Company Law Board
Gautam Kapur And Ors. vs Limrose Engineering And Ors. on 16 February, 2004
ORDER
S. Balasubramanian, Chairman
1. The petitioners claiming to hold substantial shares in M/S Limrose Engineering Works Private Limited (the company) have filed this petition under Sections 397/398 of the Companies Act, 1956 alleging oppression and mismanagement in the affairs of the company.
2. The facts of the case are: The petitioners and the 2nd respondent are all members of one Kapur family. The promoter of this group was one Janki Dass Kapur who was survived by three sons Shri Bishamber Das Kapur,Jaidev Kapur and Jagdish Kapur. Thus, there are presently, three identifiable groups being petitioners 1 and 3 (sons of Jaidev Kapur) , petitioners 2 and 4 (sons of Jagdish Kapur) and the 2nd respondent (son of Bishamber Das Kapur). The family controls/manages a number of entities - both incorporated or otherwise, the companies including one M/s. Atlas Cycle Industries Limited, a listed company, in which the company holds substantial shares. Each group holds 1/3rd shares in the company and each group had equal representation on the Board. The members of Kapur family entered into a Memorandum of Understanding on 8th January, 1999 wherein it was agreed that various entities and also assets and properties jointly held by the family including properties and assets held through various companies, firms etc. shall be divided equally among the three groups of the family by means of lots and each unit shall thereafter manage business/properties coming under respective lot. One of the terms of the MOU is that till the draw of lot, no change will be made unilaterally in the practices being followed in different companies and status quo would be maintained. The MOU also contained an arbitration clause that any disputes arising out of the said MOU would be referred to Shri Justice Ahmedi, former Chief Justice of India. In pursuant to this clause, in view of certain disputes, arbitration proceedings have commenced and are pending.
3. The main complaint of the petitioners in this petition are that even though the company is a family company in the nature of a partnership, the 1st and 2nd petitioners had been illegally removed as directors of the company and further shares have been issued exclusively to the respondents' group and that 3rd, 4th and 5th respondents have been co-opted as directors. According to the petitioners, one of the terms of the MOU was that the members of Kapur family holding positions in the group companies shall continue to hold such positions till the MOU was worked out. However, by removing the petitioner directors and issuing further shares and appointing his own wife and two sons as directors, the 2nd respondent has acted in a manner oppressive to the petitioners.
4. The 2nd respondent has filed this instant application CA in terms of Section 8 of Arbitration and Conciliation Act, 1996 seeking for referring the disputes to arbitration on the ground that the issues raised in the, petition arise out of the MOU which contains an arbitration Clause.
5. Shri Tiku, Sr. Advocate appearing for the respondents/applicants submitted: The disputes raised in the petition fall squarely within the jurisdiction of the arbitrator in terms of the arbitration clause in the MOU. When the MOU was under implementation, Bishamber Dass Kapur expired in August, 2000 where after the dispute started among the three groups and accordingly, the 2nd respondent invoked Section 17 of the Arbitration Act consequent to which the arbitrator Shri Justice Ahmedi has commenced the arbitration proceedings. During the arbitration proceedings, by an application dated 7.4.2001, the petitioners filed an application more or less or the same grounds as in the petition seeking for similar relief as in the petition in regard to the shares as well as directorship In his order dated 28.12.2001 the learned arbitrator has Observed: "Shri Arun Kapur has undoubtedly disturbed the status quo in respect of the directorship and shareholding of Limrose. Such unilateral action on his part would also interfere with the requirement of maintaining status quo, so important to fix the 3 baskets. It goes without saying the disturbance of status quo from time to time would make it difficult to decide on the 3 baskets. The importance of that was understood when the MOU was drawn up and must be maintained. Since I do not see any substance in the objection raised in the reply and urged before me by the learned, counsel for Shri Arun Kapur, I think that in view of Shri Arun Kapur having disturbed the status quo by removing Shri Salil Kapur and Shri Gautam Kapur as directors without their consent and knowledge and having disturbed the shareholding by issuing new shares, the relief claimed in paragraph 15(a) and 15(b) deserves to be granted. I therefore give the directions sought in terms of the two paragraphs (a)(b) of paragraph 15 of the application under consideration ". As a matter of fact, when this application was heard, the 2nd respondent contended that the application was not maintainable before the arbitrator as the grievances in the application had to be raised before the Company Law Board. However, the petitioners contended that the Company Law Board would not entertain these complaints as they were covered by the MOU and as such arbitrator had the jurisdiction. The learned arbitrator had observed in his order 28.12.2001 " In the reply