Shareholding disputes in company proceedings may be referred by consent, while unsupported bias allegations cannot stop arbitration.

A consensual reference of inter partes shareholding disputes in proceedings under sections 397 and 398 of the Companies Act, 1956 was held permissible, and the order of reference was construed as appointing the named person as arbitrator to decide the validity of the relevant meetings and allotments. Allegations of bias or misconduct were rejected because they lacked factual basis, so the arbitral proceedings were allowed to continue. The court also permitted an early amendment to the reply challenging the first petitioner's shareholding, subject to costs, while holding that the new issue would enter the arbitral reference only if both parties consented; otherwise, it would remain for later determination by the court.

---

---

Issues: (i) Whether the controversy concerning the shareholding of the parties in a petition under sections 397 and 398 of the Companies Act, 1956 could be validly referred to arbitration and whether the named person was appointed as an arbitrator. (ii) Whether allegations of bias or misconduct justified stopping the arbitral proceedings. (iii) Whether the respondents could be permitted to amend their reply to challenge the validity of the first petitioner's shareholding and, if so, to what extent the amended controversy could be decided in the arbitral proceedings.

Issue (i): Whether the controversy concerning the shareholding of the parties in a petition under sections 397 and 398 of the Companies Act, 1956 could be validly referred to arbitration and whether the named person was appointed as an arbitrator.

Analysis: The order of reference was read as sending the main dispute on shareholding, including the validity of the relevant meetings and the allotments made at those meetings, to the named person for decision. The court held that the language and substance of the order showed an adjudicatory reference, not a mere request for a report. It further held that disputes in proceedings under sections 397 and 398, being civil and inter partes in nature, were not incapable of being referred to arbitration, and that the court's wide powers under the company law provisions were not fettered by such a consensual reference.

Conclusion: The reference was valid and the named person was appointed as an arbitrator to decide the referred controversy.

Issue (ii): Whether allegations of bias or misconduct justified stopping the arbitral proceedings.

Analysis: The allegations were found to have no factual basis. The arbitrator's dealing with the validity of the meeting could not by itself establish bias, and the report did not show pre-judgment or improper conduct. The objections raised were held to be insufficient to recall the reference or halt the proceedings, leaving any challenge to the award open on recognised grounds at the appropriate stage.

Conclusion: The allegations of bias and misconduct were rejected and the proceedings before the arbitrator were permitted to continue.

Issue (iii): Whether the respondents could be permitted to amend their reply to challenge the validity of the first petitioner's shareholding and, if so, to what extent the amended controversy could be decided in the arbitral proceedings.

Analysis: The court accepted that amendments at an early stage should be allowed liberally where they assist in determining the real controversy and may bear upon maintainability. The proposed challenge to the first petitioner's shareholding was therefore allowed, subject to costs. At the same time, the court held that the amendment would not automatically become part of the existing reference; it could be taken up by the arbitrator only if both sides consented, failing which it would remain for the court to decide later.

Conclusion: The amendment was allowed, but the newly raised issue could be decided in the arbitral proceedings only with both parties' consent.

Final Conclusion: The proceedings were directed to continue before the arbitrator, the challenge based on bias failed, the reference was upheld, and the pleadings were modified in part so that the shareholding controversy could proceed on the corrected basis.

Ratio Decidendi: A consensual reference in company proceedings to decide inter partes shareholding disputes is permissible, and allegations of bias must rest on a real basis before proceedings can be stopped; amendments affecting the real controversy may be allowed liberally at an early stage, but a new issue enters the reference only by the parties' consent.

---