TaxTMI 
TaxTMI 
2014 (8) TMI 1179
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Advocate and M.S. Doctor, i/b Federal & Rashmikant For Respondents: D.D. Madon, Senior Advocate, Simil Purohit, Amol Baware, V.S. Charalwar, Udwadia Udeshi & Argus Partners, Aspi Chinoy, Senior Advocate, J.P. Sen, Senior Advocate and M.S. Doctor, i/b Federal & Rashmikant JUDGMENT G.S. Patel, 1. Is a dispute brought before the Company Law Board invoking the provisions of Sections 397, 398 and 402 of the Companies Act, 1956 at all referable to a private tribunal, viz., an arbitral panel for resolution? Does a decision of a foreign court on the question of whether a dispute is covered by an arbitration agreement bind the Company Law Board? These are among the questions of law canvassed in this group of appeals. A. Structure 2. The following table of contents is intended to serve as a guide to the structure of this judgment. A list of the authorities cited or referred is appended for convenience. A. Structure....................................................................................... 13 B. Summary....................................................................................... 15 C. The factual background.................................................
X X X X Extracts X X X X
X X X X Extracts X X X X
............................................. 150 ...continued/- B. Summary 3. All eight appeals, under section 10F of the Companies Act, 1956, are directed against an order dated 31st January 2013 of the Company Law Board ("CLB"). One Rakesh Rajinder Malhotra is the Appellant in the first four appeals: Company Appeal (L) No. 10 of 2013, Company Appeal (L) No. 11 of 2013, Company Appeal No. 23 of 2013 (Company Appeal (L) No. 12 Of 2013), Company Appeal No. 24 of 2013 (Company Appeal (L) No. 13 of 2013). Rakesh Malhotra's father, one Rajinder Kumar Malhotra, is the Appellant in Company Appeal No. 15 of 2013 (Company Appeal (L) No. 16 of 2013). He and his wife, Rakesh's mother, Veena Rajinder Malhotra are the two Appellants in Company Appeal No. 18 of 2013 (Company Appeal (L) No. 19 of 2013). One Sapphire Properties Private Limited is the Appellant in Company Appeal No. 16 of 2013 (Company Appeal (L) No. 17 of 2013). One RSM Properties Private Limited is the Appellant in Company Appeal No. 17 of 2013 (Company Appeal (L) No. 18 of 2013). Rakesh is the contesting Respondent in these four appeals, all in the nature of cross-appeals. 4. Although the array of parties is complex ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is trust. After the transfers were effected, Rakesh, using his sole authority, deployed the funds received by the Indian companies held by RKM not only to grant loans (a matter contemplated by the agreements under certain conditions), but also to guarantee bank loans and facilities to the newly formed Indian company under Rakesh's control. These funds were also used to pay the financial consultants' fees. A peculiar situation had resulted: following the restructuring and transfer agreements, the directors of the RKM-held Indian companies were now all employees of the entities controlled and held by Rakesh. On finding that these liabilities had been incurred and funds deployed, RKM attempted to gain information from the directors of his own companies, the ones he controlled. They refused to divulge this information, being all beholden to Rakesh. 7. RKM filed four company petitions before the Company Law Board in Mumbai and one before the Company Law Board in Chennai under Section 397 and 398 read with Section 402 of the Companies Act, 1956 alleging oppression and mismanagement. After an ad-interim order was obtained but before these matters could move further, Rakesh obtain....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tator. That order was subsequently varied by an order of Mr. Justice Jamdar in these Appeals, and another retired judge of this Court was appointed as an Observer. In view of the final disposal of these appeals, those interim orders of this court also do not survive. C. The Factual Background I. The SuperMax Group 13. Founded in the late 1940's, the Supermax group claims to be the world's second-largest manufacturer of razor blades and related products. In its product category, it is said to be among the world's fastest-growing companies. It has a presence in over 70 countries across the globe. 14. Companies in the Supermax Group were held through a Cayman Islands company, Super Max Offshore Holding ("SMOH"). In turn, SMOH was a subsidiary of a Mauritius company, Super Max Mauritius ("SMM"), and the entirety of SMM was held by a Lichtenstein foundation, the Arvee Family Foundation ("Arvee Foundation"). Between them, RKM and his wife, Mrs. Veena Malhotra, are effectively the owners of a raft of Indian companies ("RKM Companies"). These companies manufactured products for the Supermax group, or owned land or held intellectual property rights used by the Supermax group....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ghts to a new company, Super Max Personal Care Private Limited ("SPCPL"). In return, the Indian RKM Companies were to receive an aggregate amount of US$ 53 million (then about Rs. 238 crores) from Actis's private equity investment. These acquisitions and transfers were to be effected through restructuring agreements. The SSD did not, it must be noted, deal with the further activities of the Indian RKM Companies following this proposed transfer. They also did not restrict the Indian RKM Companies' use of these funds. 18. Some clauses of the SSD must be noted in brief. One of these, clause 18.10, bound the Malhotra family to provide loans to the Supermax group should certain conditions be met. I am not concerned with the details of this clause; I only mention it as an indication of how closely involved the individual Malhotra family members were with the entire scheme. More important, perhaps, is clause 41.1. This is a clause that, in and of itself, shows the immense trust placed in Rakesh, particularly by his father, RKM. This is reinforced by events that followed shortly thereafter. This clause, however, said in terms that each of the Malhotra parties to the SSD had appoin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....29.17% stake. The five Indian RKM Companies (the Five Transauto Companies) had transferred their businesses, assets and employees to the Supermax Group. RKM believed that the amounts the Indian RKM Companies were to receive, viz., US$ 53 million (with US$ 15 million set aside for contingencies) had been in fact received. At this time, almost all these matters were in Rakesh's hands; and it was during this period, too, that RKM was away from India on account of a serious illness. IV. The onset of disputes 22. Several months later, on 23rd January 2012, RKM and Rajiv learned from an email from one of Rakesh's employees to an employee of VMPL that, in the interregnum, Rakesh, exercising his clearly vast powers, had arranged for the Indian RKM Companies to guarantee loans made by the Punjab National Bank ("PNB") to SPCPL (the newly formed company in the Supermax Group). RKM now found himself in a most peculiar situation: all the directors of the Indian companies he controlled and held were, on account of the