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The Arbitration Act, 1940
Section 397 in The Companies Act, 1956
Section 398 in The Companies Act, 1956
Section 402 in The Companies Act, 1956
Section 8 in The Companies Act, 1956
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Company Law Board
Altek Lammertz Needles Limited, ... vs Lammertz Industrienadel Gmbh on 31 March, 2004
Equivalent citations: 2006 129 CompCas 108 CLB, 2004 56 SCL 156 CLB
Bench: K Balu

ORDER K.K. Balu, Member

1. In this Company Petition filed by M/s Lammertz Industrienadel GmbH ("the petitioner") under Sections 235, 397, 398 Schedule XI read with Sections 402, 403 of the Companies Act, 1956 ("the Act") alleging acts of oppression and mismanagement in the affairs of M/s Altek Lammertz Needles Limited ("the Company"), the respondents 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 arise out of or in connection with the Joint Venture Agreement dated 02.11.1995 ("the JVA"), Clause 33 of which provides for resolving the disputes by arbitration under auspices of the Indo - German Chamber of Commerce in accordance with the Rules framed by it.

2. The facts, in brief, leading to the present application are that the Company was promoted by the second respondent in January, 1988 with main objects to carry on the business of manufacturers and dealers of all kinds of industrial, commercial and domestic moulds. By virtue of the JVA, the petitioner came to hold 69.30% and the second respondent together with his wife, being the third respondent hold 0.88% of the total issued and paid-up-capital of the Company. In addition, the Company owes to the petitioner huge sums of money on account of supply of machinery and tools, long term loans, royalty, export advances etc. In spite of majority shareholding of the petitioner and its huge investments, the Company and the second respondent diluted the majority shareholding of the petitioner from 69.30% to 26.14% in the Company, without giving notice of the Board Meeting or the Extraordinary General Meeting of the Company by causing reduction of share capital of the Company and immediately thereafter, increasing its share capital with malafide object of giving majority share holding in the Company to the fourth respondent which is a competitor presently holding 66.90% of the paid-up-capital, acquired partly by allotment and partly by transfer of shares by the second respondent. The Board structure was also unilaterally changed by removing the two directors nominated by the petitioner by resorting to the provisions of Section 283(1)(g) of the Act. The sum and substance of the grievances are that the share capital of the Company was reduced to 1.0% of the original share capital and again increased to 26.5% of the original share capital without any notice to the petitioner with the view to usurp control of the Company by the second and third respondent through the fourth respondent. Thus, the acts of oppression and mismanagement as alleged in the Company Petition are in relation to issue of additional shares, non-issue of notices for the Board and general meetings, reduction of share capital of the Company and vacation of office of directors belonging to the petitioners group.

