TMI Blog1999 (12) TMI 876X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on October 4, 1999. In the meanwhile, the first respondent filed an application C. A. No. 248 of 1999 in terms of the provisions of Section 45 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Arbitration Act ), on the ground that the disputes raised in the petition arise out of and in connection with certain agreements entered into between the parties in which there is an arbitration Clause for arbitration by the International Chambers of Commerce ( ICC ) and as such the petition should be dismissed and the parties be referred to arbitration. In the meanwhile, the second respondent had invoked the jurisdiction of the ICC in terms of the arbitration Clause in the joint venture agreement. In view of this, the petitioner filed C. A. No. 254 of 1999 seeking for staying the arbitration proceedings before the ICC. Accordingly, both these applications were taken up for hearing. 2. Before we deal with the arguments of counsel, we shall narrate certain factual aspects. A joint venture and shareholders' agreement ( the JVA ) was entered into between the petitioner and the first respondent on June 28, 1991, consequent to which the company was incorporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles were amended to incorporate the terms of the agreement as at annexure C to the JVA. Certain disputes seemed to have arisen between the parties in the conduct of the affairs of the company culminating in the filing of this petition. 3. We have, in this order, considered the arguments of counsel in three parts. The first part--on the scope of Section 45 of the Arbitration Act, the second part--on C. A. No. 248 of 1999 filed by the first respondent (hereinafter referred to as the respondent) seeking for referring the matter to arbitration and the third--on C. A. No. 254 of 1999 filed by the petitioner seeking for staying the proceedings before ICC/restraining the first respondent from further prosecuting the arbitration proceedings. 4. We shall first deal with, without reference to the facts of this case, the scope of the provisions of Section 45 of the Arbitration Act and its applicability to the proceedings under Section 397/398 of the Companies Act as that is the issue that has arisen on the application filed by the respondent. Before we deal with the arguments of counsel in detail on this issue, we may sum up their arguments in a nutshell, noting the fact that the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since all the disputes raised in the petition related to that agreement. Likewise, in Escorts Finance Ltd. v. G. R. Solvents and Allied Industries Ltd. [1999] 96 Comp Cas 323 (CLB) ; [1999] 20 SCL 23, wherein the agreement between the parties provided for domestic arbitration, the Company Law Board declined to entertain the petition on the ground that the allegations were in relation to and arising out of the said agreement. He further submitted that where the Company Law Board found that some of the allegations related to an agreement providing for arbitration, it had declined to entertain those allegations and kept for examination only the other allegations which were not related to arbitration agreement. In this connection, he referred to the decisions of the Company Law Board in 20th Century Finance Corporation Ltd. v. RFB Latex Ltd. [1999] 97 Comp Cas 636 and Khandwala Securities Ltd. v. Kowa Spinning Ltd. [1999] 97 Comp Cas 632. 6. He submitted that in all the above four cases, the Company Law Board had examined various cases cited in those proceedings and held that all those cases related to the provisions of Section 34 of the Arbitration Act, 1940, in which discre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me proposition that the jurisdiction of the civil court is not barred, he relied on Marikar (Motors) v. M. I. Ravikumar [1982] 52 Comp Cas 362 (Ker). 8. He submitted that the relationship between the parties is of a commercial nature and when the agreement resulting in such a relationship provides for arbitration in the case of any differences arising out of such a relationship, then, the only course available is that such differences should be referred to the arbitration as agreed upon. It is more so, in the case of a foreign arbitration as held by the Supreme Court in R. M. Investment and Trading Co. (P.) Ltd. v. Boeing Co . [1994] 80 Comp Cas 588 ; [1994] 4 SCC 541 in which the Supreme Court taking this view, stayed the proceedings under Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961, pending the arbitration proceedings. For the same proposition he relied on Svenska Handelsbanken v. Indian Charge Chrome Ltd . [1994] 79 Comp Cas 589 ; [1994] 2 SCC 155 wherein at para. 43, the apex court held that the right to foreign arbitration provided by Parliament is an indefeasible right in which the court does not have any kind of discretion. He also pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Municipal Corporation of Delhi v. Gurnam Kaur [1989] 1 SCC 101; AIR 1989 SC 38, he submitted that in this case, the Supreme Court has laid down the principles of interpretation of a judgment, wherein it has held that pronouncement of law which are not part of the ratio decidendi are classed as obiter dicta and not authoritative. In the Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd . [1999] 97 Comp Cas 683 ; [1999] 5 SCC 688, there were no arguments on the powers of the court to refer matters covered in a winding up petition to an arbitrator, as