2014 (8) TMI 1120 - HC - Companies Law

Court upholds Company Law Board's decision, rules on scope of arbitration & directors' liability

Sadbhav Infrastructure Project Limited Versus Company Law Board

The court dismissed the petition, upholding the Company Law Board's decision to reject arbitration. It ruled that the allegations of oppressive conduct ... Arbitration and Conciliation - reliefs claimed to hold the directors personally liable for their alleged prejudicial conduct against the interest of the company - Held that:- The majority directors are already held to be necessary parties. In such derivative action, if the reliefs are claimed to hold the directors personally liable for their alleged prejudicial conduct against the interest of the company, they are joined in the company petition for their fiduciary relationship as directors with company and such reliefs cannot be granted in their absence. Since they are not parties to the arbitration agreement, they cannot be referred to arbitration. They therefore, cannot be bound by the result of the arbitration. The Court is, therefore, of the view that the CLB has not committed any error in holding that neither the company nor the respondent Nos. 4 to 8 of the company petition are parties common to the arbitration agreement. In view of such conclusion, the arguments raised by both the sides and the judgments relied on the question of issue Estoppel, on the question that since other agreements are connected with joint venture and therefore, the parties to such agreements could be referred to arbitration or they could be said to be claiming through parties to arbitration agreement, are not required to be considered. Similarly, the question about the intention of the parties to relate the dispute to all agreements is also not required to be considered. In view of the joint venture agreement, reference of part of the matter to the arbitration would not amount to bifurcation of subject matter of the company petition. However, when the Court finds that entire matter before the CLB is not referable to the arbitration, even if the parties are taken to be bound by JVA, it is not permissible to bifurcate the matter and the cause of action for referring the matter to the arbitration. In any case, in the context of Section 8 of the Arbitration Act, as held by the Hon'ble Supreme Court in the case Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya and Another reported in MA: (2003 (4) TMI 435 - SUPREME COURT OF INDIA)it is not permissible to make reference for part of the matter For the reasons stated above, no interference is called for in the impugned order in exercise of the powers under Article 226/227 of the Constitution of India. The petition is, therefore, dismissed. Interim relief, if any, stands vacated. Rule is discharged. Issues Involved:1. Whether parties to a company petition under Sections 397, 398 read with Sections 399, 402, and 403 of the Companies Act, 1956, can be referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996.2. Whether the jurisdiction of civil courts is impliedly barred for matters under Sections 397, 398 read with Section 402 of the Companies Act.3. Whether the arbitrator is competent to decide matters under Sections 397 and 398 of the Companies Act.4. Whether it is permissible to refer parties to arbitration to examine if the matter before the Company Law Board (CLB) can be resolved by arbitration.5. Whether it is permissible to refer part of the matter involved in a company petition to arbitration.6. Whether directors joined as parties to a company petition can be bound by arbitration if they are not parties to the arbitration agreement.Detailed Analysis:1. Arbitration Referral under Section 8 of the Arbitration Act:The petition raised the issue of whether parties to a company petition under Sections 397, 398 read with Sections 399, 402, and 403 of the Companies Act, 1956, can be referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The CLB rejected the application for arbitration, holding that the matter in the company petition is not subject to the arbitration agreement, the reliefs claimed do not fall within the domain of the Arbitral Tribunal, and there is no commonality of parties between the company petition and the arbitration agreement. The court upheld this decision, emphasizing that the matter before the CLB involves allegations of oppressive conduct and mismanagement, which are beyond the scope of arbitration.2. Jurisdiction of Civil Courts:The court examined whether the jurisdiction of civil courts is impliedly barred for matters under Sections 397, 398 read with Section 402 of the Companies Act. It concluded that the jurisdiction of civil courts is impliedly excluded for such matters, as the CLB has been conferred exclusive powers to deal with them. The court relied on various judgments to support this view, including the Supreme Court's decision in the case of Kamal Kumar Dutta, which held that the CLB's powers under Sections 397 and 398 are special and exclusive.3. Competence of Arbitrator:The court addressed whether the arbitrator is competent to decide matters under Sections 397 and 398 of the Companies Act. It concluded that the arbitrator is not competent to decide such matters, as the CLB has exclusive jurisdiction to deal with complaints of oppressive and unfair conduct by the majority. The court emphasized that the CLB has wide powers under Section 402 to make orders to end the matters complained of, which are not available to the arbitrator.4. Referral to Arbitration to Examine Arbitrability:The court considered whether it is permissible to refer parties to arbitration to examine if the matter before the CLB can be resolved by arbitration. It concluded that this is not permissible, as the matter before the CLB involves allegations of oppressive conduct and mismanagement, which are beyond the scope of arbitration. The court relied on the Supreme Court's decision in Booz Allen and Hamilton Inc., which held that certain categories of disputes are reserved for public fora and are not arbitrable.5. Partial Referral to Arbitration:The court examined whether it is permissible to refer part of the matter involved in a company petition to arbitration. It concluded that this is not permissible, as the entire subject matter of the suit should be subject to the arbitration agreement. The court relied on the Supreme Court's decision in Sukanya Holdings, which held that bifurcation of the subject matter of a suit is not allowed under Section 8 of the Arbitration Act.6. Directors' Binding to Arbitration:The court addressed whether directors joined as parties to a company petition can be bound by arbitration if they are not parties to the arbitration agreement. It concluded that they cannot be bound by arbitration, as they are joined in the company petition in their capacity as directors of the company and have fiduciary duties towards the company. The court emphasized that the directors are necessary parties to the company petition and cannot be referred to arbitration if they are not parties to the arbitration agreement.Conclusion:The court dismissed the petition, upholding the CLB's decision to reject the application for arbitration. It concluded that the matter before the CLB involves allegations of oppressive conduct and mismanagement, which are beyond the scope of arbitration. The court emphasized that the CLB has exclusive jurisdiction to deal with such matters and that the arbitrator is not competent to decide them. The court also held that it is not permissible to refer part of the matter to arbitration or to bind directors to arbitration if they are not parties to the arbitration agreement.