TMI Blog2014 (9) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter herein and hence the question of referring the said matter to arbitration does not arise. Subject matter of dispute vis-a-vis agreement - Held that:- The subject matter of the petition relates to rights of members and relief in pursuance of statutory provisions as provided for in sections 397 to 403 of the Companies Act, 1956 and the same cannot be construed as matters covered by scope of arbitration agreement. However the scope of the said section as laid down by various courts makes clear the distinction between the statutory power and terms of any mutual arrangement by an agreement. It is well settled law that parties by mutual concern cannot be permitted to override the statutory provisions. Hence both factually and legally the subject matter of the company petition would not fall within the scope of arbitration agreement. Whether the applicant had filed the said application before submitting the 1st statement on the substance of the dispute? - Held that:- This Bench is of the view that having issued a purported legal notice in February 2013, by the said applicant as per Exhibit R3 no plausible explanation was offered for their action of filing section 8 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 1991 praying this Bench to refer the subject matter of the company petition to arbitration in terms of the Arbitration Agreement incorporated in the Articles of Association of the company and in the Shareholders Agreement dated 30.07.2008 and also prayed this Bench to vacate any interim orders passed and dismiss the company petition. Shri Uday Shankar, learned counsel appeared for the applicant narrated the brief facts of the case. He submitted that the subject matter of the company petition is covered by an Arbitration Agreement between the parties and in the circumstances the instant application is filed seeking reference of the subject matter of the company petition to arbitration. He submitted that the company petition has been filed by the respondents herein claiming existing certain disputes and differences in relation to the affairs of the 1st applicant company viz, Mysore Realty Pvt Ltd (hereinafter referred to as the company). It is submitted that Article-103 of the Articles of Association of the company, which constitutes by law, a binding contract between the company and its shareholders, and inter se shareholders provides as follows: 'Article-103 - Except as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, ii. to declare that Form 23 dated 06.04,2010 null and void, iii. to declare the removal of the petitioners under section 284 of the Companies Act, 1956 and Form 32 dated 18.12.2012 as null and void and reinstate them as directors, without interruption with powers of management as per the provisions of the share Holders Agreement and Articles of Association of the company, iv. to direct the company to reinstate the share application money of ₹ 4,39,78,925/- belonging to the promoter directors and their associates in the balance sheet as on 31.03.2011 and subsequent years, v. to direct the company to make proportionate allotment as per the provisions of the shareholders agreement and refund of the remaining amount to the shareholders concerned, vi. permanent injunction restraining the respondents 2 to 7 from allotting further shares in the R1 Company without offering the same proportionately to the petitioners and other shareholders as per the shareholding agreement and as per the shareholding existed prior to the allotment impugned in the petition. 3. It is submitted that the above issues are covered in the shareholders' agreement and Articles of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s herein. It is submitted that Clause-16 of the shareholders agreement incorporated an Arbitration Clause which is in pari-materia with the Articles of Association of the company reads as follows: 16.4.1: Except as provided in section 16.4.2, the parties hereto irrevocably agree that any dispute, controversy of claim arising out of relating to or in connection with this agreement (including any provision of any exhibit, annexure or schedule hereto) or the existence, breach, termination or validity hereof (a dispute ) shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The arbitration shall be held at Mumbai. The Investor No.l, Investor No.3 each shall appoint one arbitrator; the Investor No.2 and Investor No.4 shall jointly appoint one arbitrator and the company and promoters shall also jointly appoint one arbitrator. In the event that any party fails to appoint an arbitrator within 15 days after receipt of written notice of the other party's intention to refer a dispute to arbitration, such arbitrator shall be appointed by a court of competent jurisdiction on an applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders agreement by the respondents herein which would need to be placed before the arbitrators and only issues of oppression and mismanagement cannot be raised on baseless grounds to nullify the legal remedies available to the Ist respondent. Splitting of cause of action and splitting of parties should not be permitted since the grievances of the petitioners can be addressed by the arbitrator in arbitration proceedings which has already been envisaged and agreed upon between the parties. It is therefore prayed that this Hon'ble Bench may be pleased to refer the subject matter of the company petition to arbitration in terms of the arbitration agreement incorporated in the Articles of Association of the company and in the shareholder's agreement dated 30.07.2008 and vacate any interim orders passed and consequently dismiss the company petition and render justice. In support of this case the learned counsel relied upon following citations. 