BEFORE THE COMPANY LAW BOARD

ADDITIONAL PRINCIPAL BENCH

CHENNAI

C.A. No. 275/1999

in

C.P. No. 52/99

Present: 1. Shri S. Balasubramanian, Vice-Chairman.

2. Shri K.K.Balu, Member.

IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)

SECTION 397, 398, 402, 403

AND

IN THE MATTER OF SECTION 8 OF ARBITRATION & CONCILIATION ACT,

1996

AND

IN THE MATTER OF M/S GTP GRANITES LIMITED

1. M/s GTP Granites Limited

2. Shri S.Muthurajan … APPLICANTS

RESPONDENTS

Vs

1. M/s Aurora Trading Limited

2. M/s Harndale Granites Limited

3. Shri K. Raghuveer

4. M/s Harndale (U.K.) Limited … RESPONDENTS

 PETITIONERS

5. Shri K.Kamalakannan

6. Shri J.Jaya Singh

7. Shri R.Sivasubramanian … RESPONDENTS

RESPONDENTS

PRESENT ON BEHALF OF PARTIES:

1. Shri T.R.Rajagopalan, Sr. Advocate … for Applicants.

2. Shri T.Poornam, Advocate … for Applicants.

3. Shri K.Manoj Menon, Advocate … for Applicants.

4. Shri Arvind P.Datar, Sr. Advocate … for Respondents 1 to 4.

5. Shri R.Senthil Kumar, Advocate … for Respondents 1 to 4.

ORDER

(DATE OF FINAL HEARING: 05.06.2002)

K.K. BALU:

1. In the Company Petition filed under Section 397/398 of the Companies Act, 1956
(“the Act”), alleging acts of oppression and mismanagement in the affairs of M/s
GTP Granites Limited (“the Company”), the respondents have filed an application
under Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act, 1996”) to
order and direct that the disputes raised by the petitioners in the Company Petition
be referred to arbitration in accordance with Clause 9 of the Shareholders’
Agreement dated 28.01.1993.

2. The acts complained of in the petition relate to the following: -

(a) Though the Company had allotted 4,52,978 shares of Rs.10/- each to the
first petitioner, it failed to allot 47,022 shares as per the Shareholders’
Agreement dated 28.01.1993;

(b) Though the Shareholders’ Agreement was entered on 28.01.1993, the

Company could appoint the third petitioner as an Additional Director only
on 14.07.1995;
 (c) The Company had raised the authorised capital of the Company to Rs.7
crores at an extraordinary general meeting held on 07.04.1995 without any
notice to the petitioner and a special resolution amending the Articles of
Association was accordingly passed without even consulting the
petitioners. Pursuant to raising of the authorised capital, the Company had
issued and allotted 3,05,770 equity shares of face value of Rs.10/- each as
bonus shares, just before the belated allotment of shares in May, 1995 in
favour of the petitioners.

(d) The Company did not send notices to the petitioners 1 & 2, being
shareholders for any general body meetings and furnish copies of balance
sheet and profit and loss account or annual return of the Company from
time to time.

(e) The Company did not send any notice to the third petitioner, being an
additional director for the Board meetings convened by the Company from
time to time.

(f) Though the Company consistently made profits, no dividend was declared
for the years 1994-95, 1995-96 and 1996-97.

(g) The Company declined the opportunity to the petitioners from

participating in its day-to-day affairs either as shareholders or directors.

(h) The Company had taken major policy decisions without the effective
participation of the petitioners.

(i) The Company had diverted substantial portion of its business through its
own corporate entity to the detriment of members of the Company.

With the above allegations, the petitioners have sought for the following reliefs: -

(i) to appoint an administrator to supervise the management and regulate

the affairs and working of the Company;

(ii) to direct the Company to issue and allot 47,022 equity shares in the
name of the first petitioner and make necessary entries in the register
of members;

(iii) to direct the Company to issue and allot bonus shares to the first
petitioner in proportion to its shareholding;

(iv) to direct the respondents to give notices to the first petitioner of all
general meetings of the Company;
 (v) to direct the Company to give notices for all its board meetings to the
third petitioner;

(vi) to direct the Company to amend its Articles of Association

effectuating the Shareholders’ Agreement entered between the parties;

(vii) to direct the Company to declare and disburse dividend to the

shareholders for the years 1995-96, 1996-97; 1997-98 and 1998-99;

(viii) to restrain the Company from taking major policy decisions without
the express consent of the petitioners; and

(ix) to direct the Company to adhere to the Shareholders’ Agreement dated

28.01.1993.

3. Shri T.R.Rajagopalan, Senior Advocate for the respondents, moving the

application, submitted that the Company engaged in the business of quarrying
granite for export purposes had entered into a Shareholders’ Agreement on
28.01.1993 (Page 40 of typed set of pleadings) with the fourth petitioner, a limited
company incorporated under the laws of the United Kingdom, in terms of which
certain obligations have been cast on the petitioners as well as the Company. The
Company had also on the same day entered into a Marketing Agreement with the
fourth petitioner, thereby the latter agreed to buy back the products supplied by
the Company. In the meanwhile, the petitioners have approached the CLB
invoking the provisions of Section 397/398 of the Act and alleged certain acts of
oppression and mismanagement in the affairs of the Company, on account of its
failure to comply with the terms of the Shareholders’ Agreement. Shri
Rajagopalan enumerated the acts of oppression and mismanagement, set out in the
company petition.