filed by Shri Arun Kapur, it is further stated that Company Law Board alone can have jurisdiction and that in any case the issue in question falls outside the scope of this arbitration ...Shri Makkar therefore rightly pointed out that if he moves CLB for the relief, which he seeks in the present application, he would be tossed back to the arbitrator in view of these two decisions of the Board. I see consideration force in this submission and therefore the objection in this behalf cannot be sustained". Since the arbitrator has already ruled his jurisdiction over the subject matter in the present petition, the Company Law Board cannot proceed with the petition and should leave it to the arbitrator to decide in terms of Section 8 of the Arbitration Act. This Board has taken a consistent view that if the matters covered in a petition under Sections 397/398 are covered by an arbitration agreement, then, on an application under Section 8 of the Arbitration Act, the matter would be relegated to arbitration - Bhadresh Kantilal Shah v. Magotteaux International and Ors. 2000 2 Comp LJ 323 CLB; Naveen Kedia Chennai Power Corporation 1998 4 CLJ 128, 20th Century Power Corporation Ltd. v. RFB Latex Limited 1997 CC 636. The Supreme Court also, in Hindustan Petroleum Corporation Ltd. v. Pink City Midway Petroleum 2003 (5) Scale, has decided that once there is an arbitration agreement, it is obligatory for the court to refer the parties to arbitration and it is for the arbitral tribunal to rule on its own jurisdiction including ruling on any objection with respect to the existence or validity of the arbitration agreement. In P. Dar Anand Gajapathi Raju v. P.K.G. Raju also, the Supreme Court has held that the language of Section 8 is peremptory and therefore it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in the original action. In view of these decisions and since the learned arbitrator is already seized of the very matter that is being agitated in this petition, this Board should not proceed with the petition and leave it to the arbitrator to decide.
6. Shri Makkar, Advocate and Shri Sarkar, Sr Advocate appearing for the petitioners/non applicant submitted: The application filed by the applicants is not maintainable for various reasons. The allegations in this petitioji relate to the oppressive conduct of the respondents in the affairs of the company and not in relation to the breach of the terms of the MOU which is before the Arbitrator. Creation of a new majority and exclusion of a family members from management in a family company are grave acts of oppression which could be redressed only by the Company Law Board. Moreover, the company is not a party to the MOU and therefore, the arbitration clause in that MOU does not bind the company and the learned Arbitrator cannot, therefore pass any orders in respect of the company more so in respect of the prayer relating to investigation into the affaires of the company as sought for by the petitioners. Further the 5th and 6th petitioners and respondents 3 to 5 are also not parties to the arbitration agreement. The signatories to the Memorandum are only the members of the Kapur family and none of the companies in the group including M/S Limrose is party to the MOU. This Board has, in Magotteaux case, held that if parties are not common, then the matter cannot be referred to arbitration. Since the petitioners have exercised their statutory rights as members of the company to move the CLB on allegations of oppression, the statutory rights cannot be curbed by referring the matter to arbitration, rnoreso, because, the Arbitral Tribunal cannot exercise the wide powers under Section 402 of the Act. The application before the learned arbitrator as referred to by the applicants was moved by the brothers of the 2nd respondent and not by the petitioners and the relief granted by the learned Arbitrator was also only with reference to the exercise of Voting rights in another company Viz M/s Atlas. Therefore, it is not correct to say that the petitioners have sought similar reliefs in the arbitration proceedings. Thus, neither legally or in facts of this case, the allegations in the petition can be referred to the Arbitrator.
7. I have considered the matter carefully. The main allegations in the petition are that the 2nd respondent had issued further shares and has also removed the petitioner directors and in their place appointed his own family members, thus taking over the full control of the company in exclusion of the petitioners. These acts, according to the petitioners, are acts of oppression. According to them, the 2nd respondent is guilty of fabrication of records and therefore there should be an investigation into the affairs of the company. One of the objection of the petitioners to this application under Section 8, is, that even though there is an MOU containing an arbitration clause, there is no commonality of the parties to the proceedings and the parties to the arbitration agreement as is evident from the fact that the company, 5th and 6th petitioners and 3rd to 5th respondents are not parties to the arbitration agreement. Another objection is that since the petitioners are exercising their rights as shareholders, their statutory right cannot be curbed by referring the matter to arbitration. Further, allegations of oppression cannot be a subject matter of arbitration as the Arbitral Tribunal cannot grant all the reliefs sought in the petition.
