K.K. Balu, Vice-Chairman
1. In this company petition filed by M/s Financial Technologies Limited ("the petitioner") under Sections 397 and 398 of the Companies Act, 1956 ("the Act") alleging certain acts of oppression and mismanagement in the affairs of M/s E-Logistics Private Limited ("the Company"), the Company and its Managing Director, being respondents 1 & 2, have filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("the Act, 1996) to refer the parties for arbitration on the ground that the disputes raised in the company petition are arising out of or in connection with the Term Sheet dated 27.12.2005, Investor Rights Agreement dated 28.12.2005 and Reciprocal Obligations Agreement dated 27.12.2005 ("the agreements") which provide for resolving the disputes by arbitration.
2. According to Shri R. Venkatavaradan, learned Counsel, the petitioner has approached the Company Law Board for various reliefs allegedly governed by Section 397/398. The entire petition is based on the rights and obligations arising out of the agreements. The allegations forming part of the company petition in relation to unauthorised payments (para 3.4), collection of tax without corresponding payments (para 3.5), status of books of account (para 3.10), bogus and fraudulent booking of sales, unaccounted sales realisations, non-maintenance of registers, discrepancies in stocks (para e, f, g, h, & i at pages 11 to 14), actions contrary to law and the articles (para 1 in page 15), infusion and application of funds (para 3.1) and allotment of shares in favour of M/s e-Logistics Services Private Limited (para (a) in page 10) are arising out of the Reciprocal Obligations Agreement and Investor Rights Agreement. Similarly, the allegations in relation to unapproved decisions (para 3.11) and unethical practices in finance (para (d) in page 11) are covered under the Term Sheet. The charges pertaining to misappropriation and wrong application of surplus funds (para (j) in page 15) and appointment of Managing Director (para (k) in page 15) are connected to Investor Rights Agreement. The agreements contain an arbitration clause, thereby the parties have agreed to resolve all the disputes arising under the agreements through a properly constituted arbitral tribunal. The reliefs claimed in the company petition are flowing from the agreements and can be granted only by an arbitrator and do not arise for consideration by this Bench. The petitioners cannot do forum shopping and, therefore, it is not justifiable for the petitioner to approach the CLB for reliefs under Sections 397/398. In this connection, reliance has been placed on Sukanya Holdings (P) Ltd. v. Jayesh H. Pandey , the principles of which have been re-enforced in Rashtriya Ispat Nigam Ltd. v. Verma Transport CO. (2006) 78 CC 275.
3. Shri Chirag Balsara, learned Counsel, opposed the company application on the following grounds:
The CLB has exclusive jurisdiction to entertain the present petition for oppression and mismanagement in the affairs of the Company, which cannot be defeated on account of any arbitration agreement.
The main grievances of the petitioner are in relation to (a) irregular allotment of shares; (b) fudging of accounts; (c) filing of false statutory returns; (d) mismanagement in granting of loans; fudging sales figures, realisation of sales, non-maintenance of registers and various other violations set out in the internal audit report and the reliefs sought for in the company petition are in the exclusive domain of the CLB and do not fall within the scope and ambit of the agreements. These acts of oppression and mismanagement do not relate to disputes arising out of the agreements. Hence, the existence of an arbitration clause in the agreements is inconsequential for the purpose of the present petition and the disputes raised by the petitioner cannot be resolved through the arbitration process as provided in the agreements.
Section 8 of the Act, 1996 has no application to a petition under Sections 397 and 398. The petition sets out the acts of oppression, mismanagement as well as breach of the agreements together with the reliefs to bring to an end the acts complained of. The reliefs claimed by the petitioner cannot be granted by an arbitrator. In view of this no bifurcation of the subject matter of an action brought before a judicial authority is allowed as held by the Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya (supra). This principle has been reiterated in Rashtriya Ispat Nigams Ltd. v. Verma Transport Co. (Supra) and followed by this Board in S.S. Organics Limited v. V.N. Subba Reddy (Order dated 20.09.2005 in C.P. No. 22/2005). The allegations contained in the present petition are independent of the agreements, which an arbitrator cannot adjudicate for want ' of jurisdiction and therefore, the acts of oppression and mismanagement in the affairs of the Company are bound to be examined by the CLB, as held in 20^th Centuary Finance Corporation Ltd. v. RFB Latex Ltd. (1999) Vol. 9 7 CC. 636.
