nothing but commercial and
once a person becomes a member of a company, legal relationship is established
between the company and the member. Thus when a member exercises his right
arising out of such relationship in filing a petition under section
397/section 398,
the same would fall within the term of faction'.
26. Thus, we are not in a position to agree with Shri Chagla that proceedings
under section 397/section
398 are out side of the purview of section 45 of the Arbitration Act.
Such a situation would completely nullify the object of the Act, as, it
is quite possible that, in a given case, to avoid arbitration on disputes
squarely traceable to the terms of an arbitration agreement, one can initiate
a proceeding under section
397/section 398
and claim that provisions of section of 45 have no application. In the
same way, one could ask for referring the parties to arbitration merely
on the ground that there is an arbitration agreement between the parties
even though the disputes may be out side the scope of the agreement, just
to defeat the judicial proceedings. That is why section 45 stipulates
satisfaction of certain requirements for referring the parties to arbitration.
27. We shall now summarise our findings on the various issues raised before
us on the scope and application of section 45 of the Arbitration Act vis-a-vis
proceedings under section
397/section 398
:
* The right to file a petition under section
397/section 398
of arises out of commercial relationship between a shareholder and the
company.
* The word 'action' would cover a proceeding under section
397/section 398.
* While considering a petition under section
397/section 398,
the of Company Law Board is seized of an action.
* Proceedings under these sections are not outside the purview of section
45 of the Arbitration Act.
* The principles applicable to a winding up proceeding, need not necessarily
apply to a proceeding under section
397/section 398
& The provisions of the Arbitration Act of are not repugnant to the
provisions of section 9 of the Act.
* Once the Company Law Board is convinced that the matters governed in
a petition under section
397/section 398
of the Act of relate to or arise out of or in connection with an arbitration
agreement and that the reliefs appropriate to the facts of the case could
be determined/granted by an arbitrator, then, the Company Law Board is
bound to refer the matter to arbitration in terms of the mandatory provisions
of section 45 of the Arbitration Act provided that the agreement is not
null and void, inoperative or incapable of being performed.
* If any of the requirements of section 45 is not satisfied, then, the
Company Law Board can decline to refer the parties to arbitration.
* The judicial authority has to prima facie, come to the conclusion, that
the requirement of section 45 have been fulfilled, before referring the
parties to arbitration.
28. Having discussed the scope of section 45 and having come to the decision
that there is no bar in referring the matters covered under section
397/section 398
to arbitration of depending on the facts of a case, we shall deal with
the instant application under section 45 of the Arbitration Act.
29. Shri Diwan submitted that it is the petitioner who is in the management
of the company in his capacity as the managing director and as such his
filing this petition alleging oppression against himself being the single
shareholder other than the respondent does not arise. Further, he pointed
out that all the complaints in the petition relate to the arbitration
agreements and as such arise out of and in connection with those agreements.
He submitted that at the time of entering into JVA, the petitioner openly
and without reservation agreed for all the terms contained therein and
as such he cannot now complain that certain terms of the agreement are
prejudicial to his interest or the company. The very fact that he has
not alleged that the agreement was entered into fraudulently or due to
undue influence or coercion, he is estopped from questioning the terms
of the agreement. He further submitted that most of the terms of the agreement
relating to the affairs of the company have been incorporated in the articles
of the company. He further submitted that there are only two shareholders
in the company and both were the signatories to the JVA. The parties,
on their own volition, agreed to refer the disputes arising out of the
agreement to arbitration by ICC. In other words, he submitted that ICC
is the consensual forum selected by the parties in their own wisdom. Going
through the averments in the petition and also the various reliefs sought
for, he pointed out that the foundation of the petition itself arises
out' of the various terms of the JVA and as such all the disputes in the
petition arise out of or in connection with the JVA in which there is
an arbitration agreement. He also pointed out that even though the company
was not a party to the JVA, yet, the company itself is the creation of
the JVA and it has taken all benefits out of the JVA including incorporating
many of the terms of JVA in the articles and as such the company not being
a party to JVA is irrelevant. He further pointed out that the petitioner
has impleaded many unnecessary parties without any allegations against
them or seeking any relief against them. Accordingly, he submitted that
his application should be allowed and the petition be dismissed.