is evident from the absence of any mention of such arguments in the judgment. Therefore, he contended, that only in the facts of that case, the Supreme Court decided that an arbitrator cannot order winding up of a company, the jurisdiction being exclusive to a court. A reading of the High Court judgment, he pointed out, would reveal that in the case of bona fide disputes, even matters covered in a winding up petition could be referred to arbitration. Since the High Court found that there were no bona fide disputes, it allowed the winding up petition. The Supreme Court also upheld the decision of the High Court observing that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Arbitration Act, Shri Diwan submitted that once it is established that the allegations in the petition arise out of or in connection with an arbitration agreement providing for foreign arbitration, the Company Law Board has no option but to refer the parties to arbitration and this right view has already been taken by a two-member Bench of the Company Law Board in Naveen Kedia's case [1999] 95 Comp Cas 640 and in the case of domestic arbitration, the right view of referring the parties to arbitration in terms of Section 8 of the Arbitration Act has again been taken by a two-member Bench of the Company Law Board in three other cases. Therefore, he contended that the present Bench consisting of two members cannot take a different view on this issue. Accordingly, he submitted that as long as the disputes/allegations in the petition arise out of or in connection with a foreign arbitration agreement, even in a proceeding under Section 397/398 of the Act, the Company Law Board is bound to refer the parties to arbitration as mandated by Section 45 of the Arbitration Act. 12. Shri Subramanian, advocate, supplemented the arguments of Shri Diwan that we should refer the matter t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shareholders in the representative capacity. Since the provisions of Section 397/398 are an exception to the rule of majority, the forum designated for looking into allegations of oppression alone has the jurisdiction to deal with the same and not a private forum agreed upon by the parties. He pointed out that the power of an arbitrator is limited to settling the disputes between the parties and he cannot provide the relief to put an end to the acts of oppression unlike the Company Law Board which has wide powers under Section 402 of the Act unlimited by the other provisions of the Act ( Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom)). He further stated that an arbitrator cannot invoke the provisions of Section 406 of the Act while the Company Law Board can do so in a Section 397/398 petition. He supplemented this argument by referring to Cosmosteels (P.) Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 ; AIR 1978 SC 375, wherein the court held that in the case of ordering purchase of shares held by the shareholders by the company in proceedings under Section 397/398, there is no need to follow the provisions of Sections 100 to 104 of the Act. For the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the Company Law Board has been created under the Companies Act to deal with matters of oppression, then, only the Company Law Board will have exclusive jurisdiction to deal with the matter and not any other forum including an arbitrator. 14. In this connection, he also referred to Section 9 of the Companies Act according to which the provisions of the Act override the memorandum and articles or any agreement and any provision repugnant to the provisions of the Act would be void. Therefore, when the right to move the Company Law Board has been statutorily conferred by the Act on a shareholder, such a right cannot be taken away by an agreement to refer the disputes to arbitration as such an agreement would be void in terms of Section 9 of the Act. In this connection, he relied on Surendra Kumar Dhawan v. R. Vir [1977] 47 Comp Cas 276 (Delhi) and O.P. Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp Cas 279 wherein the Delhi High Court held that arbitration Clause in the articles of association was void in view of the provisions of Section 9 of the Act and as such the court would not stay the proceedings under Section 397/398 of the Act on the ground that the articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, the only remedy provided by the statute is to approach the Company Law Board under Section 397/398 of the Act and the powers of the Company Law Board cannot be delegated by an agreement by the parties to a private forum. He further submitted that, earlier, a composite petition under Section 397/398 and Section 433(f) could be filed and in view of the Supreme Court decision in Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683, the matter would have been heard by the court without being referred to arbitration. Just because, the Company Law Board has been designated now to deal with the matters under Section 397/398, the Company Law Board cannot take a different view. Referring to World Wide Agencies (P.) Ltd. v. Margaret T. Desor (Mrs.) [1990] 67 Comp Cas 607 ; AIR 1990 SC 737, he submitted that in that case the Supreme Court held that a combined petition under Section 397/398 and Section 433(f) could be filed. Referring to the decisions of this Board cited by Shri Diwan, Shri Chagla submitted that the decision of the apex court in Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683 should be deemed to have overruled the decisions of this Board. Therefore, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of defined legal relationship, whether contractual or not, concerning a subject-matter capable of settlement by arbitration. 