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TMI Blog2006 (6) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... e before the judicial authority. In the case on hand, the petitioner complained of the breach committed by the second respondent in discharging the liabilities of the Company taken over by him in terms of the agreement and in incurring an aggregate amount of Rs. 2.95 crores by it as on 31-7-2005 for and on behalf of the Company, but no relief has been claimed before the CLB in this behalf. The petitioner, in the Company Petition, on the other hand, made a claim of Rs. 31.74 crores against the second respondent spent by it in relation to operations and management of the Company and damages of Rs. 5 crores for breach of the contract which are covered under clauses 5 and 23A respectively of the agreement. These claims made by the petitioner before the Arbitral Tribunal are not urged before the CLB, in which case, the Arbitral Tribunal will adjudicate only these specific issues on which reference has been made by the petitioner. When there is an allegation of acts of oppression and mismanagement, the CLB is empowered to deal with it independently. It is also seen that the statement of claims filed by the petitioner before the Arbitral Tribunal deal rights and obligations of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 397, 398, 402 and 403 of the Indian Companies Act, 1956 ( the Act ) alleging acts of oppression and mismanagement in the affairs of Sporting Pastime (India) Limited ( SPIL ), the respondents 1, 2, 5, 8, 9 and 10 in the Company Petition have filed C.A. Nos. 154, 155 and 160 of 2005 before the Additional Principal Bench of the Company Law Board ( CLB ) under section 8 of the Arbitration and Conciliation Act, 1996 ( the Act, 1996 ) to direct the parties for arbitration and dismiss the Company Petition as not maintainable on the ground that the grievances of KSL form part of clause 21 of an agreement dated 19-7-2004 which provides for resolving the disputes by arbitration and that KSL has already instituted the arbitration proceedings to resolve certain disputes, which are inter-connected with the acts complained of in the Company Petition. The CLB, upon hearing the arguments of both sides, has rejected the prayer of the applicants to refer the parties to arbitration in terms of section 8 of the Act, 1996 and dismissed the C.A. Nos. 154, 155 and 160 of 2005. Aggrieved by this order of the CLB, the present appeal. 2. For the purpose of easy comprehension, the parties are refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions that may be passed either at Board Meeting or General Meeting as void and inoperative, ( e ) to rectify the Register of Members suitably consequent to the cancellation of the allotment of shares of Rs. 25 crores on 28-10-2004, ( f ) to further direct rectification of Register to include Mr. S. Kuppuswamy and Mr. T.B. Narayanaswamy as members as the first respondent Company holding one share each and by reducing the two shares from the total shareholding of the petitioner, ( g ) to further rectify the Register of Members as an interim measure so that the petitioner is fully protected from the effect of section 45, and ( h ) to appoint a Commissioner to visit the Registered Office of the Company and such other offices to inspect the records and books of the Company, to authenticate the Minutes Book of the Board of Directors, the Minutes Book of the General Meetings, Share Register and other statutory records situated or which ought to be situated at the Registered Office of the Company. 5. The appellants who were the applicants in C.A. Nos. 154,155 and 160 of 2005 contended before the CLB and according to them, the Company Petition is not maintainable and it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2:30 p.m. 8. Heard Mrs. Elizabeth Seshadri for M/s. Iyer and Thomas, learned counsel for the appellants and Mr. Arvind P. Datar, learned Senior Counsel for Mr. Muizz Ali, learned counsel for the respondent. 9. Mrs. Elizabeth Seshadri, learned counsel for the appellants has contended that: ( a ) the order of CLB is contrary to law and has been passed without due consideration of all relevant facts presented before the Bench, without application of mind to the legal provisions applicable to the facts of the case and by not applying the applicable law so as to meet the legislative intendment, ( b ) the CLB ought to have seen that the Company Petition that has been filed by the respondent is a vexatious petition which is not maintainable in law and the respondent herein is guilty of forum shopping and hence, the CLB ought to have rejected the Company Petition in limine , ( c ) the petition has been filed on the basis of an agreement dated 9-7-2004 which contains an arbitration clause whereby parties had agreed to refer all and any disputes