ARBITRABILITY OF DISPUTES RELATING TO OPPRESSION AND MISMANAGEMENT.

[Mr. M. GOVINDARAJAN]

OPPRESSION:

                        Section 397 of the Companies Act, 1956 that any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this Section provided such members have a right so to apply in virtue of Section 399.  On application, if the Company Law Board is of opinion that the company affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that to win up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, the Company Law Board may, with a view to bringing an end the matters complained of, make such order as it thinks fit.

                        The scope of the Section 397 is well explained by the Supreme Court in ‘Shanti Prasad Jain V. Kalinga Tubes Limited’ (1965) 35 Com cases 351 in which it was held that it is not enough to show that there is just and equitable cause for winding up the company through that must be shown as a preliminary to the application of Section 397.   It must be further shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as part of a consecutive story.  There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members.   The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority in the management of company’s affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

MISMANAGEMENT:

                        Section 398 provides that any members of the company, who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or in any class of shareholders, of the company) has taken place in the management or control of the company whether by an alteration in its Board of Directors or Manager or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company,  may apply to the Company Law Board for an order provided such members have a right so to apply in virtue of Section 399.  If the Company Law Board is of the opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing an end or preventing the matters complained of or apprehended, make such order as it thinks fit. taxmanagementindia.com

                        Section 398 is a complete code in itself.   In exercising jurisdiction under this section the court can pass any order and lay down the procedure for implementing the order.  The Court will continue to have the power till its orders are fully implemented as held in ‘Gopal Shamsher Jang Bahadur Rana V. Jagdish Chandra Chowdhury’ – 1981 Tax LR NOC 151 (Cal).

                        Under Section 398 the applicant only has to prove that the affairs of the company are being conducted in a manner prejudicial to the public interest or prejudicial to the interest of the company itself, or that there has been material change effected in the management/ownership of the company which is against public interest or against the interest of the company.

REQUIREMENTS TO FILE PETITION UNDER SECTION 397 OR 398:

                        Section 399 of the Act prescribes the requirements for filing a petition under Section 397 or 398 before the Company Law Board:

• In the case of a company having a share capital, not less than 100 members of the company or not less than one tenth of the total number of its members, whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
• In the case of a company not having a share capital, not less than one fifth of the total number of its members;
• Where any share or shares are held by two or more persons jointly, they shall be counted only as one member;
• Where any members of a company are entitled to make an application any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them;
• The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board under Section 397 or 398, notwithstanding that the requirements as noted above are not fulfilled;
• Under Section 401 the Central Government may itself apply to the Company Law Board for an order under Section 397 or 398 or cause an application to be made the Company Law Board for such an order by any person authorised by it in this behalf.

POWERS OF COMPANY LAW BOARD:

                        The powers of the Company Law Board under Section 402 of the Companies Act are very wide.   It may make any order for regulation of the conduct of the company’s affairs upon such terms and conditions as may, in its opinion, be just and equitable in all the circumstances of the case.   It is necessary that the Company Law Board should have a very broad discretion, applying general standard of fairness, to decide cases on merits

ARBITRABILITY OF DISPUTES:

                        Law encourages parties, as far as possible, to settle their differences privately either by mutual concessions or by the mediation of a third person.  Litigation is an evil, albeit necessary, and, being also very expensive, law wishes it to be kept to the minimum.  When the parties agree to have their disputes decided with the mediation of a third person, but with all formality of a judicial adjudication that may be, speaking broadly, called arbitration. 

                        The term ‘dispute’ has not been defined by the Arbitration and Conciliation Act, 1996.  The dispute may relate to an act of omission or commission.   The existence of dispute is condition precedent for the existence of power by arbitration.  Disputes which can be referred to arbitration are present or future disputes which are in respect of a defined legal relationship, whether contractual or not.   The second feature of arbitration is the agreement between the parties to the dispute to refer the matter to arbitration.  ‘Arbitration agreement’ means a written agreement to submit present or future difference to arbitration, whether an arbitrator is named therein or not.  It is not necessary to specify the dispute either in the arbitration agreement or in the reference to the arbitrator.  Section 7 of the Arbitration and Conciliation Act gives the requirements of arbitration agreement as detailed below:

• An arbitration agreement may be in the form of an arbitration clause in a contract or in form of a separate agreement;
• An arbitration agreement shall be in writing;
• An arbitration agreement is in writing, if it contained in-
  • A document signed by the parties;
  • An exchange of letters, telex, telegrams or other means of telecommunications which provide a record of the agreement; or
  • An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Section 8 of the Arbitration and Conciliation Act, 1996 gives parties to the arbitration agreement to refer to arbitration.    Section 8 stipulates that the party who claims the existence of arbitration agreement may apply ‘not later than when submitting his first statement on the substance of the dispute’, calling for the arbitration. For a judicial authority to refer the parties to arbitration all the conditions stipulated in Section 8 have to be fulfilled  as detailed below:.

