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TMI Blog2004 (2) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... an Administrator filed under Section 402 of the Companies Act (C.A. No. 294 of 1999 dated 15.12.1999) by Group A wherein it has been alleged that Group B had been violating the Shareholders Agreement and Articles of Association and also narrating the steps taken to settle outstanding issues. The second application is C.A. No. 7 of 2000 dated 13.1.2000 filed under Section 403 of the Companies Act making a prayer for interim relief on the plea that after the filing of the Company Petition, Group B had been indulging in oppression and mismanagement and violating the Shareholders Agreement which was prejudicial to the affairs of the Company. Details have accordingly been set out as to how by its conduct, the company was being adversely affected. The third is C.A. No. 440 of 2000 dated 3.3.2000 wherein full details with regard to the oppression and mismanagement at the hands of Group B has been brought out and it has been prayed that the Board. We have also perused the application filed on 16.5.2000. It is the case of Group A that it is this application which contained the substance of the dispute. We find that this application is exclusively a repetition of what had already been said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shareholders and the Company could be, prejudicially affected if the matters were put to Arbitration and finally decided by the arbitrator, whereas an order made by the Company Law Board under Sections 397, 398, 402 and 403 would be appealable u/s 10F of the companies Act. These aspects become relevant in the light of the observations in Chiranjilal Shriial Goenka s case [ 1993 (3) TMI 354 - SUPREME COURT] . In this matter, the question of the probate of a will was referred by the consent of the parties for arbitration to retired Chief Justice of the Bombay High Court. As some proceedings with regard to the probate were also pending in Court, the question arose as to whether the Arbitrator could decide on the validity of the Will. We find that the aforesaid observations would clearly apply in the present case as well for the reasons already set out above. X X X X Extracts X X X X X X X X Extracts X X X X ..... uish its majority stake in favour of Group B, a shareholders agreement, copy Annexure P-4, was signed on 8.2.1997 and it was agreed that the two groups would henceforth hold their shares in complete parity and that they would endeavour to manage the affairs of the Company with dedication and honesty of purpose. Clause 33 of the Shareholders Agreement also provided for settlement of disputes by Arbitration. It appears that the terms of the Shareholders Agreement, Annexure P4, were adopted and incorporated in the Memorandum & Articles of Association of the Company, Annexure P-5 and Clause 33 thereof was adopted mutatis mutandis in the memorandum as well. It is further the case of Group A that after having received parity in the share holding in the Company, Group-B took control of the Company and ousted Group-A from its management and in order to frustrate whatever little control is still held, filed Company Petition No. 76 of 1999 under Section 397, 398, 402 and 403 of the Companies Act, 1956 before the Company Law Board in total disregard of the Arbitration agreement contained in the Articles of Association of the Company. It is submitted by Group-A that it was in fact Group-B, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Board before the filing of the application aforesaid. Group- A thereafter challenged the order in this Court by way of Company Appeal No. 2 of 2001 under Section 10F of the Companies Act. This Court on 22.8.2001 passed the following order:- "Having heard learned counsel appearing for the parties, it appears to us that the questions of law involved in the case will require detail (sic) hearing. Admit. Meanwhile, stay further proceedings before the company Law Board. List the case for hearing on 2.10.2001" 2. This order was challenged by Group. B before the Hon'ble Supreme Court, which was listed as SLP (Civil) No. 16255 of 2001. The Hon'ble Supreme Court, however, without opining on the merits of the controversy dismissed the SLP. Several interim orders were also made by the High Court in the Company Appeal but it was ultimately dismissed as being not maintainable vide judgment dated 24.4.2002. Copy appended as Annexure P13 to this petition. It is in these circumstances that Group A has filed the present Civil Writ Petition impugning the order, Annexure P1, which too has been dismissed as already mentioned above. 3. In the reply to the writ petition, Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out that the appeal filed by the petitioners under Section 10F of the Companies Act against the order of the Company Law Board dated 8.12.2000 had been dismissed on 24.4.2002 and about three months thereafter, the present writ petition had been filed impugning the order dated 8.12.2000. 