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Delhi High Court
Sunair Hotels Ltd. And Ors. vs Union Of India (Uoi) And Anr. on 26 September, 2000
Author: C Joseph
Bench: C Joseph


JUDGMENT

Cyriac Joseph, J.

1. The appellants challenge the order dated 21st August, 2000 passed by the Company Law Board, Principal Bench, New Delhi dismissing an application filed by the appellants under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred as ‘the Act) on the ground that the said application was filed later than when submitting their first statement on the substance of the dispute. The question raised in this appeal relates to the understanding and interpretation of Section 8
of the Act.

2. According to the averments in this appeal, M/s V.L.S. Finance Limited (respondent No. 2) entered into an Agreement/Memorandum of Understanding with M/s. Sunair Hotels Limited (Appellant No. 1) on 11th March, 1995 for providing financial assistance to the appellants to construct a hotel on the site allotted to the appellants by the New Delhi Municipal Committee. Clause 12 of the said agreement’ provided that in the event of any dispute, the matter would be adjudicated by referring the same to arbitration. The appellants fulfillled their part of the obligations under the agreement but respondent No. 2 failed to fulfilll its part of the obligations. It is alleged that instead of fulfillling its obligations, respondent No. 2 started sabotaging the project and even wrote numerous communications to various organizations prejudicial to the interest of the project. In terms of the agreement, respondent No. 2 had given Rs. 10 crores as a security deposit to the appellant company. It was stipulated in the agreement that in the event of the respondent’s failure to perform its obligations, the amount of security deposit shall stand forfeited. Apprehending forfeiture of the security deposit, respondent No. 2 filed a petition (CP No. 45/98) under Sections 250, 377 and 378 of the Companies Act, 1956 before the Company Law Board alleging acts of oppression and mismanagement in the affairs of Sunair Hotels Limited (Appellant No. 1). The main allegation related to irregular and illegal allotment of shares stated to have been made by the appellants to their own group in violation of the provisions of the Companies Act. When the said company petition came up for hearing on 9th September, 1998 the Company Law Board passed an ex-parte interim order against the respondents therein (appellants herein) and the company petition stood adjourned to 23rd September, 1998 for appearance of the appellants. On 23rd September, 1998 the appellants filed reply to the company petition along with the prayer for vacating the ex-parte interim order. In the reply, the appellants specifically stated that the petition before the Company Law Board was not maintainable in view of the arbitration clause in the agreement. On the first date of hearing i.e. 23rd September, 1998 instead of hearing the matter the Company Law Board suggested to the parties to try and settle the disputes amicably and the case was adjourned to 9th October, 1998. Thereafter the company petition was adjourned from time to time without any effective hearing . In the meanwhile on 23rd February, 1999 the appellants filed an application (CA 63/99) under Section 8 of the Act praying for referring the disputes to arbitration. Respondent No. 2 filed reply to the said application contending that the arbitration clause was not operative in a case of mismanagement of the affairs of the company. The appellants, filed a rejoinder to the said reply. However, the said application (CA 63/99) was not heard till 17th August, 2000 in view of the filing of an agreement of settlement dated 28th July, 1999 wherein it was agreed that respondent No. 2 would pay the first instalment of Rs. 6 crores on 1st September, 1999 and the second instalment of Rs. 13 crores on 31st May, 2000. Since respondent No. 2 failed to make payments even in terms of the said agreement of settlement dated 28th July, 1999, there could not be any compromise between the parties and the Company Law Board proceeded to hear the matter. The appellants’ application under Section 8 of the Act and their objections regarding maintainability of the company petition were heard by the Company Law Board on 17th August, 2000 and as per the impugned order dated 21st August, 2000, the Company Law Board dismissed the application of the appellants on the ground of non-fulfillment of the requirements of Section 8 of the Act and posted the Company Petition for hearing on 24th and 25th August, 2000.

3. Being aggrieved by the impugned order dated 21st August, 2000 of the Company Law Board, the appellants have filed this appeal. According to the appellants, the Company Law Board erred in holding that the disputes between the parties are not liable to be referred to arbitration as stipulated in Clause 12 of the Agreement. It is stated that the Company Law Board erred in not appreciating that on 26th December, 1998 the appellants had issued a notice to respondent No. 2 naming three arbitrators and that the said notice was duly acknowledged by respondent No. 2 vide its letter dated 24th November, 1998. It is contended that the issuance of the said notice by the appellants and its acceptance by respondent No. 2 amounted to commencement of arbitration proceedings and thereafter Company Law Board had no jurisdiction to proceed with the company petition filed by respondent No. 2. It is also contended that the Company Law Board erred in not appreciating that the appellants had raised the objection regarding jurisdiction on the first date of hearing itself i.e. 23rd September, 1998 and that in the reply filed before the Company Law Board, the appellants had referred to the arbitration clause and had submitted that the dispute ought to be referred to arbitration. According to the appellants, the statements of the appellants in the said reply substantially fulfillled the requirements of Section 8 of the Act. It is further contended that the law does not stipulate that a formal application is required for referring the matter to arbitration. The appellant3s have raised several other contentions also but it is not necessary to refer to them for deciding the issue raised in the isappeal.