30. Shri Subramaniam, supplementing the arguments of Shri Diwan, submitted
that even though the company was not a party initially to the JVA, yet,
later, through a subsequent agreement dated 14th January, 1998 at ex.
A-9 to the petition, the company had adopted the JVA and the shareholders'
agreement dated.28th June, 1991 and as such the same is binding on the
company. He also went through the various reliefs sought in the petition
and pointed out that most of the reliefs sought are in relation to the
terms of the JVA or the other agreements, all of which contain an arbitration
clause. He also stated that to adjudicate on the disputes, recourse has
to be taken to these agreements and if it is so, then, it must be held
that the matter is within the scope of arbitration clause and that the
arbitrator will have jurisdiction to decide those disputes as held in
Silween Timber & Construction Co. (India) case (supra).
31. Shri Chagla, dealing with the application, submitted that, one of
the important requirements of section 45 of the Arbitration Act is that
all the parties before the Company Law Board should be parties to the
arbitration agreements. In the present case, the company, in the affairs
of which acts of oppression have been complained, is not a party to the
JVA and in other agreements, the petitioner is not a party and as such
the main requirement of section 45 for referring the matter to arbitration
is absent. In this connection, he referred to Shanti Prasad Jain v. Kalinga
Tubes Ltd. AIR 1965 SC 1535 in which the court held that a company not
being a party to an agreement is not bound by the same. He submitted that
the disputes before the Company Law Board are not private disputes between
the shareholders but disputes relating to the affairs of the company and
the complaint of the petitioner is that by oppressive conduct, the respondent,
being the majority shareholder, is acting against the interest of the
company. No doubt, he submitted, that the petitioner with open mind entered
into the JVA but the bona fide expectations arising out of the JVA have
been denied by the respondents resulting in adverse impact on the fortunes
of the company. In other words, he contended that the conduct of the respondents
is against the spirit of the partnership principle Ps under which the
company was envisaged and incorporated. He submitted that unilateral enforcement
of the terms of the agreement has resulted in oppressive conduct on the
part of the respondent and the same is questioned in this petition. Thus,
he complained that the terms of the agreements are acting unequally in
favour of one party. He contended that the arbitrator would not be in
a position to decide whether the enforcement of the terms of the agreement
is oppressive or not other than determining the legality or otherwise
of the agreement. In this connection, he referred to Sheth Mohan Lal Ganpatram
v. Shri Sayaji Jubilee Cotton & Jute Mills [1964] 1 Comp LJ 326 (Bom.)
wherein it was held, that in a section
397/section 398
of petition it is not the legality or otherwise of an action that is examined
but only as to whether such actions could be termed as oppressive or prejudicial
to the interest of the company. He referred to the decision of the Supreme
Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India)
Holding Ltd. [1981] 51 Comp Cas 743/AIR 1981 SC 1298 in which the court
approved the decision of the House of Lords in Ebrahimi v. Westbourne
Galleries Ltd. [1973] AC 360 wherein Lord Wilberforce observed :
"The just and equitable provision does not, as the respondents suggest,
entitle one party to disregard the obligation he assumes by entering a
company, nor the court to dispensing from it. It does, as equity always
does, enable the court to subject the exercise of legal right to equitable
consideration; considerations, that is of a personal character arising
between one individual and another, which may make it unjust or inequitable,
to insist on legal rights, or to exercise them in a particular way",
and stated that Company Law Board alone would be in a position to examine
the provisions of the agreements on equitable considerations and not the
arbitrator. He again referred to the Needle Industries case (supra) wherein
the Supreme Court has approved the proposition as contained in Lindley
on Partnership that "the utmost good faith is due from every member of
a partnership towards every other member; if any dispute arises between
partners touching on any transaction by which one seeks to benefit himself
at the expense of the firm, he will have to be required to show, not only
that he has the law on his side, but that his conduct will bear to be
tried by the highest standard of honour". Shri Chagla submitted that one
of the main allegations in the petition is that, in the guise of the JVA,
the respondent is not allowing the company to export its products to various
countries and is routing the exports only through its own company without
disclosing the prices at which they are being sold and in the process
of denying the company the benefits of the best prices possible. This,
