Company Law Board
Suresh Kumar Jain And Ors. vs Hindustan Ferro Industries Limited And ... on 15 June, 1998
Equivalent citations: [1999]96COMPCAS507(CLB)
ORDER
1. This is an application filed by respondent No. 2 in C. P. No. 55 of 1996, a proceeding under sections 397 and 398 of the Companies Act, 1956, initiated by the petitioner, Suresh Kumar Jain and others, in October, 1996, alleging, inter alia, oppression and mismanagement in the affairs of the company. By this application the petitioner is praying for further proceedings in C. P. No. 55 of 1996 to be kept in abeyance till the final adjudication by the sole arbitrator under the agreement dated August 6, 1996.
2. It is alleged in the instant application that respondents Nos. 2, 3, 7 and 10 along with petitioner No. 1 in C. P. No. 55 of 1996 (hereinafter referred to as the main petition) entered into an agreement dated August 6, 1996, whereunder it transpired that petitioner No. 1 would purchase the shares of, inter alia, the respondents at an agreed rate total sum in excess of Rs. 10 crores. It is further alleged that the said agreement dated August 6, 1996, had an arbitration clause with one Shri Amitav Kothari being appointed as the sole arbitrator.
3. The petitioner in the instant application who is respondent No. 2 in the main application has stated that the disputes raised by petitioner No. 1 the said Suresh Kumar Jain in his petition under sections 397 and 398 of the Companies Act, 1956, before the Company Law Board are substantially the same disputes on which the arbitrator is required to adjudicate in terms of the agreement dated August 6, 1996.
4. Petitioner No. 1, being the respondent in this application, has opposed this application alleging, inter alia, that the said agreement dated August 6, 1996, is not an arbitration agreement between the parties to the main petition before the Company Law Board, the said Amitav Kothari described as purported arbitrator was required to function only as stake holder or escrow agent and the parties to the said agreement did not confer any power on the person sought to be named as arbitrator to adjudicate any dispute. Petitioner No. 1 by his reply states that the other parties to the said agreement dated August 6, 1996, have not sought to enforce the said purported arbitration agreement, and further the subject-matter of the said agreement is not capable of being a subject-matter of any arbitration agreement.
5. It is contended on behalf of petitioner No. 1 that respondent No. 2, the applicant in the instant application, has challenged the maintainability of the main petition being Company Petition No. 55 of 1996 on the ground of pendency of the suit in the Calcutta High Court covering the same subject-matter, and also on the competency of petitioner No. 1 in moving the said main petition. It is stated by petitioner No. 1 that several affidavits were exchanged between the parties both in the said suit in the Calcutta High Court as also this main proceedings before the Company Law Board under sections 397 and 398 of the Companies Act, 1956, as to maintainability of the said suit or the main petition but it was never urged by respondent No. 2, the applicant herein at any earlier stage that the disputes as raised in the present proceeding being C. P. No. 55 of 1996 were covered by the said purported arbitration agreement.
6. It is the further case of petitioner No. 1 that petitioner No. 1 made several interlocutory applications seeking various interim reliefs both in the main proceedings before the Company Law Board, as also in the suit in the Calcutta High Court. Respondent No. 2 the applicant herein, contested the said several interlocutory applications dealing with the merits of the case of petitioner No. 1 both in the said suit as also this main proceedings amounting to first statement on the substance of the dispute. According to petitioner No. 1 respondent No. 2, the applicant herein, having made futile attempts to stall the main proceeding now pending before the Company Law Board, has now come up with their present application after 13 months of filing the main petition by petitioner No. 1.
7. Relying' on the decision of the Division Bench of the Calcutta High Court in Engineers India Limited v. D Wren International Limited [1997] I CHN Shri Ajay Gupta, learned counsel for the applicant submitted that as per Section 5 of the Arbitration and Conciliation Act, 1996, no judicial authority shall intervene in matters covered by an arbitration agreement. According to him, this bar of jurisdiction is much more stringent than in the earlier Arbitration Act of 1940, and even the High Court cannot exercise its extraordinary jurisdiction under Article 226 of the Constitution of India to intervene in matters covered by the arbitration agreement. He also referred to Section 42 of the said Act on the jurisdiction aspect. Therefore, according to him, we should not entertain the petition containing matters on which there is an arbitration agreement.