1. Bialetti Industries S.P.A v. Rachit Suresh Gangar 2. Pinaki Das Gupta v. Maadhyam Advertising (P.) Ltd. [2002] 38 SCL 170 (CLB - New Delhi) 3. Escorts Finance Ltd. v. G.R. Solvents Allied Industries Ltd. [1999] 20 SCL 23 (CLB - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration before it submits his first statement on the substance of the dispute 7. It is submitted that the shareholders agreement (hereinafter called as SHA) was entered into on 30.07.2008 between the following persons: 1. M/s. Lev-India Pvt Ltd 2. M/s. India Acceierted Growth Real Estate Ltd 3. M/s. Sulam Financials Ltd 4. M/s. India Acceierted Growth Real Estate (Mauritius) 5. Mr. C. Ramakrishna Others (Promoters) and 6. M/s. Central Resorts Plantations (P.) Ltd 8. It is submitted that the respondents crave leave of the Hon'ble Bench to refer the Shareholder Agreement (in short SHA) dated 30.07.2008. It is respectfully submitted that the companies referred to above at SI.No. 1 to 4 are not parties to the present application. Further there are 10 promoters who are parties to the SHA and their names are given in the Schedule 1 of the SHA, Mr H.P Basavaraju and Mr. Ramakrishna alone are the parties to the proceedings before the Hon'ble Bench and they are the petitioners in the main petition. Therefore one of the conditions laid down under the provisions of section 8 of the Arbitration and Conciliation Act has not been satisfied with. It is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d would not be in a position to give any direction for the above matters as they would not fall under his jurisdiction. The power to deal with the above matter is vested only with the Hon'ble Bench while dealing with the proceedings filed under section 397, 398 and 237 of the Act Therefore, it is evident that the subject matter of the SHA and the subject matter complained off in the present petition are entirely different and it could not be settled by the arbitrator to be appointed for the purpose. It is submitted that the original petition was dispatched to the Hon'ble Bench on 18.02.2013 and on the same day it was dispatched to all the respondents. The 1st respondent company has received the physical copy of the petition on 19.02.2013 and the 2nd respondent has received the copy on 22.02.2013. Besides, the above service of petition, the copy of the petition was sent to all the respondents by email on 19.02.2013. It is submitted that all the respondents are aware that the petition is being moved on 28.02.2013. Immediately after receiving the copy of the petition, the notice dated 22.02.2013 was issued to the respondents herein invoking the arbitration under SHA, however n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re I and II and the respondents crave leave of the Hon'ble Bench to refer those emails. It is submitted that subsequent to the email correspondence, the applicants brought in one M/s.Nandi Gruha Nirmana Sahakar Sanga, Mysore - 570 009 (the Sanga) into the picture and it was informed that the sanga would be purchasing the entire shareholding of the company for the said 60 crores. However, the time period of 10 months given by the said sanga to make the payment was not acceptable and as such the respondents were not accepted for the proposal. 10. The respondents further submit that it is a well settled legal proposition that referring the disputes in a pending legal proceeding to be referred to arbitration, there should be identity of causes of action and of parties. In other words, all the parties in such legal proceedings should be parties to the arbitration agreement and all issues in the company petition should be within the four corners of the arbitration agreement for the arbitration to be applicable. It is further submitted that none of such requirements are satisfied in the instant case. In so far as the cause of action of the present company petition is concerned a my ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g judgment: 1. Cosmosteels (P.) Ltd. v. Jairam Das Gupta [1978] 48 Comp. Cas. 312 (SC). 2. Bennet Coleman Co. v. Union of India [1977] 47 Comp. Cas. 92 (Bom.) 3. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1980 SC 1298. On the point of Arbitration Clause contained in Articles of Association cannot take away the right of a member to invoke section 397 or 398 of the Companies Act. The learned counsel relied upon the following judgment: 1. O.P Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp. Cas. 279 (Delhi) 2. Kara (P.) Ltd., In re [1977] 47 Comp. Cas. 276 (Delhi) On the point of that certain disputes cannot be referred to arbitration the learned counsel relied upon the following judgments: 1. Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 22 SCL 156 (SC) 2. Shankarlal Laxminarayan Rathi v. Udaysingh Dinkarrao Rajurkar AIR 1976 BOM 237 3. Chiranjeelal Shrilal Goenka v. Jasjit Singh [1993] 2 SCC 507 4. Booz Allen Hamilton Inc (supra) 5. Al Champdany Industries Ltd. v. Blancatex AG [2011] 164 Comp. Cas. 122 (Cal.). 