even though, may be legal in terms of the JVA, yet, it is a grave act
of oppression against the shareholders and against the interest of the
company. This, he submitted, the arbitrator would not be in a position
to redress while the Company Law Board in exercise of its equitable jurisdiction
would be in a position to do. He further submitted that even though many
of the terms of the JVA were incorporated in the articles, yet the arbitration
clause has not been incorporated and as such cannot be enforced against
the company. To support this argument, he relied on the unreported decision
of the Bombay High Court in Vijay Kumar Shankar Rao Thakur v. Thakur Savadekar
& Co. Ltd. (Company Petition 259 of 1992) wherein the court held that
no terms of agreement between shareholders would bind a company unless
the same are incorporated in the articles. On the same proposition, he
relied on another unreported decision of the Bombay High Court in the
matter of Aditya Textile Industries (P.) Ltd. (Company Petition 339 of
1998) as also on V. B. Rangaraj v. V. B. Gopatakrishnan [1991] 6 CLA 211
(SC)/AIR 1992 SC 453.
32. In the second paragraph of this order, we have summarised the factual
aspect of this case. The main acts of oppression alleged in this petition
relate to the sole distribution agreement by which all exports of the
company are to be routed/effected through the 2nd respondent, termination
of technical collaboration agreement with 8th respondent (Welcast), depriving
the company from obtaining local orders by counter bidding by the 1st
respondent in tenders floated by KIOCL, terminating the technical collaboration
agreement with the 9th respondent and non implementation of an agreement
entered into between the respondent and the petitioner in Dubai on 30th
October, 1998. On the basis of these allegations, the reliefs sought,
inter alia, include cancellation and termination of the sole distributor
agreement, enforcement of Dubai agreement, equalisation of shareholding
between the respondent and the petitioner, amendment to articles and the
JVA, ordering the 1st and 2nd respondent to pay US Dollars 10 million
byway of damages, directing the respondent from contending that the agreements
between respondent Nos. 8 and 9 have been terminated, appointment of an
independent chairman to preside over all general body meetings and the
Board meetings, and permanent injunction restraining 1st and 2nd respondent
from acting contrary to Dubai agreement, acting in violation of the JVA
and other agreements entered into along with the JVA, from competing with
the company, respondent Nos. 8 and 9 in India and ordering the 1st respondent
to comply with the terms of JVA and other agreements to supply all technical
know how and technology to the company.
33. Even though there are 11 parties before us, the main parties are,
the petitioner who has filed this petition alleging oppression, the 1st
respondent against which acts of oppression are alleged and the company
in the affairs of which oppression is alleged. Section 2(1)(h) states
that "party means a party to an arbitration agreement". It is on record
that all the three are not parties to all the agreements except to the
non-competition agreement, in the matter of which there is no allegation
or relief sought. Thus there is no commonality of parties in all these
agreements. Since, as we have already mentioned, there are only 3 main
parties in the proceedings before us, and to invoke the provisions of
section 45, the arbitration agreement should be among all these 3 parties.
It is evident from section 45 which states "at the request of one of the
parties" to indicate that there should be commonality of parties to the
proceedings before the judicial authority and the agreement. We have already
pointed out that there is only one agreement among all the three, i.e.,
the non-competition agreement. The main reliance of the respondent in
moving this application is by virtue of the JVA, which is only between
the petitioner and the 1st respondent. Shri Subramaniam pointed out that
the company has adopted the JVA in the agreement dated 4th January, 1998
and as such it has become a party to the JVA and, therefore, the same
is binding on the company. We have seen the agreement dated 4th January,
1998. Even though, the petitioner has signed the agreement as a director
of the company, the agreement itself is only between the 1st respondent
and the company and in the preamble to the agreement reciting the parties,
there is no mention of the petitioner nor he has signed the agreement
in his individual capacity as was done in respect of the JVA. Instead
of a tri-parte agreement, it is a bi-parte agreement. Mere reference to
other agreements in this agreement does not mean that the parties to the
earlier agreements are parties to this agreement. Since the petitioner
is not a party to the agreement dated 4th January, 1998, he has every
right to claim that the arbitration agreement between him and the respondent
can not bind the company. Thus, our observation that there is no commonality
of parties to the present proceedings and the agreements still holds good.
