2014 (8) TMI 1179 - HC - Companies Law

Reference to Arbitration - 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? - HELD THAT - 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 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.

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.

Issue-wise Detailed Analysis:

1. Arbitrability of Disputes Under Sections 397, 398, and 402 of the Companies Act, 1956
The primary issue was whether disputes invoking Sections 397, 398, and 402 of the Companies Act, 1956, could be referred to arbitration. The judgment concluded that such disputes are inherently non-arbitrable due to the nature and source of the statutory power invoked. The court emphasized that the reliefs sought under these sections often involve wide-ranging powers that an arbitral tribunal cannot grant. It was noted that the Company Law Board (CLB) has the authority to supplant corporate management and take actions that are beyond the remit of an arbitral tribunal. However, the judgment clarified that if a petition is found to be mala fide, vexatious, or a mere attempt to evade an arbitration clause, it could be dismissed and the disputes referred to arbitration.

2. Binding Nature of a Foreign Court's Decision on the CLB
The judgment addressed whether the decision of the UK Commercial Court, which held that the disputes were not covered by the arbitration clause, was binding on the CLB. The court found that the CLB was bound by the UK court's decision under Section 13 of the Code of Civil Procedure (CPC), as it did not fall under any exceptions that would make it non-conclusive. The UK court's decision was not contrary to the Supreme Court's ruling in Chloro Controls and was thus binding on the CLB. Consequently, the CLB's finding that the disputes were covered by the arbitration clause was incorrect in law.

3. Maintainability of Cross-Appeals/Cross-Objections
The judgment affirmed the maintainability of cross-appeals/cross-objections under Order 41 of the CPC. It was noted that a party has the right to support a judgment on any ground, even if it involves findings that were not explicitly challenged. The court referenced a recent decision of a learned single judge in Satpal Malhotra v. Puneet Malhotra to support this view.

4. Appointment of an Observer by the CLB
The judgment scrutinized the appointment of an observer-cum-facilitator by the CLB. It was held that while the CLB has the authority to appoint an observer to ensure the fair and transparent running of the companies, it cannot delegate its judicial function of resolving disputes to such an observer. The court found that the appointment in this case was unwarranted and served no effective purpose, particularly since the restructuring process was already complete. The observer's role was not to resolve disputes but to oversee the companies' operations, which was not necessary given the circumstances.

Conclusion & Final Order
The court upheld the CLB's finding that disputes in a properly brought petition under Sections 397 and 398 read with Section 402 are not referable to arbitration. However, it set aside the CLB's finding that the disputes were covered by the arbitration clause and the appointment of an observer-cum-facilitator. The appeals filed by Rakesh were dismissed, and the cross-appeals filed by RKM were allowed to the extent of setting aside the observer's appointment. The CLB was directed to proceed with hearing the main company petitions.

Stay of the Order & Judgment
The application for a stay of the judgment was rejected. The court found no justification for continuing the interim arrangement that had worked unfairly to RKM and the Transauto companies. The previous status quo orders regarding shareholding and fixed assets were allowed to continue, but no new interim orders were put in place. The parties were given liberty to apply for further interim orders, which the CLB would consider on their merits.

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