transfers, employees of Rakesh's Supermax Group. These directors refused to give RKM access to records, registers and accounts. Rakesh directed them not to communicat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 27. A day before the extraordinary general meeting, on 26th March 2012, RKM was served with a copy of an ex-parte order passed by Mr. Justice Gloster of the Commercial Court, Queen's Bench Division, High Court of Justice, UK. That order was an anti-suit injunction granted at Rakesh's behest. RKM was restrained from proceeding with the petitions before the CLB and from holding the extraordinary general meeting. The papers in this proceeding and Rakesh's witness statement were also served. Rakesh's plaint before the Commercial Court of the QBD proceeded on this basis: (a) That RKM's Company Petitions all raised issues that were within the ambit of the arbitration agreement in the SSD, and that the SSD was governed by English law and provided for arbitration under the LCIA Rules in Geneva; (b) That RKM's Company Petitions sought an impermissible roll-back of the restructuring agreements and transfers effected under the SSD; (c) That simultaneously with the SSD, there was an "oral agreement" between Rakesh, RKM and Rajiv to the effect that Rakesh was to be given unfettered control of the funds to be received by the Five Transauto Companies/the Indian R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot fall within the scope of the arbitration Clause 43.2 of the SSD. He also held that the SSD and its arbitration clause did not include the manner in which the directors of the Five Transauto Companies had dealt with the funds of those companies following the restructuring. 30. Several consequences followed. With the injunction vacated, the extraordinary general meeting originally scheduled for 27th March 2012 was held on 31st October 2012 (the day after Walker J. released his order). At this extraordinary general meeting, all existing directors of Transauto were removed and replaced with RKM's nominees. A Board Meeting of Transauto was then held on 6th November 2012. The Board resolved to call extraordinary general meetings of Transauto's four subsidiaries to remove the directors of each and replace them with RKM's nominees. At subsequent hearings before the CLB, a status quo order came to be issued on 19th November 2012 regarding the boards of directors of the three Transauto's subsidiaries then before the CLB Mumbai. There was also a subsequent order of 21st December 2012 to the same effect. VII. The applications for reference to arbitration before the CLB 31....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany Applications for reference to arbitration are also challenged. These appeals were also admitted. Even after these appeals were admitted, RKM sought information about the deployment of funds received by the Five Transauto Companies under the business transfer agreements. These disclosures, RKM contends, have either been refused or are incomplete. RKM then filed Company Applications seeking disclosure, on which certain orders were passed. D. Rkm's Company Petitions Before The CLB, Mumbai In Summary 34. The 1st respondent in each of the CLB Mumbai Company Petitions is the corresponding Transauto company. 35. Company Petition No. 11 of 2012--the Transauto Petition: (Rajinder Kumar Malhotra & Veena Malhotra v. Transauto & Mechaids Pvt. Ltd. and Ors.) The Petitioners are RKM and his wife, Mrs. Veena Malhotra. They sue as the holders of 100% of the shares of Transauto, the 1st Respondent. Mrs. Malhotra holds one share. RKM holds the rest. Respondents Nos. 2, 3 and 4 are directors of Transauto; and Respondents Nos. 5, 6 and 7 are those authorised to operate Transauto's bank accounts. Respondent No. 7 is Rakesh. 36. Company Petition No. 12 of 2012--the Unique Petition: (Sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders under Sections 397-402 of the Companies Act, 1956 to prevent ongoing mismanagement; (c) For orders of disclosure, particularly of financial matters; (d) For an order of compensation payable to the company in question; and (e) For orders to set aside, terminate and modify all dealings with the company's assets after 18th March 2011. 41. Mr. Chinoy, learned Senior Counsel for RKM and his fellow petitioners, at once pointed out that this date of 18th March 2011 was an error. This was admitted before Walker J. in the UK proceedings 2. Any order with effect from this date would undo the restructuring agreements and the corresponding transfers. The intention was to refer to the post-restructuring period, not to undermine the transfers under those restructuring agreements. Before the UK Court, RKM and Rajiv undertook to amend the necessary paragraphs of the petitions before the CLB so as to refer to such dealings effected "after the completion of the Restructuring Agreements", with the added clarification that those Restructuring Agreements were not sought to be dislodged or impeached in any way.3 E. The Impugned Order Dated 31st January 2013; Questions for Determination ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oro Controls was pressed into service. The CLB held that the applications were maintainable. (c) On the third point, as to whether, having regard to the nature of disputes raised and reliefs sought, any reference to arbitration could even be made, the CLB held that no such reference could be made. (d) Fourth, it appointed an independent Observer-cum-Facilitator on the Board of Directors of the Five Transauto Companies. It also freed the Petitioners from the earlier status quo orders and allowed them to proceed with the reconstitution of the first respondent companies' boards. F. The Questions for Determination In These Appeals 45. The submissions and arguments on both sides on the four points framed for determination by the CLB are complex and intricately intertwined. Rakesh sought an injunction against RKM from proceeding with the Company Petitions before the CLB inter alia on the ground that there was an all-encompassing arbitration clause 43.2 in the SSD. Walker J. of the UK Commercial Court found against Rakesh, i.e., that the disputes in the company petitions before the CLB were not within the ambit of the arbitration clause. One question, therefore, that arises is h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y held so; and (3) that the disputes in the Company Petitions before the CLB are covered by the arbitration clause in the SSD. Should he fail on even one of these, no reference to arbitration is possible. G. Submissions On Behalf Of RKM Regarding Arbitration and The Scope of Sections 397-402 of The Companies Act, 1956 48. Given the nature of the controversy before me, and for greater clarity, it seems to me that the correct place to start is not with Mr. Madon's submissions, but those of Mr. Chinoy, learned Senior Counsel for RKM and the other Petitioners before the CLB. For, if he is correct in saying that the source and nature of the power under Section 402 of the Companies Act, 1956 is such that any dispute invoking it is inherently incapable of being referred to a private dispute resolution tribunal, then Rakesh's appeals must fail. This is, in substance, the finding of the CLB. Mr. Madon has assailed this finding as being