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Cites 20 docs - [View All]
The Arbitration Act, 1940
Section 8 in The Arbitration Act, 1940
Section 433 in The Companies Act, 1956
Section 434 in The Companies Act, 1956
Section 439 in The Companies Act, 1956
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Punjab-Haryana High Court
Haryana Telecom Limited vs Sterlite Industries (India) Ltd. on 7 January, 1999
Equivalent citations: 1999 97 CompCas 675 P H, (1999) 122 PLR 116
Author: G Singhvi
Bench: G Singhvi, I Singh

JUDGMENT G.S. Singhvi, J.

1. This is an appeal under section 483 of the Companies Act, 1956 (hereinafter referred to as "the 1956 Act"), against the order dated January 22, 1998, passed by the learned company judge dismissing Company Application No. 46 of 1998 filed by the appellant under section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the 1996 Act") in Sterlite Industries (India) Ltd. v. Haryana Telecom Ltd. (Company Petition No. 147 of 1997).

2. The facts necessary for deciding the issue raised in this appeal are that Sterlite Industries (India) Ltd. (hereinafter described as "the respondent") filed a petition under sections 433, 434 and 439 of the 1956 Act for winding up of Haryana Telecom Ltd. (hereinafter described as "the appellant"), on the ground that the appellant (non-petitioner before the learned company judge) is commercially insolvent and is unable to discharge its liability to pay off the admitted debts in terms of the demand made by the respondent (petitioner before the learned company judge). In the said petition, it has been averred that the respondent had supplied poly cable wrap to the appellant between February 21, 1995, and August 31, 1996, in pursuance of various purchase orders placed by the latter but it failed to pay Rs. 2.09 crores with interest at the rate of 24 per cent. In support of its plea for winding up of the appellant, the respondent relied on letters, annexures P-3, dated December 12, 1996, P-5 dated December 31, 1996, and P-8 dated February 24, 1997, as well as the minutes of the meeting held between the officials of the two companies (annexure P-7) and the notice annexure P-9, dated June 18, 1997, sent by its counsel to the appellant under section 434 of the 1956 Act. It also relied on the letters, annexure P-4, dated December 25, 1996, and annexure P-6, dated January 7, 1997, written by the appellant admitting its liability to pay the amount due.

3. After service of the notice of Company Petition No. 147 of 1997, the case was adjourned by the learned company judge to January 23, 1998, on the request of counsel for the appellant for grant of time to file a written statement. However, instead of doing that, the appellant filed an application dated January 17, 1998, and prayed for dismissal of the petition on the ground that the same cannot be entertained in view of section 8 of the 1996 Act. By the impugned order, the learned company judge dismissed the application by observing that the application is not maintainable. He also held that the power to pass an order of winding up against a company is vested with the company court and this power cannot be exercised by the arbitrator.

L.M. Suri,

4. Senior counsel appearing for the appellant, argued that the impugned order should be set aside because the learned company judge does not have the jurisdiction to make an adjudication of the dispute relating to the claim of the respondent. He referred to the provisions of section 34 of the Arbitration Act, 1940, and section 8 of the 1996 Act and argued that the deliberate changes made in the new legislative scheme exclude the jurisdiction of the company court to try a dispute which is the subject-matter of an arbitration agreement. Learned counsel further submitted that under the old Act, the court had the limited jurisdiction to stay legal proceedings but under section 8 of the new Act (1996 Act), the company court has no option but to refer the dispute between the parties to arbitration. Shri Suri then argued that the learned company judge has gravely erred in holding that the appellant's request for adjournment was a step towards filing of the written statement. He relied on Gaya Electric Supply Co. Ltd. v. State of Bihar, AIR 1953 SC 182; Sadhu Singh Ghuman v. Food Corporation of India, AIR 1990 SC 893; Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. (No. 1) [1993] 2 PLR. 745; [1994] 80 Comp Cas 340 (P&H) and Gousia Javed v. Jagdish Pershad Associates, AIR 1992 AP 12.