3. According to Shri Arvind P. Datar, the learned Senior Counsel appearing for the respondents, the petitioner and respondents 2 & 3 had invested in the first respondent-Company, pursuant to the execution of and on the basis of the JVA between the petitioner, and second respondent and first respondent-Company which determines the rights and obligations of the respective parties in regard to the share holding and the management of the Company etc. The fourth respondent had, in April 2003, subscribed to shares of the Company and given an undertaking to abide by the provisions of the JVA, in terms of Clause 6 thereto, which binds the fourth respondent. The third respondent is none other than wife of the second respondent. Thus all the parties to the Company Petition are parties to the JVA. Clause 33 of the JVA provides that any dispute or difference arising between the parties, including all incidental and connected issues arising out of the JVA should be referred to arbitration. The alleged acts of oppression and mismanagement are subject to the various terms and condition of the JVA which would determine the rights of the parties inter-se in regard to share holding of the Company, issuance of shares herein and the management of the Company. By virtue of the arbitration clause the issues raised in the Company Petition vest only with the arbitral tribunal constituted according to the agreement. All the claims in the present Company Petition arise out of the JVA and necessarily the rights and obligations of the parties to the JVA must be adjudicated by the agreed arbitral tribunal. Thus there is complete commonality of issues and parties to the JVA with those raised before the CLB in the present Company Petition. Accordingly, Shri Datar learned Senior Counsel contented that the present application is filed under Section 8 of the Act, 1996 to refer the parties to the arbitration. In this connection the learned Senior counsel referred to the order of this Board made in Gautam Kapur and Ors. v. Limrose Engineering and Ors. (CP.No. 18 of 2002), wherein it has been held that it is not correct as a proposition to state that matters covered in a petition under Sections 397 & 398 are not arbitral. Whether such matters are arbitral or not would depend upon the facts of each case and on whether such allegations can be referred to without referring to the terms of the arbitration agreement. In the present case all the issues arising out of the Company Petition are subject to the various terms and conditions of the JVA, which enjoin upon the parties to refer the disputes to the arbitration as held in the decision in AIR 1958 A.P. 158. The Company Petition discloses that the petitioner is taking steps for recalling the order dated 30.12.2003 of the High Court of Madras approving the capital reduction of the Company and therefore this disputed issue is not before the CLB for adjudication. Shri Datar, the learned Senior counsel placing reliance on the decisions of the CLB in Naveen Kedia v. Chennai Power Generation Limited [1999] 95 CC 640 and Airtouch International (Mauritius) Limited v. RPG Cellular Investments and Holdings Private Limited (C.P.No. 31 of 2003 unreported) urged that merely because the CLB has been vested with exclusive jurisdiction under Section 402, it does not mean that the provisions of the Act 1996 are not applicable to the proceedings before the CLB. Thus, the plea of the petitioner that the provisions of Sections 397/398 statutorily confer exclusive jurisdiction in favour of the CLB and that these matters cannot be referred to arbitration have been negatived by the CLB. However, the arbitral tribunal is empowered under Sections 28(1)(a) and 8 of the Act 1996 to determine all issues in terms of the JVA. The arbitral tribunal is bound by, inter-alia, the Act 1956 including the provision of Section 397/398 and other related provisions, other relevant laws and judicial precedents, while adjudicating the disputes between the parties. Any question as to whether the disputes can be resolved under the arbitration clause or not and whether the disputes fall within or outside purview of the arbitration must be decided by the arbitral Tribunal, in support of which reference has been made to the judgment of the apex court in Hindustan Petroleum Corporation Limited v. Pinkcity Midway Petroleums - (2003) 6 SCC 503. Moreover, the JVA provides for assignment of the rights and obligations of the parties in favour of their nominees who will be bound by the JVA. In view of this, both the petitioner and respondents 2 & 3 are empowered to assign their rights to shares in the Company to any nominee upon necessary undertaking given by such nominee. The JVA envisages the transfer of shares among each party and his nominee without reference to right of pre-emption. Thus by virtue of Clause 6 of the JVA the respondents 3 & 4 are bound by and entitled to enforce the JVA as nominees and assignees of the second respondent under the JVA. The JVA expressly recognizes the right of assignment of the parties thereto. In this connection the learned Senior Counsel referred to Naveen Kedia v. Chennai Power Generation Ltd. - [1999] 95 CC 640 to show that the assignees/nominees under an agreement as parties thereto are bound by the arbitration. Moreover, there are no allegations against respondents 3 & 4 in the Company Petition excepting the petitioners are seeking to set aside the allotment of shares made in favour of the fourth respondent whose presence is not required for determination of the validity of impugned allotments, as held in Malleswara Finance Investments Company Private Limited v. CLB - (1995) 82 CC 836.

The Company has filed a Civil suit in C.S. 953 of 2003 against the petitioner and several others not only in relation to the issues pertaining to the right of the Company to the trademarks, but also certain issues which are not covered or amenable to arbitration under the JVA. Moreover, the Company has since obtained leave of the Civil Court to approach the appropriate jurisdictional forum to obtain relief in respect of suit claim. Thus the suit not exclusively concerning the JVA would not amount to waiver of the arbitration clause.

4. According to Shri Sudipto Sarkar the learned Senior Counsel appearing for the petitioner, the grievances raised in the Company Petition are on account of various statutory violations. The petitioner is seeking to enforce its statutory remedy available under the Act, 1956, and not claiming any contractual reliefs. The petitioner is challenging the illegal allotment made by the Company in favour of the fourth respondent; illegal removal of the Directors nominated by the petitioner, non-issue of notices either to the Board meeting or Annual General meeting or general meeting to the petitioner etc. and has the effect of reducing the petitioner from a majority to a minority shareholder. The provisions of Section 397 and 398 statutorily confer exclusive jurisdiction to the CLB remedying these grievances and the matters covered by these provisions cannot be referred to arbitration. No arbitrator can give any relief under Sections 397, 398, 402 and 403 of the Act 1956, as held in the following cases:

O.P. Gupta v. Shiv General Finance (P.) Ltd. - (1997) 47 CC 279.

Sudarshan Chopra and Ors. v. Company Law Board - L.P.A No. 235 of 2003 - Punjab and Haryana High Court.

