Company Law Board
Pinamaneni Subb Rao And K.Y. Mok vs Semiconductors Limited on 30 December, 2003
Equivalent citations: [2004]53SCL58(CLB)
ORDER
K.K. Balu, Member
1. In this company petition filed by M/s Semi-conductors Limited ("the petitioner") under Section 397/398 of the Companies Act, 1956 ("the Act, 1956") in the affairs of M/s Teamasia Semi-conductors (India) Limited ("the Company"), respondents No. 2 & 3 have 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 Shareholders' Agreement (SHA) entered into, among others, the petitioner, the Company and respondents No. 2 & 3 and that the SHA provides for arbitration in respect of any dispute, difference for claim among the parties in connection with the terms of the SHA, and as such, in terms of Section 8 of the Act, 1996, the Company Law Board should refer the parties to arbitration and not proceed with the Company Petition.
2. According to Shri K. Sridhar, the learned Counsel appearing for the applicants, they are the promoter directors of the Company holding substantial number of shares. HSBC Private Equity India Fund Limited ("HPEIF") has invested in the Company, pursuant to the SHA entered on 12.06.2000 between HPEIF, the petitioner, exclusively formed as a special purpose vehicle by HPEIF, the Company, respondent Nos. 2 & 3 along with others. Shri Sridhar pointed out that Clause 20.2.1 of the SHA provides that any dispute, difference or claim arising out of or in connection with the SHA must be referred to and resolved by an arbitration and that the acts of oppression and mismanagement set out in the Company petition are in relation to the matters covered by the SHA. According to Sridhar, the disputes raised in the Company Petition are in relation to the SHA and the cause of action as well as the reliefs claimed by the petitioners are arising out of the SHA. The respondents have breached the terms and conditions of the SHA. The reliefs appropriate to the facts of the case could be granted by an arbitrator and therefore, sought for in limini dismissal of the Company Petition. The learned Counsel in support of his claim referred to the decisions in Bhadresh Kantilal Shah v. Magotteaux International and Ors. - (2000) 2 Comp LJ 323 (CLB) and (2002) Ar. WLJ 265.
3. Shri D.B. Saxena, learned Counsel appearing for the respondent-petitioner, at the outset contended that the proceedings under Sections 397, 398 and 402 contemplate representative action on behalf of and for the benefit of all the shareholders, creditors and for better management of the Company securing public interest and that individual disputes are not envisaged in these provisions. Shri Saxena, the learned Counsel pointed out that the applicants claiming themselves to be directors of the Company have committed a series of acts of mismanagement, viz., creation of liabilities on account of the Company, dilution of shareholding of subsidiary, disposing of assets of the subsidiary in contravention of the provisions of the Act etc., which cannot be the subject matter for arbitration. The learned Counsel further argued that no arbitrator can give any relief to the aggrieved person under Section 397/398 or pass any order under Section 402/403 and further contended that the provisions of the Act, 1996 will not apply to a petition under Section 397. Shri Saxena, the learned Counsel urged that these acts are independent of the SHA and, therefore, the present disputes cannot be referred to arbitration, in support which referred to the following decisions ; -
Manavendra Chitnis v. Leela Chitnis Studios P. Ltd. -[1985] 58 CC 113 - to show that "merely because there is an arbitration clause or an arbitration proceeding, or for that matter an award, the court's jurisdiction under Sections 397 and 398 of the Companies Act, 1956, cannot stand fettered. On the other hand, the matter which can form the subject-matter of a petition under Sections 397 and 398 cannot be the subject-matter of an arbitration, for an arbitrator can have no powers such as are conferred on the court by sections such as Section 402. Furthermore, the scope of a petition for setting aside the award and the petition under ss.397 and 398 are wholly different."
In re KARE P. Ltd. Surendra Kumar Dhawan v. R. Vir -[1977] 47 CC 276 -- to show that "the jurisdiction of the court under Section 397 and 398 of the Companies Act, 1956, or under Section 433 is concerned with the management of the company in the special circumstances provided in Sections 397 and 398 or for winding up when the situation provided in Section 433 arises. This is a statutory jurisdiction which cannot be ousted by arbitration clause."
Haryana Telecom Limited v. Sterlite Industries (India) Ltd. - [1999] 97 CC 675 - to show that the arbitration clause will not per se and oust jurisdiction of the winding up court.
C. Sri Hari Rao v. Sri Ramdas Motor Transport Ltd. - [1999] 97 CC 685 - to show that the Company Court alone has jurisdiction in the matter of winding up of a company and that an arbitrator has no jurisdiction to order winding up.
Prime Century City Developments Pvt. Ltd. v. Ansal Buildwell Ltd. - [2003] 113 CC 68 - to show that the existence of an arbitration clause cannot oust the jurisdiction of the Company court exercising its discretionary powers under Sections 433 and 434 of the Act.