According to him, the issues that have been raised in the Company Petition arise
out of the Shareholders’ Agreement dated 28.01.1993 entered between the
petitioners and the respondents 3 & 4. He drew our attention to the fact that the
allotment of shares are governed by Clauses 1.E and 2.2, delay in appointment of
the third respondent as director by Clause 3.1, Board meetings and notice
regarding Board meetings by clause 3.2 and 8, allotment of bonus shares and
amendment of Memorandum and Articles of Association by Clauses 2.4 & 3.2 of
the Shareholders’ Agreement dated 28.01.1993. The Shareholders’ Agreement
contains an arbitration clause, in terms of which, it is mandatory that any dispute
under the Shareholders’ Agreement should be referred for arbitration in the light
of the provisions of Section 8 of the Arbitration and Conciliation Act, 1996,
especially when the present application has been filed before filing counter by the
Company. In support of his legal submissions, Shri Rajagopalan relied upon the
following decisions: -
 (i) (1999) 97 CC 632 - Khandwala Securities Ltd. And Others V. Kowa
Spinning Ltd. And Others.

(ii) (1999) 97 CC 636 – 20th Century Finance Corporation Ltd. Vs. RFB
latex Ltd. And Others.

(iii) (1999) 2 Comp LJ 534 (CLB) – Escorts Finance Limited Vs.

G.R.Solvents And Allied Industries Ltd. And Others.

(iv) (1998) 4 Comp LJ 128 (CLB) – Naveen Kedia And Others Vs. Chennai
Power Generation Ltd. And Others.

- to show that a strict interpretation of the provision of Section 8 of the

Arbitration and Conciliation Act, 1996 indicates that when the subject
matter before the judicial body is the same as covered in an arbitration
agreement, such judicial body would be bound to refer the parties to
arbitration.

(v) (2002) 1 Supreme Court Cases 203 – Kalpana Kothari Vs. Sudha Yadav
and others & Parasnath Builders Pvt. Ltd. Vs. Sudha Yadav and Others.
– to show that Section 8 of the Act, 1996 mandates that the judicial
authority before which an action has been brought in respect of a matter,
which is the subject matter of an arbitration agreement, shall refer the
parties to arbitration if a party to such an agreement applies not later than
when submitting his first statement.

(vi) (2000) 4 Supreme Court Cases 539 – P.Anand Gajapathi Raju And
Others Vs. P.V.G. Raju and others – to show that the language of Section
8 of the Act, 1996 is pre-emptory. It is obligatory for the Court to refer
the parties to arbitration, in terms of the Arbitration Agreement in the
event of the Arbitration Agreement covers all the disputes between the
parties in the proceedings before the Court.

(vii) AIR 1974 ANDHRA PRADESH 278 (V 61 C 56) – M/s

Srivenkates-wara Constructions and others Vs. The Union of India – to
show that the Court would refer the dispute to arbitration provided it is
satisfied that the applicant is ready and willing to proceed to arbitration
before the commencement of the proceedings as also at the times of the
application.

4. Shri Arvind P.Datar, Senior Advocate for the petitioners has challenged the
maintainability of the application on the following among other grounds: -

(i) The petitioners have filed the Company Petition complaining of various
acts of oppression and mismanagement to vindicate their statutory rights
 as shareholders of the Company seeking statutory remedies, but the
arbitration proceedings cannot redress these grievances of the petitioners.

(ii) The Shareholders’ Agreement dated 28.01.1993 has been signed by the
fourth petitioner and respondents 1 & 2. The third respondent has signed
the agreement as director of the fourth respondent and not in his individual
capacity. Thus, the third respondent is not a party to the Shareholders’
Agreement. The first respondent which is a distinct legal entity is also not
a party to the agreement.

(iii) The reliefs sought in the petition can only be granted by the CLB in
exercise of its powers under Section 402 of the Act and not in arbitration
proceedings.

(iv) The provisions of Section 8 of the Act, 1996 will apply with regard to the
disputes between the parties to the arbitration agreement and cannot deal
with matters beyond the scope of the agreement. The disputes between
the parties raised in the Company Petition are independent of the
Arbitration Agreement dated 28.01.1993.

(v) The petitioners have leveled charges of diversion of funds against the
promoter directors of the Company, who are not parties to the
Shareholders’ Agreement and, therefore, cannot be parties to the
arbitration proceedings.

(vi) The application deals with merits of the company petition extensively and
stated their submissions before the CLB subjecting themselves to the
jurisdiction of the CLB.

Shri Datar, in support of his legal submissions, relied upon the following
decisions: -

(i) (1999) 3 Comp LJ 161 (SC) – Haryana Telecom Limited Vs. Sterlite
Industries (India) Ltd. – to show that sub-section (1) of Section 8 of the
Act, 1996 provides that where the judicial authority before whom an
action is brought in a matter, will refer the parties to arbitration, the said
matter in accordance with the arbitration agreement. This postulates that
what can be referred to the arbitrator is only that dispute or matter which
the arbitrator is competent or empowered to decide.

