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2015 (12) TMI 1378 - COMPANY LAW BOARD NEW DELHI

2015 (12) TMI 1378 - COMPANY LAW BOARD NEW DELHI - TMI - Application u/s 8 of the Arbitration and Conciliation Act, 1996 - Whether the dispute raised in a properly filed petition under sections 397, 398, 402 and 403 of the Companies Act can be referred to arbitration in accordance with the agreement between the parties? - Held that:- The arguments look attractive at the first blush but when examined closely find that it lacks substance. A perusal of para 22 of the petition which contains prayer .....

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e not right in personam. In any case the jurisdiction of Company Law Board cannot be excluded by a clause in an agreement between the parties including provision of arbitration.

The other argument advanced by Mr. Nayyar equaily lacks merit. It emerges from para 27 of the judgment of Hon'ble Supreme Court rendered in the case of Everest Holding Ltd. (2008 (10) TMI 629 - Supreme Court Of India ) wherein observed that Arbitrator can find out and adjudicate as to whether or not a company .....

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e fora has been provided by the Companies Act. I do not think that para 27 of the judgment of the Supreme Court advances the case of applicant-petitioner. It cannot be concluded that arbitrator enjoys all those powers which are vested in a CLB under sections 397, 398, 402 and 403 of the Companies Act. I don't feel the necessity of refereeing to various other judgments of Company Law Board on which reliance has been placed by Mr. Nayyar. - the prayer for making reference to the arbitration stands .....

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iled by the respondents with a prayer that the dispute raised in the company petition is referable to arbitration In terms of Article 18 of the Joint Venture Agreement dated 18.09.2001 and therefore no adjudication of the company petition would be permissible to take place. 2. Notice of the application was issued. The non-applicant petitioner has filed the reply opposing the prayer for making reference to the Arbitrator in terms of Article 18 of the Joint Venture Agreement dated 18.09.2001 sugge .....

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the respondent No. 2 (being the proprietor of M/s. A V International, Kanpur) entered into a Memorandum of Understanding dated 17.7.2001 [for brevity 'MOU'] for the purpose of setting up a 100% export oriented Unit [for brevity 'EOU'] as a joint venture at Kanpur. The object of joint venture was manufacturing, trading and packing of braided, woven and twisted narrow fabrics and other hardware metal components etc. According to MOU the ratio of equity between the non-applicant-pet .....

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of the Articles of Association of Respondent No. 1 company, the JV Agreement and Annexures attached with it were to form a part and parcel of Articles of Association. The provisions of the JV Agreement and Annexures appended therewith were to prevail in case of any conflict between the two. According to the JV Agreement the petitioner No. 1 was liable inter alia to identify and recondition the machinery for Respondent No. 1- Company, pre-finance the other machines required, update the technology .....

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- face value each. The share capital subscribed by petitioner No. 1-Dutch party was 51% [Rs. 14,02,000/-] while by respondents-Indian party was 49% [13,48,000/-]. The Article 3(4) of the JV Agreement stipulated that the proportion of 51% and 49% was to be held and maintained for the entire period of the JV Agreement and the share capital would always be called for and paid up by the two partners in the aforesaid proportion. It could be changed only by mutual consent in writing by both the partne .....

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by Respondent No. 2. It was also to appoint a Chairman amongst themselves which was to be nominated by the Petitioner No. 1. Notice of 45 days excluding the date of dispatch and receipt of the notice before the meeting of the Board of Directors was required to be issued. This provision was made keeping in view the convenience of Dutch party as it was ordinary residents in Netherland and required to apply for VISA and make other arrangements to travel to India. Under Article 7 certain other decis .....

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he General Meeting in which all the shareholders are present. (c) Changes in the criterion of the constitution of the Board of Directors and the election of the Chairman and Managing Director as set out in article 6 paragraph 1,3 and 4. This decision shall have to be confirmed by a unanimous decision of the General Meeting in which all the shareholders are present. (d) Extensions or significant reductions of the activities of the company. (e) Increase in Authorized capital or share capital. (f) .....

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y form of financial restructuring or dissolution or liquidation of the Company except when required by the applicable law. (j) Recommendation of declaration of dividends or any other disbursement of the Company's shares or the forfeiture of any such shares by the Company. (k) Decisions to enter any transactions as specified in Article 9 paragraph 4. (l) Any investment in another Company or legal entity or except in the ordinary course of business-the leading or borrowing of money and issuing .....