11. Heard the learned counsel appeared for the respective parties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it is covered by the arbitration clause. It is difficult to contemplate that the judicial authority has also to act mechanically or has merely of see the original arbitration agreement produced before it and mechanically refer the parties to arbitration. Where a suit is filed by one of the parties to an arbitration agreement against the other parties to the arbitration agreement, and if the Defendants files an application under Section 8 stating that the parties should be referred to arbitration, the court (judicial authority) will have to decide (i) whether there is an arbitration agreement among the parties; (ii) whether all parties to the suit are parties to the arbitration agreement; (iii) whether the disputes which are the subject matter of the suit fall within the scope of arbitration agreement; (iv) whether the Defendant had applied under Section 8 of the Act before submitting his first statement on the substance of the dispute; and (v) Whether the reliefs sought in the suit are those that can be adjudicated and granted in an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons, the agreement has not been signed by all such promoters. Therefore, I am of the view that all the parties have not signed the agreement. Besides the above in view of the blanks at various places in the said agreement viz. S.H.A dated 30.07.2008 particularly in clauses 4.2.17 and schedule 4 at various places, which forms part of the said S.H.A. Hence it could not be said that there could be a concluded contract, at the most it could be construed as an agreement to agree. It is well settled law that an agreement to agree or an undertaking to agree or try to agree or to negotiate with a view to reaching an agreement in any given document is nothing but uncertain and incapable of giving rise to an enforceable legal obligation. Therefore, even from this angle the said document viz. S.H.A 30.07.2008 is unenforceable and hence the question of referring the matter to arbitration does not arise. In terms of Arbitration and Conciliation Act, 1996 to satisfy the requirement of section 8 one must satisfy the basic necessity of existence of an agreement as stipulated under section 7 of the Act. In the facts and circumstances of the matter herein the said document namely SHA dated 30.07. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral meeting held on November 2012, and the management, the affairs of the company carried out solely and exclusively by the directors nominated by the investors. A perusal of the petition further reveals that the said petition has been filed by Mr H.P Basavaraju and Mr Ramakrishna against the company and 6 directors named therein who are all alleged to be nominees of investors. The petition is also filed against Haribhakti and Co., Chartered Accountants as respondent No.8 and in the averments it has been alleged that the said auditor has colluded with the respondents necessitating the filing of the Company petition. Though prima facie above basic facts have been elucidated, only upon final hearing of the Company petition it could be concluded about the validity and conclusiveness of such averments. Subject matter of the Company petition versus claim of arbitration is concerned, in determining this aspect though it is not essential to get into the averments in the Company petition in the absence of reply/counter from the respondents. It is necessary for this Bench to look in the main relief sought for by the petitioners. The same are reproduced hereunder: The Petitioners, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is therefore prayed that this Hon'ble Bench may be pleased to refer the subject matter of the Company petition to Arbitration in terms of the arbitration agreement incorporated in the Articles of Association of the Company and in the Shareholders agreement dated 30th July 2008 and vacate any interim orders passed and consequently dismiss the Company petition and render justice. A perusal of the application reveals that the applicant had referred to legal notice issued for invoking arbitration agreement and the relevant para of the said application is reproduced hereunder: It is further noteworthy that as early as on 26.11.20I2, the investors and the Company had caused a communication to be issued to the Petitioners herein, pointing out in detail the breaches committed by the petitioners under the Shareholders Agreement and called for the Petitioners to remedy the same and further notified that legal proceedings will be commenced failing such remedial measures. Owing to failure of the Petitioners to comply with the demand, the investors and the Applicant Company had caused a legal Notice dated 22.02.2013 to be issued specifically invoking the Arbitration Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd ingredient of section 8 as stipulated by the Hon'ble Supreme Court in the judgment rendered in the case of Booz Alien Hamilton (supra) viz. whether the disputes fall within the scope of Arbitration Agreement or not, can be answered to the effect that the relief sought for in the petition as compared to the disputes raised in the legal notice are not one and the same. Though the clauses 3.5.1 of SHA provided that the promoters already advanced the payments towards the project, the legal notice at para 3 as referred to above states certain breach of non payment of balance amount. This Bench thought at this juncture cannot get into the correctness of such legal notice, however can only observe that such averments in the legal notice goes contrary to the terms of the said documents viz. S.H.A dated 30.07.2008. On submission of counter/reply by the respondents in the petition it could be ascertained as to the full facts of the matter but however for the purpose of due compliance of the factors to be taken into account as stipulated by the Apex court, this Bench is of the view that the matter covered by the petition cannot be referred to arbitration. It is also strange to see th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the attendance-cum-order sheet when the company petition was mentioned 28.02.2013. From a perusal of the attendance-cum-order sheet, this Bench directed the respondents