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Company Law Board v. Arbitral Tribunal: A Tussle For Jurisdiction

Written by: Navneet Kumar - Law Officer, Bajaj Allianz General Insurance Company Ltd.
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The mandatory provisions, S. 8(1) and S. 45 of the Arbitration Act which have created the controversy are as follows:

S.8(1) : A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

S.45 : Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

When the parties have entered into an arbitration agreement, they cannot file a suit in a court of law in respect of any matter covered by the agreement; otherwise the very purpose of arbitration will be frustrated. The court will normally not intervene except when provided by the Act.

But certain judgments by the Indian Judiciary have compelled us to rethink about these mandatory provisions. There are hundreds of cases in which disputes (having arbitration agreement between parties) were referred to the arbitral tribunal. However, there has been significant number of instances where the courts have taken a different stance. One such example is where the courts have referred matters to Company Law Board (hereinafter referred to as “CLB”), though it was governed by an arbitration clause.

A Brief Introduction Of S. 397 And 398 (Oppression And Mismanagement) Of The Companies Act, 1956
a. Under Section 397, a member or number of members (not less than 100 members of the company or 1/10th of the total number of its members, whichever is less, or members holding not less than 1/10th of the issued share capital of the company) may apply to the CLB, on the ground of an allegation of conducting the Company in a manner prejudicial to public interest or oppressive to any member or members, for an order of the Board under this section. However the burden of proof is on the petitioner to prove that:
(I) The affairs of the company are being conducted against public interest or in a manner oppressive to any member/s, and.
(II) The fact would otherwise justify winding up on the ground of being ‘just and equitable’, but that the winding up order would be prejudicial to the interest of any member or members. Therefore Board is to allow an order other than winding up, though the situation must be such as to warrant the winding up of the company. The standard of proof is as high as required for ordering winding up, which is only ordered in exceptional cases.

b. However, under Section 398 the applicant only has to prove that the affairs of the company are being conducted in a manner prejudicial to the public interest or prejudicial to the interest of the company itself, or that there has been material change effected in the management/ownership of the company which is against public interest or against the interest of the company. Thus it is evident that the burden of proof is more onerous in Section 397 in comparison to section 398. If any fact can be strongly alleged with primary proof that there is a high probability of financial leakage or resistance to follow standard accounting practice, or that financial security of the company is at stake, an applicant under Section 398 can make a plea for preemptory or equitable remedy. It may be pointed out here that the CLB generally does not allow a remedy such as institution of receiver. But on appeal the matter would go to the High Court having jurisdiction, where such a remedy is a common feature.

c. In the event that a complaint is sought to be brought before the CLB under any or both of the above two sections, full particulars must be given by the petitioner of the alleged acts of mismanagement and oppression. None of the allegations of mismanagement and oppressions which are proposed to be raised by a petitioner can be vague or uncertain.

Though the Indian judiciary has maintained that such allegations may constitute grounds for suspicion, however that itself does not entitle the petitioner to demand investigation of the affairs of the company through the court. The courts have on one hand stated that it may not always be possible for a single shareholder or a group of shareholders to furnish particulars of acts of mismanagement, fraud, oppression, misappropriation or other improper acts, but on the other hand have said that such inability on the part of shareholders, who have no access to the books of the company, is not a ground for directing an investigation into the affairs of the company or for giving any other relief to a petitioner.

The petitioner must prove, prima facie, that on those facts an investigation is warranted. If a petition fails to set out the facts and produce satisfactory proof in support of those facts, no order for investigation into the affairs of the company would be made by the court to grant relief to the petitioner. Denial of access to such books is not an act of oppression. Merely because a petitioner cannot make out a case of mismanagement and oppression due to his inability to collect material, it is not for the court to direct the directors of the company to offer inspection of the company’s books and accounts. The court cannot also direct investigation into the company’s affairs and accounts by an independent person, to bring out the materials for further orders by the Tribunal.

Requisites For Referring The Matter To Arbitral Tribunal:

A bare perusal of Section 7 of Arbitration and Conciliation Act, 1996 would reveal that an ‘Arbitration Agreement’ means the agreement by the parties to submit the disputes (present or future) to arbitration and that it shall be in writing and signed by the ‘parties’. Either party voluntarily refers the dispute to arbitration or one of the aggrieved parties applies in the court of law to refer the same to an arbitrator. Section 8 stipulates that the party who claims the existence of arbitration agreement may apply ‘not later than when submitting his first statement on the substance of the dispute’, calling for the arbitration. For a judicial authority to refer the parties to arbitration all the conditions stipulated in Section 8 have to be fulfilled.

Such conditions are:
§ An action should have been brought before a judicial authority.
§ The matter in action should be a subject of arbitration agreement.
§ A party to the agreement should apply to the judicial authority.
§ Such application should be made not later than when submitting his first statement on the substance of the dispute.
§ The application has to be accompanied by the original or duly certified copy of the arbitration agreement.

Once all these conditions are fulfilled, the judicial authority is bound to refer the parties to arbitration.

