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2015 (5) TMI 799 - CALCUTTA HIGH COURT

2015 (5) TMI 799 - CALCUTTA HIGH COURT - TMI - Challenge 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 a .....

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s 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 m .....

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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 t .....

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ompany 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 s .....

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lled 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 m .....

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ame 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 .....

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sclosed 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 .....

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re 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, i .....

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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. - GA No.2437 of 2014, CS No.284 of 2014 - Dated:- 14-5-2015 - Soumen Sen, J. For the Appellant : Mr. Surajit Nath Mitra, Sr. Adv., Mr. .....

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ant is an award-holder. The question which arises in this application for determination is, if a share-holder of a company can maintain an action by a way of a suit to challenge an award on behalf of the company. A brief summary of facts as appear from the pleadings are narrated hereinafter. The plaintiffs are incorporated in Mauritius and jointly hold the entire issued paid up and subscribed capital of the proforma defendant. The defendant no.1 is a company owned by Sarda group. The defendant n .....

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sortium and joint development agreement and to make downstream investment in the wholly owned subsidiaries and joint ventures engaged for the aforesaid activities. Pursuant to the approval of the Foreign Investment Promotion Board (FIPB), foreign equity participation of US $ 10,000,000 was to be made by the plaintiff no. 1 in the paid up share capital of the proforma defendant. Following the approval, the plaintiff no. 1 subscribed to the paid up share capital and holds 99.5% of the share capita .....

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ndant no.2, whereas the balance share capital of the company was held by the defendant no.1. However, the directorial pattern was not as agreed and Mr. Jagdish Sarda all along had and has control over the defendant no.2 through his nominated board of directors. The plaintiffs, all throughout reposed trust and faith in Mr. Sarda and had never objected to the same. Between 12th September, 2007 and 31st March, 2009, there have been changes in the board of directors. By reason of cessation of office .....

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irectors of the proforma defendant. The defendant no.3, as sole director of the proforma defendant was incapable of holding any valid board meeting or could appoint defendant nos.4 and 5 as additional directors of the proforma defendant. The said appointments are illegal, invalid and not binding on the proforma defendant or on the plaintiffs. The plaintiffs recorded its objection to such appointments in an electronic mail, dated 1st October, 2009, sent to the defendant no.3. The defendant no.3, .....

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ing, the defendant nos.3 to 5 were removed from the board of the proforma defendant and two new directors were appointed in the said Board. The plaintiffs, thereafter, duly informed the banker of the proforma defendant about the removal of the said defendant nos. 3 to 5, as directors of the said company and requested Hong Kong and Shanghai Bank to freeze the account of the proforma defendant. The proforma defendant, however, could not file the requisite Form 32 recording the cessation of directo .....

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a Company Secretary, addressed a mail dated 18th February, 2010, to the Registrar of Company, Mumbai, requesting the said office to issue necessary order and direction, so that the requisite Form 32 recording the appointment of the directors could be uploaded. The plaintiffs, however, did not receive any formal written response from the Registrar of Companies. Thereafter, the plaintiffs were served with a Writ Petition, being W.P. No. 1971 of 2011, filed by the proforma defendant along with defe .....

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ents, since the Bank had acted at the behest of the plaintiffs and plaintiffs as shareholders were required to be heard. It was only thereafter upon service, the plaintiffs became aware of the said proceeding. The said Writ Petition was disposed of by recording that there is undoubtedly a dispute with regard to the affairs of the proforma defendant. The defendant nos. 3, 4 and 5 claimed to be the directors of the proforma defendant and the defendant nos.3 and 4 claimed to have mandate to operate .....

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sed the Writ Petition on the ground that jurisdiction under Article 226 of the Constitution of India could not be exercised in deciding disputes about internal management upon which the ultimate authority to operate the bank account must rest. However, it was mentioned in the said judgement that it would be open to the proforma defendant and defendant No. 2 and for that matter the plaintiffs herein to move the appropriate forum for appropriate orders. The Review Petition filed by the Writ Petiti .....

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king Ombudsman, closed the complaint filed by the defendant no.2 based on a finding that the freezing of the account was done by the Hong Kong Bank on the basis of the Board resolution, and not on the request of the shareholders. The Hong Kong Bank refused to honour the cheques on the basis of the instructions received from the plaintiffs. On a notice being issued, the plaintiffs were impleaded as Respondent nos. 7 and 8. The Hon ble Division Bench of the Bombay High Court by a judgment and orde .....

