ORDER
S. Balasubramanian, Actg. Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956, in the matter of G.R. Solvents and Allied Industries Limited, the respondents have filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”), on the ground that most of the allegations in the petition relate to a sponsorship agreement entered into between the petitioner-company and the respondent-company and that the said agreement provides for arbitration in respect of any claim, dispute or differences between the parties in relation to the terms of the agreement and as such in terms of Section 8 of the said Act the Company Law Board should refer the parties to arbitration and should not proceed with the petition.
2. In view of the preliminary objection raised by the respondents, it was decided to hear this application first before considering the petition. Shri U.K. Chowdhary, advocate for the petitioner, taking us through the allegations in the petition submitted that the very foundation of the petition is on account of certain differences that have arisen in the implementation of the sponsorship agreement dated April 4, 1995, between the petitioner-company and the respondent-company. According to him, for the purpose of increasing the manufacturing capacity of the respondent-company, respondents Nos. 2 and 3, being the promoters of the company, sought the assistance of the petitioner-company, both for investment in the company as well as sponsoring the listing of the shares of the company in OTC Exchange of India, Accordingly, a tripartite agreement dated April 4, 1995, was entered into between the promoters, the petitioner-company and the respondent-company. This agreement conferred on the parties certain rights, obligations and liabilities. The main obligations on the part of the petitioner-company designated as sponsor in the agreement were that it was to subscribe to certain number of shares in the company and the petitioner-company was to sponsor the listing of the shares of the company on the OTC. Some of the obligations on the respondent-company were that the articles were to be amended in consonance with the sponsorship agreement, appoint a nominee of the sponsor on the board of the company, to furnish various information as may be required by the sponsor in the matter of the affairs of the company, etc. Since the petitioner-company had failed to comply with the terms of this agreement, the company also has not discharged its obligations as per the terms of this agreement. The sponsorship agreement at Clause 11.4 provides that any claims, disputes or differences between the parties arising out of or in relation to or under or in any manner connected with this agreement shall be referred to and decided by arbitration as provided in the rules, bye laws and regulations of the OTCEI. According to Shri Chowdhary, in para. 15 of the petition, the allegation is that the company has failed to amend the articles to conform to the partnership agreement, in para. 16, it is about failure to appoint the petitioners’ nominee as a director in the company, in para. 20, it is about failure to provide requisite information. These three allegations directly arise out of the terms of the sponsorship agreement which is covered by the arbitration clause. Further, even the allegation relating to siphoning off of funds at paras 21 to 26, relates to certain alleged projections made before the sponsorship agreement was entered into on which basis the petitioner alleges that the sponsorship agreement was signed. According to the learned counsel, other than these major allegations, the petition does not disclose any other cause of action to initiate proceedings under Section 397/398.
3. In view of the above, Shri Chowdhary submitted that in terms of Section 8 of the Arbitration and Conciliation Act, 1996, this matter should be referred to arbitration as provided in the agreement and as a matter of fact he submitted that the petitioner-company has already initiated the arbitration proceedings which are pending. Since he submitted that the provisions of Section 8 of the Arbitration Act have been invoked by the respondents at the initial stage itself, the Company Law Board is bound to refer the matter to arbitration and should not proceed with the petition. In addition to this, he submitted that one of the co-investors of the petitioner-company has already filed a suit in the court of the Additional Chief Judicial
Magistrate, Moradabad, with similar allegations and as such, the matter is sub-judice and the Company Law Board cannot take cognizance of the petition, Further, he also submitted that the petitioner is not an ordinary shareholder having the right to move this petition but it acquired the shares in the company only with a view to later on sell the shares at a premium. He further submitted that the petitioner-company had itself already initiated various actions in the matter like complaining to the Department of Company Affairs, SEBI, CBI. etc. Under these circumstances, he pleaded that this petition should be dismissed. Relying on the decision of the Company Law Board in Naveen Kedia v. Chennai Power Generation Ltd. [1998] 31 CLA 1 (CLB); [1999] 95 Comp Cas 640 he submitted that in a similar situation, the Company Law Board had referred the parties to arbitration and, therefore, the Company Law Board cannot decide this matter in any manner other than referring the parties to arbitration.