The petitioner has already invoked the arbitration clause in June 2006 and appointed Mr. R.G. Kakodkar, as arbitrator in terms of the arbitration clause. The respondents challenged the appointment of P.G. Kakodkar as director in the High Court, but could not be successful in its endeavour. Therefore, the application is liable to be rejected.
4. I have considered the elaborate arguments of learned Counsel. While according to the applicants, the entire company petition is based on the agreements, it is forcefully contended by the respondent that the exclusive jurisdiction of the CLB under Sections 397 and 398, to entertain the present company petition for acts of oppression and mismanagement in the affairs of the Company cannot be defeated on account of any arbitration agreement between the parties.
At this juncture, the acts complained of in the company petition and relevant terms of the agreement governing the rights and obligations of the parties thereto assume importance to determine these contentious issues, which are summarised as under:
The Company had received a sum of Rs. 6.80 crore by way of fresh issue of share capital from the existing shareholders on rights basis and new shareholders on application basis. The funds were not utilised for a quite number of days leading to loss of interest, but at the same time invested the funds into diversified equity fund of Templeton India Growth Fund resulting in huge losses suffered by it and further lost from treasury operations. There are no entries in the books of account for the shares allotted in the name of M/s e-Logistics Services Private Limited. However, allotment of 1,50,369 shares have been shown as made for cash and the cash account does not reveal any such cash received by the Company. While the petitioner was issued shares at premium, the second respondent was allotted the shares at par and that too without bringing any money or money's worth.
Imports made during the year between April 2005 and December 2005 were without any approval and no entries are found in the relevant register required to be maintained under the Act.
The payments made to several of the persons listed out in para 3.4 were without any approval and no entries are found in the relevant register required to be maintained under the Act.
The first respondent had collected sales tax on sales in the state of Andhra Pradesh without registration under the Andhra Pradesh Sales Tax Laws.
There are instances of shortage of cash between cash on hand as per the books and cash as per cash balance with cashier.
The Company maintains only manual registers giving details of the movement of some specific components and in no way represent the actual stock position of the Company. The Company failed to maintain any quantitative details of stock, but shows various items as held in stock are not supported by physical stock. When the annual sales accounted for less than Rs. 1 crore, the Company cannot hold stock of Rs. 6.55 crore, as claimed by the respondents. This amply shows that the respondents have manipulated the figures of stock purportedly maintained by the Company.
The Company deducted TDS on various payments made under different categories such as salary, rent, commission, professional fees etc, but the same has not been remitted on time for most of the year.
During the year the sales effected by the Company are quite low which resulted in huge losses in terms of various overheads and substantial part of the amount raised by way of fresh equity already stands eroded due to negligence sales with all regular expenses.
The books of account maintained by the Company are grossly incomplete and give absolutely erroneous results.
The Company failed to take approval of the investors in the matter of appointment of Chief Financial Officer and alterations in the business plans, in contravention of the agreement reached with the investors.
The respondents have acted in breach of their fiduciary obligations abusing their position as principal officers of the Company by allotting 1.50 lakh shares of the Company in favour of e-Logistics Services Private Limited without any consideration and no entry is found in the books of account of the Company.
The Company has given loans to the relatives of promoters, which include a loan of Rs. 20 lakh advanced to the second respondent's son, without passing any board resolution. Similarly, the Company, without any authority, repaid an unsecured loan of Rs. 5 lakh of the second respondent from and the funds of the Company. The Company had further settled an amount of Rs. 83 lakh due to Tamil Nadu Development Bank in order to release the personal guarantee of the second respondent, without however, supported by any resolution of the board of directors.
The respondents have repaid various amounts to the dealers, purportedly appointed by the Company under the garb of refund of secured deposits with a view to attract the investors including petitioners.
The respondents have indulged in various unethical practices by showing large amounts as bank balance having been received from a number of entities, which were non-existent and were held as cheques in the bank account of the Company for a period of over six months.
There are no recoveries in case of some of the large accounts and the debts remained outstanding. The respondents have been indulging in fraudulent practice of booking of sales on the basis of orders received by the Company, without either delivery or recovery the amount of sales reportedly effected by them. The sales income booked prior to April 2005 are bogus and no sales had taken place because there are no recoveries from such sales and only nominal recoveries are observed. The Company had, as on 31.03.2005, recovered only an amount of Rs. 8.72 lakh out of the outstanding amount of Rs. 56 lakh.