Shri Sarkar referred to decision in Limrose Engineering & Ors (Supra) to show that if the allegations of oppression and mismanagement can be adjudicated, without reference to the terms of the arbitration agreement then the question of referring the matter to arbitration does not arise even if the agreement covers the same matter. When the matter related to the allegation of oppression directly relating to the rights or benefits to the shareholders in their capacity as members of the company arising out of the Act 1956, articles or on equitable grounds, the CLB would intervene and grant appropriate relief to put an end to the acts complained of by the aggrieved shareholder.

The issues in relation to non-issuance of statutory notices by the Company and oppression of the petitioner are not covered by the JVA. Furthermore all the parties to the Company Petition are not parties to the JVA. While the respondents 3 & 4 are parties in the Company Petition, they are not parties to the JVA. The third respondent has not given any undertaking to abide by the terms of the JVA. The petitioner has never accepted the fourth respondent as a subscriber to the shares of the first respondent Company and therefore, the purported unilateral acceptance of the JVA by the fourth respondent cannot, in any way, create arbitration agreement between the petitioner and respondents. Any unilateral undertaking by a person that he would observe and be bound by the terms of an agreement does not make such person a party to the agreement as held in Bharti Televentures Ltd v. DSS Enterprises Pvt. Ltd. 92 (2001) DLT 788. There is no arbitration agreement in writing as specified in Section 7 (4) and (5) of the Act 1996 between the petitioner and the respondents 3 & 4. As there is no mutual consent between the parties, there cannot be any arbitration agreement as held in K.K. Modi v. K.N. Modi - (1998) 3 SCC 573.

Thus, there is no commonality of issues and parties to the JVA and the Company Petition. A judicial body may refer the parties to arbitration only in cases where the entire subject matter of the proceedings is subject of an arbitration agreement and all the parties to proceedings are the parties to the arbitration agreement. A judicial body cannot bifurcate the subject matter of proceedings so as to refer part of the subject matter or some of the parties to arbitration, as held in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531.

The Company seeking reference to arbitration has forfeited its claim for resolving the dispute through arbitration by filing a civil suit, against the petitioner in respect of the trade marks of the Company and certain other matters in relation to the joint venture, in breach of the arbitration clause and, therefore, estopped by its conduct from invoking the provisions of Section 8 of the Act 1996 as held in Sudarshan Chopra (Supra) and Magma Leasing v. NEPC Micon Limited.- AIR 1998 Cal 94.

Shri Sarkar, the learned Senior Counsel, while concluding his arguments submitted that by virtue of Section 16 of the Act 1996 a judicial authority is not barred from adjudicating the existence or otherwise of an arbitration agreement as held in Sudarshan Chopra (Supra). For these reasons Shri Sarkar learned Senior Counsel sought for dismissal of the application.

5. I have considered the elaborate arguments of the learned Senior Counsel. While according to the petitioners, if the allegations of oppression and mismanagement contained in the Company Petition can be adjudicated without reference to the terms of the SHA, there is no question of referring the matter to arbitration, even if the SHA covers the same matter, especially when the allegations of oppression are directly relating to the rights of shareholders in their capacity as members of the Company, arising out of the provisions of the Act, Articles or on equitable grounds, as propounded by this Board in Gautam Kapur v. Limrose Engineering (supra), it is forcefully contended by the respondents that all the issues raised in the Company Petition are arising out of the JVA, containing the arbitration clause, in which case the Court has a mandatory duty to refer the disputes arising between the contracting parties to an arbitrator, who shall only decide even the question regarding the applicability of the arbitration clause, in accordance with the judgment of the Apex Court in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums - (2003) 6 SCC 503.

At this juncture, the acts complained of in the Company Petition and the relevant terms of the JVA governing the rights and obligations of the parties thereto assume relevance to determine these contentious issues. Towards this end, the alleged grievances of the petitioners are summarized as under: -

• The Company had issued 18,50,000 equity shares in favour of the fourth respondent by increasing the authorised capital of the Company within less than a month of passing a resolution for capital reduction, without notice to the petitioner of the Board meeting held on 02.12.2002 approving the capital reduction, thereby majority shareholding of the petitioner constituting 69.30 per cent was reduced to minority with 26.14 per cent of the paid-up capital of the Company in violation of the provisions of the Act and the Articles of Association of the Company.

• The petitioner and IP Support and its nominee were not given notice of the extraordinary general meeting held on 30.12.2002 at which the capital reduction to 10 per cent of the original share capital was approved and also for the extraordinary general meeting held on 25.01.2003 at which the authorised share capital was increased. Similarly, the paid-up capital was increased to 26.5 per cent of the original paid-up capital on 04.04.2003 without notice to the petitioner's nominees on the Board of the Company.

