2015 (1) TMI 1351 - HC - Companies Law

Oppression and mismanagement - maintainability of the Company Petition - Held that - The appellants are questioning the maintainability of proceedings under Section 397-398 of the Companies Act on the ground that the dispute between the parties has been settled on the basis of the arbitration award dated 31.7.2014 whereas the appellants themselves have questioned the said award by filing an application under Section 34 of the Arbitration and Conciliation Act. Respondents has drawn the attention of this Court to the grounds on which the appellants have challenged the award and has pointed out that the award has been challenged on numerous grounds and some of the grounds support the reasoning assigned by the CLB rejecting in the impugned order. Undisputedly the award has not attained finality and the grounds raised by the appellants in the application under Section 34 of the Arbitration and Conciliation Act reflect that the entire award is under challenge on numerous grounds. Under Section 397-398 of the Companies Act, the tribunal/CLB has power to grant relief in case of oppression and mismanagement of the affairs of the Company. The distribution of the assets in terms of the award has not taken place, therefore, in the facts of the present case the jurisdiction of the Company Law Board will not cease on the passing of the award. So far as the reasons which have been assigned by the Company Law Board in the impugned order are concerned, the question formulated by this Court is about the sustainability of those reasons and not the perversity of any finding recorded by the CLB while assigning those reasons. If there is no commonality of parties and if respondent No.1 Company is not a party to the agreement, then the arbitration agreement would not have any effect on the pending proceedings under Section 397-398 in respect of the affairs of respondent No.1 Company. If the said conclusion on fact about commonality of parties is incorrect, then it would be open to the appellants to address the CLB on this aspect of the matter at the time of final hearing of the application, since the CLB in the impugned order itself has stated that the effect of the arbitration agreement would be seen at the time of final disposal of the petition. Even if the reason assigned by the CLB about entering into the alleged arbitration agreement during the trial of the case may not be sustainable, that would not effect the final conclusion arrived at by the CLB on account of the other reasons and specially the fact that the arbitration award has not attained finality and also considering the different scope of two proceedings. Appeal dismissed.

Summary

Issues:
Challenge to interlocutory order rejecting Company Application; Maintainability of Company Petition under Sections 397-398 of Companies Act; Effect of arbitration award on pending proceedings under Companies Act.

Analysis:
1. The appeal challenged an interlocutory order rejecting a Company Application under Section 10-F of the Companies Act. The appellants questioned the maintainability of the Company Petition under Sections 397-398, alleging oppression and mismanagement in the affairs of the respondent company. The appellants argued that since an arbitration award had been passed, the proceedings under Sections 397-398 were not maintainable. The Company Law Board rejected the appellants' application, leading to the appeal.

2. The substantial questions of law admitted by the Court pertained to the applicability of Section 8 of the Arbitration and Conciliation Act and the Company Law Board's understanding of the effect of the arbitration award on the pending proceedings under Sections 397-398 of the Companies Act. The Court noted the limited scope of appeal under Section 10-F, emphasizing that interference was not warranted unless the Company Law Board's findings were perverse or arbitrary.

3. The appellants contended that the arbitration award rendered the proceedings under Sections 397-398 of the Companies Act not maintainable, citing the mandatory nature of Section 8 of the Arbitration and Conciliation Act. Conversely, the respondents argued that the Company Law Board correctly rejected the appellants' application, highlighting that the arbitration award was under challenge and the scope of the two proceedings differed.

4. The Court analyzed the facts, noting the meeting and agreements between the parties regarding arbitration. It considered the reasons provided by the Company Law Board for rejecting the appellants' application, including the lack of commonality of parties, absence of an arbitration clause in the company's Articles of Association, and the challenge to the arbitration award under Section 34 of the Arbitration and Conciliation Act.

5. The Court referred to precedents from the Bombay and Gujarat High Courts regarding the non-arbitrability of disputes under Sections 397-398 of the Companies Act, except in specific circumstances. It underscored that the jurisdiction of the Company Law Board persisted until the distribution of assets as per the award, emphasizing the distinction between civil disputes and oppression/mismanagement cases.

6. Ultimately, the Court upheld the Company Law Board's decision, finding most of the reasons provided by the Board sustainable in law. It concluded that the Board did not commit any error in appreciating the effect of the arbitration award on the pending proceedings under the Companies Act. Consequently, the appeal was dismissed.