ORDER
S. Balasubramanian, Chairman
1. In this order, I am considering CA 257 of 2006 filed by the 2nd respondent under Section 8 of Arbitration & Conciliation Act of 1996 in the petition CP 66 of 2006 filed under Sections 397/398.
2. The facts of the case are: The petitioners held 100% shares in M/S DOMCO Private Limited. With a view to set up a pig iron plant with a capacity of 2 lakh tones per annum, DOMCO applied for allocation of a captive coal mine in West Bokaro Coal field in Orissa. Accordingly, the Ministry of Coal identified Lalgarh Sub Block and conveyed the same to the company on 24th November, 2003. To mobilize funds to set up the pig iron plant and also to develop the coal mine, the petitioners held discussions with the 3rd respondent who is MD of the 2nd respondent. On the understanding that DOMCO would supply surplus coal to the 2nd respondent for use in its pig iron plants, DOMCO, the petitioners and the 2nd respondent entered into a Shareholders Agreement (SHA) on 27th March 2004. Main terms of the agreement are:
1. The petitioners and the 2nd respondent were to subscribe to 50% shares in the company in accordance with the terms settled in the said agreement.
2. Initially, both of them were to subscribe to shares worth Rs. 30 lacs each.
3. On obtaining the allocation of the mining block, the petitioners were to subscribe to 40,000 shares of Rs. 100/- each at par and simultaneously sell 20000 shares to the 2nd respondent at Rs. 7700/- per share aggregating to Rs. 15.4 crores. (The 2nd respondent paid Rs. 7 crores to the petitioners at the time of signing the agreement, the balance being payable against transfer of the 20000 shares within 9 month from the date of allocation of the mining block)
4. Thereafter, the petitioners were to subscribe to 2 lakh shares of Rs. 100/- each at par and the 2nd respondent was also to subscribe 2 lakh shares of Rs. 100/- each at a premium of Rs. 2265/- per share aggregating to Rs. 47.3 crores.
5. The cost of the project was estimated at Rs. 150 crores and the 2nd respondent was to be responsible for the financial closer.
6. The 2nd respondent was to have one director more than the directors nominated by the petitioners.
7. Certain decisions, whether in the board or in the general meetings were to be taken with the consent of both the groups and at least one nominee from both the groups should be present to form a quorum in the board meetings.
8. DOMCO was to be de-merged, by hiving of other businesses to another company to be incorporated by the petitioners so that DOMCO would carry on the only the business of mining and pig iron plant.
9. The agreement contains an arbitration clause in the following terms: All disputes, controversies and claims arising out of or pertaining to this agreement which are not amicably settled between the parties, shall be finally settled by arbitration by two arbitrators , one each to be appointed by Biney Prakash group and Electro Steel respectively and the third arbitrator to be appointed by two arbitrators appointed in accordance with the provisions of the Arbitration & Conciliation Act, 1996. Arbitration to be conducted in English language at Calcutta, India.
3. The coal block was allotted to the company on 8th July, 2005. According to the petitioners, immediately thereafter, in terms of the SHA, 40000 shares of Rs. 100/- each were allotted to the petitioners on 27.7.2005. In a Board meeting held on 7.8.2005, 4th, 5th and 6th respondents were appointed as nominee directors of the 2nd respondent and the 4th respondent was appointed as CMD and the 7th respondent was appointed as nominee director of the petitioners’ group. Other nominees of the petitioners’ group, other than the 1st petitioner resigned. Thus, from that date, 3 nominees of the 2nd respondent and 2 nominees of the petitioners’ group were on the Board as directors.
