Karnataka High Court
Aeg - Aktiengesellschaft vs Insotex (India) Ltd. And Another on 24 January, 1995
Equivalent citations: [1995]83COMPCAS677A(KAR), ILR1995KAR796, AIR 1996 KARNATAKA 69, 1996 (1) ARBI LR 479, 1995 (3) COM LJ 64 KAR, (1995) ILR (KANT) 796, (1995) 2 KANT LJ 617, (1996) 1 ARBILR 479, (1995) 83 COMCAS 677
Author: P. Krishnamoorthy
Bench: P. Krishnamoorthy
JUDGMENT P. Krishna Moorthy, J.
1. The appeal arises out of the an order rejecting as application under Section 34 of the Arbitration Act by the Company Law Board. The first respondent in the appeal is an Indian Company by name Insotex (India) Ltd.
2. The first respondent filed an application before the Company Law Board under Section 111 of the Companies Act alleging that they purchased 13,600 shares of the second respondent company from the appellant which is a German Company and a non-resident company, under an agreement between them dated 1-9-1989 for a total Consideration of Rs. 13,60,000/-. The first respondent Insotex (India) Limited duly lodged transfer. Instruments together with share certificates with the second respondent company on 4.9.1989. Since the transaction involved transfer of share by a non-resident company, permission of the Reserve Bank of India was obtained subject to certain terms and conditions stipulated by the Reserve Bank of India. The time granted by the Reserve Bank of India was extended from time to time up to 5-9-1989. According to the first respondent Insotex (India) Limited, they also handed over to the appellant a cheque dated 4-9-1989 for the consideration amount and also paid relevant tax on the same. According to Insotex (India) Limited, they had completed all the formalities regarding transfer of shares by the stipulated date 4-9-1989. The first respondent Insotex (India) Limited also received a communication from the second respondent company through a copy of the letter addressed by them to the Reserve Bank of India that the transfer of shares had been effected in the books of account of the company by a resolution of the Board of Directors on 17-5-1991. Immediately, therefore, they received another copy of the letter dated 31-7-1991 addressed by the company to the Reserve Bank of India intimating that the Board of Directors of the second respondent company had in their Board Meeting held on 24-7-1991, rescinded the resolution passed on 17-5-1991, and consequently, the name of the first respondent Insotex (India) Limited has been removed from the register of member. Insotex (India) Ltd., further alleged that, no notice of the proposed removal of the name from the register of members was given to them. On various grounds, the Insotex (India) Limited filed a petition before the Company Law Board under Section 111 of the Companies Act for rectification of register of members and thereby to include the name of the Insotex as holder of 13,600 shares in the second respondent company.
3. This petition came up for hearing on 4-9-1992 and at the suggestion of the learned counsel for the second respondent and agreed to by the learned counsel for the Insotex (India) Ltd., a direction was issued by the Company Law Board that the appellants shall also be impleaded as a party and that a copy of the petition should be served on them.
4. On receipt of the notice from Company Law Board the appellant filed an application under Section 34 of the Arbitration Act praying for staying the proceedings before the Company Law Board in view of a provisions for arbitration in the agreement between the appellant and the first respondent Insotex (India) Limited. It was contended by the appellant that there is a serious dispute in existence between the appellant and the first respondent Company as to validity of the contract entered into between them for the sale of 13,600 shares in the second respondent company. This dispute warrants adjudication on the validity of the contract and as per clause 7 of the agreement dated 1/4-9-1989, between the appellant and the first respondent, any dispute arising out of the agreement should be settled by arbitration. The first respondent should have invoked the arbitration clause for settlement of the above dispute and if it were invoked, the appellant would, at all time, have been and was even now ready and willing to accept the arbitration and do everything necessary for the proper conduct of the same. It was, therefore, prayed that the proceedings before the Company law Board may be stayed as per Section 34 of the Arbitration Act.
5. The matter was elaborately heard by the Company Law Board. The contentions of all the parties were considered and it was held that the issue for consideration in that proceedings before them is only as to whether the removal of the name of the first respondent from the register of members by the second respondent 1 and 2 and accordingly, the case and proper. That dispute is mainly between respondent after having been entered is valid is not a fit one for being stayed under Section 34 of the Arbitration Act and dismissed the application filed by the appellant. This appeal is against the above said order.