entirely incorrect in law. But before I consider his submissions it is, I think, essential to understand precisely how Mr. Chinoy places his case. 49. At this stage, I must note that it is not Mr. Chinoy's case that the facts of this present ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rship of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under subsection (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. Sec. 399--Right to apply under sections 397 and 398. (1) The following members of a company shall have the right to apply under section 397 or 398: (a) in the case of a company having a share capital, not less than one hundred members of the company o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case; (e) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned; (f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; (g) any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made. 51. Two decisions form the core of Mr. Chinoy's construct. The first is that of the Supreme Court in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. (1999) 5 SCC 688. This was a case under Section 8 of the Arbit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l for removal of the existing directors and for appointment of new directors; (b) orders directing SIPL, Unique and RCC (Transauto's subsidiaries) to similarly call extraordinary general meetings to remove their respective existing directors and to appoint RKM's nominees as new directors; (c) orders and directions under sections 397 or 398 and 402 of the Companies Act, 1956 to end acts of mismanagement; (d) orders of disclosure of payments made by Transauto to third parties, encumbrances created on Transauto's assets, guarantees issued by Transauto and liabilities incurred or undertaking by the Company with effect from March 2011; (e) an order of compensation to Transauto; (f) orders setting aside, terminating and modifying all agreements purportedly executed by the Company, payments made by the Company, transfers and other dealings with the Company's assets or properties for the period after the restructuring agreements were effected.4 The interim reliefs sought were of a similarly wide nature. These were even more specific. They included inter alia prayers for orders of restraint in respect of the bank account with Punjab National Bank ("PNB"), although PNB was no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de to pass appropriate orders which the circumstances of the case may require, it would be difficult to accept Mr. Sen's submissions that the impugned orders and directions are liable to be set aside on the basis that the reconstituted board or modified article 95 was not in consonance with section 255 of the Act. To correctly appreciate the ambit of the court's jurisdiction and the amplitude of the court's powers under section 397 or 398 read with section 402 of the Companies Act, 1956, it will be necessary to consider the entire scheme of the Act pertaining to corporate management of companies. At the outset, it may be stated that all these concerned provisions occur in Part VI of the Act which deals with the management and administration of companies. It may further be pointed out that in this part there are eight chapters. Chapter I contains general provisions with regard to corporate management and administration of the companies such as registered office, registers of members and debenture-holders, annual returns, meetings and proceedings, accounts, audit, investigation, etc.; Chapter II, which includes section 255, deals with directors, their qualification, disqu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Part VI of the Act will also indicate that the powers of the court under section 397 and 398 read with section 402 cannot be read as being subject to the other provisions contained in sections dealing with usual corporate management of a company in normal circumstances. As stated earlier, Chapter VI deals with the prevention of oppression and mismanagement and the provisions therein have been divided under two heads-under head A powers have been conferred upon the court to deal with cases of oppression and mismanagement in a company falling under section 397 and 398 of the Act while under head B similar powers have been given to the Central Government to deal with cases of oppression and mismanagement in a company but it will be clear that some limitation have been placed on the Government's powers while there are no limitations or restrictions on the court's powers to pass orders that may be required for bringing to an end the oppression or mismanagement complained of and to prevent further oppression or mismanagement in future or to see that the affairs of the company are not being conducted in a manner prejudicial to public interest. In other words, whenever the legisl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e powers conferred on the court under these sections, section 402 proceeds to indicate what type of orders the court could pass and clauses (a) to (g) are clearly illustrative and not exhaustive of the type of such orders. Clauses (a) and (g) indicate the widest amplitude of the court's power: under clause (a) the court's order may provide for the regulation of the conduct of the company's affairs in future and under clause (g) the court's order may provide for any other matter for which in the opinion of the court it is just and equitable that provision should be made. An examination of the aforesaid section clearly brings out two aspects, first, the very wide nature of the power conferred on the court, and, secondly, the object that is sought to be achieved by the exercise of such power with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder the object sought to be achieved by these sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court&#....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssion or mismanagement that has occurred during the course of normal corporate management, the court must have the power to supplant the entire corporate management, or rather corporate mismanagement by resorting to non-corporate management which may take the form of appointing an administrator or a special officer or a committee of advisers, etc., who could be in charge of the affairs of the company. If the court were to have no such power the very object of the section would be defeated. We must observe in fairness to Mr. Sen that it was not disputed by him that the powers of the court under section 398 read with section 402 of the Companies Act were wide enough to enable the court to appoint an administrator or a special officer or a committee of advisers for the future management of the company and thereby supplant completely the corporate management through the board of directors and it was conceded that it should be so for the simple reason that if as a result of corporate management that has been allowed to run for a certain period oppression or mismanagement has resulted, the court should have power to substitute the entire corporate management by some form of non-corporate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stante clause and since there was no non-obstante clause in section 397 or section 398 read with section 402 of the Act, the court's powers thereunder could not override the other provisions of the Act but would be subject to such provisions. In the first place, like a deeming provision which is sometimes made with a view to make explicit what is obvious, a non-obstante clause is also used at times ex abundanti cautela to make explicit what is obvious and, therefore, the absence of that clause would not necessarily lead to an inference suggested by Mr. Sen. Secondly, normally, such non-obstante clause becomes necessary when the enacted provisions or enacted clause is necessarily going in conflict with the other provisions of the Act and if there would be no such conflict, then there would be no necessity to use a non-obstante clause and well shall indicate presently that there is no necessary conflict between the provisions of section 397 and section 398 read with section 402 and the provisions of section 255 of the Act and, therefore, the non-obstante clause must not have been used while enacting the relevant sections. By the very nature the provisions contained in sections 39....