8. Mr. Gupta has further submitted that the subject-matter of the present proceedings under sections 397 and 398 of the Companies Act, 1956, is fully covered by the said arbitration agreement dated August, 6, 1996, and the Company Law Board, being a judicial authority shall under Section 8 of the Arbitration Act, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. He submits that the provisions under Section 8 are of mandatory nature, and there is no scope for any discretion. He further submits that respondent No. 2, the applicant in the instant application, has not submitted his first statement on the substance of the dispute.
9. Mr. Sudipto Sarkar, appearing on behalf of the respondent in the instant application who is the petitioner in the main application, submits that respondent No. 2 cannot now have recourse to Section 8 of the said Arbitration Act of 1996, having already submitted his first statement on the substance of the dispute between the parties in the shape of an affidavit affirmed by respondent No. 2 herein on December 2, 1996. Mr. Sarkar also submits that Section 397 proceedings are essentially in the nature of winding up of a company and can also be equated with the winding up proceedings of the company and such proceedings cannot be the subject-matter of the arbitration proceedings. In support of this proposition, he cites Hind Mercantile Corporation P. Ltd. v. Rayner (J. H.) and Co. Ltd. [1971] 41 Comp Gas 548 (Mad), Kare P. Ltd., In re [1977] 47 Comp Cas 276 (Delhi), Manavendra Chitnis v. Leela Chitnis Studios P. Ltd. [1985] 58 Comp Cas 113 (Bom). It is also his submission that on a comparative reasoning an action of dissolution of partnership cannot be the subject-matter of arbitration and in support of this argument he has placed reliance on a decision of the Calcutta High Court in AIR 1997 Cal 130 (sic).
10. Mr. Sarkar has also argued that in a proceeding under Section 397 of the Companies Act the reliefs claimed in this proceeding can only be granted by the Company Law Board and such reliefs cannot be granted by an arbitrator in any arbitration proceedings. It is his further submission that any statutory rights conferred by any special statute, namely, the Companies Act, 1956, cannot be taken away by any arbitration agreement between the parties. Finally, Mr. Sarkar argues that this application is a much belated application and is clearly an afterthought, the sole object being to stall the proceedings now pending before the Company Law Board since October 17, 1996. He has further submitted that until this application, respondent No. 2 has not raised in any of its pleadings raising preliminary objection as to the maintainability of the main petition that there has been an arbitration agreement between the parties or that the subject-matter of the main petition is fully covered by the said alleged arbitration agreement.
11. Mr. Sarkar referring to Section 8 of the Arbitration Act submits that an applicant would be debarred from invoking an arbitration agreement, if he submits his first statement on the substance of the dispute in his reply to the main proceeding or in any interim or in any affidavits used in any of the interlocutory proceedings contesting the substance of disputes as raised in the main proceeding under sections 397 and 398 of the Companies Act. Mr. Sarkar drew our attention to affidavits wherein respondent No. 2 while raising a preliminary objection as to the maintainability of the main petition, seriously and strenuously contested the case of petitioner No. 1 and others in the main petition as also the suit in the Calcutta High Court. He finally submits that this application should be rejected as not being made in the first instance immediately after the said main proceedings were filed.
We have heard counsel for the respective parties. The parties have also submitted written notes of arguments after obtaining our leave.
Let us first dispose of the submissions of Mr Gupta on the scope of Section 5 of the Arbitration and Conciliation Act, 1996, which, inter alia, provides that, "notwithstanding anything contained in any law for the time being in force, in any matters governed by this part, no judicial authority shall intervene except where so provided in this part". He also relied on the decision of Calcutta High Court in Engineers India Limited's case [1997] I CHN.
12. A careful reading of Section 5 would show that it is not that judicial intervention in a matter covered by arbitration agreement is barred. It only provides that no judicial authority shall intervene in matters governed by Part I, except where so provided in that part. In Part I, in various sections the role of a judicial authority/court has been specifically stipulated and by virtue of Section 5, a judicial authority cannot intervene in any other matters in that part except as provided in that part. One such section which deals with the role of a judicial authority is Section 8 and if we are to approve of the arguments of learned counsel for the applicant, then the provisions of Section 8 would become redundant, in as much as, this section authorises the judicial authority to proceed with a matter covered under arbitration, in case, no one applies for referring the matter to arbitration before submitting his first statement on the substance of the dispute. This being the case, we do not consider that the provisions of Section 5 act as a bar to entertain an application on matters on which there is an arbitration agreement. As far as the decision of the Calcutta High Court in Engineers India Limited's case [1997] I CHN is concerned, since the decision of the court was with reference to a writ petition, this decision may not be directly applicable to a proceeding under Section 397/398.