arising out of the agreement to arbitration, ( d ) the relief sought for in the Company Petition in the case of oppression a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot covered by the agreement would be patently wrong, ( j ) if KCP had organised the inflow of funds in the form of secured or other loan into SPIL, such party would have been a creditor of SPIL and he would be having better enforceable rights and would be in a better position than KSL, ( k ) the Arbitration Tribunal constituted under the Act, 1996, has all the powers including to test the validity or otherwise of an agreement and in effect, is a substitute for a Civil Court though it functions and the arbitrator could go the validity of the agreement and declare in a given case that the agreement is null and void merely because the aggrieved shareholders could move the CLB under sections 397 and 398 of the Act, ( l ) the CLB was bound to take note of the fact and apply the principles laid down in the case of R. Balakrishnan v. Vijay Dairy Farm Products (P.) Ltd. [2005] 59 SCL 667 (CLB - Chennai), ( m ) the CLB has committed a manifest error in judgment by stating that where allegations of oppression and mismanagement set out in the Company Petition can be adjudicated without reference to the terms of the agreement, the question of referring the parties to arbitrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow ought to have referred the dispute to arbitration. (p. 2885) ( b ) the decision of the Supreme Court in the case of Konkan Railway Corpn. Ltd. v. Rani Construction (P.) Ltd. AIR 2002 SC 778 1 in which it was held that section 16 of the Act, 1996 empowers the Arbitration Tribunal to rule on its own jurisdiction including to rule on any objection with respect to the existence or the very validity of the arbitration agreement and therefore, it is not for the Courts to decide on the applicability of the arbitration clause to the facts of the case. The Courts are obligated to leave it to the Arbitration Tribunal to determine the issue of applicability of the arbitration clause. ( c ) the decision of the Supreme Court in the case of P. Anand Gajapathi Raju v. P.V.G. Raju [2004] 4 SCC 539 in which it was held that the language of section 8 of the Act, 1996 is quite unambiguous and peremptory in nature. In case where there is an arbitration clause in the agreement between the parties, it is obligatory on the part of the Court to refer the parties to arbitration. 11. The learned counsel for the appellants has placed further reliance on: ( a ) the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yanaswamy to maintain the minimum statutory number of seven members, ( d ) the respondents 2 to 4, along with one Gopinath Athappan, son of the third respondent were involved in the promotion of a group of Companies with cross-holdings incorporated or acquired for siphon-ing of the Company s funds and assets and diverting Rs. 25 crores out of the huge amounts received from a Canadian Company to the first respondent by way of parking measure and not towards investment or advance share capital. The conversion of Rs. 25 crores into share capital of first respondent company was a deliberate manipulation, which resulted in attachment of the said sum by the Income-tax Department for the dues and penalties of the Company. Thus, the Company lost its substratum and the main business of the Company has become incapable of being performed due to the huge liabilities incurred and illegalities committed by the Company, ( e ) the authorised share capital of the Company has been increased from Rs. 27 crores to Rs. 53 crores and the allotment of shares of Rs. 25 crores has been made in October 2004, without meeting the requirements of the Act and notice to the petitioner, ( f ) the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judicial authority, an arbitration may be commenced or continued and an arbitral awardmade. 16. By virtue of section 8 of the Act, 1996, it is mandatory for the judicial authority, before which an action has been brought in a matter, being the subject-matter of an arbitration agreement, to refer the parties for arbitration provided, ( a ) the application under this section is made any time before submitting the first statement on the substance of the dispute and ( b ) the judicial authority is satisfied that there is a valid arbitration agreement. Sub-section (3) provides that an arbitration may be commenced or continued and an arbitral award be made in spite of ( a ) application made under sub-section (1) and ( b ) pendency of the issue before the judicial authority. 