4. The allegations of the petitioners in the petition are: The 2nd respondent had failed to purchase 20000 shares and make payment of balance sum of Rs. 8.4 crores, in breach of the terms of the SHA. The respondents 3 to 6 failed to hold AGM for the year 31st March, 2005 in spite of the petitioners seeking for such a meeting and even after getting extension to hold a meeting up to 31st December, 2005, the respondent directors have not convened such meeting. The company was to submit a bank guarantee for Rs. 6.24 crores but the respondents had failed to submit the bank guarantee and the 2nd respondent had filed to subscribe to further shares and has also failed to set up the project as per the time frame submitted to the Ministry, by failing to procure funds for the company. Thus, the 2nd respondent has completely breached the terms of the shareholders’ agreement Having breached the obligations under the shareholders’ agreement the 4th respondent, a nominee of the 2nd respondent and also the MD of the company wrote a letter to the Ministry on 5th June, 2006 stating that the company had not made any progress since the allocation of the coal mine and therefore in case the allocation was cancelled, the coal mine should be allotted to the 2nd respondent. By writing the said letter, the 4th respondent has tried to appropriate the coal mine allotted to the company to the 2nd respondent, which as a director of the company, he could not have done in breach of his fiduciary duties. On the basis of these allegations, the petitioners have sought for removal of 3rd, 4th and 5th respondents as directors of the company, forfeiture of 30000 shares held by the 2nd respondent, restraining the respondents 2 to 6 from writing any letter to the Ministry regarding the affairs of the company and also for permission to the petitioners to bring necessary funds for setting up the project.
5. In the present application, the 2nd respondent has contended that since all the allegations arise out of and in connection with the shareholders’ agreement, the matter should be referred to arbitration in terms of the arbitration clause in the said agreement.
6. Shri Sen, Sr. Advocate, appearing for the 2nd respondent submitted: The foundation of the petition, as is evident from various averments in the petition, is that the 2nd respondent has not complied with its obligations under the agreement in bringing funds etc. In terms of Section 8, it is the commonality of the subject matter which has to be considered and not the reliefs sought. The term “subject matter” in Section 8 has to be given widest possible interpretation and if it is done so by considering the petition as a whole, there is nothing in the petition which could be considered to be outside the terms of the agreement. Once it is established/admitted that there is an arbitration agreement covering the subject matter of the arbitration, the Board has no option but to refer the parties to arbitration. In the present case, all the petitioners and the company are parties to the agreement and therefore, they are bound by the arbitration clause. In terms of Section 8 which has been held to be mandatory, this Board should refer the disputes to arbitration as held in Kalpana Kothari v. Sudha Yadav ; Anand Ganapathy Raju v. PV G Raju 2004 SCC 539; Escorts Finance Ltd. v. G.R. Solvents & Allied Industries 1996 CC 9323 CLB.
7. The learned Counsel further submitted: Having based the entire petition on the shareholders agreement, the petitioners have complained that the 2nd respondent is trying to take away the mining lease. In Clause 2 of Article VII of the agreement, it is provided that the parties should maintain confidentiality, non competition and non solicitation. Since non solicitation is a part of the shareholders’ agreement and since the main complaint of the petitioners is that the 2nd respondent is trying take away the mining lease, which is nothing but solicitation, the same is squarely covered under the arbitration agreement. Further, even in his letter to the Ministry, the 4th respondent has sought for allotment of the mine to the 2nd respondent only if the allotment to the company was cancelled and as such it cannot be considered that the 4th respondent is trying to take away the mining lease from the company. Another allegation is that the respondents are not holding Annual General Meeting, which the petitioners, themselves could have convened.
8. Shri Sarkar, Sr. Advocate appearing for the petitioners submitted: This application is not maintainable for the main reason that there is no commonalities of parties. The petitioners have sought for removal of respondent directors 3 to 5, who are not parties to the SHA. The petitioners have referred to the terms of the agreement not with a view to get the agreement enforced but only to highlight that having failed to comply with the terms of the agreement, the 2nd respondent is trying to snatch away the mining lease from the company. By writing the impugned letter to the Ministry, the 4th respondent has breached his fiduciary duties. In the shareholders’ agreement, there is no provision that in such cases, the matter should be referred to arbitration. If the attempt of the 2nd respondent to take away the mining lease succeeds, there would be no project to implement. The entire agreement was founded on the premise that the company will prospect the coal mine and therefore obviously the parties could not have not envisaged or contemplated that one of the parties would attempt at diversion of the coal mine to subject the same to arbitration. Further, the agreement itself provides in Clause 5 of Article IX that arbitration is not the only remedy, thus, making it abundantly clear that the petitioners have the option of instituting other legal proceedings. In Sukanya Holdings Pvt. Ltd. v. Jaish H. Pandeya , the Supreme Court has held that there is no provision for splitting the cause or parties and referring the subject matter of the suit to arbitration. Since in the present case, respondents 3 to 5 are not parties to the agreement and that the main complaint of the petitioners relates to the attempt of the 2nd respondent to take away the mining lease which is not a part of the agreement, the matter cannot be referred to arbitration. Further, the