2004 (10) TMI 616 - HC - Companies Law

Summary

Issues Involved:
1. Whether the Company Law Board (CLB) should have examined all allegations of oppression and mismanagement under Section 397/398 of the Companies Act, 1956, or referred certain disputes to arbitration under the Arbitration and Conciliation Act, 1996.
2. Whether the allegations in the petition were covered by the arbitration clause in the sponsorship agreement.
3. Whether the statutory right to file a petition under Section 397/398 of the Companies Act, 1956, can be ousted by an arbitration clause in an agreement.

Detailed Analysis:

1. Examination of Allegations by CLB vs. Referral to Arbitration:
The appellant contended that the CLB should have examined all allegations of oppression and mismanagement under Section 397/398 of the Companies Act, 1956, rather than referring certain disputes to arbitration. The CLB had referred disputes covered by the arbitration clause in the sponsorship agreement to arbitration and decided to proceed with the remaining disputes. The appellant argued that the CLB should have examined all allegations, as they pertained to statutory rights under Section 397/398 of the Act.

2. Allegations Covered by the Arbitration Clause:
The CLB identified specific allegations that were covered by the arbitration clause in the sponsorship agreement. These included:
- Failure to amend articles of association to conform to the sponsorship agreement.
- Irregularities in rights issue.
- Second expansion project.
- Loan from IDBI.
- Failure to cooperate with auditors.
The CLB held that these issues arose directly out of the sponsorship agreement and, therefore, should be referred to arbitration. The remaining allegations, which were independent of the sponsorship agreement, would be examined by the CLB.

3. Statutory Rights vs. Arbitration Clause:
The appellant argued that the statutory right to file a petition under Section 397/398 of the Companies Act, 1956, could not be ousted by an arbitration clause in an agreement. The appellant relied on Section 9 of the Companies Act, which states that the provisions of the Act override the memorandum and articles of association or any agreement. The appellant also cited the judgment in Surendra Kumar Dhawan v. R Vir, where it was held that an arbitration clause in the articles of association could not bar a petition under Section 397/398.

The CLB, however, held that Section 5 of the Arbitration Act, which states that no judicial authority shall intervene in matters governed by the Arbitration Act except as provided in the Act, took precedence. The CLB concluded that it was bound to refer parties to arbitration for disputes arising out of an agreement containing an arbitration clause, notwithstanding Section 9 of the Companies Act.

Conclusion:
The CLB's approach was validated by the court, which found no infirmity in the impugned order. The court held that the CLB was justified in referring disputes covered by the arbitration clause to arbitration while retaining jurisdiction over independent allegations of oppression and mismanagement. The appeal was dismissed, upholding the CLB's decision to bifurcate the issues based on the arbitration clause and the statutory provisions of the Companies Act.