2015 (5) TMI 799 - HC - Companies Law

Challenge of Award passed in arbitration proceeding by a third party - It is settled law that what cannot be done directly cannot be permitted to be done indirectly - It is submitted that Arbitration is a creation of statute and not a Common Law right and therefore, the remedy must be as per statute only. A suit in relation to arbitration proceedings and for challenge to an Award may, if at all, be maintainable only in cases where there is a doubt as to the execution and existence of the arbitration agreed. In the instant case, the existence and validity of the arbitration agreement is an admitted fact and is not under challenge - Held that - There is a clear distinction between individual and corporate membership rights of shareholders. A member can always sue for wrongs done to himself in his capacity as a member. The individual rights of a member arise in part from the general law. Under the contract emanating from his memberships, he is entitled to have his name entered and kept on the register of members, to vote at meetings of members, to receive dividends which have been duly declared, to exercise pre-emption rights conferred by the articles, and to have his capital returned in proper order of priority on a winding up or on a properly authorized reduction of capital. Under the general law he is entitled to restrain the company from doing acts which are ultra vires, to have a reasonable opportunity to speak at meetings of members and to move amendments to resolutions proposed at such meetings to transfer his shares; not to have his financial obligations to the company increased without his consent; and to exercise the many rights conferred on him by the Companies Act, such as his right to inspect various documents and registers kept by the Company. The dividing line between personal and corporate rights is not always very easy to draw. The Courts, however, incline to treat a provision in the memorandum or articles as conferring a personal right on a member, if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In an action for violation of personal rights a single shareholder suing alone and not even on behalf of other shareholders may make the company a defendant and obtain his reliefs. Where a wrong has been done to the company and an action is brought to restrain its continuance or to recover the company s property or damages or compensation due to it, it is a derivative action. Here the company is the only true plaintiff. The dispute is not an internal one between those who constitute the membership of the company but one between the company on the one hand and third parties on the other. It makes no difference in principle that the third parties may accidentally happen to be the directors or controlling shareholders of the company. In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and may join the company as a defendant. The directors are usually defendants. This action is brought instead of an action in the name of the company. The form of the action is always A.B. (a minority shareholder) on behalf of himself and all other shareholders of the company against the wrongdoing directors and the company . It is a procedural device for enabling the Court to do justice to a company controlled by miscreant directors or shareholders. A company is a mere abstraction of law. By registration under the Companies Act, a company is vested with corporate personality, which is independent of and distinct from its members. It is a legal person with perpetual succession and common seal. It is a body corporate having a separate identity and distinct from the directors and shareholders. The property of the company is not the property of the shareholders. In the eye of law, even a member holding majority shares or a managing director of a company is held liable for criminal misappropriation of the funds or property of the company, if he unauthorisedly takes it away and uses it for his personal purpose. As a juristic legal person, a company can sue in its name and be sued by others. The pleadings in the suit if taken, as a whole, would clearly indicate that the plaintiffs are seeking to enforce their personal cause of action as opposed to derivative action. The same would be further clear from Paragraph 41 of the Plaint where the plaintiffs have specifically stated that the defendants in collusion and conspiracy with each other have perpetrated fraud on the plaintiffs through the proforma defendant. This sentence clearly indicates that it is a wrong done to the plaintiffs. It makes it very clear that the plaintiffs are espousing their personal cause of action. A party to a contract with the company is no way concerned with the inter se disputes between the directors. In case of a dispute with regard to the internal management of the Company and as to who would represent the company and/or authorize to represent the company, the proper course is to file a suit for declaration and injunction and to seek appropriate remedy against the miscreant directors and for persons asserting their right as directors. In the instant case, it appears that there are disputes with regard to the internal management of the proforma defendant company. The orders disclosed in this proceeding would not show that the defendant Nos.3 to 5 were not authorized to represent the said company in the arbitration proceeding. This observation, however, is not an expression of opinion with regard to the claim of the plaintiffs against the said defendant Nos.3 to 5, that the said defendants have ceased to become directors. The said defendant No.1 is no way concerned with the inter se disputes between the plaintiffs and the defendant Nos.3 to 5. Although, the plaintiffs have asserted that the said defendants for long years have ceased to become directors and since 2009 the said defendants were not entitled to hold themselves as directors but the plaintiffs did not take recourse to any legal proceeding to prevent the said defendants from asserting their rights as directors since even thereafter the said defendants continued to assert their right as directors that had resulted in various litigation. Even if it is assumed that the defendant No.1 is aware of the inter se disputes between the plaintiffs and the defendant Nos.3 to 5, the defendant No.1 is under no obligation to disclose such dispute before the arbitrator since the claim of the defendant No.1 is against the proforma defendant. The defendant No.1 appears to have been roped in by clever drafting, in order to avoid the award passed against the proforma defendant. The reliefs claimed in the plaint so far as it seeks a declaration that the award against the defendant No.1 is nonest, illegal and not enforceable and the said award is required to be set aside, in my view, having regard to the frame of the suit is not maintainable and barred by law. The challenge to the award has now become barred by limitation. It is settled law that what cannot be done directly cannot be permitted to be done indirectly. It is not been alleged that the proforma defendant was prevented by the said defendants Nos. 3 to 5 to challenge the award. In so far as other reliefs are concerned, in my view, they are required to be adjudicated at the trial and the suit cannot be dismissed as against the other defendants. Since the prayer for setting aside of the award is barred by law, I hold that the suit so far as it relates to setting aside of the award against the defendant No.1 is concerned is not maintainable. - The application is allowed in part.