R.K. Chhiber,

5. Senior counsel appearing for the respondent, argued that the jurisdiction of the company court to deal with a winding up petition filed under the 1956 Act is altogether different from the jurisdiction of an arbitrator to decide the dispute which may be the subject-matter of arbitration. He submitted that the jurisdiction of the company court to deal with a winding up petition filed by the respondent cannot be treated as ousted by virtue of the arbitration clause contained in the purchase orders. Learned counsel argued that the arbitration clause cannot be invoked in this case because the appellant never disputed its liability to pay the amount in terms of the demand made by the respondent. Shri Chhibber relied on Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1990] 2 PLR. 655; [1991] 70 Comp Cas 197 (P&H); State of U. P. v. Janki Saran Kailash Chandra, AIR 1973 SC 2071 and Rachappa Guruadappa v. Gurusiddappa Nuraniappa, AIR 1989 SC 635.

6. With a view to appreciate the respective contentions in the correct perspective, we may notice clause 14 of the purchase order and section 8 of the 1996 Act. The same read as under :

"Clause 14 of the purchase order :

14. Arbitration : Any dispute, questions of difference whatever shall arise between the suppliers and the purchaser in relation to or in connection with this order, the same shall be referred to arbitration within the meaning of the Indian Arbitration Act or any statutory mediatorial Act.

Section 8 of the 1996 Act :

Power to refer parties to arbitration where there is an arbitration agreement. - (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made."

7. A bare reading of section 8 of the 1996 Act shows that sub-section (1) thereof comes into play only if the action brought before a judicial authority is the subject-matter of an arbitration agreement. In other words, if the issue pending before the judicial authority is not the subject-matter of an arbitration agreement, then the applicability of section 8 is ruled out. In this case, the action brought before the learned company judge is in the form of a petition under sections 433, 434 and 439 of the 1956 Act for winding up of the appellant on the ground that it has failed to pay the debts and this, in our considered view, cannot be treated as an action involving determination of a dispute which is the subject-matter of arbitration agreement. Therefore, the rejection of the appellant's application by the learned company judge cannot be termed as erroneous.

8. The aforesaid conclusion is also supported by a simple analysis of the arbitration clause which provides for reference of the dispute to arbitration. The use of the expressions "any disputes" and "questions of difference" shows that the reference to arbitration can be made only if there exists a dispute between the parties or there is some difference between them. As far as this case is concerned, there is no dispute between the parties about the liability of the appellant to pay the amount due to the respondent in lieu of the goods supplied by it. A bare reading of the letters, annexures P-3 to P-6 and P-8, exchanged between the appellant and the respondent and the minutes of the meeting held between the representatives of the appellant and the respondent shows that at no point of time, the appellant disputed its liability to pay the amount demanded by the respondent. In the letter dated December 25, 1996, it conveyed its unequivocal willingness to pay the amount due subject to some clarification. In the letter dated January 7, 1997 (annexure P-6), the appellant conveyed to the respondent that the dues will be cleared most probably by the end of March, 1997. Before the learned company judge also, the appellant did not project the existence of any dispute or difference on the issue of payment of the dues to the respondent. Thus, there is no escape from the conclusion that the appellant did not have the occasion to invoke the arbitration clause for settlement of the dispute between the parties. As a logical corollary, it must be held that the order passed by the learned company judge does not suffer from any legal error.

9. In view of our abovementioned finding on the issue of applicability of section 8 of the 1996 Act, we do not consider it necessary to deal with the question whether by making request for adjournment for the purpose of filing of written statement, the appellant disentitled itself from invoking section 8 of the 1996 Act.