20. It is to be noted that this Board has decided, at least in four cases, which have all been cited by Shri Diwan that in view of the mandatory provisions of Section 8 and Section 45 of the Arbitration Act, once it is established that the matters agitated in a Section 397/398 petition arise out of or in connection with an arbitration agreement, then, the Company Law Board has to refer the parties to arbitration. To take a different view in the instant case, there have to be persuasive materials in the form of new points of law not considered in those orders or decisions of a higher forum like a High Court or Supreme Court contrary to the decision taken by this Board. Now we shall analyse the various issues raised by Shri Chagla, including the Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683, to examine as to whether the decision of this Board requires . reconsideration. The point urged by him, in a nutshell, is that the proceedings under Section 397/398 are outside the purview of Section 45 of the Arbitration Act for the following reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 of the Arbitration Act, when a plea of arbitration is taken, was solely within the discretion of the court before which such a plea was taken. While in the cases cited by Shri Singh, the courts had refused to exercise their discretion to stay the proceedings, in the cases cited by Shri Sarkar, the courts exercised the discretion to stay the proceedings. However, after the coming into force of the Arbitration and Conciliation Act, 1996, the legal position has changed, more particularly, with reference to foreign arbitration. Now it is mandatory, by virtue of Section 45 of this Act, that a judicial body will have to refer the parties to arbitration once it is seized of an action in respect of which the parties have made an agreement for arbitration to which the convention in the First Schedule to the Act applies (Foreign Arbitration). The ingredients of this Section are: a judicial authority should be seized of an action in the matter of which the parties have made an agreement for arbitration ; one of the parties should make a request for referring the parties to arbitration and that the judicial body does not find that the said agreement is null and void, inoperative or incapabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no provision of any agreement can take away the statutory rights conferred by the Companies Act and he also relied on a Delhi High Court case in this regard. Section 9 of the Act deals only with memorandum, Articles or any agreement or any resolution which are repugnant to the provisions of the Act and does not deal with the provisions of other statutes. As a matter of fact Section 5 of the Arbitration Act which reads. 'Notwithstanding anything contained in any other law for the time being in force, in matters governed by this part, no judicial authority shall intervene except where so provided in this Act' makes it clear that in the case of an arbitration agreement, a judicial authority cannot intervene except as provided in the Arbitration Act, notwithstanding anything contained in any other law .... 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 . Thus, it is clear that the provisions of the Arbitration Act, have overriding effects on the provisions of Section 9 of the Companies Act. 23. Shri Chagla heavily re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates, in our opinion, that what can be referred to arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide . Having observed so, in para. 5, the Supreme Court has held that since the company had become commercially insolvent, it should be wound up and that an arbitrator would have no jurisdiction to order winding up of a company. Normally, an observation of a court on a point of law, unless made after detailed examination of the same, cannot be considered to be a ratio decidendi . In this case, a reading of the judgment would show, that there is no discussion, as a point of law, as to whether, winding up proceedings are outside the scope of Section 8 or Section 45 of the Arbitration Act. Therefore, we have no hesitation to hold that the observation of the apex court in Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683 was specific to that case and not to be taken as a binding decision to be applied in all winding up proceedings, when the issue of arbitration is raised. Our line of reasoning in this regard conforms to the principles laid down by the Supreme Court in Municipal Corporation of Delhi v. Gurnam Kaur [1989] 1 SCC 101; AI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with a view to put an end to the matters complained of. This order of the Board was taken on appeal to the same High Court, and the High Court upheld the order of the Company Law Board. Thus, it is not necessary that the principles applicable to winding up petitions ipso facto are applicable to a proceeding under Section 397/398. 