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., to which our attention was invited by Mr. Phadke. The relevant rule of construction has been stated thus: "If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result." The above passage is based on the judgment of Viscount Simon L.C. in the case of Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] AC 1014 and, in our view, the rule could be applied to the instant case. Having regard to the admitted position that there is neither a non-obstante clause contained in any of these relevant sections nor is there anything to indicate that the court's powers under these sections are to be exercised subject to any of the other provisions of the Act, there is a choice available to the court and having regard to the manifest purpose of the legislation, it will be difficult to accept the contention of Mr. Sen that the narrower construction of these sections leading to curtailme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....402 of the Companies Act, 1956." Further at page 550, the learned judge has observed as follows: "Since the appointment of the special officer attempts are being made by him to put the company's administration on a sound basis. The corporation now makes the application to have a board of advisers to assist the special officer of this court in regulating and managing the company's affairs and its business. The pattern of the court's power of managing under section 402 has to be worked out. The section is an innovation in company administration by the court." We are in agreement with Justice Mukharji's view that section 402 is an innovation in company administration by the court and the pattern of the court's powers of managing thereunder has to be worked out but there is no doubt having regard to the scheme a Part VI in which all the sections staining to management and administration of the company's affairs occur, the language employed in sections 397, 398 and 402 and the object sought to be achieved by these sections, the court's powers to regulate the conduct of the company's affairs in future, must of necessity be of the widest amplitude and o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e affairs of a company being conducted in a manner prejudicial to the interest of the public, while at the same time attempting to avoid winding up of a company to the extent possible. Under Section 402(a), the CLB could even regulate the future conduct of the company's affairs. Section 402(g) empowers the CLB to provide for any other matter which it thinks just and equitable to do. In the achievement of these objects, the CLB can supplant the ordinary corporate management of the company. Thus, these matters that fall within the purview of Sections 397-402 cannot possibly be left to an arbitral panel. 56. Leela Chitnis Studios itself relied upon a decision of a learned Single Judge of the Delhi High Court in Surendra Kumar Dhawan & Anr. v. R. Vir & Ors. MANU/DE/0282/1974 : [1977] 47 Comp Cas 276 (Delhi). Mr. Chinoy also relies on the decision of Surendra Kumar Dhawan for its observation that the jurisdiction of the CLB under sections 397 and 398 is a statutory jurisdiction that cannot be ousted by arbitration clause. Therefore, Mr. Chinoy submits that the fact that a party can also seek reliefs in arbitration or in a civil suit is entirely irrelevant. The question is not, he s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndent for a takeover of the company. The 2nd Respondent acquired a 90% stake in the company for a lump sum consideration of Rs. 2.43 crores. It agreed to discharge the debts and liabilities of the company to the Petitioner and others. After the 2nd Respondent acquired these shares, the Petitioner's nominees resigned as directors and other Respondents, all nominees of the 2nd Respondent, were inducted onto the board. The Petitioner complained in his company petition that ever since the takeover, and under the concluded agreement, these individual Respondents had committed acts of oppression and mismanagement in the affairs of the company. The Petitioner, therefore, invoked the jurisdiction of CLB under sections 397 and 398 of the Act. The reliefs sought included for orders superseding the board of directors, declaring as void an increase in share capital, cancelling a share allotment, declaring certain resolutions at a meeting as void, for rectification of the register, and for appointment of a commissioner. One of the contentions raised before the learned Single Judge was that the petition before the CLB was brought on the basis of an agreement that contained an arbitration cla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xceptions: in any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. Because Foss v. Harbottle leaves the minority in an unprotected position, several important exceptions have been developed, and these are often said to be "exceptions to the rule in Foss v. Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of 'wrongdoer control'. This is actually the only true exception to the rule in Foss v. Harbottle, a rule that, on its own, leaves minority shareholders unprotected. Their remedies now have statutory voice, in the provision of special forums with special powers for minority protection. These statutory remedies also allow for reliefs against mismanagement. Sections 397-403 are among those. 62. What Mr. Chinoy does suggest is that the source and nature of the adjudicatory power are such that disputes under these sections of the Companies Act, 1956 are not referable to arbitration. A civil suit is always maintainable as a derivative action following the exceptions to the rule in Foss vs. Harbottle. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tration. After all, he submits, it is the nature of the relief sought that is determinative, unlike in the case of special statute (a declaration of tenancy or a probate action). The reliefs sought by RKM are, ex-facie, all arbitrable. If disputes are covered by the arbitration agreement, some reason must be shown for its ouster, and there is no complete ban. Once it is found, as the Company Law Board has done, that disputes are covered by the arbitration agreement, a reference must be made. Sections 8 and 45 do not confer discretion in the matter of a reference to arbitration. 