Madras High Court
Gowri Spinning Mills Ltd., ... vs Adimoolam And Anr. on 23 November, 2001
Author: Prabha Sridevan
Bench: Prabha Sridevan
ORDER Prabha Sridevan, J.
1. The petitioners are the plaintiffs who filed O.S.No. 262 of 2000. The cause title in the plaint shows that the first petitioner, who is the first plaintiff is a company represented by the Managing Director and the second petitioner is the Chairman. The suit has been filed for injunction restraining the respondents from interfering with the administration and management of the first petitioner-company. The respondents filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') claiming that there was an arbitration agreement on 15.6.2000, which bound the parties, and therefore, the matter should be referred to arbitration. The Court below ordered the application and therefore, the revision.
2. Mr. M.S. Krishnan, learned counsel for the petitioners would submit that the agreement dated 15.6.2000 did not bind the first petitioner. He submitted that though the so called agreement was supposed to bind all the members of the company, it was in fact signed only by 14 members, the company is a separate entity and the company has not signed the agreement, the suit filed by the company cannot be stayed. He also made a reference to the agreement, in which the disputes that were arbitrable were, "(sic)" and which bears the signatures of 15 members. Therefore, according to him, the disputes of the members cannot be equated to the disputes relating to the company. He read out Section 7 of the Act and pointed out that the words used are 'by the parties' and therefore, the company is not the party, and Section 8 of the Act will not apply. He also referred to Section 26, 34, 36 and 255(2) of the companies Act and submitted that the effect of all these provisions is that there cannot be any by-passing of the Memorandum and Articles of Association by devising a mode of appointment of Chairman or Managing Director contrary to the provisions of the Companies Act. He also made clear that the provisions of the Companies Act takes care of the manner in which Managing Directors, Directors or Chairman can be removed or appointed. There are enough safeguards in the Company Law itself. He relied on several decisions:
(1) V.B. Rangaraj v. V.B. Gopalakrishnan and Ors., 1992 Comp. Cas 201; (2) S.S. Rajakumar v. Perfect Castings Private Ltd., 1968 Comp.Cas 187; (3) Sudhir Kumar Saha and Ors. v. J.N. Chemicals Private Ltd. and Ors., ; (4) Turner Morrison & Co. Ltd. v. Hungerford Investment Trust Ltd., (5) Shanti Prasad Jain v. Kalinga Tubes, (6) Shiv Omkar Maheshwari v. Bansidhar Jagannath, 1956 Bom. 459
3. Mr. S.V. Jayaraman, learned counsel appearing for the respondent submitted that the suit was not bona fide. He referred to Ex-A2, the award and pointed out that the pleading were contrary to it. He submitted that the alleged Managing Director of the Company, who had filed the suit and the second plaintiff, who is the second petitioner herein were both signatories of the agreement and they had also been appointed as the Managing Director and Chairman only by the agreement arrived at before the arbitrators/ the Panchayatars. Having obtained the benefit under the award, they cannot now go back upon it. He also submitted that the agreement itself is only in relation to the manner in which the company should be managed and the persons, who should be put in charge, that, therefore, it will not be proper to say that the agreement does not bind the Company. He referred to Section 16 of the Arbitration Act and submitted that the effect of award was as binding on the parties as a decree and that a party, who benefited by an award cannot thereafter challenge it. He further submitted that the appointment of the Directors was made by the Board passing the necessary resolutions, which approved of all the recommendations of the arbitrators. He relied on the following decisions:
(1) Kvaerner Cementation India Ltd. v. Bajranglal Agarwal & Anr., 2001 (6) Supreme 265; (2) Satish Kumar v. Surinder Kumar, ; (3) R.N. Gosain v. Yashpal Dhir, ; (4) Om Prakash Gupta v. Dr. Rattan Singh, 1963 (I) S.C.W.R. 333
4. The case of the respondents in brief are as follows:
The respondents herein are shareholders in the Company called Gowri Spinning Mills Pvt. Ltd. There appears to have been disputes among the shareholders and about fifteen of them entered into, what is called the arbitration agreement, dated 15.6.2000. This is marked as Ex-A1. It was stated in this document that there are two companies, Gowri Spinning Mills and Jayagowri Spinning Mills and all the signatories of the agreement are shareholders in both the companies. For the last 18 years, one G.A. Vadivel, who is allegedly the Managing Director of the petitioner-Company and one K. Kumar had been in management in the company. Subsequently, there was some misunderstanding amongst the shareholders and in the Executive Committee Meeting, the second respondent herein was appointed as the Managing Director and one Elango as the Chairman. Thereafter, on 17.4.2000, there was a general body meeting where this appointment was accepted. In spite of this, disputes could not be solved and therefore, they appointed one P.V. Balasubramanian, one V. Ponmudi and one K.V. Muthial as the arbitrators to resolve their disputes. This is the content of Ex-A1. Thereafter, according to the respondent, an award was passed on 30.7.2000, which is marked as Ex-A2. Under this award inter alia, D1 was appointed as Managing Director and the second petitioner was appointed as the Chairman. The alleged award also says that necessary resolutions