2007 (10) TMI 609 - Board - Companies Law

Arbitration Clauses Inapplicable: Court Dismisses Application, Grants Interim Relief to Maintain Status Quo.

Enercon Gmbh Versus Enercon (India) Ltd. And Ors.

The court dismissed the application under Section 8 of the Arbitration and Conciliation Act, 1996, as the arbitration clauses were deemed inapplicable due ... Arbitration Proceedings - Application filed u/s 8 - seeking for referring the parties to the proceeding to Arbitration in terms of arbitration agreements - financial mismanagement - removal as MD and WTD - breach of right of pre-emption - HELD THAT:- In the present case, the petitioner has relied on the Article 58(a) of the Articles of Association of the company in regard to the allegation of depriving the petitioner of its pre-emption rights and likewise the petitioner has sought for amendment to the Articles regarding directorship. Both these matters can be decided independent of the terms of SHA. In Limrose case [2005 (6) TMI 565 - COMPANY LAW BOARD NEW DELHI] this Board has held that if the allegations could be examined without reference to the terms of the agreements containing arbitration clause, then the parties need not be referred to arbitration even if the subject mater is covered in the arbitration agreement. Even otherwise, as rightly pointed out by Shri Sarkar, allegation of financial management cannot be traced to any of the terms of SHA. Even otherwise, in view of the judgment in Sukanya Holdings [2003 (4) TMI 435 - SUPREME COURT], there is no possibility of bifurcation of the subject matter between the CLB and the Arbitrator. Whether, there is a breach of right of pre-emption, whether the Mehra group is guilty of financial mismanagement meriting their removal as MD and WTD and whether Articles relating to directorship is to be amended etc. would all depend on the merits of the case and need not be gone into while dealing with the instant petition under Section 8 of the Act. Considering the fact that the company is not a party to SHA and that some of the allegations cannot be traced to the terms of the SHA, even assuming that pre-emption rights and directorship are covered under the terms of SHA, the application is not maintainable and is accordingly dismissed. Grant of interim reliefs - maintenance of status quo with regard to the shares - stoppage of supplies - If the shares are sold by Mehra Group to ILFS during the pendency of the proceeding challenging such a sale, irreparable damage would be caused to the petitioner and therefore, the balance of convenience is definitely in its favour. Accordingly, I direct both the sides to maintain status quo with regard to their shareholdings, till the petition is disposed of. Considering the nature of the business of the company, Public interest is also likely to be affected. It is on record that Mehra group itself, realizing the necessity that the supplies should be resumed urgently, have filed a suit seeking for directions to the petitioner to resume supplies. Therefore, when the petitioner, on its own, is willing to resume supplies, I do not find any justification in the opposition of Mehra Group on grant of the said relief. Perhaps, their objection is that the said offer has come with a rider that the nominee of the petitioner should be appointed as the Joint MD. In the present case, the petitioner has been given the right, in terms of Article 171(1), to appoint its nominee as the Joint MD, even though, it has not exercised the said right so far. When such an appointment would be in the interests of the company, I am inclined to grant the said prayer, taking into consideration that in terms of Section 403 of the Act, this Board has the power to regulate the conduct of the company during the pendency of the proceeding. However, with the view to protect the interests of Mehra Group also will be with checks and balances. Accordingly, I authorize the petitioner to appoint one of its nominees as the Joint MD subject to: 1. The petitioner should first resume supply. 2. The appointment will be made in a Board meeting to be convened within a week of first shipment of the components/materials to the company. 3. The Joint MD will work together with the MDall major decisions will be taken jointly 4. He shall not gather materials/evidence/probe into the past affairs of the company. 5. Status quo with regard to all the issues pending in the proceeding should be maintained and no action in relation to the same shall be taken. 6. No changes shall be brought about in the managerial set up and their responsibilities. The parties will appear before me to react to my suggestion, directions for either valuation or for completion of pleadings will be given. Both the sides may also keep a list of reputed valuers for deciding the name of the valuer if the suggestion for valuation, is acceptable to both the sides. Issues Involved:1. Application under Section 8 of the Arbitration and Conciliation Act, 1996.2. Allegations of financial mismanagement and concealment of company affairs.3. Interim reliefs sought by the petitioner.4. Validity of the arbitration agreements (SHA and TKA) and their applicability.5. Appointment of a Joint Managing Director.6. Sale of shares and preemption rights.Detailed Analysis:1. Application under Section 8 of the Arbitration and Conciliation Act, 1996:The application under Section 8 sought to refer the parties to arbitration based on existing arbitration clauses in the Shareholders Agreement (SHA) and Technical Know-how Agreement (TKA). The petitioner opposed this, arguing that the company was not a party to the SHA, and the Mehra group was not a party to the TKA. Moreover, the TKA had expired, and many allegations of financial mismanagement were outside the scope of the arbitration agreements. The judgment concluded that due to the lack of commonality of parties and subject matter, the application under Section 8 was dismissed.2. Allegations of financial mismanagement and concealment of company affairs:The petitioner alleged that the Mehra group, managing the company, engaged in financial mismanagement, including indiscriminate borrowings, investments, manipulation of accounts, and non-payment of royalties. The petitioner sought the removal of the 2nd and 3rd respondents from their managerial positions and amendments to the Articles of Association to remove Mehra group's representation on the board. The judgment noted that these allegations required detailed examination and could not be dismissed summarily.3. Interim reliefs sought by the petitioner:The petitioner sought various interim reliefs, including the appointment of a local commissioner to inspect the company's books, maintenance of status quo regarding the company's assets, and investigation into the company's affairs. The respondents opposed these reliefs, arguing that the petition was filed with ulterior motives and that the petitioner had suppressed vital documents. The judgment acknowledged the contested nature of the issues and emphasized the need to preserve the status quo until a detailed examination could be conducted.4. Validity of the arbitration agreements (SHA and TKA) and their applicability:The judgment examined the validity and applicability of the arbitration clauses in the SHA and TKA. It was noted that the company was not a party to the SHA, and the Mehra group was not a party to the TKA. Furthermore, the TKA had expired, and the SHA terms had been incorporated into the company's Articles of Association, excluding the arbitration clause. The judgment referenced previous cases to support the conclusion that the arbitration clauses were not applicable in this context.5. Appointment of a Joint Managing Director:The petitioner proposed appointing a Joint Managing Director to ensure proper management and resumption of supplies. The judgment authorized the petitioner to appoint a Joint MD, subject to certain conditions, including the resumption of supplies and joint decision-making with the current MD. This arrangement aimed to protect the company's interests while maintaining checks and balances.6. Sale of shares and preemption rights:The petitioner challenged the Mehra group's attempt to sell shares to an outsider, arguing it violated preemption rights. The judgment directed both parties to maintain the status quo regarding their shareholdings until the petition was resolved. The judgment also suggested an amicable settlement, proposing that the Mehra group consider selling its shares to the petitioner at a fair value determined by an independent valuer.Conclusion:The judgment dismissed the application under Section 8 of the Arbitration and Conciliation Act, 1996, and granted interim reliefs to preserve the status quo. It authorized the appointment of a Joint Managing Director and suggested an amicable settlement for the sale of shares. The detailed examination of allegations and completion of pleadings were deemed necessary for a final resolution. The parties were directed to appear for further proceedings to discuss the valuation and other pending issues.