2015 (12) TMI 1378 - Board - Companies Law

Application u/s 8 of the Arbitration and Conciliation Act, 1996 - Whether the dispute raised in a properly filed petition under sections 397, 398, 402 and 403 of the Companies Act can be referred to arbitration in accordance with the agreement between the parties? - Held that - The arguments look attractive at the first blush but when examined closely find that it lacks substance. A perusal of para 22 of the petition which contains prayer for various relict reliefs would show that the petitioners have prayer for restoration of the shareholding of the petitioner, reinstatement of the Petitioners as directors and staying diversion of business/clients of respondent No. 1 company to a related party Respondent No. 5- Ayushman Ropes & Tapes Pvt. Ltd. All such relief would fall within the jurisdiction of the Company Law Board and are founded on oppression and mismanagement . It has flavor of public interest and the rights of parties are not right in personam. In any case the jurisdiction of Company Law Board cannot be excluded by a clause in an agreement between the parties including provision of arbitration. The other argument advanced by Mr. Nayyar equaily lacks merit. It emerges from para 27 of the judgment of Hon ble Supreme Court rendered in the case of Everest Holding Ltd. (2008 (10) TMI 629 - Supreme Court Of India ) wherein observed that Arbitrator can find out and adjudicate as to whether or not a company is functional and if it was not functional then he could always find out the nature and status of its assets and can also issue directions and pass orders regarding dues and liabilities and also for taking recourse to appropriate remedy. The aforesaid observations were made in the teeth of the view taken by Hon ble Supreme Court in the case of Haryana Telecom Ltd. (1999 (7) TMI 545 - SUPREME COURT OF INDIA ) that Arbitrator would have no power to order for winding up of a company for which a sole fora has been provided by the Companies Act. I do not think that para 27 of the judgment of the Supreme Court advances the case of applicant-petitioner. It cannot be concluded that arbitrator enjoys all those powers which are vested in a CLB under sections 397, 398, 402 and 403 of the Companies Act. I don t feel the necessity of refereeing to various other judgments of Company Law Board on which reliance has been placed by Mr. Nayyar. - the prayer for making reference to the arbitration stands rejected

Issues Involved:
1. Whether the dispute raised in a properly filed petition under sections 397, 398, 402, and 403 of the Companies Act can be referred to arbitration in accordance with the agreement between the parties.

Detailed Analysis:

1. Background and Context:
The petition was filed under sections 397, 398, 402, and 403 of the Companies Act, 1956, alleging oppression and mismanagement by the respondents. The respondents filed an application under section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the dispute to arbitration based on Article 18 of the Joint Venture Agreement (JV Agreement) dated 18.09.2001.

2. Legal Framework and Contentions:
The petitioner opposed the application, arguing that disputes under sections 397, 398, 402, and 403 of the Companies Act cannot be referred to arbitration. The respondents contended that all allegations of oppression and mismanagement are covered by Article 18 of the JV Agreement and should be referred to arbitration. They relied on various judgments, including those of the Delhi High Court and the Supreme Court, to support their position.

3. Company Law Board's Powers:
Sections 397 and 398 of the Companies Act provide for relief in cases of oppression and mismanagement, respectively. Section 402 outlines the powers of the Company Law Board (CLB), which include regulating the conduct of the company's affairs, terminating or modifying agreements, and setting aside any transfer or payment made by the company. Section 403 allows the CLB to issue interim orders.

4. Judicial Precedents:
The Supreme Court and various High Courts have consistently held that the CLB enjoys wide powers to adopt correctional mechanisms where the affairs of the company are being conducted in a manner prejudicial to public interest or oppressive to any member(s). The Supreme Court in Cosmosteels Private Ltd. v. Jairam Das Gupta & Ors. and Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. emphasized that the reliefs available under sections 397 and 398 are not arbitrable.

5. Analysis of Arbitration Clause:
The arbitration clause in the JV Agreement (Article 18) was examined in light of sections 397, 398, 402, and 403 of the Companies Act. The court noted that the nature of powers enjoyed by the CLB is alien to the powers of an arbitrator. The reliefs sought in the petition, such as restoration of shareholding and reinstatement of directors, cannot be granted by an arbitrator.

6. Public Interest and Rights in Rem:
The court highlighted the distinction between rights in rem and rights in personam. Disputes involving rights in rem, which affect the public interest and the status of the company, are not arbitrable. The reliefs sought in the petition touch upon larger public interest and the status of the company, making them non-arbitrable.

7. Conclusion:
The court concluded that the disputes raised in the petition under sections 397, 398, 402, and 403 of the Companies Act are not arbitrable. The arbitration clause in the JV Agreement cannot override the statutory jurisdiction of the CLB. The application under section 8 of the Arbitration Act was dismissed, and the prayer for making reference to arbitration was rejected.

Summary of Judgment:
The court dismissed the application under section 8 of the Arbitration and Conciliation Act, 1996, and rejected the prayer for referring the dispute to arbitration. The court held that the disputes raised under sections 397, 398, 402, and 403 of the Companies Act, 1956, involving allegations of oppression and mismanagement, are not arbitrable. The statutory jurisdiction of the Company Law Board to grant reliefs in such cases cannot be ousted by an arbitration clause in the Joint Venture Agreement. The court emphasized that the reliefs sought in the petition touch upon larger public interest and the status of the company, making them non-arbitrable.

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