20th Century Finance Corporation Ltd. vs Union of India (UOI) and Others

A.K. Sikri, J.—The Appellant herein is aggrieved against the order dated 29th June, 1999 (20th Century Finance Corporation Ltd. v. RFB Latex Ltd. (1999) 34 CLA 267), passed by the Principal Bench of the Company Law Board (''CLB''). This order is passed in CA No. 213 of 1998, which was filed by the Respondent herein in CP No. 11 of 1998. CP No. 11 of 1998 was the petition filed by the Appellant herein u/s 397/398 of the Companies Act, 1956 (''the Act'') alleging oppression and mismanagement on the part of the Respondents. After receiving notice of that petition the Respondent chose to file CA No. 213 of 1998 u/s 8 of the Arbitration and Conciliation Act, 1996 (''Arbitration Act''), with the prayer that the parties be referred to arbitration as the subject-matter raised by the Appellant in the company petition was covered by the arbitration clause contained in the sponsorship agreement dated 6th October, 1994, entered into between the parties. Some of the disputes raised by the Appellant in the company petition were found to be covered by the arbitration agreement between the parties and, therefore, vide impugned order the CLB has referred those disputes for arbitration and decided to proceed with the remaining disputes. According to the Appellant, the CLB itself should have examined all the allegations in the petition which are the proceedings u/s 397/398 of the Act and that is the cause for filing the instant appeal.

The basic facts of the matter are not in dispute. Note thereof may be taken at this stage. The Appellant entered into a sponsorship agreement dated 6th October, 1994, for listing of the shares of Respondent No. 2-KFB Latex Ltd. (''the company'') at OTCEI and accordingly invested a sum of Rs. 1,25,00,000 by purchasing five lakh shares of the company of the face value of Rs. 10 per share at a premium of Rs. 15 per share. Immediately thereafter the Appellant and the company entered into a lease agreement dated 12th October, 1994, as per which, the Appellant agreed to finance the equipment taken on lease by the company and advance lease amount of Rs. 50,00,000. Coming back to the sponsorship agreement, addendum to that agreement was entered into on 10th April, 1995. It may be noted at this stage that as per this agreement it was agreed that certain amendments would be made in the articles of association so as to bring the same in conformity with the sponsorship agreement. On 20th February, 1996, in terms of this agreement Mr. Dev Ahuja of the Appellant-company became a nominee director of the company. The company thereafter functioned through its Board of directors with the nominee of the Appellant-company as well. Certain dividends were declared. Rights issue was also held. Decision was taken twice for expansion of the projects. Loans were also taken from the Industrial Development Bank of India (''IDBI'').

The Appellant was not happy with the manner in which the aforesaid and other business was transacted by the company. In these circumstances, the Appellant was constrained to file petition u/s 397/398 of the Act. According to the Appellant, the Respondents, who were controlling the affairs of the company, were not conducting the affairs in a proper manner and in the interest of the Appellant herein, and numerous acts of theirs amounted to not only mismanagement but oppression of the minority, namely, the Appellant. It is not necessary to go into these allegations in detail as we are not dealing with the merits of these allegations. The scope of this appeal is limited and we are concerned with the decision of the CLB on the application of the Respondent u/s 8 of the Arbitration Act. However, there is no dispute that as per the petition filed by the Appellant, allegations raised were in the following nature, which are mentioned by the CLB in the impugned order in paragraph 2 as well:

(a) Failure to amend articles of association to conform to the sponsorship agreement.

(b) Delayed payment of dividend.

(c) Default in lease payment to the Petitioner.

(d) Irregularities in right issue.

(e) Irregularities in respect of Board meetings.

(f) Fabrication of the minutes of Board meetings.

(g) Second expansion project/fabrication of company records.

(h) Obtaining loan from IDBI in violation of the sponsorship agreement.

(f) Siphoning of funds and non-disclosure of interest.

(j) Failure to co-operate with the auditors.