4. We find from the record that the writ petition first came up before this Court on 15.7.2002, and while issuing notice of motion for 2.9.2002, it was directed that the proceedings before the Company Law Board could go on but the final order should not be pronounced till the next date. The matter came up before the Company Law Board on 16.7.2002 when Group A sought an adjournment on the ground that the matter was.pending in the High Court. It is conceded position that the stay order continues to be in operation as on date. 5. The learned Single Judge in his judgment, held that as Group A had not spelt out its intention to seek arbitration at the very initiation of the proceedings before the Company Law Board and had on the contrary made a statement on 17.9.1999 before the Company Law Board that the matter be finally heard by it, it appeared that it had abandoned its claim to arbitration and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te an intention to abandon its claim to arbitration for the reason that Group A had absolutely on option but to make a reply thereto. It has further been pleaded that the delay in the proceedings before the Company Law Board could not be foisted exclusively on Group A as this had occurred at the instance of both parties to explore the possibility of a compromise between them. He has further argued that a mention of the Arbitration Agreement had been made in the reply dated 13.9.1999 and as the various arbitration agreements were already on the file of the Company Petition pending before the Company Law Board, it had to be taken that the objections to the assumption of jurisdiction by the Company Law Board had been raised at the very initial stage. It has also been submitted that the four applications moved by Group A before the Company Law Board i.e., Company Application No. 294 of 1999. Contempt Application No. 6 of 2000, Company Application No. 7 of 2000 and Company Application No. 440 of 2000 also could not be read to mean an acquiescence or abandonment of the claim to arbitration as these applications did not touch on the substance of the dispute pending before the Company Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that it reserved its right to claim arbitration. It has accordingly been pointed out that it was for the first time on 16.5.2000 when a formal application under Section 8 of the Act had been moved a clear claim for arbitration had been made. It has, thus, been highlighted that as Group A had moved four applications giving the substance of the dispute long before the formal applications under Section 8 of the Act had been filed, it was now precluded from claiming arbitration and as such the finding of the Company Law Board and the learned Single Judge on this score was correct. It has in addition been pleaded that a formal application under Section 8 of the Act was indeed necessary and the one finally moved on 16.5.2000 too was defective as it was not accompanied by a copy of the Arbitration Agreement. Reference in this connection has been made to the judgment of the Hon'ble Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh Pandya and Anr., J.T. 2003(4) S.C. 58. 9. It has also been emphasised by Mr. Kathpalia that the arbitration clause was even otherwise uninvokeable for the reason that the Company Hind Samachar Limited was not a party to the Arbitration Agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is contained in- (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. 8. Power to refer parties to arbitration where there is an arbitration agreement.- (i) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party no applies not later than when submitting his first statement on the substance of the dispute, refer the parlies to arbitration. (2) The application referred to in Sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under Sub-section (i) and that the issue is pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangements could be made for holding a Board meeting of the Company. The order dated 17.9.1999, Annexure R-5/5 pursuant to the order dated 14.9.1999 is significant and is reproduced hereunder:- "In pursuance of our Order dated 14.9.1999 learned counsel for the petitioners on the basis of instructions has stated that his clients are not agreeable for the appointment of Chairman for conducting the Board meeting, however they have no objection to the appointment of observer appointed by us. The Respondents have strongly contended that unless an independent Chairman is appointed no purpose will be served. Both the parties are however agreed that the petition could be heard finally. In view of the same we direct that the Respondents (1) and (2) and the other Respondents shall file their reply to main petition within one month and the Petitioners shall file the rejoinder within one month thereafter. This case is fixed for hearing on 16th and 17th December, 1999 at 10.30 A.M. in case it does not conclude shall be taken up on 22.12.99 at 2.30 P.M." 16. The underlined portion clearly reveals that Group A had clearly decided to forego its objections, if any, to the continuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court on 19.3.2002 making a clear shift away from arbitration. Mr. Aggarwal has, however, attempted to explain away this matter by urging that the suit did not cover the dispute raised in the Company Petition as the relief sought therein was clearly different and distinct. 