1995 (1) TMI 270 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the contract for the sale of shares.
2. Compliance with formalities for the transfer of shares.
3. Applicability of the arbitration clause.
4. Competence of the Company Law Board (CLB) to decide the case.
5. Discretionary power under Section 34 of the Arbitration Act, 1940.

Issue-Wise Detailed Analysis:

1. Validity of the contract for the sale of shares:
The appellant, a German company, sold 13,600 shares to the first respondent, Insotex (India) Ltd., under an agreement dated 1/4-9-1989. The title of the first respondent to these shares depends on the terms of this agreement. The appellant contended that there was a serious dispute regarding the validity of the contract, which should be settled by arbitration as per clause 7 of the agreement.

2. Compliance with formalities for the transfer of shares:
The first respondent claimed that all formalities for the transfer of shares were completed by 4-9-1989, including obtaining RBI permission and paying the consideration amount. However, the second respondent company rescinded the resolution that initially approved the transfer, citing the absence of a valid RBI approval. The first respondent argued that their name was removed from the register of members without notice.

3. Applicability of the arbitration clause:
The agreement between the appellant and the first respondent contained an arbitration clause stating that any dispute arising out of or in connection with the agreement should be settled by arbitration. The appellant argued that the dispute regarding the title to the shares falls under this clause. However, the first respondent contended that the main issue was the removal of their name from the register by the second respondent, who was not a party to the arbitration agreement.

4. Competence of the Company Law Board (CLB) to decide the case:
The CLB held that it was competent to decide the issue of whether the removal of the first respondent's name from the register was valid and proper. The CLB found that the dispute primarily involved the first and second respondents and was not a fit case for being stayed under Section 34 of the Arbitration Act, 1940.

5. Discretionary power under Section 34 of the Arbitration Act, 1940:
The court noted that the power to stay proceedings under Section 34 is discretionary. The court referred to the Supreme Court's judgment in Ramji Dayawala & Sons (P.) Ltd v. Invest Import, which emphasized that the discretion should be exercised by granting a stay unless strong cause for not doing so is shown. In this case, the court found that the entire dispute was not covered by the arbitration clause, and the second respondent was not a party to the arbitration agreement. Additionally, the court considered the practical difficulties and potential prejudice to the first respondent in pursuing arbitration in Zurich, Switzerland.

Conclusion:
The court concluded that the CLB was right in holding that this was not a fit case to be stayed under Section 34. The appeal was dismissed without any order as to costs.