Proceedings u/s 397 and 398 of the Companies Act, 1956 are not outside the purview of the Sec. 8 and 45 of the Arbitration and Conciliation Act, 1996. Once the CLB is convinced that the matters governed in a petition u/s 397/398 of the Companies Act relate to or arise out of or is in connection with an arbitration agreement and the relief appropriate to the facts of the case could be determined/granted by an arbitrator, then, the CLB is bound to refer the matter to arbitration in terms of the mandatory provisions of the S. 8 or S. 45 of Arbitration Act provided that the Agreement is not null and void, inoperative or incapable of being performed. If any of the requirements of S. 8 or S. 45 is not satisfied then CLB can decline to refer the dispute to arbitration.

The judicial authority, prima facie, has to come to the conclusion, that the requirements of S.8 or S. 45 have been fulfilled, before referring the parties to arbitration. By virtue of the mandate of the provisions of S. 8/45 of the Arbitration Act, once the ingredients of this section are satisfied, then even the matters covered u/s 397/398 of the Companies Act shall have to be referred to Arbitration in terms of the S. 8 or S. 45 as the case may be of the Arbitration Act[1].

The Apex Court in the matter of P.Anand Gajapati Raju v. P.V.G. Raju[2] held that the language of Section 8 of the Arbitration Act, 1996 is pre-emptory. It is obligatory for the Court to refer the parties to arbitration, if the arbitration agreement covers all the disputes between the parties in the proceedings before the Court.

In Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums[3], again the arbitrator got an edge over the court. In this case appellant was carrying on the business of manufacture, sale and distribution of petroleum products through dealers and distributors appointed by them only. Respondent was the dealer appointed by the appellant to sell its petroleum products through a retail outlet. The Dealership Agreement entered into between the parties, contained an arbitration clause.

A Show-cause notice was issued by Appellant to the Respondent with regard to short-delivery and tampering. A perusal of the arbitration clause clearly showed that the parties to the Dealership Agreement had agreed to refer their dispute arising out of the Agreement of whatever nature it may be, to an arbitrator as contemplated in that Agreement. In cases where there is an arbitration clause in the agreement, it is obligatory for the Court to refer the parties to arbitration on the terms contained in their arbitration agreement. The Arbitral Tribunal is empowered to rule on its own jurisdiction including rule on any objection with respect to the existence or validity of the arbitration agreement. The Courts below ought not to have proceeded to examine the applicability of the arbitration clause to the facts of the case in hand but ought to have left that issue to be determined by the Arbitral Tribunal.

In Pinaki Das Gupta v. Maadhyam Advertising (P.) Ltd.[4], the CLB (Delhi) had observed that the main grievance of the petitioner in the petition was non-performance of the terms of the Agreement and it was found that the arbitration clause in the Agreement specifically provided for arbitration in cases of non-performance of the terms of the Agreement. Therefore, it was held that the matter covered in the petition was the subject matter of the Arbitration Agreement. There was no scope to examine whether the petitioner had been oppressed or not. Matter was referred to the arbitrator.

In Smt. Kalpana Kothari v. Smt. Sudha Yadav and Ors.[5], the Supreme Court observed that Section 8 of the Arbitration Act, 1996 mandates that the judicial authority before which an action has been brought in respect of a matter, which is the subject matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than when submitting his first statement.

A strict interpretation of Section 8 of the Arbitration and Conciliation Act, 1996 indicates that when the subject matter before the judicial body is the same as covered in an arbitration agreement, such judicial body would be bound to refer the parties to arbitration[6].

In spite of all these decisions, there are judgments stating that the matters under S. 397/398 of the Companies Act, 1956 (as well as few other matters) cannot be adjudicated by an arbitrator. An arbitrator can have no powers such as are conferred on the court by S.402 of the Companies Act and other statutes.

The Hon’ble Supreme Court in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.[7] observed that Sub-section (1) of Section 8 of the Arbitration & Conciliation Act, 1996 provides that where the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration, the said matter should be in accordance with the arbitration agreement. This postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. In this decision, it was held that an arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company since such power is conferred on a high court by the Companies Act and referral of a winding up petition under Section 8 of the Arbitration Act was dismissed.

An application was filed for stay of petition under Section 397 and 398 of the Companies Act, 1956 before the Delhi High Court. It was held that power to stay the petition was discretionary and it was for the Court to decide whether matter should be referred to arbitrator for adjudication or not. Even if the Articles of Association of a company contains provisions for arbitration, the matters dealt with by S. 397 and 398 cannot be referred to arbitration or such proceeding be stayed[8].}

The competency of Courts to interfere in company’s management in the interest of minority shareholders is not restricted. An Arbitration clause is not a valid ground to bar Court from exercising its jurisdiction. Matters which fall within the purview of Sections 397 and 398 cannot be left to arbitration. If the subject matter of both the proceedings is different then proceedings initiated before Court is tenable. Merely because there is arbitration proceeding or for that matter an award, the court’s jurisdiction u/s 397 and 398 cannot stand fettered. The matter which can form the subject matter of a petition u/s 397 and 398 cannot be the subject matter of arbitration, for an arbitrator can have no powers such as are conferred on the court by S. 402 of the Companies Act. The scope of the two enquiries, namely that of a petition for setting aside the award and the petition u/s 397 & 398 is wholly different. Sec. 10 of CPC read with Sec. 141 can have no application whatsoever, nor can the question of exercising powers u/s 151 arise. There is no question of the Company Court granting stay of the proceeding on a petition for relief against mismanagement or oppression merely because there is a petition pending in the Court impeaching an award of an Arbitrator between two groups of shareholders.

