TaxTMI 
TaxTMI 
2014 (9) TMI 1183
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....ter of the company petition to arbitration. He submitted that the company petition has been filed by the respondents herein claiming existing certain disputes and differences in relation to the affairs of the 1st applicant company viz, Mysore Realty Pvt Ltd (hereinafter referred to as the company). It is submitted that Article-103 of the Articles of Association of the company, which constitutes by law, a binding contract between the company and its shareholders, and inter se shareholders provides as follows: 'Article-103 - "Except as provided in Article 104, the parties hereto irrevocably agree that any dispute, controversy or claim arising out of, relating to or in connection with the company, promoters and investors (including any provisions of any exhibit, annex or schedule hereto) or the existing, breach termination or validity hereof (a "Dispute ") shall be finally settled by arbitration, The arbitration shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The arbitration shall be held at Mumbai The Investor No. 1 Investor No. 3 each shall appoint one arbitrator, the Investor No. 2 and Investor No. 4 shall jointly app....
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.... company to make proportionate allotment as per the provisions of the shareholders agreement and refund of the remaining amount to the shareholders concerned, vi. permanent injunction restraining the respondents 2 to 7 from allotting further shares in the R1 Company without offering the same proportionately to the petitioners and other shareholders as per the shareholding agreement and as per the shareholding existed prior to the allotment impugned in the petition. 3. It is submitted that the above issues are covered in the shareholders' agreement and Articles of Association as follows: I. Clause 8.1 and 8.2 of the shareholders agreement provides on issues concerning issue of further shares and the procedure to be adopted along with the right of pre-emption etc. II. Article 16 and 17 of the Articles of Association provides on issues concerning issue of further shares III. Clause 9.1.1 & 9.1.5 shareholders agreement provides the constitution of the Board of directors along with the representation required by the promoters also along with the Investors and consent rights etc clearly reflecting that the clause provides for promoters right to ....
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.... shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The arbitration shall be held at Mumbai. The Investor No.l, Investor No.3 each shall appoint one arbitrator; the Investor No.2 and Investor No.4 shall jointly appoint one arbitrator and the company and promoters shall also jointly appoint one arbitrator. In the event that any party fails to appoint an arbitrator within 15 days after receipt of written notice of the other party's intention to refer a dispute to arbitration, such arbitrator shall be appointed by a court of competent jurisdiction on an application initiated by any party. An arbitral tribunal thus constituted is herein referred to as a "Tribunal". In the event, an appointed arbitrator may not continue to act as an arbitrator of a Tribunal, then the party that appointed such arbitrator shall have the right to appoint a replacement arbitrator in accordance with the provisions of this section 14.4.1", 5. It is submitted that the respondents/petitioners have purposely not made the shareholders as respondent knowing very well that the same would be referred to arbitration and to circumvent this, they have arrayed the ....
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....r of the company petition to arbitration in terms of the arbitration agreement incorporated in the Articles of Association of the company and in the shareholder's agreement dated 30.07.2008 and vacate any interim orders passed and consequently dismiss the company petition and render justice. In support of this case the learned counsel relied upon following citations. 1. Bialetti Industries S.P.A v. Rachit Suresh Gangar 2. Pinaki Das Gupta v. Maadhyam Advertising (P.) Ltd. [2002] 38 SCL 170 (CLB - New Delhi) 3. Escorts Finance Ltd. v. G.R. Solvents & Allied Industries Ltd. [1999] 20 SCL 23 (CLB - New Delhi). 4. Boot Allen & Hamilton Ine v. SBI Home Finance Ltd. [2011] 5 SCC 532 5. Rashtriya Ispat Nigam Ltd. v. Verma Transport Co. 6. Food Corpn. of India v. Yadhav Engineer & Contractor 6. The respondents 1 & 2 have filed their detailed counter to this application and denied all the averments made in the application. Shri P H Arvindh Pandian, learned senior counsel appeared for the respondents submitted that the applicant company has filed the present application under section 8 of the Arbitration and Conciliation Act, 1996 ....