Therefore, we are not in a position to hold that the company is a party
to the JVA. If so, then, as rightly pointed out by Shri Chagla, relying
on Shanti Prasad Jain's case (supra), an agreement, to which a company
is not a party, does not bind the company. In the said application, the
1st respondent has also relied on the other agreements.. As we have pointed
out earlier, except in case of non-competition agreement, all the three
parties who are the main parties before us are not parties to those agreements.
Thus, we find that there is no commonality of all the three parties in
all the agreements relied upon by the 1st respondent. When the application
of the provisions of a statute visits with certain disability on the rights
of a person, then the provisions of the that statute have to be strictly
construed. Section 45 talks of parties having made an agreement, and if
one applies for referring the matters to arbitration, then, in both the
legal proceedings and the agreement, the parties should be common for
the judicial authority to refer them to arbitration as per the arbitration
agreement. Since, the respondent has invoked the arbitration clause in
the JVA to which the company is not a party, and other agreements to which
the petitioner is not a party, one of the main requirements of section
45 of the Arbitration Act, of the parties being common, has not been satisfied
and as such we do not find any scope to allow CA 254 of 1999 and refer
the parties to arbitration. Accordingly, this application is dismissed.
Since, we are dismissing this application on the lone ground of there
being no commonality of parties, we have not gone into the other issues
argued by the counsel for the parties, including the main issue as to
whether, the matter contained in the petition arise out of or in connection
with the arbitration agreements.
34. Having dismissed CA 254 of 1999 on the ground that there is no commonality
of parties to the arbitration agreements and the present petition, we
shall deal with the prayer of the petitioner to stay the proceedings before
the ICC/restrain the respondents from taking further steps in the ICC
proceedings. Shri Chagla initiating arguments on this issue, submitted
that to avoid conflicting decisions, one by the Company Law Board and
the other by ICC, the Company Law Board should invoke its inherent jurisdiction
to stay the arbitration proceedings. He submitted that, since the Company
Law Board is a court of equity, justice and honour, by exercising its
just and equitable jurisdiction, the Company Law Board should stay the
arbitration proceeding. Even otherwise, he submitted that by virtue of
the provisions of section
402 (g) of the Act, the Company Law Board could pass any order on
just and equitable grounds. Further, in the instant case, since the respondent
initiated the arbitration proceedings only after filing of this petition,
it cannot be allowed to proceed with the arbitration proceedings. He referred
to Tractorexport v. Tarapur & Co. AIR 1971 SC 1 wherein, in an application
for stay of a suit under section 3 of Foreign Awards (Recognition and
Enforcement) Act, 1961 applying the principles of section 35 of the old
Act, the court had restrained the party from proceeding with arbitration
in Moscow during the pendency of the legal proceedings. Accordingly, he
submitted that there is no bar, even statutorily, in Company Law Board
restraining the respondent from further proceeding with the arbitration
by lee. He further submitted that while under section 8 of the Arbitration
Act, parallel arbitration proceedings in domestic arbitration are envisaged,
in the absence of any such a provision in section 45 of the said Act,
it should be perceived that foreign arbitration proceedings cannot simultaneously
continue. Therefore, both in law as well as in equity, the arbitration
proceedings can be stayed or the respondent restrained.
35. Shri Sarkar supplementing the arguments of Shri Chagla on this issue,
again referred to Tractorexport case (supra) and stated that notwithstanding
the coming into force of the Arbitration Act, 1996 the principles of section
35 of the old Act, could still be applied according to which once legal
proceedings are initiated and the same are not stayed, then, the arbitrator
cannot proceed with the arbitration and if it is still continued, then,
such proceeding would be invalid. According to him, in the absence of
the provisions of concurrent continuation of foreign arbitration under
section 45 of the Arbitration Act unlike such provision found in section
8(3) of the Arbitration Act in relation to domestic arbitration, the principles
of section 35 of the old Act, should be applied in case of foreign arbitration.