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e plaintiffs and respondent nos. 2 to 5. On 10th July, 2014, the plaintiffs received a letter dated 7th July, 2014 from the HSBC wherefrom the plaintiffs came to learn for the first time that on 2nd July, 2014, an order was served upon the bank in connection with Execution Case No. 212 of 2014, directing the bank to pay the Receiver appointed in the said execution proceeding a sum of ₹ 28,51,83,561/- from the account of the proforma defendant maintained with the said bank. Further enquiry .....

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had failed to fulfil its obligation under the Joint-venture Agrement dated 12th July, 2007 by investing a minimum of 5 million dollars in terms of Press Note - 2 of 2005. On 9th October, 2010, the proforma defendant in compliance of their obligation under the Press Note-2 of 2005 issued two several cheques both dated 9th October, 2010, drawn on the HSBC for a sum of ₹ 5 crore and ₹ 15 crore, respectively in favour of the joint-venture company. On 13th October, 2010, upon presentatio .....

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is of the aforesaid allegations, arbitration proceeding was initiated and an award was passed on 7th October, 2012, which, however, was subsequently corrected on 16th May, 2013. The defendant no.1 has put that award into execution. It is alleged that the defendants, in collusion and conspiracy with each other, have perpetrated fraud on the plaintiffs through the proforma defendant. The defendant nos. 3 to 5 and each one of them purported to represent themselves as directors of the proforma defen .....

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esent the proforma defendant, and the defendant nos. 3, 4 and 5 had no authority to represent the proforma defendant. The alleged dispute between the defendant no.1 and the proforma defendant was not covered by the arbitration clause contained in the Joint-venture Agreement dated 12th July, 2007. The defendant nos. 1 and 3 to 5 were not authorized and not entitled to the arbitration clause contained in the Jointventure Agreement dated 12th July, 2007. A false impression has been created that mon .....

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award dated May 16, 2013, passed against the proforma defendant and not against the plaintiffs. The proforma defendant neither has filed the present suit nor any application challenging the award. The suit has been filed by two shareholders of the proforma defendant. The suit is misconceived and a derivative action is not maintainable. The suit could not have been instituted by the shareholders of the proforma defendant. The proforma defendant alone is entitled in law to challenge the said awar .....

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ill not lie. Even on the assumption that the allegations in the plaint are taken to be true and correct that the plaintiffs are 100% shareholders and are in control, they are not entitled in law to maintain the instant suit without making the company, that is, the proforma defendant, a plaintiff. Accordingly, in its present form, the suit as framed is a creature unknown to law without a head, body or tail. Mr. Chatterjee has relied upon the following decisions in support of the aforesaid submiss .....

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gle averment in the plaint that the suit is being filed for the benefit of or on behalf of the proforma defendant company. The suit is not for protection of assets of the proforma defendant company. The suit is essentially a personal cause of action and not a derivative action. Mr. Chatterjee has relied upon Bacha F. Guzdar -vs- Commissioner of Income Tax, Bombay reported at AIR 1955 SC 74 and Vodafone International Holdings BV -vs- Union of India & Anr., reported at 2012 (6) SCC 613 @ page .....

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made by filing an application under section 34 of the Arbitration and Conciliation Act, 1996 and not by filing a separate suit. No suit can lie for setting aside an Award. Krishna Kumar Mundhra -vs- Narendra Kumar Anchalia reported at 2004(2) ARBLR 469 Cal was cited for the said propositions. It is submitted that an award cannot be challenged by a third party. By the instant suit, the plaintiffs are seeking to do indirectly, what the law prohibits them from doing directly. Determination of quest .....

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Ors.-vs-Jute Corporation of India Limited and Anr. reported at (2007)14 SCC 680. 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 agree .....

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irectors of the proforma defendant in this suit and the suit as framed is not maintainable. According to the plaintiffs, even though the defendant nos. 3 to 5 were removed as Directors of the proforma defendant in December, 2009, they continued to act as Directors. It is the admitted case of the plaintiffs that they knew of the continuance of the defendant nos. 3 to 5 as Directors of the proforma defendant since 22nd December, 2009 and have intentionally permitted the state of affairs to continu .....

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ithout any consequential reliefs being claimed, and hence cannot be granted, in view of the law laid down in M. K. Rappai & Ors. -vs- John & Ors. reported at (1969)2 SCC 590. Abdul Sattar Hajee Abdoulla has no authority to represent the plaintiff companies and execute a Power of Attorney for institution of the instant suit. Also, Kurupath Madhavan Nayar has no authority to initiate the instant suit as he cannot possibly have any knowledge of the averments made in the plaint which have be .....

