2010 (2) TMI 589 - HC - Companies Law

Arbitral award dated 14-1-2006, of a sole arbitrator challenged - Held that - The award is contrary to substantive provisions of law and is patently illegal. The illegality in the present case, is something that goes to the root of the matter and is certainly not one which can be termed as of a trivial nature. The award must, in the circumstances, be held to be contrary to public policy.The arbitrator proceeded on the basis that the presence of a clause conferring a right of pre-emption in the articles of association was sufficient to dispose of the challenge to the legality of the provision. In this, the arbitrator has fallen into a patent illegality. The fact that the restriction is contained in the articles of association would deal with the submission based on the application of the V.B. Rangaraj s case (1991 (11) TMI 195 - SUPREME COURT OF INDIA), principle. But that is not dispositive of the legality of a provision by which a right of pre-emption is created in the case of a public limited company. The arbitrator has ignored the express and specific provisions of the Companies Act, 1956; lost sight of the very concept of free transferability of the shares of a public limited company and failed to apply the provisions of section 9 under which overriding force is given to the Act notwithstanding anything to the contrary contained in the memorandum, articles or agreement. The award of the learned arbitrator would have to be set aside. The petition is, accordingly, made absolute in terms of prayer clause (a) by setting aside the award

Issues Involved:
1. Validity of the protocol agreement under the Arbitration and Conciliation Act, 1996.
2. Determination of the relevant date for the valuation of shares.
3. Jurisdiction of the arbitrator.
4. Legality of the pre-emptive right created by clause 7 of the protocol agreement under Section 111A of the Companies Act, 1956.
5. Valuation methodology and the application of discount on shares.
6. Free transferability of shares in a public company.

Detailed Analysis:

1. Validity of the Protocol Agreement:
The protocol agreement dated 2-10-1974, between the petitioner and the respondent, led to the incorporation of Maharashtra Scooters Ltd. (MSL). The agreement stipulated that neither party could alter the structure of MSL or issue further capital without the other's consent, ensuring control over at least 51% of the equity capital.

2. Relevant Date for Valuation of Shares:
The dispute centered around clause 7 of the protocol agreement, which required an offer to sell shares to be made to the other party with a specified rate. If the rate was unacceptable, arbitration would determine the price. The arbitrator determined that the relevant date for valuation was 3-5-2003, the date when the respondent accepted the offer to purchase shares, albeit with a dispute on price.

3. Jurisdiction of the Arbitrator:
The petitioner challenged the arbitrator's jurisdiction, arguing that the protocol agreement was illegal and void under the Securities Contracts (Regulation) Act, 1956, and Section 111A of the Companies Act, 1956. The arbitrator rejected this challenge, stating that the reasons would form part of the final award.

4. Legality of the Pre-emptive Right:
The arbitrator held that the pre-emptive right created by clause 7 of the protocol agreement and incorporated in the articles of association was valid. However, the court found this to be contrary to Section 111A, which mandates free transferability of shares in a public company. The court held that the pre-emptive right imposed a restriction on free transferability, making it void under Section 9 of the Companies Act, 1956.

5. Valuation Methodology and Discount Application:
The arbitrator applied a 30% discount on the value of shares held by MSL in Bajaj Auto Ltd. (BAL), based on the evidence provided by Mr. Bansi Mehta. The court upheld this methodology, noting that the arbitrator's decision was based on both empirical and conceptual analyses. The court found no fault in the arbitrator's application of a 30% discount, despite an error in referencing Mr. Raghuram's report.

6. Free Transferability of Shares:
The court emphasized that the principle of free transferability of shares in a public company is paramount. The imposition of a pre-emptive right through clause 7 of the protocol agreement was found to be in violation of Section 111A, which mandates that shares in a public company must be freely transferable. The court held that such restrictions are impermissible and void under Section 9 of the Companies Act, 1956.

Conclusion:
The court set aside the arbitral award, declaring it contrary to the substantive provisions of law and patently illegal. The award was found to be in conflict with the public policy of India, particularly concerning the free transferability of shares in a public company. The petition was made absolute, and the award was set aside with no order as to costs.

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