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; Auditors who shall have the qualifications specified in the article 8 of paragraph 1. (b) Any major policy decision not specified in paragraph 1 of the present article and in sub-paragraphs (a) and (b) of the present paragraph." 5. The arrangements between the parties worked well till September 2013. However on 07.10.2013 Respondent No. 1 company through its counsel sent a legal notice [Annexure P-10] calling upon Dutch party as to why all the arrangements made between Dutch party and the .....

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hares of ₹ 10/- each of the Respondent No. 1-company to the Director-Respondent No. 3. It reduced ration of the shareholding of the Petitioner No. 1-Dutch party from 51% to 46.75%. The resolution has been placed on record [Annexure p-20]. Again a resolution was passed on 05.05.2014 by the Board of Directors removing the petitioner as Director in Respondent No. 1-Company w.e.f. 01.04.2014. According to another resolution passed by the Board of Directors on 05.05.2014 under s. 184(l) of the .....

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notice, short notice and lack of unanimity as per stipulation in the JV Agreement. On the basis of aforesaid facts the petitioners have then alleged that they have become victim of oppression and mismanagement at the instance of respondent Nos. 2 to 4 by virtue of reducing them to minority at their back, removing them as Chairman/director & holding meeting without unanimity. 6. In addition the petitioners have also accused respondent Nos. 2 to 4 with various other acts of oppression and mis .....

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It is the case of the petitioner that the meetings of the Board of Directors on 08.01.2014 and 05.05.2014 constitute acts of 'oppression' and 'mismanagement'. These meetings were held in violation of various provisions of JV Agreement requiring 45 days notice which required unanimity. No change in the share capital pattern could have been made. The Respondent No. 1-Company has been diverting its sources to the benefit of the company owned by respondent Nos.2 to 4. All these acts .....

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and rectify the register of members; C. The Board of Directors be restored to as it was prior of the resolution dated 05.05.2014 as the said resolution is bad in law and declare Form DIR-12 filed thereto with the office of ROC as illegal and void; D. Restore Petitioner Nos.1 & 2 as Directors of the Respondent No. 1 company; E. In the alternative to prayer D, permit the petitioners to nominate 3 directors on the Board of the Respondent No. 1 company; F. Declare that the termination notice dat .....

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irs, legal representatives, employees, servants, agents, assigns and/or any person/s claiming through them from transferring, selling, alienating, disposing off, licensing, sub-letting and/or creating third party rights/interests in any manner whatsoever in respect of fixed and movable and immovable assets of the Respondent No. 1 company without the leave of this Board; J. Permanent injunction be granted retraining the Respondent Nos. 1 to 4 from altering the shareholding pattern and the composi .....

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rs of the company which are being conducted in a manner prejudicial to public interest, the company and various stakeholders; M. Direct to debar the Respondent Nos. 2-4 to act as Director(s) in the Respondent No. 1 company, N. Scheme be framed to regulate the management and affairs of the company on such terms and conditions as this Board may deem, fit and proper to end deadlock in the company; O. Pass such other/further order/directions, which this Board may deem fit and proper in facts and cir .....

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for the parties. Learned counsel for the applicant-respondent pressed application filed under section 8 of Arbitration and Conciliation Act, 1998 and insisted that the whole matter warrants to be referred to the arbitration in view of Article 18 incorporated in the Joint venture agreement dated 18.9.2001. In support of his submission learned counsel has placed reliance on various judgments rendered by various High Courts. In that regard reliance has been placed on the view of the Delhi High Cou .....

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rbitration would not be permissible in a petition filed u/ss. 397, 398, 402 and 403. In that regard heavy reliance has been placed on a judgment of the Bombay High Court in the case of Rakesh Malhotra v. Rajinder Kumar Malhotra. A reference was also made to the view taken by Punjab and Haryana High Court in the case of Sudarshan Chopra v. Company Law Board 2004 (2) ARBLR 241 (P&H) and judgment of Delhi High Court in the case of O.P Gupta V. Shiv General Finance (P) Ltd. 47 Comp case 279, Sur .....

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, 1956 would fall within the parameter of a reference to a arbitrator or it is beyond. During the hearing it transpires that the Respondents have not filed any reply to the petition which would be necessary for recording prima facie findings. In view of the above learned counsel for the Respondent seeks time to file reply within a period of three weeks i.e. on or before 22.07.2015 with a copy in advance to the counsel opposite. Counsel for the Petitioners may then file their rejoinder within fur .....