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.... (P.) Ltd 8. It is submitted that the respondents crave leave of the Hon'ble Bench to refer the Shareholder Agreement (in short SHA) dated 30.07.2008. It is respectfully submitted that the companies referred to above at SI.No. 1 to 4 are not parties to the present application. Further there are 10 promoters who are parties to the SHA and their names are given in the Schedule 1 of the SHA, Mr H.P Basavaraju and Mr. Ramakrishna alone are the parties to the proceedings before the Hon'ble Bench and they are the petitioners in the main petition. Therefore one of the conditions laid down under the provisions of section 8 of the Arbitration and Conciliation Act has not been satisfied with. It is submitted that on the basis of the above point alone the application is liable to be dismissed. The respondents also reserve the right of filing an application to amend the petition in order to bring the subsequent events to the knowledge of the Hon'ble Bench. It is pertinent to submit that the respondents in the main petition has filed one application in CA No. 1/2013 invoking the provision of section 8 of the Arbitration Act and after filing the counter statement by the respondent....
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....appointed for the purpose. It is submitted that the original petition was dispatched to the Hon'ble Bench on 18.02.2013 and on the same day it was dispatched to all the respondents. The 1st respondent company has received the physical copy of the petition on 19.02.2013 and the 2nd respondent has received the copy on 22.02.2013. Besides, the above service of petition, the copy of the petition was sent to all the respondents by email on 19.02.2013. It is submitted that all the respondents are aware that the petition is being moved on 28.02.2013. Immediately after receiving the copy of the petition, the notice dated 22.02.2013 was issued to the respondents herein invoking the arbitration under SHA, however no one has represented before the Hon'ble Bench on 28.02.2013 for the reasons best known to them. Since the pleadings and the prayers made in the main petition are not pan and parcel of the SHA, the respondents herein did not reply to the notice dated 22.02.2013. On mentioning the petition before the Bench on 28.02.2013. the Hon'ble Bench has directed the respondents therein to file their counter within a period of four weeks and posted the matter on 11.06.2013. However,....
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.... and as such the respondents were not accepted for the proposal. 10. The respondents further submit that it is a well settled legal proposition that referring the disputes in a pending legal proceeding to be referred to arbitration, there should be identity of causes of action and of parties. In other words, all the parties in such legal proceedings should be parties to the arbitration agreement and all issues in the company petition should be within the four corners of the arbitration agreement for the arbitration to be applicable. It is further submitted that none of such requirements are satisfied in the instant case. In so far as the cause of action of the present company petition is concerned a myriad of issues arise in the company petition several of which have no connection with the shareholders agreement dated 30.07.2008. Therefore there are no disputes arising under or by virtue of the shareholders agreement dated 30.07.2008 for being capable of being referred to arbitration. Significantly, the issues raised in the company petition relate to several acts of oppression and mismanagement by the respondents and relief against such acts is sought for in the company petition....
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....nies Act. The learned counsel relied upon the following judgment: 1. O.P Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp. Cas. 279 (Delhi) 2. Kara (P.) Ltd., In re [1977] 47 Comp. Cas. 276 (Delhi) On the point of that certain disputes cannot be referred to arbitration the learned counsel relied upon the following judgments: 1. Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 22 SCL 156 (SC) 2. Shankarlal Laxminarayan Rathi v. Udaysingh Dinkarrao Rajurkar AIR 1976 BOM 237 3. Chiranjeelal Shrilal Goenka v. Jasjit Singh [1993] 2 SCC 507 4. Booz Allen & Hamilton Inc (supra) 5. Al Champdany Industries Ltd. v. Blancatex AG [2011] 164 Comp. Cas. 122 (Cal.). 11. Heard the learned counsel appeared for the respective parties, perused the pleadings, documents and citations relied upon by them. After analysing the pleadings and documents the only issue felt for consideration is whether the applicant has made out any case to refer the subject matter of the company petition to arbitration? Now I deal with the issue: Before commencing to answer the issue as to whether the applicant has made out any ca....