10. The judgments relied upon by learned counsel for the parties except the one of the Division Bench in Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. (No. 1) [1994] 80 Comp Cas 340 (P&H) do not directly or indirectly deal with the issue raised in this appeal. In most of the cases, the apex court, this court and the Andhra Pradesh High Court dealt with the scope of section 34 of the Arbitration Act, 1940, and the stage at which the application for stay can be entertained by the court. Therefore, these decisions cannot be of any help for determining the issue involved in this appeal. In Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. (No. 1) [1994] 80 Comp Cas 340 (P&H), the Division Bench examined the correctness of the judgments of the learned single judge in Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1991] 70 Comp Cas 197 (P&H) on which reliance has been placed by Shri Chhiber and held that the jurisdiction of the company court is not ousted merely because of the existence of an arbitration clause in the agreement entered into between the parties. The observations made in paragraphs 39 to 41 of that decision read as under (page 356 of 80 Comp Cas) :

"I may again venture, to state, as also has been observed in the precedents cited above by learned counsel for the petitioner, that no jurisdiction by an agreement can be conferred for winding up of a company upon the arbitrator particularly in view of section 9 of the Companies Act. It is the special jurisdiction conferred by the statute on a court alone, and cannot be taken away or restricted or ousted by the mutual agreement of the parties. It is further so for the reason that it is essentially not for the benefit of the petitioner-creditors alone as it is undisputedly for the benefit of all concerned, i.e., creditors, shareholders, debtors and contributories, etc. A company petition is a representative petition on behalf of all for bringing it to the notice of the company court that either the company is unable to pay its debts as envisaged by section 433(e) of the Act, or it is just and fair, in the facts and circumstances of the case, to wind up the company. The arbitration agreement may bind the parties to the agreement but the same cannot affect the rights and liabilities of the other creditors, contributories, etc., who were not privy to the arbitration agreement but have got a right to seek the winding up of the company. Though the party may be a party to the arbitration agreement, in seeking the winding up it does not do so only on his own behalf but also on behalf of others, as observed in the earlier part of the judgment. It has been observed in O. P. Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp Cas 279 (Delhi), that where there is an arbitration clause in the memorandum of association to refer any dispute amongst the members to the arbitrator, the party cannot seek the stay of proceedings under section 34 of the Arbitration Act in proceedings under sections 397 and 398 of the Act as section 9 of the Companies Act overrides the memorandum and articles, etc., which are contrary to the provisions of the Companies Act, secondly, on the ground that sections 397, 398 and section 434 deal with the jurisdiction for winding up or to regulate and manage the affairs of the company, is within the jurisdiction of the court and cannot be referred to the arbitration. It was further observed that it is the duty of the court to protect the interest of the creditors, etc., though a reference has been made that there have to be strong circumstances to stay the proceedings and refer them to the arbitrator. It is essentially for the court to decide or adjudicate in each case under what circumstances the court should stay the proceedings.

In Star Trading Corporation v. Rajrathna Naranbhai Mills Company Ltd. (In Liquidation) [1971] 41 Comp Cas 1023 (Guj), the company went into liquidation and the official liquidator sought permission to sue in a suit for recovery wherein the question was raised that in view of the arbitration agreement between the parties the civil court was excluded from the jurisdiction, in view of section 446(2) of the Act. The Hon'ble court found that since on the winding up of a company, it does not cease to exist as a company as no transformation takes place in so far as its legal or juristic entity is concerned, the rights also continue to exist and only the board of directors are changed and the management of the company goes to the official liquidator. Thus, the court can grant permission to sue in suitable circumstances or otherwise proceed himself.

In Company Application No. 8 of 1979 in C.P. No. 147 of 1978, the Hon'ble Bench of this court observed after noticing the arbitration clause in the said case that proceedings under sections 433, 434 read with section 439 of the Companies Act, 1956, are completely a different jurisdiction, than the one regarding which remedy can be sought by way of arbitration under the clause in question. It is fallacious to conceive that the proceedings for winding up under the provisions of sections 433, 434 and 439 of the Companies Act, are by way of recovery of amount touching the various provisions of the scheme. Under the provisions of section 433, the Legislature codified the circumstances/grounds on which a company may be ordered to be wound up by the court. Section 434 provides as to under what circumstances a company may be deemed to be unable to pay its debts. The proceedings in the said petition cannot be taken to be the proceedings for the recovery of disputed debts or proceedings regarding the settlement of the disputes arising out of the rights and liabilities of the conditions of the scheme. Consequently, the application was declined. Similar are the observations made in Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1991] 70 Comp Cas 197 (P&H). Even the Division Bench judgment which the learned single judge observed having gone contrary to the judgment of the Division Bench reported in Maruti Ltd. v. B. G. Shirke and Co. P. Ltd. [1981] 51 Comp Cas 11 (P&H) has observed on page 14 that the arbitration clause does not even, after referring the disputes to an arbitrator, take away the jurisdiction of the company court, for winding up. It has been categorically laid down that 'what is presupposed by learned counsel is that the mere existence of an arbitration clause in the agreement would take away the jurisdiction of the company court to entertain or dispose of any suit or proceeding and any claim made by or against the company. But this approach is not legally tenable'.