24. Another point raised by Shri Chagla has been that an arbitrator is incapable of granting the reliefs as provided for in Section 402 of the Act. In regard to this argument, no doubt the Company Law Board has vast powers under Section 402 of the Act, yet, granting of relief depends on the facts of a particular case and if for granting the relief, determination of bona fide disputes is required and the same is covered by an arbitration agreement, then, it is for the arbitrator to decide these issues and not the Company Law Board. In this connection we may also refer to the Delhi High Court judgment in Gurnir Singh Gill's case [1987] 62 Comp Cas 197. In this case, the court itself, as pointed out by Shri Chagla, in exercise of the powers under Section 402, referred the parties to arbitration. It did so because, in the facts of that case, it f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue raised by Shri Chagla is that Section 45 covers only those matters which could be agitated in suits/writs and not the proceedings under Section 397/398, in view of the term action used in that section. In other words, according to him, only matters which could be agitated in civil courts could be covered under Section 45. We feel that this particular word cannot be considered in isolation, without reference to the preceding words a judicial authority, when seized of . The words judicial authority have been used in the entire Act, only in Sections 5, 8 and 45. In other sections, only the word court has been used. If the contention of Shri Chagla that the term action would mean only suits/writs, which have necessarily to be instituted only before a court, the Legislature could have used the word court in Section 45, instead of judicial authority . In that case, an issue that would have come up for examination is, whether the Company Law Board is a court for the purposes of Section 45. Thus we are of the view, that by using the words judicial authority in Section 45, the Legislature has actually enlarged the scope of the word action and has not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings under these Sections are not outside the purview of Section 45 of the Arbitration Act; --the principles applicable to a winding up proceeding, need not necessarily apply to a proceeding under Section 397/398 ; --the provisions of the Arbitration Act are not repugnant to the provisions of Section 9 of the Companies Act; --once the Company Law Board is convinced that the matters governed in a petition under Section 397/398 of the Act relate to or arise out of or in connection with an arbitration agreement and that the reliefs appropriate to the facts of the case could be determined/granted by an arbitrator, then, the Company Law Board is bound to refer the matter to arbitration in terms of the mandatory provisions of Section 45 of the Arbitration Act provided that the agreement is not null and void, inoperative or incapable of being performed ; --if any of the requirements of Section 45 is not satisfied, then the Company Law Board can decline to refer the parties to arbitration ; --the judicial authority has to prima facie, come to the conclusion, that the requirements of Section 45 have been fulfilled, before referring the parties to arbitration. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions against them or seeking any relief against them. Accordingly, he submitted that his application should be allowed and the petition be dismissed. 31. Shri Subramaniam, supplementing the arguments of Shri Diwan, submitted that even though the company was not a party initially to the JVA, yet, later, through a subsequent agreement dated January 14, 1998, at exhibit A-9 to the petition, the company had adopted the JVA and the shareholders' agreement dated June 28, 1991, and as such the same is binding on the company. He also went through the various reliefs sought in the petition and pointed out that most of the reliefs sought are in relation to the terms of the JVA or the other agreements, all of which contain an arbitration clause. He also stated that to adjudicate on the disputes, recourse has to be taken to these agreements and if it is so, then, it must be held that the matter is within the scope of the arbitration Clause and that the arbitrator will have jurisdiction to decide those disputes as held in Union of India v. Salween Timber and Construction Co. (India), AIR 1969 SC 488. 32. Shri Chagla, dealing with the application, submitted that, one of the important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298 in which the court approved the decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 wherein Lord Wilberforce observed (page 379 of AC): The just and equitable provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way and stated that the Company Law Board alone would be in a position to examine the provisions of the agreements on equitable considerations and not the arbitrator. He again referred to Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 wherein the Supreme Court has approved the proposition as contained in Lindley on Partnership that (page 779): the utmost good faith is due from every member of a partnership towards every other member; and if any dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of an agreement entered into between the respondent and the petitioner in Dubai on October 30, 1998. On the basis of these allegations, the reliefs sought, inter alia, include cancellation and termination of the sole distributor agreement, enforcement of the Dubai agreement, equalisation of shareholding between the respondent and the petitioner, amendment to the Articles and the JVA, ordering the first and second respondents to pay US Dollars 10 million by way of damages, directing the respondent from contending that the agreements between respondents Nos. 8 and 9 have been terminated, appointment of an independent chairman to preside over all general body meetings and the board meetings, and permanent injunction restraining the first and second respondents from acting contrary to the Dubai agreement, acting in violation of the JVA and other agreements entered into along with the JVA, from competing with the company, respondents Nos. 8 and 9 in India and ordering the first respondent to comply with the terms of the JVA and other agreements to supply all technical know-how and technology to the company. 