64. It is, he submits, well settled that sections 397 and 398 do not oust the jurisdiction of a civil court. Therefore, it follows that once a party can go to a civil court with a dispute, that dispute can always be referred to arbitration; and where there is an arbitration clause it must be referred to arbitration. The only exception is if there is an express bar to the jurisdiction of the civil court and, therefore, of the arbitral panel. It is much too broad, therefore, he submits, to suggest that no dispute under sections 397, 398 and 402 can ever be referred to arbitration. Under Section 9 of the Code ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....led, the civil court has no jurisdiction to continue with the suit. The position is no different under Section 45 of the Arbitration Act. Now if the jurisdiction of a civil court to continue with a suit is occluded by the mere existence of an arbitration agreement, and on an application under Section 8 or Section 45 been filed that dispute must be referred to arbitration, then, equally, the same consideration must apply to a proceeding before the CLB under Sections 397 and 398 of the Companies Act, 1956. The reason, according to Mr. Madon, suggests itself: if Sections 397 and 398 do not oust the jurisdiction of a civil court, and an arbitration agreement, following Pinkcity, has the effect of eclipsing a jurisdiction of a civil court, the CLB cannot be said to stand on any higher pedestal. This is an unacceptable incongruity. Consequently, only two things are required to be shown: first, that there exists an arbitration agreement, and second, that the disputes are covered by that arbitration agreement. Once this is done, the plain language of Sections 8 and 45 of the Arbitration Act requires that the disputes be referred to arbitration. This is the legislative intent of the Arbitra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 68. Mr. Madon then turns to the decision of a learned Single Judge of the Kerala High Court in Marikar (Motors) & Anr. v. M.I. Ravikumar & Ors. [1982] 52 Comp Cas 362 (Ker) in support of the proposition that the Companies Act is not a complete code so as to oust the ordinary jurisdiction of a civil Court. In this decision too, it was held that suits by minority shareholders against oppression and mismanagement are a well-known exception to the Foss v. Harbottle rule and that Sections 397 and 398 do not exclude the jurisdiction of civil courts. This was also the view of a learned Single Judge of the Calcutta High Court in Pradip Kumar Sarkar & Ors. v. Luxmi Tea Co. Ltd. & Ors.8 69. Mr. Madon's argument is that it is not the Companies Act but the Arbitration Act that is a complete code. The grant of relief in an application under Section 8 or 45 of the Arbitration Act is not an order that is appealable under Section 37 or 50 of the Arbitration Act respectively. In support of this proposition, Mr. Madon relies on the decision of the Supreme Court in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2011) 8 SCC 333. The question before the Supreme Court in that case was whether the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of whether the main contract is void or voidable can be referred to arbitration. To shut out arbitration at the initial stage is to destroy the very purpose for which the parties agreed to an arbitral dispute resolution process. This cannot be permitted, said the Supreme Court. 72. If this is so, Mr. Madon submits, and since an order under Section 11 of the Arbitration Act is a judicial pronouncement, SBP & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618 then there is no question that the entire weight of precedent is that an arbitration agreement must be honoured and, secondly, that since there is no ouster of a civil court's jurisdiction, even a dispute under Sections 397 and 298 can always be referred to arbitration. To test this, Mr. Madon suggests, we might consider a case where instead of moving under Sections 397 and 398 a party chooses to come to a civil court (following the various decisions cited). Such a civil suit too would be an action seeking remedies against oppression and mismanagement. That civil suit, of necessity, would not only be referable to arbitration but would have to be referred to arbitration, cadit quaestio; the Supreme Court having said the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rts. This is clearly incorrect in view of the decision in CDS Financial Services and other judgments. The decisions in Vijay Sekhri and Everest Holdings both support Mr. Madon's proposition and not that of Mr. Chinoy. The key to this, Mr. Madon submits, is that a reference to arbitration must be of a dispute. How that dispute is resolved is another matter. There is only a very narrow class of cases in which such reference cannot be made. I. Are Disputes Under Sections 397/398 And 402 Of The Companies Act, 1956 Arbitrable? 74. The arguments of both sides are equally compelling. It is hard to find fault with Mr. Madon's formulation that parties must be held to their contractual bargain. Where they have agreed to refer their disputes to arbitration and have an arbitration clause, they must be held to the bargain they made. That is the plain language of the Arbitration Act. It is the legislative intent of that Act. It is, in no uncertain terms, the ratio of various Supreme Court decisions, most recently that of the Nijjar, J in Swiss Timing. 75. I do believe however, that Mr. Madon and Mr. Chinoy are somewhat at cross-purposes. I did not understand Mr. Chinoy's submissio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ise by the CLB of its powers under Section 402. These are not powers that can be exercised by a civil court. They certainly cannot be exercised by an arbitral forum. This is very different from saying that a civil court, too, can entertain a suit as one of the exceptions to the Foss v. Harbottle rule, and that the jurisdiction of a civil court is not excluded by Sections 397 and 398 of the Companies Act, 1956. 77. Consider paragraph 14 of the Supreme Court's decision in Pinkcity, also cited in Swiss Timing: 14. This Court in the case of P. Anand Gajapathi Raju v. P.V.G. Raju [(2000) 4 SCC 539] has held that the language of Section 8 is peremptory in nature. Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator. Therefore, it is clear that if, as contended by a party in an agreement between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In CDS Financial Services, in an action for oppression and mismanagement by a minority following the only true exception to the Foss v. Harbottle rule, it was argued that the plaintiff ought to have moved the CLB in a petition under Sections 397 and 398. The Division Bench rejected this submission. What Mr. Madon suggests is, in effect, the mirror image of this argument: that the CLB can always tell a petitioner before it that he should have filed a suit; and that, had he filed the suit, the dispute might have been referred to arbitration; ergo, the action before the CLB was also so referable. This is the 'fallacy of the undistributed middle': all x is z; some (or all) y is z; therefore, all y is x. Or, to illustrate this more graphically: all policemen wear uniforms; some (or all) bus conductors wear uniforms; therefore, all bus conductors are policemen. 