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2016 (4) TMI 876 - COMPANY LAW BOARD NEW DELHI

2016 (4) TMI 876 - COMPANY LAW BOARD NEW DELHI - TMI - Mismanagement and oppression - Arbitration and Conciliation seeked - Held that:- On a close examination of the provisions of section 397, 398 and 402 of the Act it must be said that Company Law Board has wide power to adopt correctional mechanism when the affairs of the company are being conducted in a manner prejudicial to the interest of general public or to a manner oppressive to any Member and /or shareholders. The Company Law Board is a .....

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ach of terms of SSSA and claim for damage should have been made before the arbitrator have not impressed me because there are a number of allegations concerning mismanagement and oppression of the petitioner as already set out in this judgment. A perusal of the various sub paras of para xxiii would reveal prima facie wholesome violation of various Articles of the Articles of Association’. In such a situation Hon’ble Bombay High Court in the case of Rakesh Malhotra (2014 (8) TMI 1050 - BOMBAY HIG .....

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d is rejected.

As a sequel to above discussion application filed u/s 8 of the Arbitration and Conciliation Act 1996 is dismissed. The respondent may file reply to the main petition within a period of four weeks and rejoinder if any be filed within two weeks thereafter. - CPNO.96(ND)2014 - Dated:- 18-3-2016 - M.M.KUMAR, J. For The Petitoner : Aditya Tiwari, Advocate For The Respondent : Ajay K. Jain, Advocate, Joydeep Mazumdar and Akshat Kumar, Advocate Avigo PE Investment Ltd filed th .....

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ration clause 19 of Share Subscription cum Shareholder s Agreement dated 18.08.2010 (for brevity SSSA ) entered between the parties. On the prayer made in the applications it has been emphasized that disputes raised in the company petition have already been brought before the Arbitral Tribunal at the instance of petitioner-non applicant and the arbitrate is in progress. Therefore no adjudication of the same issues would be permissible in the company petition. 2. Notice of the application was iss .....

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ion is dressed up in such a manner as to seek similar relief which is available to the parties before the Arbitrator, It would be necessary to briefly notice the prayers made by the non applicant-petitioner. A declaration has been sought from this Board that actions of the Respondents are oppressive and amount to mismanagement u/s 397, 398 etc. of the Companies Act, 1956, A further prayer has also been made to issue directions and pass order declaring that all resolutions passed in the Board Mee .....

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rayers have teen made in the background facts stated in various paras of the petition asserting that non applicant-petitioner made an investment of ₹ 40,00,00,000/- Rs forty crores by subscribing to the equity shares and compulsory convertible preference share of the Respondent No. 1 company in accordance with the SSSA dated 18.08.2010 (Annexure P-3). The petitioner has subscribed to 6,25,000 fully paid-up equity shares of ₹ 10/- each of the Respondent No.1 company for cash at a prem .....

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year 2012-2013, the authorized share capital of the company is ₹ 3,00,00,000 /- divided into 30,00,000 equity shares of ₹ 10/- each. The Issued, subscribed and fully paid share capital of the Respondent No.1 company is ₹ 2,48,50,000/- divided into 24,85,000 equity shares. The shareholding pattern of the parties in the respondent No.1 company is as follows:- Name of the shareholder Equity Shares Preference Shares (No.) Percentage Mr. Ajay Kumar Bishnoi 45000 1.81 Mr. Amul Gabran .....

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aims to have funded the business of the subsidiary of the Respondent No.1-company namely Tecpro Infra Projects Ltd, Edappally, Ernakulam. As per the terms of agreement dated 18.8.2010 the affairs of the subsidiary were also subjected to the supervision of the Board of the Respondent No. 1-Company. 5. It is alleged that after 31.03.2013 respondent No. 2 to Respondent No 5 stopped communicating with the non applicant-petitioner and also stopped reverting to the communications sent by him to respon .....

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ting of the Board of Directors for the quarter ending June 2013 in accordance with the provisions of the Articles of Association of respondent No. l-company despite notice and reminders. Eventually the legal notice was issued on May 7, 2014 which enlisted the breach of the terms of the SSSA committed by the Respondent No.1 company. The non applicant-petitioner terminated the SSSA in accordance with the terms of the Clause 15.3 thereof. Accordingly it further exercised the option contemplated und .....

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hat it had filed an application u/s 9 of the Arbitration and Conciliation Act, 1996 for securing interim reliefs against the Respondents. Eventually they have also invoked arbitration clause in SSSA and the matter is now pending in arbitration. However, some crucial averments have been made in paras (a) to (m) of para xxiii of the petition disclosing various acts of management and oppression. A perusal of paras xxiv to xxvi would reveal suppression of information from non applicant-petitioner in .....

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e transferred share to their relatives without approval and meeting of the Board or the shareholders of Respondent No.1-company. Likewise there are violations of the procedure as prescribed by Articles 23 to 35 for transfer of shares. It has also been alleged that quorum of the general meeting of Respondent No.1 company was to be considered complete only when representative of the petitioner was present as provided by Article 53 of Articles of Association and the meeting held on 2.9.2013 fails t .....

