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1940 1 The Arbitration And Conciliation Act, 1996 Section 45 in The Arbitration And Conciliation Act, 1996 The Companies Act, 1956 Article 40 in The Constitution Of India 1949 Citedby 1 docs Sporting Pastime India Ltd. And ... vs Kasturi And Sons Ltd. [Alongwith ... on 5 December, 2005 Blog Links
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Company Law Board

Premier Automobiles Ltd. vs Fiat India Private Ltd. And Ors. on 17 May, 2004
Equivalent citations: 2005 124 CompCas 14 CLB, 2004 56 SCL 59 CLB Bench: S Balasubramanian ORDER S. Balasubramanian, Chairman

1. The petitioner holding 2.52% shares in M/S Fiat India Private Ltd. (the company ) has filed this petition alleging acts of oppression and mismanagement in the affairs of the company. This company was established as a joint venture between the petitioner and the 10^th respondent for the manufacture, sale and distribution of the cars of the 10^th respondent. At the time of incorporation, the petitioner held 49% shares and the 10^th respondent held 51% shares along with its wholly owned subsidiary - the 11^th respondent. Over a period of time, by issue of further shares to the 10^th respondent's group, the petitioner's holding has come down to 2.52%. Presently, there are 3 shareholders in the company - the petitioner (2.52% shares), the 10^th respondent (9.98% shares) and the 11^th respondent (87.50% shares). 2. Both the groups had entered into a Shareholders' Agreement (SHA) and a Joint Venture Agreement on 4^th July, 1997 wherein the rights and duties of the parties vis-a-vis the joint venture agreement as also their rights regarding the management of the company have been specified. In addition there is also an Escrow Agreement (EA) by which the shares held by the petitioner are kept in the custody of an escrow agent. In all these three agreements, there is a provision for arbitration in case of disputes arising out of these agreements. The petitioner had two nominees on the Board, namely, the 6^th and the 9^th respondents. The main complaints of the petitioner in the petition are that Board Meetings were being held without notice to the 6^th and 9^th respondents, that the 9^th respondent has been removed as Chairman of the Board in a Board Meeting held on 15^th May, 2002, and he was also removed as a director in the AGM held on 24^th May,2002, that Article 40 of the AOA according to which the 9^th respondent is to be a life time director has been amended to delete this provision, and that there is a proposal to remove the 6^th respondent as a director in the EOGM proposed to be held. According to the petitioner, all these acts are oppressive to the petitioner and accordingly has sought for supersession of the Board and appointment of an administrator and for reinstatement of the 9^th respondent as a director and restraining the respondents from removing the 6^th respondent as a director. 3. When this petition was mentioned on 9.7.2002, I had advised the parties to resolve the disputes amicably and directed the parties to complete the pleadings in the meanwhile. The 10^th respondent filed an application CA 181 of 2002 under Section 45 of Arbitration and Conciliation Act, 1996 seeking for referring the disputes in the petition to international arbitration in terms of the arbitration clause contained in the SHA and JVA and also the EA. When this application was mentioned on 14.8.2002, while directing the parties to complete the pleadings in respect of this application, I had also advised the petitioner to, give its proposal for

settlement of the disputes in writing so that the respondent could react to the same in writing and the matter was fixed for consideration on 12.9.2002. In the hearing held on 12.9.2002, it was noted that the petitioner had given its proposal and the respondents were to react to the same by 29.2.2002. In the hearing held on 15.9.2003, it was reported that compromise efforts were on and accordingly, the matter was adjourned. Both the sides had given their proposals but no finality could be reached. Therefore, this application CA 181 of 2002 was finally heard. 4. Shri Haksar, Sr. Advocate, appearing for the 10^th respondent submitted: Both SHA and JVA provide for international arbitration in case of any dispute between the parties arising in/out of these agreements. The allegations made in the petition are squarely relate to the terms of these agreements. The petitioner has failed to discharge many of its obligations under these agreements. As a matter of fact, the petitioner being aware that the disputes are covered by arbitration agreement, filed an application under Section 9 of the Arbitration &Conciliation Act before Bombay High Court seeking for certain interim reliefs. When the High Court declined to grant any relief, the petitioner filed an appeal before the Division Bench which was later on withdrawn without notice to the respondents. Therefore, it is a fit case where the parties should be relegated to arbitration in terms of Section 9 of the Arbitration Act. 5. Shri Sarkar appearing for the 1^st respondent submitted: In addition to the SHA and JVA, the parties had entered into another escrow agreement dated 29^th April 1998. While the petitioner and the 10^th respondent are parties to the JVA and SHA, the parties to the escrow agreement are the company, the 11^th respondent and the petitioner. Therefore all relevant parties, namely, the 3 shareholders and the company are covered by these agreements. The petitioner is a party to all the agreements. Even though the company is not a party to the SHA and JVA, yet, the company, being the creation by these agreements is willing to go for arbitration. In paragraph 18 of the petition, even the petitioner has averred " The petitioner submits that the respondent No. 10 and the petitioner have entered into the shareholders ' agreement and joint venture agreement both dated 4^th July, 1997 which were and continue to be valid, subsisting and binding between them. The petitioner and respondent No. 10 are bound by the terms of the said agreement dated 4^th July, 1997 which imposes various rights and obligations on the parties. The petitioner submits that the company, being a joint venture between the petitioner and the respondent No., 10 is accordingly also bound by the terms of the same". This being the stand of the petitioner, it cannot change the stand now. Therefore, the disputes raised in the petition should be referred to arbitration. Further, in paragraph 20 of the petition, the petitioner has submitted that "A limited interim relief sought from

