Company Law Board
Insotex (India) Ltd. vs Aeg-Ngef Ltd. on 9 July, 1993
Equivalent citations: [1995]83COMPCAS358(CLB)
ORDER
1. The petitioner is a company which purchased 13,600 shares in the respondent-company from AEG-AG Germany, a non-resident company, under an agreement between them dated September 1, 1989, for a total consideration of Rs. 13,60,000. The petitioner-company lodged duly executed transfer instruments together with the share certificates with the respondent-company on September 4, 1989. Since the transaction involved transfer of shares by a non-resident company, the 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 was extended from time to time up to September 5, 1989. According to the petitioner, they also handed over to AEG-AG Germany a cheque dated September 4, 1989, for the consideration amount and also paid the relevant tax on the same. It is the contention of the petitioner that they had completed all the formalities regarding the transfer of shares by the stipulated date, i.e., September 4, 1989. According to them, they also received a communication from the respondent-company through a copy of the letter addressed by the company to the Reserve Bank of India and endorsed to the petitioner that the transfer had been effected in the books of the company on May 17, 1991. However, immediately thereafter they were surprised to receive a copy of the letter dated July 31, 1991, addressed by the company to the Reserve Bank of India intimating that the board of directors of the respondent-company, had, in their board meeting held on July 24, 1991, rescinded the resolution passed on May 17, 1991, and consequently the petitioner's name has been removed from the register of members. The petitioner's grievance is that no notice of the proposed removal of the name from the register of members was given to him. Under the circumstances, the petitioner has presented this petition for rectification of register of members and thereby to include the name of the petitioner as holder of 13,600 shares in the respondent-company. This petition was taken up for hearing on September 4, 1992, and at the suggestion of learned counsel for the respondent and agreed to by learned counsel for the petitioner, we issued a direction that AEG-AG Germany should also be impleaded as a party and a copy of the petition should be served on them.
2. At the hearing on March 26, 19-93, the petitioner filed an interlocutory application seeking directions from this Bench to restrain the company from issuing any further shares during the pendency of the petition. AEG-AG Germany also filed an application under Section 34 of the Arbitration Act read with Regulation 1-7 of the Company Law Board Regulations, 1991, praying for staying the proceedings before the Company Law Board in view of a provision for arbitration in the agreement between AEG-AG Germany and the petitioner. The application by the applicant regarding restraining the first respondent-company, viz., AEG-NGEF Limited from issuing rights shares was taken up first for hearing. It was objected to by learned counsel for the first respondent-company on the grounds that there was no basis for the application and as a matter of fact the company had no intention of issuing any rights shares. In view of the assertion by the respondent-company, the petitioner decided not to press for any orders on the application.
3. Then the application under Section 34 of the Arbitration Act read with regulation 17 of the Company Law Board Regulations, 1991, for stay of proceedings preferred by AEG Antiengesells chaft (AG) was taken up. It was pointed out to counsel that the application was not in proper form and the same has not been accompanied by the appropriate fee or an affidavit duly verified supporting the application. Learned counsel for the petitioner, Shri K.R. Prasad, submitted that despite the defects pointed out by the Bench, he would not raise any objection on technicalities. He said that he would waive his right to object. Thereafter, it was decided to take up the application.
4. It has been stated in the application that there is a serious dispute in existence between the petitioner and the applicant as to the validity of the contract entered into between them for sale/purchase of 13,600 shares in respondent No. 1 company. This dispute warrants adjudication on the validity of the contract. As per clause No. 7 of the agreement dated September 1,4, 1989, between the petitioner and the applicant, any dispute arising out of the agreement should be settled by arbitration and as such the petitioner being the aggrieved party ought to have invoked the arbitration clause for settlement of the above dispute. If he had done so, the applicant would, at all times, 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 is, therefore, necessary, as has been averred in the application, that the proceedings before this Bench should be stayed as per Section 34 of the Arbitration Act.