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. On the basis of the aforesaid facts and circumstances the petitioner-non applicant has asserted that there is wholesome mismanagement and oppression. Arguments: Applicant-Respondents 9. I have heard the learned counsel for the parties at a considerable length and have perused the paper book with their able assistance. Learned counsel for the applicant-respondents has vehemently argued that: - (a) The company petition is nothing else but a ruse to enforce the contractual obligations emerging fr .....

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in progress before the learned Arbitrator Former Chief Justice of India Hon ble Dr. A. S. Anand. It has further been argued that on the ground that there is a breach of SSSA dated 18.8.2010 and violation of the provisions of Companies Act a notice was issued on 7.5.2010 (Annexure P-20) terminating the SSSA. Fundamentally it is a breach of agreement and claim of damages. There is no issue of mismanagement and oppression. Accordingly the matter needs to be left to the Arbitration. (b) Another argu .....

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tion agreement is not part of the Articles and Respondent No. 1-company is not bound as per the provisions of section 36 of the Companies Act, 1956. (c) Learned counsel has then submitted that all disputes raised in the company petition emanate from SSSA which contains clause 19 providing for arbitration, therefore non applicant-petitioner approached Hon ble Delhi High Court by filing an application u/s 9 of Arbitration Act for grant of interim protection being OMP No. 831 of 2014. However no in .....

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this Board regarding the statement of non applicant-petitioner demanding a sum of ₹ 100 Crores for leaving the company because they are basically investors. Arguments: Non applicant Petitioner 10. Learned counsel for the non-applicant petitioner has argued that the relief claimed in the petition filed u/s 397, 398 read with sections 402 cannot be granted by an Arbitrator in the arbitration proceedings as the acts of oppression and mismanagement cannot be subject matter of proceeding before .....

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mpany. Moreover no notice for approving the financial statement for the year 2012-2013 was issued to the petitioner who holds 25.15% shareholding in the respondent No. l-company. A number of similar averments have been given in para IIB of the primary submissions. It has been maintained that there are false allegations of a dressed up petition to enforce SSSA which falls within the domain of the Arbitrator in accordance with the provision of arbitration clause 19 of the SSSA . Conclusion: 11. Ha .....

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position 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 of power enjoyed by the Company Law Board and the same is as follows:- 397. Application to Company Law Board for relief in cases of oppression:- (l) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any .....

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embers, 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. 398. Application to Company Law Board for relief in cases of mismanagement:- (1) Any member of a company who complain- (a) that the affairs of the company are being conducted in a manner prejudicial to public int .....

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ts 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, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or] in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in v .....

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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 under either section may provide for- (a) the regulation of the conduct of the company s affairs in future; (b) the purchase of the shares or interests of any members of the company by other members thereof or by the company; (c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduct .....

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ation, 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 aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned; (f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against .....

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ication 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. 13. A bare perusal of aforesaid provision would reveal that Company Law Board enjoys wide powers to adopt correctional mechanism 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/ .....

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er 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 an Arbitrator. 14. Their lordship of the Hon ble Supreme Court has held in categorical terms in the case of Cosmosteels Private Ltd. v Jairam Das Gupta &Ors [1978] 48 Comp Case 312 that the scheme of s. 397, 398 & 402 constitute a complete code in itself which is aimed at granting relief to a complainant who is victim of mismanagement or oppression including .....

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, 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 the application was filed by the petitioner herein as relating to winding up of the company. .....

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t has further been held the context of s. 9(b) of the Companies Act that any provision in a any memorandum, article or agreement to the extent of repugnancy to the Companies Act would be void. In the present case learned counsel for the applicant-respondent placed reliance on Article 18 of the JV Agreement which appears to be repugnant to the provision of section 397 & 398 of the Companies Act when the ratio of the judgment is applied to the facts of the case in hand. The Delhi High Court we .....

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properly instituted petition u/s 397 & 398 read with 402 & 403 of the Companies Act. Similar view has been expressed in the case of Surindra Kumar Dhawan v. R. Vir & Ors. 47 comp case 276 and Manavendra Chitnis & Another v Leela Chitnis Studios P. Ltd. 58 Comp Caes 113. 15. The aforesaid judgments rendered by Hon ble Supreme Court and Delhi High Court have been followed and applied by a Division Bench of the Punjab & Haryana High Court in the case of Sudarshan Chopra v. CLB [ .....

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w of the matter, Mr. Aggarwal s argument based on the analogy of the Specific Relief Act and the Partnership Act and the judgments relied upon by him can have absolutely no applicability . 16. An elaborate and comprehensive analysis of the aforesaid provisions has been made by Bombay High Court in the case of Rakesh Malhotra (Supra). Banking on the view taken by Hon ble Supreme Court in case of Booz-Allen & Hamilton Inc v SBI Home Finance Ltd. [2011] 5 SCC 532, the question examined by the l .....

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ight in rem and the right in personam. The following pertinent paras from the judgment of Hon ble Supreme Court have direct bearing on the issue before this Board which are as under: - 35. The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided .....

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rom the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes. 36. The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (n) matrimonial disputes relatin .....