question of referring the matter to arbitration would arise only if the agreement provides for the only remedy of arbitration and if in addition to arbitration if the agreement provides that either of the parties would be free to initiate/institute other legal proceedings, then the matter cannot be referred to arbitration. Such a liberty has been given in Clause 5 of Article IX of the agreement. In Limrose’s case this Board has held that if the allegations could be examined without reference to arbitration agreement, then the matter need not be referred to arbitration. In the present case the allegations relating to the breach of fiduciaries duties by the 4th respondent can be independently examined without reference to arbitration agreement. In other words, the allegation is in relation to a non contractual matter. In Willington Association v. Kirit Mehta , the Supreme Court has held that arbitration is a remedy. In the same case, it has also been held that the agreement must mandatorily require appointment of arbitrator and if the agreement provides that- parties “may” go to suit or may go to arbitration cannot be considered to be a arbitration agreement. In Sudershan chopra v. CLB 2004 2ARB LR 241(P&H), the Punjab High Court has held that matter covered under Sections 397/398 cannot be referred to arbitration. Thus, this application has to be dismissed for the reasons that there is no commonalities of parties, that the allegations are not covered by the arbitration agreement, that in the SHA the parties have been given liberty to seek remedies other than arbitration.
9. In rejoinder, Shri Sen submitted: It is wrong to contend that there is no commonalities of parties. Respondents 3 to 5 being the nominees of the 2nd respondent, which is a signatory to the agreement, are bound by the said agreement. Even otherwise, this Board has held in Airtouch International (Mauritius)Ltd. v. RPG Cellular Investments and Holdings P. Ltd. 121 CC 647 that as long as the main parties to the proceedings are parties to the agreement, mere addition of other parties will not stand in the way of the matter being referred to arbitration. A perusal of the petition would very clearly indicate that the entire foundation of the petition is based on the shareholders’ agreement and the allegations cannot be examined without reference to the shareholders’ agreement which contains an arbitration clause. In Altek Lammertz Needles Ltd. and Ors. v. Lammertz Industrienadel GMBH 129 CC 108, this Board has held that the test to determine as to whether the matter in a petition under Sections 397/398 is to be relegated to arbitration is to examine as to whether allegations of oppression and mismanagement contained therein can be adjudicated without reference to the terms of the arbitration agreement. In the present case, it cannot be done and therefore the matter has to be referred to arbitration. Even though the petitioners have complained that the respondents are not calling the AGM, no complaint to that effect has been voiced by the petitioners and as a matter of fact since the petitioners claim majority in the company, they themselves could have convened the AGM. As a matter of fact, it is the petitioners who have failed to de-merge the company as per the terms of the agreement. In Akkadian Housing & Infrastructure Ltd. v. Panthian Infrastructure Ltd. CP 106 of 2005 decided on 7.7.2006, this Board has held that by adding parties against whom no relief has been sought, reference to arbitration cannot be sought to be scuttled. In so far as Sukanaya’s case is concerned, the decision relating to parties and bifurcation of the matter arose in a dispute in relation to partnership firm and therefore in a matter relating to a company, the same ratio cannot be applied and has to be decided on facts of the case. The averment in Page 80 of the petition that “the 2nd respondent has acted prejudicially to the interest of the company and the petitioners and has failed to invest in the company or to set up pig iron plant as has been agreed” is the foundation of the petition. There are no other allegations of any oppression and mismanagement. The reliance of the petitioners on the decision in Willington Associates Limited’s case (supra) that there should be a mandatory provision for arbitration is not well founded as in that case, the agreement provided that the disputes or differences arising in connection with the agreement “may” be referred to arbitration. But in the present case, Clause 2 of Article VIII clearly stipulates that the disputes “shall be finally settled by arbitration”, thus, making it mandatory that disputes should be referred to arbitration. Further, the 2nd respondent by a letter dated 15.2.2006 informed the 1st petitioner that the agreement was under review meaning thereby efforts had been taken to resolve the disputes as contemplated in the arbitration clause. In so far as the reliance of the petitioners on Clause 5 of Article IX that discretion has been given to the parties to avail of any other remedy is concerned, it is to be noted that arbitration provided in the agreement is not a remedy. It is only a mechanism to resolve the disputes. Even assuming that arbitration is a remedy, then, Clause 5 specifically states that other remedies can be pursued “except as stated to the contrary in the agreement”. This would indicate that arbitration having been specifically provided in the agreement, this is an exception. The argument that the arbitrator cannot exercise powers in terms of Section 402 of the Act has been negatived by this Board in B.K. Shah v. Magotteaux International 111 CC 220 wherein this Board has held that appropriate relief in terms of the arbitration agreement could always be considered by the arbitrator. Since in Gautam Kapur v. Limrose Engineering CP 128 CC 237, this Board has held that if the allegations cannot be decided without reference to arbitration agreement, the matter has to be referred to arbitration, in the present case, since the foundation of the petition is breach of the terms of the SHA, the matter should be referred to arbitration. Since in number of cases filed under Sections 397/398, this board has referred to the matter to arbitration, the said decisions are binding on this Bench.