• The Company had removed the two nominee directors of the petitioner by illegally invoking the provisions of Section 283(1)(g) of the Act for allegedly not attending three consecutive Board meetings without seeking leave of absence.

• The balance sheet, profit and loss account, directors' report and auditors' report containing several false and incorrect statements have not been drawn in accordance with the relevant provisions of the Act.

• The annual general meeting held for the year ended 31.03.2003, wherein the fourth respondent participated and exercised their voting rights was invalid. The notice sent by the Company for the adjourned annual general meeting of the Company held on 12.01.2004 was defective.

• The second respondent mismanaged the affairs of the Company and diverted its business to the fourth respondent.

• The Company did not give 21 days notice for the 15th annual general meeting as required by the Act and failed to give any notice to the petitioner and its nominee for the said AGM.

• The minutes of the Board and shareholders meeting are not properly maintained and are manipulated by the second respondent.

• The Company did not comply with the relevant provisions relating to the retiring directors. When the third respondent was retiring at the annual general meeting held on 27.12.2003, there was no provision in the agenda for her retirement at the said annual general meeting.

The summary of the terms of the JVA pertaining to the subject matter of the disputes is as under:-

• The second respondent shall not directly or indirectly either by himself or through his nominee increase his beneficial interest in the share capital of the Company beyond the stipulated proportion. (Clause 4(ii)).

• The Company shall not allot and/or register any shares in the name of a nominee of any of the parties to the JVA unless such a nominee prior to the allotment or registration has given an undertaking to abide by the provisions of the JVA (Clause 6).

• Unless and otherwise agreed, the petitioner and the second respondent shall be equal partners and shall have equal rights in all respects. (Clause 7).

• Clause 8 deals with the constitution and configuration of the Board of Directors of the Company.

• Clauses 9 & 10 are in relation to the appointment of the Chairman, Managing Director, non-retiring Director and retiring Director.

• The Company shall give 30 clear days written notice of every meeting of Board of Directors to every director of the Company unless the petitioner agrees for a shorter notice. (Clause 13).

• Clause 14 deals with the quorum for the meeting or adjourned meeting of the Board.

• A nominee of the petitioner or the third respondent may transfer shares held by such a nominee in favour of a party of whom he/it is a nominee. (Clause 20).

• The second respondent in the event of desirous of transferring any shares held by him or the second respondent or his nominee declines to take up shares offered pursuant to any further issue of capital, shall offer such shares to the petitioner. The same stipulations shall be applicable to the petitioner. (Clause 21 & 22).

From a critical analysis of the grievances of the petitioner and the relevant terms of the SHA, while it is apparent that the acts complained of in the Company Petition directly relate to the rights of the petitioner in their capacity as member of the Company arising out of the provisions of the Act and Articles of Association of the Company, the JVA covers, inter-alia, the rights and obligations of the parties in relation to the shareholding pattern, issue of additional capital in favour of the parties, or their nominees, transfer of shares, constitution and configuration of members of the Board, meetings of the Board of Directors; right of participation of the Directors in the meetings of the Board, etc. Against this background, the decision of the CLB in Limrose Engineering (supra) assumes importance, the relevant portion of which is reproduced hereunder: -