this Hon'ble Tribunal will only be a measure of interim protection not affecting/impinging upon the arbitration". This Board has no powers to grant interim relief pending disposal of the arbitration proceedings. 6. Shri Doijode, Advocate appearing for the 11^th respondent submitted: Even though the petitioner has withdrawn the appeal before Bombay High Court, yet, in the petition it is stated that the same was dismissed. Further, by a fax dated 20^th May, 2002, the advocate for the petitioner sent a notice invoking the arbitration clauses in joint venture agreement and in shareholders' agreement. However, after issue of this notice, the petitioner has not taken any further action. In a petition under Sections 397/398 of the Act, the relief sought cannot be of interim nature pending arbitration and the CLB has no jurisdiction to grant any such relief. Further, the petitioner is guilty of suppression in the sense it has not disclosed in the petition, the existence of escrow agreement. In Clause 'J' of the Escrow Agreement, the 11^th respondent has been specifically vested with a right to enforce the terms of shareholders' and joint venture agreement including the arbitration clause. Therefore, if all agreements are read together, it would be evident that all the relevant parties are bound by the terms of all these three agreements. Since all the 3 agreements have arbitration clause, the disputes raised in the petition should be referred to arbitration. 7. Shri Mookherjee, Senior Advocate, for the petitioner submitted: The disputes raised in the petition are not covered under any of the agreements. There is no commonality of parties in these agreements. While the petitioner and the 10^th respondent are parties to the shareholders' agreement and the joint venture agreement, the escrow agreement, is amongst the petitioner, 10^th and 11^th respondents and the escrow agent, The main complaint of the petitioner in the petition relates to removal of the nominees of the petitioner from the Board. In the escrow agreement, there is no provision regarding directorship and therefore this agreement, having an arbitration clause has no relevance and that is why the petitioner has not referred to the same in the petition. It only relates to security for discharge of obligations by the petitioner. Even though in the shareholders' agreement wherein there are provisions relating to management of the company, yet, the company is not a party to that agreement and this petition has been filed making various allegations in the affairs of the company. It is to be noted that when the petitioner approached the Bombay High Court for interim relief, the same was refused on the sole ground that the company was not a party to the arbitration agreement. Further, one of the prayers in the petition is to direct rendering of accounts which is to be done by directors who are not parties to the shareholders'

agreement. Further, in para 11(hh) of the petition, the petitioner has voiced its grievances relating to amendment to Article 40, non issue of notices in terms of Article 30 etc. In paragraph (jj), the petitioner has made certain allegations regarding the conduct of the AGM held on 24^th May, 2002. None of these matters are covered in any of the agreements. In Sukanya Holding Pvt. Ltd. v. Jayesh H. Pandeya (2003 5 SCC 531), it has been held that there should be commonality of the parties and there is no power conferred on the court to add parties who are not parties to the agreement. Therefore, even if the company is willing to be added as a party to arbitration, it cannot be done. Even if the company is willing to be added as a party to the arbitration proceedings, the consent of the petitioner is necessary as the arbitration agreement is a consensual one. In the same judgment, the Apex Court has also held that the matters in a petition cannot be bifurcated for part adjudication by the court and the rest by the Arbitral Tribunal, In Bhadresh Kantilal Shah v. Magotteaux International and Ors. (2000 2 Comp LJ 323 CLB), this Board has held that if a company is not a party to the arbitration agreement, then the question of referring the disputes in a petition under Sections 397/398 to arbitration does not arise. Most of the allegations in the petition can be adjudicate without reference to any of the agreements. In Gautam Kapoor v. Limrose Engineering Co. Ltd. (CP 18 of 2002), this Board has held that if allegations are capable of being examined without reference to the terms of the arbitration agreement, then, the question of referring the matter to arbitration does not arise. As a matter of fact, the Punjab & Haryana High Court in Sudershan Chopra v. CLB (LPA 235 of 2003) has held that matters covered in a petition under Sections 397/398 of the Act cannot be referred to arbitration as the arbitrator has no powers as are conferred on the Company Law Board in terms of Section 402 of the Companies Act, 1956. Further, there is no provision in the AOA of the company relating to arbitration. In V.B. Rangarajan's case, the Supreme Court has held that private agreements, if not incorporated in the Articles, are not binding on the company or the shareholders. Since all these agreements are private agreements and the terms therein have not been incorporated in the Articles, they are not binding on the company. In Surrender Kumar Dhavan v. R. Vir (47 CC 276 Del) and O.P. Gupta v. Shiv General Finance Private Ltd (47 CC 279), it has been held that even if there is a provision in the Articles for referring the disputes between the company and its directors or between the director themselves or between any members of the company or between the company and any person shall be referred to arbitration, would be void in terms of Section 9 of the Companies Act. Therefore, when there is no commonality of parties and when many allegations are not relating to matters covered under the arbitration agreement and when these allegations can be examined without reference to any of these agreements, the