10. I have considered the pleadings and arguments of the counsel. This application has been filed under Section 8 of the Arbitration and Conciliation Act. This Section reads:
(1)A judicial authority before which an action is brought in a matter which is the subject matter of an arbitration enactment, 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.
(2) The application referred to in Sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under Sub-section (1) and the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.
11. Shri Sen contended, citing certain cases that the provisions of this Section mandatory, once it is established/admitted that there is an arbitration agreement, the judicial authority is bound to refer the matter to arbitration without any further enquiry. The role of a judicial authority while considering an application under Section 8 has been explained by the Supreme Court in SBP & Co. v. Patel Engineering Ltd. 2005 8SCC 618, wherein, the Court has held “When the defendant to an action before a judicial authority raises the plea that there is an arbitration agreement and the subject matter of the claim is covered by the agreement and the plaintiff or the person who has approached the judicial authority for relief, disputes the same, the judicial authority, in the absence of any restriction in the Act, has necessarily to decide whether in fact there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause. It is difficult to contemplate that the judicial authority has also to act mechanically or has merely to see the original arbitration agreement produced before it and mechanically refer the parties to an arbitration “. Therefore, before referring the parties to arbitration in terms of Section 8, the judicial authority is obligated to satisfy itself that the matter covered in the judicial proceedings is subject to arbitration. In addition, in view of various judicial decisions, it has also to satisfy itself that there is a commonality of parties etc. The admitted fact is that the company, the petitioners and the 2nd respondents are parties to the SHA and it contains an arbitration clause. As far as the respondents 3 to 7 are concerned, it is also an admitted fact that the respondents 3 to 6 are the nominees of the 2nd respondent and the 7th respondent is the nominee of the petitioners. It has been urged by the petitioners, that since these respondents 3 to 5 against whom relief of their removal has been sought, are not parties to the agreement, there is no commonality of parties. I do not agree with this contention. Since they are the nominees of the 2nd respondent which is a party to the agreement, their status is that of agents of the 2nd respondent and as such, even if they are not parties to the agreement they are bound by the same. They have no independent right or obligation de-hors the agreement as their status as directors arises out of the terms of the agreement. Their acts of commission and omissions are directly attributable to the 2nd respondent and the Arbitrator can always direct the 2nd respondent, which is a party to the agreement, to withdraw their nomination. Therefore, there is no force in the contention that there is no commonality of parties. Shri Sen, correctly distinguished the decision in Sukanya’s case to state that the decision relating to a partnership firm cannot be applied in a company.
12. The next objection of the petitioners is that the arbitrator is not capable of granting relief in terms of Section 402 of the Companies Act. As this Board has held in Magotteaux case, the arbitrator has the power to grant such a relief as he deems fit taking into consideration the terms of the agreement.