19. We have accordingly examined the pleadings in the suit viz-a-viz those in the Company Petition and find that they very substantially overlap each other. At the very initial stage, the plaint refers to the Shareholders Agreement and the Articles Association of the Company in which the parties had undertaken to run the business as per the terms and conditions made therein, and thereafter goes on to say that the defendants in the suit had in utter disregard of the agreements aforesaid filed a petition under Sections 397 and 398 of the Companies Act on the plea that the affairs of the Company were being conducted in a manner prejudicial to the public and/or the shareholders, and that a dead lock existed between them. The plaint then goes on to dilate on the various acts of omission and commission, which are said to be in violation of the Shareholders Agreement and the articles of Association of the Company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in particular relied on the following observations:- "Therefore, the expression "taking any other steps in the proceedings" must be given a narrow meaning in that the step must be taken in the main proceeding of the suit, and it must be such step as would clearly and unambiguously manifest the intention to waive the benefit of the arbitration agreement and to acquiesce in the proceedings. Interlocutory proceedings are incidental to the main proceedings. They have a life till the disposal of the main proceedings. As the suit or the proceeding is likely to take some time before the dispute in the suit is finally adjudicated, more often interim orders have to be made for the protection of the rights of the parties. Such interlocutory proceedings stand independent and aloof of the main dispute between the parties involved in the suit. They are steps taken for facilitating the just and fair disposal of the main dispute. When these interlocutory proceedings are contested it cannot be said that the party contesting such proceedings had displayed an unequivocal intention to waive the benefit of the arbitration agreement or that it has submitted to the jurisdiction of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement to be carried out." 24. Admittedly Group A never complies with this direction. 25. Reliance has also been placed by Mr. Kathpalia on Food Corporation of India v. Sreekanth Transport, 1999 Supreme Court 2184. In this case the question was as to whether an agreement for arbitration could be enforced by the Food Corporation of India, in the light of the fact that the Corporation itself had filed a suit in the Civil Court for a similar relief. It was observed as under:- "There is, therefore, a positive act on the part of the Food Corporation of India not to put any reliance on to that particular clause of the agreement. There is as a matter of fact, thus, on the state of facts, as above, appears to be a positive relinquishment or abandonment of a right so far as the adjudication of the excepted matters are concerned by the Appellant-Corporation since the Corporation itself wanted to have it adjudicated by a Civil Court." 26. The learned counsel has also referred to Magma Leasing Limited v. NEPC Micon Limited and Anr., A.I.R. 1998 Calcutta 94. The facts of the case were that the plaintiff-Magma Leasing had entered into an agreement with the first defendant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may by its word or conduct opt out of the clause related to arbitration. In the light of the facts that have been brought out above, we are of the opinion that Group A had not only by its conduct but even by specific words abandoned its claim to arbitration and acquiesced to the jurisdiction of the Company Law Board. 28. It is in this background that Mr. Kathpalia's subsidiary argument must be dealt with. He has submitted that this Court while exercising jurisdiction under Article 226 of the Constitution of India should not act as a Court in appeal, and as the Company Law Board and the learned Single Judge had given a finding of fact that Group A had abandoned its claim to arbitration, no interference was called for by us. Reliance for this argument has been placed on Satyanarayan Laxminarayan Hegde and Ors. v. Mallikarjun Bhavanappa Tinumale, A.I.R. 1960 Supreme Court 137. In this judgment, it has been observed that the High Court should ordinarily not interfere in the orders of Subordinate Tribunals and unless there was an error apparent on the face of the record, interference was not called for. It was further observed that:- "An error which has to be observed by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequent applications filed on 15.12.1999, 13.1.2000 and 13.3.2000, to which reference has been made above, also did not constitute the first statement on the substance of the dispute and as such it had to be taken that the substance for the first time had been submitted before the Company Law Board in the application dated 16.5.2000 and any statement or action taken prior to that date could not be taken as having foreclosed the plea for arbitration. Reliance has been placed on the judgment of the Hon'ble Supreme Court in Food Corporation of India's case (supra), to contend that a mere participation in the proceedings on the interim or interlocutory matter would not constitute an intention to waive or abandon the arbitration agreement or acquiescence to the proceedings before the Company Law Board. 