The respondents have collected directly some of the sales realisation, which are not duly accounted in the books of account of the Company.
The Company is not maintaining several statutory records, though the compliance certificate given by the Company Secretary shows that all registers are maintained by the Company, which indicates that the management could stealthily obtain a compliance certificate.
The Investors Rights Agreement envisages joint operation of the bank account with one of the directors belonging to the petitioner, group, which was never acted upon till date, resulting in misappropriation of funds, wrong application of surplus funds, settlement of earlier liabilities etc.
The Investors Rights Agreement stipulates that the board of directors of the Company shall consist of two members from each of the petitioner and respondents groups. However, the second respondent got appointed himself as managing director without obtaining any authority and failed to conduct any meeting of the board of directors of the Company.
The respondents are obliged to take approval before incurring any capital expenditure in excess of Rs. 25 lakh and before implementing any business plan. Nevertheless, the respondents have incurred over Rs. 25 lakh on several occasions, aggregating several lakh of rupees, without obtaining approval for such capital expenditure.
The acts of commission and omission attributed to the respondents, apart from being on account of certain statutory violations, are found to be covered by the Term Sheet dated 27.12.2005, Reciprocal Obligation Agreement dated 27.12.2005 and Investors Rights Agreement dated 28.12.2005, as admitted by the petitioner in para-m (page 17 of the company petition), which reads thus:
it is submitted that the Petitioners vide their letters dated April 19, 2006 and May 25, 2006, raised all the aforesaid grounds and requested the Respondents to comply with the Agreements. However the Respondents have failed to comply with the said requisitions of Petitioners. Hereto annexed and marked Annexure "L" and "M" are the copies of the letter dated April 19, 2006 and May 25, 2006. The Respondent No. 1 without dealing with the issued raised by the Petitioners in their aforesaid letters, vide their email dated June 8, 2006 addressed to Petitioner, recalling a sum of Rs. 2.01 crores failing which legal proceedings under Section 434 would be initiated. The Petitioner vide their letter dated June 9, 2006 Replied back to the Respondents email, denying that any sum was outstanding as alleged. Hereto annexed and marked Annexure "M" and "N" are the copies of the emails dated June 9, 2006.
All the agreements contain default as well as arbitration clause. It is on record that the petitioner by its communications dated 19.04.2006 and 25.05.2006, detailing the breaches in detail, committed by the respondents, called upon them to act in terms of the agreements. The grievances of the petitioner, though styled as acts of oppression and mismanagement in the affairs of the Company, are directly flowing from the agreements and therefore, those disputes cannot be ' adjudicated in the present proceedings, without any reference to the terms of the agreements. This Board in R. Balakrishnan v. Vijay Diary and Farm Products Private Limited (2005) 59 SCL 667 held that any relief for alleged breach of an agreement and consequential relief do not lie before the CLB under Section 397/398. In terms of the agreements, any dispute or difference arising between the parties to the agreements, they shall endeavour to settle such dispute amicably, failing which the disputes shall be referred to the Arbitration of a sole arbitrator as specified therein. The agreements are in force and therefore, the parties must be bound to refer the dispute arising out of the agreements for arbitration. By virtue of Section 8 of the Act, 1996 it is mandatory for the judicial authority, before which an action has been brought in a matter, being the subject matter of an arbitration, to refer the parties for arbitration. Thus, one of the essential requirements of Section 8 of the Act, 1996 that the subject matter of the action must be the same as the subject matter of the agreements is found to be admittedly satisfied in the case before me. Similarly, the reliefs claimed by the petitioner are on account of the purported breach of the agreements by the respondents. In this connection, beneficial reference is invited to a decision of the apex court in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. (2005) Vol.123 CC 566, wherein it has been held, inter-alia, that when a complaint is made as regards violation of statutory or contractual right, the shareholder may initiate a proceeding in a civil court but a proceeding under Section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view of the wide and far-reaching power of the court in relation to the affairs of the company. Against this background, the decisions cited by learned Counsel appearing for the respondent herein will be of little assistance to them. For these reasons, the parties are hereby directed to resolve the disputes raised in the company petition by arbitration. Ordered accordingly.