Company Law Board
Khandwala Securities Ltd. And Ors. vs Kowa Spinning Ltd. And Ors. on 28 June, 1999
Equivalent citations: [1999]97COMPCAS632(CLB)
ORDER
S. Balasubramanian, Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956 ("the Act), alleging acts of oppression and mismanagement in the affairs of Kowa Spinning Limited (the company), the respondents have raised a preliminary objection on the maintainability of the petition in terms of Sections 5 and 8 of the Arbitration and Conciliation Act, 1996.
2. The acts complained of in the petition relate to the following :
(a) The company has illegally and in contravention of the provisions of Section 370 of the Act diverted funds to the tune of Rs. 100 lakhs for expansion of its production facility to one Maya Spinners Limited, which is a company under the same management and control as the respondent-company.
(b) The company has illegally, in contravention of Section 370 of the Act invested in shares of a company under the same management and control to the extent of Rs. 225 crores.
(c) The company has failed to implement the expansion plan as contemplated under the sponsored agreement dated October 20, 1994, and to fulfil its obligations as set out therein,
(d) The company has, in violation of Section 171 of the Act, held its annual general meetings and extraordinary general meetings without giving notice thereof to the petitioner.
(e) The company is holding information from the petitioner which he is entitled to under the sponsorship agreement as well as in his capacity as shareholder of the company as provided under Section 163 of the Act.
(f) The company has failed to appoint a director nominated by the petitioner even though it was bound to do so under the terms of the said sponsorship agreement.
(g) The company, in violation of Section 78 of the Act, used funds from the share premium account for purposes other than those permitted by law.
3. With the above allegations, the petitioners have sought for various reliefs inter alia including directions to the respondents to buy back the shares held by the petitioners, directing the company to appoint a nominee of the petitioners as a director in terms of the sponsorship agreement, direction to the company to give inspection of the registers pursuant to Section 163 of the Act, direction to the company to give information in regard to contracts/arrangements entered into in pursuance of Sections 297 and 299 of the Act, appointment of an independent auditor to audit the accounts of the company, etc.
4. U.K. Choudhary, advocate for the respondents, moving the application C. A. No. 87 of 1999, submitted that the first petitioner entered into a sponsorship agreement with the company in terms of which certain obligations has been cast on the first petitioner. In view of its failure to comply with the terms of the sponsorship agreement, certain obligations on the part of the company were not fulfilled. Aggrieved by this, the petitioners have filed this petition without taking recourse to arbitration as provided in Clause 19 of the sponsorship agreement dated October 20, 1994. As per Section 8 of the Arbitration and Conciliation Act, the Company Law Board, being a judicial body, is bound to refer the parties to arbitration when there is an agreement to refer the disputes to arbitration. In other words, according to him, the first petitioner cannot invoke the provisions of Section 397/398 of the Act to pursue matters covered in the sponsorship agreement when there is specific provision in the agreement that disputes arising out of the agreement have to be referred to arbitration. He submitted that the foundation of this petition is based on the sponsorship agreement and most of the allegations also relate to the same and as such, the first petitioner should have invoked arbitration. As far as the other petitioners are concerned, he submitted that, they only hold, among themselves, only about 7.3 per cent. shares and as such are not qualified in terms of Section 399 of the Act. He also pointed out that in case of Escorts Finance Ltd. v. G.R. Solvents and Allied Industries Ltd. [1999] 96 Comp Cas 323 (CLB), in which also the petition was based on a sponsorship agreement which had an arbitration clause, the Company Law Board declined to entertain the petition and referred the parties to arbitration. Therefore, he prayed that the parties be referred to arbitration. Even otherwise, he submitted that the petition is not maintainable in face of the allegations contained in the petition.
5. Shri Haksar, senior advocate, appearing for the petitioners, submitted that even though some of the allegations in the petition and the reliefs sought thereon pertain to the sponsorship agreement, yet, the petition also contains various allegations of oppression and mismanagement which can be agitated in this petition. He submitted that these allegations mostly relate to non-compliance with the provisions of the Act resulting in mismanagement and oppression. While conceding that those allegations relating to the sponsorship agreement cannot be a subject-matter of this petition in view of the arbitration clause in the said agreement, he urged that those allegations which are not arising out of the sponsorship agreement should be examined by the Company Law Board. Referring to Escorts Finance Ltd. v. G.R. Solvents and Allied Industries Ltd. [1999] 96 Comp Cas 323 (CLB), he submitted that in that case, practically every allegation and the reliefs sought for fell within the purview of the sponsorship agreement and as such the Company Law Board declined to entertain the petition. But in the present case, it is not so as is evident from the allegations contained in the petition.
6. We have considered the arguments of the counsel. It is on record that the first petitioner and the respondents entered into a sponsorship agreement on October 24, 1994, and that Clause 19 of that agreement provides for arbitration in respect of disputes arising under that agreement. The said clause reads as follows : "Any dispute arising under this agreement shall be referred to a sole arbitrator to be appointed jointly by the sponsor and the company and venue of the arbitration shall be Bombay, The arbitrator's award shall be binding on both the parties". Section 8 of the Arbitration and Conciliation Act reads as follows : "A judicial authority before which an action is brought in o 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". In the present case it is an admitted fact that there is an arbitration clause in the sponsorship agreement and that the respondents have filed this application before submitting their first statement on the substance of the dispute. The only issue for consideration is whether the allegations in the petition arise out of the sponsorship agreement. We have already given, in a nut-shell, the allegations in the petition in para. 2 above. It is abundantly clear that other than the allegations in sub-paras. (c) and (f) of para. 2 above, other allegations do not arise out of the sponsorship agreement. In other words, this is the petition in which matters which arise out of the sponsorship agreement as well as those which are independent of the said agreement have been covered. A strict interpretation of the provisions of Section 8 df the Arbitration Act 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. Since in this case, there are allegations which are independent of the sponsorship agreement, we are of the view that these allegations have to be examined by us and cannot be referred to arbitration. The facts of Escorts Finance Ltd. v. G.R. Solvents and Allied Industries Ltd. [1999] 96 Comp Cas 323 (CLB) are different from the present one, inasmuch as, all the allegations in that case wholly related to a sponsorship agreement in which there was an arbitration clause and, therefore, the Company Law Board declined to entertain the petition and referred the parties to arbitration. As far as the submissions of Shri Chaudhary that the petition is otherwise also not maintainable in facts of the allegation, it is to be noted that when we deal with an application under Section 8 of the Arbitration Act, our role is limited to examining whether the subject-matter is covered by an arbitration agreement and not to examine whether the allegations merit consideration or not. This can be done only when the pleadings are completed.
7. In view of our finding that there are allegations in the petition which are independent of the sponsorship agreement, the prayer of the respondents in C. A. No. 87 of 1999, to refer the parties to arbitration and dismiss the petition is rejected. The respondents should file their replies covering all the allegations in the petition other than those at sub-paras. (c) and (f) of para. 2 above by August 1, 1999, and rejoinder, if any, will be filed by September 1, 1999. The petition will be heard on October 18, 1999, at 10.30 a.m.