2011 (9) TMI 1158 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of misuse of funds and defalcation by the managing partner.
2. Expulsion of petitioners from the partnership firm.
3. Invocation of the arbitration clause and appointment of an arbitrator.
4. Objections by respondents regarding the arbitration and the nature of the dispute.

Summary:

1. Allegations of Misuse of Funds and Defalcation by the Managing Partner:
The petitioners alleged that the first respondent, who was the managing partner, along with other respondents, misused the funds of the firm, Shivgiri Associates. This misuse was willfully suppressed from the petitioners, who later called for a meeting to verify the true accounts. The respondents reluctantly called for meetings but did not allow verification of records and allegedly compelled the petitioners to sign blank papers, threatening them with false cases if they did not cooperate.

2. Expulsion of Petitioners from the Partnership Firm:
The first petitioner issued a legal notice to the respondents to furnish accounts, and in response, he was informed of his expulsion from the firm as of 21-10-2009. The second petitioner also issued a similar notice and invoked the arbitration clause under the partnership deed, naming an arbitrator, which the respondents did not consent to.

3. Invocation of the Arbitration Clause and Appointment of an Arbitrator:
The petitioners invoked the arbitration clause, but the respondents suggested an alternative arbitrator. The present petition was filed seeking the appointment of an arbitrator. The respondents contended that the petitioners were relieved from the firm's affairs in 2009 and that there was no live dispute, arguing that the allegations required detailed evidence suitable for a formal suit.

4. Objections by Respondents Regarding the Arbitration and the Nature of the Dispute:
The respondents argued that the allegations of fraud and mismanagement required detailed evidence and should be resolved by a civil court. They relied on several decisions, including Union of India v. Onkar Nath Bhalla, Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, and N. Radhakrishnan v. Maestro Engineers, to support their contention that the matter should not be referred to arbitration due to the serious nature of the allegations.

Judgment:
The court found the objections by the respondents untenable. It noted that the partnership deed containing the arbitration clause was not denied, and the respondents were not averse to arbitration but sought an arbitrator named by them. The court held that mere allegations of fraud do not necessarily require the matter to be tried in open court unless they are of a serious nature. The court referred to the decision in Abdul Kadir Shamsuddin Bubere, which emphasized that not every allegation of dishonesty in accounts warrants a trial in open court.

The court concluded that the allegations in the present case were vague and related to the accounts of the firm, not involving complicated fact situations. Therefore, the matter was suitable for arbitration. The petition was allowed, and Shri Justice Chandrashekariah, Former Judge, High Court of Karnataka, was appointed as the sole arbitrator to adjudicate the dispute.