5. Learned counsel for the petitioner argued that the stay application has been preferred only at the behest of AEG-NGEF Limited, first respondent in C. P. as it was averse to the transfer. He referred to the agreement entered into between AEG and the petitioner in 1989 towards the transfer of the 10 per cent. holding of AEG to the petitioner and he also referred to the resolution at page 56 of the reply to indicate that the company entered the transfer in the books of members in May, 1991. He also referred to the permission given by the Government of Karnataka for transfer of shares by AEG-AG to the petitioner which, according to counsel, was obtained after great efforts on his part. He further pointed out that the removal of his name later was purely on the ground that the period of the Reserve Bank of India permission had expired on the day of transfer and not on the basis of failure of the contract as now projected by AEG. When his name was removed on July 24, 1991, there was no mention in the resolution about the contract being void or the consideration not having been paid. Even on June 28, 1991, i.e., after the transfer was effected on May 15, 1991, AEG wrote to the petitioner conveying its happiness on the transfer. It never complained about or repudiated the contract. The only request AEG-AG made to the company was not to hand over the shares. AEG-AG at no time suggested to the company to remove the name of the petitioner and put its name in the register. He also pointed out that the petitioner never made AEG a party to the petition but only NGEF wanted and insisted on AEG-AG being made a party. That itself shows, he asserted, that NGEF has for collateral purpose instigated AEG to raise the issue relating to arbitration, etc. When as per AEG-AG there was a breach of contract, AEG never reported the matter to the Reserve Bank of India or sought arbitration. When AEG-AG wrote the letter in June, 1991, it must have been aware of the non-payment of the consideration and, therefore, it cannot at this point of time raise this as an issue.
6. Learned counsel for NGEF, initiating his arguments, stated that the company has full powers to rectify the register as long as there is sufficient cause. He explained the scope of Section 111 and stated that when no decision was taken on the transfer in November, 1989, the petitioner should have moved the Company Law Board under Section 111 as delay in transfer means deemed refusal. When the company exceeded the time limit of four months and no appeal had been preferred on the, deemed refusal the transfer instruments have to be treated as no longer valid and the company cannot act on the transfer instrument filed as early as in 1989. To this extent the company had erred and the mistake of the company cannot give rise to any right to the petitioner to claim title to the shares. He also explained the scope of the provisions, of the Contract Act dealing with contingent contracts to substantiate his arguments that the contract between AEG and the petitioner was a contingent contract. He then referred to the agreement between AEG-AG and the petitioner according to which all three conditions which are prerequisite should have been fulfilled. One of the pre-conditions as indicated in the agreement was compliance with the Reserve Bank of India sanction which was valid only for a period of four months. Even though the validity period was extended, yet since the transfer took place only in May, 1991, the Reserve Bank of India permission was not valid on that day and, therefore, the contract itself had become invalid and has created a dispute between the petitioner and the AEG-AG. It was further contended that any orders by the Company Law Board for rectification of the register would mean an order for specific performance for which the Company Law Board has no powers. Since a dispute exists regarding title to shares which has arisen out of the agreement only an arbitrator is competent to decide the issue or they should go to civil court to establish their right. The Company Law Board has no role to play. As per Section 34 of the Arbitration Act, even though the grant of stay is at the discretion of the judicial authority, judicial precedent is such that when parties have chosen their own domestic forum, they should settle the dispute only in that forum and, therefore, the Company Law Board should stay further proceedings in this case and let the arbitrator deal with the dispute. He also referred to Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961, according to which whenever any foreign arbitrator has been suggested in the agreement then it is compulsory on the part of the judicial authority to stay the proceedings. (However, he did not insist on this on the objection raised by counsel for the petitioner that the petition has not been based on this particular Act but only under Section 34 of the Arbitration Act).
7. Mr. Prasad, counsel for the petitioner, in his reply did not agree that there could be a presumption relating to deemed refusal of transfer of shares in the absence of any specific provision to that extent. Whether to approach the Company Law Board or the civil court is for the petitioner to decide and at his discretion he has approached the Company Law Board for rectification of the register. Referring to Section 7 of the agreement, he drew our attention to Section 8 which according to him is very relevant. What has been mentioned in the agreement as conditions precedent are those which are beyond the control of the parties like getting permission from the Government of Karnataka for transfer of shares, etc. Only when such essential conditions are not fulfilled, then recourse to Section 3 could be had. He pointed out to some correspondence to show the repeated negotiations between the parties. The company could not register the shares early, not purposely, but due to the permission from the Karnataka Government not having been received. Since this is with the full knowledge of all the parties, it should be presumed that there had been deemed extension of the agreement up to May, 1991. He also stated that Section 3 of the agreement indicates only a few conditions which are precedent. As a matter of fact they are not even conditions but only formalities.