He also drew support from section 5 of the Arbitration Act to state that,
by virtue of that section, no judicial authority will intervene only in
domestic arbitration and as such it should be construed that foreign arbitration
is subject to intervention by a judicial authority which would also include
power to stay the arbitration proceedings.
36. Shri Anil Diwan submitted that the power of granting interim reliefs
in a section 397/section
398 proceeding by the of Company Law Board is governed by the provisions
of section 403 of the
Act, according to which such powers are to be exercised only in relation
to the conduct of the affairs of the company and as such cannot extend
to stay the proceedings before ICC or to restrain the respondent from
prosecuting those proceedings. Therefore, he submitted that statutorily
the Company Law Board has no powers for granting any relief in matters
other than in the conduct of the affairs of the company. He submitted
that what is not statutorily conferred cannot be exercised under inherent
powers. Regarding the power of the CLB to restrain the respondent from
proceeding with the arbitration, he referred to section 41(b) of the Specific
Relief Act, 1963, and pointed out that a court can restrain a person from
prosecuting proceedings only in a court subordinate to that court. In
this connection he referred to Cotton Corporation of India Ltd. v. United
Industrial Bank Ltd. [1983] 4 SCC 625, wherein the court has observed
:
"Court has no jurisdiction either under section 41(b) of the Specific
Relief Act or underlies inherent powers under section
151, CPC to grant temporary injunction restraining a person from instituting
any proceeding which such a person is otherwise entitled to institute
in a court not subordinate to that from which the injunction is sought."
If that be the case, the Company Law Board has to examine, before exercising
its inherent powers, whether ICC is subordinate to the Company Law Board
before considering the prayer for restraining the respondent from prosecuting
his case before the icc. Obviously, the answer would be in the negative.
Countering the arguments of Shri Sarkar that the principles of section
35 of the old Act should be applied, Shri Diwan pointed out to the observation
of the Supreme Court in Sundaram Finance Ltd. v. NEPC Ltd. [1999] 32 CLA
321 wherein the court has observed :
"The 1996 Act is very different from the Arbitration Act, 1940. The provisions
of this Act have, therefore, to be interpreted and construed independently,
and in fact, reference to 1940 Act may actually lead to mis-construction.
In other words, the provisions of 1996 Act have to be interpreted being
uninfluenced by the principles underlying the 1940 Act. In order to get
help in construing these provisions, it is more relevant to refer to the
UNCITRAL Model Law rather than the 1940 Act."
Accordingly, he submitted that provisions of old Act cannot be applied.
Referring to Renu Sagar Power Co. Ltd. v. General Electric Company [1984]
4 SCC 679, Shri Diwan submitted that the Supreme Court, in interpreting
section 3 of the Foreign Awards Act as amended by Act 47 of 1973 has held
that it is the obligation of the court to stay the legal proceedings commenced
by a party to a foreign arbitration agreement. In other words, he submitted
that it is the arbitration proceedings which gets precedence over the
legal proceedings. He further pointed out that section 45 of the Arbitration
Act has gone one step further to mandate a judicial authority to refer
the dispute to arbitration. Referring to section 16 of the Arbitration
Act and also articles 4 and 6 of ICC Rules of Arbitration, he submitted
that it is for the arbitral tribunal to decide as to the existence, validity
and the scope of the arbitration agreement. Once it is prima facie established
before the judicial authority that the matters under dispute before it
are covered by arbitration agreement, it has no option but to refer the
same to arbitration and, therefore, the question of staying the arbitration
proceedings already commenced does not arise. He also referred to an unreported
judgment of the Supreme Court in Dresser Rand SA v. Bindal Agro Chemicals
Ltd. (Civil Appeal Nos. 1455-1456 of 1994) wherein while considering the
orders of the High Court staying further proceedings before the ICC, the
Supreme Court observed :
"We are afraid
this kind of relief may not be permissible at all in domestic courts in
respect of an international arbitration regulated by the provisions of
the Foreign Awards (Recognition and Enforcement) Act, 1961. The High Court,
we regret to say, was in serious error in entertaining this plea and what
is more granting it exparte. Though we are informed that, that order has
since been modified, it is necessary to set aside that order."