4. Shri S. Murugavelu, the learned Counsel appearing on behalf of the Company represented by Shri T.K. Sudharsan, one of its Directors, submitted that the first applicant, one of the promoter Directors of the Company had resigned in November 2002. However, he was appointed again as Director by the second applicant on the same day which is invalid, for want of any Board resolution. Moreover, the petitioner's consent was not taken for the appointment of the applicant as director in terms of Article 31 of the Articles of Association of the Company as well as Clause 4.6 of the SHA. The second applicant who ceased to be a Director was not elected in the Board meeting held on 01.10.2003. Shri Murugavelu, the learned Counsel pointed out that the applicants are holding themselves out as directors of the Company contrary to the provisions of the, Act, especially when they are not appointed either by the Board of Directors or shareholders of the Company. The learned Counsel further contended that the acts of oppression and mismanagement raised in the Company Petition are independent of the SHA, which cannot be referred to arbitration and, therefore, prayed for dismissal of the application.
5. I have considered the arguments of the learned Counsel for the petitioner as well as respondents. The issue which arises for my consideration is whether the disputes raised in the Company Petition are arising out of or in connection with the SHA? Before answering the issue before me, the material provisions of the" Act, 1996, the relevant portion of the SHA containing arbitration clause, in the light of which, the nature of the subject disputes has to be examined and the acts of oppression and mismanagement must be borne in view. Section 8(1) of the Act, 1996 provides that "a judicial authority before which an action is brought in a matter which is the subject matter 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 a judicial authority is the same as covered in the agreement, then such judicial authority is bound to refer the parties to arbitration. Admittedly, Clause 20.2 of the SHA contains an arbitration clause which reads as under :-
"20.2.1 Any dispute, difference or claim related to or arising under, out of or in connection with this Agreement or any transaction here under shall be referred to and finally resolved by arbitration under the UNCITRAL Arbitration Rules to the exclusion of the courts of any country. Such Rules are deemed to be incorporated by reference into this Agreement. The arbitrator shall be a retired English, Australian or New Zealand judge of a superior court of record appointed by the Singapore International Arbitration Centre. Any such arbitration shall take place in Singapore before a sole arbitrator, the language of such arbitration shall be English, and a judgement may be entered into on the award by any court having jurisdiction thereof.
20.2.2 Where any dispute, difference or claim related to or arising under, out of or in connection with this Agreement also involves or may involve a dispute, claim or difference falling within the corresponding arbitration clause of any Ancillary Agreement, such dispute, difference or claim shall be referred to and resolved in a single set of arbitration proceedings."
It is abundantly clear from the above terms of the SHA that any dispute, difference or claim arising out of or in connection with the SHA or any transaction covered by any ancilliary agreement thereof shall be referred to and finally resolved by an arbitration. Against this background, it shall now be seen whether the disputes raised in the Company Petition are covered by the SHA or the subscription agreement dated 12.06.2000. A perusal of the Company petition shows that the petitioner has alleged the following acts of oppression and mismanagement in the affairs of the Company :-
The second respondent had appointed the third respondent in December 2002 as a director of the Company, without following the due process of law.
The third respondent, without convening the Board meeting or general meeting had appointed the second respondent on 02.06.2003 as an additional director in contravention of the SHA and the Articles of Association of the Company. No prior consent of the investors was obtained for the appointment of the third respondent, thereby contravening Article 4.6 of the SHA.
The third respondent had appointed respondent Nos. 4 to 7 as directors, alternate directors and Company Secretary respectively, without the knowledge of the Company or the Board of Directors or the investors, in contravention of the SHA and the Articles of Association of the Company.
The fourth respondent at the instigation of respondents 2 & 3 initiated frivolous proceedings before the High Court of Andhra Pradesh challenging the initiative taken by the petitioner for convening the general body meeting to constitute the Board of Directors of the Company, thereby oppressing the rights of the majority shareholders under the SHA.
The respondent Nos. 4 to 7 have been interfering in the affairs of the Company and its subsidiaries by sending a series of communications purported to be sent on behalf of the Company without any authority of the Board of Directors or members of the Company.
The respondents 4, 5 & 7 forcibly attempted to enter the registered office of the Company in October 2003 to take unlawful possession of the Company's records to meet their own ulterior motives.
The Company had invested funds through its wholly owned subsidiary TAM for purchase of 5,482,284 shares of common stock in the eighth respondent and appointed the second respondent as its nominee on the Board of Directors of the eighth respondent, while the second respondent was the Managing Director of the first respondent till November, 2002.