8. Drawing our attention to last para of page 19 of the petition, Mr. Prasad pointed out that if the parties are not bound by any of the terms of the agreement then the arbitration provision which is a part of the agreement is also not applicable and as such the question of staying the proceedings at this point of time does not arise. He then pointed out to the recent letter from the Reserve Bank of India which has clarified that since all the formalities between the transferor and transferee had been completed before the expiry of the date of permission, the registration at a later date does not vitiate the permission. He also stated that NGEF has not relied on failure of consideration and as a matter of fact the petitioner handed over a cheque for the, requisite amount to AEG-AG and it was the duty of the AEG to complete all formalities regarding opening of account, etc. To show his sincerity in complying with the agreement, he pointed out that even the income-tax payable for the consideration was paid by the petitioner. He further pointed out that the ingredients of Section 34 of the Arbitration Act have not been fulfilled in this case inasmuch as he had not impleaded AEG-AG as a party to these proceedings while in the agreement it is the main party. Secondly, the matter under consideration by the Company Law Board is not an issue that could be raised in the arbitration. He once again reiterated that it was as per the orders of the Company Law Board that AEG-AG was impleaded as a party.
9. Mr. Prasad tried to differentiate between legal proceedings and judicial proceedings. According to him as per Section 1QE(4B), the Company Law Board is a judicial body only with reference to, certain criminal proceedings and this matter being a civil matter, even though the Company Law Board is a legal authority, it is not a judicial authority in a civil matter. Elaborating further with reference to the ingredients of Section 34 of the Arbitration Act, Mr. Prasad stated, that the issue before the Company Law Board is whether the petitioner's name should be removed or put back in the register and, therefore, there is no common issue that is being agitated in the Company Law Board which could have been agitated before an arbitrator.
Only when matters are directly involved the question of stay would arise.
The deletion of the petitioner's name is not directly referable and there is no reference to this in the so called arbitration agreement. In this connection, he cited Chiranjiv Lal v. Tropical Insurance Co. Ltd.', AIR 1952 Punj 63 and Chartered Bank v. Commissioner for the Port of Calcutta, AIR 1972 Cal 198.
10. According to him, AEG being an unpaid seller is entitled to proceed in a civil suit and this cannot be treated as a dispute which could be referred to an arbitrator and as provided in Section 55 of the Sale of Goods Act it can have a lien on the shares but cannot rescind the contract. Even now the petitioner is prepared to pay the full consideration along with applicable interest.
11. Finally, Mr. Prasad argued that in case the Company Law Board is inclined to stay the proceedings then it should consider, as an interim measure, to put back the name of the petitioner in the register of members till the final outcome of the arbitration or civil suit as the case may be.
12. Shri Doctor, counsel for the first respondent-company, pointed out that the agreement between AEG and the petitioner shall become invalid due to non-fulfilment of various conditions. Therefore, a dispute in connection with the agreement has arisen which relates to the title to the shares. Since putting back the name of the petitioner in the register of members would mean recognition of his title to the shares, it becomes a contentious issue arising out of the agreement and as such the Company Law Board should stay its proceedings to enable the arbitrator who has wider powers compared to the Company Law Board to decide the case.
13. We have considered the arguments put forth by learned counsel for and against staying the proceedings before us under the provisions of Section 34 of the Arbitration Act. The essential conditions for invoking the provisions of Section 34 of the Arbitration Act are as follows :
(1) The proceeding must have been commenced by a party to the arbitration agreement against any other party to the agreement ;
(2) the legal proceeding must be in respect of a matter agreed to be referred to the arbitration ;
(3) the applicant for stay must be a party to the legal proceeding and he must not have taken part in the proceeding ;
(4) he is and also was at the commencement of the proceeding ready and willing to do everything necessary for the conduct of the arbitration.
From the above, it is very clear that the first and foremost essential requirement to make an order of stay under this section is the existence of an arbitration agreement between the parties in the suit. As far as this aspect is concerned, it is an undisputed fact that the agreement between the applicant and the petitioner provides that the dispute arising out of, or in connection, with the agreement which cannot be solved by the parties shall finally be settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed in accordance with the said rules and the applicable law shall be the law of the Republic of India. It is also a fact that the present proceedings under Section 111 have been initiated by one of the parties to the agreement. The applicant for staying the proceeding was also a party to the agreement even though the applicant was not a party to the proceeding originally. At the outset he has filed an application for stay before taking part in these proceedings and he has also stated in this application that he is and always willing to do everything necessary for proper conduct of arbitration.