6. Learned counsel for the appellant contended that the contract between the appellant and the first respondent for sale of 13,600 shares is covered by an agreement dated 1/4-9-1989 and that the title of the first respondent to the shares will depend upon the terms of the agreement. If the terms of the agreement had not been complied with, there will be no transfer of shares in favour of the first respondent and accordingly, they will not be entitled to have the shares transferred in their name. That agreement contains an arbitration clause, which provides that, that all the disputes which arises out of or in connection with that, shall be referred to an arbitration. According to them, right to have the register of second respondent company rectified in favour of the first respondent will depend as to whether the first respondent has obtained titled to the shares in question. The Company Law Board is competent under Section 111(7) of the Companies Act to decide any question in regard to any title of a person who is a party to an application. The question of title of the first respondent will depend upon the agreement which is a dispute or question which arises out of the agreement and accordingly, the matter is to be referred to the arbitrator. On the other hand, learned counsel for the first respondent contended that the only question before the Company Law Board is as to whether there are justifiable grounds in the second respondent company removing the first respondent company from the register of the company. According to the first respondent, their name was removed from the register of the second respondent only on the ground that there was no valid approval from the Reserve Bank of India and not on the basis that they had not obtained title. It is further contended that, at any rate, the second respondent who is a necessary party before the Company Law Board is not a party to the agreement and as the relief is mainly claimed against them and the arbitration clause being not applicable to them, the proceedings could not be stayed. It was, further contended by them that, at any rate, in the facts and circumstances of the case, the court should not exercise the discretion vested in it under Section 34 of the Arbitration Act in favour of the appellant taking into account the facts of the case.
7. The question to be decided is as to whether in the facts and circumstances of the case, the proceedings before the Company Law Board should be stayed under Section 34 of the Arbitration Act. As stated earlier, the appellant sold 13,600 shares of the second respondent company to the first respondent company under an agreement dated 1/4.9.1989. It is seen from Annexure 'D' letter of the second respondent company dated 30.5.1991 that by a resolution of the Board dated 17.5.1991, the transfer was effected and the name of the first respondent Insotex (India) Ltd., has been registered in the name of members of company effective from that date. Therefore, by a subsequent resolution dated 24-7-1991, the name of the first respondent has been removed from the register of members. The reason for the removal of the name of the first respondent as could be seen from Annexure 'E' letter is that, there was no valid approval of the Reserve Bank of India subsisting on the date when the transfer was effected. It is in pursuance to this removal of their name, the first respondent has filed an application before the Company Law Board for the rectification of the register. The appellant company no doubt, raised a dispute regarding the title of the first respondent over the shares under the terms of the agreement entered into between them. According to them, the terms of the contract has worked out itself as the formalities have not been complied within the period stipulated therein. It is not necessary for us to go into that question at this stage. But it has to be noted that, in the proceedings before the Company Law Board, the question of title to the first respondent over the shares may also be relevant and the Company Law Board is also competent to go into that question under Section 111(7) of the Companies Act. The case of the appellant is that the agreement has come to an end by its own terms and the dispute regarding the effect of the agreement is a matter fully covered by arbitration clause. The arbitration clause contained in the agreement is Clause 7(b) of the agreement, which reads :
"7(b) : If for whatever reasons, disputes shall arise out or in connection with the present agreement that cannot be solved by the parties it shall be finally settled under the rules of conciliation and arbitration of the International Chamber of Commerce Paris, France, by three arbitrations appointed in accordance with said rules. The applicable law shall be the Law of the Republic of India. The arbitration shall take place in Zurich, Switzerland."
The terms of arbitration clause are very wide and any dispute arising out of the contract has to be settled by arbitration. The dispute between the appellant and the first respondent as to whether the first respondent has acquired title under the agreement is certainly a matter which comes under the arbitration clause. The fact that the case of the appellant is that the agreement itself has worked itself out will not put an end to the arbitration clause. The appellant is relying on the agreement to contend for the position that the agreement has worked out itself and in such circumstances, the question as to the effect of the provisions of the agreement in question is a dispute arising out of the agreement and will be covered by the arbitration clause. It is not because of the appellant that the agreement is said ab initio but their only case is that, it has worked out itself and the agreement has come to an end. Certainly, this question comes under arbitration clause.
