Company Law Board
Das Lagerwey Wind Turbines Limited vs Cynosure Investments Private Limited on 17 December, 2002
ORDER
K.K. Balu, Member
1. In this company petition filed by M/s Cynosure Investments Private Limited ("the petitioner") under Section 397/398 of the Companies Act, 1956 ("the Act, 1956") in the affairs of M/s Das Lagerwey Wind Turbines Limited ("the Company"), the Company has filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("the Act, 1996") on the ground that the allegations in the company petition relate to a subscription agreement entered into between the petitioner and the Company and that the said agreement provides for arbitration in respect of any claim, dispute or differences between the parties in relation to the terms of the agreement and as such in terms of Section 8 of the Act, 1996, the Company Law Board should refer the parties to arbitration and should not proceed with the petition.
2. Shri T.V. Ramanujun, Senior Counsel appearing for the Company has submitted that the petitioner in the company petition and the Company had entered into a subscription agreement dated 16.02.1996 (Annexure A-3) under which the petitioner subscribed to the shares of the Company. When the petitioner derived its rights as a shareholder under the subscription agreement any dispute thereon should necessarily be referred to arbitration under the arbitration clause in the agreement. Learned senior counsel pointed out that fact that the agreement dated 16.02.1996, though not signed by the petitioner, the same was ratified and acted upon by the petitioner by calling upon the Company and the third respondent to comply with the term of agreement through a lawyer's notice dated 29.08.1998 (Annexure R-1). The main reliefs claimed by the petitioner will arise out of the subscription agreement which contains arbitration clause, in which case it is the arbitrator who has to adjudicate on the disputes arising out of the subscription agreement and not the CLB, in support of which learned senior counsel referred to Escorts Finance Ltd. v. G.R. Solvents And Allied Industries Ltd. - (1999) 96 CC 323. Learned Senior Counsel further submitted that in December, 2000 the petitioner had entered into an agreement with the third respondent, by which the petitioner agreed to sell its shares in the Company to the third respondent and further agreed that it would not have any claim against the Company and its directors in their official or personal capacity in respect of the subscription agreement. Thus the petitioner had divested itself of its rights as a shareholder of the Company. Clause 11 of the Agreement entered in December, 2000 contains an arbitration clause. Learned Senior Counsel further placed reliance on India Cements Capital Finance Ltd. v. Kwality Spinning Mills Ltd.- 2000 (II) CTC 267 to show that a judicial authority before which an action is brought in a matter which is the subject matter of an 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. Both the subscription agreement and the agreement entered in December, 2000 have to be read together thereby the petitioner as well as the Company become parties to the transactions and both the agreements contain an arbitration clause to refer the parties to arbitration on disputes arising out of these agreements, in which case, it is mandatory that a judicial body refer the parties to arbitration, in support of which learned senior counsel relied on Naveen Kedia v. Chennai Power Generation Limited - (1999) 95 CC 640. According to learned Senior Counsel, the foundation of the company petition is the subscription agreement and the rights of the petitioner thereunder is extinguished by virtue of the subsequent agreement of December, 2000. Hence the company petition has to be dismissed or the parties would have to be referred for arbitration, especially when the other respondents in the company petition need not be parties to the arbitration agreement and substantive reliefs in the company petition are claimed only against the Company.