34. Even though there are 11 parties before us, the main parties are, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JVA. If so, then, as rightly pointed out by Shri Chagla, relying on Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC), an agreement, to which a company is not a party, does not bind the company. In the said application, the first respondent has also relied on the other agreements. As we have pointed out earlier, except in the case of non-competition agreement, all the three parties who are the main parties before us are not parties to those agreements. Thus, we find that there is no commonality of all the three parties in all the agreements relied upon by the first respondent. When the application of the provisions of a statute visits with certain disability on the rights of a person, then the provisions of that statute have to be strictly construed. Section 45 talks of parties having made an agreement, and if one applies for referring the matters to arbitration, then, in both the legal proceedings and the agreement, the parties should be common for the judicial authority to refer them to arbitration as per the arbitration agreement. Since, the respondent has invoked the arbitration Clause in the JVA to which the company is not a party, and other agreements to which the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings in domestic arbitration are envisaged, in the absence of any such a provision in Section 45 of the said Act, it should be perceived that foreign arbitration proceedings cannot simultaneously continue. Therefore, both in law as well as in equity, the arbitration proceedings can be stayed or the respondent restrained. 36. Shri Sarkar supplementing the arguments of Shri Chagla on this issue, again referred to WO. Tractoroexport's case, AIR 1971 SC 1 and stated- that notwithstanding the coming into force of the Arbitration Act of 1996 the principles of Section 35 of the old Act, could still be applied according to which once legal proceedings are initiated and the same are not stayed, then, the arbitrator cannot proceed with the arbitration and if it is still continued, then, such proceeding would be invalid. According to him, in the absence of the provisions of concurrent continuation of foreign arbitration under Section 45 of the Arbitration Act unlike such provisions found in Section 8(3) of the Arbitration Act in relation to domestic arbitration, the principles of Section 35 of the old Act, should be applied in the case of foreign arbitration. He also drew suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court has observed (page 210) : The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact, reference to the 1940 Act may actually lead to misconstruction. In other words, the provisions of the 1996 Act have to be interpreted being uninfluenced by the principles underlying the .1940 Act. In order to get help in construing these provisions, it is more relevant to refer to the Uncitral Model Law rather than the 1940 Act . Accordingly, he submitted that provisions of the old Act cannot be applied. Referring to Renusagar Power Co. Ltd. v. General Electric Co. [1984] 4 SCC 679 ; AIR 1985 1156 at para. 51, Shri Diwan submitted that the Supreme Court, in interpreting Section 3 of the Foreign Awards Act as amended by Act 47 of 1973 has held that it is the obligation of the court to stay the legal proceedings commenced by a party to a foreign arbitration agreement. In other words, he submitted that it is the arbitration proceedings which gets precedence over the legal proceedings. He further pointed out that Section 45 of the Arbitration Act has gone one step further to mandate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts ; the injunction is, however, issued against a party and not a foreign court , injuncted the Russian firm from proceeding with the foreign arbitration, applying the principles of Section 35 of the 1940 Act. Thus, the question of staying the proceedings before the ICC does not arise. In regard to restraining the respondent from proceeding with arbitration before the ICC, in WO. Tractoroexport's case, AIR 1971 SC 1 case, the Supreme Court applied the principles of Section 35 of the 1940 Act as applicable to domestic arbitration to a foreign arbitration. Section 35 of the old Act specified that once civil proceedings commenced, then, proceedings before the arbitrator would be invalid. Shri Diwan has pointed out the decision of the Supreme Court in Sundaram Finance Ltd.'s case [1999] 3 Comp LJ 205 wherein the Supreme Court has held that the provisions of the 1996 Act should be interpreted without being influenced by the provisions of the 1940 Act. If so and if the principles of domestic arbitration could be applied to foreign arbitration also as submitted by Shri Sarkar, then, we have to only apply the provisions of Section 8(3) according to which an arbitration can be com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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