-           An action should have been brought before a judicial authority.

-          The matter in action should be a subject of arbitration agreement.

-           A party to the agreement should apply to the judicial authority.

-           Such application should be made not later than when submitting his first statement on the substance of the dispute.

-           The application has to be accompanied by the original or duly certified copy of the arbitration agreement.

Once all these conditions are fulfilled the judicial authority is bound to refer the parties to arbitration.

           The legislative intent is to minimise the supervisory role of the court in the arbitral process and quick nomination of appointment of arbitrator, leaving all contentious issues to be decided in arbitration.   One of the aims is to settle all the disputes between the parties and to avoid further litigation.   The provisions of the Act mqke it clear that the arbitration proceedings are to be conducted by the arbitrator with reasonable dispatch.   It follows that after passing of the award the court should also dispose of proceedings expeditiously so that the party, in whose favour the award has been passed, actually gets the benefit of the arbitration clause.

                        The following matters cannot be referred to arbitration since the law has given jurisdiction to determine to specified tribunals only:

• Claim for recovery of Octroi duty;
• Industrial disputes (the Industrial Disputes Act, 1947 carries its own machinery for settlement through arbitration);
• Insolvency proceedings;
• Matrimonial causes, except settlement of terms of separation or divorce;
• Probate proceedings;
• Proceedings for appointment of guardian;
• Suit under Section 92 CPC;
• Title to immoveable property in a foreign country.

ARBITRATION IN COMPANY DISPUTES:

                        As per section 36 of the Companies Act, 1956 (the Act) articles of association (the AoA) of a company, when registered, bind the company and the members thereof to the same extent as if it had been signed by the company and by each member. Thus, the AoA is a contract entered into between each member and the company respectively. Further, AoA being a constituent document it binds the company and its directors as well. Since AoA is a contract, an arbitration clause incorporated in it partakes the nature of an arbitration agreement between the members and the company.

                        The nature of disputes arising out arbitration agreements mainly confine to the management functions and control of the company where invariably the aggrieved person /group alleges non-compliance of the terms of the agreements and / or AoA. The allegations generally take any of the following contours:

• Non-appointment of directors nominated by the other group or person.
• Manner of utilization of funds.
• Deadlock in meetings.
• Non-supplying of minutes and or/financial information required by the other group or person.
• Implementation of projects without the consent of the other group.
• Implementing project that is rejected by the other group.
• Not sending the notice of meeting, non-provision of agenda of the meeting etc.
• Effecting changes in the shareholding pattern in detriment to the other person or group.
• Violating the provisions of the articles of association.                      

ARBITRATION AND RELIEF UNDER SECTION 397 OR 398:

                        In ‘Sri Hari Rao v. Sri Ramdas Motor Transport Ltd’. - [1999] 97 CC 685 - to show that the Company Court alone has jurisdiction in the matter of winding up of a company and that an arbitrator has no jurisdiction to order winding up.

                        In ‘Das Lagerway Wind Turbines P. Limited V. Cynosure Investments P. Limited’ – (2007) 80 CLA 211 (Mad) the scope of relief under Section 397 or 398 is quite different from the relief which is possible under an arbitration agreement.  Reliefs which are possible under these sections cannot be granted by arbitration.

                        If the allegations pertain to the violation of the Statue or AoA or in relation to the rights of the oppressed person in his capacity as a member of the company, then it refuses to refer the parties to arbitration. More so, in a petition where allegations pertain to oppression and mismanagement such dispute cannot be referred to arbitration. The CLB refused to refer the parties to arbitration on the above reasoning.

                        It has been held  by Delhi High Court  In re: Kare Pvt. Ltd.( 1977) 47 Com cases 276) that a provision in the articles of association of a company for reference of a disputes between the company and its directors, between the directors or between any members of the company or between the company and any person cannot oust the jurisdiction of the Court to try a petition by a member for winding up of the company under Section 433 or a petition against oppression and mismanagement under Section 397 or 398.  Those sections confer statutory rights on the shareholders of the company and any provision repugnant to such rights is rendered void by Section 9(g) of the Companies Act.   The Court cannot stay such petitioners under Arbitration Act.

                        In ‘Prime Century City Developments Pvt. Ltd. v. Ansal Buildwell Ltd. - [2003] 113 CC 68 – it was held that the existence of an arbitration clause cannot oust the jurisdiction of the Company court exercising its discretionary powers under Sections 433 and 434 of the Act.

                        In ‘Manavendra Chitnis V. Leela Chitnis Studios P. Litd., -[1985] 58 CC 113 – it was held that "merely because there is an arbitration clause or an arbitration proceeding, or for that matter an award, the court's jurisdiction under Sections 397 and 398 of the Companies Act, 1956, cannot stand fettered. On the other hand, the matter which can form the subject-matter of a petition under Sections 397 and 398 cannot be the subject-matter of arbitration, for an arbitrator can have no powers such as are conferred on the court by sections such as Section 402. Furthermore, the scope of a petition for setting aside the award and the petition under ss.397 and 398 are wholly different."