It would be reasonable to infer from the observations made above that mere existence of an arbitration clause in an agreement by itself would not debar or oust the jurisdiction of the company court in proceedings for winding up nor would it make it incumbent upon the company court to stay the proceedings till the decision of the arbitrator. It has been observed by me in the earlier part of the judgment that the company court has much wider jurisdiction. It can go behind the award. The winding up order not only enures for the petitioner but also for other creditors. Other creditors cannot be bound by the agreement between the petitioner-creditor and the company particularly when the winding up petition by a creditor would be deemed to be a representative petition."

11. The Division Bench analysed the provisions of the 1956 Act vis-a-vis the Arbitration Act, 1940, and then held as under (page 361 of 80 Comp Cas) "In view of the discussion made above, it emerges that an arbitration agreement between the parties to the company petition under sections 433, 434 and 439 continues to bind the parties and the party against whom the company petition is filed can raise the objection that in view of the arbitration clause further proceedings in the company petition be stayed. But the right to raise an objection would not mechanically result in stay of the winding up proceedings because of the arbitration clause.

It is for the court, keeping in view the peculiar facts and circumstances of the case in any dispute, the questions raised, the bonafides of the parties, the expediency of the case, the conduct of the parties, the bona fide defence raised, the problem which necessitates reference, the language of the arbitration clause, the purpose sought to be served by referring the matter to the arbitrator, the advantage and disadvantage of the reference to the other persons interested in the company, etc., to determine what order should be passed in terms of section 443 of the Companies Act, i.e., dismissal of the winding up petition, adjourning the same conditionally or unconditionally; make any interim order or pass any other order which it thinks fit or make or refuse to make the order of winding up if it comes to the conclusion that though remedy is available to the petitioners, they are acting unreasonably and seeking the company to be wound up instead of adhering to the other remedy for the recovery of their amount. Thus, in my considered view, I may venture to answer the questions in the following terms :

(a) That the arbitration agreement between the company and the party to the agreement would bind the company as well as the party to the arbitration agreement before as well as after an order of winding up has been passed.

(b) That a bona fide objection to the winding up including the prayer for the stay of the winding up proceedings in view of the arbitration clause can be raised and it will be examined by the company court whether it is bona fide and likely to succeed on point of law, yet no absolute right vests in a party to the arbitration agreement to use the arbitration clause by itself as a shield to winding up. It is for the party invoking the arbitration clause for stay of the proceedings, to satisfy the court that there is an arbitration clause and there is a bona fide dispute between the parties to the agreement and also there is a prima facie bona fide defence available to the applicant which requires determination by the arbitrator before passing of the order for winding up of the company on the grounds envisaged by section 433 of the Act. It is the court's discretion to pass a suitable order as demanded in the facts and circumstances of each case, as observed in the earlier part of the judgment."

Therefore, it must be treated as a settled proposition of law that the arbitration clause does not ipso facto oust the jurisdiction of the company court to entertain a winding up petition and the party invoking the arbitration clause for making a request to the company court to refer the matter to arbitration must satisfy the said court that there is a bona fide dispute between the parties to the agreement which requires reference to the arbitrator and it is not sufficient for the applicant to say that the court should refer the matter to the arbitration because there is a clause in the agreement for making reference to the arbitrator.

12. As already mentioned above, in the present case, the appellant has not denied its liability to pay the amount. Rather, it has unequivocally admitted the same. Therefore, we do not find any valid ground to interfere with the order of the learned company judge.

13. For the reasons mentioned above, the appeal is dismissed with costs of Rs. 5,000.