14. The other essential requirement of this section is that the suit must have been filed in respect of the very matter which was agreed to be referred to arbitration by the parties under the arbitration agreement. In Anderson Wright Ltd. v. Moron and Co., AIR 1955 SC 53, the Supreme Court said that the question whether the dispute in the suit falls within the arbitration clause involves consideration of two matters ; viz., (i) what is the dispute in the suit ? and (ii) what dispute the arbitration clause covers ? In order to determine whether the dispute is covered by the arbitration agreement, the agreement has to be construed according to its language and in the light of the circumstances under which it was made. In the present proceedings before us, the issue for consideration is whether the name of the petitioner after having been entered in the register was omitted therefrom for sufficient cause or not and whether there is a case for ordering rectification of the register. This, dispute is mainly between respondent No. 1-company and the petitioner. Respondent No. 1-company is not a party to the arbitration agreement.
15. Sections 3, 7 and 8 of the share purchase agreement between the petitioner and the applicant read as follows :
" 3. Conditions to closing--The obligation of the parties to consummate the transaction provided for herein is subject to the satisfaction on or prior to November 15, 1989, of all the following.
(a) Fulfilment of the conditions precedent as set forth in the authorization of the Reserve Bank of India Co-FID/592(Activity) 88-89 as annexed to this share purchase agreement.
(b) The approval of the transaction by any further requisite governmental authority in India under any law or regulation including the Companies Act, 1956, and the Monopolies and Restrictive Trade Practices Act, 1969.
(c) Payment of the purchase price by buyer to seller.
(d) Assignment of the shares by seller to buyer in an appropriate form as required by Indian corporate law and in accordance with the articles of association of AEG-NGEF.
Should any or all of the above conditions to closing have not occurred till November 15, 1989, then this agreement shall be considered null and void and the parties to this agreement will not be bound by any of its terms.
7. Jurisdiction and applicable law. -- (a) The parties shall make best endeavours and shall work together in good faith in order to successfully accomplish the transaction contemplated by this agreement.
(b) If, for whatever reason, disputes shall arise out of 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 arbitrators 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.
8. Miscellaneous. -- In the event individual provisions of this agreement should in their entirety or partially be or become invalid or impracticable then the validity of the remaining provisions of this agreement shall not be affected thereby. Instead of the invalid or impracticable provision, such reasonable provision shall apply which corresponds as closely as legally possible to what the parties, had they considered the matter initially in the light of such invalidity or impracticability, would have agreed according to the sense and purpose of this agreement. "
From the provisions of the above sections of the share purchase agreement, we are unable to find any direct commonality between the issue before us and the agreement.
16. Learned counsel for the applicant vehemently argued that the removal of the name of the petitioner from the register of members was on account of non-fulfilment of certain conditions stipulated in the agreement between the parties and therefore even though the company was not a party to the arbitration agreement, the issue would fall within the purview of the arbitration agreement inasmuch as putting the name in the register of members would be tantamount to recognition of title to the shares, a right that arises from the terms of agreement between the parties.
17. We are unable to agree with the contentions of counsel for the applicant. Even though we are conscious of the fact that when the parties, in their wisdom, have chosen their own forum for settling the dispute, they should be allowed to have recourse only to the said forum and the general tendency of judicial authorities has been to stay the civil proceedings in such cases, the powers to stay legal proceedings is discretionary and cannot be claimed as a matter of right. As we have indicated earlier even though the applicant is also a party to these proceedings, it is a matter of record that originally it was not a party but was impleaded as a party at the instance of respondent No. 1-company. There is also force in the argument of Shri Prasad, that if, as per the assertion of the applicant that the agreement is no longer valid, then the arbitration provision which is a part of the agreement also no longer exists. This argument of counsel is also supported by decisions in Khela Wati v. Chet Ram Kkub Ram, AIR 1952 Punj 67 and Chartered Bank v. Commissioner for the Port of Calcutta, AIR 1972 Cal 198. The dispute in the petition is between respondent No. 1 company and the petitioner. From the arguments of learned counsel for the applicant, it transpires that the stay application has been preferred mainly on account of the apprehension that any orders passed by us for rectification would amount to specific performance and settle the issue of title to shares, which is in dispute and which will have to be decided by arbitration. We are of the view that apprehension of the applicant is unfounded and cannot be the basis for prayer for staying the present proceedings. Any orders by us in the main petition would be between respondent No. 1 and the petitioner would be without prejudice to inter se agreement between the applicant and the petitioner. Therefore, guided by the spirit behind the provisions of Section 34 of the Arbitration Act and in the facts and circumstances of this case that the present dispute is mainly between respondent No. 1 company and the petitioner and that respondent No. 1 company is not a party to the agreement and the dispute in thus case is not a matter covered under the arbitration agreement directly, we are not inclined to exercise our discretionary power to stay the proceedings before us. Accordingly, the application for stay of proceedings is dismissed.