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2016 (4) TMI 876 - Board - Companies LawMismanagement and oppression - Arbitration and Conciliation seeked - Held that - On a close examination of the provisions of section 397, 398 and 402 of the Act it must be said that Company Law Board has wide power to adopt correctional mechanism when the affairs of the company are being conducted in a manner prejudicial to the interest of general public or to a manner oppressive to any Member and /or shareholders. The Company Law Board is also clothed with wide powers of regulating the affairs of the company in a manner so as to sub-serve the public interest and put an end to oppression of an individual member. It has already been observed that the scheme of sections 397, 398 & 402 constitutes a complete code in itself and no Arbitrator can possibly give relief to an aggrieved party like the petitioner in terms of section 402 and 403 of the Companies Act, The arguments that there are averments which clearly indicate breach of terms of SSSA and claim for damage should have been made before the arbitrator have not impressed me because there are a number of allegations concerning mismanagement and oppression of the petitioner as already set out in this judgment. A perusal of the various sub paras of para xxiii would reveal prima facie wholesome violation of various Articles of the Articles of Association . In such a situation Hon ble Bombay High Court in the case of Rakesh Malhotra (2014 (8) TMI 1050 - BOMBAY HIGH COURT) following the view taken by Hon ble Supreme Court in Sukanya Holdings (P) Ltd. s (2003 (4) TMI 435 - SUPREME COURT OF INDIA ) has held that bifurcation of a cause of action is impermissible. Therefore in cases filed u/s 397 and 398 of the Companies Act seeking some of the reliefs which invite a judgment in rem and some other which invite judgment in personam would not permit severe one cause of action from the other and disassemble such a petition. Therefore aforesaid arguments fails and is rejected. As a sequel to above discussion application filed u/s 8 of the Arbitration and Conciliation Act 1996 is dismissed. The respondent may file reply to the main petition within a period of four weeks and rejoinder if any be filed within two weeks thereafter.
Issues Involved:
1. Whether the company petition is a ruse to enforce contractual obligations under the SSSA. 2. Whether disputes concerning oppression and mismanagement under sections 397, 398, 402, and 403 of the Companies Act, 1956, can be referred to arbitration. 3. Jurisdiction and powers of the Company Law Board versus those of an Arbitrator. 4. Allegations of oppression and mismanagement, including violations of Articles of Association and related party transactions. Detailed Analysis: 1. Whether the company petition is a ruse to enforce contractual obligations under the SSSA: The respondents argued that the company petition was a disguised attempt to enforce contractual obligations arising from the Share Subscription cum Shareholder’s Agreement (SSSA) and not genuinely about mismanagement or oppression. They emphasized that the petitioner, being an investor, sought to recover their investment rather than addressing actual issues of mismanagement. The respondents highlighted that the arbitration clause in the SSSA had already been invoked, and proceedings were in progress before an Arbitrator. They contended that the petitioner was engaging in forum shopping by filing the company petition after failing to obtain interim protection from the Delhi High Court. 2. Whether disputes concerning oppression and mismanagement under sections 397, 398, 402, and 403 of the Companies Act, 1956, can be referred to arbitration: The petitioner opposed the referral to arbitration, arguing that issues of oppression and mismanagement under the specified sections of the Companies Act cannot be arbitrated. The Company Law Board examined whether the petition was a mere ruse to harass the respondents and whether the relief sought was similar to what could be granted by an Arbitrator. The Board concluded that the nature of the powers enjoyed by the Company Law Board under sections 397, 398, 402, and 403 is distinct and broader than those of an Arbitrator. The Board’s powers include regulating the company’s affairs, terminating or modifying agreements, and issuing interim orders, which are beyond the scope of arbitration. 3. Jurisdiction and powers of the Company Law Board versus those of an Arbitrator: The judgment emphasized that the Company Law Board has wide-ranging powers to address issues of oppression and mismanagement, which are not within the jurisdiction of an Arbitrator. The Board can make orders to regulate the company’s future affairs, purchase shares, terminate agreements, and set aside transactions, which are crucial for addressing the grievances of minority shareholders and maintaining public interest. The Supreme Court and various High Courts have consistently held that disputes involving the winding up of a company or issues under sections 397 and 398 cannot be referred to arbitration, as these matters require adjudication by public fora like the Company Law Board. 4. Allegations of oppression and mismanagement, including violations of Articles of Association and related party transactions: The petitioner alleged numerous acts of oppression and mismanagement, including the transfer of shares in violation of the Articles of Association, failure to provide financial information, and related party transactions without proper disclosure or approval. The petitioner claimed that these actions were prejudicial to their interests and violated the fiduciary duties of the directors. The Board found that these allegations prima facie fell within the parameters of sections 397 and 398, warranting its intervention. The Board noted that the petitioner held a significant shareholding (25.18%) and had the right to nominate a director, further justifying the need for judicial scrutiny of the alleged mismanagement. Conclusion: The Company Law Board concluded that the petition was not a dressed-up attempt to enforce contractual obligations but a legitimate grievance concerning oppression and mismanagement. The Board held that the disputes raised in the petition could not be referred to arbitration, as they required the broader remedial powers of the Company Law Board. The application under section 8 of the Arbitration and Conciliation Act, 1996, was dismissed, and the respondents were directed to file a reply to the main petition. The matter was scheduled for further hearing on 13.5.2016.
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