3. Shri R. Shankaranarayanan, Advocate for the petitioner opposing the application has submitted that while the company petition deals with the acts of oppression and mismanagement in the affairs of the Company and the fraud committed by the respondent Nos. 2 & 3 in collusion with the other respondents, resulting in huge losses suffered by the Company, the subscription agreement and the subsequent agreement entered in December, 2000 does not relate to the matters covered in the company petition. The allegations made in the company petition are independent of the subscription agreement and therefore, the application to refer the parties to arbitration cannot be entertained. In this connection, he relied upon Khandwala Securities Ltd. v. Kowa Spinning Ltd. (1999) 97 CC 632. The charges of fraud made by the petitioner in the company petition are very serious which cannot be decided in arbitration proceedings, in which case, the application to refer the dispute to arbitration must be dismissed, for which he relied on (i) M/s GDR Financial Services Pvt. Ltd. v. Allsec Securities Ltd., - 2001 (3) CTC 461 and (ii) H.G. Oomor Sait v. O. Aslam Sait - 2001 (3) CTC 269. Shri Shankaranarayanan pointed out that the subscription agreement has not been signed by the petitioner, without which the arbitration clause cannot be enforced by the Company. The subsequent agreement entered in December, 2000 is for sale of shares held by the petitioner, to which the Company is not a party. The Company not being a party to the agreement executed in 2000, the disputes in relation to the said agreement cannot be referred to arbitration for which he relied on M/s Gowri Spinning Mills Ltd. v. Adimoolam - 2000(2) CTC 164. Though one Shri Gandhi is recited to be one of the parties, he has signed the agreement as one of the witnesses. Shri Shankaranarayanan pointed out that had the subscription agreement come to an end, as contended by the Company, then the Company cannot fall back and enforce the same for referring the parties to arbitration. Moreover, the other respondents in the company petition, who have colluded with the respondents 2 & 3 and caused losses to the Company are not parties to these agreements. The allegations in the company petition, if established they would be against the interest of the Company and in the public interest and the CLB will not allow such withdrawal of petition and in this connection he referred to V. Sundararajan v. R.R. Spinning Mills Ltd. - (1998) 3 Comp LJ 137 (CLB). Shri Shankaranarayanan while concluding arguments asserted that the petitioner holding 24.74 percentage of the paid-up equity capital of the Company and its name having been entered in the register of members of the Company, the petitioner is entitled to maintain the company petition. He, therefore, sought for dismissal of the application.
4. After considering the arguments of learned counsel, the issue that arises for my consideration is whether the application satisfies the requirements of Section 7(4)(a) and Section 8(1) of the Act, 1996.
5. Section 7 defines "arbitration agreement". It means an agreement by the parties to submit to arbitration, all or certain disputes which have arisen or which may arise between them in respect of defined legal relationship whether contractual or not. Section 7(4)(a) provides that an arbitration agreement should be signed by both the parties. In the present case, on record there is a subscription agreement dated 16.02.1996. Though the Company, the petitioner and the third respondent are parties to the agreement, the same has not been signed on behalf of the petitioner. It is observed that the agreement is in regard to the obligations of the petitioner to subscribed to 12,00,000 equity shares of the Company subject to the Company performing all its obligations and undertakings contained in the agreement. It is beyond doubt from recitals of the company petition (para 1 in page 5) thta the petitioner has subscribed to the equity capital of the Company and that the petitioner holds 24.74 per cent of the paid-up equity capital of the Company. The petitioner in its lawyer's notice dated 29.08.1998 (Annexure R-1) sent to, among others, the Company categorically asserted that the petitioner has purchased 12,00,000 equity shares of the Company of the face value of Rs. 40/- at a premium of Rs. 30/- per share, pursuant to the subscription agreement dated 16.02.1996 and that the petitioner is a major shareholder in the Company holding about 25 per cent of the paid-up equity share capital of the Company. Further the petitioner acting upon the subscription agreement called upon the Company and the second respondent to comply with the following requirements in terms of the subscription agreement:-
(i) to appoint the petitioner's nominees as directors of the Company; and
(ii) to furnish copies of the annual report and minutes of all general meetings.
The petitioner in December, 2000 entered into an agreement to sell its 12,00,000 equity shares of the Company acquired pursuant to the subscription agreement in favour of the third respondent. At this juncture, it is relevant to point out that an agreement under law may either be express or implied by conduct of parties. In the instant case, the subscription agreement dated 16.02.1996, though not signed by the petitioner, the same has been confirmed and acted upon by the petitioner by its conduct as enumerated hereabove and therefore, in my considered view, satisfies the requirement of Section 7(4)(a) of the Act, 1996. Admittedly, the subscription agreement contains an arbitration clause, according to which any dispute arising out of the subscription agreement should be referred to arbitration in terms of Article 11 of the subscription agreement. I shall now proceed to consider the second agreement entered in December, 2000 between the petitioner and the third respondent. This agreement is in relation to the sale of 12,00,000 equity shares of the Company by the petitioner in favour of the third respondent. The agreement envisages the terms and conditions of the ale of the shares. Clause 11 of the agreement provides that any dispute arising out of the agreement should be settled in accordance with the provisions of the Arbitration and Conciliation Act, 1996. Admittedly, the Company is not a party to this agreement, in which case, the Company cannot resort to arbitration, as held in M/s Gowri Spinning Mills Ltd. stated supra. The plea of learned senior counsel that by virtue of combining both the subscription agreement and the subsequent agreement entered in December, 2000, the petitioner and the Company become parties to the transactions, the devoid of merits in view of the fact that the subscription agreement is for purchase of shares by the petitioner from the Company and the subsequent agreement is for sale of the shares so acquired by the petitioner. The parties and purpose of these two agreements are different. While the Company is a necessary party in case of purchase of shares, it need not be a party for sale of the said shares by the petitioner. The Company need not and cannot be a party to the agreement entered in December, 2000. Therefore, the Company not being party to the agreement of December, 2000 cannot resort to arbitration.