81. Mr. Madon is correct, generally speaking, in saying that a draughts person's acuity cannot permit a party to slither out of a binding arbitration agreement. But just as a petition cannot be 'dressed up' to evade an arbitration agreement, a bona fide....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the "excepted matters" excluded from the purview of the arbitration agreement. (iii) Whether the parties have referred the disputes to arbitration? That is, whether the disputes fall under the scope of the submission to the Arbitral Tribunal, or whether they do not arise out of the statement of claim and the counterclaim filed before the Arbitral Tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be "arbitrable" if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the Arbitral Tribunal. 35. The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable. 39. The Act does not specifically exclude any category of disputes as being not arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an arbitral award will be set aside if the court finds that "the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force". 40. Russell on Arbitration (22nd Edn.) observed thus (p. 28, Para 2.007): "Not all matters are capable of being referred to arbitration. As a matter of English law certain matters are reserved for the court alone and if a tribunal purports to deal with them the resulting award will be unenforceable. These include matters where the type of remedy required is not one which an Arbitral Tribunal is empowered to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court held: (SCC pp. 689-90, paras 4-5) "4. Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. 5. The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the company. That could obviously not be referred to arbitration and, therefore, the High Court, in our opinion was right in rejecting the applicatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee. None of these can possibly lie within the remit of an arbitral tribunal. Neither Swiss Timing nor Chloro Controls deal with a situation where the very substance of the relief sought was such as was beyond the powers of any arbitrator. What purpose might be served by such a reference? Swiss Timings takes as its starting point the indefeasibility of an arbitration agreement in the regular course. The matter before the Court was an application under Section 11 of the Arbitration Act. It is difficult to see this as an authority for the proposition that even when the CLB's plenary and expansive powers are properly invoked, a narrowly tailored arbitral proceeding is sufficient redress for the broad and far-reaching reliefs sought by a petitioner in a Section 397 and 398 petition. 85. In my view, Mr. Chinoy's submissions demand acceptance. The first question for determination must be answered in his favour. The disputes in a petition properly brought under Sections 397 and 398 read with Section 402 are not capable of being referred to arbitration, having regard to the nature and source of the power invoked. J. The "Dressing Up" Argument 86. Does this mean that the CLB canno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed. (Emphasis supplied) 87. Thus, when the CLB finds in favour of the respondent on his showing that the entirety of the petition, including the reliefs sought, are within the scope of an arbitration agreement, it will dismiss the petition, thus guarding against the mischief of 'dressing up', a dishonest attempt to escape an arbitration c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....regard to the source of power, not arbitrable. It is quite another thing to say that when a mala fide, vexatious, oppressive or 'dressed up' petition is brought only to evade an arbitration clause, all that the CLB can do is to dismiss the petition and drive the applicant seeking arbitration to some other forum in which to file an application under Sections 8 or 45 of the Arbitration Act. 91. The true consequence of my finding on Mr. Chinoy's submission regarding the non-arbitrability of disputes validly brought under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 is that it is not enough for an applicant seeking a reference to arbitration merely to show that there exists an arbitration agreement. He must, in addition, establish before the CLB that the petition is mala fide, vexatious and 'dressed up' and that the reliefs sought are such as can be resolved by a private arbitral tribunal. To hold otherwise would be to say that even a dressed up petition cannot be referred to arbitration. I see no reason why the CLB should be denuded of its powers in that situation. It is, after all, a "judicial authority" within the meaning of the Arbitrat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ieve this entire approach to have been incorrect. The issue was not one of res-judicata and Section 11 of the CPC at all, but one, as Mr. Chinoy rightly says, under Section 13 of the CPC, of whether the "foreign judgment" of Walker J. was or was not conclusive. 95. Section 13 of the CPC says this: Section 13 --When foreign judgment not conclusive A foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim litigating under the same title except-- (a) where it has not been pronounced by a Court of competent jurisdiction; (b) where it has not been given on the merits of the case; (c) where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable; (d) where the proceedings in which the judgment was obtained are opposed to natural justice; (e) where it has been obtained by fraud; (f) where it sustains a claim founded on a breach of any law in force in India. 96. For our purposes, the relevant clause is Section 13(c), it being the case th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gn Court, and for that purpose the first thing to look at is the actual decree or order of the foreign Court. But in order to understand and interpret the decree or order, we may have to look at the pleadings of the parties and the reasons of the Judge. Those reasons would not, in my opinion, be binding on any question of fact or law, except so far as they show what the judgment actually decides, and whether any of the exceptions to Section 13 applies. 98. The decision of our Division Bench was carried to the Privy Council, which dismissed the appeal. Brijlal Ramjidas & Anr. v. Govindram Gordhandas Seksaria & Ors., MANU/PR/0089/1947 : AIR 1947 PC 192 Lord du Parcq of the Privy Council said: 8. Some difficulty has been occasioned in the interpretation of Section 13 by the definition of "judgment" contained in Section 2. Notwithstanding this definition, their Lordships agree with the learned Chief Justice that the expression "foreign judgment" in Section 13 must be understood to mean "an adjudication by a foreign Court upon the matter before it." The Chief Justice pointed out that "it would be quite impracticable to hold that 'a foreign judgment' means a statement by a fore....