13. The third objection of the petitioners is that the allegations made in the petition more particularly with regard to the attempt of the 2nd respondent to take away the mining lease is not covered under the arbitration agreement. I am inclined to agree with the petitioners on this. No doubt, in the petition the petitioners have alleged breach of the terms of the agreement that the 2nd respondent has not paid for 20000 shares and that it has not subscribed to further shares and that it has not brought necessary funds to complete the project, yet, no relief or directions have been sought on these issues, which if such directions or relief had been sought, then the same would be arising out of the agreement. Their allegation is that having failed to comply with the terms of the agreement, the 2nd respondent is trying to take away the mining lease. I do not find any specific term in the agreement that such an issue has been either contemplated or specifically included in the agreement. Shri Sen drew my attention to Clause 2 of Article VII which reads “This agreement shall remain in force and effect so long as Binay Prakash group holds at least 50% of the equity capital of DOMCO provided that the confidentiality, non competition and non solicitation shall continue notwithstanding such termination “. According to him, since non solicitation is included in the agreement, if the petitioners are aggrieved that by writing the letter to the Ministry, the 2nd respondent is guilty of solicitation, then, the same is squarely covered under the arbitration agreement. A careful reading of Clause 2 of Article VII would indicate that it provides for continuation of the provisions relating to confidentiality, non competition and non solicitation would continue even after the termination of the agreement. A perusal of the agreement reveals that while there is a provision in Article 6 relating to Confidentiality, there are no provisions in the Agreement either relating to non competition or non solicitation during the currency of the agreement. Therefore, this main allegation does not form part of the arbitration agreement. In Sukanaya Holdings, the Supreme Court has held that there is no scope for bifurcating the matter before the judicial forum and refer part of the matter covered under the arbitration to arbitration.
14. In addition, the petitioners have relied on Clause 5 of Article IX to contend that the SHA itself provides for any of the parties to initiate and pursue other remedies notwithstanding the arbitration clause. This clause reads ” No remedy conferred by any of the provisions of the agreement is intended to be exclusive of any other remedy which is otherwise available for law. In equity, by statute or otherwise and each and other remedy given hereunder are now or hereafter is existing at law, in equity by statute or otherwise except as stated to the contrary in this agreement. The election of any of any one or more of such remedies by any of the parties hereto shall not constitute a waiver by such party of the rights to pursue any other available remedy except as aforesaid”,… A careful analysis of this clause would indicate an inbuilt contradiction in this clause. The first line of this clause is in a way a non-obstante provision as it specifies “no remedy conferred by any of the provisions of the agreement is intended to be exclusive of other remedies available”. Having so specified, this clause also specifies that “except as stated to the contrary in the agreement” which is completely contradictory to the first line. Shri Sen contended that when the SHA specifically stipulates that disputes shall be finally settled by arbitration, not withstanding the fact that arbitration is not a remedy, ,. the words “except as stated to the contrary in this agreement” would indicate that this clause only gives the right to the parties to seek specific performance of the terms of this agreement including voting rights in terms of Clause 4 of Article IX. I am unable to agree. In the arbitration clause it is stated that “all disputes, controversies, claims arising out of or pertaining to this agreement shall be finally settled by arbitration “. Voting rights and specific performance are also part of this agreement and the same have not been specifically excluded in the arbitration clause to claim that Clause 5 of Article IX are applicable only in these cases. Thus, to my mind it appears that a proper appreciation of these two clauses would only reveal that Arbitration has not been intended by the parties to be the sole remedy or mechanism to resolve disputes arising out of or in connection with the SHA. In Wellington Associates case, wherein the agreement provided for resolution of disputes either by way of a suit or by way of arbitration, the Supreme Court held that unless the parties had intended arbitration to be the sole remedy, there would be no biding arbitration agreement. Therefore, even assuming as contended by Shri Sen that the entire dispute has arisen out of and in connection with the agreement and therefore there is commonalities of the subject matter, yet, since as per Clause 5 of Article IX, the parties have been given the liberty to avail of other remedies available, and since the petitioners holding requisite qualification shares have invoked their statutory rights under Sections 397/398 of the Act to initiate and prosecute this petition, the matter cannot be referred to arbitration. Shri Sen contended that except the allegation relating to non holding of AGM, no allegation of either oppression or mismanagement on the part of the respondents has been alleged and therefore this petition is not maintainable. Whether the petition succeeds and/or whether any relief can be granted, being matters on merits, cannot be decided at this stage while considering this present application.
15. In view of the foregoing, the application stands dismissed. The respondents will file their replies by 25th of November, 2006 and rejoinder will be filed by 10th December of 2006 and the petition will be heard on 9th January 2007 at 10.30 AM. Interim orders will continue.