should be passed in terms of this award and after obtaining the copy of the resolution from the arbitrators the appointees should take charge. As per the award, this arrangement should continue till 31.3.2002 and in the interim period if there are any further disputes the arbitrators will resolve it. Therefore, according to the respondent, when there is an arbitration agreement, the petitioners ought not to approach the Civil Court for resolution of any dispute. The first petitioner-company is represented by the Managing Director, G.A. Vadivel and the second petitioner and originally from 5.12.1999 to 9.8.2000, the first petitioner and from 9.8.2000 to 30.11.2000 the first respondent were the Managing Directors. According to the petitioner, thereafter, on 28.8.2000 at the Directors' Meeting the first respondent tendered his resignation and pursuant to that the present Managing Director was appointed and as an interim arrangement until 30.11.2000, the first respondent was permitted to act as the Managing Director. On the basis of the above resolution, G.A. Vadivel has been functioning as the Managing Director from 1.12.2000. Thereafter, since the respondents tried to interfere with the smooth administration of the petitioner-company, the suit was filed for permanent injunction. On the face, of the agreement Ex-A1, it is seen that the company is not a party. This is the focal point on which the argument of the learned counsel for the petitioners rests. When the petitioner-company is not a party to the arbitration agreement there can be no bar to the company resorting to the Civil Court. According to the learned senior counsel for the respondent however, the original appointment of G.A. Vadivel was itself on the basis of the arbitrators' award and having derived the benefit of it now he cannot challenge the arbitrators' power to decide the dispute, when the aforesaid G.A. Vadivel and the second petitioner themselves had signed the agreement.
5. Section 7 of the Act defines arbitration agreement as an agreement by the parties to submit to arbitration. The word 'party' is defined in Section 2(h) of the Act as a party to an arbitration agreement. Section 8 of the Act, which gives the power to a judicial authority, also employs the word 'parties'. The Section reads thus:
"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."
Therefore, the word 'parties' can only mean parties to an arbitration agreement. There is no dispute that the plaint reads as if the Company had filed the suit. The respondents have questioned the rights of this G.A. Vadivel to act as the Managing Director of the Company. To decide whether he has the authority would go beyond the scope of this revision. The arbitration agreement is a contract like any other contract.
6. Section 46 of the Companies Act reads thus:
Section 46. Form of Contracts: - (1) Contracts on behalf of a company may be made as follows:
(a) a contract which, if made between private persons, would by law be required to be in writing signed by the parties to be charged therewith, may be made on behalf of the company in writing signed by any person acting under its authority, express or implied, and may in the same manner be varied or discharged;
(b) a contract which, if made between private persons, would by law be valid although made by parol only and not reduced into writing, may be made by parol on behalf of the company by any person acting under its authority, express or implied, and may in the same manner be varied or discharged.
(2) A contract made according to this section shall bind the company.
Consequence of this is that for a company to enter into a contract it must be signed or made by a person acting under its authority, which may be express or implied. The intention must be clear from the contract that the person, who is signing it, is doing so on behalf of the company, or he is acting for or on account of the company. The company is not a living person and can only act through agents. But this Section makes it clear that the circumstances under which contracts on behalf of a company will be valid, by which we also understand the conditions which should exist to show that the contract has been made on behalf of the company whether it is in writing or parol.
7. In the affidavit filed in support of the application under Section 8 of the Act it is no doubt stated that there is a valid, lawful and binding agreement of arbitration between the respondents and the petitioners and that the petitioners had also agreed to accept and obey the said award. Neither in the agreement nor in the affidavit is there any material to show that the agreement dated 15.6.2000 was executed on behalf of the company. In fact, the agreement, dated 15.6.2000, refers not only to the petitioner-company but also to the Jayagowri Spinning Mill. Therefore, on the face of the agreement it is difficult to come to the conclusion that the agreement was signed on behalf of the company. The learned counsel for the petitioner submitted that not all the shareholders have signed the agreement, dated 15.6.2000 and therefore, some of the shareholders cannot arbitrarily bind the company to the course of action, which is acceded to by the other shareholders. Even otherwise, the agreement does not show which of the signatories to the award had the authority express or implied to sign on behalf of the company, if in fact somebody did so. From a reading of the agreement, what emerges is that some of the shareholders had agreed to resolve their dispute by resorting to arbitration. When the company is not a party to the arbitration agreement, Section 8 of the Act will not apply.