In the application filed by the Respondents the case projected by the Respondents was that most of the allegations related to alleged non-implementation of the sponsorship agreement and, therefore, whether Respondents defaulted in carrying out their obligations under the said sponsorship agreement or not could not be the subject-matter of the petition u/s 397/398 of the Act. It was further submitted that the said sponsorship agreement provided an arbitration clause and the dispute raised by the Petitioner about non-compliance with the agreement would fall within the scope of that arbitration agreement. The submission of the Appellants herein, on the other hand, was that the allegations in the petition relate to various acts of oppression and mismanagement in the affairs of the company against which as a substantial shareholder the Appellant was entitled to file the petition. According to the Appellant, the sponsorship agreement consisted of two parts, namely, (z) about the Appellant being a shareholder; and (ii) regarding the undertaking of the Respondents in respect of certain obligations. As the Appellant had become a member of the company it had a statutory right to maintain the petition u/s 397/398 of the Act which could not be ousted by the provisions of the memorandum and articles of association and in support reliance was placed on the judgment if this Court in the case of Surendra Kumar Dhawan v. R Vir (1977) 47 Comp Cas 276. Another submission was that the sponsorship agreement had been referred to in the petition only for the purposes of indicating relationship between the parties and not for the purpose of enforcing the terms of the agreement. The allegations in the petition, as per the Appellant, cover various issues like failure to issue notices for the Board meetings, siphoning oft of funds, non-payment of dividends, etc., which were not part of the arbitration agreement and could be the subject-matter of the proceedings under the Act.

After considering the aforesaid submissions, the CLB held that such an application u/s 8 of the Arbitration Act, was maintainable only to the extent it related to the terms of sponsorship agreement and covered by the arbitration clause contained therein. On this aspect discussion is contained in paragraph 6 of the order which reads as under:

We have considered the pleadings and arguments of counsel, Shri Dholakia, referred to Section 9 of the Act to state that no provision of any agreement can take away the statutory rights conferred by the Act and he also relied on a Delhi High Court case in this regard. Section 9 of the Act deals only with the memorandum, articles or any agreement or any resolution which are repugnant to the provisions of the Act and does not deal with the provisions of other statutes. As a matter of fact, Section 5 of the Arbitration Act which reads "notwithstanding anything contained in any other law for the time being in force, in matters governed by this part, no judicial authority shall intervene except where so provided in this Act" makes it clear that in case of an arbitration agreement, a judicial authority cannot intervene except as provided in the Arbitration Act, notwithstanding anything contained in any other law. Section 8(1) of the Arbitration Act, 1996, reads as follows "a judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if the party so applies not later than when submitting his first statement on the substance of the dispute refer the parties to arbitration". The CLB being a judicial body is bound, in terms of Section 8 of the Arbitration Act, to refer the parties to arbitration if the allegations arise out of the terms of an agreement containing an arbitration agreement as defined in Section 7 of that Act, notwithstanding the provisions of Section 9 of the Act. In other words, Section 9 of the Act does not affect a right of a shareholder to invoke the provisions of Section 8 of the Arbitration Act in case there is an agreement to refer the disputes to arbitration. In the case of Surendm Kumar Dhawan v. R Vir (1977) 47 Comp Cas 276, the Delhi High Court was dealing with a provision in the articles relating to arbitration, which the High Court held that the same cannot act as a bar for entertaining a Section 397/398 petition. Therefore, this case is not applicable in terms of the provisions of the Arbitration Act. In the two cases cited by learned Counsel for the applicants/Respondents, we declined to entertain those petitions filed u/s 397/398 of the Act and referred the parties to arbitration since the allegations contained in those petitions directly related to the terms of agreements which contained an arbitration clause.{p. 640 of 97 Comp Cas}

Thereafter the Tribunal examined the question as to which allegations contained in the petition would be covered by the arbitration clause and came to the conclusion that issues contained in sub-paragraphs (a), (d), (g), (h) and (j) of paragraph 2 of the order are those issues which would be covered by the sponsorship agreement. Discussion in that behalf is contained in paragraphs 9 and 10, which are reproduced hereunder:

We have already indicated the allegations contained in the petition, in a nut shell, in paragraph 2. From those allegations it can be seen that the allegations relating to failure to amend the articles, rights issue, second expansion project, loan from IDBI, failure to co-operate with the auditors, are grievances arising directly out of the sponsorship agreement and as such they cannot be agitated in the present proceedings in view of the arbitration clause. Yet there are other allegations which are independent of the sponsorship agreement, which an arbitrator cannot adjudicate for want of jurisdiction. According to the Petitioner, these allegations exhibit acts of oppression and mismanagement in the affairs of the company. If it is so, then the CLB is bound to examine the same. Whether the allegations merit grant of any relief or not is a matter to be decided after the pleadings are completed and arguments concluded. The facts of Escorts Finance Ltd. v. G R Solvents and Allied Industries Ltd. (1999) 96 Comp Cas 323 (CLB) are different from the present one, inasmuch as, all the allegations in that case wholly related to a sponsorship agreement in which there was an arbitration clause and, therefore, the CLB declined to entertain the petition and referred the parties to arbitration. In a recent case of Khandwala Securities Ltd. v. Kowa Spinning Ltd. (1999) 97 Comp Cas 632 (CLB) in which also there were allegations in respect of matters covered in a sponsorship agreement covered by an arbitration clause as also matters independent of the agreement, we dismissed the application filed u/s 8 of the Arbitration Act, and directed the Respondents to file a reply on the allegations which were independent of the sponsorship agreement.

In view of our finding that there are allegations in the petition independent of the sponsorship agreement, the prayer of the Respondents in CA No. 213 of 1998, to refer the parties to arbitration and dismiss the petition is rejected. The Respondents should file their replies covering all the allegations in the petition other than those at sub-paragraphs (a), (d), (g), (h) and (j) of paragraph 2 above by 1st August, 1999, and rejoinder, if any, will be filed by 1st September, 1999. The petition will be heard on 1st November, 1999, at 10.30 AM. {p. 642 of 97 Comp Cas)

While challenging the aforesaid decision, the thrust of learned Counsel for the Appellant was the same as before the CLB and it was submitted that the CLB did not appreciate the contentions of the Appellant in the right perspective. Reiterating the submission that Section 9 of the Act was an overriding provision, which specifically provided that the provisions of the Act would override the memorandum and articles of association or any agreement, etc., right of the Petitioner to file petition u/s 397/398 which was a statutory right could not be taken away merely because of the arbitration clause contained in the sponsorship agreement. His submission was that the CLB was required to examine as to whether the allegations of the Appellant herein were in the realm of acts of oppression and mismanagement. When it was so, contended learned Counsel, the CLB was required to examine the same in those proceedings rather than relegating the Appellant to the arbitration. According to him, all the issues were intractably inter-mixed and it was not proper for the CLB to examine some of the allegations and refer other allegations to the arbitrator. Referring to Section 31 of the Act, which provides for alteration of articles of association by special resolution, it was contended that when it was specifically provided under the sponsorship agreement that the memorandum and articles of association would be amended to bring it in conformity with the said sponsorship agreement and if the Respondents representing majority shareholders were not doing so, that could be treated as an act of oppression of the minority and the CLB was within its power to give directions to this effect rather than relegating the Appellant to the arbitration on this aspect. He also referred to Section 402 of the Act which lays down powers of the CLB while considering application u/s 397/398 of the Act and specifically relied upon Clause (g) thereof which provides for the following power:

(A)ny other matter for which in the opinion of the Tribunal (read CLB) it is just and equitable that provision should be made.

He referred to various clauses of the sponsorship agreement, particularly Clause 4.1 of article IV, Clause 5.3A of article v. and Clause 5.3B(viii) of article v. in his Endeavour to demonstrate that specific pre-conditions were laid down for amending the memorandum and articles of association which after entering into the agreement, the Respondent constituting majority were not fulfilling.