Summary

Issues Involved:
1. Maintainability of the suit by shareholders to challenge an arbitration award.
2. Derivative action and personal rights of shareholders.
3. Fraud and collusion allegations against directors.
4. Authority and representation of directors.
5. Limitation period for challenging an arbitration award.
6. Applicability of Section 34 of the Arbitration and Conciliation Act, 1996.
7. Jurisdiction of the court under Section 47 of the Code of Civil Procedure.

Issue-wise Detailed Analysis:

1. Maintainability of the Suit by Shareholders:
The primary issue is whether shareholders can maintain a suit to challenge an arbitration award on behalf of the company. The court observed that the suit challenging an award is not maintainable in law when filed by shareholders instead of the company. It was emphasized that the proforma defendant, against whom the award was passed, did not file the suit or challenge the award. The suit was filed by two shareholders, which is not permissible as the company alone is entitled to challenge the award.

2. Derivative Action and Personal Rights of Shareholders:
The court discussed the principles of derivative action, indicating that shareholders can sue on behalf of the company when the directors are wrongdoers and the company is unable to act. However, it was noted that the suit as framed is a personal action by shareholders and not a derivative action. The plaintiffs were seeking to enforce their personal rights rather than the rights of the company, which is not permissible.

3. Fraud and Collusion Allegations Against Directors:
The plaintiffs alleged fraud and collusion by the directors and other defendants to siphon off funds. The court acknowledged these allegations but noted that the primary wrong alleged was against the plaintiffs personally and not the company. The court stated that fraud affecting the plaintiffs could not be the basis for a derivative action.

4. Authority and Representation of Directors:
The court examined the authority of the directors (defendant nos. 3 to 5) who were allegedly acting without proper authorization. It was noted that the plaintiffs had not taken timely legal action to prevent these directors from representing the company. The court observed that the plaintiffs had allowed the situation to continue, which weakened their position.

5. Limitation Period for Challenging an Arbitration Award:
The court held that the challenge to the arbitration award was barred by limitation. It was emphasized that any challenge to an arbitral award must be made within the prescribed period under Section 34 of the Arbitration and Conciliation Act, 1996. Since the proforma defendant did not challenge the award within this period, the plaintiffs could not indirectly challenge it through this suit.

6. Applicability of Section 34 of the Arbitration and Conciliation Act, 1996:
The court reiterated that an application under Section 34 is the only mode for setting aside an arbitration award. The plaintiffs, not being parties to the arbitration agreement, could not file an application under Section 34. The court noted that the proforma defendant did not challenge the award, and the plaintiffs could not do so on its behalf.

7. Jurisdiction of the Court Under Section 47 of the Code of Civil Procedure:
The court stated that questions relating to the execution, discharge, and satisfaction of the award could only be determined by the court executing the award, not through a separate suit. The suit was barred under Section 47 of the Code of Civil Procedure, as the Arbitration and Conciliation Act, 1996, is a self-contained code that limits judicial intervention.

Conclusion:
The court allowed the application for rejection of the plaint in part. It held that the suit challenging the arbitration award was not maintainable and barred by law. However, other reliefs sought by the plaintiffs were to be adjudicated at trial, and the suit could not be dismissed entirely. The application was thus allowed in part, with the challenge to the arbitration award being dismissed.