to file counter to the petition within a period of four weeks and serve copies on the other side and the matter was posted on 11.06.2013. When the matter was listed on 11.06.2013, this Bench directed that all the pleadings shall be completed within a period of eight weeks. The matter was posted on 17.09.2013 at 10.30 AM for compliance of the order dated 11.06.2013. The orders of this Bench have not been complied with. However, the respondents have filed the present application and there is no explanation from the counsel for the applicants/respondents that why the orders of this Bench have not been complied with and if the subject matter is covered by the arbitration agreement then why necessary steps have not been taken to file application at the earliest? Notwithstanding the above, the respondents to this application may file counter within a period of three weeks and serve copies on the other side. The CA No. 1/2013 is posted on 21.11.2013 at 10.30 AM. 18. However the said application was permitted to be wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 10. The reliefs that are being claimed arise out of a breach of the shareholders agreement and the Articles of Association. The breach as claimed by the opponents/petitioners would need to be addressed keeping in view of the provisions of the shareholders agreement and the Articles of Association. The right of pre-emption and proportionate allotment in the ratio agreed between the shareholders and also the fact that the promoters would need to be represented through their directors are all issues covered under the shareholders agreement and the Articles of Association. Further, the removal of the directors representing the promoters under section 190 and 284 were initiated by the shareholders themselves and if the opponents/petitioners have any grouse it should be against the other shareholders and not the directors who have been arrayed as respondents 2 to 7 from whom no reliefs can be given. Para 11. That it is therefore clear that all the disputes raised and the reliefs asked are based out of a breach of the shareholders agreement and the Articles of Association and all the issues that have been raised are squarely covered under the shareholders agreement and the Articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the disputes is not arbitrable and the powers of CLB is very wide under sections 397/398 as compared to powers of arbitrator. Further it was submitted by the learned counsel for the respondents herein that the existence of arbitration clause contained in the Articles of Association cannot take away the right of the member to invoke sections 397/398 of the Companies Act. Further arguments were also advanced to the affect that certain disputes cannot be referred to arbitration and in this connection certain judgments of the Supreme Court and the High Courts were relied upon (i) Haryana Telecom Ltd (supra), (ii) Chiranjilal Shrilal Goenka (supra), (iii) (2011) 5 SCC 532 in Booz Allene Hamiton Inc. (supra) and (iv) Shankarlal Laxminarayan Rathi (supra). 22. The counsel for the respondents herein also highlighted that the relief sought for and the issues raised in the petition are not arbitrable and the written submission of the relevant para is extracted hereunder: Substance of Dispute: (i) The respondents/petitioners have raised various issues and sought various reliefs in the company petition which are neither part of the arbitration agreement nor are they arbitrabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SHA and the arbitration clause in the AOA. In this aspect it is well settled law that in a matter of oppression and mismanagement any arbitration clause in the articles of association a company shall not have any legal force and validity of enforcement in view of the provisions of section 9 of the Companies Act, 1956. For better appreciation the said section 9 is reproduced hereunder: Act to override Memorandum, Articles, etc. 9. Save as otherwise expressly provide in the act (a) The provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as a case may be, before or after the commencement of the act, and (b) Any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this act, become or be void, as a case may be. 24. In view of the mandatory provisions of the Act the question of relying upon the clauses of the AOA and makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement between the parties, and any disputes between the parties on subject matter covered within the terms of agreement, shall fall within the jurisdiction of any arbitrator subject to certain statutory provisions which confer exclusive domain to tribunal and courts such as matters covered by section 397 to 402 of the Act before the CLB, matters covered by section 391 to 394 of the Act, matters covered by section 433 onwards relating to winding up as provided under the Companies Act, 1956 as well as such similar acts covered under other statutory enactments shall not fall within the jurisdiction of arbitrator. In the facts of the case herein the reliance placed by the applicant by invoking arbitration clause in the AOA of the said company is inappropriate and against the mandatory provision of section 9 of the Companies Act and hence the same is unenforceable. 25. The above analysis made in terms of judgment rendered by the Apex Court in the matter of Booz Allen Hamilton Inc (supra), makes it very clear that the applicant has not satisfied the factors which are required to be complied with for invoking section 8 of the Arbitration and Conciliation Act. 1996. Hence the core is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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