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at the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves bu .....

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le to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid, or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable. 39. The Act does not specifically exclude any category of disputes as being not arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an .....

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where the type of remedy required is not one which an Arbitral Tribunal is empowered to give. The subsequent edition of Russell (23rd Edn., p. 470, Para 8.043) merely observes that English law does recognise that there are matters which cannot be decided by means of arbitration. 41. Mustill and Boyd in their Law and Practice of Commercial Arbitration in England (2nd Edn., 1989), have observed thus: In practice therefore, the question has not been whether a particular dispute is capable of settl .....

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on filed under sections 397 and 398 of the Companies Act such disputes touch upon the larger public interest and status of a company. The right are determined by the judicial forum which results into a judgement in rem. These factors bring the disputes out of the purview of arbitrability. 18. The High Court further held that the types of reliefs which an Arbitrator can award are limited by considerations of public policy and by the fact that he is appointed by the parties and not by the state. F .....

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man and Co. v. Union of India and Ors. (1977) 47 Comp Cas 92. With regard to the jurisdiction of the Company Law Board for issuing various orders u/s 402 it has been held that u/s 402 the powers of the Company Law Board are wide enough to resort to non-corporate management and to supplant corporate management in a whole or in part. The Company Law Board is clothed with the powers for the regulation of the company s future affairs keeping in view the previous oppression and mismanagement. The Hon .....

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that a bifurcation of a cause of action is impermissible procedure beyond the contemplation of the Arbitration Act. Accordingly it has been held that where the petition u/s 397 and 398 of the Companies Act has been filed by seeking reliefs some of which invite a judgment in rem and other are in personam then it is not possible or permissible to sever one from the other and disassemble such a petition The basis rationale has been adopted by Bombay High Court in para 124(a) which is as under:- 124 .....

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ng No.(c) 24572-24579/2014 has been filed. Leave has been granted by Hon ble Supreme Court on 10.9.2014 and it has expressly been stated that No stay. The matter may proceed before the Company Law Board in accordance with law. 21. I have prefaced this judgment with legal principles emerging on the issue raised before this Court, These principles were also applied by this court in the another case namely M/s Christianus Muller & ors v. M/s A & C Braid & Rope Company Pvt. Ltd. Ors. (CP .....

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or on the Board which comprise of total seven members. 23. There is a list of wholesome violation of various Articles of Association which indicate that the matter falls prima facie within the parameter laid down by the provisions of sections 397 and 398 of the Act which of course is subject to the reply to be filed by respondents. A number of such allegations concerning oppression and mismanagement have been culled out in paras 5, 6 and 7 of this judgment and with a view to avoid repetition the .....

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C 2012. Obviously all these matters would be alien to the area of jurisdiction of the arbitrator and have to be adjudicated by this Board. 24. There are pre-emptive rights of the Petitioner for receipt of share before transferring it to any outsider by virtue of provisions made in Article 22 of the Articles of Association and the procedure laid down in Articles 23 to 35. The Annual General Meeting as per averments appears to be held on 2.9.2013 in violation of Article 53 of the Articles of Assoc .....

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t any stage was made about the related party transactions. The meetings of the company are not being held in accordance with the Article 66 and there is investment made by Respondent No. 1 company in subsidary company amounting to 14 crores which constitutes 99.9% of the paid-up share capital of die subsidiary company. The aforesaid steps have been taken without any written consent of the petitioner in terms of Article 74 and the business plan/annual budget as provided by Article 82. At this sta .....

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e jurisdiction of an arbitrator appointed by the parties. 25. There are allegations of violating Article 66 as the meeting for the quarter ending on June 2013, September 2014, December 2013, March 2014 and June 2014 had not been called despite issuance of requisition by the petitioner for convening meeting of Board of Directors. There are further auctions of violating provisions of Articles 72, 74 and 86. In terms of Article 86 of the Articles of Association obligations are cast upon Respondent .....

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quarter of financial year certified by the managing director/director of the company. 4. An annual budget for the next year, within 30 (thirty) days prior to the end of each financial year, 5. Any additional information as reasonable requested by the petitioner. Therefore in accordance with the aforementioned article 86, since March 2013, the respondents were supposed to provide the following to the petitioner:- 1. An audit annual financial statement at the end of the financial year 2012-13 and .....

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olation of Article 79. The non applicant-petitioner has filed various objections to the balance sheet for the financial year 2011-2012 and 2012-2013. There are a number of other allegations levelled against Respondents which would not fall within the jurisdiction of an Arbitrator. Therefore jurisdiction of this Board to adjudicate those issues cannot be overtaken by a private forum appointed by parties styled as Arbitrator . 27. It is true that some of the allegations made in the petition relate .....

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anner oppressive to any Member and /or shareholders. The Company Law Board is also clothed with wide powers of regulating the affairs of the company in a manner so as to sub-serve the public interest and put an end to oppression of an individual member. It has already been observed that the scheme of sections 397, 398 & 402 constitutes a complete code in itself and no Arbitrator can possibly give relief to an aggrieved party like the petitioner in terms of section 402 and 403 of the Companie .....

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