Now, we have to see whether the applicant before moving this application under Section 8 of the Arbitration Act, 1996, has submitted his first statement on the substance of the dispute. If it is found that he has so submitted at any stage of the proceedings his first statement on the substance of the dispute, then this present application is not sustainable.
13. It will appear from the main petition in the proceedings under sections 397 and 398 of the Companies Act, 1956, that petitioner No. 1, the respondent in the present application, has extensively dealt with the said agreement dated August 6, 1996, being annexure A-9 to the said main petition, now being relied on by respondent No. 2, the applicant in this application annexing the copy of the self-same agreement. The petitioners have stated in the said main petition that the said agreement has been referred to demonstrate the acts of oppression and mismanagement committed by the respondent and his group known as the AKD group vis-a-vis the company. Some serious allegations Of siphoning off of funds by the AKD group, under invoicing, over invoicing, etc., have been made in the main petition.
14. There is no denying the" fact that the applicant herein had definite knowledge of the said agreement to which he was a party, from the day the main petition was filed before the Company Law Board. For thirteen long months the applicant had been silent about this agreement, which according to him was an arbitration agreement and the parties should be held to their bargain, and further when he appeared from time to time before us through his counsel, there was no whisper of this alleged arbitration agreement. Further, he did not take any steps for moving any application for stay of the proceedings before us on the ground of arbitration agreement before submitting any first statement on the substance of the dispute. More so, it will also appear from the said affidavit affirmed in December, 1996, on behalf of respondent No. 2, the applicant herein, that he relied on the said agreement dated August 6, 1996, described by him as an arbitration agreement being annexure R-1 in the said affidavit as well to make out his defence to the case made out by the petitioner in the main petition and the application for interim orders. Strangely enough he did not move the Company Law Board for reference of disputes to arbitration until this present application after thirteen months.
As we have stated above the applicant herein has used an affidavit dated December 2, 1996, in reply to an interim application for certain reliefs by the respondent herein and petitioner No. 1 in the main petition being C. A. No. 243 of 1996. By the said affidavit the applicant raised several objections to the maintainability of the main proceedings without, however, alleging any arbitration agreement now being taken in this application.
15. In the said affidavit dated December 2, 1996, respondent No. 2, the applicant herein, giving a reply on the merits denied any instances of mismanagement or siphoning off of funds. He, however, craved leave to file a detailed reply at the appropriate time. He asserted in the said affidavit under the heading "Reply on merits" that all sales and purchases were duly documented and verified by the statutory auditors. He also denied that there was any under-invoicing of sales or making any illegal profits at the expense of the company. He stressed that the company made tremendous progress under the control of the present management. He also alleged by way of counter allegations that petitioner No. 1 being in operational control of some manufacturing units raised allegations in his main petition in order to avoid his misconduct, mismanagement, financial irregularities and siphoning off of funds and diversion of funds. Respondent No. 2 by his said affidavit further asserted that the rights of petitioner No. 1 as director cannot be the subject of the present petition under sections 397 and 398 of the Companies Act, 1956. Under the heading "Reply on merits", respondent No. 2 made an elaborate and intensive defence or statement on the substance of the dispute in the said affidavit from paragraphs 1 to 14 thereof.
16. In our view the aforesaid statement of respondent No. 2 who has now moved this application alleging some arbitration agreement is sufficient enough on the substance of the dispute within the meaning of Section 8 of the Arbitration Act, 1996. Mr. Gupta has, however, relied on a decision of the Supreme Court in Food Corporation of India v. Yadav Engineer and Contractor, AIR 1982 SC 1302, to contend that contesting an interlocutory application or filing an application for setting aside interim orders does not constitute "taking any other steps in the proceedings" and does not entitle the party in question from applying for stay of the suit. The above decision was rendered construing the provision Section 34 of Arbitration Act, 1940. Under Section 8 of the present Arbitration Act, we have to find whether there is any "statement on the substance of the dispute" made at any stage of the proceedings before taking out the present application under Section 8 of the Arbitration Act, 1996. The above Supreme Court decision has no application in the present context.