32. Mr. Kathpalia has, however, stated that the aforesaid judgment was made in the background of the provisions of Section 34 of the Old Act under which the consideration was as to what constituted a waiver or abandonment of the claim manifestly different and as Section 8 of the Act had clearly fixed the time as being the date on which the substance of the dispute was put befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would reveal that the substance of the dispute had in fact been set out in each one of them. We have also perused the application filed on 16.5.2000. It is the case of Group A that it is this application which contained the substance of the dispute. We find that this application is exclusively a repetition of what had already been said in the four documents referred to herein above. The application under Section 8 of the Act is also significant for yet another reason. In para 9 of the application, it has been pleaded that:- "The respondent on the first date of hearing had submitted that they wish to file an application under the said Act for reference of the disputes and difference for arbitration in terms of the above detailed arbitration clause. It is further submitted that the respondent is presenting the present application before filing its first statement on the substance of the dispute. The respondents submit that they are willing to go through the arbitration proceedings as agreed by and between the parties hereto and have not submitted to the present proceedings as would be evinced from the records." 35. The 'wish' referred to in the application was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r be referred to the arbitrator. We find that the matter stands settled by the Hon'ble Supreme Court in P.Anand Gajapathi Raju and Ors. case (supra) and the judgment of the Hon'ble Supreme Court in Sukanya Holdings Pvt. Ltd.'s case (supra). This was a case where all parties to the dispute were not parties to the arbitration agreement. The Court in paragraphs 12 and 15 of the judgment observed as under:- "Further, the matter is not required to be referred to the Arbitral Tribunal, if.- (i) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that Arbitration Act does not oust the jurisdiction of the Civil Court to decide the dispute in a case where parties to the Arbitration Agreement do not take appropriate steps as contemplated under Sub-sections (1) and (2) of Section 8 of the Act." Para 15 "The relevant language used in Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven these provisions also visualise an application in a particular form and accompanied by certain documents, is however misplaced. We have perused the different format provided for different categories of applications but find that these would apply only to applications made under the Companies Act and not to an application under Section 8 of the Act. 43. The last two arguments of the learned counsel for the parties flow from an interpretation of arbitration clause Article 33 in the Shareholders Agreement dated 8.2.1997, Annexure P-4 to the petition, which corresponds largely to Clause 190 of the Articles of Association dated 9.8.1949, Annexure P5 as amended and to the scope and ambit of Sections 397, 398 and 402 of the Companies Act. 44. Relying on the terminology used in paragraph 190 of the Articles, Mr. Aggarwal has argued that the word 'may' used therein was to be read as 'shall' and as such there was no option with the Company Law Board but to relegate the parties to arbitration. He has also urged that in any case it was for the Arbitrator to decide on the existence or otherwise of an Arbitration Agreement as provided by Section 16 of the Act. 45. Mr. Kath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given a finding that a dispute under Sections 397 and 398 of the Companies Act could be a subject matter for arbitration. We agree with Mr. Aggarwal when he says that though the decision of the Company Law Board can not be said to be binding on this Court but it would still have great persuasive value and must be given due consideration. We, however, find that Mr. Aggarwal's argument that as this issue had not been seriously debated before the learned Single Judge, this Court should stay its hands in this Letters Patent Appeal, is clearly unwarranted. It has to be borne in mind that the matter in the writ petition before the learned Single Judge was in the nature of a first appeal and the present proceedings are in the nature of a second appeal. Moreover, we find that this I technical consideration cannot shackle the writ jurisdiction of this Court in what is I purely a question of law. 49. Section 2-A of the Act defines a 'Party' to mean a party to the arbitration agreement. Admittedly, the Company is not a party to the Arbitration Agreement as the same is confined only to groups A and B which constitute the parties in this appeal. In the family settlement dated 6.5.