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intiff in short is that the defendants colluded with each other and perpetrated fraud not only on the plaintiffs but also on this Hon ble Court to siphon off the funds of the plaintiffs which were lying with the proforma defendant. It is the further case of the plaintiffs that for the purpose of siphoning off such funds, the defendants in collusion and conspiracy with each other fraudulently procured an award against the proforma defendant. On the basis of such allegations, the plaintiffs have s .....

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ile the above suit for redressal of such acts of fraud. The reliefs claimed in the plaint and the pleadings in support thereof read as a whole would show that neither the suit is a challenge to the award dated 16th May, 2013 simplicitor nor is it a derivative action of the minority shareholders alleging fraud on minority. The award dated 16th May, 2013 is a product of such fraud. The primary wrong is the wrong done to the proforma defendant and through it to its shareholders being the plaintiffs .....

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ed, the plaintiffs though aggrieved by such award could not have filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the same. In the normal course it was for the proforma defendant to challenge the said award. However, the proforma defendant has not challenged the award as its directors on record being the defendant nos. 3 to 5 are parties to the collusion and conspiracy which culminated into the fraudulent award. An application under Section 34 .....

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no.1 to contend that the above suit is barred by the Arbitration and Conciliation Act, 1996, has no application to the instant suit. None of such decisions say that a non-party cannot institute a suit challenging an award particularly when such award prejudices or affects the right of such non-party. The only remedy left to the plaintiffs to protect their right and interest through the proforma defendant was to file the suit. Without prejudice to the aforesaid, it is submitted that the issues r .....

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t in Sopan Sukhdeo Sable & Ors. Vs. Assistant Charity Commissioner & Ors. reported at (2004)3 SCC 137 paragraph 18. While making an application under Order 7 Rule 11of the Code of Civil Procedure, 1908 a defendant has to show that the plaint filed in the suit and the statements contained therein are clearly barred by law. In the instant case, the defendant no.1 has not been able to show the same. There is no law which bars a suit like the instant suit. There is no bar in the majority sha .....

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Such decisions say that the suit has to be for the benefit of the company and not against the company. In dealing with the submission that the claims against the defendant nos. 3, 4 and 5 are barred by the laws of limitation it is submitted that from the plaint it would appear that the defendant nos. 3 to 5 started acting contrary to the interest of the proforma defendant in December 2009. In doing so, the defendant nos. 3 to 5 filed a Writ Petition in the Bombay High Court being W.P. No. 1971 o .....

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approach any forum to assert or claim their right to represent the proforma defendant. Only on 10th July, 2014, the plaintiffs came to know about the further wrongful activities of the defendant nos. 3 to 5 which led to filing of the instant suit. Under the circumstances, it cannot be said that the claim of the plaintiffs against the defendant nos. 3 to 5 is barred by the laws of limitation. In any event, on that ground the entire suit cannot be dismissed. In reply Mr. Pratap Chatterjee, the lea .....

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t specific pleading is not enough and the plaintiffs are required to offer an explanation with regard to the said documents on which they are relying in the plaint. Now let me examine the merits of the application for rejection of the plaint. Company actions, in the wide sense including by and on behalf of the Company and also actions by shareholders have always been considered to be a vexed question in Company Law. Since Foss Vs. Harbottle reported at (1843) 2 Hare 461, numerous attempts have b .....

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ch special reference can be made to Company Actions in the Modern Set-Up by S. C. Sen, First Edition, The New Frontiers of Company Law by S. C. Sen, 1971 Edition and Guide To Companies Act , by A. Ramaiya, 17th Edition, are summarized, hereinafter. In company jurisprudence, company actions are divided into different groups:- (a) Actions by the Company - for enforcement of Company s rights. (b) Derivate actions - i.e., actions by shareholders for enforcement of the Company s rights (as distinguis .....

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anating 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 opp .....

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sion 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 restra .....

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e itself is an illustration of such an action. Where such an action is allowed the member is not really suing on his own behalf nor on behalf of the members generally but on behalf of the company itself. In a derivative action, in the framing of the suit for the purpose of compliance of the formalities the plaintiff had to describe himself as a representative suing for and on behalf of all the members other than the wrong-doers. In a true derivative action the plaintiff shareholder is not acting .....

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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 o .....

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will not interfere in matters of internal administration. It is for the majority of shareholders to decide the manner in which the affairs of the company are to be conducted. This principle was laid down in the celebrated case of Foss Vs. Harbottle. The court held that in the case of an injury to the corporation, it is for the corporation to sue in its own name and individual shareholders cannot assume to themselves the right of suing in the name of corporation. The effect of the rule is that t .....