This according to Shri Diwan, settles the issue as to, the power of a
court to stay the proceedings before ICC.
37. On this issue, the main concern of Shri Chagla is that there is likely
to be conflict of decisions - one by the arbitrator and another by the
Company Law Board. Accordingly, he prayed that either the ICC proceedings
should be stayed or the respondent should be restrained from taking further
steps in ICC proceedings. We do not propose to deliberate in extentio
the issue relating to staying the proceedings before ICC in view of the
decision of the Supreme Court in Dresser Rand SA case (supra). This case
directly was on an arbitration by the ICC and the counsel for the petitioner
has not cited any later authority contrary to the decision of the Supreme
Court in that case. Further, even in Tractorexport case (supra), the Supreme
Court, after observing that "In England, courts have been very cautious
and have largely refrained from granting stay of proceedings in foreign
courts; the injunction is, however, issued against a party and not a foreign
court", injuncted the Russian firm from proceeding with the foreign arbitration,
applying the principles of section 35 of the old Act. Thus, the question
of staying the proceedings before the ICC does not arise. In regard to
restraining the respondent from proceeding with arbitration before the
ICC, in Tractorexport case, the Supreme Court applied the principles of
section 35 of the old Act as applicable to domestic arbitration to a foreign
arbitration. Section 35 of the old Act specified that once civil proceedings
commenced, then, proceedings before the arbitrator would be invalid. Shri
Diwan has pointed out the decision of the Supreme Court in Sundaram Finance
Ltd. case (supra) wherein the Supreme Court has held that the provisions
of the 1996 Act should be interpreted without being influenced by the
provisions of the old Act. If so and if the principles of domestic arbitration
could be applied to foreign arbitration also as submitted by Shri Sarkar,
then, we have to only apply the provisions of section 8(3) according to
which an arbitration can be commenced or continued and arbitral award
made notwithstanding the pendency of the application under section 8(1).
Thus, this section envisages even making an arbitral award during the
pendency of the application under section 8(1). Assuming for argument's
sake, that, during the pendency of the application before the judicial
authority, the arbitral award is made and later the judicial authority
rejects the application and proceeds with the legal proceedings, then
in that case, it appears that there could be conflicting decisions. However,
a reference to the provisions of sections 34 and 35 in respect of domestic
arbitration and sections 46 and 48 in respect of foreign arbitration,
would indicate that, that there is hardly any possibility for conflicting
decisions. Further, we note that the powers under section
402 (g) of the Act are to be exercised only in the final order to
be passed and not at the interim stage. Any way, we feel that the discussion
on the power of the Company Law Board in staying/restraining is only of
an academic interest in the present case, as we have dismissed the application
of the 1st respondent only on the ground that there is no commonality
of the parties, and if so, for the same single reason, the application
of the petitioner has also to be dismissed, which we do.
38. In fine, both the applications CA 248199 and CA 254/99 stand dismissed.
The respondents will file their replies to the application CA 237199 by
20th January, 2000 and rejoinder, it any will be filed by 5th February,
2000 and the application will be heard on 15th February, 2000 at 2.30 p.m.
39. Before parting with this order, we would also like to mention that,
after the conclusion of the hearing, both the sides expressed their desire
to provide us with written submission and accordingly they did so. Since
we found some additional arguments/citations in these submissions, we
have neither considered them in this order nor taken them on record for
the reason that the other side did not have the benefit to react on the
written submissions.
40. After the conclusion of the hearing, we advised both the sides to
explore the possibility of resolving the disputes amicably and intimate
the results of the same by 15th December, 1999. Since no feedback has
come from the parties by 15th December, 1999, we are releasing this order.
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