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....y refer the parties to arbitration. Where a suit is filed by one of the parties to an arbitration agreement against the other parties to the arbitration agreement, and if the Defendants files an application under Section 8 stating that the parties should be referred to arbitration, the court (judicial authority) will have to decide (i) whether there is an arbitration agreement among the parties; (ii) whether all parties to the suit are parties to the arbitration agreement; (iii) whether the disputes which are the subject matter of the suit fall within the scope of arbitration agreement; (iv) whether the Defendant had applied under Section 8 of the Act before submitting his first statement on the substance of the dispute; and (v) Whether the reliefs sought in the suit are those that can be adjudicated and granted in an arbitration." 13. The aforesaid factors need to be analysed as to whether the factors enumerated by the Apex Court exist or not, and the same are discussed as hereunder: (A) Now I deal with the criteria whether there is an arbitration agreement among the parties (i): In so far as the existence of agreement is concerne....
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....7 and schedule 4 at various places, which forms part of the said S.H.A. Hence it could not be said that there could be a concluded contract, at the most it could be construed as an agreement to agree. It is well settled law that an agreement to agree or an undertaking to agree or try to agree or to negotiate with a view to reaching an agreement in any given document is nothing but uncertain and incapable of giving rise to an enforceable legal obligation. Therefore, even from this angle the said document viz. S.H.A 30.07.2008 is unenforceable and hence the question of referring the matter to arbitration does not arise. In terms of Arbitration and Conciliation Act, 1996 to satisfy the requirement of section 8 one must satisfy the basic necessity of existence of an agreement as stipulated under section 7 of the Act. In the facts and circumstances of the matter herein the said document namely SHA dated 30.07.2008 having not been signed by the parties described as promoters in Schedule 1, the said document cannot be construed as an agreement. Like in the previous occasions, wherein the applicant produced a draft agreement dated 20.05.2008 wherein some of the parties have signed the said....
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....nst the company and 6 directors named therein who are all alleged to be nominees of investors. The petition is also filed against Haribhakti and Co., Chartered Accountants as respondent No.8 and in the averments it has been alleged that the said auditor has colluded with the respondents necessitating the filing of the Company petition. Though prima facie above basic facts have been elucidated, only upon final hearing of the Company petition it could be concluded about the validity and conclusiveness of such averments. Subject matter of the Company petition versus claim of arbitration is concerned, in determining this aspect though it is not essential to get into the averments in the Company petition in the absence of reply/counter from the respondents. It is necessary for this Bench to look in the main relief sought for by the petitioners. The same are reproduced hereunder: The Petitioners, therefore, prays that: 1. In view of the facts mentioned in Para 6 of this petition, the Hon'ble Bench of the Company Law Board may give a direction that the allotment of 77,100 voting equity shares, 765 non Equity shares. 192290 Clause A convertible preference shares and 54397 Clas....
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....he Company and in the Shareholders agreement dated 30th July 2008 and vacate any interim orders passed and consequently dismiss the Company petition and render justice." A perusal of the application reveals that the applicant had referred to legal notice issued for invoking arbitration agreement and the relevant para of the said application is reproduced hereunder: "It is further noteworthy that as early as on 26.11.20I2, the investors and the Company had caused a communication to be issued to the Petitioners herein, pointing out in detail the breaches committed by the petitioners under the Shareholders Agreement and called for the Petitioners to remedy the same and further notified that legal proceedings will be commenced failing such remedial measures. Owing to failure of the Petitioners to comply with the demand, the investors and the Applicant Company had caused a legal Notice dated 22.02.2013 to be issued specifically invoking the Arbitration Agreement between the parties and also proposing names of Arbitrators proposed by the Applicants are all legendary Jurists and former Judge of the Hon'ble Supreme Court of India. Therefore ail issues of contentions b....