8. But the further question is as to whether in spite of that, this court should exercise its discretion by staying the proceedings under Section 34 of the Arbitration Act. No doubt, the question of title to the shares of the first respondent may also be relevant but that is not the only question to be decided. As stated earlier, originally the name of the first respondent company was entered in the register of the second respondent company which was later removed by a subsequent resolution dated 24-7-1991, on the basis that, there was no valid approval from the Reserve Bank of India. So, one of the important questions to be considered by the Company Law Board is as to whether the removal of the name of the first respondent company was proper on the ground given by the company. Whether the reason given in the second resolution dated 24-7-1991 is proper or not is not a dispute coming under the arbitration agreement between the appellant and the first respondent but it is outside the same. The removal of the name from the register was by the second respondent. The second respondent is not a party to the arbitration agreement and it is the action of the second respondent that is challenged in the application before the Company Law Board. In the light of the above facts, we are clearly of the view that the proceedings before the Company law Board takes in issues which are not covered by the arbitration clause and are also against a party who is not signatory to the agreement. In other words, the proceedings before the Company Law Board covers also issues not covered by the arbitration clause, though, one of the disputes that may arise is within the arbitration clause. Moreover, it is the action of the second respondent that is challenged before the Company Law Board which is not a party to the arbitration agreement. In the circumstances of the case, it cannot be said that the second respondent is only a formal party. The validity of their action on the ground given by them has also to be considered. For the aforesaid two reasons, we are of the view that the Company Law Board was right when it held that this is not a fit case to be stayed under Section 34 of the Arbitration Act.
9. It is well settled that the power under Section 34 to stay any proceedings before a judicial authority is discretionary. The appellant is a German Company and the first respondent is an Indian Company and the first respondent is an Indian Company. According to Clause 7(b) of the arbitration agreement, any dispute has to be finally settled under the rules of conciliation and arbitration of the International Chamber of Commerce, Paris, France by three arbitrators appointed in accordance with the said rules. It is further provided that the law applicable shall be the law of the Republic of India and the arbitration shall take place in Zurich. Switzerland.
10. Thus, the arbitration as provided for is by a foreign Arbitral Tribunal. A similar case, wherein a foreign Arbitral Tribunal was agreed between the parties came up for consideration before their Lordships of the Supreme Court in the matter of stay under Section 34 of the Arbitration Act, in Ramji Dayawala & Sons (P.) Ltd. v. Invest Import . In that case, the plaintiff therein, a labour contractor, entered into a sub-contract with the defendant, a Yogoslavia based company, which in turn, had entered into a contract with the Bihar State Electricity Board for setting up the power station. The plaintiff sub-contractor, pursuant to the sub-contract dated 10-7-1961, had to supply skilled labour, unskilled labour and apprentice labour, to carry out the erection work and incidentally to do other things provided in the sub-contract. The plaintiff claims that it carried out certain extra work for which it was entitled to recover Rs. 70,000/- from the respondent. There were also other claims made by the plaintiff and the plaintiff therein, filed an original suit in the Calcutta High Court to recover a sum of Rs. 4,25,343/- from the defendant therein. On service of notice on the defendant, they appeared before the court and filed an application purporting to be under Section 151 of the Civil Procedure Code contending that the sub-contract between the plaintiff and defendant incorporates an agreement to refer all the disputes arising out of the contract to arbitration and, therefore, the suit should be stayed. The arbitration agreement in that case provided that the arbitration has to be done by the International Chamber of Commerce in Paris with application of Yogoslav materials and economical law. In the circumstances of the case, their Lordships considered the question as to whether the suit is liable to be stayed under Section 34 of the Arbitration Act or not. In that context, in paragraph 22 of the Judgment, their Lordships observed as follows :
"When parties by contract agree to arrange for settlement of their disputes by a Judge of their choice, by procedure of arbitration voluntarily agreed upon, ordinarily the court must hold the parties to their bargain. As a corollary, if a party to a subsisting arbitration agreement in breach or violation of the agreement to refer dispute to arbitration approaches the court, the court would not lend its assistance to such a party and by staying the suit compel the party in breach to abide by its contract. When the parties have agreed to an arbitration by a foreign arbitral tribunal the case for stay would be stronger than if there was a domestic arbitration agreement. This proceeds on the assumption that parties not only sought and agreed upon the forum for resolution of dispute but also the law according to which the dispute would be the law according to which the dispute would be resolved. However, this is not an absolute rule. Granting or refusing to grant stay is still a matter within the discretion of the court. How discretion would be exercised in a given case would depend upon various circumstances. But to grant stay of the suit is still a matter within the discretion of the court."
