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2015 (5) TMI 799 - HC - Companies LawChallenge of Award passed in arbitration proceeding by a third party - It is settled law that what cannot be done directly cannot be permitted to be done indirectly - It is submitted that Arbitration is a creation of statute and not a Common Law right and therefore, the remedy must be as per statute only. A suit in relation to arbitration proceedings and for challenge to an Award may, if at all, be maintainable only in cases where there is a doubt as to the execution and existence of the arbitration agreed. In the instant case, the existence and validity of the arbitration agreement is an admitted fact and is not under challenge - Held that:- There is a clear distinction between individual and corporate membership rights of shareholders. A member can always sue for wrongs done to himself in his capacity as a member. The individual rights of a member arise in part from the general law. Under the contract emanating from his memberships, he is entitled to have his name entered and kept on the register of members, to vote at meetings of members, to receive dividends which have been duly declared, to exercise pre-emption rights conferred by the articles, and to have his capital returned in proper order of priority on a winding up or on a properly authorized reduction of capital. Under the general law he is entitled to restrain the company from doing acts which are ultra vires, to have a reasonable opportunity to speak at meetings of members and to move amendments to resolutions proposed at such meetings to transfer his shares; not to have his financial obligations to the company increased without his consent; and to exercise the many rights conferred on him by the Companies Act, such as his right to inspect various documents and registers kept by the Company. The dividing line between personal and corporate rights is not always very easy to draw. The Courts, however, incline to treat a provision in the memorandum or articles as conferring a personal right on a member, if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In an action for violation of personal rights a single shareholder suing alone and not even on behalf of other shareholders may make the company a defendant and obtain his reliefs. Where a wrong has been done to the company and an action is brought to restrain its continuance or to recover the company’s property or damages or compensation due to it, it is a derivative action. Here the company is the only true plaintiff. The dispute is not an internal one between those who constitute the membership of the company but one between the company on the one hand and third parties on the other. It makes no difference in principle that the third parties may accidentally happen to be the directors or controlling shareholders of the company. In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and may join the company as a defendant. The directors are usually defendants. This action is brought instead of an action in the name of the company. The form of the action is always: ‘A.B. (a minority shareholder) on behalf of himself and all other shareholders of the company against the wrongdoing directors and the company . It is a “procedural device for enabling the Court to do justice to a company controlled by miscreant directors or shareholders. A company is a mere abstraction of law. By registration under the Companies Act, a company is vested with corporate personality, which is independent of and distinct from its members. It is a legal person with perpetual succession and common seal. It is a body corporate having a separate identity and distinct from the directors and shareholders. The property of the company is not the property of the shareholders. In the eye of law, even a member holding majority shares or a managing director of a company is held liable for criminal misappropriation of the funds or property of the company, if he unauthorisedly takes it away and uses it for his personal purpose. As a juristic legal person, a company can sue in its name and be sued by others. The pleadings in the suit if taken, as a whole, would clearly indicate that the plaintiffs are seeking to enforce their personal cause of action as opposed to derivative action. The same would be further clear from Paragraph 41 of the Plaint where the plaintiffs have specifically stated that the defendants in collusion and conspiracy with each other have perpetrated fraud on the plaintiffs through the proforma defendant. This sentence clearly indicates that it is a wrong done to the plaintiffs. It makes it very clear that the plaintiffs are espousing their personal cause of action. A party to a contract with the company is no way concerned with the inter se disputes between the directors. In case of a dispute with regard to the internal management of the Company and as to who would represent the company and/or authorize to represent the company, the proper course is to file a suit for declaration and injunction and to seek appropriate remedy against the miscreant directors and for persons asserting their right as directors. In the instant case, it appears that there are disputes with regard to the internal management of the proforma defendant company. The orders disclosed in this proceeding would not show that the defendant Nos.3 to 5 were not authorized to represent the said company in the arbitration proceeding. This observation, however, is not an expression of opinion with regard to the claim of the plaintiffs against the said defendant Nos.3 to 5, that the said defendants have ceased to become directors. The said defendant No.1 is no way concerned with the inter se disputes between the plaintiffs and the defendant Nos.3 to 5. Although, the plaintiffs have asserted that the said defendants for long years have ceased to become directors and since 2009 the said defendants were not entitled to hold themselves as directors but the plaintiffs did not take recourse to any legal proceeding to prevent the said defendants from asserting their rights as directors since even thereafter the said defendants continued to assert their right as directors that had resulted in various litigation. Even if it is assumed that the defendant No.1 is aware of the inter se disputes between the plaintiffs and the defendant Nos.3 to 5, the defendant No.1 is under no obligation to disclose such dispute before the arbitrator since the claim of the defendant No.1 is against the proforma defendant. The defendant No.1 appears to have been roped in by clever drafting, in order to avoid the award passed against the proforma defendant. The reliefs claimed in the plaint so far as it seeks a declaration that the award against the defendant No.1 is nonest, illegal and not enforceable and the said award is required to be set aside, in my view, having regard to the frame of the suit is not maintainable and barred by law. The challenge to the award has now become barred by limitation. It is settled law that what cannot be done directly cannot be permitted to be done indirectly. It is not been alleged that the proforma defendant was prevented by the said defendants Nos. 3 to 5 to challenge the award. In so far as other reliefs are concerned, in my view, they are required to be adjudicated at the trial and the suit cannot be dismissed as against the other defendants. Since the prayer for setting aside of the award is barred by law, I hold that the suit so far as it relates to setting aside of the award against the defendant No.1 is concerned is not maintainable. - The application is allowed in part.
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