6. The next issue before me is whether the allegations in the company petition are matters of differences arising out of the subscription agreement which contains an arbitration clause. A perusal of the petition shows that the petitioner has alleged several acts of oppression and mismanagement in the affairs of the Company. According to the petitioner, the respondents No. 2 & 3 committed fraud in the affairs of the Company in collusion with the other respondents; caused depletion in the assets of the Company, violated a number of Statue laws; misappropriated the grants provided by the Netherlands government; illegally diverted the Company's business to the fourth respondent etc, adversely affecting the financial position of the Company and thereby the Company became a shell company. With these alleged acts of oppression and mismanagement in the affairs of the Company, the petitioner has sought in the company petition the following reliefs:-
to supersede the Board of Directors of the Company;
to appoint two nominees of the petitioner in the Board of Directors of the Company and to amend the Articles of Association of the Company to ensure that the petitioner would have at least one-fourth representation in the Board of Directors of the Company;
to remove the third respondent from the Board of Directors of the Company;
to direct the respondents to restore the benefits including diversion of profits business assets taken away from the Company;
to direct initiation of misfeasance proceedings against the third respondent and to direct the third respondent to reply the misappropriated funds and return the assets of the Company; and to terminate the lease agreements entered into between the respondents and to order investigation into the affairs of the Company by the Central Government.
Whereas in the subscription agreement the Company has proposed a private placement of 12,00,000 equity shares of Rs. 10/- each at a premium of Rs. 30 per share aggregating Rs. 480 lakhs and the petitioner agreed to subscribe to the said shares on the terms and conditions prescribed therein. The parties to the agreement have formalized the terms and conditions of this arrangement by means of the subscription agreement, which enumerates the obligations of the parties, viz. the Company, the petitioner and the respondent No. 3 Thus, the subscription agreement is entirely for a different purpose. It is abundantly clear from the company petition that the allegations made therein and enumerated hereabove do not arise out of the subscription agreement. In other words, the matters, which arise out of the subscription agreement are independent of the company petition excepting Article 4.7 of the subscription agreement which stipulates that so long as the petitioner holds the shares in the Company, the petitioner would have the option to nominate two directors. At this juncture Section 8(1) of the Act, 1996 assumes importance which reads as under:-
"8.(1) A judicial authority before which an action is brought in a manner 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.
A strict interpretation of the provisions of Section 8(1) would indicate that only when the subject matter before the judicial body is the same as covered in an arbitration agreement, then such judicial body would be bound to refer the parties to arbitration, as held in Khandwala Securities Limited cited by counsel for the petitioner. Since in the instant case, all the matters in the company petition are independent of the subscription agreement other than the allegation in relation to nominee directors, I am of the view, that the acts of oppression and mismanagement alleged in the company petition have to be examined by the CLB and cannot be referred to arbitration. The case laws cited by learned counsel for the Company have no application to the case on hand, when especially, the matters covered in the company petition do not arise out of the subscription agreement. As far as the submissions of learned senior counsel for the Company that the entire foundation of the company petition is on the subscription agreement; that the petitioner had waived its rights under the subscription agreement by virtue of the subsequent agreement executed in December, 2000; that the petitioner, therefore, has no locus standi to prosecute the company petition and that the CLB should dismiss the company petition or refer the parties to arbitration will not hold good in Section 8 proceeding. However, the Company is at liberty to take preliminary objection on maintainability of the company petition, if so advised. For these reasons, the application is liable to be dismissed and accordingly it is dismissed. The respondents will file counter in the company petition by 31.01.2003 and rejoinder to be filed by 28.02.2003. The petition will be heard on a future date to be notified later.