8. Let us look at the decisions cited by both the counsel.
(I) Shanti Prasad Jain v. Kalinga Tubes, .
In this decision, it was held that when a company was not a party to an agreement and the agreement was not made part of Articles of Association, which is not binding in the case of fresh issue.
(2) Shiv Omkar Maheshwari v. Bansidhar Jagannath, : In this decision, the construction of Articles of Association is dealt with and when the disputes of the transactions or dealings is not covered by an Articles of Association, no obligation had been imposed upon any member to refer such a dispute to the arbitration.
(3) V.B. Rangaraj v. V.B. Gopalakrishnan and others, 1992 CompCas 201 :
In this decision, it was held that the terms of agreement contrary to articles would not bind the company or its members.
(4) S.S. Rajakumar v. Perfect Castings Private ltd. 1968 Comp Cas 187 :
In this decision, it was held that the company's Articles of Association is its magna carta and no shareholder can contend that there was an independent contract de hors the articles contemplating joint management which would virtually be re-writing the articles and importing into it something which it does not mean.
(5) Sudhir Kumar Saha and others v. J.N. Chemicals Private Ltd. And others, : In this decision, the-Calcutta High Court refused to stay the suit on an interpretation of the arbitration agreement. In that the company was a family company. A suit was filed by the company for a declaration that the award of the arbitrator was invalid. Section 34 of the Old Arbitration Act was invoked and stay, of suit was not granted. It was held that what was referred to arbitration by the said agreement where the disputes and differences of directors to sign the agreement and since the company was neither a party nor is made a party to the said agreement, the suit filed by the company cannot be stayed. This applies squarely to the present case.
(6) Turner Morrison & Co. Ltd. v. Hunger ford Investment Trust Ltd., :
In this decision, the Calcutta High Court held that the holding company and the subsidiary company each had a separate corporate veil. Because the company is a holding company it does not mean that the holding company and the subsidiary company will constitute one entity. It was held that the corporate veil still remains.
9. As regards the decision relied by the learned senior counsel for the respondent, they will not come to their aid.
{1) Satish Kumar v. Surinder Kumar, ; (3) R.N. Gosain v. Yashpal Dhir, :
In this decision, it was held that the law does not permit a person to both approbate and reprobate and no party can accept and reject the same instrument.
This was referred to show that G.A. Vadivel, the alleged Managing Director and the second petitioner could not take advantage of the arbitration award and then attack it. But here, the question is whether the company was a party to the arbitration agreement and therefore, this decision will not apply to the case on hand.
(2) Satish Kumar v. Surinder Kumar, :
In this decision, the binding effect of an award is considered and this will not have any application to this case.
(3) Kvaerner Cementation India Ltd. v. Bajranglal Agarwal & Anr., 2001 (6) Supreme 265: In this decision, it was held that an arbitrator can even go into the objection relating to the existence and validity of the arbitration agreement. This was relied on by the learned senior counsel for the purpose that the arbitrator can decide whether he has jurisdiction to decide the dispute that is raised in the suit. That case arose under Section 5, 16 and 34 of the Act.
Here, the respondents seek the intervention of he Court under Section 8 of the Act. The Court functioning as a judicial authority exercising its power under Section 8 of the Act can only, refer parties to arbitration. Parties mean parties to an arbitration agreement. Since it has been held that the first petitioner-company is not a party, Section 8 cannot be invoked.
10. In Heavy Engineering Mazdoor Union v. State of Bihar and Ors., , the question arose whether a company in which the shares are owned by the President of India and some officials is a agent of the Central Government. The Supreme Court held that an incorporated company has a separate existence and the law recognizing it as a separate and distinct from its members. This new personality emerges from the moment of its incorporation and its rights and obligations are different from those of its shareholders. The mere fact that the entire share capital of the Heavy Engineering Corporation Ltd., Ranchi was contributed by the Central Government and the fact that all its shares are held by the President and certain officers of the Central Government does not make any difference. The company and the shareholders being, distinct entities, this fact does not make the company an agent either of the President or the Central Government.
11. This decision is referred to only for the purpose of showing that the rights and obligations of the shareholders under the arbitration agreement is not the same as the right of the company unless it is shown to be so. At this stage, it is not possible for the Court to come to a conclusion, that the agreement had been entered into on behalf of the company for referring the matter straightway to arbitration. A juristic person, who is to a party to an arbitration agreement, cannot be compelled to go before the arbitrator in an application under Section 8 of the Act.
12. For all these reasons, the impugned order is set aside. The civil revision petition is allowed. No costs. Consequently, the connected miscellaneous petitions are closed.