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een highlighted namely using of same worker, premises and machinery of the Respondent No. 1 company for the benefit of their own company namely Ayushmann Ropes & Twines (Ayushmann Ropes and Tapes Pvt Ltd.?). Therefore interim directions are required to be issued. At this stage learned counsel for the Respondent states that he would file an undertaking on behalf of Respondent Nos. 1 to 4 specifying that no machinery, premises, labour or assets belonging to Respondent No. 1 are being used by t .....

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s then this order shall operate as an interim order against Respondent Nos. 1 to 4. List on 13.8.2015 at 10.30 am." On the basis of the statement made by the counsel for the Respondent Nos. l to 4 an undertaking stands filed on 07.07.2015. 9. I have heard learned counsel for the parties at a considerable length and have perused the paper books with their able assistance. Rival contentions: 10. Mr. Nayyar learned counsel for the applicant-respondent has vehemently argued that there is a prov .....

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ation before this forum. Once the aforesaid position is clear then the matter has to be sent to sole arbitration of a mutually agreed arbitrator. In support of his submission Mr. Nayyer has placed reliance on para 27 of the judgment of the Hon'ble Supreme Court rendered in the case of Everest Holding Ltd. v. Shyam Kumar Srivastava & Ors., (2008) 16 SCC 774. Reliance has also been placed on the Judgment of Delhi High Court rendered in the case of Vijay Sekhri & Ors. v. Union of India .....

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l for the non-applicant-petitioner has however urged that in a properly constituted company petition filed under s. 397, 398, 402 and 403 of the Act the reliefs available to the petitioner cannot be granted by an arbitrator. According to the learned counsel despite the arbitration agreement under Article 18 of the JV Agreement no reference to arbitrator can be made unless the petition could be regarded as mala fide. Learned counsel has emphasized that the relief claimed in various clauses of par .....

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use of machinery, manpower and premises of the Respondent No. 1-company by the related company could be dealt with by the Arbitrator. The power given to the Board under s. 402 would not be available to the Arbitrator particularly when the petitioner has approached this forum bona fide and without any malice. In support of his submission learned councel has placed reliance on a Divison Bench Judgment of Punjab & Haryana High Court rendered in case of Sudarshan Chopra & Ors. v. Company Law .....

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hich emerges for determination in this application fried under section 8 of the Arbitration Act is: 'Whether the dispute raised in a properly filed petition under sections 397, 398, 402 and 403 of the Companies Act can be referred to arbitration in accordance with the agreement between the parties' The proposition of law raised in this case is no longer res-integra. It would however be profitable to peruse sections 397, 398, 402 and 403 of the Companies Act so as to understand the nature .....

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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 .....

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nture holders, or any class of shareholders, of the company has taken place in the management or control of the company, whether by an alteration in its Board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, an .....

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by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with view to bringing to an end or preventing the matters complained or apprehended, make such order as it thinks fit. 402. Powers of Company Law Board on application under section 397 or 398. Without prejudice to the generality of the powers of the Company Law Board under section 397 or 398, any order u .....

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g persons, on the other, namely:- (i) the managing director, (ii) any other director, (iii) the managing agent, (iv) the secretaries and treasurers, and (v) the manager, upon such terms and conditions as may, in the opinion of the Company Law Board be just and equitable in all the circumstances of the case; (e) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set .....

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cy 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. 403. Interim order by Company Law Board. Pending the making by it of a final order under section 397 or 398, as the case may be, Company Law Board may, 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 ap .....

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it is competent to terminate, set-aside or modify any agreement arrive at between the company on the one hand and any of the person like Managing Director and the other Director or the Manager on the other on such terms and conditions as may appear to be just and equitable in the circumstances of that case. It has also wide power to issue interim order. It is thus evident that the nature of powers enjoyed by the Company Law Board is alien to the powers of a Arbitrator. 15. Their lordship of the .....

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be covered by s. 8 of Arbitration Act and an Arbitrator appointed by the consent of the parties for that purpose would not be competent to do so. Some pertinent observations made by Hon'ble Supreme court reads as under:- 'The claim in a petition for winding up is not for money. 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 c .....

