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TMI Blog2008 (7) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... ND ARBITRATION PETITION 170 OF 2008) - - - Dated:- 4-7-2008 - D.G. KARNIK, J. Dj. Khambatta, Shyam Mehta, Gautam Ankhadi, Federal and Rashmikant for the Petitioners V.V. Tulzapurkar, P. Palkhiwala, Dwarkadas, T.N. Subramaniam, G.R. Joshi, I.C. Legal for the Respondent JUDGEMENT D.G. Karnik, J. - These matters were heard on 27 April 2008 and the order was reserved. In the meanwhile, the plaintiffs/petitioners moved the vacation Bench by filing Arbitration Petition Nos. 239 and 240 of 2008 and the papers of these matters were called by the vacation bench and the papers are now returned after passing some ad-interim orders. Those arbitration petitions are however not placed on board. After reopening of the courts I have heard the counsel again. By consent, the matters are heard finally. 2. The plaintiffs in the suit are the petitioners and the defendants in the suit are the respondents in the arbitration petition Nos. 169 and 170 of 2008. Hence, for the sake of convenience the parties are referred to as the plaintiffs and the defendants. 3. In the suits as well as in the arbitration petitions, the plaintiffs seek an order of injunction restrainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge potential in the internet business, the defendant No. 1 made various attempts to exclude internet content from the licence agreement with a view to exploit the internet rights by itself, to the exclusion of the defendant No. 2. The defendant No.1 firstly attempted to persuade and pressurise the plaintiffs to modify the terms of the licence agreement. On being unable to succeed in its design the defendant No. 1 adopted three pronged approach. Firstly, it tried to exploit the internet content in respect of its various film on its own in gross violation of the terms of licence agreement; secondly, it tried to obstruct exploitation of the internet rights by the defendant No. 2 by adopting a non- operative stand; and, thirdly, it attempted to try and contrive/engineer a deadlock with regard to the operations and management of the defendant No. 2 company. According to the plaintiffs, the defendant No. 1 is trying to give internet and mobile rights in its film 'Tashan' to the defendant No. 3. The plaintiffs, therefore, filed the aforesaid two arbitration petitions to restrain the defendant No. 1 from giving away the internet or mobile rights in the contents of the films produced or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence agreement. Under section 2( j ) and section 54 of the Copyright Act, the defendant No. 2 is entitled to exclude even the plaintiff from use of the copyright in the mobile and internet content of the said films and plaintiffs are entitled to an injunction restraining the defendant No. 1 from committing breach of the licence agreement. Counsel further submitted that the defendant No. 2 was a joint venture company and since the plaintiff Nos. 2 to 5, on the one hand, and defendant No. 1, on the other hand, were equal shareholders and each party had two directors on the board of directors of defendant No. 2, it was not possible for the defendant No. 2 to file any suit or arbitration petition and therefore plaintiffs were entitled to sue and/or file arbitration petitions by way of a derivative action on behalf of and for the benefit of defendant No. 2. Submissions of the defendant Nos. 1 and 3 7. Per Contra, Mr. Tulzapurkar, learned Senior Advocate, appearing for the defendant No. 1 submitted that suit and the arbitration petitions by the present plaintiffs were not maintainable. Under the licence agreement dated 23 April 2005, the licence was granted by the defendant No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted in the suit. He further submitted that the principles which ordinarily apply for grant of an injunction in a suit do also apply for grant of an injunction in a petition under section 9 of the Arbitration Act. In order to get an injunction in a suit the plaintiff is required to make out a strong prima facie case, including on the point of maintainability of the suit and show the balance of convenience was in his favour. In a petition under section 9 of the Arbitration Act the same would be required to be shown by a petitioner. Since the plaintiffs, who were the petitioners in arbitration petition, had not made out a strong prima facie case and as the arbitration petition at their instance was not maintainable they were not entitled to any relief in the suit as well as the arbitration petitions. He further submitted that since the plaintiffs had filed the suit (Suit No. 959 of 2008) after the filing of the arbitration petitions, claiming that the relief of injunction on the very same cause the arbitration petitions were not maintainable as two forums cannot, in law, hear and decide the same issues. Since the plaintiffs themselves had chosen public forum (of a civil court) g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foss v. Harbottle [1843] 2 Hare 461 observed that difficulties could arise in determining the exceptions. He said: "If the rule in Foss v. Harbottle [1843] 2 Hare 461 had remained unqualified, the way would have been open for the majority to stultify any proceedings which were for the benefit of the minority and to the disadvantage of the majority. Accordingly, a number of exceptions from the rule have been established; and it is here that the difficulties begin." 