2018 (9) TMI 2017 - Tri - Companies Law

Oppression and mismanagement - Seeking to appoint an independent auditor to audit the accounts of the Company from the date of incorporation till date - seeking to direct the Respondent No. I to convene and hold a board meeting to consider the passing of the accounts so audited - seeking to grant injunction restraining the Respondent No. 2 from making transfer of funds except with the consent of the Petitioners and other board members - seeking to restore the rightful position and the authority of the Petitioners to direct and control the operations of the Respondent No. I company - seeking to investigate and assess the sums of money of Respondent No. I Company misappropriated by any person and direct person guilty of such misappropriation to restore the funds to the Respondent No. I company - seeking to direct the 1 st Respondent Company to pay the salary of the petitioners promptly each month. HELD THAT - It is a fact that the petitioners shareholders. wanted funds for the development of the company for which purpose roped the R2 into the company and while doing so both the parties have entered into the SPA and SSSA. Further the SSSA is also incorporated in the AOA - It is also a fact that the R I and R2 herein are the promoter directors and they are still continuing as directors of the Company. They are very much aware that SPA and SSSA contains clause with regard to appointment of other directors by the investor and it is also a fact that what binds on the Company would also binds its board of directors and shareholders. Clause 9 of SSSA and Clause 7.1 of amended AOA deal with use of money, borrowings and funding and clause 10.17 and clause 8.18 of the amended AOA deal with decision of the board. The clause 10.20 of the SSSA deals with the undertaking given by the petitioners. It is also a fact that the company convened all the board meetings and general meetings and the petitioners are party to the decisions taken in such meetings. The petitioners have not made any allegations that the Company has not convened any meetings. It is also an admitted fact that the Clause 19.4 and 19.5 of SSSA and Clause 17.4 and 17.5 of the amended AOA deal with the provisions of infusing funds and it also bars the RI and R2 (the main petitioners in CP) to obstruct or create any impediment to such further subscription by the investor. The petitioners in the main petition sought for appointment of an auditor to audit the accounts of the Company from its incorporation, direct the respondents to convene the board meeting to consider the passing Of the accounts so audited, grant injunction restraining the R2 from making transfer of funds except with the consent of the petitioners and other board members and restore the rightful position and authority of the petitioner to the direct control of the operations of the applicant company. It is a fact that the board meetings and general meetings have been convened by the Company as per the provisions of the Act and the petitioners are party to all such decisions taken in the said meetings. The infusing of funds and allotment of shares are also covered in the SSSA. The other directors who are not party to the agreement are not third parties and they are the directors appointed by the investor (R2 in the main petition) as per the clause of SSSA. Being aware about the consequences of the SPA and SSSA and, the petitioners having entered into such SPA and SSSA, it is not proper for them to make allegations against R2 in the main petition. It is clear that the dispute between the parties arises only out of SPA and SSSA and, therefore, in the circumstances it is felt that the issues raised have to be referred to Arbitration in terms of the Arbitration Clause contained in the said agreements. Regarding the managerial decisions which can be raised in a Petition under Section 241/242 of the Act, it is held that the Petitioners were a party to all the decisions and cannot raise the issues by way of a Petition under Section 241/242 of the Companies Act, 2013. Application allowed.

Summary

Issues:
1. Maintainability of the application under section 8 of the Arbitration Act for referring the dispute to arbitration.
2. Applicability of the arbitration clause in the Share Purchase Agreement (SPA) and Share Subscription and Shareholder's Agreement (SSSA) to the dispute.
3. Allegations of oppression and mismanagement in the affairs of the Company.
4. Legal position and arbitrability of oppression and mismanagement.
5. Prayers sought in the petition and their alignment with the arbitration clause.
6. Interpretation of relevant case laws supporting each party's arguments.
7. Consideration of the importance of arbitration agreements in resolving disputes.

Analysis:

1. The application under section 8 of the Arbitration Act was filed by the Respondent Company to refer the dispute to arbitration. The Respondents in the main petition alleged acts of oppression and mismanagement and sought various reliefs. The Respondents contended that the subject matter of the Company petition is covered by the arbitration clause in the SPA and SSSA, which are duly incorporated in the Articles of Association. The Respondents argued that the dispute falls within the scope of the arbitration agreement.

2. The Respondents emphasized that the SPA and SSSA contain clauses for dispute resolution, and the allegations in the Company petition derive from these agreements. The Respondents, who are directors and parties to the arbitration agreement, claimed that the petitioners cannot bypass arbitration by raising allegations of mismanagement. The Respondents highlighted clauses in the agreements related to decision-making, funding, and board composition to support their argument for arbitration.

3. The Respondents further argued that the petitioners, who are also directors and shareholders, were aware of the agreements' provisions and participated in all relevant meetings. The Respondents refuted the petitioners' claims of reduction in shareholding and misappropriation of funds, stating that all actions were in compliance with the agreements. The Respondents contended that the petitioners' allegations lacked evidence and did not establish a prima facie case of oppression or mismanagement.

4. The petitioners, in response, challenged the maintainability of the application under section 8, citing the limited scope of the arbitration clauses in the SPA and SSSA. They argued that issues of oppression and mismanagement are not arbitrable and cannot be decided by an arbitrator. The petitioners relied on case laws to support their position that certain reliefs sought in the petition fall outside the purview of arbitration.

5. The Tribunal considered the arguments presented by both parties and reviewed the agreements and relevant clauses. It noted that the dispute primarily arose from the SPA and SSSA, and the petitioners, as parties to these agreements, were bound by their terms. The Tribunal emphasized the importance of upholding arbitration agreements and referred the issues to arbitration, dismissing the Company petition filed by the petitioners.

6. In conclusion, the Tribunal allowed the application under section 8, highlighting the mandatory nature of referring disputes to arbitration when covered by an arbitration clause. The Tribunal found that the issues raised by the petitioners were contractual in nature and should be resolved through arbitration as per the agreements in place. The Tribunal dismissed the Company petition and made no orders regarding costs.

This detailed analysis covers the key issues raised in the legal judgment, providing a comprehensive overview of the arguments presented by both parties and the Tribunal's decision.