17. In the said affidavit in December, 1996, respondent No. 2 had raised a preliminary objection under Section 399 of the Companies Act that petitioner No. 1 did not have the requisite share qualification under Section 399 of the Companies Act and signatures of the other petitioners purporting to have filed this main application are not genuine. Respondent No. 2 in the said affidavit submitted that the subject-matter of the said application was similar and identical to the subject-matter in the suit filed by the petitioner before the Calcutta High Court. Regarding competency, petitioner No. 1 filed before the Company Law Board, the power of attorney and also other materials as to due authorisation. Regarding objection as to pending suit, the counsel for the petitioner undertook to withdraw the Calcutta suit with liberty to proceed with the main petition before the Company Law Board.
18. By order dated April 7, 1997, we dismissed the said objections raised by respondent No. 2 and directed the respondents to file the replies and also directions given as to the filing of rejoinder. An appeal was preferred from our said order before the Allahabad High Court. The Allahabad High Court had upheld the order of the Company Law Board. Respondent No. 2 thereafter filed a special leave petition in the Supreme Court and the said special leave petition was also dismissed.
19. Both sides have cited several decisions in support of their respective contentions. We need not deal with the cases in detail. It has been urged on behalf of the petitioner in the main application and the respondents in the instant application that an arbitration clause cannot decide the rights of a shareholder to institute and continue the proceedings under sections 397 and 398 of the Companies Act. The decisions cited in support of this proposition were all rendered in the context of the old Arbitration Act, now repealed by the present Arbitration Act.
20. Mr. Gupta has argued to state that the Additional District Judge, Kanpur Nagar, by its order dated July 10, 1997, has confirmed that there has been an arbitration agreement between the parties. He has filed a copy of the judgment passed by the learned Additional District Judge. It appears from the said judgment that respondent No. 2 made an application under Section 9 of the Arbitration Act, 1996, for certain interim reliefs. The learned Additional District Judge finally was of the view that the applicant therein made out a prima facie case for interim injunction and ultimately allowed the application for interim injunction. It will appear that there was no substantive suit or proceedings pending before that court for consideration and there had been no application for stay of the proceedings under Section 8 of the Arbitration Act, 1996. The learned Additional District Judge, in that case, had no opportunity of knowing whether the applicant in the said proceedings, being respondent No. 2 in the proceedings before the Company Law Board had made any application for stay of the proceedings before submitting his first statement on the substance of the dispute. Therefore, in our view, the decision or the finding by the learned District Judge in the said case has no relevance in the proceedings now pending before us. In the said Allahabad case the learned judge had no occasion to find whether the subject-matter of any proceedings pending before any judicial authority was covered by the said arbitration agreement or that by virtue of the said arbitration agreement, the party concerned had applied for the stay of the proceedings at the first instance.
21. We are of the view that any party relying on any arbitration agreement can invoke Section 8 by making an application not later than the date of submitting his first statement on the substance of the dispute. In our opinion, this first statement of dispute need not be filed in the reply to the main proceedings or any written statement to the suit. Such first statement on the substance of the dispute can be ascertained from any intervening affidavits filed on behalf of the parties seeking arbitration in any interlocutory applications. If it is found that in any such interlocutory applications and affidavits filed in the proceedings the applicant has dealt with the merits or substance of the main dispute, then it cannot be said that he has not delivered his first statement on the substance of the dispute within the meaning of Section 8 of the Arbitration Act, 1996.
22. Under the Arbitration Act, 1940, any party under Section 34 of the Arbitration Act seeking stay of proceedings could move the court by an application before filing the written statement in the suit or before taking any steps in the proceedings. Under Section 8 of the new Act, the party can seek stay of the proceedings if there was an arbitration agreement covering the same subject-matter, before giving his first statement on the substance of the dispute. As we have indicated above, such statement or first statement may be ascertained from any of the affidavits filed in the proceedings on behalf of the parties seeking stay of proceedings alleging an arbitration agreement covering the subject-matter of the proceedings.
23. By reason of the aforesaid, this application is dismissed as this application has been made long after initiation of the main proceedings under sections 397 and 398 of the Companies Act and after having taken a stand on the merits of the main petition.
24. This order also governs the other two applications being C. A. No. 30 and C. A. No. 31 of 1996 seeking same reliefs on the same grounds.
Since we have dismissed the application of the respondents for referring the parties to arbitration, the petition will be heard on the merits on November 19 and 20 of 1998, at 10.30 a.m. each day. The respondents are yet to file their replies to the petition, which they may do by September 1, 1998, and rejoinder if any will be filed by October 1, 1998.
25. There will be no orders as to costs.