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t and those claiming under or through them, the courts under the English law have, in certain cases, also applied the "group of companies doctrine". This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. [Russell on Arbitration (23rd Edn.)] 72. This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, "intention of the parties" is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed with liberal protection then such provision should normally be construed liberally. 96. Examined from the point of view of the legislative object and the intent of the framers of the statute i.e. the necessity to encourage arbitration, the court is required to exercise its jurisdiction in a pending action, to hold the parties to the arbitration clause and not to permit them to avoid their bargain of arbitration by bringing civil action involving multifarious causes of action, parties and prayers. 102. Joinder of non-signatory parties to arbitration is not unknown to the arbitration jurisprudence. Even the ICCA's Guide to the Interpretation of the 1958 New York Convention also provides for such situation, stating that when the question arises as to whether binding a non-signatory to an arbitration agreement could be read as being in conflict with the requirement of written agreement under Article I of the Convention, the most compelling answer is "no" and the same is supported by a number of reasons. 103. Various legal bases may be applied to bind a non-signatory to an arbitration agreement: 103.1. The first theory is that of implied consent, third-party beneficiaries, gu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t there was, beyond the SSD/SD, some other controlling agreement that brings this dispute within the frame of Chloro Controls. That, the Supreme Court says, is binding; and it is no answer to a claim for reference to arbitration to point out that there is not an exact identity of parties. In Chloro Controls, as Mr. Madon says, all that the Supreme Court did was to interpret the law as it stood, not create new law. Rajeshwar Prasad Misra v. State of West Bengal, AIR 1965 SC 1887; P. Ramachandra Rao v. State, AIR 2002 SC 1856. 101. Correctly read, the basis of Mr. Justice Walker's finding that the CLB disputes are not covered by the arbitration Cl. 43.2 of the SSD is not that the parties to the SSD and to CLB petitions were dissimilar. In paragraph 26, this is mentioned but only as a factual narrative. 26. As noted above, Rakesh says that funds paid to the Transauto companies were to be at his disposal for working capital of the business. Ms. Weaver rightly points out that the Transauto companies are not parties to the SSD, that the SSD does not contain any express obligations or restrictions on them in relation to the payments received, that the SSD does not impose any express....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was vexatious and oppressive because it was a blatant attempt to circumvent the arbitration clause. By contrast at the hearing in the present case Mr. Calver relied on principles applicable in cases where the foreign litigation was a breach (as opposed to a circumvention) of an arbitration clause. 178. It seems to me that as a matter of principle the dressing up argument could only succeed if the test identified in the BNP Paribas case were met. Unless the claims against the other respondents in India were vexatious or oppressive, the Indian petitioners would in my view be fully entitled to say that as between them and the relevant respondent there was no agreement to arbitrate. ... 183. Also for completeness I record here some comments on matters relied on by Rakesh in order to distinguish Stonehouse v. Jones. Mr. Calver asserted that none of the Californian claims in that case was founded on the relevant agreement: that seems to be equally true of the Indian claims in the present case. Mr. Calver added that there was no suggestion that the Californian claims could be defended on the merits. To my mind that had little if any relevance to the decision. As to the matters identif....
X X X X Extracts X X X X
X X X X Extracts X X X X
....For the reasons given earlier in this judgment the evidence relied upon does not point only one way. (Emphasis supplied) 103. Chloro Controls was decided on 28th September 2012. Mr. Justice Walker's decision is of 30th October 2012; the last hearing appears to have been some time earlier, on 15th June 2012. I do not think Mr. Madon is correct in his submission that Mr. Justice Walker's decision is contrary to that of our Supreme Court in Chloro Controls, or even that the question of referrability to arbitration was decided on the basis that the parties to the SSD were not the parties before the CLB or vice-versa. Mr. Justice Walker's decision on the question of referrability was decided expressly on the basis that the issues raised before the CLB fell outside the scope of the arbitration clause 43.2 in the SSD. 104. What Mr. Madon urges, based on paras 71 to 73 and 94 to 96 of Chloro Controls, is that whether or not there was an overarching (in the words of Chloro Controls, a "mother") agreement was a finding of fact by the CLB, one that is not assailable in a Section 10F appeal. Further, Mr. Justice Walker himself noted in paragraph 181 that it was for the CLB to d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly correct. Consider the array of parties before the CLB. The 1st Respondent is always the Transauto company in question. There is then a batch of individuals joined either as directors or as authorised signatories of the 1st respondent company's bank accounts; and then there is Rakesh. Once we do this clubbing or grouping, it is difficult to see how the directors and bank account authorised signatories could ever be said to be claiming "through" Rakesh. They were certainly acting at his instance. They were not parties to the SSD, and could never have been. The SSD does not concern them, and they are not bound by any arbitration clause. There is no mother agreement in play here. The relief sought is their removal. The directors, and very possibly the authorised signatories too, were in a position where they had two masters but served well only one. They were directors of RKM's companies, but employed, post-restructuring, by Rakesh. RKM and Mrs. Veena Malhotra wholly owned Transauto. Between them, these three along with Rajiv and Mrs. Kunika Malhotra wholly controlled every one of the other first respondent companies (with Rakesh having a negligible holding in one respondent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ute must be referred to arbitration where there exists an arbitration agreement. There were two grounds of opposition to the Section 11 application in Swiss Timing. The second was on the question of the agreement being void or voidable, an issue that does not arise in this case. That formed the central discussion in Swiss Timing. The first, though, was whether the disputes arose out of or relating to the agreement in question. This was dispensed with in short order in paragraph 15 (of the SCC report): 15. It is evident from the counter-affidavit filed by the respondents that the disputes have arisen between the parties out of or relating to the agreement dated 11-3-2010. On the one hand, the respondent disputes the claims made by the petitioner and on the other, it takes the plea that efforts were made to amicably put a "closure to the agreement". I, therefore, do not find any merit in the submission of the respondent that the petition is not maintainable for non-compliance with Clause 38.3 of the dispute resolution clause. 