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39; 16. Similar view has been expressed by Delhi High Court in the case of O.P. Gupta v. Sffiv General Finance (P) Ltd. & Ors. [1977] 47 Comp Case 279. It has been held that no Arbitrator can possibly give relief to an aggrieved party which is postulated by ss. 397 and 398 and he would be unable to pass any order u/s 402 and 403 of the Companies Act. It has further been held in the context of s. 9(b) of the Companies Act that any provision in any memorandum, article or agreement to the exten .....

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be resolved by holding that such an article is wholly void when tested on the touch stone of section 9(b) of the Companies Act or that by declaring that the articles does not apply when the proceedings under sections 397 and 398 are initiated before the Company Law Board. In any case article 18 cannot operate for the purposes of staying the proceedings in a properly instituted petition u/ss. 397 & 398 read with 402 & 403 of the Companies Act. Similar view has been expressed in the case o .....

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that has been sought by Group B cannot be granted by an Arbitrator and is available only under the provisions of Sections 397 and 398, read with Sections 402 and 403 from the Company Law Board. Moreover, the statutory jurisdiction of the Company Law Board and the right of appeal against its orders cannot be ousted even by consent of parties. In this view of the matter, Mr. Aggarwal's argument based on the analogy of the Specific Relief Act and the Partnership Act and the judgments relied up .....

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within the domain of a public fora. A distinction has thus been drawn opining that an arbitrator is a private person to settle the disputes whereas courts like Company Law Board are a public fora. Another aspect highlighted by the Bombay High Court again based on the judgment rendered in the case of Booz-Allen & Hamilton Inc. (supra) is distinction in law between right in rem and the right in personam. The following pertinent paras from the judgment of Hon'ble Supreme Court have direct .....

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itral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora, Consequently, where the cause/dispute is inarbitrable, the court where a suit is pendin .....

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lvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. 37. It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at lar .....

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efers to a judgment against a person as distinguished from a judgment against a thing, right or status and a judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself. (Vide Black's Law Dictionary.) 38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tr .....

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ettlement by arbitration under the law for the time being in force". 40. Russell on Arbitration (22nd Edn.) observed thus (p. 28, Para 2.007): "Not all matters are capable of being referred to arbitration. As a matter of English law certain matters are reserved for the court alone and if a tribunal purports to deal with them the resulting award will be unenforceable. These include matters where the type of remedy required is not one which an Arbitral Tribunal is empowered to give." .....

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has given rise to an enforceable award. No doubt for this reason, English law has never arrived at a general theory for distinguishing those disputes which may be settled by arbitration from those which may not. . . ."' 19. Thus Bombay High Court followed the rationale of public and private fora apparently. Keeping in view the nature of rights involved for adjudication in a petition filed under ss. 397 and 398 of the Companies Act. Such disputes touch upon the larger public interest and .....

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a writ of subpoena. It cannot also make an award which is binding on third party or affects the public at large. An Arbitrator would not enjoy any jurisdiction to bind anyone else by a decision on whether a patent is valid, for no one else has mandated him to make such a decision. 21. The Bombay High Court also placed reliance on its earlier judgment rendered in the case of Bennet Coleman and Co. v. Union of India and Ors. (1977) 47 Comp cas 92. With regard to the jurisdiction of the Company Law .....

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se it was difficult to see that a narrowly tailored arbitral proceedings would be sufficient in face of Company Law Board plenary and expansive powers which are sufficient to redress and grant the far-reaching reliefs u/ss. 397 and 398. 22. The other proportion on law culled out from the judgment of the Hon'ble Supreme Court in Sukanay Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531 by the Bombay High Court is to affirm that a bifurcation of a cause of action is impermissible procedur .....

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rought under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 can be referred to arbitration, the answer is no, subject to the caveat that I have noted regarding a mala fide, vexatious or oppressive petition and one that is merely 'dressing up' to avoid an arbitration clause" 23. It is pertinent to mention that against the judgment of Bombay High Court in the case of Rakesh Malhotra (supra) a Special leave to appeal bearing Nos.(c) 24572- 24579/2014 has been fil .....

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ent dated 18.9.2001. 25. I may nevertheless refer to the submissions made by Mr. Nayyar in support of the application for reference u/s 8 of the Arbitration Act. Learned counsel has argued that the whole case of non-applicant-petitioner is founded on the breach of JV Agreement and therefore the dispute becomes arbitrable as per the ratio of the judgment in Vejay Sikhri's case (supra). The arguments look attractive at the first blush but when examined closely I find that it lacks substance. A .....

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