4. Shri Haksar, senior advocate, for the petitioner submitted that his client being a shareholder holding the requisite number of shares in terms of Section 399 has a right to file this petition. Even though, it is a fact that a sponsorship agreement was entered into and that it contained an arbitration clause, the petitioner-company, in this petition, has not sought for implementation of the sponsoring agreement but only for granting certain reliefs against the acts of oppression and mismanagement in the affairs of the company. Even though there are certain averments in the petition relating to the sponsorship agreement, yet, no reliefs in relation to the terms of agreement have been sought for in the petition. Further, he submitted that even though the petitioners have invoked arbitration proceedings in terms of the sponsorship agreement, the respondents have raised an objection that recourse to arbitration is not permissible in view of the currency of the agreement having come to an end. In other words, Shri Haksar submitted that the respondents are blowing hot and cold at the same time, namely, taking a stand that arbitration proceedings cannot be initiated on the ground that the agreement has come to an end and, on the other hand, in the present proceedings claiming that the matter should be referred to arbitration. He further submitted that this petition contains a large number of other allegations, like, non-receipt of notices for the annual general meeting and the annual report, siphoning off of funds, etc., which are clear acts of oppression and mismanagement on the part of the management of the company. He also stated that the various reliefs which would put an end to the matters complained of in the petition are incapable of being granted by an arbitrator. He also relied on Kare P. Ltd., In re [1977] 47 Comp Cas 276 (Delhi) wherein it was held that the statutory right to file a petition under Section 397/398 for relief against mismanagement and oppression cannot be taken away by a provision in the articles that differences between the company and any person should be referred to arbitration and stated that in the same way the mere provision for reference to arbitration as contained in the sponsorship agreement cannot take away the rights of the petitioner-company as a shareholder to move this petition.
5. We have considered the arguments of counsel. At the outset, we note that through the application the respondents have sought to invoke the provisions of Section 8 of the Arbitration Act and as such we shall be dealing in this order only this issue and not any other issue like parallel proceedings, motivation for the petition, etc., as alleged in the application.
6. It is on record that a tripartite agreement was entered into between the petitioner-company, respondent-company and respondents Nos. 2 and 3 by which the petitioner along with its co-investors was to invest Rs. 84 lakhs for 7 lakhs shares of the company at Rs. 10 with a premium of Rs. 2 and that the petitioner-company was to sponsor the shares of the company for listing in the OTC. It is not clear from the petition as to whether the entire 7 lakhs shares have been subscribed by the petitioners and co-investors as it is stated in the petition that the petitioner is holding 3.625 lakhs shares constituting 25.1 per cent. of the equity share capital of the company. This holding by the petitioner satisfies the requirements of Section 399 of the Act to file this petition. The limited issue before us is whether the allegations in the petition are matters of differences arising out of the sponsorship agreement which contains an arbitration clause. A perusal of the petition shows that the entire foundation of the petition is on the sponsorship agreement. The allegations relating to failure to amend the articles of association, failure to appoint the nominee of the petitioners on the board of the company, failure to provide requisite information as contained in the petition directly arise out of the sponsorship agreement. Even the allegations relating to siphoning off of funds are based on the actual performance of the company from what was projected at the time of entering into the sponsorship agreement and as such the petitioners’ allegation that the deviation from the projection and the actuals is an indication of siphoning off of funds and mismanagement in the affairs of the company has also to be viewed as arising out of the sponsorship agreement. Other than these allegations which are all arising out of the sponsorship agreement, no other substantial acts of oppression or mismanagement have been alleged in the petition except that the petitioners have not received annual reports and notices of annual general meeting. Therefore, we find that there is substance in the arguments of learned counsel for the respondents that most of the allegations are in relation to the disputes and differences that have arisen between the parties in implementation of the sponsorship agreement which contains an arbitration clause.
7. Shri Haksar submitted that even though some of the allegations relate to the sponsorship agreement, yet the petitioners have sought various
reliefs in matters not covered under the sponsorship agreement. He also pleaded that since the petitioner has come before the Company Law Board by virtue of the statutory rights vested by the Act to move the petition, the parties should not be referred to arbitration inasmuch as an arbitrator cannot grant the various reliefs sought for and on this proposition, he relied on some case laws.
8. Section 8 of the Arbitration and Conciliation Act, 1996, under which the respondents have moved this petition reads as follows (See [1996] 87 Comp Cas (St.) 60, 64) :
“8. Power to refer parties to arbitration where there is an arbitration agreement–(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 ;
(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; . . .”.
9. In the present case, the existence of the arbitration clause in the sponsorship agreement is not disputed and as a matter of fact, the petitioner has already invoked that clause. It itself has enclosed a copy of the sponsorship agreement along with the petition. Section 8 enjoins a judicial authority, which admittedly the Company Law Board is, to refer disputes which the parties have agreed for referring to arbitration to refer the same to arbitration. Even though Shri Haksar submitted that the reliefs sought for in the petition cannot be granted by an arbitrator, yet we find that the foundation for seeking the reliefs is based on the terms covered in the sponsorship agreement. Only when the disputes arising out of the sponsorship agreement are adjudicated, the question of grant of relief would arise. In view of the arbitration agreement, it is the arbitrator who has to adjudicate on the disputes arising out of this sponsorship agreement and not the Company Law Board in view of the provisions of Section 8 of the Arbitration Act which makes it obligatory for a judicial authority to refer such disputes to arbitration, unlike the Arbitration Act, 1940, according to which a judicial authority had the discretion to either refer the matter to arbitration or not. Therefore, we are of the view that the present disputes before us, being disputes arising out of or in connection with the sponsorship agreement which provides for arbitration at Clause 11.4, have to be referred to arbitration in terms of Section 8 of the Arbitration Act and accordingly we do so and thus dispose of this petition noting that the petitioner has already initiated arbitration proceedings.