2000 (12) TMI 915 - Board - Companies Law

Summary

Issues Involved:
1. Applicability of Section 8 of the Arbitration and Conciliation Act, 1996.
2. Validity of the arbitration agreement.
3. Whether matters under Section 397/398 of the Companies Act, 1956 can be referred to arbitration.
4. Compliance with procedural requirements of Section 8 of the Arbitration Act.

Detailed Analysis:

1. Applicability of Section 8 of the Arbitration and Conciliation Act, 1996:
The respondents filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the disputes to arbitration based on a shareholders' agreement. The petitioners opposed this, arguing that the respondents had already participated in the proceedings by filing a detailed reply on the substance of the petition, thus not fulfilling the requirements of Section 8. The court concluded that the respondents had indeed participated in the proceedings by filing replies and applications for interim relief, which signified their intent to submit to the jurisdiction of the Company Law Board (CLB).

2. Validity of the Arbitration Agreement:
The petitioners contended that there was no binding arbitration agreement between the parties, as the agreement used the term "may" instead of "shall," indicating that arbitration was not mandatory. The court referred to the Supreme Court's decision in Wellington Associates Ltd. v. Kirit Mehta, which held that if arbitration is not the sole remedy, it cannot be considered a valid arbitration agreement under Section 7 of the Arbitration Act. The court agreed with the petitioners, finding that the arbitration clause in the shareholders' agreement was not mandatory and thus did not constitute a binding arbitration agreement.

3. Whether Matters Under Section 397/398 of the Companies Act, 1956 Can Be Referred to Arbitration:
The petitioners argued that the matters covered under Section 397/398, which deal with oppression and mismanagement, cannot be the subject of an arbitration agreement. The court noted that previous decisions had established that the right to file a petition under Section 397/398 arises out of a commercial relationship between a shareholder and the company, and such proceedings are not outside the purview of Section 45 of the Arbitration Act. However, the court also recognized that an arbitrator does not have the same wide-ranging powers as the CLB under Section 402 of the Companies Act, which can override the provisions of the Act, Memorandum, and Articles of the company.

4. Compliance with Procedural Requirements of Section 8 of the Arbitration Act:
The court examined whether the respondents had fulfilled the procedural requirements of Section 8, which mandates that an application for referring parties to arbitration must be made before submitting the first statement on the substance of the dispute. The court found that the respondents had filed a reply dealing with the main issues raised in the petition, thus constituting a statement on the substance of the petition. This non-compliance with Section 8 requirements led the court to dismiss the application.

Conclusion:
The court dismissed the application under Section 8 of the Arbitration and Conciliation Act, 1996, on the grounds that there was no valid and binding arbitration agreement and that the respondents had not complied with the procedural requirements of Section 8. The respondents were given the liberty to file any additional affidavits in relation to the petition, and the matter was scheduled for further hearing.