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne months. "That as part of such conciliation process, members of Group A and Group B will meet each other, in order to settle disputes of any nature in reaching a solution to the problems/disputes. Any claim, dispute, deadlock or controversy which cannot be resolved through conciliation within 15 days or such extended period as Parties may unanimously agree, a party may refer the claim, dispute or difference to arbitration as hereinunder provided in accordance with the New Indian Arbitration and Conciliation Act, 1996. The arbitration shall be held in the city where the registered office of the company is situated. There shall be three arbitrators in arbitration proceedings. Group A and Group B shall have the right to appoint one arbitrator each and two such appointed arbitrators shall appoint the third arbitrator. The applicable law shall be Indian Law. The costs and expenses of such arbitration shall be allocated between the borne by the parties. 51. A cumulative reading of these paragraphs would reveal that as the Company and the shareholders holding the miniscule 2.4% of the shares were not parties to the Arbitration Agreements, an option had apparently been left with Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended for the petitioner that the word "may" in Clause 5 has to be construed as "shall". According to the petitioner's counsel, that is the true intention of the parties. The question then is as to what is the intention of the parties. The parties, in my view, used the words "may" not without reason. If one looks at the fact that Clause 4 precedes Clause 5, one can see that under Clause 4 parties desired that in case of disputes, the civil courts at Bombay are to be approached by way of a suit. Then follows Clause 5 with the words "it is also agreed' that the dispute "may" be referred to arbitration go to the civil court by way of suit but can also go before on arbitrator. Thus, Clause 5 is merely an enabling provision as contended by the respondents. I may also state that in cases where there is sole arbitration clause couched in mandatory language, it is not preceded by a clause like Clause 4 which discloses a general intention of the parties to go before a civil court by way of suit. Thus, reading Clause 4 and Clause 5 together, I am of the view that it is not the intention of the parties that arbitration is to be the sole r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under this section, provided such members have a right so to apply in virtue of Section 399. (2) If, on any application under Sub-section (1), the court is of opinion- (a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. Section 398: 398 Application to Company Law Board for relief in cases of mismanagement.- (1) Any members of a company who complain- (a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the Company, or (b) that a material change not being a change brought about by, or in the interest of, any creditors including debenture holders, or any class of shareholders, of the company has taken place in the manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under Section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; g) any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.Section 403: 403. Interim order by Company Law Board.- Pending the making by it of a final order under Section 397, 398, as the case may be, the Company Law Board on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable. 56. A bare reading of the aforequoted sections would reveal that interference by the Company Law Board is called for where the affairs of the Company are being conducted in a manner prejudicial to the interest of the general public or in a manner oppressive to any member(s) and Shareholders of the Company. The various Clauses of Section 402 also show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which application was filed by the petitioner herein was relating to winding up of the company. That could obviously not be referred to arbitration and, therefore, the High Court, in our opinion was right in rejecting the application. 58. We are also the of the opinion that the unanimous opinion in the High Courts dealing directly with the issue raised appears to be that no arbitration in cases such as the present one is permissible. In O.P.Gupta's case (supra), while dealing with an identical situation, a Single Bench of the Delhi High Court observed as under;- "I fully agree that no arbitrator can possibly give relief to the petitioner under Sections 397 and 398 and will be unable to pass any order under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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