4. The only issue arising in this appeal and argued by the learned counsel for the appellants is whether the Company Law Board was justified in dismissing the appellants’ application under Section 8 of the Act on the ground that the said application did not satisfy the requirement of Section 8 that the party should make the application not latter than when submitting his first statement on the substance of the dispute. It was clarified in the impugned order that in view of the fact that the Company Law Board was dismissing the application on the ground of non-fulfillment of the requirements of Section 8 of the Act, the Company Law Board was not dealing with other issues argued by the counsel.

5. At this stage, it is necessary to refer to certain undisputed facts. CP 45/98 was filed by respondent No. 2 before the Company Law Board on 4th September, 1998. The said company petition came up before the Company Law Board on 9th September, 1998 on which date it was adjourned to 23rd September, 1998 for appearance of the appellants. The appellants appeared before the Company Law Board on 23rd September, 1998 and also filed a reply to the company petition. The said reply filed by the appellants admittedly dealt with the substance of the dispute and contested the petition on merits as well. The said reply referred to the arbitration clause in the following words:

“It is relevant to note that the agreement dated 11.3.95 contains an arbitration clause and if there is any grievance to the petitioner, the same could only be adjudicated through the contractual forum i.e. by referring the same to arbitration and not to this forum.”

It was also stated in the reply that the right, if any, of the petitioner (i.e. respondent No. 2 herein) was on the basis of the MOU dated 11th March, 1995 which clearly stipulated that in the event of any dispute or difference of opinion in the matter of interpretation, execution or carrying out the subjects and function as enumerated in the MOU/agreement, the same should be referred for settlement/award in terms of the provisions of the Indian Arbitration Act, 1940, with modifications therein and, therefore, the Company Law Board did not have jurisdiction to try and entertain the petition and that the petition was liable to be dismissed. However, the said reply did not contain any specific prayer on request for referring the disputes to arbitration. It was only on 23rd February, 1999 that the appellants filed an application (CA 63/99) under Section 8 of the Act praying for referring the disputes to arbitration. The said application was heard on 17th August, 2000 and was dismissed on 21st August, 2000.

6. The main contention urged by Shri. P. Chidambaram, learned Senior Advocate appearing for the appellants is that even though a formal application under Section 8 of the Act was filed only on 23rd February, 1999 there was substantial compliance with the requirement that any application for referring the parties to arbitration should be filed not later than when submitting the first statement on the substance of the dispute. Learned counsel pointed out that the appellants had submitted their first statement on the substance of the dispute on 23rd September, 1998 through their reply to the company petition. In the said reply itself, the appellants had referred to the arbitration clause in the agreement and had contended that the dispute raised by respondent No. 2 could be adjudicated only through arbitration and that the Company Law Board did not have jurisdiction to try the company petition. According to the learned counsel, the above mentioned averments in the reply to the company petition amounted to a request for referring the parties to arbitration as contemplated under Section 8(1) of the Act. Learned counsel also contended that for the purpose of Section 8(1) of the Act, a formal application was not necessary and that it was sufficient if the party conveyed to the judicial authority his stand that the parties should be referred to arbitration.

7. Section 8 of the Act reads thus:

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.

(3) Notwithstanding that an application has been made under Sub-section(1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

Sub-section (1) of Section 8 specifically speaks about the party applying to the judicial authority for referring the parties to arbitration. Sub-section (2) of Section 8 stipulates that 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. In view of the clear provisions in Section 8 of the Act, it cannot be held that for the purpose of Section 8(1) of the Act a formal application is not required. Considering the whole scheme of the Act, the option available to the party to subject himself to the jurisdiction of the judicial authority without resorting to arbitration, the stipulation of the time when the application for reference should be filed and the specific condition that the application should be accompanied by the original arbitration agreement or a duly certified copy thereof. I have no hesitation to reject the argument that the application under Section 8(1) for referring the parties to arbitration need not be a formal application. In my view the Statute contemplates a formal application. Admittedly, the formal application of the appellants was filed later than when submitting their first statement on the substance of the dispute. Therefore the application was beyond the time prescribed under Sub-section(1) of Section 8 of the Act and hence it was not maintainable and the Company Law Board was justified in dismissing the application on that ground.

8. It is also necessary to observe that there is no merit in the contention of the learned counsel for the appellants that there was substantial compliance with the requirements under Section 8(1). It is true that the appellants in their reply to the company petition had referred to the arbitration clause contained in the agreement and had questioned the jurisdiction of the Company Law Board to entertain the company petition. But even in the said reply, the appellants did not specifically pray or request that the parties may be referred to arbitration. This omission on the part of the appellants has to be viewed in the light of the fact that a party can question the jurisdiction of the judicial authority and plead for dismissing the company petition on the ground of lack of jurisdiction, without praying for referring the parties to arbitration. The pleadings contained in the reply to the company petition indicated that the appellants were pleadings for the dismissal of the company petition on the ground that Company Law Board had no jurisdiction in the matter in view of the arbitration clause. They were not praying for referring the parties to arbitration. Therefore it cannot be accepted that the above averments in the reply to the company petition amounted to substantial compliance with the requirement of applying for reference of the parties to arbitration not later than when submitting the first statement on the substance of the dispute.

9. In the light of the discussion above, there is no merit in this appeal. Hence it is dismissed in limine.


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