17. It is seen that the CLB, before rejecting the Company Applications, has given due consideration to the facts and circumstances pleaded before it and the following decisions of the Supreme Court: ( a ) Airtouch International (Mauritius) Ltd. s case ( supra ) ( b ) Canara Bank v. Scanomax India Ltd. [2000] 99 Comp. Cas. 285 (Punj. Har.) ( c ) Pinaki Das Gupta s case ( supra ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke over of the Company shall not exceed Rs. 36,00,00,000, subject to the additional sum as agreed between the parties (Clause 12) ( i ) The petitioner is at liberty to sell its remaining 10 per cent shareholding in the Company to the second respondent and or his nominees for a consideration mutually agreeable between them. The second respondent is agreeable in principle of the petitioner s desire (Clause 15). ( j ) In the event of any dispute arising out of the agreement relating to aims and counter-claims, they shall be referred to arbitration under the Indian Arbitration Law in the prescribed manner (Clause 21) ( k ) The Company shall not open any new bank account, until the acquisition of controlling interest by the second respondent in the Company is completed and notified to the concerned banks (Clause 23) ( l ) The second respondent shall indemnify the petitioner against all losses, damages, claims or demands that the petitioner may suffer on account of failure by the second respondent to discharge his obligations under the agreement (Clause 23A). 19. The CLB has further gone through the agreement dated 19-7-2004 and as given due consideration to the terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng other principles: ( a ) The suit should be in respect of a matter which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, the subject matter of the suit lies outside the arbitration agreement and also between some of the parties who are not parties to the arbitration agreement, there is no question of application of section 8. The entire subject of the suit should be subject to the arbitration agreement. ( b ) There is no provision in the Act, 1996 suggesting that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitration. ( c ) There is no provision dealing with the situation where some parties to the suit are not parties to the arbitration agreement. 22. Further, the Supreme Court in its decision Haryana Telecom Ltd. s case ( supra ) has held as under: Sub-section (1) of section 8 provides that the judicial authority before whom an action is brought in a matter, will refer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 397 and 398, read with sections 402 and 403 of the Act from the CLB alone and the statutory jurisdiction of the CLB can neither be ousted even by the consent of the parties. The Arbitral Tribunal would deal with reference to the specific terms of the agreement, especially when the jurisdiction and scope of powers of the CLB and those of the Arbitral Tribunal are quite different. When there is an allegation of acts of oppression and mismanagement, the CLB is empowered to deal with it independently. It is also seen that the statement of claims filed by the petitioner before the Arbitral Tribunal deal rights and obligations of the parties to the agreement dated 19-7-2004 in relation to disposal of the petitioner s (C.P. No. 50 of 2005) shareholding, controlling and management interest in the Company in favour of the second respondent. The non-performance of the obligations under the agreement in discharging the Company s liabilities as per the schedules to the agreement on the respective due dates and the various acts done as well as undone pursuant to the agreement, are elaborately dealt in the statement of claims. 24. In the light of the above discussion, it is seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to Arbitration under the Indian Arbitration Law. The arbitration shall be by three arbitrators. KCP shall be entitled to appoint one arbitrator. KSL shall be entitled to appoint one arbitrator. The two arbitrators so appointed shall elect the third arbitrator. 26. A reading of the above clause makes it very clear that in case of disputes arising out of agreement relating to claims and counter claims, the parties shall be referred to arbitration under the Indian Arbitration Law. In the instant case, the relief sought for in the Company Petition under the provisions of sections 397 and 398 read with sections 402 and 403 of the Act for the various acts which are statutorily not performed like failure of the second respondent to maintain the minimum statutory number of seven members in the Company, pledge of the properties and assets of the Company in violation of the Foreign Exchange and Management Act, siphoning of the Company s funds, increase of authorised Share Capital from Rs. 27 crores to Rs. 53 crores, further allotment of shares of Rs. 25 crores without meeting the requirements of the Act, loss of substratum of the Company on account of the attachment, by the Income- t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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