question of relegating the parties to arbitration docs not arise and as such this application should be dismissed. 8. In rejoinder, Shri Sarkar submitted: The 11^th respondent is a wholly owned subsidiary of the 10^th respondent and both collectively hold 97.5% shares in the company. When the petitioner himself asserts in its petition that the terms of the agreements are binding on the company and when the company is also willing to abide by the terms of the agreement, the present contention that the company is not a party to the shareholders' and joint venture agreements has no meaning. Even though, there are allegations on certain matters not covered under the arbitration agreement, yet, the petitioner has not sought any relief in respect of these agreements. When an order is given to the company, it is binding on all the directors and therefore they need not be parties to the agreement. None of the cases cited by the counsel for the petitioner is relevant to the facts of the present case and therefore, the application should be allowed. 9. I have considered the matter carefully. All the agreements have an arbitration clause similarly worded providing for international arbitration. The allegations of the petitioner in the petition relate to the management and the affairs of the company. The escrow agreement has nothing to do with the affairs of the company and is restricted to custody of the petitioner's shares in escrow with the escrow agent as security to ensure discharging of the obligations of the petitioner in terms of JVA and SHA. While JVA extensively deals with the terms of spin off, it also refers to the SHA, wherein there are terms coving the management and affairs of the company. However, the company is not a party to either of the agreements. In Magotteaux case, this Board has held that if the company is not a party to the arbitration agreement, then the matter cannot be referred to arbitration. Even though the company is now willing to be abide by the terms of the agreement, in view of the judgment of the Supreme Court in Sukanya Holding's case, it is not permissible to add the company as a party to the arbitration proceedings. Further, there are certain allegations as elaborated by Shri Mukherjee, which are not on matters covered in the arbitration agreement and can be examined by this Bench without reference to the said agreement. (Limrose case). Therefore, there is no scope to refer the parties to arbitration by allowing this application. 10. Further I have noted an important provision in the Arbitration clause contained in all the three agreements to which, unfortunately, none of the counsel made any reference. The last part of the arbitration clause in all the three agreements reads "Any arbitration pursuant to this agreement shall be an international arbitration and

award given under such arbitration shall be regarded as an award relating to a dispute arising out of a commercial, legal relationship to which the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 applies. The Arbitration and Conciliation Act 1996 or any other arbitration laws of India from time to time in force in India shall not apply to this clause and to the arbitration proceedings except for the purposes of enforcement of the foreign awards in India". This highlighted portion (by me) indicates that the parties have consciously agreed that the provisions of Arbitration & Conciliation Act, 1996 are not applicable to the arbitration clause contained in these agreements except for the purposes of enforcing the foreign award. An Arbitration agreement is always consensual and contractual and the parties arc bound by the terms agreed upon. This application has been filed under Section 45 of the said Act. When the parties have expressly excluded the application of this Act in the matter of arbitration, whether, the parties can invoke any of the provisions of the sai'd Act, other than for the purposes of enforcing the foreign award, has not been explained by any counsel, perhaps because, this highlighted portion of the arbitration clause had not been brought to their attention. Therefore, I do not have the benefit of their views on this highlighted portion. However, on a plain reading of the highlighted portion, it appears to me that none of the parties can invoke the jurisdiction of the court in terms of any other provision of the said Act including Section 45 for intervention by the court except those in relation to enforcement of the foreign award. If so, then the present application is not maintainable. 11. Accordingly, I dismiss this application on the grounds- the company, in the affairs of which the petition has been filed, is not a party to the relevant agreements containing arbitration clause; it cannot be added a as a party now even if it is willing; there are certain allegations on matters which are not covered under the arbitration agreements which can be examined only by this Board; bifurcation of matters between this Board and Arbitral Tribunal is not permissible; this application has been filed under Section 45 of the Arbitration & Conciliation Act of 1996, contrary to the terms of the arbitration clause which specifically excludes the invocation of the provisions of the said Act. 12. The respondents will file their replies to the petition by 1.7.2004 and rejoinder to be filed by 25.7.2004. The petition will be heard on 4/8/2004 at 2.30 p.m.