8. It is on record that complaints relating to issue of shares and directorship were made before the learned arbitrator, not as acts of oppression but as a breach of the terms of the MOU. In those proceedings, the applicants/respondents before me raised an objection that the matters complained of had to be agitated before the CLB while the petitioners urged that the learned arbitrator had jurisdiction to decide the same. The learned arbitrator has ruled that he has jurisdiction in the matter and has also recorded an undertaking from the respondents that status quo ante in respect of both the issues would be restored. Now the issue for my consideration is, when the subject matter being the same before me and the learned arbitrator, (irrespective of who has raised the same before the arbitrator) who has already ruled that he has jurisdiction and has also recorded an undertaking, whether I should continue with the petition on the grounds advanced by the petitioners or relegate the matter to the learned arbitrator in terms of Section 8 of the Arbitration and Conciliation Act.
9. Section 8 of Arbitration and Reconciliation Act, 1996 reads "A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if the party so applies not later than when submitting his first statement on the substance of the dispute refer the parties to arbitration". In Gajapathi Raju's case, the Apex Court has elaborated this Section to state that for referring the parties to arbitration, the Court should be satisfied that (1) There is an arbitration agreement (2) A party to the agreement brings an action in the court against the other party (3) Subject matter of the action is the same as the subject matter of the arbitration agreement (4) The other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute. This would indicate that to refer the parties to Arbitration, all these requirements have to be satisfied. As far as the first requirement is concerned that there is an MOU containing arbitration agreement. The second requirement is that, a party to the agreement brings an action in the court against the other party. It would indicate that the lis should be between the parties to the arbitration agreement. In other words there should be commonality of parties. In the MOU under the head of various undertakings of the family, which are to be divided into 3 lots, the name of the company is mentioned. However, none with the authority of the company has signed the same on behalf of the company. This MOU is exclusively among the male members of Kapur family as is evident from the recital of the parties to the MOU and their signatures. Even if that all the members who are members of the company sign the MOU, yet, legally, they cannot bind the company without a formal authority of the Board/members. Mere mention of the company as part of the settlement process would not make it a party to the arbitration agreement. Further 5th f and 6th petitioners, being shareholders of the company and who can, by themselves could have filed this petition, have also joined this petition, are not parties to the MOU. The fact that the companies mentioned in the MOU are not parties to the MOU has also been recognized by the learned Arbitrator. In his order dated 4.4.2001, the learned Arbitrator has recorded " I explained to him that the scope of the reference before me is confined to what has been mentioned in the MOU dated 8th January 1999 and since the company Atlas Cycle Industries Ltd and non family members are not party to the MOU it would be difficult for me to issue any directive to the Board of Directors, I am aware that the reference under MOU is limited and it may not be possible to issue any directions to the Board, but since his clients are on the Board they could exercise restraint to avoid aggravation of the disputes". Thus it is crystal clear that the company in the affairs of which acts of oppression/mismanagement have been alleged is not a party to the arbitration agreement. Thus one of the requirements as enunciated by the Apex Court that there should be commonality of parties is not satisfied. This Board has held in Magotteaux case, that there should be commonality of parties failing which the application under Section 8 would not lie. The learned Counsel for the respondents contended that, in view of the decision of the Apex Court in Hindustan Petroleum case that once there is an arbitration agreement, the matter should be referred to Arbitration, I am of the view that the said judgment can apply only when there is commonality of parties. This very aspect has been considered by the Apex Court in Sukanya Holdings(P) Ltd V Jayesh Pandya (2003 3 CLJ 68 -SC) wherein the Court held "Where, however, a suit is commenced -- "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8" (para 15). Since there is no commonality of the parties to the present proceeding and the arbitration agreement, the second requirement as per Apex Court judgment in Sukanya Holding is not satisfied.
10. As far as the third requirement relating to subject matter is concerned, I feel that it requires some elaboration. 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 although the disputes may be out side the scope of the agreement just to deaft 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.
11. In view of the findings that there is no commonality of parties and that the allegations of oppression could be examined without reference to the arbitration agreement, this application is dismissed. The respondents will file their replies to the petition by 31-3-2004 and the rejoinder will be filed by 30-4-004. The petition will be heard on 6.5.2004 at 10.30. AM