9.1 Though difficulties may arise, as observed by Sir Robert Magerry, as to what should be the exception to the rule in Foss v. Harbottle [1843] 2 Hare 461, one thing is clear that the exception have been recognised by the courts to the rule in Foss v. Harbottle [1843] 2 Hare 461. Court of Appeal recognised it in Moir v. Wallersteiner ( No .2 ) [1975] 1 All ER 849 (CA). 10. In India in Dr. Satya Clmran Law v. Rameshwar Prasad Bajoria AIR 1950 FC 133, the Federal Court, after recognising well settled principle of law that in order to redress the wrong done to a company or to recover monies or damages alleged to be due to the company, the action should prima facie be brought by the company, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the exception to the rule in Foss v. Harbottle [1843] 2 Hare 461. 12. In Nirad Amilal Mehta v. Genelec Limited [2009] 1 Comp LJ 361 (Bom) (Notice of Motion No. 1272 of 2008 in Suit No. 888 of 2008) decided on 23 and 25th April 2008 I have taken a view that a derivative action by a shareholder for a wrong done to a company is maintainable in certain circumstances such as where the directors of the company themselves are the wrong doers and sell the property and substantial undertaking of the company without proper authorisation under section 293 of Companies Act. 13. I see no reason to depart from the view which I have taken earlier. I therefore hold that a suit at the instance of a minority shareholder for a wrong done to a company is maintainable where it is shown that the wrongdoers are insiders, say directors of the company or majority of the shareholders who are unlikely to take any action for the wrong done to the company. I am, however, not prepared to go thus far as to hold that even a derivative action by way of an arbitration can be taken by initiating arbitration before an arbitral tribunal, for the reasons indicated a little later. 14. The form of act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endant No. 3 who is not a party to the arbitration agreement. The defendant No. 3 is not a party either to the joint venture agreement or to the licence agreement, both dated 23 April 2005 which contain arbitration agreement. There is no other agreement between the plaintiffs and the defendant No. 3 for reference of any dispute to arbitration. Section 2( h ) of the Arbitration Act defines party to mean a party to an arbitration agreement. Section 9 of the Arbitration Act says that a party may, before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced, may apply to a court for interim reliefs mentioned in sub-clause ( a ) to ( e ) of clause ( ii ) of the section. Obviously, the reliefs under section 9 of the Arbitration Act an interim relief can be claimed by a party to an arbitration agreement against the other party. Since the defendant No. 3 is not a party to the arbitration agreement, plaintiffs are not entitled to claim any relief against the defendant No. 3 in either of the arbitration petitions. Counsel for the plaintiffs, in fact, submitted that realising this difficulty, the plaintiffs have filed the suit joining d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arbitration Act. The arbitral tribunal obviously would have no jurisdiction to adjudicate upon the disputes raised by any of the plaintiff Nos. 2 to 5 who are not the parties to the licence agreement, about the alleged breach of the licence agreement. 17. Counsel for the plaintiffs, however, submitted that just as a derivative action by way of a suit is permitted at the instance of the shareholders of a company which has been wronged a derivative action by way of an arbitration would also be permissible at the instance of the minority shareholders. He submitted that the defendant No. 2 company was wronged by the defendant No. 1 by committing a breach of the licence agreement. The defendant No. 1 being 50% shareholder and holding equal number of directors on the board of the defendant No. 2 company, it was impossible for the defendant No. 2 to pass a resolution for taking any action against the wrong doer the defendant No. 1. Therefore, the minority or shareholder holding 50% of the share capital were entitled to take action in arbitration against the wrong doer by joining the defendant no.2 company as a party. 