The first respondent had invested in 2000 directly by subscribing to the convertible debentures of short term nature of the eighth respondent to the tune of 3.5 millions for working capital operations to overcome the financial difficulties of the eighth respondent. Moreover, the eighth respondent failed to redeem the debentures on due dates. The Company and the eighth respondent have entered into a Security Agreement thereby granting security interest in favour of the Company to secure with the Property. The eighth respondent has been raising funds by diluting drastically the interest of the Company.
The second respondent not being a duly elected director has filed certain statutory records on behalf of the Company under the laws of the United States of America converting the interest on debentures to stock in the eighth respondent in lieu of cash and without receipt of prior consent of the majority shareholders or investors of the Company or the Reserve Bank of India.
The second respondent has converted the accrued interest on the convertible debentures by allotting shares of common stock in the eighth respondent in favour of the Company without consent of the Board of Directors or shareholders or the investors of the Company causing severe financial constraint on the Company.
The second and third respondents have terminated the local resident (Mauritius) directors of the ninth respondent in violation of the mandatory requirements of the Mauritius law without the consent and knowledge of the investors as well as the Company.
The respondent Nos. 2&3 have unilaterally terminated the services of the Company's attorney engaged for recovery of the outstanding payments due from the eighth respondent under the convertible debentures.
The respondents Nos. 2&3 have sold the assets of the Company at a lower price thereby causing loss and damages; Moreover, the sale proceeds on account of the product sale have neither been credited to the account of the Company.
The eighth respondent through respondent Nos. 2 & 3 have entered into an agreement to set up a joint-venture with a partner in Chennai for the transfer of their entire facilities of equipments and assets at USA without the consent and knowledge of the Board of Directors or the shareholders or the investors of the Company.
The respondents 2 & 3 have terminated the Company's security interest in the eighth respondent's assets without any authority from the Company or shareholders or investors.
The respondents No. 2 & 3 unlawfully declared bankruptcy of the eighth respondent thereby diluting the investments made by the Company in the eighth respondent.
The respondents 2 & 3 have played fraud on the Company by borrowing monies from the individual lenders based in Singapore by making false assurances and warranties on behalf of the Company without the knowledge and authority of the Board of Directors or the shareholders of the Company and routed such borrowed funds through their own entities. These borrowings are subsequently passed on to the Company creating a foreign liability of USD 1.35 millions.
The Company's wholly owned subsidiary, viz. M/s Teamasia Lakhi Semiconductors Ltd has supplied finished goods and inventory valued at USD 169,082 to M/s Global Plus Trading Company at Hong Kong at the instance of the respondent Nos. 2 & 3. Though the respondents have collected the monies and made profit for themselves, they tailed to settle the claim of the Company, thereby causing huge loss.
By virtue of the SHA, the parties have confirmed their understanding regarding the regulation of the affairs of the Company as well as the relationship among the promoters, investors, the Company etc. A perusal of the SHA shows that the disputes in regard to the appointment of directors and disposal of assets of the Company alone are covered by the SHA. The remaining matters which arise out of the Company Petition are found to be independent of the SHA. It has not been demonstrated as to how the disputes raised in the Company Petition are covered by the various clauses specified in the SHA. The application is rather silent on this vital aspect. It is found that the entire subject matter of the Company Petition is not covered by the SHA. Section 8 will apply only when the action brought in the matter and subject of the arbitration agreement are the same, in support of which beneficial reference is made to the following decisions:-
Khandwala Securities Limited v. Kowa Spinning Limited -1999 97 CC 362.
Gaya Electric Supply Co. Ltd. v. State of Bihar - AIR 1953 SC 182.
Garden Finance Ltd. v. Prakash Industries Ltd. - AIR 2002 Bom 8.
Bengal Jute Mill Co. Ltd. v. Lalchand Dugar - AIR 1963 Cal 405.
Hind Mercantile Corporation Pvt. Ltd. v. J.H. Rayner & Co. Ltd. - (1971) 41 Comp. Cas 548 (Mad) Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya - (2003) 3 Comp LJ 68 (SC).
As the proceedings have commenced before the CLB "as to a matter" which lie outside the SHA in respect of most of the matters 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. At this juncture, it is relevant to observe that any bifurcation of the subject matter of an action before a judicial authority is not allowed and there is also no provision for splitting the cause or parties and referring the subject matter of the Company Petition to an arbitrator as held by the Apex Court in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya - (2003) 3 Comp. LJ. 68. I am, therefore, 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. Similarly, the disputes raised in the Company Petition do not arise out of the subscription agreement dated 12.06.2000. In these circumstances, the prayer of the applicants to refer the parties to arbitration must fail. Accordingly, the application is dismissed. The respondents to the Company Petition will file counter by 31.01.2004 and rejoinder to be filed by 15.02.2004. The petition will be heard on 27.02.2004 at 2.30 p.m.