11. Their Lordship also quoted with approval the following passage from Russell on the Law of Arbitration, 19th Edn. at p. 194, which reads thus :
"The principles established by the authorities can, I think, be summarised as follows :
(1) Where plaintiffs sue in England in breach of an agreement to refer disputes to a foreign court, and the defendants apply for a stay the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant a stay but has a discretion whether to do so or not.
(2) The discretion should be exercised by granting a stay unless strong cause for not doing so is shown.
(3) The burden of proving such strong cause is on the plaintiffs.
(4) In exercising its discretion the court should take into account all the circumstances of the particular case.
(5) In particular, but without prejudice to (4). The following matters, where they arise, may properly be regarded :
(a) In what country the evidence on the issues of fact is situated, or more readily available, and the effect of that on the relative convenience and expense of trial as between the English and Foresign Courts.
(b) Whether the law of the foreign court applies and, if so, whether it differs from English law in any material respect.
(c) With what country either party is connected, any how closely. (d) Whether the defendants genuinely desire trial in the foreign country, or are only seeking procedural advantages,
(e) Whether the plaintiffs would be prejudiced by having to sue in the foreign court because they would;
(i) be deprived of security for their claim;
(ii) be unable to enforce any judgment obtained : (iii) be faced with a timebar not applicable in England; or
(iv) for political, racial, religious or other reasons be unlikely to get a fair trial."
12. After considering various aspects of the matter, their Lordships held as follows :
"To sum up, the entire evidence both of the appellant and the respondent is in this country; the contract as a whole was executed and carried out in this country; the claim as a whole arose in this country; the appellant is a company incorporated in this country and the respondent is having its office in this country, and that the respondent is not motivated by any principle to have the decision of the foreign arbitral tribunal at Paris but the principal object of the respondent is merely to make it more difficult, if not impossible, for the appellant to assert the claim. Add to this two other vital considerations, viz., that the cost of arbitration at Paris will be so disproportionately high to the claim involved is adjudication that one would never think of incurring such a huge cost to realise such a small sum claimed, and the restriction on the availability of foreign exchange, another vital relevant consideration. The sum total of all these well established circumstances clearly indicate that this was a suit in which when discretion is exercised on well settled judicial consideration no court would grant stay and the stay has to be refused."
13. In the light of the principles laid down by the Supreme Court in the aforesaid case, we do not think that this is a fit case where (we) should exercise discretion in favour of the appellant by granting stay of the proceedings under Section 34 of the Arbitration Act. From the facts of the case, it is clear that the contract was entered into in India; the first respondent is an Indian company : the entire evidence of both the appellant and the respondents are in this country; contract as a whole was executed and carried out in this country and the whole claim arose in this country. The appellant is a German Company and the first respondent is an Indian Company and the arbitration has to take place in a third country, viz., Zurich, Switzerland and we feel that the object of the appellant is only to make it very difficult for the first respondent to enforce their rights. Moreover, relief has to be granted by a special Tribunal, though, no doubt, it is a judicial proceeding. At any rate, the enire dispute before the Company Law Board is not covered by the arbitration clause and the second respondent is not a party to the arbitration agreement. For all these reasons, we are of the view that this is not a fit case where the discretion under Section 34 of the Arbitration Act has to be exercised in favour of the appellant.
In view of what is stated above, we do not find any reason to interfere with the order of the Company Law Board and accordingly, the appeal is dismissed but without any order as to costs.
14. Appeal dismissed.