18. The rule in Foss v. Harbottle [1843] 2 Hare 461 clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his agreement shall be deemed to have come into force from 1st March 2005 and shall be valid so long as the joint venture agreement entered into between Yashraj (defendant No. 1) and Onyx (defendant No. 2) is in full force and effect. 19.1 The licence agreement was to remain in force only so long as the joint venture agreement was in full force and effect. I would, therefore, have to look to the joint venture agreement to ascertain the term of the licence. The joint venture agreement does not specify the period for which the joint venture was to remain in force. The joint venture agreement however contains a provision regarding the 'deadlock' in clause No. 11. Clause no.11.1 defines the 'deadlock' to mean any dispute or disagreement in relation to any matter consisting the operation or management of the joint venture company or any of the terms in the agreement that remains unremedied or unresolved for a continuous period of 60 days. Clause No. 11.2 to 11.5 provide for the procedure to be followed in the event of the deadlock. In the event of deadlock, one party is to give notice of the deadlock to the other; each party is then to appoint chartered accountant for the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice of the deadlock notice. 20. Mr. Khambatta submitted that the deadlock notice was waived. He invited my attention to the letter dated 18 January 2008 written by the defendant No. 1 to the plaintiffs wherein it is stated that in view of the meetings to be held in first week of February 2008, the deadlock notice was temporarily being kept in abeyance. This was accepted by the plaintiffs by their reply dated 30 January 2008. What is material to note is that the deadlock notice was not withdrawn but was only kept in abeyance. The only possible inference which can be drawn by reading the two letters as a whole was that procedure to be followed on a deadlock notice, that is to say, appointment of a chartered accountant, valuation of the company and bidding process between the parties was to be kept in abeyance. This is clear by use of the words 'temporarily kept in abeyance'. Naturally, when the parties are in discussion of resolution of the disputes by negotiations, they may not like bad blood to flow which may affect the negotiations. By letter dated 11 March 2008, respondent No. 1 clearly stated that the parties had agreed to discuss without prejudice to the deadlock notice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect after the dead lock notice? The reliefs which are sought to be claimed in the proposed arbitration, as can be seen from the averments made in the petition under section 9 of the Arbitration Act are to restrain the defendant No. 1 from granting internet or mobile rights in any of the films including 'Tashan' to the defendant No. 3. The defence of the defendant No. 1 in the arbitration petition again is the same, viz., that the licence agreement dated 23 April 2005 stands terminated on issuance of a deadlock notice or otherwise. The grant of any relief in the arbitration proceedings in favour of the plaintiffs would therefore depend upon an affirmative finding on the very same issues, viz., whether the licence agreement dated 23 April 2005 is in full force? Whether it stands terminated and/or has ceased to be in full force and effect after the deadlock notice? Undoubtedly, there would be some other issues but the common issues in both, suit and arbitration petitions are whether the agreement dated 23 April 2005 was in force and defect and was binding on the parties. Unless the affirmative finding was recorded on the same issue in both the proceedings and the claimants in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls simultaneously have jurisdiction only one of them would exercise the jurisdiction. Section 10 of the Code of Civil Procedure is only a statutory embodiment of that principle. It says that no court shall proceed with the trial of any suit in which the matter in issue is also directly or substantial in issue in a previously restricted suit between the same parties. In case proceedings before two public forums like two courts, the rule is the forum wherein the proceedings were filed first would hear it to the exclusion of other. In my view, this principle of general application has not undergone any change under the Arbitration Act. Section 8 contemplates that a judicial authority before which an action is brought in a matter which is subject of an arbitration clause shall, if a party so applies not later that it submitted his first statement on the substance of the dispute, refer the parties to arbitration. The civil court, therefore, would be required to refer the parties to arbitration when there is an arbitration agreement and one of the parties applies for the court to do so. Though section 8 of the Arbitration Act, 1996, does not provide for a stay of a suit like 34 of the Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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