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therefore, he gets a derivative authority to sue. (Birch Vs. Sullivan; 1958 (1) All ER 56] This type of action is a derivative action, i.e. the right to sue and enforce the right are derived from the company. The shareholders as such have no such right. If their own personal rights are being infringed they may bring a representative action. The reliefs in such an actions would be essentially, primarily and solely for the benefit of the company as opposed to vindication and enforcement of the per .....

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powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders must in such a case be entitled to take steps to redress the wrong. There is no provision in the articles of association to meet the contingency, and therefore the rule which has been laid down in a long line of cases that in such circumstances the majority of the share-holders can sue in the .....

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rs themselves. Even in Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, (1906) 2 Ch. 34: (75 L. J. Ch. 437), it was recognised that misconduct on the part of the director provided an exception to the rule laid down in that case. In Jhajharia Bros. (supra) the form of a derivative actions was discussed and it was held that if a wrong is done to the company a special form of suit can be adopted as a matter of machinery to obtain relief under special and peculiar circumstances. It .....

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any fundamental difference in principle. Suit to restrain acts ultra vires and suits to restrain certain acts about to be discussed notwithstanding that the acts have the support of the majority of shareholders, are both exceptions to the rule that the Court will not interfere in the affairs of the company or with the decision of the majority. The Court interferes in cases of an ultra vires act, because it is not an act within the constitution. In the other class of cases the Court interferes u .....

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e are two courses open. The minority may take the risk and boldly use the company s name. The other course, and what has been thought to be the better course, where the wrongful act is supported by the majority, is for the minority shareholders to sue in their own name or, as a matter of convenience, for a shareholder to sue on behalf of himself and all the other share-holders. If, however, as generally happens and must happen logically, the wrong-doers are also shareholders, these shareholders .....

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a minority qua minority against a majority qua majority, I disagree. There can be no such thing as a legal war of parties. Brown v. British Abrasive Wheel Co. is in my opinion not an authority for such a theory nor did Mr. Sanyal cite it as such. In that case, if I remember rightly, the Court would not allow an alteration of articles so that the majority could appropriate a small minority. It was not allowed as being contrary to justice. The real significance of it, in my opinion, is that it was .....

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s are themselves the majority. I can conceive, however, of cases where the distinction may become apparent, in other words, where the primary wrong-doers, those committing the fraud or the wrongful act, are not themselves the majority but get the support of the majority. As has been lucidly explained in Pennington Company Law:- In certain circumstances an individual member may bring an action to remedy a wrong done to the company or to compel his company to conduct its affairs in accordance with .....

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gainst the company, it must, of course, be made a defendant; if he seeks to enforce a corporate claim against other persons, the company must still be joined as a co-defendant so that it may be bound by the judgment, and so that it may enforce any order giving relief against the substantive defendants. 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 lega .....

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a company can sue in its name and be sued by others. The company is a party to the arbitration proceeding. The existence of the agreement is not in dispute. It is the award of the arbitrator which is the subject of challenge in the suit. The plaintiffs as the majority shareholders of the proforma defendant contends that the defendant No.1 in the arbitration proceeding knew that the defendant nos. 3, 4 and 5 had no authority to represent the proforma defendant in the said arbitration proceeding. .....

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The plaintiffs alleged that the said defendant nos. 3, 4 and 5 are the miscreants and they have fraudulently represented themselves as directors of the proforma defendant and in collusion and conspiracy with the defendant No.1 enabled the defendant No.1 to obtain the award. The award sought to be enforced is against the proforma defendant. It appears from the reading of the Plaint that it is essentially a personal cause of action against the Defendant nos. 3, 4 and 5. The plaintiffs are the maj .....

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initiate arbitration proceedings and claim any relief on behalf of the company. No shareholder can say that because the company is a party to the arbitration agreement, he should be allowed to initiate arbitration proceedings and claim any relief in the said proceeding. It is the company who alone can initiate and/or defend such proceeding. A third party is no way concerned with the inter se disputes between the shareholders of the company. However if the said third party is a party to a fraud i .....

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belongs to the company and not to the shareholder personally. The essential purpose of such an action is to remedy a wrong done to the company and if the suit ultimately succeeds, the judgement is given in favour of the company, so that the complainant shareholder obtains no direct personal benefit therefrom. 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 wo .....

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rectors. 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 disclose .....

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