(ii) AIR 1969 SUPREME COURT 823 (V 56 C 149) – Official Trustee, West
Bengal and others Vs. Sachindra Nath Chatterjee and Another – to
show that the judicial authority should have jurisdiction to decide the issue
presented before them.
(iii) (1999) 97 CC 632 – Khandwala Securities Ltd. And Others Vs. Kowa
Spinning Ltd. And others – to show that the prayer to refer the parties to
arbitration must be declined in case the allegations in the company petition
are independent of the sponsorship agreement.

(iv) (1977) 47 CC 279 – O.P. Gupta Vs. Shiv General Finance (P.) Ltd. And
Others – to show that the provisions of Section 397/398 and 434 give
exclusive jurisdiction to the Court and the matters dealt with thereby
cannot be referred to arbitration. No arbitrator can possibly give relief to
the petitioner under Sections 397 and 398 or pass any order under Section
402 or Section 403.

(v) Madras Refineries Limited Vs. Southern Petrochemicals Industries

Corporation Limited and others

Southern Petrochemical Industries Corporation Limited Vs. Madras

Refineries Limited–- to show that the Court before referring the parties to
arbitration must be satisfied that the conditions of Section 8 are fulfilled,
which are as under: -

(1) The legal proceeding brought before it is in respect of a matter,

which is the subject matter of an arbitration agreement. (2) An
application for reference to arbitration is made by a party to the
proceeding, who is also party to that arbitration agreement. (3) The
application is made not later than when submitting its first
statement on the substance of the dispute, and (4) the application is
accompanied by the original or duly certified copy of the
arbitration agreement.

(vi) 1999-3-L.W. 322 – M/s Shree Ganesh Spinners Vs. Syndicate Bank, – to
show that the Court can stay the suit under Section 8 only if the subject
matter of the Arbitration Agreement and the proceedings before the
judicial authority are one and the same.

(vii) (1977) 47 CC 276 - In re KARE P. LTD. : Surendra Kumar Dhawan And

Another V. R.Vir And Others – to show that the right of shareholders
under Section 397 or 398 is a statutory right which by section 8 of the Act,
1996 cannot be ousted by a provision in the Articles of Association of the
Company.

(viii) (1985) 58 CC 113 – Manavendra Chitnis And Another Vs. Leela Chitnis
Studios P. Ltd. And others – to show that the matter which can form part
of the petition under Section 397/398 cannot be the subject matter of an
arbitration, for an arbitrator can have no powers such as conferred on the
court by Section 402.
 5. We have considered the pleadings and arguments of the senior counsel. It is on
record that respondents No.1 & 2 as well as petitioner No.4 (in Company Petition)
entered into a shareholders agreement on 28.01.1993 and that clause 8.3 of the
agreement provides for arbitration in respect of disputes arising out of the said
agreement. Clause 8.3 reads as under: -

“All disputes and differences relating to claims and contracts between the parties
hereto affecting this agreement including disputes concerning the validity,
interpretation or application thereof or of agreement of assignment as far as
practicable shall be sought to be settled amicably by the parties and in the event
of the failure of the parties to do so the same may be referred to one arbitrator, if
agreed to by the parties, or two arbitrators to be appointed one by each party
hereto and the arbitration proceedings shall be in terms of the proposed Indian
Arbitration Act, 1940.”

Section 8 of the Arbitration and Conciliation Act, 1996 provides that “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”.

This application under Section 8 of Arbitration and Conciliation Act, 1996 was
filed in July, 1999 seeking for referring the parties to arbitration, in terms of the
arbitration clause in the Shareholders’ Agreement dated 28.01.1993 as extracted
above.

One of the main requirements of Section 8 of the Arbitration and Conciliation

Act, 1996 is that a party should apply not later than when submitting his first
statement on substance of the dispute. In the present case, we find that the
application filed under Section 8 of Arbitration and Conciliation Act, 1996
extensively deals with the merits of the case. We find that of the 18 pages of the
application, the applicant has countered, with extensive details, the various
allegations in the petition, from pages 5 to 14. A strict interpretation of Section 8
of the Arbitration and Conciliation Act, 1996 would indicate that if the merits of
the case is dealt with even in the application under Section 8 of the said Act, the
requirement of filing an application not later than when submitting first statement
on the substance of the dispute, is not satisfied. Therefore, in the present case,
since the applicant has extensively dealt with the merits of the case in the
application, the provisions of Section 8 relating to referring the party to arbitration
has not been satisfied and as such this application is dismissed.

If the respondents desire to file any additional affidavit to deal with merits of the
case further, they are liberty to file such an affidavit on or before 30.09.2002 and
rejoinder will be filed by 15.10.2002. The petition will be heard on a date to be
notified.

(K.K. BALU) (S. BALASUBRAMANIAN)

 Dated this the 9th day of August, 2002

http://clb.nic.in/sections/gtp_397_398.htm