                        In ‘Haryana Telecom Limited V. Sterlite Industries (India) Limited’ – AIR 1999 SC 2354 the court explained why the matter of winding up of a company cannot be referred to arbitration.  Section 8(1) of the Arbitration and Conciliation Act, 1996 provides that the judicial authority before whom an action is brought in a matter will refer the parties to arbitration the said matter in accordance with the arbitration agreement.  This, however, postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.  The claim in a petition for winding up is not for money.   The petition filed under the Companies Act would be to the effect, in a matter like this that the company has become commercially insolvent and, therefore, should be wound up.   The power to order winding up of a company is contained the Companies Act and is conferred on the Court.   An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company.  The Court further held that the powers to order winding up is in the exclusive jurisdiction of the court and an arbitrator would not have any jurisdiction to order winding up of a company. These cases would clearly indicate that CLB having been given the exclusive jurisdiction in respect of redressal of oppression and mismanagement can alone deal with a petition under Sections 397/398 and an agreement to refer these matters to arbitration cannot be enforced.  The powers exercisable by the Company Law Board under Section 402 of the Act is so wide that it could pass orders even overriding the provisions of the Act, Memorandum & Articles of a company, as held by the Apex Court in Cosmos Steel Ltd V Jai Ram Gupta ( 48 CC 312). Such a power, an arbitrator being a private person, cannot exercise. Further, there is deadlock in the company arising out of affirmative votes by both the groups as provided by the Articles and such a dead lock situation can be resolved only by the CLB by exercising its powers under Section 402 and an arbitrator cannot do so.

                   A proceeding under section 397/398 of the Companies Act, 1956 cannot be seen as a proceeding between or among the shareholders only and it is the responsibility of the Company Law Board to look into the functioning of the company, other shareholders, other stake holders, rights of other third parties who are not involved in the proceeding too apart from public interest. In view of the scope of a proceeding under section 397/398 of the Companies Act, 1956, an Arbitrator or an Arbitral Tribunal cannot effectively deal with a case of oppression and mismanagement.  A proceeding under section 397/398 of the Companies Act, 1956 will normally be based on a series of acts on the part of the majority in the Company and as such no Arbitration clause can effectively cover the scope of allegations in a petition under section 397/398 of the Companies Act, 1956.  The object of the Company Law Board under section 397/398 of the Companies Act, 1956 is to ‘put an end to the mattes complained of’ and in order to ‘regulate the affairs of the Company’. In view of the scope of section 397/398 and the object, Company Law Board may simultaneously look into a particular issue though that particular issue is a subject matter of a Civil Suit or some other proceeding.  The object of section 397/398 of the Companies Act, 1956 is different from the scope of a Civil Suit or some other proceeding.           

COMPANIES ACT IS A SPECIAL ACT:

                        It is the statutory right of a shareholder to invoke the provisions of Sections 397/398 of the Act.  The provisions of Sections 397/398 are a complete code and the acts of oppression and mismanagement cannot be considered or adjudicated upon by an arbitrator.  When a special statutory right has been created by the Act, then, only the forum designated by the Act can be approached for enforcing the right. Wherever such a specialized forum has been created, its jurisdiction cannot be ousted by a private agreement for arbitration.  It has been held that the matters could be considered by such specialized forum cannot be a matter for arbitration.  The rationale of the CLB is legally sound because the Companies Act, 1956 is a special Act compared with the Arbitration and Conciliation Act, 1996 where the latter Act is general as far as arbitration is concerned and the former is special as far as violations of its provisions are concerned. Since the CLB is a special Tribunal specifically established to deal with and adjudicate on issues resulting in violations of the Act the provisions of arbitration would have no application to determine such issues. Further, when the acts of the oppressor infringe the rights of the oppressed such infringement or violations cannot be adjudicated through the process of arbitration because violation of statutory rights is not the subject of arbitration agreement.

CONCLUSION:          

                        The competency of Courts to interfere in company’s management in the interest of minority shareholders is not restricted. An Arbitration clause is not a valid ground to bar Court from exercising its jurisdiction. Matters which fall within the purview of Sections 397 and 398 cannot be left to arbitration. If the subject matter of both the proceedings is different than proceedings initiated before Court is tenable. Merely because there is arbitration proceeding or for that matter an award, the court’s jurisdiction u/s 397 and 398 cannot stand fettered. The matter which can form the subject matter of a petition u/s 397 and 398 cannot be the subject matter of arbitration, for an arbitrator can have no powers such as are conferred on the court by S. 402 of the Companies Act   Thus, it is likely that the object of section 397/398 and other provisions of the Companies Act, 1956 may get defeated if law of Arbitration is made applicable automatically or mechanically. Without referring to any judgments on the issue, I strongly feel that the