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....of Arbitration Agreement or not, can be answered to the effect that the relief sought for in the petition as compared to the disputes raised in the legal notice are not one and the same. Though the clauses 3.5.1 of SHA provided that the promoters already advanced the payments towards the project, the legal notice at para 3 as referred to above states certain breach of non payment of balance amount. This Bench thought at this juncture cannot get into the correctness of such legal notice, however can only observe that such averments in the legal notice goes contrary to the terms of the said documents viz. S.H.A dated 30.07.2008. On submission of counter/reply by the respondents in the petition it could be ascertained as to the full facts of the matter but however for the purpose of due compliance of the factors to be taken into account as stipulated by the Apex court, this Bench is of the view that the matter covered by the petition cannot be referred to arbitration. It is also strange to see that the company and the investors have jointly issued the legal notice dated 22.02.2013 and whereas the company and the directors nominated by the investors along with its statutory auditors ar....
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....unter to the petition within a period of four weeks and serve copies on the other side and the matter was posted on 11.06.2013. When the matter was listed on 11.06.2013, this Bench directed that all the pleadings shall be completed within a period of eight weeks. The matter was posted on 17.09.2013 at 10.30 AM for compliance of the order dated 11.06.2013. The orders of this Bench have not been complied with. However, the respondents have filed the present application and there is no explanation from the counsel for the applicants/respondents that why the orders of this Bench have not been complied with and if the subject matter is covered by the arbitration agreement then why necessary steps have not been taken to file application at the earliest? Notwithstanding the above, the respondents to this application may file counter within a period of three weeks and serve copies on the other side. The CA No. 1/2013 is posted on 21.11.2013 at 10.30 AM." 18. However the said application was permitted to be withdrawn by this Bench on 21.11.2013, Though it could be said that the respondents have not filed any counter however filed only section 8 application during November 2013, thereby t....
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....imed by the opponents/petitioners would need to be addressed keeping in view of the provisions of the shareholders agreement and the Articles of Association. The right of pre-emption and proportionate allotment in the ratio agreed between the shareholders and also the fact that the promoters would need to be represented through their directors are all issues covered under the shareholders agreement and the Articles of Association. Further, the removal of the directors representing the promoters under section 190 and 284 were initiated by the shareholders themselves and if the opponents/petitioners have any grouse it should be against the other shareholders and not the directors who have been arrayed as respondents 2 to 7 from whom no reliefs can be given. Para 11. That it is therefore clear that all the disputes raised and the reliefs asked are based out of a breach of the shareholders agreement and the Articles of Association and all the issues that have been raised are squarely covered under the shareholders agreement and the Articles of Association which provides that in case of any dispute, Arbitration would be the route for dispute resolution." 20. In response to t....
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....her it was submitted by the learned counsel for the respondents herein that the existence of arbitration clause contained in the Articles of Association cannot take away the right of the member to invoke sections 397/398 of the Companies Act. Further arguments were also advanced to the affect that certain disputes cannot be referred to arbitration and in this connection certain judgments of the Supreme Court and the High Courts were relied upon (i) Haryana Telecom Ltd (supra), (ii) Chiranjilal Shrilal Goenka (supra), (iii) (2011) 5 SCC 532 in Booz Allene Hamiton Inc. (supra) and (iv) Shankarlal Laxminarayan Rathi (supra). 22. The counsel for the respondents herein also highlighted that the relief sought for and the issues raised in the petition are not arbitrable and the written submission of the relevant para is extracted hereunder: "Substance of Dispute: (i) The respondents/petitioners have raised various issues and sought various reliefs in the company petition which are neither part of the arbitration agreement nor are they arbitrable, moreover some of the reliefs sought for also against respondents 3 to 8 who are not parties to the arbitration agreement. ....
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....e AOA. In this aspect it is well settled law that in a matter of oppression and mismanagement any arbitration clause in the articles of association a company shall not have any legal force and validity of enforcement in view of the provisions of section 9 of the Companies Act, 1956. For better appreciation the said section 9 is reproduced hereunder: "Act to override Memorandum, Articles, etc. 9. Save as otherwise expressly provide in the act (a) The provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as a case may be, before or after the commencement of the act, and (b) Any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this act, become or be void, as a case may be." 24. In view of the mandatory provisions of the Act the question of relying upon the clauses of the AOA and making any reference to....