The aforesaid argument of learned Counsel for the Appellant may be attracted in the first blush. However, a little deeper scrutiny thereof with reference to the pleading would expose its demerit. The very reading of the petition would itself suggest that the allegations contained in sub-paragraphs (a)/ (d) (g), (h) and (j) are based on non-fulfilment of the various clauses contained in this sponsorship agreement. In fact, the entire thrust of the petition, on these issues, is the sponsorship agreement. A reading of the petition on these aspects would give a clear impression that the grievance of the Appellant was that the Respondent had not adhered to these clauses of the sponsorship agreement. Thus, the Petitioner is alleging breach on the part of the Respondent of their obligations contained In the said agreement. However, the Respondents have denied the same and according to the Respondents, it is the Appellant who did not fulfill its obligation-under the sponsorship agreement and, therefore, the question of amending the memorandum and articles of association or fulfill other obligations of the Respondent under the said agreement did not arise. In the application filed by the Respondent u/s 8 of the Arbitration Act, breaches on the part of the Appellant are highlighted in detail, particularly in paragraphs 2(g) and (h) of the said application and elsewhere as well giving the background in which the Appellant, merely a finance company, agreed to finance by investing in shares of the Respondent-company after having impressed with its performance. The Respondent stated in detail the obligations of the Appellant under the said sponsorship agreement and alleged that it did not fulfill its commitments. We may reproduce paragraph 2(h) of the application for better appreciation of the submissions of the Respondent:

(h) The applicant/Respondent No. 1 states that under the sponsorship agreement it was, thus, the obligation of the Petitioner to get them listed on the OTCEI Stock Exchange. In terms of the sponsorship agreement the applicant/Respondent No. 1 paid fee of Rs. 3.75 lakh as management fee for getting the shares of the company listed at said exchange. However, the Petitioners have grossly and willfully breached their obligation in that they failed to get the company listed on the said exchange. It is pertinent to point out that the applicant/Respondent No. 1 had submitted all relevant documents to the Petitioner and SEBI so that the shares of the company could be listed on the OTCEI Exchange. The Respondent-company had provided complete co-operation and support to the Petitioner in order, inter alia, to obtain the SEBI Card ; preparation of the prospectus and sending it for vetting to SEBI, and also obtaining the acknowledgement card ; but the Petitioner failed to honour their commitment and committed a breach of the said agreement. The applicant/Respondent No. 1 has a claim against the Petitioner for their failure to get the shares of the company listed on the stock exchange and. will claim substantial damages from them on this account. This is a clear breach committed by the Petitioner. The applicant/Respondent No. 1 will get this dispute also resolved through the forum of arbitration in terms of Article 8.2. There are other breaches committed by the Petitioner-company which will entail a claim on the Petitioners by Respondent-company and which also will be resolved through arbitration forum.

Assaying the pleading in their proper perspective would clearly indicate that the first and foremost dispute is as to whether the parties have fulfilled their respective obligations under the sponsorship agreement. The Appellant has argued that as per the sponsorship agreement the Respondents were required to do certain things, including amendment of the memorandum and the articles of association and as that is to be done by special resolution which can be passed by the majority only, non-passing of such a resolution amounts to oppression of the minority. However, before establishing this kind of right under the sponsorship agreement, the Appellant has to cross one important hurdle, namely, whether such a right to get the memorandum and the articles of association amended has accrued to the Appellant. For this, the pre-requisite to be shown is that as far as the Appellant is concerned, it had fulfilled all the obligations imposed on it by the sponsorship agreement as it is disputed by the Respondent. And this controversy obviously could not have been determined by the CLB in the proceedings u/s 397/398 of the Act. It flows from the contractual obligations contained in the sponsorship agreement and has to be necessarily determined though the means of arbitration agreement which is contained in Article 8(2) of the sponsorship agreement and that reads as under:

...Any claim, disputes or differences between the parties hereto arising out of or in relation to or under or in any manner connected with the agreement shall be referred to and decided by arbitration as provided in the rules, bye-laws and regulations of OTCEI.... Such arbitration shall be governed by the provisions of the Arbitration Act, 1940 or any modification or re-enactment thereof. The arbitration shall be held in Bombay only.

This is a subtle and fine distinction and has to be kept in mind. Once we appreciate this distinction it becomes apparent that the approach adopted by the CLB in the impugned order is perfectly valid and justified {Naveen Kedia v. Chennai Power Generation Ltd. (1998) 4 Comp LJ 128 : (1999) 95 Comp Cas 640 (CLB)}.

In view of the above, I do not find any infirmity in the impugned order.

This appeal is without any substance and is, therefore, dismissed. The applications also stand disposed of. No costs.