2014 (8) TMI 1050 - HC - Companies Law

Arbitrable disputes - Dispute covered by an arbitration agreement - Is a dispute brought before the Company Law Board invoking the provisions of Sections 397, 398 and 402 of the Companies Act, 1956 at all referable to a private tribunal, viz., an arbitral panel for resolution? - Does a decision of a foreign court on the question of whether a dispute is covered by an arbitration agreement bind the Company Law Board? - Held that - As to whether the disputes in a petition properly brought under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 can be referred to arbitration, the answer is no, subject to the caveat that I have noted regarding a mala fide, vexatious or oppressive petition and one that is merely dressing up to avoid an arbitration clause. The decision of Mr. Justice Walker of the UK Commercial Court of the Queen s Bench Division was not covered by any of the exceptions to Section 13 of the CPC. It was not contrary to Chloro Controls. It therefore bound the CLB. As Mr. Justice Walker had already held that the CLB disputes fell outside the arbitration clause, the impugned order is incorrect in its finding that the disputes in the petition were covered by the arbitration clause. Even otherwise, the disputes before the CLB were outside the purview of the arbitration agreement as they related to matters not covered by the SSD. The appointment of an observer-cum-facilitator was entirely without warrant and served no effective purpose. The impugned order is upheld only to the extent that it holds that disputes in a properly brought petition under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 are not referable to arbitration. The CLB s finding that the disputes were referrable to arbitration is incorrect in law. Application for stay - Held that - It would be wholly inequitable to allow this state of affairs to continue. There cannot possibly be any equity in Rakesh s favour in a situation like this. The irreversible prejudice that Mr. Madon apprehends is, think, far outweighed by the considerably more profound prejudice and harm likely to result to RKM, his fellow-petitioners and the Transauto companies if the status quo or interim arrangement is continued. Such orders, once passed, tend to continue and are difficult to dislodge. As believed that equity now demands that Rakesh must assume the burden of satisfying a court in appeal from this judgment why the previous status quo or interim arrangement that has worked so unfairly to RKM and the Transauto companies should be allowed to continue. Find no justification for it. As to the question of a freeze on the shareholding and the fixed assets, as believed this to be something of a red herring and perhaps a complete misconception. There is no question of a change in shareholding at all, and therefore no question of a stay continuing in that respect. There is also no warrant for any stay on the fixed assets of the four respondent companies continuing. The application for stay is rejected. Mr. Chinoy s request that the pending interim orders of 9th February 2012 and 7th November 2012 passed by the CLB be allowed to continue is one that must be accepted. It is clarified that, except for those two orders, there will now be no interim order in place as regards any of the four respondent companies. Parties are at liberty to make such applications as they think fit for further suitable interim orders. The Company Law Board will consider every such application on its merits.

Issues Involved:
1. Arbitrability of disputes under Sections 397, 398, and 402 of the Companies Act, 1956.
2. Binding nature of a foreign court's decision on the Company Law Board (CLB).
3. Maintainability of cross appeals/cross objections.
4. Appointment of an observer by the CLB.

Detailed Analysis:

1. Arbitrability of Disputes under Sections 397, 398, and 402 of the Companies Act, 1956:
The core issue was whether disputes under Sections 397, 398, and 402 of the Companies Act, 1956 could be referred to arbitration. The judgment concluded that such disputes are not arbitrable due to the nature and source of the relief-giving statutory power. The CLB's powers under Section 402 are extensive and include regulating the conduct of the company's affairs, terminating or modifying agreements, and other broad measures that an arbitral tribunal cannot exercise. Therefore, disputes invoking these sections must remain within the jurisdiction of the CLB, unless the petition is found to be mala fide, vexatious, or an attempt to evade an arbitration clause.

2. Binding Nature of a Foreign Court's Decision on the CLB:
The judgment examined whether the decision of the UK Commercial Court, which found that the disputes before the CLB were not covered by the arbitration clause, was binding on the CLB. It was determined that the UK Court's decision was not covered by any exceptions under Section 13 of the Code of Civil Procedure (CPC), 1908, and was thus binding on the CLB. The CLB erred in holding that it was free to take its own view and that the disputes before it were covered by the arbitration clause, contrary to the UK Court's decision.

3. Maintainability of Cross Appeals/Cross Objections:
The judgment addressed the maintainability of cross appeals/cross objections filed by RKM. It was held that such objections are maintainable under Order 41 of the CPC, allowing a party to support a judgment on any ground available. The cross-objections were found valid, especially since the CLB's order contained mutually exclusive findings that the disputes were both within and outside the arbitration clause.

4. Appointment of an Observer by the CLB:
The CLB had appointed an observer-cum-facilitator to ensure the smooth running of the companies and to address the grievances of the parties. The judgment found this appointment to be unwarranted, especially since the restructuring process was already complete and the observer's role was vaguely defined. The appointment was seen as an improper delegation of judicial functions, which should remain within the CLB's purview.

Conclusion:
The judgment upheld the CLB's finding that disputes under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 are not arbitrable. However, it overturned the CLB's finding that the disputes were covered by the arbitration clause, based on the binding nature of the UK Court's decision. The appointment of the observer-cum-facilitator was also set aside. The CLB was directed to proceed with hearing the main Company Petitions. The application for a stay of the judgment was rejected, emphasizing the need for equity and the significant prejudice that would result from continuing the status quo.

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