"Sections 397/398 of the Act deals with the affairs of a company and the right to move this Board in case of oppression/mismanagement, is vested in the shareholders. Even though the counsel for the petitioners urged that, as a proposition of law, matters covered in a petition under Sections 397/398 are not arbitrable, I do not agree with this stand. Whether the matters are arbitrable or not would depend on facts of each case. In this connection I may refer to the observation of this Board in Magotteaux wherein this Board observed: "Thus we are not in a position to agree with Shri Chagla that proceedings under Sections 397/398 are outside the purview of Section 45 of the Arbitration Act. Such a situation would completely nullify the object of the Act, as, it is quite possible that in a given case, to avoid arbitration on disputes squarely traceable to the terms of an arbitration agreement, one can initiate a proceeding under Sections 397/398 and claim that provisions of Section 45 have no application. In the same way, one could ask for referring the parties to arbitration merely on the ground that there is an arbitration agreement between the parties even though the disputes may be out side the scope of the agreement just to defeat the judicial proceeding." (para 6). Therefore, the test to determine as to whether the matter in a petition under Sections 397/398 is to be relegated to arbitration is to examine as to whether the allegations of oppression/mismanagement contained therein can be adjudicated without reference to the terms of the Arbitration agreement. If it can be, then the question of referring the matter to arbitration does not arise even if the agreement covers the same matter. It is more so when the matter relates to allegation of oppression directly relating to the rights of or benefits to shareholders in their capacity as members of the company arising out of the provisions of the Act, Articles or on equitable grounds. The learned counsel for the respondents cited the cases of Chennai Power Corporation, and RFB Latex Limited cases to contend that this Board has always referred petitions under Sections 397/98 to arbitration whenever there was an arbitration agreement. A perusal of those judgments would indicate that the allegations in those petitions, even though were styled as acts of oppression/mismanagement, were directly arising out of the respective arbitration agreements and there were not really acts of oppression as generally held by various courts/CLB. In RBF Latex case, this Board retained those of the allegations which were not part of the agreement and relegated others to arbitration. (However, in Sukanya Holdings's case, the Apex Court has held that such bifurcation is not permissible and the entire matter has to be adjudicated by the judicial forum). In the present case, it is to be noted that the petitioners have alleged acts of oppression, independent of the terms of the MOU on the ground that in a family company, disturbance of directorship or shareholding would be an act of oppression. This Board has held in a number of cases that such disturbance in a family company could be held to be an act of oppression. These allegations, if established, could definitely be declared to be acts of oppression meriting grant of appropriate relief in terms of Section 402. Therefore, when such an allegation of oppression is made, I am of the view that the proper forum to adjudicate the same is this Board and not the Arbitral Tribunal as, in terms of Section 402, this Board has wider powers. No doubt, in the present case, the MOU contains a clause relating to maintenance of status quo and the learned Arbitrator is already examining the complaint relating to the breach of the same. Section 8(3) of the Arbitration and Conciliation Act does permit the Arbitrator to even make an award when an application under Section 8 is pending. The examination of this Board would be whether the allegations are acts of oppression/mismanagement without referring the agreement and mould appropriate relief to put an end to the acts complained of, while the role arbitrator would be with reference to the specific terms of the agreement. In other words the jurisdiction and scope of powers of this Board and that of the Arbitrator are different and both can adjudicate the matter before them. Because of the difference in the nature of powers, there is hardly any scope for conflict in their decisions. In this connection, it is necessary for me to refer to the decision of the Apex Court in Hindustan Petroleum Corporation case wherein the Court has held that once there is an arbitration agreement, then the matter should be relegated to arbitration. I am of the view that the said decision being with reference to a suit, the same is not applicable to a proceeding under Sections 397/399 if the allegations are capable of being examined without any reference to the terms of the arbitration agreement."

In the present case, the grievances of the petitioner are that the Company has violated, inter-alia, the provisions of Section 81(1)(a) in regard to further issue of shares; Section 166 for improper holding of Annual General meetings; Section 171(2) for non-issue of notice and defective notice for annual general meeting; Section 172 for issue of defective notice for meetings of the Company; Section 173 for non-issue of the explanatory notice in regard to reduction of share capital; Section 193 for non-maintenance of proper minutes of the Board and shareholders meeting; Section 286 for non-issue of notices for the Board meeting; falsification of balance sheet and profit and loss account of the Company; removal of the Directors nominated by the petitioner and improper conduct of the Board meetings.

It is, therefore, clear that the grievances of the petitioner are directly relating to the rights of or benefits to shareholders in their capacity as member of the Company, arising out of the provisions of the Act and Articles of Association of the Company and that the petitioner is enforcing their statutory power which can be adjudicated, in my view, without reference to the terms of the SHA. These acts of oppression, if established, would entitle the petitioners for appropriate relief in terms of Section 402. No doubt the Apex Court in Hindustan Petroleum Corporation (supra) laid down the proposition that the court has a mandatory duty to refer the disputes arising between the contracting parties by virtue of the arbitration clause to an arbitrator, on account of the fact that the appellant before the Apex court had exercised its contractual power under the agreement, but not the statutory power (emphasis supplied) under the Weights and Measures (Enforcement) Act, 1985. Therefore, the decision in Hindustan Petroleum Corporation Limited has no application to the facts and circumstances of the present case. Moreover, the reliefs sought by the petitioner cannot be granted by an arbitrator and are available under the provisions of Section 397 and 398 read with Section 402 and 403 from the Company Law Board alone and the statutory jurisdiction of the CLB cannot be ousted even by the consent of the parties as held recently in Sudharshan Chopra v. Company Law Board by a Division Bench of the High Court of Punjab & Haryana (supra). For these reasons, the prayer of the applicants to refer the parties to arbitration does not arise. There is, therefore, no need to go into the other claim and counter claim of either of the parties and the supporting decisions cited thereof. Accordingly the application is rejected. The respondents are directed to file counter by 30.04.2004 and rejoinder to be filed by 15.05.2004. The Company Petition will be heard on 21.05.2004 at 10.30 a.m.