111. Now if it is shown that the disputes in question in this case do not arise from or relate to the arbitration agreement, or that this question has been p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itration clause, even leaving aside for the moment the question of Mr. Justice Walker's decision? The CLB considers none of this. It straightaway holds, on some reasoning left to our speculation, that the disputes in the CLB petitions are within the frame of the SSD's arbitration clause. Mr. Chinoy is, I believe, entirely justified in describing this as perversity on a question of fact. 115. As the Supreme Court said in Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan: (2005) 1 SCC 212 36. Section 10F refers to an appeal being filed on a question of law. The learned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and, therefore, the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for the appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....;s decision, and the CLB could not have reopened it as it did. In doing so, the CLB in effect took two diametrically opposite views: first, that the disputes were covered by the arbitration clause and, second, that the disputes were not referable to arbitration, implying that the petition was not dressed up to avoid the arbitration clause. These findings cannot possibly coexist. 119. Mr. Madon is correct in saying that an order referring parties to arbitration is not appealable. However, in the view that I have taken, a reference to arbitration can only be made by the CLB where it dismisses the oppression and mismanagement petition before it, i.e., when it finds that the disputes lie outside Section 402 of the Companies Act and are within the ambit of an arbitration clause. Ordinarily, Mr. Madon would have been justified in contending that once it is held that the disputes are within an arbitration clause, a reference to arbitration must follow and that order is not appealable. In this case, though, the CLB has done not one or the other. It has done both: held that the disputes are arbitrable being within the arbitration clause and at the same time that such disputes are not arbit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing process is not hampered." But the restructuring process was already complete by end-March 2011. What was in dispute was the post-restructuring deployment of the Transauto companies' funds in payment of consultancy fees and the liabilities foisted on those companies for bank facilities and loans granted to SPCPL, the newly-formed Indian company under Rakesh's control. To limit the observer-cum-facilitator to supervising the "fair, smooth and transparent" running of the respondent companies was one thing. To charge him with the doing of that which had, admittedly, already been done was, at the very least, pointless. The CLB does, as Mr. Chinoy says, have very wide and sweeping powers. But those powers, by their very nature, demand that they be used judiciously and carefully. 123. Mr. Chinoy is correct in his submission, therefore, that there was no warrant whatever for the appointment of an observer-cum-facilitator as made. N. Conclusions & Final Order 124. I will return now to the questions for determination I framed earlier. (a) As to whether the disputes in a petition properly brought under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 can b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sons follow. I have also summarised the rival submissions. 129. Mr. Madon refers to the various interim orders passed by the CLB. The first in time is a set of four orders (one on each petition) dated 9th February 2012 inter alia restraining the four respondent companies from utilizing their funds except for salaries and statutory payments and secondly from disposing of any assets. A later order of 7th November 2012 directed the maintenance of status quo "as regards the shareholding, the constitution of the board of directors and the fixed assets" of the companies. In addition, the interim orders of 9th February 2012 were continued. As I have noted in Section C of this judgment, this was followed by an order of 19th November 2012 that clarified that there was no injunction as regards Transauto's board of directors, but that it would continue for the other three companies. Mr. Madon then points out the order of this Court on admission of these petitions, passed on 7th February 2013, by which the CLB's orders of 9th February 2012 and 7th November 2012 were continued. This, he says, was clarificatory. 130. Now in the impugned order of 31st January 2013, the CLB has only perm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....para 37 modifies the previous interim orders at least as regards the reconstitution of the boards. 133. Mr. Madon's response is two-fold. First, that the earlier interim orders were modified by the impugned order only to the extent of the question of reconstitution of the boards; the remaining portion, regarding the shareholding and fixed assets is unchanged and unchallenged. Also, he says, his challenge in these appeals is against the rejection of Rakesh's application for reference to arbitration. Implicit in that is, necessarily, a challenge to the order permitting a reconstitution of the four respondent companies' boards. 134. Between these rival submissions, where lies the greater equity? That, I believe, is the only question I must ask myself. Mr. Madon is not wrong in saying that a given state of affairs having continued for considerable period of time, and without objection or application for modification by the other side, a brief continuance is unexceptionable. But that argument, compelling though it is at first glance, only scratches the surface. Even given that the fabric of such separations or restructurings is seldom smooth and unwrinkled, there are tears....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on's formulation I fear there is much that is lost in translation. Mr. Madon speaks of the crippling effect a reconstitution of the four respondent companies' boards will have on Rakesh's SuperMax group companies should the contracts between the two be terminated by the former. What does this mean except that Rakesh continues to believe (presumably on the basis of his assertion of an oral agreement or common understanding) that he has unfettered control and use of, and access to, the funds of the Transauto companies. To allow them a situation where they might compromise on contracts with companies in his own group is inequitable; but it matters not a whit that those very contracts expose the four respondent companies to very considerable financial risk, and even possibly ruin. Rakesh's Supermax companies must be protected and ring-fenced, even if this comes at the cost of the RKM-controlled four Indian Transauto companies. That they might as a result be placed in severe financial distress is apparently irrelevant. In a word: Rakesh must have the SuperMax group. He must also have the safety provided by the funds of the RKM Transauto group. RKM's and Rajiv's i....