TMI Blog2004 (10) TMI 616X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant in the company petition was covered by the arbitration clause contained in the sponsorship agreement dated 6th October, 1994, entered into between the parties. Some of the disputes raised by the Appellant in the company petition were found to be covered by the arbitration agreement between the parties and, therefore, vide impugned order the CLB has referred those disputes for arbitration and decided to proceed with the remaining disputes. According to the Appellant, the CLB itself should have examined all the allegations in the petition which are the proceedings under Section 397/398 of the Act and that is the cause for filing the instant appeal. 2. The basic facts of the matter are not in dispute. Note thereof may be taken at this stage. The Appellant entered into a sponsorship agreement dated 6th October, 1994, for listing of the shares of Respondent No. 2-KFB Latex Ltd. ('the company') at OTCEI and accordingly invested a sum of ₹ 1,25,00,000 by purchasing five lakh shares of the company of the face value of ₹ 10 per share at a premium of ₹ 15 per share. Immediately thereafter the Appellant and the company entered into a lease agreement d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sponsorship agreement. (f) Siphoning of funds and non-disclosure of interest. (j) Failure to co-operate with the auditors. 4. In the application filed by the Respondents the case projected by the Respondents was that most of the allegations related to alleged non-implementation of the sponsorship agreement and, therefore, whether Respondents defaulted in carrying out their obligations under the said sponsorship agreement or not could not be the subject-matter of the petition under Section 397/398 of the Act. It was further submitted that the said sponsorship agreement provided an arbitration clause and the dispute raised by the Petitioner about non-compliance with the agreement would fall within the scope of that arbitration agreement. The submission of the Appellants herein, on the other hand, was that the allegations in the petition relate to various acts of oppression and mismanagement in the affairs of the company against which as a substantial shareholder the Appellant was entitled to file the petition. According to the Appellant, the sponsorship agreement consisted of two parts, namely, (z) about the Appellant being a shareholder; and (ii) regarding the undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement shall, if the party so applies not later than when submitting his first statement on the substance of the dispute refer the parties to arbitration . The CLB being a judicial body is bound, in terms of Section 8 of the Arbitration Act, to refer the parties to arbitration if the allegations arise out of the terms of an agreement containing an arbitration agreement as defined in Section 7 of that Act, notwithstanding the provisions of Section 9 of the Act. In other words, Section 9 of the Act does not affect a right of a shareholder to invoke the provisions of Section 8 of the Arbitration Act in case there is an agreement to refer the disputes to arbitration. In the case of Surendm Kumar Dhawan v. R Vir (1977) 47 Comp Cas 276, the Delhi High Court was dealing with a provision in the articles relating to arbitration, which the High Court held that the same cannot act as a bar for entertaining a Section 397/398 petition. Therefore, this case is not applicable in terms of the provisions of the Arbitration Act. In the two cases cited by learned Counsel for the applicants/Respondents, we declined to entertain those petitions filed under Section 397/398 of the Act and referred the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r finding that there are allegations in the petition independent of the sponsorship agreement, the prayer of the Respondents in CA No. 213 of 1998, to refer the parties to arbitration and dismiss the petition is rejected. The Respondents should file their replies covering all the allegations in the petition other than those at sub-paragraphs (a), (d), (g), (h) and (j) of paragraph 2 above by 1st August, 1999, and rejoinder, if any, will be filed by 1st September, 1999. The petition will be heard on 1st November, 1999, at 10.30 AM. {p. 642 of 97 Comp Cas) 7. While challenging the aforesaid decision, the thrust of learned Counsel for the Appellant was the same as before the CLB and it was submitted that the CLB did not appreciate the contentions of the Appellant in the right perspective. Reiterating the submission that Section 9 of the Act was an overriding provision, which specifically provided that the provisions of the Act would override the memorandum and articles of association or any agreement, etc., right of the Petitioner to file petition under Section 397/398 which was a statutory right could not be taken away merely because of the arbitration clause contained in the spon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. A reading of the petition on these aspects would give a clear impression that the grievance of the Appellant was that the Respondent had not adhered to these clauses of the sponsorship agreement. Thus, the Petitioner is alleging breach on the part of the Respondent of their obligations contained In the said agreement. However, the Respondents have denied the same and according to the Respondents, it is the Appellant who did not fulfill its obligation-under the sponsorship agreement and, therefore, the question of amending the memorandum and articles of association or fulfill other obligations of the Respondent under the said agreement did not arise. In the application filed by the Respondent under Section 8 of the Arbitration Act, breaches on the part of the Appellant are highlighted in detail, particularly in paragraphs 2(g) and (h) of the said application and elsewhere as well giving the background in which the Appellant, merely a finance company, agreed to finance by investing in shares of the Respondent-company after having impressed with its performance. The Respondent stated in detail the obligations of the Appellant under the said sponsorship agreement and allege ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the sponsorship agreement, the Appellant has to cross one important hurdle, namely, whether such a right to get the memorandum and the articles of association amended has accrued to the Appellant. For this, the pre-requisite to be shown is that as far as the Appellant is concerned, it had fulfilled all the obligations imposed on it by the sponsorship agreement as it is disputed by the Respondent. And this controversy obviously could not have been determined by the CLB in the proceedings under Section 397/398 of the Act. It flows from the contractual obligations contained in the sponsorship agreement and has to be necessarily determined though the means of arbitration agreement which is contained in Article 8(2) of the sponsorship agreement and that reads as under: 8. ...Any claim, disputes or differences between the parties hereto arising out of or in relation to or under or in any manner connected with the agreement shall be referred to and decided by arbitration as provided in the rules, bye-laws and regulations of OTCEI.... Such arbitration shall be governed by the provisions of the Arbitration Act, 1940 or any modification or re-enactment thereof. The arbitration shal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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