If the allegations are related only to the terms of an agreement containing an arbitration clause, then the parties have to be referred to arbitration and in some cases where the Board finds that the allegations can be examined without reference to the arbitration agreement, the applications under Section 8 will be rejected. However, in Hind Samachar case, the Punjab and Haryana High court has held that the matters in a petition under Section 397/398 cannot be referred to arbitration. Accordingly, the application was dismissed[9].

In the matter of Surendra Kumar Dhawan v. R. Vir & others[10] the Hon’ble Delhi High Court has clearly stated that the right of shareholders under Section 397 or 398 is a statutory right, which by section 8 of the Arbitration and Conciliation Act, 1940 cannot be ousted by a provision in the Articles of Association of the Company. This application was instituted by the respondents for stay of the proceedings on account of the fact that there was an arbitration clause in the Articles of the company. The Hon’ble Judge held that the Articles cannot debar the court's jurisdiction in the matter of a petition under sections 397 and 398 of the Companies Act, 1956.

Conclusion:
Though the whole matter is a question of interpretation, but the decision would widely depend upon the facts of the case. The judicial authority, prima facie, has to come to the conclusion that the requirements of S. 8 or S. 45 of the Arbitration Act have been fulfilled before referring the parties to arbitration. But prior to coming to any conclusion, the judicial authority must be convinced that the matters governed in the petition u/s 397/398 are covered by the arbitration agreement between the parties and relief appropriate to the facts of the case could be granted by an arbitrator.

The Arbitration Act helps in speedy justice and decreases the load of litigation on Indian judiciary, which is on the verge of collapse due to the same. However, it is very stringent so far as appeals are concerned. It does not provide for an appeal against an arbitral award, except on the grounds stated in S. 34(2).The Arbitration Act is also silent upon any qualifications that a person must possess to be appointed as an arbitrator. These provisions can lead to gross injustice to the parties in serious matters like oppression and mismanagement in a company.

When an arbitration clause in a shareholders’ agreement or any other agreement uses the phrase ‘any dispute’, it includes a wide range of disputes. Oppression and mismanagement and few other disputes of very serious nature also come under its purview. The standard of proof (in the matter of S. 397/398) is as high as required for ordering winding up of a company, which is only ordered in exceptional cases. It evidently shows the seriousness of the matters relating to oppression and mismanagement in a company. Petitions under S.397/398 would affect the future of a company, its shareholders as well as the economy of the country. Therefore, such a complex issue cannot be referred to an arbitrator, for whose appointment no minimum qualification is stipulated by the Act.

The Companies Act as well as Arbitration Act should be amended so that serious issues like oppression and mismanagement should not fall within the purview of the Arbitration Act. The matters in relation to oppression and mismanagement should be exempted from the Arbitration Act or minimum qualification for arbitrator should be provided under the Act, to deal with these kinds of serious issues.

Endnotes
[1] (2002) 108 CompCas 115
[2] (2000) 4 SCC 539
[3] AIR 2003 SC 2881
[4] MANU/CL/0040/2002
[5] AIR 2002 SC 404
[6] Naveen Kedia And Others Vs. Chennai Power Generation Ltd. (1999) 95 CompCas 640 (CLB)
[7] AIR 1999 SC 2354
[8] O.P. Gupta v. SGF (Pvt.) Ltd (1977) 47 CompCas 297 (Del)
[9] (2002)108CompCas115 ( CLB)
[10] MANU/DE/0282/1974

Bibliography:
Books Referred
1. A. Ramaiya, Guide to Companies Act,16th edition 2006
2. C. R. Dutta ,Datta on Company Law, 5th edition 1991
3. Avtar Singh, Company Law, 15th edition 2007
4. H. C. Johari, Commentary on Arbitration and Conciliation Act, 1996, 2nd edition 2002
5. Justice Dr. B.P. Saraf, Law of Arbitration and Conciliation, 4th edition 2006
6. A. K. Bansal & O. P. Chandha, Cases & Maerials on Arbitration & Conciliation Act,1996, 1st edition 1999
7. Justice R. S. Bachawat, Arbitration and Conciliation, 4th edition 2005
8. A. K. Bansal, Law of International Commercial Arbitration, 1st edition 1999

Statutes Referred
1. The Companies Act, 1956
2. The Arbitration and Conciliation Act, 1996

Websites
1. http://clb.nic.in/sections/maddhyam_397_398.htm (last visited on 5th May, 2008)
2. http://clb.nic.in/sections/hind%20397-398.htm (last visited on 5th May, 2008)
3. http://news.indlaw.com/publicdata/articles/article234.pdf (last visited on 16th June, 2008)

The author can be reached at: kmr.navneet@legalserviceindia.com / ph no: 09303660683 / Print This Article

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